**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

**Form 10-KSB**

**xTRANSITION REPORT UNDER SECTION 13 OR 15(D) OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

**FOR THE TRANSITION PERIOD**

**FROM JANUARY 1, 2006 TO SEPTEMBER 30, 2006**

**CommissionFile # 333-67174**

**BETTER BIODIESEL, INC.**

(A Development StageCompany)

(Exact name of registrantas specified in its charter)

**Colorado**(State or other jurisdiction of incorporation or organization)

**87-0533626**(IRS Employer Identification Number)

**355 South1550 WestSpanish Fork, UT 84660**(Address of principal executive offices)(Zip Code)

**(801) 990-2810**(Registrant’s telephone no., including area code)

**Mountain States Holdings, Inc.7435 East Peakview AvenueEnglewood, CO 80111Fiscal Year End Dec 31**(Former name, former address and former fiscal year, if changed since lastreport)

Securities registered pursuant to Section 12(b) of theAct:    **None**

Securities registered pursuant to Section 12(g) of theAct: ** ****CommonStock, no par value**

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

Yes xNo o

Check if there is no disclosure of delinquent filersin response to Item 405 of Regulation S-B not contained in this form, and nodisclosure will be contained, to the best of the registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-KSB or any amendment to this Form 10-KSB. x

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act) Yes oNo x

Registrant’s revenues forthe transitional period from January 1, 2006 through September 30, 2006 werenil.

Aggregate market value ofthe voting common stock held by non-affiliates of the registrant as of December 29,2006 was $16,000,008.

Number of shares of the registrant’s common stockoutstanding as of December 29, 2006 was 30,500,001.

 

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**Table of Contents**
|          | ** ** | ** **                                  |
|----------|------------|---------------------------------------------|
| PART  I  |       |                                        |
|     |       | ITEM  1.                                    |   | DESCRIPTION  OF BUSINESS |   |   |
|     |       | ITEM  2.                                    |   | PROPERTY    |   |   |
|     |       | ITEM 3.                                     |   | LEGAL  PROCEEDINGS |   |   |
|     |       | ITEM  4.                                    |   | SUBMISSION  OF MATTERS TO A VOTE BY SECURITY HOLDERS |   |   |
| PART  II |       |                                        |
|     |       | ITEM  5.                                    |   | MARKET  FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS |   |   |
|     |       | ITEM 6.                                     |   | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL |   |   |
|     |       | ITEM 7.                                     |   | FINANCIAL  STATEMENTS |   |   |
|     |       | ITEM 8A.                                    |   | CONTROLS AND  PROCEDURES |   |   |
| PART III |       |                                        |   |   |   |   |
|     |       | ITEM 9.                                     |   | DIRECTORS  AND EXECUTIVE OFFICERS |   |   |
|     |       | ITEM 10.                                    |   | EXECUTIVE  COMPENSATION |   |   |
|     |       | Stock Options  Granted in Fiscal 2006       |   |   |
|     |       | ITEM 11.                                    |   | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND |   |   |
|     |       | MANAGEMENT  AND RELATED STOCKHOLDER MATTERS |   |   |
|     |       | ITEM 12.                                    |   | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS |   |   |
|     |       | ITEM  13.                                   |   | EXHIBITS  LIST AND REPORTS ON FORM 8-K |   |   |
|     |       | ITEM 14.                                    |   | PRINCIPAL ACCOUNTANT FEES AND SERVICES |   |   |

 

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**DISCLOSUREREGARDING FORWARD-LOOKING STATEMENTS**

This Form 10-KSBrelease contains “forward-looking statements.” In some cases, you can identifyforward-looking statements by terminology such as “may,” “will,” “should,” “could,”“expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,”“potential” or “continue” or the negative of such terms and other comparableterminology. These forward-looking statements include, without limitation,statements about our market opportunity, our strategies, competition, expectedactivities and expenditures as we pursue our business plan, and the adequacy ofour available cash resources. Although we believe that the expectationsreflected in the forward-looking statements are reasonable, we cannot guaranteefuture results, levels of activity, performance or achievements. Actual resultsmay differ materially from the predictions discussed in these forward-lookingstatements. The economic environment within which we operate could materiallyaffect our actual results. Additional factors that could materially affectthese forward-looking statements include, among other things, the company’sability to, (i) manufacture and market biodiesel fuel; (ii) the Company’sability to obtain contracts with suppliers of raw materials (for the Company’sproduction of biodiesel fuel) and distributors of the Company’s biodiesel fuelproduct; (iii) the risks inherent in the mutual performance of such supplierand distributor contracts (including the Company’s production performance);(iv) the Company’s ability to protect and defend the Company’s proprietarytechnology; (v) the Company’s ability to secure and retain management capableof managing growth; (vi) the Company’s ability to raise necessary financing toexecute the Company’s business plan; and (vii) the Company’s ability to complywith all applicable federal, state and local government and international rulesand regulations; and other factors discussed in Better Biodiesel’s filings withthe Securities and Exchange Commission.

Our management has included projections and estimatesin this Form 10-KSB, which are based primarily on management’s experience inthe industry, assessments of our results of operations, discussions andnegotiations with third parties and a review of information filed by ourcompetitors with the Securities and Exchange Commission or otherwise publiclyavailable.  We caution readers not toplace undue reliance on any such forward-looking statements, which speak onlyas of the date made.  We disclaim anyobligation subsequently to revise any forward-looking statements to reflectevents or circumstances after the date of such statements or to reflect theoccurrence of anticipated or unanticipated events.

**PARTI**

**ITEM 1. DESCRIPTION OF BUSINESS**

Better Biodiesel Inc., a Colorado corporation (“BetterBiodiesel”, “BBD” or the “Company”), whose headquarters is located at 355 South1550 West, Spanish Fork, Utah, 84660, is a development stage company withproprietary technology for manufacturing biodiesel fuel.  The Company’s technology enables theproduction of commercial quantities of biodiesel fuel conforming to ASTM 6751standards at significant savings compared with conventional productiontechnologies.

Wewere previously known as Mountain States Holdings, Inc. (“Mountain States”).  Mountain States was incorporated inNovember 1990 as a Colorado corporation under the name Slam Dunk Enterprises,Inc.  The corporation was inactive untilMay 1998 when it started engaging in the business of providing first and secondmortgage financing under the name of Mountain States Lending, Inc.  During January 2001, the Company filedarticles of amendment with the Colorado Secretary of State changing thecorporation’s name to Mountain States Lending, Inc., and during September 2002the Company changed the name to Mountain States Holdings, Inc.  In September 2002, the Company formed awholly-owned subsidiary named Mountain States Lending, Inc. (“Mountain StatesLending”), and on December 31, 2002, the Company transferred all of its assetsand liabilities related to the mortgage lending business to this newsubsidiary.  In August 2006, all of theCompany’s assets and liabilities resided in two wholly-owned subsidiaries thatwere spun-off to two stockholders, one of whom was the former CEO of the Company,in exchange for 325,000 pre-split (162,500 post-split) shares of the Company’scommon stock.

In September 2006, the Company entered into a share exchange agreement with Domestic Energy Partners, LLC, a Utah limited liability company (“DEP”), pursuant to which it acquired all of the equity interests in DEP (the Share Exchange”).  On September 20, 2006, prior to the closing of its Exchange Agreement with DEP, a majority of the

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shareholders of the Company at a special meeting of the shareholders approved amendments to the Company’s Articles of Incorporation to change the Company’s name to Better Biodiesel, Inc., and to reverse split its shares of common stock on the basis of one share for each two shares issued and outstanding, with all fractional shares rounded up to the nearest whole share. The foregoing amendments were effective September 21, 2006. DEP was organized as a limited liability corporation on May 18, 2005, having previously commenced operations in November 2004, to develop alternative fuel sources, particularly the manufacture and distribution of bio-diesel products.

The Exchange Agreementbetween the Company and DEP has been accounted for as a reverse merger, whichis equivalent to a recapitalization of the Company.  Thus, in the September 30, 2006 FinancialStatements of the Company included in this Form 10-KSB, which present theCompany as being in the development stage, the assets and liabilities in theconsolidated balance sheets are the book values of DEP’s assets and liabilitiesand the operations in the consolidated statement of operations are theoperations of DEP.  Further, unlessobvious from the context that they refer to Mountain States, operational andfinancial data presented elsewhere in this Form 10-KSB refer to DEP, as theCompany’s sole and wholly-owned subsidiary. Also included in this Form 10-KSB are Financial Statements for MountainStates for the period from January 1, 2006 through September 29, 2006.  These financial statements show the formeroperations of the Company and are the final Financial Statements of the Companypresented in this form.

Our proprietarytechnology enables the production of biodiesel fuel from all types of animalfats as well as virgin oils derived from vegetative sources such soybeans,rapeseed, palm and switch grass, for example. Unlike ethanol, biodiesel can be used in any conventional diesel engine,without requiring any modifications to the existing engine, providingessentially similar energy output. Biodiesel is fully biodegradable, pollutes less than petroleum dieseland can be distributed by the existing petroleum distribution system withoutfurther downstream infrastructure investments.

In the UnitedStates, a primary driver of biodiesel fuel demand stems from the Energy PolicyAct of 2005, which mandates the increased use of all renewable fuel from 2.5billion to 7.5 billion gallons by 2010. Additional drivers are the Energy Policy Act of 1994, which mandates theuse of renewable fuel by federal, state and utility fleets.  The U.S. Navy mandates the use of 20%biodiesel in non-tactical vehicles. Lastly, many states including California, Washington and Minnesota haveissued their own mandates of 2% (B2) blended biodiesel.  Currently, the domestic availability ofbiodiesel fuel falls below the mandated demand by more than 1 billion gallonsper year.

The economics ofthe Company’s biodiesel fuel production are compelling under current marketconditions.  Depending on the selectionof feedstock, the Company can produce a gallon of biodiesel fuel for between$1.50 to $2.20, and sells domestically for between $2.75 to $3.10 pergallon.  In addition to this discretemargin, the U.S. Government pays a Blenders Tax Credit of $0.50 to $1.00 pergallon produced in addition to $0.10 per gallon for the first 15 million gallonsproduced at any single location.  TheU.S. Department of Agriculture will also pay $0.14 to $1.52 per gallonproduced, subject to reauthorization by the end of 2006.  Additionally, each state offers its ownincentive programs.

**Patentand Trademark**

BBD,through its wholly-owned subsidiary, Domestic Energy Partners, LLC (“DEP”), hasa patent pending on its proprietary technology that enables transesterficationof oils to form biodiesels.  In November2006 the Company completed and filed the claims on the existing patentapplication with the Unites States Patent and Trademark Office, whichapplication  CEO and Chairman Ron Crafts,President, Chief Technology Officer and Director John  Crawford and co-inventor James Crawfordassigned exclusively to DEP.

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The Company employsWorkman Nydegger in Salt Lake City, Utah as its patent attorneys.  The Company does not currently intend tolicense its process, but may consider business combinations that it deems to beadvantageous provided that it remains fully in control its’ proprietarytechnology

“BetterBiodiesel” is a registered trademark name for BBD’s biodiesel fuel.

**Traditional Biodiesel ProductionMethod**

Unlike the Company’s biodiesel production process,customary biodiesel production methods employ a caustic chemical catalystduring batch processing that must be removed before the fuel can be used in anengine.  The standard practice forremoval of the offending chemical requires large amounts of water to “wash” thefuel, a process that results in large quantities of contaminated water.  The next step in the traditional method is toput the water in evaporation ponds, requiring large portions of land (suchponds usually cover several acres) to enable the contaminated water toevaporate, leaving the original caustic chemical in the bottom of thepond.  The chemical residue is thenremoved from the pond and replaced with the next batch of contaminated water.

**Better BioDiesel’s Proprietary Technology**

Better Biodiesel’s unique production processeliminates the use of the caustic chemical catalyst, instead using in acontinuous flow method that can process a wide variety of raw feedstock oilsinto biodiesel fuel in a matter of minutes. While customarily used production technology results in an inferiorenergy balance and in higher costs for chemicals, real estate and productionequipment, our continuous flow process provides increased efficiency andreduced operating costs including a 25% to 50% lower equipment cost.

Major benefits of the Company’s technology includehigh volume output, reduced space requirements and lower equipment costs.  Furthermore, our technology producesbiodiesel fuel product that consistently meets the ASTM D-6751 standard forpure one hundred percent (B100) biodiesel fuel. The purity level of the finished fuel is such that it needs no postreaction processing and therefore no wastewater treatment is required.

**Biodiesel Fuel - Market Overview**

Biodiesel fuel is fully interchangeable with petroleumdiesel.  The domestic market for dieselfuel in 2005 was 70 billion gallons and at least 200 billion gallons for therest of the world.  In 2005, the combinedworldwide biodiesel refining capacity was less than 800 million gallons.

BBD believes that most prospective end users ofbiodiesel will be individuals and entities requiring the lowest possiblepollution levels in their vehicle and machinery emissions.  These include trucking companies operating instates with biodiesel initiatives (see chart below), inner city transportcompanies that are required to reduce their fleet pollution levels and otherusers who also require the advantages of less polluting fuel.

Biodiesel blends such as B5 and B20 (5% biodieselblended with 95% petrol diesel, and 20% biodiesel blended with 80% petroldiesel respectively) are currently the most common way that biodiesel reachesend users.  When used as a blended fuel,biodiesel becomes an additive to petroleum diesel that substantially lowerstoxic emissions like carbon based gases while improving the performance and longevityof the engine.

The domestic and international petroleum based dieselfuel market is a mature industry.  InEurope, over 60% of the cars, buses, trucks, ships and trains are powered bydiesel fuels.  In the U.S., the totalpetroleum diesel fuel consumption was approximately 70 billion gallons in2005.  Based on the interchangeability ofpetroleum diesel and biodiesel fuel and current shortfall of supply as comparedto demand in the U.S. biodiesel industry, without considering a potentialincrease in the percentage of diesel to gasoline fuel consumption, unmet demandfor biodiesel fuel seems likely to require at least 10 years to resolve.

Biodiesel can be used in 100% pure form (B100) or asan additive to petroleum diesel.  Itrequires absolutely no additional investment or alterations by fueldistributors for piping, pumps or transportation equipment.  And all

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conventional diesel engines are can sun on biodieselso no investments are required by existing diesel car, bus, truck, ship ortrain owners.  The efficient logistics ofbiodiesel fuel, therefore, create a significant competitive advantage.

The2005 U.S. petroleum diesel market was approximately 70 billion gallons and isexpected to grow 10% per year over the next several years.  The Federally mandated B2 blends (98%petroleum diesel plus 2% biodiesel) demand translates into a 1.4 billion gallonU.S. market.  In 2005, the total U.S.biodiesel production was only 70 million gallons.  Even considering the 400+ million GPY ofannounced production under construction at this time, management believes it isevident that biodiesel fuel supply will lag behind the increasing demand formany years.

**Competitive Conditions**

The European market for biodiesel fuel issignificantly more mature than the domestic biodiesel market.  The existing European technology employscustomary production methods (also described above), producing over 700 milliongallons of biodiesel fuel per year.  Thecustomary method entails batch processing with a caustic catalyst, which needsto be “washed” out before the fuel can be used. The “washing process” creates a substantial amount of contaminated waterthat is evaporated leaving behind residue that must be removed andprocessed.  Our management believes thatthe customary process is not efficiently scalable and has the disadvantage ofrelatively lower production and higher costs from the use of more chemicals andenergy.  BBD’s production process doesnot require the addition of caustic chemicals and therefore provides a superiorenergy balance to customary production technologies.

The domestic market capacity of 70 million gallons peryear relies upon the same technology used in the European market and thedomestic refining plants under construction will be utilizing substantially thesame outdated technology.  BBD’smanagement believes that its technology is the first of its kind to employ acontinuous flow, solid state process that does away with caustic catalyticchemicals and the “washing” cycle.  TheBBD technology is capable of producing 10 million gallons of biodiesel fuel peryear per processing module, each requiring just 300 square feet of groundspace.

The major biodiesel fuel producers in the currentmarket are Archer Daniels Midland, Altra Biofuels, Australian Renewable Fuels,D-1 Oils and Renewable Energy Group. Several oil companies including Chevron and Exxon Mobil have announcedconstruction of 100 million GPY plants using the European industry technologyto come online by 2008.

