**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 
 FORM
        10-QSB
  
 
 **QUARTERLY
        REPORT UNDER SECTION 13 OR 15** **(d)**
 **OF
        THE SECURITIES EXCHANGE ACT OF 1934**
 **FOR
        THE FISCAL QUARTER ENDED SEPTEMBER 30, 2005**
  **COMMISSION
        FILE NO.: 0-28887**
 
 
 
 
 
 **GREENSHIFT****CORPORATION**(Exact
                  name of registrant as specified in its charter)**Delaware**
              **22-3328734**(State
                  of other jurisdiction of incorporation or organization)
              (IRS
                  EmployerIdentification No.)
 
 
 **111
                  Howard Boulevard, Suite 108, Mt. Arlington New
                  Jersey**
              **07856**(Address
                  of principal executive offices)
              (Zip
                  Code)**(973)
                  398-8183**(Registrant’s
                  telephone number including area
                  code)
 
 
 
 Check
        mark whether the issuer (1) filed all reports required to be filed by Section
        13
        or 15(d) of the Securities Exchange Act of 1934 during the past 12 months
        (or
        for such shorter period that the registrant as required to file such reports),
        and (2) has been subject to such filing requirements for the past 90 days.
 Yes
              X
              No
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act)
  Yes
                
                No
                X
  The
        number of outstanding shares of common stock as of September 30, 2005 was:
        107,138,707.
  Transitional
        Small Business Disclosure Format
 Yes
                  
                  No
                  X
  
   **QUARTERLY
        REPORT ON FORM 10QSB**
 **FOR
        THE FISCAL QUARTER ENDED SEPTEMBER 30, 2005**
  **TABLE
        OF CONTENTS**
 
  **Page
                  No****Part
                  I**
              **Financial
                  Information**Item
                  1.
              Financial
                  Statements
              3*After
                  Filing Election to be Regulated as an Investment
                  Company*Balance
                  Sheet as of September 30, 2005 (Unaudited)
              4Statement
                  of Operations (Unaudited):Three and Six Months Ended September
                  30,
                  2005
              5Statement
                  of Changes in Net Assets (Unaudited): Six Months Ended September
                  30,
                  2005
              6Statement
                  of Cash Flows (Unaudited): Six Months Ended September 30,
                  2005
              7Statement
                  of Investments (Unaudited): As of Six Months Ended September 30,
                  2005
              8*Prior
                  to Filing Election to be Regulated as an Investment
                  Company*Consolidated
                  Balance Sheet as of March 31, 2005 (Unaudited)
              10Consolidated
                  Statement of Operations (Unaudited) - Three Months Ended March
                  31,
                  2005
              11Consolidated
                  Statement of Cash Flows (Unaudited) - For the Three Months Ended
                  March 31,
                  2005
              12Notes
                  to Unaudited Consolidated Financial Statements
              13Item
                  2.
              Management’s
                  Discussion and Analysis or Plan of Operation
              32Item
                  3.
              Controls
                  and Procedures
              48**Part
                  II**
              **Other
                  Information**Item
                  1.
              Legal
                  Proceedings
              49Item
                  2.
              Changes
                  in Securities and Small Business Issuer Purchases of Equity Securities
              49Item
                  3.
              Defaults
                  Upon Senior Securities
              49Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              49Item
                  5.
              Other
                  Information
              49Item
                  6.
              Exhibits
                  and Reports on Form 8K
              49**Signatures**
              50
 
  
   
   **PART
        I - FINANCIAL INFORMATION**
  **ITEM
        1.**  **FINANCIAL
        STATEMENTS (UNAUDITED)**
 
  
 
 
 
  3
   **GREENSHIFT
        CORPORATION (F/K/A GREENWORKS CORPORATION) AND
        SUBSIDIARIES**
 **BALANCE
        SHEET** **AS
        OF SEPTEMBER 30, 2005**
  **(UNAUDITED)**
  **9/30/05**
                **(unaudited)****ASSETS**Portfolio
                  at value:Companies
                  more than 25% owned (cost: $8,173,479)
              
              $
              8,487,752Companies
                  5% to 25% owned (cost: $2,447,867)
              
              
              2,556,361Companies
                  less than 5% owned (cost: $5,000)
              
              
              149,250Total
                  portfolio at value (cost: $10,626,346)
              
              
              11,193,363Notes
                  receivable from portfolio companies
              
              
              1,555,075Accrued
                  interest, dividends and fees receivable
              
              
              133,366Other
                  assets
              
              
              81,921Deferred
                  financing fees
              
              
              108,958Cash
                  and cash equivalents
              
              
              154,229Total
                  assets
              
              $
              13,226,912**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**Liabilities:Notes
                  payable and debentures (maturing within one year:
                  $864,007)
              
              $
              3,429,007Investment
                  payable
              
              
              2,497,437Accounts
                  payable and other liabilities
              
              
              499,304Total
                  liabilities
              
              
              6,425,748Shareholders’
                  equity:Series
                  B preferred stock, $0.001 par value: 1,000,000 shares authorized
                  and
                  outstanding
              
              
              1,000Common
                  stock, $0.001 par value, 100,000,000 authorized; 107,138,707 shares
                  issued
                  and outstanding
              
              
              107,139Additional
                  paid in capital
              
              
              6,681,314Net
                  unrealized appreciation on portfolio
              
              
              567,017Undistributed
                  earnings
              
              
              45,638Cumulative
                  effect of conversion to BDC
              
              
              717,000Retained
                  deficit from operations prior to conversion to BDC
              
              
              (1,317,944
              )Total
                  shareholders’ equity
              
              
              6,801,164Total
                  liabilities and stockholders’ equity
              
              $
              13,226,912Net
                  asset value per common share
              
              $
              0.28
 
 
 The
        notes
        to the financial statements are an integral part of these
        statements.
  4
   **GREENSHIFT
        CORPORATION (F/K/A GREENWORKS CORPORATION) AND
        SUBSIDIARIES**
 **STATEMENT
        OF OPERATIONS**
 **FOR
        THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2005**
 **(UNAUDITED)**
  **For
                  The Three Months Ended September 30, 2005**
              
              **For
                  The Six Months Ended September 30, 2005**Interest
                  and related portfolio income:Interest
                  and dividends:Companies
                  more than 25% owned
              
              $
              7,227
              
              $
              7,227Companies
                  5% to 25% owned
              
              
              2,389
              
              
              2,389Companies
                  less than 5% owned
              
              
              5,000
              
              
              5,000Total
                  interest and dividends
              
              
              14,616
              
              
              14,616Fees
                  and other income:Companies
                  more than 25% owned
              
              
              231,250
              
              
              356,250Companies
                  5% to 25% owned
              
              
              50,000
              
              
              50,000Companies
                  less than 5% owned
              
              
              50,000
              
              
              68,750Total
                  fees and other income
              
              
              331,250
              
              
              475,000Total
                  interest and related portfolio income
              
              $
              345,866
              
              $
              489,616Operating
                  Expenses:Interest
              
              
              39,789
              
              
              88,552Employee
              
              
              8,650
              
              
              8,650Administrative
              
              
              226,235
              
              
              346,776Total
                  expenses
              
              
              274,674
              
              
              443,978Net
                  investment income before income taxes
              
              
              71,192
              
              
              45,638Income
                  tax expense (benefit)
              
              
              --
              
              
              --Net
                  investment income
              
              $
              71,192
              
              $
              45,638Net
                  realized and unrealized gains:Net
                  unrealized gains:Companies
                  more than 25% owned
              
              $
              461,635
              
              $
              314,273Companies
                  5% to 25% owned
              
              
              --
              
              
              108,494Companies
                  less than 5% owned
              
              
              --
              
              
              144,250Total
                  net unrealized gains
              
              
              461,635
              
              
              567,017Net
                  change in unrealized appreciation or depreciation
              
              
              461,635
              
              
              567,017Cumulative
                  effect of conversion to BDC
              
              
              --
              
              
              717,000Total
                  net gains
              
              $
              461,635
              
              $
              1,284,017Net
                  increase in net assets resulting from operations
              
              $
              532,827
              
              $
              1,329,655Basic
                  and diluted earnings per common share before cumulative effect
                  of
                  conversion to BDC
              
              $
              0.00
              
              $
              0.02Cumulative
                  effective of conversion to BDC per common share
              
              $
              0.00
              
              $
              0.03Basic
                  and diluted earnings per common share
              
              $
              0.00
              
              $
              0.05Weighted
                  average common shares outstanding
              
              
              77,835,337
              
              
              24,218,993
  The
        notes
        to the financial statements are an integral part of these
        statements.
  5
   **GREENSHIFT
        CORPORATION (F/K/A GREENWORKS CORPORATION) AND
        SUBSIDIARIES**
 **STATEMENT
        OF CHANGES IN NET ASSETS**
 **FOR
        THE SIX MONTHS ENDED SEPTEMBER 30, 2005**
 **(UNAUDITED)**
  **For
                  The Six Months**
                **Ended
                  September 30, 2005**Operations:Net
                  investment income
              
              $
              45,638Net
                  realized gains
              
              
              --Net
                  change in unrealized appreciation or depreciation
              
              
              567,017Cumulative
                  effect of conversion to BDC
              
              
              717,000Net
                  increase in net assets resulting from operations
              
              
              1,329,655Shareholder
                  distributions:Common
                  stock dividends
              
              
              --Preferred
                  stock dividends
              
              
              --Net
                  decrease in net assets resulting from shareholder
                  distributions
              
              
              --Capital
                  share transactions:Issuance
                  of common stock for portfolio investments
              
              
              3,856,500Issuance
                  of preferred stock for portfolio investments
              
              
              1,000Issuance
                  of common stock upon conversion of debt repayments
              
              
              2,116,055Net
                  increase in net assets resulting from capital share
                  transactions
              
              
              5,973,555Total
                  increase (decrease) in net assets
              
              
              7,303,210Net
                  assets at beginning of period
              
              $
              (502,046
              )Net
                  assets at end of period
              
              $
              6,801,164Net
                  asset value per common share
              
              $
              0.28Weighted
                  average common shares outstanding at end of period
              
              
              24,218,993
 
 The
        notes
        to the financial statements are an integral part of these
        statements.
    6
   **GREENSHIFT
        CORPORATION (F/K/A GREENWORKS CORPORATION) AND
        SUBSIDIARIES**
 **STATEMENT
        OF CASH FLOWS**
 **FOR
        THE SIX MONTHS ENDED SEPTEMBER 30, 2005**
  **(UNAUDITED)**
  **For
                  The Six Months**
                **Ended
                  September 30, 2005**Cash
                  flows from operating activities:Net
                  increase in net assets resulting from operations:
              
              $
              1,329,655Adjustments:Net
                  unrealized gain on portfolio investments
              
              
              (567,017
              )Changes
                  in accrued interest and fees receivable
              
              
              (133,366
              )Changes
                  in accrued liabilities
              
              
              248,714Depreciation
                  and amortization
              
              
              31,042Change
                  in deferred financing fee
              
              
              (34,022
              )Advance
                  to portfolio company
              
              
              (49,225
              )Cumulative
                  effect of conversion to BDC
              
              
              (717,000
              )Net
                  cash provided by operating activities
              
              
              108,781Cash
                  flows from financing activities:Sale
                  of common stock
              
              
              100,000(Issuance
                  of) notes receivable
              
              
              (520,075
              )Borrowings
                  under notes payable and debentures
              
              
              2,015,870(Repayments)
                  on notes payable and debentures
              
              
              (686,268
              )Net
                  cash provided by financing activities
              
              
              909,527Cash
                  flows from investment activities:Development
                  costs for company website
              
              
              (26,696
              )Investments
                  funded
              
              
              (837,383
              )Net
                  cash (used in) investment activities
              
              
              (864,079
              )Net
                  increase (decrease) in cash and cash equivalents
              
              
              154,229Cash
                  and cash equivalents at beginning of period
              
              
              --Cash
                  and cash equivalents at end of period
              
              $
              154,229Supplemental
                  schedule of non-cash investing and financing activities:Issuance
                  of common stock upon investment in portfolio company
              
              $
              3,856,500Issuance
                  of preferred stock upon investment in portfolio company
              
              
              1,000Issuance
                  of debentures in return for equity in portfolio company
              
              
              400,000Issuances
                  of subscriptions payable upon investment in portfolio
                  company
              
              
              3,447,000Issuance
                  of common stock upon conversion of debentures
              
              
              2,116,055
 
  The
        notes
        to the financial statements are an
        integral part of these statements.
   7
   **GREENSHIFT
        CORPORATION (F/K/A GREENWORKS CORPORATION) AND
        SUBSIDIARIES**
 **STATEMENT
        OF INVESTMENTS**
 **AS
        OF SEPTEMBER 30, 2005**
  **(UNAUDITED)**
  **September
                  30, 2005 (unaudited)****Portfolio
                  Company**
                **(*****Nature
                  of Business*****)**
              **Investment**
              **Principal**
              **Cost**
              **Value**Veridium
                  Corporation (1) (2)
              Common
                  Stock (8,335,944 shares)
              $                      
                  --
              $           
                  1,014,914
              $         669,217Paterson,NewJersey
              Series
                  A Preferred Stock (627,122 shares)
              --
              85,792
              56,570(*Environmental
                Services*)
              Series
                  B Preferred Stock (966,968 shares)
              --
              2,329,231
              1,535,855Series
                  C Preferred Stock (750,000 shares)
              --
              1,500,000
              989,075Warrants
                  (562,500 preferred shares)
              --
              --
              --8%
                  Convertible Debenture
              280,196
              280,196
              280,196INSEQ
                  Corporation (1) (3)
              Common
                  Stock (2,587,513,297shares)
              --
              1,588,967
              1,537,900Mount
                  Arlington, New Jersey
                (*Manufacturing
                  & Distribution*)
              Series
                  C Preferred Stock (400,000 shares)
              
              400,000
              400,000GreenWorks
                  Corporation (4)
              Common
                  Stock (1,500,000 shares)
              --
              942,000
              2,986,560Mount
                  Arlington, New Jersey
                (*Engineering
                  Services*)
              
              --
                --GreenShift
                  Industrial Design Corp. (5)
              Common
                  Stock (1,000,000 shares)
              --
              6,000
              6,000New
                  York, New York
              8%
                  Convertible Debenture
              35,000
              35,000
              35,000(*Industrial
                  Design & Technology**Transfer*)Ovation
                  Products Corporation (5)
              Common
                  Stock (1,500,000 shares)
              --
              1,000,000
              1,000,000Nashua,
                  New Hampshire(*Clean
                  Water Technologies*)Tornado
                  Trash Corporation (5)
              Common
                  Stock (1,000,000 shares)
              --
              2,585
              2,585New
                  York, New York(*Trash
                  Recycling Technologies*)Mean
                  Green BioFuels Corporation (5)
              Common
                  Stock (490,000 shares)
              --
              2,990
              2,990New
                  York, New York(*BioFuels
                  Production and Distribution*)
 (1)
                Denotes
                    public company.
  (2)
              The
                  value reported here is based on an independent third party assessment
                  of
                  Veridium’s current enterprise value. Certain of the Company’s holdings in
                  Veridium are dilution protected at 25% of the fully diluted capital
                  stock
                  of Veridium until December 31, 2006, and include holdings that
                  are
                  price-protected in the aggregate amount of $2.5 million. After
                  taking
                  account for the application of these dilution and price-protections,
                  the
                  Company held about 56% of Veridium’s fully diluted capital stock as of
                  September 30, 2005. The Company additionally holds warrants exercisable
                  into 562,500 shares of Veridium preferred stock at $2.00 per share,
                  which
                  corresponds to 14,062,500 shares of Veridium common stock at $0.08
                  per
                  share at the applicable conversion ratio. These warrants will expire
                  on
                  December 31, 2005 if they are not exercised by the Company. The
                  exercise
                  price for these warrants was roughly twice the market price for
                  Veridium
                  common stock at September 30, 2005, and about four times the market
                  price
                  for Veridium common stock upon the filing of this report. The Company
                  has
                  accordingly recorded the value of these warrants at
                  zero.
  (3)
              The
                  value reported here is based on an independent third party assessment
                  of
                  INSEQ’s current enterprise value. The Company’s common stock holdings in
                  INSEQ are dilution protected until December 31, 2006 at 70% of
                  the fully
                  diluted capital stock of INSEQ. As of September 30, 2005, this
                  equated to
                  2,587,513,297 shares of INSEQ common stock.
  (4)
              The
                  value reported here is based on an independent third party assessment
                  of
                  GreenWorks’ current enterprise
                  value.
  (5)
              The
                  Company holds 100% of the capital stock of GreenShift Industrial
                  Design
                  Corporation, about 12% of Ovation Products Corporation, 100% of
                  Tornado
                  Trash Corporation, and 49% of Mean Green BioFuels Corporation.
                  The value
                  for each of these companies is deemed to be equal to the Company’s cost as
                  of September 30, 2005.
  The
        notes
        to the financial statements are an integral part of these
        statements.
  8
   **GREENSHIFT
        CORPORATION (F/K/A GREENWORKS CORPORATION) AND
        SUBSIDIARIES**
 **STATEMENT
        OF INVESTMENTS**
 **AS
        OF SEPTEMBER 30, 2005**
  **(UNAUDITED)**
  **September
                  30, 2005 (unaudited)****Portfolio
                  Company**
                **(*****Nature
                  of Business*****)**
              **Investment**
              **Principal**
              **Cost**
              **Value**Ethanol
                  Oil Recovery Systems, LLC (2)
              Membership
                  Units (15,893 units)
              --
              1,197,437
              1,305,931Clayton,
                  Georgia(*Ethanol
                  Recovery Technologies*)Sterling
                  Planet, Inc. (4)
              8%
                  Convertible Debenture
              1,000,000
              1,000,000
              1,000,000Norcross,
                  Georgia(*Renewable
                  Energy Sales*)TerraPass,
                  Inc. (4)
              Common
                  Stock (68,717 membership units)
              
              250,430
              250,430Menlo
                  Park, California
              Warrants
                  (84,025 membership units)(*Renewable
                  Energy Sales*)Coriolis
                  Energy Corporation (3)
              Common
                  Stock (1,000,000 shares)
              --
              1,000
              1,000New
                  York, New York(*Green
                  Energy Research*)Hugo
                  International Telecom, Inc. (1) (5)
              Series
                  B Preferred Stock (300,000 shares)
              --
              300,000
              300,000Mount
                  Arlington, New Jersey
              8%
                  Convertible Debenture
              67,995
              67,995
              67,995(*Development
                  Stage*)TDS
                  (Telemedicine), Inc. (1) (6)
              Common
                  Stock (3,000,000 shares)
              --
              5,000
              149,250Mount
                  Arlington, New Jersey
              8%
                  Convertible Debenture
              171,885
              171,885
              171,885(*Development
                  Stage*)
 (1)
              Denotes
                  public company.
  (2)
              The
                  Company owns 10% of Ethanol Oil Recovery Systems, LLC. The value
                  reported
                  here is based on an independent third party assessment of Ethanol
                  Oil
                  Recovery’s current enterprise
                  value.
  (3)
              Tornado
                  Trash Corporation and Coriolis Energy Corporation are development
                  stage
                  wholly-owned subsidiaries of the Company and their value is deemed
                  to be
                  equal to the Company’s cost as of September 30,
                  2005.
  (4)
              The
                  Company’s investments in Sterling Planet, Inc., and TerraPass, Inc., are
                  shown at cost. The Company also holds warrants exercisable into$500,000
                  of Sterling common stock upon Sterling’s completion of a larger venture
                  capital raise and based on a 20% discount to the price per share
                  for
                  Sterling common stock used in such raise. The Company also holds
                  warrants
                  to acquire an additional 84,025 membership units in TerraPass for
                  another
                  $250,000. The value of the Sterling warrants is currently unknowable
                  and
                  neither the Sterling nor the TerraPass warrants will vest until
                  such time
                  as the Company satisfies its investments payable with these companies.
                  The
                  value of these warrants is accordingly recorded at zero
                  herein.
  (5)
              The
                  Company’s holdings in Hugo International Telecom, Inc., are shown here
                  at
                  cost. The Company holds 300,000 shares of this portfolio company’s Series
                  B Preferred Stock, which shares include a coupon of 8% and voting
                  rights
                  that are fixed at 67% until conversion.
  (6)
              The
                  Company’s holdings in TDS are shown here at cost and are price protected
                  in this amount.
   The
        notes
        to the financial statements are an integral part of these
        statements.
   9
 
 **GREENSHIFT
        CORPORATION (F/K/A GREENWORKS CORPORATION) AND
        SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEET**
 **AS
        OF MARCH 31, 2005 (UNAUDITED)**
 **PRIOR
        TO FILING ELECTION TO BE REGULATED AS INVESTMENT COMPANY**
  **3/31/05**
                **(unaudited)****ASSETS:**Current
                  assets
              
              :Cash
              
              $
              --Accounts
                  receivable, net
              
              
              434,103Unbilled
                  revenues
              
              
              243,501Costs
                  and earnings in excess of billings on uncompleted projects
              
