UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-KSB ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006 Commission File Number: 001-14519 BALTIA AIR LINES, INC. (Exact name of registrant as specified in its charter) NEW YORK 11-2989648 (State of Incorporation) (IRS Employer Identification No.) 63-25 SAUNDERS STREET, SUITE 7 I, REGO PARK, NY 11374 (Address of principal executive offices) Registrant's telephone number, including area code: (718) 275-5205 Securities Registered under Section 12(g) of the Exchange Act: Common Stock - Par Value $.0001 Per Share Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months and (2) has been subject to such filing requirements for the past 90 days. [x] yes [ ] no Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-KSB or any amendment to this Form 10-KSB. [x] Registrant has not commenced revenue operations to date. Registrant's revenues for its fiscal year 2006: $-0- The aggregate market value of the voting common equity held by non-affiliates as of March 29, 2007 is $1,434,162. As of March 29, 2007 there were 126,300,897 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE None. Transitional Small Business Disclosure Format (Check one): No [X] PART I Item 1. Description of Business. The Company was organized in the State of New York, August 24, 1989. Its objective is to provide scheduled air transportation from the U.S. to Russia, and former Soviet Union countries. In 1991, the Department of Transportation (DOT) granted the Company routes to provide non-stop passenger, cargo and mail service from JFK Airport in New York to St. Petersburg and from JFK to Riga, with online service to Minsk, Kiev and Tbilisi, as well as back up service to Moscow. Due to a lack of sufficient working capital, the US Department of Transportation terminated the Company's route authority without prejudice to reapply when financing was in hand. Thereafter, Baltia has engaged in market research, operations development and planning, as well as activities to raise the requisite funding in order to reapply with the US Department of Transportation. These costs are borne by Baltia's shareholders and principals. Once fully operational, Baltia expects that it will employ approximately 200 persons full-time and be operating in compliance with all regulations applicable to U.S. airlines. With the exception of the JFK - Moscow route, there exists no nonstop competitive air transportation service on the routes for which Baltia can reapply pending financing. Baltia intends to provide full service, i.e. passenger, cargo and mail, and will not be dependent upon one or a few major customers. Baltia has two registered trademarks "BALTIA" and "VOYAGER CLASS" and five trademarks are subject to registration. There is currently no nonstop service from JFK to St. Petersburg. Connecting service is provided mainly by foreign carriers. Finnair, Lufthansa and SAS are the leading competitors in the US-Russia market. KLM, British Airways, Air France, Austrian Airlines, and Swissair also provide service. However, foreign carriers are required to have intermediate stops at transit airports in their respective countries (Helsinki, Frankfurt, Stockholm, Copenhagen, etc.) because they are "third nation" airlines and as such cannot fly directly between the US and Russia (only a US airline as well as a reciprocating Russian airline is eligible to fly nonstop). Delta and Aeroflot currently operate between JFK and Moscow. Baltia's objective is to establish itself as the leading nonstop carrier in the market niche over the North Atlantic with operations that are profitable and growing over time. In order to accomplish this objective, we intend to establish and maintain high quality service standards which we believe will be competitive with the European airlines currently providing connecting flights. Baltia does not expect to be in direct competition with deep discount airlines, including several East European airlines and the offspring of the former Soviet airline Aeroflot, which also provide connecting flights. Baltia intends to provide First, Business, and Voyager Class accommodations. Baltia's passenger market strategy is tailored to particular preferences of the various segments of its customer base, with marketing attention particularly focused on American business travelers with interests in Russia who require high quality, nonstop service from the US to Russia. Baltia's initial marketing strategy is based on existing agencies specializing in the market, selected travel and business publications, supplemented by direct mailings to corporate travel planners, and individual American businesses that are currently involved in Russia. Soon after the inauguration of flight service, Baltia plans to implement its frequent flyer program. As the marketing matures, Baltia plans to advertise to the general public throughout the US, and in Russia. Baltia also plans to sponsor selected industry and trade events in the US and in St. Petersburg. Baltia intends to provide customer service and reservations centers in New York and in St. Petersburg, to list Baltia's schedules and tariffs in the Official Airline Guide, and provide world wide access to reservations on Baltia's flights through a major Computer Reservations and Ticketing System ("CRS"). The Company intends to activate the reservations service when the DOT issues its order authorizing Baltia to sell tickets (expected to be approximately 30 to 45 days before the inaugural flight). Baltia has identified the following market segments in the U.S.-Russia market: (i) Business Travelers, (ii) General Tourism, (iii) Ethnic Travelers, (iv) Special Interest Groups, (v) Professional Exchanges, and (vi) Government and Diplomatic Travel. Baltia believes that the direct nonstop service to be offered by it will be superior to the stop-over service currently offered by foreign airlines. A comparison between the two services with respect to passenger convenience and cargo transport efficiency is set forth below. BALTIA - US flag, non-stop service: With non-stop service, a passenger can fly from JFK to St. Petersburg in about than 8 hours in a Boeing B747 wide body airplane. Cargo arrives containerized, palletized, and secure. Foreign, stop-over journeys: With stop-over service, it would take a passenger 10 to 18 hours to fly through Helsinki, Copenhagen, Moscow, or Frankfurt on a foreign carrier. In addition, passengers must change to narrow-body aircraft at a layover airport. Cargo is "broken up" and manually loaded onto narrow-body aircraft, or trucked from Helsinki. Baltia plans to operate efficiently and provide consistent high quality service to passengers and cargo shippers alike in order to establish the Company as the preferred airline in the market in comparison to its competitors. The Company also plans to use targeted marketing of its service to maintain and grow its market share. Because of the increased reliability and comfort of a nonstop flight, Baltia expects to capture a portion of the existing traffic. Further, US government traffic is required by law (Fly America Act) to fly on a US Flag carrier when service is available. In order to start revenue flight operations, the Company has to complete FAA air carrier certification. During this process the airline demonstrates to the FAA how the airline will comply with the federal aviation regulations. As part of the process the FAA reviews the Company's management and operational control. The Company's staff has prior experience with the certification and has worked closely with the New York Flight Standards District Office (NY FSDO) and is familiar with procedures of the Certification Standardization and Evaluation Team (CSET). The FAA certification is a defined process, it is structured in phases with test gates, and requires advance preparation on the part of the carrier. The FAA assembles a certification team and the airline assembles its certification team, acceptable to the FAA. The two teams interact at a counterpart level. Each team has its team leaders and managers of different functions, for example, maintenance, flight operations, cabin safety, etc. The following table shows the basic outline of the certification process. Documentation Period: Formal application documents Manual system, checklists, aircraft airworthiness records, airport/enroute analyses, environmental impact analysis Compliance statement, draft operation specifications Training curricula Mini-evacuation test plan Proving flight plan Requests for deviations and exemptions Inspection and Demonstration Period: Training of pilots, instructors, check airmen Training of mechanics, instructors Training of dispatchers Training of flight attendants Aircraft conformity check Inspection of base of operations and stations JFK and St. Petersburg Mini evacuation test Proving flights During the documentation period the FAA in essence satisfies itself that the new air