**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 March 31, 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 May 13, 2007 was 18,080,790.




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 March 31, 2007 (Unaudited)
            F-2Consolidated
                Statements of Operations for the Three Month and Six Month Periods
                Ended
                March 31, 2007 and 2006 (unaudited)
            F-3Consolidated
                Statements of Cash Flows for the Six Month Periods Ended March 31,
                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
            7**PART
                II**
                **OTHER
                  INFORMATION**Item
                1.
            Legal
                Proceedings
            8Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            9Item
                3.
            Defaults
                Upon Senior Securities
            9Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            9Item
                5.
            Other
                Information
            9Item
                6.
            Exhibits
            9Signatures
            
            10










**ITEM
      1.FINANCIAL
      STATEMENTS**


**CONVERGENCE
                  ETHANOL, INC. (fka Mems USA, Inc.)****Consolidated
                  Balance Sheet****(Unaudited)**A
                  S
                  S E T S
              
              March
                  31, 2007Current
                  assets:Cash
                  and cash equivalent
              
              $
              250,943Accounts
                  receivable, net allowance for uncollectible of$192,478
              
              
              731,677Inventories,
                  net of provision for obsolete items
              
              
              1,271,062Other
                  current assets
              
              
              518,405Total
                  current assets
              
              
              2,772,086Plant,
                  property and equipment, net
              
              
              2,495,424Other
                  assets
              
              
              855,135Total
                  assets
              
              $
              6,122,646LIABILITIES
                  AND STOCKHOLDERS' DEFICITCurrent
                  liabilities:Accounts
                  payable and accrued expenses
              
              $
              2,076,600Notes
                  payable
              
              
              188,267Current
                  portion of long-term debt
              
              
              14,999Other
                  liabilities
              
              
              100,622Loans
                  from shareholders
              
              
              115,121Liability
                  to be satisfied through the issuance of shares
              
              
              1,200,376Derivative
                  liability
              
              
              3,858,513Total
                  current liabilities
              
              
              7,554,497Long-term
                  liabilities
              
              
              6,239Liability
                  related to convertible debenture payable
              
              
              1,107,886Total
                  liabilities
              
              
              8,668,622Minority
                  interests
              
              
              103,930Stockholders'
                  deficit :-Common
                  stock, $0.001 par value; 100,000,000 shares authorized;20,335,190
                  shares issued andoutstanding
              
              
              20,335Additional
                  paid in capital
              
              
              19,755,918Shares
                  to be redeemed
              
              
              -Accumulated
                  deficit
              
              
              (18,626,601
              )Treasury
                  stock (2,710,436 shares)
              
              
              (3,799,558
              )Total
                  stockholders' deficit
              
              
              (2,649,906
              )Total
                  liabilities and stockholders' deficit
              
              $
              6,122,646




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 six months ended March 31, 2007 and 2006****(Unaudited)**Three
                    month periods ended
                  March
                    31,
                
                Six
                    month periods ended
                  March
                    31,2007
                
                2006
                
                2007
                
                2006Revenues
                
                $
                1,507,414
                
                $
                2,515,412
                
                $
                5,455,186
                
                $
                5,141,931Cost
                    of revenues
                
                
                1,354,585
                
                
                1,958,351
                
                
                4,636,096
                
                
                4,030,095**Gross
                    profit**
                
                
                152,829
                
                
                557,061
                
                
                819,090
                
                
                1,111,836Operating
                    ExpensesSelling,
                    general and administrative expenses
                
                
                1,407,740
                
                
                1,354,190
                
                
                2,795,565
                
                
                2,675,737**Loss
                    from Operations**
                
                
                (1,254,911
                )
                
                (797,129
                )
                
                (1,976,475
                )
                
                (1,563,901
                )Other
                    income (expenses)Gain
                    from change in derivative liability
                
                
                94,824
                
                
                -
                
                
                638,293
                
                
                -Liquidation
                    damage - convertible note
                
                
                (188,267
                )
                
                -
                
                
                (188,267
                )
                
                -Income
                    due to legal settlement
                
                
                -
                
                
                -
                
                
                -
                
                
                3,703,634Interest
                    expense
                
                
                (312,507
                )
                
