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


**Washington,
      D.C. 20549**


FORM
      10-KSB








[X]
            ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934




For
      the
      fiscal year ended September
      30, 2006




OR




[  
                ]
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934




For
      the
      transition period from to




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




**Securities
      to be registered under Section 12(b) of the Act:**




**Title
                    of each class****to be so
                    registered**
              
              **Name
                    of each exchange on which****each class is to be
                    registered**None
              
              N/A  Securities
        to be registered under Section 12(g) of the Act:




Common
                Stock, $.001 par value**(Title
                of
                class)**









Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 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 ___ No X




Check
      if
      there is no disclosure of delinquent filers pursuant to Item 405 of Regulation
      S-K contained in this form, and will not be contained, to the best of
      registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-KSB or any amendment
      to this Form 10-KSB. [__ ]




The
      registrant’s revenues for its most recent fiscal year were:
      $9,210,755




The
      aggregate market value of the voting and non-voting stock held by non-affiliates
      of the registrant as of December 14, 2006 was approximately
      $14,627,341.




The
      number of shares of the common stock outstanding as of December 14, 2006 was
      17,623,303.




**Documents
      incorporated by reference: None.**











**Convergence
      Ethanol, Inc.**





**TABLE
      OF CONTENTS**




**Part
                I**
            
            
            
            **Page**Item
                1.
            
            Description
                of Business
            
            1Item
                2.
            
            Description
                of Property
            
            10Item
                3.
            
            Legal
                Proceedings
            
            11Item
                4.
            
            Submission
                of Matters to a Vote of Security Holders
            
            11**Part
                II**Item
                5.
            
            Market
                for Common Equity and Related Stockholder Matters
            
            12Item
                6.
            
            Management's
                Plan of Operation
            
            13Item
                7.
            
            Financial
                Statements
            
            18Item
                8.
            
            Changes
                In and Disagreements With Accountants on Accounting and Financial
                Disclosure
            
            42Item
                8A.
            
            Controls
                and Procedures
            
            42Item
                8B.
            
            Other
                Information
            
            43**Part
                III**Item
                9.
            
            Directors,
                Executive Officers, Promoters and Control Persons; Compliance With
Section
                16(a) of the Exchange Act
            
            43Item
                10.
            
            Executive
                Compensation
            
            44Item
                11.
            
            Security
                Ownership of Certain Beneficial Owners and Management and Related
Stockholder
                Matters
            
            46Item
                12.
            
            Certain
                Relationships and Related Transactions
            
            46Item
                13.
            
            Exhibits
            
            47Item
                14.
            
            Principal
                Accountant Fees and Services
            
            47Signatures
            
            49Index
                to Consolidated Financial Statements
            
            18








**Part
      I**




**Item
      1.  D** **escription
      of Business.**




This
      annual report contains forward-looking statements within the meaning of Section
      27A of the Securities Act and Section 21E of the Securities Exchange Act. These
      statements relate to future events or our future financial performance. In
      some
      cases, you can identify forward-looking statements by terminology such as “may”,
“should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”,
“predicts”, “potential” or “continue” or the negative of these terms or other
      comparable terminology. These statements are only predictions and involve known
      and unknown risks, uncertainties and other factors, including the risks in
      the
      section entitled “Risk Factors”, that may cause our or our industry’s actual
      results, levels of activity, performance or achievements to be materially
      different from any future results, levels of activity, performance or
      achievements expressed or implied by these forward-looking
      statements.





Although
      we believe that the expectations reflected in the forward-looking statements
      are
      reasonable, we cannot guarantee future results, levels of activity, performance
      or achievements. Except as required by applicable law, including the securities
      laws of the United States, we do not intend to update any of the forward-looking
      statements to conform these statements to actual results.





Our
      financial statements are stated in United States dollars and are prepared in
      accordance with United States generally accepted accounting
      principles.





In
      this
      annual report, unless otherwise specified, all dollar amounts are expressed
      in
      United States dollars and, unless otherwise indicated, all references to “we”,
“us”, “our” and “The Company” means Convergence Ethanol, Inc. and our
      wholly-owned subsidiaries.





CORPORATE
      OVERVIEW





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 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., bda Convergence Ethanol Corp. (“CA MEMS”) a
      California corporation, Bott Equipment Company, Inc. (“Bott”) and Gulfgate
      Equipment, Inc. (“Gulfgate”), Texas
      corporations ,
      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 refineries and through the engineering, fabrication and
      sale of environmentally focused refinery systems and equipment.





-1-




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.





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 1.5 million metric tons 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 and grows at over 25% per year.
      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 by 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.





-2-




**CA
      MEMS**




Our
      CA
      MEMS subsidiary engineers, designs and oversees the construction of “Intelligent
      Filtration Systems” (“IFSTM”) for the gas and oil industry. These systems are
      utilized to filter wastes from oil or water streams. Our IFSTM 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. This equipment will purify the amine fluid by removing
      particulate, chemical contaminants, and heat stable salts to allow the amine
      to
      more effectively remove carbon dioxide and sulfur compounds during 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 IFSTM technology needn’t dispose of contaminated
      filters, but only need dispose of the contaminate itself. Thus, while a
      filtration system based upon IFSTM technology typically requires a greater
      capital investment on the part of the purchaser, these costs are offset in
      the
      long run by savings in filter replacement and disposal costs.





The
      U.S.
      EPA and California CARB requirements for cleaner burning fuels have opened
      up
      additional opportunities for our IFSTM. We believe our IFSTM 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 IFSTM 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 1952; 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 specializes in the
      construction 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
      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.





MARKETING





CA
      MEMS,
      Bott and Gulfgate have a combined direct sales force as well as commissioned
      sales representatives that sell their products.





-3-




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.





**Company
      History:**




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





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





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





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





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





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





On
      December 15, 2005, the Company assumed Weisdorn Sr.’s obligation to purchase
      165,054 shares from Mr. Trumble at $1.86 per share.





-4-




**ITEM
      1A** **. 
      Cautionary Statement Regarding Future Results, Forward-Looking Information
      and
      Certain Important Factors**




We
      make
      written and oral statements from time to time regarding our business and
      prospects, such as projections of future performance, statements of management’s
      plans and objectives, forecasts of market
      trends, and other matters that are forward-looking statements within the meaning
      of Section 27A of the Securities Act of 1933 and Section 21E of the
      Securities Exchange Act of 1934. Statements containing the words or phrases
      “will likely result,” “are expected to,” “will continue,” “is anticipated,”
“estimates,” “projects,” “believes,” “expects,” “anticipates,” “intends,”
“target,” “goal,” “plans,” “objective,” “should” or similar expressions identify
      forward-looking statements, which may appear in documents, reports, filings
      with
      the Securities and Exchange Commission, news releases, written or oral
      presentations made by officers or other representatives made by us to analysts,
      stockholders, investors, news organizations and others, and discussions with
      management and other representatives of us.





Our
      future results, including results related to forward-looking statements, involve
      a number of risks and uncertainties. No assurance can be given that the results
      reflected in any forward-looking statements will be achieved. Any
      forward-looking statement made by or on behalf of us speaks only as of the
      date
      on which such statement is made. Our forward-looking statements are based upon
      assumptions that are sometimes based upon estimates, data, communications and
      other information from suppliers, government agencies and other sources that
      may
      be subject to revision. Except as required by law, we do not undertake any
      obligation to update or keep current either (i) any forward-looking
      statement to reflect events or circumstances arising after the date of such
      statement, or (ii) the important factors that could cause our future
      results to differ materially from historical results or trends, results
      anticipated or planned by us, or which are reflected from time to time in any
      forward-looking statement which may be made by or on behalf of us.




In
      addition to other matters identified or described by us from time to time in
      filings with the SEC, there are several important factors that could cause
      our
      future results to differ materially from historical results or trends, results
      anticipated or planned by us, or results that are reflected from time to time
      in
      any forward-looking statement that may be made by or on behalf of us. Some
      of
      these important factors, but not necessarily all important factors, include
      the
      following:





**We
      are an emerging growth company with limited operating history, accordingly
      there
      is limited historical information available upon which you can judge the merits
      of an investment in our company.**




**We
      have generated net losses since inception, which may continue for the
      foreseeable future as we try to grow our business, which means that you may
      be
      unable to realize a return on your investment for a long period of time, if
      ever** .
      Our
      present business operations commenced in February 2004. From inception through
      September 30, 2006, incurred a cumulative net loss of $16,473,023 which included
      non-cash net asset impairment charges of $10,900,000. We expect to continue
      incurring operating losses until we are able to derive meaningful revenues
      from
      our proposed business relating to ethanol production, energy generation and
      supply.





**We
      have limited available working capital and require significant additional
      capital in order to sustain our operations, and if we cannot obtain additional
      financing we might cease to continue** .
      As of
      September 30, 2006, we had total current assets of $  3,990,546
      and a working capital deficit of $507,500 before including a liability for
      common stock subscribed of $1,194,376. We believe that we 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 establishment of any ethanol production
      facilities. We plan to obtain the additional working capital through private
      placement sales of our equity securities. We have not received any funds, nor
      can there be any assurance that such funds will be forthcoming. Should we be
      unable to raise the required funds, our ability to finance our continued
      operations will be materially adversely affected.





-5-




**Our
      independent auditors' report raises substantial doubt about our ability to
      continue as a going concern** .
      Our
      independent auditors have prepared their report on our 2006 financial statements
      assuming that we will continue as a going concern. Their report has an
      explanatory paragraph stating that our recurring losses from operations since
      inception, limited operating revenue and limited capital resources raise
      substantial doubt about our ability to continue as a going concern.  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.




The
      accompanying financial statements have been prepared in conformity with
      accounting principles generally accepted in the United States of America, which
      contemplate continuation of the Company as a going concern. The financial
      statements do not include any adjustments relating to the recoverability and
      classification of recorded asset amounts, or amounts and classification of
      liabilities that might be necessary, should the Company be unable to continue
      as
      a going concern.




**Because
      we have few proprietary rights, others can provide products and services
      substantially equivalent to ours** .
      We hold
      a provisional patent application relating to our MEMS operations, however we
      hold no patents or patents applications relating to our energy generation and
      supply business or our proposed ethanol production business. We believe that
      most of the technology used in the design and building of ethanol production
      facilities and in the area of the energy generation and supply business is
      generally known and available to others. Consequently, others will be able
      to
      compete with us in these areas. We rely on a combination of confidentiality
      agreements and trade secret law to protect our confidential information. In
      addition, we restrict access to confidential information on a ‘‘need to know’’
basis. However, there can be no assurance that we will be able to maintain
      the
      confidentiality of our proprietary information. If our proprietary rights are
      violated, or if a third party claims that we violate their trademark or other
      proprietary rights, we may be required to engage in litigation. Proprietary
      rights litigation tends to be costly and time consuming. Bringing or defending
      claims related to our proprietary rights may require us to redirect our human
      and monetary resources to address those claims.





**We
      may not be able to compete effectively or competitive pressures faced by us
      may
      materially adversely affect our business, financial condition, and results
      of
      operations** .
      We
      expect to face significant competition in our ethanol production, energy
      generation and supply and MEMS operations. Virtually all of our competitors
      have
      greater marketing and financial resources than us and, accordingly, there can
      be
      no assurance that we will be able to compete effectively or that competitive
      pressures faced by us will not materially adversely affect our business,
      financial condition, and results of operations.




**We
      are dependent upon our key personnel** ***.*** **** Our
      performance is substantially dependent on the continued services and on the
      performance of our senior management and other key personnel. We plan to obtain
      “key person” life insurance for our key personnel, however, at this time, no
      such policies are in effect. Our performance will also depend upon our ability
      to retain and motivate other officers and key employees. The loss of the
      services of any of our executive officers or other key employees could have
      a
      material adverse effect on our business, prospects, financial condition and
      results of operations. Our future success also depends on our ability to
      identify, attract, hire, train, retain and motivate other highly skilled
      technical and managerial personnel. Competition for such personnel is intense,
      and there can be no assurance that we will be able to successfully attract,
      assimilate or retain sufficiently qualified personnel. The failure
      to  retain
      and attract the necessary technical, and managerial personnel could have a
      material adverse effect on our business, prospects, financial condition and
      results of operations.




-6-




**Because
      we are smaller and have fewer financial and other resources than many ethanol
      producers, we may not be able to successfully compete in the very competitive
      ethanol industry.** Ethanol
      is a commodity. There is significant competition among existing ethanol
      producers. Our business faces competition from a number of producers that can
      produce significantly greater volumes of ethanol than we can or expect to
      produce, producers that can produce a wider range of products than we can,
      and
      producers that have the financial and other resources that would enable them
      to
      expand their production rapidly if they chose to. These producers may be able
      to
      achieve substantial economies of scale and scope, thereby substantially reducing
      their fixed production costs and their marginal productions costs. If these
      producers are able to substantially reduce their marginal production costs,
      the
      market price of ethanol may decline and we may be not be able to produce ethanol
      at a cost that allows us to operate profitably. Even if we are able to operate
      profitably, these other producers may be substantially more profitable than
      us,
      which may make it more difficult for us to raise any financing necessary for
      us
      to achieve our business plan and may have a materially adverse effect on the
      market price of our common stock.





