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This Annual report summarizes the research performed from 17 April 2005 through 16 April 2006. Major portions of the research in several of the project's current eight tasks have been completed. We have successfully developed the meteorological inputs using the best possible modeling configurations, resulting in improved representation of atmospheric processes. The development of the variable-grid-resolution emissions model, SMOKE-VGR, is also completed. The development of the MAQSIP-VGR has been completed and a test run was performed to ensure the functionality of this air quality model. We have incorporated new emission data base to update the offshore emissions. However, we have faced some bottleneck problems in the testing the integrity of the new database. For this reason, we have asked for a no cost extension of this project to tackle these scientific problems. Thus, the project is on a one-year delay schedule. During the reporting period, we solved all problems related to the new emission database. We are ready to move to developing the final product, implementation and testing of the variable grid technology into the Community Multiscale Air Quality Model (CMAQ) to develop the CMAQ-VGR. During the upcoming months we will perform the first CMAQ-VGR simulations over the Houston-Galveston region …