UNITED
STATES


SECURITIES AND EXCHANGE
COMMISSION


Washington,
D.C. 20549


__________________________________




FORM
10-KSB





ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE
SECURITIES EXCHANGE ACT OF 1934




For the fiscal year ended December
31, 2007  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, 2007 were
$745,367.




The
aggregate market value of the Common Stock held by non-affiliates of the issuer
as of April 11, 2008 was $1,913,293.62.




The
number of shares outstanding of the issuer’s Common Stock as of April 11, 2008
was 32,800,093 shares.





DOCUMENTS
INCORPORATED BY REFERENCE: NONE





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












1


AIRTRAX,
INC.




2007
FORM 10-KSB ANNUAL REPORT




TABLE
OF CONTENTS








PagePART
      IItem
      1.  Description of Business
            3Item
      2.  Description of Property
            10Item
      3.  Legal Proceedings
            10Item
      4.  Submission of Matters to a Vote of Security
    Holders.
            10PART
      IIItem
      5.  Market for Common Equity and Related Stockholder
      Matters.
            11Item
      6.  Management’s Discussion and Analysis or Plan of
      Operation.
            14Item
      7.  Financial Statements.
            27Item
      8.  Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure.
            28Item
      8A.  Controls and Procedures.
            28Item
      8B.   Other Information
            29PART
      IIIItem
      9.   Directors, Executive Officers, Promoters and Control
      Persons: Compliance with Section 16(a) of the Exchange Act
            29Item
      10.   Executive Compensation
            31Item
      11.   Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholders
            33Item
      12.   Certain Relationships and Related Transactions, and
      Director Independence
            34Item
      13.  Exhibits
            35Item
      14.  Principal Accountant Fees and Services.
            38








2








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.








3





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 continuing to discuss a
mutually acceptable settlement.





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.




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.




Recent
Developments





Effective
March 21, 2008, the Board of Directors formally suspended the employment of all
of our employees due to a lack of financial resources to continue operations. On
April 4, 2008, Robert Watson resigned as Chief Executive Officer, President and
a director of Airtrax, Inc. Mr. Watson will continue to serve as an advisor to
the Company on a part-time consulting basis to continue to pursue financing on
our behalf. On April 10, 2008, William F. Hungerville, one of our current
directors, was appointed interim Chief Executive Officer, and is our Principal
Executive Officer, Principal Financial Officer and Principal Accounting
Officer.





The
growth and development of our business will require a significant amount of
additional working capital. We currently have no financial resources and we will
need to raise additional capital in order to continue operations. 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. There can be no assurances that the Company will be successful in
securing financing needed to allow the Company to continue its future operations
or retain any of the previous employees.






4






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.








5







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 may 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 in
2008. We cannot predict whether we will be successful in our
application.








6




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 follow on orders could result
from this contract. 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 completed
the Acceptance Test Procedure in 2007 and received a second payment of $162,000
on June 20, 2007.  We cannot predict whether we will be able to
successfully 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




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.




MANUFACTURING
AND SUPPLIERS




There was
limited production in 2006 and 2007 due to limited working capital. 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.









7




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. 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.




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.






8






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.





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.






9






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 our former Chief of Operations. 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, 2007, 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 also
seek to protect our proprietary technology through exclusive supply contracts
with manufacturers for specially designed and manufactured components.





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
April 11, 2008, we had one person acting as our Chief Executive Officer and one
consultant responsible for helping us obtain financing.  In March
2008, we suspended the employment of all 13 of our employees due to lack of
financial resources to continue operations. There can be no assurances that we
will be successful in securing financing needed to allow us to continue our
future operations or retain any of the previous employees.




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.










10







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
            
            $Low2008
      First Quarter
            
            
            0.57
            
            0.022007
      First Quarter
            
            
            0.97
            
            0.48Second
      Quarter
            
            
            0.60
            
            0.45Third
      Quarter
            
            
            0.56
            
            0.23Fourth
      Quarter
            
            
            0.31
            
            0.102006
      First Quarter
            
            
            2.39
            
            1.08Second
      Quarter
            
            
            2.17
            
            1.15Third
      Quarter
            
            
            2.03
            
            0.92Fourth
      Quarter
            
            
            1.01
            
            0.42




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 11, 2008, there were 32,800,093 shares of common stock
outstanding.




As of
April 11, 2008, there were approximately 794 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.




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.






11






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.




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,
2007.




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
            
            
            4,000,000-
            
            -0-
            
            
            4,000,000Total
            
            
            -0-
            
            -0-
            
            
            -0-





During
2007, the board of directors approved the 2007 Stock Incentive Plan, pursuant to
which we can issue shares of common stock or options to purchase shares of
common stock to our officers, directors, employees and
consultants.  We have reserved 4,000,000 shares for issuance pursuant
to this plan.






12







Unregistered
Sales of Equity Securities




During
the fourth quarter of 2007, we issued 871,795 shares of common stock to the
holders of common stock purchased during February 2005, which contained full
ratchet protection, resulting from our February 2007 private
placement.  There was no value assigned to these shares.





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.








13





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





Effective
March 21, 2008, the Board of Directors formally suspended the employment of all
of our employees due to a lack of financial resources to continue operations. On
April 4, 2008, Robert Watson resigned as Chief Executive Officer, President and
a director of Airtrax, Inc. Mr. Watson will continue to serve as an advisor to
the Company on a part-time consulting basis to continue to pursue financing on
our behalf. On April 10, 2008, William F. Hungerville, one of our current
directors, was appointed interim Chief Executive Officer, and is our Principal
Executive Officer, Principal Financial Officer and Principal Accounting
Officer.





The
growth and development of our business will require a significant amount of
additional working capital. We currently have no financial resources and we will
need to raise additional capital in order to continue operations. 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. There can be no assurances that the Company will be successful in
securing financing needed to allow the Company to continue its future operations
or retain any of the previous employees.




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.






14






We have
incurred losses and experienced negative operating cash flow since our
inception. For the twelve month periods ended December 31, 2007 and 2006, we had
net losses attributable to common shareholders of approximately $3.2 million and
$6.2 million, respectively. The net loss in both periods includes amortization
of debt discount and financing costs of $2.0 million and $900,000 in 2007 and
2006, respectively, offset by revaluation income $4.3 million and $0 in 2007 and
2006, 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 $2 million in 2006. 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.




Results
of Operations for the Year Ended December 31, 2007 Compared to the Year Ended
December 31, 2006





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 2007. We completed
the Acceptance Test Procedure in 2007 and received a second payment of $162,000
on June 20, 2007. We cannot predict whether we will be able to successfully
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, 2007 was approximately $745,000,
representing a decrease of approximately $600,000 from revenue of $1.3 million
for the comparable period in 2006. This decrease in revenue, is primarily,
attributed to reduced sales of our SIDEWINDER ATX-3000.




