**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM
      10-KSB**




**ANNUAL
      REPORT PURSUANT TO**


**SECTION
      13 OR 15(D) OF THE**


**SECURITIES
      EXCHANGE ACT OF 1934**




For
      the
      fiscal year ended December 31, 2006




Commission
      file number:  000-51762





**ALTERNATIVE
      ENERGY SOURCES, INC.**


(Name
      of
      Small Business Issuer in its charter)








Delaware
            
            74-3038728(State
                or other jurisdiction of incorporation or organization)
            
            (I.R.S.
                Employer Identification No.)




310
                West 20thKansas
                City, Missouri
                64108Street(Address
                of Principal Executive
                Offices)(816)
                842-3835(Issuer’s
                telephone number, including area
                code)




Securities
      registered pursuant to Section 12(b) of the Exchange Act:





Title
                of each class
            
            Name
                of each exchange on which registeredNone
            
            None





Securities
      registered pursuant to Section 12(g) of the Exchange Act:





Common
      Stock, par value $.0001





Check
      whether the issuer in not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act o








Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Securities Exchange Act 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
x   No
o





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will 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.




Yes
x   No
o


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





Yes
o   No
x





State
      issuer’s revenues for its most recent fiscal year: _____ $0_____





State
      the
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      sold, or the average bid and asked price of such common equity, as of a
      specified date within the past 60 days.





$ 22,595,932
      as of March 22, 2007





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





40,500,009
      on March 22, 2007





DOCUMENTS
      INCORPORATED BY REFERENCE




Portions
      of the definitive Proxy Statement to be filed within 120 days of December 31,
      2006, pursuant to Regulation 14A under the Securities Exchange Act of 1934
      for
      the Annual Meeting of Stockholders to be held May 10, 2007 have been
      incorporated by reference into Part III of this Form 10-KSB.





Transitional
      Small Business Disclosure Format (Check one):  Yes
o  No
x





2


**Special
      Note Regarding Forward-Looking Statements**





This
      Annual Report on Form 10-KSB contains forward-looking statements regarding
      our
      business, financial condition, results of operations, performance and prospects.
      All statements that are not historical or current facts are forward-looking
      statements and are made pursuant to the safe harbor provisions of the Private
      Securities Litigation Reform Act of 1995. Forward-looking statements involve
      known and unknown risks, uncertainties and other factors, many of which may
      be
      beyond our control, that may cause our actual results, performance or
      achievements to be materially different from any future results, performances
      or
      achievements expressed or implied by the forward-looking
      statements.





In
      some
      cases, you can identify forward-looking statements by terms such as
“anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,”
“plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and
      similar expressions intended to identify forward-looking statements.
      Forward-looking statements reflect our current views with respect to future
      events, are based on assumptions and are subject to risks and uncertainties.
      Given these uncertainties, you should not place undue reliance on these
      forward-looking statements. Also, forward-looking statements represent our
      estimates and assumptions only as of the date of this report . Except
      as required by law, we assume no obligation to update any forward-looking
      statements publicly, or to update the reasons actual results could differ
      materially from those anticipated in any forward-looking statements, even if
      new
      information becomes available in the future. Readers are urged to carefully
      review and consider the various disclosures made by us in this report and in
      our
      other reports filed from time to time with the Securities and Exchange
      Commission, known as the Commission, that advise interested parties of the
      risks
      and factors that may affect our business.





Since
      our
      common stock may be considered a “penny stock,” we are ineligible to rely on the
      safe harbor for forward looking statements provided by Section 27A of the
      Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of
      the Securities Exchange Act of 1934, as amended (the “Exchange Act”).





**PART
      I**





**ITEM
      1.**  **DESCRIPTION
      OF BUSINESS**





In
      this
      Form 10-KSB, “Alternative Energy,” the “Company,” “we,” “us,” and “our” refer to
      Alternative Energy Sources, Inc., a Delaware corporation, and its subsidiaries
      taken as in whole, unless the context requires otherwise.





We
      are a
      development stage company which plans to engage in the business of constructing,
      owning and operating fuel grade ethanol plants in the Midwest corn belt. The
      ethanol expected to be produced by the plants is intended to be used by
      refineries or blenders and ultimately blended with gasoline fuel for internal
      combustion engines. Additionally, we anticipate that the plants will be designed
      to produce dried distilled grains (DDGs), which are used in the manufacture
      of
      various animal feeds and CO2 (carbon dioxide). Our operations will substantially
      be the operations of Beemer Energy, Inc., our wholly-owned subsidiary.





3


By
      the
      end of the second quarter of 2007, we intend to complete permitting for three
      corn-based ethanol plants in Iowa or Illinois and anticipate opening one
      plant for commercial production by the end of 2008 and the other two plants
      in the first half of 2009. We expect each plant to produce nearly 200 ethanol
      freight-train cars per week, acting as a consistent pipeline to the end blender
      or refinery, and 140 freight-train cars per week of DDGs. We are led by a
      seasoned management team who are experienced in grain trading, railroad
      negotiations, logistical economics, risk management, and
      acquisitions.





We
      have
      no operating history as a producer of ethanol, and to date have not constructed
      any ethanol plants. We have not earned any revenues to date. Our current capital
      and other existing resources will be sufficient to provide us with only a
      limited amount of working capital. We will require additional capital to
      continue to implement our business plans, which we may be unable to
      obtain.





On
      June
      19, 2006, Alternative Energy Sources, Inc., Beemer Acquisition Corp., our wholly
      owned subsidiary, and Beemer Energy, Inc., a Delaware corporation, executed
      a
      Merger Agreement and Plan of Reorganization. On the closing date of the merger,
      Beemer Acquisition Corp. merged with and into Beemer Energy, Inc., with Beemer
      Energy, Inc. remaining as the surviving corporation and our wholly-owned
      subsidiary. Also on the closing date of the merger, the holders of Beemer Energy
      Inc.’s issued and outstanding capital stock before the merger surrendered all of
      their issued and outstanding capital stock of Beemer Energy, Inc. and received
      12,900,000 shares of our common stock, par value $0.0001 per share. Our
      stockholders before the merger retained 15,000,000 shares of our common stock.





Beemer
      Energy, Inc. was a privately held company formed on May 10, 2006 to serve as
      a
      vehicle to effect a merger with a publicly held company. Our primary operations
      are now those of Beemer Energy, Inc.





We
      have
      announced plans to construct three ethanol plants, one in Iowa and two in
      Illinois. On August 15, 2006, we announced our plans to build a 110-million
      gallon ethanol plant in Boone County, Iowa, adjacent to a railroad line. We
      have
      begun the permitting process for the Boone County plant through the Iowa
      Department of Natural Resources, and anticipate that the plant will be
      operational by the fall of 2008. On August 21, 2006, we announced our plans
      to
      build a 110-million gallon ethanol plant in Kankakee, Illinois. The plant’s
      location is expected to be adjacent to the Canadian National / Illinois Central
      railroad line and abutting Interstate 57, which we anticipate will facilitate
      rail and truck transportation of the product from the facility. Construction
      on
      the Kankakee plant is expected to begin in the summer of 2007, and we anticipate
      that the plant will be operational in the first half of 2009. On
      October 23, 2006, we announced plans to construct a 110-million gallon ethanol
      plant in Greenville, Illinois. The Greenville plant is expected to be adjacent
      to the CSX and BNSF main railroad lines, and close to Interstates 55 and 70.
      We
      have optioned 100 acres in Greenville for the site of the plant. Construction
      is
      planned to commence within the next year, and we plan to have this plant
      operational in the first half of 2009.





4


Our
      business strategy and anticipated competitive advantage is to produce ethanol
      at
      the lowest cost by:





·
            Biomass
                fired plants for distillation energy as compared to natural gas fired
                plants. No supply contracts for biomass or natural gas have been
                secured
                as of this time.


·
            Significant
                economies of scale with identical plants each producing greater than
                110
                million gallons of ethanol per
                year.


·
            Unit
                train economics whereby both ethanol and DDGs are shipped in unit
                trains
                with dedicated power compared to single car
                shipments.


·
            Lowest
                cost producer status by way of spreading more fixed costs over more
                gallons, using biomass, and operating the plant with similar labor
                requirements as a 50-million gallon
                plant.





Our
      planned ethanol plants are intended to be situated to take advantage of railroad
      and interstate highway access. In addition, we plan to locate our plants in
      the
“cornbelt” of the Midwestern United States, to be near a major source of our raw
      material inputs.





Where
      the
      railroads support the loading of unit trains, we expect each plant to load
      a
      unit train of ethanol approximately every nine days, acting as a consistent
      pipeline to the end blender or refinery, and to load a unit train of DDGs
      approximately once a week.





We
      intend
      to seek to mitigate our exposure to commodity price fluctuations by purchasing
      forward a portion of our corn requirements on a fixed price basis and by
      purchasing corn and natural gas futures contracts. To mitigate ethanol price
      risk, we intend to sell a portion of our production forward under fixed price
      and indexed contracts. The indexed contracts are typically referenced to a
      futures contract such as unleaded gasoline on the NYMEX, and we may hedge a
      portion of the price risk associated with index contracts by selling
      exchange-traded unleaded gasoline contracts. We believe our proposed strategy
      of
      managing exposure to commodity price fluctuations will reduce somewhat the
      volatility of our results.





The
      U.S.
      ethanol market is highly competitive. According to the Renewable Fuels
      Association (“RFA”), world ethanol production rose to 12 billion gallons in
      2005. Non-U.S. ethanol accounted for 65% of world production. The U.S. and
      Brazil are the world’s largest producers of ethanol. As of December 2006,
      industry capacity in the U.S. approximated 5.6 billion gallons per year
      (“BGY”), with an additional 6.4 BGY of capacity under new construction or
      expansion of existing facilities. The ethanol industry in the U.S. consists
      of
      more than 114 production facilities and is primarily corn based, while the
      Brazilian ethanol production is primarily sugar cane based. According the RFA,
      the top 12 U.S. producers currently account for 47% of the ethanol production
      capacity in the U.S.





The
      industry is otherwise highly fragmented, with many small, independent firms
      and
      farmer-owned cooperatives constituting the rest of the market. If we follow
      our
      current plan, we will compete with our competitors primarily on a national
      basis.





5


We
      believe that our ability to compete successfully in the ethanol production
      industry depends on many factors, but we are principally relying on our strategy
      to be among the lowest-cost producers.





With
      respect to DDGs, we are likely to compete with other ethanol producers, as
      well
      as a number of large and smaller suppliers of competing animal feed. We believe
      that we will be able to successfully compete based on our product’s price,
      proximity to purchasers and quality.





We
      will
      be subject to various federal, state and local environmental laws and
      regulations, including those relating to the discharge of materials into the
      air, water and ground; the generation, storage, handling, use, transportation
      and disposal of hazardous materials; and the health and safety of our employees.
      These laws, regulations and permits also can require expensive pollution control
      equipment or operational changes to limit actual or potential impacts to the
      environment. A violation of these laws and regulations or permit conditions
      can
      result in substantial fines, natural resource damage, criminal sanctions, permit
      revocations and/or facility shutdowns. We do not anticipate a material adverse
      effect on our business or financial condition as a result of our efforts to
      comply with these requirements. We also do not expect to incur material capital
      expenditures for environmental controls in this or the succeeding fiscal year.





As
      of
      December 31, 2006, we had seven full time employees who are responsible for
      companywide management, marketing, project management, logistics and
      administration. If we are successful in obtaining financing, thus allowing
      us to
      execute the business plan, we anticipate an increase in employees of up to
      25
      full time equivalents by the end of 2007.





Alternative
      Energy Sources, Inc. was incorporated on April 8, 2002 as a development stage
      company that planned to profit by providing consulting services and selling
      wind
      energy power systems to the residential, agricultural and small business sectors
      throughout Washington, Idaho, Montana, and Oregon.





In
      the
      3rd quarter of 2004, the Company stated on Form 10-QSB that it was changing
      its
      business plan from focusing on business opportunities within the alternative
      energy marketplace to identifying and pursuing the development of a new business
      plan and direction for the Company. The reason for the change of direction
      was
      based upon the Company’s inability to raise proceeds or generate revenue from
      its proposed business plan. Since August 19, 2004, the Company’s only activities
      have been organizational ones. The Company had not commenced any commercial
      operations or material operating activities and had no revenues or income from
      the date of inception through the date of reorganization in June of 2006.


6


**RISK
      FACTORS**





**Risks
      Related to our Business**





**We
      are a development stage company with no operating history as a producer of
      ethanol.**





We
      have
      no operating history in our contemplated ethanol production business and, to
      date, have not earned any revenues. We have announced plans to construct three
      ethanol plants, but have not begun construction on any of the plants.
      Accordingly, it may be difficult for investors to evaluate our business
      prospects.





Our
      business is dependent on the implementation of our business plan, including
      our
      ability to make future investments. There can be no assurance that our efforts
      will ultimately be successful or result in revenues or profits. There is no
      assurance that investors will not lose their entire investment.





Moreover,
      our prospects must be considered in light of the risks and uncertainties
      encountered by an early-stage company and in rapidly evolving markets, such
      as
      the ethanol market, where supply and demand may change significantly in a short
      amount of time. Some of these risks relate to our potential inability
      to:





·
            effectively
                manage our contemplated business and
                operations;


·
            recruit
                and retain key personnel;


·
            successfully
                create and maintain the low-cost structure we envision as we expand
                the
                scale of our business;


·
            manage
                rapid growth in personnel and
                operations;


·
            develop
                new products that complement our contemplated business;
                and


·
            successfully
                address the other risks described throughout this
                report.





If
      we
      cannot successfully address these risks, our contemplated business and the
      results of our contemplated operations and financial position would suffer.





