SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-KSB
 (Mark
one)
 x
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934  For the Fiscal Year Ended June 30,
  2007
 OR
   ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 Commission
File No.  0-15474
 
 
  AMERALIA,
INC.
 (Exact
name of Company as specified in its charter)
 
 Utah
              87-0403973(State
      or other jurisdiction of Incorporation or organization)
              (I.R.S.
      Employer Identification No.)
 
 9233 Park Meadows Dr, Suite
431, Lone Tree, Colorado 80124
 (Address
of Principal Executive Offices)
 
 Company's
      telephone number, including area code:
              (720)
      876-2373Company’s
      Web Page:
              www.ameralia.comSecurities
      registered pursuant to Section 12(b) of the Act:
              None.Securities
      to be registered pursuant to Section 12(g) of the
  Act:
 
 Common Stock - $.01 Par
Value
 (Title of
Class)
 
 Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
 Yes x     No
 ̈
 
 Check if
disclosure of delinquent filers in response to Item 405 of Regulation S-B is not
contained in this form, and no disclosure will be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
  ̈
 
 Revenues
      for the fiscal year ending June 30, 2007:
              $16,951,997
 
 As of
July 2, 2008, the number of shares outstanding of the company's $.01 par value
common stock was 17,298,507. Aggregate market value of the voting stock held by
non-affiliates of AmerAlia as of July 2, 2008 was approximately
$5,945,790.  The estimate is based on the last sale price per share
and 6,995,047 shares held by non-affiliates.
 
 Documents
incorporated by reference:  See Item 13.
  
  Forward Looking
Statements
 
 AmerAlia’s
future conduct depends on a number of factors beyond our control, so we cannot
assure you we will be able to conduct AmerAlia’s operations as we contemplate in
this report.  This report contains various statements using the terms
“may”, “expect to”, and other terms denoting future
possibilities.  They are forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995.  We cannot
guarantee the accuracy of these statements as they are subject to a variety of
risks beyond our ability to predict or control.  These risks may cause
actual results to differ materially from the projections or estimates contained
in this report.  These risks are discussed at the end of Item 1(b) and
may be identified from time to time in our filings with the Securities and
Exchange Commission.
 
 Cautionary
Note to US Investors - The United States Securities and Exchange Commission
(SEC) limits disclosure for U.S. reporting purposes to mineral deposits that a
company can economically and legally extract or produce. The reader is cautioned
that the terms "resource," "indicated" and "inferred" are not terms recognized
by SEC guidelines for disclosure of mineral properties.
  
  TABLE OF CONTENTS
 
 Item
              
              PagePART
      11.
              Description of Business
              1Our Sodium Leases
              3Our Sodium Bicarbonate Business
              7Our Water Rights
              11Our Financing Arrangements
              16Our Recapitalization Plan
              21Risk Factors
              212.
              Description of Properties
              243.
              Legal Proceedings
              244.
              Submission of Matters to a Vote of
      Securityholders
              24PART
      115
              Market for Company’s Common Equity and Related Stockholder
      Matters
              256.
              Management’s Discussion and Analysis or Plan of
      Operation
              267.
              Financial Statements
              308.
              Changes in and Disagreements on Accounting and Financial
      Disclosure
              308A
              Controls and Procedures
              308B.
              Other Information
              30PART
      1119.
              Directors, Executive Officers, Promoters and Control Persons;
      Compliance with Section 16(a) of the Exchange Act
              3110.
              Executive Compensation
              3411.
              Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
              3912.
              Certain Relationships and Related Party
      Transactions
              4113.
              Exhibits and Reports on Form 8-K
              4414.
              Principal Accountant Fees and Services
              47SIGNATURESConsolidated Financial Statements
              F-1
  Table of Contents
  PART
I
 
 ITEM
      1.
              DESCRIPTION OF
BUSINESS
 
 (a)
              Business
      Development
 
 AmerAlia,
Inc. was incorporated in Utah on June 7, 1983 as Computer Learning Software,
Inc. and renamed AmerAlia, Inc. in January 1984.  When we use the term
“We” or “AmerAlia” in this annual report, we are referring to AmerAlia, Inc. and
its wholly-owned subsidiary, Natural Soda Holdings, Inc. (“NSHI”).  We
are also referring to Natural Soda, Inc. (“NSI”) which was a wholly owned
subsidiary of NSHI until May 31, 2007 when NSHI’s ownership was reduced to 46.5%
in settlement of various debt obligations as discussed more fully
below.
 
 AmerAlia
is a listed public company in a financial partnership with private equity funds
to develop natural resources.  We own Bureau of Land Management
(“BLM”) leases in Colorado covering very large deposits of naturally occurring
sodium bicarbonate.  We also own various water rights and our sodium
leases also cover deposits of oil shale to which we do not currently have
title.  Our business is to produce and sell natural sodium
bicarbonate, commonly known as baking soda, for use in a wide variety of
products and activities and to profitably further utilize our natural
resources.  Our immediate objective is to be a low cost producer of
sodium bicarbonate and related products.  Our longer term objectives
are to utilize our extensive water rights and to gain title to the oil shale
resources.
 
 We own
the largest BLM leases in the Piceance Creek basin which contains the largest
known deposits of naturally occurring sodium bicarbonate in the
world.  Our leases are located near the depositional center of the
Piceance Creek basin where the nahcolite beds are thickest and most
concentrated. Consequently, we believe our deposits are unique and capable of
producing sodium bicarbonate and related sodium products for many
generations.
 
 We have
water rights in the Piceance Creek basin, a part of the Colorado River drainage
system.  These various rights allow us under certain circumstances to
draw up to a maximum of 108,812 acre feet (35.46 million gallons) annually and
to store up to 7,980 acre feet of water.  These rights may never be
fully utilized for various reasons including the availability of sufficient
water, however, while subject to numerous limitations and conditions our water
rights can provide water far in excess of the current or future needs of the
sodium bicarbonate operations. We believe that these water rights can generate a
future revenue stream and have increasing value, especially as any prospective
development of the oil shale resources of the Piceance Creek basin may require
large volumes of water.
 
 As
discussed below, deposits of oil shale are contained within our sodium
leases.  We do not have any rights to this resource but we plan to
apply for title to all or part of the oil shale that is contained within the
boundaries of our leases.  Shell Frontier Oil & Gas Co. has three
research, development and demonstration leases adjacent to our sodium
leases.  A Shell fact sheet, “Shell Exploration & Production
Technology - to secure our energy future – Mahogany Research Project” reports an
estimated potential recovery rate of up to one million barrels of oil per
surface acre.  We plan to independently determine possible recovery
rates and to develop a plan to recover oil from the resource contained within
our sodium leases.
 
 In 1989
we acquired an interest in, and subsequently, in 1992, acquired a BLM lease
known as the Rock School lease in Rio Blanco County, Colorado and devoted a
number of years of research, development and permitting activity to bring that
lease into production.  In 2001, the BLM renewed the lease for a
further ten years.  Initially, we planned to produce sodium
bicarbonate through building a solution mining and recovery facility on our Rock
School lease.  We entered into agreements to design and fabricate a
processing plant and commenced the construction of equipment.
 
 However,
in February 2003 NSI, our then wholly owned subsidiary, successfully completed
the acquisition of the business operations of a company owning adjoining leases
already in production.  NSI purchased the assets and certain related
contracts held by White River Nahcolite Minerals, LLC (“WRNM”) and IMC Chemicals
Inc. (“IMC”).  This provided us access to an existing customer base,
production facilities and very substantial additional deposits of
nahcolite.  It also gave us ownership of very substantial
unconditional and conditional water rights.   We plan to use the
equipment and plans we have already developed to expand our production
capacity.
  1
 Table of Contents
  Our
acquisition was financed by Sentient Global Resource Fund I, LP and Sentient
Global Resource Trust No. 1 of George Town, Grand Cayman, Cayman
Islands.  Sentient Asset Management, the manager of these funds, is an
international private equity group specializing in the development of natural
resources.  This financing was initially provided short-term but was
converted into long term funding at the financial closing completed March 19,
2004.
  
  Figure 1: Natural Soda's Plant Operations, Rifle,
Colorado
  In May
2007, these Sentient interests were transferred to a new Sentient affiliate
known as Sentient USA Resources Fund, LP (“Sentient I” and, collectively, the
“Sentient Entities”) and Sentient I then exercised its rights to exchange some
of its debt securities issued by NSHI and NSI for 53.5% of the outstanding
common stock of NSI.  AmerAlia owns all the outstanding stock of
NSHI.  The Sentient Entities hold a security interest in all the
outstanding NSHI common stock and the NSI shares owned by NSHI as collateral for
the repayment of its loans.
 
 In August
2007, another Sentient affiliate, Sentient USA Resources Fund II (“Sentient
II”), a Delaware limited partnership, acquired 7,929,820 shares of AmerAlia
common stock from the Jacqueline Badger Mars Trust (the “Mars Trust”), our
previous major shareholder, and also acquired additional debt securities
previously due to the Mars Trust and to the Bank of America.
 
 In
addition, Sentient II advanced a loan of $350,000 to AmerAlia in August
2007.  This loan and accrued interest is due July 31, 2008 and has a
right to convert into AmerAlia common stock at 36 cents per share.  We
have been continuing our discussions with Sentient and other creditors to
recapitalize our company and its subsidiaries.  Bringing these
restructuring discussions to definitive agreement firstly requires that we file
this annual report so we do not know what the outcome of these discussions and
negotiations will be.  Meanwhile we have agreed to some interim
funding arrangements with various Sentient funds:
 
 1.
              Effective
      as of October 31, 2007, Sentient I acquired from NSI its $750,000 Series A
      Secured debenture and accrued interest of
  $271,215.75.
 2.
              Effective
      as of March 31, 2008, Sentient Global Resources Fund III LP (“Sentient
      III”) purchased AmerAlia’s rights to outstanding interest due on its
      Series A Secured 10% Debentures for $1,406,875. AmerAlia used these funds
      for the purpose of paying some of the outstanding interest owed to the
      holders of its Series A Debenture Secured promissory
      notes.  Sentient III also acquired Sentient I’s rights to
      interest owed on its Series A debentures, including the interest due on
      the debenture previously owned by NSI, for $2,076,334.20;
    and
 3.
              In
      May 2008 Sentient I loaned AmerAlia $465,000 for the purpose of
      contributing capital to NSHI which, in turn contributed $465,000 to NSI as
      its proportionate share of $1,000,000 raised by NSI for well field
      development expenditures.
  2
 Table of Contents
  Finally
in June 2008, we issued another promissory note to Sentient III for $300,000 at
6% per annum interest repayable on July 31, 2008 to enable us to access funds to
pay ordinary trade payables as approved by Sentient III.  We borrowed
$80,000 to pay audit fees.  In June we were also advised that Sentient
III had acquired the promissory note for $1,200,000 we had issued to US Filter
that had since been assigned to HPD, LLC.   As a material
inducement to Sentient III to acquire the note, HPD agreed to provide Sentient
III (or its nominee) with up to $600,000 of discounts on any contracts awarded
by Sentient III or its nominee to HPD for the supply of equipment or services
within a twelve month period of acquiring the note.
 
 (b)
              Business
      of Issuer
 
 Our
business is to profitably create value through the sale of a range of natural
products initially derived from the recovery of our natural sodium resources,
the utilization of our water rights and to seek title to oil shale resources
intermingled with our sodium resource.  These resources are located in
the Piceance Creek Basin in North West Colorado.
 
 
 GENERAL
DISCUSSION
 
 1.
              OUR
      SODIUM LEASES
 
 Our Sodium Leases and
Operations
 
 Nahcolite,
a naturally occurring mineral form of sodium bicarbonate, is only known to exist
in large quantities in the Piceance Creek basin in northwest
Colorado.  Access to these deposits is governed by the BLM, a part of
the Department of Interior, which has granted some leases to allow recovery of
the sodium bicarbonate.  NSI owns four sodium leases, collectively
known as the Wolf Ridge Mining Unit, and NSHI owns the adjoining Rock School
lease.
 
 The
geology of the Piceance Creek basin has been described and discussed in two
reports.  In March 1983, Rex D. Cole, Ph.D. Consulting Geologist,
Grand Junction, Colorado, issued a report “Geologic Framework of Federal Sodium
Lease C-0118326, Piceance Creek Basin, Colorado”.  The lease to which
Cole refers (C-0118326) is
the Wolf Ridge lease, one of the four leases comprising the Wolf Ridge Mining
Unit.  Since the preparation of this report our company and its
predecessor entities have gained extensive mining and geological experience with
the resource, however, the Cole report remains a primary credible general
reference on the resource.  On Page 3 of “Summary and Conclusions” the
report states “Total nahcolite resources for the lease area are between 6 and 8
billion tons.”  We own four sodium leases of which the Wolf Ridge
lease is one; therefore, our holdings extend beyond the particular lease to
which Cole refers.However, only a portion of
the resource will be recoverable.
 
 Also on
Page 3 “Summary and Conclusions” the report states “Shale-Oil resources for the
Saline zone under the lease are between 12 and 14 billion barrels.” This does
not include any provision for additional oil shale that might be expected to
exist under the Rock School lease and the other Wolf Ridge
leases.  Only a portion of the shale oil resource will be recoverable
and the extent of the recoverable shale oil is currently unknown.
 
 A second
report by Cole, Daub & Weston entitled “Review of Geology, Mineral
Resources, and Ground-Water Hydrology of the Green River Formation,
North-Central Piceance Creek Basin, Colorado” was published by the Grand
Junction Geological Society, Grand Junction, Colorado, in 1995.  The
authors state “...subsequent drilling established that the world’s largest
deposits of naturally occurring sodium bicarbonate (nahcolite) are present in
the Piceance Creek basin” and “...the estimated in-situ resources of nahcolite and
dawsonite are placed at 29 and 19 billion tons, respectively”.
 
 In
December 2004, Darling Environmental & Survey, Minerals Division (“Darling”)
assessed our resources in accordance with the exacting Joint Ore Reserves
Committee Code (“JORC”) of The Australian Institute of Mining and Metallurgy,
Australian Institute of Geoscientists and Minerals Council of Australia. Under
the JORC code resources are assessed as Inferred Resources, Measured Resources
and Reserves.
  3
 Table of Contents
  
  Figure 2: AmerAlia's Sodium Leases are
located
 about 54 miles northwest of Rifle,
Colorado
  The
report was prepared by Mr. John Mears who is a “competent person” under rule 10
of the JORC code, with the assistance of Ted Brennan & Associates,
Geologists.  They evaluated the Boise Bed that is under the Wolf Ridge
lease. They concluded, amongst other things that “The current data distribution
found within the Piceance Creek Basin of Colorado allows for a large Inferred
Resource. The current data suggests that the localized distribution of nahcolite
within the Boies Bed immediately surrounding the current plant site and within
the lease area is 80 million metric tons at a grade of 65.0
percent.”
 
 These
documents prepared by independent parties indicate that we own a substantial
proportion of the largest known commercial deposits of nahcolite in the
world.  Currently, we expect to produce approximately 100,000 tons per
year from a resource that can fulfill all the company’s expected production
needs into the foreseeable future.
 
 Our
leases are located near the depositional center of the Piceance Creek basin
where the nahcolite beds are thickest with the highest concentration of
nahcolite. The Wolf Ridge Mining Unit leases issued to NSI cover a total of
8,223 acres.  When combined with the Rock School lease issued to NSHI,
we own leases covering a total of 9,543 acres.  The only other sodium
leases issued by the BLM in the Piceance Creek basin, covering a total of 7,142
acres, are the Yankee Gulch lease, previously owned by American Soda and then
owned by Solvay Chemicals (“Solvay”), and the Nielsen-Juhann-Hogle lease, now
owned by Shell Frontier Oil & Gas Co. (“Shell”).  Solvay shut down
the operations on its lease because it could not economically transport the
recovered liquor to Parachute to produce sodium carbonate and sodium
bicarbonate. It has since sold its facilities located on the Yankee Gulch lease.
The Nielsen-Juhann-Hogle lease requires extensive government approvals before it
can be brought into production.  It follows that we have the largest
available resource of nahcolite in the Piceance Creek basin.
 
 Unique to
the NSI leases is the Boies Bed, an interval that, while variable, averages
approximately 30 feet thick and contains over 65% nahcolite located at an
approximate depth of 1,900 feet.  During the last fifteen years NSI
and its predecessors have been solution mining nahcolite from horizontal
cavities in the Boies Bed, the richest and most economically recoverable bed of
nahcolite in the Piceance Creek basin.  This has the advantage of
being a proven technology.
  4
 Table of Contents
  Our
operations to recover sodium products from these leases are governed by a BLM
approved mine plan.  Currently, we are recovering sodium bicarbonate
from two cavities for which we have authority, as of April, 2008, to recover up
to approximately 430,000 tons of sodium bicarbonate. The BLM will allow us to
mine an additional 208,000 tons from the two cavities.  Therefore, we
currently have approval to recover approximately 638,000 tons from our
resource.  Our plant has been able to produce approximately 100,000
tons per year and our current cavities have a capacity, if they function as
planned, to provide several years supply.  However, from time to time
the amount of the sodium bicarbonate in the brine and the recovery rate from the
cavities can and do vary which causes lower production rates.  To
ensure a reliable supply of feed liquor we plan to install more
cavities.  We discuss more fully our plans for these cavities below at
“Production cavities and solution mining”.
 
 Each of
the four Wolf Ridge leases and the Rock School lease was renewed effective July
1, 2001 for a ten year term with a preferential right to subsequent renewals
provided that sodium is being produced in paying quantities.  Under
the unit agreement, production in paying quantities from one lease is sufficient
to extend all four WRNM leases.  The leases bear a production royalty
payable to the federal government of 2.0% of the gross value of the production
exiting the processing plant.  Each of these leases contains covenants
to protect the in situ oil shale, water, and historical resources. We believe
BLM general practice is that the conduct of our activities will be sufficient to
enable lease renewals.  In order to renew the Rock School lease we may
have to undertake some additional development of that lease.
 
 Our Processes &
Strategic Advantage
  Traditionally,
sodium bicarbonate is manufactured chemically from soda ash, however, we recover
our natural sodium bicarbonate using solution mining which we believe gives us
significant production cost advantages over chemically manufactured
product.  Solution mining requires pumping hot water approximately
1,900 feet underground, dissolving the mineral and bringing the saturated liquid
to the surface where we recrystallise the sodium bicarbonate as a fine white
crystalline powder.
  
  Figure 3: A general illustration of the solution
mining process
  5
 Table of Contents
  Products & Other
Potential Uses
 
 Sodium
bicarbonate is used as a component in animal feed, human food, pharmaceutical
and industrial applications, especially as an environmentally benign cleaning
agent. Sodium bicarbonate can also be used as an agent for flue gas
desulfurization, a market that may expand in the future.
 
