---

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C.
20549

FORM 20-F

[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIESEXCHANGE ACT OF 1934

OR

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

For the fiscal year ended June 30, 2006

OR

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

For the transition period from __________________to_________________

OR

[ ] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIESEXCHANGE ACT OF 1934

Date of event requiring this shell company report
____________

Commission file number 000-50971

BLUE EARTH REFINERIES INC.(Exact name of Registrant as specified in its
charter)

Not Applicable(Translation of Registrant's name into
English)

British Virgin Islands(Jurisdiction of incorporation
or organization)

Suite 803, 8/F, Ruttonjee House, Dina Centre, 11 Duddell
Street, Central, Hong Kong, SAR, China(Address of office)

Copy of communications to: Virgil Z. Hlus, Esq.Clark
Wilson LLP Barristers and Solicitors Suite 800  885 West Georgia Street
Vancouver, British Columbia, Canada V6C 3H1 Telephone: 604-687-5700
Facsimile: 604-687-6314

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ii

Securities registered or to be registered pursuant to Section 12(b)
  of the Act.

|Title of Class | Name of each exchange on which registered
|-------------- | -----------------------------------------
|Not Applicable | Not Applicable                           

Securities registered or to be registered pursuant to Section
  12(g) of the Act.

Ordinary Shares(Title of Class)

Securities for which there is a reporting obligation pursuant
  to Section 15(d) of the Act.

Not Applicable(Title of Class)

Indicate the number of outstanding shares of each of the issuer's
  classes of capital or common stock as of the close of the period covered by
  the annual report.

There were 15,142,836 ordinary shares outstanding as at June
  30, 2006.

Indicate by check mark if the registrant is a well-known seasoned
  issuer, as defined in Rule 405 of the Securities Act.

[ ] YES [X] NO

If this report is an annual or transition report, indicate by
  check mark if the registrant is not required to file reports pursuant to Section
  13 or 15(d) of the Securities Act of 1934.

[X] YES [ ] NO

Note  Checking the box above will not relieve any registrant
  required to file reports to Section 13 or 15(d) of the Securities Exchange Act
  of 1934 from their obligations under those Sections.

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

[X] YES [ ] NO

Indicate by check mark whether the registrant is a large accelerated
  filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated
  filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check
  one):

Large Accelerated filer [ ] Accelerated filer [ ] Non-accelerated
  filer [ X]

Indicate by check mark which financial statement item the registrant
  has elected to follow.

[ ] ITEM 17 [X] ITEM 18

If this is an annual report, indicate by check mark whether the
  registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

[ ] YES [X] NO

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iii

TABLE OF CONTENTS

|       |             |                                                       |                                                         | Page
|------ | ----------- | ----------------------------------------------------- | ------------------------------------------------------- | ----
|PART I |             |                                                       |                                                         |     
|       |             | FINANCIAL INFORMATION AND ACCOUNTING PRINCIPLES       | 1                                                      
|       |             | FORWARD-LOOKING STATEMENTS                            | 1                                                      
|       | **ITEM 1.** | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS | 2                                                      
|       |             | A.                                                    | DIRECTORS AND SENIOR MANAGEMENT                         | 2   
|       |             | B.                                                    | ADVISERS                                                | 2   
|       |             | C.                                                    | AUDITORS                                                | 2   
|       | **ITEM 2.** | OFFER STATISTICS AND EXPECTED TIMETABLE               | 2                                                      
|       | **ITEM 3.** | KEY INFORMATION                                       | 2                                                      
|       |             | A.                                                    | SELECTED FINANCIAL DATA                                 | 2   
|       |             | B.                                                    | CAPITALIZATION AND INDEBTEDNESS                         | 3   
|       |             | C.                                                    | REASONS FOR THE OFFER AND USE OF PROCEEDS               | 3   
|       |             | D.                                                    | RISK FACTORS                                            | 3   
|       | **ITEM 4.** | INFORMATION ON THE COMPANY                            | 10                                                     
|       |             | A.                                                    | HISTORY AND DEVELOPMENT OF THE COMPANY                  | 10  
|       |             | B.                                                    | BUSINESS OVERVIEW                                       | 11  
|       |             | C.                                                    | ORGANIZATIONAL STRUCTURE                                | 15  
|       |             | D.                                                    | PROPERTY, PLANTS AND EQUIPMENT                          | 16  
|       | **ITEM 5.** | OPERATING AND FINANCIAL REVIEW AND PROSPECTS          | 17                                                     
|       |             | A.                                                    | OPERATING RESULTS                                       | 18  
|       |             | B.                                                    | LIQUIDITY AND CAPITAL RESOURCES                         | 23  
|       |             | C.                                                    | RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.    | 24  
|       |             | D.                                                    | TREND INFORMATION                                       | 24  
|       |             | E.                                                    | OFF-BALANCE SHEET ARRANGEMENTS                          | 25  
|       |             | F.                                                    | TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS           | 25  
|       |             | G.                                                    | SAFE HARBOR                                             | 25  
|       | **ITEM 6.** | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES            | 25                                                     
|       |             | A.                                                    | DIRECTORS AND SENIOR MANAGEMENT                         | 25  
|       |             | B.                                                    | COMPENSATION                                            | 26  
|       |             | C.                                                    | BOARD PRACTICES                                         | 27  
|       |             | D.                                                    | EMPLOYEES                                               | 27  
|       |             | E.                                                    | SHARE OWNERSHIP                                         | 28  
|       | **ITEM 7.** | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS     | 28                                                     
|       |             | A.                                                    | MAJOR SHAREHOLDERS                                      | 28  
|       |             | B.                                                    | RELATED PARTY TRANSACTIONS                              | 28  
|       |             | C.                                                    | INTERESTS OF EXPERTS AND COUNSEL                        | 29  
|       | **ITEM 8.** | FINANCIAL INFORMATION                                 | 29                                                     
|       |             | A.                                                    | CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION | 29  
|       |             | B.                                                    | SIGNIFICANT CHANGES                                     | 31  
|       | **ITEM 9.** | THE OFFER AND LISTING                                 | 31                                                     
|       |             | A.                                                    | OFFER AND LISTING DETAILS                               | 31  
|       |             | B.                                                    | PLAN OF DISTRIBUTIONS                                   | 31  
|       |             | C.                                                    | MARKETS                                                 | 32  
|       |             | D.                                                    | SELLING SHAREHOLDERS                                    | 32  
|       |             | E.                                                    | DILUTION                                                | 32  
|       |             | F.                                                    | EXPENSES OF THE ISSUE                                   | 32  

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iv

|               |               |                                                                                    |                                        | Page
|-------------- | ------------- | ---------------------------------------------------------------------------------- | -------------------------------------- | ----
|               |               |                                                                                    |                                       
|               | **ITEM 10.**  | ADDITIONAL INFORMATION                                                             | 32                                    
|               |               | A.                                                                                 | SHARE CAPITAL                          | 32  
|               |               | B.                                                                                 | MEMORANDUM AND ARTICLES OF ASSOCIATION | 32  
|               |               | C.                                                                                 | MATERIAL CONTRACTS                     | 32  
|               |               | D.                                                                                 | EXCHANGE CONTROLS                      | 32  
|               |               | E.                                                                                 | TAXATION                               | 33  
|               |               | F.                                                                                 | DIVIDENDS AND PAYING AGENT             | 35  
|               |               | G.                                                                                 | STATEMENT BY EXPERTS                   | 35  
|               |               | H.                                                                                 | DOCUMENTS ON DISPLAY                   | 35  
|               |               | I.                                                                                 | SUBSIDIARY INFORMATION                 | 35  
|               | **ITEM 11.**  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK                   | 35                                    
|               | **ITEM 12.**  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                             | 36                                    
|PART
      II  |               |                                                                                    |                                        |     
|               | **ITEM 13.**  | DEFAULTS, DIVIDENDS ARREARAGES AND DELINQUENCIES                                   | 36                                    
|               | **ITEM 14.**  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
      HOLDERS AND USE OF PROCEEDS | 37                                    
|               | **ITEM 15.**  | CONTROLS AND PROCEDURES                                                            | 37                                    
|               | **ITEM 16.**  | RESERVED                                                                           | 37                                    
|               | **ITEM 16A.** | AUDIT COMMITTEE FINANCIAL EXPERT                                                   | 37                                    
|               | **ITEM 16B.** | CODE OF ETHICS                                                                     | 37                                    
|               | **ITEM 16C.** | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                             | 38                                    
|               | **ITEM 16D.** | EXEMPTION FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                          | 38                                    
|               | **ITEM 16E.** | PURCHASES OF EQUITY BY THE ISSUER AND AFFILIATED
      PURCHASERS                  | 39                                    
|PART
      III |               |                                                                                    |                                        |     
|               | **ITEM 17.**  | FINANCIAL STATEMENTS                                                               | 39                                    
|               | **ITEM 18.**  | FINANCIAL STATEMENTS                                                               | 39                                    
|               |               | SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS                                    | 82                                    
|               | **ITEM 19.**  | EXHIBITS                                                                           | 83                                    
|               |               | SIGNATURE                                                                          | 84                                    

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1

PART I

Financial Information and Accounting Principles

The financial statements and summaries of financial information
contained in this document are reported in United States dollars ("$") unless
otherwise stated. "CAN$" means Canadian dollars and "€" means Euro, the legal
tender used by the majority of European Union member states. A "tonne" is one
metric ton or 2204.6 pounds. All such financial statements have been prepared in
accordance with United States generally accepted accounting principles.

The consolidated financial statements of our Company have been
audited by Deloitte & Touche LLP, independent registered chartered
accountants, for the year ended June 30, 2006, by Davidson & Company LLP,
Chartered Accountants, for the year ended June 30, 2005, and by Peterson
Sullivan PLLC for the year ended June 30, 2004.

Forward-Looking Statements

Except for the statements of historical fact contained herein,
some information presented in this annual report constitutes forward-looking
statements. When used in this annual report, the words "estimate", "project",
"believe", "anticipate", "intend", "expect", "predict", "may", "should", the
negative thereof or other variations thereon or comparable terminology are
intended to identify forward-looking statements. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of our Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among others,
changes in project parameters as plans continue to be refined, future prices of
cobalt, as well as those factors discussed in the section entitled "Risk
Factors". Although we have attempted to identify important factors that could
cause actual results to differ materially, there may be other factors that cause
actual results not to be as anticipated, estimated or intended. There can be no
assurance that such statements will prove to be accurate as actual results and
future events could differ materially from those anticipated in such statements.
Accordingly, prospective investors should not place undue reliance on
forward-looking statements. The forward-looking statements in this annual report
speak only as to the date hereof. We do not undertake any obligation to release
publicly any revisions to these forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.

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

As used in this annual report, the terms "we", "us", "our",
"the Company" and "Blue Earth" mean Blue Earth Refineries Inc., unless otherwise
indicated.

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2

Item 1.       Identity of Directors,
  Senior Management and Advisers

A.      Directors and Senior
Management.

Not applicable.

B.       Advisers.

Not applicable.

C.       Auditors.

Not applicable.

Item 2.       Offer
Statistics and Expected Timetable

Not applicable.

Item 3.       Key
Information

A.       Selected
financial data.

The following table summarizes selected consolidated financial
data for our Company prepared in accordance with United States generally
accepted accounting principles for the years ended June 30, 2006, 2005, 2004 and
2003. As our Company was incorporated on November 25, 2003, information for the
year ended June 30, 2002 has not been provided. The information in the table was
extracted from the detailed consolidated financial statements and related notes
included in this annual report and the reports that were previously filed and
should be read in conjunction with such financial statements and with the
information appearing under the heading, "Operating and Financial Review and
Prospects".

|                                       |   |                                                                  |   |   | For the Years Ended June 30 |   |   |             |  
|-------------------------------------- | - | ---------------------------------------------------------------- | - | - | --------------------------- | - | - | ----------- | -
|                                       |   | (US dollars, in thousands, except loss per ordinary
      share) |  
|                                       |   |                                                                  |   |   |                             |   |   |             |  
|                                       |   | 2006                                                             |   |   | **2005**(1)                 |   |   | **2004**(2) |  
|                                       |   |                                                                  |   |   | (Restated)                  |   |   |             |  
|Sales of cobalt                        | $ | 18,134                                                           |   | $ | 15,419                      |   | $ | 5,019       |  
|Sales of power                         |   | -                                                                |   |   | -                           |   |   | 404         |  
|Operating loss                         |   | (1,642                                                           | ) |   | (849                        | ) |   | (303        | )
|Loss before provision for income taxes |   | (3,324                                                           | ) |   | (3,724                      | ) |   | (477        | )
|Net loss                               |   | (3,324                                                           | ) |   | (3,724                      | ) |   | (477        | )
|Basic loss per ordinary share          |   | (0.22                                                            | ) |   | (0.24                       | ) |   | (0.03       | )
|Weighted average ordinary shares       |   |                                                                  |   |   |                             |   |   |             |  
|outstanding (in thousands of shares)   |   | 15,375                                                           |   |   | 15,555                      |   |   | 15,555      |  

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3

|                                       |   |                                                                           |   |   | As at June 30 |   |   |        |  
|-------------------------------------- | - | ------------------------------------------------------------------------- | - | - | ------------- | - | - | ------ | -
|                                       |   | (US dollars, in thousands, except cash dividend
      per ordinary share) |  
|                                       |   | 2006                                                                      |   |   | **2005**(1)   |   |   | 2004   |  
|                                       |   |                                                                           |   |   | (Restated)    |   |   |        |  
|Total assets                           | $ | 46,747                                                                    |   | $ | 50,247        |   | $ | 55,107 |  
|Total liabilities                      |   | 3,085                                                                     |   |   | 3,526         |   |   | 3,179  |  
|Shareholders' equity                   |   | 43,662                                                                    |   |   | 46,721        |   |   | 51,928 |  
|Ordinary stock                         |   | 15,143                                                                    |   |   | 15,555        |   |   | 15,555 |  
|Additional paid-in capital             |   | 37,839                                                                    |   |   | 37,450        |   |   | 38,898 |  
|Accumulated deficit                    |   | (10,080                                                                   | ) |   | (6,756        | ) |   | (3,032 | )
|Accumulated other comprehensive income |   | 760                                                                       |   |   | 472           |   |   | 507    |  
|Cash dividend                          |   |                                                                           |   |   | 1,842         |   |   | -      |  
|Cash dividend per ordinary share       |   |                                                                           |   |   | 0.12          |   |   | -      |  
|Weighted average ordinary shares       |   |                                                                           |   |   |               |   |   |        |  
|outstanding (in thousands of shares)   |   | 15,375                                                                    |   |   | 15,555        |   |   | 15,555 |  

|(1) | As described in Note 2 to our audited consolidated
      financial statements which are included in this annual report, our 2005
      consolidated financial statements have been restated. As a result of the
      restatement, the equity loss and net loss for 2005 was increased by $0.8
      million to $2.9 million and $3.7 million, respectively, and as of June 30,
      2005, the accumulated deficit was increased by $0.8 million to $6.8
      million and the investment in and advances to investment method investee
      were decreased by $0.8 million to $3.3 million. Basic loss per ordinary
      share was increased to $0.24 from $0.19. We also restated our income tax
      disclosures for the year ended June 30, 2005. There was no impact on our
      2005 consolidated balance sheet or income statement arising from this
      restatement. In July 2004, we authorized to change our common shares from
      $1 par value per share to no par value. Our 2005 financial statement did
      not reflect such changes. There was no impact on our 2005 consolidated
      balance sheet or income statement arising from this restatement. Our
      Company reclassified $0.1 million of receivables from accounts receivable
      to prepaid expenses and others in the 2005 consolidated balance sheet. Our
      Company has disclosed $0.6 million of accrued power charges and $0.4
      million of accrued cobalt royalties separately from accounts payable and
      accrued liabilities in the restated 2005 consolidated balance sheet. These
      amounts were previously disclosed in accounts payable and accrued
      liabilities. Agency fees of $0.5 million have been reclassified from cost
      of operations to sales of cobalt in the 2005 restated consolidated
      statement of operations. Depreciation had previously been included in cost
      of operations in the consolidated statement of operations. Our Company has
      reclassified depreciation expenses as a separate line item on the
      consolidated statement of operations in the determination of gross profit.
      Our Company had previously classified rehabilitation expense as a
      component of expenses in the consolidated statement of operations. Our
      Company has determined that it should be included in the determination of
      gross profit. Accordingly, gross profit has decreased $0.1 million and
      $0.3 million for the years ended June 30, 2005 and 2004,
    respectively.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(2) | Basic loss per ordinary share amounts have been adjusted
      to account for a split which was authorized on September 23, 2004 prior to
      our ordinary shares being spun-out to the shareholders of KHD Humboldt
      Wedag International Ltd. (formerly MFC Bancorp Ltd.) on December 30,
      2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

**B.****Capitalization and
indebtedness.**

Not applicable.

C.      Reasons for the offer and
use of proceeds.

Not applicable.

D.      Risk factors.

The information included in this annual report includes, or is
based upon, estimates, projections or other "forward-looking statements." Such
forward-looking statements include any projections or estimates made by us and
our management in connection with our business operations. While these
forward-looking statements, and any assumptions upon which they are based, are
made in good faith and reflect our current judgement regarding the direction of
our business, actual results will almost always vary,

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4

sometimes significantly, from any estimates, predictions,
projections, assumptions or other future performance suggested herein.

Such estimates, projections or other "forward-looking
statements" involve various risks and uncertainties as outlined below. We
caution the reader that important factors in some cases have affected and could
affect actual results in the future, and cause actual results to differ from the
results expressed in any such estimates, projections or other "forward-looking
statements." Prospective investors should consider carefully the risk factors
set out below.

Risks Associated with Refining

Our subsidiary's cobalt refining operations are subject
to market forces beyond our control which could negatively impact the demand for
our cobalt or our operational costs, and reduce the economic viability of our
operations.

Currently, we earn revenues exclusively from the sale of cobalt
that is refined by our subsidiary Kasese Cobalt Company Limited. The
marketability of cobalt is affected by numerous factors beyond our control.
These factors include government regulations relating to prices, taxes,
royalties, allowable production, imports and exports, any of which can increase
our operational costs or reduce our refining capacity. In addition, cobalt
prices are volatile, and supply and demand for cobalt fluctuates. Consumers,
fearing further price increases, tend to increase their purchases in times of
rising prices and, anticipating further price decreases, reduce purchases in
times of price decline. If the demand for cobalt were to decline, or if we were
to incur significantly higher operational and regulatory compliance costs and
taxes, our economic viability would deteriorate and the continuation of our
business would be threatened.

Our revenues are largely dependent upon cobalt prices
that are subject to dramatic and unpredictable fluctuations. A significant drop
in cobalt prices could threaten our ability to continue
operations.

The current demand for and supply of cobalt are the fundamental
influences on the metal's prices, as are technical trends, currency exchange
rates, inflation rates, changes in global economies, political factors and a
number of other factors. The supply of cobalt, in turn, consists of a
combination of mine production and existing stock held by governments,
producers, financial institutions, and consumers. As a result, cobalt prices are
subject to dramatic and unpredictable fluctuations. The following table sets
forth, for the calendar years indicated, the average annual spot price in United
States dollars per pound for cobalt cathodes as reported by the United States
Geological Survey, Mineral Commodities Summaries (unless otherwise
indicated):

Cobalt Average Spot PriceCalendar
        Year
      
      (USD/lb)2006
      
      14.502005
      
      15.802004
      
      23.932003
      
      10.602002
      
      6.912001
      
      10.552000
      
      15.16


We expect that if Kasese Cobalt Company achieves its targeted
refining capacity of 60 tonnes of cobalt cathodes per month, the cash break-even
price (revenue at a selling price which covers all cash operating costs at a
defined production level) will be $9.59 per pound, and at 55 tonnes per month,
the break-even price will be $9.80 per pound. A drop in cobalt prices below
these levels will have an adverse impact on our revenues, and threaten our
ability to continue operations. For example, due to weak cobalt prices in

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5

2002, the Kasese Cobalt Company refinery was placed on a care
and maintenance program under which all cobalt production ceased by September
2002. Operations recommenced approximately one year later when cobalt prices
improved significantly.

We may not be able to obtain the required permits to
continue our refining operations.

The operations of our subsidiary Kasese Cobalt Company require
permits and licences from various governmental authorities. Obtaining such
permits is a complex and time consuming process involving numerous agencies. The
time involved and success in obtaining such permits is contingent upon many
variables not within the control of our Company or Kasese Cobalt Company. The
failure to obtain such permits or a renewal of such permits could limit or bring
to a halt our business, operations and future prospects, and could significantly
reduce our ability to generate revenues. Currently, we have all operating
permits and licenses needed to conduct the business of Kasese Cobalt Company.
Some licenses and permits are only issued on an annual or multi-annual basis and
these must be re-applied for when expired. Examples of such annual permits are
those required for electrical generation, electricity sales, explosive storage
and blasting, and a withholding tax exemption for Kasese Cobalt Company.
Examples of multi-year (3 to 5 years) permits are those required for effluent
discharge and water extraction by Kasese Cobalt Company from the Mubuku
River.

We are subject to environmental protection legislation
with which we must comply or suffer sanctions from regulatory authorities.
Changes to existing, or the introduction of, new legislation may prove to be too
burdensome to permit us to continue business operations.

Our cobalt refining activities are subject to laws and
regulations controlling not only the refining of cobalt tailings, but also the
possible effects of such activities upon the environment. Environmental
legislation provides for restrictions and prohibitions on spills, releases or
emissions of various substances produced in association with certain mineral
refining operations, such as seepage from tailings disposal areas, which could
result in environmental pollution. A violation of such legislation may result in
the imposition of substantial fines and penalties. In addition, certain types of
operations require the submission and approval of environmental impact
statements. Environmental legislation is evolving in a manner which generally
means stricter standards and enforcement, increased fines and penalties for
non-compliance, more stringent environmental assessments of existing plant and
proposed projects and higher legal and social responsibility for companies and
their officers, directors and employees. Permits from a variety of regulatory
authorities are required for many aspects of mineral refining operations.
Current and future legislation and regulations could cause additional expense,
capital expenditures, restrictions and delays in the exploitation of Kasese
Cobalt Company's pyrite stockpile, the extent of which cannot be predicted. It
is possible that the costs and delays associated with compliance with such laws
and regulations could become such that we may decide to discontinue
operations.

The refining industry is highly competitive and there is
no assurance that we will achieve success in our refining
operations.

The cobalt refining business is competitive. We will continue
to compete with other refinery companies, many of which have greater financial
and technical resources than us, in the production of cobalt and the acquisition
of attractive cobalt properties. There is increasing competition for a limited
number of cobalt refining opportunities within Africa and elsewhere and, as a
result of this competition, we may be unable to produce cobalt on terms
acceptable to us.

---

6

We are a single-metal producer and a prolonged drop in
the market price for cobalt may force us to discontinue our
operations.

We are a single metal producer, so if the market price of
cobalt falls below the cost of production, we may be required to cease
operations and again place the Kasese Cobalt Company refinery on a care and
maintenance program until the market price of cobalt improves. Most companies
produce cobalt in concert with the production of one or more other metals. In
such cases, cobalt is usually the secondary metal and as long as the production
of the major metal is economic, cobalt will continue to be produced and sold as
a contribution to overheads, without absorbing an economic share of production
and overhead costs. This is not the case with our Company. Our dependence on the
refining of a single metal means that if cobalt market prices fall and remain
depressed for a sustained period of time, we may be unable to fund a care and
maintenance program, in which case we may be forced to dispose of our cobalt
refineries.

The supply of pyrite at the Kasese Cobalt Company
refinery is limited. Once the supply of pyrite is exhausted, we may discontinue
our operations at Kasese.

The feedstock at Kasese Cobalt Company is limited to the
stockpiles. There is no alternative supply at this time. Once the current pyrite
stockpile is exhausted, which we anticipate will be in approximately 6.0 years
based on the current targeted production, we may discontinue our operations at
Kasese.

Seasonality affects our power source. Interruptions to
our power source may adversely affect our production rate and cobalt quality,
and could therefore adversely affect our financial condition.

The cobalt production of Kasese Cobalt Company is subject to
seasonal variation in the wet and dry seasons in Uganda. During the two dry
seasons of the year, low water levels in the Mubuku River may preclude the
generation of the seven to eight megawatts of power necessary to operate the
Kasese Cobalt Company refinery. During these periods the refinery must rely to
some extent on the Ugandan electrical grid to supply the shortfall. The refinery
is equipped with a diesel generator, but the high cost of diesel-generated power
makes it an unsustainable power source, except in times of very high cobalt
prices. Ugandan electrical grid power failures are common, especially during the
peak hours of consumption between 6 PM and 10 PM. If interruptions to our power
supply are prolonged or frequent enough to adversely affect the production rate
and quality of Kasese Cobalt Company cobalt, we may be forced to halt our
business.

Our proprietary right to license the cobalt extraction
process used at the Kasese Cobalt Company refinery is uncertain.

Our proprietary right to license the cobalt extraction process
used at the Kasese Cobalt Company refinery is uncertain. The Bureau de
Recherches Géologiques et Minères (a French company operating in the geoscience
research and development field), who were instrumental in the early stages of
the process development, could potentially claim a proprietary interest in the
cobalt extraction process if an outside third party attempts to use this process
technology. If this were to occur, we would assert our rights to a royalty and,
as a last resort, attempt to negotiate an agreement with the Bureau de
Recherches Géologiques et Minères to share any royalty extracted. The ownership
of the cobalt extraction process technology rights do not affect our operations,
but may affect any royalty rights to which we become entitled.

Disclosure Controls and Procedures Risks

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7

We have identified that our disclosure controls and
procedures were not effective as at June 30, 2006, which ineffectiveness could
continue to impact our ability to report our results of operations and financial
condition accurately and in a timely manner.

Our management assessed the effectiveness of our disclosure
controls and procedures over financial reporting as at June 30, 2006. This
assessment concluded that our disclosure controls and procedures over financial
reporting were not effective as at June 30, 2006 to provide reasonable assurance
that information required to be disclosed in the reports we file and submit
under the Exchange Act is recorded, processed, summarized and reported as and
when required.

While we are implementing steps to restore the effectiveness of
our disclosure controls and procedures, failure to restore the effectiveness of
our disclosure controls and procedures could continue to impact our ability to
report our financial condition and results of operations accurately and in a
timely manner and could have a material adverse effect on our business, results
of operations, financial condition and liquidity.

