---

UNITED STATES**SECURITIES AND EXCHANGE COMMISSION**
  Washington, 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 endedJune 30, 2007

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, Dina House, Ruttonjee Centre, 11 Duddell
Street, Central,Hong Kong SAR, China(Address
of office)

Copy of communications to: Virgil Z. Hlus, Esq. Clark
Wilson LLPBarristers and Solicitors Suite 800  885 West Georgia
Street Vancouver, British Columbia, Canada V6C 3H1 Telephone:
604-687-5700Facsimile: 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 ordinary 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, 2007.

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                                       | 10  
|       |         | C.                                                        | ORGANIZATIONAL STRUCTURE                                | 14  
|       |         | D.                                                        | PROPERTY, PLANTS AND EQUIPMENT                          | 14  
|       | ITEM 5. | **OPERATING AND FINANCIAL REVIEW AND PROSPECTS**          | 16                                                     
|       |         | A.                                                        | OPERATING RESULTS                                       | 16  
|       |         | B.                                                        | LIQUIDITY AND CAPITAL RESOURCES                         | 21  
|       |         | C.                                                        | RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.    | 22  
|       |         | D.                                                        | TREND INFORMATION                                       | 22  
|       |         | E.                                                        | OFF-BALANCE SHEET ARRANGEMENTS                          | 22  
|       |         | F.                                                        | TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS           | 22  
|       |         | G.                                                        | SAFE HARBOR                                             | 23  
|       | ITEM 6. | **DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES**            | 23                                                     
|       |         | A.                                                        | DIRECTORS AND SENIOR MANAGEMENT                         | 23  
|       |         | B.                                                        | COMPENSATION                                            | 24  
|       |         | C.                                                        | BOARD PRACTICES                                         | 25  
|       |         | D.                                                        | EMPLOYEES                                               | 25  
|       |         | E.                                                        | SHARE OWNERSHIP                                         | 25  
|       | ITEM 7. | **MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS**     | 26                                                     
|       |         | A.                                                        | MAJOR SHAREHOLDERS                                      | 26  
|       |         | B.                                                        | RELATED PARTY TRANSACTIONS                              | 26  
|       |         | C.                                                        | INTERESTS OF EXPERTS AND COUNSEL                        | 27  
|       | ITEM 8. | **FINANCIAL INFORMATION**                                 | 27                                                     
|       |         | A.                                                        | CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION | 27  
|       |         | B.                                                        | SIGNIFICANT CHANGES                                     | 28  
|       | ITEM 9. | **THE OFFER AND LISTING**                                 | 28                                                     
|       |         | A.                                                        | OFFER AND LISTING DETAILS                               | 28  
|       |         | B.                                                        | PLAN OF DISTRIBUTIONS                                   | 29  
|       |         | C.                                                        | MARKETS                                                 | 29  
|       |         | D.                                                        | SELLING SHAREHOLDERS                                    | 29  
|       |         | E.                                                        | DILUTION                                                | 29  
|       |         | F.                                                        | EXPENSES OF THE ISSUE                                   | 29  

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iv

PageITEM 10.
      ADDITIONAL INFORMATION
      29A.
      SHARE CAPITAL
      29B.
      MEMORANDUM AND ARTICLES OF ASSOCIATION
      30C.
      MATERIAL CONTRACTS
      30D.
      EXCHANGE CONTROLS
      30E.
      TAXATION
      30F.
      DIVIDENDS AND PAYING AGENT
      32G.
      STATEMENT BY EXPERTS
      32H.
      DOCUMENTS ON DISPLAY
      32I.
      SUBSIDIARY INFORMATION
      33ITEM 11.
      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
        RISK
      33ITEM 12.
      DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
      34PART IIITEM 13.
      DEFAULTS, DIVIDENDS ARREARAGES AND DELINQUENCIES
      34ITEM 14.
      MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
        HOLDERS AND USE OF PROCEEDS
      34ITEM 15.
      CONTROLS AND PROCEDURES
      34ITEM 16.
      RESERVED
      35ITEM 16A.
      AUDIT COMMITTEE FINANCIAL EXPERT
      35ITEM 16B.
      CODE OF ETHICS
      35ITEM 16C.
      PRINCIPAL ACCOUNTANT FEES AND SERVICES
      35ITEM 16D.
      EXEMPTION FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
      36ITEM 16E.
      PURCHASES OF EQUITY BY THE ISSUER AND AFFILIATED
        PURCHASERS
      36PART IIIITEM 17.
      FINANCIAL STATEMENTS
      36ITEM 18.
      FINANCIAL STATEMENTS
      36ITEM 19.
      EXHIBITS
      78SIGNATURE
      79


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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.

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 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",
"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, 2007, 2006, 2005,
2004 and 2003. 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 basic and diluted earnings (loss) per ordinary
        share)2007
      
      
      2006
      
      
      2005
      
      
      2004
      
      
      2003Sales of cobalt
      $
      28,255
      
      $
      18,134
      
      $
      15,419
      
      $
      5,019
      
      $
      1,048Operating income (loss)
      
      8,125
      
      
      (1,642
      )
      
      (849
      )
      
      (303
      )
      
      (268
      )Income (loss) before provisionfor income taxes
      
      10,376
      
      
      (3,324
      )
      
      (3,724
      )
      
      (477
      )
      
      (2,555
      )Net income (loss)
      
      10,376
      
      
      (3,324
      )
      
      (3,724
      )
      
      (477
      )
      
      (2,555
      )Basic and diluted earnings (loss)per ordinary share
      
      0.69
      
      
      (0.22
      )
      
      (0.24
      )
      
      (0.03
      )
      
      (0.16
      )Weighted average ordinaryshares outstanding (inthousands of shares)
      
      15,143
      
      
      15,375
      
      
      15,555
      
      
      15,555
      
      
      15,555


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3

As at June 30(US
        dollars, in thousands, except cash dividend per ordinary share)2007
      
      
      2006
      
      
      2005
      
      
      2004
      
      
      2003Total assets
      $
      49,765
      
      $
      46,747
      
      $
      50,247
      
      $
      55,107
      
      $
      46,928Total liabilities
      
      3,613
      
      
      3,085
      
      
      3,526
      
      
      3,179
      
      
      935Shareholders' equity
      
      46,152
      
      
      43,662
      
      
      46,721
      
      
      51,928
      
      
      45,993Ordinary stock
      
      15,143
      
      
      15,143
      
      
      15,555
      
      
      15,555
      
      
      15,555Cash dividend
      
      7,571
      
      
      -
      
      
      1,842
      
      
      -
      
      
      -Cash dividend per ordinary share
      
      0.50
      
      
      -
      
      
      0.12
      
      
      -
      
      
      -


**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, 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 faces logistical issues which may affect
its ability to ship product on a regular and reliable basis, which could
negatively impact the demand for our cobalt or our operational costs, and reduce
the economic viability of our operations.

Our subsidiary faces many logistical issues both in the
shipping of finished product and the flow of incoming supplies and spares. The
remote nature of the location of our refinery facility, only 40 miles from the
Democratic Republic of Congo border in western Uganda, means that deliveries
cannot be scheduled on a regular and reliable basis.

Our subsidiary faces logistical issues as it has to import
  most of the supplies and spare parts that it requires to operate which may affect
  its ability to operate the refinery on a continual and consistent basis, which
  could increase our operating costs and as a result reduce the economic viability
  of our operations.

Most of the materials needed for the operation of the plant are
imported into Uganda from various sources worldwide, including North America,
the European Union, Australia and South Africa. This remoteness

---

4

necessitates long pre-order periods, often several months in
advance. Most shipments are by vessels and arrive through port of Mombassa,
Keyna. This port is incredibly congested due to huge increase in traffic into
East Africa in the past decade. It is estimated that there are presently in
excess of 5,000 containers awaiting onward shipping from Mombassa to
destinations in northern Kenya and Uganda.

Once the container has cleared the port there is a further
three day road journey to our refinery including the Ugandan border clearance to
be negotiated. Transport vehicles are often in poor condition and the state of
the roads can vary enormously. It is not unusual for critical supplies to be
delayed while a replacement truck is located and dispatched to solve a breakdown
problem. A major delay in an incoming shipment of a single process product could
cause a temporary shut-down of the entire plant and the subsequent extended
re-start process.

Our subsidiary faces logistical issues as it has to
export all of its cobalt to various world markets which may affect its ability
to ship product on a regular and reliable basis, which could negatively impact
the demand for our cobalt or our operational costs, and reduce the economic
viability of our operations.

The same problems are to be managed in reverse when shipping
cobalt to the world markets. Trucks are not available locally and must come from
Kampala to move the sealed containers to Mombassa. Once again the port
congestion can cause delays in lading. All of this results in extended periods
between packaged product ready for shipment and the bill of lading documents to
facilitate payment by the customer.

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.

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

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5

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.

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 or we may be
required to permanently close. Most companies produce cobalt in concert with the
production of one or more other metals. In

---

6

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 5.0 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 will 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 diesel generators, 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, may 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.

The supply of limestone is vital to our production
process. If the supply of limestone is interrupted, we may discontinue our
operations.

Among other raw materials, limestone is vital to the production
process and we consume between 4,000 and 5,000 tonnes per month. The present
quarry has been largely exhausted of quality limestone and new supply
arrangements must be made if production is to continue. If a new supply cannot
be procured, our production process may discontinue. Furthermore, the new supply
of limestone may affect our cost structure and our cash break-even price,
depending on the quality of the limestone and the transportation costs.

