AMERITYRE CORP - Annual Report: 2007 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-K

(Mark One)
x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2007
OR
o	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   000-50053

AMERITYRE CORPORATION

(Exact name of registrant as specified in its charter)

Nevada (State or other jurisdiction of incorporation or organization)	87-0535207 (I.R.S. Employer Identification No.)
1501 Industrial Road Boulder City, Nevada 89005 (702) 294-2689  (Address of principal executive office and telephone number)

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

Title of each class	Name of each exchange on which registered
Common Stock	NASDAQ Capital Market

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

 

Indicate by check mark if the Registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o  NO x

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. YES o  NO x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

Large Accelerated Filer o  Accelerated Filer x Non-Accelerated Filer o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o  NO x   

On September 7, 2007, 23,441,551 shares of common stock of the Registrant were outstanding, and the market value of common stock held by non-affiliates was $85,890,582 (based upon the closing price of $3.96 per share of common stock as quoted on the NASDAQ Capital Market).

Documents Incorporated by Reference

Portions of the Registrant's definitive proxy statement, which will be issued in connection with the 2007 Annual Meeting of Shareholders of Amerityre Corporation, are incorporated by reference into Part III of this Annual Report on Form 10-K.

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AMERITYRE CORPORATION

2007 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

		Page
PART I
ITEM 1.	BUSINESS	1
ITEM 1A.	RISK FACTORS	10
ITEM 1B.	UNRESOLVED STAFF COMMENTS	13
ITEM 2.	PROPERTIES	13
ITEM 3.	LEGAL PROCEEDINGS	14
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	14
PART II
ITEM 5.	MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	15
ITEM 6.	SELECTED FINANCIAL DATA	17
ITEM 7.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	18
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	27
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	27
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	28
ITEM 9A.	CONTROLS AND PROCEDURES	28
ITEM 9B.	OTHER INFORMATION	31
PART III
ITEM 10.	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT	31
ITEM 11.	EXECUTIVE COMPENSATION	31
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	31
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	31
ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	31
PART IV
ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	31

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AMERITYRE CORPORATION

2007 ANNUAL REPORT ON FORM 10-K

This report contains "forward-looking statements" within the meaning of the federal securities laws. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions and other information that is not historical information. In some cases, forward-looking statements can be identified by terminology such as "believes," "expects," "may," "will," "should," "anticipates," or "intends" or the negative of such terms or other comparable terminology, or by discussions of strategy. We may also make additional forward-looking statements from time to time. All such subsequent forward-looking statements, whether written or oral, by us or on our behalf, are also expressly qualified by these cautionary statements.

All forward-looking statements, including without limitation, management's examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them, but, there can be no assurance that management's expectations, beliefs and projections will result or be achieved. All forward-looking statements apply only as of the date made. We undertake no obligation to publicly update or revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in or contemplated by this report. Any forward-looking statements should be considered in light of the risks set forth in "Part I. Item 1A. Risk Factors" and elsewhere in this report.

This report includes information with respect to market share, industry conditions and forecasts that we obtained from internal industry research, publicly available information (including industry publications and surveys), and surveys and market research provided by consultants. The publicly available information and the reports, forecasts and other research provided by consultants generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy and completeness of such information. We have not independently verified any of the data from third-party sources, nor have we ascertained the underlying economic assumptions relied upon therein. Similarly, our internal research and forecasts are based upon our management's understanding of industry conditions, and such information has not been verified by any independent sources.

For convenience in this report, the terms “Amerityre,” “Company,” “our,” “us” or “we” may be used to refer to Amerityre Corporation.

PART I

ITEM 1. BUSINESS

Overview

We were incorporated as a Nevada corporation on January 30, 1995 under the name American Tire Corporation and changed our name to Amerityre Corporation in December 1999.  Since our inception in 1995, we have been engaged in the research and development of technologies related to the formulation of polyurethane compounds and the manufacturing process for producing tires from polyurethane.

We believe that we have developed unique polyurethane formulations that allow for the creation of tire products with superior performance characteristics, including abrasion resistance and load-bearing capabilities, compared to those of conventional rubber tires.  In addition, we believe that the manufacturing processes we have developed are more efficient than traditional tire manufacturing processes, in part because our polyurethane compounds do not require the processing steps, extreme heat, and high pressure that are necessary to cure rubber.  Using our polyurethane technologies, we believe tires can be produced that are cost-competitive,  more durable and more fuel efficient than existing rubber tires. As a company focused on the advanced chemistry and potential

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innovative applications of polyurethane, we believe there is a significant opportunity to apply our materials to several industries.  The escalating price of rubber, combined with its inherent limitations, demonstrates the need for and potential benefits of alternative materials.  We believe that significant product performance improvements can be realized by substitution of our unique polyurethane compounds for both rubber and inferior polyurethane compounds.

We intend to expand our intellectual property portfolio through our own research and development as well as co-development efforts with industry leaders. We have numerous patents granted  and  additional patent applications pending relating to our tire technology. By expanding our intellectual property, we believe that we will strengthen our competitive position and continue to be an innovator in the development of polyurethane technologies.

Products

Our polyurethane material technology is based on two key proprietary formulations; closed-cell polyurethane foam, which is a lightweight material with high load-bearing capabilities for light-use applications; and Elastothane®, a high performance polyurethane elastomer with high load-bearing capabilities suitable for heavy-use applications. The sale of closed-cell polyurethane foam tires accounts for approximately 79% of our total revenues at this time. However, we believe that Elastothane^® and the technology to produce tires using this proprietary formulation are significant to our potential future growth.  Our business model provides for a diversified revenue stream, and we intend to generate additional revenue through license agreements relating to the use of our patented manufacturing methods and commercialization of the products produced with Elastothane®.

Low Duty Closed-Cell Polyurethane Foam Tires

We currently manufacture several lines of closed-cell polyurethane foam tires for bicycles, wheelchairs, lawn and garden products, such as wheelbarrows and hand trucks, and outdoor power equipment products.  Our closed-cell polyurethane foam products are often referred to as flat-free because they have no inner tube, do not require inflation and will not go flat even if punctured. Our closed-cell polyurethane foam tires are mounted on the wheel rim in much the same way as a pneumatic tire.  Our closed-cell polyurethane foam products are virtually maintenance free, eliminating the need to make tedious puncture repairs and offering superior wear compared to rubber based tires.

Although we currently have the capacity to produce up to 2,000,000 closed-cell foam tires per year at our Boulder City, Nevada facility, we intend to expand commercialization of our closed-cell foam tire products through strategic relationships with off-shore licensees who will manufacture the closed-cell foam tires for use on original equipment products.

In July 2006, we entered into an agreement with Flatfree Korea, a South Korean company (“Flatfree”), to manufacture and distribute our polyurethane closed-cell foam tire products in Asia.  Flatfree paid us an annual license fee for 2006 to have the exclusivity to market the closed-cell foam tire products in South Korea and agreed to purchase the polyurethane foam chemical systems from us once they commence manufacturing operations. As of August 2007, Flatfree had not commenced manufacturing operations and has elected not to pay the annual licensee fee to maintain its exclusivity to manufacture and sell polyurethane foam products in South Korea.  We are currently negotiating with other interested parties for manufacturing and marketing rights to our closed-cell foam tire products in Asia.

Amerifill™ Tire Fill Material

We recently introduced high-quality polyurethane foam for use in the commercial tire fill market. The new materials will be marketed under the name Amerifill™. Amerifill™ is based on Amerityre’s proven, premier “flat-free” closed-cell polyurethane foam technology. Amerifill™ materials are compatible with most tire fill equipment in use today.   Currently, tire fill materials are used in many tire applications, including construction, industrial and mining applications, to “flat-proof” and extend the life of rubber tires. Amerifill™ is based on MDI polyurethane chemical formulations, which have been shown to be very stable and environmentally safe.  Most tire fill materials available today are petroleum-based compounds that have been shown to reduce the useful life of the tire and to

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pose environmental hazards. We have shown that Amerifill™ performs better under load, runs cooler and is more durable than current comparable materials.  We have evaluated Amerifill™ in the field and in side-by-side comparison testing conducted by independent test laboratories.  These evaluations and tests demonstrate that in many applications both the fill weight and cost can be significantly reduced by switching to Amerifill™.

Products in Development

We are developing tires and treads for tires using Elastothane^® for a variety of applications as discussed below. In order to design and produce polyurethane tires suitable for these applications, we have invented the manufacturing equipment necessary to produce these tires in limited quantities and currently have multiple patents and pending patent applications with respect to various aspects of this technology.  This work is ongoing and we expect to make improvements to the processes and equipment as needed so that products can be produced in commercial quantities.  Elastothane^® and the technology to produce tires using this proprietary formulation are significant to us because we believe that they allow for the creation of tires that can be produced quickly and less expensively than traditional rubber pneumatic tires, while meeting or exceeding the performance characteristics of those tires.  

Polyurethane Elastomer Passenger Car Tire and the Arcus® Run-Flat Tire

 In 2001, we developed polyurethane elastomer pneumatic passenger car tires that we were able to drive for over 500 miles without air pressure and with several holes in the sidewalls.  These tires did not contain traditional tire reinforcement materials, such as beads, belts and plies.  We then developed Arcus®, a patented system for integrating these reinforcement materials in our Elastothane^TM  tires.  The Arcus® Run-Flat Tire is designed to operate at normal air pressure, yet continue to perform normally for up to 200 miles without air.

We have produced a limited number of Arcus® passenger car tires and have conducted independent laboratory testing to demonstrate these tires comply with the Federal Motor Vehicle Safety Standards, or FMVSS.  In April 2004, our Arcus® Run-Flat tire was successfully tested by an accredited test laboratory approved by the National Highway Traffic Safety Administration, or NHTSA, to certify compliance with the laboratory test procedures required under FMVSS 109, the current safety standard for pneumatic passenger car tires.  We know of no other company that has produced a pneumatic polyurethane passenger car tire that has passed these standards.  Additionally, an independent laboratory test demonstrated that our Arcus® Run-Flat tire had 45% less rolling resistance than a comparable rubber run-flat car tire.  The independent laboratory test indicated that the lower rolling resistance would result in more than a 12% increase in fuel economy for a car equipped with Arcus® Run-Flat tires.

We have completed significant portions of FMVSS 139 (the pending U.S. safety standard) testing on our Arcus® run-flat tire design.  Successfully completed components of the testing to date include bead unseating, tire strength and the strenuous high speed component.  We are now working on the remaining endurance component of the testing protocol, and management believes that we will complete that testing successfully.

In connection with the further development of the Arcus® run-flat tire, we entered into a development agreement with Genmar Holdings, Inc., a leading recreational boat manufacturer, to design and develop a polyurethane elastomer run-flat tire for boat trailers.  We believed that passing FMVSS 139 testing on the run-flat passenger car tire design is the foundation for completing our development of the run-flat trailer tire. We originally estimated that the boat trailer tire project would require approximately six months for us to develop prototype tires.  However, due to significant delays associated with the tire tooling equipment and testing, our estimate for completing this development was extended well beyond the original estimated time frame for completion.  As a result, Genmar has a right, but is not obligated, to evaluate the run-flat tires for boat trailers once the tires have completed FMVSS 139 testing.  

Over the past several months we have been engaged in discussions with a major foreign conglomerate regarding a potential strategic relationship. Initially our discussions included the potential sale by us of a 50% equity interest. We have been unable to come to mutually agreeable terms and no further discussions regarding an equity investment are expected at this time.  We have also discussed the general terms for jointly developing a polyurethane passenger car tire with one of the conglomerate’s subsidiaries  If a transaction  materializes, it is anticipated that the proposed joint development agreement would include provisions for: (a) us to design and engineer the tooling to manufacture a radial polyurethane passenger car tire based on the tire specifications and tread

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design provided by the joint development partner; (b) the joint development partner providing the tooling necessary to manufacture the polyurethane passenger car tire; and (c) manufacturing a sufficient quantity of  polyurethane passenger car tires so that we can complete applicable safety testing. We cannot predict whether our discussions will ultimately result in a transaction or series of transactions. Further, even if agreements are reached, the terms of any such agreements could differ significantly from the proposed terms identified above.  

Polyurethane Elastomer Non-Pneumatic or “Solid” Tires

We have completed the developmental phase of a non-pneumatic zero-pressure temporary/spare tire using Elastothane^®.  This solid Elastothane® tire was developed for potential use as a temporary/spare tire for passenger vehicles.  These tires do not contain air and do not require inflation.  In April 2005, prototype non-pneumatic temporary/spare tires were successfully tested by an accredited test laboratory approved by NHTSA to certify compliance with the laboratory test procedures required under FMVSS 129, the standard applicable to new non-pneumatic tires.  We view this as a major breakthrough in tire technology because we believe no other company  has developed a non-pneumatic tire that complies with FMVSS 129.  In its current state of development the non-pneumatic temporary spare tire costs and weighs more than a conventional pneumatic temporary tire. Therefore, we are developing additional prototype non-pneumatic tires for other applications such as fork lifts, skid steers and luggage carts that currently use solid rubber tires and where the weight and cost of the solid polyurethane tire are significantly more competitive.

Polyurethane Elastomer Retread Material

We have been developing a manufacturing process for retreading off the road (“OTR”) and medium commercial truck tires with Elastothane^®.  We believe this retreading process will have broad application for the mining, construction, industrial and commercial truck tire markets.  Our tire retreading process involves applying the polyurethane tread compound to the rubber tire casing without high heat, pressure or curing.  

In September 2006, we entered into a manufacturing license agreement with Qingdao Qizhou Rubber Company, LTD. (“Qingdao”), a Chinese company, to manufacture retreads using our polyurethane elastomer compound for large size OTR tires used in mining operations.  In connection with the manufacturing license agreement we agreed to supply Qingdao with a 2,500 lb per minute polyurethane pouring machine. We commissioned a third-party equipment supplier in the United Kingdom to fabricate the machine. The machine has now been tested and prepared for shipment to Qingdao’s newly constructed OTR retread manufacturing facility in Shandong Province, China.

Qingdao has reported to us that they have experienced delays in receiving the equipment from the United Kingdom and therefore may not be able to meet their projected September 2007 time frame for commencing production of OTR retreads. We do not know at this time the extent of the delay. Once the polyurethane pouring machine has been received and installed, Qingdao will purchase  the polyurethane elastomer chemical systems necessary to produce the OTC retreads directly from us.

We have entered into an agreement with Phelps Dodge Mining Company to evaluate polyurethane elastomer retreads for large size OTR tires. We are currently developing a program with Qingdao to produce several test polyurethane elastomer retreads for OTR tires and Phelps Dodge will provide the OTR tire casings.

Glass Encapsulation Material

We believe that we have identified new, innovative applications of polyurethane formulations using our proprietary technologies.  We have tested our polyurethane elastomer material for glass encapsulation applications, and in some instances have achieved positive test results for the material in weatherization testing.  As a result, we have been conducting a broader range of tests to determine the performance characteristics of the material for use in commercial glass applications.

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Raw Materials and Supplies

The two principal chemical raw materials required to manufacture our products are known generically as polyols and isocyanates.  We purchase our chemical raw materials from multiple third-party suppliers.  In addition, we purchase various quantities of additional chemical additives that are mixed with the polyols and isocyanates.  These additional chemicals are also available from multiple suppliers.  Critical raw materials are generally sourced from at least two vendors to assure adequate supply and price competition.  