                (14,556
                )
                
                (562,376
                )
                
                (35,969
                )Other
                    income (expense)
                
                
                1,065
                
                
                3,334
                
                
                (64,028
                )
                
                1,466Total
                    other income (expenses)
                
                
                (404,885
                )
                
                (11,222
                )
                
                (176,378
                )
                
                3,669,131**Income
                    (loss) before Minority Interest**
                
                
                (1,659,796
                )
                
                (808,351
                )
                
                (2,152,853
                )
                
                2,105,230Loss
                    attributable to minority interest
                
                
                477
                
                
                -
                
                
                3,283
                
                
                -**Net
                    income (loss)**
                
                $
                (1,659,319
                )
                $
                (808,351
                )
                $
                (2,149,571
                )
                $
                2,105,230Net
                    income (loss) per share, basic and diluted:Weighted
                    average number of shares outstanding, basic
                
                
                20,301,432
                
                
                15,406,228
                
                
                20,229,699
                
                
                15,118,8744Net
                    income (loss) per share, basic
                
                $
                (0.08
                )
                $
                (0.05
                )
                $
                (0.11
                )
                $
                0.14Weighted
                    average number of shares outstanding, diluted
                
                
                20,301,432
                
                
                15,406,228
                
                
                20,229,699
                
                
                15,441,823Net
                    income (loss) per share, diluted
                
                $
                (0.08
                )
                $
                (0.05
                )
                $
                (0.11
                )
                $
                0.14





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 SIX MONTH ENDED MARCH 31, 2007 AND 2006****(Unaudited)**2007
            
            2006Cash
                flows used for operating activities:Net
                income (loss)
            
            $
            (2,149,571
            )
            $
            2,105,230Adjustments
                to reconcile net income (loss) to net cash used in operating
                activities:Income
                due to legal settlement
            
            
            
            
            
            (3,703,634
            )Depreciation
                and amortization
            
            
            65,292
            
            
            115,648Gain
                on sale of asset
            
            
            (5,629
            )
            
            -Stock
                base compensation, director and employee
            
            
            176,610
            
            
            -Amortization
                of prepaid loan fees
            
            
            144,193
            
            
            -Amortization
                of discount on convertible debenture
            
            
            398,967
            
            
            -Gain
                from derivative liability
            
            
            (638,293
            )
            
            -Common
                stock issued for services
            
            
            6,000
            
            
            235,280Loss
                attributable to minority interest
            
            
            (3,283
            )
            
            -Change
                in assets and liabilities:Accounts
                receivable
            
            
            550,321
            
            
            (992,865
            )Inventories
            
            
            768,626
            
            
            44,030Other
                current assets
            
            
            425,210
            
            
            (52,097
            )Change
                in other assets :-Accounts
                payable and accrued expenses
            
            
            (1,304,865
            )
            
            750,694Other
                current liabilities
            
            
            21,738
            
            
            56,216Liquidation
                Damages Payable
            
            
            188,267Total
                adjustments
            
            
            793,154
            
            
            (3,546,728
            )Net
                cash used for operating activities
            
            
            **(1,356,417**
            **)**
            
            **(1,441,498**
            **)**Cash
                flows from investing activities:Purchase
                of property and equipment
            
            
            19,939
            
            
            (63,338
            )Other
                assets
            
            
            -
            
            
            24,000Net
                cash provided by (used for) investing activities
            
            
            **19,939**
            
            
            **(39,338**
            **)**Cash
                flows from financing activities:Proceeds
                from convertible debenture
            
            
            3,177,000
            
            
            -Debts
                issuance cost
            
            
            (476,370
            )
            
            -Lines
                of credit
            
            
            (325,114
            )
            
            (399,505
            )Promissory
                notes payable
            
            
            (343,302
            )
            
            352,281Notes
                payable
            
            
            (66,056
            )
            
            1,000Liability
                to be satisfied through the issuance of shares
            
            
            -
            
            
            735,540Convertible
                loan
            
            
            (150,000
            )
            
            -Payment
                due to legal settlement
            
            
            (52,287
            )
            