              
              72,026Deferred
                  financing fees
              
              
              108,333Prepaid
                  expenses and other current assets
              
              
              141,717Assets
                  to be disposed of
              
              
              205,289Total
                  current assets
              
              
              1,204,969Property
                  and equipment, net
              
              
              133,327Other
                  Assets:Security
                  and other deposits
              
              
              26,911Costs
                  and earnings in excess of billings on uncompleted projects
              
              
              239,675Deferred
                  financing costs, net
              
              
              171,528Property
                  held for sale
              
              
              59,298Total
                  other assets
              
              
              497,412TOTAL
                  ASSETS
              
              $
              1,835,708**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**Current
                  liabilities:Accounts
                  payable
              
              
              841,832Accrued
                  salary costs
              
              
              54,743Accrued
                  other
              
              
              774,275Payroll
                  taxes payable
              
              
              258,638Billings
                  in excess of costs and earnings on uncompleted projects
              
              
              26,493Line
                  of credit
              
              
              1,196,972Notes
                  payable to non-affiliated parties
              
              
              57,262Installment
                  loans payable
              
              
              63,571Capital
                  lease obligations
              
              
              13,038Deferred
                  revenues
              
              
              115,525Liabilities
                  to be disposed of
              
              
              483,893Total
                  current liabilities
              
              
              3,886,242Accrued
                  employee benefits
              
              
              47,838Accrued
                  other
              
              
              30,592Billings
                  in excess of costs and earnings on uncompleted projects
              
              
              39,739Convertible
                  debenture
              
              
              500,000Notes
                  payable - deferred financing
              
              
              250,000Notes
                  payable to non-affiliated parties
              
              
              214,494Installment
                  loans payable, net of current maturities
              
              
              2,910Capital
                  lease obligations, net of current maturities
              
              
              11,000Deferred
                  revenues
              
              
              489,788Total
                  liabilities:
              
              
              5,472,603Stockholders’
                  equity:Common
                  stock $ 0.001 par value, authorized 100,000,000 shares; 8,615,275
                  shares
                  issued and outstanding
              
              
              8,615Additional
                  paid-in capital
              
              
              3,256,986Accumulated
                  deficit
              
              
              (6,902,496
              )Total
                  stockholders’ equity (impairment)
              
              
              (3,636,895
              )TOTAL
                  LIABILITIES AND STOCKHOLDERS’ EQUITY
              
              $
              1,835,708
 
 The
        notes
        to the consolidated financial statements are an integral part of these
        statements.
   10
   **GREENSHIFT
        CORPORATION (F/K/A GREENWORKS CORPORATION) AND
        SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 **FOR
        THE THREE MONTHS ENDED MARCH 31, 2005 (UNAUDITED)**
 **PRIOR
        TO FILING ELECTION TO BE REGULATED AS INVESTMENT COMPANY**
   **3/31/05**
              
              **3/31/04**Revenues
              
              $
              920,385
              
              $
              821,161Cost
                  of revenues
              
              
              457,301
              
              
              403,755Gross
                  profit
              
              
              463,084
              
              
              417,407Operating
                  expenses:Selling,
                  general and administrative expenses
              
              
              304,799
              
              
              521,573Stock-based
                  compensation
              
              
              925,837
              
              
              --Total
                  operating expenses
              
              
              1,230,636
              
              
              521,573Operating
                  loss
              
              
              (767,552
              )
              
              (104,166
              )Interest
                  expense
              
              
              (53,276
              )
              
              (53,154
              )Gain
                  on sale of fixed assets
              
              
              --
              
              
              7,282Loss
                  from continuing operations
              
              
              (820,828
              )
              
              (150,038
              )Loss
                  from discontinued operations
              
              
              (8,622
              )
              
              (105,873
              )Net
                  loss
              
              $
              (829,450
              )
              $
              (255,911
              )Loss
                  per common share from continuing operations
              
              $
              (0.17
              )
              $
              (0.30
              )Loss
                  per share form discontinued operations
              
              $
              (0.01
              )
              $
              (0.22
              )Total
                  loss per common Net loss per common share, basic and
                  diluted
              
              $
              (0.18
              )
              $
              (0.52
              )Weighted
                  average shares of common stock outstanding
              
              
              4,778,727
              
              
              492,432
 
 
 The
        notes
        to the consolidated financial statements are an integral part of these
        statements.
   11
   **GREENSHIFT
        CORPORATION (F/K/A GREENWORKS CORPORATION) AND
        SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **FOR
        THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004**
 **PRIOR
        TO FILING ELECTION TO BE REGULATED AS INVESTMENT COMPANY**
   **3/31/05**
                
                **3/31/04**CASH
                    FLOWS FROM OPERATING ACTIVITIESNet
                    loss from continuing operations
                
                $
                (820,828
                )
                $
                (150,038
                )Adjustments
                    to reconcile net loss to net cash provided by (used in) operating
                    activities:Depreciation
                    and amortization
                
                
                23,074
                
                
                13,038Amortization
                    of deferred financing costs
                
                
                22,222
                
                
                --Gain
                    on sale or disposal of equipment
                
                
                --
                
                
                (30,245
                )Equity
                    issued in exchange for services rendered
                
                
                918,015
                
                
                --Change
                    in provision for doubtful accounts
                
                
                19,732
                
                
                --(Increase)
                    Decrease in assets:Accounts
                    receivable
                
                
                (74,086
                )
                
                (75,063
                )Unbilled
                    revenues
                
                
                (72,045
                )
                
                (167,736
                )Prepaid
                    expenses and other current assets
                
                
                43,261
                
                
                (11,284
                )Cost
                    and estimated earnings in excess of billings on uncompleted
                    projects
                
                
                (7,397
                )
                
                (3,015
                )Security
                    and other deposits
                
                
                (50
                )
                
                15,291Increase
                    (decrease) in liabilities:Accounts
                    payable, accrued and payroll taxes payable
                
                
                170,529
                
                
                (62,308
                )Billings
                    in excess of costs and estimated earnings on uncompleted
                    projects
                
                
                (17,074
                )
                
                25,940Deferred
                    revenues
                
                
                (9,775
                )
                
                (18,279
                )Cash
                    provided by (used in) continuing operations
                
                
                195,578
                
                
                (463,699Loss
                    from discontinued operations
                
                
                (8,622
                )
                
                (105,873
                )(Increase)
                    decrease in net assets of discontinued operations
                
                
                (120,523
                )
                
                483,214Cash
                    (used in) provided by discontinued operations
                
                
                (129,145
                )
                
                377,341Net
                    cash provided by (used in) operating activities
                
                
                66,433
                
                
                (86,358
                )CASH
                    FLOWS FROM INVESTING ACTIVITIESProceeds
                    from sale of property & equipment
                
                
                --
                
                
                49,030Net
                    cash provided by (used in) investing activities
                
                
                --
                
                
                49,030CASH
                    FLOWS FROM FINANCING ACTIVITIESLoans
                    from stockholders
                
                
                --
                
                
                160,000Repayment
                    of stockholder loans
                
                
                --
                
                
                (1,697
                )Loans
                    from non-affiliated parties
                
                
                7,948
                
                
                4,799Repayment
                    of loans from non-affiliated parties
                
                
                (4,580
                )
                
                --Repayment
                    of installment loans and capital lease obligations
                
                
                (69,801
                )
                
                (125,774
                )Net
                    cash (used in provided by financing activities
                
                
                (66,433
                )
                
                37,328Increase
                    (decrease) in cash
                
                
                --
                
                
                --Cash
                    at beginning of period
                
                
                --
                
                
                --Cash
                    at end of period
                
                $
                --
                
                $
                --
  The
        notes
        to the consolidated financial statements are an integral part of these
        statements.
   12
  
 
 **GREENSHIFT
        CORPORATION (F/K/A GREENWORKS CORPORATION) AND
        SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS**
  **1.**
              **ORGANIZATION**
  GreenShift
        Corporation (f/k/a GreenWorks Corporation), a Delaware corporation (“we”, “our”,
“us”, “GreenShift” or the “Company”), is a closed-end management investment
        company that has elected to be regulated as a business development company
        (“BDC”) under the Investment Company Act of 1940 (“1940 Act”).
  We
        were
        formerly known as GreenWorks Corporation and our former operations were
        conducted through our wholly owned subsidiary, GreenWorks Engineering
        Corporation. On April 1, 2005, we acquired majority equity stakes in Veridium
        Corporation (“Veridium”) (OTC Bulletin Board: VRDM) and INSEQ Corporation
        (“INSEQ”) (OTC Bulletin Board: INSQ) from affiliates of Kevin Kreisler, our
        chairman and chief executive officer. We subsequently filed an election on
        Form
        N54A pursuant to Section 54 of the 1940 Act to be regulated as a BDC, and
        we
        changed our name from “GreenWorks Corporation” to “GreenShift Corporation”. We
        also changed the name of our former operating subsidiary from “GreenWorks
        Engineering Corporation” to “GreenWorks Corporation.”
  GreenShift’s
        business model is to develop and support companies and technologies that
        facilitate the efficient use of natural resources and catalyze transformational
        environmental gains. GreenShift plans to use equity and debt capital to support
        and drive the value of its existing portfolio of companies and to make
        investments in a diversified mix of strategically compatible growth stage
        public
        and private businesses and technologies. GreenShift’s portfolio as of September
        30, 2005 included investments in the following proactive companies:
  **Portfolio
                  Company**
              **Type
                  of Business**·
              Veridium
                  Corporation (OTCBB: VRDM)
              *Environmental
                  Services*·
              INSEQ
                  Corporation (OTCBB: INSQ)
              *Manufacturing
                  &**Commodities
                  Distribution*·
              GreenWorks
                  Corporation
              *Engineering
                  Services*·
              GreenShift
                  Industrial Design Corporation
              *Industrial
                  Design*&*Technology
                  Transfer*·
              Ovation
                  Products Corporation
              *Clean
                  Water Technologies*·
              Tornado
                  Trash Corporation
              *Trash
                  Recycling Technologies*·
              Mean
                  Green BioFuels Corporation
              *BioFuels
                  Production and Distribution*·
              Ethanol
                  Oil Recovery Systems, Inc.
              *Ethanol
                  Recovery Technologies*·
              Sterling
                  Planet, Inc.
              *Renewable
                  Energy Sales*·
              TerraPass,
                  Inc.
              *Renewable
                  Energy Sales*·
              Coriolis
                  Energy Corporation
              *Green
                  Energy Research*·
              Hugo
                  International Telecom, Inc. (Pink Sheets: HGOI)
              *Development
                  Stage*·
              TDS
                  (Telemedicine), Inc. (Pink Sheets: TDST)
              *Development
                  Stage*
  In
        accordance with specific rules prescribed for investment companies, subsidiaries
        hold investments on behalf of the Company or provide substantial services
        to the
        Company. Portfolio investments are held for purposes of deriving investment
        income and future capital gains. The financial results of the Company’s
        portfolio investments are not consolidated in the Company’s financial
        statements.
  **2.**
              **SUMMARY
                  OF SIGNIFICANT ACCOUNTING
                  POLICIES**
  BASIS
        OF
        PRESENTATION
  **Conversion
        to Investment Company Accounting**
  The
        results of operations for 2005 are divided into two periods. The period from
        January 1, 2005 through March 31, 2005 reflects the Company's results prior
        to
        commencing operations as a regulated BDC under the 1940 Act. The period from
        April 1, 2005 through September 30, 2005 reflects the Company's results of
        operations as a BDC. Accounting principles used in the preparation of the
        financial statements beginning April 1, 2005 are different from those used
        for
        prior periods and, therefore, the financial position and results of operations
        of these periods are not directly comparable, and are presented separately
        herein. The primary differences in accounting principles are due to the
        requirements of the 1940 Investment Company Act and Regulation S-X. The Company
        filed an election to become regulated as a BDC under the 1940 Act on April
        1,
        2005. The controlling sections of the 1940 Act and the relevant accounting
        sections of Regulation S-X require that (1) a BDC may not consolidate the
        operations of its portfolio companies with operations of the BDC and (2)
        a BDC
        must provide to its investors the cost basis, fair market value, and the
        net
        realized gain or loss and or the net unrealized gain or loss of each of its
        portfolio investments on a quarterly basis. Accordingly, to comply with the
        various BDC requirements, the Company, and its wholly owned subsidiary,
        GreenWorks Corporation (f/k/a GreenWorks Engineering Corporation, and its
        wholly
        owned subsidiary, Enviro-Sciences (of Delaware), Inc., which had previously
        reported consolidated financial statements made the appropriate adjustments
        to
        deconsolidate assets, liabilities and operations that had previously been
        reported on a consolidated basis.
   13
   **GREENSHIFT
        CORPORATION (F/K/A GREENWORKS CORPORATION) AND
        SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS**
  **2.**
              **SUMMARY
                  OF SIGNIFICANT ACCOUNTING POLICIES (****continued****)**
  The
        condensed interim financial statements included herein, prepared by the Company
        for the interim period ending September 30, 2005 and the three months ended
        March 31, 2005 and 2004, are unaudited, and have been prepared pursuant to
        the
        rules and regulations of the Securities and Exchange Commission with regard
        to
        Regulation S-B and Article 10 of Regulation S-X. In the opinion of management,
        these financial statements include all adjustments which, except as described
        elsewhere herein, are of a normal recurring nature and are necessary for
        a fair
        presentation of the Company’s financial position, results of operations, and
        cash flows for the periods presented. The results for interim periods are
        not
        necessarily indicative of results for the entire year.
  The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires the Company’s
        management to make certain estimates and assumptions. These estimates and
        assumptions affect the reported amounts of assets and liabilities and disclosure
        of the contingent assets and liabilities at the date of the financial
        statements. These estimates and assumptions will also affect the reported
        amounts of certain revenues and expenses during the reporting period. Actual
        results could differ materially based on any changes in the estimates and
        assumptions that the Company uses in the preparation of its financial statements
        that are reviewed no less than annually. Actual results could differ materially
        from these estimates and assumptions due to changes in environmental
        industry-related regulations or future operational plans, and the inherent
        imprecision associated with estimating such future matters. See *“Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations”* in this
        report.
  Investments
        are presented in three categories: companies
        more than 25% owned, which represent portfolio companies where the Company
        directly or indirectly owns more than 25% of the outstanding voting securities
        of such portfolio company and, therefore, are deemed controlled by the Company
        under the 1940 Act; companies owned 5% to 25%, which represent portfolio
        companies where the Company directly or indirectly owns 5% to 25% of the
        outstanding voting securities of such portfolio company or where the Company
        holds one or more seats on the portfolio company’s board of directors and,
        therefore, are deemed to be an affiliated person under the 1940 Act; and
        companies less than 5% owned which represent portfolio companies where the
        Company directly or indirectly owns less than 5% of the outstanding voting
        securities of such portfolio company and where the Company has no other
        affiliations with such portfolio company. The interest and related portfolio
        income and net realized gains (losses) from the portfolio and other sources
        are
        included in the companies less than 5% owned category on the statement of
        operations. In the ordinary course of business, the Company enters into
        transactions with portfolio companies in the more than 25% owned and the
        5% to
        25% owned categories that may be considered related party
        transactions.
  VALUATION
        OF PORTFOLIO INVESTMENTS
  The
        Company has retained the services of an independent third party valuation
        company, Business Valuation Center of Reston, Virginia (“BVC”), to provide an
        assessment of the fair market value of the Company’s investments. The Company’s
        financial statements for the three months ended September 30, 2005 have been
        prepared in connection with BVC’s conclusions, which conclusions were based on a
        variety of conventionally accepted valuation methods.
  The
        Company, as a BDC, has invested in illiquid securities including debt and
        equity
        securities of companies. The Company’s investments are generally subject to
        restrictions on resale and generally have a thinly-traded or no established
        trading market. The Company values substantially all of its investments at
        fair
        value as determined in good faith by the Board of Directors in accordance
        with
        the Company’s valuation policy. The Company determines fair value to be the
        amount for which an investment could be exchanged in an orderly disposition
        over
        a reasonable period of time between willing parties other than in a forced
        or
        liquidation sale. The Company’s valuation policy considers the fact that little
        or no ready market exists for substantially all of the securities in which
        it
        invests. The Company’s valuation policy is intended to provide a consistent
        basis for determining the fair value of the portfolio. The Company will record
        unrealized depreciation on investments when it believes that an investment
        has
        become impaired, including where collection of a loan or realization of an
        equity security is doubtful, or when the enterprise value of the portfolio
        company does not currently support the cost of the Company’s debt or equity
        investments. Enterprise value means the entire value of the company to a
        potential buyer, including the sum of the values of debt and equity securities
        used to capitalize the enterprise at a point in time. The Company will record
        unrealized appreciation if it believes that the underlying portfolio company
        has
        appreciated in value and the Company’s equity security has also appreciated in
        value. The value of investments in publicly traded securities is determined
        using quoted market prices discounted for restrictions on resale, if any.
   14
  
 **GREENSHIFT
        CORPORATION (F/K/A GREENWORKS CORPORATION) AND
        SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS**
  **2.**
              **SUMMARY
                  OF SIGNIFICANT ACCOUNTING POLICIES (****continued****)**
  LOANS
        AND
        DEBT SECURITIES
  For
        loans
        and debt securities, fair value generally approximates cost unless the
        borrower’s enterprise value, overall financial condition or other factors lead
        to a determination of fair value at a different amount.
  When
        the
        Company receives nominal cost warrants or free equity securities (“nominal cost
        equity”), the Company allocates its cost basis in its investment between its
        debt securities and its nominal cost equity at the time of origination. At
        that
        time, the original issue discount basis of the nominal cost equity is recorded
        by increasing the cost basis in the equity and decreasing the cost basis
        in the
        related debt securities.
  Interest
        income is recorded on an accrual basis to the extent that such amounts are
        expected to be collected. For loans and debt securities with contractual
        payment-in-kind interest, which represents contractual interest accrued and
        added to the loan balance that generally becomes due at maturity, the Company
        will not accrue payment-in-kind interest if the portfolio company valuation
        indicates that the payment-in-kind interest is not collectible. Interest
        on
        loans and debt securities is not accrued if the Company has doubt about interest
        collection. In addition, interest may not accrue on loans or debt securities
        to
        portfolio companies that are more than 50% owned by the Company depending
        on
        such company’s capital requirements. Loan origination fees, original issue
        discount, and market discount are capitalized and then amortized into interest
        income using the effective interest method. Upon the prepayment of a loan
        or
        debt security, any unamortized loan origination fees are recorded as interest
        income and any unamortized original issue discount or market discount is
        recorded as a realized gain. Prepayment premiums are recorded on loans and
        debt
        securities when received.
  The
        weighted average yield on loans and debt securities is computed as the (a)
        annual stated interest rate plus the annual amortization of loan origination
        fees, original issue discount, and market discount on accruing loans and
        debt
        securities less the annual amortization of loan origination costs, divided
        by
        (b) total loans and debt securities at value. The weighted average yield
        is
        computed as of the balance sheet date.
  EQUITY
        SECURITIES
  The
        Company’s equity interests in portfolio companies for which there is no liquid
        public market are valued at fair value based on the enterprise value of the
        portfolio company, which is determined using various factors, including cash
        flow from operations of the portfolio company and other pertinent factors,
        such
        as recent offers to purchase a portfolio company, recent transactions involving
        the purchase or sale of the portfolio company’s equity securities, or other
        liquidation events. The determined equity values are generally discounted
        to
        account for restrictions on resale or minority ownership positions.
  The
        value
        of the Company’s equity interests in public companies for which market
        quotations are readily available is based on the average closing public market
        price for the ten days preceding the balance sheet date. The Company’s policy is
        to value its equity interests in public companies at a discount of 25% from
        the
        public market value of the security, subject to considerations including
        certain
        restrictions on liquidation and the divergence of such value from the deemed
        enterprise value of the portfolio company.
  Dividend
        income is recorded on preferred equity securities on an accrual basis to
        the
        extent that such amounts are expected to be collected, and on common equity
        securities on the record date for private companies or on the ex-dividend
        date
        for publicly traded companies.
  NET
        REALIZED GAINS OR LOSSES AND NET CHANGE IN UNREALIZED APPRECIATION OR
        DEPRECIATION
  Realized
        gains or losses are measured by the difference between the net proceeds from
        the
        repayment or sale and the cost basis of the investment without regard to
        unrealized appreciation or depreciation previously recognized, and include
        investments charged off during the year, net of recoveries. Net change in
        unrealized appreciation or depreciation reflects the change in portfolio
        investment values during the reporting period, including the reversal of
        previously recorded unrealized appreciation or depreciation when gains or
        losses
        are realized.
   15
  