**We
      may be substantially dependent on a limited number of facilities, and any
      operational disruption could result in a reduction of sales volume and could
      cause us to incur substantial losses.**





Most
      of
      our anticipated revenues are and will continue to be derived from the sale
      of
      ethanol and the related co-products that we plan to produce. We recently
      announced plans to construct three ethanol plants, with construction beginning
      in 2007. Once commenced, our anticipated operations may be subject to
      significant interruption if any of our facilities experience a major accident
      or
      are damaged by severe weather or other natural disasters. In addition, our
      operations may be subject to labor disruptions and unscheduled downtime, or
      other operational hazards inherent in the ethanol industry, such as equipment
      failures, fires, explosions, abnormal pressures, blowouts, pipeline ruptures,
      transportation accidents and natural disasters. Some of these operational
      hazards may cause personal injury or loss of life, severe damage to or
      destruction of property and equipment or environmental damage, and may result
      in
      suspension of operations and the imposition of civil or criminal penalties.
      The
      insurance that we plan to obtain, if obtained, may not be adequate to fully
      cover the potential operational hazards described above.





7


**We
      may not be able to implement our business plan for acquisitions and expansion
      as
      planned or at all; we may not have and may not receive the necessary funds
      for
      our planned ethanol plant construction.**





We
      plan
      to grow our contemplated business by investing in new or existing facilities.
      In
      August, 2006 we announced plans to construct two ethanol plants - one in Iowa
      and one in Illinois. In October, 2006 we announced plans to construct one
      additional ethanol plant in Illinois. We believe that there is increasing
      competition for suitable sites. Therefore, we may not find suitable additional
      sites for construction of new facilities or other suitable expansion
      opportunities.





We
      may
      need financing to implement our business strategies and we may not have access
      to the funding required or such funding may not be available to us on acceptable
      terms. As of December 31, 2006, our cash reserves were $304,266 and we had
      an
      additional $6.8 million invested in liquid instruments, including money-market,
      30-day municipal auction rate certificates and auction rate preferred
      certificates. The funds we hold in cash reserves and liquid investments are
      not
      sufficient to fund our three announced ethanol plants, nor are they sufficient
      to fund additional acquisition or construction activities. We will therefore
      likely finance the expansion of our business with additional indebtedness or
      by
      issuing additional equity securities. We could face financial risks associated
      with incurring additional indebtedness, such as reducing our liquidity and
      access to financial markets and increasing the amount of cash flow required
      to
      service such indebtedness, or associated with issuing additional stock, such
      as
      dilution of ownership and earnings.





We
      must
      also obtain numerous regulatory approvals and permits in order to construct
      and
      operate additional or expanded facilities. These requirements may not be
      satisfied in a timely manner or at all. In addition, we may be adversely
      affected by environmental, health and safety laws, regulations and liabilities.
      Satisfaction of these federal and state governmental requirements may
      substantially increase our costs, which could have a material adverse effect
      on
      the results of our contemplated operations and financial position. Our
      contemplated expansion plans may also result in other unanticipated adverse
      consequences, such as diverting management’s attention from our existing
      operations.





Our
      anticipated construction costs may also increase to levels that would make
      a new
      facility too expensive to complete or unprofitable to operate. Contractors,
      engineering firms, construction firms, and equipment suppliers also receive
      requests and orders from other ethanol companies and, therefore, we may not
      be
      able to secure their services or products on a timely basis or on acceptable
      financial terms. We may suffer significant delays or cost overruns as a result
      of a variety of factors, such as shortages of workers or materials,
      transportations constraints, adverse weather, unforeseen difficulties or labor
      issues, any of which could prevent us from commencing operations as expected
      at
      our facilities.





8


Accordingly,
      we may not be able to implement our acquisition or expansion strategy as planned
      or at all. We may not find additional appropriate sites for new facilities
      and
      we may not be able to finance, construct, develop, or operate these new or
      expanded facilities successfully.





Potential
      future acquisitions could be difficult to find and integrate, divert the
      attention of key personnel, disrupt business, dilute shareholder value and
      adversely affect financial results.





As
      part
      of our business strategy, we may consider acquisitions of building sites,
      production facilities, storage or distribution facilities and selected
      infrastructure. We may not find suitable acquisition opportunities.





Acquisitions
      involve numerous risks, any of which could harm our contemplated business,
      including:





·
            difficulties
                in integrating the operations, technologies, products, existing contracts,
                accounting processes and personnel of the target and realizing the
                anticipated synergies of the combined
                businesses;


·
            difficulties
                in supporting and transitioning customers, if any, of the target
                company
                or assets;


·
            diversion
                of financial and management resources from existing
                operations;


·
            the
                price paid or other resources devoted may exceed the value we realize,
                or
                the value to be realized if we had allocated the purchase price or
                other
                resources to another opportunity;


·
            risks
                of entering new markets or areas in which we have limited or no
                experience;


·
            potential
                loss of key employees, customers and strategic alliances from our
                contemplated business or the business of the
                target;


·
            assumption
                of unanticipated problems or latent liabilities, such as problems
                with the
                quality of the products of the target;
                and


·
            inability
                to generate sufficient revenue to offset acquisition
                costs.





Acquisitions
      also frequently result in the recording of goodwill and other intangible assets
      which are subject to potential impairments in the future that could harm our
      financial results. In addition, if we finance acquisitions by issuing
      convertible debt or equity securities, our existing shareholders may be diluted,
      which could affect the market price of our common stock. As a result, if we
      fail
      to properly evaluate acquisitions or investments, we may not achieve the
      anticipated benefits of any such acquisitions and we may incur costs in excess
      of what we anticipate. The failure to successfully evaluate and execute
      acquisitions or investments or otherwise adequately address these risks could
      materially harm our business and financial results.





9


**We
      may be unable to obtain additional capital that we will require to implement
      our
      business plan, which could restrict our ability to grow.**





We
      expect
      that our current capital and our other existing resources will be sufficient
      only to provide a limited amount of working capital. We estimate that we will
      require $750 million to construct the three plants (one in Iowa and two in
      Illinois) that we currently plan to build. We may be unable to obtain additional
      capital required. Furthermore, an inability to maintain capital may damage
      our
      reputation and credibility with industry participants in the event we cannot
      close publicly announced transactions.





Future
      acquisitions and production costs, development, production and marketing
      activities, as well as our administrative requirements (such as salaries,
      insurance expenses and general overhead expenses, as well as legal compliance
      costs and accounting expenses) will require a substantial amount of additional
      capital and cash flow. We plan to pursue sources of additional capital through
      various financing transactions or arrangements, including joint venturing of
      projects, debt financing, equity financing or other means. We may not be
      successful in locating suitable financing transactions in the time period
      required or at all, and we may not obtain the capital we require by other means.
      If we do not succeed in raising additional capital, our current capital
      resources may not be sufficient to fund our operations going forward without
      obtaining additional capital financing, though we believe that, without
      factoring in the costs of constructing our three announced ethanol plants,
      we
      have sufficient capital to fund our operations through fiscal year 2007.





Any
      additional capital raised through the sale of equity may dilute the ownership
      percentages of existing stockholders. This could also result in a decrease
      in
      the fair market value of our equity securities because our assets would be
      owned
      by a larger pool of outstanding equity. The terms of securities we issue in
      future capital transactions may be more favorable to our new investors, and
      may
      include preferences, superior voting rights and the issuance of warrants or
      other derivative securities, and issuances of incentive awards under equity
      employee incentive plans, which may have a further dilutive effect.





Our
      ability to obtain needed financing may be impaired by such factors as the
      capital markets (both generally and in the ethanol industry in particular),
      our
      status as a new enterprise without a demonstrated operating history, the
      location of our facilities, the prices of ethanol and the raw materials needed
      to produce ethanol on the commodities markets (which will impact the amount
      of
      asset-based financing available to us) and/or the loss of key management.
      Further, if ethanol prices on the commodities markets decrease, then our
      revenues will likely decrease, and such decreased revenues may increase our
      requirements for capital. If the amount of capital we are able to raise from
      financing activities, together with our revenues from operations, is not
      sufficient to satisfy our capital needs (even to the extent that we reduce
      our
      operations), we may be required to cease our operations.





We
      may
      incur substantial costs in pursuing future capital financing, including
      investment banking fees, legal fees, accounting fees, securities law compliance
      fees, printing and distribution expenses and other costs. We may also be
      required to recognize non-cash expenses in connection with certain securities
      we
      may issue, such as convertible notes and warrants, which may adversely impact
      our financial condition.





10


**We
      may not be able to effectively manage our growth, which may harm our
      profitability.**





Our
      strategy envisions expanding our business. If we fail to effectively manage
      our
      growth, our financial results could be adversely affected. Growth may place
      a
      strain on our management systems and resources. We must continue to refine
      and
      expand our business development capabilities, our systems and processes and
      our
      access to financing sources. As we grow, we must continue to hire, train,
      supervise and manage new employees. We cannot assure investors that we will
      be
      able to:





·
            meet
                our capital needs;


·
            expand
                our systems effectively or efficiently or in a timely
                manner;


·
            allocate
                our human resources optimally;


·
            identify
                and hire qualified employees or retain valued employees;
                or


·
            incorporate
                effectively the components of any business that we may acquire in
                our
                effort to achieve growth.





If
      we are
      unable to manage our growth, our operations and our financial results could
      be
      adversely affected by inefficiency, which could diminish our profitability.





**We
      are dependent upon our officers for management and direction, and the loss
      of
      any of these persons could adversely affect our contemplated operations and
      results.**





We
      are
      dependent upon our executive officers, specifically, Mark Beemer, our Chairman
      and Chief Executive Officer, Lee Blank, our President and Chief Operating
      Officer, John Ward, our Executive Vice President and Director of Operations,
      and
      John Holland, our Executive Vice President and Chief Financial Officer, for
      implementation of our proposed expansion strategy and execution of our
      contemplated business. The loss of any of our officers could have a material
      adverse effect upon the results of our contemplated operations and financial
      position. We do not maintain “key person” life insurance for any of our
      officers. The loss of any of our officers could delay or prevent the achievement
      of our contemplated business objectives.





11


**Our
      management team does not have extensive experience in public company matters,
      which could impair our ability to comply with legal and regulatory requirements.**





Our
      management team has had limited U.S. public company management experience or
      responsibilities, which could impair our ability to comply with legal and
      regulatory requirements such as the Sarbanes-Oxley Act of 2002 and applicable
      federal securities laws including filing required reports and other information
      required on a timely basis. There can be no assurance that our management will
      be able to implement and affect programs and policies in an effective and timely
      manner that adequately respond to increased legal, regulatory compliance and
      reporting requirements imposed by such laws and regulations. Our failure to
      comply with such laws and regulations could lead to the imposition of fines
      and
      penalties and further result in the deterioration of our business.





**We
      may not be able to continue as a going concern.**





Our
      consolidated financial statements have been prepared on a going concern basis,
      which contemplates the realization of assets and the satisfaction of liabilities
      in the normal course of business. We have a history of operating losses that
      are
      likely to continue in the future. Our significant losses from operations and
      our
      dependence on equity and debt financing raise substantial doubt about our
      ability to continue as a going concern. Our financial statements do not include
      any adjustments that might be necessary should we be unable to continue as
      a
      going concern.





Our
      operations must begin to provide sufficient revenues to improve our working
      capital position. Additionally, we will require additional capital to construct
      ethanol production facilities and commence our planned operations. If we are
      unable to raise additional capital we may need to revise our business plan,
      reduce the scope of our planned operations or discontinue our operations.




**Risks
      Related to our Industry**





**Our
      anticipated results may be substantially dependent on commodity prices,
      especially prices for corn, natural gas, ethanol, and unleaded gasoline.**





As
      a
      result of the volatility of the prices for commodities, anticipated results
      may
      fluctuate substantially and we may experience periods of declining prices for
      our products and increasing costs for our raw materials, which could result
      in
      operating losses. Although we may attempt to offset a portion of the effects
      of
      fluctuations in prices by entering into forward contracts to supply ethanol
      or
      purchase corn, natural gas or other items or by engaging in transactions
      involving exchange-traded futures contracts, the amount and duration of these
      hedging and other risk mitigation activities may vary substantially over time
      and these activities also involve substantial risks.





12


**Our
      contemplated business is likely to be highly sensitive to corn prices and we
      generally will be unable to pass on increases in corn prices to our customers.**





The
      principal raw material we expect to use to produce ethanol and co-products,
      including dry and wet distillers grains, is corn. As a result, changes in the
      price of corn can significantly affect our contemplated business. In general,
      rising corn prices produce lower profit margins. Because ethanol competes with
      non-corn-based fuels, we are not likely to be able to pass along increased
      corn
      costs to customers. At certain levels, corn prices may make ethanol uneconomical
      to use in fuel markets.





Weather
      conditions and other factors affecting crop yields, farmer planting decisions,
      and general economic, market and regulatory factors all influence the price
      of
      corn. Government policies and subsidies with respect to agriculture and
      international trade, and global and local demand and supply also impact the
      price. The significance and relative effects of these factors on the price
      of
      corn are difficult to predict. Any event that tends to negatively affect the
      supply of corn, such as adverse weather or crop disease, could increase corn
      prices and potentially harm our business. In addition, ethanol producers may
      also have difficulty, from time to time, in physically sourcing corn on
      economical terms due to supply shortages. Such a shortage could require us
      to
      suspend our contemplated operations until corn becomes available at acceptable
      terms, which would have a material adverse effect on our business, results
      of
      operations and financial position. The price paid for corn at a facility could
      increase if an additional ethanol production facility is built in the same
      general vicinity.





**The
      spread between ethanol and corn prices can vary significantly, and the recent
      high levels of these spreads are unlikely to remain.**





The
      gross
      margin of our anticipated business depends principally on the spread between
      ethanol and corn prices. In recent periods, the spread between ethanol and
      corn
      prices has been at a historically high level, driven in large part by high
      oil
      prices and historically low corn prices. During 2005, however, this spread
      fluctuated widely and, because of the unusual degree of spread in current
      markets, fluctuations are likely to continue to occur. Any reduction in the
      spread between ethanol and corn prices, whether as a result of an increase
      in
      corn prices or a reduction in ethanol prices, would adversely affect our
      anticipated results of operations and financial position.