carrier has properly documented its operating procedures, that the aircraft and its documentation meet airworthiness requirements, that maintenance and training facilities are qualified and their curricula meets FAA requirements. During this period the Company prepares draft Operation Specifications, which are refined and issued upon certification. During the inspection and demonstration stage, the FAA confirms that the Company conducts its training in accordance with its procedures, under FAA supervision. The FAA satisfies itself that the base station facilities at JFK and St. Petersburg are appropriate for the proposed operations with adequate equipment and arrangements in place. Aircraft conformity check assures that the aircraft meets all airworthiness requirements. The mini evacuation test demonstrates that the crew is capable of evacuating the aircraft in emergency. Finally, proving flights demonstrate how the Company actually conducts its flights in accordance with its specifications and procedures, and the test involves simulated emergencies. The air carrier certification process includes environment impact analysis of the airline's operations. There is no specific cost attached, and there are no special environmental procedures in addition to the airline's operations specifications. Standard industry operating procedures include such environmental aspects as containment and cleaning after an accidental fuel spill, handling of de-iceing liquid, waste disposal, etc. Also, Baltia will have to conduct flight operations in compliance with noise abatement regulations. Compliance with these requirements is prescribed by Federal Aviation Regulation and is standard in the industry. The initial compliance cost is part of the air carrier certification. The Company will carry airline liability insurance as required for a US airline by DOT regulation. During the past two years the Company has been preparing for air carrier certification and is seeking funding to commence revenue flight operations on the JFK - St. Petersburg route. Until the necessary funding is in place, management is foregoing compensation and expects to contribute administrative costs. The Company does not engage in flight operations at this time and has made no equipment purchases or sales. The change in aggregate financial data during this year reflects the relatively small administrative costs that were incurred and added to the pre-launching costs. Baltia has arranged for a lease of a Boeing 747 aircraft from a reliable lessor. The Company will execute the agreement when it has the financing. The aircraft will be delivered fresh from check C, an FAA required maintenance standard. The term "check C" refers to a mandatory, extensive overall maintenance inspection program of an aircraft that is typically conducted every two years. The marketing strategy relating to capacity and overall quality of service as experienced by passengers is reflected in the choice of aircraft. Five aircraft types are capable of flying nonstop on the JFK-St. Petersburg route, Boeing 747, MD11/DC10-30, Boeing 767, A340 and Boeing 777. From among these, Baltia's management believes that the cabin size of a Boeing 747 aircraft offers the greatest degree of comfort and capacity for the JFK-St. Petersburg market. Boeing 747 dispatch reliability lies within the 97% range (Boeing Report ID:RM 23004), which is a contributing factor to on-time dependability. Baltia's on-time dependability is further enhanced because a Boeing 747, a four- engine aircraft, is not subject to ETOPS regulations which could limit flights during certain weather conditions. "ETOPS" is an acronym for Extended Range Twin Engine Operations, which for a startup airline generally requires that during year one a twin engine aircraft be operated within 75 minutes from a suitable airport. If one of the airports on the Great Circle route is unusable, a twin engine aircraft would not receive dispatch clearance from JFK for a flight to St. Petersburg. With the Boeing 747 true wide body aircraft Baltia intends to provide cargo service from JFK to St. Petersburg, offering containers, pallets, and block space arrangements. Baltia expects to carry contract cargo for express shippers. Baltia plans to market its own "Baltia Courier", "Baltia Express", and "Baltia Priority" express service for letter and packages. Baltia also expects revenues from diplomatic mail and cargo, under the Fly America Act provision. This Act provides that when service is available, US government traffic is required to fly on a US Flag carrier. Baltia has prepared passenger service and ground service arrangements at JFK, and similar services are available at Pulkovo Airport in St. Petersburg, based on recent contact. As a US carrier flying into a foreign country, Baltia will be eligible to the same degree of priority that a foreign carrier receives when arriving in the US. Baltia intends to start the JFK-St. Petersburg service with one round- trip flight per week, then increase the frequency to three round trips, and then to five round trips, within a four-month period. By starting with one roundtrip flight per week for the first four weeks, Baltia not only accelerates and simplifies its FAA certification, but expects to save itself the additional time it would incur to make needed improvements and corrections. Starting with a light schedule, any inefficiencies of a given flight may be corrected for the next flight. Baltia management believes that in the initial four weeks, the Company will attain high operating efficiencies and service standards. These standards may be further refined during the following two months when Baltia plans to increase service to three round-trips per week. Following that, Baltia plans to increase service to five round trips per week, and then subsequently to daily round trip flights as additional aircraft are brought into service. The transitional schedule allows Baltia to train additional pilots, flight attendants, and support staff with a continuous training program. It also allows Baltia marketing program to take effect through its various segments. During the past two years Baltia has also been preparing standards for service. The care taken in establishing high standards has implications beyond the launching of the JFK-St. Petersburg flight. Baltia plans to build operating modules and apply that know-how to develop new markets. Once established, Baltia plans to duplicate its JFK-St. Petersburg standards on flights on other transatlantic routes. By the end of year one, Baltia plans to introduce three additional aircrafts. Additional revenues from charter flying. In conjunction with its Part 121 air carrier certification ("Part 121"), referring to a Federal Aviation Regulations' number, is an industry acronym used to describe a US airline operating heavy jet aircraft) for scheduled service, Baltia intends to seek certification for world wide charter service. Following certification, Baltia plans to utilize aircraft time available between scheduled service, to earn additional revenues from charters. We are also considering qualifying our aircraft for military contracts. As of December 31, 2006, Baltia has four full-time employees and five part-time employees. SH&E, industry consulting firm based in New York, is Baltia's consultant. Baltia's staff includes professionals who have extensive major US airline experience in aircraft maintenance, airline operations, airline regulatory compliance and administration. Item 2. Description of Property. The Company's property consists of office equipment and operations manuals. The Company rents space for its headquarters at 63-25 Saunders Street, Suite 7I, Rego Park, New York 11374, and leases operations space at Concourse A, Terminal 4, JFK International Airport, at monthly rents of $1,171 and $900, respectively. The Company believes its property is adequate to launch its services and the Company expects to increase space within the first few months of operations. Baltia has two registered trademarks "BALTIA" and "VOYAGER CLASS", registered in Jan 7, 1992 and Jan 26, 1993, respectively. Item 3. Legal Proceedings- None. Item 4. Submission of Matters to a Vote of Security Holders- None. PART II. Item 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities. The following table sets forth the high and low sales prices, as quoted by the OTCBB, for our common stock for each quarter during our two most recent fiscal years ended December 31, 2005 and 2006. These quotations reflect inter-dealers prices, without retail mark-ups, mark-downs or commissions, and may not represent actual transactions. Fiscal Quarter Ended High Low --------------------------- --------------- ---------------- March 31, 2005 .09 .05 June 30, 2005 .09 .06 September 30, 2005 .11 .04 December 31, 2005 .11 .06 March 31, 2006 .07 .07 June 30, 2006 .06 .06 September 30, 2006 .03 .03 December 31, 2006 .02 .02 The