 **GREENSHIFT
        CORPORATION (F/K/A GREENWORKS CORPORATION) AND
        SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS**
  **2.**
              **SUMMARY
                  OF SIGNIFICANT ACCOUNTING POLICIES (****continued****)**
  FEE
        INCOME
  Fee
        income includes fees for guarantees and services rendered by the Company
        to
        portfolio companies and other third parties such as diligence, structuring,
        transaction services, management services, and other advisory services. Guaranty
        fees are recognized as income over the related period of the guaranty.
        Diligence, structuring, and transaction services fees are generally recognized
        as income when services are rendered or when the related transactions are
        completed. Management and other advisory services fees are generally recognized
        as income as the services are rendered.
  GUARANTEES
  The
        Company accounts for guarantees under FASB Interpretation No. 45, *Guarantor’s
        Accounting and Disclosure Requirements for Guarantees, Including Indirect
        Guarantees of Indebtedness of Others* (the
“Interpretation”). In accordance with the Interpretation, guarantees meeting the
        characteristics described in the Interpretation, and issued or modified after
        December 31, 2002, are  recognized
        at fair value at inception. However, certain guarantees are excluded from
        the
        initial recognition provisions of the Interpretation. See Note 5 for disclosures
        related to the Company’s guarantees.
  FINANCING
        COSTS
  Debt
        financing costs are based on actual costs incurred in obtaining debt financing
        and are deferred and amortized as part of interest expense over the term
        of the
        related debt instrument. Costs associated with the issuance of common stock,
        such as underwriting, accounting and legal fees, and printing costs are recorded
        as a reduction to the proceeds from the sale of common stock.
  CASH
        AND
        CASH EQUIVALENTS
  Cash
        and
        cash equivalents include cash in banks and all highly liquid investments
        with
        original maturities of three months or less.
  GOING
        CONCERN
  The
        Company’s financial statements for the six months ended September 30, 2005, were
        prepared assuming that the Company would continue as a going concern. At
        September 30, 2005, the Company had $154,229 in cash and total liabilities
        of
        $6,425,748. Due to this financial condition, the Company’s auditors had issued a
        going concern note as these matters raised substantial doubt as to the Company’s
        then-current ability to fund operations. The Company continues to seek
        alternative and multiple sources of financing to address its moving forward
        cash
        needs.
  DIVIDENDS
        TO SHAREHOLDERS
  Dividends
        are recorded when declared and paid to shareholders of record as of the record
        date. For the six months ended September 30, 2005, no dividends have been
        declared.
  STOCK
        COMPENSATION PLANS
  The
        Company has a stock-based employee compensation plan pursuant to which no
        stock
        or options were issued during the six months ended September 30, 2005. The
        Company accounts for this plan under the recognition and measurement principles
        of FASB  Statement
        No. 123, *Accounting
        for Stock-Based Compensation* ,
        and
        related interpretations. In December 2004, the FASB issued Statement No.
        123
        (Revised 2004), Share-Based Payment (the “Statement”), which requires companies
        to recognize the grant-date fair value of stock options and other equity-based
        compensation issued to employees in the income statement. The Statement
        expresses no preference for a type of valuation model and was originally
        effective for most public companies’ interim or annual periods beginning after
        June 15, 2005. In April 2005, the Securities and Exchange Commission issued
        a
        rule deferring the effective date to January 1, 2006, for most companies.
        The
        scope of the Statement includes a wide range of share-based compensation
        arrangements including share options, restricted share plans, performance-based
        awards, share appreciation rights, and employee share purchase plans. The
        Statement replaces FASB Statement No. 123, Accounting for Stock-Based
        Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued
        to
        Employees.
   16
  
 **GREENSHIFT
        CORPORATION (F/K/A GREENWORKS CORPORATION) AND
        SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS**
  **2.**
              **SUMMARY
                  OF SIGNIFICANT ACCOUNTING POLICIES (****continued****)**
  FEDERAL
        AND STATE INCOME TAXES
  The
        Company intends to comply with the requirements of the Internal Revenue Code
        (“Code”) that are applicable to regulated investment companies (“RIC”). The
        Company and its subsidiaries that qualify as a RIC intend to distribute or
        retain through a deemed distribution all of their annual taxable income to
        shareholders; therefore, the Company has made no provision for income taxes
        for
        these entities.
  PER
        SHARE
        INFORMATION
  Basic
        earnings per common share is calculated using the weighted average number
        of
        common shares outstanding for the period presented. Diluted earnings per
        common
        share reflects the potential dilution that could occur if options to issue
        common stock were exercised into common stock. Earnings per share is computed
        after subtracting dividends on preferred shares.
  While
        the
        Company’s various debenture holders are subject to restrictions on conversion
        limiting ownership to certain minority percentages of our common stock, without
        this restriction our various debentures outstanding at September 30, 2005,
        could
        be converted into 16,409,560 shares at the market price on September 30,
        2005,
        which would dilute the interest of our current shareholders by over
        15%.
  USE
        OF
        ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
  The
        preparation of financial statements in conformity with U.S. 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 revenue and expenses during the reporting period.
        Actual
        results could differ from these estimates. The financial statements include
        portfolio investments at value of $12.7 million at September 30, 2005. At
        September 30, 2005, 100% of the Company’s total assets represented portfolio
        investments whose fair values have been determined by the Board of Directors
        in
        good faith in the absence of readily available market values. Because of
        the
        inherent uncertainty of valuation, the Board of Directors’ determined values may
        differ significantly from the values that would have been used had a ready
        market existed for the investments, and the differences could be
        material.
   17
  
 **GREENSHIFT
        CORPORATION (F/K/A GREENWORKS CORPORATION) AND
        SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS**
  **2.**
              **SUMMARY
                  OF SIGNIFICANT ACCOUNTING POLICIES (****continued****)**
  NOTES
        RELATING TO THE COMPANY’S OPERATIONS PRIOR TO FILING ELECTION TO BE REGULATED AS
        AN INVESTMENT COMPANY
  **Going
        Concern** ****
  Prior
        to
        converting to investment company accounting, the Company’s financial statements
        for the three months ended March 31, 2005, were prepared assuming that the
        Company would continue as a going concern. The Company incurred a loss of
        $-(829,450) during the three months ended March 31, 2005, at which time the
        Company had no cash, and current liabilities from continuing operations exceeded
        current assets by $2,197,380. Due to this financial condition, the Company’s
        auditors had issued a going concern note as these matters raised substantial
        doubt as to the Company’s then-current ability to fund operations. The Company
        continues to seek alternative and multiple sources of financing to address
        its
        moving forward cash needs.
  **Net
        Income or Loss Per common Share**
  Prior
        to
        converting to investment company accounting, for the three months ended March
        31, 2005, the Company computed its net income or loss per common share under
        the
        provisions of SFAS No. 128, " *Earnings
        per Share* "
        and SAB
        No. 98. Under the provisions of SFAS 128 and SAB 98, basic net income or
        loss
        per share is computed by dividing the net loss for the period by the
        weighted-average number of shares of common stock. The computation of diluted
        earnings (loss) per share does assume exercise of securities that would have
        a
        dilutive effect on earnings (loss) per share.
  **Supplemental
        Disclosure for Stock-Based Compensation**
  The
        Company applies SFAS Opinion No.123 in accounting for stock-based compensation..
        SFAS No. 123, “ *Accounting
        for Stock-Based Compensation* ”,
        defined a fair value method accounting for stock options and other equity
        instruments. Under the fair value method, compensation cost is measured at
        the
        grant date based on the fair value of the award and is recognized over the
        service period, which is usually the vesting period. Pro forma expenses are
        based on the underlying value of the options granted by the Company. The
        fair
        value of each option grant is estimated on the date of grant using the
        Black-Scholes option pricing model and expensed over the vesting period.
        The
        following weighted average assumptions were used to calculate the fair value
        of
        options granted during the three months ended March 31, 2005:
  **3/31/05**Dividend
                  yield
              
              
              0Expected
                  volatility
              
              
              69
              %Risk-free
                  interest rate
              
              
              4.1
              %Expected
                  life
              
              
              10
                  years
 The
        following is a summary of the status of the options outstanding as of March
        31,
        2005:
  **Number
                  of**
                **Shares**
              
              **Weighted
                  Average**
                **Exercise
                  Price**Outstanding
                  at 1/1/2005
              
              
              --
              
              $
              --Granted
              
              
              13,250,000
              
              
              0.08Exercised
              
              
              --
              
              
              --Forfeited
              
              
              --
              
              
              --Outstanding
                  at 3/31/05
              
              
              13,250,000
              
              $
              0.08
  **Supplemental
        Disclosure of Cash Flow Information**
  The
        following supplements the Company’s statements of cash flows for the three
        months ended March 31, 2005, prior to converting to investment company
        accounting:
  Cash
                  paid during the period ended March 31, 2005 for:Interest
              
              $
              27,203Income
                  taxes
              
              $
              --
  18
  
 **GREENSHIFT
        CORPORATION (F/K/A GREENWORKS CORPORATION) AND
        SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS**
  **3.**
              **INVESTMENT
                  COMPANY**
  INVESTMENT
        POLICY
  The
        Company uses equity and debt capital to support its existing portfolio of
        companies and to make investments in a diversified mix of growth stage public
        and private businesses that make positive contributions to the use of natural
        resources. The Company’s investment objective is to generate both current income
        and capital appreciation through debt and equity investments.
  As
        a
        regulated investment company for tax purposes, the Company’s plan is to
        distribute substantially all of its taxable income as dividends to our
        shareholders.
  BUSINESS
        DEVELOPMENT COMPANY
  The
        Company has elected to be treated as a business development company under
        the
        1940 Act and has elected to be treated as a regulated investment company,
        or
        RIC, under Subchapter M of the Code. The 1940 Act contains prohibitions and
        restrictions relating to transactions between business development companies
        and
        their affiliates (including any investment advisers or sub-advisers), principal
        underwriters and affiliates of those affiliates or underwriters and requires
        that a majority of the directors be persons other than “interested persons,” as
        that term is defined in the 1940 Act. In addition, the 1940 Act provides
        that we
        may not change the nature of the Company’s business so as to cease to be, or to
        withdraw our election as, a business development company unless approved
        by a
        majority of our outstanding voting securities voting as a class.
  The
        Company may invest up to 100% of its assets in securities acquired directly
        from
        issuers in privately negotiated transactions. With respect to such securities,
        the Company may, for the purpose of public resale, be deemed an “underwriter” as
        that term is defined in the Securities Act. The Company’s intention is to not
        write (sell) or buy put or call options to manage risks associated with the
        publicly traded securities of the Company’s portfolio companies, except that the
        Company may enter into hedging transactions to manage the risks associated
        with
        interest rate and currency rate fluctuations. However, the Company may purchase
        or otherwise receive warrants to purchase the common stock of its portfolio
        companies in connection with acquisition financing or other investment.
        Similarly, in connection with an acquisition, the Company may acquire rights
        to
        require the issuers of acquired securities or their affiliates to repurchase
        them under certain circumstances. The Company also does not intend to acquire
        securities issued by any investment company that exceed the limits imposed
        by
        the 1940 Act. Under these limits, the Company generally cannot acquire more
        than
        3% of the voting stock of any registered investment company, invest more
        than 5%
        of the value of the Company’s total assets in the securities of one investment
        company or invest more than 10% of the value of the Company’s total assets in
        the securities of more than one investment company.
  With
        regard to that portion of the Company’s portfolio which may be invested in
        securities issued by investment companies, it should be noted that such
        investments might subject our stockholders to additional expenses. None of
        these
        policies are fundamental and may be changed without stockholder approval.
  QUALIFYING
        ASSETS
  Under
        the
        1940 Act, a business development company may not acquire any asset other
        than
        assets of the type listed in Section 55(a) of the 1940 Act, which are referred
        to as qualifying assets, unless, at the time the acquisition is made, qualifying
        assets represent at least 70% of the company’s total assets. The principal
        categories of qualifying assets relevant to the Company’s planned business are
        the following:
  (1) Securities
        purchased in transactions not involving any public offering from the issuer
        of
        such securities, which issuer (subject to certain limited exceptions) is
        an
        eligible portfolio company, or from any person who is, or has been during
        the
        preceding 13 months, an affiliated person of an eligible portfolio company,
        or
        from any other person, subject to such rules as may be prescribed by the
        SEC. An
        eligible portfolio company is defined in the 1940 Act as any issuer
        which:
  is
        organized under the laws of, and has its principal place of business in,
        the
        United States;
  is
        not an
        investment company (other than a small business investment company wholly
        owned
        by the business development company) or a company that would be an investment
        company but for certain exclusions under the 1940 Act; and
  satisfies
        any of the following:
   19
  
 **GREENSHIFT
        CORPORATION (F/K/A GREENWORKS CORPORATION) AND
        SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS**
  **3.**  **INVESTMENT
        COMPANY (** **continued** **)**
  QUALIFYING
        ASSETS ( continued )
  does
        not
        have any class of securities with respect to which a broker or dealer may
        extend
        margin credit;
  is
        controlled by a business development company or a group of companies including
        a
        business development company and the business development company has an
        affiliated person who is a director of the eligible portfolio company; or
  is
        a
        small and solvent company having total assets of not more than $4 million
        and
        capital and surplus of not less than $2 million.
  (2) Securities
        of any eligible portfolio company which the Company controls.
  (3) Securities
        purchased in a private transaction from a U.S. issuer that is not an investment
        company or from an affiliated person of the issuer, or in transactions incident
        thereto, if the issuer is in bankruptcy and subject to reorganization or
        if the
        issuer, immediately prior to the purchase of its securities was unable to
        meet
        its obligations as they came due without material assistance other than
        conventional lending or financing arrangements.
  (4)  Securities
        of an eligible portfolio company purchased from any person in a private
        transaction if there is no ready market for such securities and the Company
        already owns 60% of the outstanding equity of the eligible portfolio
        company.
  (5)  Securities
        received in exchange for or distributed on or with respect to securities
        described in (1) through (4) above, or pursuant to the exercise of warrants
        or
        rights relating to such securities.
  (6)  Cash,
        cash equivalents, U.S. Government securities or high-quality debt securities
        maturing in one year or less from the time of investment.
  The
        SEC
        has proposed a regulation under the 1940 Act to expand the definition of
        eligible portfolio company in a manner that would promote the flow of capital
        to
        small, developing and financially troubled companies. This regulation would
        define eligible portfolio company with reference to whether a company has
        any
        class of securities listed on an exchange. The Company continues to monitor
        this
        issue closely and intends to adjust its investment focus as needed to comply
        with and/or take advantage of this rule if it is adopted or of any other
        future
        administrative position, judicial decision or legislative action.
  MANAGERIAL
        ASSISTANCE TO PORTFOLIO COMPANIES
  In
        addition, a business development company must have been organized and have
        its
        principal place of business in the United States and must be operated for
        the
        purpose of making investments in the types of securities described in (1),
        (2)
        or (3) above. However, in order to count portfolio securities as qualifying
        assets for the purpose of the 70% test, the business development company
        must
        either control the issuer of the securities or must offer to make available
        to
        the issuer of the securities (other than small and solvent companies described
        above) significant managerial assistance; except that, where the business
        development company purchases such securities in conjunction with one or
        more
        other persons acting together, one of the other persons in the group may
        make
        available such managerial assistance. Making available managerial assistance
        means, among other things, any arrangement whereby the business development
        company, through its directors, officers or employees, offers to provide,
        and,
        if accepted, does so provide, significant guidance and counsel concerning
        the
        management, operations or business objectives and policies of a portfolio
        company.
  INVESTMENT
        CONCENTRATION
  The
        Company intends to concentrate on environmentally proactive investments and
        to
        invest, under normal circumstances, at least 80% of the value of the Company’s
        net assets (including the amount of any borrowings for investment purposes)
        in
        qualified companies. This 80% policy is not a fundamental policy and therefore
        may be changed without the approval of the Company’s stockholders. However, the
        Company may not change or modify this policy unless we provide our stockholders
        with at least 60 days' prior notice.
  
  20
  
 **GREENSHIFT
        CORPORATION (F/K/A GREENWORKS CORPORATION) AND
        SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS**
  **4.**
              **PORTFOLIO**
  The
        Company’s investment activity principally involves providing financing through
        privately negotiated long-term debt and equity investments.
  The
        Company’s investments in private companies are generally illiquid and subject to
        restrictions on resale. Private finance investments are generally structured
        as
        loans and debt securities that carry a relatively high fixed rate of interest,
        which may be combined with equity features, such as conversion privileges,
        or
        warrants or options to purchase a portion of the portfolio company’s equity at a
        pre-determined strike price, which is generally a nominal price for warrants
        or
        options in a private company. The annual stated interest rate is only one
        factor
        in pricing the investment relative to the Company’s rights and priority in the
        portfolio company’s capital structure, and will vary depending on many factors,
        including if the Company has received nominal cost equity or other components
        of
        investment return, such as loan origination fees or market discount. The
        stated
        interest rate may include some component of contractual payment-in-kind
        interest, which represents contractual interest accrued and added to the
        loan
        balance that generally becomes due at maturity. At September 30, 2005, 100%
        of
        the Company’s loans and debt securities had fixed interest rates.
  Loans
        and
        debt securities generally have a maturity of one to ten years, with
        interest-only payments in the early years and payments of both principal
        and
        interest in the later years, although debt maturities and principal amortization
        schedules vary.
  Equity
        interests issued by private companies may be subject to restrictions on their
        resale and are generally illiquid. The Company may incur closing costs
        associated with making control investments, which will be added to the cost
        basis of the Company’s equity investment. Equity securities generally do not
        produce a current return, but are held with the potential for investment
        appreciation and ultimate gain on sale.
  The
        Company’s largest investments at September 30, 2005, were in Veridium
        Corporation (“Veridium”) (OTC Bulletin Board: VRDM), INSEQ Corporation (“INSEQ”)
        (OTC Bulletin Board: INSQ), GreenWorks Corporation (“GreenWorks”), Ethanol Oil
        Recovery Systems, Inc. (“EORS”), Sterling Planet, Inc. (“Sterling Planet”), and
        Ovation Products Corporation (“Ovation”), accounting for 24.6%, 14.7%, 22.6%,
        9.9%, 7.6% and 7.6% respectively, of our total assets.
  VERIDIUM
        CORPORATION
  Veridium
        (OTC Bulletin Board: VRDM) is a publicly traded environmental management
        company. Veridium is currently implementing a restructuring plan which includes
        the cessation of operations of Veridium’s industrial waste recycling facility
        and is planned to include the reorganization of its services business. Veridium
        expects that these initiatives will enhance operating results in the immediate
        term and enable Veridium to grow its business more effectively.
  During
        the three months ended September 30, 2005, the Company purchased convertible
        debentures in Veridium totaling $280,196, earned $5,235 in interest income,
        and
        received no other related portfolio income from Veridium.
  Our
        chairman and chief executive officer, Kevin Kreisler, is also the chairman,
        chief executive officer and president of Veridium Corporation. As the
        controlling shareholder of the Company, who is in turn the controlling
        shareholder of Veridium, Mr. Kreisler has unconditionally guaranteed certain
        of
        Veridium’s debts with its creditors.
  INSEQ
        CORPORATION
  INSEQ
        (OTC Bulletin Board: INSQ) is a publicly traded corporation whose mission
        is to
        directly facilitate the efficient utilization of natural resources including
        metals, chemicals, fuels and plastics. INSEQ recently acquired Warnecke Design
        Services, Inc., a specialty metal manufacturer that comprised the majority
        of
        INSEQ’s operations as of September 30, 2005. INSEQ is also subject to an
        agreement to acquire Independent Metal Sales, Inc.
  During
        the three months ended September 30, 2005, the Company earned $81,250 in
        management fees from INSEQ. At September 30, 2005, $50,000 was due from
        INSEQ.
   21
  