 Currently,
the oil shale in the Piceance Creek basin is the subject of considerable
interest as a result of increasing oil prices.  This could open
significant new markets for water and for an expanded range of natural sodium
products.  If so, our proximity to the oil shale industry may become
an advantage whereas our remoteness from some of our sodium bicarbonate
customers has been a disadvantage.
 
 Electrolysis
of sodium bicarbonate produces caustic soda and hydrogen.  Hydrogen
could be sold to the oil shale industry to hydrogenate its heavy oils extracted
from oil shale to produce lighter oils.  Caustic soda is a widely used
chemical that can be sold in solution or recrystallized and
packaged.  Caustic soda could be expected to be used locally for water
treatment and air pollution control for the oil shale industry.
 
 Electrolysis
of salt produces caustic soda and chlorine.  Chlorine can be
hydrogenated to produce hydrochloric acid.  While there are salt mines
in Kansas there are no nearby caustic soda production facilities in
Colorado.  These are proven technologies.
 
 The
recovery of sodium chloride, which is interspersed with our sodium bicarbonate
reserves, potentially enables production of ancillary animal feed
supplements.  It would remove the risk of salt contamination in sodium
bicarbonate production and improve operating efficiencies through reduced energy
costs.
 
 Salt
production could also be used for high value water softening treatment products,
however this would require coal fired power generation sourcing coal from the
Meeker area that could also potentially reduce energy costs in sodium
bicarbonate and salt production.
 
 Consequently,
while we do not have any plans to utilize our sodium resources beyond our
current production of sodium bicarbonate, we remain conscious that there is a
variety of alternative products we could produce and we shall pursue these
opportunities when we determine they can be realistically
accomplished.  If an oil shale industry emerges in the Piceance Creek
basin then the development of these opportunities may become more
favorable.
 
 Oil
Shale Lease Application
 
 The
Energy Policy Act of 2005 directed the Task Force on Strategic Unconventional
Fuels to make recommendations and develop an integrated program to coordinate
and accelerate the development of fuels from domestic unconventional fuels
resources.  The Task Force found in February, 2007:
 
 “Global
and domestic demand for crude oil and refined products continues to expand,
driven by rapid economic growth in developing economies and domestic consumer
habits.  At the same time, finding and producing oil reserves to meet
rising demand is increasingly difficult and costly.  Companies are
failing to replace produced reserves, shrinking the world’s conventional oil
reserves base.  Excess production capacity is also shrinking, reducing
the ability to supply disruptions, increasing price volatility, and driving up
prices.  Domestic crude oil production is declining as demand rises,
increasing our dependence on imports of oil and refined
products..........Increasingly, oil and refined products must be imported from nations
unfriendly to the United States or threatened by political instability, reducing
the security and reliability of supplies critical to our economy, our military,
and our national security.” (Page ES-1).
 
 “Oil
shale is extremely well suited for producing premium quality refinery feedstocks
for diesel and jet fuels.  The manufacturing processes can also yield
significant quantities of value-added chemical by-products.......America’s
commercial quality oil shale resources exceed 2 trillion barrels, including
about 1.5 trillion barrels of oil equivalent in high quality shales concentrated
in the Green River Formation in Colorado, Utah and Wyoming.” (Page
I-16).
  6
 Table of Contents
  In 2006
the BLM issued five oil shale research leases adjacent to our sodium bicarbonate
operations.  Three of these leases were issued to Shell Frontier Oil
& Gas Co, as mentioned above.  It is expected that the US
Government will evaluate the results achieved by existing holders of these
research leases before any commercial leases will be issued.
 
 We intend
to apply for an oil shale research or commercial lease covering a part or all of
the areas contained within our sodium leases.  Commercial leases are
not presently available from the Department of Interior, however, the department
is drafting regulations that may permit multi mineral leasing and may enable us
to apply for a research and/or a commercial lease.  When or if
regulations are promulgated NSI, either on its own or in conjunction with
others, intends to apply for a commercial lease.  At present, the
policy of the US Government and the lack of regulations preclude NSI from
applying for an oil shale lease.
 
 The
contribution to world energy usage by oil shale is currently minimal compared to
resources like coal and petroleum and there is no guarantee that oil can be
economically recovered from oil shale.
 
 
 2.
              OUR
      SODIUM BICARBONATE
BUSINESS
 
 NSI
conducts our sodium bicarbonate business.  Since May 2007, our direct
subsidiary, NSHI, owns 46.5% of the outstanding common stock of NSI, the
remaining 53.5% is now owned by the Sentient Entities.
 
 Description
of the WRNM Acquisition
 
 Since
1992, various companies have owned and operated a production facility situated
on sodium leases adjoining our Rock School lease.  In February 2003,
NSI acquired all of the assets and all of the liabilities related to this
business for a total purchase price of $20.6 million. This provided us access to
a very large deposit of nahcolite and exclusive ownership of the desirable Boies
Bed described above.  In addition, we acquired substantial conditional
and unconditional water rights in the area.  IMC and WRNM assigned to
NSI all of their interests in the assets including property, plant, equipment,
water rights, accounts receivable and the four federal sodium leases issued by
the BLM.  NSI assumed WRNM's accounts payable, and employed all 22
employees previously working for WRNM.  We have accounted for the
acquisition as a purchase under the provisions of SFAS No.
141.  Accordingly, we recorded the assets acquired and the liabilities
assumed at their fair market values.  The excess purchase price has
been allocated to the assets purchased.  No amount was allocated to
goodwill.
 
 Description
of the Assets
 
 The
principal assets NSI acquired from WRNM are four federal sodium leases (Federal
Sodium Mineral Leases C-0118326, C-37474, C-0118327 and C-0119986) and the
26,500 square foot processing plant located on one of the
leases.  These sodium leases are discussed more fully above at “Our
Sodium Leases”.  NSI also acquired federal rights of way, operating
permits, water rights, ownership of an existing water reservoir, rights with
respect to an additional potential reservoir site, approximately 3,900 tons of
inventory and receivables.  In order to transfer the operations of the
business at the closing, we posted reclamation bonds and other financial
security with federal and state agencies totalling $959,480.  NSI also
assumed WRNM's accounts payables and other liabilities of approximately
$2,240,000, as well as equipment and other leases necessary for the business
operations.  The leases and the plant are located about 54 miles
northwest of Rifle, Colorado, and are accessible all year by paved
road.
 
 The
Plant
 
 The
26,500 square foot processing plant located on one of the Wolf Ridge Leases
consists of a single building with crystallizers, boilers, centrifuge, dryers
and other equipment capable of producing various grades of sodium
bicarbonate.  The plant has a name plate capacity of 125,000 tons per
year although the most it has ever produced was nearly 103,000 tons in
CY2007.  Until we attempt to obtain higher levels of production we
will remain uncertain as to its actual capacity.  However, we intend
to increase production capacity of the plant by an initial program of drilling
more cavities and further improving the efficiency and output of the surface
plant and facilities and then we intend to reengineer and expand the production
capacity of the plant by a significant amount when such an expansion can be
justified.
  7
 Table of Contents
  There are
also several other buildings associated with the plant - one building of
approximately 50 feet in diameter used for bulk storage with a storage capacity
of 3,000 tons - and three small sheds (lube storage shed, fire pump house shed
and hazardous materials shed).  The plant, the bulk storage facility
and one of the sheds are of metal construction; the other two sheds are of wood
construction, each on concrete pads.
 
 Production Cavities and
Solution Mining
 
 Sodium
bicarbonate is produced from nahcolite recovered by solution mining underground
cavities.  Solution mining requires pumping hot water into the
nahcolite-bearing rock zone at a depth of approximately 1,900
feet.  The nahcolite dissolves and is pumped to the surface in near
saturated solution (known as a pregnant liquor) and brought into the plant for
the sodium bicarbonate to be crystallized, dried, graded and packaged or stored
in bulk.  The barren liquor is reheated and recycled underground to
continue the solution mining process. The dried sodium bicarbonate is then
dried, screened and stored for bulk sales or is bagged at the plant in 50 pound
or 2,000 pound bags.  The plant is capable of producing all grades of
sodium bicarbonate except that used for kidney dialysis.
 
 As
mentioned above, the recovery of sodium products from the sodium leases is
governed by a BLM approved mine plan.  Sodium bicarbonate is presently
being recovered from two cavities denominated as 5H and 6H for which we have
authority to recover up to 638,000 tons of sodium bicarbonate.  The
BLM has also authorised recovery of up to 320,000 tons of sodium bicarbonate
from a new cavity, 7H, which has been drilled and is currently being brought
into production. We have recently partially completed 7H at an approximate cost
of $1,000,000.  The 5H and 6H cavities are joined and share one
injection well and two recovery wells while 7H has one injection and one active
recovery well which we also use to recover from 6H.  At current
production rates the plant, upon completion of 7H, will be adequately supplied
with pregnant brine solution for the existing surface facilities.  We
intend to obtain approval to drill another new production cavity in accordance
with the mine plan to further support our plans to expand production capacity
and to ensure a continuous supply of high quality brine to the
plant.
 
 Historically,
the plant has shipped up to approximately 55% of its production as bulk product
and the remainder as bagged product.
 
 There is
no rail transportation to the plant.  Product that is to be shipped by
rail must be transported by truck to a rail loading facility in Rifle, Colorado
that is operated by a third party.  Historically, about 25% of the
plant's production has been shipped to its final destination by truck rather
than by rail.
 
 Water
Rights
 
 WRNM also
transferred all of its water rights to NSI, including:
 ·
              the
      production well used to obtain water for solution mining
      operations,
 ·
              conditional
      well water rights  associated with 13 wells located on the land
      covered by the federal sodium
leases,
 ·
              absolute
      surface water rights from the White River
  drainage,
 ·
              a
      water storage reservoir and rights relating to future expansion of the
      reservoir, and
 ·
              rights
      associated with an augmentation plan governing substitution and exchange
      of water withdrawn from wells located on the sodium
  leases.
 
 These
water rights are discussed more fully below.
 
 Fee
Property
 
 WRNM
transferred to NSI real property owned in fee simple known as the Larsen
Reservoir that is used for the existing water storage reservoir of about 35.8
acres, about 25 miles east of the plant.
  8
 Table of Contents
  Other
Assets
 
 In
addition to the federal sodium leases and the assets associated with the plant,
NSI acquired approximately 3,900 tons of sodium bicarbonate inventory in storage
at the plant site and in a warehouse located in Rifle. NSI leases the warehouse
from an unaffiliated landlord.
 
 US Filter
assigned equipment to NSI that it had fabricated for AmerAlia in consideration
for settling obligations due to US Filter under a May 1999 Design/Build
Contract.  This equipment includes a centrifuge, six silos, a dryer
system, baghouse equipment, air compressors, pumps and pump parts now located at
or near to the NSI plant. We originally intended to use this equipment in the
plant we had contemplated constructing for production from the Rock School
lease, however, we now plan to use this equipment to expand the existing
plant.  Some components have already been used.  On February
21, 2003 we concluded a settlement agreement with U.S. Filter with respect to
the Design/Build contract that included our issuing a promissory note for
$1,200,000.  This note was then assigned to HPD, LLC.  We
have not repaid the note which is now past due.  In June 2008 Sentient
III acquired this note from HPD so our liability is now to Sentient
III.  It is our intention to utilize HPD’s services to design and
construct a plant expansion should we choose to expand the plant.
 
 Marketing
Arrangements
 
 We sell
animal feed grade product through five independent distributors.  The
largest of these is Bunnett & Company of Austin, Texas which represents the
largest part of our animal feed sales. The majority of our industrial and USP
grade products is distributed by an agent, Vitusa Products, Inc. of Berkeley
Heights, New Jersey.  Bunnett & Company and Vitusa Products
account for 33% and 23% of our sales revenues respectively. While there is a
written distribution agreement with Bunnett, there is no written agreement with
Vitusa.  There are no other significant marketing relationships that
constitute more than 10% of our sales.
 
 We
package product in various crystal sizes in 50 lb. bags, 2000 lb. “supersacks”,
or in bulk and transport to our customers by truck or rail.  We sell
most of our products throughout the United States, Canada and
Mexico.  Our principal competitors are Church & Dwight,
manufacturers of the Arm & Hammer brand; FMC Corporation and Solvay
Chemicals.  We compete with them on the basis of service and
price.
 
 Our
products have many uses and applications.  They include sales to the
animal feed, industrial, food and pharmaceutical grade
markets.  Sodium bicarbonate is used in baking products, personal care
products including toothpaste, antacid remedies; household products including
deodorizers, cleaning products, detergents, carpet cleaners, bath salts and cat
litter; in industrial situations and uses such as leather tanning, fire
extinguishers, blast media and waste water treatment.
 
 The Sodium Bicarbonate
Market
 
 The
market for sodium bicarbonate in North America is about 640,000 tons per year
and grows at the rate of 2 to 3% per year.  There are five producers
with Church & Dwight being the largest with over 60% of capacity and market
share.  NSI is the second largest producer with approximately 15% of
capacity.  NSI is the only producer of sodium bicarbonate from
nahcolite, the naturally occurring form of sodium bicarbonate.  All
other production of sodium bicarbonate utilizes trona, a mixed form of sodium
bicarbonate and sodium carbonate, from Green River, Wyoming.  We
believe that NSI is the lowest cash cost producer.
 
 The
market use is dominated by the food industry (baking soda) and animal nutrition
(rumen buffer), accounting for a majority of the total market.  The
remaining market is split between a variety of uses from pharmaceuticals,
personal care (toothpaste), deodorizers, cleaning products, chemical, blasting
media, etc.  Presently, NSI’s share of the animal feed and food
segments is in line with its share of industry production capacity, however, it
is significantly under represented in the specialty segments.
  9
 Table of Contents
 
 Analysis
      of North American Sodium Bicarbonate Production CapacityProducers
              
              Capacity
              
              
              Capacity
              
              
              Production
              
              
              Capacity
              
              
              Market(‘ooo
      Tons)
              
              
              Share
      (%)
              
              
              (‘ooo
      Tons)
              
              
              Utilization
      (%)
              
              
              Share
      (%)Church
      & Dwight
              
              
              520
              
              
              
              61
              
              
              
              397
              
              
              
              76
              
              
              
              62FMC
      Corp
              
              
              90
              
              
              
              11
              
              
              
              70
              
              
              
              78
              
              
              
              11Solvay
      (American Soda)
              
              
              100
              
              
              
              12
              
              
              
              72
              
              
              
              72
              
              
              
              11Natrium
              
              
              15
              
              
              
              2
              
              
              
              15
              
              
              
              100
              
              
              
              2Natural
      Soda
              
              
              125
              
              
              
              15
              
              
              
              87
              
              
              
              70
              
              
              
              14850
              
              
              
              100
              
              
              
              641
              
              
              
              75
              
              
              
              100Less
      Net exports
              
              
              
              
              
              
              
              
              
              
              (50)Apparent
      consumption – USA
              
              
              
              
              
              
              
              591Net
      exports – Canada & Mexico
              
              
              
              
              
              
              
              50Apparent
      Consumption – North America
              
              
              
              
              
              
              
              641Sources:
      CEH Review; US Census Statistics
 
 Competitive
Advantage
 
 Traditionally,
sodium bicarbonate is produced by carbonating sodium carbonate, commonly called
soda ash, with carbon dioxide.  The sodium carbonate can be sourced
from natural resources by processing minerals such as the mixed carbonate called
trona that is mined at Green River in Wyoming.   The alternative
method is to produce sodium carbonate synthetically from sodium chloride in an
industrial plant.   We believe that both these production methods
are more expensive than the solution mining and simple re-crystallisation of
sodium bicarbonate from naturally occurring nahcolite we employ.
 
 Sales
and Revenue Performance
 
 Fiscal
year 2004 was the first complete fiscal year of our ownership of the
plant.  Our annual sales in tonnages and gross revenues are shown in
the following tables:
 Fiscal
              Sales
      (tons)
              %
      ChangeYear
              
              on
      prior FY2004
              84,1032005
              85,038
              +
      1.12006
              88,910
              +
      4.62007
              101,970
              +14.72008
              101,594
              -  0.4Calendar
              Sales
      (tons)
              %
      ChangeYear
              
              on
      prior CY2004
              79,3132005
              87,746
              +10.62006
              94,858
              +  8.12007
              102,702
              +  8.3Fiscal
              Gross
      Revenues
              %
      ChangeYear
              ($)
              on
      prior FY2004
              12,609,0412005
              14,141,500
              +
      12.22006
              15,293,688
              +   8.12007
              16,951,997
              +
      10.8
 
 During
calendar year 2007, and so far in 2008, sales have been constrained by
production interruptions and cavity limitations.  We now expect that
the new cavity we have recently brought into production will improve our
production and supply capability.  This performance is illustrated on
a quarterly basis in the following graph.
  10
 Table of Contents
  
 
 Environmental
Issues
 
 The
sodium bicarbonate production is licensed under the EPA and BLM as a zero water
emission business.   We must not allow any water stream from the
production process to enter the environment. All breaches must be
reported.
 
 Waste
water streams are collected in two ponds where the water is evaporated and the
residual salts collected for disposal by an approved method.
 
 
 3.
              OUR
      WATER RIGHTS
 
 General
 
 NSI owns
numerous water rights in the Piceance Creek and Yellow Creek basins of
Colorado.  These streams flow into the headwaters of the White River
which flows into the Colorado River.  Yellow Creek flows through our
property; Piceance Creek, Yampa River and the White River are
nearby.  These rights incorporate direct pumping rights, direct flow
water rights and pumping rights to the White River. We also have a reservoir
right associated with the White River pumping rights called the Wolf Ridge
Reservoir and we own the Larson Reservoir at the headwaters of Piceance
Creek.
 
 The
Colorado River Basin covers 244,000 square miles and provides water for 30
million people.   The river has an average flow of around 14
million acre feet per year which occasionally increases to 18 million in good
years and decreases to about 12 million in bad years.
 
