**U.S.
      SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





FORM
      10-QSB





**QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR**


**15(D)
      OF THE SECURITIES EXCHANGE ACT OF 1934**





For
      the
      quarterly period ended June 30, 2007





Commission
      file number 0-4846-3




**CONVERGENCE
      ETHANOL, INC.** ****


**(Name
      of small business issuer in its charter)**




Nevada
            
            82-0288840**(State
                or other jurisdiction of**
              **incorporation
                or organization)**
            
            **(I.R.S.
                employer**
              **identification
                no.)**5701
                Lindero Canyon Road, Suite 2-100
              Westlake
                Village, California
            
            91362**(Address
                of principal executive offices)**
            
            **(Zip
                code)**




**Issuer's
      telephone number, including area code**  (818)
      735-4750




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




Yes x No o




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




Yes o No x




State
      the
      number of shares outstanding of each of the issuer's classes of common stock,
      as
      of the latest practicable date.




Common
      Stock Outstanding as of August 15, 2007 was 21,050,790 .




Transitional
      Small Business Disclosure Format:  Yes o No x




**Documents
      incorporated by reference:**




**None**











**PART
      I**


**FINANCIAL
      INFORMATION**


**Page**Item
                1.
            Financial
                StatementsConsolidated
                Balance Sheets as of June 30, 2007 (Unaudited)
            F-2Consolidated
                Statements of Operations for the Three Month and Nine Month Periods
                Ended
                June 30, 2007 and 2006 (unaudited)
            F-3Consolidated
                Statements of Cash Flows for the Nine Month Periods Ended June 30,
                2007
                and 2006 (Unaudited)
            F-4Notes
                to Consolidated Financial Statements (Unaudited)
            F-5Item
                2.
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            2Item
                3.
            Controls
                and Procedures
            6**PART
                II**
              **OTHER
                INFORMATION**Item
                1.
            Legal
                Proceedings
            6Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            7Item
                3.
            Defaults
                Upon Senior Securities
            8Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            8Item
                5.
            Other
                Information
            8Item
                6.
            Exhibits
            8Signatures
            
            9




F-1





**ITEM
      1.  FINANCIAL STATEMENTS**







**CONVERGENCE
                ETHANOL, INC. (fka Mems USA, Inc.)****Consolidated
                Balance Sheet**UnauditedASSETS
            
            June
                30, 2007Current
                assets:Cash
                and cash equivalent
            
            $
            168,764Accounts
                receivable, net allowance for uncollectible of$154,331
            
            
            718,261Inventories,
                net of provision for obsolete items
            
            
            1,245,291Other
                current assets
            
            
            345,983Total
                current assets
            
            
            2,478,299Plant,
                property and equipment, net
            
            
            2,435,477Other
                assets
            
            
            244,136Total
                assets
            
            $
            5,157,912LIABILITIES
                AND STOCKHOLDERS' DEFICITCurrent
                liabilities:Accounts
                payable and accrued expenses
            
            $
            2,549,393Liquidation
                Damages
            
            
            561,270Current
                portion of long-term debt
            
            
            17,412Loans
                from shareholders
            
            
            110,738Liability
                to be satisfied through the issuance of shares
            
            
            561,300Convertible
                debenture
            
            
            3,530,000Derivative
                liability
            
            
            3,016,839Total
                current liabilities
            
            
            10,346,951Long-term
                liabilities
            
            
            3,672Total
                liabilities
            
            
            10,350,623Minority
                interests
            
            
            103,930Stockholders'
                equityCommon
                stock, $0.001 par value; 100,000,000 shares authorized;21,395,178shares
                issued and outstanding
            
            
            21,395Additional
                paid in capital
            
            
            21,024,305Accumulated
                deficit
            
            
            (22,417,783
            )Prepaid
                Expenses in Stock
            
            
            (125,000
            )Treasury
                stock (2,710,436 shares)
            
            
            (3,799,558
            )Total
                stockholders' deficit
            
            
            (5,296,640
            )Total
                liabilities and stockholders' deficit
            
            $
            5,157,912








The
      accompanying notes are an integral part of these unaudited consolidated
      financial statements.


F-2




**CONVERGENCE
                ETHANOL, INC. (fka Mems USA, Inc.)****CONSOLIDATED
                STATEMENTS OF OPERATIONS****FOR
                THE THREE AND NINE MONTH PERIODS ENDED JUNE 30, 2007 AND
                2006****(Unaudited)**





Three
                month periods ended
              June
                30,
            
            Nine
                month periods ended
              June
                30,2007
            
            2006
            
            2007
            
            2006Net
                revenues
            
            $
            924,930
            
            $
            2,029,431
            
            $
            6,380,115
            
            $
            7,171,362Cost
                of revenues
            
            
            738,313
            
            
            1,554,914
            
            
            5,374,408
            
            
            5,585,009**Gross
                profit**
            
            
            186,617
            
            
            474,517
            
            
            1,005,707
            
            
            1,586,353Operating
                ExpensesSelling,
                general and administrative expenses
            
            
            1,227,701
            
            
            1,161,641
            
            
            4,023,267
            
            
            3,837,378**Loss
                from operations**
            
            
            (1,041,085
            )
            
            (687,124
            )
            
            (3,017,560
            )
            
            (2,251,025
            )Other
                income (expenses)Gain
                from change in derivative liability
            
            
            841,674
            
            
            -
            
            
            1,479,967
            
            
            -Liquidation
                damage - convertible note
            
            
            (373,003
            )
            
            -
            
            
            (561,270
            )
            
            -Income
                due to legal settlement
            
            
            -
            
            
            -
            
            
            -
            
            
            3,703,634Interest
                expense
            
            
            (3,281,146
            )
            
            
            
            
            (3,843,522
            )Other
                income (expense)
            
            
            61,378
            
            
            (18,385
            )
            
            (2,651
            )
            
            (52,888
            )Total
                other Income (expenses)
            
            
            (2,751,097
            )
            
            (18,385
            )
            
            (2,927,475
            )
            
            3,650,746**Income
                (loss) before minority interest**
            
            
            (3,792,182
            )
            
            (705,509
            )
            
            (5,945,035
            )
            
            1,399,721Loss
                attributable to minority interest
            
            
            -
            
            
            3,133
            
            
            3,283
            
            
            3,133**Net
                income (loss)**
            
            $
            (3,792,182
            )
            $
            (702,376
            )
            $
            (5,941,752
            )
            $
            1,402,854**Net
                income (loss) per share, basic and diluted:**Weighted
                average number of shares outstanding, basic
            
            
            20,622,414
            
            
            19,849,572
            
            
            20,390,298
            
            
            19,026,161Net
                income (loss) per share, basic
            
            $
            (0.18
            )
            $
            (0.04
            )
            $
            (0.29
            )
            $
            0.07Weighted
                average number of shares outstanding, diluted
            
            
            20,622,414
            
            
            19,849,572
            
            
            20,390,298
            
            
            20,700,202Net
                income (loss) per share, diluted
            
            $
            (0.18
            )
            $
            (0.04
            )
            $
            (0.29
            )
            $
            0.07








The
      accompanying notes are an integral part of these unaudited consolidated
      financial statements.


F-3


**CONVERGENCE
                ETHANOL, INC. (fka Mems USA, Inc.)****CONSOLIDATED
                STATEMENTS OF CASH FLOWS****FOR
                THE NINE MONTHS ENDED JUNE 30, 2007 AND 2006****(Unaudited)**




2007
            
            2006Cash
                flows used for operating activities:Net
                income (loss)
            
            $
            (5,941,752
            )
            $
            1,402,854Adjustments
                to reconcile net income (loss) to net cash used in operating
                activities:Income
                due to legal settlement
            
            
            -
            
            
            (3,703,634
            )Depreciation
                and amortization
            
            
            164,759
            
            
            173,855Gain
                on sale of asset
            
            
            (5,629
            )
            
            -Stock
                base compensation, director and employee
            
            
            213,740
            
            
            -Warrant
                issued to outsiders
            
            
            203,115
            
            
            -Amortization
                of discount on convertible debenture
            
            
            2,821,081
            
            
            -Gain
                from derivative liability
            
            
            (1,479,968
            )
            
            -Common
                stock issued for services
            
            
            48,279
            
            
            319,677Loss
                attributable to minority interest
            
            
            (3,283
            )
            
            (3,133
            )Change
                in assets and liabilities:Accounts
                receivable
            
            
            563,737
            
            
            (405,333
            )Inventories
            
            
            794,397
            
            
            (458,807
            )Other
                current assets
            
            
            259,362
            
            
            (546,787
            )Change
                in other assets :-Accounts
                payable and accrued expenses
            
            
            (461,517
            )
            
            1,747,962Other
                current liabilities
            
            
            -
            
            
            159,390Liquidation
                Damages Payable
            
            
            561,270
            
            
            -Total
                adjustments
            
            
            3,679,342
            
            
            (2,716,810
            )Net
                cash used for operating activities
            
            
            **(2,262,410**
            **)**
            
            **(1,313,956**
            **)**Cash
                flows from investing activities:Acquisition
                of property and equipment
            
            
            -
            
            
            (122,691
            )Disposal
                of property and equipment
            
            
            18,920
            
            
            -Other
                assets
            
            
            -
            
            
            (82,878
            )Net
                cash provided by (used for) investing activities
            
            
            **18,920**
            
            
            **(205,569**
            **)**Cash
                flows from financing activities:Proceeds
                from convertible debenture
            
            
            3,530,000
            
            
            -Lines
                of credit
            
            
            (325,114
            )
            
            (35,506
            )Promissory
                notes payable
            
            
            (343,302
            )
            
            (25,673
            )Notes
                payable
            
            
            (66,211
            )
            
            63,579Liability
                to be satisfied through the issuance of shares
            
            
            -
            
            
            2,776Payment
                on long term liabilities
            
            
            -
            
            
            (20,163
            )Convertible
                loan
            
            
            (150,000
            )
            
            -Loan
                from shareholders
            
            
            (56,670
            )
            
            (40,527
            )Purchase
                of shares pursuant to acquisition of subsidiaries
            
            
            -
            
            
            (20,000
            )Liability
                due to legal settlement
            
            
            (307,000
            )
            
            -Underwriting
                related to issuance of shares
            
            
            -
            
            
            (97,316
            )Common
                stock issued for cash
            
            
            -
            
            
            1,652,878Net
                cash provided (used) by financing activities
            
            
            **2,281,703**
            
            
            **1,480,048**Net
                increase in cash and cash equivalents
            
            
            38,213
            
            
            (39,477
            )Cash
                and cash equivalents, beginning of period
            
            
            130,550
            
            
            828,153Cash
                and cash equivalents, end of period
            
            **$**
            **168,763**
            
            **$**
            **788,676****Supplemental
                disclosure of cash flow information:**Interest
                paid
            
            $
            353,000
            
            $
            137,332Income
                taxes paid
            
            $
            -
            
            $
            29,354**Supplemental
                disclosure of non-cash financing activities:**Common
                stock issued for finder's fees for HEO property
            
            $
            38,500
            
            $
            -Common
                stock (including $1,400,000 of shares subject to mandatoryredemption
                factor) issued for acquisition of Bott and Gulfgate
            
            $
            -
            
            $
            809,966Common
                issued for prepayment of retainer
            
            $
            125,000
            
            $
            -Common
                stock issued for Accounts payable settlement
            
            $
            449,162
            
            $
            -Assets
                acquired by HEO through issuance of shares
            
            $
            -
            
            $
            11,797,096




The
      accompanying notes are an integral part of these unaudited consolidated
      financial statements.