 **GREENSHIFT
        CORPORATION (F/K/A GREENWORKS CORPORATION) AND
        SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS**
  **4.**
              **PORTFOLIO
                  (****continued****)**
  INSEQ
        CORPORATION ( continued )
  Our
        chairman and chief executive officer, Kevin Kreisler, is also the chairman
        of
        INSEQ, and our president and chief financial officer, James Grainer, is also
        the
        president and chief financial officer of INSEQ. As the controlling shareholder
        of the Company, who is in turn the controlling shareholder of INSEQ, Mr.
        Kreisler and the Company have unconditionally guaranteed certain of INSEQ’s
        debts with its creditors.
  GREENWORKS
        CORPORATION
  GreenWorks
        is an environmental engineering services company that intends to acquire
        and
        consolidate a series of qualified engineering services companies during 2005.
        GreenWorks provides consulting, technical and engineering services to alleviate
        the environmental problems of its clients. GreenWorks’ clients include Fortune
        100 and other industrial companies, commercial firms, engineering and
        construction contractors, law firms, utilities, real estate developers and
        government entities. GreenWorks is currently producing about $3.8 million
        in
        revenue per year and has a backlog of another $2 million in sales. GreenWorks
        intends to go public during 2005 in line with its completion of qualified
        acquisitions.
  During
        the three months ended September 30, 2005, earned $37,500 in management services
        fees receivable from GreenWorks. At September 30, 2005, $75,000 was due from
        GreenWorks.
  Our
        chairman and chief executive officer, Kevin Kreisler, is also the chairman
        of
        GreenWorks, and our president and chief financial officer, James Grainer,
        is
        also the chief financial officer of GreenWorks.
  GREENSHIFT
        INDUSTRIAL DESIGN CORPORATION (“GIDC”)
  GreenShift
        Industrial Design Corporation (“GIDC”) is a development stage company that
        focuses on the engineering and marketing of green innovations and processes
        that
        enhance manufacturing efficiencies, improve resource utilization and minimize
        waste. GIDC plans to deliver consumer oriented Natural SolutionsTM based on an
        array of green technologies and applied engineering expertise that reduce
        waste
        at the source and make it easier for people and businesses to recycle and
        reuse
        resources. GIDC plans to initially focus on the acquisition, development
        and
        marketing of benchmark green technologies and products that accomplish the
        following key goals:
  ·
              Reduce
                  the volume of waste generated by residential and commercial
                  consumers;
 ·
              Increase
                  the convenience and decrease the cost of recycling by residential
                  and
                  commercial consumers; and,
 ·
              Increase
                  the cost-efficiency of processing certain types of industrial
                  wastes.
  GIDC
        expects to acquire, develop and market powerful new green technologies and
        to
        generate revenue starting in 2006 from the provision of customized engineering
        services to third party clients.
  GIDC
        currently holds the rights to the following technologies:
  **Universal
        Processing: Tornado GeneratorTM**
  GIDC’s
        proprietary Tornado GeneratorTM accelerates compressed air to supersonic speeds
        in a closed cyclonic chamber where the air is powerful enough to almost
        instantly grind, flash desiccate and atomize solid and liquid wastes and
        other
        materials into micron sized powders. The Tornado GeneratorTM is robust and
        cost-efficient enough to process most conventional wastes at both centralized
        disposal facilities and decentralized point-sources. The technology is also
        capable of direct implementation in manufacturing, mining, refining and other
        industrial processes. GIDC plans to target key waste and other industrial
        processing facilities for deployment of specific applications of the Tornado
        GeneratorTM bundled with GIDC's other licensed technologies.
  On
        August
        29, 2005, GIDC secured the exclusive rights to a broad array of applications
        using a similar technology from Vortex Dehydration Technology, LLC., called
        the
        Windhexe in return for a license fee of $135,000 and royalty fees equal to
        3% of
        GIDC’s sales with the Windhexe. This technology is one of the more innovative
        implementations of the concept of harnessing the relative power of a tornado
        for
        use in industrial applications, and it is one of the technologies used in
        certain applications of GreenShift's proprietary Tornado GeneratorTM technology.
        Subject to limited exclusions, GIDC’s license with Vortex provides exclusive
        rights to the following applications of the Windhexe technology:
  
   22
  
 **GREENSHIFT
        CORPORATION (F/K/A GREENWORKS CORPORATION) AND
        SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS**
  **4.**
              **PORTFOLIO
                  (****continued****)**
  GREENSHIFT
        INDUSTRIAL DESIGN CORPORATION ( continued )
  ·
              Waste
                  Processing:
                  (a) wastes that are hazardous or otherwise harmful to human and
                  animal
                  health and the environment; (b) wastes that are water and/or wastewater
                  (including sedimentary and/or septic material); (c) wastes that
                  are
                  partially used or discarded metals, chemicals, fuels, plastics,
                  composites, glass, paper, food products and electronics; and, (d)
                  wastes
                  that are or derive from mining waste tailings.
  ·
              Mining
                  Processing:
                  the extraction, processing, separation and/or refining of wastes
                  and/or
                  commodities that are solids, liquids and
                  gases.
  ·
              Industrial
                  Design Services:
                  All applications relating to the use of the Windhexe in the provision
                  of
                  design and engineering or other services relating to the use of
                  the
                  Windhexe.
  **Waste
        Recycling: Preferential Separation of Plastics from Mixed Plastic
        Waste**
  On
        September 21, 2005, INSEQ Corporation granted GIDC the exclusive right to
        the
        use of its new patented technology for the separation of plastics from solid
        wastes and non-exclusive rights to the technology for the separation of plastics
        from electronic equipment and white appliances. The new technology was developed
        by Argonne National Laboratory under a contract with the U.S. Department
        of
        Energy and enables the cost-effective preferential separation and recovery
        of
        specific targeted plastics from a mixed plastics stream. INSEQ will receive
        3%
        of GIDC’s sales with this technology under its license agreement.
  **Water
        Purification: Vapor Compression Distillation**
  On
        August
        9, 2005, Ovation Products Corporation granted GIDC certain non-exclusive
        and
        exclusive rights to Ovation’s new patented and patent-pending vapor compression
        water purification technology and its new Clean Water Appliance in return
        for
        the payment to Ovation of royalty fees equal to 1% of any service or product
        revenue, or 20% of all licensing revenue GIDC generates from the use or license
        of the Ovation technology. Subject to limited exclusions, GIDC’s license with
        Ovation provides non-exclusive rights to the following
        applications:
  ·
              Hazardous
                  Wastes.
                  Wastes that are hazardous or otherwise harmful to human and animal
                  health
                  and the environment, including medical or other biologically active
                  wastes;
  ·
              Brownfield
                  Wastes.
                  Wastes that derive from environmentally impaired real property,
                  including
                  fixtures on or any appurtenances to such property;
  ·
              Municipal
                  Solid Wastes.
                  Wastes that derive from the centralized processing, storage, disposal
                  and/or incineration of by-products, garbage, trash or other discarded
                  materials;
  ·
              Human
                  Waste.
                  Wastes that derive from the centralized processing of sewage at
                  municipal
                  or other sewage treatment plants;
  ·
              Agricultural
                  Waste.
                  Wastes that derive from farming activities, including the production
                  of
                  crops and raising livestock, and including septic wastes and other
                  wastewaters deriving from livestock and meat
                  processing;
  ·
              Food
                  Service Waste.
                  Wastes that derive from the preparation of food and other related
                  activity
                  at establishments that prepare and/or serve
                  food;
  ·
              Mining
                  Wastes.
                  Wastes that are or derive from mining activity, mining tailings
                  and/or
                  acid mine drainage;
  ·
              Commercial
                  Real Estate Development.
                  Products for the processing and purification of dirty water for
                  residents
                  of multi-family buildings, hotels, and/or commercial office buildings
                  having a minimum of fifty (50) separate apartments, dwellings,
                  rooms or
                  other units and are located in Boston, Providence, New York City,
                  Philadelphia, Washington D.C., Miami, New Orleans, Houston, San
                  Francisco,
                  Seattle, Las Vegas, Denver and/or
                  Chicago;
  ·
              Golf
                  Courses.
                  Products for the processing and purification of dirty water for
                  reuse for
                  and at golf courses; and,
  ·
              Refining.
                  Products and applications involving the distillation and/or refining
                  of
                  inorganic and/or organic liquids and gases with the purpose of
                  preferentially separating and/or removing targeted
                  constituents.
   23
  
  **GREENSHIFT
        CORPORATION (F/K/A GREENWORKS CORPORATION) AND
        SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS**
  **4.**
              **PORTFOLIO
                  (****continued****)**
  GREENSHIFT
        INDUSTRIAL DESIGN CORPORATION ( continued )
  Subject
        to limited exclusions, GIDC’s license with Ovation provides exclusive rights to
        the following applications:
  ·
              Survival
                  Gear.
                  Portable products for the processing of dirty water into water
                  that is
                  safe for consumption and/or other use;
  ·
              Fuel
                  Cells.
                  Products for the removal of impurities from or other preparation
                  of water
                  or other liquids for use in fuel cells and/or other portable energy
                  generation devices;
  ·
              Ocean
                  Exploration.
                  Products for the processing waste or other materials into water
                  that is
                  safe for consumption or other use for all applications relating
                  to
                  subsurface ocean transportation and exploration;
                  and,
  ·
              Space
                  Exploration.
                  Products for the processing waste or other materials into water
                  that is
                  safe for consumption or other use for all applications relating
                  to space
                  or space exploration.
  **Waste
        Reduction: OneLidTM**
  GIDC
        developed a patent-pending commercial appliance called OneLidTM to reduce plastic
        waste produced by the food services industry. Studies indicate that about
        1.5
        pounds of trash are produced for each fast food restaurant meal served, of
        which
        50.5% is paper, 13.6% is plastics and 1.1% is glass. The new GIDC appliance
        specifically aims to reduce the contribution to this made by unused plastic
        beverage lids by controlling the dispensing of plastic lids and allowing
        restaurant operators to more effectively manage their inventories. According
        to
        a study published by the Freedonia Group, Inc., the food services industry
        purchased about 100 billion plastic beverage lids during 2003 for about $0.005
        each or for a total of about $500 million.
  During
        the three months ended September 30, 2005, the Company purchased notes in
        GIDC
        totaling $135,000, of which $100,000 was repaid, earned $888 in interest
        income,
        and received $50,000 in management fees from GIDC.
  Our
        chairman and chief executive officer, Kevin Kreisler, is also the chairman
        of
        GIDC, and our president and chief financial officer, James Grainer, is also
        the
        chief financial officer of GIDC. Mr. Kreisler is also a co-inventor of GIDC’s
        Tornado GeneratorTM, OneLidTM and several other GIDC technologies.
  OVATION
        PRODUCTS CORPORATION
  Ovation
        is a development stage company with patented and proprietary technologies
        involving new implementations of vapor compression distillation. Ovation
        has
        invested over $9 million developing technology that offers dramatic price
        and
        performance advantages over competing clean water technologies. Ovation is
        finalizing the development of its initial product, the Clean Water Appliance
        - a
        fire-hydrant sized appliance that can generate 25 gallons of pure water per
        hour
        from a variety of dirty water input sources at a cost of approximately $0.004
        per gallon, or about 1.2% of the cost of traditional home distillation methods.
        Ovation expects that its Clean Water Appliance will be available in 2006
        and
        will sell for a fraction of the price of commercial distillation
        systems.
  To
        achieve this small size, low cost and high efficiency, Ovation’s products
        incorporate patented new implementations of a proven distillation process
        called
        vapor compression. Ovation has been granted 11 patents for its technology
        and
        system, and has filed for an additional 5 patents to date. Ovation’s technology
        has been refined to the point where Ovation has been able to reduce energy
        loss
        by over 98% and distill water for about 1.2% of the cost of traditional home
        methods. Ovation believes that its Clean Water Appliance is the most efficient
        commercial distiller in the world, of any size.
  Distillation
        is the “gold standard” for water purification in that it removes bacteria,
        viruses, heavy metals, suspended solids and almost all chemicals. It is the
        single most effective method for purifying water. Other processes such as
        ultra
        filtration and reverse osmosis do not produce perfect water quality, discharge
        several times more wastewater, degrade over time, and require replacement
        of
        filters and cartridges. Ovation’s products provide a consistent high quality
        output and require no filter or cartridges.
  GreenShift
        acquired 1,500,000 shares, or about 12%, of Ovation’s outstanding stock for $1
        million at an effective rate of $0.67 per share. Ovation recently filed to
        become publicly traded and expects to commence trading in the first quarter
        2006. As of September 31, 2005, $500,000 of the Company’s investment payable
        relates to this investment. Our chairman and chief executive officer, Kevin
        Kreisler, is a board member of Ovation.
   24
   **GREENSHIFT
        CORPORATION (F/K/A GREENWORKS CORPORATION) AND
        SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS**
  **4.**
              **PORTFOLIO
                  (****continued****)**
  TORNADO
        TRASH CORPORATION (“TTC”)
  TTC
        is a
        development stage company that the Company formed to deploy GIDC’s innovative
        green technologies with the specific goal of minimizing and eliminating the
        practice of landfill disposal by converting trash into valuable metals,
        chemicals, plastics, fuels and energy. TTC will focus on centralized
        applications of its technologies at, for example, landfills and transfer
        stations, and decentralized applications of its technologies in new green
        appliances positioned to residential and commercial consumers. During the
        three
        months ended September 30, 2005, the Company earned $12,500 in management
        fees
        payable from this portfolio company which fees remained outstanding as of
        September 30, 2005. Our chairman and chief executive officer, Kevin Kreisler,
        is
        the chairman of TTC.
  MEAN
        GREEN BIOFUELS CORPORATION
  Mean
        Green is a development-stage company that the Company formed to finance,
        build
        and operate biofuels production and distribution infrastructure predominantly
        on
        the eastern seaboard of the United States. Mean Green holds certain exclusive
        rights to the EORS technology (see below) for the cost-effective conversion
        of
        corn oil into biodiesel fuels. During the three months ended September 30,
        2005,
        the Company earned $12,500 in management fees payable from this portfolio
        company which fees remained outstanding as of September 30, 2005. Our chairman
        and chief executive officer, Kevin Kreisler, is the chairman of Mean
        Green.
  ETHANOL
        OIL RECOVERY SYSTEMS, L.L.C. (“EORS”)
  EORS,
        a
        green technology development company, is the inventor of a new patent-pending
        technology for the cost-effective conversion of corn oil into biodiesel fuels.
        EORS has licensed its technologies to VeraSun Energy Corporation for the
        territory west of the Mississippi River and to Mean Green BioFuels Corporation,
        a GreenShift company, for the rest of the world. EORS owns a 20% stake in
        VeraSun Energy’s new biodiesel facility, which is slated for production in 2007.
        Under the terms of its agreement with EORS, GreenShift acquired a 10% stake
        in
        EORS for a commitment to provide a minimum of $1.2 million to a maximum of
        $2.5
        million. As a limited liability company, EORS’ taxable income will flow directly
        through to its members.
  On
        June
        29, 2005, the Company made its first payment of $100,000 under the EORS
        investment agreements. The balance is expected to be due in the second or
        third
        quarter of 2006 upon the perfection of conventional credit financing for
        the new
        VeraSun facility. As of September 30, 2005, the Company accrued $1,097,437
        in
        investments payable to EORS.
  STERLING
        PLANET, INC.
  Sterling
        Planet is the nation’s leading retail renewable energy provider through the
        sourcing and sale of renewable energy certificates (“RECs”). RECs, or green
        tags, enable retail residential and non-residential consumers to purchase
        green,
        or environmentally friendly, energy through their existing utility and offset
        reliance on power generated from fossil fuel sources. RECs represent all
        of the
        positive environmental attributes of renewable power generation from sources
        such as solar, wind and organic bioenergy power and can be purchased and
        used by
        consumers regardless of whether or not their local utility has access to
        green
        power generation.
  Founded
        in 2000, Sterling Planet was the first company to offer every U.S. home and
        business a way to reduce the environmental impact of regular electricity
        production. Now Sterling Planet leads the way in retail sales of renewable
        energy from the sun, wind, biomass, small hydro and other renewable technologies
        produced domestically while stimulating local economies and creating jobs.
        Sterling has sold over 2.33 billion kilowatt hours of renewable energy since
        its
        inception, representing enough energy to power 214,300 homes for a full year
        or
        taking over 283,000 cars off the roads which will offset 1,624,000 tons of
        carbon dioxide. Sterling is also the nation’s leader in partnering with electric
        utilities and businesses to market or supply renewable energy. Currently,
        Sterling has 26 utility partners nationwide in states such as Florida,
        Massachusetts, New York, Connecticut, New Jersey and Rhode Island. Sterling
        currently services an impressive array of clients including Alcoa, The Coca-Cola
        Company, DuPont, Delphi Corporation, Duke University, University of Utah,
        Nike,
        Pitney Bowes, U.S. Environmental Protection Agency, the U.S. General Services
        Administration, the Homeland Security Department, Western Area Power
        Administration, New York State Energy Research and Development Authority
        (NYSERDA), the U. S. Army, Staples, Whirlpool Corporation, the World Resources
        Institute and over 150 other environmentally friendly companies.
   25
  
 **GREENSHIFT
        CORPORATION (F/K/A GREENWORKS CORPORATION) AND
        SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS**
  **4.**
              **PORTFOLIO
                  (****continued****)**
  STERLING
        PLANET, INC. ( continued )
  Under
        the
        terms of its agreement with Sterling, GreenShift purchased $1,000,000 in
        8%
        convertible notes in Sterling and warrants to purchase up to an additional
        $500,000 of Sterling common stock upon Sterling’s completion of a larger venture
        capital raise. During the three months ended September 30, 2005, the Company
        earned $2,389 in interest income and received no other related portfolio
        income
        from Sterling. As of September 31, 2005, $750,000 of the Company’s investment
        payable relates to this investment.
  TERRAPASS,
        INC.
  TerraPass
        is a development stage company founded by professor Karl Ulrich and a group
        of
        his students at the Wharton School at the University of Pennsylvania. TerraPass
        allows consumers to pay to offset their car's emissions through investment
        in
        clean-energy alternatives such as wind and bioenergy power by purchasing
        a
        "TerraPass" - a decal sold through the TerraPass website that is certified
        to
        eliminate the equivalent of a single car's carbon dioxide emissions. TerraPass
        allows a broad audience of consumers to participate in this emerging trend,
        by
        purchasing carbon dioxide credits and renewable energy certificates ("RECs")
        on
        behalf of its customers that subsidize and increase the production of green,
        or
        environmentally friendly energy, and offset consumption of fossil fuel
        sources.
  Under
        the
        terms of its agreement with TerraPass, GreenShift purchased a 10% stake in
        TerraPass for $250,000 and warrants to acquire an additional 15% of TerraPass
        for another $250,000. As of September 31, 2005, $150,000 of the Company’s
        investment payable relates to this investment.
  CORIOLIS
        ENERGY CORPORATION (“CEC”)
  CEC
        is a
        pre-revenue, research and development company with a focus on alternative
        energy
        resources. CEC is currently not operating. CEC’s initial focus will be on the
        commercial development of a new types of cost-effective and scalable green
        power
        generation. Our chairman and chief executive officer, Kevin Kreisler, is
        the
        chairman of CEC.
  HUGO
        INTERNATIONAL TELECOM, INC. (“HUGO”)
  Hugo
        is a
        development stage public company whose plan for 2005 is to complete one or
        more
        suitable acquisitions. On August 20, 2005, the Company acquired 300,000 shares
        of Hugo’s Series B Preferred Stock for $300,000. These shares are convertible
        into Hugo common stock at the rate of $1.15 per share and have voting rights
        equal to 67% of the fully diluted capital stock of Hugo. Our chairman and
        chief
        executive officer, Kevin Kreisler, is also the chairman of Hugo. As of September
        30, 2005, the Company purchased 8% convertible debentures in Hugo totaling
        $67,995. During the three months ended September 30, 2005, the Company earned
        $1,105 in interest income and $50,000 in management service fees from Hugo.
        At
        September 30, 2005, Hugo owed the company $1,105 of accrued interest. Our
        chairman and chief executive officer, Kevin Kreisler, is the chairman of
        Hugo.
  TDS
        TELEMEDICINE, INC. (“TDS”)
  TDS
        (Pink
        Sheets: TDST) is a development stage public company whose plan for 2005 is
        to
        complete one or more acquisitions of strategically compatible companies.
        It has
        recently executed a letter of intent to acquire Alfa Industries, Inc., an
        infrastructure and real estate development company. Alfa provides an array
        of
        utility installation, management and maintenance services, including: heavy,
        highway and bridge construction; trench-less technology for installation
        of
        underground utilities; development-driven environmental and remedial services;
        and, general maintenance of roadways and public property for local, state
        and
        federal governments throughout the mid-Atlantic and seaboard states. Our
        chairman and chief executive officer, Kevin Kreisler, is also the chairman
        of
        TDS. As of September 30, 2005, the Company purchased 8% convertible debentures
        in TDS totaling $171,885 and beneficially owns about 6% of TDS. During the
        three
        months ended September 30, 2005, the Company earned $5,000 in interest income
        and management service fees of $87,500 from TDS. At September 30, 2005, TDS
        owed
        the company $5,000 in interest. Our chairman and chief executive officer,
        Kevin
        Kreisler, is the chairman of TDS.
  