**RawMaterials**

Undermanagement’s plan to vertically integrate its biofuels supply chain, BBD hascommenced negotiating with farmer’s cooperatives and other entities hoping toeventually secure land devoted to the cultivation of renewable crops suitablefor conversion to biodiesel fuel.  Thechoice of feedstock crops in a particular region would be based on the uniqueweather patterns and soil conditions found of that region U.S., but may includesoybeans, cottonseed, rapeseed, switchgrass, canola or palm and will bepurchased by BBD on long term take-or-pay contracts.  Seed oil price per gallon ranges from $1.50for cottonseed to $2.25 for soybean. While soy and rapeseed are commonly grown in the U.S., palm oil from Malaysiaand Indonesia is priced at around $1.50 per gallon.

BBD’s technologyalso enables the commercial scale conversion of “tallow” (animal fats such aschicken, beef or pork) and “yellow” (recycled) grease such as is recovered fromrestaurants to biodiesel fuel.  Animalfat is $1.40 and yellow grease $1.20 per gallon.  Better Biodiesel is negotiating with severalnational pork and beef processors to establish supply contracts and/or jointventure refining plants to continuously process large quantities of tallow andyellow grease.  Management believes thevalue of long term supply chain commitments adds significant value to theenterprise valuation.

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**Licenses**

Allnecessary applications have been filed with the EPA (Environmental ProtectionAgency), the IRS (Federal Internal Revenue Service) and the Utah Division ofAir Quality. The Utah State Tax Commission requires a $50,000 bond for theState Road Tax Remittal, which the Company intends to obtain in the firstquarter of 2007.

State and county business licenses have been issued toBBD for the production of biodiesel fuel. BBD adheres to all state and federal requirements for the health andsafety of its employees.

# **Research and Development**

During the transitional year ended September 30, 2006and the year ended December 31, 2005, the Company spent $26,544 and $2,298 onResearch and Development, respectively.

# **Employees**

The Company currently employs five full time and zeropart time employees.

**Domestic Biodiesel Production Capacity and Demand**

As of April 6, 2006, there are 53 companies in theU.S. that have invested millions of dollars into the development of biodieselmanufacturing plants and are actively marketing biodiesel.  In 2005 the combined sales of thesemanufactures totaled 70 million gallons of biodiesel.  Projected sales volume for 2006 is estimatedat 130 million gallons.

Three importanttrends define the biodiesel fuel market:

1)              Decliningpetroleum diesel supply

2)              Increasingpetroleum diesel prices

3)              Mandated demand forlower polluting, renewable, and locally produced fuels.

In spite offavorable market forecasts for biodiesel, it is prudent to assume that futureincreases in biodiesel production and possible innovations of other alternativefuels (ethanol, for example) may keep biodiesel pricing highly competitive withother alternative fuels.   Biodieselprices are not likely to exceed those of petrol diesel by more than 10%.  Currently, biodiesel market prices are 10% -15% higher than petroleum diesel. Biodiesel fuel contains approximately 90% of the energy of petroleumdiesel.

**Marketing Strategy & Positioning**

BBD’s marketing effortswill emphasize the inherent benefits of biodiesel fuel and cost savings of theCompany’s proprietary technology and equipment design:

**1.**  **Biodieselexhaust is less offensive.** The use of biodiesel and biodiesel blendsresults in a noticeably less offensive exhaust odor than petroleum diesel.  Users also report absence of eye irritationwhen compare with petroleum diesel. Furthermore, since biodiesel is oxygenated, diesel engines have morecomplete combustion with biodiesel than with petroleum diesel.

**2.   Biodiesel is safer to use than petroleumdiesel.** The flash point (the point at which fuel ignites) forbiodiesel in its pure form is a minimum of 260 degrees versus about 125 degreesFahrenheit for regular No. 2 diesel, making biodiesel a significantly saferfuel to use, handle and store.

**3**.  **Biodieselreduces emissions significantly. **Theuse of biodiesel in a conventional diesel engine results in substantialreduction of unburned hydrocarbons, carbon monoxide, and particulate matter ascompared with petroleum diesel. Biodiesel provides a decrease in the solid carbon fraction ofparticulate matter (since the oxygen in biodiesel enables more completecombustion to CO2) and eliminates the sulfate fraction (as there is no sulfurin

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the fuel), while the soluble, or hydrocarbon, fractionstays the same or is increased. Emissions of nitrogen oxides indicate mixedresults as emissions test of nitrogen oxides have shown either slightly reducedor slightly increased depending on the duty cycle and testing methods.

Biodiesel works well with new technologies such ascatalysts, particulate traps, and exhaust gas recirculation. Soy biodieselreduces carbon dioxide by 78% on a life cycle basis.

**4.**  **Better Biodiesel equipment is priced to sell.**  The Company can install complete turn keybiodiesel fuel refining facilities at 25% to 50% lower cost to competition thatis marketing systems featuring old technology. Purchasers of the Company’s design will realize capital expendituressavings together with increased operating margins when using equipment fromBBD.

BBD believes therapidly expanding market of building biodiesel fuel refineries will enter aperiod of consolidation by 2010.  Duringthis expected consolidation, undercapitalized and unqualified entrants maybecome targets of acquisition by larger, better-capitalized oilincumbents.  BBD intends to exploit itscompetitive advantages to pursue strategic relationships or businesscombination with multiple, incumbent energy or agricultural companies to enhancethe Company’s market position.

**Marketing and Sales**

Our marketing efforts intend to initially target fuelblenders and distributors in the Midwest markets. These activities will employ:

1.               Press andAdvertising: We will develop our core branding using the “Better Biodiesel”trademark to differentiate our biodiesel fuel. We will concentrate our marketing message on the unique advantages of “BetterBiodiesel” compared with conventional petroleum diesel.  We will leverage:

a.               Advertisements inlocal and national newspapers and periodicals;

b.              Advertising inindustry trade journals and targeted environmental publications; and

c.               Coverage inalternative fuel websites and web blogs.

2.               Attending andspeaking at conferences and seminars.

3.               Attending andexhibiting at energy events and industry trade shows.

**Risk Factors**

**You should carefully read and consider the risks anduncertainties below and the other information contained in this report.  The risks and uncertainties described beloware not the only ones we may face.  Thefollowing risks, together with the additional risks and uncertainties notcurrently known to us or that we currently deem immaterial could impair ourfinancial condition and results of operation.**

****Risks Related to Our Business and Industry****

****Ourcurrent operations have a limited operating history and our Spanish Fork plantonly recently commenced operations, which make us a speculative investment.****

BetterBiodiesel began to manufacture biodiesel equipment and fuel (methyl esters)with its patented biodiesel fuel production technology in May 2005, in Provo,Utah.  Since the inception of businessoperations, we have been engaged in organizational activities, includingdeveloping a strategic operating plan, entering into contracts, hiringpersonnel, developing and refining our process technology, raising privateequity capital and seeking acquisitions. Our new, primary production facility in Spanish Fork, Utah beganoperations in June 2006.

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Accordingly, wehave limited relevant operating history upon which an evaluation of ourperformance and prospects can be made. We are subject to all of the business risks associated with a newenterprise, including, but not limited to, risks of unforeseen capitalrequirements, failure to obtain market acceptance, failure to establishbusiness relationships and assorted competitive disadvantages against largerand more established companies.

****Wehave had a history of net losses and our biodiesel technologies are unproven ona large-scale commercial basis and could fail to perform in a commercialproduction environment, which could have a detrimental effect on the long-termcapital appreciation of our stock.****

Duringthe period from November 1, 2004 (date of inception) through September 30,2006, we have incurred a net loss of $472,800, and may incur additional lossesthereafter, depending upon our ability to generate material revenues or achieveprofitable operations from biodiesel production.  While production of biodiesel fuel is amature technology, other technologies for production may still be indevelopment.  The technologies beingpursued by us have never been utilized on a large-scale commercial basis.  All of the tests conducted to date by us withrespect to our biodiesel technologies have been performed on limited quantitiesof feedstocks, and we cannot assure you that the same or similar results couldbe obtained at competitive costs on a large-scale commercial basis.  We have never utilized these biodieseltechnologies under the conditions or in the volumes that will be required to beprofitable and cannot predict all of the difficulties that may arise.  It is possible that the technologies, whenused, may require further research, development, design and testing prior to larger-scalecommercialization.  Accordingly, wecannot assure you that these technologies will perform successfully on alarge-scale commercial basis or that they will be profitable to us.

****Failureto make accretive acquisitions and successfully integrate them could adverselyaffect our future financial results.****

Aspart of our growth strategy, we will seek to acquire or invest in complementary(including competitive) businesses, facilities or technologies and enter intoco-location joint ventures.  Our goal isto make such acquisitions, integrate these acquired assets into our operationsand reduce operating expenses.  Theprocess of integrating these acquired assets into our operations may result inunforeseen operating difficulties and expenditures and may absorb significantmanagement attention that would otherwise be available for the ongoingdevelopment of our business.  We cannotassure you that the anticipated benefits of any acquisitions will berealized.  In addition, futureacquisitions by us could result in potentially dilutive issuances of equitysecurities, the incurrence of debt and contingent liabilities and amortizationexpenses related to goodwill and other intangible assets, any of which canmaterially and adversely affect our operating results and financial position.  Acquisitions also involve other risks,including entering geographic markets in which we have no or limited priorexperience and the potential loss of key employees.

****Ourbusiness employs proprietary technology and information which may be difficultto protect and may infringe on the intellectual property rights of thirdparties.****

Wecurrently have pending patent applications on our proprietary technology in theUnited States Patent and Trademark Office and in the future may file foreignpatent applications.  Our successdepends, in part, on our ability to obtain patents, maintain trade secrecy andoperate without infringing on the proprietary rights of third parties.  We cannot assure you that the patents ofothers will not have an adverse effect on our ability to conduct our business,that any of our pending patent applications will be approved, that we willdevelop additional proprietary technology that is patentable or that anypatents issued to us will provide us with any competitive advantages or willnot be challenged by third parties. Further, we cannot assure you that others will not independently developsimilar or superior technologies, duplicate elements of our technology ordesign around it.

Itis possible that we may need to acquire licenses to, or to contest the validityof, issued or pending patents or claims of third parties.  We cannot assure you that any licenseacquired under such patents would be made available to us on acceptable terms,if at all, or that we would prevail in any such contest.  In addition, we could

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incur substantialcosts in defending ourselves in suits brought against us for allegedinfringement of another party’s patents or in defending the validity orenforceability of our patents, or in bringing patent infringement suits againstother parties based on our patents.

Inaddition to patent protection, we also rely on trade secrets, proprietaryknow-how and technology that we seek to protect, in part or in whole, byconfidentiality agreements with prospective joint venture partners, employeesand consultants.  We cannot assure youthat these agreements will not be breached, or that we will have adequateremedies for any breach, or that our trade secrets and proprietary know-howwill not otherwise become known or be independently discovered by others.

****Wewill have a need for financing in order to sustain our operations and expand,which may not be available when needed. If we cannot obtain needed funding to sustain our operations and expandwe may have to curtail our operations, sell some of our assets or take actionsthat may dilute your financial interest.****

Wehave financed our operations to date through capital contributions by Companystockholders.** **Basedon our current financial position, cash forecast and plan of operation, webelieve that we have adequate cash resources to sustain our operations throughthis year.  However, future capitalrequirements could vary significantly and will depend on certain factors, manyof which are not within our control. These include the nature of ongoing development and testing of ourproprietary biodiesel technologies, the nature and timing of plantimprovements, construction, permitting and acquisitions, and the availabilityof financing.  The expansion of our businesswill require us to commit significant capital resources in amountssubstantially in excess of our current financial resources.

*****Weare dependent upon******* *******Ron Crafts, our Chairmanand Chief Executive Officer, and John Crawford, our President and ChiefTechnical Officer, whom we need to succeed.*****

Webelieve that our continued success will depend to a significant extent upon theefforts and abilities of Ron Crafts, our Chairman and Chief Executive Officer,and John Crawford, our President and Chief Technical Officer, due to theircontacts in the biodiesel industry and their overall insight into our businessdirection.  Our failure to retain Messrs.Crafts and Crawford, or to attract and retain additional qualified personnel,could adversely affect our operations. We do not currently carry key-man life insurance on any of ourofficers.  See “Management.”

****Becausewe are smaller and have fewer financial resources than many larger biodieselproducers, we may not be able to successfully compete in the biodieselindustry.****

Thereis significant competition among biodiesel producers.  Our business faces competition from largerplants, from plants that can produce a wider range of products than we can, andfrom other plants similar to our existing and proposed biodiesel plants.  Our biodiesel plants will be in directcompetition with other biodiesel producers, many of which have greaterresources than we currently have.  Largebiodiesel producers are capable of producing a significantly greater amount ofbiodiesel than we can and expect to produce.

****Competitionfrom large producers of petroleum-based diesel fuels and other competitiveproducts may impact our profitability.****

Ourexisting and proposed biodiesel plants will also compete with producers ofother petroleum-based diesel fuels having similar performance and emissionscharacteristics as biodiesel.  The majoroil companies have significantly greater resources than we have to developalternative products and to influence legislation and public perception ofbiodiesel.  These other companies alsohave significant resources to begin production of biodiesel should they chooseto do so.

****Ourprofits are impacted by feedstock oil prices, which could impact the value ofyour investment.****

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Ourbiodiesel production is dependant on feedstock oils, which are derived fromagricultural commodities such as soybeans, and animal fats.  A significant reduction in the harvest ofthese commodities due to adverse weather conditions, farmer planting decisions,domestic and foreign government farm programs and policies, global demand andsupply, or other factors could result in increased feedstock oil costs, whichwould thus increase our cost to produce biodiesel.  The significance and relative impact of thesefactors on the price of these feedstock oil commodities is difficult to predict.  Significant variations in actual growingconditions from normal growing conditions may also adversely affect our abilityto procure feedstock for our operations. Any events that tend to negatively impact the supply of feedstock oilcommodities will tend to increase prices and harm our business.

Risingfeedstock prices produce lower profit margins for the production of biodieseland, therefore, represent unfavorable market conditions.  This is especially true when marketconditions do not allow us to pass along increased feedstock costs to ourcustomers.  The price of soybeans andother feedstock commodities has fluctuated significantly in the past and mayfluctuate significantly in the future. We cannot assure you that we will be able to offset any increase in theprice of feedstock by increasing the price of our product.  If we cannot offset increases in the price offeedstock oil, our financial performance may be materially and adverselyaffected.

****Ifpetroleum diesel prices drop significantly, we will also be forced to reduceour prices, which potentially may lead to further losses.****

Pricesfor biodiesel products can vary significantly over time and decreases in pricelevels could adversely affect our profitability and viability.  The price of biodiesel has some relation tothe price of petroleum diesel as well as gasoline.  The price of biodiesel tends to increase asthe price of petroleum diesel increases, and the price of biodiesel tends todecrease as the price of petroleum diesel decreases.  Any lowering of petroleum prices will likelyalso lead to lower prices for biodiesel and adversely affect our operatingresults.  We cannot assure you that wewill be able to sell our biodiesel profitably, or at all.

****Increasedbiodiesel production in the United States could increase the demand forfeedstocks and the resulting price of feedstocks, reducing our profitability.****

Newbiodiesel plants are under construction or planning throughout the UnitedStates.  This increased biodieselproduction could increase feedstock demand and prices, resulting in higherproduction costs and lower profits.

****Priceincreases or interruptions in needed energy supplies could cause loss ofcustomers and impair our profitability.****

Biodieselproduction requires a constant and consistent supply of energy.  If there is any interruption in our supply ofenergy for whatever reason, such as availability, delivery or mechanicalproblems, we may be required to halt production.  If we halt production for any extended periodof time, it will have a material adverse effect on our business.  Natural gas and electricity prices havehistorically fluctuated significantly. We purchase significant amounts of these resources as part of ourbiodiesel production.  Increases in theprice of natural gas or electricity would harm our business and financialresults by increasing our energy costs.