Cost
of Goods Sold




Our cost
of goods sold for the twelve months ended December 31, 2007 amounted to
approximately $750,000, a decrease of approximately $800,000 from $1.5 million
for the twelve months ended December 31, 2006. This decrease in cost of goods
sold is primarily attributed to lower sales of our SIDEWINDER
ATX-3000.






15






Operating
and Administrative Expenses




Operating
and administrative expenses which include administrative salaries, depreciation
and other expenses for the twelve month period ended December 31, 2007 totaled
$3.3 million which represents a decrease of approximately $600,000 from $3.9
million incurred in the twelve month period ended December 31, 2006. The
decrease is primarily due to lower operating, marketing and administrative
expenses in 2007, compared to 2006, partially offset by additional expenses
relating to and the development of the Cobra and King Cobra scissor lift and
Omni-Directional Power Chair development costs.





Operating
expenses in 2006 included a $2.0 million impairment charge for the Filco
advances, which were completely written off in 2005 and 2006.




Other
Income and Expense




Other
income and expenses, which included interest expense $387,000, revaluation
income of $4.3 million, amortization of deferred financing and debt costs of
$2.0 million, liquidated damages of $443,000 and excess cost over proceeds of
$1.4 million during the twelve month period ended December 31, 2007 totaled
approximately $56,000. During 2006 we recorded other income and expenses of
approximately ($225,000), which included charges for deferred financing fees and
debt discount of approximately ($900,000), settlement expenses of ($300,000),
offset by revaluation income of $1.4 million.





Loss
Attributable to Common Shareholders




Loss
attributable to common shareholders for the twelve months ended December 31,
2007 was approximately $(3.2) million compared with a loss of $(6.3) million for
the same period in 2006. . The decrease is primarily due to lower operating,
marketing and administrative expenses in 2007, compared to 2006, partially
offset by additional expenses relating to and the development of the Cobra and
King Cobra scissor lift and Omni-Directional Power Chair development
costs.





We also
wrote down the remaining Filco advance of $2.0 million during 2006, along with
approximately $300,000 of deemed dividend expense in each year.





Research
and Development





We
incurred $73,805 and $519,134 in research and development expenses during the
year ended December 31, 2007 and 2006, respectively. Research and development
activities during fiscal 2007 primarily involved continued limited testing and
evaluation of omni-directional components and preparing these components for
production in 2008. Our wheel design was changed from the "concept" to
"production" phase. This was and is an ongoing process between us 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
we revised the algorithms used in the motor controllers as well the
microprocessor that runs the machines. Research and development activities also
included further changes to existing designs and new designs that were patented
or for those patents with pending applications. Portions of the costs we
incurred due to testing and research and development were charged to the US Navy
contract as provided therein.




Liquidity
and Capital Resources




The
February, 2007 issue had a provision for liquidated damages if the Company did
not satisfy its obligations to cause the SEC to declare the registration
statement effective within the prescribed time period. Once the conditions for
recording registration payment arrangements, established in EITF 00-19-2,
"Accounting for Registration Payment Arrangements," were statisfied, the Company
recorded liquidated damages of $514,430 for the specified maximum nine-month
period.




16






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
2007 and 2006, we recorded credits of $506,605 and $493,258, respectively, from
the sale of our losses and credits.




We
have previously 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, 2007. 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 a significant amount of operating capital
will be required during the next 12 months to sufficiently fund operations,
however, we can not accurately estimate the amount required due to the current
suspension of 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, 2007, our working capital deficit was $2.8 million. Fixed assets,
net of accumulated depreciation was $269,000, and total assets, as of December
31, 2007 were $2,513,000. Current liabilities as of December 31, 2007 were $4.4
million compared with total liabilities of $6.2 million.





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.






17






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.





During
2007, we accrued $513,400in liquidated damages in connection with the February
2007 debt issuance because 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.








18






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, 2007, 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.





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 there were no impairment charges for the year ended December 31,
2007.





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.








19





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
$10,650,648 as of December 31, 2007, 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. There is no deferred tax assets as
of December 31, 2007 due to uncertainties about the realization of the
asset.





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.








20




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, 2007 and 2006, we recognized and recorded the value of certain
warrants as equity of $2,315,935, 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, 2007 and 2006,
we have recognized in the statement of operations, revaluation income of
$4,266,042 and $1,412,143, respectively. In addition, we recognized a derivative
liability in the accompanying balance sheet for conversion benefits and warrants
of $709,183 in 2007 and $236,144 in 2006.




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, 2007 and 2006, we
issued an aggregate of 586,609 and 871,257 shares, respectively, of common stock
representing a value of services of $332,680 and $1,197,826 , respectively, to
third parties in exchange for services performed.








21










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-$1.75 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 2007 and
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,
2007 and 2006, we had a net loss attributable to common stockholders of
approximately $3.2 and $ 6.2 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 currently have no 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
couple of months we will have to seek bankruptcy protection, which would have a
material adverse impact on our business prospects.






22







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. 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.






23






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.




On
April 4, 2008, Robert Watson resigned as Chief Executive Officer, President and
a director of Airtrax Inc. effective immediately. Mr. Watson will continue to
serve as an advisor to the Company on a part-time consulting basis to continue
to pursue financing for the Company.





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.




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.






24






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
32,800,093 shares of common stock outstanding as of April 11, 2008, and we had
convertible notes which require the issuance of  approximately
9,726,000 additional shares of common stock pursuant to our 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 2007
note issuances. Further, we issued 16,595,732 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.




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:






25






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.











26








Item 7. Financial
Statements.





Index
to Consolidated Financial Statements





PageReport
      of Independent Registered Public Accounting Firm
            F-1Consolidated
      Balance Sheet as of December 31, 2007
            F-2Consolidated
      Statements of Operations for the years ended December 31, 2007 and
      2006
            F-3Consolidated
      Statement of Changes in Shareholders' Equity (Deficiency) for the years
      ended December 31, 2007 and 2006
            F-4Consolidated
      Statements of Cash Flows for the year ended December 31, 2007 and
      2006
            F-5Notes
      to Consolidated Financial Statements as of December 31, 2007 and
      2006
            F-6











27












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, 2007 and 2006 and the related statements of operations,
changes in stock holders' deficiency and cash flows for the two years ended
December 31, 2007 and 2006. 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, 2007 and 2006, and the results of its operations and its cash flows
for the years ended December 31, 2007 and 2006 in accordance with U.S. generally
accepted accounting principles.




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, 2007, the Company had a working capital deficiency
of approximately $2.8 million as well as an accumulated deficit $29.7 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 Accountants


April 11,
2008


Wayne,
New Jersey






F-1


Part
1-Financial Information




Item
1. Financial Statements
   AIRTRAX,
INC.