  
   26
  
 **GREENSHIFT
        CORPORATION (F/K/A GREENWORKS CORPORATION) AND
        SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS**
  **4.**
              **PORTFOLIO
                  (****continued****)**
  The
        Company expects to generate income from, among other things, management fees
        and
        royalty payments. The following chart provides information about how the
        Company
        expects to generate income from its portfolio:
  **Portfolio
                  Company**
              **Expected
                  Source of Income**
              **Estimated
                  Annual Amount**Veridium
                  Corporation
              Management
                  Fees
              $                  
                  150,000(*)Sale
                  of Equity
              --Interest
                  or Coupon
              25,000Dividend
                  Payments
              --*
                  Expected to commence in 2006INSEQ
                  Corporation
              Management
                  Fees
              $                   
                   200,000Sale
                  of Equity
              --Interest
                  or Coupon
              32,000Dividend
                  Payments
              --GreenWorks
                  Corporation
              Management
                  Fees
              $                  
                   150,000Sale
                  of Equity
              --Interest
                  or Coupon
              --Dividend
                  Payments
              --GreenShift
                  Industrial
              Management
                  Fees
              $                  
                  200,000Design
                  Corporation
              Sale
                  of Equity
              --Interest
                  or Coupon
              25,000Dividend
                  Payments
              --Ovation
                  Products Corporation
              Management
                  Fees
              $                          
                   --Sale
                  of Equity
              --Interest
                  or Coupon
              --Dividend
                  Payments
              --Tornado
                  Trash Corporation
              Management
                  Fees
              $                 
                  150,000Sale
                  of Equity
              --Interest
                  or Coupon
              --Dividend
                  Payments
              --Mean
                  Green BioFuels Corporation
              Management
                  Fees
              $                
                   150,000Sale
                  of Equity
              --Interest
                  or Coupon
              --Dividend
                  Payments
              --Ethanol
                  Oil Recovery
              Management
                  Fees
              $                          
                   --Systems,
                  LLC
              Sale
                  of Equity
              --Interest
                  or Coupon
              --Dividend
                  Payments
              1,500,000(*)*
                  Expected to commence in 2007Sterling
                  Planet, Inc.
              Management
                  Fees
              $                          
                   --Sale
                  of Equity
              --Interest
                  or Coupon
              80,000Dividend
                  Payments
              --TerraPass,
                  Inc.
              Management
                  Fees
              $                           --Sale
                  of Equity
              --Interest
                  or Coupon
              --Dividend
                  Payments
              --Coriolis
                  Energy Corporation
              Management
                  Fees
              $                         
                   --Sale
                  of Equity
              --Interest
                  or Coupon
              --Dividend
                  Payments
              --Hugo
                  International Telecom, Inc.
              Management
                  Fees
              $                150,000Sale
                  of Equity
              --Interest
                  or Coupon
              40,000Dividend
                  Payments
              --TDS
                  (Telemedicine), Inc.
              Management
                  Fees
              $                200,000Sale
                  of Equity
              --Interest
                  or Coupon
              25,000Dividend
                  Payments
              --
   27
  **GREENSHIFT
        CORPORATION (F/K/A GREENWORKS CORPORATION) AND
        SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS**
  **5.**  **FINANCING
        ARRANGEMENTS**
  At
        September 30, 2005, the Company was subject to the following financing
        arrangements
  **9/30/05**Short-term
                  borrowings
              
              $
              147,095Current
                  portion of convertible debentures:Candent
                  Debenture, 5% convertible debentures, due December 2005
              
              
              716,912Total
                  current portion of convertible debentures
              
              $
              864,007Convertible
                  debt, net of current portion:Cornell
                  Capital Partners, 5% convertible debenture
              
              
              2,565,000Total
                  convertible debentures, net of current maturities
              
              $
              2,565,000
 
  On
        April
        1, 2005, Kevin Kreisler, the Company’s chairman and chief executive officer,
        transferred majority ownership in Veridium and INSEQ to the Company in return
        for 46.3 million shares of the Company’s common stock, 1.0 million shares of the
        Company’s Series B Preferred Stock, and the assumption by the Company of certain
        liabilities due to Cornell Capital Partners, LP, (“Cornell”), Cedar Crescent
        Holdings, Ltd., Castlerigg Master Investments, Ltd., and Stranco Investments,
        Ltd. (Cedar Crescent, Castlerigg and Stranco are collectively referred to
        herein
        as “CCS”), Lakeland Bank (“Lakeland”), Candent Corporation (“Candent”), Serenity
        Capital, L.L.C. (“Serenity”), and Mr. Kreisler.
  SHORT
        TERM BORROWINGS:
  The
        Company has a variable interest rate line of credit with Lakeland Bank (6.5%
        at
        December 31, 2004), which had an outstanding balance of $62,579 as of September
        30, 2005, representing the entire line.
  During
        2005, GreenShift received $217,844 in non-interest bearing short term loans
        from
        Kevin Kreisler, the Company’s chairman and chief executive officer, of which
        $133,328 were repaid during 2005.
  CANDENT
        DEBENTURE
  During
        2005, Candent purchased a total of $1,293,913 in convertible debentures from
        the
        Company, of which $1,064,413 was provided to the Company during the three
        months
        ended September 30, 2005, and $575,000 was converted into 14,542,404 shares
        of
        the Company’s common stock during the three months ended September 30, 2005. The
        balance outstanding at September 30, 2005, of $716,913 bears interest at
        5% per
        annum and is convertible into the Company’s common stock on the basis of the
        average of the five lowest closing market prices for the Company’s common stock
        for the month preceding any such conversion, provided that Candent may not
        convert any portion of its debentures where such conversion would bring Candent
        to greater than 4.99% of the Company’s fully diluted capital stock. The
        president of Candent is the wife of the Company’s chairman. All of the issued
        and outstanding capital stock of Candent is held in trust for the benefit
        of its
        president.
  SERENITY
        DEBENTURE
  During
        2005, Serenity purchased a total of $592,444 in convertible debentures from
        the
        Company, of which $407,444 was provided to the Company during the three months
        ended September 30, 2005. $407,444 was converted into 7,224,184 shares of
        the
        Company’s common stock during the three months ended September 30, 2005.
        3,922,650 of these shares were issued to Serenity during the three months
        ended
        September 30, 2005. The Company’s chairman purchased 3,100,000 of these shares
        during the three months ended September 30, 2005, which shares were then
        surrendered to the Company and cancelled. Serenity is owned by a relative
        of the
        Company’s chairman.
  CORNELL
        DEBENTURE
  The
        Cornell Debentures bear annual interest at 5%, mature on April 1, 2008, and
        are
        convertible into the Company’s common stock, at the investor’s option at the
        lower of the Company’s net asset value or the average of
        the
        five lowest closing market prices for the Company’s common stock for the month
        preceding any such conversion. During the three months ended September 30,
        2005,
        Cornell purchased an additional $565,000 in 5% convertible debentures and
        effected conversions totaling $435,611, for which Cornell received 9,724,737
        shares of the Company’s common stock, and which left a balance on the Cornell
        Debentures at September 30, 2005, of $2,565,000.
   28
  
 **GREENSHIFT
        CORPORATION (F/K/A GREENWORKS CORPORATION) AND
        SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS**
  **6.**
              **SHAREHOLDERS’
                  EQUITY**
  CORNELL
        DEBENTURE ( continued )
  **THE
        CORNELL DEBENTURE COULD INCREASE OUR OUTSTANDING SHARES BY OVER
        15%**
  While
        Cornell is subject to restrictions on conversion of the Cornell Debenture
        limiting Cornell’s ownership to 9.9% of our common stock, without this
        restriction the debenture could be converted into 12,825,000 shares at the
        market price on September 30, 2005. The issuance of these shares would dilute
        the interest of our current shareholders by over 15%. To
        satisfy its conversion obligations under the Debentures, the Company placed
        5,000,000 shares of common stock into escrow for potential issuance to Cornell
        upon conversion of the Debentures.
  TRANSACTIONS
        WITH VIRIDIS CAPITAL, L.L.C.
  On
        March
        31, 2005, the Company acquired about 55% of the issued and outstanding capital
        stock of Veridium from Viridis Capital, L.L.C. (“Viridis”), an affiliate of
        Kevin Kreisler, the Company’s chairman and chief executive officer, and 70% of
        the issued and outstanding capital stock of INSEQ from Incandent Capital,
        L.L.C.
        (“Incandent”), another affiliate of Kevin Kreisler, in return for 46.3 million
        shares of the Company’s common stock, 1.0 million shares of the Company’s Series
        B Preferred Stock, and the assumption by the Company of certain liabilities
        due
        to Cornell, CCS, Lakeland, Candent, Serenity, and Mr. Kreisler (collectively,
        the “Assumed Liabilities”). The Company common and preferred stock issued at
        closing were worth an aggregate of about $3.47 million and the Assumed
        Liabilities totaled about $2.98 million, for a total of about $6.54 million.
        The
        Veridium and INSEQ securities acquired from Viridis and Incandent were
        collectively worth about $7.37 million as of April 1, 2005. For reasons mostly
        involving administrative efficiency, the consideration the Company paid for
        both
        the Veridium and INSEQ securities were paid to just Viridis as opposed to
        both
        Viridis and Incandent on a pro rated basis. The Company’s Series B Preferred
        Stock was issued to Viridis in this transaction is convertible on December
        31,
        2006 into the lesser of 50 million shares of common stock or that number
        of
        shares of commons stock which, when added to Viridis’ other holdings in the
        Company, are equal to 80% of the outstanding common stock on that date. On
        August 22, 2005, Viridis and the Company entered into an agreement pursuant
        to
        which Viridis agreed to surrender its 47,440,678 shares of common stock in
        the
        Company and eliminate its 80% dilution protection in return for the Company’s
        agreement to amend its Series B preferred stock to provide for a fixed face
        value equal to 80% of GreenShift’s Net Asset Value (“NAV”) upon closing, voting
        rights and preferences on dividend payments that are fixed at 80% until
        conversion, and the right to convert the amended preferred stock into the
        Company’s common stock at a rate equal to the Company’s NAV per share upon
        closing. The Company expects to close this transaction during the fourth
        quarter
        of 2005 and intends to perfect the surrender and amendment noted above upon
        closing.
  TRANSACTIONS
        WITH ACUTUS CAPITAL, L.L.C.
  On
        April
        1, 2005, the Company and its wholly-owned subsidiary, GreenWorks Corporation,
        entered into an Option Agreement with Acutus Capital, L.L.C. Acutus Capital
        is
        the owner of 1,140,769 shares of the Company’s common stock, which correlated to
        25% of the outstanding common stock as of March 31, 2005 (and 1.8% as of
        June
        30, 2005). The Option Agreement affords Acutus the right to exchange its
        common
        stock in the Company for 1,000,000 shares of GreenWorks, which shares represent,
        subject to further investments by the Company, 40% of the equity in GreenWorks.
        The Option Agreement further provides that, in the event of the death or
        incapacity of Kevin Kreisler, Acutus will have the right to exchange its
        common
        shares in the Company for 1,575,000 shares of GreenWorks, representing 51%
        of
        the outstanding shares. The Option Agreement expires on March 31, 2015. The
        Option Agreement had previously included an adjustment provision that operated
        to keep Acutus’ holdings in the Company constant at 4.99% of the issued and
        outstanding common stock of the Company. The Option Agreement had been entered
        into prior to the Company’s filing of its election to be regulated as a BDC
        under the 1940 Act. Prior to filing this election, the Company’s board of
        directors required and Acutus consented to the cancellation of this
        provision.
  DEBENTURE
        CONVERSIONS
  During
        the three months ended September 30, 2005, Cornell converted a total of $435,611
        in debt into 9,724,737 shares of the Company’s common stock, Anthony Warnecke
        converted a total of $222,500 in debt into 1,250,000 shares of the Company’s
        common stock, Candent converted a total of $575,000 in debt into 14,542,404
        shares of the Company’s common stock (of which 9,542,404 had not been issued as
        of September 30, 2005), and Serenity converted a total of $407,444 in debt
        into
        7,772,184 shares of the Company’s common stock (all of which shares had not been
        issued as of September 30, 2005).
   29
  
 **GREENSHIFT
        CORPORATION (F/K/A GREENWORKS CORPORATION) AND
        SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS**
  **6.**
              **SHAREHOLDERS’
                  EQUITY (****continued****)**
  DIVIDEND
        REINVESTMENT PLAN
  The
        Company has a dividend reinvestment plan (the “DRP”), whereby the Company may
        buy shares of its common stock in the open market or issue new shares in
        order
        to satisfy dividend reinvestment requests. If the Company issues new shares,
        the
        issue price is equal to the average of the closing sale prices reported for
        our
        common stock for the ten consecutive trading days immediately prior to the
        dividend payment date. There has been no activity to date under the DRP and
        the
        Company therefore did not issue any new shares under the DRP.
  STOCK
        OPTION PLAN
  The
        purpose of the Company’s stock option plan (“Option Plan”) is to provide
        officers and non-officer directors of the Company with additional incentives
        that are aligned with the Company’s growth. Options are exercisable at a price
        equal to the fair market value of the shares on the day the option is granted.
        Each option states the period or periods of time within which the option
        may be
        exercised by the optionee, which may not exceed ten years from the date the
        option is granted. The options granted vest ratably over periods ranging
        from
        one to five years. All rights to exercise options terminate 60 days after
        an
        optionee ceases to be (i) a non-officer director, (ii) both an officer and
        a
        director, if such optionee serves in both capacities, or (iii) an officer
        (if
        such officer is not also a director) of the Company for any cause other than
        death or total and permanent disability. In the event of a change of control
        of
        the Company, all outstanding options will become fully vested and exercisable
        as
        of the change of control.
  FORM
        1-E
        AND OFFERING CIRCULAR UNDER REGULATION E
  The
        Company filed a Form 1-E and Offering Circular with the U.S. Securities and
        Exchange Commission on April 22, 2005, pursuant to which the Company plans
        to
        offer for sale up to $5 million of its common stock. This offering commenced
        on
        May 6, 2005, pursuant to an exemption from registration in Regulation E of
        the
        1940 Act as set forth in Rule 604(a) thereunder. Copies of this offering
        circular are available upon request.
  On
        July
        22, 2005, the Company received a letter from the Staff of Securities and
        Exchange Commission (the “Letter”), which raised various issues including among
        other things issues as to whether all material information about the Company
        was
        included in the Offering Circular. The Company responded to the Staff’s comments
        on August 12, 2005, addressing the Staff’s concerns. It is the Company’s
        position that all material information about the Company, both prior to and
        after the Company filed its election to be regulated as an investment company
        under the 1940 Act, had been included in the Offering Circular.
  **7.**
              **RELATED
                  PARTY TRANSACTIONS**
  TRANSACTIONS
        WITH VIRIDIS CAPITAL, L.L.C.
  On
        March
        31, 2005, the Company acquired about 55% of the issued and outstanding capital
        stock of Veridium from Viridis Capital, L.L.C. (“Viridis”), an affiliate of
        Kevin Kreisler, the Company’s chairman and chief executive officer, and 70% of
        the issued and outstanding capital stock of INSEQ from Incandent Capital,
        L.L.C.
        (“Incandent”), another affiliate of Kevin Kreisler, in return for 46.3 million
        shares of the Company’s common stock, 1.0 million shares of the Company’s Series
        B Preferred Stock, and the assumption by the Company of certain liabilities
        due
        to Cornell, CCS, Lakeland, Candent, Serenity, and Mr. Kreisler (collectively,
        the “Assumed Liabilities”). The Company common and preferred stock issued at
        closing were worth an aggregate of about $3.47 million and the Assumed
        Liabilities totaled about $2.98 million, for a total of about $6.54 million.
        The
        Veridium and INSEQ securities acquired from Viridis and Incandent were
        collectively worth about $7.37 million as of April 1, 2005. For reasons mostly
        involving administrative efficiency, the consideration the Company paid for
        both
        the Veridium and INSEQ securities were paid to just Viridis as opposed to
        both
        Viridis and Incandent on a pro rated basis. The Company’s Series B Preferred
        Stock was issued to Viridis in this transaction is convertible on December
        31,
        2006 into the lesser of 50 million shares of common stock or that number
        of
        shares of commons stock which, when added to Viridis’ other holdings in the
        Company, are equal to 80% of the outstanding common stock on that date. On
        August 22, 2005, Viridis and the Company entered into an agreement pursuant
        to
        which Viridis agreed to surrender its 47,440,678 shares of common stock in
        the
        Company and eliminate its 80% dilution protection in return for the Company’s
        agreement to amend its Series B preferred stock to provide for a fixed face
        value equal to 80% of GreenShift’s Net Asset Value (“NAV”) upon closing, voting
        rights and preferences on dividend payments that are fixed at 80% until
        conversion, and the right to convert the amended preferred stock into the
        Company’s common stock at a rate equal to the Company’s NAV per share upon
        closing. The Company expects to close this transaction during the fourth
        quarter
        of 2005 and intends to perfect the surrender and amendment noted above upon
        closing.
   30
   **GREENSHIFT
        CORPORATION (F/K/A GREENWORKS CORPORATION) AND
        SUBSIDIARIES**
 **NOTES
        TO FINANCIAL STATEMENTS**
  **7.**
              **RELATED
                  PARTY TRANSACTIONS (****continued****)**
  DEBENTURE
        CONVERSIONS
  During
        the three months ended September 30, 2005, Candent converted a total of $575,000
        in debt into 14,542,404 shares of the Company’s common stock (of which 9,542,404
        were issued and were pending delivery as of September 30, 2005), and Serenity
        converted a total of $407,444 in debt into 7,224,184 shares of the Company’s
        common stock (all of which shares were issued and pending delivery as of
        September 30, 2005).
  TRANSACTIONS
        WITH OUR CHAIRMAN AND CHIEF EXECUTIVE OFFICER
  During
        2005, GreenShift received $217,844 in non-interest bearing short term loans
        from
        Kevin Kreisler, the Company’s chairman and chief executive officer, of which
        $133,328 were repaid during 2005.
  TRANSACTIONS
        WITH OUR PRESIDENT AND CHIEF FINANCIAL OFFICER
  The
        Company is party to a consulting agreement in the original amount of $150,000
        with its president and chief financial officer, James Grainer, for Mr. Grainer’s
        services from prior to April 1, 2005 relative to the Company’s formation. As of
        July 2005, the amount due to Mr. Grainer was paid in full.
  MANAGEMENT
        SERVICE AGREEMENTS
  GreenShift
        has entered into various management service agreements with related entities
        in
        which it may have a controlling ownership interest. The management of GreenShift
        also holds senior management positions at these various controlled entities.
        Accordingly, GreenShift management is directly involved in the negotiations
        of
        such management agreements on the part of the related entities. Pursuant
        to the
        agreements GreenShift will provide or oversee a variety of management services,
        including but not limited to financial, strategic development, operational,
        regulatory, administrative, risk management, insurance, and other services.
  In
        general, GreenShift’s management services agreements provide that GreenShift
        will be paid a quarterly management fee for services provided and earned
        throughout the quarter. Consistent with these agreements, GreenShift recognizes
        management fee income on a quarterly basis. A limited number of agreements
        provide that GreenShift will have earned its fee at the time it has entered
        into
        an agreement to provide certain designated management services. The related
        entities that are a party to these agreements may be very early stage companies
        or companies that are going through various stages of financial restructuring.
        Accordingly some of these entities may not have adequate financial resources
        to
        fulfill their payment obligations under the agreement. If any of these related
        entities cannot fulfill their payment obligations this would result in the
        reduction of management fee income previously recognized by GreenShift.
  The
        entities that are currently a party to a management services agreement are
        the
        following: INSEQ Corporation, GreenWorks Corporation, GreenShift Industrial Design Corporation,
        Tornado Trash Corporation, Mean Green BioFuels Corporation, Hugo International
        Telecom, Inc., and TDS (Telemedicine), Inc.
  As
        of
        September 30, 2005 the amount owed to GreenShift by related entities for
        the
        providing of management services and financing was $676,442.
  **8.**
              **SUBSEQUENT
                  EVENTS**
  NEW
        CORNELL DEBENTURES
  Effective
        October 12, 2005, the Company entered into Securities Purchase Agreement,
        with
        Cornell Capital Partners, LP, for the sale of $ 1,475,000 in
        convertible debentures (the “October 2005 Cornell Debenture”). The debentures
        issued pursuant to the October 2005 Cornell Agreement bear annual interest
        at
        5%, mature on October 12, 2008, and are convertible into the Company’s common
        stock, at the investor’s option at the lower of the Company’s net asset value or
        the average of
        the
        five lowest closing market prices for the Company’s common stock for the month
        preceding any such conversion .
   31
  
  **ITEM
                  2.**
                **MANAGEMENT'S
                    DISCUSSION AND****ANALYSIS
                    AND PLAN OF
                    OPERATION**
  *In
        addition to historical information, this Reports contains forward-looking
        statements, which are generally identifiable by use of the words
“believes,”“expects,”“intends,”“anticipates,”“plans to,”“estimates,”“projects,”
        or similar expressions. These forward-looking statements are subject to certain
        risks and uncertainties that could cause actual results to differ materially
        from those reflected in these forward-looking statements. Factors that might
        cause such a difference include, but are not limited to, those discussed
        in the* *sections* *entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial
        Condition and Results of Operations.” Readers are cautioned not to place undue
        reliance on these forward-looking statements, which reflect management’s
        opinions only as of the date hereof. We undertake no obligation to revise
        or
        publicly release the results of any revision to these forward-looking
        statements.*
  OVERVIEW
  We
        are a
        business development company that provides long-term debt and equity investment
        capital to companies and technologies that facilitate the efficient use of
        natural resources and catalyze transformational environmental gains. Our
        financing is generally used to fund growth, acquisitions, buyouts,
        recapitalizations, note purchases, bridge financings, and other types of
        financings. We generally invest in private companies and companies that are
        public but that lack access to additional public capital or whose securities
        may
        not be marginable.
  Our
        earnings depend primarily on the level of interest and dividend income, fee
        and
        other income, and net gains or losses earned on our investment portfolio
        after
        deducting interest expense on borrowed capital and operating expenses. Interest
        income results from the stated interest rate earned on a loan or debt security
        and the amortization of loan origination fees and discounts. The level of
        interest income is directly related to the balance of the interest-bearing
        investment portfolio outstanding during the period multiplied by the weighted
        average yield. Our ability to generate interest income is dependent on economic,
        regulatory, and competitive factors that influence new investment activity,
        the
        amount of loans and debt securities for which interest is not accruing and
        our
        ability to secure debt and equity capital for our investment
        activities.
  Because
        we are a regulated investment company for tax purposes, we intend to distribute
        substantially all of our annual taxable income as dividends to our
        shareholders.
  PORTFOLIO
        AND INVESTMENT ACTIVITY
  The
        total
        portfolio at value, investment activity, and the yield on interest-bearing
        investments at and for the six months ended September 30, 2005, were as
        follows:
  **9/30/05**Portfolio
                  at value
              