F-4





**CONVERGENCE
      ETHANOL, INC. (fka Mems USA, Inc.)**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**








**1)   Organization
      and Summary of Significant Accounting Policies:**




**Organization**




Convergence
      Ethanol, Inc. formerly known as MEMS USA, Inc. (the “Company” or “we”) has been
      incorporated in November, 2002; The Company changed its name to Convergence
      Ethanol, Inc. in November 2006.  The Company's mission is to support the
      energy industry in producing cleaner burning fuels. Each of our subsidiaries
      has
      a specific eco-energy focus: (1) development of a woodwaste to bio-renewable
      fuel-grade alcohol/ethanol project (HEO); (2) selling engineered products
      (Bott); (3) engineering, fabrication and sale of eco-focused energy systems
      (Gulfgate); and (4) intelligent filtration systems (CA MEMS).




**Subsidiaries:**




The
      Company is comprised of three wholly owned subsidiaries, California MEMS USA,
      Inc., a California Corporation (“CA MEMS”), Bott Equipment Company, Inc.
      (“Bott”), a Texas Corporation, and Gulfgate Equipment, Inc. (“Gulfgate”) a Texas
      Corporation, and a majority interest (87%) of Hearst Ethanol One, Inc., a
      Federal Canadian Corporation (“HEO”).




**CA
      Mems**





CA
      MEMS
      engineers, designs and oversees the construction of “intelligent filtration
      systems” (“IFS”) for the gas and oil industry. The Company's IFS systems are
      fully integrated and are composed of a “Smart Backflush Filtration System” with
      an integral electronic decanting system, a carbon bed filter and an ion-exchange
      resin bed system.




**Bott**




Bott
      is a
      stocking distributor for premier lines of industrial pumps, valves and
      instrumentation. Bott specializes in the selling of aviation refueling systems
      for helicopter refueling on oil rigs throughout the world.  Bott and
      Gulfgate have a combined direct sales force as well as commissioned sales
      representatives that sell their products.




**Gulfgate**




Gulfgate
      engineers, designs, fabricates and commissions eco-focused energy systems
      including aviation refueling systems, particulate filtration equipment for
      the
      oil and power industries.   Gulfgate also makes and sells on-site oil
      recycling systems that recycle hydrocarbon oils.  Gulfgate maintains and
      operates a rental fleet of such systems.




**HEO
      - Hearst Ethanol One**




In
      April
      10, 2006, the Company incorporated Hearst Ethanol One, Inc., a Federal Canadian
      Corporation (“HEO”). Since that time, HEO has acquired 720 acres in Hearst,
      Ontario, Canada together with approximately 1.3 million cubic meters of
      woodwaste. The property was purchased to provide the site and the biomass
      material to produce bio-renewable fuel-grade alcohol/ethanol from
      woodwaste.  HEO has obtained construction and zoning permits. The Company
      currently owns 87% of HEO.




**Fair
      Value of Financial Instruments:**




The
      Company measures its financial assets and liabilities in
      accordance with accounting principles generally accepted in the United
      States of America.  For certain of the Company's financial instruments,
      including accounts receivable (trade and related party), notes receivable
      and accounts payable (trade and related party), and
      accrued expenses, the carrying amounts  approximate fair
      value due to their short maturities.




**Use
      of Estimates:**




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to
      make estimates and assumptions that affect the reported amounts of assets
      and liabilities and disclosure of contingent assets and liabilities at
      the date of the financial statements and the reported amounts of revenues and
      expenses during the reporting period.  Actual results could differ from
      those estimates.





F-5





**Revenue
      Recognition:**




The
      Company's revenue recognition policies are in compliance with Staff accounting
      bulletin (SAB) 104. Sales revenue is recognized at the date of shipment to
      customers when a formal arrangement exists, the price is fixed or determinable,
      the delivery is completed, no other significant obligations of the Company
      exist
      and collectibility is reasonably assured. Payments received before all of the
      relevant criteria for revenue recognition are satisfied are recorded as unearned
      revenue.




**Earnings
      Per Share:**




Basic
      earnings (loss) per share are computed by dividing net income (loss)
      attributable to common stockholders by the weighted average number of common
      shares outstanding. Diluted earnings (loss) per share is computed similar to
      basic earnings (loss) per share except that the denominator is increased to
      include the number of additional shares of common stock that would have been
      outstanding if the potential shares of common stock equivalents had been
      exercised and issued and if the additional common shares were dilutive. Diluted
      earnings per share reflects the potential dilution that could occur if
      securities or other contracts to issue common stock were exercised or converted
      into common stock or resulted in the issuance of common stock that then shared
      in the earnings of the Company. There were 87,919 shares
      of common stock equivalents for the nine month period ended June 30, 2007 which
      were excluded because they are not dilutive. Common stock equivalents includes,
      but is not limited to warrants, stock options, convertible notes,
      etc.




**Interim
      Financial Statements:**





The
      accompanying unaudited consolidated financial statements for the nine month
      periods ended June 30, 2007 include all adjustments (consisting of only normal
      recurring accruals), which, in the opinion of management, are necessary for
      a
      fair presentation of the results of operations for the periods presented.
      Interim results are not necessarily indicative of the results to be expected
      for
      a full year. These unaudited consolidated financial statements should be read
      in
      conjunction with the audited consolidated financial statements for the year
      ended September 30, 2006 included in the Company's 2006 Annual Report.




**Going
      Concern and Impending Bankruptcy:**




The
      accompanying financial statements have been prepared in conformity with
      accounting principles generally accepted in the United States of America, which
      contemplates the Company as a going concern. However, the Company has sustained
      net losses of $19,428,589 which included non-cash net asset impairment charges
      of $10,900,000 and gains from a change in derivative liability of $1,479,967
      and
      has used substantial amounts of working capital in its
      operations. Realization of a major portion of the assets reflected on the
      accompanying balance sheet is dependent upon continued operations of the Company
      which, in turn, is dependent upon the Company's ability to meet its financing
      requirements and succeed in its future operations.





The
      Company is investigating the options of either selling its two Texas
      subsidiaries (Bott & Gulfgate) or electing to consent to a voluntary Chapter
      11 proceeding, (re-organization), which would allow the Company to continue
      operating under supervision of the bankruptcy court. The breathing room provided
      under Chapter 11 would allow the Company to attempt to raise equity or debt
      financing to provide the necessary capital to reorganize its affairs. There
      is
      no guarantee that the Company will be permitted to proceed under Chapter 11
      and,
      further, there is no guarantee that the Company will be successful in raising
      equity and/or debt financing sufficient to reorganize its
      affairs.  However, as of the date of this report, no firm decision has
      been made by the Management. As of the date of this report, no orders have
      been
      entered by this court, no receivers or other similar officers have been
      appointed, nor has the court assumed jurisdiction over the Company’s
      business.





These
      conditions raise substantial doubt as to the Company's ability to continue
      as a
      going concern. These consolidated financial statements do not include any
      adjustments that might result from the outcome of this uncertainty. These
      consolidated financial statements do not include any adjustments relating to
      the
      recoverability and classification of recorded asset amounts, or amounts and
      classification of liabilities that might be necessary should the Company be
      unable to continue as a going concern.





**Reclassifications**




Certain
      reclassifications have been made to prior year amounts to conform to the current
      year presentation. These changes had no effect on reported financial positions
      or results of operations.





F-6





**Recent
      Accounting Pronouncements:**




In
      September 2006, FASB issued SFAS 158 Employers Accounting for Defined Benefit
      Pension and Other Postretirement Plans--an amendment of FASB Statements No.
      87,
      88, 106, and 132(R). This Statement improves financial reporting by requiring
      an
      employer to recognize the over-funded or under-funded status of a defined
      benefit postretirement plan (other than a multiemployer plan) as an asset or
      liability in its statement of financial position and to recognize changes in
      that funded status in the year in which the changes occur through comprehensive
      income of a business entity or changes in unrestricted net assets of a
      not-for-profit organization. This Statement also improves financial reporting
      by
      requiring an employer to measure the funded status of a plan as of the date
      of
      its year-end statement of financial position, with limited exceptions. An
      employer with publicly traded equity securities is required to initially
      recognize the funded status of a defined benefit postretirement plan and to
      provide the required disclosures as of the end of the fiscal year ending after
      December 15, 2006. An employer without publicly traded equity securities is
      required to recognize the funded status of a defined benefit postretirement
      plan
      and to provide the required disclosures as of the end of the fiscal year ending
      after June 15, 2007. However, an employer without publicly traded equity
      securities is required to disclose the following information in the notes to
      financial statements for a fiscal year ending after December 15, 2006, but
      before June 16, 2007, unless it has applied the recognition provisions of this
      Statement in preparing those financial statements. The disclosures include
      a
      brief description of the provisions of this Statement; the date that adoption
      is
      required; and the date the employer plans to adopt the recognition provisions
      of
      this Statement, if earlier.




This
      statement is effective for fiscal year ending after December 15, 2008.
      Management has not determined the effect if any, the adoption of this statement
      will have on the financial statements.





In
      February of 2007 the FASB issued SFAS 159, “The Fair Value Option for Financial
      Assets and Financial Liabilities--Including an amendment of FASB Statement
      No.
      115.” The statement permits entities to choose to measure many financial
      instruments and certain other items at fair value. The objective is to improve
      financial reporting by providing entities with the opportunity to mitigate
      volatility in reported earnings caused by measuring related assets and
      liabilities differently without having to apply complex hedge accounting
      provisions. The statement is effective as of the beginning of an entity's first
      fiscal year that begins after November 15, 2007.





The
      effect of this pronouncement on our financial statements has been
      significant.





**(2)   Investments
      in Hearst Ethanol One, Inc.:**




**Hearst
      Ethanol One Inc. Agreement:**




On
      April
      10, 2006, the Company incorporated Hearst Ethanol One, Inc., a Federal Canadian
      Corporation (“HEO”). On April 21, 2006 the Company completed the acquisition of
      720 acres of real property, together with all biomass material located thereon.
      The site is located in the Township of Kendall, District of Cochrane, Canada,
      The property was purchased from C. Villeneuve Construction Co. LTD., a Canadian
      Corporation to provide the site and the biomass material for the construction
      and operation of bio-renewable woodwaste-to-fuel-grade alcohol/ethanol refinery
      to be owned by HEO.




Pursuant
      to the provisions of the Agreement, HEO issued ten point five percent (10.5%)
      of
      HEO's common shares to Villeneuve as consideration for the transfer of the
      Property. At the close of the transaction, the Company owned 87% of the common
      stock of HEO.




Pursuant
      to a Memorandum of Understanding entered into on April 20, 2006 between HEO
      and
      Villeneuve to clarify the Agreement, Villeneuve shall be entitled to appoint
      one
      member of HEO's board of directors for so long as Villeneuve is at least a
      ten
      percent (10%) stockholder of HEO.





**Hearst
      Ethanol One Inc. Valuation:**




The
      valuation based on the residual property valuation of the land is $253,070,
      building $88,574, raw material (mature timber) of $647,953 and Forest Waste
      Disposal license Bond $67,780. Also included in the valuation was the residual
      value of the biomass on the HEO site of US$11,461,362.




The
      other
      tangible and intangible assets owned by HEO include: a small rock quarry (and
      associated mineral rights) on the property, as well as a landfill license and
      permits as issued by the Government of Ontario Ministry of the Environment
      (“MOE”).