**The
      market for natural gas is subject to market conditions that create uncertainty
      in the price and availability of the natural gas that the Company may use in
      our
      anticipated manufacturing process.**





Our
      contemplated business may rely upon third parties for supplies of coal or
      natural gas or both, which is consumed in the manufacture of ethanol. The prices
      for and availability of coal and natural gas are subject to volatile market
      conditions. These market conditions often are affected by factors beyond our
      control, such as higher prices resulting from colder than average weather
      conditions and overall economic conditions. Significant disruptions in the
      supply of coal and natural gas could impair our ability to manufacture ethanol
      for our customers. Furthermore, increases in coal and natural gas prices or
      changes in coal and natural gas costs relative to natural gas costs paid by
      competitors could adversely affect our anticipated results of operations and
      financial position.





13


**Fluctuations
      in the selling price and production cost of gasoline may reduce our anticipated
      profit margins, if profits are achieved.**





Ethanol
      is marketed both as a fuel additive to reduce vehicle emissions from gasoline
      and as an octane enhancer to improve the octane rating of gasoline with which
      it
      is blended. As a result, ethanol prices are influenced by the supply and demand
      for gasoline and our anticipated results of operations and financial position
      may be materially adversely affected if gasoline demand or price decreases.
      Historically, the price of a gallon of gasoline has been lower than the cost
      to
      produce a gallon of ethanol. In addition, some of the sales contracts into
      which
      we may enter may provide for pricing on an indexed basis, so that the price
      we
      may receive for products sold under these arrangements will be adjusted as
      gasoline prices change.





**Our
      anticipated business will be subject to seasonal fluctuations.**





Our
      anticipated operating results are likely to be influenced by seasonal
      fluctuations in the price of our primary operating inputs, corn and coal or
      natural gas or both, and the price of our primary product, ethanol. The spot
      price of corn tends to rise during the spring planting season in May and June
      and tends to decrease during the fall harvest in October and November. The
      price
      for natural gas, however, tends to move opposite that of corn and tends to
      be
      lower in the spring and summer and higher in the fall and winter. In addition,
      ethanol prices are substantially correlated with the price of unleaded gasoline
      especially in connection with our indexed, gas-plus sales contracts. The price
      of unleaded gasoline tends to rise during each of the summer and winter. Given
      our lack of operating history, we do not know yet how these seasonal
      fluctuations will affect our results over time.





**If
      we engage in hedging transactions and other risk mitigation strategies, those
      strategies could harm our financial results.**





It
      is
      possible that, in an attempt to partially offset the effects of volatility
      of
      ethanol prices and corn and natural gas costs, we will enter into contracts
      to
      supply a portion of our ethanol production or purchase a portion of our corn
      or
      natural gas requirements on a forward basis and also engage in other hedging
      transactions involving exchange-traded futures contracts for corn, natural
      gas
      and unleaded gasoline from time to time. The price of unleaded gasoline also
      affects the price we receive for our ethanol under indexed contracts. The
      financial statement impact of these activities is dependent upon, among other
      things, the prices involved and our ability to sell sufficient products to
      use
      all of the corn and natural gas for which we have futures contracts. Hedging
      arrangements, if entered into, will also expose us to the risk of financial
      loss
      in situations where the other party to the hedging contract defaults on its
      contract or, in the case of exchange-traded contracts, where there is a change
      in the expected differential between the underlying price in the hedging
      agreement and the actual prices paid or received by us. Hedging activities
      can
      themselves result in losses when a position is purchased in a declining market
      or a position is sold in a rising market. A hedge position is often settled
      in
      the same time frame as the physical commodity is either purchased (corn and
      natural gas) or sold (ethanol). Hedging losses may be offset by a decreased
      cash
      price for corn and natural gas and an increased cash price for ethanol. If
      we do
      hedge, we may also vary the amount of hedging or other risk mitigation
      strategies we undertake, and we may choose not to engage in hedging transactions
      at all. As a result, our results of operations and financial position may be
      adversely affected by increases in the price of corn or natural gas or decreases
      in the price of ethanol or unleaded gasoline. As of the date of this report,
      we
      have not entered into any such hedging transactions.





14


**Growth
      in the sale and distribution of ethanol is dependent on the changes to and
      expansion of related infrastructure which may not occur on a timely basis,
      if at
      all, and the Company’s contemplated operations could be adversely affected by
      infrastructure disruptions.**





Substantial
      development of infrastructure will be required by persons and entities outside
      our control for our contemplated operations, and the ethanol industry generally,
      to grow. Areas requiring expansion include, but are not limited to:





·
            additional
                rail capacity;


·
            additional
                storage facilities for ethanol;


·
            increases
                in truck fleets capable of transporting ethanol within localized
                markets;


·
            expansion
                of refining and blending facilities to handle ethanol;
                and


·
            growth
                in service stations equipped to handle ethanol
                fuels.





Substantial
      investments required for these infrastructure changes and expansions may not
      be
      made or they may not be made on a timely basis. Any delay or failure in making
      the changes to or expansion of infrastructure could hurt the demand or prices
      for our contemplated products, impede our delivery of those products, impose
      additional costs on us, or otherwise have a material adverse effect on our
      results of contemplated operations or financial position. Our contemplated
      business will be dependent on the continuing availability of infrastructure
      and
      any infrastructure disruptions could have a material adverse effect on our
      business.





**New
      ethanol plants under construction or decreases in the demand for ethanol may
      result in excess U.S. production capacity.**





According
      to the Renewable Fuels Association, (the “RFA”), domestic ethanol production
      capacity has increased from 1.9 billion gallons per year (“BGY”) as of January
      2001 to an estimated 5.6 BGY at March 2007. During December 2006 ethanol was
      produced at a record level of 463 million gallons. The RFA
      estimates that, as of March 2007, approximately 6.4 BGY of additional
      production capacity is under construction. According to the RFA, at the end
      of
      December 2006, 114 ethanol refineries were in production. The RFA has reported
      that, according to information provided to it, there are numerous ethanol
      projects that are seeking financing. Excess capacity in the ethanol industry
      would have an adverse effect on our contemplated results of operations, cash
      flows, and financial position. In a manufacturing industry with excess capacity,
      producers have an incentive to manufacture additional products for so long
      as
      the price exceeds the marginal cost of production (i.e., the cost of producing
      only the next unit, without regard for interest, overhead or fixed costs).
      This
      incentive can result in the reduction of the market price of ethanol to a level
      that is inadequate to generate sufficient cash flow to cover costs.





15


Excess
      capacity may also result from decreases in the demand for ethanol, which could
      result from a number of factors, including regulatory developments and reduced
      U.S. gasoline consumption. Reduced gasoline consumption could occur as a result
      of increased prices for gasoline or crude oil, which could cause businesses
      and
      consumers to reduce driving or acquire vehicles with more favorable gasoline
      mileage. There is some evidence that this has occurred in the recent past as
      U.S. gasoline prices have increased.





**We
      may not be able to compete effectively in the U.S. ethanol industry.**





In
      the
      U.S., our contemplated business would compete with other corn processors,
      ethanol producers and refiners. As of November 2006, the top 12 producers
      accounted for at least 47% of the ethanol production capacity in the U.S.
      according to the RFA. A
      number
      of competitors are divisions of substantially larger enterprises and have
      substantially greater financial resources than we plan to have. Smaller
      competitors also pose a threat. Farmer-owned cooperatives and independent firms
      consisting of groups of individual farmers and investors have been able to
      compete successfully in the ethanol industry. These smaller competitors operate
      smaller facilities which do not affect the local price of corn grown in the
      proximity to the facility as much as larger facilities. In addition, many of
      these smaller competitors are farmer-owned and often require their farmer-owners
      to commit to selling them a certain amount of corn as a requirement of
      ownership. A significant portion of production capacity in the ethanol industry
      consists of smaller-sized facilities. Most new ethanol plants under development
      across the country are individually owned. In addition, institutional investors
      and high net worth individuals could heavily invest in ethanol production
      facilities and oversupply the demand for ethanol, resulting in lower ethanol
      price levels that might adversely affect the results of our contemplated
      operations and financial position.





16


The
      ethanol industry also includes increasing competition from international
      suppliers. Although there is a $0.54 per gallon tariff (which is scheduled
      to
      expire in 2007) on foreign produced ethanol that is approximately equal to
      the
      blenders’ credit, ethanol imports equivalent to up to 7% of total domestic
      production in any given year from various countries were exempted from this
      tariff under the Caribbean Basin Initiative to spur economic development in
      Central America and the Caribbean. Currently, international suppliers produce
      ethanol primarily from sugar cane and have cost structures that may be
      substantially lower than ours.





Any
      increase in domestic or foreign competition could result in reduced ethanol
      prices. As a result, we could be forced to take other steps to compete
      effectively, which could adversely affect the results of our contemplated
      operations and financial position.





**The
      U.S. ethanol industry is highly dependent upon federal and state legislation
      and
      regulation and any changes in legislation or regulation could materially and
      adversely affect the results of our contemplated operations and financial
      position.**





The
      elimination or significant reduction in the blenders’ credit could have a
      material adverse effect on the results of our contemplated operations and
      financial position. The cost of producing ethanol is made significantly more
      competitive with regular gasoline by federal tax incentives. Before January
      1,
      2005, the federal excise tax incentive program allowed gasoline distributors
      that blended ethanol with gasoline to receive a federal excise tax rate
      reduction for each blended gallon sold. If the fuel was blended with 10%
      ethanol, the refiner/marketer paid $0.052 per gallon less tax, which equated
      to
      an incentive of $0.52 per gallon of ethanol. The $0.52 per gallon incentive
      for
      ethanol was reduced to $0.51 per gallon in 2005 and is scheduled to expire
      (unless extended) in 2010. The blenders’ credits may not be renewed in 2010 or
      may be renewed on different terms. In addition, the blenders’ credits, as well
      as other federal and state programs benefiting ethanol (such as tariffs),
      generally are subject to U.S. government obligations under international trade
      agreements, including those under the World Trade Organization Agreement on
      Subsidies and Countervailing Measures, and might be the subject of challenges
      thereunder, in whole or in part. The elimination or significant reduction in
      the
      blenders’ credit or other programs benefiting ethanol may have a material
      adverse effect on the results of our contemplated operations and financial
      position.





17


**Ethanol
      can be imported into the U.S. duty-free from some countries, which may undermine
      the ethanol industry in the U.S.**





Imported
      ethanol is generally subject to a $0.54 per gallon tariff that was designed
      to
      offset the $0.51 per gallon ethanol incentive available under the federal excise
      tax incentive program for refineries that blend ethanol in their fuel. A special
      exemption from the tariff exists for ethanol imported from 24 countries in
      Central America and the Caribbean Islands, which is limited to a total of 7%
      of
      U.S. production per year. Imports from the exempted countries may increase
      as a
      result of new plants under development. Since production costs for ethanol
      in
      these countries are estimated to be significantly less than what they are in
      the
      U.S., the duty-free import of ethanol through the countries exempted from the
      tariff may negatively affect the demand for domestic ethanol and the price
      at
      which we sell our ethanol. In May 2006, bills were introduced in both the U.S.
      House of Representatives and U.S. Senate to repeal the $0.54 per gallon tariff.
      We do not know the extent to which the volume of imports would increase or
      the
      effect on U.S. prices for ethanol if this proposed legislation is enacted or
      if
      the tariff is not renewed beyond its current expiration in December 2007. Any
      changes in the tariff or exemption from the tariff could have a material adverse
      effect on our results of operations and financial position. In addition, the
      North America Free Trade Agreement, or NAFTA, which entered into force on
      January 1, 1994, allows Canada and Mexico to export ethanol to the United States
      duty-free or at a reduced rate. Canada is exempt from duty under the current
      NAFTA guidelines, while Mexico’s duty rate is $0.10 per gallon.





**The
      effect of the Renewable Fuel Standard in the recent Energy Policy Act is
      uncertain.**





The
      use
      of fuel oxygenates, including ethanol, was mandated through regulation, and
      much
      of the forecasted growth in demand for ethanol was expected to result from
      additional mandated use of oxygenates. Most of this growth was projected to
      occur in the next few years as the remaining markets switch from MTBE to
      ethanol. The recently enacted energy bill, however, eliminated the mandated
      use
      of oxygenates and established minimum nationwide levels of renewable fuels
      (ethanol, biodiesel or any other liquid fuel produced from biomass or biogas)
      to
      be included in gasoline. Because biodiesel and other renewable fuels in addition
      to ethanol are counted toward the minimum usage requirements of the renewable
      fuel standards set forth in the legislation,, the elimination of the oxygenate
      requirement for reformulated gasoline may result in a decline in ethanol
      consumption, which in turn could have a material adverse effect on the results
      of our contemplated operations and financial condition. The legislation also
      included provisions for trading of credits for use of renewable fuels and
      authorized potential reductions in the Renewable Fuel Standard (“RFS”)
      minimum by action of a governmental administrator. In addition, the rules for
      implementation of the RFS and the energy bill are still under development.





The
      legislation did not include MTBE liability protection sought by refiners, and
      ethanol producers have generally estimated that this will result in accelerated
      removal of MTBE and increased demand for ethanol. Refineries may use other
      possible replacement additives, such as iso-octane, iso-octene or alkylate.
      Accordingly, the actual demand for ethanol may increase at a lower rate than
      production for estimated demand, resulting in excess production capacity in
      our
      industry, which would negatively affect our results of operations, financial
      position and cash flows.





18


**Waivers
      of the RFS minimum levels of renewable fuels included in gasoline could have
      a
      material adverse affect on the results of our contemplated operations.**





Under
      the
      Energy Policy Act, the U.S. Department of Energy, in consultation with the
      Secretary of Agriculture and the Secretary of Energy, may waive the renewable
      fuels mandate with respect to one or more states if the Administrator of the
      U.S. Environmental Protection Agency, or U.S. EPA, determines that implementing
      the requirements would severely harm the economy or the environment of a state,
      a region or the U.S., or that there is inadequate supply to meet the
      requirement. Any waiver of the RFS with respect to one or more states would
      adversely offset demand for ethanol and could have a material adverse effect
      on
      the results of our contemplated operations and financial condition.





