U.S.
      SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549




**FORM
      10-KSB**




(Mark
      One)




[ x ]
            ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
                ACT OF
                1934




FOR
      THE
      FISCAL YEAR ENDED DECEMBER 31, 2005




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




For
      the
      transition period from __________________________ to
      _________________________.




Commission
      File Number 0-27689





**AVIATION
                UPGRADE TECHNOLOGIES, INC.**
              (Exact
                name of small business issuer as specified in its
                charter)Nevada
              
              (State
                or other jurisdiction of
              incorporation
                or organization)
            
            33-0881303
              
              (IRS
                Employer Identification No.)6550
                South Pecos Road, Suite 142, Las Vegas, NV 89120 USA
              (Address
                of principal executive offices)(702)
                450-0003
              (Issuer’s
                telephone number)




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




Title
                of each class
              
              Common
                stock
            
            Name
                of each exchange on which registered
              
              None







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




Common
                  stock
              
              (Title
                  of class)







Check
      whether the issuer (1) filed all reports required to be filed by
      Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months
      (or for such shorter period that the registrant was required to file such
      reports), and (2) As been subject to such filing requirements for the past
      90 days.




Yes X No




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B is not contained in this form, and no disclosure will not be
      contained, to the best of registrant’s knowledge, in definitive proxy or
      information statements incorporated by reference in Part III of this Form
      10-KSB or any amendment to this Form 10-KSB. [X ]




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes  NoX





The
      issuer’s revenue for the fiscal year ended December 31, 2005 was
      $148,271.




The
      aggregate market value of the voting stock held by non-affiliates of the issuer
      as of February 23, 2006 was $0.




The
      number of shares of the common stock outstanding as of February 23, 2006 was
      11,457,750






**DOCUMENTS
      INCORPORATED BY REFERENCE:**




**Inapplicable**




**TRADITIONAL
      SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE)**




**YES**  **NO X**




1




**PART
      1**





Aviation
      Upgrade Technologies, Inc., a Nevada corporation (“Company,” “we,” or “AUT”),
      filed a Registration Statement on Form 10-SB on December 2, 1999. On
      February 1, 2000, our Registration Statement on Form 10-SB was declared
      effective and we became a reporting company pursuant to the Securities Exchange
      Act of 1934. We did not file any periodic reports or other information with
      the
      Securities and Exchange Commission until March 2001, at which time, we filed
      all
      delinquent quarterly and annual reports for the year ended December 31,
      2000 concurrently. We have filed all quarterly reports for the years ended
      December 31, 2001, 2002, 2003, 2004 and 2005 on a timely
      basis.





**Item
      1. Description of Business**





**Business
      Development** **.** We were
      incorporated in Nevada on January 8, 1999. The Air Alert Valve Cap earned
      $148,270 in revenue for the year ended December 31, 2005. There has not been
      any
      bankruptcy filing, receivership or any similar proceeding since our inception.
      There has been no reclassification, merger or consolidation since our inception.
      There has been no purchase or sale of a significant amount of assets that were
      not in the ordinary course of our business.





In
      April
      2001, we signed a licensing agreement with Torbjörn Lundqvist our founder and
      majority shareholder, for the worldwide marketing rights for an electronic
      tire
      valve cap that may be used on airplanes but was designed primarily for
      automobiles. The product provides early warning of low pressure in tires, which
      we believe will lead to safer travel in these vehicles and better fuel
      efficiency in automobiles. Once the tire is inflated to the appropriate
      pressure, the initial tightening of the cap onto the valve stem makes the valve
      cap memorize the tire pressure. If the pressure in the tire drops by more than
      approximately four pounds per square inch, a red LED light will blink to
      indicate the need to check the tire pressure. The licensing agreement calls
      for
      the reimbursement of research and development costs incurred by its founder
      and
      the payment of ongoing costs during the term of the agreement.




**Products.** ***Air
      Alert Valve Cap.*** We
      currently license the marketing rights for an electronic tire valve cap that
      may
      be used on both airplanes and automobiles. The product provides early warning
      of
      low pressure in tires, which we believe will lead to safer travel in these
      vehicles and better fuel efficiency in automobiles. Once the tire is inflated
      to
      the appropriate pressure, the initial tightening of the cap onto the valve
      stem
      makes the valve cap memorize the tire pressure. If the pressure in the tire
      drops by more than approximately four pounds per square inch, a red LED light
      will blink to indicate the need to check the tire pressure.




***Air
      Alert Valve Stem*** .
      We are
      currently developing a new product called the Air Alert Valve Stem. We are
      using
      the same technology as the Air Alert Valve Cap but the components are baked
      into
      a valve stem designed for today’s tubeless tires. We have showed the product at
      a trade show in Las Vegas and we had good response primarily from tire and
      automotive dealers.





**Manufacturing** .
      After
      careful evaluation of several contract manufacturers we have entered into a
      contract with Union Power Information Ind. Co., LTD in the City of Shenzhen
      in
      China. Union Power has the capability of producing up to several million Air
      Alert Valve Caps and Air Alert Valve Stems each month. Union Power has
      manufactured all sales made through 2005. Our contract provides for pricing
      as
      follows: $1.40 per unit when produced in bulk and $1.45 per unit when produced
      in 4-packs. Union Power produces in whatever volume we specify each month.
      We
      pay 60% of the aggregate price on delivery and the remaining 40% within 60
      days.
      The terms of this arrangement are reviewed every six months. We believe that
      relations with this manufacturer are good, though we could locate and engage
      another manufacturer on similar terms without difficulty.





**Marketing** **.** ** We
      believe that our initial primary target market will consist of large fleet
      operators with a secondary focus on tire dealers. We believe that the potential
      market for the tire valve cap is extremely large. The requirement for a warning
      system to detect tire pressure is currently under consideration in the
      automobile industry. On October 10, 2000, Congress passed the Transportation
      Recall Enhancement, Accountability and Documentation Act, which specified that
      legislation would be developed concerning a low tire pressure warning for motor
      vehicles. We believe that the valve cap technology could become standard
      equipment on all new low end vehicles sold in the United States and all over
      the
      industrialized world in the years ahead, in addition to being added to existing
      and replacement tires.




2




**Government
      Regulation** ***.*** **** The
      following does not purport to be a summary of all present and proposed federal,
      state and local regulations and legislation relating to the automobile industry.
      The following attempts to identify those aspects that could affect our business.
      Other existing legislation and regulation and, in many jurisdictions, state
      and
      local franchise requirements, are currently the subject of a variety of judicial
      proceedings, legislative hearings and administrative and legislative proposals
      which could also affect our method of operation or the methods of industries
      in
      which we are involved.





The
      Department of Transportation, the National Highway Traffic Safety Administration
      and other regulatory and administrative agencies have established standards
      for
      automotive and tire products and processes, which require the maintenance of
      certain records and provide for unscheduled inspections of facilities. Our
      products may be considered within the scope of such regulation and in such
      event, we will have to comply with those agency standards. In particular, the
      National Highway Traffic Safety Administration has established standards
      regarding the shape, size, and performance requirements of warning devices,
      as
      well as standards relating to tire manufacturing, maintenance and
      repair.





State,
      local and foreign governments have also adopted regulations relating to the
      manufacture and marketing of automotive and tire products. We cannot guarantee
      that our products will be in material compliance with all applicable
      regulations, which could have a material adverse impact on our business,
      financial conditions and results of operations. Any future violation of, and
      the
      cost of compliance with, these laws and regulations could have a material
      adverse effect on our business, financial condition and results of
      operations.





**Patents** ***.*** ** We do
      not presently own any patents, trademarks, concessions or royalties. Our founder
      has obtained a US patent ( **US
      Patent No. 6,629,454 B2)** for the
      Air Alert Valve Cap and filings for patent protection have been made in 29
      other
      countries. Patent protection for the Air Alert Valve Stem has also been filed
      in
      29 countries





We
      cannot
      guarantee, however, that any patents will be issued for the Air Alert Valve
      Stem
      or that, if issued, the breadth or degree of protection of these patents will
      be
      adequate to protect our interests. In addition, we cannot guarantee that others
      will not independently develop substantially equivalent proprietary information
      or obtain access to our know-how. Further, we cannot guarantee that others
      will
      not be issued patents which may prevent the sale of our products or require
      licensing and the payment of significant fees or royalties by us in order for
      us
      to be able to carry on our business. Finally, we cannot guarantee that the
      products of others will not infringe any patents issued to or licensed by us.
      Defense and prosecution of patent claims can be expensive and time consuming,
      even in those instances in which the outcome is favorable to us. If the outcome
      is adverse, it could subject us to significant liabilities to third parties,
      require us to obtain licenses from third parties or require us to cease our
      marketing activities.





**Competition** *.* **** Competition
      for the electronic tire valve cap is limited. To our knowledge, there are only
      a
      few mechanical tire valve caps on the market, which are sold by several
      companies under different brand names. Our review and testing of these products
      has indicated to us that they are unreliable and inefficient due to their
      mechanical nature. We have not seen any product like the Air Alert Valve Stem.
      Other solutions to the tire pressure problem facing the industry are currently
      directed toward dashboard warning signals, which are significantly more
      expensive than our tire valve cap and valve stem, and therefore, not considered
      direct competition. We anticipate that we will compete on the basis of the
      technical features, quality of our products and price.





**Research
      and Development** ***.*** **** We
      are
      not currently conducting any research and development activities, other than
      those activities related to the licensing agreement for the electronic tire
      valve cap and valve stem. During the license period and any renewal periods,
      we
      will pay fees, expenses and costs related to product development and any
      application fees for patents and trademarks. We have also issued 50,000 shares
      of common stock to one individual for efforts in co-designing the valve cap
      product with Mr. Lundqvist and another 1,000 shares of common stock to
      another individual for the name “Air Alert Valve Cap.”





**Insurance** **.** We
      are
      currently insured with an aggregate limit policy of $2,000,000 of product
      liability insurance for the Air Alert Valve Cap.




3





**Employees** ***.*** **** We
      have
      one full time employee and two part time directors/officers. Mr. Lundquist
      currently works for us on a full time basis. Mr. Lindholm currently devotes
      approximately four hours per week, but anticipates that he will devote
      significantly more hours if the valve cap starts producing significant revenues.
      Mr. Rhodes currently devotes approximately two hours per week, but
      anticipates that he will devote significantly more hours if the valve cap starts
      producing significant revenues. We anticipate that we will not hire any
      employees in the next six months, unless we generate significant revenues.
      We
      believe our future success depends in large part upon the continued service
      of
      our key senior management personnel and our ability to attract and retain
      managerial personnel.





**Item
      2. Description of Property**





Our
      corporate headquarters are located in Las Vegas, Nevada. We have renewed that
      lease for office space for which we pay $350 per month. The lease has a term
      of
      six months and expires on June 30, 2006. It includes certain amenities such
      as receptionist services and conference rooms. We do not anticipate any
      difficulty in extending the term of our lease on substantially the same terms
      as
      currently exists.





**Item
      3. Legal Proceedings**





There
      are
      no legal actions pending against us nor are any legal actions contemplated
      by us
      at this time.





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





No
      matters were submitted for a vote of the stockholders at any time during the
      fourth quarter of the year ended December 31, 2005.





**PART
      II**





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





We
      are a
      reporting company with the Securities and Exchange Commission. The public may
      read and copy any materials filed with the Securities and Exchange Commission
      at
      the Security and Exchange Commission’s Public Reference Room at 450 Fifth Street
      N.W., Washington, D.C. 20549. The public may also obtain information on the
      operation of the Public Reference Room by calling the Securities and Exchange
      Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains
      an Internet site that contains reports, proxy and information statements, and
      other information regarding issuers that file electronically with the Securities
      and Exchange Commission. The address of that site is
      http://www.sec.gov.