BALANCE
SHEET
 December
31, 2007


ASSETS
              
              
              2007Current
      AssetsCash
              
              $
              304,735Accounts
      receivable, net of reserve
              
              
              32,814Inventory
              
              
              1,041,598Prepaid
      expenses
              
              
              40,906Vendor
      advances
              
              
              165,712Total
      current assets
              
              
              1,585,765Fixed
      Assets
              
              
              670,369Less:
      accumulated depreciation
              
              
              (401,849)Net
      fixed assets
              
              
              268,520Other
      AssetsDeferred
      financing costs & other
              
              
              226,305Prepaid
      interest
              
              
              296,582Patents
      – net
              
              
              136,253Total
      other assets
              
              
              659,140TOTAL
      ASSETS
              
              $
              2,513,425LIABILITIES AND STOCKHOLDERS’
      DEFICIENCYCurrent
      LiabilitiesAccounts
      payable
              
              $
              323,003Accrued
      liabilities
              
              
              1,157,151Shareholder
      loans payable
              
              
              40,713Current
      portion-Convertible debt
              
              
              2,175,723Warrants
      and conversion option liability
              
              
              709,183Total
      current liabilities
              
              
              4,405,773Long
      Term Convertible Debt
              
              
              1,826,667TOTAL
      LIABILITIES
              
              
              6,232,440Stockholders’
      DeficiencyPreferred
      stock – authorized; 5,000,000 shares, no par value, 275,000 issued and
      outstanding
              
              
              12,950Common
      stock – authorized, 100,000,000 shares; no par value, issued and
      outstanding – 26,755,867 and 24,260,352, respectively
              
              
              23,395,647Paid
      in capital – warrants
              
              
              2,315,935Paid
      in capital – options
              
              
              244,799Accumulated
      deficit
              
              
              (29,688,346)Total
      stockholders’ deficiency
              
              
              (3,719,015)TOTAL
      LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
              
              $
              2,513,425
   The
accompanying notes are an integral part of these financial
statements.
   F-2
  AIRTRAX,
INC.
 STATEMENT
OF OPERATIONS
 For the Twelve Months Ended December
31,
 (In dollars, except share data)
 2007
                
                
                2006Revenues
                
                $
                745,367
                
                
                $
                1,346,913Cost
      of sales
                
                
                749,043
                
                
                
                1,470,542Gross
      Margin
                
                
                (3,676
                )
                
                
                (123,629
                )Operating
      and administrative expensesGeneral
      and Administrative costs
                
                
                2,809,689
                
                
                
                3,943,632Impairment
      of Filco advances
                
                
                -
                
                
                
                2,000,000Total
      Operating Expenses
                
                
                2,809,689
                
                
                
                5,943,632Operating
      loss
                
                
                (2,813,365
                )
                
                
                (6,067,261
                )Other
      income expenseInterest
      expense
                
                
                (386,510
                )
                
                
                (230,149
                )Revaluation
      income
                
                
                4,266,042
                
                
                
                1,412,143Amortization
      of financing costs
                
                
                (457,696
                )
                
                
                (251,438
                )Amortization
      of debt discounts
                
                
                (1,595,007
                )
                
                
                (648,440
                )Liquidated
      damages
                
                
                (513,431
                )
                
                
                (214,247
                )Excess
      cost of liabilities over proceeds
                
                
                (1,401,941
                )
                
                
                -Setttlement
      expenses
                
                
                -
                
                
                
                (290,804
                )Other
      income
                
                
                74,285
                
                
                
                (2,255
                )Net
      loss before taxes
                
                
                (2,827,623
                )
                
                
                (6,292,451
                )Income
      tax (expense) benefit, State:
                
                
                (413,284
                )
                
                
                437,803Net
      loss before dividends
                
                
                (3,240,907
                )
                
                
                (5,854,648
                )Deemed
      dividends on preferred stock
                
                
                -
                
                
                
                303,100Net
      loss attributable to common shareholders
                
                
                (3,240,907
                )
                
                
                (6,157,748
                )Preferred
      stock dividends paid
                
                
                -
                
                
                
                (112,500
                )Deficit
      allocable to common shareholders
                
                $
                (3,240,907
                )
                
                $
                (6,270,248
                )Net
      loss accumulated;Net
      loss attributable to common shareholders
                
                $
                (3,240,907
                )
                
                $
                (5,854,648
                )Adjustment
      for preferred share dividends accumulated
                
                
                68,750
                
                
                
                91,667Net
      Loss allocable to common shareholders
                
                $
                (3,309,657
                )
                
                
                (5,946,315
                )Net
      loss per share basic & diluted
                
                $
                (0.13
                )
                
                $
                (0.27
                )Weighted
      average shares outstanding
                
                
                24,962,106
                
                
                
                23,055,578






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





F-3




AIRTRAX,
INC.




STATEMENT
OF CHANGES IN EQUITY
  For the Two Years Ended December 31, 2007 and
2006


Common
      Shares
              
              
              Common
      Stock Amount
              
              
              Preferred
      Shares
              
              
              Preferred
      Amount
              
              
              Paid
      in Capital Warrants
              
              
              Paid
      in Capital Options
              
              
              Accumulated
      Deficit
              
              
              TotalBalance
      at December 31, 2005
              
              
              21,939,360
              
              
              $
              18,426,605
              
              
              
              275,000
              
              
              
              12,950
              
              
              $
              2,051,118
              
              
              $
              1,330,948
              
              
              $
              (20,177,194
              )
              
              $
              1,644,427Warrants
      issued in connectionwith
      Convertible debt
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              -
              
              
              
              264,817
              
              
              
              -
              
              
              
              -
              
              
              
              264,817Shares
      issued for settlement of interest
              
              
              49,081
              
              
              
              66,516
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              66,516Employee
      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 Note default
              
              
              184,000
              
              
              
              93,490
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              93,490Options
      issued
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              76,351
              
              
              
              -
              
              
              
              76,351Conversion
      of convertible debt
              
              
              761,952
              
              
              
              1,138,012
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,138,012Shares
      issued for cash
              
              
              35,723
              
              
              
              65,500
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              65,500Proceeds
      from warrant extensions
              
              
              
              
              
              
              117,000
              
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              117,000Dividends
      on preferred stock
              
              
              418,879
              
              
              
              415,610
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (112,500
              )
              
              
              303,110Net
      Loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              (6,157,745
              )
              
              
              (6,157,745
              )Balance
      at December 31, 2006
              
              
              24,260,352
              
              
              $
              21,520,559
              
              
              
              275,000
              
              
              $
              12,950
              
              
              $
              2,315,935
              
              
              $
              1,407,299
              
              
              $
              (26,447,439
              )
              
              $
              (1,190,696
              )Shares
      issued for services
              
              
              317,261
              
              
              
              166,016
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              166,016Correction
      of shares outstanding
              
              
              (19,667
              )
              
              
              (24,389
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (24,389
              )Shares
      issued to directors
              
              
              269,348
              
              
              
              166,664
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              166,664Cancellation
      of options
              
              
              -
              
              
              
              1,162,500
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,162,500
              )
              
              
              -
              
              
              
              -Conversion
      of convertible debt
              
              
              933,407
              
              
              
              404,297
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              404,297Shares
      issued in connection with Feb 2005 MFN
              
              
              995,166
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
      Loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (3,240,907
              )
              
              
              (3,240,907
              )Balance
      at December 31, 2007
              
              
              26,755,867
              
              
              $
              23,395,647
              
              
              
              275,000
              
              
              $
              12,950
              
              
              $
              2,315,935
              
              
              $
              244,799
              
              
              $
              (29,688,346
              )
              
              $
              (3,719,015
              )




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





F-4






AIRTRAX,
INC.