**We
      may be adversely affected by environmental, health and safety laws, regulations
      and liabilities.**





As
      we
      pursue our business plan, we will become subject to various federal, state
      and
      local environmental laws and regulations, including those relating to the
      discharge of materials into the air, water and ground, the generation, storage,
      handling, use, transportation and disposal of hazardous materials, and the
      health and safety of our employees. In addition, some of these laws and
      regulations require our contemplated facilities to operate under permits that
      are subject to renewal or modification. These laws, regulations and permits
      can
      often require expensive pollution control equipment or operational changes
      to
      limit actual or potential impacts to the environment. A violation of these
      laws
      and regulations or permit conditions can result in substantial fines, natural
      resource damages, criminal sanctions, permit revocations and/or facility
      shutdowns.





Furthermore,
      upon implementing our plan, we may become liable for the investigation and
      cleanup of environmental contamination at each of the properties that we own
      or
      operate and at off-site locations where it may arrange for the disposal of
      hazardous substances. If these substances have been or are disposed of or
      released at sites that undergo investigation and/or remediation by regulatory
      agencies, we may be responsible under the Comprehensive Environmental Response,
      Compensation and Liability Act of 1980, or CERCLA, or other environmental laws
      for all or part of the costs of investigation and/or remediation, and for
      damages to natural resources. We may also be subject to related claims by
      private parties alleging property damage and personal injury due to exposure
      to
      hazardous or other materials at or from those properties. Some of these matters
      may require expending significant amounts for investigation, cleanup, or other
      costs.





In
      addition, new laws, new interpretations of existing laws, increased governmental
      enforcement of environmental laws, or other developments could require us to
      make additional significant expenditures. Continued government and public
      emphasis on environmental issues can be expected to result in increased future
      investments for environmental controls at ethanol production facilities. Present
      and future environmental laws and regulations (and interpretations thereof)
      applicable to ethanol operations, more vigorous enforcement policies and
      discovery of currently unknown conditions may require substantial expenditures
      that could have a material adverse effect on the results of our contemplated
      operations and financial position.





19


The
      hazards and risks associated with producing and transporting ethanol and Dried
      Distilled Grains (“DDGs”) (such as fires, natural disasters, explosions, and
      abnormal pressures and blowouts) may also result in personal injury claims
      or
      damage to property and third parties. As protection against operating hazards,
      we maintain insurance coverage against some, but not all, potential losses.
      However, we could sustain losses for uninsurable or uninsured risks, or in
      amounts in excess of existing insurance coverage. Events that result in
      significant personal injury or damage to our property or third parties or other
      losses that are not fully covered by insurance could have a material adverse
      effect on the results of our contemplated operations and financial
      position.





**Risks
      Related to Our Common Stock**





**Investors
      may have difficulty trading and obtaining quotations for our common stock.**





Our
      common stock is currently quoted on the Over-the-Counter Bulletin Board under
      the symbol “AENS.OB.” Our common stock is not actively traded, and the bid and
      asked prices for our common stock have fluctuated widely. As a result, investors
      may find it difficult to dispose of, or to obtain accurate quotations of the
      price of, our securities. This severely limits the liquidity of our common
      stock, and would likely reduce the market price of our common stock and hamper
      our ability to raise additional capital.





**The
      market price of our common stock is, and is likely to continue to be, highly
      volatile and subject to wide fluctuations.**





The
      market price of our common stock is highly volatile and subject to wide
      fluctuations. A number of factors that are beyond our control contribute to
      this
      volatility, including:





·
            Investor
                response to dilution caused by our issuance of additional shares
                of common
                stock and other forms of equity securities, which we expect to make
                in
                connection with future capital financings to fund our operations
                and
                growth, to attract and retain valuable personnel and in connection
                with
                future strategic partnerships with other
                companies;


·
            announcements
                of new acquisitions, reserve discoveries or other business initiatives
                by
                our competitors;


·
            changes
                in the market for ethanol and the commodities used in the production
                of
                ethanol and/or in the capital markets
                generally;


·
            changes
                in the demand for ethanol, including changes resulting from the
                introduction or expansion of alternative fuels and fuel
                additives;


·
            quarterly
                variations in our revenues and operating
                expenses;


·
            changes
                in the valuation of similarly situated companies, both in our industry
                and
                in other industries;


·
            changes
                in analysts’ estimates affecting our company, our competitors and/or our
                industry;


·
            changes
                in the accounting methods used in or otherwise affecting our
                industry;


·
            additions
                and departures of key personnel;


·
            announcements
                of technological innovations or new products available to competitive
                industries, such as the oil and gas
                industry;


·
            announcements
                by relevant governments pertaining to incentives for alternative
                energy
                development programs;


·
            fluctuations
                in interest rates and the availability of capital in the capital
                markets;
                and


·
            significant
                sales of our common stock, including sales by existing investors
                and/or
                future investors in future offerings we may make to raise additional
                capital.





20


These
      and
      other factors are largely beyond our control, and the impact of these risks,
      singly or in the aggregate, may result in material adverse changes to the market
      price of our common stock and/or our results of operations and financial
      condition.





**Our
      operating results may fluctuate significantly, and these fluctuations may cause
      our stock price to decline.**





Our
      operating results will likely vary in the future primarily as the result of
      fluctuations in our revenues and operating expenses, including the coming to
      market of ethanol that we are able to produce, expenses that we incur, the
      price
      of ethanol in the commodities markets and other factors. Since our inception,
      we
      have not generated revenues on which investors may gauge our future performance.
      If our results of operations do not meet the expectations of current or
      potential investors, the price of our common stock may decline.





**We
      do not expect to pay dividends in the foreseeable future.**





We
      do not
      intend to declare dividends for the foreseeable future, as we anticipate that
      we
      will reinvest any future earnings in the development and growth of our business.
      Therefore, investors will not receive any funds unless they sell their common
      stock, and stockholders may be unable to sell their shares on favorable terms
      or
      at all. Investors cannot be assured of a positive return on investment or that
      they will not lose the entire amount of their investment in the common stock.





**Investors
      will experience dilution upon the exercise of warrants or options.**





There
      are
      12,000,000 shares of common stock underlying outstanding warrants, which if
      exercised or converted, could decrease the net tangible book value of investors’
common stock. In addition, there are 4,000,000 shares of common stock underlying
      options that have been or may be granted pursuant to our stock option plan.
      If
      the holders of those options exercise those options, investors may experience
      dilution in the net tangible book value of their common stock. Further, the
      sale
      or availability for sale of the underlying shares in the marketplace could
      depress our stock price.





21


**Our
      directors and officers will have a high concentration of common stock ownership.**





Based
      on
      the 40,500,009 shares of common stock that are outstanding as of March 22,
      2007,
      our officers and directors beneficially own approximately 32.3% of our
      outstanding common stock. Such a high level of ownership by such persons may
      have a significant effect in delaying, deferring or preventing any potential
      change in control of us. Additionally, as a result of their high level of
      ownership, our officers and directors might be able to strongly influence the
      actions of the Board and the outcome of actions brought to our shareholders
      for
      approval. Such a high level of ownership may adversely affect the voting and
      other rights of our shareholders.





**Applicable
      SEC rules governing the trading of “penny stocks” limit the trading and
      liquidity of the common stock, which may affect the trading price of our common
      stock.**





Shares
      of
      our common stock are considered “penny stock” and may be subject to SEC rules
      and regulations which impose limitations upon the manner in which such shares
      may be publicly traded and regulate broker-dealer practices in connection with
      transactions in “penny stocks.” Penny stocks generally are equity securities
      with a price of less than $5.00 (other than securities registered on certain
      national securities exchanges or quoted on the NASDAQ system, provided that
      current price and volume information with respect to transactions in such
      securities is provided by the exchange or system). The penny stock rules require
      a broker-dealer, prior to a transaction in a penny stock not otherwise exempt
      from the rules, to deliver a standardized risk disclosure document that provides
      information about penny stocks and the risks in the penny stock market. The
      broker-dealer must also provide the customer with current bid and offer
      quotations for the penny stock, the compensation of the broker-dealer and its
      salesperson in the transaction, and monthly account statements showing the
      market value of each penny stock held in the customer’s account. In addition,
      the penny stock rules generally require that prior to a transaction in a penny
      stock, the broker-dealer make a special written determination that the penny
      stock is a suitable investment for the purchaser and receive the purchaser’s
      written agreement to the transaction. These disclosure requirements may have
      the
      effect of reducing the level of trading activity in the secondary market for
      a
      stock that becomes subject to the penny stock rules which may increase the
      difficulty investors may experience in attempting to liquidate such securities.





22


**ITEM
      2.**  **DESCRIPTION
      OF PROPERTIES**





No
      properties are or have been owned by the Company since its formation. The
      Company has announced plans to construct plants in Boone County, Iowa, Kankakee,
      Illinois and Greenville, Illinois. None of the properties are owned by or under
      lease to the Company, although the Company does have options to purchase each
      of
      these properties. In addition, the Company leases its headquarters in Kansas
      City, Missouri.





**ITEM
      3.**  **LEGAL
      PROCEEDINGS**





The
      Company may be a party from time to time to various claims and lawsuits which
      arise in the ordinary course of business. The Company does not believe that
      the
      ultimate resolution of these ordinary claims or lawsuits will have a material
      adverse effect on our business, financial condition, results of operation,
      or
      cash flows.





No
      director, officer, or affiliate of the Company and no owner of record or
      beneficial owner of more than 5.0% of the equity securities of the Company,
      or
      any associate of any such director, officer or security holder is a party
      adverse to the Company, or has a material interest adverse to the Company in
      reference to pending litigation.





On
      February 12, 2007, McGuireWoods, LLP, notified the Company that an entity
      controlled by Louis Zehil, a former partner with that firm, caused an entity
      under his control to acquire shares in a private placement of the Company’s
      stock without the required restricted legend, which shares were subsequently
      traded. If the shares were acquired without the required legend and subsequently
      traded, such trades may be in violation of the federal securities laws. The
      transactions in question relate to the $12 million private placement of shares
      of the Company’s common stock and warrants to purchase shares of the Company’s
      common stock to a group of institutional and accredited investors announced
      on
      June 20, 2006, for which McGuireWoods served as the Company’s external legal
      counsel.





On
      February 21, 2007, the U.S. Securities and Exchange Commission notified the
      Company that it was conducting an investigation into Zehil’s activities as it
      relates to the sale of shares of the Company’s common stock during June and
      September of 2006.





The
      Company is cooperating fully with the Securities and Exchange Commission’s
      review of the Zehil transactions. We do not expect any legal action to be
      brought against the Company as a result of the suspect transactions and their
      review by the Securities and Exchange Commission. Accordingly, there should
      be
      no material impact on our results of operations or financial
      position.





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





No
      matters were submitted to a vote of security holders during the fourth quarter
      of fiscal year 2006.


23


**PART
      II**





**ITEM
      5.**  **MARKET
      FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER
      PURCHASES OF EQUITY SECURITIES**





Our
      common stock has been quoted on the Over-the-Counter Bulletin Board under the
      symbol “AENS.OB” since July, 2004, but has only been actively traded since June
      19, 2006. For the periods indicated, the following table sets forth the high
      and
      low bid prices per share of our common stock on the OTC Bulletin Board:





**Quarter
                Ended**
            
            **High**
            
            **Low**December
                31, 2006
            
            $2.62
            
            $1.05September
                30, 2006
            
            $2.85
            
            $1.59June
                30, 2006 (since June 19)
            
            $2.90
            
            $2.46





Quotations
      reflect inter-dealer prices, without retail mark-up, mark-down or commission
      and
      may not represent actual transactions.




As
      of
      December 31, 2006 there were 40,500,009 shares of common stock issued and
      outstanding.





As
      of
      December 31, 2006, there were approximately 104 holders of record of shares
      of
      our common stock.





We
      have
      never declared or paid dividends on shares of our common stock and we intend
      to
      retain future earnings, if any, to support the development of our business
      and
      therefore do not anticipate paying cash dividends for the foreseeable future.
      Payment of future dividends, if any, will be at the discretion of our board
      of
      directors after taking into account various factors, including current financial
      condition, operating results and current and anticipated cash
      needs.





**Equity
      Compensation Plan**





Securities
      authorized for issuance under equity compensation plans as of December 31,
      2006,
      are as follows:





24


**Plan
                category**
            
            **Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights**
              **(a)**
            
            **Weighted-average
                exercise price of outstanding options, warrants and rights**
              **(b)**
            
            **Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in column (a))****(c)****Equity
                compensation plans approved by security holders**
            
            
            1,604,000
            
            $
            1.90
            
            
            2,396,000**Equity
                compensation plans not approved by security holders**
            
            
            —
            
            
            —
            
            
            —**Total**
            
            
            1,604,000
            
            $
            1.90
            
            
            2,396,000





Equity
      compensation plans consist of our 2006 Equity Incentive Plan, under which our
      board of directors is authorized to issue options or other rights to acquire
      up
      to 4,000,000 shares of our common stock. The shares of common stock underlying
      awards granted under the 2006 Equity Incentive Plan include options to acquire
      1,604,000 shares of common stock. Options granted under the 2006 Equity
      Incentive Plan entitle the grantee, upon exercise, to purchase a specified
      number of shares from us at a specified exercise price per share. The exercise
      price for shares of common stock covered by an option cannot be less than the
      fair market value of the common stock on the date of grant unless we agree
      otherwise at the time of the grant. The board of directors will determine the
      period of time during which an option may be exercised, except that no option
      may be exercised more than ten years after the date of grant.





Our
      stockholders approved and adopted the 2006 Equity Incentive Plan on June 9,
      2006. Through December 31, 2006, our board of directors has granted stock
      options to acquire 1,604,000 shares of our common stock under the 2006 Equity
      Incentive Plan, at a weighted average exercise price of $1.90 per
      share.





During
      the past three years no unregistered securities under the Securities Act have
      been sold by the Company.