We
      participate in the OTC Bulletin Board, an electronic quotation medium for
      securities traded outside of the Nasdaq Stock Market, and prices for our common
      stock are published on the OTC Bulletin Board under the trading symbol "AVUG".
      This market is extremely limited and the prices quoted are not a reliable
      indication of the value of our common stock. As of February 23, 2006, our stock
      has not been traded.





All
      our
      filings and reports are available through our web site at:
      http://www.AviationUpgrade.com with a direct link to the SEC web
      site.





As
      of
      February 23, 2006, there were 120 record holders of our common
      stock.





As
      of
      February 23, 2006, there were 150,000 outstanding warrants to purchase shares
      of
      our common stock. Each warrant entitles the holder the right to purchase an
      additional share of common stock at $2.00 per share. These warrants expire
      seven
      years from the date of issuance.





All
      the
      shares of our common stock are subject to Rule 144 promulgated pursuant to
      the
      Securities Act of 1933; there are 1,914,604 shares that could be sold as of
      February 23, 2006 pursuant to Rule 144. Rule 144 provides, among other things,
      that persons holding restricted securities for a period of one year may each
      sell, assuming all of the conditions of Rule 144 are satisfied, in brokerage
      transactions every three (3) months an amount of restricted securities equal
      to
      one percent (1%) of our outstanding shares of common stock, or the average
      weekly reported volume of trading during the four calendar weeks preceding
      the
      filing of a notice of proposed sale, which ever is more. Rule 144 also provides
      that, after holding such securities for a period of two (2) years, a
      non-affiliate of the company may sell those securities without restriction,
      other than the requirement that we are current with respect to our information
      reporting requirements.




4





There
      have been no cash dividends declared on our common stock. Dividends are declared
      at the sole discretion of our Board of Directors.





**Recent
      Sales of Unregistered Securities** **.** During
      the year ended December 31, 2005, we issued no unregistered shares of our Common
      Stock.





During
      the fiscal year ended December 31, 2004, we issued unregistered shares of
      our Common Stock in the following transactions:





During
      the three month period ended March 2004, outstanding warrants to purchase 30,466
      shares of common stock were exercised by the holders. The warrants were issued
      as part of a Rule 506 Regulation D offering, exempt under
      Section 4(2) of the Securities Act of 1933. No underwriter was involved in
      the exercise of the warrants.





On
      March
      1, 2004, we entered into a Securities Purchase Agreement with an accredited
      investor for the sale of 55,000 shares of common stock for cash consideration
      of
      $50,000. These securities were issued under Section 4(2) of the Securities
      Act of 1933. No underwriter was involved in the sale of these
      securities.





On
      April
      26, 2004, we entered into a Securities Purchase Agreement with an accredited
      investor for the sale of 20,000 shares of common stock for cash consideration
      of
      $20,000. These securities were issued under Section 4(2) of the Securities
      Act of 1933. No underwriter was involved in the sale of these
      securities.





During
      the three month period ended September 30, 2004, AUT entered into Securities
      Purchase Agreements with various accredited investors for the sale of 61,050
      shares of common stock for cash consideration of $55,500. These securities
      were
      issued under Section 4(2) of the Securities Act of 1933. No underwriter was
      involved in the sale of these securities.





During
      the three month period ended December 31, 2004, AUT entered into Securities
      Purchase Agreements with various accredited investors for the sale of 28,875
      shares of common stock for cash consideration of $26,250 and a stock
      subscription of $750. These securities were issued under Section 4(2) of
      the Securities Act of 1933. No underwriter was involved in the sale of these
      securities.





**Equity
      Compensation Plans.** There
      are no compensation plans under which equity securities of the Company are
      authorized for issuance.





**Penny
      Stock Regulation.** Shares
      of our common stock are subject to rules adopted by the Securities and Exchange
      Commission that regulate broker-dealer practices in connection with transactions
      in "penny stocks". Penny stocks are generally equity securities with a price
      of
      less than $5.00 (other than securities registered on certain national securities
      exchanges or quoted on the Nasdaq system, provided that current price and volume
      information with respect to transactions in those securities is provided by
      the
      exchange or system). The penny stock rules require a broker-dealer, prior to
      a
      transaction in a penny stock not otherwise exempt from those rules, deliver
      a
      standardized risk disclosure document prepared by the Securities and Exchange
      Commission, which contains the following:





·
            a
                description of the nature and level of risk in the market for penny
                stocks
                in both public offerings and secondary
                trading;


·
            a
                description of the broker's or dealer's duties to the customer and
                of the
                rights and remedies available to the customer with respect to violation
                to
                such duties or other requirements of securities'
                laws;


·
            a
                brief, clear, narrative description of a dealer market, including
                "bid"
                and "ask" prices for penny stocks and the significance of the spread
                between the "bid" and "ask" price;


·
            a
                toll-free telephone number for inquiries on disciplinary
                actions;


·
            definitions
                of significant terms in the disclosure document or in the conduct
                of
                trading in penny stocks; and


·
            such
                other information and is in such form (including language, type,
                size and
                format), as the Securities and Exchange Commission shall require
                by rule
                or regulation.




5





Prior
      to
      effecting any transaction in penny stock, the broker-dealer also must provide
      the customer the following:





·
            the
                bid and offer quotations for the penny
                stock;


·
            the
                compensation of the broker-dealer and its salesperson in the
                transaction;


·
            the
                number of shares to which such bid and ask prices apply, or other
                comparable information relating to the depth and liquidity of the
                market
                for such stock; and


·
            monthly
                account statements showing the market value of each penny stock held
                in
                the customer's account.





In
      addition, the penny stock rules require that prior to a transaction in a penny
      stock not otherwise exempt from those rules, the broker-dealer must make a
      special written determination that the penny stock is a suitable investment
      for
      the purchaser and receive the purchaser's written acknowledgment of the receipt
      of a risk disclosure statement, a written agreement to transactions involving
      penny stocks, and a signed and dated copy of a written suitably statement.
      These
      disclosure requirements may have the effect of reducing the trading activity
      in
      the secondary market for a stock that becomes subject to the penny stock rules.
      Holders of shares of our common stock may have difficulty selling those shares
      because our common stock will probably be subject to the penny stock
      rules.





**Item
      6. Management’s Discussion and Analysis or Plan of
      Operation**





**This
      following information specifies certain forward-looking statements of management
      of the company. Forward-looking statements are statements that estimate the
      happening of future events are not based on historical fact. Forward-looking
      statements may be identified by the use of forward-looking terminology, such
      as
“may”, “shall”, “could”, “expect”, “estimate”, “anticipate”, “predict”,
“probable”, “possible”, “should”, “continue”, or similar terms, variations of
      those terms or the negative of those terms. The forward-looking statements
      specified in the following information have been compiled by our management
      on
      the basis of assumptions made by management and considered by management to
      be
      reasonable. Our future operating results, however, are impossible to predict
      and
      no representation, guaranty, or warranty is to be inferred from those
      forward-looking statements.**





**The
      assumptions used for purposes of the forward-looking statements specified in
      the
      following information represent estimates of future events and are subject
      to
      uncertainty as to possible changes in economic, legislative, industry, and
      other
      circumstances. As a result, the identification and interpretation of data and
      other information and their use in developing and selecting assumptions from
      and
      among reasonable alternatives require the exercise of judgment. To the extent
      that the assumed events do not occur, the outcome may vary substantially from
      anticipated or projected results, and, accordingly, no opinion is expressed
      on
      the achievability of those forward-looking statements. No assurance can be
      given
      that any of the assumptions relating to the forward-looking statements specified
      in the following information are accurate, and we assume no obligation to update
      any such forward-looking statements.**





**Critical
      Accounting Policy and Estimates.**





Our
      Management's Discussion and Analysis of Financial Condition and Results of
      Operations section discusses our financial statements, which have been prepared
      in accordance with accounting principles generally accepted in the United States
      of America. The preparation of these financial statements requires management
      to
      make estimates and assumptions that affect the reported amounts of assets and
      liabilities at the date of the financial statements and the reported amounts
      of
      revenues and expenses during the reporting period. On an on-going basis,
      management evaluates its estimates and judgments, including those related to
      revenue recognition, accrued expenses, financing operations, and contingencies
      and litigation. Management bases its estimates and judgments on historical
      experience and on various other factors that are believed to be reasonable
      under
      the circumstances, the results of which form the basis for making judgments
      about the carrying value of assets and liabilities that are not readily apparent
      from other sources. Actual results may differ from these estimates under
      different assumptions or conditions. The most significant accounting estimates
      inherent in the preparation of our financial statements include estimates as
      to
      the appropriate amounts to accrue for accounting and legal expenses. These
      accounting policies are described at relevant sections in this discussion and
      analysis and in the notes to them consolidated financial statements included
      in
      our Annual Report on Form 10-KSB for the year ended December 31,
      2005.




6





**General** ***.*** **** For the
      year ended December 31, 2005, we have generated $148,271 in revenue from the
      sale of our Air Alert Valve Cap product.





In
      April
      2001, we acquired from Torbjörn B. Lundqvist, our chief executive officer and
      one of our directors, the marketing rights to an electronic tire valve cap
      for
      airplanes and automobiles that blinks if the tire pressure falls below an
      initially calibrated level. The product provides early warning of low pressure
      in tires which we believe will lead to safer travel in both these types of
      vehicles and better fuel efficiency in automobiles. Once the tire is inflated
      to
      the appropriate pressure, the initial tightening of the cap onto the valve
      stem
      makes the valve cap memorize the tire pressure. If the pressure in the tire
      drops by more than approximately four pounds per square inch, a red LED light
      will blink to indicate the need to check the tire pressure. The licensing
      agreement has a term of five years and requires the payment of a license fee
      equal to 12% of the monthly gross profit from sales of the tire valve cap.
      It
      also requires the reimbursement of research and development costs incurred
      by
      its founder and the payment of ongoing development costs during the term of
      the
      agreement. In addition, it stipulates the issuance of 50,000 shares of its
      common stock to one individual for efforts in co-designing the product and
      1,000
      shares of common stock to another individual for naming the product. We
      anticipate we will continue to operate under this contract on a year-to-year
      basis after the expiration date in April 2006, or renegotiate similar terms.





We
      are
      currently developing a new product called the Air Alert Valve Stem. We are
      using
      the same technology and many of the same parts as in the Air Alert Valve Cap
      but
      the components are baked into a valve stem designed for today’s tubeless tires.
      We have showed a mock up of the product at a trade show in Las Vegas, and we
      had
      a positive response primarily from tire and automobile dealers. This product
      is
      anticipated to be released after we have sufficient funds to begin production
      and will be primarily marketed to tire and automobile dealers.





***For
      the fiscal year ended December 31, 2005, compared to the fiscal year ended
      December 31, 2004.***





**Liquidity
      and Capital Resources** **.** The
      cash
      on hand as of December 31, 2005 was $30,598, as compared to $8,212 as of
      December 31, 2004. We continue to operate without any source of funds beyond
      our
      revenues, and advances from Mr. Lundqvist, one of our officers and one of our
      directors and our majority shareholder, to pay our liabilities, which are
      increasing steadily as our vendors and others continue to support us. Total
      current liabilities were $1,652,406 as of December 31, 2005, an increase of
      $293,374 over the prior year balance of $1,359,032, represented primarily by
      accrued payroll and advances. We had negative working capital of $1,600,383
      as
      of December 31, 2005, and we had an accumulated deficit of $2,584,139 as
      compared to an accumulated deficit of $2,310,465 at December 31, 2004. Due
      to
      the lack of cash to meet ongoing general operating expenses, payroll and related
      expenses, total current liabilities increased $293,374 from $1,359,032 at
      December 31, 2004 to $1,652,406 at December 31, 2005. The increase in
      liabilities was primarily due to accrued payroll expenses and advances from
      Mr.
      Lundqvist. During the year ended December 31, 2005, we issued no shares of
      common. Our continued ability to operate is dependent upon the raising of
      additional capital to produce and market our product and sufficient sales;
      however, we cannot guarantee that additional funds could be raised on terms
      acceptable to us or that any level of sales will occur. If we are unable to
      satisfy our cash requirements through either product sales or additional raising
      of capital, we may have to cease operations, which could result in a loss to
      our
      investors.