 On the
basis of the Colorado River Compact of 1922, the Colorado River Basin is divided
into the Upper Colorado River Basin and Lower Colorado River Basin at Lee’s
Ferry (just below the confluence of the Paria River and the Colorado River near
the Utah-Arizona boundary).  The upper basin and the lower basin were
each apportioned a consumptive use of 7.5 million acre feet of water annually,
based on an assumption of 15 million acre feet of totally available water for
the Colorado River.   The assumption was demonstrated to be an
overestimate and reduced to 12 million acre feet in a hydrologic study by the
Bureau of Reclamation (CWCB 2004).  In the Upper Colorado River Basin
Compact of 1948, the water of the Upper Colorado River Basin was further
allocated among the states of Arizona, Colorado, New Mexico, Utah, and
Wyoming.  Arizona has a fixed allocation of 50,000 acre feet
annually.  The remainder is shared by Colorado (51.75%), New Mexico
(11.25%), Utah (23%), and Wyoming (14%).
  11
 Table of Contents
  By
treaty, Mexico must get 1.5 million acre feet annually.  California
has a right to a minimum of 4.4 million acre feet while the upper basin where
NSI is located has an accumulated withdrawal allotment of around 3.6 million
acre feet.   The Central Arizona Project, a 335 mile canal and
the largest water transfer system ever built, has the capacity to withdraw more
than 2 million acre feet. State by State allotments are shown in the following
table:
 
 Water
      Allocation from The Colorado River SystemState
              
              Allocation
                (Acre
      Feet per year)California
              
              
              4,400,000Colorado
              
              
              3,881,250Arizona
              
              
              2,800,000Utah
              
              
              1,725,000Mexico
              
              
              1,500,000Wyoming
              
              
              1,050,000New
      Mexico
              
              
              845,750Nevada
              
              
              300,00016,502,000
 
 The
United States requires that removed groundwater be augmented (i.e. replaced)
from surface water sources.  Thus, new groundwater pumping rights
cannot be used for any length of time without an approved plan to augment, over
time, the water removed from the groundwater wells.
 
 Colorado
operates under the “Prior Appropriation Doctrine” with respect to water
rights.  The Prior Appropriation Doctrine essentially provides that
any person or entity that diverts water and applies the water to beneficial use
before another person or entity has the first and prior right to divert water
under the water right.  The doctrine is also commonly known as the
“First in Time – First in Right”.  To the extent that a water right
was appropriated prior to another water right, the Prior Appropriation Doctrine
provides that a senior water right is entitled to be fully satisfied before the
junior water right is allowed to take any water.  The Colorado General
Assembly requires the claimants of a water right to create documentary evidence
by obtaining a decree from a court confirming the existance of the water
right.
 
 NSI’s
water rights were incorporated into a Decree entered by the District Court in
and for Water Division No. 5 in Case No. 88CW420 on August 13, 1991 (the
“Decree”).  The Decree is crucial for continued operations of the
sodium mining business.  NSI’s water rights were combined in the
Decree to ensure the reliability of the water supply for mining
operations.  In addition, since all the water rights are under common
ownership, the ability to maximize the use and value of the water rights is
enhanced if the water rights could be used for any purpose associated with the
mining operations or other purposes.  Another factor leading to the
inclusion of all the water rights in the Decree was that some of the water
rights and facilities for the water rights had not been developed, and the
conditional portion of the water rights could be maintained by legally
integrating and attributing work on some of the water rights to other
conditional water rights.
 
 However,
even though all of the water rights were integrated into the Decree, various
water rights may be separated from the water supply required for mining
operations.  As discussed below our substitution and exchange rights
and our augmentation plan provide additional flexibility in how we can manage
access to our water rights.
  12
 Table of Contents
   
  The
Decree also includes a Water Court approved “plan for
augmentation”.  This is a plan that can considerably aid operational
flexibility.  Our augmentation plan includes rights under Colorado law
of “substitution and exchange”.  Substitution and exchange enables
delivering water at one point on a stream and taking water out at another point
on the stream.  Water rights may be acquired to enable substitution
and exchange.  While this concept may not seem significant,
“substitution and exchange” can save millions of dollars in construction
costs.
 
 For
example, under the Decree we may deliver fully consumable agricultural water
rights to Piceance Creek at its headwaters, and “substitute and exchange” this
water depleted from Piceance Creek by the operation of our wells.  We
thereby avoid the necessity to pipe water from the headwaters of Piceance Creek
to our operations.  Further, because Piceance Creek is such a dry
stream, the substitution and exchange ability is limited and at a
premium.  As a result of the Decree, we own all or virtually all of
the substitution and exchange potential on Piceance Creek and Yellow Creek.
While someone else may acquire the right to operate a substitution and exchange
on the two streams, that use would be subordinate to our own substitution and
exchange rights.  Other parties seeking access to water may be
prepared to pay us to share in our substitution and exchange
rights.
 
 Under
current operations, the water supply for the mining operations is provided by a
single well.  The pumping of water from the well causes depletions to
Piceance Creek and Yellow Creek.  Colorado law requires that
depletions to Piceance Creek and Yellow Creek must be replaced with other
water.  The Decree provides that senior water rights on Piceance Creek
are used to replace the depletions to Piceance Creek and part of the depletions
to Yellow Creek.  Hence in order to protect mining operations, it is
necessary to maintain ownership of well water rights to supply mining operations
and senior water rights to replace the depletions caused to Piceance Creek and
Yellow Creek.  We have several different sources of water to replace
the depletions to the streams.  Currently, our water requirements for
our sodium operations are less than one cubic foot per second (“CFS”) while our
total water rights exceed more than 100,000 acre feet per year as shown below at
“Identification of water rights”.
 
 There are
other factors independent of the Decree that enhance the value of our water
rights.  First, no other plan for augmentation has been approved by
the Water Court within the Piceance Creek basin thereby providing us a
significant competitive advantage in the water supply available to our
activities.  There is also a value associated with having the
augmentation plan approved in our Decree completed.  Litigation is
always an uncertain venture, and any new augmentation plan application that is
filed will be scrutinized by all the other water right owners in the Piceance
Creek and Yellow Creek basins, including the major oil companies that have a
presence in these basins.  Potential users of our water rights may
find that constructing a pipeline for delivery of water may be more reliable and
cheaper than obtaining a judicially approved plan for
augmentation.  As more mining and industrial operations develop in the
Piceance Creek and Yellow Creek area, there may be more interest in purchasing
or leasing an interest in our water rights.
  13
 Table of Contents
  As we
discussed in Item 1(a) “Business Development”, our water rights can provide
water far in excess of the current or future needs of the sodium bicarbonate
operations. We believe that these water rights can generate a future revenue
stream and have increasing value, especially as any prospective development of
the oil shale resources of the Piceance Creek Basin may require very large
volumes of water.  It is our objective to develop and utilize the
water rights we own and we are pursuing various ways in which we can generate
revenue from these assets.
 
 Agreement
with Shell Frontier Oil & Gas, Inc.
 
 NSI
entered into a contract on January 29, 2007 with Shell Frontier Oil & Gas,
Inc., effective January 1, 2007, to sell up to 120 acre feet of water per year
at a price equal to $8,146 per acre foot.  Shell has been awarded
three 160 acre oil shale research and development leases by the Bureau of Land
Management over land adjoining our sodium leases.  If Shell purchases
any water, it will remove the water using water transport trucks or by
constructing a pipeline at its own expense.
 
 Natural
Soda will provide water to Shell from one of its existing water
wells.  The water will be recovered from the geologic formation
commonly known as the “A Groove” and the quality of the water shall be “as is”
upon withdrawal from the geologic formation without any treatment by
NSI.  The initial term of the agreement is five years and renewable
thereafter with the purchase price adjusted according to a formula based on
movement in the consumer price index.  A condition of the agreement is
that we may sell water to other users provided that such delivery is subordinate
to the delivery of water to Shell.
 
 The
agreement will be extended automatically for successive periods of five years
although Shell may elect to terminate the agreement by providing written notice
prior to the end of the initial term or each subsequent renewal date. Similarly,
NSI can terminate the agreement by providing written notice on the same
basis.  In addition, the agreement terminates if NSI ceases to have an
interest in the sodium leases.
 
 Our
initial sales under this agreement have not been significant.  We
intend to devote more attention to generating more sales from this
resource.
 
 Appraisals
 
 AmerAlia
has previously obtained an independent appraisal of the value of the water
rights, identifying a range of approximate aggregate value of $12 million to $16
million.  The current value of our rights is unknown.  The
highest value component relates to the Wolf Ridge Reservoir and Pipeline Water
rights.  These rights produce a large quantity of water that may be
used for commercial purposes.  They could be separately developed and
are not required for mining purposes.  The market value of the Wolf
Ridge Rights is a function of the amount of fully consumable water available
under these water rights.  We have been advised that since this water
can be used for industrial purposes, their value may be in the order of $3,000
to $4,500 per acre foot of fully consumable water.
 
 The Wolf
Ridge Reservoir and Pipeline Water right allows us to construct a reservoir and
pipeline for storage of 7,379.70 acre feet of water, fed by the pipeline at the
rate of 100 CFS, equivalent to 44,800 gallons per minute.  A purchaser
of these rights might be interested in moving the points of diversion or
location of the structures. The purchaser could construct the structures at a
new location and still take advantage of the relatively senior priority of the
rights on the Yampa River.  It is possible the purchaser may already
have reservoir and/or pipeline facilities, in which case the value to a
prospective purchaser may be greater than the net valuation provided to us if we
decided to offer the Wolf Ridge Water Rights for sale.
  14
 Table of Contents
  Identification
of Water Rights
 
 Our water
rights can be categorized and summarized as follows:
 Water
      Flow Rights
              Location
              Flow
      Rate
              Flow
      Rate
              Percent
      of(CFS)
              (acre
      ft/yr)
              Annual
      FlowDirect
      pumping
              13
      wells on plateau
              45.0
              32,579
              30%Direct
      Flow rights
              Piceance
      Creek
              5.3
              3,837
              4%River
      pumping
              White
      River
              100.0
              72,397
              67%Total
      flow
              
              150.3
              108,812
              100%
 
 Water
      Storage
              Location
              Volume
              Percent
      ofRight
              
              (acre
      feet)
              StorageWolf
      Ridge Reservoir
              Plateau
              7,380
              92%Larson
      Reservoir
              Plateau
              600
              8%Total
      flow
              
              7,980
              100%
 
 Direct Pumping
Rights   - Well Water
 
 We own
thirteen well water rights described in the Decree.  They have
priority dates from the 1970s so they are very “junior” water
rights.  Under Colorado law, the Well Water Rights cannot divert water
without having a plan of augmentation approved by the Water
Court.  Our Decree includes a plan for augmentation authorizing, among
other things, wells which have a hydraulic connection to the surface stream to
pump water, provided depletions to the surface stream caused by well pumping are
replaced with other water supplies.  As discussed above, the well
water rights are included within the Decree.
 
 Senior Direct Flow Water
Rights
 
 We own
the following senior direct flow water rights:
 Name
              
              Appropriation
      Date
              Decree
      Date
              Flow
      Rate (CFS)Morgan
      Ditch No. 1
              
              April
      15, 1883
              April
      28, 1890
              1.00Enlargement
      and Extension of Morgan Ditch No. 1
              
              September
      27, 1886
              April
      28, 1890
              0.40Morgan
      No. 2 Ditch
              
              September
      27, 1886
              April
      28, 1890
              0.40Home
      Supply Ditch
              
              September
      19, 1886
              May
      10, 1889
              1.00Larson
      Ditch
              
              September
      17, 1886
              May
      10, 1889
              2.50
 
 The
direct flow water rights are among the most senior water rights in the Piceance
Creek basin.  They were originally decreed for agricultural irrigation
however the Water Court in its Decree changed the direct flow water rights for
numerous purposes including commercial and industrial purposes.  In
addition, the Water Court imposed certain terms and conditions on the use of the
water, including annual volumetric limitations on the use of the water
rights.
 
 The
average annual amount of water that may be diverted and consumed pursuant to the
direct flow rights is approximately 234 acre feet.
 
 Wolf Ridge Reservoir and
Feed Pipeline Water Rights to the White River
 
 The Wolf
Ridge Reservoir and Wolf Ridge Feeder Pipeline water rights were decreed in the
1970s.  However, unlike the Well Water Rights that divert water from
the aquifer tributary to Piceance Creek, the Wolf Ridge Water Rights divert
water primarily from the White River.  Piceance Creek is dry most of
the summer, but the White River is seldom dry and is a much larger
stream.  Hence a 1970s water right diverting out of the White River
will have water available for diversion in most years.  As discussed
above, the Wolf Ridge Water Rights provide for the construction of a reservoir
to contain a maximum of 7,379.70 acre feet.  This reservoir could be
fed by the Wolf Ridge feeder Pipeline at the rate of 100 CFS.  (44,800
gallons per minute).  This is equivalent to 72,396 acre feet per
year.
  15
 Table of Contents
  Larson Reservoir and Larson
Reservoir Enlargement Water Rights
 
 The
Larson Reservoir was originally decreed for 62 acre feet of water storage rights
with an appropriation date of July 20, 1888 and a decree date of May 10,
1889.  Hence it is a very “senior” right.  The Water Court
Decree changed the uses of the Larson Reservoir Right to include industrial and
commercial uses and allows the consumption of approximately 39 acre feet of
fully consumable water per year.
 
 The
Decree also approved an additional water right referred to as the Larson
Reservoir Enlargement Water Right.  It has an appropriation date of
April 5, 1988 and may store up to 600 acre feet of water, with the right to
refill the Larson Reservoir with an additional 600 acre feet of water per
year.  This has not been constructed but could be constructed on land
entirely owned by NSI.  The Larson Reservoir Enlargement Water Right
could only divert water during the early spring runoff period, so we estimate
approximately 300 acre feet of water could be stored annually if a reservoir was
constructed.  The Larsen Reservoir has a large deposit of silt. We
intend to evaluate the possibility of excavating the silt and extending the
reservoir to provide greater storage capacity.
 
 Future Uses and Development
of Water Rights
 
 We are
conscious of the increased public interest in water rights generally, their
scarcity and value.  It is our objective to develop and utilize the
water rights we own.  We are pursuing various ways in which we can
generate revenue from these assets.
 
 4.
              OUR
      FINANCING ARRANGEMENTS
 
 Description
of the Short-Term Financing
 
 At the
time the asset purchase agreement with IMC was due for completion, AmerAlia and
the Sentient Entities had not yet finalized their own agreements on their final
structure and commercial arrangements.  Therefore, as an interim
measure, AmerAlia and the Sentient Entities entered into a "Closing Agreement"
which provided for temporary funding until replaced by the long term funding
structure when the final structure and commercial arrangements were
resolved.
 
 Consequently,
the Sentient Entities loaned $24,000,000 to NSHI.  NSHI used these
funds to pay the purchase price of approximately $20.6 million to WRNM, pay
deposits to certain suppliers, pay a portion of the fee to US Filter for
termination of the May 1999 Design/Build Contract, pay for transaction costs and
provide working capital.
 
 The
Sentient Entities loaned the funds to NSHI on a short-term basis and took a
security interest in all the outstanding shares of NSI capital
stock.  The Sentient Entities and NSHI completed their agreements on
March 19, 2004 for the financial closing and long term financing for the
acquisition as discussed below.
 
 Long
Term Financing Agreements
 
 On March
19, 2004 NSHI and the Sentient Entities completed their arrangements known as
the financial closing.  The principal agreement is the Debenture
Purchase Agreement which provided for the repayment of the short term financing
and raising additional funding.  A Securityholder Agreement between
AmerAlia, NSHI, NSI and the Sentient Entities defines their mutual expectations
and conduct with respect to the restrictions on transfer of the debentures and
other securities issued in the transaction; board representations and
appointment of management; budget approvals and minimum voting majority;
limitations on the actions of NSHI and NSI; restrictions on transfer of
securities and/or a trade sale including drag along/tag along rights;
forbearance agreements; agreements for the conversion of Series B2 Debentures
into 49% of NSI common stock and exchange of the NSI common stock for AmerAlia
common stock; exchange of the Series B1 and Series B2 Debentures for AmerAlia
common stock and dispute resolution procedures.  The agreements
included a Management & Cost Reimbursement Agreement whereby AmerAlia would
provide management services for a fee until September 30, 2005.  This
agreement was pledged to US Filter as security for moneys then owed to US
Filter.  Finally, in consideration for amending the terms of the
original closing agreement completed with the Sentient Entities on February 20,
2003 to allow a closing, AmerAlia granted the Sentient Entities warrants to
purchase 600,000 shares of its restricted common stock exercisable at $1.00 per
share until March 19, 2009.
  16
 Table of Contents
  Under
these agreements, NSHI raised additional debt of $5,500,000 through the issue of
new debentures, as follows:
 ·
              AmerAlia
      received $3,500,000 in NSHI Series A Secured 10% Debentures utilizing
      funds it raised from accredited investors (see “AmerAlia Funding”, below);
      and
 ·
              The Sentient Entities invested an
      additional $2,000,000 in NSHI Secured Series A 10%
      Debentures.
 
 In
addition at the financial closing, NSHI issued to the Sentient Entities in
exchange for its $24 million short term loan:
 ·
              $3,000,000
      in Secured Series A 10% Debentures;
 ·
              $11,300,000
      in Secured Subordinated Series B1 Debentures;
  and
 ·
              $9,700,000
      in Secured Subordinated Series B2 Convertible Debentures (these debentures
      and their accrued interest have since been exchanged for 49% of the equity
      of NSI as described below)
 
 NSHI also
issued to AmerAlia in cancellation of its loan to NSHI of approximately
$17,678,100:
 ·
              $275,000
      of Secured Series A 10% Debentures;
 ·
              $12,000,000
      of Unsecured Subordinated Series C
Debentures;
 ·
              4,949
      shares of Series A Preferred Stock having a liquidation value of
      $4,949,000; and
 ·
              an
      additional issue of common stock bringing the total common stock held by
      AmerAlia to 51,000 shares, being all the common stock
    issued.
 
 NSHI also
issued $750,000 of Secured Series A 10% Debentures to NSI in exchange for an
obligation by NSI to pay $750,000 to NSHI.  The purpose of the issue
of the $750,000 Series A Debenture to NSI was to enable NSI to provide the
debenture as collateral to the Mars Trust for its bonding support as discussed
in Item 12 “Certain Relationships and Related Party
Transactions”.  This arrangement ended in August 2007 when we used our
own resources to support the bonding obligations.
 
 Subsequently,
in addition to the financing agreements finalised in March 2004, the Sentient
Entities provided a further $1 million working capital loan to NSI in November
2005.  In May 2007, in accordance with the terms of the loan, this
loan and its accrued interest were converted into 4.5% equity interest in
NSI.  Also, as discussed below, in May 2007 the Sentient Entities
converted their B2 debentures into 49% of the equity of NSI thus increasing
their ownership of NSI to 53.5%.  This ownership interest is held by
Sentient I.
 
 In
addition, we agreed to expand the boards of directors of NSHI and of NSI to five
members comprising two representatives from AmerAlia, two representatives from
the Sentient Entities and one member with industry experience mutually
acceptable to all parties.  Currently, the NSI board comprises Mr.
Bill H. Gunn, Chairman and CEO of AmerAlia, and Mr. Peter Cassidy and Mr. Mark
Jackson, representatives of the Sentient Entities, who were appointed in June
2007 after Sentient exercised its rights to convert some of their loans to
equity in NSI as discussed further below.  The NSHI board of directors
comprises Mr. Bill H. Gunn and Mr. Robert van Mourik, CFO and Executive Vice
President of AmerAlia, Inc.
 