STATEMENT
OF CASH FLOWS


FOR THE TWELVE MONTHS ENDED DECEMBER
31,


2007
            
            
            
            
            2006Cash
      flows from operating activities:Net
      loss
            
            $
            (3,240,907
            )
            
            
            
            $
            (6,157,745
            )Adjustments
      to reconcile net loss to net cashused
      in operating activities:Depreciation
      and amortization
            
            
            74,528
            
            
            
            
            
            69,019Amortization
      of debt discounts
            
            
            2,052,693
            
            
            
            
            
            899,878Common
      stock issued as payment for services
            
            
            333,055
            
            
            
            
            
            1,274,177Provision
      for bad debts
            
            
            22,403
            
            
            
            
            
            -Impairment
      of advances to Filco GmBH
            
            
            -
            
            
            
            
            
            2,000,000Stock
      issued in settlement of obligations
            
            
            -
            
            
            
            
            
            93,490Excess
      discount expense
            
            
            1,401,941
            
            
            
            
            
            -Cost
      of settling liquidated damages
            
            
            -
            
            
            
            
            
            183,572Provision
      for excess inventory
            
            
            64,000
            
            
            
            
            
            -Deemed
      dividend on preferred stock
            
            
            -
            
            
            
            
            
            303,100Amortization
      of prepaid interest
            
            
            218,523
            
            
            
            
            
            -Revaluation
      income
            
            
            (4,266,042
            )
            
            
            
            
            (1,412,143
            )Accrued
      interest on shareholder advances
            
            
            -
            
            
            
            
            
            7,136Stock
      to settle interest
            
            
            -
            
            
            
            
            
            66,464Adjustment
      of deferred tax asset
            
            
            413,284
            
            
            
            
            
            -Decrease
      in accrual of deferred tax benefit
            
            
            506,605
            
            
            
            
            
            7,413Change
      in assets (liabilties)(Increase)
      decrease in accounts receivable
            
            
            (4,513
            )
            
            
            
            
            43,653(Increase)
      decrease in vendor advances
            
            
            (62,084
            )
            
            
            
            
            59,889Increase
      in prepaid expenses
            
            
            (40,906
            )
            
            
            
            
            -(Increase)
      decrease in inventory
            
            
            (56,141
            )
            
            
            
            
            955,682Increase
      in accrued expenses
            
            
            500,220
            
            
            
            
            
            524,984(Decrease)
      increase in accounts payable
            
            
            (579,529
            )
            
            
            
            
            211,898Net
      cash used in operating activities
            
            
            (2,662,870
            )
            
            
            
            
            (869,533
            )Cash
      flows from investing activities:Acquisition
      of equipment
            
            
            (47,232
            )
            
            
            
            
            (151,577
            )Additions
      to patent cost
            
            
            -
            
            
            
            
            
            (6,800
            )Net
      cash used in investing activities
            
            
            (47,232
            )
            
            
            
            
            (158,377
            )Cash
      flows from financing activities:Proceeds
      from converted debt
            
            
            -
            
            
            
            
            
            1,219,800Proceeds
      from convertible debt
            
            
            2,822,100
            
            
            
            
            
            -Proceeds
      from the sale of common stock
            
            
            -
            
            
            
            
            
            65,500Payment
      on note payable
            
            
            (100,000
            )
            
            
            
            
            -Proceeds
      from notes payable to related parties
            
            
            -
            
            
            
            
            
            35,000Payment
      of notes payable to related parties
            
            
            (35,000
            )
            
            
            
            
            (100,941
            )Proceeds
      from exercise of warrants
            
            
            -
            
            
            
            
            
            117,000Net
      cash provided by financing activities
            
            
            2,687,100
            
            
            
            
            
            1,336,359Net
      (decrease) increase in cash
            
            
            (23,002
            )
            
            
            
            
            308,449Cash,
      beginning of year
            
            
            327,737
            
            
            
            
            
            19,248Cash,
      end of year
            
            $
            304,735
            
            
            
            
            $
            327,697




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










F-5







AIRTRAX,
INC.


NOTES
TO FINANCIAL STATEMENTS


December
31, 2007





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 2006 and
2007, 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,
2007.




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, 2007,  there was a reserve of $13,750 and there was no
allowance for doubtful accounts as of December 31, 2006..






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, 2007 and 2006.




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, 2007, 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 there were no impairment charges for the year
ended December 31, 2007.








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 2007 and 2006.




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
$10,650,648 as of December 31, 2007, 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. There was no net deferred tax asset
as of December 31, 2007 due to the uncertainty of its
realizability.




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.






F-8




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, 2007 and 2006, the Company
recognized and recorded the value of certain warrants as equity of $
2,315,935.




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, 2007
and 2006, the Company has recognized in the statement of operations, revaluation
income <expense>  of $4,266,042 and $1,412,143,
respectively. In addition, the Company recognized a derivative liability in the
accompanying balance sheet for conversion benefits and warrants of $709,283 in
2007 and $236,144 in 2006.




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:








F-9










2007
            
            
            2006Fair
      Value of stock
            
            $
            .17
            
            
            $
            .0.47Exercise
      Price
            
            $
            .45-$1.65
            
            
            $
            $1.56-1.65Dividend
      Yield
            
            
            None
            
            
            NoneRisk
      Free Interest Rate
            
            
            4.68
            %
            
            
            4.63%-5.10
            %Expected
      Volatility
            
            
            89.25%-91.23
            %
            
            
            89.25%-91.23
            %Expected
      Life-Years
            
            
            1.81-2.68
            
            
            
            2.5-3.5





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, 2007 and 2006, the Company issued an aggregate of 586,609  and
871,257 shares, respectively, of common stock representing a value of services
of $332,680  and $1,197,826 , 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.




Pursuant
to the requirements of SFAS 123R, the weighted average fair value of options
granted during 2006, as determined on the dates of grant, was $ .25. The fair
values were determined in 2006 using a Black Scholes Model, with a volatility
rate of 89.88%, risk free interest rate of 4.25%, and an expected life of 3.33
years. There were no options granted during 2007




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,
2007.  Each of these warrants is exercisable over five year periods from
dates of issuance at prices ranging from $0.45-$1.75 per share.