---

7

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 civil unrest, 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.

Our production facility is located in a region which is
adversely affected by political and/or economic turmoil and social unrest.

Our production facility is located 50 kilometers from the
border with the Democratic Republic of Congo. Ugandan rebel groups conduct raids
into Uganda and during July 2007, such armed clashes with the Ugandan armed
forces resulted in deaths of 50 combatants. Ugandan squatters are presently
trying to occupy our land held for necessary reserve for our tailings dam. There
have been clashes with fire arms being discharged and threats of death against
our employees. Our employees at the worksite have been subject to threats of
kidnap in 2007. In the immediate vicinity, we have an outbreak of the diseases
of ebola which is causing labour shortages. Some of our key operating personnel
are non African natives and if they leave Uganda, we may not be able to continue
our production.

Financing Risks

We generate cash flow from a single source 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.

Being 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 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.

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8

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, as
defined in the royalty agreement, generated by our Kasese Cobalt Company
operation, as defined in the royalty agreement, up to a total of $10 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 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, there is a supply of qualified workers 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 immediate vicinity, we have an outbreak of the diseases of
ebola, HIV and other diseases which is causing labour shortages. In the case of
our operations in Uganda, due to the remoteness and civil unrest, new qualified
workers may be difficult to find. There is unrest due to the civil war against
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 companies.

The following persons are directors, officers and/or
shareholders of other 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. The President and director of our
Company and the President and director of Mass Financial Corp. are the same
individual. 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 260 employees, of which
103 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 directors or officers may
sustain or incur in the execution of their duties. Our Articles of Association
further state that no director or 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 on any securities exchange or
national securities quotation system.

Our shares are not listed or quoted for trading on any
securities exchange or national securities quotation system although they are
traded over the counter (OTC) on the pink sheets electronic OTC market.
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

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10

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 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 our Company**

**A.** **** **History
and development of our 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.

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. In December 2006, we sold 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 consisted of units in two British Virgin Islands
open-ended investment companies. Out of the gross consideration, our Company
repaid 36569 Yukon's liability of $261,188 due to Mass Financial and paid a
commission of $195,106 at 8% to MFC Corporate Services SA (formerly MFC Merchant
Bank SA, a subsidiary of Mass Financial). We assigned units of investment
companies to settle the debt liability due to Mass Financial and deducted the
commission. We received units in FE Global Undervalued Investments Ltd. and 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.

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

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11

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.

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 $120 million
  as at June 30, 2007, 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 may 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 feedstock at Kasese Cobalt Company is limited to the stockpiles and
there is no alternative supply. Once the current pyrite stockpile is exhausted,
which we anticipate will be in approximately 5.0 years based on the current
targeted production, we will discontinue our operations of Kasese's refinery.

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

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12

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 at Kasese Cobalt Company is limited to the
stockpiles and there is no alternative supply at this time. Once the current
pyrite stockpile is exhausted, which we anticipate will be in approximately 5.0
years based on the current targeted production, we may discontinue our
operations at Kasese. 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 (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 indicates 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, 2007:

Composition of the Kasese Cobalt Company Refinery Pyrite
Stockpile at June 30, 2007

Composite
    
    High (%)
    
    Low (%)Cobalt
    
    1.64
    
    1.17Copper
    
    0.66
    
    0.26Nickel
    
    0.19
    
    0.14Iron
    
    37.74
    
    17.07Sulphur
    
    50.21
    
    33.47


A detailed drilling and survey program, which has not been
updated since November 2000, then established the volume of the remaining
stockpiles as 709,000 tonnes at that time. Using the numbers from the November
2000 program and considering process consumption, we estimate this volume may
have been reduced to approximately 387,000 tonnes by June 30, 2007.

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.

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13

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.

Revenues

Current monthly cobalt production is projected at approximately
60 tonnes as of August 31, 2007. The revenue generated will depend upon sale
volume, monthly production tonnage, ability to deliver and the cobalt price for
the quality produced.

Principal Market

Kasese Cobalt Company markets its production through our agent,
Mass Financial.

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, 2007, there
were approximately 387,000 tonnes remaining that may be processed. At the
expected rate of consumption, the remaining stockpile will be exhausted in June
2012. As a result, our Companys business has a limited lifespan. At that time,
the site will 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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14

Kasese Cobalt Company enters into various contracts for the
supply of limestone (which have expired), 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.

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 and is
considered as a contribution to overheads instead of absorbing an economic share
of production and overhead costs for as long as the production of the major
metal or metals is economic. This is not the case with our Company, which is
currently engaged in the recovery and refining of cobalt only. The feedstock at
Kasese Cobalt Company is limited to the stockpiles. As there is no alternative
supply at this time, our Companys business has a limited lifespan. 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 will be forced to
halt our business operations and to again place our facilities on a care and
maintenance program or close the refinery.

If, after a shutdown, the market price of cobalt were to
improve sufficiently to make our refining operations once again economically
viable, the reactivation phase would take several months and even longer and
substantial capital and 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. |  | Yukon, Canada    |  | Blue Earth Refineries Inc. |  | 100.0%         

**D.** **** **Property,
Plants and Equipment.**

Our office is located at Suite 803, 8/F, Dina House,
RuttonjeeCentre, 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.

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15

We believe that our existing facilities are adequate for our
needs through the end of the year ending June 30, 2008. 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, we placed the plant on a care and
maintenance program under which all cobalt production ceased by September 2002.
Due to improved cobalt prices, operations were recommenced at the plant in
December 2003, and we are now engaged in the extraction of cobalt from the
pyrite stockpile. As of June 30, 2007, the stockpile contained approximately
387,000 tonnes of material with an average grade of 1.38% cobalt. There is no
alternative supply. Once the current pyrite stockpile is exhausted, which we
anticipate will be in approximately 5.0 years based on the current targeted
production, we will discontinue our operations of Kasese's refinery. As a
result, our Companys business has a limited lifespan. 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 260 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 never been or will ever be able to attain the
targeted refining capacity, resulting in higher refining costs per unit
produced.

Kasese Cobalt Company 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. Subject to various government approval, we may sell excess
power into the Ugandan Electrical Transmission Company's power grid. 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. But there is no
assurance that such sales will occur.

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.

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 copper then cobalt and finally nickel. Copper and nickel
are recovered in the form of hydroxides. These processes result in an
electrolyte solution containing between 4.5 and 5.0 grams of

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16

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
try to achieve a steady capacity with saleable quality of the production while
the cobalt price is at the present levels. Our secondary goal is to reduce the
costs of production through the reduction in the volume of refining chemicals
being consumed.

**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, 2007, 2006 and
2005 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.

**A.** **** **Operating
results.**

Our results of operations have been, and may continue to be,
affected by many factors of a global nature, including security, economic and
market conditions, raw materials, logistic, 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 and predetermined
reserves of which we have a limited supply. 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. As a result of our Company's limited
reserves, our business has a limited lifespan.

The market for cobalt is negotiated between the producers or an
intermediary traders and the end users. Cobalt is not listed on any trading
exchange, so no official current market price exists. BHP Billion Limited 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 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. 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
prices.

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17

Year Ended June 30, 2007 Compared to Year Ended June 30,
2006

Our Company sold 1.4 million pounds of cobalt for $28.3 million
in the fiscal year 2007, compared to 1.6 million pounds of cobalt for $18.1
million in the fiscal year 2006. The average price realized was $20.46 per pound
in the fiscal year 2007, compared to $11.27 per pound in the fiscal year 2006.

The cost of sales was $16.5 million for the fiscal years 2007
and 2006, respectively. The cost of sales included depreciation charges of $5.0
million and $5.8 million and the rehabilitation expense was $0.2 million and
$0.2 million in fiscal years 2007 and 2006, respectively. The gross profit was
$11.7 million and $1.6 million for the fiscal years 2007 and 2006, respectively.
The increase in gross profit was due to an increase in the price of cobalt.

The general and administrative expenses were $3.6 million and
$3.3 million for the fiscal years 2007 and 2006, respectively. The increase of
approximately 9% is primarily due to an increase in business activities. The
operating income was $8.1 million for the fiscal year 2007, compared to
operating loss of $1.6 million in the same period in 2006.

We recognized an equity loss of $nil and $1.9 million for the
fiscal years 2007 and 2006, respectively, representing our proportionate share
in the operating loss of our equity method investee. In December 2006, we sold
all of our interest in our equity method investee and did not have any equity
income or loss in the current fiscal year. We recognized an accounting gain of
$1.3 million and $nil on the sale of the equity method investee in fiscal years
2007 and 2006, respectively.

Net income was $10.4 million (or basic earnings per share of
$0.69) for the fiscal year 2007, compared to a net loss of $3.3 million (or
basic loss per share of $0.22) for the fiscal year 2006.

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

Our 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 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 decrease was
primarily due to insurance expenses reduced by $0.3 million in fiscal year 2006.
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.

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.

---

18

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 on vessel 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 and collectibility is reasonably assured.

Valuation of Equity Method Investments and Available for
Sale Securities

Until our sale of 36569 Yukon in December 2006, we had an
equity method investment which was accounted for by the equity method. Under the
equity method, the investment was initially recorded at cost, then reduced by
dividends and increased or decreased by our proportionate share of the
investee's net earnings or loss.