We believe that sufficient quantities of chemical raw materials can be obtained through normal sources to avoid interruption of production.  However, with respect to both polyols and isocyanates, worldwide demand is increasing and may exceed current capacity.  If we are successful in implementing our business strategy, the quantities of chemical raw materials required by us or by others that utilize our technology may increase significantly.  Shortages, if any, may result in price increases that we may or may not be able to pass on to our customers by means of corresponding changes in product pricing.  Therefore, raw material price increases or our inability to pass price increases through to customers could adversely affect our results of operations.

In addition to the chemical raw materials, we purchase steel and plastic wheel components for use in tire and wheel assemblies.  We purchase these components from multiple third-party suppliers.  In fiscal 2005 and 2006 we experienced price increases for steel wheel components but no supply delays or shortages.  To reduce the impact of these price increases, in the second half of 2006, we found lower-cost alternative suppliers for steel wheel components in China.  However, we anticipate that we may experience an increase in steel wheel components at such time as the Chinese government cancels any export rebates it may be currently providing Chinese wheel manufactures. We believe that we can continue to purchase wheel components from multiple sources without any difficulty.

Operations/Manufacturing

Our closed-cell polyurethane foam products are manufactured utilizing single or multiple stationed carousel centrifugal molding presses.  We produce closed-cell foam products using these presses by pouring a proprietary polyurethane formula into a mold, which then spreads out in the mold through centrifugal force.  The molding process occurs by reacting MDI with polyol and other chemicals.  The chemical reaction causes a cross linking of the chemicals, which thereafter become solid.  The manufacturing process for a closed-cell polyurethane foam product takes less than two minutes.  The closed-cell polyurethane foam product can then be removed from the mold and the process is repeated.

Our polyurethane car tire technology is best summarized as a combination of specially formulated chemicals coupled with unique manufacturing processes and tire building techniques. We have also invented manufacturing processes to make tires for vehicles from polyurethane elastomer. We believe this manufacturing process offers significant advantages over the process for producing rubber tires.    We believe that manufacturing a passenger car tire using our manufacturing technology will significantly reduce the cost of a tire manufacturing plant.  Because of our simplified manufacturing process, much of the equipment typically required to produce rubber tires is not necessary, and an Elastothane™ tire manufacturing plant will require much less square footage and require less energy to run.

All of our closed-cell polyurethane foam products are inspected following the manufacturing process and prior to shipment to ensure quality. Any closed-cell foam products considered by our quality control personnel to be defective are disposed of through traditional refuse collection services or can be ground into pellets, which can be melted and reused to make other products and reduce waste of raw materials.  We expect to implement similar quality control procedures with respect to any Elastothane™ products that we produce.

Information Systems

We use commercial computer aided design, or CAD, software in connection with engineering and designing our products.  This software allows us to integrate our proprietary manufacturing and production data with our design technology, enabling our engineering department to leverage our previous manufacturing and test results

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to predict the performance characteristics of new product designs.  For general business purposes, we use Microsoft Dynamics GP for financial, distribution, manufacturing, customer relationships and payroll management.  

Sales, Marketing and Distribution

Historically, we have been primarily a technology company in the development stage, manufacturing a limited number of products for the purpose of validating our polyurethane materials and manufacturing technology.  We now have an extensive line of closed-cell polyurethane foam tire products for various product segments and have recently introduced our Amerfill™ tire fill material.  Our three full-time sales representatives are actively targeting customers that utilize tires in significant volume through telephone and in person meetings.  Our sales representatives are also working to establish broader distribution for our products in the aftermarket by contacting major regional distributors, retail cooperatives and chains that distribute and otherwise sell our products.

Our polyurethane elastomer technology is currently marketed by our principal executive officers through direct contact with representatives at international and domestic automobile and tire industry manufacturers as well as end-users.  This sales strategy is enhanced by introductions provided by members of our Board of Directors.  If successful, the meetings will be followed by the development of a product designed for the potential end-users and a subsequent period of evaluation and testing.  We intend to shift the responsibility of marketing our polyurethane elastomer technology from our principal executive officers to full time sales and marketing personnel once we determine that our technology has been commercially established.

Customers

We have one customer, Central Purchasing, which accounted for approximately 20%, 23% and 12% of total sales during the fiscal years ended June 30, 2007, 2006 and 2005, respectively. We don't believe that the loss of this customer would have a material adverse effect on our business.  In general, our customers include OEMs of lawn and garden products ,and outdoor power equipment, regional distributors, retail cooperatives and chains that sell lawn and garden products, bicycle tires and hand truck tires to the aftermarket.

Competition

There are several companies that produce not-for-highway-use or light-use tires from polyurethane foam such as Green Tire, UK, Alshin Tire, USA, KIK Technology International, Inc., USA, Woo Tire, China and Krypton-India, India.  We believe our closed-cell polyurethane foam tires differ from the polyurethane foam tires offered by the above competitors because our products contain millions of closed-cell versus open-cell air bubbles.  By closing the cells, our products have higher load bearing characteristics than tire products with open-cell polyurethane foam, while effectively producing a ride quality comparable to a pneumatic tire.

In addition to manufacturers of polyurethane foam tires, we compete directly with companies that manufacture and market traditional not-for-highway-use, light-use pneumatic, semi-pneumatic, and solid tires made from rubber.  The not-for-highway use tire industry has historically been highly competitive and several of our competitors have financial resources that substantially exceed ours. In addition, many of our competitors are very large companies, such as Kenda, Taiwan, Maxxis International, Taiwan, and Carlisle Tire, USA, that have established brand name recognition, have established distribution networks for their products, and have developed consumer loyalty to such products.

There are several companies that produce pneumatic tire fill material, such as Carpenter, Pathway Polymers and Arnco. These companies are larger than us and have established distribution networks for their products. We believe that most tire fill materials available today are petroleum-based compounds that have been shown to reduce the useful life of the tire and to pose environmental hazards.  Governments in both Europe and the United States have either passed or are considering legislation that will eventually outlaw the use or disposal of these hazardous fill materials. Our Amerifill™ tire fill material is based on MDI polyurethane chemical formulations, which have been shown to be very stable and environmentally safe. We have shown that Amerifill™ performs better under load, runs cooler and is more durable than current comparable materials.  We have evaluated Amerifill™ in the field and in side-by-side comparison testing conducted by independent test laboratories  and both the fill weight and cost can be significantly reduced by switching from oil-filled elastomers to Amerifill™.

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We know of no other companies that have the technology necessary to formulate and produce polyurethane elastomer compounds suitable for either highway or OTR tire use.  To our knowledge, no other company has produced polyurethane pneumatic and/or non-pneumatic passenger car tires that comply with FMVSS for those tires.  However, there are several domestic and international companies that produce rubber tires for highway or OTR use, most of which are larger and have greater financial resources than we do.  Significant competitors in the highway tire market include Goodyear, Bridgestone/Firestone and Michelin.  Significant competitors in the OTR tire market include Bridgestone/Firestone, Michelin and Carlisle Companies Incorporated.

 

Intellectual Property Rights

We seek to obtain patent protection for, or to maintain as trade secrets, those inventions that we consider important to the development of our business.  We rely on a combination of patent, trademark, copyright and trade secret laws in the United States and other jurisdictions as well as confidentiality procedures and contractual provisions to protect our proprietary technology and branding.  We control access to our proprietary technology and enter into confidentiality agreements with our employees and other third parties.  We own seven issued U.S. patents and have several additional pending U.S. and foreign patent applications.  We use various trademarks in association with marketing our products, including the names Arcus®, Amerityre®, Atmospheric®, Elastothane®, Amerifill™ and Tire Technology for the 21st Century™.  

Trade Secrets

Our polyurethane material technology is based on two key proprietary formulations, a closed-cell polyurethane foam, which is a lightweight material with high load-bearing capabilities for light-use applications, and polyurethane elastomer, which is a high performing material with high load-bearing capabilities for heavy-use applications.  The polyurethane elastomer material is identified by us as Elastothane™.

We restrict access to our key proprietary formulations to a limited number of our executive officers and managers.  Documentation of our proprietary formulations is secured in a safe deposit box.  We have not applied for patent protection of our proprietary formulations because such applications would require us to publicly disclose these formulations.  Instead, we have chosen to maintain these formulations as trade secrets.  

Patents

Set forth in the schedule below are patents that have been issued or for which a patent application is pending with respect to our technology.

[Table begins on next page]

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Description of Patent	U.S. Patent App/Serial No.	Issued Date or Date Filed	Brief Description/Purpose
Spin Casting Apparatus for Manufacturing an Item From Polyurethane Foam	5,906,836	5/25/1999	Broader application to products other than tires for centrifugal method of manufacturing
Method for Making Tires and the Like	6,165,397	12/26/2000	Applies to pouring the material at the inside diameter (where the tire starts) during the manufacturing process
Non-Pneumatic Tire and Rim Combination	6,431,235	8/13/2002	Applies to how the polyurethane foam tires mechanically locks to the wheel/rim without tire beads
Run-Flat Tire with Elastomeric Inner Support	6,679,306	1/20/2004	Applies to a polyurethane insert within a tire to create a “run-flat” system
Elastomeric Tire with Arch Shaped Shoulders	6,971,426	12/06/2005	Applies the design of the Arcus® run-flat tire (the first polyurethane elastomer tire to run with or without air)
Tire Core Package for Use in Manufacturing a Tire with Belts, Plies and Beads and Process of Tire Manufacture	6,974,519	12/13/2005	Applies to how we put the plies, beads and belts on a mandrel or bladder to be placed inside a mold for manufacturing a tire
Method and Apparatus for forming a core of plies, belts and beads and for positioning the core in a mold for forming an Elastomeric tire and the formed Elastomeric Tire	Pending	6/4/2004	Applies to method used to lock the tire beads into place within the tire mold during the manufacturing process
Method and Apparatus for Forming a Core of Plies, Belts and Beads and for positioning the core in a mold for forming an Elastomeric tire	7,094,303	8/2/2004	Applies to improvements on how we put the plies, beads and belts on a mandrel or bladder to be placed inside a mold for manufacturing a tire
Method and Apparatus for Vacuum Forming an Elastomeric Tire	Pending	9/4/2004	Applies to polyurethane tires and the method we employ to evacuate air from the mold while moving material through the mold utilizing a vacuum process to eliminate air pockets within the matrix of the material
Method and Apparatus for Vacuum Forming a Wheel from a Urethane Material	Pending	4/29/2005	Applies to the method we employ to coat a light gauge steel or aluminum wheel by evacuating air from the mold while moving material through the mold utilizing a vacuum process to eliminate pockets of air within the matrix of the material. The resulting product becomes a “Composite” wheel.
Plies Sleeve for use in Forming an Elastomeric Tire	Pending	1/10/2006	Applies to the how the tire beads and tire plies are assembled prior to putting them on a mandrel or a core/bladder
Run-Flat Tire Insert System	Pending	6/27/05	Applies to how to utilize an insert on a wheel within a corresponding pneumatic tire
Air-No-Air Elastomeric Tire	Pending	8/12/05	Applies to a pneumatic tire that can run with our without air
Airless Spare Tire	Pending	11/25/05	Applies to a non-pneumatic tire
Belt For Use in Forming a Core for Manufacturing an Elastomeric Tire	Pending	4/3/07	Applies to the belt package used in a pneumatic tire

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Apparatus for Vacuum Forming a Tire, Wheel or Other Item from an Elastomeric Material	Pending	5/22/06	Applies to an improvement in the vacuum forming equipment used to manufacture a tire and other items
Bead alignment clip and system for its use for locating and maintaining a tire bead positioning onto a core build mandrel in forming a core for manufacturing an elastomeric tire	Pending	3/9/2007	Applies to the manufacturing of a pneumatic tire that requires a tire bead for internal reinforcement

Trademarks

Set forth in the schedule below are the United States trademarks that have been registered or for which a trademark application has been filed.

Trademarks	Registration/Serial #	Issued/Filed
Amerityre®	2,401,989	11/7/2000
Logo®	3,118,909	7/25/2006
Tire Technology for the 21st Century™	Pending	6/20/2005
Arcus®	2,908,077	12/7/2004
Atmospheric®	3,089,313	5/9/2006
Elastothane®	3,139,489	9/9/2003
Amerifill™	Pending	9/5/06

We also own certain trademark applications and/or trademark registrations relating to the Arcus trademark in several foreign jurisdictions.

As discussed under “Legal Proceedings” Continental Automotive Licensing Corp. filed a petition for Cancellation #92045199 in the United States Patent and Trademark Office against Richard A. Steinke, our former Chairman and Chief Executive Officer concerning the registration of Amerityre®, Registration No. 2,401,989.  Continental withdrew their petition in June 2007.

Employees

As of August 31, 2007 we had 28 full-time employees, including 19 salaried and 9 hourly employees.  We may hire temporary labor for manufacturing needs as required.  We believe that we will be able to hire a sufficient quantity of qualified laborers in the local area to meet our employment needs.  Our manufacturing process does not require special training, other than orientation to our production techniques and specific equipment.  None of our employees is represented by a labor union or a collective bargaining agreement.  We consider our relations with our employees to be good.

Research and Development

Our research and development activities are focused primarily on developing Amerifill™ and Elastothane® for use in multiple tire applications as discussed above. However, over time, and provided we have sufficient funding, we intend to devote a portion of our research and development efforts to the identification and development of additional applications for our polyurethane technology outside of the tire industry.

Regulatory Environment

Tire manufacturers must comply with a wide range of government- and industry- imposed standards and regulations.  In order to commercially market motor vehicle tires in the U.S., manufacturers must comply with the FMVSS, which are promulgated by the National Highway Traffic Safety Administration.  In addition to FMVSS, tire manufacturers are subject to a variety of national and local laws and regulations, many of which deal with the

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environment and health and safety issues, including specific requirements related to tire strength, performance and endurance.  Regulations may change in response to judicial proceedings, legislative and administrative proposals, government policies, competition, and technological developments.

ITEM 1A. RISK FACTORS

Historically, we have lost money from operations and we have made no provision for any contingency, unexpected expenses or increases in costs that may arise.

We are an early-stage company and our products have not obtained broad market acceptance.  Since inception, we have been able to cover our operating losses from the sale of our securities.  We cannot assure you, however, that these sources of funds will be available to cover future operating losses. If we are not able to obtain adequate sources of funds to operate our business we may not be able to continue as a going concern.

Our business operations and plans could be adversely affected in the event we need additional financing and are unable to obtain such funding when needed.  To the extent that our business strategy requires expanding our operations, such expansion could be costly to implement and may cause us to experience significant continuing losses.  It is possible that our available short-term assets and anticipated revenues may not be sufficient to meet our operating expenses, business expansion plans, and capital expenditures for the next twelve months.  Insufficient funds may prevent us from implementing our business strategy or may require us to delay, scale back or eliminate certain opportunities for the commercialization of our technology and products.  If we cannot generate adequate sales of our products, or increase our revenues through licensing of our technology or other means, then we may be forced to cease operations.