Political Risks

We may be adversely affected by corruption, political or
economic instability, or threat of expropriation in Uganda, where our
subsidiary, Kasese Cobalt Company, is located.

Our operating subsidiary, Kasese Cobalt Company, is located in
Uganda where business activities may be affected by corruption, political
instability, economic instability and threat of expropriation. Any changes in
political or economic conditions which may adversely affect our business are
beyond our control. The risks include, but are not limited to, terrorism,
military repression, expropriation, and high rates of inflation. Any one or more
of these factors could compromise Kasese Cobalt Company's ability to achieve its
targeted cobalt refining capacity and control its operating costs, or otherwise
interfere with normal operation of the Kasese Cobalt Company refinery.

Financing Risks

We generate limited cash flow and may require additional
funds to maintain business operations.

We currently generate cash flow from operations and there can
be no assurance that future operations will generate sufficient cash flow to
satisfy our ongoing cash requirements. In the past, Kasese Cobalt Company has
relied on working capital loans. Given current high market prices for cobalt, we
anticipate that we will realize sufficient cash flow from the sale of cobalt by
Kasese Cobalt Company to cover our cash requirements for the next twelve months.
If our revenues prove to be insufficient to meet our cash requirements, we may
be required to issue additional shares or seek debt financing to finance our
operations. We currently do not have a relationship with an investment bank who
will undertake to provide us with working capital loans or any credit
facilities. Without adequate cash flow from operations, and if we fail to obtain
equity or debt financing when needed, there is a risk that our business
operations would be significantly reduced or our business would fail.

Our international operations make us subject to
fluctuations in foreign currency exchange rates which in turn may affect our
results.

While engaged in the business of processing and refining, our
international operations make us subject to foreign currency fluctuations. Such
fluctuations may adversely affect our financial positions and results. Our
management may not take any steps to address foreign currency fluctuations that
will eliminate all

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8

adverse effects and any steps taken may not be effective to
eliminate all adverse effects. Accordingly, we may suffer losses due to adverse
foreign currency fluctuations.

The royalty payments we are required to make reduces the
free cash flow available to us by 10%, and may adversely affect the viability of
our operations.

We are required to pay royalties of 10% of the cash flow
generated by our Kasese Cobalt Company operation, as defined in the royalty
agreement, up to a total of $10.0 million. The absolute amount of the royalty to
be paid will depend on the level of free cash flow and this will depend on the
price of cobalt. Due to the on-going royalty payments, the free cash flow
available to us is reduced by 10% until an aggregate of $10.0 million is
paid.

Risks Relating to Company Personnel

We are dependent on the services of qualified employees
with experience in cobalt refining operations, and the loss of such employees
may result in discontinuance of our operations.

We will continue to compete with other refinery companies in
connection with the recruitment and retention of qualified employees with the
skills and experience necessary for cobalt refining operations. At the present
time, a sufficient supply of qualified workers is available for operations at
our Kasese Cobalt Company refinery. The continuation of such supply depends upon
a number of factors, including, principally, the demand occasioned by other
projects. In the case of our operations in Uganda, due to the remoteness and
terrorism, new qualified workers may be difficult to find. With respect to
terrorism, there is unrest due to the presence of the Lords Revolutionary Army
in the northern part of Uganda. The civil wars in the eastern part of the
Democratic Republic of Congo and in the Dafur region of Sudan are in close
proximity to Uganda and may have the same deterrent effect. Without qualified
employees, we will not be able to operate the refinery.

Conflicts of interest may arise as a result of our
directors and officers being directors and officers of other natural resource
companies.

The following persons are directors, officers and/or
shareholders of other natural resource companies: the Chairman of the board of
directors of Kasese Cobalt Company is also the Chairman of the board of
directors of Kilembe Mines Limited; a director of Kasese Cobalt Company is also
the President and Chief Operating Officer of Kilembe Mines. While we are engaged
in the business of cobalt processing and refining, such associations may give
rise to conflicts of interest from time to time. Our directors are required by
law to act honestly and in good faith with a view to our best interests and to
disclose any interest that they may have in any project or opportunity of ours.
If a conflict of interest arises at a meeting of our board of directors, any
director in a conflict must disclose his interest and abstain from voting on
such matter. Conflicts may cause lost opportunities for us. In determining
whether or not we will participate in any project or opportunity, our directors
will primarily consider the degree of risk to which we may be exposed and our
financial position at the time. Our directors and officers are free to accept
other positions either as directors or employees of other companies, in which
case these other positions may impact on the amount of time they are able to
focus on our operations. Officers of our subsidiary Kasese Cobalt Company are
full-time employees of that company and do not devote any significant time to
other commercial activities.

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9

Kilembe Mines has exercised its sole right to appoint
three of the eight directors of Kasese Cobalt Company, which appointments may
result in a divergence of opinion in regards to how to operate Kasese Cobalt
Company.

The board of directors of Kasese Cobalt Company consists of
eight members. Of these members, Kilembe Mines has appointed three members and
we have appointed four members to this board of directors. The eighth member is
appointed by the remaining board members. If required, the Managing Director has
an extra deciding vote. As a result, Kilembe Mines may seek to appoint three
directors who may not agree with the decisions made by our appointees to the
board. Under such circumstances, the operation of our Company may be
disrupted.

The operations at our Kasese Cobalt Company refinery may
be adversely affected due to a work stoppage by the unionized workforce.

Kasese Cobalt Company has approximately 250 employees, of which
125 employees belong to a non-compulsory Ugandan national union, Uganda Mines
Metal and Allied Workers Union. With a unionized workforce, we need to enter
into collective bargaining and any unresolved issues in negotiations could lead
to work stoppages that would adversely affect our business by bringing our
refinery operations to a halt.

Risks Relating to an Investment in our Securities

Our Articles of Association contain provisions
indemnifying our officers and directors against all costs, charges and expenses
incurred by them.

Our Articles of Association contain provisions that state,
subject to applicable law, we shall indemnify every one of our directors or
officers against all losses or liabilities which our director or officer may
sustain or incur in the execution of their duties. Our Articles of Association
further state that no director of officer shall be liable for any loss, damage
or misfortune which may happen to, or be incurred by us in the execution of
their duties. Such limitations on liability may reduce the likelihood of
litigation against our officers and directors and may discourage or deter our
shareholders from suing our officers and directors based upon breaches of their
duties to us, though such an action, if successful, might otherwise benefit us
and our shareholders.

Investors of our Company may not be able to sell their
shares, as our shares are not publicly traded.

Our shares are not listed or quoted for trading on any
securities exchange or national securities quotation system. Accordingly, our
shareholders may be unable to sell their shares. We currently have no intention
to list or otherwise qualify our ordinary shares for trading on any national
securities exchange or securities quotation system.

United States investors may not be able to enforce their
civil liabilities against us or our directors, controlling persons and
officers.

It may be difficult to bring and enforce suits against us. We
were incorporated under the International Business Companies Act(British
Virgin Islands). All of our directors and officers are residents of countries
other than the United States, and all of our assets are located outside of the
United States. Consequently, it may be difficult for United States investors to
effect service of process in the United States upon our directors or officers,
or to realize in the United States upon judgments of United States courts
predicated upon civil liabilities under the United States Securities Exchange
Act of 1934, as amended. There is substantial doubt whether an action could
be brought successfully outside the United

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10

States against any of such persons or us predicated solely upon
such civil liabilities.

We may not be able to declare and pay dividends or
distribute cash by way of a return of capital.

Any future payment of dividends or distributions will be
determined by our board of directors on the basis of our earnings, debt
collection, financial requirements and other factors relevant to cash
availability.

Item 4.      Information on the Company

A.      History and development of
  the Company

We were incorporated in the Territory of the British Virgin
Islands under the International Business Companies Act on November 25,
2003, under the name Nature Extrac Limited. We changed our corporate name to
Blue Earth Refineries Inc. effective July 8, 2004.

Our registered office is located at Akara Building, 24 De
Castro Street, Wickhams Cay I, Road Town, Tortola, British Virgin Islands. Our
registered agent is Mossack Fonseca & Co. (B.V.I.) Ltd., P.O. Box 3136, Road
Town, Tortola, British Virgin Islands.

The Plan of Arrangement

In December 2003, the board of directors of KHD Humboldt Wedag
International Ltd. (under its former name, MFC Bancorp Ltd.), at the time our
ultimate parent company, effected a plan of arrangement pursuant to section 195
of the Business Corporations Act (Yukon Territory, Canada), whereby,
among other things, KHD Humboldt Wedag International reorganized and
consolidated its non-core cobalt assets in our Company and distributed all of
our issued and outstanding shares to the holders of KHD Humboldt Wedag
International common shares, by way of a reduction in stated capital of KHD
Humboldt Wedag International.

We also altered our share capital to 100,000,000 ordinary
shares and 100,000,000 Class A Preferred shares without par value. Mass
Financial Corp., under its former name Sutton Park International Limited,
continued to hold all of the 50,000 issued and outstanding ordinary shares of
our Company until September 2004 when, under the plan of arrangement, all of
these shares were transferred to KHD Humboldt Wedag International.

The holders of record of KHD Humboldt Wedag International
common shares on the date that was ten business days following the effective
date of the registration statement that registered our ordinary shares was
entitled to participate in the distribution of our ordinary shares by KHD
Humboldt Wedag International. Each holder of KHD Humboldt Wedag International
common shares received one of our ordinary shares for each common share of KHD
Humboldt Wedag International held on such record date. No consideration was
payable by KHD Humboldt Wedag International's shareholders in connection with
the distribution.

On September 23, 2004, pursuant to the plan of arrangement, the
Articles of Arrangement were filed with the Yukon Registrar of Corporations. The
consolidation of the cobalt assets was completed on December 30, 2004 when we
completed a stock split that resulted in us having issued and outstanding
ordinary shares equal in number to KHD Humboldt Wedag International's issued and
outstanding common shares on the distribution record date and KHD Humboldt Wedag
International distributed all of our issued and outstanding ordinary shares by
way of a reduction of stated capital in the amount of approximately
CAN$85,076,241 to the holders of record of KHD Humboldt Wedag International
common shares on a pro rata basis.

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11

Our ordinary shares are not listed or otherwise qualified for
trading on a stock exchange or stock quotation system in the United States or
elsewhere and there is currently no intention to do so. The completed
distribution of our ordinary shares by KHD Humboldt Wedag International did not
create a public market for our ordinary shares in the United States or
elsewhere. However, our ordinary shares are quoted on the Pink Sheets, LLC.

Sale of 36569 Yukon

36569 Yukon held a cobalt refining plant in Lorrain Township,
approximately 450 kilometres north of Toronto, Ontario, Canada. The plant has
never operated commercially and has no operating history, due to the lack of a
suitable source of cobalt at attractive pricing. Subsequent to the year ended
June 30, 2006, we entered into a definitive agreement to sell all of our
interest in 36569 Yukon, including a long-term income debenture $5.4 million
(€4,242,000) (principal amount) and a receivable of $1.9 million (CDN$2,142,104)
under a credit facility for gross consideration of $2.7 million. Consideration
received will comprise units in two British Virgin Islands open-ended investment
companies. Out of the gross consideration, our Company agreed to repay 36569
Yukon's liability of $261,188 due to Mass Financial (a related party) and to pay
an 8% commission ($195,106) of the net balance (total consideration minus
repayment to 36569 Yukon) to MFC Merchant Bank SA (a related party). The Company
assigned certain units of the two investment companies to settle the liability
due to Mass Financial and the commission to MFC Merchant Bank. The Company
received 3,802 units in FE Global Undervalued Investments Ltd. and 3,588 units
in Global Convertible Megatrend Ltd. as net consideration on December 29,
2006.

B.      Business overview.

Current Operations

Our business assets consist of our 75% interest in Kasese
Cobalt Company, a company which holds and operates a cobalt refinery in Kasese,
Uganda. Upon the closing of the sale of 36569 Yukon, we hold 3,802 units in FE
Global Undervalued Investments Ltd. and 3,588 units in Global Convertible
Megatrend Ltd. as passive investments as a result of the sale of 36569
Yukon.

Information Concerning Kasese Cobalt Company

Name and Incorporation

Kasese Cobalt Company was incorporated in the Republic of
Uganda on June 24, 1992. The head office of Kasese Cobalt Company is located at
the cobalt refinery located at Kasese/Mbarara Road, P.O. Box 524, Kasese,
Uganda. The registered office of Kasese Cobalt Company is located at c/o
Livingstone Registrars (U), Rwenzori House, P.O. Box 10314, Kampala, Uganda.
Kasese Cobalt Company's business is administered principally from its head
office and a logistics office at Suite WI, 3 Mukwasi House, Lumumba Avenue,
Kampala.

Description of our Interest in Kasese Cobalt Company

We own 75% of the outstanding share capital in Kasese Cobalt
Company.

Kilembe Mines, which is 100% owned by the government of the
Republic of Uganda, owns 25% of the outstanding share capital in Kasese Cobalt
Company. Under the development agreement between the Ugandan Government and
Kasese Cobalt Company, Kilembe Mines has the right to appoint three members to
the board of directors and Blue Earth has the right to appoint four members.

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12

Kilembe Mines is indebted to Kasese Cobalt Company in the
amount of $1,634,256 and this amount has been fully reserved as a doubtful debt
in the accounts of Kasese Cobalt Company. This debt is to be repaid out of
dividends received by Kilembe Mines from Kasese Cobalt Company and, since Kasese
Cobalt Company owes us a debt in the principal amount of approximately $137
million as at June 30, 2006, it is unlikely that dividends will be paid by
Kasese Cobalt Company to its shareholders in the near future. However, it is
expected that Kasese Cobalt Company will pay down the debt owed to us when
Kasese Cobalt Company generates surplus cash from its operations.

We intend to distribute to our shareholders cash that we will
receive from Kasese Cobalt Company as loan payments, net of any expenses,
expenditures and funding for the refinery operations, by way of dividends and/or
distributions.

Description of Business of Kasese Cobalt Company

Kasese Cobalt Company operates a cobalt project located in
southwest Uganda and recovers the cobalt contained in a pyrite stockpile from a
former copper mine. The metal refining operations involve the bioleaching of
pyrite concentrate, solvent extraction of the dissolved cobalt and recovery
through electro-winning. The Kasese Cobalt Company project, which is located
approximately 420 kilometres west of Kampala, includes the Mubuku III
hydro-electric power station that has a maximum deliverable capacity of about
9.9 megawatts. While the cobalt refinery was on care and maintenance status
prior to recommencing operations in early 2004, electricity generated at Mubuku
was sold to the state-owned grid of the Ugandan Electrical Transmission Company
Limited.

The project grew out of a feasibility study on the reopening of
the Kilembe copper mine that had operated from 1956 to 1978. While it was not
economic to recommence copper mining operations, an alternative was to produce
cobalt from a pyrite stockpile using bio-leaching technology. The stockpile near
Kasese graded 1.38% cobalt. Kasese Cobalt Company subsequently acquired the
rights to the pyrite stockpile from Kilembe Mines under an agreement, which is
set to expire in June 2012 unless Kasese Cobalt Company elects to extend it for
an additional maximum term of 25 years. Kasese Cobalt Company may terminate the
agreement at any time, if the refinery operation is not considered commercially
viable.

When operating at full capacity, the power requirements of the
Kasese Cobalt Company refinery range between seven and eight megawatts. There
are three power sources available to the refinery: the plant is connected to the
Ugandan power grid, on site equipment at the plant includes four diesel
generators with a capacity of one Megawatt each, and the plant is serviced by a
company owned river fed hydro-electric facility of three generation units with a
capacity of 3.3 Megawatts each. Excess power, when available, can be sold into
Ugandan Electrical Transmission Company's power grid for local use.

Kasese Cobalt Company resumed a full-year normal operations and
produced metal in 2005. Cobalt output at full capacity is 60 tonnes per month or
720 tonnes annually. The build-up in production, after a shutdown, is gradual
due to the required increase in bacteria in the bio-leach tanks.

The Kasese Cobalt Company property is currently a fully
operational cobalt bio-leach, solvent extraction and electro-winning
refinery.

Description of the Feedstock

The feedstock of the refinery is a cobalt rich pyrite stockpile
which was the result of 26 years and 16 million tonnes of copper mining by
Kilembe Mines. The average grade of the stockpile was initially determined by
Kilembe Mines, based on concentrator records between 1956 and 1982, as 1.36%
cobalt. This average grade of cobalt was confirmed with the further analysis
completed by Seltrust in 1982

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13

(1.35% cobalt) and by Kilembe Mines in 1987 (1.4% cobalt).
These results were further confirmed by Bureau de Recherches Géologiques et
Minères in the original pre-feasibility study (1.27%) and the feasibility study
(1.34%) . These grades were further confirmed by OMAC Laboratories Ltd. of
Galway, Ireland by an analysis of 41 samples for an average of 1.43% cobalt.

Kasese Cobalt Company monitors the cobalt contained in the
refinery plant feed on a daily basis and although such testing indicate a 1.40%
cobalt feed since the beginning of operations, it continues to use the assayed
test average of 1.38% in the calculation of reserves. The composition of the
Kasese Cobalt Company refinery pyrite stockpile as determined by daily leach
feed testing was as follows for June 30, 2006:

Composition of the Kasese Cobalt Company
      RefineryPyrite Stockpile at June 30,
      2006Composite
      
      High (%)
      
      Low
        (%)Cobalt
      
      1.635
      
      1.172Copper
      
      0.6559
      
      0.2615Nickel
      
      0.1902
      
      0.1382Iron
      
      37.736
      
      17.066Sulphur
      
      50.21
      
      33.47


A detailed drilling and survey program in November 2000
established the volume of the remaining stockpiles as 709,000 tonnes at that
time. Through process consumption, this volume had been reduced to 450,000
tonnes by June 30, 2006.

The stockpile is located on the higher elevation of a 74
hectare site which is leased from Kilembe Mines. It is consumed by the
application of high pressure water using two water cannons operating at 70 cubic
metres per hour. The resulting slurry flows by gravity through a series of
control trenches to a sump pump from where it is pumped to the processing plant
through stainless steel pipes.

Principal Holders of Voting Securities of Kasese Cobalt
Company

We own 1,674 B class shares or 75% of the share capital of
Kasese Cobalt Company. The Government of the Republic of Uganda, through its
ownership of Kilembe Mines, owns 566 A class shares or 25% of the share capital
of Kasese Cobalt Company.

Information Concerning Fund Investment

Global Convertible Megatrend is an open-ended investment
company which was incorporated with limited liability under the laws of the
British Virgin Islands on November 17, 1994. Global Convertible Megatrend
commenced operations on February 14, 1995. The principal objective of Global
Convertible Megatrend is both current income and capital appreciation through
investing and trading primarily in publicly traded convertible debt securities
of issuers based, or with substantial business activities, in Asian and other
emerging economies.

FE Global Undervalued Investments is an open-ended investment
company which was incorporated with limited liability under the laws of the
British Virgin Islands on October 29, 1997. FE Global Undervalued Investments
commenced operations on May 1, 1998. The principal objective of FE Global
Undervalued Investments is to achieve capital appreciation by investing and
trading on a global basis in securities, including common and preferred stock,
warrants, debt securities and money market instruments.

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14

Revenues

At present, the revenue earned by us comes from cobalt sales of
Kasese Cobalt Company. In 2004, Kasese Cobalt Company has entered into a
distribution agreement with Danzas, a wholly-owned subsidiary of MFC Commodities
GmbH ("MFCC", a subsidiary of Mass Financial). This distribution agreement
between Kasese Cobalt Company and Danzas was assigned to us at the completion of
the plan of arrangement. MFCC continues to be our sales agent.

Monthly production since start-up has increased from 30 to 60
tonnes as of November 30, 2006. The expected capacity of the Kasese Cobalt
Company refinery is 60 tonnes per month. The revenue generated will depend upon
sale volume, monthly production tonnage attained and the world cobalt price.

Principal Market

Kasese Cobalt Company markets its production through MFCC.
Kasese Cobalt Company does not have any direct connection with the end user.

Seasonality of our Business

Kasese Cobalt Company's cobalt production is subject to
seasonal variation in the wet and dry seasons in western Uganda. During the two
dry spells per year (January/February and June/July), the output of the Mubuku
III power station is reduced. During these periods, power failures of the
national grid cause interruptions to production, which cause a loss of
production quantity as well as a deterioration of quality. The wet season may
also cause temporary disruptions to the ability to deliver production to
Mombassa due to local road conditions. The on-site diesel generators cannot
always compensate for national grid failures in time of low output from the
Mubuku III power station.

Sources and Availability of Raw Materials

The source of raw materials for the Kasese Cobalt Company
refinery is restricted to the pyrite stockpile located on the Kasese Cobalt
Company refinery property. This stockpile contained an estimate of 920,000
tonnes of pyrite when the project was started (which was later reduced as the
result of a more detailed survey in November 2000), and on June 30, 2006, there
were approximately 450,000 tonnes remaining to be processed. At the expected
rate of consumption, the remaining stockpile will be exhausted in June 2012. At
that time, the site may have to be rehabilitated and abandoned. Due to the
remoteness of the Kasese Cobalt Company site, it is not economic to import raw
material to extend the life of the refinery.

Patents and Licenses; Industrial, Commercial and
Financial Contracts; and New Manufacturing Processes

Kasese Cobalt Company has all the required permits and licenses
to conduct its present business. These are extensive and varied, ranging from
government royalty agreements and effluent discharge permits to a local business
license. The process utilized by Kasese Cobalt Company was developed, in concert
with the Bureau de Recherches Géologiques et Minères, during the planning and
commissioning of the project. The process has subsequently been modified to such
an extent that it has evolved into a process unique unto itself. There is no
assurance that Bureau de Recherches Géologiques et Minères would not claim a
proprietary interest in the process, and in previous years, there were
discussions as to who held the proprietary rights to the cobalt extraction
process. Kasese Cobalt Company is of the opinion that all proprietary rights to
the process utilized by Kasese Cobalt Company are the property of Kasese Cobalt
Company.

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15

Kasese Cobalt Company enters into various contracts for the
supply of limestone, hydrated lime, petroleum, energy and chemicals used in the
production process in the normal course of business. Other permits and licenses
include: waste water discharge, surface water abstraction, withholding tax
exemption, keeping financial records in US dollars, limestone blasting, embedded
power producer sales, power generation, cobalt export, employees union
agreement, property and limestone quarry leases.

Cobalt output is budgeted at 60 tonnes per month or 720 tonnes
annually.

Competitive Conditions

Many of our competitors are national or international companies
with far greater resources, capital and facilities than us. Most of these
companies produce cobalt in concert with the production of one or more other
metals. In such cases, cobalt is usually produced as a secondary metal for as
long as the production of the major metal or metals is economic, as a
contribution to overheads without absorbing an economic share of production and
overhead costs. This is not the case with our Company, which is currently
engaged in the recovery and refining of cobalt only. Our dependence on the
refining of a single metal means that if cobalt market prices fall and remain
depressed for a sustained period of time, we may be forced to halt our business
operations and to again place our facilities on a care and maintenance
program.

Even if the market price of cobalt were to improve sufficiently
to make our refining operations economically viable, the reactivation phase
could take some time if changes in technology, permit requirements,
environmental legislation or other operational considerations require us to
undertake significant upgrades to our facilities. Those of our competitors who
may have been able to fund the operational status of their facilities through
the production and sale of other metals during the period of our care and
maintenance program would likely be able to recommence their cobalt refining
operations much more quickly than us, and thereby stand a much better chance of
taking a lead in market share for cobalt sales.

Governmental Regulations

Refining operations are subject to a wide range of government
regulations such as restrictions on production, price controls, tax increases,
expropriation of property, environmental protection, protection of agricultural
territory or changes in conditions under which minerals may be marketed, any of
which could have the effect of reducing or preventing us from exploiting any
pyrite deposits on our property.

C.      Organizational Structure.

The names of our subsidiaries, their jurisdiction of
incorporation, our percentage voting ownership and the owner of such interests
are as follows:

|                                       |  | Jurisdiction of  |  |                            |  | Shareholding of
|-------------------------------------- |  | ---------------- |  | -------------------------- |  | ---------------
|                                       |  | Incorporation or |  |                            |  | the Owner of   
|Name of
      Subsidiary               |  | Organization     |  | Owner of Interests         |  | Interests      
|Kasese Cobalt Company Limited          |  | Uganda           |  | Blue Earth Refineries Inc. |  | 75.0%          
|Blue Earth Refineries (Canada) Inc.(1) |  | Yukon, Canada    |  | Blue Earth Refineries Inc. |  | 100.0%         

(1)      Holds 49% of 36569 Yukon
Inc.

We expect that if Kasese Cobalt Company achieves its targeted
refining capacity of 60 tonnes of cobalt cathodes per month, the cash break-even
price (revenue at a selling price which covers all cash operating costs at a
defined production level) will be $9.59 per pound, and at 55 tonnes per month,
the break-even price will be $9.80 per pound. Current Kasese Cobalt Company tax
losses amount to approximately $161 million.

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16

D.      Property, Plants and Equipment.

Our office is located at Suite 803, 8/F, Ruttonjee House, Dina
Centre, 11 Duddell Street, Central, Hong Kong, SAR, China. This space
accommodates all of our executive and administrative offices. We have a
registered office at Akara Building, 24 De Castro Street, Wickhams Cay I, Road
Town, Tortola, British Virgin Islands.

We believe that our existing facilities are adequate for our
needs through the end of the year ending June 30, 2007. Should we require
additional space at that time, or prior thereto, we believe that such space can
be secured on commercially reasonable terms.

Kasese Cobalt Company Cobalt Refinery

Due to weak cobalt prices, the Company placed the plant on a
care and maintenance program under which all cobalt production ceased by
September 2002. Due to significantly improved cobalt prices, operations were
recommenced at the plant in December 2003, and it is now engaged in the
extraction of cobalt from the pyrite stockpile. As of June 30, 2006, the
stockpile contained approximately 450,000 tonnes of material with an average
grade of 1.38% cobalt. The plant recovers cobalt metal from cobalt concentrate
using a combination of bio-leaching, solvent extraction and electro-winning.
Site construction of the plant commenced in November 1997 and was completed on
July 1, 1999. Plant commissioning ran into various difficulties which continued
from completion until June 30, 2001. The plant currently employs approximately
250 personnel.