**Results
      of Operations** **.** During
      the year ended December 31, 2005, we generated $148,271 in revenues. Total
      operating expenses for the year ended December 31, 2005 were $360,720
      compared to total operating expenses for the prior year period of $415,934.
      The
      decrease of $55,214 resulted primarily from lower travel and research and
      development costs offset by additional consulting expenses. For the year ended
      December 31, 2005, our net loss was $273,674, compared to a loss of
      $443,599 for the prior period.





***For
      the fiscal year ended December 31, 2004, compared to the fiscal year ended
      December 31, 2003.***




7





**Liquidity
      and Capital Resources** **.** The
      cash
      on hand as of December 31, 2004 was $8,212, as compared to $3,986 as of December
      31, 2003. We continue to operate without any source of liquidity to pay our
      liabilities, which are increasing steadily as our vendors and others continue
      to
      support us. Total current liabilities were $1,359,032 as of December 31, 2004,
      an increase of $288,098 over the prior year balance of $1,070,934, represented
      primarily by accrued payroll, advances, profit participation agreements and
      research and development costs. We had negative working capital of $1,344,040
      as
      of December 31, 2004, and we had an accumulated deficit of $2,310,465 as
      compared to an accumulated deficit of $1,866,866 at December 31, 2003. Due
      to
      the lack of cash to meet ongoing general operating expenses, payroll and related
      expenses, total current liabilities increased $288,098 from $1,070,934 at
      December 31, 2003 to $1,359,032 at December 31, 2004. During the year ended
      December 31, 2004, AUT issued 30,466 shares of common stock upon the exercise
      of
      warrants for total cash consideration of $3,047. During 2004, we also sold
      164,925 shares of additional common stock and subscribed 825 shares of common
      stock for total cash consideration of $152,500. All proceeds for these issuances
      were used for production set up costs and general operating purposes. The amount
      of expenditures required to maintain operations and to continue business
      development has been estimated at $31,500 per month. Our continued ability
      to
      operate is dependent upon the raising of additional capital and the sale of
      our
      product; however, we cannot guarantee that additional funds could be raised
      on
      terms acceptable to us or that sales will occur. If we are unable to satisfy
      our
      cash requirements through either product sales or additional capital raising,
      we
      may have to cease operations, which could result in a loss to our
      investors.





**Results
      of Operations** **.** During
      2004, we generated $77,994 in revenues. Total operating expenses for the year
      ended December 31, 2004 were $415,934 compared to total operating expenses
      for the prior year period of $371,222. The increase of $44,712 resulted
      primarily from additional expenses associated with the production of the tire
      valve cap. For the year ended December 31, 2004, our net loss was $443,599,
      compared to a loss of $387,429 for the prior period.





**Plan
      of Operation For Next 12 Months** **.** With
      regard to the tire valve cap, we believe that our primary target market will
      consist of major vehicle fleets with a secondary focus on retailers and tire
      stores and manufacturers. With regard to the valve stem we believe our primary
      target is tire and automobile dealers as well as auto and tire manufacturers.
      We
      believe that the potential market for both the tire valve cap and the valve
      stem
      are large. The requirement for a warning system to detect low tire pressure
      is
      currently under consideration in the automobile industry. On October 10, 2000,
      Congress passed the Transportation Recall Enhancement, Accountability and
      Documentation Act, which specified that legislation would be developed
      concerning a low tire pressure warning for motor vehicles. The latest final
      rule
      issued in April 2005 by the National Highway Transportation Safety
      Administration (NHTSA) states that all new vehicles shall have a tire pressure
      monitoring system by 2008.





Competition
      for the electronic tire valve cap is limited. To our knowledge, there are only
      a
      few mechanical tire valve caps on the market which are sold by several companies
      under different brand names. Our review and testing of these products has
      indicated to us that they are unreliable and inefficient due to their mechanical
      nature. We have not seen any product like the Air Alert Valve Stem. Other
      solutions to the tire pressure problem facing the industry are currently
      directed toward interior warning signals which are significantly more expensive
      than our tire valve cap and valve stem, and therefore, not considered direct
      competition. We anticipate that we will compete on the basis of the technical
      features, quality of our products and price.





Our
      plan
      of operation is wholly dependent on our ability to generate revenues from the
      sale of our tire pressure monitoring products. During the first half of 2003,
      we
      visited several potential contract manufacturers in China and Taiwan and after
      careful evaluation we have entered into a contract with Union Power Information
      Ind. Co., LTD in the City of Shenzhen in China. Union Power has the capability
      of producing up to several million Air Alert Valve Caps each month. Union Power
      has indicated that it will help us meet any orders we may receive by providing
      favorable terms of payment if those orders come from qualified major U.S.
      retailers. Union Power is currently manufacturing the Air Alert Valve Stem
      for
      us.





Notwithstanding
      any assistance from Union Power, we will need to raise additional capital to
      market, promote and sell the tire valve cap product. Such additional capital
      may
      be raised through public or private financing as well as borrowings and other
      sources. We cannot guarantee that additional funding will be available on
      favorable terms, if at all.





We
      are not currently conducting any research and development activities, other
      than
      those activities related to the production of the electronic tire valve cap
      and
      valve stem.





Mr. Lundqvist
      is our only employee. The loss of Mr. Lundqvist could have a material
      adverse effect upon our operations.




8





**Off
      Balance Sheet Arrangements** .
      Inapplicable.





**Forward
      Looking Statements** **.** This
      Form 10-KSB contains forward-looking statements within the meaning of the
      Private Securities Litigation Reform Act of 1995. Our forward-looking statements
      involve known and unknown risks, uncertainties and other factors which may
      cause
      our actual results, performance or achievements to be materially different
      from
      any future results, performance or achievements expressed or implied by such
      forward-looking statements. Factors that could cause actual results to differ
      materially from the forward looking statements include, but are not limited
      to,
      risks associated with lack of significant operating history, international,
      national and local general economic and market conditions; our ability to
      sustain, manage or forecast growth; new business development, adverse publicity;
      competition; changes in business strategy or development plans; business
      disruptions; the ability to attract and retain talented personnel; the ability
      to protect technology; and other factors referenced in this report. Given these
      uncertainties, readers are cautioned not to place undue reliance on such
      forward-looking statements. Management disclaims any obligation to
      forward-looking statements contained herein to reflect any change in our
      expectation with regard thereto or any change in events, conditions,
      circumstances or assumptions underlying such statements.




**Item
                7. Financial Statements**
            Page
                #Report
                of Independent Registered Accounting Firm
            10Balance
                Sheets as of December 31, 2005 and 2004
            11Statements
                of Operations for the years ended December 31, 2005, 2004 and
                2003
            12Statements
                of Stockholders’ Deficit for the years ended December 31, 2005, 2004
                and 2003
            13Statements
                of Cash Flows for the years ended December 31, 2005, 2004 and
                2003
            14Notes
                to Financial Statements
            15
                - 26





9





**A**
            **C**
            **I**
            **ARMANDO
                C. IBARRA**
              **Certified
                Public Accountants**
              **A
                Professional Corporation**




****


Armando
      C. Ibarra, C.P.A.    Members
      of the
      California Society of Certified Public Accountants


Armando
      Ibarra, Jr., C.P.A., JD      Members
      of the
      American Institute of Certified Public Accountants


Registered
      with the Public Company Accounting Oversight Board








To
      the
      Board of Directors


Aviation
      Upgrade Technologies








**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





We
      have
      audited the accompanying balance sheet of Aviation
      Upgrade Technologies as of
      December 31, 2005 and the related statements of operations, changes in
      stockholders’ equity and cash flows for the year then ended. 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 audit.





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





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of the Company as of December 31,
      2005, and the results of its operations and its cash flows for the year then
      ended in conformity 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 discussed in Note 2d, t he
      Company in the past has shown significant operating losses that raise
      substantial doubt about its ability to continue as a going concern. The
      accompanying financial statements do not include any adjustments that might
      result from the outcome of this uncertainty.





__________________________________


ARMANDO
      C. IBARRA, C.P.A. -
      APC





January
      17, 2006





**371
      “E” Street, Chula Vista, CA 91910**


**Tel:
      (619) 422-1348       
Fax:
      (619)
      422-1465**


10


**AVIATION
      UPGRADE TECHNOLOGIES, INC.**





**BALANCE
      SHEETS**




ASSETS


**December
                31,****2005**
            
            **2004**CURRENT
                ASSETSCash
            
            $
            30,598
            
            $
            8,212Accounts
                receivable
            
            
            8,264
            
            
            0Stock
                subscription receivable
            
            
            0
            
            
            750Inventory
            
            
            7,734
            
            
            39Prepaid
                expenses
            
            
            5,427
            
            
            5,991Total
                Current Assets
            
            
            52,023
            
            
            14,992NET
                PROPERTY AND EQUIPMENT
            
            
            25,997
            
            
            43,328DEPOSITS
            
            
            350
            
            
            350Total
                Assets
            
            $
            78,370
            
            $
            58,670


LIABILITIES
      AND STOCKHOLDERS’ EQUITY (DEFICIT)


CURRENT
                LIABILITIESAccounts
                payable
            
            $
            628,351
            
            $
            667,226Profit
                participation payable (Note 4)
            
            
            6,085
            
            
            2,420Accrued
                payroll and related expenses
            
            
            647,606
            
            
            455,590Loan
                payable, stockholder
            
            
            270,322
            
            
            131,972Profit
                participation advances, net (Note 4)
            
            
            100,042
            
            
            101,824Total
                Current Liabilities
            
            
            1,652,406
            
            
            1,359,032COMMITMENTS
                AND CONTINGENCIESSTOCKHOLDERS’
                EQUITY (DEFICIT)Common
                stock, $0.001 par value; 100,000,000 shares authorized;11,457,750
                shares issued and outstanding at
              December
                31, 2005 and 2004
            
            
            11,458
            
            
            11,458Additional
                paid-in capital
            
            
            998,645
            
            
            998,645Accumulated
                deficit
            
            
            (2,584,139
            )
            
            (2,310,465
            )Total
                Stockholders’ Equity (Deficit)
            
            
            (1,574,036
            )
            
            (1,300,362
            )Total
                Liabilities & Stockholders’ Equity (Deficit)
            
            $
            78,370
            
            $
            58,670




See
      the
      accompanying notes to these financial statements


11


**AVIATION
      UPGRADE TECHNOLOGIES, INC.**





**STATEMENTS
      OF OPERATIONS**




**Years
                Ended****December
                31,****2005**
            
            **2004**
            
            **2003**REVENUES
            
            $
            148,271
            
            $
            77,994
            
            $
            0COST
                OF SALES
            
            
            92,433
            
            
            83,732
            
            
            0GROSS
                PROFIT
            
            
            55,838
            
            
            (5,738
            )
            
            0OPERATING
                EXPENSESGeneral
                and administrative
            
            
            343,389
            
            
            335,767
            
            
            363,140Research
                and development (Note 8)
            