Balance
      December 31, 2006
                
                
                10,383,323Warrants
      issued February 2007
                
                
                16,595,732Convertible
      debentures
                
                
                715,333Warrants
      issued to Placement Agent
                
                
                200,000Warrants
      issued August 26, 2007Total warrants
      issued in 2007
                
                
                17,511,065Balance
      December 31, 2007
                
                
                27,894,388





F-10








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, 2007 and 2006, the Company had approximately 24,962,106 and
23,055,578 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 2006 financial statements have been reclassified to
conform to the 2007 financial statement presentation.




NOTE 2– DEBT AND RELATED
SECURITIES




Convertible
notes payable consist of the following at December 31, 2007 and
2006:


Convertible
notes payable at December 31, 2007:


Debt
              
              
              
              
              
              Conversion
              
              
              
              
              
              ExerciseNote
              
              
              Discount
              
              
              Net
              
              
              Price
              
              
              Warrants
              
              
              PriceMay
      31, 2005, 8% interest, due May 31, 2007
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              1.30
              
              
              
              423,077
              
              
              $
              2.11
              
              
              
              (1
              )October
      18, 2005, 8% interest, October 18, 2007
              
              
              1,325,500
              
              
              
              -
              
              
              
              1,325,500
              
              
              $
              2.00
              
              
              
              851,400
              
              
              $
              3.25
              
              
              
              (1
              )
      (2)March
      1, 2006, 4% interest, due March 1, 2008
              
              
              150,000
              
              
              
              (2,044
              )
              
              
              147,956
              
              
              $
              1.56
              
              
              
              48,077
              
              
              $
              1.65June
      30, 2006, 4% interest, due June 30, 2008
              
              
              48,248
              
              
              
              (1,619
              )
              
              
              46,629
              
              
              $
              1.56
              
              
              
              24,124
              
              
              $
              1.65July
      21, 2006, 2% interest, due July 21, 2008
              
              
              359,549
              
              
              
              (3,879
              )
              
              
              355,670
              
              
              $
              1.56
              
              
              
              282,051
              
              
              $
              1.65
              
              
              
              (1
              )July
      26, 2006, 12% interest, due October 26, 2007
              
              
              300,000
              
              
              
              -
              
              
              
              300,000
              
              
              $
              1.56
              
              
              
              110,808
              
              
              $
              1.56
              
              
              
              (1
              )February
      20, 2007, 8% interest, due February 20, 2009
              
              
              3,734,040
              
              
              
              (1,907,405
              )
              
              
              1,826,635
              
              
              $
              0.45
              
              
              
              8,297,867
              
              
              $
              0.544,148,933
              
              
              $
              0.754,148,933
              
              
              $
              1.25715,533
              
              
              $
              0.54Total
      Convertible Notes Payable
              
              $
              5,917,337
              
              
              $
              (1,914,947
              )
              
              $
              4,002,390
              
              
              
              
              
              
              
              19,050,803Less:
      Current Portion
              
              $
              2,183,297
              
              
              $
              (7,574
              )
              
              
              2,175,723Long
      term convertible notes payable
              
              $
              3,734,040
              
              
              $
              (1,907,373
              )
              
              $
              1,826,667
 Convertible
notes payable 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
              )March
      1, 2006, 4% interest, due March 1, 2008
              
              
              150,000
              
              
              
              (10,216
              )
              
              
              139,784
              
              
              $
              1.56
              
              
              
              48,077
              
              
              $
              1.65June
      30, 2006, 4% interest, due June 30, 2008
              
              
              48,248
              
              
              
              (5,511
              )
              
              
              42,737
              
              
              $
              1.56
              
              
              
              24,124
              
              
              $
              1.65July
      21, 2006, 2% interest, due July 21, 2008
              
              
              359,549
              
              
              
              (10,528
              )
              
              
              349,021
              
              
              $
              1.56
              
              
              
              282,051
              
              
              $
              1.65
              
              
              
              (1
              )July
      26, 2006, 12% interest, due October 26, 2007
              
              
              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
  (1)
              The
      conversion price and exercise price were subsequently reduced to $0.45 in
      connection with the February 20, 2007 convertible debt
      issuance.(2)
              The
      October 2005 issuance due October 2005 was automaticallt extended to April
      18, 2008 due the terms of the Notes.




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.






F-11




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.




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.




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.  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 and was in default.  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.  The amount
due was reduced to $300,000 and interest was reduced to
10%.  Additionally, the Company issued 184,000 shares of common stock
as settlement of the default and paid a fee of $15,000 to Source Capital Group,
Inc., a registered representative of the Note holder, and the Company also
agreed to make monthly interest payments.




The July
26, 2006 Renegotiated Note was due and payable in full, including all accrued
and unpaid interest, on November 29, 2007.  The Note was not paid in
October and was again in default.  In December, the Company
renegotiated the Note and agreed to issued 100,000 shares of common stock to the
Note holder for forbearance, and subsequently issued 150,000 shares of common
stock as payment of interest through April 2008.    There
can be no assurances that the Company will be successful in maintaining further
interest payments.






F-12







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.





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").




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






F-13




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.




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.




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.




F-14





DEBT,
CONVERSION TO STOCK AND RELATED WARRANTS


The
balances of Convertible Notes and Warrants at December 31, 2007 and 2006 consist
of the following:


Convertible
      Notes and Warrants at December 31, 2007:CONVERTIBLE NOTES
              
              
              WARRANTSConversion
              
              
              
              
              
              ExerciseNote
              
              
              Shares
              
              
              Price
              
              
              Warrants
              
              
              PriceMay
      31, 2005, 8% interest, due May 31, 2007
              
              $
              -
              
              
              
              
              
              $
              -
              
              
              
              423,077
              
              
              $
              0.45
              
              
              
              (1
              )October
      18, 2005, 8% interest, October 18, 2007
              
              
              1,325,500
              
              
              
              2,945,556
              
              
              $
              0.45
              
              
              
              851,400
              
              
              $
              0.45
              
              
              
              (1
              )
      (2)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
              
              
              300,000
              
              
              
              666,667
              
              
              $
              0.45
              
              
              
              110,808
              
              
              $
              0.45
              
              
              
              (1
              )February
      20, 2007, 8% interest, due February 20, 2009
              
              
              3,734,040
              
              
              
              8,297,867
              
              
              $
              0.45
              
              
              
              8,297,867
              
              
              $
              0.544,148,933
              
              
              $
              0.754,148,933
              
              
              $
              1.25715,533
              
              
              $
              0.54Total
      Convertible Notes Payable
              
              $
              5,917,337
              
              
              $
              12,267,492
              
              
              
              
              
              
              
              19,050,803
  Convertible
      Notes and Warrants at December 31, 2006:
              
              CONVERTIBLE NOTES
              
              
              WARRANTSConversion
              
              
              
              
              
              ExerciseNote
              
              
              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
              )
      (2)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
              
              
              $
              1,545,157
              
              
              
              
              
              
              
              1,739,537
  (1)
              The
      conversion price and exercise price were reduced to $0.45 in connection
      with the February 20, 2007 convertible debt issuance.(2)
              The
      October 2005 issuance due October 2005 was automatically extended to April
      18, 2008 due the terms of the Notes.