Company currently estimates that there are approximately 400 holders of record of its common stock. Given its continuing need to retain any earnings to fund its future operations and desired growth, the Company has not declared or paid, nor does it currently anticipate declaring or paying for the foreseeable future, any dividends on the Company's common stock. The Company currently has no equity compensation plans, no written purchase, savings, option, bonus, appreciation, profit sharing, thrift, incentive, pension or similar plan or written compensation contracts. Item 6. Management's Discussion and Analysis or Plan of Operation. The following discussion includes certain forward-looking statements within the meaning of the safe harbor protections of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements that include words such as "believe," "expect," "should," intend," "may," "anticipate," "likely," "contingent," "could," "may," or other future-oriented statements, are forward-looking statements. Such forward-looking statements include, but are not limited to, statements regarding our business plans, strategies and objectives, and, in particular, statements referring to our expectations regarding our ability to continue as a going concern, generate increased market awareness of, and demand for, our service, realize profitability and positive cash flow, and timely obtain required financing. These forward-looking statements involve risks and uncertainties that could cause actual results to differ from anticipated results. The forward-looking statements are based on our current expectations and what we believe are reasonable assumptions given our knowledge of the markets; however, our actual performance, results and achievements could differ materially from those expressed in, or implied by, these forward-looking statements. Our fiscal year ends on December 31. References to a fiscal year refer to the calendar year in which such fiscal year ends. OVERVIEW The Company was organized in the State of New York, August 24, 1989. Its objective is to provide scheduled air transportation from the U.S. to Russia, and former Soviet Union countries. In 1991, the Department of Transportation (DOT) granted the Company routes to provide non-stop passenger, cargo and mail service from JFK to St. Petersburg and from JFK to Riga, with online service to Minsk, Kiev and Tbilisi as well as back up service to Moscow. For lack of sufficient working capital, the US Department of Transportation terminated the Company's route authority without prejudice to reapply when financing was in hand. Since such time, Baltia has engaged in market research, operations development and planning, as well as activities to raise requisite funding in order to reapply with the US Department of Transportation. These costs are borne by Baltia shareholders and principals. With the exception of the JFK - Moscow route, there exists no nonstop competitive air transportation service on the routes for which Baltia can reapply pending financing. Baltia intends to supply full service, i.e. passenger, cargo and mail, and will not be dependent upon one or a few major customers. Baltia has two registered trademarks "BALTIA" and "VOYAGER CLASS" and five trademarks subject to registration. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company's starting revenue operations is dependent upon its timely procuring significant external debt and/or equity financing to fund its immediate and nearer-term operations, and subsequently realizing operating cash flows from ticket sales sufficient to sustain its longer- term operations and growth initiatives. PLAN OF OPERATION We do not currently have sufficient capital to commence revenue flight operations and must rely on additional sources of financing in order to maintain our current level of operations. During 2006 and into 2007 we continued to finance our operations through the issuance of our common stock. Until revenue operations begin, our monthly expenditures for administrative and regulatory compliance can be controlled at about $2,500-$5,000. Based on current reserves we have sufficient capital to support our development stage operations through the end of 2007. In 2007 we plan to raise $1.5 to $2 mm in additional financing in order to start revenue flight operations. Based on our prior experience with certification and current preparations the management believes that the launch budget, previously reviewed by the DOT, will be adequate to complete certification and to commence flight service. Approximately $500,000 is budgeted for aircraft, $450,000 for certification tasks, and $300,000 for general and administrative expenses. At the time flight service is inaugurated the Company plans to have approximately 15 management and 45 staff personnel. Management has considered the overall pipeline effect that enhances the initial cash position of a startup carrier. It is the industry practice for passengers to purchase tickets in advance of their flights while service vendors bill the carrier later. In order that a new airline would not fly empty on day one, approximately 30 days prior to the expected inaugural date the DOT authorizes sales of tickets and cargo. Such funds from advance sales, estimated at approximately $3 mm for the company, accumulate in an escrow account, and are released upon the issuance of the air carrier certificate. There can be no assurance that additional financing will be available on terms favorable to us or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to fund operations. 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 U.S. The preparation of our financial statements requires us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Our estimates, judgments and assumptions are continually re-evaluated based upon available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. Areas in which significant judgment and estimates are used include, but are not limited to valuation of long lives assets and deferred income taxes. Valuation of Long-Lived Assets: We review the recoverability of our long-lived assets, including buildings, equipment and intangible assets, when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of the asset from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. Our primary measure of fair value is based on discounted cash flows. The measurement of impairment requires management to make estimates of these cash flows related to long-lived assets, as well as other fair value determinations. We amortize the costs of other intangibles (excluding goodwill) over their estimated useful lives unless such lives are deemed indefinite. Amortizable intangible assets are tested for impairment based on undiscounted cash flows and, if impaired, written down to fair value based on either discounted cash flows or appraised values. Intangible assets with indefinite lives are tested for impairment, at least annually, and written down to fair value as required. Stock-Based Compensation Plans: Stock-based awards to non-employees are accounted for using the fair value method in accordance with SFAS No. 123(R), Accounting for Stock-Based Compensation, and EITF Issue No. 96-18, Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services. On January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards ("SFAS") 123R, "Share-Based Payment" ("SFAS 123(R)"), which requires that companies measure and recognize compensation expense at an amount equal to the fair value of share-based payments granted under compensation arrangements. Prior to January 1, 2006, we accounted for our stock-based compensation plans under the recognition and measurement principles of Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock Issued to Employees," and related interpretations, and would typically recognize no compensation expense for stock option grants if options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. We adopted SFAS 123(R) using the "modified prospective" method, which results in no restatement of prior period amounts. Under this method, the provisions of SFAS 123(R) apply to all awards granted or modified after the date of adoption. In addition, compensation expense must be recognized for any unvested stock option awards outstanding as of the date of adoption on a straight-line basis over the remaining vesting period. We calculate the fair value of options using a Black-Scholes option pricing model. We do not currently have any outstanding options subject to future vesting. SFAS 123(R) also requires the benefits of tax deductions in excess of recognized compensation expense to be reported in the Statement of Cash Flows as a financing cash inflow rather than an operating cash inflow. In addition, SFAS 123(R) required a modification to the Company's calculation of the dilutive effect of stock option awards on earnings per share. For companies that adopt SFAS 123(R) using the "modified