****RisksRelated to Government Regulation and Subsidization****

****Federalregulations concerning tax incentives could expire or change, which could causean erosion of the current competitive strength of the biodiesel industry.****

Congresscurrently provides certain federal tax credits for biodiesel producers andmarketers.  The biodiesel industry andour business depend on continuation of these credits.  The credits have supported a market forbiodiesel that might disappear without the credits.  These credits may not continue beyond theirscheduled expiration date or, if they continue, the incentives may not be atthe same level.  The revocation oramendment of any one or more of

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these taxincentives could adversely affect the future use of biodiesel in a materialway, and we cannot assure investors that any of these tax incentives will becontinued.  The elimination or reductionof federal tax incentives to the biodiesel industry could have a materialadverse impact on our business by making it more costly or difficult for it toproduce and sell biodiesel.  If thefederal biodiesel tax incentives are eliminated or sharply curtailed, we believethat a decreased demand for biodiesel could result.

****Laxenforcement of environmental and energy policy regulations may adversely affectdemand for biodiesel.****

Oursuccess will depend in part on effective enforcement of existing environmentaland energy policy regulations.  Many ofour potential customers are unlikely to switch from the use of conventionalfuels unless compliance with applicable regulatory requirements leads, directlyor indirectly, to the use of biodiesel. Both additional regulation and enforcement of such regulatory provisionsare likely to be vigorously opposed by the entities affected by suchrequirements.  If existingemissions-reducing standards are weakened, or if governments are not active andeffective in enforcing such standards, our business and results of operationscould be adversely affected.  Even if thecurrent trend toward more stringent emissions standards continues, we willdepend on the ability of biodiesel to satisfy these emissions standards moreefficiently than other alternative technologies.  Certain standards imposed by regulatoryprograms may limit or preclude the use of our products to comply withenvironmental or energy requirements. Any decrease in the emission standards or the failure to enforceexisting emission standards and other regulations could result in a reduceddemand for biodiesel.  A significantdecrease in the demand for biodiesel will reduce the price of biodiesel,adversely affect our profitability and decrease the value of your stock.

****Costsof compliance with burdensome or changing environmental and operational safetyregulations could cause our focus to be diverted away from our business and ourresults of operations to suffer.****

Biodieselproduction involves the emission of various airborne pollutants, includingparticulate matter, carbon monoxide, carbon dioxide, nitrous oxide, volatileorganic compounds and sulfur dioxide.  Asa result, we are subject to complicated environmental regulations of the U.S.Environmental Protection Agency and regulations and permitting requirements ofthe State of Utah.  These regulations aresubject to change and such changes may require additional capital expendituresor increased operating costs. Consequently, considerable resources may be required to comply withfuture environmental regulations.  Inaddition, our biodiesel plants could be subject to environmental nuisance orrelated claims by employees, property owners or residents near the biodieselplants arising from air or water discharges. Environmental and public nuisance claims, or tort claims based onemissions, or increased environmental compliance costs could significantlyincrease our operating costs.

Ourexisting and proposed new biodiesel plants will also be subject to federal andstate laws regarding occupational safety. Risks of substantial compliance costs and liabilities are inherent inbiodiesel production.  We may be subjectto costs and liabilities related to worker safety and job related injuries,some of which may be significant. Possible future developments, including stricter safety laws for workersand other individuals, regulations and enforcement policies and claims forpersonal or property damages resulting from operation of the biodiesel plantscould reduce the amount of cash that would otherwise be available to further enhanceour business.

****RisksRelated to Our Common Stock****

****Ourcommon stock price may fluctuate considerably and stockholders may not be ableto resell their shares at or above the price at which such shares werepurchased.****

Themarket price of our common stock may fluctuate significantly in response tofactors, some of which are beyond our control, including the following:

·                  Inabilityto manufacture biodiesel fuel as efficiently as we expect due to factorsrelated to costs and supply of feedstock oil and energy;

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·                  Factorsaffecting demand for biodiesel such as price, competition and general economicconditions;

·                  Discontinuationor limitations on state and federal biodiesel subsidies;

·                  Negativepublic sentiment toward biodiesel production and use; and

·                  Environmentalrestrictions increasing the costs and liabilities of biodiesel production.

Thestock market in general has experienced extreme price and volumefluctuations.  The market prices ofsecurities of fuel-related companies have experienced fluctuations that oftenhave been unrelated or disproportionate to the operating results of thesecompanies.  Continued market fluctuationscould result in extreme volatility in the price of our common stock, whichcould cause a decline in the value of our common stock.  Price volatility might be worse if thetrading volume of our common stock is low.

****Becausewe became public by means of a reverse merger, we may not be able to attractthe attention of major brokerage firms for research and support.****

Additionalrisks may exist since we became public through a “reverse merger.”  Securities analysts of major brokerage firmsmay not provide us with coverage since there is no incentive to brokerage firmsto recommend the purchase of our common stock. We cannot assure you that brokerage firms will want to conduct anysecondary offerings on our behalf in the future.

****Ourcommon stock may be considered “a penny stock” and may be difficult for you tosell.****

TheSEC has adopted regulations which generally define “penny stock” to be anequity security that has a market price of less than $5.00 per share or anexercise price of less than $5.00 per share, subject to specificexemptions.  The market price of ourcommon stock has been for much of its trading history since February 2005 and maycontinue to be less than $5.00 per share, and therefore may be designated as a “pennystock” according to SEC rules.  Thisdesignation requires any broker or dealer selling these securities to disclosecertain information concerning the transaction, obtain a written agreement fromthe purchaser and determine that the purchaser is reasonably suitable topurchase the securities.  These rules mayrestrict the ability of brokers or dealers to sell our common stock and mayaffect the ability of investors to sell their shares.  In addition, since our common stock iscurrently traded on the NASD’s OTC Bulletin Board, investors may find itdifficult to obtain accurate quotations of our common stock and may experiencea lack of buyers to purchase such stock or a lack of market makers to supportthe stock price.

*****Failureto achieve and maintain effective internal controls in accordance with Section404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect onour business and operating results.  In addition,current and potential stockholders could lose confidence in our financialreporting, which could have an adverse effect on our stock price.*****

Effectiveinternal controls are necessary for us to provide reliable financial reportsand effectively prevent fraud.  If wecannot provide reliable financial reports or prevent fraud, our operatingresults could be harmed.

Inaccordance with 1933 Act Release No. 8760, commencing with our fiscal yearending September 30, 2008, we will become subject to the requirement to includein our annual report management’s assessment of internal controls overfinancial reporting.  This assessmentwill require us to document and test our internal control procedures inaccordance with Section 404 of the Sarbanes-Oxley Act of 2002. Our independentregistered public accountants will be required to attest to our assessment ofinternal controls for our fiscal year ending September 30, 2009.

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Duringthe course of our testing, we may identify deficiencies which we may not beable to remediate in time to meet the deadline imposed by the Sarbanes-OxleyAct for compliance with the requirements of Section 404.  In addition, if we fail to maintain theadequacy of our internal accounting controls, as such standards are modified,supplemented or amended from time to time, we may not be able to ensure that wecan conclude on an ongoing basis that we have effective internal controls overfinancial reporting in accordance with Section 404.  Failure to achieve and maintain an effectiveinternal control environment could cause us to face regulatory action and alsocause investors to lose confidence in our reported financial information,either of which could have an adverse effect on our stock price.

****Ourprincipal stockholders have significant voting power and may take actions thatmay not be in the best interest of all other stockholders.****

Ourofficers, directors and principal stockholders control approximately 84% of ourcurrently outstanding shares of common stock. If these stockholders act together, they may be able to exertsignificant control over our management and affairs requiring stockholderapproval, including approval of significant corporate transactions.  This concentration of ownership may have theeffect of delaying or preventing a change in control and might adversely affectthe market price of our common stock. This concentration of ownership may not be in the best interests of allour stockholders.

****Investorsshould not anticipate receiving cash dividends on our common stock.****

Wehave never declared or paid any cash dividends or distributions on our capitalstock.  We currently intend to retain ourfuture earnings to support operations and to finance expansion and therefore wedo not anticipate paying any cash dividends on our common stock in theforeseeable future.

****Wecould issue “blank check” preferred stock without stockholder approval with theeffect of diluting then current stockholder interests and impairing theirvoting rights, and provisions in our charter documents and under Delaware lawcould inhibit a takeover at a premium price.****

Ourcertificate of incorporation authorizes the issuance of up to 5,000,000 sharesof “blank check” preferred stock with designations, rights and preferences asmay be determined from time to time by our board of directors.  Accordingly, our board of directors isempowered, without stockholder approval, to issue a series of preferred stockwith dividend, liquidation, conversion, voting or other rights which coulddilute the interest of, or impair the voting power of, our commonstockholders.  The issuance of a seriesof preferred stock could be used as a method of discouraging, delaying orpreventing a change in control.

**ITEM 2. DESCRIPTION OF PROPERTY**

The Company doesnot own any real property.  BBD’sproduction plant is located on an operational rail spur in Spanish Fork, Utah,just off Interstate Highway 15. The plant is visible from the highway,providing an excellent marketing opportunity with signage on one of the US’sbusiest highways. The rail spur provides efficient delivery of feedstock oilsand equipment of finished biodiesel fuel, as does the close proximity to thehighway.

The BBD main plant is comprised of:

·                  A leased fiveacre parcel, secure gated and fenced with an additional, adjacent twenty-eightacres available for expansion, at the Company’s option, leased year to year,containing four active railroad spurs that are suitable for ingress/egress ofraw agricultural products and finished biodiesel.

·                  A 175,000 squarefoot covered warehouse with offices, laboratories, refining, maintenance andfabrication areas, with heavy power supplied by the local utility.  Currently, the refining capacity is 3 milliongallons per year.

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·                  Tank farmconsisting of three 10,000-gallon tanks and one 108,000-gallon tank for storingfeedstock oils, finished biodiesel and glycerin.

·                  Completebiodiesel fuel production and materials fabrication equipment.

BBD’splant is in compliance with all zoning and building code requirements.

**ITEM 3. LEGAL PROCEEDINGS**

The Company is notcurrently subject to any legal proceedings. From time to time, the Company maybecome subjected to litigation or proceedings in connection with its business,as either a plaintiff or defendant.  TheCompany is currently not aware of any pending legal proceedings to which theCompany may become a party that is likely to have a material adverse effect onthe Company’s business, financial condition or results of operations.

**ITEM 4. SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS**

On September 20, 2006prior to in the closing of its Exchange Agreement with Domestic EnergyPartners, LLC, a majority of the shareholders of the Company at a specialmeeting of the shareholders approved amendments to the Company’s Articles ofIncorporation to change the Company’s name to Better Biodiesel, Inc., and toreverse split its shares of common stock on the basis of one share for each twoshares issued and outstanding with all fractional shares rounded up to thenearest whole share. The foregoing amendments were effective September 21,2006.

**PARTII**

**ITEM 5. MARKET FOR COMMON EQUITY ANDRELATED STOCKHOLDER MATTERS**

The Company’s commonstock is traded in the Over-the-Counter market and is quoted on the ElectronicBulletin Board (“OTC Bulletin Board”) under the symbol “BBDS.”  The following table represents the range ofthe high and the low closing bid prices, as quoted on the OTC Bulletin Board,for each fiscal quarter for the transition period ended September 30, 2006 andthe year ended December 31, 2005.  Thesequotations represent prices between dealers, and may not include retailmark-ups, markdowns or commissions, and may not necessarily represent actualtransactions.  On September 20, 2006, theCompany’s amended its Articles of Incorporation to change the Company’s name toBetter Biodiesel, Inc., and to reverse split its shares of common stock on thebasis of one share for each two shares issued and outstanding with allfractional shares rounded up to the nearest whole share. The foregoingamendments were effective September 21, 2006. On September 29, 2006, theCompany announced the closing of its acquisition of Domestic Energy Partners,LLC by way of a Share Exchange Agreement.
| **FISCAL QUARTER   ENDING** | ** ** | **HIGH BID** | ** ** | **LOW BID** | ** ** |
|---------------------------------------|------------|-------------------|------------|------------------|------------|
| September 30,  2006                   |       | $                 | 2.50       |             | $          | 1.30 |   |
| June 30, 2006                         |       | $                 | 6.00       |             | $          | 1.30 |   |
| March 31, 2006                        |       | $                 | 6.00       |             | $          | 3.10 |   |
| December 31,  2005                    |       | $                 | 10.00      |             | $          | 4.00 |   |
| September 30,  2005                   |       | $                 | 12.00      |             | $          | 5.20 |   |
| June 30, 2005                         |       | $                 | 8.00       |             | $          | 2.02 |   |
| March 31, 2005                        |       | $                 | 5.00       |             | $          | 2.20 |   |

 

As of December 29, 2006, the Company had 30,500,001shares of common stock issued and outstanding and had approximately 63stockholders of record.

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We have never declared or paid cash dividends to ourstockholders. We currently intend to retain all available funds and any futureearnings for use in the operation of our business and we do not anticipatedeclaring or paying cash dividends for the foreseeable future.

## **EquityCompensation Plans**

### In August 2002the Company established an equity compensation plan, the 2002 Equity IncentivePlan (the “Equity Incentive Plan”), authorizing 2,500,000 shares of commonstock of the Company, which pursuant to the terms of the Equity Incentive Planwas adjusted downward, as a result of the September 2006 reverse stock split ofthe Company’s common stock to 1,250,000 shares, for the grant of incentivestock options and non-qualified stock options, as well as restricted stockawards or bonuses.  Currently, no optionsare issued and outstanding and no options or stock grants have been issued, andthe Company’s Board of Directors has not allocated any shares to the EquityIncentive Plan.

### Pursuant toSection 4.3 of the Equity Incentive Plan the number of shares authorized,issued and outstanding or stock awards or options granted under the EquityIncentive Plan are adjusted in like manner with any increase, decrease in theissued and outstanding shares by payment of stock dividend or otherdistribution payable in stock, or through stock split, subdivision,consolidation, combination or recapitalization.

**Equity Compensation PlanInformation**

 
| Plan Category                                               | ** ** | **Number of securities to  be issued upon exercise  of outstanding options,  warrants and rights (a)** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights (b)** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  column (a))** |
|-------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                        |       |                                                                                                   |       |                                                                                   |       |                                                                                                                                                  |
| Equity compensation plans  approved by security holders     |       | N/A                                                                                                    |       | N/A                                                                                    |       | N/A                                                                                                                                                   |
|                                                        |       |                                                                                                   |       |                                                                                   |       |                                                                                                                                                  |
| Equity compensation plans  not approved by security holders |       | N/A                                                                                                    |       | Price as listed on the OTCBB at the time of issuance.                                  |       | N/A  N/A  N/A  N/A  N/A  N/A                                                                                                                          |

 

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**RecentSales of Unregistered Securities**

During the period covered by this 10-KSB, the Companysold the following securities that were not registered under the Securities Actof 1933 (the “Act”) and not reported on any other form:

In accordance with the share exchange between theCompany and DEP, which closed on September 29, 2006 the Company, authorized theissuance of 28,500,000 shares of its unregistered common stock, pursuant to theprivate offering exemption under Section 4(2) of the Securities Act of1933.  The issuance was as follows:

At the election of Sausalito Capital Partners I, LLC,pursuant to the terms of a convertible promissory note issued to SCP by theCompany, SCP converted the promissory note into 1,500,000 shares of the Company’scommon stock.

Additionally, inconnection with the terms the Company’s share exchange agreement with DomesticEnergy Partners, LLC, under an exemption provided by Section 4(2) of theSecurities Act of 1933, the Company issued, in exchange for all of the andoutstanding equity and voting interests of Domestic Energy Partners, LLC,5,250,000 shares of common stock to Ron Crafts, 5,250,000 shares to JohnCrawford, 3,755,500 shares to Lynn Dean Crawford, 2,625,000 shares to PeterKristensen, 2,625,000 shares to Briton McConkie, 1,494,500 shares of commonstock to James Crawford, 4,500,000 shares of common stock to Capital GroupCommunications, Inc., and 1,500,000 shares of common stock to Joseph Martin,LLC.