            -Loan
                from shareholders
            
            
            -
            
            
            30,730Purchase
                of shares pursuant to acquisition of subsidiaries
            
            
            -
            
            
            (20,000
            )Liability
                due to legal settlement
            
            
            (307,000
            )
            
            -Underwriting
                related to issuance of shares
            
            
            -
            
            
            (68,362
            )Common
                stock issued for cash
            
            
            -
            
            
            429,500Net
                cash provided (used) by financing activities
            
            
            **1,456,871**
            
            
            **1,061,184**Net
                increase in cash and cash equivalents
            
            
            120,393
            
            
            (419,652
            )Cash
                and cash equivalents, beginning of period
            
            
            130,550
            
            
            828,153Cash
                and cash equivalents, end of period
            
            **$**
            **250,943**
            
            **$**
            **408,501****Supplemental
                disclosure of cash flow information:**Income
                taxes paid
            
            $
            -
            
            $
            -Income
              taxes paid
            
            $
            -
            
            $
            63,233**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
            
            $
            -
            
            $
            809,966






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


F-4




**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
      December 2005, 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.




F-5


**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.




**Concentration
      of Credit Risk:**




The
      Company's financial instruments that are exposed to concentrations of credit
      risk consist primarily of cash and accounts receivable. The Company maintains
      cash with various major financial institutions and performs evaluations of
      the
      relative credit standing of these financial institutions in order to limit
      the
      amount of credit exposure with any institution. The Company extends credit
      to
      customers based upon an evaluation of the customer's financial condition and
      credit history and generally requires no collateral. The Company's customers
      are
      principally located throughout North America, and their ability to pay amounts
      due to the Company may be dependent on the prevailing economic conditions of
      their geographic region. Management performs regular evaluations concerning
      the
      ability of its customers to satisfy their obligations and records a provision
      for doubtful accounts based on these evaluations. The Company's credit losses
      for the periods presented are insignificant and have not significantly exceeded
      management's estimates.




**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 six month period ended March 31, 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 six month
      periods ended March 31, 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.





F-6


**Going
      Concern:**




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 $18,626,601 which included non-cash net asset impairment charges
      of $10,900,000 and gains from a change in derivative liability of $638,293
      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. Management believes that
      actions presently being taken to revise the Company's operating and financial
      requirements provide them with the opportunity for the Company to continue
      as a
      going concern. We will continue to raise additional cash through debt or equity
      financings in 2007 in order to meet our working capital
      requirements.





**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.





**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
      management is currently evaluating the effect of this pronouncement on financial
      statements.





F-7




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




**Hearst
      Ethanol One Inc. Agreement:**




In
      December 2005, 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.





**(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.




F-8


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, 2007.




**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 March
      31, 2007 in the amount of 192,478 which the Company believes are
      adequate.


**(5)Factoring
        Receivable:**


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.
  F-9
 At
        March
        31, 2007, the Company had a factoring receivable balance of $188,000 associated
        with this factor.
  **(6)Inventories:**
  Inventories
        consist of finished goods of $420,332, raw material of mature timber of
        $647,953, and work in process in the amount of $240,884 at March 31, 2007.
        The
        inventory reserves included in the books are $38,107.
  **(7)Other
        Assets** :
  The
        other
        assets at March 31, 2007 comprises of the following:
 
 Prepaid
                  Interest on the Convertible Loan
              
              $
              303,970Prepaid
                  Debt issuance cost
              
              
              583,324Deferred
                  compensation to Directors
              
              
              183,328Prepaid
                  Expenses
              
              
              79,119Advance
                  to vendors
              
              
              94,540Deposits
              
              
              56,124Other
                  assets
              
              
              73,137Total
                  Other Assets
              
              
              1,379,540Less
                  : current portion of other assets
              
              
              (518,405
              )Long-term
                  other assets
              
              $
              855,135
 
 **(8)** **Plant,
        Property and Equipment** :
 A
          summary
          at March 31, 2007 are as follows:
  Land
                
                $
                817,108Buildings
                    and improvements
                
                
                1,244,453Furniture,
                    Machinery and equipment
                
                
                1,012,123Automobiles
                    and trucks
                
                
                47,5083,121,192Less
                    accumulated depreciation
                
                
                (625,787
                )$
                2,495,424
  Depreciation
          expense charged to operations totaled $65,292 and $115,648 respectively,
          for the
          three months ended March 31, 2007 and 2006.
  F-10


**(9)** **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.




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.