              $
              12,748,438Investments
                  funded
              
              
              8,128,909Change
                  in accrued or reinvested interest
              
              
              133,366Principal
                  collections related to investment repayments or sales
              
              
              --Yield
                  on interest-bearing investments
              
              
              8.00
              %
  The
        level
        of investment activity for investments funded and principal repayments for
        our
        investments can vary substantially from period to period depending on many
        factors, including the amount of debt and equity capital available to middle
        market companies, the level of merger and acquisition activity for such
        companies, the general economic environment, and the competitive environment
        for
        the types of investments we make. We believe that merger and acquisition
        activity in the middle market was strong in the first quarter of 2005, which
        when combined with a lower interest rate environment resulted in an increase
        in
        private finance investments funded, as well as increased repayments. The
        first
        quarter of the year tends to be a seasonally slower period for deal closings
        as
        the industry recovers from what is typically an active fourth quarter closing
        schedule.
 The
        level
        of investment activity for investments funded and principal repayments for
        our
        investments can vary substantially from period to period depending on many
        factors, including the amount of debt and equity capital available to middle
        market companies, the level of merger and acquisition activity for such
        companies, the general economic environment, and the competitive environment
        for
        the types of investments we make. We believe that merger and acquisition
        activity in the middle market was strong in the first quarter of 2005, which
        when combined with a lower interest rate environment resulted in an increase
        in
        private finance investments funded, as well as increased repayments. The
        first
        quarter of the year tends to be a seasonally slower period for deal closings
        as
        the industry recovers from what is typically an active fourth quarter closing
        schedule.
  Investments
        funded for the six months ended September 30, 2005 consisted of the
        following:
  **9/30/05**Companies
                  more than 25% owned
              
              $
              7,128,909Companies
                  5% to 25% owned
              
              
              1,000,000Total
              
              $
              8,128,909
 
   32
  
  **ITEM
                2.**
              **MANAGEMENT'S
                  DISCUSSION AND****ANALYSIS
                  AND PLAN OF OPERATION**
  PORTFOLIO
        AND INVESTMENT ACTIVITY ( continued )
  We
        intend
        to continue a balanced approach to private finance investing that emphasizes
        a
        complementary mix of non-control investments and buyout investments, subject
        to
        regulatory diversity requirements. The combination of these two types of
        investments provides current interest and related portfolio income and the
        potential for future capital gains. Our current strategy is to focus on buyout
        and recapitalization transactions where we can control a portfolio company
        to
        manage risk and where we can potentially realize more attractive total returns
        from both current interest and fee income and future capital gains. In addition
        to our mezzanine investing, we are also focusing on smaller strategically
        compatible middle market companies for non-control transactions where we
        can
        provide either or both equity and/or debt financing.
  We
        generally fund new investments using cash. In addition, we may acquire
        securities in exchange for our common equity. Also, we may acquire new
        securities through the reinvestment of previously accrued interest and dividends
        in debt or equity securities, or the current reinvestment of interest and
        dividend income through the receipt of a debt or equity security
        (payment-in-kind income). From time to time we may opt to reinvest accrued
        interest receivable in a new debt or equity security in lieu of receiving
        such
        interest in cash.
  At
        September 30, 2005, we had an outstanding investment commitments to Ethanol
        Oil
        Recovery Systems, L.L.C., Ovation Products Corporation, Sterling Planet,
        Inc.,
        and TerraPass, Inc., totaling $2.5 million.
  The
        Company’s largest investments at September 30, 2005, were in Veridium
        Corporation (“Veridium”) (OTC Bulletin Board: VRDM), INSEQ Corporation (“INSEQ”)
        (OTC Bulletin Board: INSQ), GreenWorks Corporation (“GreenWorks”), Ethanol Oil
        Recovery Systems, Inc. (“EORS”), Sterling Planet, Inc. (“Sterling Planet”), and
        Ovation Products Corporation (“Ovation”), accounting for 24.6%, 14.7%, 22.6%,
        9.9%, 7.6% and 7.6% respectively, of our total portfolio value.
  **Veridium
        Corporation**
  At
        September 30, 2005, our investment in Veridium totaled $4,929,937 at cost
        and
        $3,250,717 at value, or 24.6% of our total assets. Total interest and related
        portfolio income earned from our investment in Veridium for the three months
        ended September 30, 2005, was $5,235. Net change in unrealized appreciation
        or
        depreciation for the three months ended September 30, 2005, includes $429,869
        of
        unrealized depreciation related to Veridium.
  Veridium
        (OTC Bulletin Board: VRDM) is a publicly traded environmental management
        company. Veridium is currently implementing a restructuring plan which includes
        the cessation of operations of Veridium’s industrial waste recycling facility
        and is planned to include the reorganization of its services business. Veridium
        expects that these initiatives will enhance operating results in the immediate
        term and enable Veridium to grow its business more effectively.
  Our
        chairman and chief executive officer, Kevin Kreisler, is also the chairman,
        chief executive officer and president of Veridium Corporation. As the
        controlling shareholder of the Company, who is in turn the controlling
        shareholder of Veridium, Mr. Kreisler has unconditionally guaranteed certain
        of
        Veridium’s debts with its creditors.
  **INSEQ
        Corporation**
  At
        September 30, 2005, our investment in INSEQ totaled $1,988,967 at cost and
        $1,937,900 at value, or 14.7% of our total assets. Total
        interest and related portfolio income earned from our investment in INSEQ
        for
        the three months ended September 30, 2005, was $81,250 which includes management
        fees of $81,250. Net change in unrealized appreciation or depreciation for
        the
        three months ended September 30, 2005, includes $490,056 unrealized depreciation
        related to INSEQ.
  INSEQ
        is
        a publicly traded corporation whose mission is to directly facilitate the
        efficient utilization of natural resources including metals, chemicals, fuels
        and plastics.
  Our
        chairman and chief executive officer, Kevin Kreisler, is also the chairman
        of
        INSEQ, and our president and chief financial officer, James Grainer, is also
        the
        president and chief financial officer of INSEQ. As the controlling shareholder
        of the Company, who is in turn the controlling shareholder of INSEQ, Mr.
        Kreisler and the Company have unconditionally guaranteed certain of INSEQ’s
        debts with its creditors.
   33
   **ITEM
                  2.**
                **MANAGEMENT'S
                    DISCUSSION AND****ANALYSIS
                    AND PLAN OF OPERATION**
 PORTFOLIO
        AND INVESTMENT ACTIVITY ( continued )
  **GreenWorks
        Corporation**
  At
        September 30, 2005, our investment in GreenWorks totaled $942,000 at cost
        and
        $2,986,560 at value, or 22.6% of our total assets. Total
        related portfolio income earned from our investment in GreenWorks for the
        three
        months ended September 30, 2005, was $37,500. Net change in unrealized
        appreciation or depreciation for the three months ended September 30, 2005,
        includes $1,381,560 unrealized appreciation related to GreenWorks.
  GreenWorks
        is an environmental engineering services company that provides consulting,
        technical and engineering services to alleviate the environmental problems
        of
        its clients. GreenWorks’ clients include Fortune 100 and other industrial
        companies, commercial firms, engineering and construction contractors, law
        firms, utilities, real estate developers and government entities.
  Our
        chairman and chief executive officer, Kevin Kreisler, is also the chairman
        of
        GreenWorks, and our president and chief financial officer, James Grainer,
        is
        also the president and chief financial officer of GreenWorks.
  **Ethanol
        Oil Recovery Systems, L.L.C.**
  At
        September 30, 2005, our investment in EORS totaled $1,197,437 at cost and
        $1,305,931 at value, or 9.9% of our total assets. We did not realize any
        interest or related portfolio income from our investment in EORS for the
        three
        months ended September 30, 2005. Net change in unrealized appreciation or
        depreciation for the three months ended September 30, 2005, includes no
        unrealized appreciation related to EORS.
  EORS,
        a
        green technology development company, is the inventor of a new patent-pending
        technology for the cost-effective conversion of corn oil into biodiesel fuels.
        EORS has licensed its technologies to VeraSun Energy Corporation for the
        territory west of the Mississippi River and to Mean Green BioFuels Corporation,
        a GreenShift company, for the rest of the world. EORS owns a 20% stake in
        VeraSun Energy’s new biodiesel facility, which is slated for production in 2007.
  **Sterling
        Planet, Inc.**
  At
        September 30, 2005, our investment in Sterling totaled $1,000,000 at cost
        and
        $1,000,000 at value, or 7.6% of our total assets. Total interest and related
        portfolio income earned from our investment in Sterling for the three months
        ended September 30, 2005, was about $2,400. Net change in unrealized
        appreciation or depreciation for the three months ended September 30, 2005,
        includes no unrealized appreciation related to Sterling.
  Sterling
        Planet is the nation’s leading retail renewable energy provider through the
        sourcing and sale of renewable energy certificates (“RECs”). RECs, or green
        tags, enable retail residential and non-residential consumers to purchase
        green,
        or environmentally friendly, energy through their existing utility and offset
        reliance on power generated from fossil fuel sources. RECs represent all
        of the
        positive environmental attributes of renewable power generation from sources
        such as solar, wind and organic bioenergy power and can be purchased and
        used by
        consumers regardless of whether or not their local utility has access to
        green
        power generation.
  **Ovation
        Products Corporation**
  At
        September 30, 2005, our investment in Ovation totaled $1,000,000 at cost
        and
        $1,000,000 at value, or 7.6% of our total assets. We did not realize any
        interest or related portfolio income from our investment in Ovation for the
        three months ended September 30, 2005. Net change in unrealized appreciation
        or
        depreciation for the three months ended September 30, 2005, includes no
        unrealized appreciation related to Ovation.
  Ovation
        is a development stage company with patented and proprietary technologies
        involving new implementations of vapor compression distillation. Ovation
        has
        invested over $9 million developing technology that offers dramatic price
        and
        performance advantages over competing clean water technologies. Ovation is
        finalizing the development of its initial product, the Clean Water Appliance
        - a
        fire-hydrant sized appliance that can generate 25 gallons of pure water per
        hour
        from a variety of dirty water input sources at a cost of approximately $0.004
        per gallon, or about 1.2% of the cost of traditional home distillation methods.
        Ovation expects that its Clean Water Appliance will be available in 2006
        and
        will sell for a fraction of the price of commercial distillation systems.
        Ovation recently filed to become publicly traded and expects to commence
        trading
        in 2006. Our chairman and chief executive officer, Kevin Kreisler, is a board
        member of Ovation.
   34
  
 **ITEM
                  2.**
                **MANAGEMENT'S
                    DISCUSSION AND****ANALYSIS
                    AND PLAN OF
                    OPERATION**
  RESULTS
        OF OPERATIONS
  **Total
        Interest and Related Portfolio Equity Income**
  Total
        interest and related portfolio income includes interest and dividend income,
        loan payments, and fees and other income. We generated $14,616 in interest
        and
        dividend income during the three months ended September 30, 2005.
  Fees
        and
        other income for the three months ended September 30, 2005, was composed
        of the
        following:
  **9/30/05**Management
                  services provided to portfolio companies
              
              $
              243,750Transactional
                  and other services provided to portfolio companies
              
              
              --Structuring
                  and diligence services provided for portfolio companies
              
              
              87,500Other
                  income
              
              
              --Total
              
              $
              331,250
  Fees
        and
        other income are generally related to specific transactions or services and
        therefore may vary substantially from period to period depending on the level
        and types of services provided.
  **Operating
        Expenses**
  Operating
        expenses include interest, employee, and administrative expenses. Our interest
        expense is mostly associated with our various convertible debentures, and
        totaled $39,789 during the three months ended September 30, 2005. Employee
        expenses include salaries and employee benefits and the individual performance
        award and bonuses, and totaled $8,650 during the three months ended September
        30, 2005. Administrative expenses include legal and accounting fees, valuation
        assistance fees, insurance premiums, the cost of leases for our offices,
        stock
        record expenses, directors’ fees, and various other expenses, and totaled
        $226,235 during the three months ended September 30, 2005.
  **Realized
        Gains and Losses**
  Net
        realized gains primarily result from the sale of equity securities associated
        with certain investments, and the sale of debt, bonds and preferred shares.
        Net
        realized gains for the three months ended September 30, 2005, were $0. When
        we
        exit an investment and realize a gain or loss, we make an accounting entry
        to
        reverse any unrealized appreciation or depreciation, respectively, we had
        previously recorded to reflect the appreciated or depreciated value of the
        investment. For the three months ended September 30, 2005, we made no such
        reversals.
  **Change
        in Unrealized Appreciation or Depreciation**
  We
        determine the value of each investment in our portfolio on a quarterly basis,
        and changes in value result in unrealized appreciation or depreciation being
        recognized in our statement of operations. Value, as defined in Section 2(a)(41)
        of the Investment Company Act of 1940, is (i) the market price for those
        securities for which a market quotation is readily available and (ii) for
        all
        other securities and assets, fair value is as determined in good faith by
        the
        Board of Directors. Since there is typically no readily available market
        value
        for the investments in our portfolio, we value substantially all of our
        portfolio investments at fair value as determined in good faith by the Board
        of
        Directors pursuant to a valuation policy and a consistently applied valuation
        process.
  The
        Company relies on the services of an independent third party valuation company,
        Business Valuation Center of Reston, Virginia (“BVC”), to provide an independent
        assessment of the fair market value of the Company’s investments. The Company’s
        financial statements for the three months ended September 30, 2005 have been
        prepared in connection with BVC’s conclusions, which conclusions were based on a
        variety of conventionally accepted valuation methods.
  At
        September 30, 2005, portfolio investments recorded at fair value constituted
        greater than 96% of our total assets. Because of the inherent uncertainty
        of
        determining the fair value of investments that do not have a readily available
        market value, the fair value of our investments determined in good faith
        by the
        Board of Directors may differ significantly from the values that would have
        been
        used had a ready market existed for the investments, and the differences
        could
        be material.
   35
   **ITEM
                  2.**
                **MANAGEMENT'S
                    DISCUSSION AND****ANALYSIS
                    AND PLAN OF
                    OPERATION**
  RESULTS
        OF OPERATIONS ( continued )
  There
        is
        no single standard for determining fair value in good faith. As a result,
        determining fair value requires that judgment be applied to the specific
        facts
        and circumstances of each portfolio investment while employing a consistently
        applied valuation process for the types of investments we make. Unlike banks,
        we
        are not permitted to provide a general reserve for anticipated loan losses.
        Instead, we are required to specifically value each individual investment
        on a
        quarterly basis. We will record unrealized depreciation on investments when
        we
        believe that an investment has become impaired, including where collection
        of a
        loan or realization of an equity security is doubtful, or when the enterprise
        value of the portfolio company does not currently support the cost of our
        debt
        or equity investment. Enterprise value means the entire value of the company
        to
        a potential buyer, including the sum of the values of debt and equity securities
        used to capitalize the enterprise at a point in time. We will record unrealized
        appreciation if we believe that the underlying portfolio company has appreciated
        in value and our equity security has also appreciated in value. Changes in
        fair
        value are recorded in the statement of operations as net change in unrealized
        appreciation or depreciation.
  As
        a
        business development company, we have invested in illiquid securities including
        debt and equity securities of companies, and preferred shares. The structure
        of
        each private finance debt and equity security is specifically negotiated
        to
        enable us to protect our investment and maximize our returns. We include
        many
        terms governing interest rate, repayment terms, prepayment penalties, financial
        covenants, operating covenants, ownership parameters, dilution parameters,
        liquidation preferences, voting rights, and put or call rights. Our investments
        are generally subject to restrictions on resale and generally have no
        established trading market. Because of the type of investments that we make
        and
        the nature of our business, our valuation process requires an analysis of
        various factors. Our fair value methodology includes the examination of,
        among
        other things, the underlying investment performance, financial condition,
        and
        market changing events that impact valuation.
  *Valuation
        Methodology*
  Our
        process for determining the fair value of a private finance investment begins
        with determining the enterprise value of the portfolio company. The fair
        value
        of our investment is based on the enterprise value at which the portfolio
        company could be sold in an orderly disposition over a reasonable period
        of time
        between willing parties other than in a forced or liquidation sale. The
        liquidity event whereby we exit a private finance investment is generally
        the
        sale, the recapitalization or, in some cases, the initial public offering
        of the
        portfolio company.
  There
        is
        no one methodology to determine enterprise value and, in fact, for any one
        portfolio company, enterprise value is best expressed as a range of fair
        values,
        from which we derive a single estimate of enterprise value. To determine
        the
        enterprise value of a portfolio company, we analyze its historical and projected
        financial results. We generally require portfolio companies to provide annual
        audited and quarterly unaudited financial statements, as well as annual
        projections for the upcoming fiscal year. Typically in the private equity
        business, companies are bought and sold based on multiples of EBITDA, cash
        flow,
        net income, revenues or, in limited instances, book value.
  The
        private equity industry uses financial measures such as EBITDA or EBITDAM
        (Earnings Before Interest, Taxes, Depreciation, Amortization and, in some
        instances, Management fees) in order to assess a portfolio company’s financial
        performance and to value a portfolio company. EBITDA and EBITDAM are not
        intended to represent cash flow from operations as defined by U.S. generally
        accepted accounting principles and such information should not be considered
        as
        an alternative to net income, cash flow from operations, or any other measure
        of
        performance prescribed by U.S. generally accepted accounting principles.
        When
        using EBITDA to determine enterprise value, we may adjust EBITDA for
        non-recurring items. Such adjustments are intended to normalize EBITDA to
        reflect the portfolio company’s earnings power. Adjustments to EBITDA may
        include compensation to previous owners, acquisition, recapitalization, or
        restructuring related items or one-time non-recurring income or expense
        items.
  In
        determining a multiple to use for valuation purposes, we generally look to
        private merger and acquisition statistics, discounted public trading multiples
        or industry practices. In estimating a reasonable multiple, we consider not
        only
        the fact that our portfolio company may be a private company relative to
        a peer
        group of public comparables, but we also consider the size and scope of our
        portfolio company and its specific strengths and weaknesses. In some cases,
        the
        best valuation methodology may be a discounted cash flow analysis based on
        future projections. If a portfolio company is distressed, a liquidation analysis
        may provide the best indication of enterprise value.
   36
   **ITEM
                  2.**
                **MANAGEMENT'S
                    DISCUSSION AND****ANALYSIS
                    AND PLAN OF
                    OPERATION**
  RESULTS
        OF OPERATIONS ( continued )
  **Change
        in Unrealized Appreciation or Depreciation (continued)**
  *Valuation
        Methodology (continued)*
  If
        there
        is adequate enterprise value to support the repayment of our debt, the fair
        value of our loan or debt security normally corresponds to cost unless the
        borrower’s condition or other factors lead to a determination of fair value at a
        different amount. The fair value of equity interests in portfolio companies
        is
        determined based on various factors, including the enterprise value remaining
        for equity holders after the repayment of the portfolio company’s debt and other
        preference capital, and other pertinent factors such as recent offers to
        purchase a portfolio company, recent transactions involving the purchase
        or sale
        of the portfolio company’s equity securities, or other liquidation events. The
        determined equity values are generally discounted when we have a minority
        position, restrictions on resale, specific concerns about the receptivity
        of the
        capital markets to a specific company at a certain time, or other
        factors.
  As
        a
        participant in the private equity business, we invest primarily in private
        middle market companies for which there is generally no publicly available
        information. Because of the private nature of these businesses, there is
        a need
        to maintain the confidentiality of the financial and other information that
        we
        have for the private companies in our portfolio. We believe that maintaining
        this confidence is important, as disclosure of such information could
        disadvantage our portfolio companies and could put us at a disadvantage in
        attracting new investments. Therefore, we do not intend to disclose financial
        or
        other information about our portfolio companies, unless required, because
        we
        believe doing so may put them at an economic or competitive disadvantage,
        regardless of our level of ownership or control.
  To
        balance the lack of publicly available information about our private portfolio
        companies, we will continue to work with independent third-party consultants
        to
        obtain assistance in determining fair value for a portion of the private
        finance
        portfolio each quarter. We work with these consultants to obtain assistance
        as
        additional support in the preparation of our internal valuation analysis
        for a
        portion of the portfolio each quarter (for all investments with a cost or
        value
        greater than $250,000). In addition, we may receive independent assessments
        of a
        particular private finance portfolio company’s value in the ordinary course of
        business, most often in the context of a prospective sale transaction or
        in the
        context of a bankruptcy process. The valuation analysis prepared by management
        using these independent valuation resources is submitted to our Board of
        Directors for its determination of fair value of the portfolio in good
        faith.
  At
        September 30, 2005, Business Valuation Center, Inc. (“BVC”) assisted us by
        reviewing our valuations of our portfolio companies. For the remaining quarters
        in 2005, we intend to continue to obtain valuation assistance from BVC and
        possibly other third parties. We currently anticipate that we will generally
        obtain assistance for all companies in the portfolio that are more than 50%
        owned for each of the remaining quarters in 2005 and that we will generally
        obtain assistance for companies that are equal to or less than 50% owned
        at
        least once during the course of the year. Valuation assistance may not be
        obtained for new companies that enter the portfolio after September 30 of
        any
        calendar year during that year. We estimate that professional fees for valuation
        assistance for all of 2005 will be approximately $30,000.
  OTHER
        MATTERS
  **Per
        Share Amounts**
  All
        per
        share amounts included in the Management’s Discussion and Analysis of Financial
        Condition and Results of Operations section have been computed using the
        weighted average common shares outstanding to compute basic earnings per
        share,
        which were $0.00 with 77.8 million weighted average common shares outstanding
        for the three months ended September 30, 2005.
  **Regulated
        Investment Company Status**
  We
        have
        elected to be taxed as a regulated investment company under Subchapter M
        of the
        Internal Revenue Code of 1986. As long as we qualify as a regulated investment
        company, we are not taxed on our investment company taxable income or realized
        net capital gains, to the extent that such taxable income or gains are
        distributed, or deemed to be distributed, to shareholders on a timely
        basis.
   37
   **ITEM
                  2.**
                **MANAGEMENT'S
                    DISCUSSION AND****ANALYSIS
                    AND PLAN OF
                    OPERATION**
  OTHER
        MATTERS ( continued )
  **Regulated
        Investment Company Status (continued)**
  Taxable
        income generally differs from net income for financial reporting purposes
        due to
        temporary and permanent differences in the recognition of income and expenses,
        and generally excludes net unrealized appreciation or depreciation, as gains
        or
        losses are not included in taxable income until they are realized. In addition,
        gains realized for financial reporting purposes may differ from gains included
        in taxable income as a result of our election to recognize gains using
        installment sale treatment, which results in the deferment of gains for tax
        purposes until notes received as consideration from the sale of investments
        are
        collected in cash.
  Dividends
        declared and paid by the Company in a year generally differ from taxable
        income
        for that year as such dividends may include the distribution of current year
        taxable income, the distribution of prior year taxable income carried forward
        into and distributed in the current year, or returns of capital. We are
        generally required to distribute 98% of our taxable income during the year
        the
        income is earned to avoid paying an excise tax. If this requirement is not
        met,
        the Code imposes a nondeductible excise tax equal to 4% of the amount by
        which
        98% of the current year’s taxable income exceeds the distribution for the year.
        The taxable income on which an excise tax is paid is generally carried forward
        and distributed to shareholders in the next tax year. Depending on the level
        of
        taxable income earned in a tax year, we may choose to carry forward taxable
        income in excess of current year distributions into the next tax year and
        pay a
        4% excise tax on such income, as required.
  In
        order
        to maintain our status as a regulated investment company, we must, in general,
        (1) continue to qualify as a business development company; (2) derive at
        least
        90% of our gross income from dividends, interest, gains from the sale of
        securities and other specified types of income; (3) meet asset diversification
        requirements as defined in the Internal Revenue Code; and (4) timely distribute
        to shareholders at least 90% of our annual investment company taxable income
        as
        defined in the Internal Revenue Code. We intend to take all steps necessary
        to
        continue to qualify as a regulated investment company. However, there can
        be no
        assurance that we will continue to qualify for such treatment in future
        years
  FINANCIAL
        CONDITIONS, LIQUIDITY AND CAPITAL RESOURCES
  Our
        portfolio is expected to generate cash flow from which we plan to pay dividends
        to shareholders and fund new investment activity. Cash generated from the
        portfolio includes cash flow from net investment income and net realized
        gains
        and principal collections related to investment repayments or sales. Cash
        provided by our operating activities before new investment activity for the
        three months ended September 30, 2005, was $0.
  From
        the
        cash provided by operating activities before new investments, we make new
        portfolio investments, fund our operating activities, and pay dividends to
        shareholders. We also raise new debt and equity capital from time to time
        in
        order to fund our investments and operations.
  While
        we
        paid no dividends during the three months ended September 30, 2005, we expect
        to
        do so in the future. Dividends will generally be determined based upon an
        estimate of annual taxable income, which includes our taxable interest, dividend
        and fee income, as well as taxable net capital gains. As discussed above,
        taxable income generally differs from net income for financial reporting
        purposes due to temporary and permanent differences in the recognition of
        income
        and expenses, and generally excludes net unrealized appreciation or
        depreciation, as gains or losses are not included in taxable income until
        they
        are realized. Taxable income includes non-cash income, such as changes in
        accrued and reinvested interest and dividends and the amortization of discounts
        and fees. Cash collections of income resulting from contractual payment-in-kind
        interest or the amortization of discounts and fees generally occur upon the
        repayment of the loans or debt securities that include such items. Non-cash
        taxable income is reduced by non-cash expenses, such as realized losses and
        depreciation and amortization expense.
  Our
        Board
        of Directors reviews the dividend rate quarterly, and may adjust the quarterly
        dividend throughout the year. Dividends are declared based upon our estimate
        of
        annual taxable income available for distribution to shareholders. Our goal
        is to
        declare what we believe to be sustainable increases in our regular quarterly
        dividends. To the extent that we earn annual taxable income in excess of
        dividends paid for the year, we may spill over the excess taxable income
        into
        the next year and such excess income will be available for distribution in
        the
        next year. Excess taxable income spilled over and paid out in the next year
        may
        be subject to a 4% excise tax (see “ *Other
        Matters — Regulated Investment Company Status* ”
        above).
        We believe that spilling over excess taxable income into future periods may
        provide increased visibility with respect to taxable earnings available to
        pay
        the regular quarterly dividend.
   38
   **ITEM
                  2.**
                **MANAGEMENT'S
                    DISCUSSION AND****ANALYSIS
                    AND PLAN OF
                    OPERATION**
  FINANCIAL
        CONDITIONS, LIQUIDITY AND CAPITAL RESOURCES ( continued )
  Because
        we are a regulated investment company, we distribute our taxable income and,
        therefore, from time to time we will raise new debt or equity capital in
        order
        to fund our investments and operations.
  At
        September 30, 2005, our total assets, total debt outstanding, total
        shareholders’ equity, debt to equity ratio and asset coverage for senior
        indebtedness were as follows:
  **9/30/05**Total
                  assets
              