 Description of the
Debentures
 
 The
Series A Debentures were issued March 19, 2004 and were due September 30,
2005.  The interest rate is 10% per annum and the first interest
payment was paid as required on June 30, 2004 but since then the unpaid interest
has been accruing.  The Series A Debentures are senior to all other
debentures and are collateralized by all of the assets of NSI and NSHI, as well
as by all of NSHI’s common stock of NSI.  These assets also
collateralize the Series B1 Debentures held and the Series B2 Debentures
previously held by the Sentient Entities.  Sentient Resources USA,
Inc. acted as agent holding the collateral for the benefit of all of the secured
debenture holders until November 2006 when its responsibilities were assigned to
Sentient Asset Management USA, Inc.
 
 The
Series B1 Debentures are (and Series B2 Debentures were) subordinate to the
Series A Debentures but rank equally with the Series C Debentures with respect
to all payments of principal and interest unless the Series B Debenture holders
declare an event of default.  The Series B1, Series B2 and Series C
debentures were issued March 19, 2004, pay interest quarterly and have interest
rates as follows:
  17
 Table of Contents
 
 Period
              Interest
      Rate per AnnumMarch
      19, 2004 – June 30, 2004
              1.5%July
      1, 2004 – June 30, 2005
              4.5%July
      1, 2005 – June 30, 2006
              7.5%July
      1, 2006 – June 30, 2007
              10.5%July
      1, 2007 – February 19, 2008
              13.5%
 
 The
Series B1 Debentures have a right to earn “Contingent Interest” which means a
payment of additional interest, which when added to the other payments of
principal and interest on the Debentures held by the Sentient Entities, could
provide the Sentient Entities with an internal rate of return of 34.8766% per
annum compounded annually, using February 20, 2003 as the commencement
date.  Contingent Interest shall be paid on the amounts represented by
the Series B1 Debentures to the Sentient Entities on the Maturity Date of the
Series B1 Debentures.  In addition to the quarterly payments of
interest in accordance with the interest rate table above, a mandatory
prepayment of principal of $4,029,760 was required on September 30,
2005.  This mandatory prepayment was not made as
required.
 
 The
Series B2 Debentures had similar terms and conditions as the Series B1
Debentures except that the “Contingent Interest” internal rate of return was
thirty percent (30%) per annum compounded annually commencing February 20,
2003.  The Sentient Entities also had an option to convert the Series
B2 Debentures and their accrued interest and rights to contingent interest into
49% of the common stock of NSI.  They exercised this right in May 2007
at the same time they exercised their right to convert their $1 million loan and
accrued interest into 4.5% of NSI’s capital.  Hence, the Sentient
Entities now own 53.5% of NSI and NSHI has no further obligation to pay
contingent interest on the Series B2 Debentures.
 
 The
Sentient Entities also have the option to exchange the Series B1 Debentures into
shares of AmerAlia common stock.  This right to exchange the
debentures (and/or the underlying NSI common stock that the Sentient Entities
acquired through their conversion of the Series B2 Debentures) provides for the
issuance of AmerAlia common stock at a price equal to 85% of the market price
for the AmerAlia common stock.  If the Sentient Entities were to
exchange these debentures, they would acquire a significant majority of
AmerAlia’s shares based on today’s stock prices and could exercise control of
AmerAlia.
 
 The
Unsecured Subordinated Series C Debentures held by AmerAlia earn the same
interest rate as the Series B Debentures and have a right to earn contingent
interest up to a total internal rate of return of fifteen per cent (15%) per
annum compounded annually, commencing February 20, 2003.  They rank
equally with the Series B1 Debentures with respect to all payments of principal
and interest unless the Series B1 Debenture holders declare an event of default,
in which case the Series B1 Debentures will be senior to and be repaid prior to
the Series C Debentures.  The Series C Debentures have been pledged by
AmerAlia to secure guarantees and loans as discussed below under “Other Loans”
and in Item 12 at “Satisfaction of Bonding Requirements and Mars Trust
Obligations”   Also discussed at Item 12 at “Sentient Entities
(now Sentient I), Sentient II and Sentient III”, Sentient II acquired various
AmerAlia debt obligations and thereby acquired the Mars Trust’s right to this
Series C debenture as collateral.
 
 The
Series B and the Series C Debentures have a provision that if NSHI sells NSI or
substantially all of the assets of NSI in a trade sale, then the proceeds must
be used to repay the Series A Debentures, then the Series B1 Debentures and then
the Series C Debentures.
 
 Current Status of Series A
and B1 Debentures.
 
 The dates
for the due repayment of these debentures have passed and Sentient I has rights
to serve notices of default on us.  They have not done so and, as
discussed below at “Our Recapitalization Plan”, we are exploring with Sentient
plans to recapitalize these obligations.
  18
 Table of Contents
  Drag Along & Tag Along
Rights
 
 The drag
along and tag along rights apply to the Sentient I and to AmerAlia if Sentient I
owns NSI common stock and the remaining Series B1 Debentures have been
repaid.  They are defined in the Securityholder
Agreement.
 
 Under the
drag along rights, if the Sentient Entities wish to sell all (and not less than
all) of the shares of NSI common stock they own, the Sentient Entities shall
make a written offer to sell the shares to AmerAlia naming a price and the terms
of purchase.  If AmerAlia does not elect irrevocably and in writing to
purchase the shares within 30 days, the Sentient Entities may complete the sale
of the shares to a third party at the same price and on the same terms within 90
days of AmerAlia’s receipt of the written offer.  The Sentient
Entities may further require that AmerAlia or NSHI sell all the shares of NSI
common stock they own to the third party on the same terms.  If the
AmerAlia shareholders are required to approve the sale of the NSI common stock
by AmerAlia and fail to do so, then there is a mechanism whereby the Sentient
Entities can gain a majority of the board and a majority of the common stock of
NSHI.  Thereafter, the Sentient Entities shall have 90 days to
complete the sale of the shares to the third party.  If the Sentient
Entities are unable to complete the sale within that time, the Sentient Entities
will rescind the actions that gave them control.
 
 Alternatively,
under the tag along rights, if AmerAlia wishes to sell the NSI shares of common
stock it owns, AmerAlia shall make a written offer to the Sentient Entities
naming a price and terms.  If the Sentient Entities do not elect
irrevocably and in writing to purchase the shares within 30 days, AmerAlia may
complete the sale of the shares to a third party at the same price and on the
same terms within 90 days of the Sentient Entities receipt of the written offer,
provided that the Sentient Entities may require the purchaser to purchase its
shares at the same price and on the same terms.  If the purchaser will
not buy the shares held by the Sentient Entities, AmerAlia may not sell its
shares unless AmerAlia buys the Sentient Entities shares on the same terms and
conditions.
 
 Management & Cost
Reimbursement Agreement
 
 This
agreement provided for the payment of $700,000 per year commencing October 1,
2003 for two years to AmerAlia for providing management services to NSHI and
NSI.  The agreement also provided for indemnification of NSHI and the
Sentient Entities from certain AmerAlia creditors.  AmerAlia’s rights
to this agreement were pledged as security to U.S. Filter under its settlement
agreement with U.S. Filter completed on February 21, 2003 and discussed in
AmerAlia’s filings on Form 8-K.  This agreement ended on September 30,
2005.
 
 AmerAlia
Funding
 
 As part
of the financial closing, AmerAlia raised $3,500,000 from a group of accredited
investors through the issue of 10% promissory notes due September 30, 2005 and
also granted four warrants for each $10 of their promissory notes to subscribe
for shares of its restricted common stock at $1.00 per share until March 19,
2009.  The Promissory notes are secured by an equal value of NSHI
Series A Debentures held by AmerAlia.  The warrant agreements are on
the same terms and conditions as the warrants issued to the Sentient
Entities.  A total of 1,400,000 warrants were granted to these
accredited investors.  Consequently, as a result of her participation
in this funding, Mrs. Karen O. Woolard, spouse of Mr. Robert C. Woolard, now an
AmerAlia director, became a five percent shareholder.
 
 As
discussed in Item 12 “Certain Relationships and Related Party Transactions”,
these investors also included James V. Riley, an AmerAlia director, and J.
Jeffrey Geldermann who was elected a director on June 25,
2004.  Subsequently in fiscal year 2005, we raised a further $500,000
through the issue of additional 10% promissory notes and grant of warrants on
the same terms as before to James V. Riley, J. Jeffrey Geldermann and affiliates
of  Robert van Mourik and Bill H Gunn; all directors of the
company.  At the date of this filing, Sentient has not completed
documentation to support the issue of these notes and the issue of an additional
Series A debenture to AmerAlia hence the collateral security to support the new
promissory notes has not been perfected.
 
 Since
September 2005 a penalty rate of interest of 15% applies to the balance of
principal and interest outstanding on all these secured notes at that
date.
  19
 Table of Contents
  Other
Loans
 
 Prior to
the financial closing, AmerAlia was obliged under guaranty and loan agreements
to two accredited investors who had provided loan funds with accrued interest
totalling $2,317,692 at the time of the financial closing.  AmerAlia
met these obligations by issuing 121,295 shares of restricted common stock in
satisfaction of outstanding guarantee fees to each of two accredited investors,
one of them Mrs. Karen O. Woolard; and two promissory notes secured by
$2,078,417 of AmerAlia’s Series C Debentures and 359 shares of its NSHI Series A
Preferred Stock.  One of these promissory notes in an amount of
$853,400, secured by $765,295 of Series C Debenture and 132 shares of Series A
Preferred Stock, was issued to Mr. Robert C. Woolard now an AmerAlia
director.  Any interest, contingent interest, dividends or principal
repayments received by AmerAlia from the pledged securities must be applied to
meeting the obligations on these notes.  In May 2005, Mr Woolard
assigned his rights to this debenture to the Karen O. Woolard
Trust.
 
 In
addition, AmerAlia had a long term debt due to the Bank of America that was
guaranteed by the Mars Trust.  The Mars Trust guaranty was secured by
the Series C-1 Debenture as discussed at Item 12 “Certain Relationships and
Related Party Transactions”.  In August 2007, the Mars Trust fulfilled
its obligations to the Bank of America under its guaranty and, as discussed at
Item 12 at “Sentient Entities (now Sentient I), Sentient II and Sentient III”,
Sentient II acquired from the Mars Trust its rights under the guaranty
agreement.
 
 In August
2007, Sentient II lent $350,000 to AmerAlia at 6% interest until December 31,
2007 and this maturity date was subsequently extended to July 31,
2008.  The loans and accrued interest are convertible into AmerAlia
common stock at 36 cents per share.
 
 We have
agreed some interim funding arrangements with various Sentient
funds.  In May 2008:
 
 1.
              Effective
      as of October 31, 2007, Sentient I acquired from NSI its $750,000 Series A
      Secured debenture and accrued interest of
  $271,215.75.
 2.
              Effective
      as of March 31, 2008, Sentient Global Resources Fund III LP (“Sentient
      III”) purchased AmerAlia’s rights to outstanding interest due on its
      Series A Secured 10% Debentures for $1,406,875. AmerAlia used these funds
      for the purpose of paying some of the outstanding interest owed to the
      holders of its Series A Debenture Secured promissory
      notes.  Sentient III also acquired Sentient I’s rights to
      interest owed on its Series A debentures, including the interest due on
      the debenture previously owned by NSI, for $2,076,334.20;
    and
 3.
              Sentient
      I loaned AmerAlia $465,000 for the purpose of contributing capital to NSHI
      which, in turn contributed $465,000 to NSI as its proportionate share of
      $1,000,000 raised by NSI for well field development
      expenditures.
 
 Also, in
June 2008, we issued another promissory note to Sentient III for $300,000 at 6%
per annum interest repayable on July 31, 2008 to enable us to access funds to
pay ordinary trade payables as approved by Sentient III.  We borrowed
$80,000 to pay audit fees.  In June we were also advised that Sentient
III had acquired the promissory note for $1,200,000 we had issued to US Filter
and had since been assigned to HPD, LLC.   As a material
inducement to Sentient III to acquire the note, HPD agreed to provide Sentient
III (or its nominee) with up to $600,000 of discounts on any contracts awarded
by Sentient III or its nominee to HPD for the supply of equipment or services
within a twelve month period.
  20
 Table of Contents
  5.
              OUR
      RECAPITALIZATION
PLAN
 
 We
believe we have accomplished many milestones since we acquired the WRNM assets
from IMC in February, 2003 and the subsequent financial closing with the
Sentient Entities in March 2004.  Meanwhile, we have found that our
current financial structure and obligations described above have hindered our
ability to raise new equity or debt.  However, it is the achievement
of these milestones that has enabled us to formulate a plan to recapitalize the
company. This plan requires the simultaneous agreement of a number of parties to
establish a simplified structure and more conventional financing
arrangements.  In Item 1(a) “Business of the Issuer” we indicated that
we are discussing restructuring options with Sentient and other
creditors.  To progress these discussions further we must first file
this annual report, however, we cannot guarantee this restructuring plan will be
successful or even will be accomplished.
 
 EMPLOYEES
 
 AmerAlia’s
day to-day business activities are managed by Mr. Bill H. Gunn, Chairman and
President; and Mr. Robert van Mourik, Executive Vice President and Chief
Financial Officer.    See Item 10 “Executive
Compensation”.  NSI has 39 employees in production, sales &
marketing, financial, environmental compliance and humans resources
roles.
 RISK
FACTORS
 
 NSHI and its operations are highly
leveraged which increases the risk of default and the loss of collateral to our
lenders.
 
 NSHI debt
comprises $16 million due to the Sentient Entities, a further $4.375 million of
senior debt and $12 million of subordinated debt due to AmerAlia.  All
of this debt bears interest at various rates up to 34% per annum as described
above under “Long-Term Financing Agreements”.  However, if there is a
default on any debenture then we are obliged to repay the Series A and B
debentures, including all contingent interest, before any other debentures are
repaid.  The $10,125,000 of Series A Debentures were due September 30,
2005.  If Sentient were to declare a default on our failure to repay
the debentures, we would lose all of our interest in all of our assets including
the assets we previously held as well as all of the assets acquired from
WRNM.  We have not paid any interest at all on these debentures since
2004.  We cannot offer any assurance that NSHI will be able to repay
its obligations.
 
 In
addition, we retain approximately $27 million of debt and creditor obligations
as at June 30, 2007 which includes notes due to the investors who subscribed the
new funding, additional obligations and notes due to the Sentient Entities
including obligations previously due to the Bank of America and the Mars Trust,
and approximately $7 million due to officers, directors and other related
accredited investors.  If we default in paying our other creditors,
the Sentient Entities have a right to declare a default on the debentures and
foreclose on our assets.  If the Sentient Entities declare a default
and foreclose on our assets, we will have no operating assets and our equity
will have no value.
 
 Our ability to service our debt
obligations will be entirely dependent on payments we receive from the interest
earned from the debentures and dividends on the preferred and common stock, or
else from new debt or equity offerings.
 
 AmerAlia
is obliged to pay all this interest income to the promissory note holders and
other debt providers.  There can be no assurance that AmerAlia will
receive sufficient cash flow to meet its financial obligations because of the
significant amount of these obligations burdening AmerAlia.  Any
default by AmerAlia in servicing its long term financing obligations will cause
a default under the debentures issued by NSHI and the possible loss of all
collateral for such debentures.
 
 AmerAlia
is also required to repay or else refinance its obligations now held by Sentient
II which were previously due to the Bank of America and due in June 30, 2007.
AmerAlia had pledged its Series C Debentures to the Mars Trust as guarantor of
this loan.  This security is now held by Sentient II.  If we
fail to repay this loan Sentient II can foreclose and take possession of the
Series C-1 Debenture under its guaranty agreement.  This would cause
all debentures to fall into default, in which case the Sentient Entities will
foreclose on our assets.
  21
 Table of Contents
  We
have large accumulated losses, we expect future losses and we may not achieve or
maintain profitability.
 
 We have
incurred substantial losses and used substantial cash to support our activities
through the development stage, complete our acquisition, refurbish our plant and
sustain our activities to date.  Our accumulated losses were
approximately $59 million at June 30, 2007 and we had a deficit of shareholders’
funds of $31 million at that date.  We will continue to lose money
unless we significantly increase our revenues and repay our debt with new
equity.  We cannot predict when, if ever, we will operate
profitably.
 
 We
rely on key employees in NSI to manage its operations and may have difficulty
replacing them if they were to leave our employ.
 
 While Mr.
Gunn is intensively involved in NSI’s management, we conduct our operations with
a relatively small management team so the loss of an employee through an
extended illness or resignation can adversely impact our capacity to
successfully fulfill our obligations and thereby impact our sales, margins and
operating profitability.
 
 Our pricing of our products is
determined in a competitive environment in which we are not generally able to
lead prices.
 
 Our
industry is dominated by Church & Dwight, a long time manufacturer of the
Arm & Hammer brand of baking soda and related products.  Our major
competitors also include FMC and Solvay, major corporations with considerable
resources, marketing expertise and broader access to customers than we
do.  Consequently, if there is a price war with the major companies
that dominate the industry our margins and profitability may be
threatened.  From time to time, we may need to reduce prices for some
of our products to respond to competitive and customer pressures and to maintain
market share. Consequently, our operating results may suffer.
 
 The
loss of any of our principal customers could significantly lower our sales and
profitability.
 
 We
primarily sell our animal feed grade product through customers who act as
distributors.  The largest of these in tonnages and revenues is
Bunnett & Company who account for the majority of our animal feed
sales.  In addition, we sell most of our higher grade products through
Vitusa Products, Inc. of Berkeley Heights, New Jersey.  These two
constituted approximately 53% of our sales through June 30, 2007 and represented
about 55% of our accounts receivable at June 30, 2007.  Consequently,
there is also a concentration of credit risk associated with the continuing
successful performance of these customers.  We have a written
distribution agreement with Bunnett but do not have one with
Vitusa.  The loss of all or part of their business could be injurious
to our sales, margins and profitability.
 
 We
may not be able to continue to recover sodium bicarbonate economically or at all
from the cavities if there are failures in the underground
operations.  If so, we cannot service our debt
obligations.
 
 We
recover our sodium bicarbonate from cavities that are about 1,900 feet
underground and we do so by pumping hot water through a pipe into the cavity and
then recovering the pregnant liquor through a recovery pipe that is about 8
inches in diameter.  If portions of the underground cavity collapse or
if there are blockages in our wells our ability to recover pregnant liquor can
be severely affected and it is possible the well may become unusable so that we
would have to drill new a new cavity and associated injection and recovery wells
at considerable expense and delays to our production.  As continuity
of production requires having operational cavities and as it can take some
months to drill new cavities and bring them into production, failure of existing
cavities can severely jeopardize our production capability.
 