prospective" method, disclosure of pro forma information for periods prior to adoption must continue to be made. In computing fair value we used the following assumptions: Year Interest Rate Dividend Yield Expected Volatility Expected Life 2006 5.15% 0.0% 75.0% 60 mos. Income Taxes: We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. Deferred income taxes are recorded in accordance with SFAS No. 109, "Accounting for Income Taxes," or SFAS 109. Under SFAS No. 109, deferred tax assets and liabilities are determined based on the differences between financial reporting and the tax basis of assets and liabilities using the tax rates and laws in effect when the differences are expected to reverse. SFAS 109 provides for the recognition of deferred tax assets if realization of such assets is more likely than not to occur. Realization of our net deferred tax assets is dependent upon our generating sufficient taxable income in future years in appropriate tax jurisdictions to realize benefit from the reversal of temporary differences and from net operating loss, or NOL, carryforwards. We have determined it more likely than not that these timing differences will not materialize and have provided a valuation allowance against substantially all of our net deferred tax asset. Management will continue to evaluate the realizability of the deferred tax asset and its related valuation allowance. If our assessment of the deferred tax assets or the corresponding valuation allowance were to change, we would record the related adjustment to income during the period in which we make the determination. Our tax rate may also vary based on our results and the mix of income or loss in domestic and foreign tax jurisdictions in which we operate. In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and to the extent to which, additional taxes will be due. If we ultimately determine that payment of these amounts is unnecessary, we will reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We will record an additional charge in our provision for taxes in the period in which we determine that the recorded tax liability is less than we expect the ultimate assessment to be. RESULTS OF OPERATIONS We had no revenues during the fiscal years ended December 31, 2006 and 2005 because we do not fly any aircraft and cannot sell tickets. Our general and administrative expenses increased $493,750 to $1,208,298 during fiscal year ended December 31, 2006 as compared to $714,548 during the fiscal year ended December 31, 2005. This increase is mainly the result of increased activity in preparing for air carrier certification. Primarily as a result of the foregoing, we incurred a net loss of $1,208,680 during the fiscal year ended December 31, 2006 as compared to a net loss of $721,114 during the fiscal year ended December 31, 2005. Our future ability to achieve profitability in any given future fiscal period remains highly contingent upon us beginning flight operations. Our ability to realize revenue from flight operations in any given future fiscal period remains highly contingent upon us obtaining significant equity infusions and/or long-term debt financing sufficient to fund leasing and operating a Boeing 747. Even if we were to be successful in procuring such funding, there can be no assurance that we will be successful in commencing revenue operations or, if commenced, that such operations would be profitable. LIQUIDITY AND CAPITAL RESOURCES Since our inception, we have incurred substantial operating and net losses, as well as negative operating cash flows. As of December 31, 2006, our working capital was $2,985 and our stockholders' equity was $5,514. This reflects a decrease from December 31, 2005 when our working capital was $13,747 and our stockholders' equity was $15,858. We had unrestricted cash balance of $4,185 at December 31, 2006, as compared to $14,947 at December 31, 2005. Our operating activities utilized $121,171 in cash during the fiscal year ended December 31, 2006, a decrease of $73,089 from the $194,260 in cash utilized during the fiscal year ended December 31, 2005. Our financing activities provided $11,209 and $175,444 in cash during the fiscal year ended December 31, 2006 and 2005, respectively. As a result of the foregoing, our unrestricted cash decreased by $10,762 to $4,185 at December 31, 2006, as compared to $14,947 at December 31, 2005. We had no significant planned capital expenditures, budgeted or otherwise, as of December 31, 2006. Off-Balance Sheet Arrangements: We do not have any off-balance sheet arrangements which have, or are reasonably likely to have, an effect on our financial condition, financial statements, revenues or expenses. Item 7. Financial Statements. BALTIA AIR LINES, INC. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Michael F. Cronin Certified Public Accountant 687 Lee Road Rochester, NY 14606 Board of Directors and Shareholders Baltia Air Lines, Inc. New York, NY I have audited the accompanying balance sheet of Baltia Air Lines, Inc. (the "Company") as of December 31, 2006 and December 31, 2005 and the related statements of operations, stockholders' equity and cash flows for the years then ended. The financial statements are the responsibility of the directors. My responsibility is to express an opinion on these financial statements based on my audits. I conducted my audits in accordance with standards established by the Public Company Accounting Oversight Board (United States). Those standards require that I plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor was I engaged to perform, an audit of its internal control over financial reporting. My audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, I express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audits provide a reasonable basis for my opinion. In my opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Baltia Air Lines, Inc. as of December 31, 2006 and December 31, 2005 and the results of its operations, its cash flows and changes in stockholders' equity for the years then ended in conformity with accounting principles generally accepted in the United States. The Company has incurred operating losses since inception and does not currently have sufficient capital to commence revenue flight operations. Note 7 of the financial statements addresses Management's Plan regarding the future operations of the Company. Also discussed in the notes and effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment. March 29, 2007 /s/ Michael F. Cronin Michael F. Cronin Certified Public Accountant March 29, 2007 Baltia Air Lines, Inc. Balance Sheets (A Development Stage Company) 12/31/2006 12/31/2005 Assets Current Assets Cash $ 4,185 $ 14,947 Property & Equipment: Equipment 63,264 62,464 Accumulated Depreciation (60,735) (60,353) Net Property & Equipment 2,529 2,111 Total Assets $ 6,714 $ 17,058 Liabilities & Equity Current Liabilities: Accounts Payable $ 1,200 $ 1,200 Equity: Preferred stock - 2,000,000 authorized $0.01 par value 66,500 issued & outstanding 665 665 Common Stock - 200,000,000 authorized $0.0001 par value 122,394,109 issued & outstanding (67,298,009 in 2005) 12,239 6,730 Additional paid in capital 10,486,192 9,293,365 Deficit Accumulated During Development Stage (10,493,582) (9,284,902) Total Equity $ 5,514 $ 15,858 Total Liabilities & Equity $ 6,714 $ 17,058 See Summary of Significant Accounting Policies and Notes to Financial Statements. Baltia Air Lines, Inc. Statements of Operations (A Development Stage Company) Years Ended Inception to 12/31/2006 12/31/2005 12/31/2006 Revenue $ 0 $ 0 $ 0 Costs & Expenses General & administrative 1,208,298 714,548 8,118,852 FAA certification costs 0 0 206,633 Training 0 0 225,637 Depreciation 382 6,566 306,408 Other 0 0 568,245 Interest 0 0 1,066,659 Total Costs & Expenses 1,208,680 721,114 10,492,434 Loss before income taxes (1,208,680) (721,114) (10,492,434) Income Taxes 0 0 1,148 Deficit Accumulated During Development Stage $ (1,208,680) $ (721,114) $(10,493,582) Per share amounts: Basic: Loss ($0.01) ($0.01) Weighted Average 86,475,527 63,771,434 See Summary of Significant Accounting Policies and Notes to Financial Statements. Baltia Air Lines, Inc. Statements of Cash Flows (A Development Stage Company) Years Ended Inception to 12/31/2006 12/31/2005 12/31/2006 Cash flows from operating activities: Deficit Accumulated During Development Stage $(1,208,680) $ (721,114) $(10,493,582) Adjustments required to reconcile deficit accumulated during development stage to cash used in operating activities: Depreciation 382 6,566 306,408 Expenses paid by issuance of common stock 1,087,127 522,772 1,740,751 (Increase) decrease in prepaid expenses 0 0 400,301 Increase (decrease) in accounts payable & accrued expenses 0 2,484 3,152,681 Cash flows used by operating activities: (121,171) (194,260) (4,893,441) Cash flows from investing activities: Purchase of equipment (800) (2,273) (312,139) Deposit on