              $
              13,226,912Total
                  debt outstanding
              
              
              6,425,748Total
                  shareholders’ equity
              
              
              6,801,164Debt
                  to equity ratio
              
              
              0.94Asset
                  coverage ratio(1)
              
              
              206
              %
  (1)
              As
                  a business development company, we are generally required to maintain
                  a
                  minimum ratio of 200% of total assets to total
                  borrowings.
  We
        currently target a debt to equity ratio ranging between 0.75:1.00 to 1.25:1.00.
        We believe that it is prudent to operate with a larger equity capital base
        and
        less leverage, but we may from time to time increase our leverage to exploit
        compelling investment opportunities. During the three months ended September
        30,
        2005, we completed $1,344,154 in debt financing to provide cash for our
        operations.
  CRITICAL
        ACCOUNTING POLICIES
  The
        financial statements are based on the selection and application of critical
        accounting policies, which require management to make significant estimates
        and
        assumptions. Critical accounting policies are those that are both important
        to
        the presentation of our financial condition and results of operations and
        require management’s most difficult, complex, or subjective judgments. Our
        critical accounting policies are those applicable to the valuation of
        investments and certain revenue recognition matters as discussed
        below.
  **Valuation
        of Portfolio Investments**
  As
        a
        business development company, we invest in illiquid securities including
        debt
        and equity securities of companies. Our investments are generally subject
        to
        restrictions on resale and generally have little to no established trading
        market. We value substantially all of our investments at fair value as
        determined in good faith by the Board of Directors in accordance with our
        valuation policy. We determine fair value to be the amount for which an
        investment could be exchanged in an orderly disposition over a reasonable
        period
        of time between willing parties other than in a forced or liquidation sale.
        Our
        valuation policy considers the fact that no ready market exists for
        substantially all of the securities in which we invest. Our valuation policy
        is
        intended to provide a consistent basis for determining the fair value of
        the
        portfolio. We will record unrealized depreciation on investments when we
        believe
        that an investment has become impaired, including where collection of a loan
        or
        realization of an equity security is doubtful, or when the enterprise value
        of
        the portfolio company does not currently support the cost of our debt or
        equity
        investments. Enterprise value means the entire value of the company to a
        potential buyer, including the sum of the values of debt and equity securities
        used to capitalize the enterprise at a point in time. We will record unrealized
        appreciation if we believe that the underlying portfolio company has appreciated
        in value and our equity security has also appreciated in value. The value
        of
        investments in publicly traded securities is determined using quoted market
        prices discounted for restrictions on resale, if any.
  **Loans
        and Debt Securities**
  For
        loans
        and debt securities, fair value generally approximates cost unless the
        borrower’s enterprise value, overall financial condition or other factors lead
        to a determination of fair value at a different amount.
  When
        we
        receive nominal cost warrants or free equity securities (“nominal cost equity”),
        we allocate our cost basis in our investment between debt securities and
        nominal
        cost equity at the time of origination. At that time, the original issue
        discount basis of the nominal cost equity is recorded by increasing the cost
        basis in the equity and decreasing the cost basis in the related debt
        securities.
  Interest
        income is recorded on an accrual basis to the extent that such amounts are
        expected to be collected. For loans and debt securities with contractual
        payment-in-kind interest, which represents contractual interest accrued and
        added to the loan balance that generally becomes due at maturity, we will
        not
        accrue payment-in-kind interest if the portfolio company valuation indicates
        that the payment-in-kind interest is not collectible. Interest on loans and
        debt
        securities is not accrued if we have doubt about interest collection. Loans
        in
        workout status that are classified as Grade 4 or 5 assets under our internal
        grading system do not accrue interest. In addition, interest may not accrue
        on
        loans or debt securities to portfolio companies that are more than 50% owned
        by
        us depending on such company’s capital requirements. Loan origination fees,
        original issue discount, and market discount are capitalized and then amortized
        into interest income using the effective interest method. Upon the prepayment
        of
        a loan or debt security, any unamortized loan origination fees are recorded
        as
        interest income and any unamortized original issue discount or market discount
        is recorded as a realized gain. Prepayment premiums are recorded on loans
        and
        debt securities when received.
   39
  **ITEM
                  2.**
                **MANAGEMENT'S
                    DISCUSSION AND****ANALYSIS
                    AND PLAN OF
                    OPERATION**
  CRITICAL
        ACCOUNTING POLICIES (continued)
  **Equity
        Securities**
  Our
        equity interests in portfolio companies for which there is no liquid public
        market are valued at fair value based on the enterprise value of the portfolio
        company, which is determined using various factors, including cash flow from
        operations of the portfolio company and other pertinent factors, such as
        recent
        offers to purchase a portfolio company, recent transactions involving the
        purchase or sale of the portfolio company’s equity securities, or other
        liquidation events. The determined equity values are generally discounted
        to
        account for restrictions on resale or minority ownership positions.
  The
        value
        of our equity interests in public companies for which market quotations are
        readily available is based on the closing public market price on the balance
        sheet date. Securities that carry certain restrictions on sale are typically
        valued at a discount from the public market value of the security.
  Dividend
        income is recorded on preferred equity securities on an accrual basis to
        the
        extent that such amounts are expected to be collected, and on common equity
        securities on the record date for private companies or on the ex-dividend
        date
        for publicly traded companies.
  **Net
        Realized Gains or Losses and Net Change in Unrealized Appreciation or
        Depreciation**
  Realized
        gains or losses are measured by the difference between the net proceeds from
        the
        repayment or sale and the cost basis of the investment without regard to
        unrealized appreciation or depreciation previously recognized, and include
        investments charged off during the year, net of recoveries. Net change in
        unrealized appreciation or depreciation reflects the change in portfolio
        investment values during the reporting period, including the reversal of
        previously recorded unrealized appreciation or depreciation when gains or
        losses
        are realized.
  **Fee
        Income**
  Fee
        income includes fees for guarantees and services rendered by us to portfolio
        companies and other third parties such as diligence, structuring, transaction
        services, management services, and other advisory services. Guaranty fees
        are
        recognized as income over the related period of the guaranty. Diligence,
        structuring, and transaction services fees are generally recognized as income
        when services are rendered or when the related transactions are completed.
        Management and other advisory services fees are generally recognized as income
        as the services are rendered.
  RISKS
        FACTORS
  **We
        have negligible operations to date, so our ability to remain profitable is
        speculative.**
  We
        only
        recently initiated operations as an investment company. No assurances can
        be
        given that we will remain profitable.
  **We
        may change our investment policies without further shareholder
        approval.**
  We
        may
        change our investment policies without shareholder approval. We currently
        do not
        intend to change our investment policies and do not expect to do so in the
        future, although we may do so. We will notify our shareholders if we do change
        our investment policies.
  **Our
        investments may not generate sufficient income to cover our
        operations.**
  We
        intend
        to make investments into qualified companies that will provide the greatest
        overall return on our investment. However, certain of those investments may
        fail, in which case we will not receive any return on our investment. In
        addition, our investments may not generate income, either in the immediate
        future, or at all. As a result, we may have to sell additional stock, or
        borrow
        money, to cover our operating expenses.
   40
   **ITEM
                  2.**
                **MANAGEMENT'S
                    DISCUSSION AND****ANALYSIS
                    AND PLAN OF OPERATION**
 RISKS
        FACTORS ( continued )
  **We
        need to raise capital in order to fulfill our business plan.**
  We
        have
        generated no revenues and have extremely limited cash liquidity and capital
        resources. Any equity financings could result in dilution to our stockholders.
        Debt financing may result in high interest expense. Any financing, if available,
        may be on unfavorable terms. If we cannot obtain adequate funds, we may be
        required to reduce or curtail operations.
  **Investing
        in our stock is highly speculative and you could lose some or all of your
        investment.**
  The
        value
        of our common stock may decline and may be affected by numerous market
        conditions, which could result in the loss of some or the entire amount invested
        in our stock. The securities markets frequently experience extreme price
        and
        volume fluctuations that affect market prices for securities of companies
        generally and very small capitalization companies such as us in
        particular.
  **We
        are subject to regulatory risks as a business development company.**
  We
        are
        subject to regulation as a BDC. The loans and other investments that we expect
        to make in small business concerns are extremely speculative. Many of these
        concerns will be privately held. Even if a public market for their securities
        later develops, the securities we purchase are likely to be restricted from
        sale
        or other transfer for significant periods of time. These securities will
        be very
        illiquid.
  **We
        have received a letter from the Staff of Securities and Exchange Commission
        that
        raised concerns as to whether all material information about the Company
        was
        included in our recent Form 1-E and Offering Circular filed pursuant to
        Regulation E of the 1940 Act.**
  We
        filed
        a Form 1-E and Offering Circular with the U.S. Securities and Exchange
        Commission on April 22, 2005, pursuant to which we plan to offer for sale
        up to
        $5 million of its common stock. This offering commenced on May 6, 2005, pursuant
        to an exemption from registration in Regulation E of the 1940 Act as set
        forth
        in Rule 604(a) thereunder. Copies of this offering circular are available
        upon
        request. On July 22, 2005, we received a letter from the Staff of Securities
        and
        Exchange Commission (the “Letter”), which raised various issues including among
        other things issues as to whether all material information about the Company
        was
        included in the Offering Circular. The Company responded to the Staff’s comments
        on August 12, 2005, addressing the Staff’s concerns. It is our position that all
        material information about the Company, from both prior to and after we filed
        our election to be regulated as an investment company under the 1940 Act,
        had
        been included in the Offering Circular. We intend to resolve the issues raised
        by the Staff as promptly as practicable.
  **Our
        business development could be hindered if we lost the services of our Chief
        Executive Officer or our Chief Financial Officer.**
  Kevin
        Kreisler and James Grainer are our only executive officers. Together, they
        are
        responsible for strategizing not only our business plan but also the means
        of
        financing it. If either Mr. Grainer or Mr. Kreisler were to leave us or become
        unable to fulfill his responsibilities, our business would be imperiled.
        At the
        very least, there would be a delay in the development of our plans until
        a
        suitable replacement for the officer could be retained.
  **Viridis
        Capital LLC controls over 80% of the Company’s voting power and has the ability
        to exercise significant influence over matters submitted for stockholder
        approval and its interests may differ from other stockholders.**
  Viridis
        Capital, LLC, an affiliate of Kevin Kreisler, our chairman and chief executive
        officer, owns the majority of our common stock. Accordingly, Viridis will
        have
        significant influence in determining the outcome of any corporate transaction
        or
        other matter submitted to our stockholders for approval, including mergers,
        acquisitions, consolidations and the sale of all or substantially all of
        our
        assets, and also has the power to prevent or cause a change in control. The
        interests of these stockholders may differ from the interests of the other
        stockholders.
  **The
        issuance of shares under our agreements with Cornell Capital Partners could
        increase our outstanding shares by over 15%.**
  While
        Cornell is subject to restrictions on conversion of the Cornell Debenture
        limiting Cornell’s ownership to 9.9% of our common stock, without this
        restriction the Cornell Debenture could be converted into 12,825,000 shares
        at
        the market price on September 30, 2005, which would dilute the interest of
        our
        current shareholders by over 15%.
  41
   **ITEM
                  2.**
                **MANAGEMENT'S
                    DISCUSSION AND****ANALYSIS
                    AND PLAN OF
                    OPERATION**
  RISK
        FACTORS (continued)
  **Substantially
        all of our portfolio investments are recorded at fair value as determined
        in
        good faith by our Board of Directors and, as a result, there is uncertainty
        regarding the value of our portfolio investments.**
  At
        September 30, 2005, portfolio investments recorded at fair value were
        approximately 98% of our total assets. Pursuant to the requirements of the
        1940
        Act, we value substantially all of our investments at fair value as determined
        in good faith by our Board of Directors on a quarterly basis. Since there
        is
        typically no readily available market value for the investments in our
        portfolio, our Board of Directors determines in good faith the fair value
        of
        these investments pursuant to a valuation policy and a consistently applied
        valuation process.
  The
        Company relies on the services of an independent third party valuation company,
        Business Valuation Center of Reston, Virginia (“BVC”), to provide an independent
        assessment of the fair market value of the Company’s investments. The Company’s
        financial statements for the three months ended September 30, 2005 have been
        prepared in connection with BVC’s conclusions, which conclusions were based on a
        variety of conventionally accepted valuation methods. There is no single
        standard for determining fair value in good faith. As a result, determining
        fair
        value requires that judgment be applied to the specific facts and circumstances
        of each portfolio investment while employing a consistently applied valuation
        process for the types of investments we make. Unlike banks, we are not permitted
        to provide a general reserve for anticipated loan losses; we are instead
        required by the 1940 Act to specifically value each individual investment
        on a
        quarterly basis and record unrealized depreciation for an investment that
        we
        believe has become impaired, including where collection of a loan or realization
        of an equity security is doubtful, or when the enterprise value of the portfolio
        company does not currently support the cost of our debt or equity investment.
        Enterprise value means the entire value of the company to a potential buyer,
        including the sum of the values of debt and equity securities used to capitalize
        the enterprise at a point in time. We will record unrealized appreciation
        if we
        believe that the underlying portfolio company has appreciated in value and
        our
        equity security has also appreciated in value. Without a readily available
        market value and because of the inherent uncertainty of valuation, the fair
        value of our investments determined in good faith by the Board of Directors
        may
        differ significantly from the values that would have been used had a ready
        market existed for the investments, and the differences could be
        material.
  **There
        is likely to be no liquid market for our portfolio investments.**
  Our
        current investments are, and we expect that most of our intended investments
        will be, either equity securities acquired directly from small companies
        or
        below investment grade subordinated debt securities. Our portfolio of equity
        securities will usually be subject to restrictions on resale or otherwise
        have
        no established trading market. The illiquidity of most of our portfolio may
        adversely affect our ability to dispose of such securities at times when
        it may
        be advantageous for us even if our portfolio companies are able to develop
        commercially viable products; the market for new products and services is
        highly
        competitive and rapidly changing. Commercial success is difficult to predict
        and
        the marketing efforts of our expected portfolio companies may not be
        successful.
  **We
        plan to invest primarily in small, private companies.**
  There
        are
        significant risks inherent in our planned venture capital business. We intend
        to
        invest a substantial portion of our assets in early stage or start-up companies.
        These private businesses tend to be thinly capitalized, unproven small companies
        with risky technologies that lack management depth and have not attained
        profitability or have no history of operations. Because of the speculative
        nature and the lack of a public market for these investments, there is
        significantly greater risk of loss than is the case with traditional investment
        securities. We expect that some of our investments will be a complete loss
        or
        will be unprofitable and that some will appear to be likely to become successful
        but never realize their potential. We intend to be risk seeking rather than
        risk
        averse in our approach to venture capital and other investments. Neither
        our
        investments nor an investment in our stock is intended to constitute a balanced
        investment program. We may need to rely to a large extent upon proceeds from
        sales of investments rather than investment income to defray a significant
        portion of our operating expenses. Such sales are unpredictable and may not
        occur.
  **Our
        quarterly results will fluctuate.**
  Our
        quarterly operating results could fluctuate as a result of a number of factors.
        These factors include, among other things, variations in and the timing of
        the
        recognition of realized and unrealized gains or losses, the degree to which
        portfolio companies encounter competition in their markets and general economic
        conditions. As a result of these factors, results for any one quarter should
        not
        be relied upon as being indicative of performance in future
        quarters.
   42
  **ITEM
                  2.**
                **MANAGEMENT'S
                    DISCUSSION AND****ANALYSIS
                    AND PLAN OF
                    OPERATION**
  RISK
        FACTORS (continued)
  **Economic
        recessions or downturns could impair our portfolio companies and harm our
        operating results.**
  Many
        of
        the companies in which we have made or will make investments may be susceptible
        to economic slowdowns or recessions. An economic slowdown may affect the
        ability
        of a company to engage in a liquidity event such as a sale, recapitalization,
        or
        initial public offering. Our nonperforming assets are likely to increase
        and the
        value of our portfolio is likely to decrease during these periods. These
        conditions could lead to financial losses in our portfolio and a decrease
        in our
        revenues, net income, and assets. Our business of making private equity
        investments and positioning them for liquidity events also may be affected
        by
        current and future market conditions. The absence of an active senior lending
        environment or a slow down in middle market merger and acquisition activity
        may
        slow the amount of private equity investment activity generally. As a result,
        the pace of our investment activity may slow. In addition, significant changes
        in the capital markets could have an effect on the valuations of private
        companies and on the potential for liquidity events involving such companies.
        This could affect the timing of exit events in our portfolio and could
        negatively affect the amount of gains or losses upon exit.
  **Our
        borrowers may default on their payments, which may have a negative effect
        on our
        financial performance.**
  We
        make
        long-term unsecured, subordinated loans and invest in equity securities,
        which
        may involve a higher degree of repayment risk. We primarily invest in companies
        that may have limited financial resources and that may be unable to obtain
        financing from traditional sources. Numerous factors may affect a borrower’s
        ability to repay its loan, including the failure to meet its business plan,
        a
        downturn in its industry, or negative economic conditions. Deterioration
        in a
        borrower’s financial condition and prospects may be accompanied by deterioration
        in any related collateral and may have a negative effect on our financial
        results.
  **Our
        private finance investments may not produce current returns or capital gains.**
  Our
        private finance investments are typically structured as unsecured debt
        securities with a relatively high fixed rate of interest and with equity
        features such as conversion rights, warrants, or options. As a result, our
        private finance investments are generally structured to generate interest
        income
        from the time they are made and may also produce a realized gain from an
        accompanying equity feature. We cannot be sure that our portfolio will generate
        a current return or capital gains.
  **Our
        financial results could be negatively affected if a significant portfolio
        investment fails to perform as expected.**
  We
        purchase controlling equity positions in companies and our total debt and
        equity
        investment in controlled companies may be significant individually or in
        the
        aggregate. Investments in controlled portfolio companies are generally larger
        and in fewer companies than our investments in companies that we do not control.