Our Companys available for sale securities are stated at their
quoted market bid price as an active market is available. Any unrealized holding
gains or losses are reported as a separate component of comprehensive income
until realized.

When there has been a loss in value other than a temporary
decline, the equity method investment and available for sale securities would 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 reviewed
our position to determine whether an other than temporary decline existed.

In determining whether the decline in value was other than
temporary, quoted market price, if available, was not the only deciding factor.
We considered, but such consideration was 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;                

---

19

| | (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 test our long-lived assets for recoverability whenever
events or changes in circumstances indicate that their carrying amounts may not
be recoverable and an impairment loss is measured as the amount by which their
carrying amounts exceed their fair value using the estimated future undiscounted
cash flows. The estimated future undiscounted cash flows, based on reasonable
and supportable assumptions and projections, require our management to make
subjective judgments. Depending on the assumptions and estimates used, the
estimated future undiscounted cash flows can vary within a wide range of
outcomes. Our management considers the likelihood of possible outcomes in
determining the best estimate of future undiscounted cash flows.

Rehabilitation Provision

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

---

20

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 primarily spare parts and materials,
and to a lesser degree 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 of inventory periodically. The primary factors
that affect the valuation of inventory 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 of the work-in-progress and finished
goods periodically, and not less than on a quarterly basis.

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. At June 30, 2007, our Company had no equity method
investments.

Recent Developments

In September 2007, we entered into a Syndicated Unpriced
Forward Sale Derivative Agreement with Mass Financial Corp. (together with its
subsidiaries  Mass). We agreed to deliver 696 metric tons of our cobalt
products over a term of one year in exchange for an initial prepayment amount of
$18,400,000, with a floor price of $12 per lb. Adjustment amounts, first six
months being 45% of balance between the floor price and the resale price, and
seven to twelve months being (i) in case the resale price per lb. is equal or
less than $20, 75%, or (ii) in case the resale price exceeds $20, 75% of the
balance between the floor price and $20 plus 25% of the balance between $20 and
the resale price, as determined in the future, will be paid 15 days after each
calendar quarter. Pursuant to an Underwriting and Syndication Agreement

---

21

between our Company and Mass, we agreed to pay Mass an
underwriting fee of 10% of the prepayment amount and a syndication fee of
$670,000. The syndication fee was paid by 239,286 shares of our common stock
valued at $2.80 per share.

In addition, we declared a cash distribution of $1.00 per share
to our holders of ordinary shares, totalling $15.5 million in September 2007.

**B.** **** **Liquidity
and capital resources.**

As of June 30, 2007, we had cash on hand of $1.6 million and as
of June 30, 2006, we had cash on hand of $1.8 million.

Operating Activities

The operating activities provided cash of $7.5 million in the
fiscal year 2007, compared to $1.3 million in the fiscal year 2006. Cash
provided by operating activities increased in the fiscal year 2007, largely due
to net income of $10.4 million as compared to net loss of $3.3 million in the
fiscal year 2006. The increase in cash flow from operating activities reflected
the higher price of cobalt in the current year.

At present, the revenue earned by us comes from cobalt sales of
Kasese Cobalt Company.

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
expenditure 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.

Investing Activities

The investing activities used cash of $0.1 million and $0.2
million on capital assets in the fiscal years 2007 and 2006, respectively.

Financing Activities

The financing activities used cash of $7.6 million on dividend
payment during the fiscal year 2007, compared to $23,000 on the repurchase of
shares during the fiscal year 2006.

Our Company declared and paid a cash distribution of $0.50 per
share to our holders of ordinary shares, totalling $7.6 million in fiscal year
2007.

We had no material commitments to acquire assets or operating
businesses at June 30, 2007. 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 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.

---

22

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 2007, the trend
for the price of cobalt has been upward. However, management is not optimistic
with the current price.

**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.**

|                                      |   | Payments Due by Period | 
|------------------------------------- | - | ---------------------- | 
|                                      |   | (in thousands)         | 
|Contractual Obligations as at         |   | Less than              | 
|June 30, 2007                         |   | 1
      Year           | 
|Long-term obligations                 | $ | -                      | 
|Capital lease obligations             |   | -                      | 
|Operating lease obligations           |   | 4                      | 
|Purchase obligations                  |   | 150                    | 
|Other long-term liabilities reflected |   | -                      | 
|on the balance sheet under GAAP(1)    |   |                        | 
|Total                                 | $ | 154                    | 

(1)      Rehabilitation
Provision.

---

23

Cash outlays for our contractual obligations and commitments
identified above are expected to be funded by cash on hand. Purchase obligations
can typically be cancelled with little or no financial penalty.

**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: 59 |  | Director since 2004. As director,
      Mr. Smith is responsible for the management affairs of our Company, our
      day-to-day operations, our financing functions and for developing our
      strategic direction.
| |                                                                  |  |                                                                                                                                                                                                                       
| | Rajesh Kumar Singhal Director Age: 45                            |  | 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: 63                                 |  | Director since 2005. As a
      director, Mr. Jal Cama is responsible for 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 resigned from such positions. Mr. Smith has
been the Chief Financial Officer from 2003 to October 15, 2007 and Secretary of
KHD Humboldt Wedag International and a director since 1986. KHD Humboldt Wedag
International is a publicly traded company listed on the New York Stock Exchange
with its common shares registered with the SEC under the Securities Exchange
Act of 1934. Mr. 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,

---

24

corporate finance and human resources development. From 2005 to
June 2007, Nowroz Jal Cama was a director of Sasamat Capital Corporation (a
related party prior to its merger with and into KHD Humboldt Wedag
International).

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, 2007 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

|                     |  |      |  | Annual
      Compensation |  | Long
      Term Compensation |  |              | 
|-------------------- |  | ---- |  | ------------------------- |  | ---------------------------- |  | ------------ | 
|                     |  |      |  |                           |  |                              |  |              | 
|                     |  |      |  |                           |  |                              |  |              | 
|                     |  |      |  |                           |  |                              |  | Other        | 
|Name and Principal   |  |      |  |                           |  |                              |  | Annual       | 
|Position             |  | Year |  | Salary                    |  | Bonus                        |  | Compensation | 
|                     |  |      |  |                           |  |                              |  |              | 
|Michael J. Smith     |  | 2007 |  | 85,000                    |  | Nil                          |  | Nil          | 
|President, Secretary |  |      |  |                           |  |                              |  |              | 
|and Director         |  |      |  |                           |  |                              |  |              | 

Option Grants During the Most Recently Completed
Financial Year

We did not grant any stock options to our directors and
executive officers as compensation for services during the financial year ended
June 30, 2007.

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, 2007.

Option and SAR Repricing

No options were repriced during the financial year ended June
30, 2007.

Directors' Compensation

During the 2007 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.

---

25

Stock Option Plan

We do not currently have a stock option plan.

**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 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 will 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.**

As of June 30, 2007, Kasese Cobalt Company, our operating
subsidiary, had approximately 260 employees, of which 103 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, 2008. We
expect to extend the agreement to January 2009 with similar terms.

**E.** **** **Share
ownership.**

There were 15,493,941 ordinary shares of our Company issued and
outstanding as of November 14, 2007. The number of our ordinary shares owned by
our directors or executive officers as of that date were:

|Name                 |  | Number of Ordinary Shares |  |              
|-------------------- |  | ------------------------- |  | -------------
|Office
      Held    |  | Beneficially Owned        |  | Percentage(1)
|Michael J. Smith(2)  |  | 1,639,400(3)              |  | 10.6%        
|Rajesh Kumar Singhal |  | Nil                       |  | Nil          
|Nowroz Jal Cama      |  | Nil                       |  | Nil          

|(1) | Based on 15,493,941 ordinary shares issued and
      outstanding as at November 14, 2007.                  
|--- | -----------------------------------------------------------------------------------------------------------
|    |                                                                                                            
|(2) | Michael J. Smith is the President and a director of Mass
      Financial Corp.                             
|    |                                                                                                            
|(3) | This number includes 85,000 directly held by Michael
      Smith and 1,554,400 held by Mass Financial
Corp.

---

26

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

**A.** **** **Major
shareholders.**

The following table sets forth, as of November 14, 2007, the
only persons known to us to be the beneficial owner of more than five (5%) of
our ordinary shares:

Percentage ofNo. of Ordinary
      
      OutstandingName of Shareholder
      
      Shares Owned
      
      Ordinary Shares(1)Peter Kellogg
      
      4,863,546(2)
      
      31.4%(2)Mass Financial Corp.
      
      1,554,400
      
      10.0%Lloyd I. Miller, III
      
      1,903,203(3)
      
      12.3%(3)The PNC Financial Services Group, Inc.(4)
      
      1,056,965(4)
      
      6.8%(4)


| | (1) | Based on 15,493,941 ordinary shares issued and
      outstanding as at November 14, 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 1,903,203 shares as an investment advisor to
      the trustee of certain family trusts and with respect to shares owned by
      his wife.                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | (4) | In the public filings made by The PNC Financial Services
      Group with respect to shares in our Company, the company disclosed that
      such shares are held directly or indirectly through subsidiaries of The
      PNC Financial Services Group. Such shares are held in trust accounts for
      an undisclosed beneficiary in which Lloyd I. Miller, Jr. was grantor and
      PNC Bank, National Association serves as trustee.         