            
            0
            
            
            71,501
            
            
            8,082Depreciation
                expense
            
            
            17,331
            
            
            8,666
            
            
            0360,720
            
            
            415,934
            
            
            371,222LOSS
                FROM OPERATIONS
            
            
            (304,882
            )
            
            (421,672
            )
            
            (371,222
            )OTHER
                EXPENSEProfit
                participation expense
            
            
            (1,884
            )
            
            (1,244
            )
            
            0Other
                income
            
            
            57,878
            
            
            0
            
            
            0Interest
                expense
            
            
            (24,786
            )
            
            (20,683
            )
            
            (16,207
            )NET
                LOSS
            
            $
            (273,674
            )
            $
            (443,599
            )
            $
            (387,429
            )BASIC
                AND DILUTED LOSS PER COMMON SHARE
            
            $
            (0.02
            )
            $
            (0.04
            )
            $
            (0.03
            )WEIGHTED
                AVERAGE COMMON SHARES OUTSTANDING
            
            
            11,457,750
            
            
            11,348,970
            
            
            11,153,332





See
      the
      accompanying notes to these financial statements


12




**AVIATION
      UPGRADE TECHNOLOGIES, INC.**





**STATEMENTS
      OF STOCKHOLDERS’ DEFICIT**


**YEARS
      ENDED DECEMBER 31, 2005, 2004 AND 2003**




**Common
                Stock**
            
            **Common
                Stock Subscribed**
            
            **Additional**Paid-In
            
            **Accumulated****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **Capital**
            
            **Deficit**
            
            **Total**Balance,
                December 31, 2002
            
            
            11,042,418
            
            
            11,042
            
            
            0
            
            
            0
            
            
            764,599
            
            
            (1,479,437
            )
            
            (703,796
            )Common
                stock issued on warrant exercise for $0.10 per share
            
            
            119,116
            
            
            119
            
            
            0
            
            
            0
            
            
            11,796
            
            
            0
            
            
            11,915Common
                stock issued under Securities Purchase Agreement
            
            
            100,000
            
            
            100
            
            
            0
            
            
            0
            
            
            66,900
            
            
            0
            
            
            67,000Net
                loss
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            (387,429
            )
            
            (387,429
            )Balance,
                December 31, 2003
            
            
            11,261,534
            
            
            11,261
            
            
            0
            
            
            0
            
            
            843,295
            
            
            (1,866,866
            )
            
            (1,012,310
            )Common
                stock issued on warrant exercise for $0.10 per share
            
            
            30,466
            
            
            31
            
            
            0
            
            
            0
            
            
            3,016
            
            
            0
            
            
            3,047Common
                stock issued under Securities Purchase Agreements
            
            
            164,925
            
            
            165
            
            
            825
            
            
            1
            
            
            152,334
            
            
            0
            
            
            152,500Net
                loss
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            (443,599
            )
            
            (443,599
            )Balance,
                December 31, 2004
            
            
            11,456,925
            
            
            11,457
            
            
            825
            
            
            1
            
            
            998,645
            
            
            (2,310,465
            )
            
            (1,300,362
            )Common
                stock subscribed
            
            
            825
            
            
            1
            
            
            (825
            )
            
            (1
            )
            
            0
            
            
            0
            
            
            0Net
                loss
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            (273,674
            )
            
            (273,674
            )Balance,
                December 31, 2005
            
            
            11,457,750
            
            $
            11,458
            
            
            0
            
            $
            0
            
            $
            998,645
            
            $
            (2,584,139
            
            $
            (2,584,139
            )




See
      the
      accompanying notes to these financial statements


13




**AVIATION
      UPGRADE TECHNOLOGIES, INC.**





**STATEMENTS
      OF CASH FLOWS**





**Years
                Ended****December
                31,****2005**
            
            **2004**
            
            **2003**CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                loss
            
            $
            (273,674
            )
            $
            (443,599
            )
            $
            (387,429
            )Adjustments
                to reconcile net loss to net cash used in operating
                activitiesDepreciation
                and amortization
            
            
            17,331
            
            
            8,666
            
            
            0Amortization
                of profit participation advances
            
            
            (1,782
            )
            
            (1,176
            )
            
            0Changes
                in operating assets and liabilitiesAccounts
                receivable, net
            
            
            (8,264
            )
            
            0
            
            
            0Inventory
            
            
            (7,695
            )
            
            8,581
            
            
            (8,619
            )Prepaid
                expenses
            
            
            564
            
            
            (322
            )
            
            (5,669
            )Other
                assets
            
            
            0
            
            
            0
            
            
            (40,000
            )Accounts
                payable
            
            
            (38,875
            )
            
            121,770
            
            
            120,299Profit
                participation payable
            
            
            3,665
            
            
            0
            
            
            0Accrued
                payroll and related expenses
            
            
            192,016
            
            
            142,030
            
            
            142,161Net
                cash used in operating activities
            
            
            (116,714
            )
            
            (164,050
            )
            
            (179,257
            )CASH
                FLOWS FROM INVESTING ACTIVITESFactory
                tooling costs
            
            
            0
            
            
            (11,995
            )
            
            0Net
                cash used in investing activities
            
            
            0
            
            
            (11,995
            )
            
            0CASH
                FLOWS FROM FINANCING ACTIVITIESAdvances
                from stockholder
            
            
            138,350
            
            
            18,474
            
            
            6,986Proceeds
                from issuance of common stock
            
            
            0
            
            
            155,547
            
            
            78,915Proceeds
                from profit participation investments
            
            
            0
            
            
            7,000
            
            
            96,000Common
                stock subscribed
            
            
            750
            
            
            (750
            )
            
            0Stock
                offering costs
            
            
            0
            
            
            0
            
            
            0Net
                cash provided by financing activities
            
            
            139,100
            
            
            180,271
            
            
            181,901NET
                INCREASE (DECREASE) CASH
            
            
            22,386
            
            
            4,226
            
            
            2,644CASH,
                beginning of year
            
            
            8,212
            
            
            3,986
            
            
            1,342CASH,
                end of year
            
            $
            30,598
            
            $
            8,212
            
            $
            3,986SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATIONCash
                paid during the period for interest
            
            $
            24,786
            
            $
            20,683
            
            $
            16,207Cash
                paid during the period for taxes
            
            $
            0
            
            $
            195
            
            $
            1,627





SUPPLEMENTAL
      SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES





None.


See
      the
      accompanying notes to these financial statements




14





**AVIATION
      UPGRADE TECHNOLOGIES**


**Notes
      to the Financial Statements**


**As
      of December 31, 2005**





***NOTE
      1. ORGANIZATION AND DESCRIPTION OF BUSINESS***





Aviation
      Upgrade Technologies, Inc. ("AUT" or the "Company") was incorporated under
      the
      laws of the State of Nevada on January 8, 1999.





In
      April
      2001, we acquired from Torbjörn B. Lundqvist, our chief executive officer and
      one of our directors, the marketing rights to an electronic tire valve cap
      for
      automobiles that blinks if the tire pressure falls below an initially calibrated
      level. The product provides early warning of low pressure in tires that we
      believe will lead to safer travel and better fuel efficiency. Once the tire
      is
      inflated to the appropriate pressure, the initial tightening of the cap onto
      the
      valve stem makes the valve cap memorize the tire pressure. If the pressure
      in
      the tire drops by more than approximately four pounds per square inch, a red
      LED
      light will blink to indicate the need to check the tire pressure. The licensing
      agreement has a term of five years and requires the payment of a license fee
      equal to 12% of the monthly gross profit from sales of the tire valve cap.
      It
      also requires the reimbursement of research and development costs incurred
      by
      its founder and the payment of ongoing development costs during the term of
      the
      agreement. In addition, it stipulates the issuance of 50,000 shares of its
      common stock to one individual for efforts in co-designing the product and
      1,000
      shares of common stock to another individual for naming the product




***NOTE
      2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES***





**a.** **Accounting
      Method**





The
      Company's policy is to use the accrual method of accounting to prepare and
      present financial statements, which conforms to generally accepted accounting
      principles ("GAAP'). The company has elected a December 31,
      year-end.





**b.** **Cash
      Equivalents**





The
      Company considers all highly liquid investments with maturity of three months
      or
      less when purchased to be cash equivalents.





**c.
      Estimates and Adjustments**





The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities and disclosure of
      contingent assets and liabilities at the date of the financial statements and
      the reported amounts of revenues and expenses during the reporting period.
      Actual results could differ from those estimates. In accordance with FASB 16
      all
      adjustments are normal and recurring. See note 2j regarding the Companies
      revenue recognition policy.


15





**AVIATION
      UPGRADE TECHNOLOGIES**


**Notes
      to the Financial Statements**


**As
      of December 31, 2005**








***NOTE
      2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      (CONTINUED)***




**d.
      Basis of Presentation and Considerations Related to Continued Existence
      (going concern)**





The
      Company is attempting to obtain revenues from additional product sales, but
      there is no commitment by any person for future purchase of the Company's
      electronic tire valve cap. The Company has significant working capital needs
      in
      order to produce sufficient products for sale. Moreover, in the absence of
      significant sales and profits, the Company will likely seek to raise additional
      funds to meet its working capital needs principally through the additional
      sales
      of its securities. However, there is no assurance that the Company will be
      able
      to obtain sufficient additional funds when needed, or that such funds, if
      available, will be obtainable on terms satisfactory to the Company.





These
      circumstances raise substantial doubt about the Company's ability to continue
      as
      a going concern. The accompanying financial statements do not include any
      adjustments that might result from the outcome of this uncertainty.





**e.**   **Accounts
      Receivable**





The
      Company considers accounts receivable to be fully collectible; accordingly,
      no
      allowances for doubtful accounts are required. If amounts become uncollectible,
      they will be charged to operations when that determination is made.





**f.
      Inventory**





Inventories
      are stated at the lower of cost or market with cost determined using the
      first-in, first-out (FIFO) method.





**g.
      Property and Equipment**





Property
      and equipment are recorded at cost and depreciated by the straight-line method
      over the expected useful lives of the assets. Expenditures for normal
      maintenance and repairs are charged to operations and significant improvements
      are capitalized. The estimated useful life for the tooling and equipment costs
      is 3 years.





**h.
      Production Design and Development Costs**





All
      tooling, equipment and molds of $ 51,994 used for production have been
      capitalized as of December 31, 2004.


16





**AVIATION
      UPGRADE TECHNOLOGIES**


**Notes
      to the Financial Statements**


**As
      of December 31, 2005**








***NOTE
      2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      (CONTINUED)***





**i.
      Concentrations**





As
      discussed in Note 12, the Company has a concentration of risk in the form of
      one
      major customer and one major supplier. The Company is attempting to mitigate
      its
      sales risk with the introduction of new products and the expansion of its sales
      and business. While primarily one source of supply is utilized, other sources
      are available should the Company have to change suppliers. A change in
      suppliers, however, could cause a delay in shipping and a possible loss of
      sales
      and could be at less favorable terms. This would affect operating results
      adversely.





**j.
      Common Stock Issued for Services Rendered**





AUT
      periodically issues common stock for services rendered. Common stock issued
      is
      valued at the estimated fair market value, as determined by management and
      the
      board of directors of the Company. Management and the board of directors
      consider, recent stock offering prices and other factors in determining fair
      market value for purposes of valuing the common stock. No common stock was
      issued for services during the years ended December 31, 2005.