        As a result, if a significant investment in one or more controlled companies
        fails to perform as expected, our financial results could be more negatively
        affected and the magnitude of the loss could be more significant than if
        we had
        made smaller investments in more companies. Our largest investments at September
        30, 2005, were in Veridium, INSEQ, GreenWorks, EORS, Sterling Planet, and
        Ovation, accounting for 24.6%, 14.7%, 22.6%, 9.9%, 7.6% and 7.6% respectively,
        of our total assets value, of which Veridium, INSEQ and GreenWorks continue
        to
        struggle with liquidity and operational issues relating to each of their
        businesses, including, as applicable, cash flow restrictions, working
        deficiencies, and ongoing settlement negotiations of outstanding payroll
        taxation and environmental regulatory matters. Specifically, GreenWorks’
        wholly-owned subsidiary, ESI, is currently resolving outstanding payroll
        tax
        liabilities arising from its former operations prior to ESI’s acquisition of the
        assets of ESI-NJ.
   43
   **ITEM
                  2.**
                **MANAGEMENT'S
                    DISCUSSION AND****ANALYSIS
                    AND PLAN OF OPERATION**
 RISK
        FACTORS (continued)
  **We
        borrow money, which magnifies the potential for gain or loss on amounts invested
        and may increase the risk of investing in us.**
  Borrowings,
        also known as leverage, magnify the potential for gain or loss on amounts
        invested and, therefore, increase the risks associated with investing in
        our
        securities. We borrow from and issue senior debt securities to banks, insurance
        companies, and other lenders. Lenders of these senior securities have fixed
        dollar claims on our assets that are superior to the claims of our common
        shareholders. If the value of our assets increases, then leveraging would
        cause
        the net asset value attributable to our common stock to increase more sharply
        than it would have had we not leveraged. Conversely, if the value of our
        assets
        decreases, leveraging would cause net asset value to decline more sharply
        than
        it otherwise would have had we not leveraged. Similarly, any increase in
        our
        income in excess of interest payable on the borrowed funds would cause our
        net
        income to increase more than it would without the leverage, while any decrease
        in our income would cause net income to decline more sharply than it would
        have
        had we not borrowed. Such a decline could negatively affect our ability to
        make
        common stock dividend payments. Leverage is generally considered a speculative
        investment technique. At September 30, 2005, we had $3.4 million of outstanding
        indebtedness bearing a weighted average annual interest cost of about 6%.
        In
        order for us to cover these annual interest payments on indebtedness, we
        must
        achieve annual returns on our assets of at least 2%.
  **We
        may not borrow money unless we maintain asset coverage for indebtedness of
        at
        least 200%, which may affect returns to shareholders.**
  We
        must
        maintain asset coverage for total borrowings of at least 200%. Our ability
        to
        achieve our investment objective may depend in part on our continued ability
        to
        maintain a leveraged capital structure by borrowing from banks, insurance
        companies or other lenders on favorable terms. There can be no assurance
        that we
        will be able to maintain such leverage. If asset coverage declines to less
        than
        200%, we may be required to sell a portion of our investments when it is
        disadvantageous to do so. As of September 30, 2005, our asset coverage for
        senior indebtedness was 206%.
  **Our
        business depends on our key personnel.**
  We
        depend
        on the continued services of our executive officers and other key management
        personnel. If we were to lose any of these officers or other management
        personnel, such a loss could result in inefficiencies in our operations and
        lost
        business opportunities, which could have a negative effect on our
        business.
  **Changes
        in interest rates may affect our cost of capital and net investment income.**
  Because
        we borrow money to make investments, our net investment income is dependent
        upon
        the difference between the rate at which we borrow funds and the rate at
        which
        we invest these funds. As a result, there can be no assurance that a significant
        change in market interest rates will not have a material adverse effect on
        our
        net investment income. In periods of rising interest rates, our cost of funds
        would increase, which would reduce our net investment income. We use a
        combination of long-term and short-term borrowings and equity capital to
        finance
        our investing activities. We utilize our revolving line of credit as a means
        to
        bridge to long-term financing. Our long-term fixed-rate investments are financed
        primarily with long-term fixed-rate debt and equity. We may use interest
        rate
        risk management techniques in an effort to limit our exposure to interest
        rate
        fluctuations. Such techniques may include various interest rate hedging
        activities to the extent permitted by the 1940 Act. We have analyzed the
        potential impact of changes in interest rates on interest income net of interest
        expense. Assuming that the balance sheet were to remain constant and no actions
        were taken to alter the existing interest rate sensitivity, a hypothetical
        immediate 1% change in interest rates would have affected the net income
        by less
        than 1% over a one year horizon. Although management believes that this measure
        is indicative of our sensitivity to interest rate changes, it does not adjust
        for potential changes in credit quality, size and composition of the assets
        on
        the balance sheet and other business developments that could affect net increase
        in net assets resulting from operations, or net income. Accordingly, no
        assurances can be given that actual results would not differ materially from
        the
        potential outcome simulated by this estimate.
   44
  **ITEM
                  2.**
                **MANAGEMENT'S
                    DISCUSSION AND****ANALYSIS
                    AND PLAN OF
                    OPERATION**
  RISK
        FACTORS (continued)
  **We
        will continue to need additional capital to grow because we must distribute
        our
        income.**
  We
        will
        continue to need capital to fund growth in our investments. Historically,
        we
        have borrowed from financial institutions and have issued equity securities
        to
        grow our portfolio. A reduction in the availability of new debt or equity
        capital could limit our ability to grow. We must distribute at least 90%
        of our
        taxable ordinary income, which excludes realized net long-term capital gains,
        to
        our shareholders to maintain our regulated investment company status. As
        a
        result, such earnings will not be available to fund investment originations.
        In
        addition, as a business development company, we are generally required to
        maintain a ratio of at least 200% of total assets to total borrowings, which
        may
        restrict our ability to borrow in certain circumstances. We expect to continue
        to borrow from financial institutions and issue additional debt and equity
        securities. If we fail to obtain funds from such sources or from other sources
        to fund our investments, it could limit our ability to grow, which could
        have a
        material adverse effect on the value of our common stock.
  **Loss
        of regulated investment company tax treatment would substantially reduce
        net
        assets and income available for dividends.**
  We
        have
        operated so as to qualify as a regulated investment company under Subchapter
        M
        of the Code. If we meet source of income, asset diversification, and
        distribution requirements, we will not be subject to corporate level income
        taxation on income we timely distribute to our stockholders as dividends.
        We
        would cease to qualify for such tax treatment if we were unable to comply
        with
        these requirements. In addition, we may have difficulty meeting the requirement
        to make distributions to our shareholders because in certain cases we may
        recognize income before or without receiving cash representing such income.
        If
        we fail to qualify as a regulated investment company, we will have to pay
        corporate-level taxes on all of our income whether or not we distribute it,
        which would substantially reduce the amount of income available for distribution
        to our stockholders. Even if we qualify as a regulated investment company,
        we
        generally will be subject to a corporate-level income tax on the income we
        do
        not distribute. Moreover, if we do not distribute at least 98% of our annual
        taxable income in the year earned, we generally will be subject to a 4% excise
        tax on such income carried forward and distributed in the next tax
        year.
  **Results
        may fluctuate and may not be indicative of future performance.**
  Our
        operating results may fluctuate and, therefore, you should not rely on current
        or historical period results to be indicative of our performance in future
        reporting periods. Factors that could cause operating results to fluctuate
        include, but are not limited to, variations in the investment origination
        volume
        and fee income earned, variation in timing of prepayments, variations in
        and the
        timing of the recognition of net realized gains or losses and changes in
        unrealized appreciation or depreciation, the degree to which we encounter
        competition in our markets, and general economic conditions.
  **There
        is a risk that you may not receive dividends or distributions.**
  We
        intend
        to make distributions on a quarterly basis to our stockholders. We may not
        be
        able to achieve operating results that will allow us to make distributions
        at a
        specific level or to increase the amount of these distributions from time
        to
        time. In addition, due to the asset coverage test applicable to us as a business
        development company, we may be limited in our ability to make distributions.
        Also, our credit facilities limit our ability to declare dividends if we
        default
        under certain provisions. If we do not distribute a certain percentage of
        our
        income annually, we will suffer adverse tax consequences, including possible
        loss of our status as a regulated investment company. In addition, in accordance
        with U.S. generally accepted accounting principles and tax regulations, we
        include in income certain amounts that we have not yet received in cash,
        such as
        contractual payment-in-kind interest which represents contractual interest
        added
        to the loan balance that becomes due at the end of the loan term. The increases
        in loan balances as a result of contractual payment-in-kind arrangements
        are
        included in income in advance of receiving cash payment and are separately
        included in the change in accrued or reinvested interest and dividends in
        our
        statement of cash flows. Since we may recognize income before or without
        receiving cash representing such income, we may have difficulty meeting the
        requirement to distribute at least 90% of our investment company taxable
        income
        to maintain our status as a regulated investment company.
   45
   **ITEM
                  2.**
                **MANAGEMENT'S
                    DISCUSSION AND****ANALYSIS
                    AND PLAN OF
                    OPERATION**
  RISK
        FACTORS (continued)
  **Our
        ability to invest in private companies may be limited in certain circumstances.**
  If
        we are
        to maintain our status as a business development company, we must not acquire
        any assets other than “qualifying assets” unless, at the time of and after
        giving effect to such acquisition, at least 70% of our total assets are
        qualifying assets. If we acquire debt or equity securities from an issuer
        that
        has outstanding marginable securities at the time we make an investment,
        these
        acquired assets cannot be treated as qualifying assets. This result is dictated
        by the definition of “eligible portfolio company” under the 1940 Act, which in
        part looks to whether a company has outstanding marginable
        securities.
  Amendments
        promulgated in 1998 by the Federal Reserve expanded the definition of a
        marginable security under the Federal Reserve’s margin rules to include any
        non-equity security. Thus, any debt securities issued by any entity are
        marginable securities under the Federal Reserve’s current margin rules. As a
        result, the staff of the SEC has raised the question as to whether a private
        company that has outstanding debt securities would qualify as an “eligible
        portfolio company” under the 1940 Act.
  Until
        the
        question raised by the staff of the SEC pertaining to the Federal Reserve’s 1998
        change to its margin rules has been addressed by legislative, administrative
        or
        judicial action, we intend to treat as qualifying assets only those debt
        and
        equity securities that are issued by a private company that has no marginable
        securities outstanding at the time we purchase such securities or those that
        otherwise qualify as an “eligible portfolio company” under the 1940
        Act.
  The
        SEC
        has recently issued proposed rules to correct the unintended consequence
        of the
        Federal Reserve’s 1998 margin rule amendments of apparently limiting the
        investment opportunities of business development companies. In general, the
        SEC’s proposed rules would define an eligible portfolio company as any company
        that does not have securities listed on a national securities exchange or
        association. We are currently in the process of reviewing the SEC’s proposed
        rules and assessing its impact, to the extent such proposed rules are
        subsequently approved by the SEC, on our investment activities. We do not
        believe that these proposed rules will have a material adverse effect on
        our
        operations.
  **We
        will face a lot of competition, most of which is better capitalized and more
        experienced than us.**
  We
        will
        face competition in our investing activities from private venture capital
        funds,
        investment affiliates of large industrial, technology, service and financial
        companies, small business investment companies, wealthy individuals and foreign
        investors. As a BDC, we are required to disclose quarterly the name and business
        description of portfolio companies and value of any portfolio securities.
        Many
        of our competitors are not subject to this disclosure requirement. Our
        obligation to disclose this information could hinder our ability to invest
        in
        certain portfolio companies. Additionally, other regulations, current and
        future, to which some of our competitors may not be subject, may make us
        less
        attractive as a potential investor to a given portfolio company than a private
        venture capital fund.
  **Changes
        in the law or regulations that govern us could have a material impact on
        us or
        our operations.**
  We
        are
        regulated by the SEC and the Small Business Administration. In addition,
        changes
        in the laws or regulations that govern business development companies, regulated
        investment companies, real estate investment trusts, and small business
        investment companies may significantly affect our business. Any change in
        the
        law or regulations that govern our business could have a material impact
        on us
        or our operations. Laws and regulations may be changed from time to time,
        and
        the interpretations of the relevant laws and regulations also are subject
        to
        change, which may have a material effect on our operations.
  **Due
        to the concentration of our investments, our portfolio may be subject to
        increased risk of depreciation arising from the possibility that one or more
        of
        our portfolio companies may fail to realize their respective business plans.**
  Our
        investments include a number of operating companies that have yet to realize
        their business plans, and each face a number of issues relating to their
        ability
        to do so. If one or more of our portfolio companies fails to affect their
        business plan, the value of our portfolio may be subject to significant
        depreciation.
   46
  **ITEM
                  2.**
                **MANAGEMENT'S
                    DISCUSSION AND****ANALYSIS
                    AND PLAN OF
                    OPERATION**
  RISK
        FACTORS (continued)
  **We
        may change our investment policies without further shareholder
        approval.**
  We
        many
        change our investment policies without shareholder approval. We currently
        do not
        intend to change our investment policies and do not expect to do so in the
        future, although we may do so. We will notify our shareholders if we do change
        our investment policies.
  **Investing
        in our stock may be inappropriate for your risk tolerance.**
  Our
        planned investments into other companies, in accordance with our investment
        objective and principal strategies, result in a far above average amount
        of risk
        and volatility and may well result in loss of principal.
  **We
        will be quoted on the OTC Bulletin Board for the immediate future.**
  We
        currently do not meet the eligibility requirements for listing on the NASDAQ
        Stock Market. Until we meet those standards and are accepted into the NASDAQ
        Stock Market, or unless we are successful in securing a listing on the American
        Stock Exchange or some other exchange, our common stock will be quoted only
        on
        the OTC Bulletin Board. Such a listing is considered less prestigious than
        a
        NASDAQ Stock Market or an exchange listing, and many brokerage firms will
        not
        recommend Bulletin Board stocks to their clients. This situation may limit
        the
        liquidity of your shares.
  **Our
        common stock price may be volatile.**
  The
        trading price of our common stock may fluctuate substantially. The price
        of the
        common stock may be higher or lower than the price you pay for your shares,
        depending on many factors, some of which are beyond our control and may not
        be
        directly related to our operating performance. These factors include, but
        are
        not limited to, the following:
  ·
              price
                  and volume fluctuations in the overall stock market from time to
                  time;
  ·
              significant
                  volatility in the market price and trading volume of securities
                  of
                  business development companies or other financial services
                  companies;
  ·
              volatility
                  resulting from trading in derivative securities related to our
                  common
                  stock including puts, calls, long-term equity anticipation securities,
                  or
                  LEAPs, or short trading positions;
  ·
              changes
                  in regulatory policies or tax guidelines with respect to business
                  development companies or regulated investment
                  companies;
  ·
              actual
                  or anticipated changes in our earnings or fluctuations in our operating
                  results or changes in the expectations of securities
                  analysts;
  ·
              general
                  economic conditions and trends;
  ·
              loss
                  of a major funding source; or
  ·
              departures
                  of key personnel.
  
   47
   **ITEM
                3.**
              **Controls
                  and Procedures**
  (a)
              As
                  of the end of the period covered by this quarterly report on Form
                  10QSB,
                  the Company’s chief executive officer and chief financial officer
                  conducted an evaluation of the Company’s disclosure controls and
                  procedures (as defined in Rules 13a-15 and 15d-15 of the Securities
                  Exchange Act of 1934). Based upon this evaluation, the Company’s chief
                  executive officer and chief financial officer concluded that the
                  Company’s
                  disclosure controls and procedures are effective in timely alerting
                  them
                  of any material information relating to the Company that is required
                  to be
                  disclosed by the Company in the reports it files or submits under
                  the
                  Securities Exchange Act of 1934.
  (b)
              There
                  have been no changes in the Company’s internal control over financial
                  reporting that occurred during the quarter ended September 30,
                  2005, that
                  have materially affected, or are reasonably likely to materially
                  affect,
                  the Company’s internal control over financial
                  reporting.
  
   48
   **PART
        II - OTHER INFORMATION**
  **ITEM
                1.**
              **LEGAL
                  PROCEEDINGS**
  None.
  **ITEM
                2.**
              **UNREGISTERED
                  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**
  During
        the three months ended September 30, 2005, Cornell converted a total of $435,611
        in debt into 9,724,737 shares of the Company’s common stock, Anthony Warnecke
        converted a total of $222,500 in debt into 1,250,000 shares of the Company’s
        common stock, Candent converted a total of $575,000 in debt into 14,542,404
        shares of the Company’s common stock (of which 9,542,404 had not been issued as
        of September 30, 2005), and Serenity converted a total of $407,444 in debt
        into
        7,772,184 shares of the Company’s common stock (all of which shares had not been
        issued as of September 30, 2005).
  **ITEM
                3.**
              **DEFAULTS
                  UPON SENIOR SECURITIES**
  None.
  **ITEM
                  4.**
                **SUBMISSION
                    OF MATTERS TO A VOTE OF SECURITY
                    HOLDERS**
  None.
  **ITEM
                5.**
              **OTHER
                  INFORMATION**
  None.
  **ITEM
                6.**
              **EXHIBITS**
  The
        following are exhibits filed as part of the Company’s Form 10-QSB for the period
        ended September 30, 2005:
  Exhibit
                  Number
              Description31.1
              Certification
                  of Chief Executive Officer pursuant to Rules 13a-14(a)/15d-14(a)
                  of the
                  Securities Exchange Act of 1934, as adopted pursuant to Section
                  302 of the
                  Sarbanes-Oxley Act of 2002.31.2
              Certification
                  of Chief Financial Officer pursuant to Rules 13a-14(a)/15d-14(a)
                  of the
                  Securities Exchange Act of 1934, as adopted pursuant to Section
                  302 of the
                  Sarbanes-Oxley Act of 2002.32.1
              Certification
                  of Chief Executive Officer and Chief Financial Officer pursuant
                  to 18
                  U.S.C. Section 1350, as adopted pursuant to the Sarbanes-Oxley
                  Act of
                  2002.
  49
   **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 on the date indicated.
   **GREENSHIFT
        CORPORATION**
   
  By:
              /S/
              KEVIN
                  KREISLERKEVIN
                  KREISLERChairman
                  and Chief Executive OfficerDate:
              
              November
                  17, 2005
  
  By:
              /S/
              JAMES
                  GRAINERJAMES
                  GRAINERPresident
                  and Chief Financial OfficerDate:
              
              November
                  17, 2005


















50