Cobalt output at the refinery is budgeted at 60 tonnes per
month or 720 tonnes annually. The original design parameters of the project
included an annual refining capacity of 1,000 tonnes of cobalt. The Kasese
Cobalt Company refinery has not been able to attain the targeted refining
capacity, resulting in higher refining costs per unit produced.

Kasese Cobalt Company also owns a hydro-electric power station
with three hydro-electric generation units with a combined capacity of 9.9
megawatts. The power requirements of the Kasese Cobalt Company refinery range
between seven and eight megawatts. Excess power, when available, can be sold
into the Ugandan Electrical Transmission Company's power grid for local use. The
hydro-power plant is approximately 22 kilometres from the cobalt refinery.
Demands for electricity on the western Ugandan power grid continue to be in
excess of generating capacity during heavy load periods.

The site of the refinery is three miles south of Kasese on the
Kasese to Mbarara Road. The latitude and longitude references are 30 degrees, 5
minutes east and 0 degrees, 9 minutes north. The refinery site is 1,250 metres
long by 750 metres wide. There is a further 40 hectares of adjacent land owned
by Kasese Cobalt Company which is available for tailings pond expansion.

Kasese Cobalt Company utilizes bioleaching as the primary stage
of cobalt removal. There are five bioleaching tanks each with a production
utilization capacity of 1,280 cubic metres. During normal production, these
tanks contain 23.5 tonnes of cobalt in solution. The tanks are mechanically
agitated while air is being forced through the pyrite solution to create the
necessary environment for the bioleach bacteria to break down the raw material
into a solution which can be fed through the iron removal and stabilization
phases of the process.

In the iron removal stage, the solution pH is adjusted to
precipitate the iron content and a belt filter process removes the solids
contained in the solution. The belt filter has a rated capacity of 65 cubic
metres per hour.

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17

The solution is then fed into the lower terrace for solvent
extraction of the other metals in solution. Using pH adjustment and various
chemicals, the trace metals are separated into different streams. Zinc is
extracted followed by nickel and copper which are recovered in the form of
hydroxides. These processes result in an electrolyte solution containing between
4.5 and 5.0 grams of cobalt per litre, which is then electroplated into 99.8%
cobalt metal in the electrowinning tank house. The cobalt is, by electrolysis,
plated onto cathodes which are then removed in rotation and the cobalt metal is
recovered for cleaning, burnishing and crushing into the final product, crushed
cathode cobalt.

Effluent from the process is treated to precipitate
contaminates and discharged into tailings dams. Once the discharge complies with
environmental discharge standards, it is then released to the Rokoki River at a
maximum rate of 104 cubic metres per hour.

Plan of Operations

Our current overall plan is to operate the Kasese Cobalt
Company refinery only during such time when cobalt market price makes operations
profitable until its pyrite stockpile is exhausted. Our immediate focus is to
achieve a steady capacity production level while the cobalt price is at the
present profitable levels. Our secondary goal is to reduce the costs of
production through the reduction in the volume of refining chemicals being
consumed. This is an ongoing process and management believes that, given a
stable level of production, considerable savings can be achieved.

Item 5.      Operating and Financial
  Review and Prospects

The following discussion and analysis of our financial
condition and results of operations for the years ended June 30, 2006, 2005 and
2004 should be read in conjunction with our consolidated financial statements
and related notes included in this annual report. Our financial statements
included in this annual report were prepared in accordance with United States of
America's generally accepted accounting principles.

As described in Note 2 to our audited consolidated financial
statements which are included in this annual report, our 2005 consolidated
financial statements have been restated. As a result of the restatement, the
equity loss and net loss for 2005 was increased by $0.8 million to $2.9 million
and $3.7 million, respectively, and as of June 30, 2005, the accumulated deficit
was increased by $0.8 million to $6.8 million and the investment in and advances
to investment method investee were decreased by $0.8 million to $3.3 million.
Basic loss per ordinary share was increased to $0.24 from $0.19. We also
restated our income tax disclosures for the year ended June 30, 2005. There was
no impact on our 2005 consolidated balance sheet or income statement arising
from this restatement. In July 2004, we authorized to change our common shares
from $1 par value per share to no par value. Our 2005 financial statement did
not reflect such changes. There was no impact on our 2005 consolidated balance
sheet or income statement arising from this restatement. Our Company
reclassified $0.1 million of receivables from accounts receivable to prepaid
expenses and others in the 2005 consolidated balance sheet. Our Company has
disclosed $0.6 million of accrued power charges and $0.4 million of accrued
cobalt royalties separately from accounts payable and accrued liabilities in the
restated 2005 consolidated balance sheet. These amounts were previously
disclosed in accounts payable and accrued liabilities. Agency fees of $0.5
million have been reclassified from cost of operations to sales of cobalt in the
2005 restated consolidated statement of operations. Depreciation had previously
been included in cost of operations in the consolidated statement of operations.
Our Company has reclassified depreciation expenses as a separate line item on
the consolidated statement of operations in the determination of gross profit.
Our Company had previously classified rehabilitation expense as a component of
expenses in the consolidated statement of operations. Our Company has determined
that it should be included in the determination of gross

---

18

profit. Accordingly, gross profit has decreased $0.1 million
and $0.3 million for the years ended June 30, 2005 and 2004, respectively.

A.      Operating results.

Our results of operations have been, and may continue to be,
affected by many factors of a global nature, including economic and market
conditions, the availability of capital, the level and volatility of prices and
interest rates, currency values, commodities prices and other market indices,
technological changes, the availability of credit, inflation and legislative and
regulatory developments. Factors of a local nature, which include the political,
social, financial and economic stability, the availability of capital,
technology, workers, engineers and management, geological factors and weather
conditions, also affect our results of operations. See "Key Information  Risk
Factors". As a result of the economic and competitive factors discussed above,
our results of operations may vary significantly from period to period.

The spot market for cobalt is negotiated between the producers
or an intermediary trader and the end user. Cobalt is not listed on any trading
exchange, so no official current market price exists. Western Mining Corporation
offers small quantities (usually five or ten tonne lots) for sale on its company
web site. The London-based Metal Bulletin magazine is published weekly and gives
high and low prices for 99.3% and 99.8% cobalt. These prices are produced from
information made available to the magazine and do not purport to reflect the
average of all transactions. Many producers and customers enter into long term
contracts for the supply of a given volume of cobalt at prices that are fixed or
determined by formula (based on Metal Bulletin or Western Mining quotes). Within
the two concentrate grades of 99.3 and 99.8% there is a large variation in level
of various impurities measured in parts per million. Some impurities are of a
major concern to some consumers and not to others, depending on the final
product incorporating the metal. Thus the market is further complicated by these
different levels of acceptability. The cobalt produced by Kasese has tended to
be priced at between the low and high prices for 99.8% concentrate grade cobalt.
Due to the recent volatility of prices, consumers have purchased heavily when
prices were rising, fearing higher costs and have avoided any inventory build up
as prices fall, waiting for better costs.

Year Ended June 30, 2006 Compared to Year Ended June 30,
2005

The Company sold 1.6 million pounds of cobalt for $18.1 million
in the fiscal year 2006, compared to 1.1 million pounds of cobalt for $15.4
million in the fiscal year 2005. The average net price realized was $11.27 per
pound in the fiscal year 2006, compared to $13.50 per pound in the fiscal year
2005.

The cost of sales was $16.5 million and $12.5 million for the
fiscal years 2006 and 2005, respectively. The cost of sales included
depreciation charges of $5.8 million and $4.6 million and the rehabilitation
expense was $0.2 million and $0.1 million in fiscal years 2006 and 2005,
respectively. The gross profit was $1.6 million and $3.0 million for the fiscal
years 2006 and 2005, respectively. The decrease in gross profit was due to lower
realized prices in 2006.

The general and administrative expenses were $3.3 million and
$3.8 million for the fiscal years 2006 and 2005, respectively. The operating
loss was $1.6 million and $0.8 million for the fiscal years 2006 and 2005,
respectively.

We recognized an equity loss of $1.9 million and $2.9 million
for the fiscal years 2006 and 2005, respectively, representing our proportionate
share in the operating loss of our equity method investee.

The net loss was $3.3 million (or basic loss per share of
$0.22) and $3.7 million (or basic loss per share of $0.24) for each of the
fiscal years 2006 and 2005, respectively.

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19

Year Ended June 30, 2005 Compared to Year Ended June 30,
2004

Our Company sold 1.1 million pounds of cobalt for $15.4 million
in the fiscal year 2005, compared to 353,572 pounds of cobalt for $5.0 million
in the fiscal year 2004. The average net price realized was $13.50 per pound in
the fiscal year 2005, compared to $14.20 per pound in the fiscal year 2004.
Kasese Cobalt Company was placed on a care and maintenance program in September
2002. It resumed production in 2004.

Kasese Cobalt Company earned $nil and $0.4 million from power
sales for the fiscal years 2005 and 2004, respectively. Its hydro-power plant
generates electricity for its own use, and any excess power, when available, is
sold to a government power company. The cost of sales was $12.5 million and $4.0
million for the fiscal years 2005 and 2004, respectively. The cost of sales
included depreciation charges of $4.6 million and $1.7 million for the fiscal
years 2005 and 2004, respectively. The rehabilitation expense was $0.1 million
and $0.3 million for the fiscal years 2005 and 2004, respectively. The gross
profit was $3.0 million and $1.4 million for the fiscal years 2005 and 2004,
respectively.

The general and administrative expenses were $3.8 million and
$1.7 million for the fiscal years 2005 and 2004, respectively. The operating
loss was $0.8 million and $0.3 million for the fiscal years 2005 and 2004,
respectively.

We recognized an equity loss of $2.9 million and $0.5 million
for the fiscal years 2005 and 2004, respectively, representing our proportionate
share in the operating loss of our equity method investee.

The net loss was $3.7 million (or basic loss per share of
$0.24) and $0.5 million (or basic loss per share of $0.03) for the fiscal years
2005 and 2004, respectively.

Restatement of 2005 Financial Statements

During the year ended June 30, 2004, Mass Financial transferred
its 49% interest in and its advances to an equity method investee to our Company
at carrying value of $5,905. The investee owns a cobalt refinery in Ontario,
Canada.

The Company has accounted for this equity method investee in
accordance with EITF 99-10, Percentage Used to Determine the Amount of Equity
Method Losses. The Task Force reached a consensus in EITF 99-10 that an
investor should not recognize equity method losses based solely on the
percentage of investee common stock held by the investor. The Task Force also
discussed whether an investor should recognize equity method losses based on (a)
the ownership level of the particular investee security or loan/advance held by
the investor to which the equity method losses are being applied or (b) the
change in the investor's claim on the investee's book value. The Task Force did
not reach a consensus on the appropriate method, and observed that both approach
(a) and (b) are acceptable. In the year ended June 30, 2004, we adopted approach
(a) as our accounting policy. In 2005, we inappropriately changed our accounting
treatment by adopting method (b) resulting in an error in the previously issued
financial statements. Our Company has restated our audited financial statements
for the year ended June 30, 2005. The effects of the restatement are summarized
in Note 2 to the consolidated financial statements included in this annual
report. As a result of the restatement, the equity loss and net loss for 2005
was increased by $0.8 million to $2.9 million and $3.7 million, respectively,
and as of June 30, 2005, the accumulated deficit was increased by $0.8 million
to $6.8 million and the investment in and advances to investment method investee
were decreased by $0.8 million to $3.3 million. Basic loss per share was
increased to $0.24 from $0.19.

---

20

We also restated our income tax disclosures for the year ended
June 30, 2005. There was no impact on our 2005 consolidated balance sheet or
income statement arising from the restatement

Our Company has reclassified $143 of receivables from accounts
receivable to prepaid expenses and others in the 2005 consolidated balance
sheet.

Our Company has disclosed $569 of accrued power charges and
$359 of accrued cobalt royalties separately from accounts payable and accrued
liabilities in the restated 2005 consolidated balance sheet. These amounts were
previously disclosed in accounts payable and accrued liabilities.

In July 2004, our Company changed our authorized share capital
from ordinary shares with a par value of $1 each to without par value. Our
Company's 2005 financial statements did not reflect such a change. On October
27, 2006, our Company changed our authorized share capital again which resulted
in us once again having ordinary shares with a par value of $1 each.

Agency fees of $462 have been reclassified from cost of
operations to sales of cobalt in the 2005 restated consolidated statement of
operations.

Depreciation had previously been included in cost of operations
in the consolidated statement of operations. Our Company has reclassified
depreciation expenses as a separate line item on the consolidated statement of
operations in the determination of gross profit.

Our Company had previously classified rehabilitation expense as
a component of expenses in the consolidated statements of operations. Our
Company has determined that it should be included in the determination of gross
profit. Accordingly, gross profit has decreased $140 and $261for the years ended
June 30, 2005 and 2004, respectively.

Application of Critical Accounting Policies

The preparation of financial statements in conformity with
applicable generally accepted accounting principles requires our management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting periods.

Our management routinely makes judgements and estimates about
the effects of matters that are inherently uncertain. As the number of variables
and assumptions affecting the probable future resolution of the uncertainties
increase, these judgements become even more subjective and complex. We have
identified certain accounting policies, described below, that are the most
important to the portrayal of our current financial condition and results of
operations. Our significant accounting policies are disclosed in Note 1 to our
consolidated financial statements included in this annual report.

Revenue Recognition

Our Company's primary business is cobalt refining and our
revenue primarily comes from the sale of cobalt. Our Company receives orders
from the sales agent, and ships the finished goods as instructed. The revenue is
recognized when the finished goods are delivered to the port where the buyers
take over title of the goods, the terms of the sales are known and complied with
and no significant Company obligations remain. Management believes that the risk
of misstating revenue is very remote and the only major misstatement, if any,
may come from the period-end cut-off.

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21

Valuation of Equity Method Investments

We have an investment which is accounted for by the equity
method. Under the equity method, the investment is initially recorded at cost,
then reduced by dividends and increased or decreased by our proportionate share
of the investee's net earnings or loss.

When there has been a loss in value other than a temporary
decline, the investment will be written down to recognize the loss.

A decline in value may be only temporary in nature or may
reflect conditions that are more persistent. Declines may be attributable to
general market conditions, either globally or regionally, that reflect the
prospects of the economy as a whole or prospects of a particular industry or a
particular company. Such declines may or may not indicate the likelihood of
ultimate recovery of the carrying amount of a security. We regularly review our
position to determine whether an other than temporary decline exists.

In determining whether the decline in value is other than
temporary, quoted market price, if available, is not the only deciding factor.
We consider, but such consideration is not limited to, the following
factors:

| | (a) | trend of the quoted market price and trading volume, if
      available;                                            
| | --- | --------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                     
| | (b) | financial position and results for a period of
    years;                                                           
| |     |                                                                                                                     
| | (c) | liquidity or going concern problems of the
    investee;                                                            
| |     |                                                                                                                     
| | (d) | changes in or reorganization of the investee and/or its
      future business plan;                                 
| |     |                                                                                                                     
| | (e) | outlook of the investee's industry;                                                                                 
| |     |                                                                                                                     
| | (f) | the current fair value of the investment (based upon an
      appraisal thereof) relative to its carrying value; and
| |     |                                                                                                                     
| | (g) | our business plan and strategy to divest the security or
      to restructure the investee.                         

Impairment of Long-Lived Assets

We periodically evaluate long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. In performing the review of recoverability, we estimate future
cash flows expected to result from the use of the asset and its eventual
disposition. The estimates of future cash flows, based on reasonable and
supportable assumptions and projections, require our management to make
subjective judgements. In addition, the time periods for estimating future cash
flows is often lengthy, which increases the sensitivity of the assumptions made.
Depending on the assumptions and estimates used, the estimated future cash flows
projected in the evaluation of long-lived assets can vary within a wide range of
outcomes. Our management considers the likelihood of possible outcomes in
determining the best estimate of future cash flows.

Rehabilitation Provision

Our refinery activities are subject to various laws, statutes,
ordinances and contracts governing the protection of the environment. We adopt
Financial Accounting Standards Board Statement ("FAS") No. 143, Accounting
for Asset Retirement Obligations, which addresses financial accounting and
reporting for

---

22

obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs.

FAS No. 143 applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development and/or the normal operation of a long-lived asset, except for
certain obligations of lessees. A legal obligation is an obligation that a party
is required to settle as a result of an existing or enacted law, statute,
ordinance, or written or oral contract or by legal construction of a contract
under the doctrine of promissory estoppel.

In compliance with the FAS No. 143, we recognize the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred if a reasonable estimate of fair value can be made. If a reasonable
estimate of fair value cannot be made in the period the asset retirement
obligation is incurred, the liability shall be recognized when a reasonable
estimate of fair value can be made. Upon initial recognition of a liability for
an asset retirement obligation, we capitalize an asset retirement cost by
increasing the carrying amount of the related long-lived asset by the same
amount as the liability. In periods subsequent to initial measurement, we
recognize period-to-period changes in the liability for an asset retirement
obligation resulting from (a) the passage of time and (b) revisions to either
the timing or the amount of the original estimate of undiscounted cash
flows.

Accounting for the rehabilitation provision requires management
to make estimates of the future costs that we will incur to complete the
reclamation and remediation work required to comply with the current laws,
statutes, ordinances and contacts. We make these estimates based on the current
data. We also need to make interpretation of such laws, statutes, ordinances and
contacts, and our interpretation may be different from that of the lawmakers,
regulatory agencies or other contracting parties. Furthermore, future changes
and amendment to the laws, statutes, ordinances and contracts usually increase
the extent of the reclamation and remediation work required to be performed.
Actual costs incurred in the future periods could differ our current estimates.
Any such increases in the future costs could have material adverse impact on our
financial positions and result of operations.

Inventories

Our inventories consist of spare parts and materials,
work-in-progress and finished goods. Spare parts and materials are stated at the
lower of the weighted average cost or replacement cost. We review the valuation
allowance periodically. The primary factors that affect the valuation allowance
include the short-term and long-term metals prices and the current production
process which includes, but not limited to, the input factors such as labor,
fuel and energy, materials and supplies, the quality of the finished goods, the
production level, productivity and efficiency.

Work-in-progress represents materials that are currently in the
process of being converted into a saleable product. We measure the
work-in-progress in terms of a percentage of finished goods. Such estimation is
based on our production and process engineering reports. The work-in-progress is
valued at the weighted average cost of production and the net realizable value
of its finished product less additional cost to complete, whichever is
lower.

Finished goods of cobalt are stated at the lower of weighted
production cost or net realizable value. The production costs include the
material cost, depreciation, direct labor and manufacturing overhead.

We review the valuation allowance for the work-in-progress and
finished goods periodically, and not less than on a quarterly basis.

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23

The allocation of cost to work-in-progress and finished goods
involves the use of estimates and assumptions, which include the production and
engineering data. A degree of judgment is involved in determining such
assumptions and estimates and no assurance can be given that actual results will
not differ significantly from the corresponding estimates and assumptions, until
all work-in-progress has been converted into finished goods.

We review our inventory activity reports regularly, and perform
a stock count at least once a year. We review our inventory activity reports as
part of our production planning and control procedure, as well as financial
control. During such review, we identify the slow-moving, obsolete or excess
spare parts and materials, if any. Our production engineers may modify our
production process, to a limited extent, to use such slow-moving or excess
materials in the production, or put them into alternative use. The slow-moving
items may indicate that such items are damaged. Management usually reviews the
inventory activity reports with our finance department to determine whether a
write-down or valuation allowance is required. Unless the items are badly
damaged, the review of the slowing moving, excess or obsolete items and their
alternative use are judgmental and their ultimate outcome may be different from
what we estimate.

Recent Developments

Cobalt production for the 12 months ended June 30, 2006 was 684
tonnes and has averaged 56.5 tonnes per month from July to November, 2006. The
market price per pound for Kasese grade cobalt has increased from $13.00 on June
30, 2005 to $14.50 on June 30, 2006. The current price in December 2006 of
Kasese grade cobalt is approximately $20.00 per pound.

Since June 30, 2006, the price of cobalt has experienced market
volatility. We sold 333,339 pounds of cobalt for $4.2 million in the quarter
ended September 2006 in which the average net price realized was $12.60 per
pound.

B.       Liquidity and capital
  resources.

As of June 30, 2006, we had cash on hand of $1.8 million and as
of June 30, 2005, we had cash on hand of $0.7 million.

Operating Activities

The operating activities provided cash of $1.3 million in the
fiscal year 2006, compared to $2.7 million in the fiscal year 2005. Cash
provided by operating activities decreased in the fiscal year 2006, largely due
to an increase in receivables from affiliates of $3.9 million as compared to
$Nil in the fiscal year 2005. The decrease in cash flow from operating
activities reflected the lower price of cobalt in the current year.

At present, the revenue earned by us comes from cobalt sales of
Kasese Cobalt Company. In 2004, Kasese Cobalt Company entered into a
distribution agreement with Danzas, a wholly-owned subsidiary of MFCC, a
subsidiary of Mass Financial. This distribution agreement between Kasese Cobalt
Company and Danzas was assigned to us at the completion of the plan of
arrangement. MFCC continues to be our sales agent. We believe that these
arrangements will permit us to generate sufficient cash flow from operations to
meet our working capital and other requirements for the next twelve months.
There are no material capital expenditures commitments at the Kasese Cobalt
Company refinery. Given current market demand for Kasese cobalt, we anticipate
that our cash flow from Kasese Cobalt Company will meet our operating
expenses.

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24

Investing Activities

The investing activities used cash of $0.2 million and $0.3
million on capital assets in the fiscal years 2006 and 2005, respectively.

Financing Activities

The financing activities used cash of $23,000 on the repurchase
of shares during the fiscal year 2006, compared to $1.8 million on a dividend
payment to KHD Humboldt Wedag International in December 2004, prior to the
distribution of our ordinary shares to the shareholders of KHD Humboldt Wedag
International.

The Company declared and paid a cash distribution of $0.25 per
share to its holders of ordinary shares, totalling $3.8 million in September
2006.

We had no material commitments to acquire assets or operating
businesses at June 30, 2006. We do not anticipate any acquisition of businesses
or commitments to projects in the future. We intend to pay to our shareholders a
distribution by way of dividends and/or return of capital in the future, subject
to availability of cash and our capital requirements.

Foreign Currency

Substantially all of our operations are conducted in US
dollars. Cobalt transactions are quoted in US dollars.

Derivative Instruments

Derivatives are financial instruments, the payments of which
are linked to the prices, or relationships between prices, of securities or
commodities, interest rates, currency exchange rates or other financial
measures. Derivatives are designed to enable parties to manage their exposure to
interest rates and currency exchange rates, and security and other price
risks.

We do not have any derivative instruments which are subject to
the requirements of FAS No. 133,

Accounting for Derivative Instruments and Hedging
Activities.

Inflation

We do not believe that inflation has had a material impact on
our revenues or income over the past two fiscal years. However, increases in
inflation could result in increases in our expenses, which may not be readily
recoverable in the price of products sold to our customers. To the extent that
inflation results in rising interest rates and has other adverse effects on
capital markets and the economy, it could adversely affect our financial
position and profitability.

C.      Research and development,
  patents, licenses, etc.

We do not currently, and did not previously, have research and
development policies in place. Over the past three fiscal years, we have not
expended any material amounts on research or development.

D.      Trend information.

The commodity price of cobalt has a direct impact on our
revenue prospects and our ability to raise capital. Generally in 2006, the trend
for the price of cobalt has been upward. Although there is no

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25

assurance that this trend will continue, management is
optimistic that the current price level will continue for the foreseeable
future.

E.       Off-balance sheet arrangements.

We do not have any off-balance sheet arrangements that have, or
are reasonably likely to have, a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resource that is material
to investors.

F.       Tabular disclosure of contractual
  obligations.

We do not have any contractual obligations and commitments as
of June 30, 2006 that will require significant cash outlays in the future.

G.       Safe harbor.

The safe harbor provided in Section 27A of the Securities Act
and Section 21E of the Exchange Act ("statutory safe harbors") shall apply to
forward-looking information provided pursuant to Item 5.E and F. All information
set out in Item 5.E.1 and 5.E.2 is deemed to be a "forward looking statement" as
that term is defined in the statutory safe harbors, except for historical
facts.

Item 6.       Directors, Senior Management
  and Employees

A.      Directors and senior management.

The following table sets forth the names, business experience
and function/areas of expertise of each of our directors and officers:

|Name Office Held Age                                                           |  | Area of Experience and Functions in Blue Earth                                                                                                                                                                                                                                                                                                                       
|------------------------------------------------------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                               |  |                                                                                                                                                                                                                                                                                                                                                                      
|Michael J. Smith 
      Director, President
      and Secretary 
      Age: 58 |  | Director since 2004. As director, Mr. Smith is
      responsible for the management and supervision of our board of directors
      and of the affairs and business of our Company. As President and Secretary,
      Mr. Smith is responsible for our day-to-day operations, management of our
      financing functions and for developing our strategic direction.
|Rajesh Kumar Singhal 
      Director 
      Age: 44                            |  | Director since 2005. As a director, Mr. Singhal is responsible
      for the management and supervision of the affairs and business of our Company.                                                                                                                                                                                                                  
|                                                                               |  |                                                                                                                                                                                                                                                                                                                                                                      
|Nowroz Jal Cama 
      Director Age: 62                                        |  | Director since 2005. As a director, Mr. Jal Cama
      is responsible for the management and supervision of the affairs and business
      of our Company.                                                                                                                                                                                                           

Michael J. Smith  Director, President, Chief Executive
Officer and Secretary

Michael J. Smith has been our President, Chief Executive
Officer, Secretary and a director since 2004. Mr. Smith has extensive experience
in advisory services, corporate finance and restructuring. Mr. Smith was the
President and Chief Executive Officer of KHD Humboldt Wedag International from
1996 to March 7, 2006 when Mr. Smith voluntarily resigned from such positions.
Mr. Smith has been the Chief Financial Officer and Secretary of KHD Humboldt
Wedag International since 2003 and a director since 1986. KHD Humboldt Wedag
International is a publicly traded company listed on the Nasdaq Global Market
with its common shares registered with the SEC under the Securities Exchange
Act of 1934. Mr.