**Writing
      off Inventory:**





During
      the fourth quarter of last year the company wrote off the value of HEO's
      inventory to a nominal amount. After conducting an asset evaluation review
      it
      was determined that no known market for the materials other than utilization
      in
      the Company's planned manufacturing facility currently exists.




At
      September 30, 2006, HEO's inventory with a gross value of US $11,461,362 was
      fully written off.





F-7





**(3)   Business
      Acquisition:**




On
      October 26, 2004 (“Closing Date”), effective October 1, 2004, the Company
      purchased 100% of the outstanding shares of two Texas corporations, Bott
      Equipment Company, Inc. (“Bott”) and Gulfgate Equipment, Inc. (“Gulfgate”) from
      their president and sole stockholder, Mr. Mark Trumble.




Under
      the
      terms of the stock purchase agreement, the Company acquired 100% of the shares
      of Bott and Gulfgate from Mr. Trumble for $50,000 in cash and 1,309,677 shares
      of the Company's newly issued common stock.




The
      Company also agreed, to raise $2,000,000 in gross equity funding within 120
      days
      of the Closing Date. The Company failed to achieve this milestone and issued
      Trumble an additional 123,659 shares of its restricted stock




During
      the first quarter of fiscal year 2005, the Company, in order to avoid the
      issuance of 61,829 penalty shares, paid $75,000 directly to Mr. Trumble. As
      of
      the date of this report the Company has received approximately $39,000 of the
      $75,000 from Mr. Weisdorn Sr. The Company has recorded this payment as a
      reduction to additional paid-in capital.




On
      December 15, 2005, the Company assumed Weisdorn Sr.'s obligation to purchase
      165,054 shares from Mr. Trumble at $1.86 per share. This obligation was
      satisfied on October 31, 2006.




**First
      amended stock purchase agreement with Mark Trumble**





Effective
      May 8, 2006, the Company and its officers entered into a First Amended Stock
      Purchase Agreement and Release (“Agreement”) with Mark Trumble, amending that
      certain Stock Purchase Agreement dated September 1, 2004 (the “SPA”), pursuant
      to which the parties agreed to, among other things, Trumble agreed to release
      the Company from its obligations under the put, including any obligation to
      make
      the interest payment or to pay interest on any sum whatsoever, and release
      any
      security interest he claims in the real estate owned by Gulfgate and/or Bott,
      and the Company, within 60 days, shall secure a funding commitment in which
      Trumble shall be paid the sum of $307,000 at the time of the closing of the
      funding. This sum shall be used to purchase 165,053 shares of the common stock
      of the Company from Trumble at the price of $1.86 per share. The Company shall
      also pay from the funding all amounts of bank or other indebtedness owed by
      the
      Company, Bott or Gulfgate, which is personally guaranteed by Trumble. The
      Company shall issue Trumble, upon closing of the funding, 60,000 shares of
      the
      Company's common stock. This additional issuance of shares of the common stock
      of the Company shall be in full and final satisfaction of all claims that
      Trumble has or may have to additional shares of the Company's common stock
      as a
      result of any breach of, or failure to meet a milestone under, the SPA. The
      Company has met all of its obligations to Mr. Trumble. As of the date of this
      report Mr. Trumble owes the Company 45,000 shares of stock.




**(4)   Accounts
      Receivable:**




Accounts
      receivable has been reduced by an allowance for amounts that may become
      uncollectible. This estimated allowance is based primarily on Management's
      evaluation of the financial condition of the customer and historical bad debt
      experience. The Company has provided reserves for doubtful accounts as of June
      30, 2007 in the amount of $154,331 which the Company believes are
      adequate.




**(5)   Factoring
      Payable:**





The
      Company entered into an agreement with BLX Funding LLC (“the Factor”) whereby
      the Factor will purchase the Company's accounts receivable in factoring
      transactions with recourse.





Pursuant
      to the agreement, the Factor will purchase accounts receivables from the Company
      at varying discounts from the face value of the individual accounts receivable
      dependent upon the age of the receivable. The discounts range from 2.5% for
      receivables 30 days or less to 15% for receivables that are older than 90 days.
      The Factor will advance to the Company 75% of the face amount of each of the
      accounts receivable it elects to purchase. The Company agreed to sell a minimum
      of $200,000 of qualified accounts receivables for both Bott and Gulfgate in
      any
      given month. The term of the agreement was from November 22, 2006 to November
      21, 2008.




At
      June
      30, 2007, the Company had a factoring payable balance of $154,244 associated
      with this factor.




**(6)   Inventories:**




Inventories
      consist of finished goods of $281,357, raw material of mature timber of
      $647,953, and work in process in the amount of $353,778 at June 30, 2007. The
      inventory reserves included in the books are $38,107.





F-8





**(7)**   **Other
      Assets** :





The
      other
      assets at June 30, 2007 comprises of the following:





Prepaid
                Interest on the Convertible Loan
            
            $
            158,040Prepaid
                Debt issuance cost
            
            
            643,272Deferred
                compensation to Directors
            
            
            156,601Prepaid
                Expenses
            
            
            120,513Advance
                to vendors
            
            
            154,791Deposits
            
            
            58,191Collateralized
                CDs
            
            
            92,571Other
                assets
            
            
            7,453Total
                Other Assets
            
            
            1,391,432Less
                : current portion of other assets
            
            
            (345,983
            )Long-term
                other assets
            
            $
            1,045,448





**(8)   Plant,
      Property and Equipment** :





A
      summary
      at June 30, 2007 are as follows:




Land
            
            $
            848,608Buildings
                and improvements
            
            
            1,244,453Furniture,
                Machinery and equipment
            
            
            980,623Automobiles
                and trucks
            
            
            47,5083,121,192Less
                accumulated depreciation
            
            
            (685,715$
            2,435,477




Depreciation
      expense charged to operations totaled $164,759 and $173,855 respectively, for
      the nine months ended June 30, 2007 and 2006.




**(9)
      Accounts Payable and Accrued Expenses:**





As
      at
      June 30, 2007, the accounts payable and accrued expenses comprises of the
      following:





Accounts
                Payable
            
            $
            1,466,898Accrued
                Expenses
            
            
            317,407Factor
                Payable (Refer Note 2)
            
            
            154,244Payroll
                and Sales Taxes
            
            
            163,753Customer
                Advances
            
            
            388,235Other
                current liabilities
            
            
            58,858Total
            
            $
            2,549,393





**(10)   Business
      Lines of Credits - Bott:**





Bott
      previously maintained three lines of credits with a bank in Houston, Texas.
      The
      credit lines were evidenced by three promissory notes, a Business Loan Agreement
      and certain commercial guarantees issued in favor of the bank.




In
      May
      2004, Bott entered into a promissory note with a bank whereby Bott could borrow
      up to $250,000 over a three year term. The note required monthly payments of
      one
      thirty-sixth (1/36) of the outstanding principal balance plus accrued interest
      at the Bank's prime rate plus 1.0 percent.




In
      June
      2004, Bott executed a promissory note ("Note") with a bank whereby Bott could
      borrow up to $600,000, at an interest rate equal to the bank's prime rate.
      The
      Note provided for monthly payments of all accrued unpaid interest due as of
      the
      date of each payment. The Note further provided for a balloon payment of all
      principal and interest outstanding on the Note's one year anniversary. The
      Company informed the bank that it would not renew the line of credit and
      negotiated a long-term promissory note.




This
      replacement promissory note was finalized in December 2005, for $372,012 at
      a
      variable interest rate equal to the bank's prime rate. The note provides for
      five monthly principal payments of $3,092 and a final payment of the remaining
      principal and interest in June 2006.





F-9





The
      Agreements and Notes are secured by the inventory, chattel paper, accounts
      receivable and general intangibles. The Agreements and Notes are also secured
      by
      the personal performance guarantees of certain executives of the
      Company (Commercial Guarantees). All amounts related to Bott's outstanding
      promissory notes totaled $496,877 on September 30, 2006 and were paid in
      full on October 31, 2006.





**(11)   Business
      Line of Credit - Gulfgate:**




In
      June
      2002, Gulfgate executed a promissory note (“Note”) with a bank that allowed
      Gulfgate to borrow up to $200,000 at an interest rate equal to the bank's prime
      rate, or a minimum interest rate of 5.00% per annum, whichever was greater.
      The
      Note provided for monthly payments of all accrued unpaid interest due as of
      the
      date of each payment. The Note remains in force and effect until the bank
      provides notice to Gulfgate that no additional withdrawals are permitted (Final
      Availability Date). Thereafter, payments equal to either $250 or the outstanding
      interest plus one percent of the outstanding principal as of the Final
      Availability Date are due monthly until the Note is repaid in full. The Note
      allows for prepayment of all or part of the outstanding principal or interest
      without penalty. The Note is secured by Gulfgate's accounts with the bank,
      and
      by Gulfgate's inventory, chattel paper, accounts receivable, and general
      intangibles. The Agreement is also secured by the performance guarantees of
      Mr.
      Mark Trumble, Mr. Lawrence Weisdorn and the Company. Amounts outstanding at
      September 30, 2006 totaled $171,539 and were paid in full on October 31,
      2006.





**(12)   Loan
      from Shareholders:**





In
      September 2005, Daniel K. Moscaritolo, then COO and Director, and James A.
      Latty, CEO and Chairman, (“Lenders”) each loaned the Company, $95,800
      (collectively, $191,600).





The
      transactions are evidenced by two notes dated November 1, 2005 (hereinafter,
      “Notes”). The terms of the Notes require repayment of the principal and
      interest, which accrues at a rate of ten percent (10%) per annum on May 1,
      2006.
      The Notes are accompanied by Security Agreements that grant the Lenders a
      security interest in all personal property belonging to the Company, as well
      as
      granting an undivided 1⁄2 security interest in all of the Company's right title
      and interest to any trademarks, trade names, contract rights, and leasehold
      interests.





On
      October 31, 2006 the Company paid Mr. Daniel Moscaritolo a sum of $54,358 of
      which $8,558 was for accrued interest. As of October 31, 2006 Mr. Moscaritiolo's
      loan was paid in full.





At
      June
      30, 2007 the Company owes James A. Latty, President, CEO and Chairman, the
      sum
      of $110,738 in loan and accrued interest and expense reimbursement.





**(13)   Liability
      to be satisfied through the issuance of shares**




As
      of
      June 30, 2007, the Company incurred a liability for stock subscribed in the
      amount of $561,300.





On
      June
      26, 2007 the Company authorized the issuance to Richardson & Patel LLP, or
      its designees, of an aggregate of 1,800,000 shares ($0.24 per share) of the
      Company’s common stock registered on a registration statement on Form S-8 and an
      aggregate of 500,000 restricted shares ($0.25 per share) of common stock, in
      lieu of cash, for legal services rendered (non-capital raising transaction)
      valued at $561,300.





The
      Company intends to satisfy this obligation through issuance of common stock
      to
      Richardson & Patel LLP in July, 2007.




**(14)   Long-Term
      Debts:**




**Promissory
      Notes:**




In
      May
      2003, Bott executed a promissory note with a bank in the amount of $26,398
      at an
      interest rate equals to four point fifty five percent (4.55%) for a vehicle
      purchase. The term of the note is for fifty-nine (59) months at $494 per month.
      Balance outstanding at September 30, 2006 was $10,143 and was paid in full
      on
      October 31, 2006.