**Competition
      from large producers of petroleum-based gasoline additives and other competitive
      products may impact our profitability.** Our
      success depends substantially upon continued demand for ethanol from major
      oil
      refiners. There are other gasoline additives that have octane and oxygenate
      values similar to those of ethanol but which currently cannot be produced at
      a
      cost that makes them competitive. The major oil refiners have significantly
      greater financial, technological and personal resources than we have to reduce
      the costs of producing these alternative products or to develop other
      alternative products that may be produced at lower cost. The major oil refiners
      also have significantly greater resources than we have to influence legislation
      and public perception of ethanol. If the major oil refiners are able to produce
      ethanol substitutes at a cost that is lower than the cost of ethanol production,
      the demand for ethanol may substantially decrease. A substantial decrease in
      the
      demand for ethanol will reduce the price of ethanol, adversely affect our
      profitability and decrease the value of your stock.





**If
      ethanol and gasoline prices drop significantly, we will also be forced to reduce
      our prices, which potentially may lead to losses.** Prices
      for ethanol products can vary significantly over time and decreases in price
      levels could adversely affect our profitability and viability. The price of
      ethanol has some relation to the price of gasoline. The price of ethanol tends
      to increase as the price of gasoline increases, and the price of ethanol tends
      to decrease as the price of gasoline decreases. Any lowering of gasoline prices
      will likely also lead to lower prices for ethanol and adversely affect our
      operating results. We cannot assure you that we will be able to sell our ethanol
      profitably, or at all.





**Lax
      enforcement of environmental and energy policy regulations may adversely affect
      the demand for ethanol.** Our
      success will depend, in part, on effective enforcement of existing environmental
      and energy policy regulations. Many of our potential customers are unlikely
      to
      switch from the use of conventional fuels unless compliance with applicable
      regulatory requirements leads, directly or indirectly, to the use of ethanol.
      Both additional regulation and enforcement of such regulatory provisions are
      likely to be vigorously opposed by the entities affected by such requirements.
      If existing emissions-reducing standards are weakened, or if governments are
      not
      active and effective in enforcing such standards, our business and results
      of
      operations could be adversely affected. Even if the current trend toward more
      stringent emissions standards continues, our future prospects will depend on
      the
      ability of ethanol to satisfy these emissions standards more efficiently than
      other alternative technologies. Certain standards imposed by regulatory programs
      may limit or preclude the use of our products to comply with environmental
      or
      energy requirements. Any decrease in the emission standards or the failure
      to
      enforce existing emission standards and other regulations could result in a
      reduced demand for ethanol. A significant decrease in the demand for ethanol
      will reduce the price of ethanol, adversely affect our profitability and
      decrease the value of your stock.





-7-




**Price
      increases or interruptions in needed energy supplies could cause loss of
      customers and impair our profitability.** Ethanol
      production requires a constant and consistent supply of energy. If there is
      any
      interruption in our supply of energy for whatever reason, such as availability,
      delivery or mechanical problems, we may be required to halt production. If
      we
      halt production for any extended period of time, it will have a material,
      adverse effect on our business. Natural gas and electricity prices have
      historically fluctuated significantly. We purchase significant amounts of these
      resources as part of our ethanol production. Increases in the price of natural
      gas or electricity would harm our business and financial results by increasing
      our energy costs.





**Our
      common stock may be thinly traded, so you may be unable to sell at or near
      ask
      prices or at all if you need to sell your shares to raise money or otherwise
      desire to liquidate your shares.** Our
      common stock is thinly traded and we will be required to undertake efforts
      to
      develop market recognition for us and support for our shares of common stock
      in
      the public market. The price and volume for our common stock that will develop
      cannot be assured.





The
      number of persons interested in purchasing our common stock at or near ask
      prices at any given time may be relatively small or non-existent. This situation
      may be attributable to a number of factors, including the fact that we are
      a
      small company which is relatively unknown to stock analysts, stock brokers,
      institutional investors and others in the investment community that generate
      or
      influence sales volume, and that even if we came to the attention of such
      persons, they tend to be risk-averse and would be reluctant to follow an
      unproven company such as ours or purchase or recommend the purchase of our
      shares until such time as we became more seasoned and viable. As a consequence,
      there may be periods of several days, weeks, months, or more when trading
      activity in our shares is minimal or non-existent, as compared to a seasoned
      issuer which has a large and steady volume of trading activity that will
      generally support continuous sales without an adverse effect on share price.
      We
      cannot give you any assurance that a broader or more active public trading
      market for our common stock will develop or be sustained. While we are trading
      on the OTC Bulletin Board, the trading volume we will develop may be limited
      by
      the fact that many major institutional investment funds, including mutual funds,
      as well as individual investors follow a policy of not investing in Bulletin
      Board stocks and certain major brokerage firms restrict their brokers from
      recommending Bulletin Board stocks because they are considered speculative,
      volatile and thinly traded.





**Our
      common stock is subject to the “penny stock” rules which could limit the trading
      and liquidity of the common stock, adversely affect the market price of our
      common stock and increase your transaction costs to sell those
      shares.** The
      trading price of our common stock is below $5 per share; and therefore, the
      open-market trading of our common stock will be subject to the “penny stock”
rules, unless we otherwise qualify for an exemption from the “penny stock”
definition. The “penny stock” rules impose additional sales practice
      requirements on certain broker-dealers who sell securities to persons other
      than
      established customers and accredited investors (generally those with assets
      in
      excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together
      with their spouse). These regulations, if they apply, require the delivery,
      prior to any transaction involving a penny stock, of a disclosure schedule
      explaining the penny stock market and the associated risks. Under these
      regulations, certain brokers who recommend such securities to persons other
      than
      established customers or certain accredited investors must make a special
      written suitability determination regarding such a purchaser and receive such
      purchaser’s written agreement to a transaction prior to sale. These regulations
      may have the effect of limiting the trading activity of our common stock,
      reducing the liquidity of an investment in our common stock and increasing
      the
      transaction costs for sales and purchases of our common stock as compared to
      other securities.





-8-




**The
      market price for our common stock may be particularly volatile given our status
      as a relatively unknown company with a small and thinly traded public float
      and
      lack of history as a public company which could lead to wide fluctuations in
      our
      share price.** The
      market for our common stock may be characterized by significant price volatility
      when compared to seasoned issuers, and we expect that our share price could
      continue to be more volatile than a seasoned issuer for the indefinite future.
      The potential volatility in our share price is attributable to a number of
      factors. First, as noted above, our shares of common stock may be sporadically
      and thinly traded. As a consequence of this lack of liquidity, the trading
      of
      relatively small quantities of shares by our stockholders may disproportionately
      influence the price of those shares in either direction. The price for our
      shares could, for example, decline precipitously in the event that a large
      number of our shares of common stock are sold on the market without commensurate
      demand, as compared to a seasoned issuer which could better absorb those sales
      without adverse impact on its share price. Many of these factors will be beyond
      our control and may decrease the market price of our common shares, regardless
      of our operating performance. We cannot make any predictions or projections
      as
      to what the prevailing market price for our common stock will be at any
      time.




In
      addition, the market price of our common stock could be subject to wide
      fluctuations in response to:


·
            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





The
      stock
      market, in general, and the market prices for penny stock companies in
      particular, have experienced volatility that often has been unrelated to the
      operating performance of such companies. These broad market and industry
      fluctuations may adversely affect the price of our stock, regardless of our
      operating performance.




Stockholders
      should be aware that, according to SEC Release No. 34-29093, the market for
      penny stocks has suffered in recent years from patterns of fraud and abuse.
      Such
      patterns include (1) control of the market for the security by one or a few
      broker-dealers that are often related to the promoter or issuer; (2)
      manipulation of prices through prearranged matching of purchases and sales
      and
      false and misleading press releases; (3) boiler room practices involving
      high-pressure sales tactics and unrealistic price projections by inexperienced
      sales persons; (4) excessive and undisclosed bid-ask differential and markups
      by
      selling broker-dealers; and (5) the wholesale dumping of the same securities
      by
      promoters and broker-dealers after prices have been manipulated to a desired
      level, along with the resulting inevitable collapse of those prices and with
      consequent investor losses. Our management is aware of the abuses that have
      occurred historically in the penny stock market. Although we do not expect
      to be
      in a position to dictate the behavior of the market or of broker-dealers who
      participate in the market, management will strive within the confines of
      practical limitations to prevent the described patterns from being established
      with respect to our securities. The occurrence of these patterns or practices
      could increase the volatility of our share price.




-9-




**Limitations
      on director and officer liability and indemnification of our officers and
      directors by us may discourage stockholders from bringing suit against a
      director.** Our
      bylaws provide, with certain exceptions as permitted by governing state law,
      that a director or officer shall not be personally liable to us or our
      stockholders for breach of fiduciary duty as a director, except for acts or
      omissions which involve intentional misconduct, fraud or knowing violation
      of
      law, or unlawful payments of dividends. These provisions may discourage
      stockholders from bringing suit against a director for breach of fiduciary
      duty
      and may reduce the likelihood of derivative litigation brought by stockholders
      on our behalf against a director. In addition, our articles of incorporation
      and
      bylaws may provide for mandatory indemnification of directors and officers
      to
      the fullest extent permitted by governing state law.




**We
      do not expect to pay dividends for the foreseeable future, and we may never
      pay
      dividends.** We
      currently intend to retain any future earnings to support the development and
      expansion of our business and do not anticipate paying cash dividends in the
      foreseeable future. Our payment of any future dividends will be at the
      discretion of our board of directors after taking into account various factors,
      including but not limited to our financial condition, operating results, cash
      needs, growth plans and the terms of any credit agreements that we may be a
      party to at the time. In addition, our ability to pay dividends on our common
      stock may be limited by state law. Accordingly, investors must rely on sales
      of
      their common stock after price appreciation, which may never occur, as the
      only
      way to realize their investment.





**Our
      management owns 29.7% and an investment group may own a significant percentage
      of our outstanding common stock, which may limit your ability and the ability
      of
      our other shareholders, whether acting alone or together, to propose or direct
      the management or overall direction of our Company.** Such
      concentrated control of the Company may adversely affect the price of our common
      stock. Our principal stockholders may be able to control matters requiring
      approval by our shareholders, including the election of directors, mergers
      or
      other business combinations. Such concentrated control may also make it
      difficult for our shareholders to receive a premium for their shares of our
      common stock in the event we merge with a third party or enter into different
      transactions which require shareholder approval. These provisions could also
      limit the price that investors might be willing to pay in the future for shares
      of our common stock. Accordingly, if all of our officers and directors exercise
      outstanding option this shareholder together with our directors and executive
      officers could have the power to control the election of our directors and
      the
      approval of actions for which the approval of our shareholders is required.
      If
      you acquire shares, you may have no effective voice in the management of the
      Company.





**Future
      sales of our equity securities could put downward selling pressure on our
      securities, and adversely affect the stock price. There is a risk that this
      downward pressure may make it impossible for an investor to sell his securities
      at any reasonable price, if at all.** Future
      sales of substantial amounts of our equity securities in the public market,
      or
      the perception that such sales could occur, could put downward selling pressure
      on our securities, and adversely affect the market price of our common
      stock.




**Item
      2.** **Description
      of Property**




Our
      executive offices are located in Westlake Village, California and consist of
      approximately 9,100 square feet. The lease has an initial term of five years
      ending on December 31, 2008, subject to one five year renewal option.




We
      also
      maintain two separate facilities in Houston, Texas from which we conduct the
      operations of our subsidiaries, Bott and Gulfgate. We own both facilities in
      fee
      simple. The Bott facility consists of approximately 91,000 square feet of real
      estate and 61,000 square feet of
      buildings. The Gulfgate facility
      consists of approximately 67,500 square feet of real estate and 34,000 square
      feet of buildings.




-10-




Our
      HEO
      subsidiary owns 720 acres of land in Hearst, Ontario which includes a
      significant wood waste repository, an agate rock quarry, a small forest area
      and
      certain structures. We intend to use this property to build an ethanol plant.




**Item
      3.** **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 12, 2006, the Company filed a Form 8-K with the United States
      Securities and Exchange Commission disclosing the resignation and termination
      of
      Daniel Moscaritolo as a director and officer of the Company.


On
      December 13, 2006, Mr. Moscaritolo presented management with a purported action
      by written consent of the shareholders of the Company indicating that the
      shareholders had elected to remove the current board of directors and elect
      Daniel Moscaritolo and Thomas Hemingway as directors in their place. Mr.
      Moscaritolo also presented management with two separate purported actions by
      written consent of the new purported board of directors indicating that the
      Company's current officers, James A. Latty and Richard W. York, were terminated
      and that Mr. Moscaritolo was elected to serve as Secretary of the Company and
      Mr. Hemingway was elected to serve as President and Chief Executive Officer
      of
      the Company. The Company rejected the purported shareholder action on the
      grounds that, on its face, the purported action showed an insufficient number
      of
      votes had been obtained to approve the requested action, and on the further
      grounds that the consenting shareholders had violated the proxy rules set forth
      in Section 14 of the Securities Exchange Act of 1934, as amended (the “Act”). In
      light of the invalidity of the purported shareholder action, the Company also
      rejected the actions of the new purported board of directors terminating and
      replacing the officers of the Company.





On
      December 14, 2006, the Company filed a lawsuit in the United States District
      Court, Central District of California, Western Division (Case No.: CV06-07971)
      against Daniel Moscaritolo for violations of the Act, declaratory relief, breach
      of fiduciary duty, intentional interference with contract, and conversion (the
      “Company Action”). Specifically, the Company alleged that Mr. Moscaritolo's
      actions to wrest control of the Board of Directors were invalid and
      unlawful.





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”). The Moscaritolo action has been dismissed,
      but on January 10, 2007 Mr. Moscaritolo and Charles L. Christensen filed a
      second lawsuit in Nevada District Court against the Company, Dr. Latty, and
      Mr.
      Newsom for injunctive relief to hold Annual Shareholders Meeting.