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26

Smith is also Chief Executive Officer, Chief Financial Officer
and a director of Cathay Merchant Group, Inc., a public company with its common
shares registered with the SEC under the Securities Exchange Act of 1934.
Mr. Smith is also the President and a director of Mass Financial.

Rajesh Kumar Singhal  Director

Rajesh Kumar Singhal has been a director since 2005. Rajesh
Kumar Singhal obtained a Diploma in Tool and Die Making from NTTF Tellicherry
Kerola and is employed as a training officer.

Nowroz Jal Cama  Director

Nowroz Jal Cama has been a director since 2005. Nowroz Jal Cama
has extensive experience in banking, corporate finance and human resources
development. Since 2005, Nowroz Jal Cama has been a director of Sasamat Capital
Corporation (a related party).

There are no family relationships between any of our executive
officers or directors. There are no arrangements or understandings with major
shareholders, customers, suppliers or others pursuant to which any person
referred to above was selected as a director or executive officer.

B.       Compensation.

Executive Compensation

The following table provides a summary of compensation paid by
us during the fiscal year ended June 30, 2006 to our President and Secretary and
to our next four most highly paid executive officers who received a combined
salary and bonus during such period in excess of $100,000:

|SUMMARY COMPENSATION TABLE                                            
|----------------------------------------------------------------------
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Name and                                                              
|Principal Position                                                    
|                                                                      
|Michael J. Smith 
      President,
      Secretary and 
      Director

Option Grants During the Most Recently Completed
Financial Year

We did not grant any stock options during the financial year
ended June 30, 2006.

Aggregated Option Exercises During the Most Recently
Completed Financial Year and Financial Year-End Option Values

No options were exercised during the financial year ended June
30, 2006 and there are no options currently outstanding.

---

27

Option and SAR Repricing

No options were repriced during the financial year ended June
30, 2006.

Directors' Compensation

During the 2006 fiscal year, Michael J. Smith did not receive
any compensation as a director of our Company. Rajesh K. Singhal and Nowroz Jal
Cama received $600 per month as compensation as a director of our Company and
$150 for each meeting of directors that they attended. We also reimburse our
directors and officers for expenses incurred in connection with their services
as our directors and officers.

Stock Option Plan

We do not currently have a stock option plan and there are no
stock options outstanding at the date of this annual report.

C.      Board practices.

The election and retirement of our directors are provided for
in our Articles of Association. Each director holds office until his or her
successor takes office or until his or her death, resignation or removal.

At our last annual meeting of shareholders held in 2004, five
directors were elected for five year terms. In 2005, four of our directors, Mr.
Shuming Zhao, Dr. Kelvin Yao, Dr. Stefan Feuerstein and Ms. Silke Brossmann,
each resigned independently. Dr. Feuerstein resigned on March 9, 2005, Mr. Zhao
and Dr. Yao resigned on March 15, 2005 and Ms. Brossmann resigned on April 11,
2005. Two of the resulting vacancies on our board of directors were filled by a
resolution of our remaining director. Mr. Rajesh Kumar Singhal and Mr. Nowroz
Jal Cama were appointed as directors to fill the vacancies created by these
resignations. Each of them will serve the remaining terms of the directorships
to which they were appointed. Commencing with the 2009 annual meeting of
shareholders, and as permitted under the corporate law of the British Virgin
Islands, our directors are required to be divided into five classes: Class I,
Class II, Class III, Class IV and Class V, as equal in number as possible.

Audit Committee

We do not currently have an audit committee.

Compensation Committee

We do not currently have a compensation committee.

D.      Employees.

Currently, Blue Earth does not have any employees. As of June
30, 2006, Kasese Cobalt Company, our operating subsidiary, had approximately 250
employees, of which 125 employees belonged to a non-compulsory Ugandan national
union, Uganda Mines Metal and Allied Workers Union. Their current collective
agreement is to expire on January 31, 2007. We expect to extend the agreement to
January 2008 with similar terms.

---

28

E.      Share ownership.

There were 15,142,836 ordinary shares of our Company issued and
outstanding as of February 1, 2007. The number of our ordinary shares owned by
our directors or executive officers as of that date were:

|Name                 |  | Number of Common Shares |  |              
|-------------------- |  | ----------------------- |  | -------------
|Office
      Held    |  | Beneficially Owned      |  | Percentage(1)
|Michael J. Smith(2)  |  | 1,639,400(3)            |  | 10.8%        
|Rajesh Kumar Singhal |  | Nil                     |  | Nil          
|Nowroz Jal Cama      |  | Nil                     |  | Nil          

|(1) | Based on 15,142,836 ordinary shares issued and
      outstanding as at February 1, 2007.
|--- | ----------------------------------------------------------------------------------------
|    |                                                                                         
|(2) | Michael J. Smith is the President and a director of Mass
      Financial Corporation.   
|    |                                                                                         
|(3) | This number includes 1,554,400 indirectly held by Mass
      Financial Corporation.     

**Item 7.** Major
Shareholders and Related Party Transactions

A.       Major shareholders.

The following table sets forth, as of February 1, 2007, the only persons known
  to us to be the beneficial 
  owner of more than five (5%) of our common shares:

|                     |  |               |     |  | Percentage of    |    
|-------------------- |  | ------------- | --- |  | ---------------- | ---
|                     |  | No. of Common |     |  | Outstanding      |    
|Name of Shareholder  |  | Shares Owned  |     |  | Common Shares(1) |    
|Peter Kellogg        |  | 4,863,546     | (2) |  | 32.1%            | (2)
|Mass Financial Corp. |  | 1,554,400     |     |  | 10.3%            |    
|Lloyd I. Miller, III |  | 994,542       | (3) |  | 6.6%             | (3)

|(1) | Based on 15,142,836 common shares issued and outstanding
      as at February 1, 2007.                                                                                                                                                                                                                                                                                                                                                             
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(2) | In the public filings made by Peter Kellogg with respect
      to his shares in our Company, 4,290,846 shares are held by IAT Reinsurance
      Company Ltd., 522,700 shares are held by a foundation which is jointly
      administered by Mr. Kellogg and his wife and 50,000 shares are held by a
      partnership controlled by Mr. Kellogg. Mr. Kellogg disclaims beneficial
      ownership of the shares owned by IAT Reinsurance Company.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(3) | In the public filings made by Lloyd I. Miller, III with
      respect to his shares in our Company, Lloyd I. Miller, III shares voting
      and dispositive control over 673,302 shares as an investment advisor to
      the trustee of certain family trusts and with respect to shares owned by
      his wife.                                                                                                                                

B.      Related party transactions.

Other than as disclosed herein, to the best of our knowledge,
there have been no material transactions since formation of our Company to which
we were or are a party and in which any of our directors or officers, any
relative or spouse of any director or officer, or any individual owning,
directly or indirectly, an interest in our voting power that gives it
significant influence over us, has or will have a direct or indirect material
interest nor were any of our directors or officers, any relatives or spouses of
such directors or officers, or any individuals owning, directly or indirectly,
an interest in our voting power that gives them significant influence over us,
indebted to us during this period.

---

29

In 2004, Kasese Cobalt Company entered into an exclusive
distribution agreement for an initial term ending December 31, 2014, with Danzas
Corporation to sell all of the cobalt produced by Kasese Cobalt Company. Danzas
had an agreement with its parent corporation, MFCC, a subsidiary of Mass
Financial, whereby MFCC acted as Danzas' sales agent. Pursuant to an Assignment,
Consent and Amendment Agreement dated December 30, 2004, our Company replaced
Danzas as the party of the distribution agreement, acquired all of Danzas'
claims, rights and entitlements and assumed all of Danzas' obligations under the
distribution agreement. Until June 30, 2005, MFCC charged agency fees of $1.50
per pound of cobalt sold. Our Company renegotiated agency fees with MFCC and
from July 1, 2005 to June 30, 2006, the agency fees were revised to $0.50 per
pound of cobalt sold. MFCC also charged fees for additional services rendered to
our Company. Total fees of $1.3 million, $2.2 million and $0.5 million were paid
or payable to MFCC for the years ended June 30, 2006, 2005 and 2004,
respectively.

Our Company has an amount due from (to) MFCC in the amount of
$3.5 million and $(0.5 million) at June 30, 2006 and 2005, respectively,
primarily for cobalt sales proceeds net of the purchase of supplies and
materials. During the years ended June 30, 2006, 2005 and 2004, our Company
purchased supplies and materials amounting to $nil, $1.4 million and $1.5
million from MFCC, which are paid in the normal course.

Kilembe Mines owes our Company $1.6 million in an unsecured
loan which is payable through forfeiture of any future dividends if payable by
Kasese Cobalt Company. This amount is fully reserved because of the uncertainty
that Kasese Cobalt Company will pay dividends.

During 2005, certain expenses of our Company were paid by KHD
Humboldt Wedag International in the amount of $0.5 million.

Our Company has an amount due to KHD Humboldt Wedag
International in the amount of $nil and $0.5 million at June 30, 2006 and 2005,
respectively.

During 2006, certain expenses of our Company were paid by Mass
Financial in the amount of $0.6 million.

Our Company has an amount due to Mass Financial in the amount
of $0.6 million and $nil at June 30, 2006 and 2005, respectively.

These transactions were in the normal course of operations and
were measured at the exchange value, which is the amount of consideration
established and agreed to by the affiliated parties.

C.      Interests of experts and
  counsel.

None of the named experts or counsellors employed on a
contingent basis owns shares in the Company or its subsidiaries or has a
material, direct or indirect economic interest in the Company.

Item 8.      Financial Information

A.      Consolidated statements and
  other financial information.

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

---

30

Financial Statements filed as part of this annual
report:

The following financial statement of our Company are filed as
part of this annual report:

Report of Independent Registered
Chartered Accountants dated February 16, 2007

Report of Independent Registered Public
Accounting Firm dated December 2, 2005 (February 1, 2007 as to the effects of
the restatement discussed in Note 2)

Report of Independent Registered Public
Accounting Firm dated September 3, 2004 except for the effects of the stock
split described in Note 1, the date of which was December 30, 2004

Consolidated Balance Sheets as at June
30, 2006 and 2005 (Restated)

Consolidated Statements of Operations
for the years ended June 30, 2006, 2005 (Restated) and 2004

Consolidated Statements of
Comprehensive Income (Loss) for the years ended June 30, 2006, 2005 (Restated)
and 2004

Consolidated Statements of Changes in
Shareholders' Equity for the years ended June 30, 2006, 2005 (Restated) and
2004

Consolidated Statements of Cash Flows
for the years ended June 30, 2006, 2005 (Restated) and 2004

Notes to Consolidated Financial
Statements

The following financial statement of 4025776 Canada Inc., an
investee accounted for by the equity method, are filed as part of this annual
report:

Report of Independent Auditor dated
January 16, 2007

Report of Independent Registered Public
Accounting Firm dated September 3, 2004 Consolidated Balance Sheets as at June
30, 2006 and 2005 Consolidated Statements of Operations for the years ended June
30, 2006, 2005 and 2004

Consolidated Statements of Changes in
Shareholders' Deficiency for the years ended June 30, 2006, 2005 and 2004

Consolidated Statements of Cash Flows
for the years ended June 30, 2006, 2005 and 2004

Notes to Consolidated Financial
Statements

Legal Proceedings

There are no legal proceedings to which we are a party and, to
our knowledge, no such proceedings are pending.

---

31

Dividend Distributions

During our fiscal year ended June 30, 2005, our board of
directors distributed $1.8 million to KHD Humboldt Wedag International prior to
the distribution of our ordinary shares to the shareholders of KHD Humboldt
Wedag International. Subsequent to fiscal year ended June 30, 2006, our board of
directors declared and paid a cash distribution of $0.25 per share on our issued
and outstanding ordinary shares to our shareholders of record as of September
18, 2006. We distributed an aggregate of $3,785,709 to our shareholders of
record. We may pay additional cash dividends or distributions on our shares in
the foreseeable future. However, any future payment of dividends or
distributions will be determined by our board of directors on the basis of our
earnings, financial requirements and other relevant factors. Successful
operation of the cobalt assets is subject to a number of risks and
uncertainties, including those described under the heading "Risk Factors".

B.      Significant changes.

Our management is not aware of any significant changes.

Item 9.      The Offer and Listing

A.      Offer and listing details.

The following table sets forth the high and low sales of prices
of our ordinary shares on the Pink Sheets LLC for the periods indicated since
May 26, 2005, the first day when prices for our ordinary shares were published
by the Pink Sheets.

|                                              | Pink Sheets
|--------------------------------------------- | -----------
|                                              | High       
|                                              | (U.S.$)    
|Annual Highs and Lows                         |            
|For the Fiscal Year Ended June 30,
      2006 | $1.97      
|                                              |            
|Quarterly Highs and Lows                      |            
|For the Fiscal Year Ended June 30, 2006       |            
|Quarter ended September 30, 2005              | $1.97      
|Quarter ended December 31, 2005`              | $1.97      
|Quarter ended March 31, 2006                  | $1.50      
|Quarter ended June 30, 2006                   | $1.70      
|                                              |            
|Monthly Highs and Lows Subsequent             |            
|to the Fiscal Year Ended June 30,
      2006  |            
|June                                          | $1.38      
|July                                          | $1.30      
|August                                        | $1.35      
|September                                     | $1.70      
|October                                       | $1.65      
|November                                      | $2.00      

The transfer of our common shares is managed by our transfer
agent, Mellon Investor Services, LLC, 480 Washington Boulevard, Jersey City, NJ
07310.

B.      Plan of distributions.

Not applicable.

---

32

C.      Markets.

Our ordinary shares quoted on the Pink Sheets LLC under the
symbol "BUERF".

D.      Selling shareholders.

Not applicable.

E.      Dilution.

Not applicable.

F.      Expenses of the issue.

Not applicable.

Item 10.      Additional Information

A.      Share capital.

Not applicable.

B.      Memorandum and articles of
  association.

Incorporation

We were incorporated in the British Virgin Islands on November
25, 2003 under the name Nature Extrac Limited. We formally changed our corporate
name to Blue Earth Refineries Inc. effective July 8, 2004.

2006 Amendment to Memorandum and Articles of
Association

On October 27, 2006, our board of directors filed an amendment
to our Memorandum of Association and Articles of Association with the Registry
of Corporate Affairs, British Virgin Islands. As a result of the amendments, we
changed our authorized share capital from $100,000,000 without par value to
100,000,000 ordinary shares with a par value of $1.00 each. As of October 27,
2006, the authorized capital of our Company consists of 100,000,000 ordinary
shares of $1.00 par value and 100,000,000 Class A Preferred shares without par
value.

C.      Material contracts.

Other than the term sheet dated November 30, 2006, between our
Company and First Equity Securities, whereby we agreed to sell all of our
interest in 36569 Yukon, we have not entered into any material contracts during
the last twenty-four months from the date of this annual report which were not
otherwise entered into in the normal course of business.

D.      Exchange controls.

There are no restrictions on foreign exchange in the Territory
of the British Virgin Islands.

---

33

E.      Taxation.

United States Federal Income Taxation

The following is a general discussion of the material United
States federal income tax consequences which may be applicable to a US holder of
our ordinary shares who holds such shares as capital assets. This discussion
does not address all relevant federal income tax matters and it does not address
consequences peculiar to persons subject to special provisions of federal income
tax law, such as those described below and excluded from the definition of a US
holder. In addition, this discussion does not cover any state, local or foreign
tax consequences.

The following discussion is based on sections of the
Internal Revenue Code of 1986, as amended, treasury regulations,
published Internal Revenue Service rulings, published administrative portions of
the IRS and court decisions that are currently applicable, any or all of which
could be materially and adversely changed, possibly on a retroactive basis, at
any time. In addition, this discussion does not consider the potential effects,
both adverse and beneficial, of any recently proposed legislation which, if
enacted, could be applied, possibly on a retroactive basis, at any time.

The following discussion is not intended to be, nor should
it be construed to be, legal or tax advice to any holder of our ordinary shares,
and no opinion or representation with respect to the US federal income tax
consequences to any such holder or prospective holder is made. Accordingly,
holders of our ordinary shares should consult their own tax advisors about
federal, state, local and foreign tax consequences.

As used herein, a "US holder" includes a holder of our ordinary
shares who is a citizen or resident of the United States, a corporation created
or organized in or under the laws of the United States or of any political
subdivision thereof, any entity which is taxable as a corporation for US tax
purposes and any other person or entity whose ownership of our ordinary shares
is effectively connected with the conduct of a trade or business in the United
States. A US holder does not include persons subject to special provisions of US
federal income tax law, such as tax-exempt organizations, qualified retirement
plans, financial institutions, insurance companies, real estate investment
trusts, regulated investment companies, broker-dealers, non-resident alien
individuals or foreign corporations whose ownership of common shares is not
effectively connected with the conduct of a trade or business in the United
States and shareholders who acquired their shares through the exercise of
employee stock options or otherwise as compensation.

Distributions

A distribution to a US holder of our ordinary shares will
generally be taxed as follows: first, as a taxable dividend to the extent of the
shareholder's pro rata share of our current and accumulated earnings and
profits; second, as a return of capital and reduction of the shareholder's basis
in the our ordinary shares to the extent the distribution exceeds the
shareholder's pro rata share of current and accumulated earnings and profits;
and third, as capital gain to the extent the distribution exceeds both the
shareholder's pro rata share of current and accumulated earnings and profits and
such shareholder's cost basis in our ordinary shares.

Foreign Tax Credit

The following is a general discussion of certain possible United
  States federal foreign income tax credits under current law, generally applicable
  to a US holder of our ordinary shares who holds such shares as capital assets.
  This discussion does not address all relevant United States federal income tax
  matters and it does not address consequences peculiar to persons subject to
  special provisions of United States federal income tax law, such as those described
  below and excluded from the definition of a US holder. In addition, this discussion
  does not cover any state, local or foreign tax consequences.

---

34

A US holder who pays (or has withheld from distributions) Canadian
  income tax with respect to the ownership of our ordinary shares may be entitled,
  at the option of the US holder, to either a deduction or a tax credit for such
  foreign tax paid or withheld. Generally, it will be more advantageous to claim
  a credit because a credit reduces United States federal income taxes on a dollar-for-dollar
  basis, while a deduction merely reduces the taxpayer's income subject to tax.
  This election is made on a year-by-year basis and generally applies to all foreign
  income taxes paid by (or withheld from) the US holder during that year. There
  are significant and complex limitations which apply to the credit, among which
  is the general limitation that the credit cannot exceed the proportionate share
  of the US holder's United States income tax liability that the US holder's foreign
  source income bears to his or its worldwide taxable income. In determining the
  application of this limitation, the various items of income and deduction must
  be classified into foreign and domestic sources. Complex rules govern this classification
  process. There are further limitations on the foreign tax credit for certain
  types of income such as "passive income", "high withholding tax interest", "financial
  services income", "shipping income", and certain other classifications of income.
  The availability of the foreign tax credit and the application of the limitations
  on the credit are fact specific and holders of our ordinary shares should consult
  their own tax advisors regarding their individual circumstances.

Passive Foreign Investment Company

The following is a general discussion of certain possible
United States federal income tax consequences generally applicable to a US
holder of a passive foreign investment company. This discussion does not address
all relevant United States federal income tax matters and it does not address
consequences peculiar to persons subject to special provisions of United States
federal income tax law and excluded from the definition of a US holder. The
Company has not made a determination as to whether it would be considered a
passive foreign investment company.

If a US holder disposes of shares in a passive foreign
investment company, any resultant gain will be subject to a tax that is
determined by apportioning the gain pro rata over the entire holding period of
the shares. The amount of gain that is apportioned to the current year, and to
any pre-1987 holding period, is included in the US holder's current income.

The tax on the amount apportioned to any prior years beginning
with 1987 is calculated using the highest tax rate in each applicable year. In
addition, interest compounded daily is charged on the tax due for each prior
year from the due date of the return for the respective year to the due date for
the current year. The interest rate is set quarterly. The US holder's current
year tax is increased by the special tax and interest on amounts apportioned to
prior years.

A US holder can avoid this special tax and interest charge by
making a permanent election to treat a passive foreign investment company as a
"qualified electing fund" and to report in each year thereafter such
shareholder's pro rata share of the ordinary earnings and net capital gains of a
passive foreign investment company. If the election is not made in the first
year that the US holder owns the shares, a special election would have to be
made to cleanse the effect of the prior year's holding periods.

These rules apply similarly to distributions from a passive
foreign investment company that would be considered excess distributions.
Complex rules govern the determination of applicable gains and excess
distributions, the calculation of the amounts allocated pro rata to prior years,
the resultant tax and applicable interest, and the qualified electing fund
elections whether as pedigreed or non-pedigreed.

---

35

Holders and prospective holders of common shares of a passive
foreign investment company should consult their own tax advisor regarding their
individual circumstances.

F.      Dividends and paying agents.

Not applicable.

G.      Statements by experts.

Not applicable.

H.      Documents on display.

We are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and we file reports and
other information with the SEC. You may read and copy any of our reports and
other information at, and obtain copies upon payment of prescribed fees from,
the Public Reference Room maintained by the SEC at 100 F Street, N.E.,
Washington, DC 20549. In addition, the SEC maintains a web site that contains
reports and other information regarding registrants that file electronically
with the SEC at HTTP://www.sec.gov. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-732-0330.

We will provide without charge to each person, including any
beneficial owner, on the written or oral request of such person, a copy of any
or all documents referred to above which have been or may be incorporated by
reference in this report (not including exhibits to such incorporated
information that are not specifically incorporated by reference into such
information). Requests for such copies should be directed to us at the following
address: Suite 803, 8/F, Ruttonjee House, Dina Centre, 11 Duddell Street,
Central, Hong Kong, SAR, China.

The documents concerning our Company may also be viewed at the
offices of our corporate solicitors, Clark Wilson LLP, Suite 800 - 885 West
Georgia Street, Vancouver, British Columbia, Canada V6C 3H1, during normal
business hours.

I.      Subsidiary Information

As at February 1, 2007, our subsidiaries were as follows:

|                                       |  |                 |  |                            |  | Shareholding of
|-------------------------------------- |  | --------------- |  | -------------------------- |  | ---------------
|                                       |  | Jurisdiction    |  | Owner                      |  | the Owner of   
|Name                                   |  | of Organization |  | of Interests               |  | Interests      
|Kasese Cobalt Company Limited          |  | Uganda          |  | Blue Earth Refineries Inc. |  | 75.0%          
|Blue Earth Refineries (Canada) Inc.(1) |  | Yukon Canada    |  | Blue Earth Refineries Inc. |  | 100.0%         

(1)      Holds 49% of 36569 Yukon Inc.

Item 11.     Quantitative and Qualitative
  Disclosures About Market Risk

We are exposed to market risks from changes in foreign currency
exchange rates which may affect our results of operations and financial
condition and, consequently, our fair value. We manage these risks through
internal risk management policies.

Many of our strategies are based on historical trading patterns
and correlations and our management's expectations of future events. However,
these strategies may not be fully effective in all market

---

36

environments or against all types of risks. Unexpected market
developments may affect our risk management strategies during this time, and
unanticipated developments could impact our risk management strategies in the
future. If any of the variety of instruments and strategies we utilize are not
effective, we may incur losses.

Foreign Currency Exchange Rate Risk

Our reporting currency is the United States dollar. We held a
long-term income debenture €4,242,000 (principal amount) and a receivable of
CDN$2,142,104 under a credit facility held by 36569 Yukon, until December, 2006,
which subjected us to currency exchange rate risk. A depreciation of the Euro
and Canadian dollar against the United States dollar will decrease the fair
value of our financial instrument assets. An appreciation of the Euro and
Canadian dollar against the United States dollar will increase the fair value of
our financial instrument assets. The following table provides information about
our exposure to foreign currency exchange rate fluctuations for the carrying
amount of the investment that may be sensitive to such fluctuations as at June
30, 2006 and 2005 and expected cash flows from these instruments. In December
2006, we agreed to sell all our interest in 36569 Yukon.

|As at June 30, 2006                                   
|------------------------------------------------------
|(in thousands)                                        
|                                                      
|                                                      
|                                                      
|Equity 
            method 
            investments(2)

| | (1) | Representing the net consideration to be received from the investment
      sold subsequent to the fiscal year ended June 30, 2006.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                    
| | (2) | Consisting of debt securities and advances.                                                                                        

|As at June 30, 2005                       
|------------------------------------------
|(in thousands)                            
|                                          
|                                          
|                                          
|Equity 
      method 
      investments(2)

| | (1) | Including interest.                             
| | --- | ------------------------------------------------
| |     |                                                 
| | (2) | Consisting of debt securities and advances.     
| |     |                                                 
| | (3) | Consisting of advances and interest on advances.

Item 12.      Description of Securities
  Other than Equity Securities

Not applicable.

PART II

Item 13.       Defaults, Dividend
  Arrearages and Delinquencies

Not applicable.

---

37

Item 14.      Material Modifications
  to the Rights of Security Holders and Use of Proceeds

Not applicable.

Item 15.      Controls and Procedures

As required by Rule 13a-15 under the Exchange Act, we have
carried out an evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures as of the end of the period covered by
this annual report, being June 30, 2006. This evaluation was carried out under
the supervision and with the participation of our management, including the
President.

Based on this evaluation, the President has concluded that our
disclosure controls and procedures as at June 30, 2006 were not effective to
provide reasonable assurance that information required to be disclosed in the
reports we file and submit under the Exchange Act is recorded, processed,
summarized and reported as and when required and that it is accumulated and
communicated to our management, including the President, as appropriate, to
allow timely decisions regarding required disclosure.

We have identified, developed and begun to implement remedial
measures in light of the findings of the President's assessment of the
effectiveness of disclosure controls and procedures over financial reporting, to
strengthen our Company's disclosure controls and procedures. The President is
currently developing a plan and timetable for the implementation of remedial
measures intended to strengthen our disclosure controls and procedures. Upon
finalization and board approval of the plan, the President intends to implement
the plan.

In light of the conclusion that our Company's disclosure
controls and procedures were ineffective as of June 30, 2006, we have applied
procedures and processes as necessary to ensure the reliability of our financial
reporting in regards to this annual report. Accordingly, management believes,
based on its knowledge, that (i) this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which they were made,
not misleading with respect to the period covered by this report and (ii) the
financial statements, and other financial information included in this report,
fairly present in all material respects our financial condition, results of
operations and cash flows as at, and for, the periods presented in this
report.