In order to succeed as a company, we must continue to develop commercially viable products and sell adequate quantities of products at prices sufficient to generate profits.  We may not accomplish these objectives. Even if we are successful in increasing our revenue base, a number of factors may affect future sales of our products.  These factors include whether competitors produce alternative or superior products and whether the cost of implementing our products is competitive in the marketplace.

In addition, we are attempting to increase revenues through licensing our technology and manufacturing rights, selling polyurethane chemical systems to customers that produce their own products,  and offering contract design and engineering services.  If these proposals are not viable in the marketplace, we may not generate significant revenues from these efforts.

Because we have limited experience, we may be unable to successfully manage planned growth as we complete the transition from a technology development company to a licensing, manufacturing and marketing company.

We have limited experience in the commercial manufacturing and marketing arena, limited product sales and marketing experience, and limited staff and support systems, especially compared to competitors in the tire industry.  In order to become profitable through the commercialization of our technology and products, they must be cost-effective and economical to implement on a commercial scale.  Furthermore, if our technologies and products do not achieve, or if they are unable to maintain, market acceptance or regulatory approval, we may not be profitable.

Our success depends, in part, on our ability to license, market and distribute our technologies and products effectively.    We have limited manufacturing, marketing and distribution capabilities.  Although we have hired consultants to assist us in this transition period, we cannot assure you that we will properly ascertain or assess any and all risks inherent in the industry.  We may not be successful in entering into new licensing or marketing arrangements, engaging independent distributors, or recruiting, training and retaining a larger internal marketing staff and sales force.  If we are unable to meet the challenges posed by our planned licensing, manufacturing, distribution and sales growth, our business may fail.

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We are subject to governmental regulations, including environmental and health and safety regulations.

Our business operations are subject to a variety of national, state and local laws and regulations, many of which deal with the environment and health and safety issues. We believe we are in material compliance with applicable environmental and worker health and safety requirements. However, material future expenditures may be necessary if compliance standards change or material unknown conditions that require remediation are discovered. If we fail to comply with present and future environmental and worker health and safety laws and regulations, we could be subject to future liabilities or interruptions in our operations, which could have a material adverse affect on our business.

The markets in which we sell our products are highly competitive.

The markets for our products are highly competitive on a global basis, with a number of companies having significantly greater resources and market share than us.  Many of our competitors also maintain a significantly higher level of brand recognition than we do.  Because of greater resources and more widely accepted brand names, many of our competitors may be able to adapt more quickly to changes in the markets we have targeted or devote greater resources to the development and sale of new products.  Most of the products we have developed have not obtained broad market acceptance and rely on our emerging technology.  To improve our competitive position, we will need to make significant ongoing investments in manufacturing, customer service and support, marketing, sales, research and development and intellectual property protection.  We cannot assure you that we will have sufficient resources to continue to make such investments or that we will maintain or improve our competitive position within the markets we serve.  

We attempt to protect the critical elements of our proprietary technology as trade secrets.  Because of our reliance on trade secrets, we are unable to prevent third parties from independently developing technologies that are similar or superior to our technology or from successfully reverse engineering or otherwise replicating our technology.

In certain cases, where the disclosure of information required to obtain a patent would divulge critical proprietary data, we may choose not to patent elements of our proprietary technology and processes which we have developed or may develop in the future and instead rely on trade secret laws to protect certain elements of our proprietary technology and processes.  For example, we rely on trade secrets to protect our  key polyurethane formulations.  These formulations are critical elements of and central to our proprietary technology.  Our trade secrets could be compromised by third parties, or intentionally or accidentally by our employees.  There also can be no assurance that others will not independently develop technologies that are similar or superior to our technology.  Third parties may also legally reverse engineer our products.  Independent development, reverse engineering, or other legal copying of those elements of our proprietary technology that we attempt to protect as trade secrets could enable third parties to benefit from our technologies without compensating us.  The protection of proprietary technology through claims of trade secret status has been the subject of increasing claims and litigation by various companies both in order to protect proprietary rights as well as for competitive reasons, even when proprietary claims are unsubstantiated.  The prosecution of litigation to protect our trade secrets or the defense of such claims is costly and unpredictable given the uncertainty and rapid development of the principles of law pertaining to this area.  We may also be subject to claims by other parties with regard to the use of technology information and data that may be deemed proprietary to others.  The independent development of technologies that are similar or superior to our technology or the reverse engineering of our products by third parties would have a material adverse effect on our business and results of operations.  In addition, the loss of our ability to use any of our trade secrets or other proprietary technology would have a material adverse effect on our business and results of operations.  Because trade secrets do not ensure exclusivity and pose such issues with respect to enforcement, third parties may decline to partner with us or may pay lesser compensation for use of our technology which is protected only by trade secrets.

Our business depends on the protection of our patents and other intellectual property and may suffer if we are unable to adequately protect such intellectual property.

Our success and ability to compete are substantially dependent upon our intellectual property.  We rely on patent, trademark and copyright laws, trade secret protection and confidentiality or license agreements with our employees, customers, strategic partners and others to protect our intellectual property rights.  However, the steps we take to protect our intellectual property rights may be inadequate.  There are events that are outside of our control

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that pose a threat to our intellectual property rights as well as to our products and services.  For example, effective intellectual property protection may not be available in every country in which we license our technology or our products are distributed.  Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective.  Any impairment of our intellectual property rights could harm our business and our ability to compete.  Also, protecting our intellectual property rights is costly and time consuming.  Any increase in the unauthorized use of our intellectual property could make it more expensive to do business and harm our operating results.  In addition, other parties may independently develop similar or competing technologies designed around any patents that may be issued to us.

We have been granted several U.S. patents and have several U.S. patent applications pending relating to certain aspects of our manufacturing technology and use of polyurethane to make tires and we may seek further patents on future innovations.  Our ability to either manufacture products or license our technology is substantially dependent on the validity and enforcement of these patents and patents pending.  We cannot assure you that our patents will not be invalidated, circumvented or challenged, that patents will be issued for our patents pending, that the rights granted under the patents will provide us competitive advantages or that our current and future patent applications will be granted.

Third parties may invalidate our patents

Third parties may seek to challenge, invalidate, circumvent or render unenforceable any patents or proprietary rights owned by or licensed to us based on, among other things:

·

subsequently discovered prior art;

·

lack of entitlement to the priority of an earlier, related application; or

·

failure to comply with the written description, best mode, enablement or other applicable requirements.

United States patent law requires that a patent must disclose the “best mode” of creating and using the invention covered by a patent.  If the inventor of a patent knows of a better way, or “best mode,” to create the invention and fails to disclose it, that failure could result in the loss of patent rights.  Our decision to protect certain elements of our proprietary technologies as trade secrets and to not disclose such technologies in patent applications, may serve as a basis for third parties to challenge and ultimately invalidate certain of our related patents based on a failure to disclose the best mode of creating and using the invention claimed in the applicable patent.  If a third party is successful in challenging the validity of our patents, our inability to enforce our intellectual property rights could seriously harm our business.

We may be liable for infringing the intellectual property rights of others.

Our products and technologies may be the subject of claims of intellectual property infringement in the future.  Our technologies may not be able to withstand any third-party claims or rights against their use.  Any intellectual property claims, with or without merit, could be time-consuming, expensive to litigate or settle, could divert resources and attention and could require us to obtain a license to use the intellectual property of third parties.  We may be unable to obtain licenses from these third parties on favorable terms, if at all.  Even if a license is available, we may have to pay substantial royalties to obtain it.  If we cannot defend such claims or obtain necessary licenses on reasonable terms, we may be precluded from offering most or all of our products or services and our business and results of operations will be adversely affected.

Tires for highway use must meet applicable safety standards prior to marketing which could delay anticipated revenues and increase expenses, while off-the-road tires, although not subject to specific safety standards, are subject to discretionary industry performance evaluations based on product application.

Tires intended for highway use must meet applicable federal safety standards through various testing processes.  Our prototype polyurethane car tires, temporary spare tire, and medium commercial truck retread material are all subject to such standards.  The testing procedures involve submission of sample products to approved independent testing facilities, a process that may entail both significant time and expense.  OTRtires,

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including tire retread material, must meet the performance standards established by the manufacturers and end-users based on the criteria established by them after taking into account their specific needs, such as load capacity, terrain and proposed uses.  The applicable standards may be changed at any time and meeting current or future performance standards may require reevaluation and additional research and testing.  

We have received approval for only a limited number of our highway-use products.  In the future, we may be unable to obtain the requisite approval for the sale of some of our products.  Therefore, the timing of product placement in the market may be difficult to determine, may require additional research, development and testing expenses, and we may not receive revenues from such products as planned.  Such delays, our inability to obtain the requisite approval and potential additional expenses could have a negative impact on cash flows, results of operations and business planning.

Because our proposed tire products are derived from new technology, our product liability insurance costs will likely increase and we may be exposed to product liability risks that could adversely affect profitability.

Even if tests indicate that our tires meet performance standards and our new highway-use tire products are approved for use, these products may subject us to significant product liability claims because the technology is new and there is little history of on-road use.  Moreover, because our products are and will be used in applications where their failure could result in substantial injury or death, we could also be subject to product liability claims.  Introduction of such new products and increased use of our existing products will most likely increase our product liability premiums and defense of potential claims could increase insurance costs even further, which could substantially increase our expenses.  Any insurance we obtain may not be sufficient to cover the losses incurred through such lawsuits.

Significant increases in the price of chemical raw materials, steel and other raw materials used in our products could increase our production costs and decrease our profit margins or make our products less competitive in the marketplace due to price increases.

The materials used to produce our products are susceptible to price fluctuations due to supply and demand trends, the economic climate and other unforeseen trends.  We have recently experienced increases in the cost of wheel components for our tire/wheel assemblies due to the increased cost of steel and have also seen increases in our chemical raw materials pricing.  Our raw materials pricing could increase further in the future.  Because we are introducing products that will compete, in part, on the basis of price, we may be unable to pass cost increases on to our customers.  If we are unable to pass on raw material cost increases to our customers, our future results of operations and cash flow will be materially adversely affected.

Our ability to execute our business plan would be harmed if we are unable to retain or attract key personnel.

Our polyurethane technology has been developed by a small number of the members of our management team and only a limited number of the members of our management team maintain the technical knowledge to produce our products.  Our future success depends, to a significant extent, upon our ability to retain and attract the services of these and other key personnel.  The loss of the services of one or more members of our management team could hinder our ability to effectively manage our business and implement our growth strategies.  Finding suitable replacements could be difficult, and competition for such personnel of similar experience is intense.  We do not carry key person insurance on any of our officers.  

ITEM 1B. UNRESOLVED STAFF COMMENTS

As of June 30, 2007, we did not have any unresolved comments with the staff of the Securities and Exchange Commission.

ITEM 2. PROPERTIES

In October 2002, we leased our executive and manufacturing facilities located at 1501 Industrial Road, Boulder City, Nevada.  The property consists of a 49,200 square foot building, which includes approximately 5,500 square feet of office space, situated on approximately 4.15 acres.  The original term of the lease was for five years

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and expires October 14, 2007.  We are currently in discussion with our landlord regarding either extending the term of our lease or purchasing the facility and related property provided we can reach mutually acceptable terms We believe our facility is sufficient to handle our administrative and research and development needs, and the 4.15 acres of land will facilitate additional expansion of our production capabilities, if necessary, for the foreseeable future.  

ITEM 3. LEGAL PROCEEDINGS

We are involved in legal proceedings in the normal course of our business that we do not expect to have a material adverse effect on our business, financial condition or results of operations.  The significant proceedings in which we are involved are discussed below.

In November 2005, Continental Automotive Licensing Corp. (“Petitioner”) filed a petition for Cancellation #92045199 in the United States Patent and Trademark Office against Richard A. Steinke, our former Chairman and Chief Executive Officer, concerning the registration of Amerityre®, Registration No. 2,401,989.  The Petition was withdrawn by Petitioner on June 22, 2007.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of stockholders of the Company during the fourth quarter of the fiscal year ended June 30, 2007.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Beginning, March 21, 2006, our common stock has been traded on the NASDAQ Capital Market under the symbol "AMTY."  Prior to that date, our common stock was quoted on the NASD’s OTC Bulletin Board. The following table sets forth for the periods indicated the high and low sale prices of our common stock.  Prices represent inter-dealer quotations without adjustment for retail markups, markdowns or commissions and may not represent actual transactions.

Fiscal year ended June 30,	High		Low
2007
Fourth Quarter	$5.04	$3.98
Third Quarter	$5.05	$2.90
Second Quarter	$5.90	$3.81
First Quarter	$8.00	$5.65
2006
Fourth Quarter	$9.22	$6.85
Third Quarter	$7.50	$4.51
Second Quarter	$6.50	$4.15
First Quarter	$7.45	$5.25
2005
Fourth Quarter	$7.45	$4.80
Third Quarter	$7.85	$4.95
Second Quarter	$8.06	$6.00
First Quarter	$9.75	$6.45

The closing price of our common stock on the NASDAQ Capital Market on September 7, 2007 was $3.96 per share.  As of September 7, 2007, there were approximately 500 holders of record of our common stock and  23,441,551 shares of common stock outstanding based on information provided by our transfer agent, Interwest Transfer Company, 1981 E. Murray-Holladay Road, Holladay, Utah  84117.

Dividends

We have not paid any dividends on our common stock since our inception and do not anticipate paying any dividends in the foreseeable future.  Any future determination to pay dividends will be at the discretion of our Board of Directors and will be dependent upon then-existing conditions, including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors our Board of Directors deems relevant.

Performance Graph

The following Performance Graph and related information compares the cumulative five-year total return to stockholders on our common stock relative to the cumulative total returns of the Russell MicroCap index and the NASDAQ Composite index.  An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each of the indexes on July 1, 2002 and its relative performance is tracked through June 30, 2007.

The comparisons shown in the graph below are based on historical data and we caution that the stock price performance shown in the graph below is not indicative of, and is not intended to forecast, the potential future performance of our common stock.  Information used in the graph was obtained from public financial quotation services believed to be reliable, but we are not responsible for any errors or omissions in such information.  The

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following graph and related information shall not be deemed “soliciting materials” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that we specifically incorporate it by reference into such filing.

	June 30,
	2002	2003	2004	2005	2006	2007
Amerityre Corporation	$100	$154.40	$342.13	$245.63	$277.56	$153.69
Russell MicroCap Index	$100	$105.41	$144.03	$152.65	$173.81	$198.51
NASDAQ Composite Index	$100	$114.81	$141.09	$144.02	$152.05	$182.23

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ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this report.  The selected balance sheet data as of June 30, 2006 and 2007 and the selected statements of operations data for each of the three years in the period ended June 30, 2007 have been derived from our audited financial statements, which are included elsewhere in this report.  The selected balance sheet data as of June 30, 2003, 2004 and 2005 and selected statements of operations data for the years ended June 30, 2003 and 2004 have been derived from our audited financial statements not included in this report.   Historical results are not necessarily indicative of the results to be expected in the future.