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.





The
February 2007 convertible debt issuance includes certain variable conversion
pricing which results in the actual maximum number of potential shares needed to
satisfy the conversion of such debt to be unknown and not quantifiable at the
date of issuance.  EITF 00-19-2 specifies that debt issuances with
variable conversion pricing for which there is no established “floor” in the conversion
pricing, and where the maximum number of shares needed to satisfy the conversion
of such debt is not known, should be accounted for as derivative liabilities and
revalued at the end of each reporting period. When a derivative classified as a
liability is exercised, cancelled, or the maximum number of shares needed to
satisfy the conversion of such debt is known, the fair value of the derivative,
as determined at that time, is revalued and transferred to equity, and is no
longer revalued.  To the extent that the initial fair values of the
derivative liabilities exceed the net proceeds received, an immediate charge to
the statement of operations is recognized, for the excess. As
of  December 31, 2007, the Company recognized in the statement of
operations excess costs over debt proceeds of $1,401,901 related to the excess
of derivative liabilities over the net proceeds received for the February 2007
debt issuance.  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 classification of derivative instruments, including whether
such instruments should be recorded as liabilities or as equity, is re-assessed
at the end of each reporting period. Derivative liabilities are classified in
the balance sheet as current or non-current based on the classification
previously elected for the host instrument.






F-15




NOTE
3-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.  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.





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:




2007
            
            
            2006Shares
            
            
            Price
            
            
            Shares
            
            
            PriceOptions
      outstanding at beginning of year
            
            
            1,715,500
            
            
            $
            .73
            
            
            
            1,375,000
            
            
            $
            .80Options
      granted during year
            
            
            0
            
            
            
            -
            
            
            
            350,000
            
            
            $
            .46Options
      expired during the year
            
            
            (1,300,000)
            
            
            $
            .83
            
            
            
            -
            
            
            
            -Options
      exercised during year
            
            
            -
            
            
            
            -
            
            
            
            (7,500
            )
            
            
            -Options
      outstanding at end of year
            
            
            415,5004
            
            
            
            
            
            
            
            1,715,500Weighted
      average price
            
            
            
            
            
            $
            .32
            
            
            
            
            
            
            $
            .73Weighted
      average Fair Value of options granted
            
            
            
            
            
            $
            0
            
            
            
            
            
            
            $
            .25




Stock
option expense for 2007 and 2006 was $0   and $ 76,351,
respectively.




SHARES
ISSUED FOR SERVICES




There
were shares awarded as compensation for other services aggregating $332,680 and
$1,242,177, in 2007 and 2006, respectively. These share issuances for 2007 and
2006 are detailed below by type of service performed.





The
following shares were issued for services in 2007:





Number
      of
            
            Grant
            
            Price
      at
            
            Value
      atServices
      Rendered
            
            Shares
            
            Date
            
            Date
            
            Grant
      DateLegal
      services
            
            
            94,444
            
            
            2/8
            
            $
            .52
            
            $
            49,111Investor
      relations
            
            
            75,758
            
            
            2/11
            
            
            .52
            
            
            39,394Investor
      relations
            
            
            147,059
            
            
            7/2
            
            
            ..52
            
            
            77,511Director
      fees
            
            
            140,000
            
            
            2/27
            
            
            .63
            
            
            88,200Director
      fees
            
            
            54,348
            
            
            2/27
            
            
            .63
            
            
            32,864Director
      fees
            
            
            60,000
            
            
            2/27
            
            
            .63
            
            
            37,800Director
      fees
            
            
            15,000
            
            
            4/15
            
            
            .52
            
            
            7,800Total
      shares issued for services
            
            
            586,609
            
            
            
            
            
            
            
            $
            332,680







F-16







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-17










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.




The following is a schedule of changes in warrants outstanding during
the years 2007 and 2006. 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
      January 1,  2006
            
            
            9,392,750Warrants
      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
            
            
            10,383,323Warrants
      issued with $3.7 million convertible debt, February
            
            
            17,311,065Warrants
      issued August 26, 2007
            
            
            200,000Balance
      December 31, 2007
            
            
            27,894,388





The
exercise price of certain warrants was changed 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-18






NOTE 4 - 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, 2007, the Company had NOL
carry forwards of $28,586,386 available for Federal taxes. The potential tax
benefit of the state NOL’s for all periods through December 31, 2006 has
been recognized on the books of the Company.  The potential
benefit of state NOL’s subsequent to December 31, 2006 and
the  potential benefit of the Federal NOL’s have been offset by a
valuation allowance. If not used, these Federal carry forwards 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
            
            
            6,804,7132027
            
            
            3,943,479








During
the year 2007, the Company realized $506,605 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 2006 as compared to $445,216 from
similar sales that accrued during 2005. These potential New Jersey offsets for
periods prior to 2007 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:


Deferred
      Tax Assets
            
            $
            10,650,468Valuation
      allowance
            
            $
            (10,650,468Balance
      Recognized
            
            $
            -




The  balance
of the valuation allowance relates to Federal taxes and state taxes of 2007.
Since state tax benefits for years prior to 2007 have been realized, no reserve
is deemed necessary for them. The valuation reserve increased by $ 2,392,829
during the year 2007.




NOTE
5 -SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION




Cash paid
for interest and income taxes is presented below:





2007
            
            2006Interest
            
            $
            56,983
            
            
            $
            1,971Income
      taxes
            
            
            520
            
            
            
            500




During
2007, 1,300,000 stock options expired at a value of $1,162,500 which was
transferred to paid in capital.





There
were no non-cash investing activities during either 2007 or 2006.





The
following non-cash financing activities occurred:





a)
            Shares
      of common stock were issued for services during 2007 and 2006; these
      totaled 586,609 and 687,665 shares,
  respectively.





b)
            During
      2007 and 2006, the following amounts were converted from debt to
      equity:





c)
            During
      2007, $246,797 of the May 2005 convertible debt issue was converted into
      548,438 08 shares of our common stock at $.45 per
  share.









F-19







d)
            During
      2007, $157,500 of the October 2005 convertible debt issue was converted
      into 350,000 shares of our common stock at $.45 per
  share.





e)
            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.





f)
            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.





g)
            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.





h)
            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.





NOTE
6 -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
7-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 2006
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
2007, the Board of Directors received 269,348 shares for services as directors;
these were valued at $168,000, 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. Those options were not exercised, and are now
considered to be expired.  Accordingly, the value of $1,162,500 has
been transferred to paid in capital.  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.






F-20






NOTE
8 -COMMITMENTS AND CONTINGENCIES




At
present, the Company is not obligated under any operating lease. Rent expense
amount to $ 153,000 in 2007 and $160,571 in 2006.