Item 16.       [Reserved]

Item 16A.       Audit Committee Financial
  Expert

Our board of directors has determined that it does not have a
member that qualifies as an "audit committee financial expert" as defined in
Item 401(e) of Regulation S-B, and is "independent" as the term is used in Item
7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934, as
amended.

We have been unable to retain the services of a person who
qualifies as an "audit committee financial expert." Until we appoint such a
person, we believe that the members of our board of directors are collectively
capable of analyzing and evaluating our financial statements and understanding
internal controls and procedures for financial reporting.

Item 16B.      Code of Ethics

As a foreign private issuer, we have not yet adopted a code of
ethics that applies to our principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing
similar functions.

---

38

Item 16C.      Principal Accountant
  Fees and Services.

Audit Fees

Our board of directors appointed Deloitte & Touche LLP as
independent auditors to audit our financial statements for the fiscal year ended
June 30, 2006.

The aggregate fees billed by Deloitte & Touche LLP to date
for professional services rendered for the audit of our annual financial
statements included in this Annual Report for the fiscal year ended June 30,
2006 were $24,000.

The aggregate fees billed by Davidson & Company LLP for
professional services rendered for the audit of our annual financial statements
included in this Annual Report for the fiscal year ended June 30, 2005 were
$127,500.

Audit Related Fees

For the fiscal year ended June 30, 2006, Deloitte & Touche
LLP did not perform any assurance and related services which are not reported
under the caption "Audit Fees" above.

For the fiscal year ended June 30, 2005, Davidson & Company
LLP did not perform any assurance and related services which are not reported
under the caption "Audit Fees" above.

Tax Fees

For the fiscal year ended June 30, 2006, the aggregate fees
billed for tax compliance, tax advice and tax planning on tax matters by
Deloitte & Touche LLP were $Nil.

For the fiscal year ended June 30, 2005, the aggregate fees
billed for tax compliance, tax advice and tax planning on tax matters by
Davidson & Company LLP were $5,953.

All Other Fees

For the fiscal year ended June 30, 2006, Deloitte & Touche
LLP did not perform any other non-audit professional services, other than those
services listed above.

For the fiscal year ended June 30, 2005, Davidson & Company
LLP did not perform any other non-audit professional services, other than those
services listed above.

The board of directors pre-approves all services provided by
our independent auditors. All of the services and fees described under the
categories of "Audit Related Fees", "Tax Fees" and "All Other Fees" were
reviewed and approved by the board of directors before the respective services
were rendered and none of such services were approved by the board of directors
pursuant to paragraph (c)(7)(i)(c) of Rule 2-01 of Regulation S-X.

The board of directors will consider the nature and amount of
the fees to be billed by Deloitte & Touche LLP, and will examine the
provision of the services for activities unrelated to the audit is compatible
with maintaining Deloitte & Touche LLP's independence.

Item 16D.      Exemption from the
  Listing Standards for Audit Committees

Not applicable.

---

39

Item 16E.      Purchases of Equity
  Securities by the Company and Affiliated Purchasers

During our fiscal year ended June 30, 2006, we offered to
purchase for cash all ordinary shares that on October 20, 2005, were owned by
holders of 99 or fewer ordinary shares. Our offer to repurchase odd-lots enabled
our shareholders owning odd-lots to receive cash for their ordinary shares
without incurring brokerage fees. This offer was also an attempt to reduce the
effort and expense in communicating and servicing a large number of shareholders
who own a small number of ordinary shares.

The repurchase offer expired on December 30, 2005 at 5:00 p.m.
Pacific Standard Time. We paid $1.82 for each ordinary share that was properly
submitted for purchase, such price being the market price of the ordinary shares
on October 20, 2005. As a result of our offer, 12,507 shares were properly
tendered prior to the December 30, 2005 expiry date. As a result, we repurchased
12,507 shares for total cash of $22,763.

Issuer Purchases Of Equity Securities

|Period                                                 | Total No. of Shares (or 
      Units) Purchased |  | Average Price Paid per 
      Share (or Units) |  | Total No. of Shares (or 
      Units) Purchased as Part 
      of Publicly Announced 
      Plans or Programs |  | Max. no. (or approximate 
      $ value) of Shares (or 
      Units) that may yet be 
      purchased under the 
      plans or programs(1)
|------------------------------------------------------ | ----------------------------------------------- |  | ---------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|                                                       |                                                 |  |                                                |  |                                                                                                               |  |                                                                                                                                            
|October 20, 2005(2)
      to October 31, 2005          | -                                               |  | $1.82                                          |  | N/A                                                                                                           |  | N/A                                                                                                                                        
|                                                       |                                                 |  |                                                |  |                                                                                                               |  |                                                                                                                                            
|November 1, 2005 
      to November 30, 
      2005    | 12,507                                          |  | $1.82                                          |  | N/A                                                                                                           |  | N/A                                                                                                                                        
|                                                       |                                                 |  |                                                |  |                                                                                                               |  |                                                                                                                                            
|December 1, 2005 to 
      December 30, 
      2005(3) | -                                               |  | $1.82                                          |  | N/A                                                                                                           |  | N/A                                                                                                                                        
|Total                                                  | $          12,507                               |  | $          1.82                                |  | $          N/A                                                                                                |  | $          N/A                                                                                                                             

| | (1) | The 2005 repurchase plan was open to all shareholders
        holding fewer than 100 shares in the capital of our Company as of the
        record date determined by our board of directors to be October 20, 2005.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                     
| | (2) | October 20, 2005 was the first day that shareholders
        were eligible to participate in our 2005 repurchase plan.                                                                                              
| |     |                                                                                                                                                                                                                     
| | (3) | December 30, 2005 was the last day that shareholders
        were eligible to participate in our 2005 repurchase plan.                                                                                              

PART III

Item 17.      Financial Statements

See Item 18. Financial Statements

Item 18.      Financial Statements

Financial Statements filed as part of this annual
report:

The following financial statement of our Company are filed as
part of this annual report:

Report
  of Independent Registered Chartered Accountants dated February 16, 2007

---

40

Report of Independent Registered Public
  Accounting Firm dated December 2, 2005 (February 1, 2007 as to the effects of
  the restatement discussed in Note 2)

Report of Independent Registered Public
  Accounting Firm dated September 3, 2004 except for the effects of the stock
  split described in Note 1, the date of which was December 30, 2004

Consolidated Balance Sheets as at June
  30, 2006 and 2005 (Restated)

Consolidated Statements of Operations
  for the years ended June 30, 2006, 2005 (Restated) and 2004

Consolidated Statements of Comprehensive
  Income (Loss) for the years ended June 30, 2006, 2005 (Restated) and 2004

Consolidated Statements of Changes in
  Shareholders' Equity for the years ended June 30, 2006, 2005 (Restated) and
  2004

Consolidated Statements of Cash Flows
  for the years ended June 30, 2006, 2005 (Restated) and 2004

Notes to Consolidated Financial Statements

The following financial statement of 4025776 Canada Inc., an
  investee accounted for by the equity method, are filed as part of this annual
  report:

Report of Independent Auditor dated January
  16, 2007

Report of Independent Registered Public
  Accounting Firm dated September 3, 2004

Consolidated Balance Sheets as at June
  30, 2006 and 2005

Consolidated Statements of Operations
  for the years ended June 30, 2006, 2005 and 2004

Consolidated Statements of Changes in
  Shareholders' Deficiency for the years ended June 30, 2006, 2005 and 2004

Consolidated Statements of Cash Flows
  for the years ended June 30, 2006, 2005 and 2004

Notes to Consolidated Financial Statements

---

41



BLUE EARTH REFINERIES INC.

CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006, 2005 and 2004

****

---

42

Report of Independent Registered Chartered Accountants

To the Board of Directors and Shareholders of 
  Blue Earth Refineries Inc.

We have audited the accompanying consolidated balance sheet of
  Blue Earth Refineries Inc. as of June 30, 2006, and the related consolidated
  statements of operations, comprehensive income (loss), changes in shareholders
  equity and cash flows for the year then ended. Our audit also included the financial
  statement schedule listed in the Index at Item 18. These financial statements
  and financial statement schedule are the responsibility of the Companys
  management. Our responsibility is to express an opinion on these financial statements
  and financial statement schedule based on our audit. We did not audit the financial
  statements of 4025776 Canada Inc., the Companys investment in which is
  accounted for by the use of the equity method. The Company equity of $1,416,000
  in 4025776 Canada Inc.s net assets at June 30, 2006, and of $2,213,000
  in that companys net loss for the year then ended are included in the
  accompanying consolidated financial statements. The financial statements of
  4025776 Canada Inc. for the year ended June 30, 2006 were audited by other auditors
  whose report has been furnished to us, and our opinion, insofar as it relates
  to the amounts included for such company, is based solely on the report of such
  other auditors. The consolidated financial statements of Blue Earth Refineries
  Inc. for the year ended June 30, 2005 were audited by other auditors whose report
  dated December 2, 2005 (February 1, 2007 as to the effects of the restatements
  discussed in Note 2) expressed an unqualified opinion on those statements and
  included an explanatory paragraph that described the restatements discussed
  in Note 2 to the financial statements. The consolidated financial statements
  of Blue Earth Refineries Inc. for the year ended June 30, 2004 were audited
  by other auditors whose report dated September 3, 2004 (except for the effects
  of the stock split described in Note 1, the date of which was December 30, 2004),
  expressed an unqualified opinion on those statements.

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 an 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 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, such consolidated financial statements present
  fairly, in all material respects, the financial position of the Company as of
  June 30, 2006 and the results of its operations and its cash flows for the year
  ended June 30, 2006 in conformity with accounting principles generally accepted
  in the Unites States of America. Also, in our opinion, the financial statement
  schedule, when considered in relation to the basic consolidated financial statements
  taken as a whole, presents fairly, in all material respects, the information
  set forth therein.

/s/ Deloitte & Touche LLP

Independnent Registered Chartered Accountants 
  Vancouver, Canada 
  February 16, 2007

---

|DAVIDSON & COMPANY LLP | Chartered
      Accountants | A Partnership of
      Incorporated Professionals
|---------------------- | --------------------------- | -------------------------------------------------
|                       |                             |                                                  

REPORT OF INDEPENDENT REGISTERED 
  PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Blue Earth Refineries
  Inc.

We have audited the accompanying consolidated balance sheet of
  Blue Earth Refineries Inc. as at June 30, 2005 and the related consolidated
  statements of operations, comprehensive income (loss), shareholders' equity
  and cash flows for the year then ended. 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, such consolidated financial statements present
  fairly, in all material respects, the financial position of the Company as of
  June 30, 2005 and the results of its operations and its cash flows for the year
  then ended in conformity with generally accepted accounting principles in the
  United States of America.

As discussed in Note 2, the accompanying consolidated financial
  statements as of and for the year ended December 31, 2005, have been restated.

|                                                                                   | DAVIDSON & COMPANY LLP
|---------------------------------------------------------------------------------- | ------------------------
|Vancouver, Canada                                                                  | Chartered Accountants   
|December 2, 2005                                                                   |                         
|(February 1, 2007 as to the effects of the restatements discussed
      in Note 2) |                         



(a)A Member ofSCINTERNATIONAL

1200 - 609 Granville Street, P.O. Box 10372, Pacific Centre, Vancouver,
  BC, Canada, V7Y 1G6 
  Telephone (604) 687-0947 Fax (604) 687-6172

---

44

| | 
| | 
|

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and the Shareholder 
  Blue Earth Refineries, Inc.

We have audited the accompanying consolidated statements of operations,
  comprehensive income (loss), shareholders equity, and cash flows of Blue
  Earth Refineries, Inc. and Subsidiary for the year ended June 30, 2004. 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. An audit includes
  examining, on a test basis, evidence supporting the amounts and disclosures
  in the financial statements. An audit also includes assessing the accounting
  principles used and significant estimates made by management, as well as evaluating
  the overall financial statement presentation. We believe that our 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 results of operations
  and the cash flows of the Company and Subsidiary for the year ended June 30,
  2004, in conformity with U.S. generally accepted accounting principles.

/S/ PETERSON SULLIVAN PLLC

Seattle, Washington
  September 3, 2004 (except for the effects of the stock split described in Note
  1, the date of which was December 30, 2004)

---

|BLUE EARTH REFINERIES INC.                        
|--------------------------------------------------
|CONSOLIDATED BALANCE SHEETS                       
|(US Dollars in thousands, except per share amount)
|AS AT JUNE 30                                     

|                                                                                      |   | 2006    |   |   | 2005          |  
|------------------------------------------------------------------------------------- | - | ------- | - | - | ------------- | -
|                                                                                      |   |         |   |   | (Restated     |  
|                                                                                      |   |         |   |   | Note
      2) |  
|                                                                                      |   |         |   |   |               |  
|ASSETS                                                                                |   |         |   |   |               |  
|Current Assets                                                                        |   |         |   |   |               |  
|Cash                                                                                  | $ | 1,755   |   | $ | 650           |  
|Due from affiliates                                                                   |   | 3,484   |   |   | -             |  
|Inventories                                                                           |   | 5,789   |   |   | 6,898         |  
|Prepaid expenses and other                                                            |   | 627     |   |   | 790           |  
|Total current assets                                                                  |   | 11,655  |   |   | 8,338         |  
|                                                                                      |   |         |   |   |               |  
|Long-term Assets                                                                      |   |         |   |   |               |  
|Investment in and advances to an
      equity method investee                         |   | 1,699   |   |   | 3,341         |  
|Due from Kilembe
      Mines Ltd; net of allowance for doubtful                       |   |         |   |   |               |  
|accounts
      of $1,634 at June 30, 2006 and 2005                                    |   | -       |   |   | -             |  
|Property, plant
      and equipment, net                                              |   | 33,393  |   |   | 38,568        |  
|                                                                                      |   | 35,092  |   |   | 41,909        |  
|Total assets                                                                          | $ | 46,747  |   | $ | 50,247        |  
|                                                                                      |   |         |   |   |               |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                  |   |         |   |   |               |  
|                                                                                      |   |         |   |   |               |  
|Liabilities                                                                           |   |         |   |   |               |  
|Current liabilities                                                                   |   |         |   |   |               |  
|Accounts payable
      and accrued liabilities                                        | $ | 244     |   | $ | 816           |  
|Accrued power charges                                                                 |   | 240     |   |   | 569           |  
|Accrued cobalt royalties                                                              |   | 976     |   |   | 359           |  
|Due to affiliates                                                                     |   | 617     |   |   | 942           |  
|Total current liabilities                                                             |   | 2,077   |   |   | 2,686         |  
|                                                                                      |   |         |   |   |               |  
|Rehabilitation provision                                                              |   | 1,008   |   |   | 840           |  
|Total liabilities                                                                     |   | 3,085   |   |   | 3,526         |  
|                                                                                      |   |         |   |   |               |  
|Shareholders equity                                                                  |   |         |   |   |               |  
|Preferred stock
       no par value; authorized  100,000,000 shares                 |   |         |   |   |               |  
|Issued
      and outstanding  none                                                   |   | -       |   |   | -             |  
|Common stock 
      no par value per share; authorized  100,000,000 ordinary shares |   |         |   |   |               |  
|Issued and
      outstanding  15,142,836 and 15,555,269 at June 30, 2006 and 2005,   |   |         |   |   |               |  
|respectively                                                                          |   | 15,143  |   |   | 15,555        |  
|Additional paid-in capital                                                            |   | 37,839  |   |   | 37,450        |  
|Accumulated deficit                                                                   |   | (10,080 | ) |   | (6,756        | )
|Accumulated other comprehensive
      income                                          |   | 760     |   |   | 472           |  
|                                                                                      |   |         |   |   |               |  
|Total shareholders equity                                                            |   | 43,662  |   |   | 46,721        |  
|                                                                                      |   |         |   |   |               |  
|Total liabilities
      and shareholders equity                                      | $ | 46,747  |   | $ | 50,247        |  

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

---

|BLUE EARTH REFINERIES INC.                        
|--------------------------------------------------
|CONSOLIDATED STATEMENTS OF OPERATIONS             
|(US Dollars in thousands, except per share amount)
|FOR THE YEARS ENDED JUNE 30                       

|                                           |   | 2006    |   |   | 2005          |   |   | 2004   |  
|------------------------------------------ | - | ------- | - | - | ------------- | - | - | ------ | -
|                                           |   |         |   |   | (Restated     |   |   |        |  
|                                           |   |         |   |   | Note
      2) |   |   |        |  
|                                           |   |         |   |   |               |   |   |        |  
|                                           |   |         |   |   |               |   |   |        |  
|                                           |   |         |   |   |               |   |   |        |  
|Sales of cobalt                            | $ | 18,134  |   | $ | 15,419        |   | $ | 5,019  |  
|Sales of power                             |   | -       |   |   | -             |   |   | 404    |  
|Cost of operations, excluding depreciation |   | (10,562 | ) |   | (7,760        | ) |   | (2,039 | )
|Depreciation                               |   | (5,788  | ) |   | 557           | ) |   | (1,698 | )
|Rehabilitation expense                     |   | (168    | ) |   | (140          | ) |   | (261   | )
|                                           |   |         |   |   |               |   |   |        |  
|Gross profit                               |   | 1,616   |   |   | 2,962         |   |   | 1,425  |  
|                                           |   |         |   |   |               |   |   |        |  
|                                           |   |         |   |   |               |   |   |        |  
|EXPENSES                                   |   |         |   |   |               |   |   |        |  
|General and administrative expenses        |   | (3,258  | ) |   | (3,811        | ) |   | (1,728 | )
|                                           |   |         |   |   |               |   |   |        |  
|Operating loss                             |   | (1,642  | ) |   | (849          | ) |   | (303   | )
|                                           |   |         |   |   |               |   |   |        |  
|                                           |   |         |   |   |               |   |   |        |  
|OTHER ITEMS                                |   |         |   |   |               |   |   |        |  
|Loss from an equity method investee        |   | (1,930  | ) |   | (2,930        | ) |   | (500   | )
|Other income                               |   | 248     |   |   | 55            |   |   | 326    |  
|                                           |   |         |   |   |               |   |   |        |  
|Net loss for the year                      | $ | (3,324  | ) | $ | (3,724        | ) | $ | (477   | )
|                                           |   |         |   |   |               |   |   |        |  
|Basic loss per ordinary share              | $ | (0.22   | ) | $ | (0.24         | ) | $ | (0.03  | )

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

---

|BLUE EARTH REFINERIES INC.                            
|------------------------------------------------------
|CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|(US Dollars in thousands)                             
|FOR THE YEARS ENDED JUNE 30                           

|                                                                                 |   | 2006   |   |   | 2005          |   |   | 2004 |  
|-------------------------------------------------------------------------------- | - | ------ | - | - | ------------- | - | - | ---- | -
|                                                                                 |   |        |   |   | (Restated     |   |   |      |  
|                                                                                 |   |        |   |   | Note
      2) |   |   |      |  
|                                                                                 |   |        |   |   |               |   |   |      |  
|                                                                                 |   |        |   |   |               |   |   |      |  
|                                                                                 |   |        |   |   |               |   |   |      |  
|                                                                                 |   |        |   |   |               |   |   |      |  
|Net loss                                                                         | $ | (3,324 | ) | $ | (3,724        | ) | $ | (477 | )
|Other comprehensive income (loss), foreign
      currency translation adjustment |   | 288    |   |   | (35           | ) |   | 507  |  
|                                                                                 |   |        |   |   |               |   |   |      |  
|Total comprehensive income (loss)                                                | $ | (3,036 | ) | $ | (3,759        | ) | $ | 30   |  

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

---

|BLUE EARTH REFINERIES INC.                                
|----------------------------------------------------------
|CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
|(US Dollars in thousands)                                 
|FOR THE YEARS ENDED JUNE 30                               

|                                                                            |  | Common Stock |   |   |        |   |   |            |   |   |             |   |   |               |  
|--------------------------------------------------------------------------- |  | ------------ | - | - | ------ | - | - | ---------- | - | - | ----------- | - | - | ------------- | -
|                                                                            |  |              |   |   |        |   |   |            |   |   |             |   |   | Accumulated   |  
|                                                                            |  |              |   |   |        |   |   | Additional |   |   |             |   |   | Other         |  
|                                                                            |  | Number       |   |   |        |   |   | Paid-In    |   |   | Accumulated |   |   | Comprehensive |  
|                                                                            |  | of Shares    |   |   | Amount |   |   | Capital    |   |   | Deficit     |   |   | Income        |  
|                                                                            |  |              |   |   |        |   |   |            |   |   |             |   |   |               |  
|Balance at June 30, 2003                                                    |  | 15,555,269   |   | $ | 15,555 |   | $ | 32,993     |   | $ | (2,555      | ) | $ | -             |  
|Contribution of investment in and advances to equity method
      investee, |  |              |   |   |        |   |   |            |   |   |             |   |   |               |  
|at carrying value                                                           |  | -            |   |   | -      |   |   | 5,905      |   |   | -           |   |   | -             |  
|Net loss                                                                    |  | -            |   |   | -      |   |   | -          |   |   | (477        | ) |   | -             |  
|Foreign currency translation gain                                           |  | -            |   |   | -      |   |   | -          |   |   | -           |   |   | 507           |  
|Balance at June 30, 2004                                                    |  | 15,555,269   |   |   | 15,555 |   |   | 38,898     |   |   | (3,032      | ) |   | 507           |  
|Capitalization of deficit account                                           |  | -            |   |   | -      |   |   | (1,842     | ) |   | 1,842       |   |   | -             |  
|Dividend paid                                                               |  | -            |   |   | -      |   |   | -          |   |   | (1,842      | ) |   | -             |  
|Contribution of advances to equity method investee                          |  | -            |   |   | -      |   |   | 394        |   |   | -           |   |   | -             |  
|Net loss (Restated Note 2)                                                  |  | -            |   |   | -      |   |   | -          |   |   | (3,724      | ) |   | -             |  
|Foreign currency translation loss                                           |  | -            |   |   | -      |   |   | -          |   |   | -           |   |   | (35           | )
|Balance at June 30, 2005 (Restated Note 2)                                  |  | 15,555,269   |   |   | 15,555 |   |   | 37,450     |   |   | (6,756      | ) |   | 472           |  
|Repurchase and cancellation of shares                                       |  | (412,433     | ) |   | (412   | ) |   | 389        |   |   | -           |   |   | -             |  
|Net loss                                                                    |  | -            |   |   | -      |   |   | -          |   |   | (3,324      | ) |   | -             |  
|Foreign currency translation gain                                           |  | -            |   |   | -      |   |   | -          |   |   | -           |   |   | 288           |  
|Balance at June 30,
      2006                                              |  | 15,142,836   |   | $ | 15,143 |   | $ | 37,839     |   | $ | (10,080     | ) | $ | 760           |  

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

---

|BLUE EARTH REFINERIES INC.           
|-------------------------------------
|CONSOLIDATED STATEMENTS OF CASH FLOWS
|(US Dollars in thousands)            
|FOR THE YEAR ENDED JUNE 30           

|                                                                |   | 2006   |   |   | 2005          |   |   | 2004   |  
|--------------------------------------------------------------- | - | ------ | - | - | ------------- | - | - | ------ | -
|                                                                |   |        |   |   | (Restated     |   |   |        |  
|                                                                |   |        |   |   | Note
      2) |   |   |        |  
|                                                                |   |        |   |   |               |   |   |        |  
|                                                                |   |        |   |   |               |   |   |        |  
|CASH FLOWS FROM OPERATING ACTIVITIES                            |   |        |   |   |               |   |   |        |  
|Loss for the year                                               | $ | (3,324 | ) | $ | (3,724        | ) | $ | (477   | )
|Adjustments for:                                                |   |        |   |   |               |   |   |        |  
|Loss
      from an equity method investee                       |   | 1,930  |   |   | 2,930         |   |   | 500    |  
|Accretion of
      rehabilitation expense                       |   | 168    |   |   | 140           |   |   | 261    |  
|Depreciation                                                    |   | 5,788  |   |   | 4,557         |   |   | 1,698  |  
|                                                                |   |        |   |   |               |   |   |        |  
|Changes in non-cash working
      capital items:                |   |        |   |   |               |   |   |        |  
|Due from Danzas
      Corporation                               |   | -      |   |   | 886           |   |   | (886   | )
|Due
      from affiliates                                       |   | (3,947 | ) |   | -             |   |   | -      |  
|Inventories                                                     |   | 700    |   |   | (2,520        | ) |   | (2,899 | )
|Prepaid
      expenses and other                                |   | 163    |   |   | 263           |   |   | (248   | )
|Accounts payable
      and accrued liabilities                  |   | (284   | ) |   | 704           |   |   | 544    |  
|Due
      to affiliates                                         |   | 137    |   |   | (497          | ) |   | 1,439  |  
|                                                                |   |        |   |   |               |   |   |        |  
|Net cash flows provided
      by (used in) operating activities |   | 1,331  |   |   | 2,739         |   |   | (68    | )
|                                                                |   |        |   |   |               |   |   |        |  
|                                                                |   |        |   |   |               |   |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES                            |   |        |   |   |               |   |   |        |  
|Purchases of property,
      plant and equipment                |   | (203   | ) |   | (264          | ) |   | (75    | )
|                                                                |   |        |   |   |               |   |   |        |  
|Net cash flows used in
      investing activities               |   | (203   | ) |   | (264          | ) |   | (75    | )
|                                                                |   |        |   |   |               |   |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES                            |   |        |   |   |               |   |   |        |  
|Repurchase of shares                                            |   | (23    | ) |   | -             |   |   | -      |  
|Dividend paid                                                   |   | -      |   |   | (1,842        | ) |   | -      |  
|                                                                |   |        |   |   |               |   |   |        |  
|Net cash flows used in
      financing activities               |   | (23    | ) |   | (1,842        | ) |   | -      |  
|                                                                |   |        |   |   |               |   |   |        |  
|Increase (decrease) in cash                                     |   | 1,105  |   |   | 633           |   |   | (143   | )
|                                                                |   |        |   |   |               |   |   |        |  
|Cash, beginning of year                                         |   | 650    |   |   | 17            |   |   | 160    |  
|                                                                |   |        |   |   |               |   |   |        |  
|Cash, end of year                                               | $ | 1,755  |   | $ | 650           |   | $ | 17     |  
|                                                                |   |        |   |   |               |   |   |        |  
|Supplemental cash flow information                              |   |        |   |   |               |   |   |        |  
|Interest paid                                                   | $ | -      |   | $ | -             |   | $ | -      |  
|Income taxes
      paid                                         | $ | -      |   | $ | -             |   | $ | -      |  