**(10)** **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.





**(11)       
      Liability to be satisfied through the issuance of
      shares**




As
      of
      March 31, 2007, the Company incurred a liability for stock subscribed in the
      amount of $1,200,376.  The Company sold 670,000 shares of its common stock
      for $1,005,000 via a private placement offering through SW Bach & Company, a
      New York securities dealer.  The Company anticipates satisfying its private
      placement obligations through issuance of common stock to stockholders as soon
      as the Company completes its SB-2 registration with the Securities &
Exchange Commission.




The
      Company sold 277,978 shares of its common stock for $180,000 via another private
      placement offering from June through August 2006. The balance of the liability
      ($15,376 / 12,298 shares) was for services rendered during 2006. The Company
      intends to satisfy these obligations through issuance of common stock to
      stockholders in February 2007.




F-11


**(12)       
      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.




**Loans
      from stockholders:**




At
      March
      31, 2007 the Company owes James A. Latty, President, CEO and Chairman, the
      sum
      of $115,121 in loan and accrued interest.





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. Balance outstanding at September 30, 2006
      was
      $147,163. The interest recorded was $17,563 for the year ended September 30,
      2006.





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.




**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.





F-12


**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: The Company agreed to use its best efforts to file a registration
      statement to register the resale of the common shares issuable upon the
      conversion of the Note and exercise of the warrants (the “Conversion Shares”) by
      March 31, 2007. The Company will also use its best efforts to cause the
      registration statement to become effective within by January 31, 2007. 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. As of March 31, 2007 liquidation
      damages of $188,267 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.




F-13


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).




The
      proceeds received from this agreement were used to pay off all notes payable
      to
      third party listed under Footnotes 9, 10 and 12. Major disbursements included
      three notes payable to a bank (Notes 9 and 10) totaling $668,030; auto and
      property loans totaling $40,561; convertible loan $150,000; and $307,000 related
      to the First
      amended stock purchase agreement with Mark Trumble (Note
      3) **,** and
      Daniel Moscaritolo.





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 $2,677,979 at March 31, 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 have been reported as a liability at March 31, 2007 in the
      accompanying balance sheet with a fair value of $557,593. 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 March 31, 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.





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




F-14




**(13)** **Warrants:**
  Warrants
        outstanding as of March 31, 2007 are as follows:
  Wt
                  Avg
              
              AggregateWarrants
              
              Exercise
                  Price
              
              Intrinsic
                  valueOutstanding
                  as of October 1, 2006
              
              
              822,000
              
              $
              2.61
              
              $
              0Granted
              
              
              2,458,991
              
              
              0.60Exercised
              
              
              -
              
              
              -Forfeited
              
              
              -
              
              
              -Outstanding
                  as of March 31, 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.
 
 **(14)** **Stock-based
        Compensation:**
 
 Following
        is the Company’s stock option activity during the six months ended March 31,
        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 $19,898 during
        the six months ended March 31, 2007. The unamortized deferred director
        compensation amounted to $66,931 at March 31, 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 $10,582 during
        the six months ended March 31, 2007. The unamortized deferred director
        compensation amounted to $116,397 at March 31, 2007.
 
 F-15
 
 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.
  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 3 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 three years on the straight-line
        method. Amortization of this deferred director compensation amounted to $7,054
        during the three months ended March 31, 2007. The unamortized deferred director
        compensation amounted to $119,925 at March 31, 2007
 
 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 March 31, 2006Net
                  income, as reported
              
              
              $
              (808,351
              )Deduct:
                  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
              
              
              
              (468,527
              )Pro
                  forma net income
              
              
              $
              (1,276,878
              )Income
                  per share:Weighted
                  average shares, basic
              
              
              
              15,406,228Basic,
                  pro forma, per share
              
              
              $
              (0.08
              )
  F-16
  A
        summary
        of option activity relating to employee and director compensation as of March
        31, 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
              