**Mortgage:**




On
      May
      31, 2002, Gulfgate entered into a $140,000 promissory note (“Note”) with a bank
      in connection with the refinancing of Gulfgate's real estate.   The
      Note bears a fixed interest rate of seven percent (7.00%) per annum.  
The Loan provided for fifty-nine monthly payments of $1,267 due beginning July
      2002 and ending June 2007.  The Note may be prepaid without fee or penalty
      and is secured by a deed of trust on Gulfgate's realty.   Balance
      outstanding at September 30, 2006 was $19,724 and was fully paid for on October
      31, 2006.





F-10





**Convertible
      Loan Payable:**




**A.  Securities
      Purchase Agreement with an Individual Investor:**





In
      September 2004, the Company entered into a convertible loan with an investor.
      The principal amount of the convertible loan payable is $150,000 at an interest
      rate of 8% per annum paid quarterly. The loan is convertible into common stock
      at any time within two (2) years (24 months) starting September 3, 2004 at
      the
      conversion price of $2.20 or 68,182 shares. Each share converted entitles the
      holder to purchase one additional share of stock at an exercise price of $3.30
      within the ensuing 12 months.




The
      loan
      plus accrued interest was paid in full on October 31, 2006.





**B.  Securities
      Purchase Agreement with CGA Strategic Investment Fund
      Limited:**




On
      October 31, 2006, the Company closed its Securities Purchase Agreement (the
      “Agreement”) with CGA Strategic Investment Fund Limited (“Purchaser”). The
      Company issued a $3,530,000 Convertible Note due October 31, 2009 (the “Note”),
      and the purchase price of the Note was $3,177,000 (ninety per cent of the
      principal amount of the Note). The Note does not bear interest except upon
      an
      event of default, at which time interest shall accrue at the rate of 18% per
      annum.





Security:
      The Note is secured by a first security position in all assets of the Company
      and its subsidiaries, Bott Equipment Company, Inc., a Texas corporation, and
      Gulfgate Equipment, Inc., in their inventory, equipment, furniture and fixtures,
      rental fleet equipment and any other of their assets wherever located except
      accounts receivable and assets solely attributable to their alternative fuel
      projects.




Registration
      Rights: Per the agreement, if the registration statement is not timely filed,
      the Company owes Purchaser liquidated damages in the amount of 1% of the
      principal amount of the then outstanding balance due under the Note for each
      60-day period, prorated, until the registration statement is filed. If the
      registration statement is not declared effective within such 90 day period,
      the
      Company will owe Purchaser liquidated damages in the amount of 2% of the
      principal amount of the then outstanding balance of the Note for each 30-day
      period, prorated, until the registration statement is declared effective. The
      Company filed a Registration Statement on June 13, 2007. As of June 30, 2007
      liquidated damages of $561,270 were accrued.




Conversion
      Price: The Note may be converted into Company's common shares. The conversion
      price will be 85% of the trading volume weighted average price, as reported
      by
      Bloomberg LP (the “VWAP”), for the five trading days immediately prior to the
      date of notice of conversion. During the first 30 days after the registration
      statement is effective registration the conversion price will not be less than
      $0.47 (the “Floor Conversion Price”), nor greater than $0.61 (the “Ceiling
      Conversion Price”). For the ninety (90) day period following the Initial Pricing
      Period and each successive ninety (90) day period thereafter (each a “Reset
      Period”), the Floor Conversion Price shall be reduced by an amount equal to 40%
      of the lesser of (i) the Floor Conversion Price or (ii) the Closing Bid Price
      as
      reported by Bloomberg on the trading day immediately following the Initial
      Pricing Period or Reset Period, as the case may be, and the Ceiling Conversion
      Price shall be increased by an amount equal to 40% of the lesser of (y) the
      current Ceiling Conversion Price or (z) the closing bid price as reported by
      Bloomberg on the trading day immediately following the Initial Pricing Period
      or
      Reset Period as the case may be.




Prepayment:
      For so long as Company is not in default and Company is not in receipt
      of a notice of conversion from the holder of the Note, Company may, at its
      option, prepay, in whole or in part, this Convertible Note for a pre-payment
      price (the “Prepayment Price”) equal to the greater of (i) 110% of the
      outstanding principal amount of the Note plus all accrued and unpaid interest
      if
      any, and any outstanding liquidated damages, if any, or (ii) (x) the number
      of Company's common shares into which the Notes is then convertible, times
      (y) the average VWAP of Company's common shares for the five (5) trading
      days immediately prior to the date that the Note is called for redemption,
      plus
      accrued and unpaid interest.




Redemption:
      The Company may be required under certain circumstances to redeem any
      outstanding balance of the Note and the warrants. The redemption price under
      these circumstances of the outstanding balance due under the Note is equal
      to
      the greater of: (i) the Prepayment Price or (ii) (x) the number of Company's
      common shares into which the unpaid balance due under the Note is then
      convertible, times (y) the five (5) day VWAP price of Company's common shares
      for the five trading days immediately prior to the date that the unpaid balance
      due under the Note is called for redemption, plus accrued and unpaid interest,
      if any.





Warrant:
      The Company issued warrants to purchase 1,000,000 shares of its common stock.
      These warrants are callable if the common stock trades at a price equal to
      200%
      of the strike price of the warrants based on any consecutive five day trading
      average VWAP value. The warrants have a term of five years and an exercise
      price
      of $0.66 (120% of the average five day VWAP price for Company's common
      stock for the five trading days immediately prior to October 31,
      2006).




The
      Company paid an application fee to Global Capital Advisors, LLC
      (“Adviser”), Purchaser's adviser, from the proceeds of the funding in an amount
      equal to one percent of the funding, excluding warrants.
      Additionally, Company issued to Adviser on warrant to purchase 500,000
      shares of Company's common stock. These warrants have a term of five years
      and have an initial fixed exercise price of $0.66 (120% of the five day
      VWAP for the five trading days immediately prior to October 31,
      2006).





F-11





Per
      EITF
      00-19, paragraph 4, these convertible notes do not meet the definition of a
      “conventional convertible debt instrument” since the debt is not convertible
      into a fixed number of shares. The debt can be converted into common stock
      at a
      conversions price that is a percentage of the market price; therefore the number
      of shares that could be required to be delivered upon “net-share settlement” is
      essentially indeterminate. Therefore, the convertible note is considered
“non-conventional,” which means that the conversion feature must be bifurcated
      from the debt and shown as a separate derivative liability. This beneficial
      conversion liability has been calculated to be $2,078,431 at June 30, 2007.
      In
      addition, since the convertible note is convertible into an indeterminate number
      of shares of common stock, it is assumed that the Company could never have
      enough authorized and unissued shares to settle the conversion of the warrants
      into common stock. Therefore, the warrants issued in connection with this
      transaction and all other non-employee options and warrants have been reported
      as a liability at June 30, 2007 in the accompanying balance sheet with a fair
      value of $315,467. The value of the warrant was calculated using the
      Black-Scholes model using the following assumptions: Discount rate of 4.64%,
      volatility of 93.54% and expected term of five year. The redemption liability
      was $622,941 as at June 30, 2007. The fair value of the beneficial conversion
      feature, redemption liability and the warrant liability will be adjusted to
      fair
      value each balance sheet date with the change being shown as a component of
      net
      income.





The
      fair
      value of the beneficial conversion feature and the warrants at the inception
      of
      these convertible notes were $2,414,852 and $406,229, respectively. $2,821,081
      has been recorded as a discount to the convertible notes which will be amortized
      over the term of the notes. The following is the summary of Convertible Note
      as
      at June 30, 2007




Convertible
                Note
            
            $
            3,530,000Less
                : Unamortized Discount
            
            
            (2,187,882
            )Net
                Convertible Note
            
            $
            1,342,118





Principal
      payments on these convertible notes are as follows:





Year
                ending September 30,2007
            
            $
            -0-2008
            
            
            -0-2009
            
            
            -0-2010
            
            
            3,530,000$
            3,530,000


**(15)   Warrants:**





Warrants
      outstanding as of June 30, 2007 are as follows:




Outstanding
                Warrants
            
            
            Wt
                  AvgExercise Price
            
            
            Aggregate
              Intrinsic
                valueOutstanding
                as of October 1, 2006
            
            
            822,000
            
            $
            2.61
            
            $
            0Granted
            
            
            2,458,991
            
            
            0.60Exercised
            
            
            -
            
            
            -Forfeited
            
            
            -
            
            
            -Outstanding
                as of June 30, 2007
            
            
            3,280,991
            
            $
            1.53
            
            $
            0




Outstanding
            ExercisableWeighted
            Weighted
            
            WeightedPrice
                range:
            Warrants
            Price
            Life
            Warrants
            Price
            Weighted
                Life$0.61-$3.75
            3,280,991
            1.53
            3.45
            3,280,991
            1.53
            3.45Total
            3,280,991
            1.53
            3.45
            3,280,991
            1.53
            3.45





All
      of
      the Company's warrants were fully vested as of October 1, 2006.





F-12





**(16)   Stock-based
      Compensation:**





Following
      is the Company's stock option activity during the nine months ended June 30,
      2007:





On
      October 18, 2006, the Company issued options to purchase 300,000 shares of
      common stock to a director. The options vested upon issuance, have an exercise
      price of $0.51 per share, and expire in 5 years. The fair value of these options
      on the date of grant amounted to $86,829, was recorded as deferred director
      compensation, and is being amortized over two years on the straight-line method.
      Amortization of this deferred director compensation amounted to $30,752 during
      the nine months ended June 30, 2007. The unamortized deferred director
      compensation amounted to $56,077 at June 30, 2007.





On
      November 1, 2006, the Company issued options to purchase 300,000 shares of
      common stock to an officer. The options vest over 3 years, have an exercise
      price of $0.45 per share, expire in 10 years, and also vest the day before
      any
      merger or acquisition of more than 50% of the Company's capital stock, or the
      purchase of substantially all of the Company's assets, by a third-party. The
      fair value of these options on the date of grant amounted to $104,792 and is
      being recognized on a straight-line basis over the requisite service
      period.





On
      February 1, 2007, the Company issued options to purchase 300,000 shares of
      common stock to a director. The options vested upon issuance, have an exercise
      price of $0.60 per share, and expire in 5 years. The fair value of these options
      on the date of grant amounted to $126,979, was recorded as deferred director
      compensation, and is being amortized over two years on the straight-line method.
      Amortization of this deferred director compensation amounted to $26,454 during
      the nine months ended June 30, 2007. The unamortized deferred director
      compensation amounted to $100,525 at June 30, 2007.





Prior
      to
      October 1, 2006, the Company accounted for its stock options in accordance
      with
      the intrinsic value provisions of Accounting Principles Board Opinion No. 25,
      “Accounting for Stock Issued to Employees” (“APB 25”). Under APB 25, the
      difference between the quoted market price as of the date of grant and the
      contractual purchase price of shares was recognized as compensation expense
      over
      the vesting period on a straight-line basis. The Company did not recognize
      compensation expense in its consolidated financial statements for stock options
      as the exercise price was not less than 100% of the fair value of the underlying
      common stock on the date of grant.