	For the Years Ended June 30,
	2003		2004		2005		2006		2007
	(in thousands, except share and per share data)
Statements of Operations Data:
Net Revenues	$	1,040	$	1,419	$	1,681	$	2,026	$		3,427
Cost of Revenues	976		1,114		1,233		1,546		2,383
Gross profit	64		305		448		480		1,044
Expenses:
Consulting	340		371		77		99		286
Advisory Group expense (1)	–		–		6,134		--		--
Depreciation and amortization	299		296		386		385		379
Research and development (2)	29		572		881		791		835
Selling, general and administrative (3)	2,505		3,807		3,093		4,629		4,660
Total expenses	3,173		5,046		10,571		5,904		6,160
Loss from operations	(3,109)		(4,741)		(10,123)		(5,424)		(5,116)
Other income	17		20		50		100		109
Net loss	$	(3,092)	$	(4,721)	$	(10,073)	$	(5,324)	$	(5,007)
Basic net loss per share	$	(0.21)	$	(0.26)	$	(0.53)	$	(0.26)	$	(0.23)
Weighted average number of shares outstanding	14,796,744		17,846,910		18,931,779		20,350,981		21,520,394

	At June 30,
	2003		2004		2005		2006		2007
	(in thousands)
Condensed Balance Sheet Data:
Cash and cash equivalents	$	2,491	$	1,591	$	2,122	$	3,066	$	5,789
Total current assets	$	3,137	$	2,415	$	3,081	$	4,289	$	7,035
Total assets	$	4,583	$	4,061	$	4,627	$	6,140	$	8,829
Total liabilities (4)	$	95	$	59	$	85	$	357	$	621
Total stockholders’ equity	$	4,488	$	4,002	$	4,542	$	5,784	$	8,208

(1)  During the period ended September 30, 2004, we issued options to acquire an aggregate of 3,000,000 shares of our common stock to certain non-employees in connection with an advisory agreement.  We recognized a total of $6,134,000 in expense associated with the issuance of these options and deferred $1,000,000 as stock offering costs.  In February 2006, we closed a private placement of our securities and charged the $1,000,000 of deferred stock offering costs against the gross proceeds of the offering.  We estimated the fair value of the stock options at the grant date by using the Black-Scholes option pricing model.  

(2)  Research and development expenses were not broken out of selling, general and administrative expenses until 2003.

(3)  Fiscal years ended June 30, 2006 and 2007 include deferred compensation expense for employee stock options of $664,171 and $783,503, respectively, in accordance with SFAS 123(R).

(4)  All liabilities are current liabilities.  We do not currently have any long-term liabilities.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis contains statements of a forward-looking nature relating to future events or our future financial performance or financial condition.  Such statements are only predictions and the actual events or results may differ materially from the results discussed in or implied by the forward-looking statements.  Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Part I. Item 1A. Risk Factors" as well as those discussed elsewhere in this report.  The historical results set forth in this discussion and analysis are not necessarily indicative of trends with respect to any actual or projected future financial performance.  This discussion and analysis should be read in conjunction with the financial statements and the related notes thereto included elsewhere in this report.

Overview

Since our inception in 1995, we have been engaged in the research and development of technologies related to the formulation of polyurethane compounds and the manufacturing process for producing tires constructed of polyurethane.  We believe that we have developed unique polyurethane formulations that, when used in tire applications, substantially simplify the production process and allow for the creation of products with superior performance characteristics, including abrasion resistance and load-bearing capabilities, than conventional rubber tires.  We also believe that the manufacturing processes we have developed to produce polyurethane tires are more efficient than traditional tire manufacturing processes, in part because our polyurethane compounds do not require the multiple processing steps, extreme heat, and high pressure that are necessary to cure rubber.  Using our polyurethane technologies, we believe tires can be produced that last longer, are less susceptible to failure and offer improved fuel economy.  

Our aggregate revenues for the year ended June 30, 2007, June 30, 2006 and June 30, 2005 were $3.43 million, $2.03 million and $1.68 million, respectively, and our aggregate cost of revenues during those same periods were $2.38 million, $1.55 million and $1.23 million, respectively.  For the year ended June 30, 2007, June 30, 2006 and June 30, 2005, we had net losses of approximately $5 million, $5.32 million and $10.07 million, respectively. We expect to incur significant additional expenses as we expand our business due to increased selling, general and administrative expenditures related to the commercialization of our proprietary polyurethane Elastothane® or Amerifill™ products. We expect the increase in revenues from the expanded commercialization activities should reduce net loss in the near term and move us closer to profitability.

While the sale of polyurethane foam tires to original equipment manufacturers, distributors and retail stores accounts for most of our revenue at this time, Elastothane^® and Amerifill™ are significant to our potential future growth.  Our business model provides for a diversified revenue stream.  We will continue to generate revenue through license agreements relating to the use of our patented manufacturing methods and systems; the sale of specialty equipment; the sale of proprietary chemical systems; the sale of a select number of finished tire products; and contract research and development services.  

Factors Affecting Results of Operations

Historically, our operating expenses have exceeded our revenues resulting in net losses of approximately $5 million, $5.32 million and $10.07 million in fiscal years ended June 30, 2007, 2006 and 2005, respectively. In each of these periods, our operating expenses consisted primarily of the following:

·

Cost of sales, which consists primarily of raw materials, components and production of our products, including applied labor costs and benefits expenses, maintenance, facilities and other operating costs associated with the production of our products;

·

Selling, general and administrative expenses, which consist primarily of salaries, commissions and related benefits paid to our employees and related selling and administrative costs including professional fees;  

·

Research and development expenses, which consist primarily of equipment and materials used in the development of our technologies;

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·

Consulting expenses, which consist primarily of amounts paid to third-parties for outside services;

·

Depreciation and amortization expenses which result from the depreciation of our property and equipment, including amortization of our intangible assets; and

·

Amortization of deferred compensation that results from the expense related to certain stock options to our employees.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.  On an ongoing basis, we evaluate our estimates, including those related to uncollectible receivables, inventory valuation, deferred compensation and contingencies.  We base our estimates on historical performance and on various other assumptions that we believe to be reasonable under the circumstances.  These estimates allow us to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

We believe the following accounting policies are our critical accounting policies because they are important to the portrayal of our financial condition and results of operations and they require critical management judgments and estimates about matters that may be uncertain.  If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods could be materially affected.

Revenue Recognition

Revenue is recognized when the sales amount is determined, shipment of goods to the customer has occurred and collection is reasonably assured. Generally, we ship all of our products FOB origination.

Valuation of Intangible Assets and Goodwill

At June 30, 2007, we had capitalized patent and trademark costs totaling $664,527.  The patents which have been granted are being amortized over a period of 20 years.  Patents which are pending or are being developed are not amortized until a patent has been issued.  Amortization expense for the fiscal years ended June 30, 2007, 2006 and 2005 was $23,209, $25,514 and $30,857, respectively.  We evaluate the recoverability of intangibles and review the amortization period on a continual basis utilizing the guidance of Statement of Financial Accounting Standards “SFAS” No. 142, "Goodwill and Other Intangible Assets."  We test our patents and trademarks for impairment at least annually and whenever events or changes in circumstances indicated that the carrying value may not be recoverable.  We consider the following indicators, among others, when determining whether or not our patents are impaired:

·

any changes in the market relating to the patents that would decrease the life of the asset;

·

any adverse change in the extent or manner in which the patents are being used;

·

any significant adverse change in legal factors relating to the use of the patents;

·

current-period operating or cash flow loss combined with our history of operating or cash flow losses;

·

future cash flow values based on the expectation of commercialization through licensing; and

·

current expectations that, more likely than not, the patents will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.

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Inventory

Inventory is stated at the lower of cost (computed on a first-in, first-out basis) or market.  The inventory consists of chemicals, finished goods produced in our plant and products purchased for resale.

Stock-Based Compensation

Equity securities issued for services rendered have been accounted for at the fair market value of the securities on the date of authorization.

On July 1, 2005, we adopted SFAS No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense based on estimated fair values for all share-based payments to employees and Directors, including employee stock options and stock purchases related to our employee stock option and award plans.  SFAS 123(R) supersedes our previous accounting under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for periods beginning in the fiscal year ended June 30, 2006.  In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R).  We have applied the provisions of SAB 107 in our adoption of SFAS 123(R).

We adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of July 1, 2005, the first day of our fiscal year ended June 30, 2006.  Our financial statements as of and for the period ended June 30, 2006 reflect the impact of SFAS 123(R).  In accordance with the modified prospective transition method, our financial statements for the prior year have not been restated to reflect, and do not include, the impact of SFAS 123(R). Stock-based compensation expense recognized under SFAS 123(R) for the fiscal year ending June 30, 2007 was $783,503, related to employee stock options granted during the year.  Stock-based compensation expense recognized under SFAS 123(R) for the fiscal year ending June 30, 2006 was $664,171. There was no stock-based compensation expense related to employee stock options recognized during the fiscal year ended June 30, 2005.  

SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option pricing model.  The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Statement of Operations. Under SFAS 123(R), stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period.  At June 30, 2005, we had no unvested share-based payment awards that required the recognition of compensation expense during the fiscal year ended June 30, 2006.  Stock-based compensation expense recognized in our Statement of Operations for the fiscal years ended June 30, 2006 and 2007 is based on the grant date fair value estimated in accordance with SFAS 123(e), and only includes compensation expense for share-based payment awards that were granted after July 1, 2005 and vested during the fiscal year ended June 30, 2006 and 2007.  Stock-based compensation expense recognized in our Statement of Operations for the fiscal year ended June 30, 2006 and 2007 assumes all awards will vest.  Therefore, no reduction has been made for estimated forfeitures.

The valuation of options and warrants granted to unrelated parties for services are measured as of the earlier of the date at which a commitment for performance by the counterparty to earn the equity instrument is reached, or the date the counterparty’s performance is complete.  Pursuant to the requirements of Emerging Issues Task Force No. 96-18, the options and warrants will be revalued in situations where they are granted prior to the completion of the performance.

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Seasonality

A substantial majority of our sales are to customers within the United States. We experience some seasonality in the sale of our closed-cell polyurethane foam tires for bicycles and lawn and garden products because sales of these products generally decline during the winter months in the United States.  Sales of our closed-cell polyurethane form tire products generally peak during the spring and summer months; typically resulting in greater sales volumes during the third and fourth quarters of the fiscal year.

Results of Operations

Our management reviews and analyzes several key performance indicators in order to manage our business and assess the quality and potential variability of our revenues and cash flows. These key performance indicators include:

·

Sales revenue, net of returns and trade discounts, which is an indicator of our overall business growth and the success of our sales and marketing efforts;

·

Gross profit, which is an indicator of both competitive pricing pressures and the cost of sales of our products;

·

Growth in our customer base, which is an indicator of the success of our sales efforts; and

·

Distribution of revenue across our products offered.

The following summary table presents a comparison of our results of operations for the fiscal years ended June 30, 2007, 2006 and 2005 with respect to certain key financial measures.  The comparisons illustrated in the table are discussed in greater detail below.

	Fiscal Year Ended June 30,							Percent Change
		2005		2006		2007		2006 vs. 2005		2007 vs. 2006
	(in thousands)
Net sales	$	1,681	$	2,026	$	3,427		21%		69%
Cost of sales	$	1,233	$	1,546	$	2,383		25%		54%
Gross profit	$	448	$	480	$	1,044		7%		118%
Selling, general, and administrative expenses (1)	$	3,075	$	4,629	$	4,655		51%		1%
Research and development expenses	$	881	$	791	$	835		(10)%		6%
Consulting expenses	$	77	$	99	$	286		29%		188%
Depreciation and amortization expenses	$	386	$	385	$	379		(–) %		(1)%
Advisory Group expense	$	6,134	$	-	$	-		(100)%		0%
Loss on sales and impairment of assets	$	18	$	-	$	5		(100)%		100%
Other Income	$	50	$	100	$	109		100%		9%
Net loss	$	(10,073)	$	(5,324)	$	(5,007)		(47)%		(6)%

(1)

Includes deferred compensation for employee stock options of $664,171 and $783,503 for the fiscal years ended June 30, 2006 and 2007, respectively.

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Year Ended June 30, 2007 Compared to the Year Ended June 30, 2006

Net Sales.   Sales of our closed-cell polyurethane foam products accounted for 76% of all of our sales revenue during the fiscal year ended June 30, 2007.  For the fiscal year ended June 30, 2007. we had $2,620,587 of net sales compared to $2,025,630 for 2006. Net sales for the fiscal year ended June 30, 2007 increased by $594,957, or 29%, as compared with 2006 due primarily to a 34% increase in the number of product units sold to our original equipment manufacturer, retail chain and distributor customers through increased sales activities of our sales staff. During the fiscal year ended June 30, 2007, we had $35,404 and $12,461 of returns of our products and trade discounts, respectively, compared to $22,814 and $10,410, respectively, for the fiscal year ended June 30, 2006. During the fiscal year ended June 30, 2007, we had $266,667 of sales derived from licensing fees, or 8% of total net sales. Also, during the fiscal year ended June 30, 2007, we had $540,000 of sales derived from sales of equipment, or 16% of total net sales. There were no sales revenues derived from licensing fees and sales of equipment during the year ended June 30, 2006.

Cost of Sales.  For the fiscal year ended June 30, 2007, our cost of sales related to our closed-cell polyurethane foam products increased $280,915, or 18%, compared to 2006 due to a substantial increase in product sales.  In 2007, our gross margin increased to 30% from 24% the prior year due primarily to our successful efforts to obtain reduced raw materials pricing.  We obtained reduced raw material pricing during the second half of fiscal year ended June 30, 2006 and did not experience material increases in raw material pricing in fiscal 2007. We believe that our product sales margin can continue to improve as our increased sales efforts generate additional product orders to take further advantage of manufacturing efficiencies. We believe we currently have sufficient foam product manufacturing equipment and employees to accomplish a substantial increase in production without incurring a proportionately equivalent increase in labor costs.

For the fiscal year ended June 30, 2007, we had $556,677 in cost of sales related to specialty pouring equipment supplied to one of our foreign licensees. The cost was greater than the sale price for the equipment quoted by us to our customer, in part because the equipment was unique and had to be custom fabricated. The cost of the equipment exceeded our original estimates due to modification and unexpected expenses incurred during the production of the equipment   In the future we intend to make provision for modifications and unexpected expenses in determining our pricing for the sale of specialty equipment.

Gross Profit.  For the fiscal year ended June 30, 2007, we had $1,043,909 of total gross profit compared to $479,877 for 2006.  The gross profit related to our closed-cell polyurethane foam products represents $793,919, or 76%, of the total gross profit. The additional gross profit of $249,990 resulted from licensing fees and equipment sales. Gross profit for the fiscal year ended June 30, 2007 increased by $564,032, or 118%, as compared with 2006 due primarily to the increase in licensing fees and net sales from our closed-cell polyurethane foam products. Our gross profit margin increased to 30% in 2007 from 24% in 2006 due to the improvement in our closed-cell polyurethane foam product sales margin and the receipt of licensing revenues with no associated cost of sales, offset by a small loss associated with sales of specialty equipment.  During the fiscal year ending June 30, 2008, we believe that the foregoing measures may allow us to maintain the gross margin we experienced during the fiscal year ended June 30, 2007.  

Selling, General, and Administrative Expenses.  For the fiscal year ended June 30, 2007, we had $4,655,456 of SG&A expenses, including the amortization of deferred compensation, compared to $4,629,023 for 2006.  As we focused our commercialization efforts, our SG&A for the fiscal year ended June 30, 2007 increased by $26,433, or 0.6%, as compared with 2006 due primarily to increased expenses in the following areas:

-  Approximately $191,000 in sales and marketing expenses;

-  Approximately $42,000 in facilities related expenses;

-  Approximately $65,000 in professional fees;

-  Approximately $39,000 in insurance expenses and business taxes; and

-  Approximately $131,000 in directors’ fees and expenses.