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.





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
9- 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
2007, and has concluded that they will have no effect on the Company's
financials statements.




NOTE 10-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, 2007, 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 11-SUBSEQUENT
EVENTS




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.






F-21







On
February 8, 2008, the Company issued 160,000 shares of common stock to eight
Directors as payment of board fees for 2008.





On
February 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.





On
February 21, 2008, the Company issued 635,097 shares of common stock to holders
of the October 2005 debt issuance for $196,000 of principal and $18,055 of
accrued interest.  The conversion price was $0.45 per
share.





On
February 27, 2008, the Company issued 48,478 shares of common stock to holders
of the October 2005 debt issuance for $11,150 of principal.  The
conversion price was $0.23 per share.





On March
3, 2008, the Company issued 50,000 shares of common stock to holders of the
October 2005 debt issuance for $11,500 of principal.  The conversion
price was $0.23 per share.





On March
14, 2008, the Company issued 50,000 shares of common stock to holders of the
October 2005 debt issuance for $11,500 of principal.  The conversion
price was $0.23 per share.





On March
21, 2008, the Company issued 285,130 shares of common stock to holders of the
October 2005 debt issuance for $61,500 of principal and $4,080 of accrued
interest.  The conversion price was $0.23 per share.





On March
21, 2008, the Company issued 217,391 shares of common stock to holders of the
February 2007 debt issuance for $50,000 of principal.  The conversion
price was $0.23 per share.





On
February 27, 2008, the Company issued 2,262,948 shares of common stock to
holders of the February 2007 debt issuance for $479,000 of principal
and  $41,478 of accrued penalty.  The conversion price was
$0.23 per share.





On
February 29, 2008, the Company issued 200,000 shares of common stock to holders
of the February 2007 debt issuance for $46,000 of principal.  The
conversion price was $0.23 per share.





On March
3, 2008, the Company issued 326,086 shares of common stock to holders of the
February 2007 debt issuance for $75,000 of principal.  The conversion
price was $0.23 per share.





On March
21, 2008, the Company issued 176,001 shares of common stock to holders of the
February 2007 debt issuance for $40,596 of principal.  The conversion
price was $0.23 per share.





On March
21, 2008, the Board of Directors of Airtrax suspended the employment of all of
its officers. It is expected that Mr. Robert Watson, the CEO of Airtrax, will
continue as Acting Chief Executive Officer on a part-time consulting basis to
continue to pursue financing. The Board of Directors of Airtrax elected to
suspend all operations of Airtrax's business, due to Airtrax's inability to
secure the financing required to continue operations. In connection with
Airtrax's suspension of operations, Airtrax has suspended the employment of all
employees. As instructed by the Board,  Airtrax's Acting Chief
Executive Officer, on a part-time consulting basis, intends to continue to
pursue financing.





On April
4, 2008, Robert Watson resigned as Chief Executive Officer, President and a
director of Airtrax Inc. (the "Company"), effective immediately. Mr. Watson will
continue to serve as an advisor to the Company on a part-time consulting basis
to continue to pursue financing for the Company. There was no disagreement or
dispute between Mr. Watson and the Company which led to his
resignation.  Pursuant to the Company's Bylaws, in the event that the
Chief Executive Officer shall vacate his or her office, and there is no
replacement, the Company's Chairman of the Board of Directors shall fill the
vacancy and assume the responsibilities and title of the Chief Executive
Officer. However, the Company does not currently have a Chairman of the Board of
Directors.




On April
10, 2008, William F. Hungerville was appointed interim Chief Executive Officer,
Mr. Hungerville is a director of Airtrax Inc.














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





None





Item 8A(T).    
  Controls and
Procedures.





Evaluation of Disclosure
Controls and Procedures.





We
maintain "disclosure controls and procedures," as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange
Act"), that are designed to ensure that information required to be disclosed by
us in reports that we file or submit under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in
Securities and Exchange Commission rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating our disclosure
controls and procedures, management recognized that disclosure controls and
procedures, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the disclosure
controls and procedures are met. Additionally, in designing disclosure controls
and procedures, our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures also is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions.





As of December 31, 2007, we carried out an evaluation, under the
supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective in ensuring that information required to
be disclosed by us in our periodic reports is recorded, processed, summarized
and reported, within the time periods specified for each report and that such
information is accumulated and communicated to our management, including our
principal executive and principal financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.





Management’s Report of
Internal Control over Financial Reporting.





We are
responsible for establishing and maintaining adequate internal control over
financial reporting in accordance with Exchange Act Rule 13a-15.  With
the participation of our Chief Executive Officer and Chief Financial Officer,
our management conducted an evaluation of the effectiveness of our internal
control over financial reporting as of December 31, 2007 based on the criteria
established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.  Based on this evaluation,
management concluded that our internal control over financial reporting was
effective as of December 31, 2007, based on those criteria.  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.  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.





This
annual report does not include an attestation report of the Company’s registered
accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission.




28






Item
8B - Other Information





None.





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
            PositionWilliam
      Hungerville
            72
            Director,
      Acting CEO and CFOD.
      Barney Harris
            47
            DirectorJames
      Hudson
            65
            DirectorFil
      Filipov
            61
            DirectorAndrew
      Guzzetti
            60
            DirectorIzak
      On
            60
            DirectorRobert
      Borski, Jr.
            59
            Director





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:




William Hungerville - Mr.
Hungerville has been our Acting Chief Executive Officer since April 10, 2008 and
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.





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.





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 was Chairman of the board between August 31, 2006 and
April 9, 2008. 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.




29






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.





Izak On- Mr. On has been a
Director since May 2007. Since 2001, Mr. On has been the founder and board
director of E.P.A. Fuel Services Ltd., an Israeli fuel service company. Between
2001 and 2003, Mr. On was the CEO and a partner of Erez Tal Bar - Fuelling
Services Ltd., an Israeli company that builds and manages fuel stations. Since
March 2007, Mr. On serves as a director of Diversified Senior Services, of
Winston-Salem, North Carolina. Mr. On received his degree in business
administration - marketing from the Tel-Aviv College of Management. Mr. On was
nominated by Alpha Capital to be their board representative, pursuant to the
Securities Purchase Agreement dated February 20, 2007.




Robert Watson -Mr. Watson was
our Chief Executive Officer and a Director since November 1, 2006 until he
resigned on April 4, 2008. Mr. Watson will continue to serve as an advisor to us
on a part-time consulting basis to continue to pursue financing on our behalf.
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.





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.