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

FORWARD LOOKINGSTATEMENTS CAUTIONARY

This Item 6 and the report on Form 10KSB for thetransition period ended September 30, 2006 may contain “forward-lookingstatements.” In some cases, you can identify forward-looking statements byterminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,”“anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue”or the negative of such terms and other comparable terminology. Theseforward-looking statements include, without limitation, statements about ourmarket opportunity, our strategies, competition, expected activities andexpenditures as we pursue our business plan, and the adequacy of our availablecash resources. Although we believe that the expectations reflected in anyforward-looking statements are reasonable, we cannot guarantee future results,levels of activity, performance or achievements. Actual results may differmaterially from the predictions discussed in these forward-looking statements.Changes in the circumstances upon which we base our predictions and/orforward-looking statements could materially affect our actual results.Additional factors that could materially affect these forward-lookingstatements and/or predictions include, among other things: (1) our limitedoperating history; (2) our ability to pay down existing debt; (3) the Company’sability to obtain contracts with suppliers of raw materials (for the Company’sproduction of biodiesel fuel) and distributors of the Company’s biodiesel fuelproduct; (4) the risks inherent in the mutual performance of such supplier anddistributor contracts (including the Company’s production performance); (5) theCompany’s ability to protect and defend the Company’s proprietary technology;(6) the Company’s ability to secure and retain management capable of managinggrowth; (7) the Company’s ability to raise necessary financing to execute theCompany’s business plan; (8) potential litigation with our shareholders,creditors and/or former or current investors; (9) the Company’s ability tocomply with all applicable federal, state and local government andinternational rules and regulations; and (10) other factors over which we havelittle or no control.

Organization andBusiness - Better Biodiesel, Inc. (f/k/a Mountain StatesHoldings, Inc. (“Mountain States”)) was incorporated as a Colorado corporationin November 1990 under the name Slam Dunk Enterprises, Inc, was inactive untilMay 1998 when it started engaging in the business of providing first and secondmortgage financing under the name of Mountain States Lending, Inc.  During January 2001, the corporation filedarticles of amendment with the Colorado Secretary of State, changing thecorporation’s name to Mountain States Lending, Inc., and during

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September 2002 changedthe name again, to Mountain States Holdings, Inc.  During September 2002, the corporation formeda wholly-owned subsidiary named Mountain States Lending, Inc. (“Mountain StatesLending”) and on December 31, 2002, it transferred all of its assets and liabilitiesrelated to the mortgage lending business to this new subsidiary.  In August 2006, all of the Company’s assetsand liabilities resided in two wholly-owned subsidiaries that were spun-off totwo stockholders, one of whom was the former CEO of the Company, in exchangefor 325,000 pre-split (162,500 post-split) shares of the Company’s commonstock.  In September 2006, the Companyentered into a the Exchange Agreement with Domestic Energy Partners, LLC, aUtah limited liability company (“DEP”), pursuant to which it acquired all ofthe equity interests in DEP.  OnSeptember 20, 2006 prior to the closing of its Exchange Agreement with DEP, amajority of the shareholders of the Company at a special meeting of the shareholdersapproved amendments to the Company’s Articles of Incorporation to change theCompany’s name to Better Biodiesel, Inc., and to reverse split its shares ofcommon stock on the basis of one share for each two shares issued andoutstanding with all fractional shares rounded up to the nearest whole share.The foregoing amendments were effective September 21, 2006. 

                The share exchange of theCompany and DEP has been accounted for as a reverse merger, which is equivalentto a recapitalization of the Company. Thus, in the September 30, 2006 Financial Statements of the Companyincluded in this Form 10-KSB, which present the Company as being in thedevelopment stage, the assets and liabilities in the consolidated balancesheets are the book values of DEP’s assets and liabilities and the operationsin the consolidated statement of operations are the operations of DEP.  Further, unless obvious from the context thatthey refer to Mountain States, operational and financial data presentedelsewhere in this Form 10-KSB refer to DEP, as the Company’s sole andwholly-owned subsidiary.  Also includedin this Form 10-KSB are Financial Statements for Mountain States for the periodfrom January 1, 2006 through September 29, 2006.  These financial statements show the formeroperations of the Company and are the final Financial Statements of the Companypresented in this form.

#### PLAN OF OPERATION

During the next 12-monthperiod the Company intends to focus on (1) developing its customer base,particularly among of fuel distributors, (2) securing long-term, reliablesupplies of cost-effective feedstock (e.g. soy and canola oils, animal fats)from agricultural companies and farmer co-ops, (3) to expand its biodieselproduction capacity at its existing production facility Spanish Fork, Utah,plant, and to construct at an additional production facility in the centralgeographic region of the United States, for which the Company has engaged REDDEngineering & Construction, Inc., to manage the Company’s production plantexpansion and installation, and (5) to seek to forge strategic relationshipswith energy and agricultural firms.  Inorder to execute this plan, the Company will need to raise addition capitalthrough debt or equity financing.

Management believes thatthe benefits of the Company’s biodiesel production technology result in highvolume output, reduced space requirements and lower equipment costs.  Furthermore, the Company’s technologyproduces biodiesel fuel product that consistently meets the ASTM D-6751standard for pure one hundred percent (B100) biodiesel fuel.  The purity level of the finished fuel is suchthat it needs no post reaction processing and therefore no wastewater treatmentis required.

We had a net loss of$420,853.00 for the transitional period ended September 30, 2006.  We had net loss of $50,647.00 and $1,300.00for the periods ended December 31, 2005 and December 31, 2004,respectively.  Management believes thatthe net loss in 2006 is not readily comparable with that of 2005 and 2004 givenour significant increase of investment into research and development andinfrastructure during the transitional period ended September 30, 2006.  These increases include scaling up from aprototype to a 3,000,000 gallon per year continuous manufacturing plant,equipment and storage tanks, construction of corporate offices andrefurbishment of our production plant and facility.  We have completed the engineering on a10,000,000 gallon processor and are ready to begin construction of these modules.  The Company currently produces and sellsbiodiesel fuel to end users, and intends to now seek financing to scale itsproduction to a capacity of up to 50 million gallons per year during 2007,subject to the Company’s ability to raise sufficient funds.

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Portions of the net lossfor the transition period ended September 30, 2006 include expenses inconnection with the Exchange Agreement executed between the Company and DEP.

Our operating expenseswere $414,186.00 for the transitional period ended September 30, 2006 and$50,647.00 and $1,300 for the periods ended December 31, 2005 and December 31,2004, respectively.  We have financed ouroperations through various private equity and debt transactions.  The respective increases in our operatingexpenses are due to our significant expansion in operating capacity.

REDD Engineering- In November 2006, the Company engaged REDD Engineering & Construction,Inc. (“REDD Engineering”) of Salt Lake City, Utah to perform engineering andconsulting services to assist in expanding operations at the Company’s currentplant site in Spanish Fork, Utah and in creating additional sites. Inconnection with the engagement, the Company provided REDD a $20,000.00 retainerfor its services.  REDD Engineering is anengineering, procurement and construction company that provides planning,management and consulting services for projects from the initial concept phasethrough to the operation and maintenance of plants. Projects are provided forindustrial and institutional clients involving engineered processes,facilities, or technology-based products.

Critical Accounting Policies and Estimates- The preparation of financial statements included in this Annual Report onForm 10-KSB requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  On an on-going basis, management evaluates itsestimates and judgments. Management bases its estimates and judgments onhistorical experiences and on various other factors that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying value of assets and liabilities that arenot readily apparent from other sources.  Actual results may differ fromthese estimates under different assumptions or conditions.  The moresignificant accounting estimates inherent in the preparation of the Company’sfinancial statements include estimates as to the valuation of equity relatedinstruments issued, and valuation allowance for deferred income taxassets. Our accounting policies are described in the notes to financialstatements included in this Annual Report on Form 10-KSB. The more criticalaccounting policies are as described below.

Going concern presentation - Theaccompanying consolidated financial statements have been prepared in conformitywith generally accepted accounting principles, which contemplate continuationof the Company as a going concern. The Company has incurred recurring lossesfrom operations and has a net working capital deficiency and net capitaldeficiency that raises substantial doubt about its ability to continue as agoing concern. The Report of Independent Registered Public Accounting Firmincluded in this Annual Report on Form 10-KSB stated that these conditions,among others, raise substantial doubt about the Company’s ability to continueas a going concern. Company management intends to raise additional debt andequity financing to fund future operations and to provide additional workingcapital. However, there is no assurance that such financing will be obtained insufficient amounts necessary to meet the Company’s needs. The accompanyingconsolidated financial statements do not include any adjustments to reflect thepossible future effects on the recoverability and classification of assets orthe amounts and classifications of liabilities that may result from the outcomeof this uncertainty.

Accounting for Derivatives - As ofSeptember 30, 2006, the Company has no convertible debt, options, warrants orother contracts with derivative characteristics.  The Company will evaluate any futureconvertible debt, options, warrants or other contracts to determine if thosecontracts or embedded components of those contracts qualify as derivatives tobe separately accounted for under Statement of Financial Accounting Standards133 “Accounting for Derivative Instruments and Hedging Activities” and relatedinterpretations including EITF 00-19 “Accounting for Derivative FinancialInstruments Indexed to, and Potentially Settled in, a Company’s Own Stock”. Theresult of this accounting treatment is that the fair value of the embeddedderivative is marked-to-market each balance sheet date and recorded as aliability. In the event that the fair value is recorded as a liability, thechange in fair value is recorded in the consolidated statement of operations asother income or expense. Upon conversion or exercise of a derivativeinstrument, the instrument is marked to fair value at the conversion date andthen that fair value is

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reclassified to equity. Equity instruments that areinitially classified as equity that become subject to reclassification underSFAS 133 are reclassified to liability at the fair value of the instrument onthe reclassification date.

Revenue recognition - The Companywill recognize revenue when the product has been delivered or the services havebeen provided to the customer, the sales price is fixed or determinable, andcollectability is reasonably assured. The Company will recognize revenues fromsales of recycled products upon delivery to customers. The Company willrecognize revenues from sales of equipment or systems outside the United Statesonce configuration of such systems are completed and accepted by the customer.

Income taxes - The Company utilizesSFAS No. 109, “Accounting for Income Taxes,” which requires recognition ofdeferred tax assets and liabilities for the expected future tax consequences ofevents that have been included in the financial statements or tax returns.Under this method, deferred income taxes are recognized for the taxconsequences in future years of differences between the tax bases of assets andliabilities and their financial reporting amounts at each period end based onenacted tax laws and statutory tax rates applicable to the periods in which thedifferences are expected to affect taxable income. Valuation allowances areestablished, when necessary, to reduce deferred tax assets to amounts expectedto be realized. The provision for income taxes represents the tax payable forthe period and change during the period in net deferred tax assets andliabilities.

Stock-based compensation - TheCompany did not issue options or warrants to employees prior to 2005. EffectiveJanuary 1, 2005, the Company accounts for all options and warrant grants toemployees and consultants in accordance with SFAS 123R, which requiresrecording an expense over the requisite service period for the fair value ofall options or warrants granted employees and consultants.  During the transitional period endingSeptember 30, 2006, there were no outstanding options or warrants.

Results of Operations - We have hadno revenues since the date of inception (November 1, 2004).

Liquidity and Capital Resources -Historically, our cash needs have been satisfied primarily throughproceeds from private placements of our equity securities and debt instrumentsincluding debt instruments convertible into our equity securities.  Weexpect to continue to be required to raise capital in the future, but cannotguarantee that such financing activities will be sufficient to fund our currentand future projects and our ability to meet our cash and working capital needs.

TheCompany’s working capital was $54,666 at September 30, 2006 compared to adeficit of $189,119 at December 31, 2005.

Netcash used in operating activities during the transitional period endedSeptember 30, 2006 was $283,953 compared to $48,994 used in operatingactivities during the year ended December 31, 2005.

Cash was used ininvesting activities in the amount of $144,158 for the transitional periodended September 30, 2006.  No amountswere used in investing activities for the year ended December 31, 2005.

Cash was providedfrom financing activities in the amount of $601,927 during the transitionalperiod ended September 30, 2006 compared to $48,994 provided from financingactivities in the year ended December 31, 2005.

Off-Balance Sheet Arrangements - Wedo not have any off-balance sheet arrangements that have or are likely to havea material current or future effect on the Company’s financial condition, orchanges in financial condition, liquidity or capital resources or expenditures.

Recentaccounting pronouncements - In June 2006, the FinancialAccounting Standards Board (“FASB”) issued FASB Interpretation No. 48, *Accounting for Uncertainties in Income Taxes* (“FIN 48”).  FIN 48 clarifies the accounting foruncertainty in income taxes and prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return.  FIN

20

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48is effective for financial statement as of January 1, 2007.  The Company has not yet determined the affectof applying FIN 48.

InSeptember 2006, the FASB issued Statement of Financial Accounting Standards No.157, *Fair Value Measurements* (“FAS 157”).  FAS 157 defines fair value, establishes aframework for measuring fair value and expands disclosures about fair valuemeasurements but does not require any new fair value measurements.  FAS 157 is effective for financial statementsissued for fiscal years beginning after November 15, 2007, and interimperiods within those fiscal years.  TheCompany does not believe the application FAS 157 will change its financialstatements.

InSeptember 2006, the FASB issued Statement of Financial Accounting Standards No.158, *Employers’ Accounting for Defined Benefit Pensionand Other Postretirement Plans*(“FAS 158”).  FAS 158 requires an employer to recognize theover funded or under funded status of a defined benefit postretirement plan(other than a multi-employer plan) as an asset or liability in its statement offinancial position and to recognize changes in that funded status in the yearin which the changes occur through comprehensive income.  FAS 158 is effective for financial statementsas of December 31, 2006.  TheCompany does not believe that FAS 158 will have any effect on its financialstatements.

**ITEM 7.FINANCIAL STATEMENTS**

*The Company changed independentregistered public accountants in 2006. See Item 8 below. The financialstatements reported on by our current auditors for the period from the Company’sassumed date of inception as a development stage entity (November 1, 2004)through September 30, 2006 are included in this Form 10-KSB.  The financial statements for the Companyshowing its former operations that were spun-off, for the period from January1, 2006 to September 29, 2006, are reported on by our current auditors, and arealso included in this Form 10-KSB.*

The financial statementsare set forth on pages F-1 through F-22 hereto.

**ITEM 8.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE**

**ITEM 8A.CONTROLS AND PROCEDURES**

The Companymaintains disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in the Company’s Exchange Act reports isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms, and that such information is accumulated andcommunicated to the Company’s management, including its Chief Executive Officerand Chief Financial Officer, as appropriate, to allow timely decisions inaccordance with the required “disclosure controls and  procedures” as defined in Rule13a-15(e).  The Company’s disclosure andcontrol procedures are designed to provide reasonable assurance of achievingtheir objectives, and the principal executive officer and principal financialofficer of the Company concluded that the Company’s disclosure controls andprocedures were effective at the reasonable assurance level.

At the end of theperiod covered by this Annual Report, the Company carried out an evaluation,under the supervision and with the participation of the Company’s management,including the Company’s principal executive officer and principal financialofficer, of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures. Based of the foregoing, the principal executive officer and principalfinancial officer of the Company concluded that the Company’s disclosurecontrols and procedures were effective to ensure that the information requiredto be disclosed in the Company’s Exchange Act reports is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms, and that such information is accumulated and communicated to theCompany’s management including the Company’s principal executive officer andprincipal financial officer to allow timely decisions regarding requireddisclosure.

21

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There were no changes in the Company’s internalcontrol over financial reporting that occurred during the Company’s last fiscalquarter that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

**ITEM 8B.OTHER INFORMATION**

None.

**PARTIII**

**ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, AND CONTROLPERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT**

**Directors and Executive Officers**
| **NAME**           | ** ** | **AGE** | ** ** | **POSITION**                                                   |
|--------------------|------------|---------|------------|----------------------------------------------------------------|
|               |       |    |       |                                                           |
| Ron Crafts         |       | 50      |       | Chairman, Chief Executive Officer and Chief  Financial Officer |
|               |       |    |       |                                                           |
| John Crawford      |       | 41      |       | President, Chief Technology Officer and Director               |
|               |       |    |       |                                                           |
| Lynn Dean Crawford |       | 62      |       | Chief Operations Officer                                       |
|               |       |    |       |                                                           |
| Peter Kristensen   |       | 45      |       | Vice President of Corporate Development and Director           |
|               |       |    |       |                                                           |
| F. Briton McConkie |       | 60      |       | Vice President of Business Development and Director            |
|               |       |    |       |                                                           |
| David M. Otto      |       | 48      |       | Director and General Securities Counsel                        |

 

Ron Crafts

Chairman, Chief Executive Officer and Chief FinancialOfficer

Mr. Crafts, age 50, isan entrepreneur with 23 years of experience in business management andoperations.  Mr. Crafts was a Utah “Bestof State” winner of the “Entrepreneur of the Year” award in 2005 for hissuccessful catering company, Culinary Crafts, LLC.  Culinary Crafts has been fueling their fleetof 14 vehicles and their auxiliary generators with biodiesel produced from DEP’smachinery for the past two years.  Mr.Crafts attended college at Brigham Young University and has a background inaccounting.