airplane lease 0 0 0 Cash used in investing activities (800) (2,273) (312,139) Cash flows from financing activities: Proceeds from issuance of common stock 111,209 175,444 4,724,429 Proceeds from issuance of preferred stock 0 0 2,753 Loans from related parties 0 0 1,351,573 Repayment of related party loans 0 0 (368,890) Acquisition of treasury stock 0 0 (500,100) Cash generated by financing activities 111,209 175,444 5,209,765 Change in cash (10,762) (21,089) 4,185 Cash-beginning of period 14,947 36,036 0 Cash-end of period $ 4,185 $ 14,947 $ 17,220 See Summary of Significant Accounting Policies and Notes to Financial Statements Baltia Air Lines, Inc. Statements of Shareholders' Equity (A Development Stage Company) Preferred Common Deficit Accumulated Common Additional During Par Stock Paid-In Development Shares Value Shares Amount Capital Stage Balance at December 31, 2001 275,250 $ 2,753 48,679,757 $ 4,868 $ 8,138,593 $ 8,049,149) Contribution of Additional Capital 12,877 Net Loss (76,106) Balance at December 31, 2002 275,250 2,753 48,679,757 4,868 8,151,470 (8,125,255) Exercise of Warrants and Options 2,934,662 293 86,906 Stock issued for cash 696,428 70 50,442 Stock issued for services (145,000) (15) 417 Eliminated Treasury Stock Account (100) Correct error in Preferred Stock (208,750) (2,088) 2,088 Net Loss (100,906) Balance at December 31, 2003 66,500 665 52,165,847 5,217 8,291,223 (8,226,161) Exercise of Warrants and Options 3,771,162 377 36,082 Shares issued for services 4,600,000 460 201,547 Shares issued to correct previous error 408,000 41 66,909 Shares issued to correct previous errors 75,000 8 (8) Cancellation of shares issued in error (1,370,000) (137) 137 Net Loss (337,627) Balance at December 31, 2004 66,500 665 59,650 009 5,965 8,595,914 (8,563,788) Exercise of Warrants and Options 210,000 21 189 Shares issued for cash 500,000 50 175,184 Shares issued for services 6,938,000 694 522,078 Net Loss (721,114) Balance at December 31, 2005 66,500 665 67,298,009 6,730 9,293,365 (9,284,902) Exercise of Warrants and Options 22,000,000 2,200 9,000 Shares issued for cash 13,550,000 1,355 98,655 Shares issued for services 19,546,900 1,955 941,213 Net Loss (1,208,680) Balance at December 31, 2006 66,500 665 122,394,909 12,240 10,486,192 (10,493,582) See Summary of Significant Accounting Policies and Notes to Financial Statements BALTIA AIR LINES, INC. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DECEMBER 31, 2006 Basis of Presentation: The financial statements have been presented in a "development stage" format. Since inception, our primary activities have been raising of capital, obtaining financing and of obtaining route authority and approval from the DOT and the FAA. We have not commenced our principal revenue producing activities. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires our management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates. Cash and Cash Equivalents: For financial statement presentation purposes, we consider those short-term, highly liquid investments with original maturities of three months or less to be cash or cash equivalents. Fair Value of Financial Instruments: Statements of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments. Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2006. The respective carrying value of certain on-balance sheet financial instruments approximated their fair values. These financial instruments include cash and cash equivalents, accounts payable and accrued expenses. Fair values were assumed to approximate carrying values for these financial instruments since they are short-term in nature and their carrying amounts approximate fair values or they are receivable or payable on demand. The carrying value approximates the fair value of the notes payable Property and Equipment: Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 5-7 years. Expenditures for renewals and betterments are capitalized. Expenditures for minor items, repairs and maintenance are charged to operations as incurred. Gain or loss upon sale or retirement due to obsolescence is reflected in the operating results in the period the event takes place. Valuation of Long-Lived Assets: We review the recoverability of our long- lived assets, including buildings, equipment and intangible assets, when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of the asset from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. Our primary measure of fair value is based on discounted cash flows. The measurement of impairment requires management to make estimates of these cash flows related to long-lived assets, as well as other fair value determinations. We amortize the costs of other intangibles (excluding goodwill) over their estimated useful lives unless such lives are deemed indefinite. Amortizable intangible assets are tested for impairment based on undiscounted cash flows and, if impaired, written down to fair value based on either discounted cash flows or appraised values. Intangible assets with indefinite lives are tested for impairment, at least annually, and written down to fair value as required. Comprehensive Income: Comprehensive income is defined as changes in the equity of an enterprise except those resulting from shareholder transactions. The amounts shown on our consolidated statement of stockholders' equity relate to the cumulative effect of minimum pension liabilities, translation adjustments, and unrealized gain or loss on securities. Stock-Based Compensation Plans: Stock-based awards to non-employees are accounted for using the fair value method in accordance with SFAS No. 123(R), Accounting for Stock-Based Compensation, and EITF Issue No. 96-18, Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services. On January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards ("SFAS") 123R, "Share-Based Payment" ("SFAS 123(R)"), which requires that companies measure and recognize compensation expense at an amount equal to the fair value of share-based payments granted under compensation arrangements. Prior to January 1, 2006, we accounted for our stock-based compensation plans under the recognition and measurement principles of Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock Issued to Employees," and related interpretations, and would typically recognize no compensation expense for stock option grants if options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. We adopted SFAS 123(R) using the "modified prospective" method, which results in no restatement of prior period amounts. Under this method, the provisions of SFAS 123(R) apply to all awards granted or modified after the date of adoption. In addition, compensation expense must be recognized for any unvested stock option awards outstanding as of the date of adoption on a straight-line basis over the remaining vesting period. We calculate the fair value of options using a Black-Scholes option pricing model. We do not currently have any outstanding options subject to future vesting. SFAS 123(R) also requires the benefits of tax deductions in excess of recognized compensation expense to be reported in the Statement of Cash Flows as a financing cash inflow rather than an operating cash inflow. In addition, SFAS 123(R) required a modification to the Company's calculation of the dilutive effect of stock option awards on earnings per share. For companies that adopt SFAS 123(R) using the "modified prospective" method, disclosure of pro forma information for periods prior to adoption must continue to be made. In computing fair value we used the following assumptions: Year Interest Rate Dividend Yield Expected Volatility Expected Life 2006 5.15% 0.0% 75.0% 60 mos. Accounting For Obligations And Instruments Potentially To Be Settled In The Company's Own Stock We account for obligations and instruments potentially to be settled in the Company's stock in accordance with EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed To, and Potentially Settled In a Company's Own Stock. This issue addresses the initial balance sheet classification and measurement of contracts that are indexed to, and potentially settled in, the Company's own stock. Under EITF Issue No. 00-19 contracts are initially classified as equity or as either assets or liabilities, in the following situations: Equity Contracts that require physical settlement or net-share settlement; and Contracts that give the company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement), assuming that all the criteria for equity classification have been met. Assets or Liabilities Contracts that require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside the control of the company); and Contracts that give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). All contracts are initially measured at fair value and subsequently accounted for based on the current classification. Contracts initially classified as equity do not recognize subsequent