The
      Company intends to pursue the claims set forth in the Company Action and to
      oppose the claims set forth in the Moscaritolo Action.




**Item
        4.** **Submission
        of Matters to a Vote of Security Holders.**
  There
        were no matters submitted to our security holders during the fourth quarter
        of
        the fiscal year ended September 30, 2006.





-11-




**Part
      II**




**Item
        5.  **Market
        for Common Equity and Related Shareholder
        Matters.****




Market
      Information




Our
      common stock is listed on the OTC Bulletin Board under the symbol “CETH.OB.” Set
      forth below are high and low closing prices for our common stock for each
      quarter during the two fiscal years ended September 30, 2006. We consider
      our common stock to be thinly traded and that any reported bid or sale prices
      may not be a true market-based valuation of the common stock.




**Quarter
                Ended**
            **High**
            **Low**December
              31, 2005
            $1.80
            $0.87March
              31, 2006
            $1.80
            $0.95June
              30, 2006
            $3.50
            $1.02September
              30, 2006
            $1.91
            $0.82December
              31, 2004
            $2.32
            $1.51March
              31, 2005
            $3.30
            $2.10June
              30, 2005
            $2.59
            $1.70September
              30, 2005
            $2.45
            $1.50




Holders




As
      of
      December 14, 2006, there were 3,361 record holders of our common stock.




Dividends




We
      have
      not declared or paid any cash dividends on our common stock since our inception
      and do not contemplate paying dividends in the foreseeable future. It is
      anticipated that earnings, if any, will be retained for the operation of our
      business.





**TRANSFER
      AGENT**





Our
      transfer agent is Interwest Stock Transfer Company who is located at 1981 E.
      Murray Holladay Rd. #1, Salt Lake City, UT 84117 and can be reached at 801
      272-9294.





Sales
      of Unregistered Securities




During
      the fiscal year ended September 30, 2006, we sold unregistered shares of our
      securities in the following transactions which were not previously
      reported:




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.





-12-




**Item
      6.**  **Management’s Discussion and Analysis or Plan of Operation.**




*Unless
      otherwise indicated, all references to our company include our wholly-owned
      subsidiaries, MEMS USA, Inc., a California corporation,, Bott Equipment Company,
      Inc., a Texas corporation and Gulfgate Equipment, Inc., a Texas corporation
      as
      well as an 87.0% equity interest in Hearst Ethanol One, Inc., a Canadian Federal
      corporation (“HEO”).*





Overview




We
      are
      engaged in the business of developing bio-renewable energy projects and
      providing professional 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”).





The
      following discussion should be read in conjunction with the consolidated
      financial statements and notes thereto. The years 2006 and 2005 represent the
      fiscal years ended September 30, 2006 and 2005, respectively, and are used
      throughout the document.





Ethanol
      from Woodwaste




HEO-
      Our
      Hearst Ethanol One Inc. (HEO) subsidiary 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 an area which offers abundant
      supplies of cellulosic woodwaste, superior transportation infrastructure,
      expedited permitting processes, high local demand for Ethanol and favorable
      local, 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.





**D** **elivery
      of Intelligent Filtration System** **(IFS** **)
      - a $1.6 million contract**




On
      December 1, 2006 the Company delivered of its first Intelligent Filtration
      System (IFSTM) to a major Los Angeles-area oil refinery. This advanced filtration
      system enables the production of cleaner-burning, reduced-sulfur motor fuel,
      supporting refinery environmental improvement goals.




-13-




The
      IFSTM
integrates previously separate units into a dynamic filtration system.
      Engineered for ease of operation and maintenance, it gives the refinery
      exceptional and coordinated control. Direct ecological benefits of the
      energy-efficient design include reduced greenhouse emissions and a dramatic
      reduction in the volume of hazardous waste.




This
      IFS
      system has been delivered on budget and before scheduled
      installation.





**Basis
      of Presentation**





The
      accompanying condensed consolidated financial statements, included elsewhere
      in
      this Annual Report on Form 10-KSB, have been prepared in conformity with
      accounting principles generally accepted in the United States of America, which
      contemplate continuation as a going concern. From inception through September
      30, 2006, we incurred a cumulative net loss of $16,473,023 which included
      non-cash asset impairment charges of $10,900,000. We expect to continue
      incurring operating losses until we are able to derive meaningful revenues
      from
      our proposed business relating to ethanol production, energy generation and
      supply and increase sales of our filtration equipment, industrial pumps,
      compressors, flow meters, valves and instrumentation for the oil and power
      industries.. These conditions raise substantial doubt as to our ability to
      continue as a going concern. The condensed consolidated financial statements
      do
      not include any adjustments that might result from the outcome of this
      uncertainty.





Comparison
      of Operations





Net
      sales
      for the twelve-month periods ended September 30, 2006 and 2005 were $9,210,755
      and $8,828,157, respectively. The sales increase for the twelve months (4.3%)
      ended September 30, 2006 as compared to the prior year were due primarily to
      strong customer demand for our industrial pumps, equipment rentals and repairs
      services.





The
      Company computes gross profit as net sales less cost of sales. The gross profit
      margin is the gross profit divided by net sales, expressed as a percentage.
      Gross profit margin for the twelve-month periods ended September 30, 2006 and
      2005 were 19.8% and 24.4% respectively. This decrease of 4.6% was primarily
      due
      to lower margins on commercial aviation refueling systems shipments and cost
      over-runs on two large international orders for our Vacuum Industrial Oil
      purifier Systems. Also impacting the margins were higher physical inventory
      adjustments and material costs as compared to the prior year. Margins for this
      segment of the business reflect the significant competitive pressures
      encountered on bidding and winning this business.




Selling,
      general and administrative (SG&A) expenses were $5,125,048 and $4,570,066
      for the twelve months ended September 30, 2006 and 2005, respectively. The
      increase in SG&A spending for the twelve months ended September 30, 2006 as
      compared to the prior year were due primarily to legal costs (See Part I, Item
      3, Legal Proceedings), consulting fees and commissions.




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.




-14-




For
      the
      year ended September 30, 2006, shareholder’s equity was $577,844 as compared to
      equity of $428,632 for the prior year period ended September 30, 2005. The
      increase in shareholder equity is primarily attributable to the acquisition
      of
      HEO.





Other
      expense (income), net for the twelve-month periods ended September 30, 2006
      and
      2005 were $71,364 and $4,704, respectively. The increase in other expense is
      attributable to the interest payments made pursuant to the terms of the credit
      lines of Bott and Gulfgate and the “Put Option” (See note 13) with Mr.
      Trumble.





Loss
      from
      operations for the twelve-month periods ended September 30, 2006 and 2005 were
      $3,371,350 and $2,424,798, respectively.





The
      Company has addressed the low margin performance by launching a profit
      improvement - cost savings initiative in the second half of 2006. The initiative
      is significantly improving operations efficiency, increasing competitiveness
      and
      improving business profitability. The cost savings 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 related pre-tax charge. On an annualized basis, the
      company expects to increase profitability by more than $2,000,000 as a combined
      result of cost savings and business growth.





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 also intend to continue to develop our sensor technology.
      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 $130,150 as of September 30, 2006, compared to cash and cash equivalents
      of
      $828,153 as of September 30, 2005





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 of our IFSTM product line 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
      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 establishment of
      any
      ethanol production facilities. 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.





-15-




Off-Balance
      Sheet Arrangements:





We
      do not
      have any off-balance sheet financing arrangements.





**Recent
      Accounting Pronouncements:**




In
      December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-Based
      Payment”. Statement 123(R) will provide investors and other users of financial
      statements with more complete and neutral financial information by requiring
      that the compensation cost relating to share-based payment transactions be
      recognized in financial statements. That cost will be measured based on the
      fair
      value of the equity or liability instruments issued. Statement 123(R) covers
      a
      wide range of share-based compensation arrangements including share options,
      restricted share plans, performance based awards, share appreciation rights,
      and
      employee share purchase plans. Statement 123(R) replaces FASB Statement No.
      123,
      Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
      Accounting for Stock Issued to Employees. Statement 123, as originally issued
      in
      1995, established as preferable a fair-value-based method of accounting for
      share-based payment transactions with employees. However, that Statement
      permitted entities the option of continuing to apply the guidance in APB Opinion
      25, as long as the footnotes to financial statements disclosed what net income
      would have been had the preferable fair-value- based method been used. Public
      entities (other than those filing as small business issuers) will be required
      to
      apply Statement 123(R) as of the first quarter of the fiscal year beginning
      after June 15, 2005. For small business (S-B) filers, the effective date is
      fiscal year beginning after December 15, 2005. The Company has evaluated the
      impact of the adoption of SFAS 123(R), and believes the impact will be
      significant.




In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.”
This statement applies to all voluntary changes in accounting principles and
      requires retrospective application to prior periods’ financial statements of
      changes in accounting principle, unless such would be impracticable. This
      statement also makes a distinction between “retrospective application” of an
      accounting principle and the “restatement” of financial statements to reflect
      the correction of an error. This statement is effective for accounting changes
      and corrections of errors made in fiscal years beginning after December 15,
      2005. The Company does not expect the adoption of SFAS No. 154 to have a
      material impact on its financial position or results of operation.




In
      February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments”. SFAS No. 155 amends SFAS No 133, “Accounting for
      Derivative Instruments and Hedging Activities”, and SFAS No. 140, “Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities”. SFAS No. 155, permits fair value re-measurement for any hybrid
      financial instrument that contains an embedded derivative that otherwise would
      require bifurcation, clarifies which interest-only strips and principal-only
      strips are not subject to the requirements of SFAS No. 133, establishes a
      requirement to evaluate interest in securitized financial assets to identify
      interests that are freestanding derivatives or that are hybrid financial
      instruments that contain an embedded derivative requiring bifurcation, clarifies
      that concentrations of credit risk in the form of subordination are not embedded
      derivatives, and amends SFAS No. 140 to eliminate the prohibition on the
      qualifying special-purpose entity from holding a derivative financial instrument
      that pertains to a beneficial interest other than another derivative financial
      instrument. This statement is effective for all financial instruments acquired
      or issued after the beginning of the Company’s first fiscal year that begins
      after September 15, 2006. Management believes that this statement will not
      have
      a significant impact on the financial statements.




-16-




In
      March
      2006 FASB issued SFAS 156 Accounting for Servicing of Financial Assets, this
      Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing
      of Financial Assets and Extinguishments of Liabilities *,* with
      respect to the accounting for separately recognized servicing assets and
      servicing liabilities. This Statement requires:




1.
            An
                entity to recognize a servicing asset or servicing liability each
                time it
                undertakes an obligation to service a financial asset by entering
                into a
                servicing contract.




2.
            All
                separately recognized servicing assets and servicing liabilities
                to be
                initially measured at fair value, if practicable.




3.
            Permits
                an entity to choose Amortization method or  Fair Value Measurement
                method for each class of separately recognized servicing assets and
                servicing liabilities:




4.
            At
                its initial adoption, permits a one-time reclassification of
                available-for-sale securities to trading securities by entities with
                recognized servicing rights, without calling into question the treatment
                of other available-for-sale securities under Statement 115, provided
                that
                the available-for-sale securities are identified in some manner as
                offsetting the entity’s exposure to changes in fair value of servicing
                assets or servicing liabilities that a servicing company elects to
                subsequently measure at fair value.




5.
            Separate
                presentation of servicing assets and servicing liabilities subsequently
                measured at fair value in the statement of financial position and
                additional disclosures for all separately recognized servicing assets
                and
                servicing liabilities.




This
      Statement is effective for fiscal year beginning after September 15, 2006.
      Management has not determined the effect if any, the adoption of this statement
      will have on the financial statements.




In
      September 2006, the FASB issued SFAS No. 157, Fair Value Measurements.
      This statement clarifies the definition of fair value, establishes a framework
      for measuring fair value, and expands the disclosures on fair value
      measurements. SFAS No. 157 is effective for fiscal years beginning after
      November 15, 2007. Management has not determined the effect if any, the
      adoption of this statement will have on the financial statements .




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.




-17-




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.




**Item
      7.  Financial Statements**






**INDEX
      TO FINANCIAL STATEMENTS**









Report of Independent Certified Public
              Accountants
            19Consolidated Balance Sheet at September
              30,
              2006
            20Consolidated Statements of Operations
              for the
              years ended September 30, 2006 and 2005
            21Consolidated Statements of Stockholders’
              Equity for the years ended September
              30, 2006 and 2005
            22Consolidated Statements of Cash Flows
              for the
              years ended September 30, 2006 and 2005
            23Notes to Consolidated Financial
              Statements
            24







-18-




REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM









To
      the
      Board of Directors of:


CONVERGENCE
      ETHANOL, INC.


Westlake
      Village, California








We
      have
      audited the accompanying consolidated balance sheet of Convergence Ethanol,
      Inc.
      and subsidiaries as of September 30, 2006, and the related consolidated
      statements of operations, stockholders’ equity and cash flows for the years
      ended September 30, 2006 and 2005. These financial statements are the
      responsibility of the Company’s management. Our responsibility is to express an
      opinion on these consolidated financial statements based on our
      audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the consolidated
      financial statements. An audit also includes assessing the accounting principles
      used and significant estimates made by management, as well as evaluating the
      overall financial statement presentation. We believe that our audits provide
      a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Convergence Ethanol, Inc.
      and subsidiaries as of September 30, 2006 and the results of their operations
      and their cash flows for the years ended September 30, 2006 and 2005 in
      conformity with accounting principles generally accepted in the United States
      of
      America.