John Crawford

President, Chief Technology Officer and Director

Mr. Crawford, age 41, is the inventor of the Company’simproved refining technology, and is in charge of all scientific developmentand advisory.  Mr. Crawford is a chemicalengineer who has co-authored numerous scientific papers and holds severalpatents in the area chemical science and engineering. Mr. Crawford’s careerbegan in

22

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environmental chemistry at Brigham YoungUniversity.  Since that time he has had16 years of experience developing chemical reaction measuring devices andequipment.

Lynn Dean Crawford

Chief Operations Officer

Mr. Crawford, age****62, hasextensive experience in all aspects of technical engineering management,research and development, large-scale maintenance and logistics support foroperations, government compliance oversight, mechanical design, computersystems and software implementation, and employee supervision.  Mr. Crawford has over 25 years of experiencein technical management positions of small and large companies, with 11 of thosepositions at the corporate level.  Since2002, Mr. Crawford has also been an independent consultant, providing guidanceon project management, product design, patent development and regulatorysupport to start-up companies.  Mr.Crawford received a B.S.E. in Mechanical Engineering and a Masters inMechanical Engineering from Brigham Young University in 1971.

Peter Kristensen

Vice President of Corporate Development and Director

Mr. Kristensen,age 45, is Vice President of Corporate Development and a Director of theCompany.  He is responsible for contractprocurement of feedstock as well as forming key business alliancesworldwide.  Since 1998, Mr. Kristensenhas also been a business consultant, facilitating and arranging capitalformations, evaluating business opportunities and deal structuring, andadvising on mergers and acquisitions and corporate governance issues.  Mr. Kristensen received a B.S. in GeophysicalEngineering from the University of Utah in 1985.

F. Briton McConkie

Vice President of Business Development and Director

Mr. McConkie, age60, is Vice President of Business Development and a Director of theCompany.  His responsibilities includestructuring biodiesel joint ventures, strategic alliances and distributiontransactions all over the world.  Since1994, Mr. McConkie has consulted on private/public mergers and acquisitions inSalt Lake City, where he has worked with investors and institutions on dealstructuring and capital formation involving limited partnerships, as well asconsulting for public companies.  Mr.McConkie has worked to provide financing for NASDAQ companies.  Mr. McConkie received a Bachelor of Sciencefrom the University of Utah in 1971.

David M. Otto

Director and General Securities Counsel

Mr. Otto, age 48, is a Seattle-based attorney and thePresident of The Otto Law Group, PLLC. Mr. Otto’s practice is focused oncorporate finance, securities, mergers & acquisitions, corporate law andgovernance. Mr. Otto began his practice on Wall Street in New York City in 1987with the Hughes, Hubbard and Reed law firm, where he concentrated onsignificant corporate leveraged buyout and takeover transactions and equity anddebt offerings for investment banks, venture capital firms and Fortune 1000companies. In 1991, Mr. Otto moved to Seattle in order to dedicate hisextensive experience to entrepreneurs, technology innovators, start-up andemerging growth businesses. In July 1999, Mr. Otto founded the Otto Law Group,PLLC in Seattle. Mr. Otto is a Director of Vocalscape Networks, Inc., SinoFreshHealthcare, Inc., TechAlt, Inc., Avisere, Inc. and Saratoga Capital Partners,Inc. He is a member of the American Bar Association Committee on the FederalRegulation of Securities, Subcommittee on the 1933 Act and Chairman of theLegislation Subcommittee of the ABA’s Venture Capital and Private EquityCommittee. Mr. Otto is admitted to practice law in New York and Washington. Mr.Otto earned an AB from Harvard University and a JD from Fordham UniversitySchool of Law.

23

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**Compliance with Section 16(a) of theExchange Act**

Section 16(a) of the Exchange Act requires the Company’sofficers, directors and persons who beneficially own more than 10% of theCompany’s common stock to file reports of ownership and changes in ownershipwith the SEC. These reporting persons also are required to furnish the Companywith copies of all Section 16(a) forms they file. None of the officers ordirectors of the Company have provided to the Company any filed reports upontheir acquisition or disposition of securities of the Company. With theexception of the aforementioned, to the Company’s knowledge, no officers,directors and persons who beneficially own more than 10% of the Company’scommon stock have failed to file the reports required pursuant to Section16(a).

**ITEM 10. EXECUTIVE COMPENSATION**

The followingtables set forth certain information regarding the Company’s former CEO and CFOand each of our most highly compensated executive officers whose total annualsalary and bonus for the transitional period ended September 30, 2006 and theyear ended December 31, 2005 exceeded $100,000.   No other former or current officer receivedcompensation in excess of $100,000 for the transitional period ended September30, 2006, or for the year ended December 31, 2005:

SUMMARY COMPENSATIONTABLE

 
|                                                      | ** ** | **Annual Compensation** | ** ** | **Long-term Compensation** | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| **Name**                                             | ** ** | **Fiscal  Year(1)**          | ** ** | **Salary $**               | ** ** | **Bonus  $** | ** ** | **Other  Annual  Comp.** | ** ** | **Restricted  Stock** | ** ** | **Securities  Underlying  Options(#)** | ** ** | **LTIP  Payouts $** | ** ** | **All Other  Compensation** | ** ** |
|                                                 |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Ron Crafts                                           |       | 2006                         |       | N/A                             |       | N/A |   | N/A |   |   |   |   |   |   |   |   |   |
| Chief Executive Officer and  Chief Financial Officer |       | 2005                         |       | N/A                             |       | N/A |   | N/A |   |   |   |   |   |   |   |   |   |
|                                                 |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Mark E Massa (2)                                     |       | 2006                         |       | N/A                             |       | N/A |   | N/A |   | N/A |   |   |   |   |   |   |   |
| Chief Executive Officer and  Chief Financial Officer |       | 2005                         |       | N/A                             |       | N/A |   | N/A |   | N/A |   |   |   |   |   | $ |   |   |
|                                                      |            |                              |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)          Fiscal year for 2006ended September 30; fiscal year for 2005 ended December 31.

(2)          MarkE. Massa resigned upon the closing of the share exchange between the Companyand Domestic Energy Partners, LLC, on September 29, 2006.

OPTION GRANTS IN LAST FISCAL YEAR.

No options were granted during the 2006 fiscal year:

**ITEM 11. SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS.**

The following table sets forth certain informationregarding the beneficial ownership of our common stock as of September 30,2006:

24

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| **Title of Class** | ** ** | **Name and Address of Beneficial Owner**                     | ** ** | **Amount and Nature of  Beneficial Ownership** | ** ** | **Percent of  Class** | ** ** |
|------------------------------|------------|---------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------------------------|------------|
| Common, no par value         |       | Ron  Crafts  690 West 350 North  Spanish Fork, UT 84660                               |       | 5,250,000                                                          |       | 17.21                      | %          |
| Common, no par value         |       | John  Crawford  3820 S. Elm  Tempe, AZ 85282                                          |       | 5,250,000                                                          |       | 17.21                      | %          |
| Common, no par value         |       | Lynn  Dean Crawford  5121 Yearling Ave  Irvine, CA 92064                              |       | 3,755,500                                                          |       | 12.31                      | %          |
| Common, no par value         |       | Peter  Kristensen  7668 Quicksilver Dr.  Salt Lake City, UT 84121                     |       | 2,625,000                                                          |       | 8.61                       | %          |
| Common, no par value         |       | F.  Briton McConkie  4014 Splendor Way  Salt Lake City, UT 84124                      |       | 2,625,000                                                          |       | 8.61                       | %          |
| Common, no par value         |       | David  M. Otto  601 Union Street, Suite 4500  Seattle, WA 98164                       |       | 1,500,000                                                          |       | 4.92                       | %(1)       |
| Common, no par value         |       | Capital  Group Communications, Inc.  1750 Bridgeway, Suite A-200  Sausalito, CA 94965 |       | 4,500,000                                                          |       | 14.75                      | %          |
| Common, no par value         |       | Directors, Officers and  Control Persons as a Group                                   |       | 25,505,000                                                         |       | 84                         | %          |

 

----

(1) Represents the common stock shares owned by JosephMartin, LLC, of which David M. Otto is a beneficial owner of 50% of the equity.

**ITEM 12. CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS**

Lynn Dean Crawford is the uncle of John Crawford.

**ITEM 13.EXHIBITS**

See Exhibit Indeximmediately following the signature page below.

**ITEM 14. PRINCIPAL ACCOUNTANT FEESAND SERVICES**
| Fee Category   | ** ** | **Fiscal 2006** | ** ** | **Fiscal 2005** | ** ** |
|---------------------|------------|----------------------|------------|----------------------|------------|
| Audit Fees          |       | $                    | —     |                 | $          | 12,900 |   |
| Audit-Related  Fees |       | —               |       | —               |       |
| Tax Fees            |       | —               |       | —               |       |
| All Other Fees      |       | 5,000                |       | $                    | 7,500      |   |
| Total               |       | $                    | 5,000      |                 | $          | 18,000 |   |

 

The audit fees stated above consisted of fees for MountainStates Holdings, Inc., prior to the name change to Better Biodiesel, Inc., and theExchange Agreement with DEP, and include the audit of the Company’s annualfinancial statements for the year ended 2005 and the review of quarterly financialstatements for the three months ended March 31, 2006 and the six months endedJune 30, 2006, as well as for services normally provided in connection withstatutory and regulatory filings or engagements, consents and assistance withreview of Company documents filed with the SEC.

Tax fees consistedprimarily of fees for tax compliance, tax advice and tax planning services.

 

25

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**Policyfor Pre-Approval of Audit and Non-Audit Services**

The Audit Committee’s policy is to pre-approve allaudit, audit-related and non-audit services to be provided by the independentauditors and adopt and implement policies for such pre-approval. Independentauditors shall not be engaged to perform specific non-audit services proscribedby law or regulation. The Committee may delegate pre-approval authority to amember of the Committee. The decisions of any Committee member to whompre-approval authority is delegated must be presented to the full AuditCommittee at its next scheduled meeting.

All engagements of the independent auditor to perform any auditservices and non-audit services have been pre-approved by the Committee inaccordance with the pre-approval policy. The policy has not been waived in anyinstance.

26

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**BETTER BIODIESEL, INC.(A Development Stage Company)**

**Financial Report**

**September 30, 2006**

----

 

**C  O N  T  E N  T  S**
|                                                              | ** ** | **Page**         |
|--------------------------------------------------------------|------------|------------------|
| **REPORT OF INDEPENDENT REGISTERED PUBLIC  ACCOUNTING FIRM** | ** ** | **1 and 2**      |
|                                                         |       |             |
| CONSOLIDATED  BALANCE SHEETS                                 |       | 3                |
| CONSOLIDATED  STATEMENTS OF OPERATIONS                       |       | 4                |
| CONSOLIDATED  STATEMENTS OF STOCKHOLDERS’ EQUITY        |       | 5                |
| CONSOLIDATED  STATEMENTS OF CASH FLOWS                       |       | 6                |
| NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS                  |       | 7 - 13 |

 

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# **REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of DirectorsBetter Biodiesel, Inc.Orem, Utah

We have auditedthe accompanying consolidated balance sheets of Better Biodiesel, Inc., andsubsidiary (a development stage company), formerly known as MountainStates Holdings, Inc., as of September 30, 2006, December 31, 2005,and December 31, 2004, and the related consolidated statements of operations,stockholders’ equity, and cash flows for the nine months endedSeptember 30, 2006, the year ended December 31, 2005 and the twomonths ended December 31, 2004, and the period from November 1, 2004(date of inception) through September 30, 2006.  These financial statements are the responsibilityof the Company’s management.  Ourresponsibility is to express an opinion on these financial statements based onour audits.

We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  The Company has determinedthat it is not required to have, nor were we engaged to perform, an audit of itsinternal control over financial reporting. Our audit included consideration of internal control over financialreporting as a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

1

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In our opinion,the consolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Better Biodiesel, Inc. (adevelopment stage company) and subsidiary as of September 30, 2006,December 31, 2005, and December 31, 2004, and the results of their operationsand their cash flows for the nine months ended September 30, 2006, theyear ended December 31, 2005, and the two months ended December 31,2004, and for the period from November 1, 2004 (date of inception) toSeptember 30, 2006, in conformity with accounting principles generallyaccepted in the United States.

The accompanyingconsolidated financial statements have been prepared assuming the Company willcontinue as a going concern.  Asdiscussed in Note 2 to the financial statements, the Company has experiencedrecurring losses from operations since inception and has accumulated a deficitduring its development stage.  Theseconditions raise substantial doubt about the Company’s ability to continue as agoing concern.  Management’s plansregarding these matters are also discussed in Note 2.  The financial statements do not include anyadjustments that might result from the outcome of this uncertainty.

/S/ PETERSONSULLIVAN PLLC

December 11,2006Seattle, Washington

2

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** **

**BETTERBIODIESEL, INC.**(A Development Stage Company)

## CONSOLIDATEDBALANCE SHEETS

| ** **                                                                                                                    | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ASSETS                                                                                                                        |       |                         |       |                        |       |                        |       |
|                                                                                                                          |       |                         |       |                        |       |                        |       |
| Current Assets                                                                                                                |       |                         |       |                        |       |                        |       |
| Cash and cash  equivalents                                                                                                    |       | $                            | 173,816    |                        | $          | —                      |       | $ | — |   |
| Prepaid expenses                                                                                                              |       | 18,377                       |       | —                      |       | —                      |       |
| Total current  assets                                                                                                         |       | 192,193                      |       | —                      |       | —                      |       |
|                                                                                                                          |       |                         |       |                        |       |                        |       |
| Property and Equipment,  net                                                                                                  |       | 264,747                      |       | 137,172                     |       | —                      |       |
| Deposits                                                                                                                      |       | 5,500                        |       |                        |       | —                      |       |
| Total assets                                                                                                                  |       | $                            | 462,440    |                        | $          | 137,172                     |       | $ | — |   |
|                                                                                                                          |       |                         |       |                        |       |                        |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY (DEFICIT)                                                                          |       |                         |       |                        |       |                        |       |
|                                                                                                                          |       |                         |       |                        |       |                        |       |
| Current Liabilities                                                                                                           |       |                         |       |                        |       |                        |       |
| Accounts payable  and accrued expenses                                                                                        |       | $                            | 137,527    |                        | $          | —                      |       | $ | — |   |
| Due to related  party                                                                                                         |       | —                       |       | 189,119                     |       | 1,300                       |       |
| Total current  liabilities                                                                                                    |       | 137,527                      |       | 189,119                     |       | 1,300                       |       |
|                                                                                                                          |       |                         |       |                        |       |                        |       |
| Stockholders’ Equity  (Deficit)                                                                                          |       |                         |       |                        |       |                        |       |
| Preferred stock,  no par value, 5,000,000 shares authorized, none issue                                                       |       | —                       |       | —                      |       | —                      |       |
| Common stock, no  par value, 200,000,000 shares authorized, 30,500,001, zero, and zero,  respectively, issued and outstanding |       | 797,713                      |       | —                      |       | —                      |       |
| Deficit  accumulated during the development stage                                                                             |       | (472,800                     | )          | (51,947                     | )          | (1,300                      | )          |
| Total  stockholders’ equity (deficit)                                                                                    |       | 324,913                      |       | (51,947                     | )          | (1,300                      | )          |
| Total liabilities and  stockholders’ equity (deficit)                                                                    |       | $                            | 462,440    |                        | $          | 137,172                     |       | $ | — |   |

 

See Notes to Financial Statements

3

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**BETTERBIODIESEL, INC.**(A Development Stage Company)