 This is a
high fixed cost business and if there are underground production problems such
as cavity collapses that cause difficulties in recovering product or if we are
unable to sell sufficient tonnages, the relatively high fixed operating costs
applied to a low volume of sales may cause the operation to not be
viable.  Our resource of naturally occurring sodium bicarbonate has a
zone that contains some sodium chloride.  The presence of too much
sodium chloride in our pregnant liquor adversely impacts plant productivity and
potentially may cause a reduction in the amount of sodium bicarbonate that might
be recovered from a cavity.
  22
 Table of Contents
  Increasing
gas, power and fuel costs could erode our profit margins and harm operating
results.
 
 Energy
costs and transport costs represent a major component of our cost
structure.  It may be difficult to pass on increased costs to our
customers so that our profitability may be adversely impacted.  This
could harm the company’s financial condition and operating results.
 
 NSI’s operations are subject to a
significant amount of regulatory scrutiny and regulation from federal and state
authorities.
 
 NSI’s
mining and processing operations operate under permits from several state and
federal authorities, including the Environmental Protection Agency, the Bureau
of Land Management, and the Colorado Division of Minerals and Geology.Failure to comply with
government conditions and permitting requirements may cause these permits to be
revoked with material and adverse effects on NSI, NSHI and
AmerAlia.  If we lose our permits we may have to cease operations
while we seek their renewal.  If we cannot do this, we will be out of
business.
 
 The long-term financing agreements
allow the conversion and exchange of the Sentient debentures for AmerAlia stock
that may result in the issuance of a significant number of shares which would
dilute the ownership of the current AmerAlia shareholders.
 
 One exit
strategy for the Sentient Entities is to exchange their interests in the Series
B1 debentures and NSI shares for AmerAlia common stock at a value equal to 85%
of market prices.  This could result in the issuance of more than 130
million shares of AmerAlia common stock at their current prices.  This
could substantially increase the number of shares of AmerAlia common stock
currently outstanding and could result in a substantial dilution in the
interests of the existing AmerAlia shareholders.  If issued, the
Sentient Entities would control AmerAlia.  Furthermore, the existence
of the large number of shares potentially issuable may make it more difficult
for AmerAlia to raise the financing that it may require in the
future.
 
 Under the Securityholder Agreement,
AmerAlia has granted Sentient the right to force the sale of its economic
interests in NSHI and its business operations on the same terms and conditions
agreed to by Sentient for its interests.
 
 If this
occurs, neither the board of directors nor the AmerAlia shareholders will have
any opportunity to approve the transaction.  The Sentient Entities may
approve a transaction which is beneficial to them but not to the remaining
stockholders.
 
 We
may have to take certain actions to avoid registration under the Investment
Company Act of 1940.
 
 We are a
listed public company in a financial partnership with private equity funds to
develop natural resources.  The conversion in May 2007 of debt securities
held by the Sentient Entities into 53.5% of the equity of NSI may require us to
register as an investment company.  Generally, a company must register
under the Investment Company Act and comply with significant restrictions on
operations and transactions with affiliates if its investment securities exceed
40% of the company's total assets, or if it holds itself out as being primarily
engaged in the business of investing, owning or holding securities.
 
 It is not
feasible for us to register as an investment company because the Investment
Company Act regulations are inconsistent with our strategy of actively managing
and operating our natural resource assets in partnership with the private equity
funds.  If we must register as an investment company, then the various,
extensive provisions of the Investment Company Act and its regulations could
adversely affect our operations and cause us to incur significant registration
and compliance costs.  We have not obtained a formal determination from the
Securities and Exchange Commission as to our status under the Investment Company
Act of 1940 and, consequently, any violation of such Act could subject us to
material adverse consequences.
  23
 Table of Contents
  ITEM
      2.
              DESCRIPTION OF
PROPERTIES
 
 AmerAlia
through its subsidiaries is a lessee of United States Sodium Mineral Leases
C-0118326, C-37474, C-0118327 and C-0119986 covering 8,223 acres and Sodium
Lease No. C-0119985 covering 1,320 acres in Rio Blanco County, Colorado,
USA.  These are described more fully in Item 1. - "Business",
above.
 
 The plant
consists of a single building with boilers, centrifuge, and other equipment
capable of producing various grades of sodium bicarbonate at approximately
100,000 tons per year.  There are also several other buildings
associated with the plant which are used for bulk storage (one building of
approximately 50 feet in diameter with a storage capacity of 3,000 tons) and
three small sheds (lube storage shed, fire pump house shed, and hazardous
materials shed).  The plant, the bulk storage facility and one of the
sheds are of metal construction and the other two sheds are of wood
construction, each on concrete pads.  In management’s opinion, the
plant facilities are adequately insured.
 
 NSI has
real property owned in fee simple that is used for the existing water storage
reservoir of about 35.8 acres, about 25 miles east of the plant.  NSI
also leases a 21,517 square-foot warehouse in Rifle, Colorado, from an
unaffiliated landlord.
  ITEM
      3.
              LEGAL PROCEEDINGS
 
 In June
2002, the El Paso County, Colorado, District Court entered judgment against
AmerAlia in AmerAlia, Inc. v.
Marvin H. Hudson (case no. 99-CV-3050) in the amount of
$374,100.  This case developed from a dispute between AmerAlia and Mr.
Hudson regarding the existence of an employment contract and certain of Mr.
Hudson’s actions taken while an officer of AmerAlia.  In August, 2007
we completed an agreement with Mr. Hudson to settle this judgement for a cash
payment of $300,000.
 
 In
September 2005, Mr. Joseph Pecherski filed a suite against AmerAlia and Natural
Soda in the District Court, Arapahoe County, for alleged unpaid compensation
(Case number
2005CV3361).  We reached an agreement with Mr. Pecherski to
settle this matter in December 2006 and are now fulfilling our remaining
obligations under that agreement.
 
 ITEM
      4.
              SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS
 
 None.
  24
 Table of Contents
  PART
II
 
 ITEM
      5.
              MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS
 
 (a)
              Market
      Information.
 
 From
August 1987 until August 2002, our Common Stock was publicly traded under the
symbol “AALA” on the Nasdaq SmallCap Market, operated by the National
Association of Securities Dealers, Inc.   Since August 20, 2002,
AmerAlia was listed on the OTC Bulletin Board until its shares were transferred
to the over the counter market in late 2005.  The highest, lowest and
average closing prices for AmerAlia's common stock as provided by an online
service for the past two fiscal years up to June 30, 2007 and subsequently are
pro­vided in the table below.  These prices do not include
allowance for retail mark-up or mark-down, commissions or other transaction
costs.
 
 Highest
      Price
              Lowest
      Price
              Average
      ReportedFor
      the Quarter Ended
              For
      the Quarter ($)
              For
      the Quarter ($)
              Last
      Sale Price ($)September
      30, 2005
              1.05
              0.38
              0.68December
      31, 2005
              0.98
              0.25
              0.67March
      31, 2006
              1.02
              0.20
              0.61June
      30, 2006
              0.90
              0.30
              0.49September
      30, 2006
              0.50
              0.20
              0.33December
      31, 2006
              0.55
              0.35
              0.47March
      31, 2007
              0.60
              0.40
              0.48June
      30, 2007
              0.51
              0.30
              0.42September
      30, 2007
              0.75
              0.30
              0.34December
      31, 2007
              1.01
              0.27
              0.45March
      31, 2008
              0.75
              0.35
              0.47June
      30, 2008
              1.10
              0.50
              0.80
 
 
 (b)
              Holders.
 
 The
number of record holders of our Common Stock on June 30, 2007 was approximately
414.
 
 (c)
              Dividends.
 
 AmerAlia
has not paid dividends on its Common Stock and has no plans to pay cash
dividends in the future.
  25
 Table of Contents
  (d)
              Securities
      authorized for issuance under equity compensation
  plans.
 
 The
following is provided with respect to compensation plans (including individual
compensation arrangements) under which equity securities are authorized for
issuance as of the fiscal year ending June 30, 2007.
 
 Equity Compensation Plan
      Information (1)Plan
      Category and Description
              
              Number
      of Securities to be issued upon exercise of outstanding options, warrants,
      and rights
              
              
              Weighted-average
      exercise price of outstanding options, warrants, and rights
              
              
              Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))(a)
              
              
              (b)
              
              
              (c)Equity
      compensation plans approved by security holders
              
              
              915,000
              
              
              $
              0.62
              
              
              
              460,000Equity
      compensation plans not approved by security holders (2)
              
              
              200,000
              
              
              $
              3.00
              
              
              
              -0-Total
              
              
              1,115,000
              
              
              $
              1.04
              
              
              
              460,000
 (1)
              This
      does not include options held by management and directors that were not
      granted as compensation.  In each case, the disclosure refers to
      options or warrants unless otherwise specifically
  stated.
 (2)
              Options
      granted in April 2004 to some present directors and another director who
      has since retired at variable exercise prices up to $3 until June 30,
      2009.
 
 (e)
              Recent
      Sales of Unregistered Securities -- Item 701
  Disclosure.
 
 There
were no issues of shares of common stock sold during the fiscal year ended June
30, 2007.  However, we have issued various promissory notes as
discussed above under Item 1(b) at “Our Financing Arrangements”.
  ITEM
      6.
              MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION
 
 (b)
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
 
 Our
business is to be a profitable natural products company through our ownership of
our natural sodium leases and water rights.  We are currently involved
in the production of various grades of sodium bicarbonate recovered from our
resource of naturally occurring nahcolite using solution mining.  We
have directed our efforts to improve our business performance toward our three
objectives of being a low cost producer of all grades of sodium bicarbonate,
increasing our market penetration of the North American market and increasing
the price at which we sell our product.  We believe that NSI is now
the second largest supplier of sodium bicarbonate in North
America.  We consider that while we have demonstrated progress toward
these objectives, we have not yet achieved our full capabilities.  We
have invested heavily in our production capacity, particularly our cavities
which are the source of both our natural sodium bicarbonate and our strategic
low cash cost of production advantage over our competitors.
 
 It is now
five years since we acquired the majority of our assets and four years since we
concluded our financing arrangements with the Sentient Entities, our private
equity financial partners.  In that time we have accomplished much to
develop our business.  Fiscal year 2004 was the first complete fiscal
year of our ownership.  Our annual sales in tonnages and gross
revenues have grown as shown in the following tables:
  26
 Table of Contents
 
 Fiscal
              Sales
      (tons)
              %
      ChangeYear
              
              on
      prior FY2004
              84,1032005
              85,038
              +
      1.12006
              88,910
              +
      4.62007
              101,970
              +14.72008
              101,594
              -  0.4Calendar
              Sales
      (tons)
              %
      ChangeYear
              
              on
      prior CY2004
              79,3132005
              87,746
              +10.62006
              94,858
              +  8.12007
              102,702
              +  8.3Fiscal
              Gross
      Revenues
              %
      ChangeYear
              ($)
              on
      prior FY2004
              12,609,0412005
              14,141,500
              +
      12.22006
              15,293,688
              +   8.12007
              16,951,997
              +
      10.8
 
 During
calendar year 2007, and so far in 2008, sales have been constrained by
production interruptions and cavity limitations.  We now expect that
the new cavity we have recently brought into production will improve our
production and supply capability.  This performance is illustrated on
a quarterly basis in the following graph.
  
  Most of
our plant costs are fixed in nature. Consequently, our costs of production on a
per ton basis are sensitive to variations in the volume of production. Our plant
has a nameplate capacity of 125,000 tons of production per year. The facility
has, because of limitations in the capacity of the cavities to deliver an
adequate volume and concentration of brine and the occasional limitations of the
market, never produced at or near nameplate capacity.  Its highest
production was nearly 103,000 tons in CY2007.  Since the plant has
never produced at nameplate capacity we are unable to determine the actual
current capacity of the mine and plant although we believe that its capacity
under the current configuration of the facilities would exceed 103,000 tons per
year.
  27
 Table of Contents
  As
discussed elsewhere in this report, our objective is to further increase our
production capacity to support our growing sales.  The recovery of
sodium products from our leases is governed by a BLM approved mine plan and we
have authority to recover up to 638,000 tons of sodium bicarbonate from our
existing cavities.  The BLM has also authorised recovery of up to
320,000 tons of sodium bicarbonate from a new cavity which has been drilled and
is now being brought into production. This cavity cost an estimated $1,000,000
to complete.  We intend to obtain approval to drill another new
production cavity in accordance with the mine plan to further support our plans
to expand production capacity and to ensure a continuous supply of high quality
brine to the plant.
 
 In
addition to the development of our sodium bicarbonate business, we have
identified value in our extensive water rights and while we have completed an
agreement to sell water to our neighbor, Shell, for its oil shale investigation
facility, our initial sales have not been significant and we intend to devote
more attention to generating more sales from this resource.  Our
leases are situated in an area that is receiving extensive interest and
publicity for the prospective development of its oil shale
resources.  If an oil shale industry develops it will likely require
access to large quantities of water which we are capable of
supplying.  However, we have rights to far greater volumes of water
than we anticipate will be required for this purpose and we are investigating
how we can exploit this significant asset.  We also plan to seek a
research lease and ultimately a commercial lease to exploit the oil shale
resource, most likely in partnership with suitably qualified
organizations.
 
 Gross
revenues of $16,951,997 in FY2007 were 10.8% higher than the $15,293,688 earned
in FY2006 due mainly to higher prices and cost recoveries.  Cost of
goods sold of $15,181,369 increased by 3.9% over FY2006 $14,611,153 due to
higher production and distribution costs.  The resulting gross profit
of $1,770,628 represented a 159.4% increase on the previous year’s gross profit
of $682,535.  General and administrative expenses were 1.2% lower than
the previous year; $1,080,151 compared with $1,093,523.  Depreciation,
amortization and accretion expenses were 9.4% higher at $1,267,781 compared with
$1,158,700 as a result of higher levels of production.  Consequently,
the loss from operations was reduced to $577,304 from $1,569,688, a reduction of
63.2%.  Interest expense increased 32.2% to $5,636,448 from $4,263,677
although there was no more amortisation of financing costs after the final
amortisation charge of $300,185 in the previous year.  These financing
costs represented the amortisation of outlays previously
capitalised.  Interest costs increased in FY2007 primarily because the
interest payable under the Sentient debentures increases in accordance with the
graduated terms of those debentures.  The exchange of various debt
securities held by Sentient for 53.5% of the equity of NSI resulted in a loss on
settlement of debt of $1,832,300.  During the previous year we
reviewed the carrying value of our engineering drawings and some of our assets
previously acquired for the development of facilities in the Rock School lease
and recorded an impairment charge on these assets totalling $1,843,281 but there
was no impairment charge in FY2007.  We also recorded a gain on our
minority interest in NSI for the month of June following the exchange of
securities with the Sentient entities of $42,121.  The resulting net
loss was $7,994,404 compared with $7,822,468 in the previous year, a decrease of
2.2%.
 
 Liquidity
and Capital Resources
 
 Our
financing arrangements when we bought this business were structured as debt with
very onerous interest obligations.  Our management’s attention was
necessarily focused on developing the new business activity and creating
value.  The fruits of our efforts are now becoming apparent in the
increasing profitability of our operations and in the additional recognition of
our asset values.
 
 While NSI
established a good credit reputation over time with its suppliers, NSHI and
AmerAlia have stayed in business through the support of our lenders, suppliers,
directors and executive officers who have both advanced further funds to the
company and have not received compensation and reimbursement of expenses
properly due to them.  The Sentient Entities have allowed us to accrue
unpaid interest on their debentures and, similarly, AmerAlia has not received
interest on its debentures.  Consequently, AmerAlia has been unable to
pay the interest required on its outstanding promissory notes.  These
straitened circumstances led to our inability to file our reports to the SEC on
time. This filing of the 2007 annual report follows the filing of our 2006
annual report last month and we expect to file the FY2008 quarterly reports soon
followed by a timely filing of our 2008 annual report.
  28
 Table of Contents
  In May
2007 the Sentient Entities converted their working capital loans and Series B2
debentures into ownership of 53.5% of the equity of NSI.  In August
2007 we utilized our factoring facility with Wells Fargo to borrow $960,000 that
we placed on deposit with Wells Fargo Bank to secure letters of credit to
support our bonding obligations with the BLM, the United States Environment
Protection Agency and the State of Colorado.  Also, in August 2007
another Sentient affiliate (“Sentient II”) acquired from the Mars Trust all of
its AmerAlia shares and the debt securities it held, together with its guaranty
rights resulting from the Trust meeting our obligations to the Bank of
America.   Sentient II also loaned us $350,000 at 6% interest
until July 31, 2008 for working capital purposes.  In addition, we
agreed some interim arrangements with various Sentient funds:
 
 1.
              Effective
      as of October 31, 2007, Sentient I acquired from NSI its $750,000 Series A
      Secured debenture and accrued interest of
  $271,215.75.
 2.
              Effective
      as of March 31, 2008, Sentient Global Resources Fund III LP (“Sentient
      III”) purchased AmerAlia’s rights to outstanding interest due on its
      Series A Secured 10% Debentures for $1,406,875. AmerAlia used these funds
      for the purpose of paying some of the outstanding interest owed to the
      holders of its Series A Debenture Secured promissory
      notes.  Sentient III also acquired Sentient I’s rights to
      interest owed on its Series A debentures, including the interest due on
      the debenture previously owned by NSI, for $2,076,334.20;
    and
 3.
              In
      May 2008 Sentient I loaned AmerAlia $465,000 for the purpose of
      contributing capital to NSHI which, in turn contributed $465,000 to NSI as
      its proportionate share of $1,000,000 raised by NSI for well field
      development expenditures.
 
 In June
2008, we issued another promissory note to Sentient III for $300,000 at 6% per
annum interest repayable on July 31, 2008 to enable us to access funds to pay
ordinary trade payables as approved by Sentient III.  We borrowed
$80,000 to pay audit fees.  In June we were also advised that Sentient
III had acquired the promissory note for $1,200,000 we had issued to US Filter
and had since been assigned to HPD, LLC.   As a material
inducement to Sentient III to acquire the note, HPD agreed to provide Sentient
III (or its nominee) with up to $600,000 of discounts on any contracts awarded
by Sentient III or its nominee to HPD for the supply of equipment or services
within a twelve month period of its acquisition of the note.
 
 All these
activities are discussed more comprehensively in this report at Item 1 –
“Business of the Issuer” and at Item 12 – “Certain Relationships and Related
Party Transactions”.
 