During
      the quarter ended December 31, 2006 we did not repurchase any shares as part
      of
      any publicly announced plans or programs or otherwise.




25


**ITEM
      6.**  **MANAGEMENT’S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS**





**Management’s
      Plan of Operation and Discussion and Analysis of Financial Condition and Results
      of Operations**





We
      are a
      development stage company that has been engaged in product development and
      pre-operational activities since its formation and have no operating history
      as
      a producer of ethanol. We have had no revenues since our inception. We are
      planning to engage in the business of constructing, owning and operating fuel
      grade ethanol plants in the Midwest corn-belt. The ethanol expected to be
      produced by the plants is intended to be used by refineries or blenders and
      ultimately blended with gasoline fuel for internal combustion engines.
      Additionally, we anticipate that the plants will be designed to produce dried
      distilled grains (DDGs), which are used in the manufacture of various animal
      feeds, and carbon dioxide.





We
      intend
      to complete permitting for three corn-based ethanol plants by mid-year of 2007
      and anticipate opening these plants for commercial production by late 2008
      through the first half of 2009 (the “Plants”). Where the railroads
      support the loading of unit trains, we expect each plant to load a unit train
      of
      ethanol approximately every nine days, acting as a consistent pipeline to the
      end blender or refinery, and to load a unit train of DDGs approximately once
      a
      week.





We
      have
      earned no revenues to date and our current capital and other existing resources
      will be sufficient only to provide a limited amount of working capital. We
      will
      require additional capital within the next twelve months to implement our
      business plans and may be unable to obtain the additional capital.





Our
      business strategy and anticipated competitive advantage is to produce ethanol
      at
      the lowest cost by:





·
            Biomass
                fired plants for distillation energy as compared to natural gas fired
                plants. No supply contracts for biomass or natural gas have been
                secured
                at this time.


·
            Significant
                economies of scale with identical plants each producing greater than
                110
                million gallons of ethanol per
                year.


·
            Unit
                train economics whereby both ethanol and DDGs are shipped in unit
                trains
                with dedicated power compared to single car
                shipments.


·
            Lowest
                cost producer status by way of spreading more fixed costs over more
                gallons, using biomass, and operating the plant with similar labor
                requirements as a 50 million gallon
                plant.





Our
      ability to continue as a going concern is dependent upon obtaining the necessary
      financing to acquire, construct, or enter into other venture activities and
      generate profitable operations from our ethanol facilities in the future. Our
      financial statements as at and for the period ended December 31, 2006 have
      been
      prepared on a going concern basis, which contemplates the realization of assets
      and the settlement of liabilities and commitments in the normal course of
      business. We expect to incur substantial expenditures to further our capital
      investment programs and our available cash on hand may not be sufficient to
      satisfy our current obligations and meet our capital investment
      objectives.





26


To
      address our ability to continue as a going concern, we intend to raise
      additional capital through the sale and issuance of equity shares and debt
      financing over the next twelve months. We also plan to expand our production,
      capacity, and product development and distribution opportunities using
      additional capital raised and cash provided by future operating
      activities.





We
      had no
      ethanol operations in the fourth quarter of 2006, and therefore no operating
      or
      material capital expenditures for the period. General and administrative
      expenditures for the twelve months ended December 31, 2006 totaled $2,565,946.
      During the period from inception to December 31, 2006, we funded our operating
      expenditures from cash balances which were received from our private offering
      of
      securities in June, 2006. Our cash balance at December 31, 2006 was
      $304,266.





The
      Plants will require that we raise approximately $750 million in additional
      financing in order to implement our business plan and we may be unable to obtain
      the additional capital or secure the financing on commercially viable terms.
      In
      addition to the Plants mentioned above, we intend to pursue new ventures,
      possible acquisitions and development of additional Greenfield plants that
      may
      add ethanol production and distribution opportunities. There is no assurance
      these additional opportunities will be available, or if we participate in
      additional opportunities, that those opportunities will be successful. These
      potential new business opportunities will require equity and/or debt financing
      and there can be no assurance we will be able to obtain the capital or secure
      the financing on commercially viable terms.





The
      following describes our current business plan, including a summary of our plans
      to build ethanol plants in Iowa and Illinois, our ability to satisfy our cash
      requirements, and our need to raise additional funds over the next
      year.





27


·
            On
                August 15, 2006, we announced our plans to build a 110-million gallon
                ethanol plant in Boone County, Iowa, adjacent to a railroad line.
                We have
                begun the permitting process for the Boone County plant through the
                Iowa
                Department of Natural Resources, and anticipate that the plant will
                be
                operational late in 2008. The cost of this ethanol plant is expected
                to be
                approximately $275 million. This plant will be funded from additional
                financing, for which we currently have no
                commitments.


·
            On
                August 21, 2006, we announced our plans to build a 110-million gallon
                ethanol plant in Kankakee, Illinois. The plant’s location is expected to
                be adjacent to the Canadian National/Illinois Central railroad line
                and
                abutting Interstate 57, which we anticipate will facilitate rail
                and truck
                transportation of the product from the facility. Construction on
                the
                Kankakee plant is expected to begin in the summer of 2007, and we
                anticipate that the plant will be operational in the first half of
                2009.
                The cost of this ethanol plant is expected to be approximately $255
                million. This plant will be funded from additional financing, for
                which we
                currently have no commitments.


·
            On
                October 23, 2006, we announced our plans to build a 110-million gallon
                ethanol plant in Greenville, Illinois. The plant’s location is expected to
                be adjacent to the CSX and BNSF main railroad line served by the
                Illinois
                Western Railroad. The location is also within five miles of Interstate
                70
                and within 30 minutes of Interstate 55. For this plant, we have optioned
                100 acres of land at the John W. Kelsey Business and Technology Park.
                We
                have begun the permitting process for this
                plant.


·
            Our
                business plan calls for the operation of biomass-fired plants for
                distillation energy, rather than natural gas-fired plants. We believe
                that
                the use of biomass-fired plants presents significant cost savings
                over the
                use of natural gas-fired plants.


·
            We
                plan to operate a number of identical plants, each producing a planned
                110
                million gallons of ethanol per year, thereby achieving significant
                economies of scale to our business. We believe that the use of identical
                plants will result in consistent and predictable production. All
                of our
                planned ethanol plants will be situated to take advantage of railroad
                and
                interstate highway access. In addition, we plan to locate our plants
                in
                the “cornbelt” of the Midwestern United States, to be near a major source
                of our raw material inputs.


·
            We
                plan to continue to evaluate acquisition, joint venture, and construction
                activities. If we successfully complete acquisitions, such acquisitions
                may provide additional cash flow which may allow us to expand our
                activities and capabilities, and advance our ethanol production
                opportunities.





As
      of
      December 31, 2006, we had seven full time employees who are responsible for
      companywide management, marketing, project management, logistics and
      administration. If we are successful in obtaining financing, thus allowing
      us to
      execute the business plan, we anticipate an increase in employees of up to
      25
      full time equivalents by the end of 2007.





We
      have
      not entered into any commodity derivative arrangements or hedging transactions.
      We may, however, enter into such transactions in conjunction with future
      financings.




We
      anticipate an increase in general and administrative expenses to approximately
      $180,000 per month in the first half of 2007.





**Off-Balance
      Sheet Arrangements**





We
      have
      no off-balance sheet arrangements.





28


**ITEM
      7.**  **FINANCIAL
      STATEMENTS**





**ALTERNATIVE
      ENERGY SOURCES, INC.**





**ALTERNATIVE
      ENERGY SOURCES, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**Page****Consolidated
                Financial Statements for the period beginning May 10, 2006, (Inception)
                to
                December 31, 2006:**Report
                of Independent Registered Public Accounting Firm
            
            
            F-2Consolidated
                Balance Sheet
            
            
            F-3Consolidated
                Statement of Operations
            
            
            F-4Consolidated
                Statement of Stockholders’ Equity
            
            
            F-5Consolidated
                Statement of Cash Flows
            
            
            F-6Notes
                to the Consolidated Financial Statements
            
            
            F-8





F-1


**BAGELL,
        JOSEPHS, LEVINE & COMPANY, L.L.C.**
 Certified
        Public Accountants
 
 200
        Haddonfield Berlin Road, Suite 402
 Gibbsboro,
        New Jersey 08026-1239
 (856)
        346-2828 Fax (856) 346-2882


**REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 Board
        of Directors and Stockholders
 Alternative
        Energy Sources, Inc.
 310
        West 20th Street
 Kansas
        City, MO 64108
 
 
 We
        have
        audited the accompanying consolidated balance sheet of Alternative Energy
        Sources, Inc., (the “Company”), a development stage enterprise, as of December
        31, 2006, and the related consolidated statements of operations, stockholders’
equity, and cash flows for the period May 10, 2006 (inception) to December
        31,
        2006. These financial statements are the responsibility of the Company's
        management. Our responsibility is to express an opinion on these financial
        statements based on our audit.
 
 We
        conducted our audit 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. The Company is not required
        to
        have, nor were we engaged to perform, an audit of its internal control over
        financial reporting. Our audit included consideration of internal control
        over
        financial reporting as a basis for designing audit procedures that are
        appropriate in the circumstances, but not for the purpose of expressing an
        opinion on the effectiveness of the Company’s internal control over financial
        reporting. Accordingly, we express no such opinion. An audit also includes
        examining, on a test basis, evidence supporting the amounts and disclosures
        in
        the financial statements, assessing the accounting principles used and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audit provides 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 Alternative Energy Sources,
        Inc., a development stage enterprise, as of December 31, 2006, and the results
        of its operations and its cash flows for the period May 10, 2006 (inception)
        to
        December 31, 2006 in conformity with accounting principles generally accepted
        in
        the United States of America.
 
 The
        accompanying financial statements have been prepared assuming the Company
        will
        continue as a going concern. As discussed in Note 2 to the financial statements,
        the Company is currently in the development stage, and there is no guarantee
        whether the Company will be able to generate revenue or raise capital to
        support
        current operations and generate anticipated sales. These matters raise
        substantial doubt about the Company’s ability to continue as a going concern.
        Management’s plan in regard to these matters is also described in Note 2. The
        financial statements do not include any adjustments that might result from
        the
        outcome of this uncertainty.
  
 /s/
        BAGELL, JOSEPHS, LEVINE & COMPANY, L.L.C.
 Bagell,
        Josephs, Levine & Company, L.L.C.
 Gibbsboro,
        NJ 08026
 
 March
        22,
        2007




AMERICAN
        INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (AICPA)
 CENTER
        FOR
        PUBLIC COMPANY AUDIT FIRMS (CPCAF)
 NEW
        JERSEY
        SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS
 PENNSYLVANIA
        INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
 FLORIDA
        STATE BOARD OF ACCOUNTANCY




F-2


**ALTERNATIVE
      ENERGY SOURCES, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**CONSOLIDATED
      BALANCE SHEET**


**DECEMBER
      31, 2006**


**ASSETS**Current
              AssetsCash-Unrestricted
            
            $
            304,266Cash
                and cash equivalents -Restricted
            
            
            622,079Investments
            
            
            6,800,000Prepaid
                expenses
            
            
            718,433Total
                Current Assets
            
            
            8,444,778Property
                and equipment, net
            
            
            33,947Other
                assets
            
            
            592,954TOTAL
                ASSETS
            
            $
            9,071,679**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                LiabilitiesAccounts
                payable
            
            $
            103,930Accrued
                liabilities
            
            
            99,421TOTAL
                LIABILITIES
            
            $
            203,351Commitments
                and ContingenciesStockholders’
                EquityCommon
                stock, $.0001 par value, 75,000,000shares
                authorized, 40,500,009 shares issuedand
                outstanding
            
            
            4,050Additional
                paid-in capital
            
            
            11,212,839Accumulated
                deficit
            
            
            (2,348,561
            )TOTAL
                STOCKHOLDERS’ EQUITY
            
            
            8,868,328TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            9,071,679


**See
      accompanying notes to the consolidated financial statements.**


F-3


**ALTERNATIVE
      ENERGY SOURCES, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**CONSOLIDATED
      STATEMENT OF OPERATIONS**


**For
      the period beginning May 10, 2006 (Inception) to December 31, 2006 with**


**Cumulative
      Totals Since Inception**




May
                10, 2006
              to
              December
                31, 2006
            
            
            2006
              Cumulative
                Totals Since InceptionOperating
                Revenues
            
            $
            0
            
            $
            0Cost
                of Sales
            
            
            0
            
            
            0Gross
                Profit
            
            
            0
            
            
            0General
                and Administrative Expenses
            
            
            2,565,946
            
            
            2,565,946Operating
                Loss
            
            
            (2,565,946
            )
            
            (2,565,946
            )Investment
                and Other Income
            
            
            218,514
            
            
            218,514Interest
                Expense
            
            
            (1,129
            )
            
            (1,129
            )Loss
                Before Income Tax
            
            
            (2,348,561
            )
            
            (2,348,561
            )Provision
                for Income Taxes
            
            
            0
            
            
            0Net
                Loss
            
            $
            (2,348,561
            )
            $
            (2,348,561
            )Net
                Loss per share:Basic
                and diluted
            
            $
            (0.06
            )
            $
            (0.06
            )Weighted
                Average Number of Shares OutstandingBasic
                and diluted
            
            
            40,500,009
            
            
            40,500,009





**See
      accompanying notes to the consolidated financial
      statements.**


F-4


**ALTERNATIVE
      ENERGY SOURCES, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**CONSOLIDATED
      STATEMENT OF STOCKHOLDERS’ EQUITY**


**For
      the period beginning May 10, 2006 (Inception) to December 31,
      2006**







Number
                of Shares
            
            
            Amount
            
            
            Additional
                Paid-in Capital
            
            
            Accumulated
                Deficit
            
            
            Subscription
              Receivable
            
            
            Total
                Stockholders
              EquityBalance
                at May 10, 2006
            
            
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0Issuance
                of common stock
            
            
            12,900,000
            
            
            1,290
            
            
            710
            
            
            0
            
            
            (2,000
            )
            