The
      following table illustrates the effect on net income and net income per share
      had the Company recognized compensation expense consistent with the fair value
      provisions of SFAS No. 123 “Accounting for Stock-Based Compensation”, as amended
      by SFAS 148 “Accounting for Stock-Based Compensation Transaction and Disclosure
      - An Amendment to SFAS 123, prior to the adoption of SFAS 123R:




Three
                Months Ended June 30, 2006Net
                income, as reported
            
            
            $
            1,402,854Deduct:
                Total stock-based employee compensation expenses determined under
                the fair
                value Black-Scholes method with a 128% volatility at December 31,
                2005 and
                a 6% risk free rate of return assumption
            
            
            
            (29,911
            )Pro
                forma net income
            
            
            $
            1,372,943Income
                per share:Weighted
                average shares, basic
            
            
            
            19,026,161Basic,
                pro forma, per share
            
            
            $
            0.07





A
      summary
      of option activity relating to employee and director compensation as of June
      30,
      2007, and changes during the three months then ended is presented
      below:





Options
            Shares
            Weighted-
              Average
              Exercise
                Price
            Weighted-
              Average
              Remaining
              Contractual
              Term
            Aggregate
              Intrinsic
              ValueOutstanding
                at October 1, 2006
            
            1,884,358
            $
            1.85
            
            7.35
            $
            -Granted
            
            1,050,000
            
            0.53
            
            2.75
            
            -Exercised
            
            -
            
            -
            
            
            
            -Forfeited
            
            (465,874
            
            1.48
            
            
            
            -Converted
            
            -
            
            -
            
            
            
            -Expired
            
            -
            
            -
            
            
            
            -Canceled
            
            -
            
            -
            
            
            
            -Outstanding
                at June 30, 2007
            
            2,468,484
            $
            1.35
            
            6.43
            $
            -Exercisable
                at June 30, 2007
            
            1,987,734
            $
            1.50
            
            6.31
            $
            -




F-13





A
      summary
      of the status of the Company's non-vested option shares relating to employee
      and
      director compensation as of June 30, 2007, and changes during the three months
      then ended is presented below:




Non-vested
                Options
            
            
            Shares
            
            
            Weighted-Average
              Grant-Date
                Fair ValueNon-vested
                at October 1, 2006
            
            
            539,324
            
            $
            1.25Granted
            
            
            750,000
            
            $
            0.48Vested
            
            
            (483,074
            
            $
            1.16Forfeited
            
            
            (330,000
            
            $
            1.09Non-vested
                at June 30, 2007
            
            
            476,250
            
            $
            0.60





As
      of
      June 30, 2007, there was approximately $227,000 of total unrecognized
      compensation cost related to non-vested option share-based compensation
      arrangements. Of the amount, $133,000 is expected to be recognized throughout
      the remainder of fiscal year ending September 30, 2007, and $49,000 and $45,000
      is expected to be recognized throughout fiscal years ending September 30, 2008
      and 2009, respectively.





**(17)   Stockholders'
      Equity**




During
      the month of October 2006, the Company issued and delivered 70,000 shares of
      the
      Company's common stock to one consultant for services valued at approximately
      $38,500.





During
      the month of February 2007, the Company issued and delivered 44,606 shares
      of
      the Company's common stock to four individuals. These individuals never received
      the additional shares of stock they were eligible for resulting from the
      February 18, 2004 Lumalite Holdings, Inc. reverse merger. Shareholders of record
      prior to the reverse merger date were entitled to receive a multiplier of
      1.712458 shares of stock for every share they owned which these individuals
      never received.





During
      the month of February 2007, the Company issued and delivered 33,613 shares
      of
      the Company's common stock to a Convergence director in exchange for $20,000
      of
      consulting services.





During
      the month of April 2007, the Company issued and delivered 75,000 shares of
      the
      Company's common stock to one consulting firm for services valued at
      approximately $21,750.





During
      the month of April 2007, the Company issued and delivered 248,166 shares of
      the
      Company's common stock to seven individuals.





During
      the month of April 2007, the Company issued and delivered 25,000 shares of
      the
      Company's common stock to one consulting firm valued at approximately $12,863
      to
      satisfy an account payable.





During
      the month of April 2007, the Company issued and delivered 41,854 shares of
      the
      Company's common stock to one individual.





In
      June,
      the Company issued and delivered 670,000 shares of common stock to 27
      shareholders to satisfy its private placement obligations.





**(18)   Legal
      settlement:**




On
      December 15, 2005, the Company and its officers entered into a Settlement
      Agreement and Release with the Weisdorn Parties and other Weisdorn related
      parties, effective as of July 1, 2005 (the “Settlement Agreement”), pursuant to
      which the Weisdorn Parties and other Weisdorn related Parties agreed to deliver
      to the Company all shares or rights to shares of the Company's common stock
      owned by such parties. The net common stock returned to the Company by the
      Weisdorn parties and other Weisdorn related parties was 2,699,684
      shares.




The
      fair
      value of 2,699,684 shares of the Company's common stock at December 15, 2005
      was
      $3,779,558. The per share closing price of the Company's stock at December
      15,
      2005 was $1.40.




**(19)   Assignment
      of the Trumble Claims:**




The
      Company and the Weisdorn Parties further agreed the Weisdorn Parties, and each
      of them; assigned to the Company any and all rights or interest they, or any
      of
      them, have in or to the Trumble Claims. On December 15, 2005, the Company
      assumed Weisdorn Sr.'s obligation to purchase 165,054 shares from Mr. Trumble
      at
      $1.86 per share for a total liability of $307,000. The fair value of this
      obligation at December 15, 2005 is $231,076 (165,054 shares at $1.40 per share)
      with the difference charged to other income ($75,924). This liability was paid
      in full as of December 31, 2006.





F-14





**(20)   Commitments:**




Pursuant
      to his appointment as a director, Mr. Newsom and the Company entered into a
      Consulting Agreement. Pursuant to the Consulting Agreement, Mr. Newsom shall
      receive the following: (i) the sum of $20,000, (ii) the sum of $4,000 per month
      payable on the first day of each month during his tenure as a member of the
      Company’s Board of Directors, (iii) an additional $2,000 per trip, if Mr. Newsom
      makes more than three trips (per quarter) to attend meetings on the Company’s
      business, (iv) $250 per hour for work performed for the Company over and above
      time spent on trips to attend meetings on the Company’s business, (v) travel
      expenses for trips to attend meetings on the Company’s business, and (vi)
      options for the purchase of up to 300,000 shares of common stock of the Company
      at an exercise price of $0.51 per share. The option period shall be 60 months
      from October 18, 2006.





Pursuant
      to his appointment as a director, Mr. Fitzgerald and the Company entered into
      a
      Consulting Agreement which is similar to what was provided to Mr. Newsom.
      Pursuant to the Consulting Agreement, Mr. Fitzgerald shall receive: (i) $20,000
      worth of Company common stock, based on the exercise price being equal to 85%
      of
      the fair market value of the Company common stock on Mr. Fitzgerald’s election
      date, which equates to 33,613 shares, (ii) the sum of $4,000 per month during
      his tenure as a member of the Board of Directors, (iii) an additional $2,000
      per
      trip, if Mr. Fitzgerald makes more than three trips per year to attend meetings
      on Company business (outside of the greater Los Angeles area), (iv) $250 per
      hour for work performed for the Company over and above time spent on trips
      to
      attend meetings, (v) travel expenses for trips to attend Company meetings,
      and
      (vi) options for the purchase of up to 300,000 shares of common stock of the
      Company at an exercise price of $0.595 per share. The option period shall be
      60
      months from February 1, 2007.





The
      fees
      payable to the Director of the company is as follows **:**




For
                the year ended September 30,2007
            $12,0002008
            $48,0002009
            $48,000





**(21)   Amendments
      to Articles of Incorporation and Bylaws**




On
      December 5, 2006, the Company filed Articles of Merger with the Secretary of
      State of Nevada in order to effectuate a merger whereby the Company (as MEMS
      USA, Inc.) would merge with a newly formed wholly-owned subsidiary, Convergence
      Ethanol, Inc., as a parent/ subsidiary merger with the Company as the surviving
      corporation. This merger, which became effective as of December 5, 2006, was
      completed pursuant to Section 92A.180 of the Nevada Revised Statutes.
      Stockholder approval to this merger was not required under Section 92A.180.
      The
      purpose of this merger was to change the Company's name to "Convergence Ethanol,
      Inc."




**(22)   Contingencies
      and Legal Proceedings :**





As
      a
      normal incident of the businesses in which the Company is engaged, various
      claims, charges and litigation are asserted or commenced from time to time
      against the Company. The Company believes that final judgments, if any, which
      might be rendered against the Company in current litigation are adequately
      reserved, covered by insurance, or would not have a material adverse effect
      on
      its financial statements. In addition, the Company is subject to the following
      proceedings:




On
      December 14, 2006, the Company filed a lawsuit entitled Convergence Ethanol,
      Inc. v. Daniel Moscaritolo, et al., in the United States District Court for
      the
      Central District of California, Case No. CV06-07971 ABC (FFMx). In this action,
      the Company brought suit against one of its former officers, Daniel Moscaritolo,
      for, among other things, violations of the federal securities laws and breaches
      of fiduciary duty. Specifically, the complaint alleges, among other things,
      that
      Mr. Moscaritolo sought and obtained shareholder proxies in violation of Section
      14 of the Securities Exchange Act of 1934, and that he repeatedly breached
      his
      fiduciary duties to the corporation, while still an officer, in an attempt
      to
      assert control over it.





On
      February 12, 2007, the federal court issued a preliminary injunction that,
      among
      other things, precludes Mr. Moscaritolo from voting the shareholder proxies
      that
      he obtained. Mr. Moscaritolo has filed an answer to the complaint and
      recently brought counterclaims against the Company. Specifically, the
      counterclaims allege: (1) Breach of Mr. Moscaritolo's “Employment
      Contract”; (2) Libel; (3) Nonpayment of Compensation; (4) Waiting Time
      Penalties; (5) Breach of the Covenant of Good Faith and Fair Dealing; and
      (6) Indemnification. The Company does not yet know what amount of damages
      the counterclaims seek, and the Court has not yet evaluated whether they are
      legally, much less factually, tenable. There
      has
      been no progress to report in settlement negotiations.  A trial date has
      been set in March, 2008.





F-15





On
      December 15, 2006, Mr. Moscaritolo and Mr. Hemingway, individually, and
      purporting to act derivatively on behalf of the shareholders of the Company,
      filed a lawsuit in Nevada State Court, County of Washoe (Case No.: CV0603002)
      against Mr. Latty and Mr. York for injunctive relief, declaratory relief,
      receivership, and accounting relating to the failed effort to remove them from
      the Board of Directors of the Company and seeking a court order approving their
      removal (the “Moscaritolo Action”). In January 2007, Mr. Moscaritolo and Mr.
      Hemingway voluntarily dismissed the Moscaritolo Action.





On
      January 10, 2007, Mr. Moscaritolo and Charles L. Christensen filed a lawsuit
      in
      the First Judicial District Court of the State of Nevada in and for Carson
      City
      (Case No.: 07-00035A) against the Company, Dr. Latty, and Mr. Newsom for
      injunctive relief to hold an Annual Shareholders Meeting. On February 9, 2007,
      the Company filed a Motion to Dismiss or Stay the Action based upon the Company
      Action pending in the United States District Court, Central District of
      California, Western Division. On February 22, 2007, the court ordered the
      Corporation to conduct a shareholders meeting on or before April 16, 2007;
      therefore, an annual meeting was scheduled for that date. On April 2, 2007
      a
      notice of the meeting was sent to the shareholders. On April 4, 2007, the
      plaintiffs filed a motion for contempt based on the Company's alleged failure
      to
      follow appropriate procedures for the annual meeting. On April 9, 2007, the
      Company filed a motion in opposition disputing the contention. In addition,
      the
      Company requested an extension of time to May 24, 2007, to complete the annual
      meeting. The court ruled on the motions and dismissed the Plantiffs motion
      for
      contempt and the Company's request for an extension of time.