changes in fair value as long as the contracts continue to be classified as equity. For contracts classified as assets or liabilities, the Company reports changes in fair value in earnings and discloses these changes in the financial statements as long as the contracts remain classified as assets or liabilities. If contracts classified as assets or liabilities are ultimately settled in shares, any previously reported gains or losses on those contracts continue to be included in earnings. The classification of a contract is reassessed at each balance sheet date. In accordance with EITF Issue No. 00-19, a transaction which includes a potential for net-cash settlement, including liquidated damages, requires that derivative financial instruments, including warrants and additional investment rights, initially be recorded at fair value as an asset or liability and subsequent changes in fair value be reflected in the statement of operations. The recorded value of the liability for such derivatives can fluctuate significantly based on fluctuations in the market value of the underlying common stock of the issuer of the derivative instruments, as well as in the volatility of the stock price during the term used for observation and the remaining term. Warrant Derivative Liabilities: We account for warrants issued in connection with financing arrangements in accordance with EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock. Pursuant to EITF Issue No. 00-19, an evaluation of specifically identified conditions is made to determine whether the fair value of warrants issued is required be classified as a derivative liability. The fair value of warrants classified as derivative liabilities is adjusted for changes in fair value at each reporting period, and the corresponding non-cash gain or loss is recorded in current period earnings Earnings per Common Share: Basic earnings per share is computed by dividing income available to common shareholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) for the period. Diluted earnings per share assumes that any dilutive convertible securities outstanding were converted, with related preferred stock dividend requirements and outstanding common shares adjusted accordingly. It also assumes that outstanding common shares were increased by shares issuable upon exercise of those stock options for which market price exceeds the exercise price, less shares which could have been purchased by us with the related proceeds. In periods of losses, diluted loss per share is computed on the same basis as basic loss per share as the inclusion of any other potential shares outstanding would be anti- dilutive. If we had generated earnings during the year ended December 31, 2006, we would have added 36,060,048 common equivalent shares to the weighted average shares outstanding to compute the diluted weighted average shares outstanding (39,939,500 in 2005). 2006 2005 Numerator-Net Loss ($1,208,680) ($721,114) Denominator: Weighted average-Basic 86,475,527 63,771,434 Assumed conversion of warrants 35,860,548 39,740,000 Assumed conversion of preferred stock 199,500 199,500 Denominator-diluted 122,535,575 103,710,934 Per share: Net Loss-basic Nil Nil Net Loss-diluted Nil Nil Income Taxes: We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. Deferred income taxes are recorded in accordance with SFAS No. 109, "Accounting for Income Taxes," or SFAS 109. Under SFAS No. 109, deferred tax assets and liabilities are determined based on the differences between financial reporting and the tax basis of assets and liabilities using the tax rates and laws in effect when the differences are expected to reverse. SFAS 109 provides for the recognition of deferred tax assets if realization of such assets is more likely than not to occur. Realization of our net deferred tax assets is dependent upon our generating sufficient taxable income in future years in appropriate tax jurisdictions to realize benefit from the reversal of temporary differences and from net operating loss, or NOL, carryforwards. We have determined it more likely than not that these timing differences will not materialize and have provided a valuation allowance against substantially all of our net deferred tax asset. Management will continue to evaluate the realizability of the deferred tax asset and its related valuation allowance. If our assessment of the deferred tax assets or the corresponding valuation allowance were to change, we would record the related adjustment to income during the period in which we make the determination. Our tax rate may also vary based on our results and the mix of income or loss in domestic and foreign tax jurisdictions in which we operate. In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and to the extent to which, additional taxes will be due. If we ultimately determine that payment of these amounts is unnecessary, we will reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We will record an additional charge in our provision for taxes in the period in which we determine that the recorded tax liability is less than we expect the ultimate assessment to be. Recent Accounting Pronouncements: In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 provides guidance for using fair value to measure assets and liabilities. It also responds to investors' requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS 157 applies whenever other standards required (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the effect that the adoption of SFAS 157 will have on our results of operations and financial condition and are not yet in a position to determine such effects. In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements ("SAB 108"). SAB 108 establishes an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of the Company's consolidated financial statements and the related financial statement disclosures. SAB 108 is effective for the year ending December 31, 2006. We are currently evaluating the effect that the adoption of SFAS 157 will have on our results of operations and financial condition. In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement 109 ("FIN 48"), which clarifies the accounting for uncertain tax positions. This Interpretation allows the tax effects from an uncertain tax position to be recognized in the Company's financial statements if the position is more likely than not to be sustained upon audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We do not expect the adoption of FIN 48 to have a material impact on our financial statements. In May 2006, the FASB issued "SFAS No. 154", "Accounting Changes and Error Corrections", which replaces APB Opinion No. 20 "Accounting Changes" and FASB Statement No. 3 "Reporting Accounting Changes in Interim Financial Statements". SFAS No. 154 changes the requirements for the accounting and reporting of a change in an accounting principle. SFAS No. 154 requires retrospective application for voluntary changes in an accounting principle unless it is impracticable to do so. SFAS No. 154 is effective for accounting changes made in fiscal years beginning after December 15, 2006. We adopted SFAS No. 154 on January 1, 2006 with no expected material effect on our financial statements. BALTIA AIR LINES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2006 Note 1. Organization and Operations The Company was formed as a U.S. airline on August 24, 1989 in the State of New York. Our objective is to provide scheduled air transportation from the U.S. to Russia, the Baltic States and Ukraine. In 1991, the Department of Transportation (DOT) granted the Company routes to provide non-stop passenger, cargo and mail service from JFK to St. Petersburg and from JFK to Riga, with online service to Minsk, Kiev and Tbilisi as well as back up service to Moscow. We have two registered trademarks "BALTIA" and "VOYAGER CLASS," and five trademarks subject to registration. Our activities to date have been devoted principally to raising capital, obtaining route authority and approval from the DOT and the FAA, training crews, and conducting market research to develop the Company's marketing strategy. Regulatory Compliance We intend to operate as a Part 121 carrier, a heavy jet operator. As such, following certification we will be required to maintain our air carrier standards as prescribed by DOT and FAA regulation and as specified in the FAA approved Company manuals. As part of its regulatory compliance we will be required to submit periodic reports of our operations to the DOT. Note 2. Property and Equipment A summary of property & equipment is as follows: Estimated useful life 2006 2005 Operations manuals 5-7 years $28,109 $28,109 Office equipment 5-7 years 35,155 34,355 Less accumulated depreciation (60,735) (60,353) Net $2,529 $2,111 Depreciation expense $382 $6,566 Note 3. Stockholders' Equity Description of Securities Common Stock: We have been authorized 200,000,000 shares