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

---

50

|BLUE EARTH REFINERIES INC.                
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2006                             

|1. | NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING
        POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The Company                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | Blue Earth Refineries Inc. and subsidiary (the
        Company) is in the cobalt refining business. It was a wholly-owned
        subsidiary of Mass Financial Corporation (Mass  formerly
        Sutton Park International Limited), which was itself a wholly-owned subsidiary
        of KHD Humboldt Wedag International Ltd.(KHD). Mass was spun
        out from KHD on January 31, 2006. The Company was incorporated in the
        Territory of the British Virgin Islands (BVI) on November
        25, 2003, under the name Nature Extrac Limited. The Company changed its
        name to Blue Earth Refineries Inc. effective July 8, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | On December 30, 2004, KHD effected a stock split of
        the shares of the Company and then distributed ordinary shares of the
        Company to KHDs shareholders and the Company ceased to be an indirect
        subsidiary of KHD. Holders of KHD common shares received one share of
        the Company for each common share of KHD held on December 30, 2004. All
        references to numbers of shares and per share amounts have been restated
        to reflect the share split. Mass currently owns approximately 10% of the
        Companys ordinary shares indirectly.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The Companys cobalt operation is through its
        75%-owned subsidiary, Kasese Cobalt Company Ltd. (KCCL), a
        Ugandan corporation. KCCL operates a cobalt processing plant located in
        southwest Uganda that recovers the cobalt contained in a pyrite stockpile
        from a former copper mine. KCCLs metal refining operations involve
        the bioleaching of the pyrite concentrate, solvent extraction of the dissolved
        cobalt, and recovery through electrowinning. KCCL also owns a hydroelectric
        power station that provides some of the power for the cobalt processing
        facility and occasionally generates excess power for sale to a Uganda
        government power company. KCCL is 25%-owned by the Government of Uganda
        through Kilembe Mines Ltd. (KML). Further, the Company has
        a 49% interest in a Canadian corporation which owns a cobalt refining
        plant presently on care and maintenance (note 12).                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The Company is subject to the risks of operating in
        Uganda. These include risks associated with the political and economic
        environment, foreign currency exchange, changes in legislation, availability
        of electrical power and adverse weather conditions. The economy of Uganda
        differs significantly from the economies of North American and European
        nations in such respects as structure, level of development, resource
        allocation, self-sufficiency, rate of inflation and the level of development
        and enforcement of existing laws. The Company has sole access to a cobalt
        stockpile which is located at the processing facility site under an agreement
        with KML. The agreement is to expire in June 2012 unless KCCL elects to
        extend it for an additional maximum of 25 years. However, KCCL may terminate
        the agreement at any time. KCCL is subject to a labor union agreement
        which is to expire in February 2007. The Companys revenues are also
        subject to risk due to the cyclical nature of the international market
        for cobalt and the production capability of the processing plant.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | Principles of Consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | These consolidated financial statements include the
        accounts of the Company and its majority-owned subsidiaries. All intercompany
        accounts and transactions have been eliminated. The consolidated financial
        statements notes are stated in U.S. dollars, as rounded to the nearest
        thousands (except per share and per pound amounts), unless otherwise stated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

---

51

|BLUE EARTH REFINERIES INC.                
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2006                             

|1. | NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING
        POLICIES(contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Allowance for Doubtful Accounts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | The Companys allowance for doubtful accounts
        is maintained at an amount considered adequate to absorb estimated credit-related
        losses. Such allowance reflects managements best estimate of the
        losses in the Companys credit portfolio and judgments about economic
        conditions. Estimates and judgments could change in the near-term, and
        could result in a significant change to a recognized allowance. Credit
        losses arise primarily from receivables but may also relate to other credit
        instruments such as guarantees and letters of credit. An allowance for
        doubtful accounts may be increased by provisions which are charged to
        income and reduced by write-offs net of any recoveries.                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Specific provisions are established on an individual
        receivable basis. A general provision may be established to absorb potential
        credit losses attributable to the deterioration of credit quality on aggregate
        exposures for which specific provisions cannot yet be determined. A country
        risk provision may be made based on exposures in less developed countries
        and on managements overall assessment of the underlying economic
        conditions in those countries. Write-offs are generally recorded after
        all reasonable restructuring or collection activities have taken place
        and there is no realistic prospect of recovery. Management has determined
        that no allowance is necessary for receivables at June 30, 2006 or 2005,
        other than $1,634 for a receivable from KML.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Inventories are comprised of spare parts and materials
        and cobalt work in progress and finished goods. Spare parts and materials
        are stated at the lower of weighted-average cost or replacement cost.
        Work in progress is stated at the lower of weighted-average production
        cost or the net realizable value of the finished products less additional
        costs to complete. Finished goods are stated at the lower of weighted-
        average production cost or net realizable value.                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Equity Method Investment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Long-term investments in which the Company has significant
        influence are accounted for using the equity method whereby the investment
        is initially recorded at cost and adjusted to recognize the Companys
        proportionate share of net earnings or loss in the investee. When there
        is an other than temporary decline in value, the investment is written
        down and the unrealized loss is included in the results of operations.                                                                                                                                                                                                                                                                                                                                                                                             

---

52

|BLUE EARTH REFINERIES INC.                
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2006                             

|1. | NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING
        POLICIES(contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Property, Plant and Equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Property, plant and equipment are recorded at cost.
        Depreciable assets are depreciated, net of residual value, over the estimated
        life of the stockpile located at the processing plant site on a units-of-production
        basis except where the useful life of a depreciable asset is less than
        the life of the stockpile. In that case, depreciation is recorded on a
        straight-line basis over its useful life. The units-of-production basis
        is applied utilizing the tonnage of the stockpile concentrate fed to the
        plant in relation to the estimated stockpile reserve tonnage. Based on
        engineering estimates of the stockpile reserves and expected production
        capacity, all buildings and equipment are estimated to be fully depreciated
        in 2012. The Company has determined that all buildings and equipment have
        no residual value.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Use of Estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The preparation of financial statements in conformity
        with generally accepted accounting principles requires management to make
        estimates and assumptions that affect the reported amount of assets and
        liabilities, as well as disclosure of contingent assets and liabilities
        at the date of the financial statements and the reported amounts of revenues
        and expenses during the period. Actual results could differ from those
        estimates.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Rehabilitation Provision                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The Company recognizes the fair value of a liability
        for an asset retirement obligation in the year in which it is incurred
        when a reasonable estimate of fair value can be made. Changes in the liability
        for an asset retirement obligation due to the passage of time will be
        measured by applying an interest method of allocation. The amount will
        be recognized as an increase in the liability and an accretion expense
        in the statement of operations.                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Revenue Recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Cobalt revenue is recognized net of agency fees when
        the cobalt is delivered to the port where the buyers take over title of
        the goods, the amount of revenue is fixed or determinable, and collectibility
        is reasonably assured. Power revenue is recognized as power is delivered,
        the amount of revenue is fixed or determinable, and collectibility is
        reasonably assured.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

---

53

|BLUE EARTH REFINERIES INC.                
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2006                             

|1. | NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING
        POLICIES(contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | Foreign Currency                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | The functional and reporting currency of KCCL is the
        U.S. dollar. Transaction gains (losses) amounting to $52, $47
        and $(10) for the years ended June 30, 2006, 2005 and 2004, respectively,
        are included in general and administrative expenses in the consolidated
        statements of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | Translation adjustments for the Companys Canadian
        equity method investee, including the carrying value of debentures, are
        reported as a separate component of comprehensive income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | Taxes on Income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | The Company uses the liability method of accounting
        for income taxes. Under the liability method, deferred tax assets and
        liabilities are recognized for the future tax consequences attributable
        to differences between the financial statement carrying amounts of existing
        assets and liabilities and their respective tax bases and for tax losses
        and other deductions carried forward. Deferred tax assets and liabilities
        are measured using enacted tax rates expected to apply when the asset
        is realized or the liability settled. A reduction in respect of the benefit
        of a deferred tax asset (a valuation allowance) is recorded against any
        deferred tax asset if it is not likely to be realized. The effect on deferred
        tax assets and liabilities of a change in tax rates is recognized in the
        statement of operations in the period in which the change is enacted.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | Earnings Per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | Basic earnings per share is computed by dividing income
        available to holders of ordinary shares by the weighted average number
        of ordinary shares outstanding during the year. The weighted average number
        of ordinary shares was 15,374,852, 15,555,269 and 15,555,269 for 2006,
        2005 and 2004, respectively. The weighted average numbers of ordinary
        shares for 2004 was restated as a result of stock split in 2005. Diluted
        earnings per share takes into consideration ordinary shares outstanding
        (computed under basic earnings per share) and potentially dilutive securities.
        The Company has not issued any stock options or warrants, and there are
        no dilutive potential ordinary shares outstanding during 2006, 2005, and
        2004.                                                                                                                                                 

---

54

|BLUE EARTH REFINERIES INC.                
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2006                             

|1. | NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING
        POLICIES(contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | New Accounting Standards                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Statement of Financial Accounting Stardards (SFAS)
        No. 154, Accounting Changes and Error Corrections,replaces Accounting
        Principles Board (APB) Opinion No. 20, Accounting Changes,
        and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements,
        and changes the requirements for the accounting for and reporting of a
        change in accounting principle. This Statement applies to all voluntary
        changes in accounting principle. It also applies to changes required by
        an accounting pronouncement in the unusual instance that the pronouncement
        does not include specific transition provisions. SFAS No. 154 is effective
        for accounting changes and corrections of errors made in fiscal years
        beginning after December 15, 2005. Management is analyzing the requirements
        of this new standard and believes that its adoption will not have any
        significant impact on the Companys financial statements.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | SFAS No. 157: Fair Value Measurements,defines
        fair value, establishes a framework for measuring fair value in generally
        accepted accounting principles (GAAP), and expands disclosures about fair
        value measurements. SFAS No. 157 applies under other accounting pronouncements
        that require or permit fair value measurements. SFAS No. 157 is effective
        for financial statements issued for fiscal years beginning after November
        15, 2007, and interim periods within those fiscal years. Management is
        analyzing the requirements of this new standard.                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | FASB Staff Position (FSP) No. FAS 115-1
        and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its
        Application to Certain Investments,addresses the determination as
        to when an investment is considered impaired, whether that impairment
        is other than temporary and the measurement of an impairment loss. This
        FSP also includes accounting considerations subsequent to the recognition
        of an other-than-temporary impairment and requires certain disclosures
        about unrealized losses that have not been recognized as other-than-temporary
        impairment. This FSP shall be applied to reporting periods beginning after
        December 15, 2005. The Companys preliminary assessment does not
        indicate that this FSP will have a significant impact on the financial
        statements.                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | FASB Interpretation (FIN) No. 48: Accounting
        for Uncertainty in Income Taxes, an interpretation of FASB Statement
        No.109, clarifies the accounting for uncertainty in income taxes recognized
        in an enterprises financial statements in accordance with SFAS No.
        109, Accounting for Income Taxes. This interpretation (1) prescribes
        a recognition threshold and measurement attribute for the financial statement
        recognition and measurement of a tax position taken or expected to be
        taken in a tax return and (2) provides guidance on derecognition, classification,
        interest and penalties, accounting in interim periods, disclosure, and
        transition. This interpretation is effective for fiscal years beginning
        after December 15, 2006. Management is analyzing the requirements of this
        new standard.                                                                                                                       

---

55

|BLUE EARTH REFINERIES INC.                
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2006                             

|1. | NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING
        POLICIES(contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | New Accounting Standards(contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | The Emerging Issues Task Force (EITF)
        reached consensus on EITF 04-13, Accounting for Purchases and Sales
        of Inventory with the Same Counterpartythat two or more inventory
        purchase and sales transactions with the same counterparty that are entered
        into in contemplation of one another should be combined for purposes of
        applying Opinion 29, Accounting for Nonmonetary Transactions. The
        EITF also reached consensus that a nonmonetary exchange whereby an entity
        transfers finished goods inventory in exchange for the receipt of raw
        materials or WIP inventory within the same line of business is not an
        exchange transaction to facilitate sales to customers for the entity transferring
        the finished goods and, therefore, should be recognized by that entity
        at fair value if (a) fair value is determinable within reasonable limits
        and (b) the transaction has commercial substance. All other nonmonetary
        exchanges of inventory within the same line of business should be recognized
        at the carrying amount of the inventory transferred. This EITF issue should
        be applied to new arrangements entered into, and modifications or renewals
        of existing arrangements, beginning in the first interim or annual reporting
        period beginning after March 15, 2006. Management has analyzed the requirements
        of this new standard and determined that there will be no significant
        impact on the Companys financial position.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | FSP AUG AIR-1, Accounting for Planned Major Maintenance
        Activities, prohibits the use of the accrued- in-advance method and
        requires the application of the same method of accounting for planned
        major maintenance activities in annual and interim financial reporting
        periods. This standard is effective for fiscal years beginning after December
        15, 2006. Management has analyzed the requirements of this new standard
        and determined that there will be no significant impact on the Companys
        financial position.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | In September 2006, the SEC issued Staff Accounting
        Bulletin No. 108, Considering the Effects of Prior Year Misstatements
        when Quantifying Misstatements in Current Year Financial Statements
        (SAB 108). SAB 108 provides guidance on how prior year misstatements
        should be considered when quantifying misstatements in the current year
        financial statements. SAB 108 requires registrants to quantify misstatements
        using both a balance sheet and an income statement approach and evaluate
        whether either approach results in quantifying a misstatement that, when
        all relevant quantitative and qualitative factors are considered, is material.
        SAB 108 is effective for fiscal years ending after November 15, 2006.
        The Companys preliminary assessment does not indicate that this
        SAB will have a significant impact on the financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|2. | RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | (a) Equity method investee                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | During the year ended June 30, 2004, Mass transferred
        its 49% interest in and its advances to an equity method investee to the
        Company at carrying value of $5,905. The investee owns a cobalt refinery
        in Ontario, Canada (see notes 3 and 9).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | The Company has accounted for this equity method investee
        in accordance with EITF 99-10, Percentage Used to Determine the Amount
        of Equity Method Losses. The Task Force reached a consensus in EITF
        99- 10 that an investor should not recognize equity method losses based
        solely on the percentage of investee common stock held by the investor.
        The Task Force also discussed whether an investor should recognize equity
        method losses based on (a) the ownership level of the particular investee
        security or loan/advance held by the investor to which the equity method
        losses are being applied or (b) the change in the investors claim
        on the investees book value. The Task Force did not reach a consensus
        on the appropriate method,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

---

56

|BLUE EARTH REFINERIES INC.                
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2006                             

|2. | RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS(contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | and observed that both approach (a) and approach (b)
        are acceptable. In the year ended June 30, 2004, the Company adopted approach
        (a) as its accounting policy. In 2005, the Company inappropriately changed
        its accounting treatment by adopting method (b) resulting in an error
        in the previously issued financial statements. The Company has restated
        its audited financial statements for the year ended June 30, 2005. The
        effects of the restatement are summarized in the tables below:

| |                                           |   | As         |   |   |             |  
| | ----------------------------------------- | - | ---------- | - | - | ----------- | -
| |                                           |   | Previously |   |   |             |  
| |                                           |   | Reported   |   |   | As Restated |  
| |                                           |   |            |   |   |             |  
| |                                           |   | 2005       |   |   | 2005        |  
| |                                           |   |            |   |   |             |  
| | Consolidated Balance Sheet                |   |            |   |   |             |  
| | Investment in and advances to an          |   | 4,175      |   |   |             |  
| | equity method
      investee              | $ |            |   | $ | 3,341       |  
| | Accumulated deficit                       |   | (5,922     | ) |   | (6,756      | )
| |                                           |   |            |   |   |             |  
| |                                           |   |            |   |   |             |  
| |                                           |   |            |   |   |             |  
| | Consolidated Statement of Operations      |   |            |   |   |             |  
| | Loss from an equity method
      investee | $ | (2,096     | ) | $ | (2,930      | )
| | Net loss for the year                     |   | (2,890     | ) |   | (3,724      | )
| | Basic loss per ordinary
      share       |   | (0.19      | ) |   | (0.24       | )

Financial information of the equity method
  investee is included in the notes to the Companys consolidated financial
  statements. The financial statements of the investee were not audited when the
  Company filed its 2005 financial statements. They have subsequently been audited.
  The Company has restated the information previously disclosed in note 8 to its
  2005 consolidated financial statements for the investee as follows:

| |                                    |   | As Previously |   |   |             |  
| | ---------------------------------- | - | ------------- | - | - | ----------- | -
| |                                    |   | Reported      |   |   | As Restated |  
| |                                    |   |               |   |   |             |  
| |                                    |   | 2005          |   |   | 2005        |  
| |                                    |   |               |   |   |             |  
| | Results of operations              |   |               |   |   |             |  
| | Revenues                           | $ | -             |   | $ | -           |  
| | Net loss before impairment charges |   | -             |   |   | (326        | )
| | Impairment charges                 |   | -             |   |   | (5,812      | )
| | Net loss                           |   | (4,929        | ) |   | (6,138      | )
| |                                    |   |               |   |   |             |  
| | Financial position                 |   |               |   |   |             |  
| | Current assets                     | $ | 164           |   | $ | 164         |  
| | Total assets                       |   | 12,549        |   |   | 9,184       |  
| | Current liabilities                |   | 5,128         |   |   | 5,128       |  
| | Total liabilities                  |   | 17,819        |   |   | 16,927      |  
| | Shareholders deficiency           |   | (5,270        | ) |   | (7,743      | )

---

57

|BLUE EARTH REFINERIES INC.                
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2006                             

|2. | RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS(contd)                                                                                                                                                                                                                                                                                                      
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                     
|   | (b) Income tax disclosure                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                     
|   | The financial statements previously issued by the Company
        for the year ended June 30, 2005 contained errors with respect to the
        Companys income tax disclosures. The Company has restated its income
        tax information to correct these errors and to incorporate changes required
        by the matter referred to in (a) above as follows:

| |                                              |   | As Previously |   |   |             |  
| | -------------------------------------------- | - | ------------- | - | - | ----------- | -
| |                                              |   | Reported      |   |   | As Restated |  
| |                                              |   |               |   |   |             |  
| |                                              |   | 2005          |   |   | 2005        |  
| |                                              |   |               |   |   |             |  
| | Loss before income taxes                     | $ | (2,890        | ) | $ | (3,724      | )
| |                                              |   |               |   |   |             |  
| | Computed (provision for) benefit from        |   | -             |   |   |             |  
| | income taxes at statutory rates in BVI       | $ |               |   | $ | -           |  
| | (Increase) decrease in taxes resulting from: |   |               |   |   |             |  
| | Recovery (provision) of income taxes at      |   |               |   |   |             |  
| | higher
      statutory tax rate in Uganda    |   | -             |   |   | 484         |  
| | Permanent differences                        |   | (962          | ) |   | 12          |  
| | Valuation allowance                          |   | 962           |   |   | (496        | )
| |                                              |   |               |   |   |             |  
| | Provision for income taxes                   | $ | -             |   | $ | -           |  

| |                                               |   | As Previously |   |   |             |  
| | --------------------------------------------- | - | ------------- | - | - | ----------- | -
| |                                               |   | Reported      |   |   | As Restated |  
| |                                               |   |               |   |   |             |  
| |                                               |   | 2004          |   |   | 2004        |  
| |                                               |   |               |   |   |             |  
| | Loss before income taxes                      | $ | (477          | ) | $ | (477        | )
| |                                               |   |               |   |   |             |  
| | Computed (provision for) benefit from         |   |               |   |   |             |  
| | income taxes at statutory
      rates in BVI  | $ | -             |   | $ | -           |  
| | (Increase) decrease in taxes resulting from:  |   |               |   |   |             |  
| | Recovery (provision) of
      income taxes at |   |               |   |   |             |  
| | higher
      statutory tax rate in Uganda     |   | -             |   |   | (17,438     | )
| | Non-taxable income                            |   | -             |   |   | 17,149      |  
| | Permanent differences                         |   | (307          | ) |   | (18         | )
| | Valuation allowance                           |   | 307           |   |   | 307         |  
| |                                               |   |               |   |   |             |  
| | Provision for income taxes                    | $ | -             |   | $ | -           |  

---

58

|BLUE EARTH REFINERIES INC.                
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2006                             

|   |                                                               
|-- | --------------------------------------------------------------
|2. | RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS(contd)
|   |                                                               

| |                                              |   | As Previously |   |   |             |  
| | -------------------------------------------- | - | ------------- | - | - | ----------- | -
| |                                              |   | Reported      |   |   | As Restated |  
| |                                              |   |               |   |   |             |  
| |                                              |   | 2005          |   |   | 2005        |  
| |                                              |   |               |   |   |             |  
| | Allowance for doubtful accounts              | $ | 490           |   |   | -           |  
| | Rehabilitation provision                     |   | 252           |   |   | -           |  
| | Non-capital tax loss carryforwards in Uganda |   | 49,623        |   |   | 49,623      |  
| | Other                                        |   | 436           |   |   | 1,178       |  
| |                                              |   |               |   |   |             |  
| | Deferred income tax assets                   |   | 50,801        |   |   | 50,801      |  
| | Deferred income tax liabilities              |   | -             |   |   | (15,472     | )
| |                                              |   |               |   |   |             |  
| | Valuation allowance                          |   | (50,801       | ) |   | (35,329     | )
| |                                              |   |               |   |   |             |  
| | Net deferred income tax asset                | $ | -             |   | $ | -           |  

(c) Other

The Company has reclassified $143 of
  receivables from accounts receivable to prepaid expenses and others in the 2005
  consolidated balance sheet.

The Company has disclosed $569 of accrued
  power charges and $359 of accrued cobalt royalties separately from accounts
  payable and accrued liabilities in the restated 2005 consolidated balance sheet.
  These amounts were previously disclosed in accounts payable and accrued liabilities.

In July 2004, the Company changed its
  authorized share capital from ordinary shares with a par value of $1 each to
  without par value. The Companys 2005 financial statements did not reflect
  such a change. On October 27, 2006, the Company changed its authorized share
  capital again which resulted in it once again having ordinary shares with a
  par value of $1 each.

Agency fees of $462 have been reclassified
  from cost of operations to sales of cobalt in the 2005 restated consolidated
  statement of operations.

Depreciation had previously been included
  in cost of operations in the consolidated statement of operations. The Company
  has reclassified depreciation expenses as a separate line item on the consolidated
  statement of operations in the determination of gross profit.

The Company had previously classified
  rehabilitation expense as a component of expenses in the consolidated statements
  of operations. The Company has determined that it should be included in the
  determination of gross profit. Accordingly, gross profit has decreased $140
  and $261for the years ended June 30, 2005 and 2004, respectively.