            0Collection
                of subscription receivable
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            2,000
            
            
            2,000Offering
                of 12M units, issued for cash, net of fees of $1,554,499
            
            
            12,600,000
            
            
            1,260
            
            
            11,044,241
            
            
            0
            
            
            0
            
            
            11,045,501Stock
                based compensation expense
            
            
            0
            
            
            0
            
            
            169,388
            
            
            0
            
            
            0
            
            
            169,388Stock
                retained by originalStockholders
                prior to reverse merger
            
            
            15,000,009
            
            
            1,500
            
            
            (1,500
            )
            
            0
            
            
            0
            
            
            0Other
                comprehensive income:Net
                unrealized gains on short-term investments
            
            
            0
            
            
            0
            
            
            0
            
            
            
            
            
            0Net
                loss
            
            
            0
            
            
            0
            
            
            0
            
            
            (2,348,561
            )
            
            0
            
            
            (2,348,561
            )Balance
                at December 31, 2006
            
            
            40,500,009
            
            $
            4,050
            
            $
            11,212,839
            
            $
            (2,348,561
            )
            $
            0
            
            $
            8,868,327





**See
      accompanying notes to the consolidated financial statements.**


F-5


**ALTERNATIVE
      ENERGY SOURCES, INC. AND SUBSIDIARY**


**(A
      DEVELOPMENT STAGE COMPANY)**


**CONSOLIDATED
      STATEMENT OF CASH FLOWS**


**For
      the period beginning May 10, 2006 (Inception) to December 31, 2006 with
      Cumulative Totals Since Inception**





May
                10, 2006
              to
              December
                31, 2006
            
            2006
              Cumulative
                Totals Since Inception****CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                loss
            
            $
            (2,348,561
            )
            $
            (2,348,561
            )Adjustments
                to reconcile net loss to net cash used in operating activities:Depreciation
            
            
            3,891
            
            
            3,891Stock
                based compensation expense
            
            
            169,388
            
            
            169,388Unrealized
                gains on short-term investments
            
            
            0
            
            
            0Excess
                tax benefits from share-based payment arrangements
            
            
            (59,286
            )
            
            (59,286
            )Changes
                in assets and liabilities:Prepaid
                expenses
            
            
            (718,443
            )
            
            (718,443
            )Accounts
                payable
            
            
            103,930
            
            
            103,930Accrued
                liabilities
            
            
            99,421
            
            
            99,421Net
                cash (used) in operating activities
            
            
            (2,749,651
            )
            
            (2,749,651
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Additions
                to property and equipment
            
            
            (37,837
            )
            
            (37,837
            )Deposits
            
            
            (375,594
            )
            
            (375,594
            )Capitalized
                Project Costs
            
            
            (217,000
            )
            
            (217,000
            )Purchase
                of investments
            
            
            (11,250,000
            )
            
            (11,250,000
            )Redemption
                of investments
            
            
            4,450,000
            
            
            4,450,000Restrictions
                on Investments
            
            
            (622,079
            )
            
            (622,079
            )Net
                cash (used) in investing activities
            
            
            (8,052,870
            )
            
            (8,052,870
            )





F-6


CASH
                FLOWS FROM FINANCING ACTIVITIES:Issuance
                of common stock
            
            
            2,000
            
            
            2,000Net
                proceeds from private placement offering
            
            
            11,045,501
            
            
            11,045,501Excess
                tax benefits from share-based payment arrangements
            
            
            59,286
            
            
            59,286Net
                cash provided by financing activities
            
            
            11,106,787
            
            
            11,106,787Net
                increase in cash and cash equivalents
            
            
            304,266
            
            
            304,266Cash
                and cash equivalents, beginning of period
            
            
            0
            
            
            0Cash
                and cash equivalents, end of period
            
            $
            304,266
            
            $
            304,266Supplemental
                disclosure of cash flows information:Cash
                paid during the quarter for:Interest
            
            $
            0
            
            $
            0Income
                taxes
            
            $
            0
            
            $
            0





**See
      accompanying notes to the consolidated financial statements.**


F-7


**Alternative
      Energy Sources, Inc.**


**Notes
      to the Consolidated Financial Statements**





NOTE
      1 -
      NATURE OF BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION





Alternative
      Energy Sources, Inc. (“we”, “us” or “our”) is a development stage company which
      plans to engage in the business of constructing, owning and operating fuel
      grade
      ethanol plants. The ethanol expected to be produced by the plants is intended
      to
      be used by refineries and ultimately blended with gasoline fuel for internal
      combustion engines. Additionally, we anticipate that the plants will be designed
      to produce dried distilled grains, which are used in the manufacture of various
      animal feeds. Our operations will substantially be the operations of Beemer
      Energy, Inc., our wholly-owned subsidiary.





During
      the twelve months ended December 31, 2006 we formed a wholly-owned subsidiary,
      Beemer Acquisition Corporation to serve as a vehicle to effect a merger with
      Beemer Energy, Inc., a privately held corporation.





On
      June
      19, 2006, Beemer Acquisition Corporation (“BAC”) entered into an Agreement and
      Plan of Merger and Reorganization with Beemer Energy, Inc., (“BEI”) a privately
      held Delaware corporation, whereby, the holders of BEI’s issued and outstanding
      capital stock before the merger surrendered all of their issued and outstanding
      capital stock to us in exchange for 12,900,000 shares of our common stock.
      Concurrently with the consummation of the merger, we closed a private offering
      of our common stock and warrants to purchase our common stock. The shareholders
      of Alternative Energy Sources, Inc. prior to the merger retained 15,000,000
      shares of our common stock. As a result of the merger and the offering, the
      shareholders of Alternative Energy Sources, Inc. prior to the merger own
      approximately 37% of the issued and outstanding shares of common stock and
      the
      former shareholders of BEI, investors and a finder that received shares of
      common stock in connection with offering own approximately 63% of the issued
      and
      outstanding shares of common stock.





The
      above
      transaction has been accounted for as a reverse merger (recapitalization) with
      BEI being deemed the accounting acquirer and BAC being deemed the legal
      acquirer. Accordingly, the historical financial information presented in the
      financial statements is that of BEI (since May 10, 2006, date of BEI’s
      inception) as adjusted to give effect to any difference in the par value of
      the
      issuer’s and the accounting acquirer’s stock with an offset to additional paid
      in capital. The basis of the assets and liabilities of BEI, the accounting
      acquirer, has been carried over in the recapitalization.





F-8


These
      consolidated financial statements have been prepared in accordance with
      generally accepted accounting principles in the United States of America
      (“GAAP”). The preparation of financial statements in accordance with GAAP
      requires the use of estimates and assumptions that affect the reported amounts
      of assets and liabilities and disclosures of contingent assets and liabilities
      at the date of the consolidated financial statements, and revenues and expenses
      during the reporting period.





NOTE
      2 -
      GOING CONCERN





We
      are
      currently a development stage enterprise. All losses accumulated since the
      inception of business have been considered as part of our development stage
      activities.





The
      accompanying financial statements have been prepared on the basis that we will
      continue as a going concern, which assumes the realization of assets and the
      satisfaction of liabilities in the normal course of business. Since inception
      we
      have been engaged in product development and pre-operational activities and
      have
      not generated any revenue. During 2006 we announced plans to construct three
      ethanol plants, one in Iowa and two in Illinois. On August 15, 2006 we announced
      our plans to build a 110-million gallon per year ethanol plant in Boone County
      Iowa, and anticipate that the plant will be operational by late 2008. On August
      21, 2006 we announced plans to build a 110-million gallon per year ethanol
      plant
      in Kankakee Illinois and also anticipate that the plant will be
      operational in the first half of 2009. On October 23, 2006 we
      announced plans to construct a plant in Greenville, Illinois and plan to have
      this plant operational in the first half of 2009.





NOTE
      3 -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





This
      summary of significant accounting policies of the Company is presented to assist
      in understanding the Company’s consolidated financial statements.  The
      financial statements and notes are representations of the Company’s management
      who are responsible for their integrity and objectivity.  These accounting
      policies conform to accounting principles generally accepted in the United
      States and have been consistently applied in the preparation of the financial
      statements.  The following policies are considered to be
      significant.




Principles
      of Consolidation and Basis of Presentation





The
      consolidated financial statements include the accounts of the Company and its
      wholly owned subsidiary, Beemer Energy Inc. All intercompany accounts have
      been
      eliminated.


Development
        Stage Company
  The
        Company is considered to be in the development
        stage as defined in Statement of Financial Accounting Standards (SFAS) No.
        7,
“Accounting and Reporting by Development Stage Enterprises” as interpreted by
        the Securities and Exchange Commission. The Company is devoting substantially
        all of its efforts to the development of its business plan.





F-9


Use
      of
      Estimates





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





Cash
      and Cash Equivalents





We
      consider all highly liquid investments purchased with a maturity of less than
      three months to be cash equivalents. Cash equivalents are stated at cost, which
      approximates fair value.





Restrictions
      on Cash





All
      restrictions on cash are properly disclosed and restricted amounts are
      appropriately segregated from other cash items in accordance with Statement
      of
      Financial Accounting Standards No. 5. As of December 31, 2006 restricted cash
      totaled $622,079 to collateralize an irrevocable letter of credit held as
      security deposit for office space. This is per the lease agreement with Broadway
      Properties, LLC.





Concentration
      of Credit Risk





As
      of
      December 31, 2006 our cash and cash equivalents are maintained in two financial
      institutions, First National Bank and UBS Financial Services, Inc. The balance
      of cash held in First National Bank is insured by the Federal Deposit Insurance
      Corporation up to $100,000. The balance of cash and cash equivalents in the
      UBS
      Financial Services, Inc. account is not insured. At December 31, 2006, our
      uninsured cash and cash equivalent balance totaled approximately $ 826,000.





Investments





In
      accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
      “Accounting for Certain Investments in Debt and Equity Securities”, securities
      are classified into three categories: held-to-maturity, available-for-sale
      and
      trading. The Company’s investments consist of debt and equity securities
      classified as available-for-sale securities. Accordingly, they are carried
      at
      fair value in accordance with SFAS No. 115. Further, according to SFAS No.
      115
      the unrealized holding gains and losses for available-for-sales securities
      are
      excluded from earnings and reported, net of deferred income taxes, as a separate
      component of stockholders’ equity, unless the loss is classified as other than a
      temporary decline in market value.





Income
      Taxes





We
      account for income taxes under the Financial Accounting Standards Board of
      Financial Accounting Standards No. 109, “Accounting for Income Taxes”
(“Statement 109”). Deferred tax assets and liabilities are measured using
      enacted tax rates expected to apply to taxable income in the years in which
      those temporary differences are expected to be recovered or settled. Under
      Statement 109, the effect on deferred tax assets and liabilities of a change
      in
      tax rates is recognized in income in the period that includes the enactment
      date. There were no current or deferred income tax expenses or benefits due
      to
      our not having any material operations for the period ending December 31,
      2006.





F-10


Earnings
      (Loss) Per Share





Earnings
      (Loss) per common share represents the amount of earnings (loss) for the period
      available to each share of common stock outstanding during the reporting period.
      Diluted earnings (loss) per share reflects the amount of earnings (loss) for
      the
      period available to each share of common stock outstanding during the reporting
      period, while giving effect to all dilutive potential common shares that were
      outstanding during the period, such as common shares that could result from
      the
      potential exercise or conversion of securities into common stock. The
      computation of diluted earnings (loss) per share does not assume conversion,
      exercise, or contingent issuance of securities that would have an antidilutive
      effect on earnings (loss) per share.





As
      of
      December 31, 2006, potential future dilutive securities include 12,000,000
      shares issuable under outstanding warrants for a five year period at an exercise
      price of $2.00 per share, and 1,604,000 shares issuable under outstanding
      employee stock options.





Securities
      Issued for Services





We
      account for stock, stock options and stock warrants issued for non-employees
      services in accordance with EITF 96-18 “Accounting for Equity Instruments That
      Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling
      Goods or Services”. The fair value of the Company’s stock on the date of stock
      issuance or option grant is used and charged directly to expense and additional
      paid in capital. The Company determines the fair market value of options issued
      using the Black-Scholes Pricing Model.





Stock
      Based Compensation





We
      have
      adopted the provisions of Statement
      of Financial Accounting Standards (SFAS)
      123R, “share-based payment” which establishes accounting for equity instruments
      exchanged for employee services. Under the provisions of SFAS 123(R),
      share-based compensation cost is measured at the grant date, based on the fair
      value of the award, and is recognized as an expense over the employee’s
      requisite service period (generally the vesting period of the equity
      grant).





F-11


Fair
      Value of Financial Instruments





The
      carrying amounts of our financial instruments, including cash, investments,
      accounts payable and accrued liabilities, approximate their fair value as of
      December 31, 2006.





New
      Accounting Pronouncements





In
      February 2006, the Financial Accounting Standards Board (FASB) issued statement
      155, *Accounting
      for Certain Hybrid Financial Instruments - an amendment of FASB Statements
      no.
      133 and 140* .
      This
      statement resolves issues addressed in Statement 133 Implementation Issue no.
      D1
“Application of Statement 133 to Beneficial Interests in Securitized Financial
      Assets.” This implementation guidance indicated that entities could continue to
      apply guidance related to accounting for beneficial interests in paragraphs
      14
      and 362 of Statement 140, which indicate that any security that can be
      contractually prepaid or otherwise settled in such a way that the holder of
      the
      security would not recover substantially all of its recorded investment should
      be subsequently measured like investments in debt securities classified as
      available for sale or trading, and may not be classified as held to maturity.
      Also, Implementation issue D1 indicated that holders of beneficial interests
      in
      securitized financial assets that are not subject to paragraphs 14 and 362
      of
      Statement 140 are not required to apply Statement 133 to those beneficial
      interests, pending further guidance. Statement 155 eliminates the exemption
      from
      Statement 133 for interests in securitized financial assets. It also allows
      the
      preparer to elect fair value measurement at acquisition, at issuance or when
      a
      previously recognized financial instrument is subject to a remeasurement event.
      SFAS 155 is effective for all financial instruments acquired or issued after
      the
      beginning of the fiscal year that begins after September 15 2006. We do not
      expect the adoption of this statement will have a material impact on our results
      of operations or financial position.