**k.
      Revenue Recognition and Deferred Revenue**





The
      Company recognizes revenue on product sales at the time ownership and risk
      of
      loss passes to the customer. Shipments from the Company's warehouse are via
      express carriers such as Federal Express, and the sale is recognized upon
      customer acceptance. Shipments from the Company's factory are direct to the
      customer via common carrier, FOB the factory, ownership and risk of loss pass
      to
      the customer at this point, and the sale is recognized. Freight billed to
      customers is considered sales revenue and the related freight cost is considered
      cost of sales.





**l.** **Income
      Taxes**





The
      Company accounts for income taxes under Statement of Financial Accounting
      Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." Under SFAS 109,
      deferred tax assets and liabilities are recognized for the future tax
      consequences attributable to differences between the financial statement
      carrying amounts of existing assets and liabilities and their respective tax
      bases. Deferred tax assets and liabilities are measured using enacted tax rates
      expected to apply to taxable income in the years in which those temporary
      differences are expected to be recovered or settled. A valuation Allowance
      is
      provided for significant deferred tax assets when it is more likely than not
      that such asset will not be recovered.


17




**AVIATION
      UPGRADE TECHNOLOGIES**


**Notes
      to the Financial Statements**


**As
      of December 31, 2005**








***NOTE
      2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      (CONTINUED)***





**m.** **Warranties**





The
      Company provides a one-year manufacturer's warranty covering product defects.
      Accruals for product warranties are estimated based upon current product
      performance trends and are recorded at the time revenue is
      recognized.





Warranty
                liability at beginning of year
            
            
            $800Warranty
                product cost during 2005
            
            
            (238
            )Additional
                warranty accrual during 2005
            
            
            238Warranty
                liability at end of year
            
            
            $800





**n.** **Derivative
      Instruments and Hedging Activities** ****





The
      Company has adopted Statement of Financial Accounting Standards No. 133 ("SFAS
      133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS
      133
      establishes accounting and reporting standards for derivative instruments,
      including certain derivative instruments embedded in other contracts, and for
      hedging activities. It requires that an entity recognize all derivatives as
      either assets or liabilities on the balance sheet at their fair value. This
      statement, as amended by SFAS 137, is effective for financial statements for
      all
      fiscal quarters of all fiscal years beginning after June 15, 2000. The adoption
      of this SFAS 133 has not materially impacted the Company's results of
      operations, financial position or cash flows, as it currently does not engage
      in
      any derivative or hedging activities.





**o.** **Research
      and Development**





Research
      and development costs related to the tire valve cap are charged to operations
      as
      incurred. The Company recognized research and developments costs of $0, $71,501,
      $8,082 and $33,136 for the years ended December 31, 2005, 2004, 2003 and 2002,
      respectively.





**p.** **Employment
      Agreement**





On
      May
      31, 2000, AUT entered into an employment agreement with Mr. Lundqvist to employ
      him as its Chief Executive Officer. The agreement, which has an initial term
      of
      two years, provides for an annual base salary of $140,000 effective June 1,
      2000, adjustable annually at the discretion of the board of directors. Among
      other provisions, the agreement also provides for an annual cash salary
      incentive equal to 3% of adjusted net profits beginning with the year ended
      December 31, 2001. The "adjusted net profit" shall be the net profit of the
      Company before federal and state income taxes, determined in accordance with
      accounting principles generally accepted in the United States of America by
      the
      Company's independent accounting firm and adjusted to exclude: (i) any incentive
      salary payments paid pursuant to this employment agreement; (ii) any
      contributions to pension and/or profit sharing plans; (iii) any extraordinary
      gains or losses; (iv) any refund or deficiency of federal and state income
      taxes
      paid in a prior year; and (v) any provision for federal or state income taxes
      made in prior years which is subsequently determined to be unnecessary. The
      maximum incentive salary payable for any given year may not exceed 400% of
      the
      then applicable base salary.


18




**AVIATION
      UPGRADE TECHNOLOGIES**


**Notes
      to the Financial Statements**


**As
      of December 31, 2005**








***NOTE
      2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      (CONTINUED)***





**NEW
      ACCOUNTING PRONOUNCEMENTS:**





In
      November 2004, the Financial Accounting Standards Board (FASB) issued SFAS
      151,
      Inventory Costs - an amendment of ARB No. 43, Chapter 4. This Statement amends
      the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the
      accounting for abnormal amounts of idle facility expense, freight, handling
      costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4,
      previously stated that “... under some circumstances, items such as idle facility
      expense, excessive spoilage, double freight, and rehandling costs may be so
      abnormal as to require treatment as current period charges...” This Statement
      requires that those items be recognized as current-period charges regardless
      of
      whether they meet the criterion of “so abnormal.” In addition, this Statement
      requires that allocation of fixed production overheads to the costs of
      conversion be based on the normal capacity of the production facilities. This
      Statement is effective for inventory costs incurred during fiscal years
      beginning after June 15, 2005. Management does not believe the adoption of
      this
      Statement will have any immediate material impact on the Company.





In
      December 2004, the FASB issued SFAS No. 152, “Accounting for Real Estate
      Time-Sharing Transactions—an amendment of FASB Statements No. 66 and 67” (“SFAS
      152) The amendments made by Statement 152 This Statement amends FASB Statement
      No. 66, Accounting for Sales of Real Estate, to reference the financial
      accounting and reporting guidance for real estate time-sharing transactions
      that
      is provided in AICPA Statement of Position (SOP) 04-2, Accounting No. 67,
      Accounting for Costs and Initial Rental Operations of Real Estate Projects,
      to
      state that the guidance for (a) incidental operations and (b) costs incurred
      to
      sell real estate projects does not apply to real estate time-sharing
      transactions. The accounting for those operations and costs is subject to the
      guidance in SOP 04-2. This Statement is effective for financial statements
      for
      fiscal years beginning after June 15, 2005, with earlier application encouraged.
      The Company does not anticipate that the implementation of this standard will
      have a material impact on its financial position, results of operations or
      cash
      flows.





On
      December 16, 2004, the Financial Accounting Standards Board (“FASB”) published
      Statement of Financial Accounting Standards No. 123 (Revised 2004), Shared-Based
      Payment (“SFAS 123R). SFAS 123R requires that compensation cost related to
      share-based payment transactions be recognized in the financial statements.
      Share-based payment transactions within the scope of SFAS 123R include stock
      options, restricted stock plans, performance-based awards, stock appreciation
      rights, and employee share purchase plans. The provisions of SFAS 123R are
      effective as of the first interim period that begins after June 15, 2005.
      Accordingly, the Company will implement the revised standard in the third
      quarter of fiscal year 2005. Currently, the Company accounts for its share-based
      payment transactions under the provisions of APB 25, which does not necessarily
      require the recognition of compensation cost in the financial statements.
      Management is assessing the implications of this revised standard, which may
      materially impact the Company’s results of operations in the third quarter of
      fiscal year 2005 and thereafter.


19




**AVIATION
      UPGRADE TECHNOLOGIES**


**Notes
      to the Financial Statements**


**As
      of December 31, 2005**








***NOTE
      2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      (CONTINUED)***





**NEW
      ACCOUNTING PRONOUNCEMENTS:**





On
      December 16, 2004, FASB issued Statement of Financial Accounting Standards
      No.
      153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29,
      Accounting for Nonmonetary transactions (“SFAS 153”). This statement amends APB
      Opinion 29 to eliminate the exception for nonmonetary exchanges of similar
      productive assets and replaces it with a general exception of exchanges of
      nonmonetary assets that do not have commercial substance. Under SFAS 153, if
      a
      nonmonetary exchange of similar productive assets meets a commercial-substance
      criterion and fair value is determinable, the transaction must be accounted
      for
      at fair value resulting in recognition of any gain or loss. SFAS 153 is
      effective for nonmonetary transactions in fiscal periods that begin after June
      15, 2005. The Company does not anticipate that the implementation of this
      standard will have a material impact on its financial position, results of
      operations or cash flows.




***NOTE
      3. LICENSING AGREEMENT***





In
      April
      2001, AUT acquired from Torbjörn B. Lundqvist, our Chief Executive Officer and
      one of our directors, the marketing rights to the electronic tire valve cap.
      The
      licensing agreement has a term of five years and requires the payment of a
      license fee equal to 12% of the monthly gross profit from sales of the tire
      valve cap. It also requires the reimbursement of research and development costs
      incurred by its founder and the payment of ongoing development costs during
      the
      term of the agreement, In addition, it stipulates the issuance of 50,000 shares
      of its common stock to one individual for efforts in co-designing the product
      and 1,000 shares of common stock to another individual for naming the product,
      all shares of which were issued in 2001.




***NOTE
      4. PROFIT PARTICIPATION ADVANCES***





The
      Company has entered into six profit participation agreements in order to raise
      capital for operations. In exchange for the investment, the Company shares
      profits on the product by giving the investor an agreed upon price for every
      package sold up to a specified amount as defined in the agreement. The total
      estimated liability under these agreements is $636,000.





Per
      the
      terms of each of these six agreements, the Company has no obligation to
      reimburse any portion of the advances or make any type of payment, unless it
      has
      product sales. Should the Company not achieve the necessary sales volume to
      pay
      back the original amounts advanced in their entirety, no further payment is
      due.
      The Company incurs a liability under these agreements as it sells product on
      a
      per unit basis, it is not related to the profitability of the Company. There
      are
      no penalty clauses in these agreements. Amounts due under these agreements,
      if
      any, are payable monthly.




20




**AVIATION
      UPGRADE TECHNOLOGIES**


**Notes
      to the Financial Statements**


**As
      of December 31, 2005**








***NOTE
      4. PROFIT PARTICIPATION ADVANCES (CONTINUED)***





The
      Company has accrued $103,000 of profit sharing advances and this amount is
      being
      amortized based on the terms of these agreements, the terms of which are
      detailed below. Amortization expense was $1,782 and $1,176 of December 31,
      2005
      and 2004, respectively. The Company has accrued a liability of $6,085 and $2,420
      as of December 31, 2005 and 2004, respectively, for amounts payable under these
      agreements. No amounts have been paid out under these agreements as of December
      31, 2005 and 2004.





While
      each of the profit participation agreements is similar in the nature, only
      the
      amount of returns due under each agreement varies, i.e., the rate of return
      differs. The maximum payable under the agreements, per the terms of each
      agreement, is $636,000, based on unit sales, as follows:





Advance
            Maximum
                possible returnAgreements
                1 through 4
            $50,000
              (aggregate)
            $100,000
              (aggregate)Agreement
                5
            $20,000
            $36,000Agreement
                6
            $33,000
            $500,000TOTAL
            $103,000
            $636,000




per
      the
      terms of each agreement, is $636,000, based on unit sales, as
      follows




The
      following schedule gives a numerical illustration of these agreements detailing
      derivation of the $2,420 due at December 31, 2004, and the $1,244 profit
      participation expense that was recorded and the $6,085 due at December 31,
      2005,
      and the $1,884 profit participation expense that was recorded.




Profit
                Participation
                Advance
              Profit
                Participation
                Payable
              Profit
                Participation
                ExpenseCash
                  received
              $103,000
              $
              $Unit
                  Sales
              
              2,420
              2,420Amortization
              (1,176)
              
              (1,176)Balance
                  at 12/31/04
              $101,824
              $2,420
              $1,244Unit
                  Sales
              
              6,085
              6,085Amortization
              (1,782)
              
              (1,782)Balance
                  at 12/31/05
              $100,042
              $6,085
              $1,884


21




**AVIATION
      UPGRADE TECHNOLOGIES**


**Notes
      to the Financial Statements**


**As
      of December 31, 2005**




***NOTE
      5. WARRANTS***





In
      July
      2003, the Company entered into a stock purchase agreement, which included
      warrants to purchase 150,000 shares of common stock at $2.00 per share. These
      warrants are exercisable at the option of the warrant holder and expire seven
      years from the date of issuance. No warrants were issued during the year ended
      December 31, 2005. All warrants were issued in connection with the sale of
      stock, and therefore, no expense was recorded for their issuance.