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The increases were offset by decreases of:

-  Approximately $394,000 in payroll and payroll taxes for existing management personnel;

-  Approximately $142,000 for office related expenses; and

 -  Approximately $24,000 in travel and related expenses not associated with product development and marketing expenses.

In addition to the SG&A expenses listed above, we had deferred compensation, which is primarily related to the grant of options to our employees for the purchase of restricted stock.  We adopted SFAS 123 (R) on July 1, 2005 and as a result, we amortized $783,503 of deferred compensation compared to $664,171 for 2006 in the fiscal year ended June 30, 2007.

Research and Development Expenses.  For the fiscal year ended June 30, 2007 we had $834,647 of research and development expenses compared to $790,877 for 2006.  Our research and development expenses for the fiscal year ended June 30, 2007 increased by $43,770, or 6%, as compared with 2006 due primarily to research and development of projects using our polyurethane technologies. We expect research and development expenses to increase approximately 20% during the fiscal year ending June 30, 2008 as we continue to identify and pursue  additional applications for our polyurethane technology outside the tire industry.

Consulting Expenses.  For the fiscal year ended June 30, 2007 we had $286,274 of consulting expenses compared to $99,498 for 2006.  We incurred $177,779 in consulting expenses for the fiscal year ended June 30, 2007 due primarily to costs associated with outside consulting services with our marketing and capital raising efforts and on other operational strategies. In additional, we incurred $108,494 in outside consulting expenses associated with our search for a new chief executive officer. During the fiscal year ending June 30, 2008 we expect consulting expenses to remain approximately the same as a result of our entering into a consulting agreement with our former Chief Executive Officer, effective September 1, 2007.

Depreciation and Amortization Expenses.  For the fiscal year ended June 30, 2007 we had $379,127 of depreciation and amortization expenses compared to $384,719 for 2006.  Our depreciation and amortization expenses for the fiscal year ended June 30, 2007 decreased by $5,592, or (2)%, as compared with 2006 due primarily to no longer expensing fully depreciated assets, partially offset by the depreciation expense for newly acquired assets during the period.

Net Loss.  For the fiscal year ended June 30, 2007, we had a net loss of $5,007,822 compared to a net loss of $5,324,240 for 2006.  Our net loss for the fiscal year ended June 30, 2007 decreased by $320,211 as compared with 2006 due primarily to the increase in the gross profit and reduction in payroll and payroll taxes, partially offset by the increase in sales and marketing expenses and other general and administrative expenses.  

Year Ended June 30, 2006 Compared to the Year Ended June 30, 2005

Net Sales.   Sales of our closed-cell polyurethane foam products accounted for all of our sales revenue during the fiscal year ended June 30, 2006.  For the fiscal year ended June 30, 2006, we had $2,025,630 of net sales compared to $1,681,091 for 2005.  Net sales for the fiscal year ended June 30, 2006 increased by $344,539, or 21%, as compared with 2005 due primarily to a 17% increase in the number of product units sold to our original equipment manufacturer, retail chain and distributor customers through increased sales activities of our sales staff. During the fiscal year ended June 30, 2006 we had $22,814 and $10,410 of returns of our products and trade discounts, respectively, compared to $19,237 and $1,129, respectively, for the fiscal year ended June 30, 2005.

Cost of Sales.  For the fiscal year ended June 30, 2006, we had $1,545,753 of cost of sales, or 76% of net sales, compared to $1,233,181, or 73% of net sales for 2005.  Cost of sales for the fiscal year ended June 30, 2006 increased by $312,572, or 25%, as compared with 2005 due primarily to an increase in our net sales during the fiscal year ended June 30, 2006 and as a result of increased pricing of our chemical raw materials and wheel components during the first half of the fiscal year ended June 30, 2006, which was partially offset during the second half of the

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fiscal year ended June 30, 2006 by our obtaining reduced pricing on chemical raw materials and wheel components from new international suppliers.  Gross Profit.  For the fiscal year ended June 30, 2006, we had $479,877 of gross profit compared to $447,910 for 2005.  Gross profit for the fiscal year ended June 30, 2006 increased by $31,937, or 7%, as compared with 2005 due primarily to the increase in net sales.  Our gross profit margin decreased to 24% in 2006 from 27% for the fiscal year ended June 30, 2005.  The reduction in our gross profit for the fiscal year ended June 30, 2006 as compared to the fiscal year ended June 30, 2005 was the result of a 6% increase in our base chemicals and wheel component costs over the first half of the fiscal year ended June 30, 2006, offset by our obtaining reduced pricing on chemical raw materials and wheel components from new international suppliers.

Selling, General, and Administrative Expenses.  For the fiscal year ended June 30, 2006, we had $4,629,023 of SG&A expenses, including the amortization of deferred compensation, compared to $3,075,524 for 2005.  As we increased our commercialization efforts our SG&A for the fiscal year ended June 30, 2006 increased by $1,553,499, or 51%, as compared with 2005 due primarily to increased expenses in the following areas: approximately $509,000 in additional expense for the hiring of additional management personnel and for salary increases for existing management personnel; an increase of approximately $110,000 for travel and related expenses associated with product development and marketing expenses; $100,000 in litigation settlement expenses; $90,000 in legal expenses associated with regulatory compliance and litigation; and $64,000 in expenses associated with the listing of our common stock on the NASDAQ Capital Market.  In addition to the SG&A expenses listed above, we had deferred compensation, which is primarily related to the grant of options to our employees for the purchase of restricted stock.  We adopted SFAS 123 (R) on July 1, 2005 and as a result, we amortized $664,171 of deferred compensation compared to $0 for 2005 in the fiscal year ended June 30, 2006.

Research and Development Expenses.  For the fiscal year ended June 30, 2006, we had $790,877 of research and development expenses compared to $880,748 for 2005.  Our research and development expenses for the fiscal year ended June 30, 2006 decreased by $89,871, or 10%, as compared with 2005 due primarily to a reduction in outside testing services and prototype tooling during the period.  Consulting Expenses.  For the fiscal year ended June 30, 2006, we had $99,498 of consulting expenses compared to $77,000 for 2005.  Our consulting expenses for the fiscal year ended June 30, 2006 increased by $22,498, or 29%, as compared with 2005 due primarily to costs associated with the development of a tire pricing model used in our business planning that was completed and implemented during the fiscal year ended June 30, 2006.  

Depreciation and Amortization Expenses.  For the fiscal year ended June 30, 2006, we had $384,719 of depreciation and amortization expenses compared to $385,726 for 2005.  Our depreciation and amortization expenses for the fiscal year ended June 30, 2006 increased by $1,007, or 0.3%, as compared with 2005 due primarily to no longer expensing fully depreciated assets, partially offset by the depreciation expense for newly acquired assets during the period.

Advisory Group Expense.  For the fiscal year ended June 30, 2006, we had no Advisory Group expense compared to $6,134,000 for 2005.  We had no Advisory Group expense for the fiscal year ended June 30, 2006 because the fiscal 2005 expense was a non-recurring expense associated with the grant of options to purchase 3,000,000 shares of our common stock to certain non-employees/members of our Advisory Group in connection with an advisory agreement entered into during the fiscal year ended June 30, 2005.

Net Loss.  For the fiscal year ended June 30, 2006, we had a net loss of $5,324,240 compared to a net loss of  $10,073,008 for 2005.  Our net loss for the fiscal year ended June 30, 2006 decreased by $4,748,768 as compared with 2005 due to the non-recurring Advisory Group expense incurred during that year.  Excluding the non-recurring Advisory Group expense incurred during the fiscal year ended June 30, 2005, our net loss increased approximately $1,385,232 during the fiscal year ended June 30, 2006 as a result of additional expenses associated with the amortization of stock-based compensation and an increase in payroll and payroll taxes.

Liquidity and Capital Resources

Our principal sources of liquidity consist of cash and cash equivalents and payments received from our customers.  We have no long-term liabilities, and we do not have any significant credit arrangements.  Historically, our expenses have exceeded our revenues, resulting in operating losses.  From time to time, we have obtained additional liquidity to fund our operations through the sale of shares of our common stock.  In assessing our

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liquidity, our management reviews and analyzes our current cash balances on-hand, short-term investments, accounts receivable, accounts payable, capital expenditure commitments and other obligations.

During the fiscal year ended June 30, 2007, we engaged in two transactions that impacted our liquidity. These transactions were as follows:

·

We obtained $231,688  in funding as a result of the exercise of certain outstanding options and warrants; and

·

We raised $6,224,416 in net offering proceeds through the sale of our securities.

Cash Flows

The following table sets forth our consolidated cash flows for the fiscal years ended December 31, 2005, 2006 and 2007.

		Fiscal Year Ended December 31,
		2005				2006			2007
		(in thousands)
Net cash used by operating activities		$	(2,619		)	$	(3,407	)	$	(3,407	)
Net cash used in investing activities		(164			)	(600		)	(326		)
Net cash provided by financing activities		3,314				4,950			6,456
Net (decrease) increase in cash and cash equivalents during period		$		531		$	943		$	2,723

Net Cash Used By Operating Activities.  Our primary sources of operating cash are the issuance of common stock and receipts from our customers.  Our primary uses of operating cash are payments made to our vendors and employees. Net cash used by operating activities was $3,406,904 for the fiscal year ended June 30, 2007 compared to $3,406,853 for the fiscal year ended June 30, 2006.  The small decrease in cash used in operating activities is due partially to a decrease in payroll and payroll taxes which was offset by the increase in sales and marketing expenses and other selling, general and administrative expenses for the fiscal year ended June 30, 2007, compared to the fiscal year ended June 30, 2006.  Non-cash items include depreciation and amortization and the issuance of common stock for services and employee compensation.  Our net loss was $5,324,240 for the year ended June 30, 2006 compared to a net loss of $5,007,822 for the year ended June 30, 2007.  Net loss for the fiscal year ended June 30, 2007 included non-cash expenses of $783,503 for stock-based compensation related to employee stock options, $131,850 for common stock issued for services, and $379,127 for amortization and depreciation expenses.  Net changes in operating assets and liabilities resulted in an increase in operating cash of $103,693 for the year ended June 30, 2006 and an increase in operating cash of $238,687 for the year ended June 30, 2007.

Net Cash Used In Investing Activities.  Net cash used in investing activities was $326,273 for the fiscal year ended June 30, 2007 and $599,817 for the fiscal year ended June 30, 2006. Our primary use of investing cash for the fiscal year ended June 30, 2007 was $140,819 for patents and trademarks and $185,454 for property and equipment.  Our primary uses of investing cash for the fiscal year ended June 30, 2006 were $120,556 for patents and trademarks and $479,261 for property and equipment.  Our primary source of cash for the fiscal year ended June 30, 2007 was $7,752,607 obtained from the sale of common stock, issuance of common stock for warrants and cash from exercise stock options.  Our primary source of cash for the fiscal year ended June 30, 2006 was $4,950,025 from the issuance of common stock for cash.

Net Cash Provided by Financing Activities.  Financing activities provided net cash of $3,314,000, $4,950,025 and $6,456,104 for the fiscal years ended June 30, 2005, 2006 and 2007, respectively.  During the fiscal year ended June 30, 2005, the entire $3,314,000 in net cash provided by financing activities was derived from the issuance of common stock in connection with the exercise of outstanding options for cash.  Net cash provided by financing activities during the fiscal year ended June 30, 2006 totaled $4,950,025, consisting of $3,870,000 in cash proceeds from our private placement in February 2006; $1,410,000 in cash proceeds from the exercise of outstanding options; and $34,400 in cash proceeds from the exercise of outstanding warrants; all of which was offset

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by stock offering costs of $364,375. Of the $6,456,104 in net cash provided by financing activities during 2007, $6,224,416 was associated with the proceeds from our private placement in March and May of 2007; $31,688 in cash proceeds from stock issued for warrants; and the net amount of $200,000 in connection with exercise of stock options.

Cash Position and Outstanding Indebtedness

Our total indebtedness at June 30, 2007 was $620,525 and our total cash and cash equivalents were $5,788,602, none of which is restricted.  Our total indebtedness at June 30, 2007 includes $327,859 in accounts payable. We have no long-term liabilities.

Contractual Obligations and Commitments

The following table summarizes our contractual cash obligations and other commercial commitments at June 30, 2007.

		Payments due by period
		Total			Less than 1 year					1 to 3 years			3 to 5 years			After 5 years
		(in thousands)
Facility lease (1)		$	63			$	63			$	—		$	—		$	—
Other long-term liabilities		—				—				—			—			—
Total contractual cash obligations		$	63			$	63			$	—		$	—		$	—

(1)  In October 2002, we leased our executive and manufacturing facilities located at 1501 Industrial Road, Boulder City, Nevada.  The property consists of a 49,200 square foot building, which includes approximately 5,500 square feet of office space, situated on approximately 4.15 acres.  The term of the lease is five years expiring October 14, 2007, subject to use negotiating an extension of the lease or terms for purchasing the property.  The base rent is $16,000 per month for the first year, with annual increases of $500 per month during the term of the lease.  

Future Capital Requirements

We believe that our cash on hand will be adequate to meet our current working capital, capital expenditure, and other cash requirements, including an increase of approximately 20% in our research and development expenses that we expect to incur during the fiscal year ending June 30, 2008.  The increase in our research and development expenses will be used to identify and pursue research and development projects of additional applications for our polyurethane technology outside the tire industry.  

Although we believe that we will successfully implement our business plan, management cannot give any assurances that it will be able to do so or that we will ever operate profitably.  Our business plan assumes, among other things, that our selling, general and administrative expenses will continue at a rate similar to the rate we experienced for the fiscal year ended June 30, 2007, that we will not experience a material decline in our product pricing, and that we will not experience a material increase in our customer bad debt.  

Off-Balance Sheet Arrangements

We do not currently have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts.

Recent Accounting Pronouncements

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108 (“SAB 108”)  which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 is effective for us as of January 1, 2007.  We do not expect SAB 108 to have a material impact on our results of operations, financial position, or cash flows.

In September 2006, Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements  (“SFAS 157”), defines fair value, establishes a framework for measuring fair value in generally

26

accepted accounting principles (“GAAP”), and expands disclosures about fair value measurements. The Company will adopt the provisions of SFAS 157 effective January 1, 2008. We do not expect SFAS 157 to have a material impact on our results of operations, financial position, or cash flows.

In September 2006, SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R) (“SFAS 158”), improves financial reporting by requiring an employer to recognize the over-funded or under-funded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income.  SFAS 158 will not have an impact on our results of operations, financial position, or cash flow.

In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115 (“SFAS 159”), which allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities under an instrument-by-instrument election. Subsequent measurements for the financial assets and liabilities an entity elects to fair value will be recognized in earnings. SFAS 159 also establishes additional disclosure requirements. SFAS 159 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted provided that the entity also adopts SFAS 157

. We have not yet determined the impact this standard will have on our financial statements.