The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern. As discussed in the Note 1 to
      the
      consolidated financial statements, the Company has incurred recurring losses
      from operations and has accumulated deficit of $16,473,023 as of September
      30,
      2006 that raise substantial doubt about its ability to continue as a going
      concern. Management's plans regarding those matters also are described in Note
      1
      to the consolidated financial statements. The consolidated financial statements
      do not include any adjustments that might result from the outcome of this
      uncertainty.











/s/
      Kabani & Company, Inc.


CERTIFIED
      PUBLIC ACCOUNTANTS


Los
      Angeles, California


January
      12, 2007





-19-


CONVERGENCE
        ETHANOL, INC. (fka Mems USA, Inc.)
 Consolidated
        Balance Sheet
 September
        30, 2006
 
  ASSETS


Current
                assets:Cash
                and cash equivalent
            
            $
            130,550Accounts
                receivable, net allowance for uncollectible of $83,081
            
            
            1,281,998Inventories,
                net of provision for slow moving items of $25,000
            
            
            2,039,688Other
                current assets
            
            
            630,881Total
                current assets
            
            
            4,083,117Plant,
                property and equipment, net
            
            
            2,575,027Other
                assets
            
            
            58,473Total
                assets
            
            $
            6,716,617LIABILITIES
                AND STOCKHOLDERS' EQUITYCurrent
                liabilities:Accounts
                payable and accrued expenses
            
            $
            3,381,466Lines
                of credits
            
            
            325,114Notes
                payable
            
            
            343,302Current
                portion of long-term debt
            
            
            51,904Other
                liabilities
            
            
            78,884Loans
                from shareholders
            
            
            167,408Convertible
                loan payable
            
            
            150,000Liability
                due to a legal settlement
            
            
            307,000Liability
                to be satisfied through the issuance of shares
            
            
            1,194,376Total
                current liabilities
            
            
            5,999,454Other
                payables
            
            
            35,389Total
                liabilities
            
            
            6,034,843Minority
                interests
            
            
            103,930Stockholders'
                equity:Common
                stock, $0.001 par value; 100,000,000 shares authorized; 20,186,938
                shares
                issued and outstanding
            
            
            20,187Additional
                paid in capital
            
            
            21,061,314Receivables
                in shares of common stock
            
            
            (231,076
            )Accumulated
                deficit
            
            
            (16,473,023
            )Treasury
                stock (2,699,684 shares)
            
            
            (3,799,558
            )Total
                stockholders' equity
            
            
            577,844Total
                liabilities and stockholders' equity
            
            $
            6,716,617






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


-20-


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


Consolidated
      Statement of Operations


Years
      ended September 30 2006 and 2005





2006
            
            
            2005Revenues
            
            $
            9,210,755
            
            $
            8,828,157Cost
                of revenues
            
            
            7,385,693
            
            
            6,678,185Gross
                profit
            
            
            1,825,062
            
            
            2,149,972Operating
                expenses:Selling,
                general and administrative expenses
            
            
            5,125,048
            
            
            4,570,066Other
                operating expense
            
            
            71,364
            
            
            4,704Total
                operating expenses
            
            
            5,196,412
            
            
            4,574,770Loss
                from operations
            
            
            (3,371,350
            )
            
            (2,424,798
            )Income
                due to legal settlement
            
            
            3,703,634
            
            
            -Impairment
                of investment in CanAm
            
            
            (71,765
            )
            
            -Impairment
                of construction in progress of airplane
            
            
            (289,740
            )
            
            -Impairment
                of goodwill
            
            
            (915,434
            )
            
            -Biomass
                inventory write off
            
            
            (11,461,362
            )Loss
                attributable to minority interest
            
            
            1,478,450
            
            
            -Net
                loss
            
            $
            (10,927,567
            )
            $
            (2,424,798
            )Net
                loss per share, basic and diluted:Weighted
                average number of shares outstanding, basic and diluted
            
            
            19,489,977
            
            
            16,950,966Net
                loss per share, basic and diluted
            
            $
            (0.56
            )
            $
            (0.14
            )






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


-21-


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


Consolidated
      Statement of Stokholders’ Equity


For
      the
      years ended September 30, 2006 and 2005





****Common
                stock
            
            Subscrip-tionsreceivable
            
            Additional
                paid in capital
            
            Treasury
                Stock
            
            Accumulated
                deficit
            
            Stockholders'
                equityBalance
                as of September 30, 2004
            
            $
            15,092
            
            $
            (2,050
            )
            $
            3,422,911
            
            
            
            
            $
            (3,120,655
            )
            $
            315,298Payment
                on subscriptions receivable
            
            
            
            
            
            1,800
            
            
            
            
            
            
            
            
            
            
            
            1,800Common
                stock issued to acquired Bott & Gulfgate
            
            
            1,310
            
            
            
            
            
            890,625
            
            
            
            
            
            
            
            
            891,935Common
                stock issued for cash
            
            
            964
            
            
            
            
            
            1,613,940
            
            
            
            
            
            
            
            
            1,614,904Common
                stock issued for service
            
            
            38
            
            
            
            
            
            65,416
            
            
            
            
            
            
            
            
            65,454Other
                adjustments
            
            
            
            
            
            
            
            
            (35,960
            )
            
            
            
            
            (1
            )
            
            (35,961
            )Net
                loss for the year
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,424,798
            )
            
            (2,424,798
            )**Balance
                as of September 30, 2005**
            
            
            17,404
            
            
            (250
            )
            
            5,956,932
            
            
            -
            
            
            (5,545,454
            )
            
            28,632Common
                stock issued for service
            
            
            269
            
            
            
            
            
            378,388
            
            
            
            
            
            
            
            
            378,657Common
                stock issued for cash received in prior year
            
            
            129
            
            
            
            
            
            105,871
            
            
            
            
            
            
            
            
            106,000Common
                stock issued for cash received
            
            
            2,014
            
            
            
            
            
            1,541,949
            
            
            
            
            
            
            
            
            1,543,963Receivables
                in shares of common stock
            
            
            
            
            
            
            
            
            (231,076
            )
            
            
            
            
            
            
            
            (231,076
            )Common
                stock issued pursuant to terms of acquisition
            
            
            371
            
            
            
            
            
            809,595
            
            
            
            
            
            
            
            
            809,966Subscription
                receivable deemed uncollectible
            
            
            
            
            
            250
            
            
            
            
            
            
            
            
            
            
            
            250Canceled
                put option related to acquisition of Texas subsidiaries
            
            
            
            
            
            
            
            
            1,400,000
            
            
            
            
            
            
            
            
            1,400,000Investment
                in HEO
            
            
            
            
            
            
            
            
            10,868,579
            
            
            
            
            
            
            
            
            10,868,579Treasury
                stock from legal settlement
            
            
            
            
            
            
            
            
            
            
            
            (3,799,558
            )
            
            
            
            
            (3,799,558
            )Net
                loss for the year
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (10,927,569
            )
            
            (10,927,569
            )**Balance
                as of September 30, 2006**
            
            $
            20,187
            
            $
            -
            
            $
            20,830,238
            
            $
            (3,799,558
            )
            $
            (16,473,023
            )
            $
            577,844







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




-22-




CONVERGENCE
                ETHANOL, INC. (fka Mems USA, Inc.)CONSOLIDATED
                STATEMENT OF CASH FLOWSFor
                the years ended September 30, 2006 and 20052006
            
            2005Cash
                flows used in operating activities:Net loss
            
            $
            (10,927,567
            )
            $
            (2,424,798
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
            
            
            233,445
            
            
            242,367Bad
                debt expense
            
            
            37,135
            
            
            -Common
                stock issued for services
            
            
            388,033
            
            
            65,450Loss
                on investment in CanAm One
            
            
            71,765
            
            
            -Loss
                attributable to minority interest
            
            
            (1,478,450
            )Loss
                due to write off of biomass inventory
            
            
            11,461,362Impairment
                of goodwill
            
            
            915,434
            
            
            -Impairment
                of construction in progress - airplane
            
            
            289,740Income
                due to legal settlement
            
            
            (3,703,634
            )
            
            -(Gain)
                on sale or disposal of equipment
            
            
            -
            
            
            (44,743
            )Change
                in assets and liabilities:Accounts
                receivable
            
            
            (562,043
            )
            
            214,547Inventories
            
            
            (494,879
            )
            
            (236,662
            )Other
                current assets
            
            
            (414,851
            )
            
            (24,232
            )Accounts
                payable and accrued expenses
            
            
            1,986,201
            
            
            321,789Other
                current liabilities
            
            
            78,884
            
            
            -Total
                adjustments
            
            
            8,808,142
            
            
            538,516Net
                cash used in operating activities
            
            
            **(2,119,425**
            **)**
            
            **(1,886,282**
            **)**Cash
                flows from investing activities:Purchase
                of property and equipment
            
            
            (126,455
            )
            
            (55,408
            )Net
                proceeds from sale of equipment
            
            
            
            
            
            87,600Cash
                balance net of payments for purchase of Bott and Gulfgate
            
            
            -
            
            
            55,712Investment
                in CanAm One
            
            
            
            
            
            (71,765
            )Other
                assets
            
            
            -
            
            
            (44,340
            )Stock
                subscription receivable
            
            
            -
            
            
            1,800Net
                cash used in for investing activities
            
            
            **(126,455**
            )
            
            **(26,401**
            **)**Cash
                flows from financing activities:Lines
                of credit
            
            
            (52,297
            )
            
            -Notes
                payable
            
            
            (30,031
            )
            
            (105,655
            )Current
                portion of long-term debt
            
            
            (22,612
            )
            
            (21,158
            )Loan
                from shareholders
            
            
            (24,192
            )
            
            191,600Payment
                on long term liabilities
            
            
            (26,553
            )
            
            (76,294
            )Purchase
                of shares pursuant to acquisition of subsidiaries
            
            
            (20,000
            )
            
            -Underwriting
                related to issuance of shares
            
            
            
            
            
            (386,143
            )Cash
                received for shares to be issued
            
            
            180,000
            
            
            1,111,000Common
                stock issued for cash
            
            
            1,652,878
            
            
            2,001,047Net
                cash provided (used) by financing activities
            
            
            **1,548,278**
            
            
            **2,714,397**Net
                increase (decrease) in cash and cash equivalents
            
            
            (697,603
            )
            
            801,714Cash
                and cash equivalents, beginning of period
            
            
            828,153
            
            
            26,439Cash
                and cash equivalents, end of period
            
            **$**
            **130,550**
            
            **$**
            **828,153****Supplemental
                disclosure of cash flow information:**Income
                taxes paid
            
            $
            26,125
            
            $
            27,515Interest
                paid
            
            $
            178,814
            
            $
            84,361**Supplemental
                disclosure of non-cash financing activities:**Common
                stock (including $1,400,000 of shares subject to mandatory redemption
                factor as of September 30, 2005) issued for acquisition of Bott and
                Gulfgate
            
            $
            -
                0 -
            
            $
            2,291,935Assets
                acquired by HEO through issuance of shares
            
            $
            12,474,497
            
            
            -




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


-23-


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


**Notes
      to consolidated financial statements** :




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




**Organization**




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


**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” (“IFSTM”) for the gas and oil industry. The Company’s IFSTM 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 construction 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 particulate filtration equipment for the oil and power
      industries.   Gulfgate also makes and sells vacuum dehydration and
      coalescing systems that remove water from hydrocarbon oils.  Gulfgate
      maintains and operates a rental fleet of filtration and dehydration
      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.




-24-




**Fair
      Value of Financial Instruments:**




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




**Use
      of Estimates:**




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




**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.




**Cash
      and Cash Equivalents:**




All
      highly liquid investments maturing in three months or less when purchased are
      considered as cash equivalents.




-25-




**Accounts
      Receivable:**




In
      the
      normal course of business, the Company provides credit to customers. We monitor
      our customers’ payment history, and perform credit evaluation of their financial
      condition. We maintain adequate reserves for potential credit losses based
      on
      the age of the receivable and specific customer circumstance.




**Inventories:**




Inventories
      are valued at the lower of cost (first-in, first-out) or market value and have
      been reduced by an allowance for excess, slow-moving and obsolete inventories.
      The estimated allowance is based on Management's review of inventories on hand
      compared to historical usage and estimated future usage and sales. Inventories
      under long-term contracts reflect accumulated production costs, factory
      overhead, initial tooling and other related costs less the portion of such
      costs
      charged to cost of sales and any un-liquidated progress payments. In accordance
      with industry practice, costs incurred on contracts in progress include amounts
      relating to programs having production cycles longer than one year, and a
      portion thereof may not be realized within one year.




**Property
      and Equipment:**




Property
      and equipment are stated at cost. Depreciation of equipment is provided for
      by
      the straight-line method over their estimated useful lives ranging from three
      to
      ten years for equipment and 28 to 30 years for plants.