 As we
have indicated in our recent filings, we have been holding discussions with
Sentient and various creditors with a view to recapitalizing the
company.  These discussions have not yet resulted in any restructuring
agreements for the company and its subsidiaries and they may not result in any
agreements but we have reached a point where those discussions can now proceed
upon filing this annual report.
 
 During
the fiscal year ended June 30, 2007 we sourced funds by raising $766,498 by
issuing promissory notes to related parties; through increasing our reliance on
creditors ($698,870) and increased accruals ($109,571); the accrual of interest
payable ($3,613,440); and the accrual of compensation, expenses and advances
from related parties (totalling $974,057).  We also raised $223,768
through accessing prepaid expenses.  We utilized our cash in further
investment in property and equipment ($544,429), cavity and well development
($628,294), increases in inventory ($54,308), accounts receivable ($142,011),
payments on capital leases and loans ($203,865), applying $92,000 to a bank
certificate of deposit to secure a bond and funding our operating
loss.
 
 We do not
expect the sale of any significant equipment nor any significant change in the
number of our employees now that we have established our staffing
requirements.  Our objective in product research and development is to
identify customer needs that present opportunities for securing improved prices
and tonnages while continuing to improve plant output through additional
cavities and plant improvements.
  29
 Table of Contents
  (c)
              Off-Balance Sheet
      Arrangements
 
 We do not
have any significant off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors other
than that we sometimes enter into forward purchases of natural gas in order to
secure supplies at fixed prices for up to 75% of our anticipated
requirements.
  ITEM 7.
              FINANCIAL
STATEMENTS
 
 The
financial statements are attached to this report following
Signatures.
  ITEM
      8.
              CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
 
 None.
 
 ITEM
      8A.
              CONTROLS AND
PROCEDURES
 
 As
required by Rule 13a-15 under the Securities Exchange Act of 1934 and Item 307
of Regulation S-B we carried out an evaluation of the effectiveness of the
design and operation of our disclosure controls and procedures within the 90
days prior to filing this report and since June 5, 2008 when we filed our
previous annual report for the fiscal year ended June 30, 2006.  This
evaluation was carried out under the supervision and with the participation of
our Chief Executive Officer and our Chief Financial Officer who concluded that
our disclosure controls and procedures are not effective.
 
 Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in our reports filed or
submitted under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s
rules and forms.  Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed in our reports filed under the Exchange Act is accumulated and
communicated to management, including its Chief Executive Officer and to the
Chief Financial Officer as appropriate, to allow timely decisions regarding
required disclosure.
 
 Throughout
2006 and 2007 we have experienced difficulties in retaining qualified accounting
professionals to supervise our accounting functions at NSI resulting in our
engaging an external contractor in November 2007 with adequate resources and
qualifications to fulfil that role.  A lack of financial resources and
personnel has also caused insufficient segregation of duties and an inability to
properly record transactions and ensure the accuracy of our financial reports
without requiring additional analyses and other post-closing procedures and
compliance with generally accepted accounting principles.  These
difficulties also contributed to our failure to complete audits of our financial
statements and the timely filing of our SEC reports.  However, we
believe that the consolidated financial statements included in this report and
in our report for the fiscal year ended June 30, 2006 fairly present in all
material respects our financial condition, results of operations and cash flows
for those periods.
 
 In
response to these material weaknesses we intend to strengthen our accounting
functions and provide additional resources for its operation.  We
shall continue to monitor and evaluate the effectiveness of our internal
controls and procedures and our internal accounting controls over financial
reporting.
 
 ITEM
      8B.
              OTHER
INFORMATION
 
 None.
  30
 Table of Contents
  PART
III
 
 ITEM
      9.
              DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
      COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
  ACT
 
 (a)
              Identification
      of Directors and Executive
Officers.
 
 The
following table sets forth the names and ages of all the Directors of AmerAlia,
positions held by each such person, and when such person was first elected or
appointed.  The directors each serve until their successors are duly
elected and qualified; officers are appointed by, and serve at the pleasure of,
the Board of Directors.
 
 Name
      & Age
              Position
              First
      ElectedOr
      AppointedBill
      H. Gunn (66)
              Chairman
      of the Board,
              02/84President
      & CEO of AmerAlia, Inc.
              09/90Robert
      C.J. van Mourik (55)
              Director,
              01/89Executive
      Vice President & Chief Financial Officer,Secretary
      & Treasurer of AmerAlia, Inc.Neil
      E. Summerson (60)
              Director
      (1)
              09/90Geoffrey
      C. Murphy (67)
              Director
      (1,2)
              06/99James
      V. Riley (71)
              Director
      (1,2)
              10/01Robert
      C. Woolard (72)
              Director
      (2)
              05/04J.
      Jeffrey Geldermann (58)
              Director,
      President, Credentials, Inc.(2)
              06/04(1)  Members
      of the Audit Committee.(2)  Members
      of the Compensation Committee
 
 There are
no family relationships among the officers or directors.  No
arrangement exists between any of the above officers and directors pursuant to
which any one of those persons was elected to such office or
position.
 
 Directors
hold office until the next annual meeting of share­holders and a successor
is elected and qualified, or until their resignation.  Executive
officers are elected at annual meetings of the Board of
Directors.  Each such officer holds office for one year or until a
successor has been duly elected and qualified or until death, resignation or
removal.
 
 A brief
summary of the business experience of each person who is currently an officer or
director of AmerAlia, and their service with us is as follows:
 
 BILL H.
GUNN
 
 Mr. Gunn
graduated in Commerce from the University of Queensland, Australia in 1963,
achieving his Accounting Certificate from the University of Queensland in the
same year.  Subsequently, he was admitted as a member of the
Australian Society of Certified Practising Accountants and has successfully
completed and passed the examinations for admittance as a Certified Public
Accountant (CPA) in the USA.
 
 Mr. Gunn
has been a self-employed investor, CPA, and a director of several Australian
Stock Exchange listed public companies, as well as a number of majority owned
private corporations.   Since February 1984 he has been Chairman,
CEO and President of AmerAlia.
  31
 Table of Contents
  ROBERT VAN
MOURIK
 
 Mr. van
Mourik has served as Executive Vice President, Chief Financial Officer,
Treasurer and Secretary of AmerAlia since 1989 and was elected a director in
September 1990.  He graduated in 1974 with a Bachelor of Applied
Science (Applied Chemistry) from the Victoria Institute of Colleges, Australia
and in 1981 with a Master’s Degree in Business Administration from the
University of Newcastle, Australia.  He is a Fellow of the Australian
Institute of Company Directors.
 
 NEIL E.
SUMMERSON
 
 Mr.
Summerson is a director of several Australian listed and unlisted public
companies and closely held, private companies.  He is a director of
Bank of Queensland Ltd, Moore Stephens (Qld) Limited, Pioneer Permanent Building
Society Limited, Home Building Society Limited, PQ Lifestyles Limited and
Australian Made Campaign Limited; Australian public companies.  He was
the Senior Partner, and for five years prior was Managing Partner, in the
international accounting firm of Ernst & Young, at its offices in Brisbane,
Australia.  Mr. Summerson received his Bachelor of Commerce degree
from the University of Queensland in 1968.  He is a Fellow of the
Institute of Chartered Accountants
 
 GEOFFREY C.
MURPHY
 
 From September 1, 2001 to
September 30, 2004Mr. Murphywas employed as the Senior
Vice President of Citrico Holdings, Inc., a company engaged in the manufacture
of lemon-based products.  Previously, he was, for more than five
years, a principal of Coloney Von Soosten + Associates Inc., a consulting firm
located inKenilworth,Illinois.He is no longer active in any
business endeavors.Mr. Murphy graduated with a
Bachelor’s degree fromDartmouthCollege, and a Master’s of Business
Administration from the Amos Tuck School of Business Administration atDartmouthCollege.
 
 JAMES V.
RILEY
 
 In 1975,
Mr. Riley founded Transportation Media, Inc. and served as its President and
Chief Executive Officer until the company was sold to Clear Channel
Communications in February 1998.  The corporation, now known as Clear
Channel Airports, specializes in the operation, marketing and sales of media
programs at airports.  Mr. Riley retired as the Chairman of Clear
Channel Airports in March 2005.
 
 ROBERT C.
WOOLARD
 
 Mr.
Woolard retired in August 2003 after being in the brokerage and investment
banking business for 45 years.  His last 5 years were spent at Stifel,
Nicolaus & Company, a member firm of the New York Stock Exchange as a
Vice-President/Account Supervisor in the Investment Banking
Department.
 
 J. JEFFREY
GELDERMANN
 
 Mr. Geldermann
is and has been since 1997, President of Credentials, Inc., a company offering
computer based electronic academic qualifications verification services used by
colleges and universities.
 
 (b)
              Identification
      of Significant Employees.
 
 In
addition to the executive officers discussed above, AmerAlia employs in its
Natural Soda subsidiary two significant employees.  They are Robert
(“Bob”) Warneke, Director of Manufacturing, and Bradley (“Brad”) Bunnett, Vice
President – Commercial Operations.
  32
 Table of Contents
  Bob
Warneke joined NSI in August 2007.  He has 29 years of manufacturing
experience in industrial, chemical and mineral industries.  He was
employed by FMC Corporation for 14 years until 1993 progressing in engineering
and management.  In his last assignment with FMC, Bob managed the
start up of a new sodium bicarbonate facility in Green River,
Wyoming.  In 1993 he joined North American Chemical Company and its
successor companies as the plant manager of a new sodium bicarbonate plant in
Rifle which is now the NSI plant.  Bob transferred from IMC Chemical
Company in 2000 to become plant manager of their soda ash facility in California
until his return to Colorado in early 2007.
 
 Brad
Bunnett was Vice President of Sales & Marketing for Energy Supplements
International in Fullerton, California from July 2002 until he joined NSI in
April 2004.   From January 2001 until July 2002, he was Vice
President of Sales and Marketing for Austin-Tetra, Inc. of Irving, Texas and
previously a Vice President of Sales for Computer Associates managing a sales
team with a $43 million sales budget.
 
 (c)
              Family
      Relationships.
 
 There are
no family relationships among the officers or directors.
 
 (d)
              Involvement
      in Certain Legal Proceedings:
 
 During
the past five years, no director or executive officer of AmerAlia
has:
 
 (d)(1)       Filed
or has had filed against him a petition under the federal bankruptcy laws or any
state insolvency law, nor has a receiver, fiscal agent or similar officer been
appointed by a court for the business or property of such person, or any
partnership in which he was a general partner, or any corporation or business
association of which he was an executive officer at or within two years before
such filings;
 
 (d)(2)       Been
convicted in a criminal proceeding or is a named subject of a pending criminal
proceeding (excluding traffic violations and other minor offences);
 
 (d)(3)       Been
the subject of any order, judgment, or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently or
temporarily en­joining, barring, suspending or otherwise
limiting his involvement in any type of business, securities or bankingactivities;
 
 (d)(4)       Been
found by a court of competent jurisdiction in a civil action or by the
Securities and Exchange Commission, or by the Commodity Futures Trading
Commission to have violated a federal or state securities or commodities law,
and the judgment has not been reversed, suspended, or vacated.
 
 (e)
              Audit
      Committee Financial Expert.
 
 The Board
of directors has determined that Messrs. Neil E. Summerson and Geoffrey C.
Murphy are both qualified to be and are Financial Experts on the Audit
Committee.
 
 (f)
              Identification
      of the Audit Committee.
 
 Members
of the Audit Committee are Messrs. Neil E. Summerson (Chairman), Geoffrey C.
Murphy and James V. Riley.  The purpose of the Audit Committee is to
provide assistance to the corporate directors in fulfilling their responsibility
to the shareholders, potential shareholders and the investment community
relating to corporate accounting, reporting practices and the quality and
integrity of the company’s financial reports.  The committee engages
the services of the auditors.  Each of the members of the audit
committee is independent as that term is defined in Rule 4400(a)(15) of the
Nasdaq listing standards.  The committee did not meet formally during
the year ended June 30, 2007 but has met twice since.
  33
 Table of Contents
  (g)
              Compensation
      Committee.
 
 A
compensation committee comprising the non-executive directors of the Board of
Directors was first formed early in 1993 and determined the compensation payable
to Messrs. Gunn and van Mourik, as set out below.  The compensation
committee now comprises Messrs. Murphy, Riley, Woolard and Geldermann; none has
been an officer nor an employee of AmerAlia or any of our subsidiaries during
the fiscal year ended June 30, 2005, or subsequently.  None of Mr.
Murphy, Mr. Riley, Mr. Woolard or Mr. Geldermann has any other direct or
indirect relationship with AmerAlia requiring disclosure by us pursuant to Item
401 of Regulation S-K.  Furthermore, no executive officer of AmerAlia
served as a member of the compensation committee (or similar committee) of
another entity that dealt with compensation paid to any member of our
compensation committee, or with which any other interlocking relationship
exists.
 
 The
compensation committee held two meetings during fiscal year ended June 30, 2006
and one since.  The compensation committee has the authority to review
and make recommendations to our Board of Directors with respect to the
compensation of our executive officers.
 
 Section
16(a) Beneficial Ownership Reporting Compliance.
 
 Section
16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) requires
AmerAlia’s directors and officers and persons who own more than 10% of
AmerAlia’s equity securities to file reports of ownership and changes in
ownership with the Securities and Exchange Commission (the
“SEC”).  Directors, officers, and greater-than-10% shareholders are
required by SEC regulation to furnish AmerAlia with copies of all Section 16(a)
reports filed.
 
 Based
solely on its review of the copies of the reports it received from persons
required to file, AmerAlia believes that during the period from July 1, 2006
through June 30, 2007, all filing requirements applicable to officers,
directors, and greater-than-10% shareholders have been met in accordance with
the requirements of Section 16(a).
 
 ITEM
      10.
              EXECUTIVE COMPENSATION
 
 Summary
Compensation Table.
 
 The
following table sets forth information regarding compensation paid to our
executive officers during the two fiscal years ended June 30,
2007.  Messrs. Gunn and van Mourik were the only executive officers
receiving or accruing compensation exceeding $100,000 during fiscal year 2007,
as shown below.  None of our executive officers are subject to
employment agreements.  The compensation of our executive officers is
determined by the compensation committee of the board of
directors.  Mr. Gunn receives a salary of $100,000 per year from NSI
that is paid directly by NSI.  Otherwise, Mr. Gunn and Mr. van Mourik
are paid by on an irregular basis.  We have not always had the
resources to pay the compensation due to them nor the reimbursement of expenses
or advances they have made to us.
  34
 Table of Contents
 
 Name
      and Principal Position
              Year
              
              Salary
                (1)
                $
              
              
              Bonus
                $
              
              
              Stock
      Awards
                $
              
              
              Option
      Awards
                $
              
              
              Non-equity
      incentive plan compensation
                $
              
              
              Non-qualified
      deferred compensation earnings
                $
              
              
              All
      other compensation
                (2)
                $
              
              
              Total
                $Bill
      H. GunnPresident
      &
              2007
              
              
              214,000
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              214,000Chief
      Executive
              2006
              
              
              214,000
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              214,000OfficerRobert
      van
              2007
              
              
              164,000
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              164,000Mourik
              2006
              
              
              164,000
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              164,000Chief
      Financial Officer &Executive
      Vice President
 (1)
              At
      June 30, 2007 we had not paid $243,661 of compensation nor reimbursed
      expenses and advances due to Bill H. Gunn and we had not paid $430,518 of
      compensation nor reimbursed expenses and advances due to Robert van Mourik
      (at June 30, 2006: $225,576 and $444,812 respectively).  These
      amounts include $14,000 director’s fees due annually.  During
      the year ended June 30, 2007, Mr. Gunn received all his salary and
      directors fees and $11,045 that had previously been
      accrued.  Mr. van Mourik received all his salary and directors
      fees and $73,369 that had previously been accrued.  During the
      year ended June 30, 2006, Mr. Gunn received $171,888 of his salary and
      directors fees and we were unable to pay $28,112 which was
      accrued.  We were unable to pay any of Mr. van Mourik’s salary
      and director’s fees during the year ended June 30, 2006, which were
      accrued.  We pay interest on the accrued compensation and
      expenses that we have been unable to
pay.
 
 AmerAlia
does not have a group medical insurance plan for its executive officers although
Mr. Gunn participates in a comprehensive group medical insurance plan that NSI
has for its employees.  We have no retirement plans and, therefore,
have not made contributions to any such plan on behalf of the named
officers.
 
 We have
no plans for the payment or accrual for payment of any amounts to any executive
officer in connection with his resignation, retirement, or other termination, or
change of control or change in the executive officer's
responsibilities.  We have no long term incentive compensation plans,
defined benefit plans, or actuarial plans.  There are no plans to pay
bonuses or deferred compensation to employees of AmerAlia.
 
 2001 Stock Option
Plan:
 
 In March
2001, the Board of Directors adopted a stock option plan for its officers,
employees, and consultants.  The Board of Directors (through its
compensation committee) can issue options under this plan to acquire up to
1,000,000 shares to officers, employees and consultants.  The Plan is
intended to provide incentives to attract, retain and motivate eligible persons
whose present and potential contributions are important to our success by
offering them an opportunity to participate in our future performance through
awards of stock options.  In each case, the Board of Directors
(through its compensation committee) will determine the price at which options
may be issued, the term of the options, and the number of options to be
issued.  In no case may the exercise price be less than the market
value of the underlying shares at the time of grant. Our shareholders approved
this plan at the annual meeting of shareholders held in June 2001.
 
 No officer exercised stock options
during the fiscal year ended June 30, 2007.  The following table
summarizes information with respect to each person’s outstanding stock options
at June 30, 2007.
  35
 Table of Contents
 
 Option
      Awards
              
              Stock
      AwardsName
                (a)
              
              Number
      of securities underlying unexercised options # Exercisable
                (b)
              
              
              Number
      of securities underlying unexercised options # Unexercisable
                (c)
              
              
              Equity
      incentive plan awards: Number of securities underlying unexercised
      unearned options
                #
                (d)
              
              
              Option
      exercise price
                $
                (e)
              
              Option
      expiration date
                (f)
              
              Number
      of shares or units of stock that have not vested
                #
                (g)
              
              
              Market
      value of shares or units of stock that have not vested
                $
                (h)
              
              
              Equity
      incentive plan awards: Number of unearned shares, units or other rights
      that have not vested
                #
                (i)
              
              
              Equity
      incentive plan awards: Market or payout value of unearned shares, units or
      other rights that have not vested
                $
                (j)Bill
      H. Gunn
              
              
              270,000
              
              
              
              -
              
              
              
              -
              
              
              
              0.71
              
              4/18/2009
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -50,000
              
              
              
              -
              
              
              
              -
              
              
              
              3.00
              
              6/30/09
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Robert
      van
              
              
              270,000
              
              
              
              -
              
              
              
              -
              
              
              
              0.71
              
              4/18/2009
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Mourik
              
              
              50,000
              
              
              
              -
              
              
              
              -
              
              
              
              3.00
              
              6/30/09
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
 
 
 Compensation
of Directors
 
 Our
directors are authorized to receive $14,000 cash compensation per year for their
services as directors each year.  In addition, the Chairman of the
Audit Committee receives $6,000 per year and other Audit Committee members
$4,000 per year; the Chairman of the Compensation Committee receives an
additional $2,000 per year.  These arrangements were approved
September 10, 2002 as of July 1, 2002.  We also reimburse directors
for expenses incurred on behalf of AmerAlia.
 