 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to changes in prevailing market interest rates affecting the return on our investments but do not consider this interest rate market risk exposure to be material to our financial condition or results of operations.  We invest primarily in United States Treasury instruments with short-term (less than one year) maturities.  The carrying amount of these investments approximates fair value due to the short-term maturities.  Under our current policies, we do not use derivative financial instruments, derivative commodity instruments or other financial instruments to manage our exposure to changes in interest rates or commodity prices.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our financial statements required by this item are included on the pages immediately following the Index to Financial Statements appearing on page F-1

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

There have been no changes in our independent accountants, HJ & Associates, LLC, or disagreements with them on matters of accounting or financial disclosure.

ITEM 9A. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), an evaluation was performed under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, our management, including our principal executive officer and our principal financial officer, concluded that the design and operation of these disclosure controls and procedures were effective at the reasonable assurance level.

There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

We are responsible for the preparation and integrity of our published financial statements. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and, accordingly, include amounts based on judgments and estimates made by our management. We also prepared the other information included in the annual report and are responsible for its accuracy and consistency with the financial statements.

We are responsible for establishing and maintaining a system of internal control over financial reporting, which is intended to provide reasonable assurance to our management and Board of Directors regarding the reliability of our financial statements. The system includes but is not limited to:

·

a documented organizational structure and division of responsibility;

·

established policies and procedures, including a code of conduct to foster a strong ethical climate which is communicated throughout the company;

·

regular reviews of our financial statements by qualified individuals; and

·

the careful selection, training and development of our people.

There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Also, the effectiveness of an internal control system may change over time. We have implemented a system of internal control that was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles.

We have assessed our internal control system in relation to criteria for effective internal control over financial reporting described in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based upon these criteria, we believe that, as of June 30, 2007, our system of internal control over financial reporting was effective.

The independent registered public accounting firm, HJ & Associates, LLC, has audited our 2007 financial statements. HJ & Associates, LLC was given unrestricted access to all financial records and related data, including minutes of all meetings of stockholders, the Board of Directors and committees of the Board. HJ & Associates, LLC has issued an unqualified audit opinion on our 2007 financial statements as a result of the audit and also has issued an attestation report on management’s assessment of its internal control over financial reporting which is attached hereto.

Amerityre Corporation

September 13, 2007

By:

/s/ Gary N. Benninger

 

Gary N. Benninger

 

Chief Executive Officer

 

/s/ Anders A. Suarez

 

Anders A. Suarez

Chief Financial Officer

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGN FIRM

ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Board of Directors and Shareholders

Amerityre Corporation

Boulder City, Nevada

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Amerityre Corporation maintained effective internal control over financial reporting as of June 30, 2007, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Amerityre Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company‘s internal control over financial reporting based on our audit.

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

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

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

In our opinion, management’s assessment that Amerityre Corporation maintained effective internal control over financial reporting as of June 30, 2007, is fairly stated, in all material respects, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Amerityre Corporation maintained, in all material respects, effective internal control over financial reporting as of June 30, 2007, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2007 financial statements of Amerityre Corporation and our report dated September 13, 2007 expressed an unqualified opinion thereon.

HJ & Associates, LLC

Salt Lake City, Utah

September 13, 2007

30

ITEM 9B. OTHER INFORMATION

None.

PART III

The information called for by Part III of Form 10-K (Item 10—Directors, Executive Officers and Corporate Governance of the Registrant, Item 11—Executive Compensation, Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, Item 13—Certain Relationships and Related Transactions, and Director Independence, and Item 14—Principal Accounting Fees and Services) is incorporated by reference from our proxy statement related to our 2007 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission not later than October 28, 2007 (120 days after the end of the fiscal year covered by this Annual Report on Form 10-K).

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)

Documents filed with this report.

1.

Financial Statements:

See Index to Financial Statements on page F-1

2.

Financial Statement Schedules:

Financial statement schedules are omitted because they are not required or are not applicable or the required information is shown in the financial statements or notes thereto.

3.

Exhibits:

The exhibits to this report are listed on the Exhibit Index below.

31

(b)

Description of exhibits

Exhibit Number	Description
3.1	Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.01 to our registration statement on Form 8-A12G (File No. 000-50053)).
3.2	Certificate of Amendment to the Articles of Incorporation of the Company (incorporated by reference to Exhibit 3 to our current report on Form 8-K dated November 17, 2004).
3.3	Bylaws of the Company (incorporated by reference to Exhibit 3.02 to our registration statement on Form 8-A12G (File No. 000-50053)).
4.1	Form of Stock Certificate (incorporated by reference to Exhibit 4.01 to our registration statement on Form 8-A12G (File No. 000-50053)).
10.1	Form of Subscription Agreement of Amerityre Corporation (incorporated by reference to Exhibit 4.01 to our current report on Form 8-K dated February 1, 2006).
10.2	Form of Class A Common  Stock  Purchase  Warrant of  Amerityre  Corporation, dated as of  February 1, 2006  (incorporated  by  reference  to Exhibit 4.02 to our current report on Form 8-K dated February 1, 2006).
10.3	Form of Class B Common  Stock  Purchase  Warrant of  Amerityre  Corporation, dated as of  February 1, 2006  (incorporated  by  reference  to Exhibit 4.03 to our current report on Form 8-K dated February 1, 2006).
10.4	Form of Employment Agreement between the Company and certain officers of the Company (incorporated by reference to Exhibit 10.1 to our registration statement on Form S-3 (File No. 333-134476)).
10.5	Schedule of signers and key terms of the Employment Agreement submitted under Exhibit 10.4 (incorporated by reference to Exhibit 10.2 to our registration statement on Form S-3 (File No. 333-134476)).
10.6	Registration Rights Agreement, dated as of April 30, 2007, between the Company and the Buyers (incorporated by reference to Exhibit 4.1 to our current report on Form 8-K dated May 24, 2007).
10.7	Form of Subscription Documents (related to the April 2007 Placement) (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K dated May 24, 2007).
10.8	Form of Common Stock Purchase Warrant (issued in the April 2007 Placement) (incorporated by reference to Exhibit 10.2 to our current report on Form 8-K dated May 24, 2007).
10.9	Securities Purchase Agreement, dated as of April 30, 2007, between the Company and the Buyers(incorporated by reference to Exhibit 10.3 to our current report on Form 8-K dated May 24, 2007).
10.10	Form of Common Stock Purchase Warrant (issued on May 2, 2007) (incorporated by reference to Exhibit 10.4 to our current report on Form 8-K dated May 24, 2007).
31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32

SIGNATURES

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

Dated:  September 13, 2007

	AMERITYRE CORPORATION
	By: /s/Gary N. Benninger Gary N. Benninger Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 13th day of September 2007.

 

/s/Gary N. Benninger Gary N. Benninger Chief Executive Officer (Principal Executive Officer)	/s/Anders A. Suarez Anders A. Suarez Chief Financial Officer (Principal Financial Officer)
/s/Louis M. Haynie Louis M. Haynie Chairman of the Board of Directors	/s/Henry D. Moyle Henry D. Moyle Director
/s/Wesley G. Sprunk Wesley G. Sprunk Director	/s/Norman H. Tregenza Norman H. Tregenza Director
/s/Steve M. Hanni Steve M. Hanni Director	/s/Kenneth Johnsen Kenneth Johnsen Director

33

AMERITYRE CORPORATION

INDEX TO FINANCIAL STATEMENTS

Audited Financial Statements

      

Report of Independent Registered Public Accounting Firm

F-2

Balance Sheets as of June 30, 2007 and 2006

F-3

Statements of Operations for the years ended June 30, 2007, 2006, and 2005

F-5

Statements of Stockholders' Equity for the years ended June 30, 2007, 2006, and 2005

F-6

Statements of Cash Flows for the years ended June 30, 2007, 2006, and 2005

F-9

Notes to Financial Statements

F-11

F-1

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

Amerityre Corporation

Boulder City, Nevada

We have audited the balance sheets of Amerityre Corporation as of June 30, 2007 and 2006, and the related statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provided 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 Amerityre Corporation as of June 30, 2007 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2007, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Amerityre Corporation’s internal control over financial reporting as of June 30, 2007, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated September 13, 2007, expressed an unqualified opinion on management’s assessment of the effectiveness of Amerityre Corporation’s internal control over financial reporting and an unqualified opinion on the effectiveness of Amerityre Corporation’s internal control over financial reporting.

/s/HJ & Associates, LLC

HJ & Associates, LLC

Salt Lake City, Utah

September 13, 2007

F-2

AMERITYRE CORPORATION
Balance Sheets
ASSETS		June 30, 2007			June 30, 2006
CURRENT ASSETS
Cash and cash equivalents	$	5,788,602		$	3,065,675
Accounts receivable – net		349,125			237,788
Inventory		739,710			592,122
Prepaid expenses and other current assets		88,930			180,742
Deferred stock offering expenses		-			162,963
Deposit on equipment		68,653			49,373
Total Current Assets		7,035,020			4,288,663
PROPERTY AND EQUIPMENT
Leasehold Improvements		157,410			157,410
Molds and models		382,973			375,751
Equipment		2,834,615			2,677,687
Furniture and Fixtures		84,455			79,341
Software		280,337			280,337
Less – accumulated depreciation		(2,560,966)			(2,218,155)
Total Property and Equipment		1,178,824			1,352,371
OTHER ASSETS
Patents and trademarks – net		578,915			463,053
Deposits		36,000			36,000
Total Other Assets		614,915			499,053
TOTAL ASSETS	$	8,828,759		$	6,140,087
The accompanying notes are an integral part of these financial statements.

F-3

AMERITYRE CORPORATION
Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS’ EQUITY		June 30, 2007			June 30, 2006
CURRENT LIABILITIES
Accounts payable	$	327,859		$	246,536
Accrued expenses		292,667			10,046
Deferred revenue – special projects		-			100,000
Total Current Liabilities		620,526			356,582
TOTAL LIABILITIES		620,526			356,582
COMMITMENTS AND CONTINENCIES  (NOTE 2)
STOCKHOLDERS’ EQUITY
Preferred stock: 5,000,000 shares authorized of $0.001 par value, -0-   shares issued and outstanding		-			-
Common stock: 40,000,000 shares authorized of $0.001 par value,     23,416,551 and 21,020,180 shares issued and outstanding, respectively		23,414			21,018
Additional paid-in capital		55,608,790			47,579,729
Accrued interest on notes receivable		(3,074)			-
Notes receivable		(600,000)			-
Deferred consulting and directors’ compensation		(25,000)			(29,167)
Retained deficit		(46,795,897)			(41,788,075)
Total Stockholders’ Equity		8,208,233			5,783,505
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	8,828,759		$	6,140,087
The accompanying notes are an integral part of these financial statements.

F-4

AMERITYRE CORPORATION
Statement of Operations
	For the Years Ended June 30,
		2007		2006		2005
NET REVENUES
Products	$	2,620,587	$	2,025,630	$	1,681,091
Licenses		266,667		-		-
Equipment		540,000		-		-
Total Net Revenues		3,427,254		2,025,630		1,681,091
COST OF REVENUES
Products		1,826,668		1,545,753		1,233,181
Equipment		556,677		-		-
Total Cost of Revenues		2,383,345		1,545,753		1,233,181
GROSS PROFIT		1,043,909		479,877		447,910
EXPENSES
Consulting		286,274		99,498		77,000
Advisory group expense		-		-		6,134,000
Depreciation and amortization		379,127		384,719		385,726
Research and development		834,647		790,877		880,748
Loss on sale and impairment of assets		4,831		-		18,054
Selling, general and administrative		4,655,456		4,629,023		3,075,524
Total Expenses		6,160,335		5,904,117		10,571,052
LOSS FROM OPERATIONS		(5,116,426)		(5,424,240)		(10,123,142)
OTHER INCOME
Interest income		101,290		98,672		35,181
Miscellaneous income		7,314		1,328		14,953
Total Other Income		108,604		100,000		50,134
NET LOSS	$	(5,007,822)	$	(5,324,240)	$	(10,073,008)
BASIC AND DILUTED LOSS PER SHARE	$	(0.23)	$	(0.26)	$	(0.53)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING		21,520,394		20,350,981		18,931,779
The accompanying notes are an integral part of these financial statements.

F-5

		AMERITYRE CORPORATION
		Statements of Stockholders’ Equity
			Common Stock				Additional Paid-in Capital		Notes Receivable		Accrued Interest		Prepaid with Common Stock		Expenses Deferred Consulting/  Stock Offering		Accumulated Deficit
			Shares		Amount
Balance, June 30, 2004				$		$	30,594,482	$	-	$	-	$	(219,988)	$	-	$	(26,390,827)
Common stock issued to CEO for compensation			65,000		65		597,935		-		-		-		-		-
Common stock issued for cash exercise of options at $2.00 per share			20,000		20		39,980		-		-		-		-		-
Common stock issued for cash exercise of options at $3.00 per share			30,000		30		89,970		-		-		-		-		-
Common stock issued for cash exercise of options at $4.00 per share			796,000		796		3,183,204		-		-		-		-		-
Common stock issued for patents			15,000		15		146,235		-		-		-		-		-
Common stock issued for cash-less exercise of options			120,748		121		(121)		-		-		-		-		-
Common stock issued for services and prepaid services			29,300		29		200,491		-		-		-		-		-
Options granted for services and stock offering costs			-		-		7,134,000		-		-		-		(1,000,000)		-
Amortization of prepaid expenses			-		-		-		-		-		219,988		-		-
Net loss for the year ended June 30, 2005			-		-		-		-		-		-		-		(10,073,008)
Balance, June 30, 2005			19,505,216	$	19,505	$	41,986,176	$	-	$	-	$	-	$	(1,000,000)	$	(36,463,835)
		The accompanying notes are an integral part of these financial statements.

F-6

		AMERITYRE CORPORATION
		Statements of Stockholders’ Equity (Continued)
			Common Stock				Additional Paid-in Capital		Notes Receivable		Accrued Interest		Prepaid with Common Stock		Expenses Deferred Consulting/  Stock Offering		Accumulated Deficit
			Shares		Amount
Balance, June 30, 2005				$		$	41,986,176	$	-	$	-	$	-	$	(1,000,000)	$	(36,463,835)
Common stock issued to CEO for compensation			30,300		30		199,970		-		-		(200,000)		-		-
Common stock issued to COO for compensation			10,000		10		53,590		-		-		-		-		-
Common stock issued for cash exercise of options at $3.00 per share			470,000		470		1,409,530		-		-		-		-		-
Common stock issued for board compensation			12,964		13		69,987		-		-		(70,000)		-		-
Common stock issued to employees for compensation			64,100		64		324,777		-		-		-		-		-
Common stock issued for cash at $4.50 per share			860,000		860		3,869,140		-		-		-		-		-
Common stock issued for cash exercise of class A warrants at $5.00 per share			3,800		3		18,996		-		-		-		-		-
Common stock issued for cash exercise of class B warrants at $5.50 per share			2,800		2		15,398		-		-		-		-		-
Common stock issued for services and prepaid services			61,000		61		332,369		-		-		-		-		-
Stock offering costs			-		-		(1,364,375)		-		-		-		1,000,000		-
Stock based compensation-employee options			-		-		664,171		-		-		-		-		-
Amortization of prepaid expenses			-		-		-		-		-		240,833		-		-
Net loss for the year ended June 30, 2006			-		-		-		-		-		-		-		(5,324,240)
Balance, June 30, 2006			21,020,180	$	21,018	$	47,579,729	$	-	$	-	$	(29,167)	$	-	$	(41,788,075)
		The accompanying notes are an integral part of these financial statements.