The
      following represents a summary of the warrants outstanding as of December 31,
      2005 and 2004:





**2005**
            
            **2004****Wtd
                Avg**
            
            
            
            **Wtd
                Avg****Shares**
            
            **Ex
                Price**
            
            **Shares**
            
            **Ex
                Price**Outstanding,
                beginning of year
            
            
            150,000
            
            $
            2.00
            
            
            180,466
            
            $
            0.10Granted
            
            
            0
            
            
            0
            
            
            0
            
            
            2.00Exercised
            
            
            0
            
            
            0
            
            
            (30,466
            )
            
            0.10Expired/forfeited
            
            
            0
            
            
            0
            
            
            0
            
            
            0Outstanding,
                end of year
            
            
            150,000
            
            $
            2.00
            
            
            150,000
            
            $
            1.68Weighted
                average fair value of warrants granted
            $
            0
            
            
            
            
            $
            0


The
      outstanding warrants at December 31, 2005 and 2004 are all held by
      stockholders.




***NOTE
      6. PROPERTY & EQUIPMENT***





Property
      is stated at cost. Additions, renovations, and improvements are capitalized.
      Maintenance and repairs, which do not extend asset lives, are expensed as
      incurred. Depreciation is provided on a straight-line basis over the estimated
      useful lives ranging from 27.5 years for commercial rental properties, 5 years
      for tenant improvements, and 5 - 7 years on furniture and
      equipment.





**December
                31,**
            
            **December
                31,****2005**
            
            **2004**Tooling
            
            $
            50,500
            
            $
            50,500Equipment
            
            
            1,494
            
            
            1,494$
            51,994
            
            $
            51,994Less
                Accumulated Depreciation
            
            
            (25,997
            )
            
            (8,666
            )**Net
                Property and Equipment**
            
            **$**
            **25,997**
            
            **$**
            **43,328**





22




**AVIATION
      UPGRADE TECHNOLOGIES**


**Notes
      to the Financial Statements**


**As
      of December 31, 2005**








***NOTE
      7. BASIC & DILUTED INCOME / (LOSS) PER COMMON
      SHARE***





Basic
      gain (loss) per common share has been calculated based on the weighted average
      number of shares of common stock outstanding during the period. Diluted gain
      (loss) per common share has been calculated based on the weighted average number
      of shares of common and preferred stock outstanding during the period. The
      variance between basic and diluted weighted average is the addition of preferred
      stock in the calculation of diluted weighted average per share.





**December
                31,**
            
            **December
                31,****2005**
            
            **2004**Net
                income (loss) from operations
            
            $
            (273,674
            )
            $
            (443,955
            )Basic
                income / (loss) per share
            
            $
            (0.02
            )
            $
            (0.04
            )Weighed
                average number of shares outstanding
            
            
            11,457,750
            
            
            11,348,970




***NOTE
      8. OPERATING LEASE***





The
      Company’s headquarters are located in Las Vegas, Nevada. They have renewed their
      lease for office space for which they pay $350 per month. The lease has a term
      of six months and expires on June 30, 2006. It includes certain amenities
      such as receptionist services and conference rooms. We do not anticipate any
      difficulty in extending the term of our lease on substantially the same terms
      as
      currently exists.




***NOTE
      9. INCOME TAXES***





Income
      taxes are provided in accordance with Statement of Financial Accounting
      Standards No. 109 (SFAS 109), Accounting for Income Taxes. A deferred tax asset
      or liability is recorded for all temporary differences between financial and
      tax
      reporting and net operating loss carryfowards. Deferred tax expense (benefit)
      results from the net change during the year of deferred tax assets and
      liabilities.





At
      December 31, 2005 the Company has significant operating and capital losses
      carryfoward. The tax benefits resulting for the purposes have been estimated
      as
      follows:


23




**AVIATION
      UPGRADE TECHNOLOGIES**


**Notes
      to the Financial Statements**


**As
      of December 31, 2005**




***NOTE
      9. INCOME TAXES (CONTINUED)***





**December
                31, 2005**Beg.
                Retained Earnings
            
            $
            (2,310,465
            )Net
                Income (Loss) for Year ended 12/31/05
            
            
            (273,674
            )Ending
                Retained Earnings
            
            $
            (2,584,139
            )Gross
                income tax benefit
            
            $
            878,607Valuation
                allowance
            
            
            (878,607
            )Net
                income tax benefit
            
            $
            -





The
      net
      operating loss expires twenty years from the date the loss was incurred. In
      accordance with SFAS 109 paragraph 18 the Company has reduced its deferred
      tax
      benefit asset by a valuation allowance due to negative evidence that has caused
      the Company to feel it is more likely than not that some portion or all of
      the
      deferred tax asset will not be realized. No portion of the valuation allowance
      will be allocated to reduce goodwill or other noncurrent intangible asset of
      an
      acquired entity. There are no temporary differences or carryforward tax effects
      that would significantly affect the Companies deferred tax asset.





Utilization
      of the net operating losses and credit carryforwards may be subject to a
      substantial annual limitation due to the “change in ownership” provisions of the
      Internal Revenue Code of 1986. The annual limitation may result in the
      expiration of net operating losses and credits before utilization. None of
      the
      valuation allowance recognized was allocated to reduce goodwill or other
      noncurrent intangible assets of an acquired entity or directly to contributed
      capital.




***NOTE
      10. STOCKHOLDERS' DEFICIT***





Holders
      of the common stock do not have preemptive rights to purchase additional shares
      of common stock or other subscription rights. The common stock carries no
      conversion rights and is not subject to redemption or to any sinking fund
      provisions. All shares of common stock are entitled to share equally in
      dividends from sources legally available. Therefore, when and if dividends
      are
      declared by the board of directors and, upon liquidation or dissolution of
      the
      company, whether voluntary or involuntary, to share equally in the assets of
      the
      Company available for distribution to stockholders. The board of directors
      is
      authorized to issue additional shares of common stock on such terms and
      conditions and for such consideration as the Board may deem appropriate without
      further stockholder action. Each holder of common stock is entitled to one
      vote
      per share, either in person or by proxy, on all matters that may be voted on
      by
      the owners thereof at meetings of the stockholders. Since the shares of common
      stock do not have cumulative voting rights, the holders of more than 50% of
      the
      shares voting for the election of directors that can elect all the directors
      and, in such event, the holders of the remaining shares will not be able to
      elect any person to the board of directors.


24




**AVIATION
      UPGRADE TECHNOLOGIES**


**Notes
      to the Financial Statements**


**As
      of December 31, 2005**




***NOTE
      10. STOCKHOLDERS' DEFICIT (CONTINUED)***





Most
      of
      the Company's common stock is held by insiders and persons who acquired shares
      in private offerings. These are "restricted securities" as that term is defined
      in Rule 144 promulgated under the Securities Act. The Company has not declared
      or paid any dividends on its common stock to date, and there is no assurance
      that the Company will ever be able to pay dividends in the future.





On
      July
      3, 2003, the Company entered into a securities purchase agreement with two
      investors for the sale of $100,000 of units to purchase common stock, warrants
      and a participation in the sale of the valve cap products for cash consideration
      of $100,000. These securities were issued under Section 4(2) of the Securities
      Act of 1933. No underwriter was involved in the sale of these securities.





During
      the year ended December 31, 2003, outstanding warrants to purchase 119,116
      shares of common stock were exercised by the holders for cash consideration
      of
      $11,915. The warrants were issued as part of a Rule 506 Regulation D offering,
      exempt under Section 4(2) of the Securities Act of 1933. No underwriter was
      involved in the exercise of the warrants.





In
      February 2004, outstanding warrants to purchase 30,466 shares of common stock
      were exercised by the holders. The warrants were issued as part of a Rule 506
      Regulation D offering, exempt under Section 4(2) of the Securities Act of 1933.
      No underwriter was involved in the exercise of the warrants.





On
      March
      1, 2004, we entered into a Securities Purchase Agreement with an accredited
      investor for the sale of 55,000 shares of common stock for cash consideration
      of
      $50,000. These securities were issued under Section 4(2) of the Securities
      Act
      of 1933. No underwriter was involved in the sale of these
      securities.





On
      April
      26, 2004, we entered into a Securities Purchase Agreement with an accredited
      investor for the sale of 20,000 shares of common stock for cash consideration
      of
      $20,000. These securities were issued under Section 4(2) of the Securities
      Act
      of 1933. No underwriter was involved in the sale of these
      securities.





During
      the three month period ended September 30, 2004, AUT entered into Securities
      Purchase Agreements with various accredited investors for the sale of 61,050
      shares of common stock for cash consideration of $55,500. These securities
      were
      issued under Section 4(2) of the Securities Act of 1933. No underwriter was
      involved in the sale of these securities.





During
      the three month period ended December 31, 2004, AUT entered into Securities
      Purchase Agreements with various accredited investors for the sale of 28,875
      shares of common stock for cash consideration of $26,250 and a stock
      subscription of $750. These securities were issued under Section 4(2) of the
      Securities Act of 1933. No underwriter was involved in the sale of these
      securities. The $750 stock subscription was collected on January 14,
      2005.


25




**AVIATION
      UPGRADE TECHNOLOGIES**


**Notes
      to the Financial Statements**


**As
      of December 31, 2005**




***NOTE
      11. RELATED PARTY TRANSACTIONS***





Since
      its
      inception, AUT has not generated sufficient working capital to cover the cost
      of
      its operations. Therefore, its founder and Chief Executive Officer has provided
      working capital and substantially all its assets. All amounts advanced to AUT
      have been recorded as expenses of the Company in the period they were incurred,
      and the amount owing is reflected in accounts payable with a total outstanding
      of $7,000 and $15,594 as of December 31, 2005 and 2004, respectively.





The
      Company has $647,606 in payroll and related expenses payable as of December
      31,
      2005, of which, $597,806 is owed to the Chief Executive Officer and majority
      stockholder. In addition, during the year ended December 31, 2005, AUT loan
      payable to stockholder increased by $138,350. A balance of $270,322 is payable
      as of December 31, 2005. The increase in loan payable, stockholder (Mr.
      Lundqvist's) was money given directly from Mr. Lundqvist privately held
      marketing company. Mr. Lundqvist's privately held marketing company passes
      through the interest on these advances to the Company which ranges from nine
      and
      one quarter percent (9.25%) to twenty-eight and ninety-nine one hundredths
      percent (28.99%). Interest paid on all advances to totaled $24,786 for the
      year
      ended December 31, 2005.





In
      accordance with the valve cap licensing agreement AUT has entered into with
      its
      founder and Chief Executive Officer, the Company incurred $0, $71,501, $8,082
      and $33,136 during the years ended December 31, 2005, 2004, 2003 and 2002,
      respectively, for research and development costs in connection with the
      development of the tire valve cap.




***NOTE
      12. MAJOR CUSTOMERS/SUPPLIERS***





During
      the year ended December 31, 2005, the Company had sales of $51,480 or
      thirty-seven percent (37%) to one (1) customer. At December 31, 2005, there
      were
      no amounts due from this customer.





During
      the year ended December 31, 2005 the Company purchased all (100%) of its cost
      of
      goods sold from one supplier in China. At December 31, 2005, the amount due
      to
      the supplier included in accounts payable was $158,714.




***NOTE
      13. STOCKHOLDERS’ EQUITY***





The
      stockholders’ equity section of the Company contains the following classes of
      capital stock as of December 31, 2005:





Common
      stock, $ 0.001 par value; 100,000,000 shares authorized; 11,457,750 shares
      issued and outstanding.