---

59

|BLUE EARTH REFINERIES INC.                
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2006                             

|3. | SHARE CAPITAL                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | In December 2003, Mass transferred its investment in
        KCCL to the Company at carrying value. In accordance with SFAS No. 141,
        Business Combinations, the operations of KCCL have been reflected
        in these consolidated financial statements since August 2002, the date
        of acquisition of KCCL by Mass.                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | At the time of Masss acquisition of KCCL in August
        2002, KCCL had an outstanding note payable to a third party amounting
        to approximately $137,725. The note had an interest rate of approximately
        5.5%. In December 2002, Mass purchased the note from the third party.
        Both the note and the shares of KCCL were transferred to the Company by
        Mass at a carrying value of $48,548.                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Mass also transferred its 49% interest in and its advances
        to an equity method investee to the Company at carrying value of $5,905.
        The investee owns a cobalt refinery in Ontario, Canada. The equity loss
        from this investee has been reflected in these consolidated financial
        statements since August 2003, the date of acquisition of the investee
        by Mass (see note 9).                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | As at June 30, 2006, the Company has authorized 100
        million ordinary shares without par value (see note 2). In September 2004,
        the Company was authorized to split its ordinary shares, pursuant to which,
        50,000 ordinary shares were split into 15,555,269 ordinary shares in December
        2004. In August 2004, the Company authorized 100 million shares of preferred
        stock at no par value; no shares have been issued or preferences determined.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | On December 30, 2004, prior to the distribution of the
        ordinary shares of the Company to KHDs shareholders, the Company
        reduced its capital by transferring $1,842 out of its additional paid-in
        capital account to accumulated deficit account, and declared and paid
        a dividend of $1,842 to KHD.                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | In October 2005, the Company announced its odd-lots
        repurchase program. The Company offered $1.82 per share for shareholders
        who hold fewer than 100 common shares of the Company. As a result, 12,507
        shares were repurchased and cancelled. Accordingly, the Company recorded
        $13 to common stock, $10 to additional paid-in capital, and paid cash
        of $23.                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | In January 2006, the Company received 399,926 common
        shares owned by KHD for cancellation. Accordingly, the Company recorded
        $399 to common stock and additional paid-in capital, respectively.                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4. | INVENTORIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

| |                           |   | 2006  |  |   | 2005  | 
| | ------------------------- | - | ----- |  | - | ----- | 
| |                           |   |       |  |   |       | 
| | Spare parts and materials | $ | 4,104 |  | $ | 3,730 | 
| | Work in progress          |   | 1,090 |  |   | 1,259 | 
| | Finished goods            |   | 595   |  |   | 1,909 | 
| |                           |   |       |  |   |       | 
| |                           | $ | 5,789 |  | $ | 6,898 | 

---

60

|BLUE EARTH REFINERIES INC.                
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2006                             

|   |                              
|-- | -----------------------------
|5. | PROPERTY, PLANT AND EQUIPMENT
|   |                              

| |                          |   | 2006    |   |   | 2005   |  
| | ------------------------ | - | ------- | - | - | ------ | -
| | Buildings                | $ | 1,000   |   | $ | 1,000  |  
| | Equipment                |   | 44,543  |   |   | 44,339 |  
| |                          |   | 45,543  |   |   | 45,339 |  
| | Accumulated depreciation |   | (12,150 | ) |   | (6,771 | )
| |                          | $ | 33,393  |   | $ | 38,568 |  

|6. | REHABILITATION PROVISION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The Companys rehabilitation provision consists
        of reclamation and closure costs for its production facility. The present
        value of obligations is estimated to be $1,008, reflecting payments in
        approximately six years. Significant reclamation and closure activities
        includes remediation for site contamination and demolition. The undiscounted
        value of this liability is $3,000. An accretion expense of $168 has been
        charged to operations in 2006 (2005 - $140, 2004 - $261) to reflect an
        increase in the carrying amount of the rehabilitation provision which
        has been determined using a discount rate of 20%.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The changes in the rehabilitation provision for the
        years ended June 30 are attributable to the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

| |                            |   | 2006  |  |   | 2005 | 
| | -------------------------- | - | ----- |  | - | ---- | 
| | Balance, beginning of year | $ | 840   |  | $ | 700  | 
| | Accretion                  |   | 168   |  |   | 140  | 
| | Balance, end of year       | $ | 1,008 |  | $ | 840  | 

|7. | INCOME TAXES                                                                                                                                                                                                                                                           
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                        
|   | Loss before income taxes for the years ended June 30
        includes the results of operations in Uganda and the Companys share
        of loss from the equity method investee. The Company is not required to
        pay income tax in BVI.                       
|   |                                                                                                                                                                                                                                                                        
|   | However, KCCL is subject to income tax in Uganda. A
        reconciliation of the provision for income taxes calculated at the statutory
        rates to the provision in the consolidated statements of operations is
        as follows for the years ended June 30:

---

61

|BLUE EARTH REFINERIES INC.                
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2006                             

|7. | INCOME TAXES(contd)
|-- | --------------------

| |                                              |   | 2006   |   |   | 2005                    |   |   | 2004                    |  
| | -------------------------------------------- | - | ------ | - | - | ----------------------- | - | - | ----------------------- | -
| |                                              |   |        |   |   | (Restated
      Note 2) |   |   | (Restated
      Note 2) |  
| |                                              |   |        |   |   |                         |   |   |                         |  
| | Loss before income taxes                     | $ | (3,324 | ) | $ | (3,724                  | ) | $ | (477                    | )
| |                                              |   |        |   |   |                         |   |   |                         |  
| | Computed (provision for) benefit from        |   |        |   |   |                         |   |   |                         |  
| | income taxes at statutory rates in BVI       | $ | -      |   | $ | -                       |   | $ | -                       |  
| | (Increase) decrease in taxes resulting from: |   |        |   |   |                         |   |   |                         |  
| | Recovery (provision) of income taxes at      |   | 711    |   |   | 484                     |   |   | (17,438                 | )
| | higher
      statutory tax rate in Uganda    |   |        |   |   |                         |   |   |                         |  
| | Non-taxable income                           |   | -      |   |   | -                       |   |   | 17,149                  |  
| | Permanent differences                        |   | 44     |   |   | 12                      |   |   | (18                     | )
| | Valuation allowance                          |   | (755   | ) |   | (496                    | ) |   | 307                     |  
| |                                              |   |        |   |   |                         |   |   |                         |  
| | Provision for income taxes                   | $ | -      |   | $ | -                       |   | $ | -                       |  

The tax effect of temporary differences
  in Uganda that give rise to significant components of deferred tax liabilities
  and assets are as follows for the years ended June 30:

| |                                              |   | 2006    |   |   | 2005                    |  
| | -------------------------------------------- | - | ------- | - | - | ----------------------- | -
| |                                              |   |         |   |   | (Restated
      Note 2) |  
| | Non-capital tax loss carryforwards in Uganda | $ | 48,417  |   | $ | 49,623                  |  
| | Other                                        |   | 435     |   |   | 1,178                   |  
| | Deferred income tax assets                   |   | 48,852  |   |   | 50,801                  |  
| | Deferred income tax liabilities              |   | (13,559 | ) |   | (15,472                 | )
| | Valuation allowance                          |   | (35,293 | ) |   | (35,329                 | )
| | Net deferred income tax asset                | $ | -       |   | $ |                         |  

|   | Management believes that, due to the cyclical nature
        of its operations and other risks, the Companys available tax loss
        carryforwards in Uganda may not be utilized. Therefore, the resulting
        tax benefit has been fully reserved at June 30, 2006 and 2005. At June
        30, 2006, the Company had estimated accumulated non-capital losses in
        Uganda of $161,391 that do not expire.                                              
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|8. | FAIR VALUE OF FINANCIAL INSTRUMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The Companys financial instruments comprise primarily
        of cash, due from (to) affiliates, advances to an equity method investee
        and accounts payable. Their fair values approximate to their carrying
        values due to the short maturities of those instruments, except for advances
        to the equity method investee whose fair value was $2,244 (2005 - $4,175)
        and carrying amount was $1,699 (2005 - $3,341) as of June 30, 2006.

---

62

|BLUE EARTH REFINERIES INC.                
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2006                             

|9. | EQUITY METHOD INVESTEE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | The investees Canadian cobalt refinery is not
        operating. Mass has agreed to provide up to $5,381 (CDN$6,000) in a Canadian
        denominated credit facility against which $1,921 (CDN$2,142) has been
        advanced and assigned to the Company. Interest on this credit facility
        accrues monthly at the Royal Bank of Canada prime rate plus 3% (resulting
        in a rate of 9% at June 30, 2006). Principal and interest are due on demand.
        The note is secured by the equity method investees refinery assets.
        Also, another owner has provided a Canadian denominated credit facility
        of up to $4,484 (CDN$5,000) against which $1,448 (CDN$1,615) was advanced.                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | The original purchase of the cobalt refinery was financed
        mostly by the issuance of long-term debentures. Mass contributed its interest
        in the debentures to the Company at a carrying value of $4,660. These
        debentures have a stated principal balance in euros of 4,242 (amount is
        in thousands of euros). The debentures are secured by the equity method
        investees refinery assets. Interest on the debentures accrues at
        the three-month LIBOR rate plus 3% (resulting in a rate of 6.84% at June
        30, 2006). Interest is to be paid each March 31 provided the equity method
        investee reaches certain levels of operating cash flow, as defined by
        the debenture agreement. The debentures are due in August 2013.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | The Company has not recognized any of the interest from
        the equity method investee because it has not been paid.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | The Companys investment in and advances to the
        equity method investee are summarized as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

| |                                                            |   |        |   |   | 2005              |  
| | ---------------------------------------------------------- | - | ------ | - | - | ----------------- | -
| |                                                            |   | 2006   |   |   | (Restated Note 2) |  
| |                                                            |   |        |   |   |                   |  
| | Balance, beginning of year                                 | $ | 3,341  |   | $ | 5,912             |  
| | Advances                                                   |   | -      |   |   | 394               |  
| | Equity method loss, less $465 (2005 - $362)
      of       |   |        |   |   |                   |  
| | unrealized interest expense                                |   | (1,930 | ) |   | (2,930            | )
| | Exchange income (loss) on income debentures
      due from |   |        |   |   |                   |  
| | equity method investee                                     |   | 288    |   |   | (35               | )
| |                                                            |   |        |   |   |                   |  
| | Balance, end of year                                       | $ | 1,699  |   | $ | 3,341             |  

The equity method investees stock
  was assigned no value when it was contributed to the Company. The Companys
  proportionate share of the results of operations of the investee have been included
  in these consolidated financial statements since August 2003. Financial information
  for the year end June 30, 2006, 2005 and 2004 on the investee is summarized
  as follows (balance sheets amounts have been converted to U.S. dollars from
  Canadian dollars at the end of the periods and results of operations amounts
  have been converted to U.S. dollars from Canadian dollars at averages rate of
  the periods):

---

63

|BLUE EARTH REFINERIES INC.                
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2006                             

|9. | EQUITY METHOD INVESTEE(contd)
|-- | -------------------------------

| |                                          |   |         |   |   | 2005                    |   |   |        |  
| | ---------------------------------------- | - | ------- | - | - | ----------------------- | - | - | ------ | -
| |                                          |   | 2006    |   |   | (Restated
      Note 2) |   |   | 2004   |  
| |                                          |   |         |   |   |                         |   |   |        |  
| | Results of continuing operations         |   |         |   |   |                         |   |   |        |  
| | Revenues                                 | $ | -       |   | $ | -                       |   | $ | -      |  
| | Net loss before impairment
      charges |   | (938    | ) |   | (326                    | ) |   | (1,354 | )
| | Impairment charges                       |   | (4,294  | ) |   | (5,812                  | ) |   | -      |  
| | Net loss                                 |   | (5,232  | ) |   | (6,138                  | ) |   | (1,354 | )
| |                                          |   |         |   |   |                         |   |   |        |  
| | Financial position as of June 30         |   |         |   |   | 2005                    |   |   |        |  
| |                                          |   | 2006    |   |   | (Restated
      Note 2) |   |   |        |  
| | Current assets                           | $ | 132     |   | $ | 164                     |   |   |        |  
| | Total assets                             |   | 5,564   |   |   | 9,184                   |   |   |        |  
| | Current liabilities                      |   | 7,065   |   |   | 5,128                   |   |   |        |  
| | Total liabilities                        |   | 19,538  |   |   | 16,927                  |   |   |        |  
| | Shareholders deficiency                 |   | (13,974 | ) |   | (7,743                  | ) |   |        |  

|    | The Companys reported loss from this equity method
        investee are $1,930, $2,930 (Restated Note 2) and $500, which includes
        the Companys share of the investees loss less $465, $362 and
        $165 of unrealized intercompany interest expense, for the year ended June
        30, 2006, 2005 and 2004, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | The Company sold its interest in the investee for net
        consideration of $2,244 in December 2006 (see note 12).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|10. | TRANSACTIONS WITH AFFILIATES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | In 2004, KCCL entered into an exclusive distribution
        agreement for an initial term ending December 31, 2014, with Danzas Corporation
        (Danzas) to sell all of the cobalt produced by KCCL. Danzas
        had an agreement with its parent corporation, MFC Commodities GmbH (MFCC,
        a subsidiary of Mass), whereby MFCC acted as Danzas sales agent.
        Pursuant to an Assignment, Consent and Amendment Agreement dated December
        30, 2004, the Company replaced Danzas as the party of the distribution
        agreement, acquired all of Danzas claims, rights and entitlements
        and assumed all of Danzas obligations under the distribution agreement.
        Until June 30, 2005, MFCC charged agency fees of $1.50 per pound of cobalt
        sold. The Company renegotiated agency fees with MFCC and from July 1,
        2005 to June 30, 2006, the agency fees were revised to $0.50 per pound
        of cobalt sold. MFCC also charged fees for additional services rendered
        to the Company. Total fees of $1,298, $2,175 and $530 were paid or payable
        to MFCC for the years ended June 30, 2006, 2005 and 2004, respectively.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | The Company has an amount due from (to) MFCC in the
        amount of $3,484 and $(463) at June 30, 2006 and 2005, respectively, primarily
        for cobalt sales proceeds net of the purchase of supplies and materials.
        During the years ended June 30, 2006, 2005 and 2004, the Company purchased
        supplies and materials amounting to $nil, $1,407 and $1,500 from MFCC,
        which is expected to be paid in the normal course.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | KML owes the Company $1,634 in an unsecured loan which
        is payable through forfeiture of any future dividends if payable by KCCL.
        This amount is fully reserved because of the uncertainty that KCCL will
        pay dividends.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

---

64

|BLUE EARTH REFINERIES INC.                
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2006                             

|10. | TRANSACTIONS WITH AFFILIATES(contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | During 2005, certain expenses of the Company were
        paid by KHD in the amount of $479. The Company has an amount due to
        KHD in the amount of $nil and $479 at June 30, 2006 and 2005,
        respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | During 2006, certain expenses of the Company were
        paid by Mass in the amount of $617. The Company has an amount due
        to Mass in the amount of $617 and $nil at June 30, 2006 and 2005,
        respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | These transactions were in the normal course of operations
        and were measured at the exchange value, which is the amount of consideration
        established and agreed to by the affiliated parties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|11. | COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | Effective January 1, 2005, KCCL is required to pay
        royalties amounting to 3% of cobalt sales to the Geological Survey of
        Mines of Uganda. Before that, the royalty was charged at 2% of cobalt
        sold. The Company charges to cost of sales the royalty amounts as incurred;
        $617, $261 and $98 were incurred during the years ended June
        30, 2006, 2005 and 2004, respectively. Accrued cobalt royalties of $976
        and $359 were outstanding at June 30, 2006 and 2005, respectively.                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | KCCL is required to pay royalties to a third party
        equal to 10% of net cash flow, as defined in the royalty agreement, resulting
        from operations of the KCCL cobalt processing plant up to an aggregate
        maximum of $10,000. The Company will charge to cost of sales the royalty
        amounts as incurred. For the years ended June 30, 2006, 2005 and 2004,
        royalties of $193, $341 and $nil were incurred, respectively.
        Accrued royalties of $Nil and $73 were outstanding at June 30,
        2006 and 2005, respectively.                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | Due to the nature of the Companys operations
        in Uganda, various legal and tax matters may occur from time to time.
        In the opinion of management, these matters do not have a material effect
        on the Companys consolidated financial position or results of operations
        as at June 30, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|12. | SUBSEQUENT EVENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | The Company declared and paid a cash distribution
        of $0.25 per share to its holders of ordinary shares, totalling $3,786,
        in September 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | In December 2006, the Company entered into a definitive
        agreement to sell its economic interest in the equity method investee
        to a shareholder of 4025776 Canada Inc. for a total consideration of $2,700
        in exchange for units in two British Virgin Islands open-ended investment
        companies. Out of the total consideration, the Company agreed to pay 36569
        Yukon Inc.s liability of $261 due to Mass and to pay 8% commission
        charge ($195) on the net balance to MFC Merchant Bank SA (a subsidiary
        of Mass). The Company assigned certain units of the two investment companies
        to settle the liability due to Mass and commission to MFC Merchant Bank
        SA. The Company received the units in the two investment companies on
        December 29, 2006.

---

4025776 CANADA INC.

CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006, 2005 and 2004

---

|DAVIDSON & COMPANY LLP | Chartered
      Accountants | A Partnership of
      Incorporated Professionals
|---------------------- | --------------------------- | -------------------------------------------------
|                       |                             |                                                  



INDEPENDENT AUDITORS REPORT

To the Board of Directors and Shareholders of 
  4025776 Canada Inc.

We have audited the consolidated balance sheets of 4025776
  Canada Inc. as at June 30, 2006 and 2005 and the consolidated statements of
  operations, changes in shareholders deficiency and cash flows for the
  years then ended. 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 audits.

We conducted our audits in accordance with Canadian generally
  accepted auditing standards. Those standards require that we plan and perform
  an audit to obtain reasonable assurance whether the financial statements are
  free of material misstatement. An audit includes examining, on a test basis,
  evidence supporting the amounts and disclosures in the financial statements.
  An audit also includes assessing the accounting principles used and significant
  estimates made by management, as well as evaluating the overall financial statement
  presentation.

In our opinion, these consolidated financial statements present
  fairly, in all material respects, the financial position of the Company as at
  June 30, 2006 and 2005 and the results of its operations and its cash flows
  for the years then ended in accordance with Canadian generally accepted accounting
  principles.

|                  | DAVIDSON & COMPANY LLP
|----------------- | ------------------------
|Vancouver, Canada | Chartered Accountants   
|January 16, 2007  |                         

A Member ofSC INTERNATIONAL

1200 - 609 Granville Street, P.O. Box 10372, Pacific Centre,
  Vancouver, BC, Canada, V7Y 1G6
  Telephone (604) 687-0947 Fax (604) 687-6172

---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Director and Shareholders 
  4025776 Canada, Inc.

We have audited the accompanying consolidated statements of operations,
  stockholders' deficiency, and cash flows of 4025776 Canada, Inc. for the period
  August 1, 2003, through June 30, 2004. 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) and auditing standards
  generally accepted in Canada. Those standards require that we plan and perform
  the audit to obtain reasonable assurance about whether the financial statements
  are free of material misstatement. An audit includes examining, on a test basis,
  evidence supporting the amounts and disclosures in the financial statements.
  An audit also includes assessing the accounting principles used and significant
  estimates made by management, as well as evaluating the overall financial statement
  presentation. We believe that our 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 results of operations
  and the cash flows of the Company and Subsidiary for the period August 1, 2003,
  through June 30, 2004, in conformity with Canadian generally accepted accounting
  principles.

/s/ PETERSON SULLIVAN PLLC

Seattle, Washington 
  September 3, 2004

---

|4025776 CANADA INC.                                     
|--------------------------------------------------------
|CONSOLIDATED BALANCE SHEETS                             
|AS AT JUNE 30                                           
|(Canadian Dollars, in Thousands except par value amount)

|                                                                             |   | 2006    |   |   | 2005   |  
|---------------------------------------------------------------------------- | - | ------- | - | - | ------ | -
|                                                                             |   |         |   |   |        |  
|                                                                             |   |         |   |   |        |  
|                                                                             |   |         |   |   |        |  
|ASSETS                                                                       |   |         |   |   |        |  
|                                                                             |   |         |   |   |        |  
|                                                                             |   |         |   |   |        |  
|Current                                                                      |   |         |   |   |        |  
|Cash                                                                         | $ | 62      |   | $ | 109    |  
|Other                                                                        |   | 85      |   |   | 91     |  
|                                                                             |   |         |   |   |        |  
|                                                                             |   | 147     |   |   | 200    |  
|Property and equipment                                                       |   | 6,057   |   |   | 11,057 |  
|                                                                             |   |         |   |   |        |  
|                                                                             | $ | 6,204   |   | $ | 11,257 |  
|                                                                             |   |         |   |   |        |  
|                                                                             |   |         |   |   |        |  
|                                                                             |   |         |   |   |        |  
|LIABILITIES AND SHAREHOLDERS' DEFICIENCY                                     |   |         |   |   |        |  
|                                                                             |   |         |   |   |        |  
|                                                                             |   |         |   |   |        |  
|Current liabilities                                                          |   |         |   |   |        |  
|Accounts payable and accrued
      liabilities                               | $ | 51      |   | $ | 43     |  
|Accrued interest payable to shareholders                                     |   | 3,065   |   |   | 1,985  |  
|Due to a related party                                                       |   | 300     |   |   | 300    |  
|Due to a shareholder                                                         |   | 705     |   |   | 199    |  
|Note payable to shareholders                                                 |   | 3,757   |   |   | 3,757  |  
|                                                                             |   | 7,878   |   |   | 6,284  |  
|Rehabilitation provision                                                     |   | 307     |   |   | 307    |  
|Debentures payable to shareholders                                           |   | 13,600  |   |   | 14,155 |  
|                                                                             |   | 21,785  |   |   | 20,746 |  
|                                                                             |   |         |   |   |        |  
|                                                                             |   |         |   |   |        |  
|                                                                             |   |         |   |   |        |  
|                                                                             |   |         |   |   |        |  
|Shareholders' deficiency                                                     |   |         |   |   |        |  
|Common stock, $0.01 par
      value; 16,367 shares authorized; 16,202 shares |   |         |   |   |        |  
|issued
      and outstanding                                                 |   | -       |   |   | -      |  
|Accumulated deficit                                                          |   | (15,581 | ) |   | (9,489 | )
|                                                                             |   |         |   |   |        |  
|                                                                             |   | (15,581 | ) |   | (9,489 | )
|                                                                             |   |         |   |   |        |  
|                                                                             | $ | 6,204   |   | $ | 11,257 |  

/s/ Markus Muller
  Director

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

---

|4025776 CANADA INC.                                      
|---------------------------------------------------------
|CONSOLIDATED STATEMENTS OF OPERATIONS                    
|(Canadian Dollars, in Thousands except per share numbers)

|                                                     |   |                    |   |   |              |   |   | August 1,           |  
|---------------------------------------------------- | - | ------------------ | - | - | ------------ | - | - | ------------------- | -
|                                                     |   | Year ended June 30 |   |   | 2003 through |  
|                                                     |   | 2006               |   |   | 2005         |   |   | June
      30, 2004 |  
|                                                     |   |                    |   |   |              |   |   |                     |  
|                                                     |   |                    |   |   |              |   |   |                     |  
|                                                     |   |                    |   |   |              |   |   |                     |  
|Revenue                                              | $ | -                  |   | $ | -            |   | $ | -                   |  
|Cost of operations                                   |   | -                  |   |   | -            |   |   | -                   |  
|Gross profit                                         |   | -                  |   |   | -            |   |   | -                   |  
|Expenses                                             |   |                    |   |   |              |   |   |                     |  
|General and administrative expenses                  |   | (554               | ) |   | (911         | ) |   | (760                | )
|Loss before other items                              |   | (554               | ) |   | (911         | ) |   | (760                | )
|                                                     |   |                    |   |   |              |   |   |                     |  
|Other items                                          |   |                    |   |   |              |   |   |                     |  
|Interest expenses                                    |   | (1,129             | ) |   | (1,097       | ) |   | (1,001              | )
|Impairment charge                                    |   | (5,000             | ) |   | (7,266       | ) |   | -                   |  
|Exchange gain (loss)                                 |   | 586                |   |   | 1,496        |   |   | (329                | )
|Other income                                         |   | 5                  |   |   | 104          |   |   | 275                 |  
|                                                     |   |                    |   |   |              |   |   |                     |  
|                                                     |   | (5,538             | ) |   | (6,763       | ) |   | (1,055              | )
|                                                     |   |                    |   |   |              |   |   |                     |  
|                                                     |   |                    |   |   |              |   |   |                     |  
|Net loss for the year                                |   | (6,092             | ) |   | (7,674       | ) |   | (1,815              | )
|                                                     |   |                    |   |   |              |   |   |                     |  
|                                                     |   |                    |   |   |              |   |   |                     |  
|Basic loss per
      common share                    | $ | (376.00            | ) | $ | (473.65      | ) | $ | (112.02             | )
|                                                     |   |                    |   |   |              |   |   |                     |  
|                                                     |   |                    |   |   |              |   |   |                     |  
|Weighted average number of common shares outstanding |   | 16,202             |   |   | 16,202       |   |   | 16,202              |  

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

---

|4025776 CANADA INC.                                           
|--------------------------------------------------------------
|CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIENCY
|(Canadian Dollars in thousands)                               
|FOR THE PERIODS ENDED JUNE 30                                 

Common StockNumber
      
      
      
      
      
      Accumulatedof
        Shares
      
      
      Amount
      
      
      Deficit
      
      
      TotalBalance at August 1, 2003
      
      16,202
      
      $
      -
      
      $
      -
      
      $
      -Net loss
      
      -
      
      
      -
      
      
      (1,815
      )
      
      (1,815
      )Balance at June 30, 2004
      
      16,202
      
      
      -
      
      
      (1,815
      )
      
      (1,815
      )Net loss
      
      -
      
      
      -
      
      
      (7,674
      )
      
      (7,674
      )Balance at June 30, 2005
      
      16,202
      
      
      -
      
      
      (9,489
      )
      
      (9,489
      )Net loss
      
      -
      
      
      -
      
      
      (6,092
      )
      
      (6,092
      )Balance at June 30, 2006
      
      16,202
      
      $
      -
      
      $
      (15,581
      )
      $
      (15,581
      )


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

---

|4025776 CANADA INC.                  
|-------------------------------------
|CONSOLIDATED STATEMENTS OF CASH FLOWS
|(Canadian Dollars, in Thousands)     

|                                                           |   |                    |   |   |          |   |   | August 1,    |  
|---------------------------------------------------------- | - | ------------------ | - | - | -------- | - | - | ------------ | -
|                                                           |   |                    |   |   |          |   |   | 2003 through |  
|                                                           |   | Year ended June 30 |   |   | June 30, |  
|                                                           |   | 2006               |   |   | 2005     |   |   | 2004         |  
|                                                           |   |                    |   |   |          |   |   |              |  
|                                                           |   |                    |   |   |          |   |   |              |  
|                                                           |   |                    |   |   |          |   |   |              |  
|CASH FLOWS FROM OPERATING ACTIVITIES                       |   |                    |   |   |          |   |   |              |  
|Net loss for the year                                      | $ | (6,092             | ) | $ | (7,674   | ) | $ | (1,815       | )
|Items not affecting cash                                   |   |                    |   |   |          |   |   |              |  
|Impairment
      charge                                    |   | 5,000              |   |   | 7,266    |   |   | -            |  
|Unrealized
      foreign exchange                          |   | (555               | ) |   | (1,388   | ) |   | 329          |  
|                                                           |   |                    |   |   |          |   |   |              |  
|Changes in non-cash working capital items                  |   |                    |   |   |          |   |   |              |  
|(Increase)
      decrease other assets                     |   | 6                  |   |   | (84      | ) |   | (7           | )
|Increase in
      accounts payable and accrued liabilities |   | 8                  |   |   | 33       |   |   | 10           |  
|Increase
      in accrued interest payable                 |   | 1,080              |   |   | 984      |   |   | 1,001        |  
|                                                           |   |                    |   |   |          |   |   |              |  
|Net cash used in operating
      activities                |   | (553               | ) |   | (863     | ) |   | (482         | )
|                                                           |   |                    |   |   |          |   |   |              |  
|                                                           |   |                    |   |   |          |   |   |              |  
|CASH FLOWS FROM INVESTING ACTIVITIES                       |   |                    |   |   |          |   |   |              |  
|Business acquisition                                       |   | -                  |   |   | -        |   |   | (2,500       | )
|Additions to property and equipment                        |   | -                  |   |   | -        |   |   | (302         | )
|Net cash used in investing
      activities                |   | -                  |   |   | -        |   |   | (2,802       | )
|                                                           |   |                    |   |   |          |   |   |              |  
|CASH FLOWS FROM FINANCING ACTIVITIES                       |   |                    |   |   |          |   |   |              |  
|Due to a related party                                     |   | -                  |   |   | 300      |   |   | -            |  
|Due to a shareholder                                       |   | 506                |   |   | 199      |   |   | -            |  
|Proceeds from note payable                                 |   | -                  |   |   | 422      |   |   | 3,335        |  
|                                                           |   |                    |   |   |          |   |   |              |  
|Net cash provided by financing activities                  |   | 506                |   |   | 921      |   |   | 3,335        |  
|                                                           |   |                    |   |   |          |   |   |              |  
|Change in cash for the year                                |   | (47                | ) |   | 58       |   |   | 51           |  
|                                                           |   |                    |   |   |          |   |   |              |  
|                                                           |   |                    |   |   |          |   |   |              |  
|Cash, beginning of year                                    |   | 109                |   |   | 51       |   |   | -            |  
|                                                           |   |                    |   |   |          |   |   |              |  
|                                                           |   |                    |   |   |          |   |   |              |  
|Cash, end of year                                          | $ | 62                 |   | $ | 109      |   | $ | 51           |  