F-7

		AMERITYRE CORPORATION
		Statements of Stockholders’ Equity (Continued)
			Common Stock				Additional Paid-in Capital		Notes Receivable		Accrued Interest		Prepaid with Common Stock		Expenses Deferred Consulting/  Stock Offering		Accumulated Deficit
			Shares		Amount
Balance, June 30, 2006				$		$	47,579,729	$	-	$	-	$	(29,167)	$	-	$	(41,788,075)
Common stock issued for cash-less exercise of options			11,553		12		(12)		-		-		-		-		-
Common stock issued for cash exercise of class A warrants at $5.00 per share			875		1		4,375		-		-		-		-		-
Common stock issued for cash exercise of class B warrants at $5.50 per share			875		1		4,812		-		-		-		-		-
Common stock issued for board compensation			11,628		12		59,988		-		-		(60,000)		-		-
Common stock issued for services $3.55 to $4.31 per share			35,000		35		131,815		-		-		-		-		-
Common stock issued for cash at $3.50 per share			2,072,996		2,072		7,253,413		-		-		-		-		-
Common stock issued for cash to affiliates from $4.28 to $4.74 per share			58,444		58		265,063		-		-		-		-		-
Common stock issued for cash exercise warrants at $4.50 per share			5,000		5		22,495		-		-		-		-		-
Common stock issued for cash from options at $4.00 per share			200,000		200		799,800		-		-		-		-		-
Offering Cost			-		-		(1,296,191)		-		-		-		-		-
Stock based  comp employee options			-		-		783,503		(600,000)		-		-		-		-
Accrued interest on notes receivable			-		-		-		-		3,074		-		-		-
Amortization of prepaid expenses			-		-		-		-		-		64,167		-		-
Net loss for the year ended June 30, 2007			-		-		-		-		-		-		-		(5,007,822)
Balance, June 30, 2007			23,416,551	$	23,414	$	55,608,790	$	(600,000)	$	3,074	$	(25,000)	$	-	$	(46,795,897)
		The accompanying notes are an integral part of these financial statements.

F-8

AMERITYRE CORPORATION
Statements of Cash Flows
	For the Years Ended June 30,
		2007		2006		2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(5,007,822)	$	(5,324,240)	$	(10,073,008)
Adjustments to reconcile net loss to net cash  used by operating activities:
Depreciation & amortization expense		379,127		384,719		385,726
Bad debt expense		(1,965)		-		14,087
Loss on sale and impairment of assets		(169)		-		18,054
Common stock issued for services		131,850		523,971		798,520
Stock-based compensation expense related to employee options		783,503		664,171		-
Options issued for advisory group services		-		-		6,134,000
Amortization of expense prepaid w/ common stock		64,167		240,833		219,988
Changes in operating assets and liabilities:
(Increase) in accounts receivable		(104,371)		(68,950)		(15,923)
Decrease (increase) in prepaid expenses		91,811		(22,353)		36,518
Decrease (increase) in other assets		143,683		(131,432)		(73,723)
(Increase) decrease in inventory		(147,588)		54,676		(89,282)
Increase in accounts payable and accrued expenses		260,870		271,752		26,145
Net Cash Used by Operating Activities		(3,406,904)		(3,406,853)		(2,618,898)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for patents and trademarks		(140,819)		(120,556)		(97,226)
Proceeds from sale of fixed assets		-		-		8,800
Purchase of property and equipment		(185,454)		(479,261)		(75,645)
Net Cash Used by Investing Activities		(326,273)		(599,817)		(164,071)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the sale of common stock and warrants		7,520,607		3,870,000		3,314,000
Stock offering cost paid		(1,296,191)		(364,375)		-
Proceeds from stock issued for warrants		31,688		34,400		-
Proceeds from exercise of stock options		200,000		1,410,000		-
Net Cash Provided by Financing Activities		6,456,104		4,950,025		3,314,000
NET INCREASE IN CASH AND CASH EQUIVALENTS		2,722,927		943,355		531,031
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		3,065,675		2,122,320		1,591,289
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	5,788,602	$	3,065,675	$	2,122,320
The accompanying notes are an integral part of these financial statements.

F-9

AMERITYRE CORPORATION
Statements of Cash Flows
	For the Years Ended June 30,
		2007		2006		2005
SUPPLEMENTAL SCHEDULE OF CASH FLOW ACTIVITIES
CASH PAID FOR:
Interest	$	-	$	-	$	-
Income taxes	$	-	$	-	$	-
NON-CASH OPERATING ACTIVITIES
Common Stock issued for services rendered	$	131,850	$	523,971	$	798,520
Common Stock issued for prepaid services	$	-	$	270,000	$	-
Stock-based compensation expense related to employee options	$	783,503	$	664,171	$	-
NON-CASH INVESTING/ FINANCING ACTIVITIES
Options issued for advisory group services	$	-	$	-	$	6,134,000
Common stock issued pursuant to exercise of option by promissory notes	$	600,000	$	-	$	-
The accompanying notes are an integral part of these financial statements.

F-10

AMERITYRE CORPORATION

Notes to the Financial Statements

June 30, 2007 and 2006

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Organization

Amerityre Corporation, (the “Company”) was incorporated under the laws of the State of Nevada on January 30, 1995, under the name American Tire Corporation. The Company was organized to take advantage of existing proprietary and non-proprietary technology available for the manufacturing of specialty tires. The Company engages in the manufacturing, marketing, distribution and sales of “flatfree” specialty tires and tire-wheel assemblies and currently is manufacturing these tires at its manufacturing facility located in Boulder City, Nevada. During the year ended June 30, 2001, the name of the Company was changed to Amerityre Corporation.

b. Accounting Method

The Company’s financial statements are prepared using the accrual method of accounting. The Company has elected a June 30 year-end.

c. Reclassifications

Prior period amounts have been adjusted to conform to the current year presentation. Payroll and payroll taxes and bad debt expense previously included as separate line items are now reclassified to be included in selling, general and administrative expenses.

d. Basic and Fully Diluted Net Loss Per Share

Basis and Fully Diluted net loss per share is computed using the weighted-average number of common shares outstanding during the period.

	For the Years Ended June 30,
		2007		2006		2005
Loss (numerator)	$	(5,007,822)	$	(5,324,240)	$	(10,073,008)
Shares (denominator)		21,520,394		20,350,981		18,931,779
Per share amount	$	(0.23)	$	(0.26)	$	(0.53)

The Company’s outstanding stock options and warrants have been excluded from the basic net loss per share calculation. The Company excluded 5,182,370, 4,398,400, and 3,945,000 common stock equivalents for the years ended June 30, 2007, 2006 and 2005, respectively because they are anti-dilutive.

e. Estimates

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.

F-11

AMERITYRE CORPORATION

Notes to the Financial Statements

June 30, 2007 and 2006

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

f. Income Taxes

Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Net deferred tax assets consist of the following components as of June 30, 2007, 2006 and 2005:

		2007		2006		2005
Deferred tax assets:
NOL Carryover	$	14,168,658	$	12,627,900	$	8,154,000
Deferred tax liabilities:
Depreciation		(161,543)		(182,700)		-
Valuation allowance		(14,007,115)		(12,445,200)		(8,154,000)
Net deferred tax asset	$	-	$	-	$	-

The income tax provision differs from the amount of income tax determined by applying the U.S. federal and state income tax rates of 39% to pretax income from continuing operations for the years ended June 30, 2007, 2006 and 2005 due to the following:

		2007		2006		2005
Income Tax Expense	$	(1,953,051)	$	(2,076,453)	$	(3,928,473)
Meals & Entertainment		2,909		4,143		1,854
Other		-		(67)		397,218
Depreciation and amortization		27,339		36,920		53,773
Stock for Services/Options Expense		382,013		360,092		-
Advisory Group Option		-		-		2,392,260
Valuation Allowance		1,540,790		1,675,365		1,083,368
	$	-	$	-	$	-

At June 30, 2007, the Company had net operating loss carryforwards of approximately $36,017,075 that may be offset against future taxable income from the year 2007 through 2027. No tax benefit has been reported in the June 30, 2007 financial statements since the potential tax benefit is offset by a valuation allowance of the same amount. Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carryforwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carryforwards may be limited as to use in future years.

F-12

AMERITYRE CORPORATION

Notes to the Financial Statements

June 30, 2007 and 2006

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

g. Inventory

Inventory is stated at the lower of cost (computed on a first-in, first-out basis) or market. The cost of finished goods includes the cost of raw material, direct and indirect labor, and other indirect manufacturing costs. The inventory consists of chemicals, finished goods produced in the Company’s plant and products purchased for resale.

		2007		2006
Raw Materials	$	204,665	$	139,658
Work in Progress		-		-
Finished Goods		535,045		452,464
Total Inventory	$	739,710	$	592,122

We recorded inventory reserve expense of $14,711 during the year ended June 30, 2007 for items that have a slow turnover ratio. We recorded no inventory impairment expense during the years ended June 30, 2007, 2006 and 2005.

h. Property and Equipment

Property and equipment are stated at cost. Expenditures for small tools, ordinary maintenance and repairs are charged to operations as incurred. Major additions and improvements are capitalized. When we retire or dispose of assets, the costs and accumulated depreciation or amortization are removed from the respective accounts and we recognize any related gain or loss. Repairs and maintenance are charged to expense when incurred. Major replacements that substantially extend the useful life of an asset are capitalized and depreciated. Depreciation is computed using the straight-line method over estimated useful lives as follows:

Leasehold improvements	5 years, or over lease term
Equipment	5 to 10 years
Furniture and fixtures	7 years
Automobiles	5 years
Software	3 years

Depreciation expense for the years ended June 30, 2007, 2006 and 2005 was $355,918, $359,205, and $354,879, respectively.

i. Revenue Recognition

Revenue is recognized when the sales amount is determined, shipment of goods to the customer has occurred and collection is reasonably assured. Product is shipped FOB origination.

j. Patents and Trademarks

Patent and trademark costs have been capitalized at June 30, 2007, totaling $664,527 with accumulated amortization of $85,612 for a net book value of $578,915. Patent and trademark costs capitalized at June 30, 2006 totaled $528,198 with accumulated amortization of $65,145 for a net book value of $463,053. The patents which have been granted are being amortized over a period of 20 years. Patents which are pending or are being developed are not being amortized. Amortization will begin once the patents have been issued. Amortization expense for the years ended June 30, 2007, 2006 and 2005 was $23,209, $25,514, and $30,847, respectively. The Company evaluates the recoverability of intangibles and reviews the amortization period on a continual basis utilizing the guidance of SFAS 142, “Goodwill and Other Intangible Assets.” Several factors are used to evaluate intangibles, including, but not limited to, management’s plans for future operations, recent operating results and projected, undiscounted cash flows. During the year ended June 30, 2007 we abandoned 4 trademarks that we previously applied for.

F-13

AMERITYRE CORPORATION

Notes to the Financial Statements

June 30, 2007 and 2006

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The total cost associated with the abandoned trademarks $4,490. The estimated amortization expense, based on current intangible balances, for the next fiscal years beginning July 1, 2008 is as follows:

2008	$20,743
2009	$19,705
2010	$18,719
2011	$17,790
2012	$16,900

k. Advertising

The Company follows the policy of charging the costs of advertising to expense as incurred.  Advertising expense for the years ended June 30, 2007, 2006 and 2005 was $160,980, $159,328, and $160,860, respectively.

l. Stock Based-Compensation Expense

On July 1, 2005, we adopted Statement of Financial Accounting Standards No.  (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense for all share-based payments to employees and directors including employee stock options  and stock purchases related to the Company’s employee stock option and award plans based on estimated fair values. SFAS 123 (R) supersedes our previous accounting under Accounting Principles Board Option No. 25, “Accounting for Stock Issued to Employees” (“APB25”) for periods beginning in fiscal 2006. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123 (R). We have applied the provisions of SAB 107 in our adoption of SFAS 123 (R).

We adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of July 1, 2005, the first day of our fiscal year 2006. Our financial statements as of and for the fiscal years ended June 30, 2006 and 2007 reflect the impact of SFAS 123 (R). In accordance with the modified prospective transition method, our financial statements for the fiscal year ended June 30, 2005 have not been restated to reflect, and do not include, the impact of SFAS 123 (R). Stock-based compensation expense recognized under SFAS 123 (R) for the fiscal years ended June 30, 2007 and 2006 was $783,503 and $664,171, respectively, and related to employee stock options issued during those fiscal years. There was no stock-based compensation expense related to employee stock options recognized during the fiscal year ended June 30, 2005.

SFAS 123 (R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Statement of Operations. Prior to the adoption of SFAS 123 (R), we accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Under the intrinsic value method, no stock-based compensation expense had been recognized in our Statement of Operations because the exercise price of the stock options granted to employees and directors equaled the fair market value of the underlying stock at the date of grant.

Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. At June 30, 2005, we had no unvested share-based payment awards for which compensation expense should be recognized during the fiscal year ended June 30, 2006 and 2007. Stock-based compensation expense recognized in our Statements of Operations for the fiscal years ended June 30, 2006 and 2007 only include compensation expense for share-based payment awards granted, but not yet vested after July 1, 2005, and are based on the grant date fair value estimated in accordance with SFAS 123 (R).

F-14

AMERITYRE CORPORATION

Notes to the Financial Statements

June 30, 2007 and 2006

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock-based compensation expense recognized in our Statements of Operations for fiscal year ended June 30, 2006 and 2007 assume all awards will vest, therefore no reduction has been made for estimated forfeitures.

m. Recent Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115 (“SFAS 159”), which allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities under an instrument-by-instrument election. Subsequent measurements for the financial assets and liabilities an entity elects to fair value will be recognized in earnings. SFAS 159 also establishes additional disclosure requirements. SFAS 159 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted provided that the entity also adopts SFAS No. 157, “Fair Value Measurement” (“SFAS 157”). We have not yet determined the impact this standard will have on our financial statements.

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R) (“SFAS 158”), which improves financial reporting by requiring an employer to recognize the over-funded or under-funded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income.  SFAS 158 will not have an impact on our results of operations, financial position, or cash flow.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”), and expands disclosures about fair value measurements. The Company will adopt the provisions of SFAS 157 effective January 1, 2008. We do not expect SFAS 157 to have a material impact on our results of operations, financial position, or cash flows.

In July 2006, the FASB issued Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), which applies to all tax positions related to income taxes subject to No. 109 (SFAS 109), Accounting for Income Taxes. This includes tax positions considered to be “routine” as well as those with a high degree of uncertainty. FIN 48 utilizes a two-step approach for evaluating tax positions. Recognition (step one) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two) is only addressed if step one has been satisfied (i.e., the position is more-likely-than-not to be sustained). Under step two, the tax benefit is measured as the largest amount of benefit, determined on a cumulative probability basis that is more-likely-than-not to be realized upon ultimate settlement. FIN 48’s use of the term “more-likely-than-not” in steps one and two is consistent with how that term is used in SFAS 109 (i.e., a likelihood of occurrence greater than 50 percent).