 Name
                (a)
              Year
              
              Fees
      earned or paid in cash
                $
                (b)
              
              
              Stock
      Awards
                $
                (c)
              
              
              Option
      Awards
                $ *
                (d)
              
              
              Non-equity
      incentive plan compensation
                $
                (e)
              
              
              Non-qualified
      deferred compensation earnings
                $
                (f)
              
              
              All
      other compensation
                $
                (g)
              
              
              Total
                $
                (j)Neil
      E.Summerson
              2007
              
              
              20,000
              
              
              
              -0-
              
              
              
              9,375
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              29,375Geoffrey
      C.Murphy
              2007
              
              
              20,000
              
              
              
              -0-
              
              
              
              9,375
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              29,375James
      V.Riley
              2007
              
              
              18,000
              
              
              
              -0-
              
              
              
              9,375
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              27,375Robert
      C.Woolard
              2007
              
              
              14,000
              
              
              
              -0-
              
              
              
              9,375
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              23,375J.
      JeffreyGeldermann
              2007
              
              
              14,000
              
              
              
              -0-
              
              
              
              9,375
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              23,375
 *
              The
      option awards represents the dollar amount recognized for financial
      statement reporting purposes for the fair value of stock options granted
      to each of the named directors in accordance with SFAS
    123R.
  36
 Table of Contents
  2001 Directors’ Incentive
Plan:
 
 In March
2001, the Board of Directors adopted a plan by which each director (who is not
an employee or officer) is granted:
 ·
              An
      option to purchase 75,000 shares at a current market price upon joining
      the Board of Directors; and
 ·
              An
      option to purchase 37,500 shares on July 1 of each year he remains a
      director.
 
 The
exercise price for these options is the average market price of our Common Stock
during the month of June preceding each grant date, and the options have a
three-year term. All options granted under this plan are exercisable six months
after the date of grant.
 
 The following table summarizes
information with respect to each non-executive director’s outstanding stock
options at June 30, 2007.
  Option
      AwardsName
                (a)
              Number
      of securities underlying unexercised options
                #
      Exercisable
                (b)
              Number
      of securities underlying unexercised options
                #
      Unexercisable
                (c)
              Option
      exercise price
                $
                (e)
              Option
      expiration date
                (f)Neil
      E. Summerson
              25,000
              -
              3.00
              6/30/0937,500
              -
              0.54
              6/30/0837,500
              -
              0.42
              6/30/0937,500
              -
              0.40
              6/30/10Geoffrey
      C. Murphy
              25,000
              -
              3.00
              6/30/0937,500
              -
              0.54
              6/30/0837,500
              -
              0.42
              6/30/0937,500
              -
              0.40
              6/30/10James
      V. Riley
              25,000
              -
              3.00
              6/30/0937,500
              -
              0.54
              6/30/0837,500
              -
              0.42
              6/30/0937,500
              -
              0.40
              6/30/10Robert
      C. Woolard
              25,000
              -
              3.00
              6/30/0937,500
              -
              0.54
              6/30/0837,500
              -
              0.42
              6/30/0937,500
              -
              0.40
              6/30/10J.
      Jeffrey Geldermann
              37,500
              -
              0.54
              6/30/0837,500
              -
              0.42
              6/30/0937,500
              -
              0.40
              6/30/10
 
 On July
1, 2007, we granted 37,500 options to acquire shares of Common Stock at $0.40
per share until June 30, 2010 to each of the following non-executive
directors:
 ·
              Geoffrey
      C. Murphy
 ·
              Neil
      E. Summerson
 ·
              James
      V Riley
 ·
              Robert
      C. Woolard and
 ·
              J.
      Jeffrey Geldermann.
 
 During
the fiscal year ended June 30, 2008 Messrs. Summerson, Riley, Murphy and Woolard
each exercised options to acquire 37,500 shares at $0.53 per
share.
  37
 Table of Contents
  On July
1, 2008 , we granted 37,500 options to acquire shares of Common Stock at $0.88
per share until June 30, 2011 to each of the following non-executive
directors:
 ·
              Geoffrey
      C. Murphy
 ·
              Neil
      E. Summerson
 ·
              James
      V Riley
 ·
              Robert
      C. Woolard and
 ·
              J.
      Jeffrey Geldermann.
 
 
 Other
Arrangements.
 
 Except as
described herein, no officer or director of AmerAlia has been or is being paid
any cash compensation, or is otherwise subject to any deferred compensation
plan, bonus plan or any other arrangement and understanding whereby such person
would obtain any cash compensation for his services for and on behalf of
AmerAlia except that for the financial years ended June 30, 2007 and 2006 an
allowance for interest on unpaid outstanding compensation, directors fees and
expenses reimbursement was accrued as follows:
 
 
 Director
              
              Fiscal
      year ended June 30,2007
              
              
              2006Robert
      van Mourik
              
              $
              69,946
              
              
              $
              42,761Bill
      H. Gunn
              
              
              29,003
              
              
              
              22,538Geoffrey
      C. Murphy
              
              
              15,358
              
              
              
              11,965Neil
      E. Summerson
              
              
              4,758
              
              
              
              4,230James
      V. Riley
              
              
              4,933
              
              
              
              2,325Robert
      C. Woolard
              
              
              4,862
              
              
              
              2,700J.
      Jeffrey Geldermann
              
              
              4,594
              
              
              
              2,466Total:
              
              $
              133,454
              
              
              $
              88,985
 
 
 (g)
              Employment
      Contracts and Termination of Employment and Change-in-Control
      Arrangements.
 
 AmerAlia
has no compensation plan or arrangement with respect to any executive officer
which plan or arrangement results or will result from the resignation,
retirement or any other termination of such individual's employment with
AmerAlia.  AmerAlia has no plan or arrangement with respect to any
such persons which will result from a change in control or a change in the
individual's respon­sibilities following a change in
control.
  38
 Table of Contents
  ITEM
      11.
              SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
      RELATED STOCKHOLDER MATTERS
 
 (a)
      and (b)
              Security
      Ownership of Certain Beneficial Owners and
  Management
 
 At July
2, 2008, we had one class of outstanding voting securities, our common stock
(referred to herein as the “Common Stock”).  The following table sets
forth information as of July 2, 2008 on the ownership of the Common Stock for
all directors, individually, all executive officers named in the compensation
table, all executive officers and directors as a group, and all beneficial
owners of more than five percent of the Common.  The following
shareholders have sole voting and investment power with respect to the shares
unless indicated otherwise.
 
 Name
      & Address
              Amount
      & Nature
              Percent
      ofof
      Beneficial Owner
              of
      Beneficial Ownership
              Common
      Stock*Robert
      C. Woolard
              1,382,411   (1)
              7.8%James
      V. Riley
              718,650   (2)
              4.1%Bill
      H. Gunn
              678,060   (3)
              3.8%Robert
      van Mourik
              671,384   (4)
              3.8%Neil
      E. Summerson
              377,917   (5)
              2.2%Geoffrey
      C. Murphy
              309,118   (6)
              1.8%J.
      Jeffrey Geldermann
              313,600   (7)
              1.8%Officers
      & Directors as a Group (7 persons)
              4,594,570   (8)
              23.0%Sentient
      USA Resources Fund II, LP
              8,954,208   (9)
              45.8%George
      Town, Grand Cayman, Cayman IslandsKaren
      O. Woolard
              1,382,411
      (10)
              7.8%219
      Eagle Pointe Drive, Branson, MO  65616Charles
      D. O’Kieffe
              1,113,293
      (11)
              6.0%523
      Washington Ave, Wilmette, IL 60091Sentient
      USA Resources Fund, LP
              129,373,670
      (12)
              82.2%George
      Town, Grand Cayman, Cayman Islands
 
 *
              Percent
      of common stock is calculated individually (or as a group) assuming an
      individual (or all members of a group) exercises its options or any other
      rights it might have to take up additional common stock.  The
      calculations assume that other holders of equity interests do not exercise
      their rights unless they are part of the same
  group.
  
  .
 (1)
              Includes
      166,875 shares held by the Robert C Woolard Trust, 22,000 shares held in
      Mr. Woolard's IRA account, options to acquire 37,500 shares at $0.42 until
      June 30, 2009, options to acquire 37,500 shares at $0.40 until June 30,
      2010, options to acquire 37,500 shares at $0.88 until June 30, 2011 and
      options to acquire 25,000 shares at $3.00 until June 30, 2009. Also
      includes the following shares in which Mr. Woolard disclaims any
      beneficial interest:  392,295 shares and options to acquire
      400,000 shares at $1.00 until March 19, 2009 held by Karen O Woolard, his
      spouse; 22,000 shares held in an IRA account for Karen O Woolard and
      266,741 shares held by the Karen O Woolard
  Trust.
 (2)
              Includes
      381,150 shares of Common Stock held by the James V. Riley Revocable Trust,
      options held directly to acquire 37,500 shares of Common Stock at $0.42
      per share exercisable through June 30, 2009, options to acquire 37,500
      shares of Common Stock at $0.40 per share exercisable through June 30,
      2010, options to acquire 37,500 shares at $0.88 until June 30, 2011 and
      options to acquire 25,000 shares at $3.00 until June 30,
      2009.  In addition, options are held by the Trust to acquire
      200,000 shares of common stock at $1.00 per share until March 19,
      2009.
 (3)
              Includes
      96,125 shares of Common Stock owned by Gunn Development Pty. Ltd. (of
      which Mr. Gunn is a controlling shareholder); options to acquire 24,000
      shares at $1.00 until March 19, 2008 held by Gunn Development Pty Ltd; and
      options held directly to acquire 270,000 shares at $0.71 per share until
      April 18, 2009 and options to acquire 50,000 shares at $3.00 June 30,
      2009.
  39
 Table of Contents
  (4)
              Includes
      240,759 shares of Common Stock owned by Ahciejay Pty. Ltd. as trustee for
      The R.C.J. Trust, and 54,125 shares of Common Stock owned by the R.C.J.
      Superannuation Fund, as to both of which Mr. van Mourik and his family are
      beneficiaries.  Also includes options to acquire 56,000 shares
      at $1.00 until March 19, 2008 held by Ahciejay Pty Ltd and options held
      directly to acquire 270,000 shares at $0.71 per share until April 18, 2009
      and options to acquire 50,000 shares at $3.00 until June 30,
      2009.
 (5)
              Includes
      165,417 shares held by held by Glendower Investments Pty Ltd as trustee
      for a trust of which Mr. Summerson and his family are beneficiaries; and
      options held directly to acquire 37,500 shares at $0.42 expiring June 30,
      2009, options to acquire 37,500 shares of Common Stock at $0.40 per share
      exercisable through June 30, 2010, options to acquire 37,500 shares at
      $0.88 until June 30, 2011 and options to acquire 25,000 shares at $3.00
      until June 30, 2009.
 (6)
              Includes
      options to acquire 37,500 shares at $0.42 expiring June 30, 2009, options
      to acquire 37,500 shares of Common Stock at $0.40 per share exercisable
      through June 30, 2010, options to acquire 37,500 shares at $0.88 until
      June 30, 2011 and options to acquire 25,000 shares at $3.00 until June 30,
      2009.
 (7)
              Includes
      options to acquire 120,000 shares of common stock at $1.00 per share until
      March 19, 2009, options to acquire 37,500 shares at $0.42 until June 30,
      2009,options to acquire 37,500 shares at $0.40 until June 30, 2010 and
      options to acquire 37,500 shares at $0.88 until June 30,
    2011.
 (8)
              Includes
      beneficial ownership of Messrs. Woolard, Gunn, van Mourik, Riley,Summerson,Murphy and
      Geldermann, as described in notes 1, 2, 3, 4, 5, 6 and 7,
      above.
 (9)
              Includes
      7,929,820 shares of Common Stock and the right to convert a $350,000
      promissory note and interest to shares at 36 cents per share calculated as
      at June 30, 2008.
 (10)
                Mrs.
      Woolard is Mr. Woolard's spouse and these shares include 266,741 shares
      held by the Karen O Woolard Trust, 22,000 shares held in Mrs. Woolard's
      IRA account and options to acquire 400,000 shares at $1.00 until March 19,
      2009 held directly.  Also includes the following shares in which
      Mrs. Woolard disclaims any beneficial interest: 166,875 shares held by the
      Robert C Woolard Trust, 22,000 shares held in an IRA account for Robert C
      Woolard, options to acquire 37,500 shares at $0.42 until June 30, 2009,
      options to acquire 37,500 shares at $0.40 until June 30, 2010, options to
      acquire 37,500 shares at $0.88 until June 30, 2011 and options to acquire
      25,000 shares at $3.00 until June 30, 2009 held by Robert C.
      Woolard.
 (11)
                Includes
      options to acquire 440,000 shares at $1.00 until March 19,
      2009.  Also includes 121,295 shares held in a trust for the
      benefit of Mrs. Cornelia O’Kieffe in which Mr. O’Kieffe disclaims any
      beneficial interest.
 (12)
              This
      fund is a Delaware limited partnership which does not own any AmerAlia
      shares; it has the right to acquire 129,373,670 shares upon exercise of an
      exchange right and warrants. The partnership comprises Sentient Global
      Resources Fund I, LP (the “Fund”) and Sentient Global Resources Trust No.
      1 (the “Trust”). These rights were originally acquired by the Fund and the
      Trust in connection with loans made by the Fund and the Trust to
      NSHI.  These loans and rights have since been transferred to
      Sentient USA Resources Fund, LP.  If it exercises these exchange
      rights and warrants it will have the sole right to vote or to direct the
      vote and the sole right to dispose of or direct the disposition of the
      shares that it has the right to acquire. There is no shared voting or
      disposition rights.  The exact number of shares of Common Stock
      that may be acquired pursuant to the exchange rights depends on several
      factors, none of which can be determined until the exchange right has been
      exercised: (i) the amount of unpaid principal and interest on Series B1
      debentures (including whether Contingent Interest is payable thereon),
      (ii) the value of the shares of NSI which is determined by the Adjusted
      EBITDA of Natural Soda, Inc., and (iii) the Exchange Price (which is 85%
      of the average between the bid and the asked prices of the Common Stock of
      the Issuer during the 30 calendar days prior to exercise of the exchange
      rights) and the other terms and conditions of the exchange rights,
      conversion rights and warrant purchase rights. The number of shares also
      includes the right to convert its $465,000 promissory note and accrued
      interest to shares of AmerAlia common stock at 36 cents per
      share.  The numbers shown are copied from the Sentient Entities’
      Schedule 13D filing with the Securities and Exchange Commission dated May
      27, 2008.
 
 To the best of our knowledge, there are
no arrangements, understandings or agreements relative to the disposition of any
of our securities, the operation of which would at a subsequent date result in a
change in control of AmerAlia, other than the exchange provisions of the
Securityholder agreement with the Sentient Entities which is discussed more
fully above and in the following paragraph.
  40
 Table of Contents
  (c)
              Changes
      in Control.
 
 In
addition to the shares now owned by Sentient II, since October 31, 2004 the
Sentient Entities also have the right to exchange the Series B1 Debentures and
the shares of NSI they own into shares of AmerAlia’s common
stock.  This right to exchange the debentures and the NSI common stock
provides for the issuance of AmerAlia’s common stock at a price equal to 85% of
the market price for AmerAlia’s common stock.  If the Sentient
Entities were to exchange these debentures and shares, they would acquire a
significant majority of AmerAlia’s shares based on today’s stock prices and
could exercise control of AmerAlia.
  ITEM
      12.
              CERTAIN RELATIONSHIPS AND RELATED PARTY
    TRANSACTIONS
 
 (a)
      and (b)
              Transactions
      with Management and Others.
 
 The
following sets out information regarding transactions between officers,
directors and significant shareholders of AmerAlia during the most recent two
fiscal years and subsequently.
 
 Corporate
Loans – Loans to AmerAlia:
 
 During
the fiscal year ended June 30, 2007, officers and directors advanced loans to
AmerAlia as detailed in the Notes to the Financial Statements. This comprised
advances to us, as well as accrued but unpaid compensation, directors’ fees and
interest. The following summarises our liabilities to related
parties:
 
 Director
              
              June
      30, 2007Robert
      van Mourik
              
              $
              430,519Bill
      H. Gunn
              
              
              243,661Geoffrey
      C. Murphy
              
              
              149,141Neil
      E. Summerson
              
              
              62,274James
      V. Riley
              
              
              55,299Robert
      C. Woolard
              
              
              52,078J.
      Jeffrey Geldermann
              
              
              49,698Total:
              
              $
              1,042,670
 
 During
the fiscal year ended June 30, 2005 officers and directors of the company
subscribed for additional issues of Series A Debenture Secured Promissory Notes
for working capital purposes and received warrants on the same terms as
previously granted to investors at the financial closing, as
follows:
 
 June
      30, 2007Series
      A Debenture Secured Promissory Notes:James
      V. Riley Trust, an affiliate of Mr. Riley
              
              $
              500,000J.
      Jeffrey Geldermann
              
              
              300,000Ahciejay
      Pty Ltd, an affiliate of Mr. van Mourik
              
              
              140,000Gunn
      Development Pty Ltd, an affiliate of Mr. Gunn
              
              
              60,000$
              1,000,000Interest
      accruedJames
      V. Riley Trust, an affiliate of Mr. Riley
              
              $
              178,594J.
      Jeffrey Geldermann
              
              
              104,277Ahciejay
      Pty Ltd, an affiliate of Mr. van Mourik
              
              
              45,975Gunn
      Development Pty Ltd, an affiliate of Mr. Gunn
              
              
              19,704$
              348,550
 
 In June
2007, we issued an unsecured promissory note to an affiliate of Mr. van Mourik
for $200,000 in exchange for cash we used to reduce Mr. van Mourik’s accrued
compensation.  At June 30, 2007 the balance of principal and interest
due on this note was $200,333.
  41
 Table of Contents
  Letters
of Forbearance and General Release:
 
 A
condition to the financial closing on March 19, 2004 was that Mr. Bill H. Gunn,
Chairman and CEO, and Mr. Robert van Mourik, Executive Vice President and Chief
Financial Officer of AmerAlia sign letters forgoing their rights to take action
against the Company to recover unpaid compensation, expenses and advances made
to the Company.  In May 2008, a condition to the closing of the
debenture and interest purchase agreements was that Mr. Gunn and Mr. van Mourik
sign a general release as at December 31, 2007 in favour of Sentient and its
affiliates releasing all claims they may have with the exception of any claims
they have and are identified in the company’s financial statements as at
December 31, 2007.
 