              
              7.60
              
              $
              -Granted
              
              
              1,050,000
              
              
              0.53
              
              
              3.00
              
              
              -Exercised
              
              
              -
              
              
              -
              
              
              
              
              
              -Forfeited
              
              
              (465,874
              )
              
              1.48
              
              
              
              
              
              -Converted
              
              
              -
              
              
              -
              
              
              
              
              
              -Expired
              
              
              -
              
              
              -
              
              
              
              
              
              -Canceled
              
              
              -
              
              
              -
              
              
              
              
              
              -Outstanding
                  at March 31, 2007
              
              
              2,468,484
              
              $
              1.35
              
              
              6.68
              
              $
              -Exercisable
                  at March 31, 2007
              
              
              1,992,234
              
              $
              1.50
              
              
              6.90
              
              $
              -
  A
        summary
        of the status of the Company’s non-vested option shares relating to employee and
        director compensation as of
        March
        31, 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 March 31, 2007
              
              
              476,250
              
              $
              0.60
 
 As of
        March
        31, 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.
 
 **(15)        
        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.
  F-17
  **(16)        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.
  **(17)       
        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.
 
 **(18)       
        Commitments:**
  The
        fees
        payable to the Director of the company is as
        follows**:**
  For
                  the year ended September 30,2007
              $48,0002008
              $96,0002009
              $96,0002010
              $16,000
  **(19)        
        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."
  **(20)       
        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.
 
 F-18
 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. No trial date has been set.
 
 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. As of the date of this filing, the Court
          has
          not ruled on this motion.
 
 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.
 F-19
 **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 December
        2005, 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
        December 2005, 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.
  3
 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.
 
 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.
  4
  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 March 31, 2007 and 2006 were $1,507,414
        and
        $2,515,412, respectively. The sales decrease ($1,007,999) for the three months
        (40.0%) ended March 31, 2007 as compared to the prior year was due primarily
        to
        a weakening of demand in our industrial pumps, valves and instrumentation
        product lines. In the aftermath of Hurricane Katrina (August 2005) eight
        Gulf of
        Mexico refineries and more than 20 offshore oil platforms sustained major
        damage. The ensuing repairs and reconstruction spiked demand for the Company’s
        products and accounted for the strong prior year performance.
 
 Net
        sales
        for the six-month periods ended March 31, 2007 and 2006 were $5,455,186 and
        $5,141,931, respectively. The sales increase ($313,255) for the six months
        (6.1%) ended March 31, 2007 as compared to the prior year was due primarily
        to
        the delivery of the Company’s first Intelligent Filtration System in December
        2006 and more than offset the lower sales in our industrial pumps, valves
        and
        instrumentation product lines. The Company recognized 95% of the IFS contract
        value during the month of December, 2006. The remaining sales (5%) were
        recognized during the second fiscal quarter ended March 31, 2007. This
        represents system commissioning and documentation.
 
 The
        Company computes gross profit as net sales less cost of sales. Gross profit
        for
        the three-month periods ended March 31, 2007 and 2006 were $152,829 and $557,061
        respectively. The gross profit decrease for the three months ended March
        31,
        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 March 31, 2007 and 2006 were 10.1% and 22.1% respectively.
        The
        decrease of 12.0% was primarily due to higher overhead charges and inventory
        adjustments.
  5
 Gross
        profit for the six-month periods ended March 31, 2007 and 2006 were $819,090
        and
        $1,111,836 respectively. The gross profit decrease for the six months ended
        March 31, 2007 as compared to the prior year was due primarily due to a
        combination of lower margins on commercial aviation refueling systems shipments,
        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 six-month periods ended March 31, 2007 and 2006 were 15.0%
        and
        21.6% respectively. This decrease of 6.6% was primarily due to lower margins
        on
        commercial aviation refueling systems shipments, the IFS System shipment
        and
        higher inventory adjustments.
  Selling,
        general and administrative (S,G&A) expenses were $1,407,740 and $1,354,190
        for the three months ended March 31, 2007 and 2006, respectively. The increase
        in SG&A spending for the three months ended March 31, 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 $2,795,565 and $2,675,737
        for the six months ended March 31, 2007 and 2006, respectively. The increase
        in
        S,G&A spending for the six months ended March 31, 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, increased employee costs associated with planned staffing
        increases (replacements), increased sales and marketing expenses, increased
        activities related to the design, engineering and construction of the Hearst
        Ethanol One, Inc. ethanol production facility and increased activity in
        searching for and analyzing potential acquisitions.
  For
        the
        quarter ended March 31, 2007, shareholder’s deficit was $2,649,906 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 11 to the Consolidated
        Financial Statements in this Report).
 