 

Those tax positions failing to qualify for initial recognition are recognized in the first subsequent interim period they meet the more-likely-than-not standard, or are resolved through negotiation or litigation with the taxing authority, or upon expiration of the statute of limitations. Derecognition of a tax position that was previously recognized would occur when a company subsequently determines that a tax position no longer meets the more-likely-than-not threshold of being sustained. FIN 48 specifically prohibits the use of a valuation allowance as a substitute for derecognition of tax positions. Additionally, FIN 48 requires expanded disclosure requirements, which include a tabular rollforward of the beginning and ending aggregate unrecognized tax benefits as well as specific detail related to tax uncertainties for which it is reasonably possible the amount of unrecognized tax benefit will significantly increase or decrease within twelve months. These disclosures are required at each annual reporting period unless a significant change occurs in an interim period. FIN 48 is effective for fiscal years beginning after December 15, 2006 (our fiscal year 2008). We do not believe the adoption will have a material impact on our results of operation.

F-15

AMERITYRE CORPORATION

Notes to the Financial Statements

June 30, 2007 and 2006

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

n. Shipping and Handling

We follow Emerging Issues Task Force Statement No. 00-10, “Shipping and Handling Fees and Costs”, which requires that freight costs charged to customers be classified as revenues. Freight expenses are included in costs of sales.

o.

Trade Receivables

We charge-off trade receivables that are more than 120 days outstanding as bad-debt expense which is included in selling, general and administrative expenses.  During the fiscal year ended June 30, 2007 we recouped a net of $1,965 in bad debt expenses previously charged in prior fiscal years. As a result, bad debt expense was $(1,965), $211, and $14,087 for the fiscal years ended June 30, 2007, 2006 and 2005, respectively.

p. Equity Securities

Equity securities issued for services rendered have been accounted for at the fair market value of the securities on the date of authorization.

q. Concentrations of Risk

The Company maintains several accounts with financial institutions. The accounts are insured by the Federal Deposit Insurance Corporation up to $100,000. The Company’s balances exceeded that amount by approximately $5,688,000 and $2,965,000 as of  June 30, 2007 and 2006, respectively.

Credit losses, if any, have been provided for in the financial statements and are based on management’s expectations. The Company’s accounts receivable are subject to potential concentrations of credit risk. The Company does not believe that it is subject to any unusual risks, or significant risks in the normal course of its business.

We have one customer who accounted for 20%, 23%, and 12% of our sales for the years ended June 30, 2007, 2006 and 2005, respectively.

r. Valuation of Options and Warrants

The valuation of options and warrants granted to unrelated parties for services are measured as of the earlier of (1) the date at which a commitment for performance by the counterparty to earn the equity instrument is reached, or (2) the date the counterparty’s performance is complete. Pursuant to the requirements of EITF 96-18, the options and warrants will continue to be revalued in situations where they are granted prior to the completion of the performance.

s. Cash and Cash Equivalents

We consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

 

F-16

AMERITYRE CORPORATION

Notes to the Financial Statements

June 30, 2007 and 2006

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

t. Liquidity

Our financial statements are prepared using generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. We have historically incurred significant losses which have resulted in a total retained deficit of $46,792,103 at June 30, 2007.  Although for the fiscal years ended June 30, 2005, 2006 and 2007, we have losses from operations and have used cash in our operating activities in excess of our revenues, we have had little, if any, debt and have consistently had a positive net tangible book value. In connection with the preparation of our financial statements for the year ended June 30, 2007, we have analyzed our cash needs for fiscal 2008. Based on this analysis, we concluded that our available cash will be sufficient to meet our current working capital, capital expenditure and other cash requirements for fiscal 2008.

NOTE 2 – COMMITMENTS AND CONTINGENCIES

In October 2002, we entered into a five-year lease for a 49,200 square foot executive/manufacturing facility in Boulder City, Nevada. The agreement required a security deposit of $18,000 and monthly rent payments of $16,000 for the first twelve months with annual increases. At June 30, 2007, the monthly rent was $18,000. Our lease expires October 14, 2007 and we are in discussion with our landlord regarding either extending the term of our lease or purchasing the facility and related property provided we can reach mutually acceptable terms. Future minimum lease payments under this non-cancelable operating lease are as follows:

Year	Amount
2008	$	63,000
	$	63,000

In September 2007, we entered an agreement with Richard A. Steinke, our former Chairman and Chief Executive Officer, to provide technology consulting in exchange for an annual consulting fee of $250,000 with a potential cash performance bonus of up to 50% of his annual consulting fees based on our meeting or exceeding certain financial and strategic performance targets. The consulting agreement expires August 31, 2009.

NOTE 3 – LEGAL PROCEEDINGS

In November 2005, Continental Automotive Licensing Corp. (“Petitioner”) filed a petition for Cancellation #92045199 in the United States Patent and Trademark Office against Richard A. Steinke, our former Chairman and Chief Executive Officer, concerning the registration of Amerityre®, Registration No. 2,401,989.  The Petition was withdrawn by Petitioner on June 22, 2007.

F-17

AMERITYRE CORPORATION

Notes to the Financial Statements

June 30, 2007 and 2006

NOTE 4 – STOCK TRANSACTIONS

During the year ended June 30, 2007, the Company issued an aggregate of 2,396,371 shares of common stock as follows:

On September 30, 2006, we issued 11,553 shares of our common stock to an officer pursuant to the cashless exercise of 30,000 outstanding stock options.

On November 7, 2006, we issued 1,750 shares of our common stock for the exercise of outstanding warrants for $9,188 cash.

In December 2006, we approved the issuance of 1,938 shares of our restricted common stock to the Chairman of our audit committee as partial compensation for his services as Chairman. The value of the shares was $10,000, based on the closing price of $5.16 per share. The shares were issued in January 2007.

In December 2006, we approved the issuance of an aggregate of 9,690 shares (1,938 shares each) of our restricted common stock to our five (5) non-employee directors as annual compensation for their services as members of our Board of Directors for the period commencing December 1, 2006 through November 30, 2007. The aggregate value of the shares was $50,000, based on the closing price of $5.16 per share. The shares were issued in January 2007.

In January 2007, our board authorized the issuance of 25,000 shares of restricted common stock to Kenneth C. Johnsen as additional compensation for his tenure as President. The aggregate value of the shares was $88,750, based on the closing price of $3.55 per share.

In March 2007, our Board authorized the issuance of 10,000 shares of common stock to Elliott N. Taylor as additional compensation for his tenure as Executive Vice President. The aggregate value of the shares was $43,100, based on the closing price of $4.31 per share.

 

In April 2007, we completed the private placement of our securities in the form of units (the “Units”) for total offering proceeds of $3,670,607. Each Unit consists of four (4) shares of common stock and two (2) warrants for the purchase of common stock, exercisable for two years at an exercise price of $4.50 per share.  We sold an aggregate of 261,574 Units, or 1,046,296 shares and 523,148 warrants.  Non-affiliates paid a purchase price of $14.00 per Unit. Affiliates purchased the Units at prices ranging from $17.25 to $18,97 per Units, based on the closing price per share for our common stock on the date the Units were acquired

In May 2007, we completed an additional  private placement of the Units at a price of $14 per Unit for an aggregate purchase price of $3,850,000.   We sold an aggregate of 275,000 Units, or 1,100,000 shares and 550,000 warrants.

In May 2007, we issued 5,000 shares of common stock in connection with the exercise of 5,000 warrants at an exercise price of $4.50 per share for aggregate proceeds of $22,500. The warrants were part of the Units sold in the April 2007 private placement.

In June 2007, we issued 200,000 shares of common stock in connection with the exercise of 200,000 options at an exercise price of $4.00 per share for aggregate proceeds of $200,000 in cash and an additional two (2) notes in the amount of $300,000 each. The notes are payable in equal annual installments over a 3 year period and bear interest at 8.5% per annum.

F-18

AMERITYRE CORPORATION

Notes to the Financial Statements

June 30, 2007 and 2006

NOTE 5 – STOCK OPTIONS AND WARRANTS

General Option Information

During the fiscal year ended June 30, 2007 we issued options to acquire an aggregate of 55,000 shares of our common stock to certain employees in connection with their employment (the “Employment Options”). The Employment Options granted during fiscal year 2007 vest immediately with a three year term. The exercise price for the Employment Options granted range from $3.55 to $4.31 per share.

We use the Black-Scholes model to value stock options. The Black-Scholes model requires the use of employee exercise behavior data and the use of a number of assumptions including volatility of our stock price, the weighted average risk-free interest rate, and the weighted average expected life of the options. Because we do not pay dividends, the dividend rate variable in the Black-Scholes model is zero. We estimated the fair value of the stock options at the grant date based on the following weighted average assumptions:

	For the fiscal year ended June 30,
	2007		2006		2005
Risk free interest rate	4.80%		4.13%		2.49%
Expected life	3 years		3 years		2 years
Expected volatility	49.37% - 49.41%		57.69% - 58.10%		59.83%
Dividend yield	0.00%		0.00%		0.00%

A summary of the status of our outstanding stock options as of June 30, 2007 and June 30, 2006 and changes during the periods then ended is presented below:                                                            

	June 30, 2007		June 30, 2006
	Shares	Weighted Average Exercise Price	Shares	Weighted Average Exercise Price
Outstanding beginning of period	4,190,000	$ 6.69	3,945,000	$ 6.31
Granted	55,000	$ 3.96	775,000	$ 6.36
Expired/Cancelled	(118,447)	$(6.16)	(60,000)	$(6.70)
Exercised	(211,553)	$(3.99)	(470,000)	$(3.00)
Outstanding end of period	3,915,000	$ 6.81	4,190,000	$ 6.69
Exercisable	3,715,000	$ 6.84	415,000	$ 5.06

F-19

AMERITYRE CORPORATION

Notes to the Financial Statements

June 30, 2007 and 2006

NOTE 5 – STOCK OPTIONS AND WARRANTS, Continued

The following table summarizes the range of outstanding and exercisable options as of June 30, 2007:

	Outstanding			Exercisable
Range of Exercise Prices	Number Outstanding at June 30, 2007	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price	Number Exercisable at June 30, 2007	Weighted Average Exercise Price
$3.55	25,000	2.55	$3.55	25,000	$3.55
4.31	30,000	2.69	$4.31	30,000	$4.31
5.36	150,000	5.00	$5.36	100,000	$5.36
6.40	185,000	1.60	$6.40	185,000	$6.40
6.60	525,000	4.86	$6.60	375,000	$6.60
7.00	3,000,000	2.21	$7.00	3,000,000	$7.00
$3.55-$7.00	3,915,000	2.65	$6.81	3,715,000	$6.84

At of June 30, 2007, the unrecognized stock-based compensation related to stock options was approximately $530,407. This cost is expected to be expensed over the next year.

The table below illustrates the effect of net loss and loss per share if expense was measured using the fair value recognition provisions of  SFAS 123 to stock based compensation for the fiscal years ended June 30, 2007, 2006 and 2005:

		For the fiscal year ended June 30,
		2007		2006		2005
Net loss – as reported	$	(5,007,822)	$	(5,324,240)	$	(10,073,008)
Less: stock –based compensation expense determined under fair value based method		-		-		(668,950)
Pro forma net loss	$	(5,007,822)	$	(5,324,240)	$	(10,741,958)
Basic and fully diluted net loss per share	$	(0.23)	$	(0.26)	$	(0.53)
Proforma basic and fully diluted net loss per share	$	(0.23)	$	(0.26)	$	(0.56)

General Warrant Information

The following table summarizes outstanding warrants to purchase our common stock at June 30, 2007:

Number of Warrants Outstanding at June 30, 2007	Expiration Date	Exercise Price
102,825	1/31/2009	$5.00
103,825	1/31/2011	$5.50
506,720	3/11/09 to 3/20/09	$4.50
550,000	4/30/09	$4.50
1,263,370

F-20

AMERITYRE CORPORATION

Notes to the Financial Statements

June 30, 2007 and 2006

NOTE 6 -- QUARTERLY FINANCIAL INFORMATION (Unaudited)

		Quarter ended
		Jun 30, 2007		Mar 31, 2007		Dec 31, 2006		Sep 30, 2006
Net Revenues	$	1,471,209	$	723,717	$	596,426	$	635,903
Gross Profit	$	332,332	$	266,448	$	227,965	$	217,165
Net Loss	$	(1,054,406)	$	(1,505,091)	$	(1,249,936)	$	(1,198,389)
Basic and Diluted Loss Per Share	$	(0.05)	$	(0.07)	$	(0.06)	$	(0.06)

		Quarter ended
		Jun 30, 2006		Mar 31, 2006		Dec 31, 2005		Sep 30, 2005
Net Revenues	$	721,169	$	566,237	$	302,255	$	435,969
Gross Profit	$	220,945	$	133,488	$	43,816	$	81,626
Net Loss	$	(1,267,902)	$	(1,520,118)	$	(1,332,465)	$	(1,211,253)
Basic and Diluted Loss Per Share	$	(0.06)	$	(0.07)	$	(0.07)	$	(0.06)

NOTE 7 - SUBSEQUENT EVENTS

Effective September 1, 2007, Dr. Gary N. Benninger assumed the responsibilities of Chief Executive Officer of the Company, and Richard A. Steinke stepped down as Chief Executive Officer and Chairman of the Board of Directors to assume a new role as the Company’s chief technology consultant.  Louis M. Haynie, a member of our Board of Directors since July 1997, was appointed Chairman of the Board.

Dr. Benninger, who has been our Chief Operating Officer since October 2005, was appointed President in June 2007.  In connection with Dr. Benninger taking on the responsibilities as our Chief Executive Officer, we have entered into a new employment agreement that includes a base salary of $300,000 per year, with a potential cash performance bonus of up to 100% of his base salary based on the Company meeting or exceeding certain financial performance targets.  The agreement also includes an award of 150,000 options for the purchase of shares of our common stock exercisable at $4.04 per share for five years, with 50,000 of the options vesting on August 31, 2008 and 100,000 vesting on August 31, 2009.

In August 2007, we negotiated an amendment to the employment agreement for Richard A. Steinke, our former President and Chief Executive Officer wherein we amended the terms for compensation to provide as follows: (1) for  services rendered during the first year of the employment agreement, Mr. Steinke received a stock award of 30,303 shares of the Company’s common stock valued at $200,000, based on a price of $6.60 per share (the closing price per share as quoted on the over-the-counter market on July 8, 2005; (2) for  services provided by Mr. Steinke during the remaining term of the employment agreement (July 1, 2006 through August 31, 2007), the Company issued a stock award of 25,000 shares of the Company’s common stock valued at $100,500, based on a price of $4.02 per share (the closing price per share as quoted on the NASDAQ Capital Markets on August 7, 2007); and (3) for  services rendered by Mr. Steinke during the remaining term of the employment agreement, the Company paid Mr. Steinke  an additional cash payment of $50,000.  Beginning September 1, 2007, Mr. Steinke will provide technology consulting to the Company in exchange for an annual consulting fee of $250,000 with a potential cash performance bonus of up to 50% of his annual consulting fees based on our meeting or exceeding certain financial and strategic performance targets. In addition, Mr. Steinke was granted an option to acquire 100,000 shares of our common stock at $4.03 per share, with 50,000 of the options vesting on August 31, 2008 and 50,000 vesting on August 31, 2009.  The consulting agreement expires August 31, 2009.

F-21