**B.** **** **Related
party transactions.**

Other than as disclosed herein, to the best of our knowledge,
there have been no material transactions since the beginning of our preceding
three financial years to the date hereof 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.

In 2004, Kasese Cobalt Company entered into an exclusive
distribution agreement for an initial term ending December 31, 2014, to sell all
of the cobalt produced by Kasese Cobalt Company with MFCC, a subsidiary of Mass
Financial. In 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 marketing cost of $1.3 million, $1.3 million and $2.2 million were paid or
payable to MFCC for the years ended June 30, 2007, 2006 and 2005, respectively.

Our Company has an amount due in the ordinary course from (to)
MFCC in the amount of $4.8 million and $3.5 million at June 30, 2007 and 2006,
respectively. During the years ended June 30, 2007, 2006

---

27

and 2005, our Company purchased supplies and materials
amounting to $nil, $nil and $1.4 million from MFCC.

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 2007, the Company paid $0.2 million to a subsidiary of
Mass Financial as a commission to arrange the sale of equity method investee.
The Company has an amount due to Mass Financial in the amount of $0.6 million as
at June 30, 2007 and 2006, 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 our Company or our subsidiaries or has a
material, direct or indirect economic interest in our 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.

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 December 14, 2007Report of Independent
      Registered Public Accounting Firm dated December 2, 2005 (February 1,
      2007)Consolidated Balance
      Sheets as at June 30, 2007 and 2006Consolidated Statements
      of Operations for the years ended June 30, 2007, 2006 and 2005Consolidated Statements
      of Comprehensive Income (Loss) for the years ended June 30, 2007, 2006 and
      2005Consolidated Statements
      of Changes in Shareholders' Equity for the years ended June 30, 2007, 2006
      and 2005Consolidated Statements
      of Cash Flows for the years ended June 30, 2007, 2006 and 2005Notes to Consolidated
      Financial Statements


---

28

Legal Proceedings

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

Cash Distributions

During our fiscal year ended June 30, 2007, 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 April 2,
2007. We distributed an aggregate of $3,785,709 to our shareholders of record.
Additionally, 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. 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.

We may pay additional cash 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.**

Our ordinary shares were first published by the Pink Sheets LLC
  on May 26, 2005. 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.

---

29

Pink
        SheetsHigh
      
      Low(U.S.$)
      
      (U.S.$)Annual Highs and LowsFor the Fiscal Year Ended June 30, 2007
      2.40
      
      1.10Quarterly Highs and LowsFor the Fiscal Year Ended June 30, 2007Quarter ended September 30, 2006
      1.70
      
      1.10Quarter ended December 31, 2006
      2.02
      
      1.36Quarter ended March 31, 2007
      2.40
      
      1.72Quarter ended June 30, 2007
      2.38
      
      1.75Monthly Highs and Lows Subsequentto the Fiscal Year Ended June 30, 2007July
      2.24
      
      1.90August
      2.14
      
      1.75September
      2.65
      
      1.91October
      2.50
      
      1.30November
      1.70
      
      1.10


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

**B.** **** **Plan of distributions.**

Not applicable.

**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.

---

30

**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 November 14,
2007, 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.

**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.

---

31

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 ordinary 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 theshareholder'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.

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

---

32

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. We have not made a determination as to whether we
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. Holders and prospective holders
of ordinary 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

---

33

directed to us at the following address: Suite 803, 8/F,
Ruttonjee House, Dina Centre, 11 Duddell Street, Central, Hong Kong SAR, China.

**I.** **** **Subsidiary
Information**

As at December 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. |  | Yukon Canada    |  | Blue Earth Refineries Inc. |  | 100.0%         

**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 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. Prior to
the sale of 36569 Yukon in December 2006, 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, which subjected us to currency exchange rate risk.
We also hold trading securities which are denominated in Euros. A depreciation
of the Euro or Canadian dollar against the United States dollar during this time
decreased the fair value of our financial instrument assets. An appreciation of
the Euro or Canadian dollar against the United States dollar during this time
increased 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, 2007 and 2006 and expected cash flows from
these instruments.

As at June 30, 2007 (in thousands)

Expected
        Cash FlowCarrying
      FairValue
      Value
      2008
      2009
      2010
      2011
      2012
      ThereafterTradingsecurities(1)
      $4,526
      $4,526
      $4,526
      $ -
      $ -
      $ -
      $-
      $ -


|(1) | Represents highly liquid investment bonds denominated in
      Euros that are not asset-backed securities.
|--- | ----------------------------------------------------------------------------------------------------------

---

34

As at June 30, 2006
  (in thousands)

Expected
        Cash FlowCarrying
      FairValue
      Value
      2007
      2008
      2009
      2010
      2011
      ThereafterEquitymethodinvestments(2)
      $1,699
      $2,244
      $2,244(1)
      $ -
      $ -
      $ -
      $-
      $ -


|(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.                                                                                          

Equity Price Risk

Changes in trading prices of securities may affect the fair
value of securities. An increase in trading prices will increase the fair value
and a decrease in trading prices will decrease the fair value of securities. Our
financial instruments which may be sensitive to fluctuations in equity prices
are trading securities and available-for-sale securities. The following table
provides information about our exposure to fluctuations in equity prices for the
carrying amount of financial instruments sensitive to such fluctuations as at
June 30, 2007 and expected cash flows from these instruments. We did not have
any financial instrument sensitive to such fluctuations as at June 30, 2006.

As at June 30, 2007(in
        thousands)Carrying
      FairValue
      Value
      2008
      2009
      2010
      2011
      2012
      ThereafterTradingsecurities
      $4,526
      $4,526
      $4,526
      $ -
      $ -
      $ -
      $-
      $ -Available-for-salesecurities(1)
      $2,688
      $2,688
      $-
      $-
      $-
      $-
      $-
      $2,688


|(1) | Consisting of units in open-ended investment companies
      that are not asset-backed securities.
|--- | --------------------------------------------------------------------------------------------------

**Item
12.****Description of Securities Other than Equity Securities**

Not applicable.

PART II

**Item
13.** **Defaults,
Dividend Arrearages and Delinquencies**

Not applicable.

**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

---

35

period covered by this annual report, being June 30, 2007. 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, 2007 were 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.

In light of the conclusion that our Company's disclosure
controls and procedures were effective as of June 30, 2007, 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. Our board of directors believe that the members of our board
and the sole executive officer are collectively capable of ensuring honest and
ethical conduct, including the ethical handling of actual or apparent conflicts
of interest between personal and professional relationships among the directors
and management of our Company. The board of directors of our Company does not
believe that it is necessary to have a code of ethics due to the limited number
of directors and executive officers of our Company.

**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, 2007.

---

36

The aggregate fees billed by Deloitte & Touche LLP for
professional services rendered for the audit of our annual financial statements
for the fiscal years ended June 30, 2007 and 2006 were $22,000 and $76,000,
respectively.

Audit Related Fees

For the fiscal years ended June 30, 2007 and 2006, Deloitte
& Touche LLP did not perform any assurance and related services which are
not reported under the caption "Audit Fees" above.

Tax Fees

For the fiscal years ended June 30, 2007 and 2006, the
aggregate fees billed for tax compliance, tax advice and tax planning on tax
matters by Deloitte & Touche LLP were $nil and $nil, respectively.

All Other Fees

For the fiscal years ended June 30, 2007 and 2006, Deloitte
& Touche 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.

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

During our fiscal year ended June 30, 2007, we did not
repurchase any securities.

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 statements of our Company are filed as
part of this annual report:

Report of Independent
      Registered Chartered Accountants dated December 14, 2007Report of Independent
      Registered Public Accounting Firm dated December 2, 2005


---

37

Consolidated
      Balance Sheets as at June 30, 2007 and 2006Consolidated
      Statements of Operations for the years ended June 30, 2007, 2006 and 2005Consolidated
      Statements of Comprehensive Income (Loss) for the years ended June 30,
      2007, 2006 and 2005Consolidated
      Statements of Changes in Shareholders' Equity for the years ended June 30,
      2007, 2006 and 2005Consolidated
      Statements of Cash Flows for the years ended June 30, 2007, 2006 and 2005Notes
      to Consolidated Financial Statements


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

Independent
      Auditors Report of Davidson & Company LLP dated January 16, 2007Report of Independent
        Registered Public Accounting Firm dated December 2, 2005Consolidated
      Balance Sheets as at June 30, 2006 and 2005Consolidated
      Statements of Operations for the years ended June 30, 2006 and 2005Consolidated
      Statements of Changes in Shareholders Deficiency for the years ended June
      30, 2006 and 2005Consolidated
      Statements of Cash Flows for the years ended June 30, 2006 and 2005Notes
      to the Consolidated Financial StatementsUnaudited
      Consolidated Balance Sheets of 4025776 Canada Inc. as at November 30, 2006Unaudited
      Consolidated Statements of Operations of 4025776 Canada Inc. for the five
      months ended November 30, 2006


---

38





BLUE EARTH REFINERIES INC.

CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007, 2006 and 2005

---

39

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 sheets of
Blue Earth Refineries Inc. and subsidiaries (the "Company") as of June 30, 2007
and 2006, and the related consolidated statements of operations, comprehensive
income (loss), changes in stockholders' equity, and cash flows for each of the
two years in the period ended June 30, 2007. 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 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 audits 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 audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Blue Earth
Refineries Inc. and subsidiaries at June 30, 2007 and 2006, and the results of
their operations and their cash flows for each of the two years in the period
ended June 30, 2007, in conformity with accounting principles generally accepted
in the United States of America.

The consolidated financial statements of the Company for the
years ended June 30, 2005 was audited by other auditors whose report, dated
December 2, 2005, expressed an unqualified opinion on those statements.

/s/ Deloitte & Touche LLP

Independent Registered Chartered Accountants Vancouver,
Canada December 14, 2007

---

|DAVIDSON&COMPANYLLP |                       |  | A Partnership of Incorporated Professionals
|------------------- | --------------------- |  | -------------------------------------------
|                    | Chartered Accountants | 





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 statements of
operations, comprehensive income (loss), shareholders' equity and cash flows of
Blue Earth Refineries Inc. for the year ended June 30, 2005. 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 results of operations and cash flows of
the Company for the year ended June 30, 2005, in conformity with generally
accepted accounting principles in the United States of America.



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







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

---

41

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

|                                                                         |   | 2007   |   |   | 2006    |  
|------------------------------------------------------------------------ | - | ------ | - | - | ------- | -
|                                                                         |   |        |   |   |         |  
|                                                                         |   |        |   |   |         |  
|ASSETS                                                                   |   |        |   |   |         |  
|Current Assets                                                           |   |        |   |   |         |  
|Cash                                                                     | $ | 1,558  |   | $ | 1,755   |  
|Trading securities                                                       |   | 4,526  |   |   | -       |  
|Due from
      affiliates                                                |   | 4,833  |   |   | 3,484   |  
|Inventories                                                              |   | 7,503  |   |   | 5,789   |  
|Prepaid expenses
      and other                                         |   | 447    |   |   | 627     |  
|Total current assets                                                     |   | 18,867 |   |   | 11,655  |  
|                                                                         |   |        |   |   |         |  
|Long-term Assets                                                         |   |        |   |   |         |  
|Investment in
      and advances to an equity method investee            |   | -      |   |   | 1,699   |  
|Available-for-sale securities                                            |   | 2,688  |   |   | -       |  
|Property, plant
      and equipment, net                                 |   | 28,210 |   |   | 33,393  |  
|                                                                         |   | 30,898 |   |   | 35,092  |  
|Total assets                                                             | $ | 49,765 |   | $ | 46,747  |  
|                                                                         |   |        |   |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                     |   |        |   |   |         |  
|                                                                         |   |        |   |   |         |  
|Liabilities                                                              |   |        |   |   |         |  
|Current liabilities                                                      |   |        |   |   |         |  
|Accounts payable and
      accrued liabilities                           | $ | 1,124  |   | $ | 244     |  
|Accrued power charges                                                    |   | 8      |   |   | 240     |  
|Accrued cobalt
      royalties                                           |   | 659    |   |   | 976     |  
|Due to affiliates                                                        |   | 613    |   |   | 617     |  
|Total
      current liabilities                                          |   | 2,404  |   |   | 2,077   |  
|                                                                         |   |        |   |   |         |  
|Rehabilitation provision                                                 |   | 1,209  |   |   | 1,008   |  
|Total liabilities                                                        |   | 3,613  |   |   | 3,085   |  
|                                                                         |   |        |   |   |         |  
|Shareholders equity                                                     |   |        |   |   |         |  
|Preferred stock  no
      par value; authorized  100,000,000 shares    |   |        |   |   |         |  
|Issued and
      outstanding  none                                      |   | -      |   |   | -       |  
|Common stock  $1.00
      par value per share; authorized  100,000,000 |   |        |   |   |         |  
|ordinary
      shares                                                    |   |        |   |   |         |  
|Issued and outstanding  15,142,836 at June 30, 2007 and 2006,           |   |        |   |   |         |  
|respectively                                                             |   | 15,143 |   |   | 15,143  |  
|Additional paid-in
      capital                                         |   | 37,839 |   |   | 37,839  |  
|Accumulated deficit                                                      |   | (7,275 | ) |   | (10,080 | )
|Accumulated other
      comprehensive income                             |   | 445    |   |   | 760     |  
|                                                                         |   |        |   |   |         |  
|Total shareholders equity                                               |   | 46,152 |   |   | 43,662  |  
|                                                                         |   |        |   |   |         |  
|Total liabilities and shareholders equity                               | $ | 49,765 |   | $ | 46,747  |  

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

---

42

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

|                                                           |   | 2007    |   |   | 2006    |   |   | 2005   |  
|---------------------------------------------------------- | - | ------- | - | - | ------- | - | - | ------ | -
|                                                           |   |         |   |   |         |   |   |        |  
|                                                           |   |         |   |   |         |   |   |        |  
|                                                           |   |         |   |   |         |   |   |        |  
|Sales of cobalt                                            | $ | 28,255  |   | $ | 18,134  |   | $ | 15,419 |  
|Cost of operations, excluding depreciation                 |   | (11,332 | ) |   | (10,562 | ) |   | (7,760 | )
|Depreciation                                               |   | (5,008  | ) |   | (5,788  | ) |   | (4,557 | )
|Rehabilitation expense                                     |   | (201    | ) |   | (168    | ) |   | (140   | )
|                                                           |   |         |   |   |         |   |   |        |  
|Gross profit                                               |   | 11,714  |   |   | 1,616   |   |   | 2,962  |  
|                                                           |   |         |   |   |         |   |   |        |  
|                                                           |   |         |   |   |         |   |   |        |  
|EXPENSES                                                   |   |         |   |   |         |   |   |        |  
|General and administrative expenses                        |   | (3,589  | ) |   | (3,258  | ) |   | (3,811 | )
|                                                           |   |         |   |   |         |   |   |        |  
|Operating income (loss)                                    |   | 8,125   |   |   | (1,642  | ) |   | (849   | )
|                                                           |   |         |   |   |         |   |   |        |  
|                                                           |   |         |   |   |         |   |   |        |  
|OTHER ITEMS                                                |   |         |   |   |         |   |   |        |  
|Loss from an equity method investee                        |   | -       |   |   | (1,930  | ) |   | (2,930 | )
|Gain on sale of equity
      method investee               |   | 1,305   |   |   | -       |   |   | -      |  
|Other income                                               |   | 946     |   |   | 248     |   |   | 55     |  
|Income (loss) before income tax                            |   | 10,376  |   |   | (3,324  | ) |   | (3,724 | )
|Income tax                                                 |   | -       |   |   | -       |   |   | -      |  
|                                                           |   |         |   |   |         |   |   |        |  
|Net income
      (loss) for the year                       | $ | 10,376  |   | $ | (3,324  | ) | $ | (3,724 | )
|                                                           |   |         |   |   |         |   |   |        |  
|Basic and
      diluted earnings (loss) per ordinary share | $ | 0.69    |   | $ | (0.22   | ) | $ | (0.24  | )

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

---

43

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

|                                                  |   | 2007   |   |   | 2006   |   |   | 2005   |  
|------------------------------------------------- | - | ------ | - | - | ------ | - | - | ------ | -
|                                                  |   |        |   |   |        |   |   |        |  
|                                                  |   |        |   |   |        |   |   |        |  
|                                                  |   |        |   |   |        |   |   |        |  
|                                                  |   |        |   |   |        |   |   |        |  
|Net income (loss)                                 | $ | 10,376 |   | $ | (3,324 | ) | $ | (3,724 | )
|                                                  |   |        |   |   |        |   |   |        |  
|Other comprehensive income (loss):                |   |        |   |   |        |   |   |        |  
|Unrealized
      gain on securities               |   | 445    |   |   | -      |   |   | -      |  
|Change in foreign currency translation adjustment |   | (760   | ) |   | 288    |   |   | (35    | )
|                                                  |   | (315   | ) |   | 288    |   |   | (35    | )
|                                                  |   |        |   |   |        |   |   |        |  
|Total
      comprehensive income (loss)           | $ | 10,061 |   | $ | (3,036 | ) | $ | (3,759 | )

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

---

44

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

Common StockAccumulatedAdditional
      
      
      
      
      
      OtherNumber
      
      
      
      
      
      Paid-In
      
      
      Accumulated
      
      
      Comprehensiveof
        Shares
      
      
      Amount
      
      
      Capital
      
      
      Deficit
      
      
      Income
      
      
      TotalBalance at June 30, 2004
      15,555,269
      
      $
      15,555
      
      $
      38,898
      
      $
      (3,032
      )
      $
      507
      
      $
      51,928Capitalization of deficit account
      -
      
      
      -
      
      
      (1,842
      )
      
      1,842
      
      
      -
      
      
      -Dividend paid
      -
      
      
      -
      
      
      -
      
      
      (1,842
      )
      
      -
      
      
      (1,842
      )Contribution of advances to equity method investee
      -
      
      
      -
      
      
      394
      
      
      -
      
      
      -
      
      
      394Net loss
      -
      
      
      -
      
      
      -
      
      
      (3,724
      )
      
      -
      
      
      (3,724
      )Other comprehensive loss
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      (35
      )
      
      (35
      )Balance at June 30, 2005
      15,555,269
      
      
      15,555
      
      
      37,450
      
      
      (6,756
      )
      