30




LEGAL
PROCEEDINGS




As of the
date of this filing, 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, 2007, and Forms 5 and amendments thereto furnished to us with
respect to the fiscal year ended December 31, 2007, we believe that during the
year ended December 31, 2007, 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, 2007, 2006 and 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
              ($)Robert
      M. Watson. CEO, President & Director
            
            
            2007
              2006
              2005
            
            
            $161,539
              $11,538
              $0
            
            
            $75,000
              $50,000
              0
            
            
            
            
            
            $45,000
              0
            
            
            0
              0
            
            
            0
              0
            
            
            0
              0
            
            
            $236,539
              $61,538
              0Peter
      Amico,
              CEO,
      President & Director
            
            
            2007
              2006
              2005
            
            
            $0
              $168,269
              $303,751
            
            
            $0
              $0
              $0
            
            
            0
              0
            
            
            0
              $975,000
            
            
            0
              0
            
            
            0
              0
            
            
            0
              0
            
            
            $0
              $168,269
              $303,751Nicholas
      Fenelli, Vice President & COO
            
            
            2007
              2006
              2005
            
            
            $103,462
              $96,798
              $78,202
            
            
            $0
              $0
              $0
            
            
            0
              0
            
            
            $24,000
              $53,500
            
            
            0
              0
            
            
            0
              0
            
            
            0
              0
            
            
            $103,463
              $96,798
              $78,202






31







Outstanding
Equity Awards at Fiscal Year-End Table.





There
were no grants of options to purchase our common stock to the named executive
officers at December 31, 2007.





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,
2007.




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
            
            
            $2,500-
            
            
            
            12,600
            
            
            $
            0
            
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            $
            12,600Robert
      M. Watson
            
            
            $2,500
            
            
            
            12,600
            
            
            
            0-
            
            
            
            0
            
            
            
            
            
            
            
            0
            
            
            
            12,600-James
      Hudson (1)
            
            
            $2,250-
            
            
            
            12,600
            
            
            $
            0
            
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            $
            12,600William
      Hungerville (1)
            
            
            $2,500
            
            
            
            12,600
            
            
            $
            0
            
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            $
            12,600D.
      Barney Harris(1)
            
            
            $2,250-
            
            
            
            12,600
            
            
            $
            0
            
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            $
            12,600Fil
      Filipov
            
            
            $2,250-
            
            
            
            12,600
            
            
            
            0-
            
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            12,600-Issac
      Onn
            
            
            $250
            
            
            
            12,600
            
            
            
            0
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            12,600Robert
      Borski
            
            
            $2,250-
            
            
            
            12,600
            
            
            $
            0
            
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            $
            12,600Peter
      Amico, Jr,
            
            
            $2,250-
            
            
            
            12,600
            
            
            
            0-
            
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            12,600-




EMPLOYMENT
AGREEMENTS




None.






32






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 11, 2008.





· 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)William
      Hungerville
            Common
      Stock
            221,000
            *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 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 08012Izak
      On
            Common
      Stock
            0
            0%200
      Freeway Drive, Unit 1Blackwood,
      NJ 08012Robert
      Borski, Jr.
            Common
      Stock
            78,504
            *200
      Freeway Drive, Unit 1Blackwood,
      NJ 08012All
      Officers and Directors
            Common
      Stock
            911,866
            2.78%As
      a Group (7 persons)




* Less
than 1%.





(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 11, 2008 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 32,800,093 shares issued and outstanding on April 11,
2008.





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






33







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:




Dividends
      accrued
            
            
            
            
            $
            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.






34






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)





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.









35







10.1
            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.





10.2
            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.





10.3
            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.





10.4
            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.





10.5
            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.





10.6
            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.





10.7
            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.





10.8
            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.





10.9
            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.





10.10
            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.





10.11
            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.





10.12
            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.





10.13
            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.





10.14
            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.






36







10.15
            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.





10.16
            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.





10.17
            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.





10.18
            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.





10.19
            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.





10.20
            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.





10.21
            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.





10.22
            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.





10.23
            Securities
      Purchase Agreement dated as of February 21, 2007 by and among Airtrax,
      Inc. and the investors named on the signature pages thereto, filed as an
      exhibit to the Current Report on Form 8-K filed on February 21, 2007 and
      incorporated herein by reference.





10.24
            Registration
      Rights Agreement dated as of February 21, 2007 by and among Airtrax, Inc.
      and the investors named on the signature pages thereto, filed as an
      exhibit to the Current Report on Form 8-K filed on February 21, 2007 and
      incorporated herein by reference.





10.25
            Form
      of Secured Convertible Debenture of Airtrax, Inc. dated as of February 21,
      2007, filed as an exhibit to the Current Report on Form 8-K filed on
      February 21, 2007 and incorporated herein by
  reference.





10.26
            Form
      of Common Stock Purchase Warrant of Airtrax, Inc. dated as of February 21,
      2007, filed as an exhibit to the Current Report on Form 8-K filed on
      February 21, 2007 and incorporated herein by
  reference.





10.27
            Security
      Agreement dated as of February 21, 2007 by and among Airtrax, Inc.,
      Airtrax Financial Services LLC, Airtrax Manufacturing Corp. and the
      investors named on the signature pages thereto, filed as an exhibit to the
      Current Report on Form 8-K filed on February 21, 2007 and incorporated
      herein by reference.






37







10.28
            Subsidiary
      Guarantee dated as of February 21, 2007 by and among Airtrax Financial
      Services LLC and Airtrax Manufacturing Corp., filed as an exhibit to the
      Current Report on Form 8-K filed on February 21, 2007 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 $ 53,817 and $76,803, respectively, for the years ended
December 31, 2007 and December 31, 2006.




AUDIT-RELATED
FEES




We
incurred fees of $30,895 and $47,947, respectively, for the years ended December
31, 2007 and 2006 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."




TAX
FEES




The
aggregate fees billed by our auditors for tax compliance matters were $1,580 and
$1,045, respectively, for the fiscal years ended December 31, 2007 and December
31, 2006.




ALL
OTHER FEES




We did
not incur any fees for other professional services rendered by our independent
auditors during the years ended December 31, 2007 and December 31,
2006.





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






38









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.Date:
      April 15, 2008
            By:/s/ WILLIAM F.
      HUNGERVILLE
              
              William
      F. HungervilleChief
      Executive Officer (Principal Executive Officer) and Chief Financial
      Officer (Principal Financial and Accounting
  Officer)





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.







Name
            Position
            Date/s/
      WILLIAM F. HUNGERVILLE
              
              William
      F. Hungerville
            Chief
      Executive Officer (Principal Executive Officer), Chief Financial Officer
      (Principal Financial and Accounting Officer) and Director
            April
      15, 2008Andrew
      Guzzetti
            Director
            April
      15, 2008/s/
      D. BARNEY HARRIS
              D.
      Barney Harris
            Director
            April
      15, 2008/s/
      JAMES HUDSON
              James
      Hudson
            Director
            April
      15, 2008/s/
      FIL FILIPOV
              Fil
      Filipov
            Director
            April
      15, 2008Izak
      On
            Director
            April
      15, 2008Robert
      Borski, Jr.
            Director
            April
      15, 2008