Supplemental disclosure with respect to cash flows ( Note 8)

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

---

72

|4025776 CANADA INC.                           
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2006                                 

|1. | THE COMPANY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | 4025776 Canada Inc. was incorporated in April 2002
        in Canada. In August 2003, the Company acquired cobalt refining assets
        from another company which constituted a business. The acquisition was
        made consistent with the Company's plans to process and sell cobalt. The
        aggregate purchase price was $17,714 and consisted of cash in the
        amount of $2,500 and debenture payable amounting to $15,214 (Euro
        9,547). The Company, through its wholly owned subsidiary 36569 Yukon Inc.,
        holds the cobalt processing facility located in Ontario, Canada. The facility
        is to produce cobalt compounds utilizing environmentally compatible and
        commercially proven technologies. The Company is presently investigating
        its alternative uses.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | These consolidated financial statements include the
        accounts of the Company and its wholly-owned subsidiary. All significant
        intercompany accounts and transactions have been eliminated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | These consolidated financial statements have been
        prepared assuming the Company will continue on a going concern basis.
        The Company has incurred losses since inception and the ability of the
        Company to continue as a going-concern depends upon its ability to develop
        profitable operations and to continue to raise adequate financing. In
        order for the Company to meet its liabilities as they come due and to
        continue its operations, the Company is solely dependent upon its ability
        to generate such financing.                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | There can be no assurance that the Company will be
        able to continue to raise funds in which case the Company may be unable
        to meet its obligations. Should the Company be unable to realize on its
        assets and discharge its liabilities in the normal course of business,
        the net realizable value of its assets may be materially less than the
        amounts recorded on the consolidated balance sheets.                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The dollar amounts in the footnotes are in Canadian
        dollars, as rounded to the nearest thousand, unless otherwise indicated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|2. | SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | Use of estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The preparation of financial statements in accordance
        with Canadian generally accepted accounting principles requires management
        to make estimates 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The Company regularly maintains cash balances in financial
        institutions in excess of insured limits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

---

73

|4025776 CANADA INC.                           
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2006                                 
|(Canadian Dollars, in Thousands)              

|2. | SIGNIFICANT ACCOUNTING POLICIES(continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Property and Equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Property and equipment is recorded at cost, which
        includes the cost of renewal and betterments. Depreciation will be charged
        when the assets are ready for use.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Impairment of Long-Lived Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | The Company periodically evaluates long-lived assets
        whenever events or changes in circumstances indicate that the carrying
        amount of an asset may not be recoverable. In performing the review of
        recoverability, the Company estimate future cash flows expected to result
        from the use of the asset and its eventual disposition. An impairment
        loss is measured as the amount by which the carrying amount of a long-lived
        asset exceeds its fair value.                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Rehabilitation Provision                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | The Company recognizes the fair value of a liability
        for an asset retirement obligation in the year in which it is incurred
        when a reasonable estimate of fair value can be made. Changes in the liability
        for an asset retirement obligation due to the passage of time will be
        measured by applying an interest method of allocation. The amount will
        be recognized as an increase in the liability and an accretion expense
        in the statement of operations.                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Revenue Recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Cobalt revenue is recognized net of agency fees when
        the title of cobalt passes to the buyers, the amount of revenue is fixed
        or determinable, and collectibility is reasonably assured.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Foreign currency                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Foreign currency activities are translated to Canadian
        dollars at the exchange rate in effect on the transaction date. Foreign
        currency denominated monetary assets and liabilities are revalued to Canadian
        dollars at the exchange rate in effect at the balance sheet date. Foreign
        exchange gains or losses are included in the results of operations for
        the year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Future income taxes are recorded using the asset and
        liability method whereby future tax assets and liabilities are recognized
        for the future tax consequences attributable to differences between the
        financial statement carrying amounts of existing assets and liabilities
        and their respective tax bases. Future tax assets and liabilities are
        measured using the enacted or substantively enacted tax rates expected
        to apply when the asset is realized or the liability settled. The effect
        on future tax assets and liabilities of a change in tax rates is recognized
        in income in the period that substantive enactment or enactment occurs.
        To the extent that the Company does not consider it more likely than not
        that a future tax asset will be recovered, it provides a valuation allowance
        against the excess.

---

74

|4025776 CANADA INC.                           
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2006                                 
|(Canadian Dollars, in Thousands)              

|2. | SIGNIFICANT ACCOUNTING POLICIES(continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Earnings per share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Basic earnings per share is determined by dividing
        net income applicable to common shares by the weighted average number
        of common shares outstanding for the year. Diluted earnings per share
        is determined using the same method as basic earnings per share except
        the weighted average number of common shares outstanding includes the
        potential dilutive effect of stock options, warrants and convertible debt.
        No stock options, warrants and convertible debenture were outstanding
        as of June 30, 2006, 2005 and 2004, respectively. As a result, there was
        no potential dilutive impact in these years.                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Comparative Figures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Certain comparative figures have been reclassified
        to conform with current year's presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Future Changes to Accounting Standards                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | AcSB issued Canadian Institute of Chartered Accountants
        ("CICA") Handbook Section 3855, Financial Instruments  Recognition
        and Measurement, which establish the standards for recognizing and
        measuring financial assets, financial liabilities and non-financial derivatives.
        This section applies to interim and annual financial statements relating
        to fiscal years beginning on or after October 1, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | AcSB issued CICA Handbook Section 3861 Financial
        Instruments  Disclosure and Presentation, which establishes
        standards for presentation of financial instruments and non-financial
        derivatives, and identifies the information that should be disclosed about
        them. The presentation paragraphs deal with the classification of financial
        instruments, from the perspective of the issuer, between liabilities and
        equity, the classification of related interest, dividends, losses and
        gains, and the circumstances in which financial assets and financial liabilities
        are offset. The disclosure paragraphs deal with information about factors
        that affect the amount, timing and certainty of an entity's future cash
        flows relating to financial instruments. This section applies to interim
        and annual financial statements relating to fiscal years beginning on
        or after October 1, 2006.                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | AcSB issued CICA Handbook Section 3862, Financial
        Instruments  Disclosures,which requires entities to provide
        disclosures in their financial statements that enable users to evaluate
        (a) the significance of financial instruments for the entity's financial
        position and performance; and (b) the nature and extent of risks arising
        from financial instruments to which the entity is exposed during the period
        and at the balance sheet date, and how the entity manages those risks.
        The principles in this section complement the principles for recognizing,
        measuring and presenting financial assets and financial liabilities in
        Section 3855, Financial Instruments  Recognition and Measurement,Section 3863, Financial Instruments  Presentation,and
        Section 3865, Hedges.This section applies to interim and annual
        financial statements relating to fiscal years beginning on or after October
        1, 2007.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | AcSB issued CICA Handbook Section 3863, Financial
        Instruments  Presentation,which is to enhance financial statement
        users' understanding of the significance of financial instruments to an
        entity's financial position, performance and cash flows. This section
        establishes standards for presentation of financial instruments and non-financial
        derivatives. It deals with the classification of financial instruments,
        from the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

---

75

|4025776 CANADA INC.                           
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2006                                 
|(Canadian Dollars, in Thousands)              

|2. | SIGNIFICANT ACCOUNTING POLICIES(continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Future Changes to Accounting Standards (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | perspective of the issuer, between liabilities and
        equity, the classification of related interest, dividends, losses and
        gains, and the circumstances in which financial assets and financial liabilities
        are offset. This section applies to interim and annual financial statements
        relating to fiscal years beginning on or after October 1, 2007.                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Hedges                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | AcSB issued CICA Handbook Section 3865, Hedges,
        which describe when and how hedge accounting may be applied. The section
        is effective for years beginning on or after October 1, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Shareholders' Equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | AcSB issued CICA Handbook Section 1530, Comprehensive
        Income, which establishes standards for reporting and display of comprehensive
        income. This section is effective for years beginning on or after October
        1, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | AcSB also revised CICA Handbook Section 3250, Surplus,
        and reissued it as CICA Handbook Section 3251, Equity. The section
        is also effective for years beginning on or after October 1, 2006. The
        changes in how to report and disclose equity and changes in equity to
        provide consistency with the new requirements of Section 1530, Comprehensive
        Income.                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | AcSB issued CICA Handbook Section 1535, which establishes
        standards for disclosing information about an entity's capital and how
        it is managed. This section applies to interim and annual financial statements
        relating to fiscal years beginning on or after October 1, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Accounting Changes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | AcSB issued CICA Handbook Section 1506. The main features
        of this new standard are (a) voluntary changes in accounting policy are
        made only if they result in the financial statements providing reliable
        and more relevant information; (b) changes in accounting policy are applied
        retrospectively unless doing so is impracticable (as defined in the section);
        (c) prior period errors are corrected retrospectively; and (d) new disclosures
        are required in respect of changes in accounting policies, changes in
        accounting estimates and correction of errors. This new standard is effective
        for fiscal years beginning on or after January 1, 2007.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Management is analyzing the requirements of these
        new sections.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

---

76

|4025776 CANADA INC.                           
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2006                                 
|(Canadian Dollars, in Thousands)              

|3. | PROPERTY AND EQUIPMENT
|-- | ----------------------

| |           |   | June 30, 2006 |  |   | June 30, 2005 | 
| | --------- | - | ------------- |  | - | ------------- | 
| | Land      | $ | 1,725         |  | $ | 1,725         | 
| | Buildings |   | 250           |  |   | 250           | 
| | Equipment |   | 4,082         |  |   | 9,082         | 
| |           | $ | 6,057         |  | $ | 11,057        | 

|   | Due to a change in economic conditions and the facility
        has not been put into use, the Company performed a review of recoverability
        of its long-term assets. As a result, an impairment charge of $5,000 and
        $7,266 were recognized in 2006 and 2005, respectively to reflect the estimated
        net realizable value of the long- term assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|4. | REHABILITATION PROVISION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | The Company's rehabilitation provision consists of reclamation
        and closure costs for its production facility. The present value of obligations
        is estimated to be $307, reflecting payments in approximately ten years.
        Significant reclamation and closure activities include remediation for
        site contamination and demolition. The undiscounted value of this liability
        is $483. The rehabilitation provision which has been determined using
        discount rate of 7.25%. No accretion has been recorded for the years ended
        June 30, 2006, 2005 and 2004 as it was considered to be insignificant.                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|5. | TRANSACTION WITH AFFILIATES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | The Company has entered into a credit facility with
        Blue Earth Refineries Inc. ("Blue Earth"), a shareholder which owns 49.2%
        of the Company's common stock, that allows the Company to draw up to $6,000
        to finance operations and capital acquisitions. Interest accrues monthly
        at the Royal Bank of Canada prime rate plus 3% (9.00% at June 30, 2006
        and 7.25% at June 30, 2005). Principal and interest are due on demand.
        The note is secured by property and equipment. Amounts drawn on the facility
        amounted to $2,142 at June 30, 2006 and 2005, respectively. Accrued interest
        was $413 and $239 at June 30, 2006 and 2005, respectively. The Company
        has an amount due to a company with a common director with Blue Earth
        in the amount of $300 at June 30, 2006 and 2005, respectively.                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | The Company also entered into a credit facility with
        First Equity Securities AG ("First Equity"), a shareholder which owns
        45% of its common stock, that allows the Company to draw up to $5,000
        to finance operations and capital acquisition. Interest accrues monthly
        at the Royal Bank of Canada prime rate plus 3% (9.00% at June 30, 2006
        and 7.25% at June 30, 2005). Principal and interest are due on demand.
        The note is secured by property and equipment. Amounts drawn on the facility
        amounted to $1,615 at June 30, 2006 and 2005, respectively. Accrued interest
        was $355 and $225 at June 30, 2006 and 2005, respectively. During 2006,
        certain expenses of the Company were funded by First Equity in the amount
        of $506 (2005 - $199, 2004 - $nil). As a result, the Company has an amount
        due to First Equity in the amount of $705 and $199 at June 30, 2006 and
        2005, respectively.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | The Company has debentures payable to the Company's
        shareholders and are secured by the Company's property and equipment.
        Interest on the debentures accrues at the three-month LIBOR rate plus
        3% (resulting in a rate of 6.84% at June 30, 2006 and 5.70% at June 30,
        2005). Interest is to be paid each                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

---

77

|4025776 CANADA INC.                           
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2006                                 
|(Canadian Dollars, in Thousands)              

|5. | TRANSACTION WITH AFFILIATES (cont'd)                                                                                                                                                                                                                                                                         
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                               
|   | March 31 provided the Company reaches certain levels
        of operating cash flow, as defined by the indenture. These cash flow levels
        have not been reached. The debentures are due in August 2013. Accrued
        interest amounted to $2,346 and $1,521 at June 30, 2006 and 2005, respectively.
|   |                                                                                                                                                                                                                                                                                                               
|6. | INCOME TAXES                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                               
|   | A reconciliation of income taxes at statutory rates
        is as follows:                                                                                                                                                                                                                                    

| |                                               |   | 2006   |   |   | 2005   |   |   | 2004   |  
| | --------------------------------------------- | - | ------ | - | - | ------ | - | - | ------ | -
| |                                               |   |        |   |   |        |   |   |        |  
| | Net loss for the year                         | $ | (6,092 | ) | $ | (7,674 | ) | $ | (1,815 | )
| |                                               |   |        |   |   |        |   |   |        |  
| | Expected income tax benefit                   | $ | 2,199  |   | $ | 2,770  |   | $ | 617    |  
| | Changes in taxes resulting from:              |   |        |   |   |        |   |   |        |  
| | Non-deductible mining
      expenses          |   | (25    | ) |   | (93    | ) |   | -      |  
| | Unrealized foreign exchange gain
      (loss) |   | (200   | ) |   | (505   | ) |   | 112    |  
| | Impairment charges                            |   | (1,805 | ) |   | (2,623 | ) |   | -      |  
| | Change in valuation allowance                 |   | (169   | ) |   | 451    |   |   | (729   | )
| |                                               |   |        |   |   |        |   |   |        |  
| | Income tax expense                            | $ | -      |   | $ | -      |   | $ | -      |  

The significant components of the Company's
  future income tax assets are as follows:

| |                                    |   | 2006   |   |   | 2005   |  
| | ---------------------------------- | - | ------ | - | - | ------ | -
| | Future income tax assets:          |   |        |   |   |        |  
| | Non-capital loss carry-forwards    | $ | 1,674  |   | $ | 1,104  |  
| | Capital assets                     |   | 3,705  |   |   | 1,900  |  
| | Valuation allowance                |   | (5,379 | ) |   | (3,004 | )
| | Net future income
      tax assets | $ | -      |   | $ | -      |  

The Company has available for deduction
  future taxable income against non-capital losses of approximately $4,635. The
  non-capital losses, if not utilized, will expire through 2026. Future tax benefits
  which may arise as a result of these non-capital losses have been fully reserved
  for in these financial statements.

---

78

|4025776 CANADA INC.                           
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2006                                 
|(Canadian Dollars, in Thousands)              

|7. | FINANCIAL INSTRUMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The Company's financial instruments consist of cash,
        accrued interest payable, due to a related party, due to a shareholder,
        accounts payable and accrued liabilities, note payable and debentures
        payable. Unless otherwise noted, it is management's opinion that the Company
        is not exposed to significant credit risks arising from these financial
        instruments. The fair value of debentures payable to shareholders cannot
        be determined due to the uncertainty of the liquidity of the Company and
        the ultimate realization of the debt. The fair value of the remaining
        financial instruments approximates their carrying value, unless otherwise
        noted.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Interest rate risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Interest rate risk arises from the possibility that
        the value of, or cash flows related to, a financial instrument will fluctuate
        as a result of changes in market interest rates. The Company is exposed
        to financial risk from the interest rate differentials between the market
        rate and the rates used on their financial instruments.                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Currency risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The Company is exposed to financial risk arising from
        fluctuations in foreign exchange rates. The Company does not use derivative
        instruments to manage its exposure to foreign currency risk.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|8. | SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

| |                                        |   | 2006 |  |   | 2005 |  |   | 2004 | 
| | -------------------------------------- | - | ---- |  | - | ---- |  | - | ---- | 
| |                                        |   |      |  |   |      |  |   |      | 
| | Cash paid during the year for interest | $ | -    |  | $ | -    |  | $ | -    | 
| | Cash paid during the year for taxes    |   | -    |  |   | -    |  |   | -    | 

|   | In addition to non-monetary transactions that are disclosed
        elsewhere in these financial statements, the Company entered into a non-monetary
        transaction in 2004 pursuant to the issuance of a debenture payable for
        property and equipment in the amount of $15,214.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                              
|9. | SEGMENTED INFORMATION                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                              
|   | All of the Company's operations are in a single reportable
        segment located in Canada.                                                                                                                                                                                                

---

79

|4025776 CANADA INC.                           
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2006                                 
|(Canadian Dollars, in Thousands)              

|10. | UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | The Company's consolidated financial statements have
        been prepared in accordance with generally accepted accounting principles
        in Canada. There are no reconciling items between Canadian and United
        States generally accepted accounting principles for the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | New Accounting Standards                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | Statement of Financial Accounting Standards ("SFAS")
        No. 154, Accounting Changes and Error Corrections,replaces Accounting
        Principles Board ("APB") Opinion No. 20, Accounting Changes, and
        SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements,
        and changes the requirements for the accounting for and reporting of a
        change in accounting principle. This Statement applies to all voluntary
        changes in accounting principle. It also applies to changes required by
        an accounting pronouncement in the unusual instance that the pronouncement
        does not include specific transition provisions. SFAS No. 154 is effective
        for accounting changes and corrections of errors made in fiscal years
        beginning after December 15, 2005. Management is analyzing the requirements
        of this new standard and believes that its adoption will not have any
        significant impact on the Company's financial statements.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | SFAS No. 157: Fair Value Measurements,defines
        fair value, establishes a framework for measuring fair value in generally
        accepted accounting principles (GAAP), and expands disclosures about fair
        value measurements. SFAS No. 157 applies under other accounting pronouncements
        that require or permit fair value measurements. SFAS No. 157 is effective
        for financial statements issued for fiscal years beginning after November
        15, 2007, and interim periods within those fiscal years. Management is
        analyzing the requirements of this new standard.                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | FASB Staff Position ("FSP") No. FAS 115-1 and FAS
        124-1, The Meaning of Other-Than-Temporary Impairment and Its Application
        to Certain Investments,addresses the determination as to when an
        investment is considered impaired, whether that impairment is other than
        temporary and the measurement of an impairment loss. This FSP also includes
        accounting considerations subsequent to the recognition of an other-than-temporary
        impairment and requires certain disclosures about unrealized losses that
        have not been recognized as other-than-temporary impairment. This FSP
        shall be applied to reporting periods beginning after December 15, 2005.
        The Company's preliminary assessment does not indicate that this FSP will
        have a significant impact on the financial statements.                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | FASB Interpretation ("FIN") No. 48: Accounting
        for Uncertainty in Income Taxes, an interpretation of FASB Statement
        No.109, clarifies the accounting for uncertainty in income taxes recognized
        in an enterprise's financial statements in accordance with SFAS No. 109,
        Accounting for Income Taxes. This interpretation (1) prescribes
        a recognition threshold and measurement attribute for the financial statement
        recognition and measurement of a tax position taken or expected to be
        taken in a tax return and (2) provides guidance on derecognition, classification,
        interest and penalties, accounting in interim periods, disclosure, and
        transition. This interpretation is effective for fiscal years beginning
        after December 15, 2006. Management is analyzing the requirements of this
        new standard.                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | The Emerging Issues Task Force ("EITF") reached consensus
        on EITF 04-13, Accounting for Purchases and Sales of Inventory with
        the Same Counterpartythat two or more inventory purchase and sales
        transactions with the same counterparty that are entered into in contemplation
        of one another should be                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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80

|4025776 CANADA INC.                           
|----------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2006                                 
|(Canadian Dollars, in Thousands)              

|10. | UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
        (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | New Accounting Standards (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | combined for purposes of applying Opinion 29, Accounting
        for Nonmonetary Transactions. The EITF also reached consensus that
        a nonmonetary exchange whereby an entity transfers finished goods inventory
        in exchange for the receipt of raw materials or WIP inventory within the
        same line of business is not an exchange transaction to facilitate sales
        to customers for the entity transferring the finished goods and, therefore,
        should be recognized by that entity at fair value if (a) fair value is
        determinable within reasonable limits and (b) the transaction has commercial
        substance. All other nonmonetary exchanges of inventory within the same
        line of business should be recognized at the carrying amount of the inventory
        transferred. This EITF issue should be applied to new arrangements entered
        into, and modifications or renewals of existing arrangements, beginning
        in the first interim or annual reporting period beginning after March
        15, 2006. Management has analyzed the requirements of this new standard
        and determined that there will be no significant impact on the Company's
        financial position.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | FSP AUG AIR-1, Accounting for Planned Major Maintenance
        Activities, prohibits the use of the accrued- in-advance method and
        requires the application of the same method of accounting for planned
        major maintenance activities in annual and interim financial reporting
        periods. This standard is effective for fiscal years beginning after December
        15, 2006. Management has analyzed the requirements of this new standard
        and determined that there will be no significant impact on the Company's
        financial position.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | In September 2006, the SEC issued Staff Accounting
        Bulletin No. 108, "Considering the Effects of Prior Year Misstatements
        when Quantifying Misstatements in Current Year Financial Statements" ("SAB
        108"). SAB 108 provides guidance on how prior year misstatements should
        be considered when quantifying misstatements in the current year financial
        statements. SAB 108 requires registrants to quantify misstatements using
        both a balance sheet and an income statement approach and evaluate whether
        either approach results in quantifying a misstatement that, when all relevant
        quantitative and qualitative factors are considered, is material. SAB
        108 is effective for fiscal years ending after November 15, 2006. The
        Company's preliminary assessment does not indicate that this SAB will
        have a significant impact on the financial statements.                                                                                                                                                                                                                                                                                                           

---

|DAVIDSON & COMPANY LLP | Chartered
      Accountants | A Partnership of
      Incorporated Professionals
|---------------------- | --------------------------- | -------------------------------------------------
|                       |                             |                                                  

REPORT OF INDEPENDENT REGISTERED 
  PUBLIC ACCOUNTING FIRM

To the Directors and Shareholders of 
  Blue Earth Refineries Inc.

Our report on the consolidated financial statements of Blue
  Earth Refineries Inc. as at and for the year ended June 30, 2005 is included
  on page 43 of this Form 20-F. In connection with our audit of such financial
  statements, we have also audited the related financial statement schedule II
  for the year ended June 30, 2005 included in this Form 20-F.

In our opinion, the financial statement schedule referred
  to above for the year ended June 30, 2005, when considered in relation to the
  basic consolidated financial statements taken as a whole, presents fairly in
  all material respects the information set forth therein.

|                  | DAVIDSON & COMPANY LLP
|----------------- | ------------------------
|Vancouver, Canada | Chartered Accountants   
|December 2, 2005  |                         

A Member ofSC INTERNATIONAL

1200 - 609 Granville Street, P.O. Box 10372, Pacific Centre,
  Vancouver, BC, Canada, V7Y 1G6 
  Telephone (604) 687-0947 Fax (604) 687-6172

---

82

BLUE EARTH REFINERIES, INC.

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS 
  (U.S. Dollars, In Thousands)

Balance at
      
      
      Balance atDescription
      beginning of period
      Additions
      Deductions
      end
        of periodAllowance for receivable fromKilembe Mines Ltd.Year ended June 30, 2005
      $1,634
      $ -
      $ -
      $1,634Year ended June 30, 2006
      $1,634
      $ -
      $ -
      $1,634


---

83

Item 19. Exhibits.

Exhibits Required by Form 20-F

|Exhibit |                                                                                                                                                                                                                
|------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number  | Description                                                                                                                                                                                                    
|        |                                                                                                                                                                                                                
|1.1     | Certificate of Incorporation under The International Business
      Companies Act(British Virgin Islands)(1)                                                                                                   
|        |                                                                                                                                                                                                                
|1.2     | Memorandum of Association and Article of Association(1)                                                                                                                                                        
|        |                                                                                                                                                                                                                
|1.3*    | Amendment to Memorandum of Association
      and Articles of Association                                                                                                                                       
|        |                                                                                                                                                                                                                
|4.1     | Distribution Agreement dated June 5, 2004 between Kasese Cobalt
      Company and Danzas  relating to the sale and distribution of Kasese
      Cobalt Company cobalt cathodes(1)                              
|       
|        |                                                                                                                                                                                                                
|4.2     | Arrangement Agreement dated July 13, 2004 among MFC Bancorp
      (now known as KHD Humboldt Wedag International Ltd.), Sutton Park, Blue
      Earth, New Sutton Canco, New Nature Canco and 4025750 Canada(1)
|        |                                                                                                                                                                                                                
|4.3*    | Term Sheet dated November 30, 2006
      between Blue Earth and First Equity Securities AG                                                                                                                     
|        |                                                                                                                                                                                                                
|8.1*    | Significant subsidiary: Kasese Cobalt
      Company Limited                                                                                                                                                    
|        |                                                                                                                                                                                                                
|12.1*   | Section 302 Certification under Sarbanes
       Oxley Act of 2002 for Michael J. Smith                                                                                                                        
|        |                                                                                                                                                                                                                
|13.1*   | Section 906 Certification under Sarbanes
       Oxley Act of 2002 for Michael J. Smith                                                                                                                        

|(1) | Incorporated by reference from our Form 20-F filed on
        October 1, 2004.  
|--- | --------------------------------------------------------------------------------
|    |                                                                                 
|(2) | Incorporated by reference from our Form 20-F filed on
        February 24, 2005.

* Filed herewith.

---

84

SIGNATURE

The registrant hereby certifies that it meets all of the requirements
  for filing on Form 20-F and that it has duly caused and authorized the undersigned
  to sign this annual report on its behalf.

BLUE EARTH REFINERIES INC.

/s/ Michael J. Smith 
  Michael J. Smith 
  President and Secretary

Date: March 5, 2007

---