      472
      
      
      46,721Repurchase and cancellation of shares
      (412,433
      )
      
      (412
      )
      
      389
      
      
      -
      
      
      -
      
      
      (23
      )Net loss
      -
      
      
      -
      
      
      -
      
      
      (3,324
      )
      
      -
      
      
      (3,324
      )Other comprehensive income
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      288
      
      
      288Balance at June 30, 2006
      15,142,836
      
      
      15,143
      
      
      37,839
      
      
      (10,080
      )
      
      760
      
      
      43,662Dividend paid
      -
      
      
      -
      
      
      -
      
      
      (7,571
      )
      
      -
      
      
      (7,571
      )Net income
      -
      
      
      -
      
      
      -
      
      
      10,376
      
      
      -
      
      
      10,376Other comprehensive loss
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      (315
      )
      
      (315
      )Balance at June 30, 2007
      15,142,836
      
      $
      15,143
      
      $
      37,839
      
      $
      (7,275
      )
      $
      445
      
      $
      46,152


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

---

45

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

|                                                      |   | 2007   |   |   | 2006   |   |   | 2005   |  
|----------------------------------------------------- | - | ------ | - | - | ------ | - | - | ------ | -
|                                                      |   |        |   |   |        |   |   |        |  
|                                                      |   |        |   |   |        |   |   |        |  
|CASH FLOWS FROM OPERATING ACTIVITIES                  |   |        |   |   |        |   |   |        |  
|Net income (loss)                                     | $ | 10,376 |   | $ | (3,324 | ) | $ | (3,724 | )
|Adjustments for:                                      |   |        |   |   |        |   |   |        |  
|Loss from
      an equity method investee             |   | -      |   |   | 1,930  |   |   | 2,930  |  
|Gain on sale of equity method investee                |   | (1,305 | ) |   | -      |   |   | -      |  
|Unrealized
      gain on trading securities           |   | (43    | ) |   | -      |   |   | -      |  
|Accretion of rehabilitation expense                   |   | 201    |   |   | 168    |   |   | 140    |  
|Depreciation                                          |   | 5,008  |   |   | 5,788  |   |   | 4,557  |  
|                                                      |   |        |   |   |        |   |   |        |  
|Changes in non-cash working capital
      items:      |   |        |   |   |        |   |   |        |  
|Due from affiliates                                   |   | (1,349 | ) |   | (3,947 | ) |   | 886    |  
|Trading
      securities                              |   | (4,483 | ) |   | -      |   |   | -      |  
|Inventories                                           |   | (1,399 | ) |   | 700    |   |   | (2,520 | )
|Prepaid
      expenses and other                      |   | 179    |   |   | 163    |   |   | 263    |  
|Accounts payable and accrued liabilities              |   | 332    |   |   | (284   | ) |   | 704    |  
|Due to
      affiliates                               |   | (3     | ) |   | 137    |   |   | (497   | )
|                                                      |   |        |   |   |        |   |   |        |  
|Net cash flows provided by operating
      activities |   | 7,514  |   |   | 1,331  |   |   | 2,739  |  
|                                                      |   |        |   |   |        |   |   |        |  
|                                                      |   |        |   |   |        |   |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES                  |   |        |   |   |        |   |   |        |  
|Purchases of property, plant and
      equipment      |   | (140   | ) |   | (203   | ) |   | (264   | )
|                                                      |   |        |   |   |        |   |   |        |  
|Net cash flows used in investing
      activities     |   | (140   | ) |   | (203   | ) |   | (264   | )
|                                                      |   |        |   |   |        |   |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES                  |   |        |   |   |        |   |   |        |  
|Repurchase of
      shares                            |   | -      |   |   | (23    | ) |   | -      |  
|Dividend paid                                         |   | (7,571 | ) |   | -      |   |   | (1,842 | )
|                                                      |   |        |   |   |        |   |   |        |  
|Net cash flows used in financing
      activities     |   | (7,571 | ) |   | (23    | ) |   | (1,842 | )
|                                                      |   |        |   |   |        |   |   |        |  
|Increase (decrease) in cash                           |   | (197   | ) |   | 1,105  |   |   | 633    |  
|                                                      |   |        |   |   |        |   |   |        |  
|Cash, beginning of year                               |   | 1,755  |   |   | 650    |   |   | 17     |  
|                                                      |   |        |   |   |        |   |   |        |  
|Cash, end of year                                     | $ | 1,558  |   | $ | 1,755  |   | $ | 650    |  
|                                                      |   |        |   |   |        |   |   |        |  
|Supplemental cash flow information                    |   |        |   |   |        |   |   |        |  
|Interest
      paid                                   | $ | -      |   | $ | -      |   | $ | -      |  
|Income taxes paid                                     | $ | -      |   | $ | -      |   | $ | -      |  

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

---

46

|BLUE EARTH REFINERIES INC.                
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2007                             
|                                          

|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 Corp. (and its subsidiaries  Mass). 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 Humboldt Wedag International
      Ltd. ("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 9.99% of the Companys ordinary shares and is related by way
      of a common director and officer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The Companys cobalt operation is conducted 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).                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | 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 2008.
      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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

---

47

|BLUE EARTH REFINERIES INC.                
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2007                             
|                                          

|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, 2007 or 2006, 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.                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The Companys available-for-sale and trading securities
      are stated at their bid prices. Realized gains or losses of investments
      are included in the results of operations. Any unrealized holding gains or
      losses for trading securities are included in the result of operations.
      Any unrealized holding gains or losses for available-for-sale securities
      are reported as a separate component of comprehensive income until
      realized. If a loss in value in available-for-sale securities is
      considered to be other than temporary, it is recognized in the
      determination of net income.                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | 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.                                                                                                                                                                                                                                                                                                                                                                                   

---

48

|BLUE EARTH REFINERIES INC.                
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2007                             
|                                          

|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 estimates of the stockpile reserves
      and expected production capacity, all buildings and equipment are
      estimated to be fully depreciated in 2012. Property, plant and equipment
      are tested for recoverability whenever events or changes in circumstances
      indicate that their carrying amounts may not be recoverable and an
      impairment loss is measured as the amount by which their carrying amounts
      exceed their fair value using the estimated future undiscounted cash
      flows. Any resulting write-downs to fair value are charged to the results
      of operations. 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 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. Cobalt revenue is recorded net of agency fees. Power revenue is
      recognized as power is delivered, the amount of revenue is fixed or
      determinable, and collectibility is reasonably assured.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Foreign Currency                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | The functional and reporting currency of KCCL is the U.S.
      dollar. Foreign currency transaction gains amounting to $41, $52 and $47
      for the years ended June 30, 2007, 2006 and 2005, respectively, are
      included in general and administrative expenses in the consolidated
      statements of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Translation adjustments are a result of the process of
      translating the Companys Canadian equity method investee, including the
      carrying value of debentures, to U.S. dollars. Translation adjustments are
      not included in determining net income for the period but are accumulated
      as a separate component of comprehensive income until sale or until
      complete or substantially complete liquidation of the Companys Canadian
      equity method investee takes place.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

---

49

|BLUE EARTH REFINERIES INC.                
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2007                             
|                                          

|1. | NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING
      POLICIES(contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | 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 15,142,836, 15,374,852 and 15,555,269 for 2007,
      2006 and 2005, respectively. 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 2007, 2006, and 2005.                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | New Accounting Standards                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | Statement of Financial Accounting Standards (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.                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | SFAS No. 159, The Fair Value Option for Financial
      Assets and Financial Liabilities Included an amendment of SFAS No.
      115.This Statement permits entities to choose to measure many
      financial instruments and certain other items at fair value. This
      Statement applies to all entities, including not-for- profit
      organizations. Most of the provisions of this Statement apply only to
      entities that elect the fair value option. SFAS No. 159 is effective for
      fiscal years beginning after November 15, 2007. 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.                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | FASB Staff Position (FSP) No. FIN 46 (R)-7, The
      Application of FASB Interpretation No. 46 (R) to Investment Companies,amends interpretation 46 (R) to provide an exception to the scope of
      the Interpretation for companies within the scope of the AICPA Audit and
      Accounting Guide (Guide). This FSP concludes that no additional
      consolidation guidance is necessary to the Guide. The Companys
      preliminary assessment does not indicate that this FSP will have a
      significant impact on the financial
statements.                                                                                                                                                                                                                                                                                                                                                                                                 

---

50

|BLUE EARTH REFINERIES INC.                
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2007                             
|                                          

|1. | NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING
      POLICIES(contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | New Accounting Standards(contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | 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.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|2. | SHARE CAPITAL                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Upon inception, the Company authorized 100 million
      ordinary shares with a par value of $1.00 each. In July 2004, the Company
      changed its authorized share capital from ordinary shares with a par value
      of $1.00 each to ordinary shares with no par value. In October 2006, the
      Company changed its authorized share capital which resulted again having
      ordinary shares with par value of $1.00 each. As at June 30, 2007, the
      Company has authorized 100 million ordinary shares with $1.00 par value
      per share.                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | 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 held 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|3. | SECURITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | At June 30, 2007, trading securities included investment
      in highly liquid investment bonds of $4,526. An unrealized holding gain of
      $43 has been included in the results of operations for the year ended June
      30, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Available-for-sale securities consist of units in two
      British Virgin Islands open-ended investment companies. These investments
      were acquired in connection with the sale of the Companys economic
      interest in the equity method investee in December 2006(see Note 9). The
      fair value of available-for-sale securities was $2,688 and $Nil as at June
      30, 2007 and 2006, respectively. An unrealized gain of $445 was recorded
      in comprehensive income of $445 in the year ended June 30, 2007.                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | As at June 30, 2007 and 2006, the Company did not have
      any asset-backed securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