**Impairment
      of Long-Lived Assets**




The
      Company adopted Statement of Financial AccountingStandards No. 144, "Accounting
      for the Impairment or Disposal of Long-LivedAssets" ("SFAS 144"), which
      addresses financial accounting and reporting for the impairment or disposal
      of
      long-lived assets and supersedes SFAS No. 121,"Accounting for the Impairment
      of
      Long-Lived Assets and for Long-Lived Assets tobe Disposed Of," and the
      accounting and reporting provisions of APB Opinion No. 30, "Reporting the
      Results of Operations for a Disposal of a Segment of a Business." The Company
      periodically evaluates the carrying value of long-lived assets to be held and
      used in accordance with SFAS 144. SFAS 144 requires impairment losses to be
      recorded on long-lived assets used in operations when indicators of impairment
      are present and the undiscounted cash flows estimated to be generated by those
      assets are less than the assets' carrying amounts. In that event, a loss is
      recognized based on the amount by which the carrying amount exceeds the fair
      market value of the long-lived assets. Loss on long-lived assets to be disposed
      of is determined in a similar manner, except that fair market values are reduced
      for the cost of disposal. For the year ended September 30, 2006, impairment
      loss
      on investment in CAN AM of $71,765 (See note 8) and impairment loss on
      Construction in Progress (airplane) of 289,740 (See note 6) was
      recorded.




**Accounts
      Payable and accrued expenses:**




Accounts
      payable and accrued expenses includes trade accounts payable of $1,577,310
      and
      $879,733 for years ended September 30, 2006 and 2005 and accrued expenses of
      $1,804,156 and $515,532 respectively.




**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.





-26-


**Advertising
        Costs:**
  The
        Company expenses the cost of advertising as incurred. The advertising expense
        charged against operations for September 30, 2006 and 2005 were $10,000 and
        $17,472 respectively.
  **Income
        Taxes:**
  Provisions
        for federal and state income taxes are calculated on reported financial
        statement income based on the current tax law. Such provisions differ from
        the
        amounts currently payable because certain items of income and expense, known
        as
        temporary differences, are recognized in different tax periods for financial
        reporting purposes than for income tax purposes. Deferred income taxes are
        the
        result of the recognition of tax benefits that management expects to realize
        from the utilization of net operating loss carry-forwards. The amounts recorded
        are net of valuation allowance and represent management's estimate of the
        amount
        that is more likely than not to be realized.
  **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  1,431,456
        shares and 5,849,572 shares of common stock equivalents for the year ended
        September 30, 2006 and 2005, respectively which were excluded because they
        are
        not dilutive. Common stock equivalents includes, but is not limited to warrants,
        stock options, convertible debentures, etc.
  **Stock
        Based Compensation:**
  Pro
        forma
        information regarding net loss and loss per share, pursuant to the requirements
        of SFAS 123, for the years ended September 30, 2006 and 2005 are as follows:
  2006
              
              2005Net
                  income (loss), as reported
              
              $
              (10,927,567
              )
              $
              (2,424,798
              )Deduct:Total
                  stock-based employee compensation expenses determined under the
                  fair value
                  Black-Scholes method with a 145% and 80% volatility and 6% and
                  3% risk
                  free rate of return assumption at September 30, 2006 and 2005 respectively
              
              
              (1,036,510
              )
              
              (1,444,684
              )Pro
                  forma net income (loss)
              
              $
              (11,964,077
              )
              $
              (3,869,482
              )Income
                  (loss) per share:Weighted
                  average shares, basic and diluted
              
              
              19,489,977
              
              
              16,950,966Basic,
                  pro forma, per share
              
              $
              (
                  0.61
              )
              $
              (0.23
              )


-27-
  **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 $10,927,567 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
        December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-Based
        Payment”. Statement 123(R) will provide investors and other users of financial
        statements with more complete and neutral financial information by requiring
        that the compensation cost relating to share-based payment transactions be
        recognized in financial statements. That cost will be measured based on the
        fair
        value of the equity or liability instruments issued. Statement 123(R) covers
        a
        wide range of share-based compensation arrangements including share options,
        restricted share plans, performance based awards, share appreciation rights,
        and
        employee share purchase plans. Statement 123(R) replaces FASB Statement No.
        123,
        Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
        Accounting for Stock Issued to Employees. Statement 123, as originally issued
        in
        1995, established as preferable a fair-value-based method of accounting for
        share-based payment transactions with employees. However, that Statement
        permitted entities the option of continuing to apply the guidance in APB
        Opinion
        25, as long as the footnotes to financial statements disclosed what net income
        would have been had the preferable fair-value- based method been used. Public
        entities (other than those filing as small business issuers) will be required
        to
        apply Statement 123(R) as of the first quarter of the fiscal year beginning
        after June 15, 2005. For small business (S-B) filers, the effective date
        is
        fiscal year beginning after December 15, 2005. The Company has evaluated
        the
        impact of the adoption of SFAS 123(R), and believes the impact will be
        significant.
  In
        May
        2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.”
This statement applies to all voluntary changes in accounting principles
        and
        requires retrospective application to prior periods’ financial statements of
        changes in accounting principle, unless such would be impracticable. This
        statement also makes a distinction between “retrospective application” of an
        accounting principle and the “restatement” of financial statements to reflect
        the correction of an error. This statement is effective for accounting changes
        and corrections of errors made in fiscal years beginning after December 15,
        2005. The Company does not expect the adoption of SFAS No. 154 to have a
        material impact on its financial position or results of operation.
  In
        February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid
        Financial Instruments”. SFAS No. 155 amends SFAS No 133, “Accounting for
        Derivative Instruments and Hedging Activities”, and SFAS No. 140, “Accounting
        for Transfers and Servicing of Financial Assets and Extinguishments of
        Liabilities”. SFAS No. 155, permits fair value re-measurement for any hybrid
        financial instrument that contains an embedded derivative that otherwise
        would
        require bifurcation, clarifies which interest-only strips and principal-only
        strips are not subject to the requirements of SFAS No. 133, establishes a
        requirement to evaluate interest in securitized financial assets to identify
        interests that are freestanding derivatives or that are hybrid financial
        instruments that contain an embedded derivative requiring bifurcation, clarifies
        that concentrations of credit risk in the form of subordination are not embedded
        derivatives, and amends SFAS No. 140 to eliminate the prohibition on the
        qualifying special-purpose entity from holding a derivative financial instrument
        that pertains to a beneficial interest other than another derivative financial
        instrument. This statement is effective for all financial instruments acquired
        or issued after the beginning of the Company’s first fiscal year that begins
        after September 15, 2006. Management believes that this statement will not
        have
        a significant impact on the financial statements.
  -28-
 In
        March
        2006 FASB issued SFAS 156 Accounting for Servicing of Financial Assets, this
        Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing
        of Financial Assets and Extinguishments of Liabilities *,* with
        respect to the accounting for separately recognized servicing assets and
        servicing liabilities. This Statement requires:
  An
        entity
        to recognize a servicing asset or servicing liability each time it undertakes
        an
        obligation to service a financial asset by entering into a servicing contract.
  All
        separately recognized servicing assets and servicing liabilities to be initially
        measured at fair value, if practicable.
  Permits
        an entity to choose Amortization method or  Fair Value Measurement method
        for each class of separately recognized servicing assets and servicing
        liabilities:
  At
        its
        initial adoption, permits a one-time reclassification of available-for-sale
        securities to trading securities by entities with recognized servicing rights,
        without calling into question the treatment of other available-for-sale
        securities under Statement 115, provided that the available-for-sale securities
        are identified in some manner as offsetting the entity’s exposure to changes in
        fair value of servicing assets or servicing liabilities that a servicing
        company
        elects to subsequently measure at fair value.
  Separate
        presentation of servicing assets and servicing liabilities subsequently measured
        at fair value in the statement of financial position and additional disclosures
        for all separately recognized servicing assets and servicing liabilities.
  This
        Statement is effective for fiscal year beginning after September 15, 2006. Management
        has not determined the effect if any, the adoption of this statement will
        have
        on the financial statements.
  In
        September 2006, the FASB issued SFAS No. 157, Fair Value Measurements.
        This statement clarifies the definition of fair value, establishes a framework
        for measuring fair value, and expands the disclosures on fair value
        measurements. SFAS No. 157 is effective for fiscal years beginning after
        November 15, 2007. Management has not determined the effect if any, the
        adoption of this statement will have on the financial statements.
  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.
  -29-
 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.
  **(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%) shareholder of HEO. As of the date of this report HEO has incurred
        $180,000 for legal, market survey consulting, permits, and travel
        expenses.
  **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 this year the company has written 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.
  -30-
 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 shareholder, Mr. Mark Trumble.
  Under
        the
        terms of the stock purchase agreement, the Company acquired 100% of the shares
        of Bott and Gulfgate from Mr. Trumble for $50,000 in cash and 1,309,677 shares
        of the Company’s newly issued common stock.
  The
        Company also agreed, to raise $2,000,000 in gross equity funding within 120
        days
        of the Closing Date. The Company failed to achieve this milestone and issued
        Trumble an additional 123,659 shares of its restricted stock
  During
        the first quarter of fiscal year 2005, the Company, in order to avoid the
        issuance of 61,829 penalty shares, paid $75,000 directly to Mr. Trumble.
        As of
        the date of this report the Company has received approximately $39,000 of
        the
        $75,000 from Mr. Weisdorn Sr. The Company has recorded this payment as a
        reduction to additional paid-in capital.
  On
        December 15, 2005, the Company assumed Weisdorn Sr.’s obligation to purchase
        165,054 shares from Mr. Trumble at $1.86 per share.
  **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.
  **** **(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
        September 30, 2006 in the amount of $83,081 that the Company believes
        are adequate.
  -31-
 **(5)** **Inventories:**
  Inventories
        consist of finished goods of $647,823, raw material of mature timber of
        $647,953, and work in process in the amount of $768,912 at September 30,
        2006.
  **(6)** **Plant,
        Property and Equipment** :
  A summary
        at September 30, 2006 and 2005 are as follows:
  2006Land
              
              $
              778,608Buildings
                  and improvements
              
              
              1,244,453Furniture,
                  Machinery and equipment
              
              
              1,025,414Automobiles
                  and trucks
              
              
              47,5083,095,983Less
                  accumulated depreciation
              
              
              (520,956
              )$
              2,575,027
  Depreciation
        expense charged to operations totaled $238,569 and $242,367 respectively,
        for
        the years ended September 30, 2006 and 2005.
  The
        Company had construction in progress amounting $289,740. The Company determined
        that the completion of the asset is uncertain due to lack of resources and
        impaired the full amount of construction in progress as of September 30,
        2006.
  **(7)** **Goodwill
        Impairment**
  The
        Company evaluates intangible assets and other long-lived assets for impairment,
        at a minimum, on an annual basis and whenever events or changes in circumstances
        indicate that the carrying value may not be recoverable from its estimated
        future cash flows. Recoverability of intangible assets, other long-lived
        assets
        and goodwill is measured by comparing their net book value to the related
        projected undiscounted cash flows from these assets, considering a number
        of
        factors including past operating results, budgets, economic projections,
        market
        trends and product development cycles. If the net book value of the asset
        exceeds the related undiscounted cash flows, the asset is considered impaired,
        and a second test is performed to measure the amount of impairment loss.
        The
        Company assessed the carrying value of goodwill in accordance with the
        requirements of SFAS #142 "Goodwill and Other Intangible Assets".  Based on
        its assessment, the Company determined that $915,434 of goodwill relating
        to its
        acquisition of BOTT & Gulfgate is impaired at September 30, 2006
  **(8)** **Investments
        in Can Am Ethanol One, Inc.:**
  Can
        Am
        was created to manufacture, own and operate one ethanol production facility
        in
        British Columbia, Canada in November 2004. In June 2005, the Company made
        CN$75,000 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 (“Purchase
        Agreement”). This
        project was discontinued. As
        of
        September 30, 2006 the Company impaired
        this investment deposit .
  **(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. The material
        terms of these agreements follow:
  -32-
 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.
  **(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.
  **(11)** **Liability
        to be satisfied through the issuance of shares** ****
  In
        September, 2006, the Company incurred a liability for stock subscribed in
        the
        amount of $1,194,376.  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 shareholders 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 remainder $9,376 for
        6,298
        shares are for services rendered during the fiscal year. The Company intends
        to
        satisfy its obligations through issuance of common stock to shareholders
        in
        January 2007.
  -33-
 **(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.
  **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.
  **Loans
        from shareholders:**
  In
        September 2005, Daniel K. Moscaritolo, 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.
  **Financing
        Lease Agreements:**
  In
        September 2002, Gulfgate entered into a non-cancelable debt financing agreement
        (“Agreement”) with the bank’s leasing corporation for the financing of certain
        equipment and a paint booth. The Agreement calls for the payment of forty-eight
        (48) monthly installment payments of $1,556 beginning September 2002 at the
        interest rate of 6.90 percent per annum. Balance was paid at September 30,
        2006.
  **Convertible
        Loan Payable:**
  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.
  At
        the
        end of September 30, 2006 the loan has not been converted into common stock,
        the
        principal amount became due and payable.
  Summary
        of long-term notes payable and financing lease are as follow:
  Promissory
                    notes for automobile
                
                $
                10,143Mortgage
                  payable
                
                
                19,724Convertible
                  loan
                
                
                150,000Less
                  current portion
                
                
                179,867Long-term
                
                
                168,267$
                11,600
 
 -34-
 **(13)** **Income
        Taxes:**
  The
        Company accounts for income taxes under the provisions of Statement of Financial
        Accounting Standards No. 109 ("SFAS 109"). Under SFAS 109,
        deferred income tax assets or liabilities are computed based on the temporary
        difference between the financial statement and income tax bases of assets
        and
        liabilities using the currently enacted marginal income tax rate. Deferred
        income tax expenses or credits are based on the changes in the deferred income
        tax assets or liabilities from period to period. D eferred tax
        assets may be recognized for temporary differences that will result in
        deductible amounts in future periods and for loss carry forwards. A valuation
        allowance is recognized if, based on the weight of available evidence, it
        is
        more likely than not that some portion or all of the deferred tax asset will
        not
        be realized.
  There
        is
        no provision for income taxes for the periods presented. Net operating loss
        carry forwards have been offset in their entirety by a valuation allowance.
        The
        reconciliation of the effective income tax rate to the Federal statutory
        rate is
        as follows:
  2006
              