In
      March
      2006, the FASB issued statement 156, *Accounting
      for Servicing of Financial Assets - an amendment of FASB Statement No.
      140* .
      Under
      statement 140, servicing assets and servicing liabilities are amortized over
      the
      expected period of estimated net servicing income or loss and assessed for
      impairment or increased obligation at each reporting date. This statement
      requires that all separately recognized servicing assets and servicing
      liabilities be initially measured at fair value, if practicable. Subsequent
      measurement of servicing assets and servicing liabilities at fair value is
      permitted, but not required. If derivatives are used to mitigate risks inherent
      in servicing assets and servicing liabilities, those derivatives must be
      accounted for at fair value. Servicing assets and servicing liabilities
      subsequently measured at fair value must be presented separately in the
      statement of financial position and there are additional disclosures for all
      separately recognized servicing assets and servicing liabilities. SFAS 156
      is
      effective for transactions entered into after the first fiscal year that begins
      after September 15 2006. We do not expect the adoption of this statement will
      have a material impact on our results of operations or financial
      position.





In
      June
      2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for
      Uncertainty in Income Taxes” which defines the threshold for recognizing the
      benefits of tax return positions in the financial statement as
“more-likely-than-not” to be sustained by the taxing authority. FIN 48 also
      prescribes a method for computing the tax benefit positions to be recognized
      in
      the financial statements.





F-12


In
      addition, FIN 48 provides guidance on derecognition, classification, interest
      and penalties, accounting in interim periods, disclosure, and transition. The
      Company is a development stage company and as such, deferred tax assets arising
      from net operation loss carryforwards were fully offset by a deferred tax
      valuation reserve resulting in no current or deferred income tax expenses or
      benefits for the period ended December 31, 2006. FIN 48 is effective for fiscal
      years beginning after December 15 2006.





In
      September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS
      157). SFAS 157 defines fair value, establishes a framework for using fair value
      to measure assets and liabilities, and expands disclosures about fair value
      measurements. This statement applies whenever other statements require or permit
      assets or liabilities to be measured at fair value. SFAS 157 is effective for
      fiscal years beginning after November 15, 2007 and will be effective for us
      in
      the first quarter of fiscal 2008. We do not expect the adoption of this
      statement will have a material impact on our results of operations or financial
      position.





In
      September 2006, the Securities and Exchange Commission (SEC) issued Staff
      Accounting Bulletin (SAB) No. 108, Quantifying Financial Misstatements (SAB
      108), which expresses the Staff’s views regarding the process of quantifying
      financial statement misstatements. Registrants are required to quantify the
      impact of correcting all misstatements, including both the carryover and
      reversing effects of prior year misstatements, on the current year financial
      statements. The financial statements would require adjustment when either
      approach results in quantifying a misstatement that is material, after
      considering all relevant quantitative and qualitative factors. SAB 108 is
      effective for financial statements covering the first fiscal year ending after
      November 15, 2006, and will be effective for us in the first quarter of fiscal
      2007. We do not expect the adoption of this statement will have a material
      impact on our results of operations or financial position.





In
      September 2006 the FASB issued SFAS No. 158, Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans — an amendment of FASB Statement
      No. 87, 88, 106 and 132(R), (“FAS 158”) . This Standard requires recognition of
      the funded status of a benefit plan in the statement of financial position.
      The
      Standard also requires recognition in other comprehensive income certain gains
      and losses that arise during the period but are deferred under pension
      accounting rules, as well as modifies the timing of reporting and adds certain
      disclosures. FAS 158 provides recognition and disclosure elements to be
      effective as of the end of the fiscal year after December 15, 2006 and
      measurement elements to be effective for fiscal years ending after December
      15,
      2008. The Company does not have a defined benefit pension plan, and accordingly
      SFAS 158 will not have an impact on its financial condition, results of
      operations, or financial condition.





NOTE
      4 -
      STOCK BASED COMPENSATION





The
      Company’s 2006 Equity Incentive Plan (the “2006 Incentive Plan”) provides for
      the grant of stock options, stock appreciation rights, reload options and
      restricted shares, to officers and employees of the Company and consultants
      and
      advisors to the Company. There were 4,000,000 common shares initially available
      under the 2006 Incentive Plan. In any calendar year, no participant may be
      granted more than 200,000 incentive stock options, or more than $100,000 worth
      of incentive stock options.





F-13


*Stock
      options* —
Stock
      options have a ten-year life and vest ratably over three to four years beginning
      on the first anniversary of the date of the grant. The option holder has no
      voting or dividend rights. The grant prices are equal to the market prices
      at
      date of grant. The Company records the expense of the stock options over the
      related vesting period. The options were valued using the Black-Scholes
      option-pricing model at the date of grant using the following
      assumptions:





Expected
                Volatility
            
            
            57.9
            %Expected
                term (in years)
            
            
            6.0-6.25Expected
                dividends
            
            
            0Risk-free
                rate of return (weighted average)
            
            
            4.87Grant
                date fair value—500,000 options
            
            
            $1.00Grant
                date fair value—1,104,000 options
            
            
            $2.19
                  to $2.58Expected
                forfeitures
            
            
            0





Because
      the Company does not have specific historical or implied volatility information
      available due to its development stage nature, expected volatility is based
      on
      the historical, or implied volatility of similar entities with publicly
      available share or option prices. This methodology is in accordance with
      Securities and Exchange Commission’s Staff Accounting Bulletin (SAB) No. 107 -
“D. Certain Assumptions Used in Valuation Methods.” The expected term represents
      the estimated average period of time that the options remain outstanding using
      the “simplified” method, also in accordance with the Securities and Exchange
      Commission SAB No.107. The risk-free rate of return reflects the weighted
      average interest rate offered for zero coupon treasury bonds over the expected
      term of the options.





A
      summary
      of the stock option activity for the twelve months ended December 31, 2006,
      is
      listed below:


**Weighted-
                  Average****Number
                  of**
              
              **Weighted-
                  Average**
              
              **Remaining
                  Contractual****Options**
              
              **Exercise
                  Price**
              
              **Term
                  (years)**Outstanding
                    at May 10, 2006(date of inception)
              
              
              -
              
              
              -
              
              
              -Granted
              
              
              1,449,000
              
              $
              1.87
              
              
              9.9Exercised
              
              
              -
              
              
              -
              
              
              -Forfeited
              
              
              -
              
              
              -
              
              
              -Outstanding
                    at December 31,2006
              
              
              1,604,000
              
              $
              1.90
              
              
              9.6Exercisable
                    at December 31,2006
              
              
              -
              
              
              -
              
              
              -
  F-14


As
      of
      December 31, 2006 there was $1,645,186 of total unrecognized compensation cost
      related to the outstanding stock options that will be recognized over
      straight-line vesting periods of three or four years.





NOTE
      5 -
      STOCKHOLDERS’ EQUITY





Private
      Placement Offering





Concurrently
      with the consummation of the Merger on the Closing Date, the Company closed
      a
      private offering of 12,000,000 units ,
      each
      unit consisting of one share of the Company’s common stock and a warrant to
      acquire one share of common stock for five years at an exercise price of $2.00
      per share. On
      the
      closing date, the investors in the offering collectively purchased 12,000,000
      units for total consideration of $12,000,000, pursuant to Subscription
      Agreements entered into by the Company and each investor in the offering. The
      proceeds were allocated between the common stock and the warrants based on
      their
      respective relative fair values.





Offering
      costs consisted of 600,000 shares of common stock valued at $600,000, which
      represented their fair value on the date of issuance. Additionally, we paid
      $954,499 in legal and other professional fees in connection with the
      offering.





All
      securities issued in connection with the offering are restricted securities
      and
      will be subject to all applicable resale restrictions specified by federal
      and
      state securities laws.





Pursuant
      to a Registration Rights Agreement among the Company and the investors in the
      offering, the Company committed to file a registration statement covering the
      common stock issued in connection with the offering, including the common stock
      underlying the warrants, within 120 days from the Closing Date. The Company
      filed the registration statement on October 11, 2006. The Company also committed
      to cause the registration statement to become effective within 120 days of
      its
      filing which was accomplished on February 12, 2007. In addition, the Company
      agreed to maintain the effectiveness of this registration statement through
      the
      first anniversary of the Closing Date and use its best efforts to maintain
      the
      effectiveness through the second anniversary of the date the registration
      statement is declared effective by the SEC or until the holding period of Rule
      144(k) promulgated under the Securities Act of 1933, as amended (the “Securities
      Act”), has been satisfied for the investors in this Offering with respect to all
      of their shares, whichever is earlier.





The
      Company has adopted View A from Issue Summary No. 1. and considers that the
      registration rights agreement and the warrants the Company has issued should
      be
      considered together as a unit and analyzed under Issue 00-19 of the Emerging
      Issue Task force (“Issue 00-19”). Since the maximum potential liquidated damages
      penalty payable by the Company in cash is less than a reasonable estimate of
      the
      difference in fair value between registered and unregistered share of our common
      stock, the combined instrument may be classified as equity under Issue
      00-19.





F-15


Common
      stock





A
      summary
      of the warrant activity for the period ended December 31, 2006 is set forth
      below:




WEIGHTEDAVERAGENUMBER
                  OF
              
              EXERCISEWARRANTS
              
              PRICEOutstanding
                    at May 10,2006 (date of inception)
              
              
              0
              
              $
              0Granted
              
              
              12,000,000
              
              
              2.00Exercised
              
              
              0
              
              
              0Canceled
                  or Expired
              
              
              0
              
              
              0Outstandingat
                  December 31, 2006
              
              
              12,000,000
              
              
              2.00


NOTE
      6 -
      COMMITMENTS AND CONTINGENCIES




Employment
      Agreements





The
      Company has entered into employment
      agreements with certain key personnel which provide for a base salary, yearly
      bonuses subject to the Company achieving certain target performance levels
      as
      set by the board, stock options under the 2006 Stock Option Plan and other
      benefits. Termination of the agreements may be made by either party with advance
      notice.





NOTE
      7 -
      LEASE COMMITMENTS





The
      Company leases a copier and an office facility under operating lease agreements
      with the following approximate future minimum rental commitments:





2007
            
            $
            31,0002008
            
            
            247,0002009
            
            
            247,0002010
            
            
            247,0002011
            
            
            246,000$
            1,018,000





F-16


The
      Company recognized rent expense related to the above leases of approximately
      $17,900 for the year ended December 31, 2006.





NOTE
      8 -
      INCOME TAXES





Components
      of deferred assets consisted of the following:





Deferred
                tax assetNet
                operating loss carryforward
            
            $
            939,000Less:
                Valuation allowance
            
            
            (939,000
            )Net
                deferred tax asset
            
            $
            0





The
      year
      to date net change in the valuation allowance was $939,000.





At
      December 31, 2006, the Company had approximately $2,349,000 of net operating
      loss carryforwards which expire in 2021.





F-17


**ITEM
      8.**  **CHANGE
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE**





On
      June
      19, 2006, the Company, Beemer Acquisition Corp., a wholly owned subsidiary
      of
      the Company, and Beemer Energy, Inc. entered into a Merger Agreement and Plan
      of
      Reorganization and consummated the merger of Beemer Acquisition Corp. with
      and
      into Beemer Energy, Inc. The merger resulted in Beemer Energy, Inc. becoming
      our
      wholly owned subsidiary. Following the merger, our management and business
      operations became substantially the management and business operations of Beemer
      Energy, Inc. before the merger.





Before
      the merger, our independent registered public accounting firm was Stark Winter
      Schenkein & Co. Because the merger was treated as a reverse acquisition for
      accounting purposes, future historical financial reports filed by us will be
      those of Beemer Energy, Inc., the accounting acquiror. Accordingly, our board
      of
      directors changed our independent registered public accounting firm from Stark
      Winter Schenkein & Co. to Bagell, Josephs, Levine & Company, LLC. Stark
      Winter Schenkein & Co. was dismissed as our independent registered public
      accounting firm on August 10, 2006, and Bagell, Josephs, Levine & Company,
      LLC was engaged as our independent registered public accounting firm on the
      same
      date.





The
      reports of Stark Winter Schenkein & Co. on our financial statements for the
      past two fiscal years did not contain an adverse opinion or a disclaimer of
      opinion and were not qualified or modified as to uncertainty, audit scope,
      or
      accounting principles, but did include an explanatory paragraph relating to
      our
      ability to continue as a “going concern.”





In
      connection with the audit of our financial statements for the past two fiscal
      years ended December 31, 2005 and 2004, and through the date of the dismissal,
      there were no disagreements with Stark Winter Schenkein & Co. on any matter
      of accounting principles or practices, financial statement disclosure, or
      auditing scope or procedure, which, if not resolved to the satisfaction of
      Stark
      Winter Schenkein & Co., would have caused Stark Winter Schenkein & Co.
      to make reference to the matter in its reports.





During
      the most recent fiscal year and through the date of the dismissal of Stark
      Winter Schenkein & Co., no information is required to be reported under Item
      304(a)(1)(iv)(B) or Regulation S-B. This change in accountants was disclosed
      in
      our Current Report on Form 8-K, filed with the SEC on August 15,
      2006.





**ITEM
      8A.**  **CONTROLS
      AND PROCEDURES**





**(a)**  **Evaluation
      of Disclosure Controls and Procedures**





The
      term
“disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e)
      of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This
      term refers to the controls and procedures of a company that are designed to
      ensure that information required to be disclosed by a company in the reports
      that it files under the Exchange Act is recorded, processed, summarized, and
      reported within the required time periods.