---

51

|BLUE EARTH REFINERIES INC.                
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2007                             
|                                          

|4. | INVENTORIES
|-- | -----------

| |                           |   | 2007  |  |   | 2006  | 
| | ------------------------- | - | ----- |  | - | ----- | 
| |                           |   |       |  |   |       | 
| | Spare parts and materials | $ | 4,706 |  | $ | 4,104 | 
| | Work in progress          |   | 852   |  |   | 1,090 | 
| | Finished goods            |   | 1,945 |  |   | 595   | 
| |                           |   |       |  |   |       | 
| |                           | $ | 7,503 |  | $ | 5,789 | 

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

| |                          |   | 2007    |   |   | 2006    |  
| | ------------------------ | - | ------- | - | - | ------- | -
| | Buildings                | $ | 1,000   |   | $ | 1,000   |  
| | Equipment                |   | 44,683  |   |   | 44,543  |  
| |                          |   | 45,683  |   |   | 45,543  |  
| | Accumulated depreciation |   | (17,473 | ) |   | (12,150 | )
| |                          | $ | 28,210  |   | $ | 33,393  |  

|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 $1,209, reflecting payments in
      approximately five years. Significant reclamation and closure activities
      include remediation for site contamination and demolition. The
      undiscounted value of this liability is $3,000. An accretion expense of
      $201 has been charged to operations in 2007 (2006 - $168, 2005 - $140) 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:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

| |                            |   | 2007  |  |   | 2006  | 
| | -------------------------- | - | ----- |  | - | ----- | 
| | Balance, beginning of year | $ | 1,008 |  | $ | 840   | 
| | Accretion                  |   | 201   |  |   | 168   | 
| | Balance, end of year       | $ | 1,209 |  | $ | 1,008 | 

---

52

|BLUE EARTH REFINERIES INC.                
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2007                             
|                                          

|7. | INCOME TAXES                                                                                                                                                                                                                                                     
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                  
|   | Income (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:

| |                                                    |   | 2007   |   |   | 2006   |   |   | 2005   |  
| | -------------------------------------------------- | - | ------ | - | - | ------ | - | - | ------ | -
| |                                                    |   |        |   |   |        |   |   |        |  
| | Income (loss) before income taxes                  | $ | 10,376 |   | $ | (3,324 | ) | $ | (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          |   | (3,209 | ) |   | 711    |   |   | 484    |  
| | Non-taxable income                                 |   | -      |   |   | -      |   |   | -      |  
| | Permanent differences                              |   | (60    | ) |   | 44     |   |   | 12     |  
| | Changes in valuation allowance                     |   | 3,269  |   |   | (755   | ) |   | (496   | )
| |                                                    |   |        |   |   |        |   |   |        |  
| | 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:

| |                                                    |   | 2007    |   |   | 2006    |  
| | -------------------------------------------------- | - | ------- | - | - | ------- | -
| | Non-capital tax loss carryforwards in
      Uganda | $ | 43,390  |   | $ | 48,417  |  
| | Other                                              |   | 391     |   |   | 435     |  
| | Deferred income tax
      assets                   |   | 43,781  |   |   | 48,852  |  
| | Deferred income tax liabilities                    |   | (11,777 | ) |   | (13,559 | )
| | Valuation allowance                                |   | (32,004 | ) |   | (35,293 | )
| | 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, 2007 and 2006. At June 30, 2007, the
Company had estimated accumulated non-capital losses in Uganda of $144,633 that
do not expire.

---

53

|BLUE EARTH REFINERIES INC.                
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2007                             
|                                          

|8.  | FAIR VALUE OF FINANCIAL INSTRUMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | The Companys financial instruments comprise primarily of
      cash, trading and available-for-sale securities, due from (to) affiliates,
      advances to an equity method investee and accounts payable and accrued
      liabilities. 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 and carrying amount was
      $1,699 as of June 30, 2006.                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|9.  | EQUITY METHOD INVESTEE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | The original purchase of the cobalt refinery was financed
      mostly by the issuance of debentures payable. Mass contributed its
      interest in the debentures to the Company at a carrying value of $4,660.
      These debentures had a stated principal balance in Euros of 4,242 (amount
      is in thousands of euros). The debentures were secured by the equity
      method investee's refinery assets. Interest on the debentures accrued at
      the three-month LIBOR rate plus 3%.                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Mass had agreed to provide up to $5,381 in a credit
      facility against which $1,921 had been advanced and assigned to the
      Company. Interest on this credit facility accrued monthly at the Royal
      Bank of Canada prime rate plus 3%. Principal and interest were due on
      demand. The note was secured by the equity method investee's refinery
      assets. The Company did not recognize any of the interest from the equity
      method investee because it had not been paid.                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | The equity method investees common shares was assigned
      no value when it was contributed to the Company. The Companys
      proportionate share of the results of operations of the investee had been
      included in these consolidated financial statements since August 2003
      until June 30, 2006. The Companys reported loss from this equity method
      investee were $Nil, $1,930 and $2,930, which included the Companys share
      of the investees loss less $Nil, $465 and $362 of unrealized intercompany
      interest expense, for the year ended June 30, 2007, 2006 and 2005,
      respectively.                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | In December 2006, the Company sold all of its economic
      interest in the investee for net consideration of $2,244 in exchange for
      units in two British Virgin Islands open-ended investment companies,
      resulting in an accounting gain of $445 in the year ended June 30,
      2007.                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10. | TRANSACTIONS WITH AFFILIATES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | In 2004, Kasese Cobalt Company entered into an exclusive
      distribution agreement for an initial term ending December 31, 2014, to
      sell all of the cobalt produced by Kasese Cobalt Company with Mass. In
      June 30, 2005, Mass charged agency fees of $1.50 per pound of cobalt sold.
      Our Company renegotiated agency fees with Mass and from July 1, 2005 to
      June 30, 2006, the agency fees were revised to $0.50 per pound of cobalt
      sold. Mass also charged fees for additional services rendered to our
      Company. Total marketing cost of $1,330, $1,298 and $2,175 were paid or
      payable to Mass for the years ended June 30, 2007, 2006 and 2005,
      respectively.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | The Company has an amount due in the ordinary course from
      (to) Mass in the amount of $4,833 and $3,484 at June 30, 2007 and 2006,
      respectively. During the years ended June 30, 2007, 2006 and 2005, the
      Company purchased supplies and materials amounting to $Nil, $Nil and
      $1,407 from Mass.                                                                                                                                                                                                                                                                                                                                                                                               

---

54

|BLUE EARTH REFINERIES INC.                
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2007                             
|                                          

|10. | TRANSACTIONS WITH AFFILIATES (contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | During 2007, the Company paid $195 to Mass as a
      commission to arrange the sale of equity method investee. The Company has
      an amount due to Mass in the amount of $613 and $617 at June 30, 2007 and
      2006, 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 at 3% of cobalt sales to the Geological Survey of Mines of
      Uganda. Prior to January 1, 2005, the royalty was charged at 2% of cobalt
      sold. Royalties $504, $617 and $261 were incurred during the years ended
      June 30, 2007, 2006 and 2005, respectively. Accrued cobalt royalties of
      $49 and $976 were outstanding at June 30, 2007 and 2006,
    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. For the years ended June 30, 2007, 2006 and 2005,
      royalties of $1,685, $193 and $341 were incurred, respectively. Accrued
      royalties of $610 and $Nil were outstanding at June 30, 2007 and 2006,
      respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | The Company charges the royalties to costs of
    sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|12. | SUBSEQUENT EVENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | In September 2007, the Company entered into a Syndicated
      Unpriced Forward Sale Derivative Agreement with Mass. The Company agrees
      to deliver 696 metric tons of the Companys cobalt products over a term of
      one year in exchange for an initial prepayment amount of $18,400, with a
      floor price of $12 per lb. Adjustment amounts, first six months being 45%
      of balance between the floor price and the Resale Price, and seven to
      twelve months being (i) in case the Resale Price per lb. is equal or less
      than $20, 75%, or (ii) in case the Resale Price exceeds $20, 75% of the
      balance between the floor price and $20 plus 25% of the balance between
      $20 and the Resale Price, as determined in the future will be paid 15 days
      after each calendar quarter. Pursuant to an Underwriting and Syndication
      Agreement between the Company and Mass, the Company agreed to pay Mass an
      underwriting fee of 10% of the prepayment amount and a syndication fee of
      $670. The syndication fee was paid by 239,286 common stock of the Company
      valued at $2.80 per share.