              2005Federal
                  income tax rate
              
              
              35.0%
              
              
              35.0%State
                  income tax rate
              
              
              6.0%
              
              
              6.0%Current
                  year losses: loss for which no current benefit is provided
              
              
              (41.0)
              
              
              (41.0)Effective
                  Income Tax Rate
              
              
              0%
              
              
              0%
 
 The
        deferred tax asset results from net operating loss carry forwards of
        approximately $9.2 million of which $0.2 million expires in 2017; $0.7 million
        expires in 2018; $2.3 million expires in 2019; $2.3 million expires in 2020,
        and
        $3.6 million expires in 2021. The resulting tax benefit of approximately
        $2.3
        million is completely offset by a valuation allowance because of uncertainties
        as to its realization.
  **(14)** **Commitments:**
  The
        Company leases one facility for its operations under a lease agreement expiring
        December 31, 2008. The following is a schedule by years of future minimum
        base
        rental payments, excluding operating expenses, required under operating lease,
        which represents non-cancelable lease terms in excess of one year as of
        September 30, 2006:
  On
        April
        30, 2005, the Company entered into a vehicle lease agreement. The agreement
        provided for a $25,000 down payment and thirty-eight (38) monthly payments
        of
        $2,884 due on the 1 st of each
        month.
  Facility
                and vehicle leases:2007
              
              $
              182,7772008
              
              
              174,1242009
              
              
              37,041$
              393,942
  Lease
        expenses amounted to $151,275 and $151,275 for the years ended September
        30,
        2006 and 2005 respectively.
  The
        Company has employment agreements with certain key executives through 2007
        providing aggregate annual compensation of approximately $713,000.
  -35-
 
 **(15)**  **Warrants
            and Employee Stock Options:**
  Warrants
                      outstandingNumber
                  
                  Average
                    Exercise
                      PriceOutstanding
                      at beginning of the year
                  
                  
                  910,183
                  
                  $
                  2.65Granted
                      during the year
                  
                  
                  2,230,182
                  
                  
                  2.26Outstanding
                      at end of the year
                  
                  
                  2,440,365
                  
                  
                  2.52Exercisable
                      at end of the year
                  
                  
                  380,000
                  
                  
                  2.26Exercised
                      during the year
                  
                  
                  0
                  
                  
                  -Cancelled
                      during the year
                  
                  
                  700,000
                  
                  
                  2.65
   Aggregate
                          Intrinsic
                            Value
                        
                        
                        Number
                            of
                          WarrantsOutstanding
                            at September 30, 2005
                        
                        $
                        2,411,985
                        
                        
                        910,183Granted
                        
                        
                        921,250
                        
                        
                        2,230,182Exercised
                        
                        
                        -
                        
                        
                        -Cancelled
                        
                        
                        -
                        
                        
                        700,000Outstanding
                            at September 30, 2006
                        
                        $
                        6,145,653
                        
                        
                        2,440,365
 Significant
                Assumptions Used to Estimate Fair Value ****
  The
            weighted-average assumptions used in estimating the fair value of warrants
            granted during the period, along with the weighted-average grant date
            fair
            values, were as follows: Expected volatility: 145%; average expected
            life in
            years: 3; average risk free interest rate: 6% and dividend yield:
            0%
  **Employee
            Stock Options:**
  In
            connection with the employment agreements, the Company has granted options
            to
            certain key employees to acquire common stock of the Company
            (“Options”).
  The
            number of weighted average exercise prices of all options granted for
            the years
            ended September 30, 2006 are as follows:
  Number
                  
                  Average
                    Exercise
                      PriceOutstanding
                      at beginning of the year
                  
                  
                  4,428,044
                  
                  $
                  3.00Granted
                      during the year
                  
                  
                  300,000
                  
                  
                  1.65Outstanding
                      at end of the year
                  
                  
                  4,443,044
                  
                  
                  1.81Exercisable
                      at end of the year
                  
                  
                  3,893,720
                  
                  
                  1.81Exercised
                      during the year
                  
                  
                  10,000
                  
                  
                  1.00Cancelled
                      during the year
                  
                  
                  275,000
                  
                  
                  1.83
  Total
                    options outstanding
                
                
                4,443,044Exercise
                    prices
                
                
                $ 
                    3.35Weighted
                    average remaining life (years)
                
                
                3
  -36-
  **(16)** **Stockholders’
        Equity**
  On
        October 26, 2004 the Company issued 1,309,667 shares of its common stock
        to Mr.
        Mark Trumble in consideration for the purchase of 100% of the shares of Bott
        Equipment Company, Inc. and Gulfgate Equipment, Inc. in accordance with the
        Stock Purchase Agreement (“Agreement”) entered into by the Company and Mr.
        Trumble. The Agreement contains covenants in favor of Mr. Trumble that are
        secured with our promise to issue up to a total of 1,236,591 additional shares
        of our stock to Mr. Trumble in the event we fail to satisfy those covenants. ****
  Effective
        May 8, 2006 the Company and Mr. Trumble amended the original Stock Purchase
        Agreement dated October 26, 2004 and agreed to, among other things, to issue
        60,000 shares to Mr. Trumble 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.
  As
        of the
        date of this report, the Company is obligated to issue 60,000 additional
        shares
        to Mr. Trumble. Additionally, certain outstanding covenants may require us
        to
        issue up to 370,977 additional penalty shares in the event that we fail to
        satisfy those covenants.
 
 In
        its
        stock purchase agreement with Mr. Trumble, respecting the purchase of Gulfgate
        and Bott, the Company recognized that Trumble would sell 326,344 shares of
        its
        stock at a purchase price of approximately $607,000 to private parties,
        including a related party Lawrence Weisdorn, Sr., the CEO’s father and a
        shareholder and/or Weisdorn Sr.’s assignees pursuant to a written agreement
        between Trumble and Weisdorn Sr.. As part of the Company’s agreement with Mr.
        Trumble, the Company agreed that if Mr. Trumble failed to recognize $607,000,
        portions of which were due on specific dates following the closing date of
        the
        transaction, the Company agreed to issue up to 494,636 shares of restricted
        stock to Trumble.
  In
        December 2004 the Company paid $75,000 to Mr. Mark Trumble in order to avoid
        the
        issuance of 61,829 Penalty Shares to Mr. Trumble. In January 2005, the Company
        paid Mr. Trumble $158,000 to avoid the issuance of 123,659 Penalty Shares
        to Mr.
        Trumble. Although the Company had no obligation to make these payments under
        its
        agreement with Mr. Trumble, it did have an obligation to issue penalty shares
        to
        Mr. Trumble if Mr. Trumble did not recognize these monies through the sale
        of
        stock. When the Company learned that the primary obligor, Mr. Lawrence Weisdorn
        Sr., was then unable to fulfill his contractual obligations to Mr. Trumble,
        the
        Company believed that it was in the shareholder’s best interests to avoid
        dilution by making these payments and seeking to recoup the monies paid by
        the
        Company from Mr. Weisdorn Sr. at a later date. As of this date the company
        has
        received $185,000 from Lawrence Weisdorn Sr. The Company believes that it
        will
        recover some or all of the remaining balance, $48,000, before the close of
        the
        next quarter. The Company is obligated to issue to Mr. Trumble 247,318 Penalty
        Shares because Mr. Trumble did not recognize $307,000 within 60 days of the
        close of the acquisition. Finally, the Company is obligated to issue to Mr.
        Trumble an additional 123,659 Penalty Shares since the Company did not receive
        $2,000,000 in gross equity funding within 120 days of the Closing Date. In
        summary, the Company’s obligation to issue penalty shares totaling 370,977
        valued at $810,000 to Mr. Trumble has significantly increased
        goodwill.
  On
        November 10, 2005, the Company entered into a stock purchase agreement with
        Mercatus & Partners, Limited, a private limited company of the United
        Kingdom (“Mercatus Limited”), for the sale of 1,530,000 shares of the Company’s
        common stock for a minimum purchase price of $0.73 per share (the “SICAV One
        Agreement), and another stock purchase agreement with Mercatus Limited also
        for
        the sale of 1,530,000 shares of the Company’s common stock for a minimum
        purchase price of $0.73 per share (the “SICAV Two Agreement” and together with
        the SICAV One Agreement, the “SICAV Agreements”). The shares offered and sold
        under the SICAV Agreements were offered and sold pursuant to a private placement
        that is exempt from the registration provisions of the Securities Act under
        Section 4(2) of the Securities Act pursuant to Mercatus Limited’s exemption from
        registration afforded by Regulation S. Pursuant to the terms of the SICAV
        Agreements, the Company issued and delivered an aggregate number of 3,060,000
        shares of the Company’s common stock within five days of the execution of the
        respective SICAV Agreements to a custodial lock box on behalf of Mercatus
        Limited for placement into two European SICAV funds. The SICAV Agreements
        provided Mercatus Limited with up to 30 days after the delivery of the shares
        of
        the Company’s common stock to issue payment to the Company. If payment for the
        shares was not received by the Company within 30 days of the delivery of
        the
        shares, the Company had the right to demand the issued shares be
        returned .
  -37-
  On
        November 12, 2005, the Company also entered into another private stock purchase
        agreement with Mercatus & Partners, Limited, a private limited company of
        the United Kingdom (“Mercatus Limited”) for the sale of 170,000 shares of the
        Company’s common stock for a minimum purchase price of $0.82 per share (the
“Private SICAV One Agreement”) and another private stock purchase agreement with
        Mercatus LP also for the sale 170,000 shares of the Company’s common stock for a
        minimum purchase price of $0.82 per share (the “Private SICAV Two Agreement” and
        with the Private SICAV One Agreement, the “Private SICAV Agreements”). The
        shares offered and sold under the SICAV Agreements were offered and sold
        pursuant to a private placement that is exempt from the registration provisions
        of the Securities Act under Section 4(2) of the Securities Act pursuant to
        Mercatus Limited’s exemption from registration afforded by Regulation S.
        Pursuant to the terms of the Private SICAV Agreements, the Company issued
        and
        delivered an aggregate amount of 340,000 shares of the Company’s common stock
        within five days of the execution of the respective Private SICAV Agreements
        to
        a custodial lock box on behalf of Mercatus Limited for placement into a European
        bank SICAV fund. Subject to a valuation of the shares, Mercatus LP had up
        to 30
        days after the delivery of the shares of the Company’s common stock to issue
        payment to the Company. If payment was not received by the Company within
        45
        days of the issuance of the shares to Mercatus Limited, the Company had the
        right to demand the issued shares be returned.
  In
        a
        letter to Mercatus dated April 13, 2006 the Company declared Mercatus to
        be in
        material breach of the above Private Purchase Agreements due to non-payment,
        terminated the Agreements in their entirety and exercised its right to demand
        the return of all the shares. All 3,400,000 shares were returned to the
        Company’s treasury in August 2006.
  On
        December 13, 2005 the Company issued and delivered 129,054 shares of the
        Company’s common stock for $106,000.
 
 During
        the month of December 2005, the Company issued and delivered an aggregate
        amount
        of 8,254 shares of the Company’s common stock to three consultants for services
        valued at approximately $16,000.
 