## CONSOLIDATEDSTATEMENTS OF OPERATIONSFrom Inception (November 1, 2004) through September 30, 2006

| ** **                                 | ** ** | **For the Nine  Months Ended  September 30, 2006** | ** **   | **For the Year  Ended  December 31, 2005** | ** ** | **From Inception on  November 1, 2004  Through  December 31, 2004** | ** ** | **From Inception on  November 1, 2004  Through  September 30, 2006** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------------------------------|--------------|----------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|
| Sales                                      |       | $                                                                           | —       |                                                           | $          | —                                                                                            |       | $                                                                                                  | —     |   | $ | — |   |
| Operating  Expenses                        |       |                                                                        |         |                                                           |       |                                                                                              |       |                                                                                               |       |
| Depreciation                               |       | 16,583                                                                      |         | 1,653                                                          |       | —                                                                                            |       | 18,236                                                                                             |       |
| Marketing                                  |       | 106,778                                                                     |         | 2,975                                                          |       | —                                                                                            |       | 109,753                                                                                            |       |
| Payroll                                    |       | 73,471                                                                      |         | 16,825                                                         |       | 1,300                                                                                             |       | 91,596                                                                                             |       |
| Research and development                   |       | 26,544                                                                      |         | 2,295                                                          |       | —                                                                                            |       | 28,839                                                                                             |       |
| General and administrative                 |       | 190,810                                                                     |         | 26,899                                                         |       | —                                                                                            |       | 217,709                                                                                            |       |
| Total operating expenses                   |       | 414,186                                                                     |         | 50,647                                                         |       | 1,300                                                                                             |       | 466,133                                                                                            |       |
|                                       |       |                                                                        |         |                                                           |       |                                                                                              |       |                                                                                               |       |
| Loss from  operations                      |       | (414,186                                                                    | )            | (50,647                                                        | )          | (1,300                                                                                            | )          | (466,133                                                                                           | )          |
| Interest  (expense)                        |       | (6,667                                                                      | )            | —                                                         |       | —                                                                                            |       | (6,667                                                                                             | )          |
| **Net  Loss**                              | ** ** | **$**                                                                       | **(420,853** | **)**                                                          | **$**      | **(50,647**                                                                                       | **)**      | **$**                                                                                              | **(1,300** | **)** | **$** | **(472,800** | **)** |
| ** **                                 | ** ** | ** **                                                                  | ** **   | ** **                                                     | ** ** | ** **                                                                                        | ** ** | ** **                                                                                         | ** ** |
| Basic net loss  per common share           |       | $                                                                           | (0.18        | )                                                              | $          | (0.02                                                                                             | )          | $                                                                                                  | (0.00      | ) |   |   |
|                                       |       |                                                                        |         |                                                           |       |                                                                                              |       |                                                                                               |       |
| Weighted average basic  shares outstanding |       | 2,342,491                                                                   |         | 2,089,863                                                      |       | 2,001,230                                                                                         |       |                                                                                               |       |

 

See Notes to Financial Statements

4

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**BETTERBIODIESEL, INC.**(A Development Stage Company)

## CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITYFrom Inception (November 1, 2004) through September 30, 2006(Common stock restated to reflect two-for-one reverse split)

| ** **                                                                                                                                           | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|------------|------------|------------|------------|
| ** **                                                                                                                                           | ** ** | **Shares**               | ** ** | **Amount**            | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Accumulated  Deficit** | ** ** | **Total** | ** ** |
| At inception  November 1, 2004                                                                                                                       |       | —                   |       | $                     | —     |       | 2,000,000  |       | $          | — |   | $ | — |   | $ | — |   |
| Dec. 31, 2004 -  Sale of Common Shares at $0.50 per pre-split share                                                                                  |       | —                   |       | —                |       | 75,000     |       | —     |       | — |   | — |   |
| Net loss for the  two months ended December 31, 2004                                                                                                 |       | —                   |       | —                |       | —     |       | —     |       | (1,300 | ) | (1,300 | ) |
| Balance at  December 31, 2004                                                                                                                        |       | —                   |       | —                |       | 2,075,000  |       | —     |       | (1,300 | ) | (1,300 | ) |
| May 31, 2005 -  Sale of Common Shares at $0.50 per pre-split share                                                                                   |       | —                   |       | —                |       | 25,000     |       | —     |       | — |   | — |   |
| Dec. 31, 2005 -  Sale of common shares at $0.50 per pre-split share                                                                                  |       | —                   |       | —                |       | 50,000     |       | —     |       | — |   | — |   |
| Net loss for the  year ended December 31, 2005                                                                                                       |       | —                   |       | —                |       | —     |       | —     |       | (50,647 | ) | (50,647 | ) |
| Balance at  December 31, 2005                                                                                                                        |       | —                   |       | —                |       | 2,150,000  |       | —     |       | (51,947 | ) | (51,947 | ) |
| Aug. 15, 2006 -  Sale of Common shares at $0.50 per pre-split share                                                                                  |       | —                   |       | —                |       | 12,500     |       | —     |       | — |   | — |   |
| Aug. 31, 2006 -  Common shares returned andcancelled in exchange for two former subsidiaries                                                         |       | —                   |       | —                |       | (162,500   | )          | —     |       | — |   | — |   |
| Sept. 29, 2006 -  Share arising in reverse of stock split                                                                                            |       | —                   |       | —                |       | 1          |       | —     |       | — |   | — |   |
| Sept. 29, 2006 -  Common shares issued upon conversion of note payable at merger                                                                     |       | —                   |       | —                |       | 1,500,000  |       | 506,667    |       | — |   | 506,667 |   |
| Sept. 29, 2006 -  Common shares issued to former LLC Member of Domestic exchange for cash and  property Energy Partners, LLC in contributions to DEP |       | —                   |       | —                |       | 5,250,000  |       | 291,046    |       | — |   | 291,046 |   |
| Sept. 29, 2006 -  Other common shares issued at merger                                                                                               |       | —                   |       | —                |       | 21,750,000 |       | —     |       | — |   | — |   |
| Net loss for the  nine month period ended September 30, 2006                                                                                         |       | —                   |       | —                |       | —     |       | —     |       | (420,853 | ) | (420,853 | ) |
| Balance at September  30, 2006                                                                                                                       |       | —                   |       | $                     | —     |       | 30,500,001 |       | $          | 797,713 |   | $ | (472,800 | ) | $ | 324,913 |   |

 

No amounts are shown forthe sales of common shares through Aug. 15, 2006, or the cancellation of shareson Aug. 31, 2006, since such transactions occurred while the Company wasoperating as Mountain States Holdings, Inc.

See Notes to Financial Statements

5

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**BETTERBIODIESEL, INC.**(A Development Stage Company)

## CONSOLIDATEDSTATEMENTS OF CASH FLOWSFrom Inception (November 1, 2004) through September 30, 2006

| ** **                                                                             | ** ** | **For the Nine  Months Ended  September 30, 2006** | ** ** | **For the Year  Ended  December 31, 2005** | ** ** | **For the Two  Months Ended  December 31, 2004** | ** ** | **From Inception on  November 1, 2004  Through  September 30, 2006** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|
| Cash Flows From  Operating Activities                                                  |       |                                                                        |       |                                                           |       |                                                                      |       |                                                                                               |       |
| Net loss                                                                               |       | $                                                                           | (420,853   | )                                                              | $          | (50,647                                                                   | )          | $                                                                                                  | (1,300     | ) | $ | (472,800 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities            |       |                                                                        |       |                                                           |       |                                                                      |       |                                                                                               |       |
| Depreciation                                                                           |       | 16,583                                                                      |       | 1,653                                                          |       | —                                                                    |       | 18,236                                                                                             |       |
| Changes in operating assets and liabilities                                            |       |                                                                        |       |                                                           |       |                                                                      |       | —                                                                                             |       |
| Increase in prepaid expenses                                                           |       | (18,377                                                                     | )          | —                                                         |       | —                                                                    |       | (18,377                                                                                            | )          |
| Increase in deposits                                                                   |       | (5,500                                                                      | )          | —                                                         |       | —                                                                    |       | (5,500                                                                                             | )          |
| Increase in accounts payable and accrued expenses                                      |       | 144,194                                                                     |       | —                                                         |       | —                                                                    |       | 144,194                                                                                            |       |
| Net cash used in operating activities                                                  |       | (283,953                                                                    | )          | (48,994                                                        | )          | (1,300                                                                    | )          | (334,247                                                                                           | )          |
|                                                                                   |       |                                                                        |       |                                                           |       |                                                                      |       |                                                                                               |       |
| Cash Flows From  Investing Activities                                                  |       |                                                                        |       |                                                           |       |                                                                      |       |                                                                                               |       |
| Purchases of property and equipment                                                    |       | (144,158                                                                    | )          | —                                                         |       | —                                                                    |       | (144,158                                                                                           | )          |
|                                                                                   |       |                                                                        |       |                                                           |       |                                                                      |       |                                                                                               |       |
| Cash Flows From  Financing Activities                                                  |       |                                                                        |       |                                                           |       |                                                                      |       | —                                                                                             |       |
| Proceeds from related party for company expenses,  net                                 |       | 101,927                                                                     |       | 48,994                                                         |       | 1,300                                                                     |       | 152,221                                                                                            |       |
| Proceeds from related party notes payable                                              |       | 500,000                                                                     |       | —                                                         |       | —                                                                    |       | 500,000                                                                                            |       |
| Net cash provided by financing activities                                              |       | 601,927                                                                     |       | 48,994                                                         |       | 1,300                                                                     |       | 652,221                                                                                            |       |
| Net Increase In  Cash and Cash Equivalents                                             |       | 173,816                                                                     |       | —                                                         |       | —                                                                    |       | 173,816                                                                                            |       |
| Cash and Cash  Equivalents, beginning of period                                        |       | —                                                                      |       | —                                                         |       | —                                                                    |       | —                                                                                             |       |
| Cash and Cash  Equivalents, end of period                                              |       | $                                                                           | 173,816    |                                                           | $          | —                                                                    |       | $                                                                                                  | —     |   | $ | 173,816 |   |
|                                                                                   |       |                                                                        |       |                                                           |       |                                                                      |       |                                                                                               |       |
| Supplemental  Cash Flow Information                                                    |       |                                                                        |       |                                                           |       |                                                                      |       |                                                                                               |       |
| Non-Cash Investing and Financing Activities Contribution  of airplane by related party |       | $                                                                      | —     |                                                           | $     | 138,825                                                                   |       | $                                                                                             | —     |   | $  | 138,825 |   |
| Conversion of  related party note payable and accrued interest to common stock         |       | $                                                                           | 506,667    |                                                           | —     |                                                                      | —     |                                                                                               | $          | 506,667 |   |
| Conversion of  contributions of cash and airplane by related party to common stock     |       | $                                                                           | 291,046    |                                                           | —     |                                                                      | —     |                                                                                               | $          | 291,046 |   |

 

See Notes to Financial Statements

 

6

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## ** **

## **NOTES TO CONSOLIDATED FINANCIAL STATEMENT***S*

**Note1.  Organization and Description ofBusiness**

Better Biodiesel,Inc., (“the Company”) is a Colorado corporation and is a “C” corporation forfederal income tax purposes.  The Companywas known as Mountain State Holdings, Inc., (“MSH”) until September 20,2006, when it was renamed in anticipation of a merger on September 29, 2006,when it acquired all of the LLC Member Units of Domestic Energy Partners, LLC,(“DEP”), a Utah limited liability corporation. The previous assets and liabilities of MSH were spun off to twostockholders in August 2006 in exchange for the return of common shares.  At the time of the acquisition of DEP, theCompany had zero assets and zero liabilities. It had 2,000,001 shares of common stock issued and outstanding carriedat zero value.

The merger of theCompany and DEP has been accounted for as a reverse merger, which is equivalentto a recapitalization of the Company. The assets and liabilities of DEP are presented in the consolidatedbalance sheets at book value.  Thehistorical operations presented in the Company’s Consolidated Statements ofOperations are those of DEP.

DEP was organizedas a limited liability corporation on May 18, 2005, although it hadcommenced operations in November 2004. Therefore, November 1, 2004, is considered to be its effective dateof inception.  DEP was organized todevelop alternative fuel sources, particularly the manufacture and distributionof bio-diesel products.  DEP has norevenues to date and has been considered a development stage company since itsinception (see Note 7).  DEP comprisesthe Company’s sole subsidiary and operations and the management of DEP and theCompany are the same.  The Company’sheadquarters is in Orem, Utah.

The consolidatedfinancial statements include the accounts of the Company and its wholly-ownedsubsidiary and all intercompany balances and transactions have been eliminated.

**Note2.  Going Concern**

The Company’sfinancial statements are prepared consistent with accounting principlesgenerally accepted in the United States applicable to a going concern, whichcontemplate the realization of assets and liquidation of liabilities in thenormal course of business.  However, asshown in the accompanying financial statements, the Company has sustainedlosses and has relied on advances and loans from owners and sales of shares ofits equity for operating capital.  Tosupport the Company’s operations for the next year, management has plans toraise between $8 and $9 million in capital by a combination of stockholderloans and private placements.  There isno assurance, however, that these sources of capital will be timely obtained onacceptable terms.

The financialstatements do not include any adjustments relating to the recoverability andclassification of recorded asset amounts and classification of liabilities thatmight be necessary should the Company be unable to continue in existence.

7

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**Note3.  Significant Accounting Policies**

This summary ofsignificant accounting policies of the Company is presented to assist inunderstanding the Company’s consolidated financial statements.  The financial statements and notes arerepresentations of the Company’s management who are responsible for theirintegrity and objectivity.  These accountingpolicies conform to accounting principles generally accepted in the UnitedStates and have been consistently applied in the preparation of the financialstatements.  The following policies areconsidered to be significant.

**Cash and Cash Equivalents**

Cash equivalentsare generally comprised of certain liquid investments with original maturitiesof less than three months.  On occasion,the Company has cash balances in excess of federal insurance limits.  No cash has ever been paid for interestexpense or income tax.

**Use of Estimates**

Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andreported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

**Financial Instruments**

TheCompany’s financial instruments consist of cash and cash equivalents, andaccounts payable and accrued expenses. The fair value of all financial instruments approximates the recordedvalue based on the short-term nature of these financial instruments.

**Property and Equipment**

Propertyand equipment are stated at cost and depreciated using the straight-line methodover their estimated useful lives.  Whenassets are disposed of, the cost and accumulated depreciation (net book valueof the assets) are eliminated and any resultant gain or loss reflectedaccordingly.  Betterments andimprovements are capitalized over their estimated useful lives whereas repairsand maintenance expenditures on the assets are charged to expense as incurred.  Property and equipment consisted of thefollowing:
| **Asset Class**                  | ** ** | **Life** | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------|------------|----------|------------|------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Airplane                              |       | 7  years |       | $                            | 138,825    |                        | $          | 138,825                     |       | $ | — |   |
| Equipment                             |       | 5  years |       | 44,158                       |       | —                      |       | —                      |       |
| Construction in  Process              |       | n/a      |       | 100,000                      |       | —                      |       | —                      |       |
| Less —  Accumulated Depreciation |       |     |       | (18,236                      | )          | (1,653                      | )          | —                      |       |
| Net Property and  Equipment           |       |     |       | $                            | 264,747    |                        | $          | 137,172                     |       | $ | — |   |

 

8

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Depreciationexpense for the nine months ended September 30, 2006, for the year endedDecember 31, 2005, and for the two months ended December 31, 2004,was $16,583, $1,653, and $0, respectively.

**Impairment of Long-Lived Assets**

Inaccordance with Statement of Financial Standards (SFAS) No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*,the Company reviews long-lived assets for impairment whenever events or changesin circumstances indicate that the carrying amount of an asset may not berecoverable.  Recoverability of assets tobe held and used is measured by a comparison of the carrying amount of an assetto future net cash flows expected to be generated by the asset.  If such assets are considered to be impaired,the impairment to be recognized is measured by the amount by which the carryingamount of the assets exceeds the fair value of the assets.  Assets to be disposed of are reported at thelower of the carrying amount or fair value less cost to sell.  The Company’s management does not believethat any of the Company’s long-lived assets were impaired as of September 30,2006.

**Revenue Recognition**

TheCompany has had no revenues to date. Sales of its product will be recognized when delivered to customers.

**Advertising**

Advertisingcosts, which are included in Marketing expense, are expensed as they areincurred.

**Research and Development**

Researchand development costs are expensed as incurred.

**Income Taxes**

TheCompany follows the liability method of accounting for income taxes.  Under this method, deferred tax assets andliabilities are determined based on differences between the financial reportingand tax basis of assets and liabilities and on the expected future tax benefitsto be derived from net operating loss carryforwards measured using current taxrates.  A valuation allowance isestablished if it is more likely than not that some portion or all of thedeferred tax assets will not be realized.