---

55

|BLUE EARTH REFINERIES INC.                
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|JUNE 30, 2007                             
|                                          

|12. | SUBSEQUENT EVENTS (contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | In September 2007, the Company declared a cash
      distribution of $1.00 per share to its holders of ordinary shares,
      totalling $15,494.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | In September 2007, the Company authorized a share
      repurchase program, for the repurchase of up to 20% of its common
      shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | In August 2007, the Company issued 750,000 stock options
      to its employees pursuant to the terms of the Stock Option and
      Subscription Agreements. The options vested upon the date of grant, and
      each option entitles the holder to acquire one ordinary share at the
      exercise price of $2.05 until August 9, 2010.                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | In December 2007, the Company received a report from the
      former majority shareholder of KCCL which stated that, pursuant to its
      interpretation of the royalty agreement (see Note 11), the Company
      underpaid it by $1,428, including interest, up to the period ended
      September 30, 2005. Management of the Company believes that the Company
      has complied with the terms of the royalty agreement. In the opinion of
      management, the estimated outcome of this request for underpaid amount
      will not have a material effect on the Company's financial
    statements.

---

56





4025776 CANADA INC.

CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006 and 2005

---

57

|DAVIDSON&COMPANYLLP |                       |  | A Partnership of Incorporated Professionals
|------------------- | --------------------- |  | -------------------------------------------
|                    | Chartered Accountants | 











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

---

58

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.

---

59

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

|                                                     |   | Year ended June 30 |  
|---------------------------------------------------- | - | ------------------ | -
|                                                     |   | 2006               |  
|                                                     |   |                    |  
|                                                     |   |                    |  
|                                                     |   |                    |  
|Revenue                                              | $ | -                  |  
|Cost of operations                                   |   | -                  |  
|Gross profit                                         |   | -                  |  
|Expenses                                             |   |                    |  
|General and administrative
      expenses            |   | (554               | )
|Loss before other items                              |   | (554               | )
|                                                     |   |                    |  
|Other items                                          |   |                    |  
|Interest expenses                                    |   | (1,129             | )
|Impairment charge                                    |   | (5,000             | )
|Exchange gain (loss)                                 |   | 586                |  
|Other income                                         |   | 5                  |  
|                                                     |   |                    |  
|                                                     |   | (5,538             | )
|                                                     |   |                    |  
|                                                     |   |                    |  
|Net loss for the year                                |   | (6,092             | )
|                                                     |   |                    |  
|                                                     |   |                    |  
|Basic loss per
      common share                    | $ | (376.00            | )
|                                                     |   |                    |  
|                                                     |   |                    |  
|Weighted average number of common shares outstanding |   | 16,202             |  

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

---

60

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

|                         |  | Common Stock |  |   |        |  |   |             |  
|------------------------ |  | ------------ |  | - | ------ |  | - | ----------- | -
|                         |  |              |  |   |        |  |   |             |  
|                         |  | Number       |  |   |        |  |   | Accumulated |  
|                         |  | of Shares    |  |   | Amount |  |   | Deficit     |  
|                         |  |              |  |   |        |  |   |             |  
|Balance at June 30, 2004 |  | 16,202       |  |   | -      |  |   | (1,815      | )
|Net loss                 |  | -            |  |   | -      |  |   | (7,674      | )
|Balance at June 30, 2005 |  | 16,202       |  |   | -      |  |   | (9,489      | )
|Net loss                 |  | -            |  |   | -      |  |   | (6,092      | )
|Balance at June 30, 2006 |  | 16,202       |  | $ | -      |  | $ | (15,581     | )

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

---

61

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

|                                                           |   | Year ended
      June 30 |  
|---------------------------------------------------------- | - | ------------------------ | -
|                                                           |   | 2006                     |  
|                                                           |   |                          |  
|                                                           |   |                          |  
|                                                           |   |                          |  
|CASH FLOWS FROM OPERATING ACTIVITIES                       |   |                          |  
|Net loss for the year                                      | $ | (6,092                   | )
|Items not affecting cash                                   |   |                          |  
|Impairment
      charge                                    |   | 5,000                    |  
|Unrealized
      foreign exchange                          |   | (555                     | )
|                                                           |   |                          |  
|Changes in non-cash working
      capital items            |   |                          |  
|(Increase)
      decrease other assets                     |   | 6                        |  
|Increase
      in accounts payable and accrued liabilities |   | 8                        |  
|Increase in
      accrued interest payable                 |   | 1,080                    |  
|                                                           |   |                          |  
|Net cash used in operating activities                      |   | (553                     | )
|                                                           |   |                          |  
|                                                           |   |                          |  
|CASH FLOWS FROM INVESTING ACTIVITIES                       |   |                          |  
|Business acquisition                                       |   | -                        |  
|Additions to property and
      equipment                  |   | -                        |  
|Net cash used in investing activities                      |   | -                        |  
|                                                           |   |                          |  
|CASH FLOWS FROM FINANCING ACTIVITIES                       |   |                          |  
|Due to a related party                                     |   | -                        |  
|Due to a shareholder                                       |   | 506                      |  
|Proceeds from note payable                                 |   | -                        |  
|                                                           |   |                          |  
|Net cash provided by financing
      activities            |   | 506                      |  
|                                                           |   |                          |  
|Change in cash for the year                                |   | (47                      | )
|                                                           |   |                          |  
|                                                           |   |                          |  
|Cash, beginning of year                                    |   | 109                      |  
|                                                           |   |                          |  
|                                                           |   |                          |  
|Cash, end of year                                          | $ | 62                       |  

Supplemental disclosure with respect to cash flows ( Note 8)

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

---

62

|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

---

63

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

|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.

---

64

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

|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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

---

65

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

|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

---

66

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

|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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

---

67

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

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

---

68

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

|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 | 
| | ----------------------------------------- | - | ---- |  | - | ---- | 
| |                                           |   |      |  |   |      | 
| | 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.                                                                                                                                                                                                

---

69

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

|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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70

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

|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.                                                                                                                                                                                                                                                                                                   

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71







4025776 CANADA INC.

UNAUDITED CONSOLIDATED BALANCE SHEETS

NOVEMBER 30, 2006

---

72

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

|                                                                             |   | 2006    |  
|---------------------------------------------------------------------------- | - | ------- | -
|                                                                             |   |         |  
|                                                                             |   |         |  
|                                                                             |   |         |  
|ASSETS                                                                       |   |         |  
|                                                                             |   |         |  
|Current                                                                      |   |         |  
|Cash                                                                         | $ | 44      |  
|Other                                                                        |   | 85      |  
|                                                                             |   |         |  
|                                                                             |   | 129     |  
|Property and equipment                                                       |   | 6,057   |  
|                                                                             |   |         |  
|                                                                             | $ | 6,186   |  
|                                                                             |   |         |  
|                                                                             |   |         |  
|                                                                             |   |         |  
|LIABILITIES AND SHAREHOLDERS' DEFICIENCY                                     |   |         |  
|                                                                             |   |         |  
|Current liabilities                                                          |   |         |  
|Accounts payable and
      accrued liabilities                               | $ | 2       |  
|Accrued interest payable to
      shareholders                               |   | 3,065   |  
|Due to a related party                                                       |   | 300     |  
|Due to a shareholder                                                         |   | 889     |  
|Note payable to
      shareholders                                           |   | 3,757   |  
|                                                                             |   | 8,013   |  
|Rehabilitation provision                                                     |   | 307     |  
|Debentures payable to shareholders                                           |   | 13,600  |  
|                                                                             |   | 21,920  |  
|                                                                             |   |         |  
|Shareholders' deficiency                                                     |   |         |  
|Common stock, $0.01 par value; 16,367
      shares authorized; 16,202 shares |   |         |  
|issued and outstanding                                                       |   | -       |  
|Accumulated deficit                                                          |   | (15,734 | )
|                                                                             |   |         |  
|                                                                             |   | (15,734 | )
|                                                                             |   |         |  
|                                                                             | $ | 6,186   |  

---

73

4025776 CANADA INC.CONSOLIDATED STATEMENTS OF
OPERATIONS FOR FIVE MONTHS ENDED NOVEMBER 30 (UNAUDITED) (Canadian
Dollars, in Thousands except per share numbers)

|                                                           |   | 2006   | 
|---------------------------------------------------------- | - | ------ | 
|                                                           |   |        | 
|                                                           |   |        | 
|                                                           |   |        | 
|Revenue                                                    | $ | -      | 
|Cost of operations                                         |   | -      | 
|Gross profit                                               |   | -      | 
|Expenses                                                   |   |        | 
|General and
      administrative expenses                  |   | -      | 
|Loss before other items                                    |   | -      | 
|                                                           |   |        | 
|Other items                                                |   |        | 
|Interest expenses                                          |   | -      | 
|Impairment charge                                          |   | -      | 
|Exchange gain (loss)                                       |   | -      | 
|Other income                                               |   | -      | 
|                                                           |   |        | 
|                                                           |   | -      | 
|                                                           |   |        | 
|                                                           |   |        | 
|Net loss for the year                                      |   | -      | 
|                                                           |   |        | 
|                                                           |   |        | 
|Basic loss per
      common share                          | $ | -      | 
|                                                           |   |        | 
|                                                           |   |        | 
|Weighted average number of common shares
      outstanding |   | 16,202 | 

---

74

**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(2)                                                                                                                                              
|        |                                                                                                                                                                                                                            
|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(2)                                                                                                                            
|        |                                                                                                                                                                                                                            
|8.1*    | Significant
        subsidiaries                                                                                                                                                                                           
|        |                                                                                                                                                                                                                            
|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 referenced from our Form 20-F filed on
      March 5, 2007. 

* Filed herewith.

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75

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: December 19, 2007

---