26




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





Effective
      January 6, 2006, we dismissed Lesley Thomas Schwarz & Postma ("LTSP") which
      audited the their financial statements for the fiscal years ended December
      31,
      2003 and 2004, and engaged Armando C. Ibarra, CPA to act as our independent
      chartered accountants. The reports of LTSP for these fiscal years did not
      contain an adverse opinion, or disclaimer of opinion and were not qualified
      or
      modified as to audit scope or accounting principles except as described herein.
      The report of LTSP for these fiscal years was qualified with respect to
      uncertainty as to our ability to continue as a going concern. During our two
      most recent fiscal years and the period from the end of the most recently
      completed fiscal year through January 6, 2006, the date of dismissal, there
      were
      no disagreements with LTSP on any matter of accounting principles or practices,
      financial statement disclosure or auditing scope or procedures, which
      disagreements, if not resolved to the satisfaction of LTSP would have caused
      it
      to make reference to such disagreements in its reports.





Our
      financial statements for the year ended December 31, 2005, were audited by
      Armando C. Ibarra, CPA. LTSP was not involved in any way with the audit of
      the
      financial statements for the year ended December 31, 2005. We have authorized
      LTSP to discuss any matter relating to us and our operations with Armando C.
      Ibarra, CPA.





The
      change in our auditors was recommended and approved by the board of directors
      since we do not have an audit committee.





During
      the two most recent fiscal years and subsequent interim period, we did not
      consult with Armando C. Ibarra, CPA regarding the application of accounting
      principles to a specified transaction, either completed or proposed, or the
      type
      of audit opinion that might be rendered on our financial statements, or any
      matter that was the subject of a disagreement or a reportable event as defined
      in the regulations of the Securities and Exchange Commission.





**Item
      8a. Controls and Procedures**





Evaluation
      of Disclosure Controls and Procedures .
      An
      evaluation was performed by our Chief Executive Officer/Chief Financial Officer
      of the effectiveness of the design and operation of our disclosure controls
      and
      procedures. Based upon that evaluation, our Chief Executive Officer/Chief
      Financial Officer concluded that as of December 31, 2005, our disclosure
      controls and procedures were effective and designed to ensure that material
      information relating to us would be made known to him by others.





There
      have been no significant changes in our internal controls or in other factors
      that could significantly affect the internal controls subsequent to the last
      day
      they were evaluated.




**Item
      8b. Other Information**





No
      information is required to be disclosed in reports on Form 8-K which was not
      previously reported.





**PART
      III**





**Item
      9.**  **Directors
      and Executive Officers of the Registrant.**





We
      are
      dependent on the efforts and abilities of certain of our senior management.
      The
      interruption of the services of key management could have a material adverse
      effect on our operations, profits and future development, if suitable
      replacements are not promptly obtained. We anticipate that we will enter into
      employment agreements with each of our key executives. We cannot guarantee
      that
      each executive will remain with us during or after the term of his or her
      employment agreement. In addition, our success depends, in part, upon our
      ability to attract and retain other talented personnel. Although we believe
      that
      our relations with our personnel are good and that we will continue to be
      successful in attracting and retaining qualified personnel, we cannot guarantee
      that we will be able to continue to do so. Our officers and directors will
      hold
      office until their resignations or removal.


27




Our
      directors and principal executive officers are as specified on the following
      table:





**Name**
            **Age**
            **Position**Torbjörn
                B. Lundqvist
            53
            Chairman,
                Chief Executive Officer/
              Chief
                Financial OfficerDick
                G. Lindholm
            56
            Vice
                President, DirectorWilliam
                S. Rhodes
            56
            President,
                Director





**Torbjörn
      B. Lundqvist.** Mr.
      Lundqvist has been our chief executive officer and the chairman of our board
      of
      directors since our inception. Mr. Lundqvist has been primarily responsible
      for
      the formation and development to date of Aviation Upgrade Technologies, Inc.
      Mr.
      Lundqvist has had vast experience in international business. His strength is
      managing and developing new ventures and ideas. Mr. Lundqvist was born in
      Helsinki, Finland in 1952. After serving as a transportation officer during
      his
      mandatory service in the Finnish army, he owned and managed several companies
      in
      Finland, including companies involved in remodeling and manufacturing. Since
      1982, Mr. Lundqvist has been owner and president of Minitec Marketing, Inc.
      which is an import and export firm. Among other things, Minitec Marketing,
      Inc.
      invented, patented and manufactured a Power Take Out for 4-wheel drive GM vehicles.
      This product allows the user to divert some of the power from the vehicles
      engine and use it for other purposes than powering the vehicle itself, e.g.
      external devices like snow blowers, generators, and pumps. The product was
      developed to suit a niche market in Finland. Since 1989 he has also been
      owner and
      president of Minitec Motors, Inc., USA, a car dealership specializing
      in exporting cars to niche markets where a slight modification of the vehicle
      would put it in a lower tax bracket when imported to that particular niche
      market. Mr. Lundqvist
      is not an officer or director of any other reporting company.





**Dick
      G. Lindholm.** Mr.
      Lindholm has been our vice president and one of our directors since December
      1999. Mr. Lindholm is known in the Scandinavian aviation circles as a problem
      solver and skillful negotiator, including experience dealing with clients,
      suppliers and labor unions. He has over thirty years’ aviation experience,
      primarily in rotorcraft. He has thirty years flying experience with over 8,000
      flying hours. From 1976 until 1985, he was president of Helikopteripalvelu,
      the
      leading helicopter company in Finland. From 1985 until 1993, he held various
      duties as a pilot for Helikopter Service A/S. From 1993 until 1997, he was
      managing director of Helifyg AB, the leading helicopter operator in Sweden.
      From
      1997 to March 1999, he was area manager, Nordic Countries, of Helicopter Service
      A/S, which at the time was the world’s largest helicopter company in terms of
      revenues. From March to November 1999, Mr. Lindholm has been vice president
      of
      business development for Copter Action Oy, Finland. Since December 1999, Mr.
      Lindholm has been vice president of flight operations for SHT AB of Finland,
      a
      company responsible for development of the helicopter emergency medical service
      in the country. Mr. Lindholm was born in 1950 and resides in Espoo, Finland.
      Mr.
      Lindholm is not an officer or director of any other reporting
      company.





**William
      S. Rhodes.** Mr.
      Rhodes has been our president and one of our directors since August 2000.
      Mr. Rhodes has spent most of his career in commercial aircraft, military
      aircraft and third party aircraft maintenance. Mr. Rhodes has been
      intimately involved in the managing, planning and production of commercial
      aircraft modification and maintenance of transport aircraft for twenty-three
      years. His maintenance management experience has been with air carriers
      including American, Continental, Hawaiian, United, and U.S. Air. During the
      period 2000 through 2001, Mr. Rhodes has been working with AUT. From 1997 to
      2000, Mr. Rhodes was the General Manager and Senior Vice President of
      administration for Santa Barbara Aerospace, Inc., which repairs and maintains
      aircraft, and Director of Programs for Avtel Services, Inc., which maintains
      and
      repairs aircraft. His career includes the day-to-day management in Department
      of
      Defense contracts with NAVAIR and ARL for a period of fifteen years including
      mission specific requirements for the secretary of defense and chief of naval
      operations. Mr. Rhodes has held positions with aircraft corporations including
      Beech Aircraft, Garrett Aviation, Tracor Aviation, Rogerson Aircraft and Dynair.
      These positions have ranged from program manager to senior vice president in
      technical and administrative management fields. Mr. Rhodes is a currently
      licensed A&P whose aviation work experience started in the U.S. Marines in
      1968, and education is in engineering and business administration. Mr. Rhodes
      currently resides in San Bernardino County, California. Mr. Rhodes is not an
      officer or director of any other reporting company.





There
      is
      no family relationship between any of our officers or directors. There are
      no
      orders, judgments, or decrees of any governmental agency or administrator,
      or of
      any court of competent jurisdiction, revoking or suspending for cause any
      license, permit or other authority to engage in the securities business or
      in
      the sale of a particular security or temporarily or permanently restraining
      any
      of our officers or directors from engaging in or continuing any conduct,
      practice or employment in connection with the purchase or sale of securities,
      or
      convicting such person of any felony or misdemeanor involving a security, or
      any
      aspect of the securities business or of theft or of any felony. Nor are any
      of
      the officers or directors of any corporation or entity affiliated with us so
      enjoined.




28





**Board
      of Director Meetings and Committees**





The
      Board
      of Directors regularly maintains communication among themselves throughout
      the
      year regarding our operations and status. During the fiscal year ended
      December 31, 2005, there was one formal telephonic meeting of the board of
      directors on November 23, 2005. Due to the small size of our Board of Directors,
      the whole board acts as the Audit Committee.





**Code
      of Ethics**





We
      have
      adopted a Code of Ethics for Financial Professionals which Code of Ethics will
      be provided to any person without charge, upon request to Aviation Upgrade
      Technologies, Inc., 6550 South Pecos Road, Suite 142, Las Vegas, Nevada
      89120, Attention: Torbjörn Lundqvist, President.




**Section
      16(a) Beneficial Ownership Reporting Compliance**





Section
      16(a) of the Securities Exchange Act of 1934, as amended, requires our officers
      and directors and those persons who beneficially own more than 10% of the
      outstanding shares of our common stock to file reports of securities ownership
      and changes in such ownership with the Securities and Exchange Commission (“the
      Commission”). Officers, directors and greater than 10% beneficial owners are
      also required by rules promulgated by the Commission to furnish us with copies
      of all Section 16(a) forms they file.





Based
      solely on our review of the copies of such forms received by us, or written
      representations from certain reporting persons, we believe that during the
      year
      ended December 31, 2005, our executive officers, directors, and greater than
      10%
      stockholders complied with all applicable filing requirements.





**Item
      10. Executive Compensation**





**Cash
      Compensation of Executive Officers** - The
      following table sets forth the total compensation earned by the Chief Executive
      Officer and Directors per annum for the previous three years.





**Annual
                Compensation**
            
            **Long-Term
                Compensation****Name
                and Position**
            
            **Year**
            
            **Salary**
            
            **Annual**
              **Bonus**
            
            **Other**
              **Awards**
              **Compensation**
            
            **Restricted
                Stock Granted**
              **(#
                Shares)**
            
            **Common
                Shares Underlying Options Granted**
              **(#
                Shares)**
            
            **All
                Other Compensation**Torbjörn
                B.
              Lundqvist,
              Chairman
                and CEO
            
            2005
              2004
              2003
            
            $140,000
              $140,000
              $140,000
            
            -0-
              -0-
              -0-
            
            -0-
              -0-
              -0-
            
            -0-
              -0-
              -0-
            
            -0-
              -0-
              -0-
            
            -0-
              -0-
              -0-





**Option/SAR
      Grants in Last Fiscal Year** **.** Inapplicable.





**Director
      Compensation** **.** Board
      members are currently serving without cash compensation. Each director holds
      office until his successor is elected and qualified or until his earlier
      resignation in the manner provided in our Bylaws. We have not secured “key man”
or liability insurance coverage for our officers and directors.


29




**Employment
      contracts** **.** ****** On
      May 31, 2000, we entered into an employment agreement with Mr. Lundqvist to
      employ him as our chief executive officer. The agreement, which has an initial
      term of two years, provided for an annual base salary of $140,000 effective
      June 1, 2000, adjustable annually at the discretion of the board of
      directors. Among other provisions, the agreement also provides for an annual
      cash salary incentive equal to 3% of adjusted net profits beginning with the
      year ended December 31, 2001. The “adjusted net profit” shall be our net
      profit before federal and state income taxes, determined in accordance with
      generally accepted accounting principles by our independent accounting firm
      and
      adjusted to exclude:





·
            any
                incentive salary payments paid pursuant to this employment agreement;


·
            any
                contributions to pension and/or profit sharing plans;


·
            any
                extraordinary gains or losses;


·
            any
                refund or deficiency of federal and state income taxes paid in a
                prior
                year; and


·
            any
                provision for federal or state income taxes made in prior years which
                is
                subsequently determined to be unnecessary.