On
      April
      16, 2007, the Corporation conducted a shareholder meeting at the Corporation's
      California headquarters. Because an insufficient number of shares were present
      to constitute a quorum, the meeting was formally adjourned.





On
      May 1,
      2007, the plaintiffs filed Motion for Clarification of Prior Orders. In that
      Motion, plaintiffs requested the Court to require Convergence to proceed with
      another shareholder meeting on or before June 13, 2007, to allow for a quorum
      to
      allow the Corporation to nominate directors. On May 11, 2007, the Corporation
      filed an Opposition to the motion .
      On June
      4, 2007 the Nevada Court issued an order denying Plaintiff's motion for
      clarification of prior orders (and motion to compel a June 13th shareholder's
      meeting). The Court is satisfied with our scheduled meeting date of September
      5,
      2007 and has imposed no other obligations on the Company..





Mr.
      Moscaritolo filed a Sarbanes-Oxley Whistleblower complaint (No. 9-3290-07-019)
      on January 29, 2007, with the Occupational Safety and Health Administration
      under Section 806 of the Corporate and Criminal Fraud Accountability Act of
      2002, and Title VIII of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1514A. On
      March 14, 2007, the Company submitted its Response to the Complaint. Since
      that
      time, no further proceedings have been scheduled on this matter by the
      Occupational Safety and Health Administration.





O n
      June
      15 th ,
      2007,
      two lawsuits were filed for wrongful termination and discrimination by two
      former employees who were discharged by the Company on December 1, 2006 under
      the captions Edgar P. Ninfranco v. California Mems USA Inc. et al. (Superior
      Court of California, Los Angeles County, Case No. BC372830) and Jose Luis
      Cabrera-Chavez v. California Mems USA Inc. et al. (Superior Court of California,
      Los Angeles County, Case No. BC372831).  The responses to the complaints
      are due September 3, 2007. The Company strongly believes the claims against
      the
      company are without merit and intends to vigorously contest each lawsuit.





F-16




**ITEM
      2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATIONS**





The
      following discussion and analysis should be read in conjunction with our
      consolidated financial statements and notes to consolidated financial statements
      included elsewhere in this report. This report and our consolidated financial
      statements and notes to consolidated financial statements contain
      forward-looking statements, which generally include the plans and objectives
      of
      management for future operations, including plans and objectives relating to
      our
      future economic performance and our current beliefs regarding revenues we might
      generate and profits we might earn if we are successful in implementing our
      business strategies. The forward-looking statements and associated risks may
      include, relate to or be qualified by other important factors, including,
      without limitation:





·
            quarterly
                variations in our revenues and operating
                expenses;





·
            announcements
                of new products or services by us;





·
            fluctuations
                in interest rates;





·
            significant
                sales of our common stock, including “short”
                sales;





·
            the
                operating and stock price performance of other companies that investors
                may deem comparable to us; and





·
            news
                reports relating to trends in our markets or general economic
                conditions;·
            anticipated
                trends in our financial condition and results of operations;
                and·
            our
                ability to successfully develop, finance, construct and operate our
                planned ethanol production facilities; and·
            the
                factors disclosed in our Annual Report on Form 10-KSB under the caption
                “Cautionary Statement Regarding Future Results, Forward-Looking
                Information and Certain Important
                Factors.”




We
      do not
      undertake to update, revise or correct any forward-looking
      statements.




Any
      of
      the factors described or referenced above could cause our financial results,
      including our net income or loss or growth in net income or loss to differ
      materially from prior results, which in turn could, among other things, cause
      the price of our common stock to fluctuate substantially.





**Overview**




We
      are
      engaged in the business of developing bio-renewable energy projects and
      providing products and professionally engineered systems to the energy industry.
      The Company's mission is to support the energy industry in producing cleaner
      burning fuels. Each of three company-operating divisions has a specific
      eco-energy focus: (1) development of a woodwaste to bio-renewable fuel-grade
      alcohol/ethanol project, (2) selling engineered products; and (3) engineering,
      fabrication and sale of eco-focused energy systems. ISO 9001:2000-certified,
      operating divisions have served customers throughout the energy sector since
      1952.





We
      were
      incorporated in the State of Nevada on April 12, 2002. On November 29, 2006,
      we
      incorporated a wholly-owned Nevada subsidiary for the sole purpose of effecting
      a name change of our company through a merger with our subsidiary. On December
      5, 2006, we merged our subsidiary with and into our company, with our company
      carrying on as the surviving corporation under the name Convergence Ethanol,
      Inc. Our name change was effected with NASDAQ on December 13, 2006 and our
      ticker symbol on the OTC Bulletin Board was changed to “CETH”.





California-based
      Convergence Ethanol, Inc. is comprised of three wholly owned subsidiaries,
      California MEMS USA, Inc., (“CA MEMS”) a California Corporation, Bott Equipment
      Company, Inc. (“Bott”), Gulfgate Equipment, Inc. (“Gulfgate”) and a fourth
      majority-owned subsidiary, Hearst Ethanol One, Inc., a Federal Canadian
      Corporation (“HEO”).





Current
      Business Summary





We
      are a
      renewable energy company with a mission to support the energy industry's
      production of cleaner burning fuels, through the development of profitable,
      bio-renewable energy projects and through the engineering, fabrication and
      sale
      of environmentally focused systems and equipment.





Our
      subsidiary, Hearst Ethanol One Inc. (HEO), is working on plans for a
      woodwaste-to-ethanol refinery to be built in Hearst Ontario Canada. The company
      owns 87% of HEO. We intend that the refinery will use modern catalytic
      processing, as used in oil refineries, to synthetically convert cellulosic
      woodwaste into ethanol. Given the high and rising price of corn, we believe
      that
      the conversion of low-cost woodwaste will be important in future ethanol
      production. Our plan of operation is to focus in geographic areas which offer
      abundant supplies of cellulosic woodwaste, superior transportation
      infrastructure, expedited permitting processes, high local demand for Ethanol
      and favorable, provincial and federal tax incentives. The Company's ability
      to
      complete this project is wholly dependent, however, on the successful
      fulfillment of several conditions, including receipt of all necessary
      environmental and other permits and the acquisition of capital for the
      development and construction of the plant.





2





Our
      Operating Subsidiaries :





HEO




The
      Company is currently developing a project that is expected to produce 120
      million gallons a year of bio-renewable fuel-grade alcohol/ethanol. In April
      2006, the Company incorporated Hearst Ethanol One, Inc., a Federal Canadian
      Corporation (“HEO”). HEO, which owns 720 acres in Hearst, Ontario, Canada and
      nearly 1.3 million cubic meters of woodwaste.





HEO
      plans
      to build an ecologically sound woodwaste refinery to produce bio-renewable,
      fuel-grade alcohol or ethanol. Organic woodwaste (organic chips or fiber),
      the
      raw material for fuel-grade alcohol/ethanol, is an overabundant waste stream
      of
      the Canadian forest products industries. The proposed refinery will use modern
      catalytic processing, as used in oil refineries, to synthetically convert
      organic woodwaste into fuel-grade alcohol or ethanol. We believe the convergence
      of technologies will enable the continuous production of bio renewable
      fuel-grade alcohol in high volume, at low cost. Currently, HEO is 87% owned
      by
      parent.





Fuel-grade
      alcohol/ethanol is the world's most used alternative liquid fuel. Worldwide
      demand is more than double production capacity. Next year's market for
      fuel-grade alcohol/ethanol in Canada is eight times greater than last year's
      production capability.





The
      Province of Ontario where our HEO facility will be located has mandated that
      all
      motor gasoline sold in Ontario must contain at least 5% ethanol starting on
      January 1, 2007, with the goal of 10% by 2010. We believe this will provide
      an
      assured market for fuel-grade alcohol/ethanol. HEO, owns 720 acres in Hearst,
      Ontario, has obtained forest resources, acquired construction permits, acquired
      a quarry for construction aggregate and owns a woodwaste repository containing
      nearly 1.5 million tons of woodwaste. We believe that the existing woodwaste
      on
      site will be sufficient to run the future plant for more than one year for
      production of 120 million gallons of fuel-grade alcohol/ethanol.





Formation
      of HEO




In
      April
      2006, the Company incorporated Hearst Ethanol One, Inc., an Ontario corporation
      (“HEO”) for the purpose of building, owning and operating an ethanol production
      facility in Canada. On December 21, 2005, HEO entered into a land purchase
      agreement with C. Villeneuve Construction Company, Ltd. The transaction closed
      on April 7, 2006 and the Company owns 87% of HEO.





CA
      MEMS




Our
      CA
      MEMS subsidiary engineers, designs and oversees the construction of “Intelligent
      Filtration Systems” (“IFS”) for the gas and oil industry. These systems filter
      solids from oil or water. Our IFSTM systems are fully integrated and may be
      composed of a “Smart Backflush Filtration System” with an integral electronic
      decanting system, a carbon bed filter and an ion-exchange resin bed system.
      This
      equipment will purify an amine liquid by removing particulate, chemical
      contaminants, and heat stable salts to allow the amine to more effectively
      remove acid gases during oil refining. Unlike a typical canister filter system,
      such as the oil filter in an automobile, which needs to be periodically replaced
      and disposed of, the filters utilized in Intelligent Filtration Systems can
      last
      for decades. Furthermore, the filter system is self cleaning. Once the system
      recognizes that its filter is becoming clogged by debris filtered from the
      fluid
      flow, it turns the fluid flow through the filter off and “back flushes” the
      debris caked on the filter into a collection decanter. The system then turns
      the
      fluid flow through the system back on through the freshly cleaned filter. The
      filter cleaning process takes only seconds to complete and repeats as necessary
      to assure optimum filtration. A facility utilizing IFS technology needn't
      dispose of contaminated filters, but only need dispose of the contaminate
      itself. Thus, while a filtration system based upon IFS technology typically
      requires a greater capital investment on the part of the purchaser, these costs
      are offset in the long run by savings in filter replacement and disposal
      costs.








The
      U.S.
      EPA and California CARB requirements for cleaner burning fuels have opened
      up
      additional oil refinery opportunities for the purchase of our IFS. We believe
      our IFS product can help our customers achieve lower operating costs and
      minimize wastes while enhancing their ability to meet the more stringent
      government requirements for cleaner burning fuels. The system dramatically
      reduces hazardous waste disposal costs.





The
      Company anticipates that it may be able to utilize its intelligent filtration
      systems as an integral part of any ethanol production facility that it may
      design. The Company is presently aware of three competitors offering similar
      technologies to CA MEMS IFS technology.





Gulfgate




Our
      Gulfgate subsidiary engineers, designs, fabricates and commissions eco-focused
      energy systems including particulate filtration equipment for the oil and power
      industries.  Gulfgate also makes and sells vacuum dehydration and
      coalescing systems that remove water from turbine engine oils.  These same
      systems are used by electric power generation facilities to remove water from
      transformer oils.  To help meet its customers' diverse needs, Gulfgate
      maintains and operates a rental fleet of filtration and dehydration
      systems.  All Convergence Ethanol is ISO 9001:2000 certified and is a
      qualified international vendor to the oil and gas industries. Gulfgate has
      served customers throughout the energy sector since 1957; we acquired Gulfgate
      in 2004.