 The
        Company sold 2,013,510 shares of its common stock for $1,534,963 via another
        private placement offering from February through June 2006 ,
        net of
        underwriting fees of $108,915. The
        Company satisfied its obligations through issuance of common stock to
        shareholders in June 2006.
  The
        company issued warrants to the underwriters to purchase 310,000 shares of
        its
        common stock at a price of $1.60 per share. The proceeds from the issuance
        of
        the 2,013,510 shares were recorded net of the fair value of the warrants
        and the
        underwriter’s fees. The fair value of the warrants, $419,639 was calculated
        using the Black Scholes option pricing model using the following assumptions:
        risk free rate of return of 6%, volatility of 145%, dividend yield of 0%
        and
        expected life of 3 years.
  -38-
 **(17)** **Resignation
        of Executive Officer and Board Member:**
  On
        October 17, 2005, the Company and its officers filed a complaint against
        Lawrence Weisdorn, Jr. (“Weisdorn), the Company’s former Chief Executive Officer
        and Chairman of the Board of Directors, Lawrence Weisdorn, Sr. (“Weisdorn Sr.”
and together with Weisdorn, the “Weisdorn Parties”), Nathan Drage (“Drage”) and
        Drage related parties in the Superior Court of the State of California for
        Los
        Angeles County, alleging claims for, among other things, breaches of Nevada
        and
        federal law and breach of fiduciary duty (the “Action”). The Company’s claims
        were based in substantial part on allegations of the unauthorized issuance
        of
        shares of the Company’s predecessor’s common stock in December 2003, prior to
        the reverse acquisition and merger with CA MEMS, which was finalized in February
        2004. The Company sought an injunction preventing the Weisdorn Parties and
        Drage
        and his related parties from selling or transferring any of the shares of
        the
        Company’s common stock issued in December 2003, the return of the shares to the
        Company for cancellation and monetary damages.
  On
        November 3, 2005, the Weisdorn Parties filed a cross-complaint against the
        Company and its officers, alleging claims for, among other things, breach
        of
        employment agreement, libel and indemnification (the “Weisdorn Counterclaim”).
        The Weisdorn Parties’ claims were based in part on assertions by Weisdorn that
        he was improperly terminated without cause from his positions with the Company
        in June 2005, and that he was entitled to indemnification pursuant to Nevada
        corporations law in connection with the Action. The Weisdorn Parties sought
        monetary damages.
  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 parties agreed to, among other things, dismiss the Action as it
        related to the Weisdorn Parties, dismiss the Weisdorn Counterclaim, mutually
        release all claims and mutually indemnify the other parties from certain
        claims.
        Weisdorn also agreed to deliver a letter of resignation to the Company,
        confirming his resignation as Chief Executive Officer and Chairman of the
        Board
        of Directors of the Company as of June 25, 2005 and clarifying and confirming
        the terms of his separation from the Company. The Weisdorn Parties and other
        Weisdorn related parties further agreed to deliver to the Company all shares
        or
        rights to shares of the Company’s common stock owned by such parties. The net
        stock returned to the Company by the Weisdorn parties was 2,699,684 shares,
        not
        including 670,000 shares of the Company’s common stock to be held by the Company
        in an account for the benefit of the Weisdorn Parties (the “Retained Stock”),
        which Retained Stock will be sold for the benefit of the Weisdorn Parties
        pursuant to the terms set forth in the Settlement Agreement. The Company
        has the
        option to purchase any portion of the Retained Stock at a price determined
        according to the terms of the Settlement Agreement. The Company also agreed
        to
        assume the obligations of the Weisdorn Parties to purchase certain shares
        of the
        Company’s common stock from Mark Trumble, and the Weisdorn Parties assigned to
        the Company their interests in their rights, if any, purchase such shares
        (the
        Trumble Claims).
  The
        Settlement Agreement did not in any way affect claims brought in the Action
        by the Company and its officers against Drage and the
        Drage-related entities. However, on January 13, 2006, Drage and
        Adrian Wilson verbally agreed to a settlement in principle with the Company,
        which the parties have memorialized.  In connection with the verbal
        agreement to a settlement, the Company and its officers filed a Request for
        Dismissal without prejudice of all claims against Drage and the
        Drage-related entities on January 13, 2006.
  -39-
 **(18)** **Legal
        settlement:**
  On
        December 15, 2005, the Company and its officers entered into a Settlement
        Agreement and Release with the Weisdorn Parties and other Weisdorn related
        parties, effective as of July 1, 2005 (the “Settlement Agreement”), pursuant to
        which the Weisdorn Parties and other Weisdorn related Parties agreed to deliver
        to the Company all shares or rights to shares of the Company’s common stock
        owned by such parties. The net common stock returned to the Company by the
        Weisdorn parties and other Weisdorn related parties was 2,699,684 shares.
  The
        fair
        value of 2,669,684 shares of the Company’s common stock at December 15, 2005 was
        $3,779,558. The per share closing price of the Company’s stock at December 15,
        2005 was $1.40.
  **(19)** **Assignment
        of the Trumble Claims:**
  The
        Company and the Weisdorn Parties further agreed the Weisdorn Parties, and
        each
        of them; assigned to the Company any and all rights or interest they, or
        any of
        them, have in or to the Trumble Claims. On December 15, 2005, the Company
        assumed Weisdorn Sr.’s obligation to purchase 165,054 shares from Mr. Trumble at
        $1.86 per share for a total liability of $307,000. The fair value of this
        obligation at December 15, 2005 is $231,076 (165,054 shares at $1.40 per
        share)
        with the difference charged to other income ($75,924).
  **(20)** **Contingencies
        and Subsequent Events:**
  **A.
        Appointment of Director**
  Effective
        October 18, 2006, Mr. Steven Newsom was appointed to the Board of Directors
        of
        the Company. As of November 15, 2006, the Board of Directors is comprised
        of two
        members, Mr. Newsom and James A. Latty.
  Pursuant
        to his appointment, Mr. Newsom and the Company entered into a Consulting
        Agreement. Pursuant to the Consulting Agreement, Mr. Newsom shall receive
        the
        following: (i) the sum of $20,000, (ii) the sum of $4,000 per month payable
        on
        the first day of each month during his tenure as a member of the Company's
        Board of Directors, (iii) an additional $2,000 per trip, if Mr. Newsom makes
        more than three trips (per quarter) to attend meetings on Company's
        business, (iv) $250 per hour for work performed for the Company over and
        above time spent on trips to attend meetings on Company's business, (v)
        travel expenses for trips to attend meetings on Company's business, and
        (vi) options for the purchase of up to 300,000 shares of common stock of
        the Company at an exercise price of $0.51 per share. The option period
        shall be 60 months from October 18, 2006.
  **B.** **Securities
        Purchase Agreement with** **GCA
        Strategic Investment Fund Limited** **:**
  On
        October 31, 2006, the Company closed its Securities Purchase Agreement (the
        “Agreement”) with GCA 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
        December 31, 2006. 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.
  -40-
 Conversion
        Price: The Note may be converted into Company's common shares. The conversion
        price will be 85% of the trading volume weighted average price, as reported
        by
        Bloomberg LP (the “VWAP”), for the five trading days immediately prior to the
        date of notice of conversion. During the first 30 days after the registration
        statement is effective registration the conversion price will not be less
        than
        $0.47 (the “Floor Conversion Price”), nor greater than $0.61 (the “Ceiling
        Conversion Price”). For the ninety (90) day period following the Initial Pricing
        Period and each successive ninety (90) day period thereafter (each a “Reset
        Period”), the Floor Conversion Price shall be reduced by an amount equal to 40%
        of the lesser of (i) the Floor Conversion Price or (ii) the Closing Bid Price
        as
        reported by Bloomberg on the trading day immediately following the Initial
        Pricing Period or Reset Period, as the case may be, and the Ceiling Conversion
        Price shall be increased by an amount equal to 40% of the lesser of (y) the
        current Ceiling Conversion Price or (z) the closing bid price as reported
        by
        Bloomberg on the trading day immediately following the Initial Pricing Period
        or
        Reset Period as the case may be.
  Prepayment-For
        so long as Company is not in default and Company is not in receipt of
        a notice of conversion from the holder of the Note, Company may, at its
        option, prepay, in whole or in part, this Convertible Note for a pre-payment
        price (the “Prepayment Price”) equal to the greater of (i) 110% of the
        outstanding principal amount of the Note plus all accrued and unpaid interest
        if
        any, and any outstanding liquidated damages, if any, or (ii) (x) the number
        of Company's common shares into which the Notes is then convertible, times
        (y) the average VWAP of Company's common shares for the five (5) trading
        days immediately prior to the date that the Note is called for redemption,
        plus
        accrued and unpaid interest.
  Redemption-The
        Company may be required under certain circumstances to redeem any
        outstanding balance of the Note and the warrants. The redemption price under
        these circumstances of the outstanding balance due under the Note is equal
        to
        the greater of: (i) the Prepayment Price or (ii) (x) the number of Company's
        common shares into which the unpaid balance due under the Note is then
        convertible, times (y) the five (5) day VWAP price of Company's common shares
        for the five trading days immediately prior to the date that the unpaid balance
        due under the Note is called for redemption, plus accrued and unpaid interest,
        if any.
  Warrant-The
        Company issued warrants to purchase 1,000,000 shares of its common stock.
        These
        warrants are callable if the common stock trades at a price equal to 200%
        of the
        strike price of the warrants based on any consecutive five day trading average
        VWAP value. The warrants have a term of five years and an exercise price
        of
        $0.66 (120% of the average five day VWAP price for Company's common stock
        for the five trading days immediately prior to October 31, 2006).
  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
        proceed 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 (see section F)**
  -41-
 **C.
        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.
        Shareholder 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."
  **D.
        Resignation and termination of Daniel Moscaritolo as a director and officer:**
  On
        December 14, 2006, the Company filed a lawsuit in the United States District
        Court, Central District of California, Western Division (Case No.: CV06-07971)
        against Daniel Moscaritolo for violations of the Securities
        Exchange Act
        of
        1934, declaratory relief, breach of fiduciary duty, intentional interference
        with contract, and conversion arising out of Mr. Moscaritolo's improper actions
        to wrest control of the Company by soliciting proxies for a shareholder vote
        to
        take over the Company.
  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 Dr. 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”). The Moscaritolo action has been dismissed,
        but on January 9, 2007 he filed a second lawsuit in Nevada State Court against
        the Company, Dr. Latty, and Mr. Newsom for injuctive relief to hold Annual
        Shareholders Meeting.
  The
        Company intends to pursue the claims set forth in the Company Action and
        to
        oppose the claims set forth in the Second Moscaritolo Action.
  **E.
        Repayment of loan to Daniel Moscaritolo**
  On
        October 31, 2006 Mr. Daniel Moscaritolo demanded repayment of the remainder
        balance of his loans to the Company. He was paid a sum of $54,358 of which
        $8,558 was for accrued interest.
  **Item
        8.**  **Changes in and Disagreements with Accountants on Accounting and Financial
        Disclosure.**
  None.
  **Item
        8A. 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.
 
 -42-
 **Item
        8B. Other Information**
  None
 
 **Part
        III**
  **Item
          9.  **Directors,
          Executive Officers, Promoters and Control Persons; Compliance with Section
          16(a)
          of the Exchange Act.****
  Set
        forth
        below are our directors and officers.
  **Name**
              **Age**
              **Position**Dr.
                  James A. Latty
              
              60
              
              Chief
                  Executive Officer, President and Chairman of the Board of
                  DirectorsSteve
                  Newsom
              
              47
              
              DirectorRichard
                  W. York
              
              58
              
              Chief
                  Financial Officer
  James
        A.
        Latty, Ph.D., PE was appointed Chief Executive Officer and Chairman of the
        Board
        on July 1, 2005, in addition to the position of President, which Dr. Latty
        has
        held since September of 2004. Since 1992, Dr. Latty has been president of
        JAL
        Engineering, an engineering services provider wholly-owned by Dr. Latty
        specializing in power and petro-chemical process technologies. >From April
        2000 to September 2004, Dr. Latty was a director of business development
        for
        Rockwell Scientific, Inc.
 
 Mr.
        Newsom joined us a director and consultant in October 2006. He received his
        undergraduate degree in Maritime Systems Engineering from Texas A&M
        University, a Master's of Business Administration from the University of
        Houston
        at Clear Lake, and a Juris Doctrate from the University of Houston. Mr. Newsom
        has been an attorney in Houston, Texas since June 19, 1997. His practice
        consists of general civil practice and real estate transactions.
 
 On
        November 14, 2006, Danny Moscaritolo submitted a letter of resignation to
        resign
        as a member of the Board of Directors of the Company.
  On
        November 17, 2006, Daniel Moscaritolo was terminated from his position as
        Chief
        Operating Officer.
  On
        December 13, 2006, Mr. Moscaritolo presented management with a purported
        action
        by written consent of the shareholders of the Company indicating that the
        shareholders had elected to remove the current board of directors and elect
        Daniel Moscaritolo and Thomas Hemingway as directors. Mr. Moscaritolo also
        presented management with two separate purported actions by written consent
        of
        the new purported board of directors indicating that the Company's current
        officers, James A. Latty and Richard W. York, were terminated and that Mr.
        Moscaritolo was elected to serve as Secretary of the Company and Mr. Hemingway
        was elected to serve as President and Chief Executive Officer of the Company.
        The Company rejected the purported shareholder action on the grounds that,
        on
        its face, the purported action showed an insufficient number of votes had
        been
        obtained to approve the requested action, and on the further grounds that
        the
        consenting shareholders had violated the proxy rules set forth in Section
        14 of
        the Securities Exchange Act of 1934, as amended (the “Act”). In light of the
        invalidity of the purported shareholder action, the Company also rejected
        the
        actions of the new purported board of directors terminating and replacing
        the
        officers of the Company.
  Mr.
        York
        has served as our chief financial officer since November 2004. Mr. York served
        as controller of PTI technologies, Inc. from 2000 through October 2004 and
        Rantec Microwave & Electronics, Inc. from 1992 through 2000. PTI and Rantec
        are both subsidiaries of ESCO Technologies, Inc., a NYSE-listed producer
        of
        engineered products and systems for industrial and commercial applications.
 