 Other
        expense (income), net for the three-month periods ended March 31, 2007 and
        2006
        were $404,885 and $11,222, respectively. The increase in other expense is
        attributable to interest expense and liquidated damages associated with the
        Global note (See note 11 to the Consolidated Financial Statements in this
        Report) but, partially offset by a gain from a change in the derivative
        liability also associated with the Global note and warrants outstanding at
        March
        31, 2007.
 
 Other
        expense (income), net for the six-month periods ended March 31, 2007 and
        2006
        were $176,378 and $(3,669,131), respectively. The decrease in other income
        is
        attributable to proceeds from a legal settlement (see note 13 to the
        Consolidated Financial Statements in this Report) in the prior year and interest
        expense and liquidated damages associated with the Global note (See note
        11 to
        the Consolidated Financial Statements in this Report). These increased costs
        were partially offset by a gain from a change in the derivative liability
        also
        associated with the Global note and warrants outstanding at March 31,
        2007.
  6
 Net
        loss
        for the three-month period ended March 31, 2007 and 2006 was $1,659,319 versus
        a
        net loss of $808,351, respectively. Net income (loss) for the six-month period
        ended March 31, 2007 and 2006 was $(2,149,571) and $2,105,230,
        respectively.
 
 The
        Company implemented a Profit Improvement Initiative in the third quarter
        of
        2006. The initiative is significantly improving operations efficiency,
        increasing competitiveness and improving business profitability. 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
        over
        $1,200,000 in annualized savings, for only a one-time $200,000 maximum related
        pre-tax charge, taken in the quarter ended December 31, 2006. 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 made in non-revenue generating areas, with the greatest
        reductions in corporate headquarters administrative jobs and outside consulting.
        The company has not reduced sales, marketing, engineering, manufacturing,
        finance or audit capabilities.
 
 **Liquidity
        and Capital Resources** ****
 
 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. We believe that our working capital as of the date of
        this
        report will not be sufficient to satisfy our estimated working capital
        requirements at our current level of operations for the next twelve months.
        Our
        cash and cash equivalents were $250,943 as of March 31, 2007, compared to
        cash
        and cash equivalents of $130,550 as of September 30, 2006.
 
 At
        our
        current cash “burn rate”, we will need to raise additional cash through debt or
        equity financings during 2007 in order to fund our continued development
        and
        marketing and to finance possible future losses from operations as we expand
        our
        business lines and reach a profitable level of operations. Before considering
        Hearst Ethanol One, Inc., we believe that we will require a minimum of
        $1,800,000 in order to fund our planned operations over the next 12 months,
        in
        addition to the capital required for the development of any ethanol production
        project. We plan to obtain the additional working capital through 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 this
        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.
 
 **ITEM
        3.CONTROLS AND
        PROCEDURES**
 
 Our
        disclosure controls and procedures 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 and
        have
        concluded that the disclosure controls and procedures, overall, are 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.
  7
 **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. No trial date has been set.
 
 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.
  8
  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.  As of the date of this filing, the
        Court has not ruled on this motion.
  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.
  **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.
 
 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**
 
 There
        were no material defaults with respect to any of our indebtedness during
        the
        three months ended March 31, 2007.
 
 **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 Officer Pursuant
                to Rule 13a-14(a) of the Securities Exchange Act of
                1934  31.2
              Certification of Chief Financial Officer Pursuant
                to Rule 13a-14(a) of the Securities Exchange Act of
                1934  32.2
              Certification of Chief Executive and Chief Financial
                Officers Pursuant to 18
                U.S.C Section 1350.
  9
  **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:
                May 21, 2007
              
              /s/
                James A.
                LattyJames A. LattyChief
                Executive Officer




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