3





Bott




Our
      Bott
      subsidiary is a stocking distributor for premier lines of industrial pumps,
      compressors, flow meters, valves and instrumentation. Bott sells aviation
      refueling systems for helicopter refueling on oil rigs throughout the
      world. Bott and Gulfgate have a combined direct sales force as well as
      commissioned sales representatives that sell their products. Gulfgate also
      constructs refueling systems that Bott sells for commercial marine
      vessels.  Bott's customers include chemical manufacturers, refineries,
      power plants and other industrial customers.





Bott
      has
      served customers throughout the energy sector since 1952; we acquired Bott
      in
      2004.





Former
      Subsidiary :




We
      created Can Am to manufacture, own and operate one ethanol production facility
      in British Columbia Canada.  In June 2005, the Company and its Canadian
      counterpart each made a CN$25,000 at risk deposit to open escrow toward purchase
      of 2,150 acres of land intended to serve as a plant site in British Columbia,
      Canada.




Subsequently,
      the Company paid an additional at-risk deposit of CN$50,000 for an extension
      of
      the closing date of the purchase agreement. This project was discontinued upon
      the death of one of the principals.





Company
      History :




We
      were
      incorporated in the State of Nevada on April 12, 2002. Prior to the reverse
      acquisition described below, our corporate name was Lumalite Holdings, Inc.
      and
      we had not generated significant revenues and were considered a development
      stage company as defined in Statement of Financial Accounting Standards No.
      7.




Pursuant
      to a Merger Agreement and Plan of Reorganization dated January 28, 2004 between
      us and MEMS USA, Inc., a California corporation (“CA MEMS”), we acquired all of
      the outstanding capital shares of CA MEMS in exchange for 10 million shares
      of
      our common stock. Since the stockholders of CA MEMS acquired approximately
      75%
      of our issued and outstanding shares and the CA MEMS management team and board
      of directors became our management team and board of directors, according to
      FASB Statement No. 141 - "Business Combinations," this acquisition has been
      treated as a recapitalization for accounting purposes, in a manner similar
      to
      reverse acquisition accounting. In accounting for this transaction:




·
            CA
                MEMS is deemed to be the purchaser and surviving company for accounting
                purposes. Accordingly, its net assets are included in our consolidated
                balance sheet at their historical book values and the results of
                operations of CA MEMS have been presented for all prior periods;
                and




·
            Control
                of the net assets and business of our company were acquired effective
                February 18, 2004. This transaction has been accounted for as a purchase
                of our assets and liabilities by CA MEMS. The historical cost of
                the net
                liabilities assumed was $-0-.





Pursuant
      to the transaction described above, we changed our name from Lumalite Holdings,
      Inc to MEMS USA, Inc. As described above, in 2006, we merged into a wholly
      owned
      subsidiary to change our name to Convergence Ethanol, Inc.





On
      October 26, 2004 (“Closing Date”), effective October 1, 2004, the Company
      purchased 100% of the outstanding shares of two Texas corporations, Bott
      Equipment Company, Inc. (“Bott”) and Gulfgate Equipment, Inc. (“Gulfgate”) from
      their president and sole shareholder, Mr. Mark Trumble.





On
      December 15, 2005, the Company assumed Weisdorn Sr.'s obligation to purchase
      165,054 shares from Mr. Trumble at $1.86 per share. This liability was paid
      in
      full as of October 31, 2006.





**Comparison
      of Operations**





Net
      sales
      for the three-month periods ended June 30, 2007 and 2006 were $924,930 and
      $2,029,431, respectively. We
      attribute this decline in sales ($1,104,501)
      primarily to
      insufficient working capital which has limited our ability to purchase the
      materials necessary to complete work in process and accept new orders for our
      industrial pumps, valves, instrumentation and oil purification product lines.





Net
      sales
      for the nine-month periods ended June 30, 2007 and 2006 were $6,380,115 and
      $7,171,362, respectively. The sales decrease ($791,247) for the nine months
      (-11%) ended June 30, 2007 as compared to the prior year was due primarily to
      lower
      entered orders resulting from turnover in key sales personnel and insufficient
      working capital which has limited our ability to purchase the materials
      necessary to complete work in process and accept new orders for our industrial
      pumps, valves, instrumentation and oil purification product lines. The delivery
      of the Company's first Intelligent Filtration System ($1.6 Million) in December
      2006 partially offset the $2.4 million drop in sales in our other core
      products.





4





The
      Company computes gross profit as net sales less cost of sales. Gross profit
      for
      the three-month periods ended June 30, 2007 and 2006 were $186,617 and $474,517
      respectively. The gross profit decrease for the three months ended June 30,
      2007
      as compared to the prior year was due primarily to lower sales volume and
      inventory write-offs. The gross profit margin is the gross profit divided by
      net
      sales, expressed as a percentage. Gross profit margin for the three-month
      periods ended June 30, 2007 and 2006 were 20.2% and 23.4% respectively. The
      decrease of 3.2% was primarily due to higher overhead charges and inventory
      adjustments.




Gross
      profit for the nine-month periods ended June 30, 2007 and 2006 were $1,005,707
      and $1,586,353 respectively. The gross profit decrease for the nine months
      ended
      June 30, 2007 as compared to the prior year was due primarily due to a
      combination of lower sales volume, low margins on commercial aviation refueling
      systems shipments and the IFS shipment, and higher inventory adjustments. The
      gross profit margin is the gross profit divided by net sales, expressed as
      a
      percentage. Gross profit margin for the nine-month periods ended June 30, 2007
      and 2006 were 15.8% and 22.1% respectively. This decrease of 6.3% was primarily
      due to lower margins on commercial aviation refueling systems shipments and
      the
      IFS shipment, higher overhead charges and higher inventory
      adjustments.




Selling,
      general and administrative (S,G&A) expenses were $1,227,701 and $1,161,641
      for the three months ended June 30, 2007 and 2006, respectively. The increase
      in
      SG&A spending for the three months ended June 30, 2007 as compared to the
      prior year was due primarily to higher legal costs associated with the on-going
      litigation with an ex-employee (See Part II, Item 1, Legal Proceedings). Lower
      payroll costs resulting from last year's Profit Improvement Initiative and
      lower
      commission expense due to the lower sales volume and newly revised sales
      commission plans partially offset the higher legal costs.





Selling,
      general and administrative (SG&A) expenses were $4,023,267 and $3,837,378
      for the nine months ended June 30, 2007 and 2006, respectively. The increase
      in
      S,G&A spending for the nine months ended June 30, 2007 as compared to the
      prior year was due primarily to higher legal costs associated with the on-going
      litigation with an ex-employee (See Part II, Item 1, Legal Proceedings). The
      higher legal costs were partially offset by lower payroll costs resulting from
      last year's profit improvement plan and lower commission expense due to the
      lower sales volume and newly revised sales commission plans.





We
      expect
      that over the near term, our selling, general and administration expenses will
      increase as a result of, among other things, increased accounting fees
      associated with increased corporate governance activities in response to the
      Sarbanes-Oxley Act of 2002, recently adopted rules and regulations of the
      Securities and Exchange Commission, the filing of a registration statement
      with
      the Securities and Exchange Commission to register for resale the shares of
      common stock and shares of common stock underlying warrants issued in various
      private offerings.




For
      the
      quarter ended June 30, 2007, shareholder's deficit was $5,296,640 as compared
      to
      equity of $577,844 for the prior year period ended September 30, 2006. The
      decrease in shareholder equity is primarily attributable to operating losses
      and
      the charges related to the convertible note. (See note 14 to the Consolidated
      Financial Statements in this Report).





Other
      expense (income), net for the three-month periods ended June 30, 2007 and 2006
      were $2,751,097 and $18,385, respectively. The increase in other expense is
      attributable to the charges related to the convertible note. (See note 14 to
      the
      Consolidated Financial Statements in this Report).





Other
      expense (income), net for the nine-month periods ended June 30, 2007 and 2006
      were $2,927,475 and $(3,650,746), respectively. The decrease in other income
      is
      attributable to proceeds from a legal settlement (see note 18 to the
      Consolidated Financial Statements in this Report) in the prior year and the
      charges related to the convertible note. (See note 14 to the Consolidated
      Financial Statements in this Report).





Net
      loss
      for the three-month period ended June 30, 2007 and 2006 was $3,792,182 versus
      a
      net loss of $702,376, respectively. Net income (loss) for the nine-month period
      ended June 30, 2007 and 2006 was $(5,941,752) and $1,402,854,
      respectively.





The
      Company implemented a Profit Improvement Initiative in the third quarter of
      2006. The Profit Improvement Initiative includes: administrative workforce
      reduction, phase out of low margin products, tighter control of travel costs
      and
      a decrease in external costs across the company. The initiative is expected
      to
      deliver approximately $1,200,000 in annualized savings, for only a one-time
      $200,000 maximum related pre-tax charge, taken in fiscal year 2007. There can
      be
      no assurance that we will achieve all the cost savings that we expect or that
      those measures will not have an adverse effect on our business and results
      of
      operations.





This
      initiative reflects our ongoing commitment to improve our rate of return on
      invested capital and deliver stronger bottom-line performance. Senior management
      is focused on ensuring that our cost structure is competitive and that it is
      aligned with the company's strategic market opportunities, such as our
      development of a woodwaste-to-ethanol refinery in Ontario, Canada.





Workforce
      reductions were primarily made in non-revenue generating areas, with the
      greatest reductions in corporate headquarters administrative jobs and outside
      consulting.





5





**Liquidity
      and Capital Resources** ****


Our
      cash
      and cash equivalents were $168,764 as of June 30, 2007, compared to cash and
      cash equivalents of $130,550 as of September 30, 2006.





Our
      plan
      of operations over the next 12 months includes the continued pursuit of our
      goal
      to design, engineer, build and operate one or more ethanol plants. In that
      regard we are dependent upon Hearst Ethanol One, Inc.'s efforts to raise the
      necessary capital.





Currently
      the Company’s working capital is not sufficient to satisfy our immediate working
      capital requirements at our current level of operations. As of the date of
      this
      report we need a minimum of $250,000 to meet our insurance premiums, payrolls,
      taxes, utilities and rent payments between now and September 1, 2007. At present
      the Company is negotiating with one or more financial institutions but, has
      no
      firm commitment for additional funds. In the absence of such a commitment,
      there
      is no assurance that such funds will be available on commercially reasonable
      terms, if at all. Should we be unable to raise the required funds, our ability
      to finance our continued operations will be materially adversely affected.





In
      addition to the funding requirements outlined above we believe that we will
      require a minimum of $2.5 million in the next 30 days to bring our past due
      accounts payable current and fund our planned operations through the end of
      the
      first fiscal quarter of 2008. This funding is also in
      addition to the capital required
      for the development of any ethanol production project. We plan to obtain these
      fund through debt or private placement sales of our equity securities. As of
      the
      date of this report the Company has no firm commitment for additional funds.
      In
      the absence of a funding commitment there is no assurance that such funds will
      be available on commercially reasonable terms, if at all. Should we be unable
      to
      raise the required funds, our ability to finance our continued operations will
      be materially adversely affected.