of Common Stock at $.0001 par value per share. As of December 31, 2006, a total of 122,394,909 shares of Common Stock were issued and outstanding and held by over 100 shareholders. In addition, we have granted warrants to issue up to 26,990,000 more shares of our common stock. Holders of Common Stock are entitled to receive dividends, when and if declared by the board of directors, subject to prior rights of holders of any Preferred Stock then outstanding and to share ratably in the net assets of the company upon liquidation. Holders of Common Stock do not have preemptive or other rights to subscribe for additional shares. The Certificate of Incorporation does not provide for cumulative voting. Shares of Common Stock have equal voting, dividend, liquidation and other rights, and have no preference, exchange or appraisal rights. Preferred Stock: We are authorized to issue up to a maximum of 2 million shares (66,500 shares outstanding) of Preferred Stock. We can issue these shares as our board of directors shall from time to time fix by resolution. Our Preferred Stock is not entitled to share in any dividends declared on the Common Stock and has no voting rights. Each share is convertible in to 3 shares of Common. The liquidation preference is set by this conversion formula and results in a pro rata claim on the Company's assets based upon the underlying common shares issuable (199,500) upon conversion. Recent Issuance of Unregistered Securities 2006: Stock Issued for Cash We issued 13,550,000 shares of our common stock in exchange for receiving a total of $99,410 in cash. The shares are not registered and subject to restrictions as to transferability. Stock Issued for Services We issued 19,546,900 shares of our common stock in exchange for services. The shares were valued at $943,168 or about $0.05 per share which reflected the weighted average market value at the time of issuance. The shares are not registered and are subject to restrictions as to transferability. We also issued 75,000 shares to correct a prior issuance and cancelled 1,370,000 shares issued in error in a previous fiscal year. Stock Issued Due to Exercise of Warrants & Options During 2006 holders of 22,000,000 warrants, registered in our 1999 registration statement, exercised their option to acquire a like amount of shares of Common Stock. The options were at various exercise prices and resulted in proceeds of $ 11,200. 2005: Stock Issued for Cash We issued 500,000 shares of our common stock in exchange for receiving a total of $87,140 in cash and collected approximately $90,000 in subscriptions receivable. The shares are not registered and subject to restrictions as to transferability. Stock Issued for Services We issued 6,938,000 shares of our common stock in exchange for services. The shares were valued at $522,772 or about $0.08 per share which reflected the weighted average market value at the time of issuance. The shares are not registered and are subject to restrictions as to transferability. Summary of Option Activity The following table provides summary information on the various warrants issued by our company in private placement transactions and unapproved equity compensation plans; the warrants exercised to date; the warrants that are presently exercisable and the current exercise prices of such warrants. 2006 2005 Weighted average Weighted average Shares exercise price shares exercise price Shares outstanding January 1 39,990,000 $0.0009 39,740,000 $0.0001 Granted during year 9,000,000 $0.2500 250,000 $0.25 Exercised (22,000,000) $0.0001 0 $0.0001 Lapsed 0 $0.0000 0 $0.00 Outstanding at December 31 26,990,000 $0.0846 39,990,000 $0.0009 Weighted average months remaining 34.8 37.4 The following table summarizes the status of the Company's aggregate stock options as of December 31, 2006: Options Outstanding Options Exercisable Grantee Shares Weighted average Weighted average Shares Weighted average exercise price exercise price exercise price remaining life in months Management & Directors 25,150,000 $0.09 35.8 0 n/a Other 1,840,000 Nil 20.7 1,840,000 $0.03 Total Shares 26,990,000 1,840,000 (1) exercise price below one cent Intrinsic Value $335,286 We granted 9,000,000 options in 2006 with a fair value of $0.0156 per share. The outstanding options of 25,150,000 granted to management vest upon the completion of the first revenue flight. Note 4. Income Taxes The Company has approximately $ 8,900,000 in net operating loss carryovers available to reduce future income taxes. These carryovers expire at various dates through the year 2027. The Company has adopted SFAS 109 which provides for the recognition of a deferred tax asset based upon the value the loss carry-forwards will have to reduce future income taxes and management's estimate of the probability of the realization of these tax benefits. We have determined it more likely than not that these timing differences will not materialize and have provided a valuation allowance against substantially all of our net deferred tax asset. A summary of the deferred tax asset presented on the accompanying balance sheets is as follows: 2006 2005 The provision (benefit) for income taxes consists of the following: Currently payable: Federal $0 $0 State 325 325 Total currently payable 325 325 Deferred: Federal 390,404 232,920 State 60,434 36,056 Total deferred 450,838 268,976 Less increase in allowance (450,838) (268,976) Net deferred 0 0 Total income tax provision (benefit) $325 $325 2006 2005 Individual components of deferred taxes are as follows: Deferred tax asset arising from net operating loss carry forwards $4,055,409 $3,604,571 Less deferred tax allowance (4,055,409) (3,604,571) Net Deferred Income Taxes $0 $0 Utilization of federal and state NOL and tax credit carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of NOL and tax credit carryforwards before full utilization. Note 5. Commitments and Contingencies Facilities: The Company leases its office space for its administrative offices, under a month to month agreement, at a monthly rental of approximately $900. Note 6. Supplementary Cash Flow Disclosure: 2005 2004 Equity instruments issued for services: $1,087,127 $522,772 Note 7. Management's Plan of Operation We do not currently have sufficient capital to commence revenue flight operations and must rely on additional sources of financing in order to maintain our current level of operations. During 2006 and into 2007 we continued to finance our operations through the issuance of our common stock and the continued exercise of warrants associated with our 1999 public offering. Until revenue operations begin, our monthly expenditures for administrative and regulatory compliance can be controlled at about $1,500-$2,000. Based on current reserves we have sufficient capital to support our development stage operations through the end of 2007. In 2007 we plan to raise $1.5 to $2.0 mm in a private placement in order to start revenue flight operations. Based on our prior experience with certification and current preparations the management believes that the launch budget, previously reviewed by the DOT, will be adequate to complete certification and to commence flight service. Approximately $500,000 is budgeted for aircraft, $450,000 for certification tasks, and $300,000 for general and administrative expenses. At the time flight service is inaugurated the company plans to have approximately 15 management and 45 staff personnel. Management has considered the overall pipeline effect that enhances the initial cash position of a startup carrier. It is the industry practice for passengers to purchase tickets in advance of their flights while service vendors bill the carrier later. In order that a new airline would not fly empty on day one, approximately 30 days prior to the expected inaugural date the DOT authorizes sales of tickets and cargo. Such funds from advance sales, estimated at approximately $3 mm for the company, accumulate in an escrow account, and are released upon the issuance of the air carrier certificate. There can be no assurance that additional financing will be available on terms favorable to us or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to fund expansion. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 8A CONTROLS AND PROCEDURES As of the end of the period covered by this report, we conducted an evaluation under the supervision and with the participation of our chief executive officer and chief financial officer of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. There was no change in our internal controls or in other factors that could affect these controls during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. While existing controls may be adequate at present, upon the commencement of flight revenue service we intend to implement controls appropriate for airline operations. ITEM 8B OTHER INFORMATION. None. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT MANAGEMENT Executive Officers and Directors The following table summarizes certain information with respect to the executive officers and directors of the board: Name Age Position Igor Dmitrowsky . . . . 52 President, CEO, CFO, Chairman of the Board Walter Kaplinsky . . . 69 Secretary Andris Rukmanis . . . . 45 V.P. Europe and Director Anita Schiff-Spielman 52 Director Our directors serve until the next annual meeting and until their successors are elected and qualified. Our officers are appointed to serve for one year until the meeting of the board of directors following the annual meeting of stockholders and until their successors have been elected and qualified. There are no family relationships between any of our directors or officers. Igor Dmitrowsky, President, Chief Executive Officer and CFO, founded the Company and served as Chairman of the Board from its inception in August 24, 1989 to date. Mr. Dmitrowsky, a US citizen, born in Riga, Latvia, attended the State University of Latvia from 1972 to 1974 and Queens College from 1976 through 1979. In 1979, he founded American Kefir Corporation, a dairy distribution company, which completed a public offering in 1986, and from which he retired in 1987. Mr. Dmitrowsky has financed aircraft and automotive projects, speaks fluent Latvian and Russian, and has traveled extensively in the republics of the former Soviet Union. In 1990, he testified before the House Aviation Subcommittee on the implementation of United States' aviation authorities by US airlines. Walter Kaplinsky, a US citizen, has been with the Company since 1990. Mr. Kaplinsky has been corporate secretary since 1993. In 1979, together with Mr. Dmitrowsky, Mr. Kaplinsky was one of the co-founders of American Kefir Corporation, where from 1979 through 1982, Mr. Kaplinsky served as secretary and vice president. Andris Rukmanis, a citizen of Latvia, is the Company's Vice President in Europe. Mr. Rukmanis joined the Company in 1989. In Latvia, Mr. Rukmanis has worked as an attorney specializing in business law. From 1988 through 1989, he was Senior Legal Counsel for the Town of Adazhi in Riga County, Latvia. From 1989 to 1990, he served as Deputy Mayor of Adazhi. Anita Schiff-Spielman, a US citizen, serves as a director of the board. She has been associated with the Company since its inception in 1989. Ms. Schiff-Spielman has owned Schiff Dental Labs, New York, NY, for the past seventeen years. Code of Ethics We have not adopted a Code of Ethics that applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer. We intend adopt a Code of Ethics and intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or waiver from, a provision of our Code of Ethics by filing a Current Report on Form 8-K with the SEC, disclosing such information. Committees of the Board of Directors As of December 31, 2006, we do not have any committees of our board of directors. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT, AS AMENDED. Based solely upon our review of copies of Forms 3, 4 and 5, and any subsequent amendments thereto, furnished to the Company by our directors, officers and beneficial owners of more than ten percent of our common stock, we are not aware of any our directors, officers or beneficial owners of more than ten percent of our common stock that, during our fiscal year ended December 31, 2006, failed to file on a timely basis reports required by Section 16(a) of the Securities Exchange Act of 1934. Item 10. Executive Compensation. No compensation has been paid to our executive officers during the fiscal years ended December 31, 2006, 2005 and 2004. OPTIONS/SAR GRANTS IN THE LAST FISCAL YEAR No individual grants of stock options, whether or not in tandem with stock appreciation rights ("SARs") and freestanding SARs have been made to any executive officer or any director during our fiscal year ended December 31, 2006. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION/SAR VALUES No individual exercises of stock options, whether or not in tandem with stock appreciation rights ("SARs") and freestanding SARs have been made by executive officer or any director during our fiscal year ended December 31, 2006. LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR We had no long-term incentive plans and made no stock awards during our fiscal year ended December 31, 2006. EMPLOYMENT AGREEMENTS The Company has no individual employment agreements in place with any of its executive officers or employees. Future Compensation of Executive Officers The board of directors approves salaries for the Company's executive officers as well as the Company's overall salary structure. For year one following the closing of financing sufficient to commence flight operations, the rate of compensation for the Company's executive officers is expected to be:(i) President $186,000, (ii) Vice President Marketing $82,000,and (iii) Vice President Europe $68,000. To this date, the Company has paid officers no salaries. Board directors are not presently compensated and shall receive no compensation prior to commencement of revenue service. Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. As of March 29, 2007, there were 126,300,897 shares of common stock, par value $0.0001 outstanding. The following table sets forth, as of December 31, 2006, the ownership of the Company's Common Stock by (i)each director and officers of the Company, (ii) all executive officers and directors of the Company as a group, and (iii) all other persons known to the Company to own more than 5% of the Company's Common Stock. Each person named in the table has or shares voting and investment power with respect to all shares shown as beneficially owned by such person. Common Shares Beneficially Owned Percent of Total Outstanding Directors and Officers Igor Dmitrowsky . . . . . . 50,422,825 39.58% 63-26 Saunders St., Suite 7I Rego Park, NY 11374 Walter Kaplinsky . . . . . 4,717,294 3.73% 2000 Quentin Rd. Brooklyn, NY 11229 Andris Rukmanis . . . . . . 1,118,750 0.89% Kundzinsala, 8 Linija 9. Riga, Latvia LV-1005 Anita Schiff-Spielman . . . 113,118 * 1149 Kensington Rd. Teaneck, NJ 07666 Shares of all directors and 56,371,987 44.63% executive officers as a group (4 persons) Beneficial owners Steffanie J. Lewis . . . . . 6,623,331 5.24% 3511 North 13th St. Arlington, VA 22201 * Less than 1% Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, and Director Independence - None. Item 13. EXHIBITS. 3.1 Certificate of Incorporation of Baltia Air Lines, Inc. (incorporated by reference to Exhibit 3.1 to Form 10-KSB filed on May 19, 2005) 3.2 Bylaws of Baltia Air Lines, Inc. (incorporated by reference to Exhibit 3.2 to Form S-8 filed on December 19, 2001). 23 Consent of Michael F. Cronin, CPA 31.1 Certification by Chief Executive Officer and Chief Financial Officer pursuant to Sarbanes-Oxley Section 302, provided herewith. 32.1 Certification by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S. C. Section 1350, provided herewith. ITEM 14. Principal Accountant Fees and Services In 2006, the Company paid its present independent accountant $4,000 for services in providing an audit of the year 2005. In 2007, the Company paid its present independent Accountant $4,000 for services in providing an audit of the year 2006. All other Company accounting and tax preparations have been done in house. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Baltia Air Lines, Inc. Date: 03-29-2007 /s/ Igor Dmitrowsky By: Igor Dmitrowsky, President, CEO and CFO Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE /s/ Igor Dmitrowsky Chairman, CEO and CFO March 29, 2007 Igor Dmitrowsky (Principal Executive Officer And Principal Accounting Officer) /s/ Andris Rukmanis V.P. Europe and Director March 29, 2007 Andris Rukmanis /s/ Anita Schiff-Spielman Director March 29, 2007 Anita Schiff-Spielman Exhibit 31.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Igor Dmitrowsky, the Chief Executive Officer and Chief Financial Officer of Baltia Air Lines, Inc., certify that: 1. I have reviewed this annual report on Form 10-KSB of Baltia Air Lines, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: March 29, 2007 /s/ Igor Dmitrowsky Igor Dmitrowsky Chief Executive Officer and Chief Financial Officer (principal accounting officer) EXHIBIT 32.1 BALTIA AIR LINES, INC. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report Baltia Air Lines, Inc. (the "Company") on Form 10-KSB for the period ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Igor Dmitrowsky, Chief Executive Officer and Chief Financial Officer (principal accounting officer) of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement required by Section 906 has been provided to Baltia Air Lines, Inc. and will be retained by Baltia Air Lines, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. Date: March 29, 2007 /s/ Igor Dmitrowsky Igor Dmitrowsky Chief Executive Officer and Chief Financial Officer (principal accounting officer)