As aresult of the merger described in Note 6, at September 30, 2006, there areno material net operating tax losses available to the Company.

**Loss Per Share**

Potentialcommon shares are those issuable upon the conversion or exercise of otherpotentially dilutive securities such as preferred stock, options, andwarrants.  In these financial statementsonly basic loss per share is shown because there are no other potentiallydilutive securities issued or outstanding.

9

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Thecalculation of weighted average basic shares outstanding reflects a two-for-onereverse stock split in September 2006. The accompanying financial statements are presented on a post-splitbasis.  Basic loss per share is computedby dividing net loss by the weighted average number of common sharesoutstanding during the reporting period.

**Recent Accounting Developments**

InJune 2006, the Financial Accounting Standards Board (“FASB”) issued FASBInterpretation No. 48, *Accounting forUncertainties in Income Taxes,* (“FIN 48”).  FIN 48 clarifies the accounting for uncertaintyin income taxes and prescribes a recognition threshold and measurementattribute for the financial statement recognition and measurement of a taxposition taken or expected to be taken in a tax return.  FIN 48 is effective for financial statement asof January 1, 2007.  The Company has notyet determined the affect of applying FIN 48.

InSeptember 2006, the FASB issued Statement of Financial Accounting Standards No.157, *Fair Value Measurements* (“FAS 157”).  FAS 157 defines fair value, establishes aframework for measuring fair value and expands disclosures about fair valuemeasurements but does not require any new fair value measurements.  FAS 157 is effective for financial statementsissued for fiscal years beginning after November 15, 2007, and interimperiods within those fiscal years.  TheCompany does not believe the application FAS 157 will change its financialstatements.

InSeptember 2006, the FASB issued Statement of Financial Accounting Standards No.158, *Employers’ Accounting for Defined Benefit Pensionand Other Postretirement Plans,* (“FAS 158”).  FAS 158 requires an employer to recognize theoverfunded or underfunded status of a defined benefit postretirement plan(other than a multi-employer plan) as an asset or liability in its statement offinancial position and to recognize changes in that funded status in the yearin which the changes occur through comprehensive income.  FAS 158 is effective for financial statementsas of December 31, 2006.  TheCompany does not believe that FAS 158 will have any effect on its financialstatements.

**Note 4. Related Party Transactions**

Priorto the merger of the Company and DEP, the Company’s Chief Executive Officer,who was an LLC member of DEP, contributed net cash of $152,221 to fund theoperations of DEP and contributed an airplane valued at $138,825 to DEP.  He received common stock of the Company inthe merger in exchange for these contributions.

Anotherparty who became a stockholder of the Company in the merger loaned money to DEPunder a convertible note.  The note andthe accrued interest thereon totaling $506,667 were converted to common stockof the Company at the merger.

TwoDEP LLC members who became stockholders of the Company were paid $40,000 forconsulting services prior to the merger.

10

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**Note 5. Nonmonetary Transactions Prior to Merger**

Priorto the merger of the Company and DEP, two persons contributed future servicesand two persons contributed future services and processing development rightsto DEP in the Form of an assignment (also signed by the Company’s CEO) of anapplication for a patent on the Company’s core technology in exchange for LLCmember units.  The Company determinedthat the value of these contributions was insignificant because of the highlyspeculative nature of the DEP development process at that time.  All of these persons became stockholders ofthe Company in the merger.  The first twopersons contributing future services referred to above are the two DEP LLCmembers paid $40,000 referred to in Note 4.

**Note 6.  TheMerger and Stockholders’ Equity**

OnSeptember 29, 2006, the Company acquired all the operations of DEP in exchangefor 28,500,000 shares of the Company’s no par value common stock, as follows:

·                  5,250,000shares issued to the Company’s CEO in exchange for cash and propertycontributed to DEP;

·                  1,500,000shares issued upon conversion of note payable by DEP; and

·                  21,750,000shares issued to other parties, including LLC members of DEP

As a result ofthis merger, the Company became the sole LLC member of DEP.

As of theeffective date of inception of DEP’s development stage (November 1, 2004),the Company, then operating as MSH, had 4,000,000 shares of its common stockissued and outstanding.  InAugust 2006, two former stockholders of MSH exchanged a total of 325,000common shares for two former subsidiaries of MSH, which comprised all of theassets and liabilities of MSH.  Theremaining common stock shares of MSH were then subject to a two-for-one reversesplit, resulting in 2,000,001 shares of its common stock issued and outstandingat the time of merger.  Thesestockholders, combined with the new shares issued in the merger, comprise the30,500,001 shares of the Company’s common stock issued and outstanding atSeptember 30, 2006.  The Company isauthorized to issue a total of 200,000,000 shares of common stock.

The Company alsohas 5,000,000 shares of no par value preferred stock authorized but none isissued.  This class of stock is a “blankcheck” class in that the rights of such stock would be established at the timeof its issuance.

The Company leftin place an incentive stock option plan established by MSH in 2002 but thereare no stock grants issued or outstanding under the plan and the Company’sBoard of Directors has not allocated any stock to the plan. The Company has notissued any other stock options or warrants.

11

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A summary of theaccounting for the merger of the Company and DEP follows (in thousands):
| ** **                        | ** ** | **BBD (formerly MSH)**        | ** ** | **DEP**          | ** ** | ** **                             | ** ** | ** **                              | ** ** |
|-----------------------------------|------------|-----------------------------------------|------------|------------------|------------|----------------------------------------|------------|-----------------------------------------|------------|
| ** **                        | ** ** | **As of  9/29/06  before  merger** | ** ** | **Merger  adj.** | ** ** | **As of  9/29/06  after  merger** | ** ** | **As of  9/29/06  before  merger** | ** ** | **Merger  adj.** | ** ** | **As of  9/29/06  after  merger** | ** ** | **Consol.  Adj.** | ** ** | **BBD -  Consol.  Post-  Merger** | ** ** |
| **ASSETS:**                       |       |                                    |       |             |       |                                   |       |                                    |       |   |   |   |   |   |   |   |   |
| Current assets                    |       | $                                       | 0          |             | $          | 0                                      |       | $                                       | 0          |   | $ | 192 |   | $ | 0 |   | $ | 192 |   | $ | 0 |   | $ | 192 |   |
| PPE & other  assets           |       | 0                                       |       | 0                |       | 0                                      |       | 270                                     |       | 0 |   | 270 |   | 0 |   | 270 |   |
| Due from  subsidiary              |       | 0                                       |       | 507              |  (1)  | 507                                    |       |                                    |       |   |   |   |   | (507 | )(3) | 0 |   |
| Investment in  subsidiary         |       | 0                                       |       | (182             | )(2)       | (182                                   | )          |                                    |       |   |   |   |   | 182 |  (4) | 0 |   |
| **TOTAL  ASSETS**                 | ** ** | **$**                                   | **0**      | ** **       | **$**      | **325**                                | ** ** | **$**                                   | **325**    | ** ** | **$** | **462** | ** ** | **$** | **0** | ** ** | **$** | **462** | ** ** | **$** | **(325** | **)** | **$** | **462** | ** ** |
|                              |       |                                    |       |             |       |                                   |       |                                    |       |   |   |   |   |   |   |   |   |
| **LIABILITIES  & EQUITY:**    |       |                                    |       |             |       |                                   |       |                                    |       |   |   |   |   |   |   |   |   |
| **LIABILITIES:**                  |       |                                    |       |             |       |                                   |       |                                    |       |   |   |   |   |   |   |   |   |
| Current  liabilities              |       | $                                       | 0          |             | $          | 0                                      |       | $                                       | 0          |   | $ | 138 |   | $ | 0 |   | $ | 138 |   | $ | 0 |   | $ | 138 |   |
| Conv. note payb  to related party |       |                                    |       |             |       |                                   |       | 507                                     |       | (507 | )(1) | 0 |   | 0 |   | 0 |   |
| Advances from  parent             |       |                                    |       |             |       |                                   |       | 0                                       |       | 507 |  (1) | 507 |   | (507 | )(3) | 0 |   |
| **TOTAL  LIABILITIES**            | ** ** | **0**                                   | ** ** | **0**            | ** ** | **0**                                  | ** ** | **644**                                 | ** ** | **0** | ** ** | **644** | ** ** | **(507** | **)** | **138** | ** ** |
|                              |       |                                    |       |             |       |                                   |       |                                    |       |   |   |   |   |   |   |   |   |
| **EQUITY:**                       |       |                                    |       |             |       |                                   |       |                                    |       |   |   |   |   |   |   |   |   |
| BBD  Stockholders’ Equity:   |       |                                    |       |             |       |                                   |       |                                    |       |   |   |   |   |   |   |   |   |
| BBD Preferred  Stock              |       | 0                                       |       | 0                |       | 0                                      |       |                                    |       |   |   |   |   | 0 |   | 0 |   |
| BBD Common Stock                  |       | 0                                       |       | 507              |  (1)  | 798                                    |       |                                    |       |   |   |   |   | 0 |   | 798 |   |
|                              |       |                                    |       | 291              |  (2)  |                                   |       |                                    |       |   |   |   |   |   |   |   |   |
| BBD Retained Earnings  (Deficit)  |       | 0                                       |       | (473             | )(2)       | (473                                   | )          |                                    |       |   |   |   |   | 0 |   | (473 | ) |
| DEP Members’  Capital:       |       |                                    |       |             |       |                                   |       |                                    |       |   |   |   |   |   |   |   |   |
| DEP Contrib. by  LLC member       |       |                                    |       |             |       |                                   |       | 291                                     |       | 0 |  (5) | 291 |   | (291 | )(4) | 0 |   |
| DEP Accumulated  Deficit          |       |                                    |       |             |       |                                   |       | (473                                    | )          | 0 |   | (473 | ) | 473 |  (4) | 0 |   |
|                              |       |                                    |       |             |       |                                   |       |                                    |       |   |   |   |   |   |   |   |   |
| **TOTAL  EQUITY**                 | ** ** | **0**                                   | ** ** | **325**          | ** ** | **325**                                | ** ** | **(182**                                | **)**      | **0** | ** ** | **(182** | **)** | **182** | ** ** | **325** | ** ** |
|                              |       |                                    |       |             |       |                                   |       |                                    |       |   |   |   |   |   |   |   |   |
| **TOTAL LIAB. & EQUITY**      | ** ** | **$**                                   | **0**      | ** **       | **$**      | **325**                                | ** ** | **$**                                   | **325**    | ** ** | **$** | **462** | ** ** | **$** | **0** | ** ** | **$** | **462** | ** ** | **$** | **(325** | **)** | **$** | **462** | ** ** |

 

 
| Notes: |
|--------|
|   |   |   |   |
| 1.     | Record the conversion of the DEP convertible note  payable and accrued interest payable to 1,500,000 BBD common shares. |
|   |   |   |   |
| 2.     | Record the net book value of the net assets of DEP  on the books of BBD. |
|   |   |   |   |
| 3.     | Eliminate intercompany advances. |
|   |   |   |   |
| 4.     | Eliminate BBD’s investment in DEP. |
|   |   |   |   |
| 5.     | Contributions by LLC Member: |
|   |   |   |   |
|   | Cash - per consolidated statement of Cash Flows | $ | 152 |   |
|   |   |   |   |
|   | Contribution of airplane to DEP | 139 |   |
|   |   |   |   |
|   | Total | $ | 291 |   |

 

12

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**Note 7. Development Stage Operations**

Byvirtue of its merger with DEP, which became its sole operations, the Company isconsidered to be in the development stage in accordance with the FinancialAccounting Standards Board SFAS No. 7, *“Accounting and Reportingby Development Stage Enterprises”.* Since its inception, DEP has devoted substantially all of its time toraising capital, obtaining financing, and research and developmentactivities.  Furthermore, DEP has had norevenues and has had recurring losses since its inception.

Totalstockholders’ equity on the balance sheet includes the deficit accumulatedduring the development stage of $472,800 through September 30, 2006.

**Note 8. Commitments and Contingencies**

Futureminimum lease payments are as follows for the years ending September 30:

| 2007   |   | $      | 60,000 |   |
|--------|--------|--------|--------|--------|
| 2008   |   | 35,000 |   |
|   |   | $      | 95,000 |   |

 

**Note 9. Subsequent Events**

InNovember 2006, the Company entered into and prepaid a contract with anengineering firm for $20,000 to provide engineering services to the Company.

 

13

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**MOUNTAIN STATESHOLDINGS, INC.(Renamed Better Biodiesel, Inc.on September 20, 2006)**

**Financial Report**

**September 29, 2006**

----

**C  O N  T  E N  T  S**
|                                                              | ** ** | **Page**    | ** ** |
|--------------------------------------------------------------|------------|-------------|------------|
|                                                         |       |        |       |
| **REPORT OF INDEPENDENT  REGISTERED PUBLIC ACCOUNTING FIRM** | ** ** | **1 and 2** | ** ** |
|                                                         |       |        |       |
| BALANCE SHEET                                                |       | 3           |       |
| CONSOLIDATED  STATEMENT OF OPERATIONS                        |       | 4           |       |
| CONSOLIDATED  STATEMENT OF STOCKHOLDERS’ EQUITY         |       | 5           |       |
| CONSOLIDATED  STATEMENT OF CASH FLOWS                        |       | 6           |       |
| NOTES TO CONSOLIDATED  FINANCIAL STATEMENTS                  |       | 7 - 9       |       |

 

----

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board of DirectorsMountain States Holdings, Inc.(Renamed Better Biodiesel, Inc.)Orem, Utah

We have auditedthe accompanying balance sheet of Mountain States Holdings, Inc. renamed BetterBiodiesel, Inc., on September 20, 2006, as of September 29, 2006, andthe related consolidated statement of operations, stockholders’ equity, andcash flows for the Company and its two former subsidiaries for the period fromJanuary 1, 2006 through September 29, 2006.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.  

We conducted ouraudit in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement.  The Company has determined that it is notrequired to have, nor were we engaged to perform, an audit of its internalcontrol over financial reporting.  Ouraudit included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditprovides a reasonable basis for our opinion.

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In our opinion,the financial statements referred to above present fairly, in all materialrespects, the financial position of Mountain States Holdings, Inc., (renamedBetter Biodiesel, Inc.) as of September 29, 2006, and the consolidatedresults of the operations and cash flows for the Company and its two formersubsidiaries for the period from January 1, 2006 throughSeptember 29, 2006, in conformity with accounting principles generallyaccepted in the United States.

As discussed inNote 1, these are the financial statements of the Company showing its prioroperations, which were spun-off to two stockholders in exchange for commonshares.  All future financial statementsof the Company, under the name Better Biodiesel, Inc., will show the operationsof a new wholly-owned subsidiary it acquired on September 29, 2006.

/S/ PETERSONSULLIVAN PLLC

December 11,2006Seattle, Washington

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**MOUNTAIN STATESHOLDINGS, INC.**(RenamedBetter Biodiesel, Inc.)

BALANCE SHEETSeptember 29, 2006
| ASSETS                                                                                       |   |   |   |
|----------------------------------------------------------------------------------------------|--------|--------|--------|
|                                                                                         |   |   |   |
| Total assets                                                                                 |   | $      | — |   |
|                                                                                         |   |   |   |
|                                                                                         |   |   |   |
|                                                                                         |   |   |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                   |   |   |   |
|                                                                                         |   |   |   |
| Total  liabilities                                                                           |   | $      | — |   |
|                                                                                         |   |   |   |
| Stockholders’ Equity                                                                    |   |   |   |
| Preferred stock,  no par value, 5,000,000 shares authorized, none issued                     |   | — |   |
| Common stock, no  par value, 200,000,000 shares authorized, 2,000,001 issued and outstanding |   | — |   |
|                                                                                         |   |   |   |
| Total  stockholders’ equity                                                             |   | — |   |
|                                                                                         |   |   |   |
| Total liabilities and  stockholders’ equity                                             |   | $      | — |   |

 

See Notes to ConsolidatedFinancial Statements

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**MOUNTAIN STATESHOLDINGS, INC.**(RenamedBetter Biodiesel, Inc.)