The
      Company is investigating the options of either selling its two Texas
      subsidiaries (Bott & Gulfgate) or electing to consent to a voluntary Chapter
      11 proceeding, (re-organization), which would allow the Company to continue
      operating under supervision of the bankruptcy court. The breathing room provided
      under Chapter 11 would allow the Company to attempt to raise equity or debt
      financing to provide the necessary capital to reorganize its affairs. There
      is
      no guarantee that the Company will be permitted to proceed under Chapter 11
      and,
      further, there is no guarantee that the Company will be successful in raising
      equity and/or debt financing sufficient to reorganize its
      affairs.  However, as of the date of this report, no firm decision has
      been made by the Management. As of the date of this report, no orders have
      been
      entered by this court, no receivers or other similar officers have been
      appointed, nor has the court assumed jurisdiction over the Company’s
      business.





**ITEM
      3.  CONTROLS AND PROCEDURES**





Our
      disclosure controls and procedures (as defined in Rule 13a-15(e) under the
      Securities Exchange Act of 1934, as amended) are designed to ensure that
      information required to be disclosed in reports that we file or submit under
      the
      Securities Exchange Act of 1934 is recorded, processed, summarized and reported
      within the time periods specified in the rules and forms of the Securities
      and
      Exchange Commission and that such information is accumulated and communicated
      to
      our management, as appropriate, to allow timely decisions regarding required
      disclosure. Our Chief Executive Officer and Chief Financial Officer have
      reviewed the effectiveness of our disclosure controls and procedures as of
      the
      end of the period covered by this report and have concluded that the disclosure
      controls and procedures, overall, were effective as of the end of the period
      covered by this report. There has been no change in the Company's internal
      control over financial reporting (as defined in Rule 13a-15(f) under the
      Exchange Act) during the period covered by this report that have materially
      affected, or are reasonably likely to materially affected, the Company's
      internal control over financial reporting.




**PART
      II - OTHER INFORMATION**


**ITEM
      1.  LEGAL PROCEEDINGS**





As
      a
      normal incident of the businesses in which the Company is engaged, various
      claims, charges and litigation are asserted or commenced from time to time
      against the Company. The Company believes that final judgments, if any, which
      might be rendered against the Company in current litigation are adequately
      reserved, covered by insurance, or would not have a material adverse effect
      on
      its financial statements. In addition, we are subject to the following
      proceedings:




On
      December 14, 2006, the Company filed a lawsuit entitled Convergence Ethanol, Inc. v. Daniel Moscaritolo, et al. ,
      in the
      United States District Court for the Central District of California, Case No.
      CV06-07971 ABC (FFMx). In this action, the Company brought suit against one
      of
      its former officers, Daniel Moscaritolo, for, among other things, violations
      of
      the federal securities laws and breaches of fiduciary duty. Specifically, the
      complaint alleges, among other things, that Mr. Moscaritolo sought and obtained
      shareholder proxies in violation of Section 14 of the Securities Exchange Act
      of
      1934, and that he repeatedly breached his fiduciary duties to the corporation,
      while still an officer, in an attempt to assert control over it.





On
      February 12, 2007, the federal court issued a preliminary injunction that,
      among
      other things, precludes Mr. Moscaritolo from voting the shareholder proxies
      that
      he obtained. Mr. Moscaritolo has filed an answer to the complaint and
      recently brought counterclaims against the Company. Specifically, the counterclaims
      allege: (1) Breach of Mr. Moscaritolo's “Employment Contract”; (2)
      Libel; (3) Nonpayment of Compensation; (4) Waiting Time Penalties; (5)
      Breach of the Covenant of Good Faith and Fair Dealing; and
      (6) Indemnification. We do not yet know what amount of damages the
      counterclaims seek, and the Court has not yet evaluated whether they are
      legally, much less factually, tenable. There has been no progress to report
      in
      settlement negotiations.  A trial date has been set in March,
      2008





6





On
      December 15, 2006, Mr. Moscaritolo and Mr. Hemingway ,
      individually, and purporting to act derivatively on behalf of the shareholders
      of the Company, filed a lawsuit in Nevada State Court, County of Washoe (Case
      No.: CV0603002) against Mr. Latty and Mr. York for injunctive relief,
      declaratory relief, receivership, and accounting relating to the failed effort
      to remove them from the Board of Directors of the Company and seeking a court
      order approving their removal (the “Moscaritolo Action”). In January 2007, Mr.
      Moscaritolo and Mr. Hemingway voluntarily dismissed the Moscaritolo
      Action.





On
      January 10, 2007, Mr. Moscaritolo and Charles L. Christensen filed a lawsuit
      in
      the First Judicial District Court of the State of Nevada in and for Carson
      City
      (Case No.: 07-00035A) against the Company, Dr. Latty, and Mr. Newsom for
      injunctive relief to hold an Annual Shareholders Meeting. On February 9, 2007,
      the Company filed a Motion to Dismiss or Stay the Action based upon the Company
      Action pending in the United States District Court, Central District of
      California, Western Division. On February 22, 2007, the court ordered the
      Corporation to conduct a shareholders meeting on or before April 16, 2007;
      therefore, an annual meeting was scheduled for that date. On April 2, 2007
      a
      notice of the meeting was sent to the shareholders. On April 4, 2007, the
      plaintiffs filed a motion for contempt based on the Company's alleged failure
      to
      follow appropriate procedures for the annual meeting. On April 9, 2007, the
      Company filed a motion in opposition disputing the contention. In addition,
      because of time constraints associated with the plaintiffs' proxy solicitation
      and the need to conduct a meaningful annual meeting with an opportunity for
      full
      shareholder participation, the Company requested an extension of time to May
      24,
      2007, to complete the annual meeting. The court ruled on the motions and
      dismissed the Plantiffs motion for contempt and the Company's request for an
      extension of time.





On
      April
      16, 2007, the Corporation conducted a shareholder meeting at the Corporation's
      California headquarters.  Because an insufficient number of shares
      were present to constitute a quorum, the meeting was adjourned and no date
      was set to continue the meeting.




On
      May 1,
      2007, the plaintiffs filed Motion for Clarification of Prior Orders.  In
      that Motion, plaintiffs requested the Court to require Convergence to proceed
      with continuing the shareholder meeting on or before June 13, 2007, to
      allow the continuation of the meeting without setting a new record
      date.  On May 11, 2007, the Corporation
      filed an Opposition to the motion.  In that Opposition, the Corporation
      offered to continue the annual meeting on September 5, 2007.  On June
      4, 2007 the Nevada Court issued an order denying Plaintiff's motion for
      clarification of prior orders (and motion to compel a June 13th shareholder's
      meeting).





Mr.
      Moscaritolo filed a Sarbanes-Oxley Whistleblower complaint (No. 9-3290-07-019)
      on January 29, 2007, with the Occupational Safety and Health Administration
      under Section 806 of the Corporate and Criminal Fraud Accountability Act of
      2002, and Title VIII of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1514A. On
      March 14, 2007, the Company submitted its Response to the Complaint. Since
      that
      time, no further proceedings have been scheduled on this matter by the
      Occupational Safety and Health Administration.





On
      June
      15, 2007, two lawsuits alleging wrongful termination and
      discrimination were filed by two former employees, who were discharged by
      the Company on December 1, 2006. The two lawsuits are captioned *Edgar
      P. Ninfranco v. California Mems USA Inc. et al.* (Superior Court of California, Los Angeles County, Case No. BC372830) and *Jose
      Luis Cabrera-Chavez v. California Mems USA Inc. et al.* (Superior Court of California, Los Angeles County, Case No. BC372831).  The
      responses to the complaints are due September 3, 2007. The Company strongly
      believes the claims against the company are without merit and intends to
      vigorously contest each lawsuit.




**ITEM
      2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS**





During
      the month of October 2006, the Company issued and delivered 70,000 shares of
      the
      Company's common stock to one consultant for services valued at approximately
      $38,500.





During
      the month of February 2007, the Company issued and delivered 44,606 shares
      of
      the Company's common stock to four individuals. These individuals never received
      the additional shares of stock they were eligible for resulting from the
      February 18, 2004 Lumalite Holdings, Inc. reverse merger. Shareholders of record
      prior to the reverse merger date were entitled to receive a multiplier of
      1.712458 shares of stock for every share they owned which these individuals
      never received.





During
      the month of February 2007, the Company issued and delivered 33,613 shares
      of
      the Company's common stock to a Convergence director in exchange for $20,000
      of
      consulting services.





During
      the month of April 2007, the Company issued and delivered 75,000 shares of
      the
      Company's common stock to one consulting firm for services valued at
      approximately $21,750.





During
      the month of April 2007, the Company issued and delivered 248,166 shares of
      the
      Company's common stock to seven individuals.





During
      the month of April 2007, the Company issued and delivered 25,000 shares of
      the
      Company's common stock to one consulting firm valued at approximately $12,863
      to
      satisfy an account payable.





During
      the month of April 2007, the Company issued and delivered 41,854 shares of
      the
      Company's common stock to one individual.





7





During
      the month of June 2007, the Company issued and delivered 670,000 shares of
      the
      Company’s common stock to 27 individuals to satisfy its private placement
      obligations.





Exemption
      from the registration provisions of the Securities Act of 1933 for the
      transactions described above is claimed under Section 4(2) of the Securities
      Act
      of 1933, among others, on the basis that such transactions did not involve
      any
      public offering and the purchasers were sophisticated or accredited with access
      to the kind of information registration would provide.




**ITEM
      3.  DEFAULTS UPON SENIOR SECURITIES**





On
      June
      1, the Company received a default and demand notice (the “June Notice”) from GCA
      Strategic Investment Fund Limited (“GCA”). The June Notice demands payment of
      (i) the outstanding principal amount owed under the Note of $3,530,000.00,
      (ii)
      accrued and unpaid liquidated damages of $334,173.01, (iii) additional
      liquidated damages of $2,353.33 per day after June 1, 2007, (iv) accrued and
      unpaid default interest of $225,920.00 pursuant to the Note, and (v) additional
      default interest of $1,765.00 per day after June 1, 2007. The June Notice also
      states that legal proceedings will be instituted against the Company without
      further notice seeking a judgment against the Company for all outstanding
      indebtedness and all court costs and that GCA intends to hold the Company liable
      for reasonable attorneys’ fees, as provided in the Purchase Agreement, unless
      the Company pays the total amount demanded within ten (10) days of the Company’s
      receipt of the June Notice. (Reference SEC Form 8-K filed June 7,
      2007).





On
      June
      11, CGA submitted an offer to the Company to resolve the current default. 
The terms of that offer were unacceptable to the Company.





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




None




**ITEM
      5.  OTHER INFORMATION**




None




**ITEM
      6.  EXHIBITS**




(a) Exhibits


3.1
            Articles
                of Incorporation, as amended, of Convergence Ethanol, Inc. (incorporated
                by reference from Exhibit 3.1 to the Registrant's Form 10-QSB/A for
                the
                quarter ended December 31, 2006)3.2
            Bylaws,
                as amended, of Convergence Ethanol, Inc. (incorporated by reference
                from
                Exhibit 3.2 to the Registrant's Form 10-QSB/A for the quarter ended
                December 31, 2006)31.1
            Certification
                of Chief Executive OfficerPursuant to Rule 13a-14(a) of the Securities Exchange Act of
                193431.2
            Certification
                of Chief Financial OfficerPursuant to Rule 13a-14(a) of the Securities Exchange Act of
                193432.1
            Certification
                of Chief Executive and and Chief Financial Officers Pursuant
                to18
                U.S.C Section 1350.





8





**SIGNATURES**





Pursuant
      to the requirements 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.


**CONVERGENCE
                ETHANOL, INC.**
              (Registrant)Date:
                August 20, 2007
            
            /s/
                James A.
                LattyJames
                A. LattyChief
                Executive Officer






9