The
      maximum incentive salary payable for any given year may not exceed 400% of
      the
      then applicable base salary.  The
      salary to Mr. Lundqvist has been accrued since November 2002 and is reflected
      in
      accrued payroll on our Balance Sheet.





**Indemnification
      of Directors** **.** Section
      6
      of our Bylaws provide, among other things, that our officers or directors shall
      not be personally liable to us or our shareholders for monetary damages for
      breach of fiduciary duty as an officer or director, except liability for:





·
            any
                breach of such officer’s or director’s duty of loyalty to us or our
                security holders;


·
            for
                acts or omissions not in good faith or which involve intentional
                misconduct or a knowing violation of law;


·
            unlawful
                payments of dividends or unlawful stock purchase or redemption by
                us;
                or


·
            any
                transaction from which such officer or director derived any improper
                personal benefit.





Accordingly,
      our officers or directors may have no liability to our shareholders for any
      mistakes or errors of judgment or for any act of omission, unless such act
      or
      omission involves intentional misconduct, fraud, or a knowing violation of
      law
      or results in unlawful distributions to our shareholders.





Insofar
      as indemnification for liabilities arising under the Securities Act of 1933
      may
      be permitted to our directors, officers and controlling persons pursuant to
      the
      foregoing provisions, or otherwise, we have been advised that in the opinion
      of
      the Securities and Exchange Commission such indemnification is against public
      policy as expressed in the Act and is, therefore, unenforceable.





**Report
      of the Compensation Committee on Executive Compensation** .
      No
      report has been issued by the Compensation Committee.





**Item
      11. Security Ownership of Certain Beneficial Owners and
      Management**




30





The
      following table sets forth certain information regarding the beneficial
      ownership of our common stock as of February 23, 2006 by each person or entity
      known by us to be the beneficial owner of more than 5% of the outstanding shares
      of common stock, each of our directors and named executive officers, and all
      of
      our directors and executive officers as a group.





**Title
                of Class**
            **Name
                and Address of Beneficial Owner**
            **Amount
                and Nature of Beneficial Owner**
            **Percent
                of Class**Common
                Stock
            Torbjörn
                B. Lundqvist,
              6550
                South Pecos Road, Suite 142
              Las
                Vegas, Nevada 89120
            9,572,300
                shares, chief executive officer, chief financial officer, chairman
                of
                board of directors
            83.5%Common
                Stock
            Dick
                G. Lindholm
              6550
                South Pecos Road, Suite 142
              Las
                Vegas, Nevada 89120
            235,000
                shares, vice president, director
            2.1%Common
                Stock
            William
                S. Rhodes*
              P.O.
                Box 10746
              San
                Bernardino, California 92423
            10,000
                shares, president, director
            0.1%Common
                Stock
            All
                directors and named executive officers as a group
            9,817,300
                shares
            85.7%





*
      William
      S. Rhodes is the beneficial owner of 10,000 shares of common stock through
      his
      spouse Lyn Rhodes.





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. In accordance with Securities and Exchange Commission
      rules, shares of our common stock which may be acquired upon exercise of stock
      options or warrants which are currently exercisable or which become exercisable
      within 60 days of the date of the table are deemed beneficially owned by the
      optionees. Subject to community property laws, where applicable, the persons
      or
      entities named in the table above have sole voting and investment power with
      respect to all shares of our common stock indicated as beneficially owned by
      them.





**Changes
      in Control.** Our **** management
      is not aware of any arrangements which may result in “changes in control” as
      that term is defined by the provisions of Item 403(c) of Regulation S-B.





**Item
      12. Certain Relationships and Related Transactions**





**Conflicts
      related to other business activities** **.** The
      persons serving as our officers and directors have existing responsibilities
      and, in the future, may have additional responsibilities, to provide management
      and services to other entities in addition to us. As a result, conflicts of
      interest between us and the other entities may occur from time to
      time.





In
      addition to serving as our chief executive officer and chairman of our board
      of
      directors, Mr. Lundqvist is the president and a director of Minitec Marketing,
      Inc., a California corporation and an importer and exporter of products. Minitec
      Marketing, Inc. has not conducted any operations in the last two years. Mr.
      Lundqvist currently devotes approximately 4% of his time to Minitec Marketing,
      Inc. Mr. Lundqvist is the president and a director of Minitec Motors, Inc.,
      a
      California corporation. Mr. Lundqvist currently devotes approximately 1% of
      his
      time to Minitec Motors, Inc. We do not believe that we have any conflicts of
      interest with the business or industry of Minitec Marketing, Inc., other than
      Mr. Lundqvist’s duty to provide management and services.





In
      addition to serving as our officers and directors, Mr. Rhodes and Mr. Lindholm
      currently devote a significant portion of their time to other companies. Mr.
      Lindholm currently devotes approximately ten hours per week, but anticipates
      that he will devote significantly more hours if the valve cap starts producing
      significant revenues. Mr. Rhodes currently devotes approximately two hours
      per
      week, but anticipates that he will devote significantly more hours if the valve
      cap starts producing significant revenues. We do not believe that we have any
      conflicts of interest with the business or industry of those companies, other
      than their duties to provide management and services.





We
      will
      attempt to resolve any such conflicts of interest in our favor. Our officers
      and
      directors are accountable to us and our shareholders as fiduciaries, which
      requires that such officers and directors exercise good faith and integrity
      in
      handling our affairs. A shareholder may be able to institute legal action on
      our
      behalf or on behalf of that shareholder and all other similarly situated
      shareholders to recover damages or for other relief in cases of the resolution
      of conflicts in any manner prejudicial to us.




31





**Related
      party transactions** **.** Mr.
      Lundqvist, our chief executive officer and director and principal shareholder,
      provides substantially all the assets used by us, through Minitec Marketing,
      Inc., his privately held marketing company. We have reimbursed this entity
      for
      the cost of the services it has paid on behalf of AUT.





We
      entered into a license agreement with Torbjörn B. Lundqvist, to license the
      marketing rights for the tire valve technology. During the years ended December
      31, 2005, 2004 and 2003, we incurred $0, $71,501 and $8,082 for research and
      development costs in connection with the licensing agreement. During the license
      period and any renewal period, we will pay fees, expenses and costs related
      to
      product development and any application for patents and trademarks. The license
      agreement also specifies that we will enter into a manufacturing agreement
      with
      Torbjörn B. Lundqvist, our chief executive officer. However, no terms of the
      manufacturing agreement have been negotiated.





Mr.
      Lundqvist was issued 10,000,000 shares of our common stock in exchange for
      services relating to founding and organizing the business, which were valued
      at
      $10,000. In addition, during the period ended December 31, 1999, Mr.
      Lundqvist, our chief executive officer and director and principal shareholder,
      paid for various goods and performed services relating to our operations. Those
      goods included office supplies of $2,000. Those services of $8,000 provided
      by
      Mr. Lundqvist were for services as our promoter including founding and
      organizing the business.




**Item
                  13. Exhibits**3.1
              Certificate
                  of Incorporation of the Company(1)3.2
              Bylaws
                  of the Company(1)10.1
              Employment
                  Agreement(2)21.1
              Subdivision
                  of small business issuer. Not applicable31.1
              Rule
                  13a-14(a)/15d-14(a) Certificate of Chief Executive
                  Officer31.2
              Rule
                  13a-14(a)/15d-14(a) Certificate of Chief Financial
                  Officer32.1
              Certification
                  Pursuant to 18 U.S.C. §1350 of Chief Executive Officer32.2
              Certification
                  Pursuant to 18 U.S.C. §1350 of Chief Financial
                  Officer


(1) Previously
      filed on December 2, 1999, as exhibit to the Registration Statement on Form
      10-SB.


(2) Previously
      filed in March 2002 as exhibit to the 2001 Annual Report on Form
      10-KSB.


32
  **Item
      14. Principal Accountant Fees and Services**





The
      Board
      of Directors has selected Armando C. Ibarra, 371 E Street, Chula Vista, CA
      91910
      as independent accountants to audit our books, records and accounts for the
      fiscal year 2005. Lesley, Thomas, Schwarz & Postma, Inc. previously audited
      our financial statements during the two fiscal years ended December 31, 2004
      and
      2003.





**Audit
      and Non-Audit Fees**





Aggregate
      fees for professional services rendered to the Company by Lesley, Thomas,
      Schwarz & Postma, Inc. for the years ended December 31, 2005 and 2004, were
      as follows:





Services
                Provided
            
            2005
            
            2004Audit
                Fees
            
            $
            25,327
            
            $
            23,925Audit
                Related Fees
            
            $
            0
            
            $
            0Tax
                Fees
            
            $
            0
            
            $
            828All
                Other Fees
            
            $
            0
            
            $
            0Total
            
            $
            25,327
            
            $
            24,753





*Audit
      Fees.* The
      aggregate fees billed for the years ended December 31, 2005 and 2004 were for
      the audits of our financial statements and reviews of our interim financial
      statements included in our annual and quarterly reports.





*Audit
      Related Fees.* There
      were no fees billed for the years ended December 31, 2005 and 2004 for the
      audit
      or review of our financial statement that are not reported under *Audit
      Fees* .





*Tax
      Fees.* The
      aggregate fees billed for the years ended December 31, 2004 were for
      professional services for tax compliance, tax advice and tax planning.





*All
      Other Fees.* There
      were no other fees billed for the years ended December 31, 2005 and 2004.





**Audit
      Committee Pre-Approval Policies and Procedures**





Due
      to
      the small size of our Board of Directors, the whole board acts as the Audit
      Committee.





The
      Board
      of Directors has implemented pre-approval policies and procedures related to
      the
      provision of audit and non-audit services. Under these procedures, the Board
      of
      Directors pre-approves both the type of services to be provided by Lesley,
      Thomas, Schwarz & Postma, Inc. and the estimated fees related to these
      services.





During
      the approval process, the Board of Directors considers the impact of the types
      of services and the related fees on the independence of the auditor. The
      services and fees must be deemed compatible with the maintenance of the
      auditor's independence, including compliance with SEC rules and regulations.





Throughout
      the year, the Board of Directors will review any revisions to the estimates
      of
      audit and non-audit fees initially approved.


33




**SIGNATURES**





In
      accordance with Section 13(a) or 15(d) of the Exchange Act, the registrant
      has
      caused this report to be signed on its behalf by the undersigned, thereunto
      duly
      authorized.




**Aviation Upgrade
              Technologies, Inc.**By:
            /s/ Torbjörn
              B. LundqvistChairman
                and Chief Executive Officer




In
      accordance with the Exchange Act, this report has been signed by the following
      persons on behalf of the registrant and in the capacities and on the dates
      indicated.





Signatures
            
            Title
            
            Date/s/
                Torbjörn B. Lundqvist
              
              Torbjörn
                B. Lundqvist
            
            Chairman,
                Chief Executive Officer (principal executive officer) and Chief Financial
                Officer (principal financial officer)
            
            February
                23, 2006/s/
                Dick G. Lindholm
              
              Dick
                G. Lindholm
            
            Director
            
            February
                23, 2006/s/
                William S. Rhodes
              
              William
                S. Rhodes
            
            Director
            
            February
                23, 2006


34