CONSOLIDATED STATEMENT OF OPERATIONSFor the Period from January 1, 2006 through September 29, 2006
| Fees from Loan  Activities                |       | $         | 193,152      |   |
|-------------------------------------------|------------|-----------|--------------|--------|
| Cost of Loan Activities                   |       | 62,293    |         |
|                                      |       |      |         |
| Gross profit                              |       | 130,859   |         |
|                                      |       |      |         |
| Operating Expenses                        |       |      |         |
| Salaries,  payroll taxes and benefits     |       | 130,949   |         |
| Depreciation                              |       | 8,558     |         |
| Advertising and  promotion                |       | 1,281     |         |
| Rent expense                              |       | 24,300    |         |
| Other operating  expense                  |       | 74,622    |         |
|                                      |       |      |         |
| Total operating  expenses                 |       | 239,710   |         |
|                                      |       |      |         |
| Operating income  (loss)                  |       | (108,851  | )            |
|                                      |       |      |         |
| Other Income (Expenses)                   |       |      |         |
| Interest income                           |       | 124       |         |
| Interest  (expense)                       |       | (3,950    | )            |
|                                      |       |      |         |
| Total other  income (expenses)            |       | (3,826    | )            |
|                                      |       |      |         |
| **Net (Loss)**                            | ** ** | **$**     | **(112,677** | **)**  |
|                                      |       |      |         |
|                                      |       |      |         |
|                                      |       |      |         |
| Basic net loss per  common share          |       | $         | (0.05        | )      |
|                                      |       |      |         |
| Weighted average basic shares outstanding |       | 2,134,191 |         |

 

See Notes to ConsolidatedFinancial Statements

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**MOUNTAIN STATESHOLDINGS, INC.**(RenamedBetter Biodiesel, Inc.)

CONSOLIDATEDSTATEMENT OF STOCKHOLDERS’ EQUITYFor the Period from January 1, 2006 through September 29, 2006(Common stock restated to reflect two-for-one reverse split)
| ** **                                                                                         | ** ** | ** **               | ** ** | ** **            | ** ** | ** **  | ** ** | ** **      | ** ** | **Additional** | ** ** | ** **  | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|-------------|------------|-----------------|------------|----------------|------------|-------------|------------|------------|------------|
| ** **                                                                                         | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | ** **     | ** ** |
| ** **                                                                                         | ** ** | **Shares**               | ** ** | **Amount**            | ** ** | **Shares**  | ** ** | **Amount**      | ** ** | **Capital**    | ** ** | **Deficit** | ** ** | **Total**  | ** ** |
| Balance at December 31,  2005                                                                 |       | —                   |       | $                     | —     |        | 2,150,000  |            | $          | 572,455        |       | $           | 187,837    |       | $          | (573,563 | ) | $ | 186,729 |   |
|                                                                                               |       |                     |       |                  |       |        |       |            |       |           |       |        |       |       |       |
| Aug. 15, 2006 — Sale of  common stock at $0.50 per pre-split share                            |       | —                   |       | —                |       | 12,500      |       | 12,500          |       | —         |       | —      |       | 12,500     |       |
|                                                                                               |       |                     |       |                  |       |        |       |            |       |           |       |        |       |       |       |
| Net loss for the period  from January 1, 2006 through August 31, 2006                    |       | —                   |       | —                |       | —      |       | —          |       | —         |       | (112,677    | )          | (112,677   | )          |
|                                                                                               |       |                     |       |                  |       |        |       |            |       |           |       |        |       |       |       |
| Aug. 31, 2006 — Common  shares returned and cancelled in exchange for two former subsidiaries |       | —                   |       | —                |       | (162,500    | )          | (584,955        | )          | (187,837       | )          | 686,240     |       | (86,552    | )          |
|                                                                                               |       |                     |       |                  |       |        |       |            |       |           |       |        |       |       |       |
| Sept. 29, 2006 — Share  arising in stock split                                                |       | —                   |       | —                |       | 1           |       | —          |       | —         |       | —      |       | —     |       |
|                                                                                               |       |                     |       |                  |       |        |       |            |       |           |       |        |       |       |       |
| Balance at September 29, 2006                                                                 |       | —                   |       | $                     | —     |        | 2,000,001  |            | $          | —         |       | $           | —     |       | $          | — |   | $ | — |   |

 

See Notes to ConsolidatedFinancial Statements

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**MOUNTAIN STATESHOLDINGS, INC.**(RenamedBetter Biodiesel, Inc.)

CONSOLIDATEDSTATEMENT OF CASH FLOWSFor the Period from January 1, 2006 through September 29, 2006
| Cash Flows From  Operating Activities                                         |   |    |     |
|-------------------------------------------------------------------------------|--------|---------|----------|
| Net loss                                                                      |   | $       | (112,677 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities   |   |    |     |
| Depreciation                                                                  |   | 8,558   |     |
| Changes in  operating assets and liabilities                                  |   |    |     |
| Increase in  prepaid expenses                                                 |   | (28     | )        |
| Increase in  accounts payable, accrued expenses and other current liabilities |   | 31,864  |     |
|                                                                          |   |    |     |
| Net cash used in  operating activities                                        |   | (72,283 | )        |
|                                                                          |   |    |     |
| Cash Flows From  Financing Activities                                         |   |    |     |
| Payments on  capital leases and line of credit                                |   | (10,030 | )        |
| Proceeds from  sale of common stock                                           |   | 12,500  |     |
| Cash distributed  to stockholders in sale of subsidiaries                     |   | (12,653 | )        |
|                                                                          |   |    |     |
| Net cash used in  financing activities                                        |   | (10,183 | )        |
|                                                                          |   |    |     |
| Net Decrease In Cash  and Cash Equivalents                                    |   | (82,466 | )        |
|                                                                          |   |    |     |
| Cash and Cash  Equivalents, beginning of period                               |   | 82,466  |     |
|                                                                          |   |    |     |
| Cash and Cash  Equivalents, end of period                                     |   | $       | —   |   |
|                                                                          |   |    |     |
|                                                                          |   |    |     |
|                                                                          |   |    |     |
| Interest paid on a cash  basis                                                |   | $       | 3,950    |   |
|                                                                          |   |    |     |
| Income tax paid on a cash basis                                               |   | $       | —   |   |

 

See Notes to ConsolidatedFinancial Statements

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**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**Note 1.  Organization and Description of Business**

Mountain States Holdings, Inc. (“the Company”) is aColorado corporation and is a “C” corporation for federal income taxpurposes.  The Company was renamed BetterBiodiesel, Inc. (“BBD”) on September 20, 2006, in anticipation of a mergeron September 29, 2006, when it acquired all of the LLC Member Units of DomesticEnergy Partners, LLC, (“DEP”), a Utah limited liability corporation.  The Company had two wholly-owned subsidiariescomprising all of its assets and liabilities. These subsidiaries were spun off to two stockholders on August 31,2006, in exchange for the return of common shares.  At the time of the acquisition of DEP, theCompany had zero assets and zero liabilities. It had 2,000,001 shares of common stock issued and outstanding carriedat zero value.

The statements of operations, stockholders’ equity,and cash flows in the financial statements show the consolidated results of theCompany through the date of the spin-off of its two former subsidiaries, withall intercompany transactions eliminated. The Company had no operations after August 31, 2006, throughSeptember 29, 2006.  The balancesheet in the financial statements is for the Company after the spin-off,immediately prior to its acquisition of DEP.

These are the final financial statements of theCompany showing its prior operations. All future financial statements, prepared under the name BBD, will showthe operations of DEP as its new wholly-owned subsidiary.

**Note 2.  Significant Accounting Policies**

As of the balance sheet date, the Company had noassets, liabilities, or operations.  Ithad shares of common stock issued and outstanding but carried at zerovalue.  Consequently, the only significantaccounting policies applicable to the Company are set forth below.

**Income Taxes**

As a result of the merger described in Note 1, atSeptember 29, 2006, there are no material net operating tax lossesavailable to the Company.

**Loss Per Share**

Potential common shares are those issuable upon theconversion or exercise of other potentially dilutive securities such aspreferred stock, options, and warrants. In these financial statements, only basic loss per share is shown becausethere are no other potentially dilutive securities issued or outstanding.

The calculation of weighted average basic sharesoutstanding reflects a two-for-one reverse stock split inSeptember 2006.  The accompanyingfinancial statements are presented on a post-split 

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basis.  Basicloss per share is computed by dividing net loss by the weighted average numberof common shares outstanding during the reporting period.

**Recent AccountingDevelopments**

In June 2006, the Financial Accounting Standards Board(“FASB”) issued FASB Interpretation No. 48, *Accounting forUncertainties in Income Taxes,* (“FIN 48”).  FIN 48 clarifies the accounting foruncertainty in income taxes and prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return.  FIN 48 is effective for financial statementsas of January 1, 2007.  The Company hasnot yet determined the effect of applying FIN 48.

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 157, *Fair Value Measurements*(“FAS 157”).  FAS 157 defines fair value,establishes a framework for measuring fair value and expands disclosures aboutfair value measurements but does not require any new fair value measurements.  FAS 157 is effective for financial statementsissued for fiscal years beginning after November 15, 2007, and interimperiods within those fiscal years.  TheCompany does not believe the application FAS 157 will change its financialstatements.

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 158, *Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans,* (“FAS 158”).  FAS 158 requires an employer to recognize theoverfunded or underfunded status of a defined benefit postretirement plan(other than a multi-employer plan) as an asset or liability in its statement offinancial position and to recognize changes in that funded status in the yearin which the changes occur through comprehensive income.  FAS 158 is effective for financial statementsas of December 31, 2006.  TheCompany does not believe that FAS 158 will have any effect on its financialstatements.

**Note 3.  Related Party Transactions**

In August 2006, all of the Company’s assets andliabilities resided in two wholly-owned subsidiaries that were spun-off to twostockholders, one of whom was the former CEO of the Company, in exchange for162,500 shares of the Company’s common stock.

**Note 4.  Stockholders’ Equity**

As of September 29, 2006, after the spin-off ofthe Company’s subsidiaries described in Note 3 and immediately prior tothe merger described in Note 1, the Company had 2,000,001 shares of its commonstock issued and outstanding.  TheCompany is authorized to issue a total of 200,000,000 shares of common stock.

The Company also has 5,000,000 shares of no par valuepreferred stock authorized but none is issued. This class of stock is a “blank check” class in that the rights of suchstock would be established at the time of its issuance.

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Following the merger described in Note 1, the Companyleft in place an incentive stock option plan established in 2002.  No stock grants have been issued under theplan and the Company’s Board of Directors has not allocated any stock to theplan.  The Company has no other stockoptions or warrants issued or outstanding.

**Note 5.  Subsequent Events**

As described in Note 1, on September 29, 2006,the Company merged with DEP.  This mergeris described in more detail in the financial statements for the Company, underthe name BBD, as of September 30, 2006, and for the period fromNovember 1, 2004 through that date.

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned; thereunto duly authorized, inthe City of Orem, Utah on December 29, 2006.

 
|        |   | Registrant             |
|--------|--------|------------------------|
|   |   |                   |
|   |   | BETTER BIODIESEL, INC. |
|   |   |                   |
|   |   | By:                    | /s/ Ron Crafts |
|   |   |                   | Ron Crafts |
|   |   |                   | Chairman, Chief Executive Officer and Chief  Financial Officer |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of Registrant and in the capacities indicated on December 29,2006.
| Signature            | ** ** | **Title**                                                      |
|----------------------|------------|----------------------------------------------------------------|
|                 |       |                                                           |
| /s/ Ron Crafts       |       | Chairman, Chief Executive Officer and Chief  Financial Officer |
| Ron Crafts           |       |                                                           |
|                 |       |                                                           |
| /s/ John Crawford    |       | President, Chief Technology Officer and Director               |
| John Crawford        |       |                                                           |
|                 |       |                                                           |
| /s/ Peter Kristensen |       | Vice President of Corporate Development and Director           |
| Peter Kristensen     |       |                                                           |
|                 |       |                                                           |
| /s/ Briton McConkie  |       | Vice President of Business Development and Director            |
| Briton McConkie      |       |                                                           |
|                 |       |                                                           |
| /s/ David M. Otto    |       | Director and General Securities Counsel                        |
| David M. Otto        |       |                                                           |

 

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**EXHIBITINDEX**
| Exhibit  No. | ** ** | **Description**                                                                                                                                                    | ** ** | **Location**                                                                                       |
|--------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|
|         |       |                                                                                                                                                               |       |                                                                                               |
| 3(i)         |       | Articles of Incorporation of Slam Dunk Enterprises,  Inc.                                                                                                          |       | Incorporated by reference to Exhibit 3 of the  Company’s Form SB-2 filed August 9, 2001       |
|         |       |                                                                                                                                                               |       |                                                                                               |
| 3(ii)        |       | Bylaws                                                                                                                                                             |       | Incorporated by reference to Exhibit 3 of the  Company’s Form SB-2 filed August 9, 2001       |
|         |       |                                                                                                                                                               |       |                                                                                               |
| 3.1          |       | Articles of Amendment to the Articles of  Incorporation of Slam Dunk Enterprises, Inc. changing name to Mountain States  Lending, Inc.                             |       | Incorporated by reference to Exhibit 3.1 of the  Company’s Form SB-2 filed August 9, 2001     |
|         |       |                                                                                                                                                               |       |                                                                                               |
| 3.2          |       | Articles of Incorporation of Mountain Eagle Homes,  Inc.                                                                                                           |       | Incorporated by reference to Exhibit 3.2 of the  Company’s Form SB-2 filed August 9, 2001     |
|         |       |                                                                                                                                                               |       |                                                                                               |
| 3.3          |       | Articles of Amendment to the Articles of  Incorporation of Mountain States Lending, Inc., including a name change to Mountain  States Holdings, Inc.               |       | Incorporated by reference to Exhibit 3.3 of the  Company’s Form 10-KSB filed March 31, 2003   |
|         |       |                                                                                                                                                               |       |                                                                                               |
| 3.4          |       | Articles of Amendment to the Articles of  Incorporation of Mountain States Holdings, Inc.                                                                          |       | Incorporated by reference to Exhibit 3.4 of the  Company’s Form 10-KSB filed April 17, 2004   |
|         |       |                                                                                                                                                               |       |                                                                                               |
| 4.1          |       | Promissory Note issued to Sausalito Capital Partners  I, LLC                                                                                                       |       | Attached                                                                                           |
|         |       |                                                                                                                                                               |       |                                                                                               |
| 4.2          |       | Security Agreement issued to Sausalito Capital  Partners I, LLC                                                                                                    |       | Attached                                                                                           |
|         |       |                                                                                                                                                               |       |                                                                                               |
| 4.3          |       | Form of Subscription Agreement for Common Stock                                                                                                                    |       | Incorporated by reference to Exhibit 10.1 of the  Company’s Form 8-K filed September 5, 2006  |
|         |       |                                                                                                                                                               |       |                                                                                               |
| 10.1         |       | Share Exchange Agreement by and among Mountain  States Holdings, Inc. and Domestic Energy Partners, LLC and the security  holders of Domestic Energy Partners, LLC |       | Incorporated by reference to Exhibit 10.1 of the  Company’s Form 8-K filed September 5, 2006  |
|         |       |                                                                                                                                                               |       |                                                                                               |
| 10.2         |       | REDD Engineering Engagement                                                                                                                                        |       | Attached                                                                                           |
|         |       |                                                                                                                                                               |       |                                                                                               |
| 10.3         |       | Assignment of Intellectual Property                                                                                                                                |       | Attached                                                                                           |
|         |       |                                                                                                                                                               |       |                                                                                               |
| 16.1         |       | Letter re change in certifying accountant                                                                                                                          |       | Incorporated by reference to Exhibit 16.1 of the  Company’s Form 8-K/A filed October 30, 2006 |
|         |       |                                                                                                                                                               |       |                                                                                               |
| 21.1         |       | Subsidiaries of Better Biodiesel                                                                                                                                   |       | Attached                                                                                           |

 

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| 31.1   |   | Certification of CEO pursuant to Section 302 of the  Sarbanes-Oxley Act         |   | Attached |
|--------|--------|---------------------------------------------------------------------------------|--------|----------|
|   |   |                                                                            |   |     |
| 31.2   |   | Certification of CFO pursuant to Section 302 of the  Sarbanes-Oxley Act         |   | Attached |
|   |   |                                                                            |   |     |   |
| 32     |   | Certification of CEO and CFO pursuant to Section 906  of the Sarbanes-Oxley Act |   | Attached |   |

 

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