 -43-
 All
        directors serve for a three-year term and until their successors are duly
        elected and qualified. All officers serve at the discretion of the Board
        of
        Directors.
  **Audit
        Committee Financial Expert**
  We
        do not
        have an audit committee nor do we have a financial expert.
  **Code
        of Ethics**
  We
        have **** adopted
        a
        code of ethics that applies to the principal executive officer and principal
        financial and accounting officer. We will provide to any person without charge,
        upon request, a copy of our code of ethics. Requests may be directed to our
        principal executive offices at 5701 Lindero Canyon Road, Suite 2-100, Westlake
        Village, California 91362.
  **Section
        16(a) Beneficial Ownership Reporting Compliance**
  Section
        16(a) of the Securities Exchange Act of 1934, as amended, requires our officers,
        directors and persons who beneficially own more than 10% of a registered
        class
        of our equity securities to file reports of securities ownership and changes
        in
        such ownership with the Securities and Exchange Commission (the “SEC”).
        Officers, directors and greater than 10% beneficial owners are also required
        by
        rules promulgated by the SEC to furnish us with copies of all Section 16(a)
        forms they file.
  Our
        current officers and directors have filed the reports required by Section
        16(a).
        All reports were timely except: (1) Form 3 and Form 4 filed by James A. Latty
        on
        December 6, 2006; (2) Form 3 and Form 4 filed by Richard York on December
        7,
        2006; and, (3) Form 3 and Form 4 filed by Steven Newsom on December 11, 2006.
        We
        have requested that all former officers, directors and 10% stockholders file
        all
        required reports. We have requested that all former officers, directors and
        10%
        stockholders file all required reports.
  **Item
        10. Executive Compensation.**
  *Cash
        Compensation of Executive Officers.* The
        following table sets forth the cash compensation paid by us to our executive
        officers for services rendered during the fiscal years ended September 30,
        2006,
        2005 and 2004.
  **Annual
                  Compensation**
              
              **Long-Term
                  Compensation****Name
                  and Position**
              
              **Year**
              
              **Salary**
              
              **Bonus**
              
              **Other**
                **Annual
                  Compensa****tion**
              
              **Restricted**
                **Stock**
                **Awards**
                **($)**
              
              **Common
                  Shares Underlying Options Granted**
                **(#
                  Shares)**
              
              **All
                  Other**
                **Compensation**James
                  A. Latty,
                  CEO
              
              
              2006
              
              $
              240,000
              
              
              --2005
              
              $
              240,000
              
              
              --
              
              $
              5,950
              
              
              
              
              
              1,000,0002004
              
              $
              240,000
              
              
              --
              
              
              
              
              
              
              
              
              1,284,343Daniel
                  K. Moscaritolo,
              
              
              2006
              
              $
              240,000
              
              
              
              
              $
              9,350COO
&
                  CTO (1)
              
              
              2005
              
              $
              240,000
              
              
              
              
              $
              10,2002004
              
              $
              240,000
              
              
              
              
              $
              94,770
              
              
              
              
              
              1,284,343
                  (1
              )Richard
                  York, CFO (2)
              
              
              2006
              
              $
              93,000
              
              
              
              
              
              
              
              
              
              
              
              26,3352005
              
              $
              93,000
              
              
              
              
              
              
              
              
              
              
              
              5,0002004
              
              $
              15,500
              
              
              
              
              
              
              
              
              
              
              
              50,000
  (1)Mr.
        Moscaritolo was
        removed as our COO and CTO on November 17, 2006.
 (2)Effective
        November 1,
        2006 Mr. Richard W. York’s annual compensation will be $120,000.
  No
        executive officer received options in fiscal 2006.
  -44-
 **Aggregated
        Option/SAR Exercises in 2006 Fiscal Year**
 **and
        FY-End Option/SAR Values**
 
 **Name**
              
              **Shares**
                **Acquired
                  on**
                **Exercise
                  (#)**
              
              **Value
                  Realized**
                **($)**
              
              **Number
                  of**
                **Securities**
                **Underlying
                  Unexercised Options/SARs at**
                **FY-End**
                **(#)Exercisable/
                  Unexercisable**
              
              **Value
                  of**
                **Unexercised**
                **In-the-Money
                  Options/SARs at**
                **FY-End
                  ($)**
                **Exercisable/
                  Unexercisable**James
                  A. Latty
              
              
              -
              
              
              -
              
              
              1,000,000/0
              
              
              $0/$0
                    (1)Daniel
                  K. Moscaritolo (3)
              
              
              -
              
              
              -
              
              
              0
                  / 0
              
              
              $0/$0Richard
                  York
              
              
              -
              
              
              -
              
              
              35,000/15,000
              
              
              $0/$0
  (1) Based
        on
        a closing price of $1.00 per share for our common stock as quoted on the
        OTC
        Bulletin Board on September 29, 2006.
  *Compensation
        of Directors* .
        At the
        present time, directors receive no compensation for serving as directors
        of the
        company, however, we may in the future begin to compensate our non-officer
        directors. All directors receive reimbursement for out-of-pocket expenses
        in
        attending board of directors meetings. From time to time, we may engage certain
        members of our board of directors to perform services on our behalf and will
        compensate such persons for the services that they perform.
  ***Employment
        Agreements.*** Our
        President and CEO, Dr. Latty, has a written employment agreement with us
        dated
        as of July 1, 2002.  We assumed this agreement pursuant to the January 2004
        reverse acquisition transaction.  It provides for annual compensation of
        $240,000.  Options were granted with the original agreement which did not
        vest.
  Our
        CFO,
        Mr. York, had an employment agreement with us dated as of November 1,
        2004.  The agreement was for a term of three years and provided for annual
        compensation of $93,000.  Mr. York was granted an option to purchase 50,000
        shares of our common stock at an exercise price of $1.92 per share. These
        options shall vest as follows: 10% upon execution of the agreement; and thirty
        percent (30%) per annum on each anniversary date.
  On
        November 1, 2006, Mr. York’s employment agreement was renewed for an additional
        three year term for annual compensation of $120,000 per year and a $500 per
        month car allowance.  Mr. York was granted an option to purchase 300,000
        shares of our common stock at $0.45 per share. The options vest as follows:
        10%
        upon execution of the agreement; and thirty percent (30%) per annum on each
        anniversary date. If Mr. York terminates his employment for good reason or
        if he
        is terminated by us for any reason other than for cause, Mr. York shall be
        entitled to a lump sum cash payment equal to 12 months salary, payable no
        later
        than thirty days following termination of employment.
  Pursuant
        to his appointment, Mr. Newsom and the Company entered into a Consulting
        Agreement. Pursuant to the Consulting Agreement, Mr. Newsom shall receive
        the
        following: (i) the sum of $20,000, (ii) the sum of $4,000 per month payable
        on
        the first day of each month during his tenure as a member of the Registrant's
        Board of Directors, (iii) an additional $2,000 per trip, if Mr. Newsom makes
        more than three trips (per quarter) to attend meetings on Registrant's business,
        (iv) $250 per hour for work performed for the Registrant over and above time
        spent on trips to attend meetings on Registrant's business, (v) travel expenses
        for trips to attend meetings on Registrant's business, and (vi) options for
        the
        purchase of up to 300,000 shares of common stock of the Registrant at an
        exercise price of $0.51 per share. The option period shall be 60 months from
        October 18, 2006.
  -45-
 **Item
        11. Security Ownership of Certain Beneficial Owners and
        Management.**
  The
        following table sets forth certain information regarding the beneficial
        ownership of the shares of our common stock as of December 14, 2006 by (i)
        each
        person who is known by us to be the beneficial owner of more than five percent
        (5%) of the issued and outstanding shares of our common stock, (ii) each
        of our
        directors and executive officers and (iii) all directors and executive officers
        as a group.
  **Name
                  and Address (1)**
              
              **Number
                  of Shares**
              
              **Percentage
                  Owned**Dr.
                  James A. Latty
              
              
              3,464,468
                  (2)
              
              
              18.6%Steve
                  Newsom
              
              
              300,000
                  (3)
              
              
              1.7%Richard
                  W. York
              
              
              96,336
                  (4)
              
              
              0.5%Mark
                  Trumble
              
              
              1,569,902
              
              
              8.9%Daniel
                  K. Moscaritolo
              
              
              2,437,605
              
              
              13.8%
  (1) Address
        is 5701 Lindero Canyon Road, Suite 2-100, Westlake Village, California
        91362.
  (2) Includes
        options granted to Dr. Latty to purchase 1,000,000 shares of our common stock
        exercisable within 60 days of December 14, 2006.
  (3) All
        represent options exercisable within 60 days of December 14, 2006.
  (4) Includes
        65,000 options granted to Mr. York exercisable within 60 days of December
        14,
        2006.
  Equity
        Compensation Plans
 
 The
        following table sets forth certain information as of September 30, 2006
        concerning our equity compensation plans:
  Plan
                  Category
              
              Number
                  of Common
                Shares
                  to Be Issued Upon
                Exercise
                  of Outstanding
                Options
              
              Weighted-
                  Average
                Exercise
                  Price of
                Outstanding
                  Options
              
              Number
                  of Common
                Shares
                  Remaining
                Available
                  for Issuance
                Under
                  Equity Compensation PlanEquity
                  compensation plan approved by shareholders
              
              
              N/A
              
              
              N/A
              
              
              N/AEquity
                  compensation plan not approved by shareholders (1)
              
              
              2,453,167
              
              
              $2.53
              
              
              863,715
  (1)
              Represents
                  (a) 1,435,167 shares of common stock issuable upon exercise of
                  options
                  granted to officers and employees under our 2004 Stock Incentive
                  Plan
                  which has not been approved by shareholders (b) 1,000,000 shares
                  of common
                  stock issuable upon exercise of options issued outside the 2004
                  Plan to
                  our Chairman Mr. Latty.
  **Item
        12. Certain Relationships and Related Transactions.**
  In
        October 2005, our Chairman and CEO James Latty, PhD, PE. loaned the Company
        $105,800. The terms of the Note require repayment of the principal and interest,
        which accrues at a rate of ten percent (10%) per annum on May 1, 2006. The
        Note
        is 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 $93,187.
  Daniel
        Moscaritolo, our then COO and director loaned the Company $105,800 in October
        2005 under the same terms. Balance outstanding at September 30, 2006 was
        $53,976. Mr. Moscaritolo’s balance plus interest accrued in October 2006 was
        paid in full on October 31, 2006.
  -46-
  **Item
        13. Exhibits.**
  **(a)** **Index
        To Exhibits**
  3.1
              Articles
                  of Incorporation of the Registrant, as
                  amended
  3.2
              Bylaws
                  of the Registrant
  4.1
              Registration
                  Rights Agreement
  10.1
                  Sales
                      Agency Agreement dated August 22, 2005 between S.W. Bach & Company and
                      MEMS USA, Inc., a Nevada
                      corporation
  21.1
              List
                  of Subsidiaries
  23.1
              Consent
                  of Independent Certified Public Accountants (FY
                  2004)
 
 23.2
              Consent
                  of Independent Certified Public Accountants (FY
                  2005)
 
 31.1
              Certification
                  of Chief Executive Officer pursuant to Section 302 of the
                  Sarbanes-Oxley
                  Act of 2002
 
 31.2
              Certification
                  of Chief Financial Officer pursuant to Section 302 of the
                  Sarbanes-Oxley
                  Act of 2002
 
 32
              Certification
                  of Chief Executive Officer and Chief Financial Officer pursuant
                  to18
                  U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
                  Actof
                  2002
  **Item
        14. Principal Accountant Fees and Services.**
  Our
        board
        of directors has selected Kabani & Company, Inc. as our independent
        accountants to audit our consolidated financial statements for the fiscal
        year
        2006.
  **Audit
        and Non-Audit Fees**
  Aggregate
        fees for professional services rendered to us by Kabani & Company, Inc. for
        the years ended September 30, 2006 and Stonefield Josephson, Inc. in 2005
        were
        as follows:
  Services
                  Provided
              
              2006
              
              2005Audit
                  Fees
              
              $
              75,000
              
              $
              110,920Audit
                  Related Fees
              
              $
              22,500
              
              $
              -
                  0 -Tax
                  Fees
              
              $
              -
                  0 -
              
              $
              -
                  0 -All
                  Other Fees
              
              $
              -
                  0 -
              
              $
              -
                  0 -Total
              
              $
              97,500
              
              $
              110,920
 
 **Audit
        and Non-Audit Fees**
 
 *Audit
        Fees* .  The
        aggregate fees billed for the years ended September 30, 2006 and 2005 were
        for
        the audits of our annual financial statements and reports.
 
 *Audit
        Related Fees* .  The
        aggregate fees billed for the year ended September 30, 2006 were for review
        of
        our quarterly financial statements.
 
 -47-
 *Tax
        Fees* .  There
        were no fees billed for the years ended September 30, 2006 and 2005 for
        professional services related to tax compliance, tax advice and tax returns
        preparation.
 
 *All
        Other Fees* .  There
        were no other fees billed for the years ended September 30, 2006 and 2005
        for
        services other than the services described above.
 
 **Pre-Approval
        Policies and Procedures**
 
 We
        have
        implemented pre-approval policies and procedures related to the provision
        of
        audit and non-audit services. Under these procedures, our board of directors
        pre-approves all services to be provided by Kabani & Company, Inc. and the
        estimated fees related to these services.
  -48-
 SIGNATURES
  Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange Act
        of
        1934, the Registrant has duly caused this Report to be signed on its behalf
        by
        the undersigned, thereunto duly authorized, on this 17 th day of
        January 2007.
  CONVERGENCE
                  ETHANOL, INC.
                (Registrant)By:
              /s/ James
                A. LattyJames
                A. LattyChief
                Executive Officer
   **POWER
        OF ATTORNEY**
  KNOW
        ALL
        THESE PERSONS BY THESE PRESENTS, that each person whose signature appears
        below
        constitutes and appoints James A. Latty, his attorney-in-fact, with full
        power
        of substitution, for him in any and all capacities, to sign any and all
        amendments to this Report on Form 10-KSB, and to file the same, with
        exhibits thereto and other documents in connection therewith, with the
        Securities and Exchange Commission, hereby ratifying and confirming all that
        said attorney-in-fact or his substitute or substitutes, may do or cause to
        be
        done by virtue hereof.
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, this Report on
        Form 10-KSB has been signed below by the following persons on behalf of the
        Registrant and in the capacities and on the dates indicated:
 
 **Signature**
              
              **Title**
              
              **Date**/s/
                  James A. Latty
              
              Chief
                  Executive Officer and Director
              
              January
                  17, 2007James
                  A. Latty
              
              (Principal
                  Executive Officer)/s/
                Richard W. York
              
              Chief
                Financial Officer
              
              January
                  17, 2007Richard
                  York
              
              (Principal
                  Financial Officer)/s/
                Steven Newsome
              
              Director
              
              January
                  17, 2007Steven
                Newsome
   -49-