29


Our
      Chief
      Executive Officer and Chief Financial Officer evaluated the effectiveness of
      the
      design and operation of our disclosure controls and procedures as of the end
      of
      the period covered by this report as required by Rule 13a-15 of the Exchange
      Act. Based on their evaluation of our disclosure controls and procedures, they
      have concluded that as of the end of the period covered by this report our
      disclosure controls and procedures are effective in ensuring that material
      information required to be disclosed by us in the reports that we file or submit
      under the Exchange Act is recorded, processed, summarized, and reported within
      the time periods specified in the rules and forms of the SEC and that such
      information is accumulated and communicated to management as appropriate to
      allow timely decisions regarding required disclosure.





**(b)
      Changes in Internal Control over Financial Reporting**





No
      change
      in our internal control over financial reporting (as defined in Rules 13a-15(f)
      and 15d-15(f) under the Exchange Act) occurred during the period covered by
      this
      report that has materially affected, or is reasonably likely to materially
      affect, our internal control over financial reporting.





**ITEM
      8B.**  **OTHER
      INFORMATION**





None.


30


**PART
      III**





**ITEM
      9.**  **DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
      SECTION** **16(A) OF THE EXCHANGE ACT**





Information
      required by this Item 9 will be presented in the Company’s definitive proxy
      statement for its annual meeting of stockholders, which will be held on May
      10,
      2007, and is incorporated herein by reference.




**ITEM
      10.**  **EXECUTIVE
      COMPENSATION**





Information
      regarding executive compensation will be presented in the Company’s definitive
      proxy statement for its annual meeting of stockholders, which will be held
      on
      May 10, 2007, and is incorporated herein by reference.




**ITEM
      11.**  **SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
      RELATED** **STOCKHOLDER MATTERS**




Information
      regarding security ownership of certain beneficial owners and management and
      related stockholder matters will be presented in the Company’s definitive proxy
      statement for its annual meeting of stockholders, which will be held on May
      10,
      2007, and is incorporated herein by reference.





**ITEM
      12.**  **CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS**





Information
      regarding certain relationships, related party transactions and director
      independence will be presented in the Company’s definitive proxy statement for
      its annual meeting of stockholders, which will be held on May 10, 2007, and
      is
      incorporated herein by reference.





**ITEM
      13.**  **EXHIBITS**





The
      following exhibits are filed with or incorporated as part of this report as
      required by Item 601 of Regulation S-B:





*  Filed
      herewith.


31




**Exhibit
                No.**
            
            **Description**
            
            **Reference**2.1
            
            Agreement
                and Plan of Merger and Reorganization, dated as of June 19, 2006,
                by and
                between Alternative Energy Sources, Inc. a Delaware corporation,
                Beemer
                Acquisition Corp., a Delaware corporation, and Beemer Energy, Inc.,
                a
                Delaware corporation.
            
            Incorporated
                by reference to Exhibit 10.1 to the Current Report on Form 8-K filed
                with
                the Securities and Exchange Commission on June 23, 2006 (File No.
                000-51762).3.1
            
            Articles
                of Incorporation
            
            Previously
                filed as Exhibit 3.1 to the Company’s Form SB-2 filed on February 11,
                2003, registration number 333-103096, and is hereby incorporated
                into this
                filing by reference.3.2
            
            By-Laws
            
            Previously
                filed as Exhibit 3.2 to the Company’s Form SB-2 filed on February 11,
                2003, registration number 333-103096, and is hereby incorporated
                into this
                filing by reference.4.1
            
            Form
                of Warrant issued to the Investors in the Private Placement Offering,
                June
                19, 2006.
            
            Incorporated
                by reference to Exhibit 4.2 to the Current Report on Form 8-K filed
                with
                the Securities and Exchange Commission on June 23, 2006 (File No.
                000-51762).4.2
            
            Prospectus
                filed with the Securities and Exchange Commission that includes 12,600,000
                shares of common stock and 12,000,000 shares of common stock issuable
                upon
                the exercise of warrants.
            
            Incorporated
                by reference to Company’s Form SB-2 filed with the Securities and Exchange
                Commission on October 11, 2006.4.3
            
            Prospectus
                filed with the Securities and Exchange Commission that includes 12,600,000
                shares of common stock and 12,000,000 shares of common stock issuable
                upon
                the exercise of warrants.
            
            Incorporated
                by reference to Company’s Form SB-2/A filed with the Securities and
                Exchange Commission on December 21, 2006.




32


**Exhibit
                No.**
            
            **Description**
            
            **Reference**


10.1
            
            Form
                of Employment Agreement between the Company and John J. Holland dated
                August 16, 2006.
            
            Incorporated
                by reference to Exhibit 10.1 to the Current Report on Form 8-K filed
                with the Securities and Exchange Commission on August 22, 2006 (File
                No.
                000-51762).10.2
            
            Form
                of Subscription Agreement date June 19, 2006 by and between Alternative
                Energy Sources, Inc., Beemer Energy, Inc., and the investors in the
                Offering.
            
            Incorporated
                by reference to Exhibit 10.2 to the Current Report on Form 8-K filed
                with
                the Securities and Exchange Commission on June 23, 2006 (File No.
                000-51762).10.3
            
            Form
                of Registration Rights Agreement dated June 19, 2006 by and between
                Alternative Energy Sources, Inc. and the investors in the
                Offering.
            
            Incorporated
                by reference to Exhibit 10.3 to the Current Report on Form 8-K filed
                with
                the Securities and Exchange Commission on June 23, 2006 (File No.
                000-51762).10.4
            
            Form
                of Employment Agreement, dated June 19, 2006, by and between Alternative
                Energy Sources, Inc. and Mark A. Beemer.
            
            Incorporated
                by reference to Exhibit 10.4 to the Current Report on Form 8-K filed
                with
                the Securities and Exchange Commission on June 23, 2006 (File No.
                000-51762).10.5
            
            Form
                of Employment Agreement, dated June 19, 2006, by and between Alternative
                Energy Sources, Inc. and Lee L. Blank.
            
            Incorporated
                by reference to Exhibit 10.5 to the Current Report on Form 8-K filed
                with
                the Securities and Exchange Commission on June 23, 2006 (File No.
                000-51762).10.6
            
            Form
                of Lock-Up Agreement dated June 19, 2006 between Tompkins Capital
                Group
                and each of Mark A. Beemer and Lee L. Blank.
            
            Incorporated
                by reference to Exhibit 10.6 to the Current Report on Form 8-K filed
                with
                the Securities and Exchange Commission on June 23, 2006 (File No.
                000-51762).10.7
            
            Form
                of Agreement and Plan of Merger and Reorganization dated June 19,
                2006
                among Alternative Energy Sources, Inc., Beemer Acquisition Corp.
                and
                Beemer Energy, Inc.
            
            Incorporated
                by reference to Exhibit 10.6 to the Current Report on Form 8-K filed
                with
                the Securities and Exchange Commission on June 23, 2006 (File No.
                000-51762).




33
 
 **Exhibit
                  No.**
              
              **Description**
              
              **Reference**


10.8
            
            Form
                of Employment Agreement between the Company and Dr. John A. Ward
                dated
                September 20, 2006.
            
            Incorporated
                by reference to Exhibit 10.1 to the Current Report on Form 8-K filed
                with the Securities and Exchange Commission on September 25, 2006
                (File
                No. 000-51762).31.2
            
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                302 of
                the Sarbanes-Oxley Act of 2002. *32.1
            
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002. *32.2
            
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002. *





**ITEM
      14.**  **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**





Information
      regarding accounting fees and services will be presented in the Company’s
      definitive proxy statement for its annual meeting of stockholders, which will
      be
      held on May 10, 2007, and is incorporated herein by reference.





34





**SIGNATURES**





In
      accordance with the requirements of the Exchange Act, the registrant has caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




ALTERNATIVE
              ENERGY
              SOURCES, INC.Date: March
              30, 2007
            By:
            /s/ Mark
              A.
              BeemerMark
              A. BeemerChairman
              and Chief Executive Officer and Director





Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant in the
      capacities and on the dates indicated.





**Signature**
            
            **Title**
            
            **Date**/s/Mark
                A. Beemer
              Mark
                A. Beemer
            
            Chairman
                and Chief Executive Officer and Director
            
            March
                30, 2007/s/Lee
                L. Blank
              Lee
                L. Blank
            
            President,
                Chief Operating Officer and Director
            
            March
                30, 2007/s/John
                J. Holland
              John
                J. Holland
            
            Chief
                Financial Officer
            
            March
                30, 2007/s/W.
                Gordon Snyder
              W.
                Gordon Snyder
            
            Director
            
            March
                30, 2007/s/A.
                Michael Espy
              A.
                Michael Espy
            
            Director
            
            March
                30, 2007/s/John
                D. McNamara
              John
                D. McNamara
            
            Director
            
            March
                30, 2007/s/Douglas
                D. Wilner
              Douglas
                D. Wilner
            
            Director
            
            March
                30, 2007__
              James
                L. Spigarelli
            
            Director
            
            March
                __, 2007





35


**EXHIBIT
      INDEX**


**Exhibit
                  No.**
              
              **Description**
              
              **Reference**2.1
              
              Agreement
                  and Plan of Merger and Reorganization, dated as of June 19, 2006,
                  by and
                  between Alternative Energy Sources, Inc. a Delaware corporation,
                  Beemer
                  Acquisition Corp., a Delaware corporation, and Beemer Energy, Inc.,
                  a
                  Delaware corporation.
              
              Incorporated
                  by reference to Exhibit 10.1 to the Current Report on Form 8-K
                  filed with
                  the Securities and Exchange Commission on June 23, 2006 (File No.
                  000-51762).3.1
              
              Articles
                  of Incorporation
              
              Previously
                  filed as Exhibit 3.1 to the Company’s Form SB-2 filed on February 11,
                  2003, registration number 333-103096, and is hereby incorporated
                  into this
                  filing by reference.3.2
              
              By-Laws
              
              Previously
                  filed as Exhibit 3.2 to the Company’s Form SB-2 filed on February 11,
                  2003, registration number 333-103096, and is hereby incorporated
                  into this
                  filing by reference.4.1
              
              Form
                  of Warrant issued to the Investors in the Private Placement Offering,
                  June
                  19, 2006.
              
              Incorporated
                  by reference to Exhibit 4.2 to the Current Report on Form 8-K filed
                  with
                  the Securities and Exchange Commission on June 23, 2006 (File No.
                  000-51762).4.2
              
              Prospectus
                  filed with the Securities and Exchange Commission that includes
                  12,600,000
                  shares of common stock and 12,000,000 shares of common stock issuable
                  upon
                  the exercise of warrants.
              
              Incorporated
                  by reference to Company’s Form SB-2 filed with the Securities and Exchange
                  Commission on October 11, 2006.4.3
              
              Prospectus
                  filed with the Securities and Exchange Commission that includes
                  12,600,000
                  shares of common stock and 12,000,000 shares of common stock issuable
                  upon
                  the exercise of warrants.
              
              Incorporated
                  by reference to Company’s Form SB-2/A filed with the Securities and
                  Exchange Commission on December 21, 2006.
  36
 **Exhibit
                  No.**
              
              **Description**
              
              **Reference**
 10.1
              
              Form
                  of Employment Agreement between the Company and John J. Holland
                  dated
                  August 16, 2006.
              
              Incorporated
                  by reference to Exhibit 10.1 to the Current Report on Form 8-K filed
                  with the Securities and Exchange Commission on August 22, 2006
                  (File No.
                  000-51762).10.2
              
              Form
                  of Subscription Agreement date June 19, 2006 by and between Alternative
                  Energy Sources, Inc., Beemer Energy, Inc., and the investors in
                  the
                  Offering.
              
              Incorporated
                  by reference to Exhibit 10.2 to the Current Report on Form 8-K
                  filed with
                  the Securities and Exchange Commission on June 23, 2006 (File No.
                  000-51762).10.3
              
              Form
                  of Registration Rights Agreement dated June 19, 2006 by and between
                  Alternative Energy Sources, Inc. and the investors in the
                  Offering.
              
              Incorporated
                  by reference to Exhibit 10.3 to the Current Report on Form 8-K
                  filed with
                  the Securities and Exchange Commission on June 23, 2006 (File No.
                  000-51762).10.4
              
              Form
                  of Employment Agreement, dated June 19, 2006, by and between Alternative
                  Energy Sources, Inc. and Mark A. Beemer.
              
              Incorporated
                  by reference to Exhibit 10.4 to the Current Report on Form 8-K
                  filed with
                  the Securities and Exchange Commission on June 23, 2006 (File No.
                  000-51762).10.5
              
              Form
                  of Employment Agreement, dated June 19, 2006, by and between Alternative
                  Energy Sources, Inc. and Lee L. Blank.
              
              Incorporated
                  by reference to Exhibit 10.5 to the Current Report on Form 8-K
                  filed with
                  the Securities and Exchange Commission on June 23, 2006 (File No.
                  000-51762).10.6
              
              Form
                  of Lock-Up Agreement dated June 19, 2006 between Tompkins Capital
                  Group
                  and each of Mark A. Beemer and Lee L. Blank.
              
              Incorporated
                  by reference to Exhibit 10.6 to the Current Report on Form 8-K
                  filed with
                  the Securities and Exchange Commission on June 23, 2006 (File No.
                  000-51762).10.7
              
              Form
                  of Agreement and Plan of Merger and Reorganization dated June 19,
                  2006
                  among Alternative Energy Sources, Inc., Beemer Acquisition Corp.
                  and
                  Beemer Energy, Inc.
              
              Incorporated
                  by reference to Exhibit 10.6 to the Current Report on Form 8-K
                  filed with
                  the Securities and Exchange Commission on June 23, 2006 (File No.
                  000-51762).
  37
 
 **Exhibit
                    No.**
                
                **Description**
                
                **Reference**
 10.8
              
              Form
                  of Employment Agreement between the Company and Dr. John A. Ward
                  dated
                  September 20, 2006.
              
              Incorporated
                  by reference to Exhibit 10.1 to the Current Report on Form 8-K filed
                  with the Securities and Exchange Commission on September 25, 2006
                  (File
                  No. 000-51762).31.2
              
              Certification
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  302 of
                  the Sarbanes-Oxley Act of 2002. *32.1
              
              Certification
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002. *32.2
              
              Certification
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002. *
  38