 Satisfaction
of Bonding Requirements and Mars Trust Debt Obligations:
 
 At the
time of the financial closing in March 2004, our majority shareholder at that
time, the Mars Trust, provided a letter of credit to support various reclamation
bonds and permits totalling $959,480.  In addition, the Mars Trust
guaranteed our loan from the Bank of America.  Under the guaranty
agreement the Mars Trust advanced funds to us each month to pay the interest on
the loan and in return we issued guaranty promissory notes to the
Trust.  At June 30, 2007 the balance of these advances totalled
$1,907,227.  Interest accrues on these notes at 4.5% per annum and the
notes were originally due December 31, 2005.  In addition, AmerAlia
issued a promissory note at 7% interest and a maturity date of December 31, 2005
to the Mars Trust for $469,628 to recognise the remaining balance of advances
and accrued interest due to the Trust at the time of the financial
closing.   Total accrued interest on these various notes was
$318,254 at June 30, 2007.
 
 Subsequently,
in August 2007 Sentient II acquired all the debt securities previously due to
the Trust and its rights under its guaranty agreements including its rights to
recover the Bank of America loan which the Mars Trust had
repaid.  Natural Soda then substituted bonds from its own resources
and the Mars Trust was released from its bonding obligations.
 
 Sentient
Entities (now Sentient I), Sentient II and Sentient III:
 
 In
addition to acquiring these various debts in August 2007, Sentient II also
acquired from the Mars Trust all its shares of common stock of
AmerAlia.  Consequently, Sentient II became AmerAlia’s new major
shareholder.  Sentient I, Sentient II and Sentient III each disclaim
any beneficial interest in the securities held by the other.
 
 Also in
August 2007, Sentient II lent $350,000 to AmerAlia in exchange for an unsecured
promissory note paying 6% pa interest due December 31, 2007.  This
maturity date was later extended to July 31, 2008.  The note and
interest are convertible into AmerAlia common stock at 36 cents per
share.
 
 In May
2008 we completed agreements with Sentient as follows:
 1.
              Effective
      as of October 31, 2007, Sentient I acquired from NSI its $750,000 Series A
      Secured debenture and accrued interest of
  $271,215.75.
 2.
              Effective
      as of March 31, 2008, Sentient Global Resources Fund III LP (“Sentient
      III”) purchased AmerAlia’s rights to outstanding interest due on its
      Series A Secured 10% Debentures for $1,406,875. AmerAlia used these funds
      for the purpose of paying some of the outstanding interest owed to the
      holders of its Series A Debenture Secured promissory
      notes.  Sentient III also acquired Sentient I’s rights to
      interest owed on its Series A debentures, including the interest due on
      the debenture previously owned by NSI, for $2,076,334.20;
    and
 3.
              On
      May 27, 2008 Sentient I loaned AmerAlia $465,000 for the purpose of
      contributing capital to NSHI which, in turn contributed $465,000 to NSI as
      its proportionate share of $1,000,000 raised by NSI for well field
      development expenditures.  The loan is at 6% interest, is due
      July 31, 2008 and the principal and interest are convertible into AmerAlia
      shares at 36 cents per share.
  42
 Table of Contents
  Finally,
in June 2008, we issued another promissory note to Sentient III for $300,000 at
6% per annum interest repayable on July 31, 2008 to enable us to access funds to
pay ordinary trade payables as approved by Sentient III.  We borrowed
$80,000 to pay audit fees.  In June we were also advised that Sentient
III had acquired the promissory note for $1,200,000 we had issued to US Filter
and since assigned to HPD, LLC.   As a material inducement to
Sentient III to acquire the note, HPD agreed to provide Sentient III (or its
nominee) with up to $600,000 of discounts on any contracts awarded by Sentient
III or its nominee to HPD for the supply of equipment or services within a
twelve month period of the acquisition of the note.
 
 No
Other Relationships:
 
 No
nominee or director of AmerAlia is, or has been, a partner or executive officer
of any investment banking firm that has performed services for AmerAlia during
the last fiscal year or that AmerAlia proposes to have perform services during
the current year.
 
 (c)
              List
      All Parents of the Company
 
 Under
Rule 405 of Regulation C, the term “parent” when used with respect to AmerAlia
means an affiliate controlling AmerAlia directly or indirectly through one or
more intermediaries.  One entity that has the ability to potentially
control AmerAlia (other than its board of directors and shareholders generally)
is Sentient II through its ownership of 46% of our outstanding common
stock.  The Sentient Entities also have the ability to control
AmerAlia if they choose to exercise their rights to convert or exchange their
holdings of Series B debentures and NSI shares into AmerAlia common stock as
discussed above in Item 1 under “Description of Debentures” and in Item 1 under
“Risk Factors”.
 
 (d)
              Transactions with
      Promoters:  Not
applicable.
  43
 Table of Contents
  ITEM
      13.
              EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
      8-K
 
 (a)
              Exhibits.
 
 (1)
              The
      financial statements included as a part of this report are as described on
      page F-2.
 
 (2)
              No
      financial statement schedules are included in this
  report.
 
 (3)
              The
      exhibits required by Item 601 of Regulation S-B are as
      follows.
 
 Certain
      of the following exhibits are hereby incorporated by reference pursuant to
      Rule 12b-23 as promulgated under the Securities and Exchange Act of 1934,
      as amended, from the reports noted
below:
 
 Exhibit Number
              
              Description3.1
      (b)
              
              Restated
      Articles of Incorporation3.2
      (a)
              
              Bylaws
      of AmerAlia, Inc.10.6
      (e)
              
              Form
      of Distributor agreements for marketing of sodium
    bicarbonate.10.7
      (e)
              
              General
      Services Agreement with Raytheon Engineers & Constructors,
      Inc.10.8
      (f)
              
              First
      Amendment to Special Warranty Assignment, Royalty Reservation, and Minimum
      Royalty Payment between AmerAlia and E.E. Kinder Co.10.9
      (f)
              
              Consulting
      Agreement between AmerAlia and E.E. Kinder Co.10.10
      (f)
              
              U.S.
      Government Sodium Lease10.11
      (g)
              
              Design/Build
      Contract with U.S. Filter Corp.10.12
      (b)
              
              Amended
      and Restated Guaranty Agreement with the Jacqueline Badger Mars
      Trust10.13
      (d)
              
              Second
      Amended and Restated Guaranty Agreement with the Jacqueline Badger Mars
      Trust10.14
      (c)
              
              AmerAlia,
      Inc. 2001 Directors’ Incentive Plan10.15
      (c)
              
              AmerAlia,
      Inc. 2001 Stock Option Plan10.16
      (h)
              
              Third
      Amended and Restated Guaranty Agreement with the Jacqueline Badger Mars
      Trust10.17
      (i)
              
              Fourth
      Amended and Restated Guaranty Agreement with the Jacqueline Badger Mars
      Trust10.18
      (i)
              
              Guaranty
      Agreement – Messrs Woolard and O’Kieffe.10.19
      (j)
              
              Asset
      Purchase Agreement between AmerAlia, Inc., Natural Soda, Inc., White River
      Nahcolite Minerals, LLC., and IMC Global, Inc. dated January 9,
      2003.10.19
      (j)
              
              Amendment
      dated February 10, 2003 to the Asset Purchase Agreement.10.20
      (j)
              
              Closing
      Agreement dated February 20, 2003, between AmerAlia, Inc., Natural Soda
      Holdings, Inc., Sentient Global Resources Fund I, LP and Sentient Global
      Resources Trust No. 1; Promissory note from Natural Soda Holdings, Inc. to
      Sentient Global Resource Fund I, LP and Sentient Global Resource Trust No.
      1; and Pledge Agreement from Natural Soda Holdings, Inc. to Sentient
      Global Resources Fund I, LP and Sentient Global Resources Trust No.
      1.10.21
      (k)
              
              Extension
      Agreement dated March 24, 2003 between AmerAlia, Inc., Natural Soda
      Holdings, Inc., Sentient Global Resource Fund I, LP and Sentient Global
      Resource Trust No. 1.10.22
      (l)
              
              Second
      Extension Agreement dated April 22, 2003 between AmerAlia, Inc., Natural
      Soda Holdings, Inc., Sentient Global Resource Fund I, LP and Sentient
      Global Resource Trust No. 1.10.23
      (m)
              
              Third
      Extension Agreement dated May 31, 2003 between AmerAlia, Inc., Natural
      Soda Holdings, Inc., Sentient Global Resource Fund I, LP and Sentient
      Global Resource Trust No. 1.10.24
      (n)
              
              Fourth
      Extension Agreement dated June 30, 2003 between AmerAlia, Inc., Natural
      Soda Holdings, Inc., Sentient Global Resource Fund I, LP and Sentient
      Global Resource Trust No. 1.10.25
      (o)
              
              Fifth
      Extension Agreement dated July 31, 2003 between AmerAlia, Inc., Natural
      Soda Holdings, Inc., Sentient Global Resource Fund I, LP and Sentient
      Global Resource Trust No. 1.10.27
      (p)
              
              Sixth
      Extension Agreement dated August 31, 2003 between AmerAlia, Inc., Natural
      Soda Holdings, Inc., Sentient Global Resource Fund I, LP and Sentient
      Global Resource Trust No. 1.10.28
      (q)
              
              Seventh
      Extension Agreement dated September 30, 2003 between AmerAlia, Inc.,
      Natural Soda Holdings, Inc., Sentient Global Resource Fund I, LP and
      Sentient Global Resource Trust No. 1.
  44
 Table of Contents
  10.29
      (r)
              
              Eighth
      Extension Agreement dated October 31, 2003 between AmerAlia, Inc., Natural
      Soda Holdings, Inc., Sentient Global Resource Fund I, LP and Sentient
      Global Resource Trust No. 1.10.30
      (s)
              
              Ninth
      Extension Agreement dated November 30, 2003 between AmerAlia, Inc.,
      Natural Soda Holdings, Inc., Sentient Global Resource Fund I, LP and
      Sentient Global Resource Trust No. 1.10.31
              
              No
      exhibit.10.32
              
              No
      exhibit.10.33
      (t)
              
              Debenture
      Purchase Agreement executed March 19, 2004 by and among Natural Soda
      Holdings, Inc., Natural Soda, Inc., AmerAlia, Inc. and Sentient Executive
      GP I, Limited, acting on behalf of the General Partner of Sentient Global
      Resources Fund I, L.P. and Sentient (Aust) Pty Limited, Acting on behalf
      of Sentient Global Resources Trust No. 1.10.34
      (t)
              
              Securityholder
      Agreement dated March 19, 2004 among AmerAlia, Inc., Natural Soda, Inc.,
      Sentient Executive GP I, Limited, acting on behalf of the General Partner
      of Sentient Global Resources Fund I, L.P. and Sentient (Aust.) Pty
      Limited, Acting on behalf of Sentient Global Resources Trust No. 1 and
      Natural Soda Holdings, Inc.10.35
      (t)
              
              Management
      & Cost Reimbursement Agreement dated March 19, 2004 among AmerAlia,
      Inc., Sentient Executive GP I, Limited, acting on behalf of the General
      Partner of Sentient Global Resources Fund I, L.P. and Sentient (Aust.) Pty
      Limited, Acting on behalf of Sentient Global Resources Trust No. 1,
      Natural Soda Holdings, Inc. and Natural Soda, Inc.10.36
      (t)
              
              Form
      of Secured Series A 10% Debenture Due September 30, 2005.10.37
      (t)
              
              Form
      of Secured Subordinated Series B1 Debenture Due February 19,
      2008.10.38
      (t)
              
              Form
      of Secured Subordinated Series B2 Convertible Debenture Due February 19,
      2008.10.39
      (t)
              
              Form
      of Unsecured Subordinated Series C Debenture Due February 19,
      200810.40
      (t)
              
              Addendum
      to the Third and Fourth Amended and Restated Guaranty Agreements entered
      into March 19, 2004 by and between AmerAlia, Inc. and Jacqueline B. Mars,
      as Trustee of the Jacqueline B. Mars Trust dated February 5, 1975, as
      amended.10.41
      (u)
              
              Consent
      of Business Appraisal Associates, Inc.10.42
      (v)
              
              Form
      of Secured Promissory Note Due 6-30-06.10.43
      (v)
              
              Memorandum
      of Understanding AmerAlia, Inc. and Series C Security
    Holders.10.44
      (v)
              
              Account
      Purchase Agreement with Wells Fargo Bank NA.10.45
      (v)
              
              Amendment
      to Account Purchase Agreement with Wells Fargo Bank NA.10.46
      (w)
              
              Water
      Purchase Contract with Shell Frontier Oil & Gas, Inc.10.47
      (x)
              
              Promissory
      Note for $350,000 issued to Sentient USA Resources Fund II,
      LP.10.48
      (y)
              
              Report
      of Independent Registered Public Accounting Firm, dated June 2, 2008,
      related to the restated financial statements for the fiscal year ended
      June 30, 2005,10.49
      (y)
              
              Debenture
      Purchase Agreement executed May 27, 2008, to be effective as of October
      31, 2007, by and among Natural Soda Holdings, Inc., Natural Soda, Inc.,
      AmerAlia, Inc. and Sentient USA Resources Fund. LP.10.50
      (y)
              
              Interest
      Purchase Agreement executed May 27, 2008, to be effective as of March 31,
      2008, by and among Natural Soda Holdings, Inc., Natural Soda, Inc.,
      AmerAlia, Inc., Sentient USA Resources Fund. LP and Sentient Global
      Resources Fund III LP.10.51
      (z)
              
              Promissory
      note for $300,000 issued to Sentient Global Resources Fund III,
      L.P.31.1
              
              Certification
      of Chief Executive Officer pursuant to 15 U.S.C. Section 10A, as adopted
      pursuant to Section 302 of the Sarbanes Oxley Act of 2002 (filed
      herewith).31.2
              
              Certification
      of Chief Financial Officer pursuant to 15 U.S.C. Section 10A, as adopted
      pursuant to Section 302 of the Sarbanes Oxley Act of 2002 (filed
      herewith).32.1
              
              Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. Section 10A, as adopted pursuant to Section 906 of the Sarbanes
      Oxley Act of 2002 (filed herewith).21.1
              
              Subsidiaries
      of the Registrant:  Natural Soda Holdings, Inc., a Colorado
      corporation and Natural Soda, Inc., a Colorado
      corporation.  Since May 2007, AmerAlia’s ownership of NSI
      through its wholly owned subsidiary, NSHI, has been 46.5%.
  45
 Table of Contents
  (a)
              
              Incorporated
      by reference from AmerAlia's Form 10 General Registration Statement filed
      with the Commission on March 5, 1987.(b)
              
              Incorporated
      by reference from AmerAlia’s annual report on Form 10-K for the year ended
      June 30, 2000.(c)
              
              Incorporated
      by reference from AmerAlia’s Form 10-K for its year ended June 30,
      2001.(d)
              
              Incorporated
      by reference from AmerAlia’s Form 8-K reporting an event of December 1,
      2000.(e)
              
              Incorporated
      by reference from AmerAlia's Form 10-K for its year ended June 30,
      1993.(f)
              
              Incorporated
      by reference from AmerAlia's Form 10-K for its year ended June 30,
      1995.(g)
              
              Incorporated
      by reference from AmerAlia’s Form 10-K for its year ended June 30,
      1999.(h)
              
              Incorporated
      by reference from AmerAlia’s Form 8-K reporting an event of December 17,
      2001.(i)
              
              Incorporated
      by reference from AmerAlia’s Form 8-K reporting an event of March 29,
      2002.(j)
              
              Incorporated
      by reference from AmerAlia’s Form 8-K reporting an event of February 20,
      2003.(k)
              
              Incorporated
      by reference from AmerAlia’s Form 8-K reporting an event of March 24,
      2003.(l)
              
              Incorporated
      by reference from AmerAlia’s Form 8-K reporting an event of April 22,
      2003.(m)
              
              Incorporated
      by reference from AmerAlia’s Form 8-K reporting an event of May 31,
      2003.(n)
              
              Incorporated
      by reference from AmerAlia’s Form 8-K reporting an event of June 30,
      2003.(o)
              
              Incorporated
      by reference from AmerAlia’s Form 8-K reporting an event of July 31,
      2003.(p)
              
              Incorporated
      by reference from AmerAlia’s Form 8-K reporting an event of August 31,
      2003.(q)
              
              Incorporated
      by reference from AmerAlia’s Form 8-K reporting an event of September 30,
      2003.(r)
              
              Incorporated
      by reference from AmerAlia’s Form 8-K reporting an event of October 31,
      2003.(s)
              
              Incorporated
      by reference from AmerAlia’s Form 8-K reporting an event of November 30,
      2003.(t)
              
              Incorporated
      by reference from AmerAlia’s Form 10-QSB for its quarter ended December
      31, 2003.(u)
              
              Incorporated
      by reference from AmerAlia’s Form 10-QSB for its quarter ended March 31,
      2004.(v)
              
              Incorporated
      by reference from AmerAlia's Form 10-KSB for its year ended June 30,
      2005.(w)
              
              Incorporated
      by reference from AmerAlia’s Form 8-K reporting an event of January 29,
      2007.(x)
              
              Incorporated
      by reference from AmerAlia’s Form 8-K reporting an event of August 22,
      2007.(y)
              
              Incorporated
      by reference from AmerAlia’s Form 10-KSB for its year ended June 30,
      2006.(z)
              
              Incorporated
      by reference from AmerAlia’s Form 8-K reporting an event of June 24,
      2008.
  46
 Table of Contents
  ITEM
      14.
              PRINCIPAL ACCOUNTANT FEES AND
  SERVICES
 
 HJ &
Associates, LLC, Certified Public Accountants, are the Company’s independent
auditors.  For the fiscal years ended June 30, 2007 and 2006 HJ &
Associates has billed the Company the following amounts for services provided.
 
 Year
      ended June 30,2007
              
              
              2006Audit
      fees
              
              $
              93,500
              
              
              $
              153,500Audit
      related fees
              
              
              -
              
              
              
              -Tax
              
              
              11,380
              
              
              
              1,200Other
              
              
              -
              
              
              
              -
 
 The Board
of Directors has adopted an Audit Committee Charter which is reviewed annually
and amended if considered necessary.  It was last amended September 9,
2002.  The Audit Committee’s responsibilities include responsibility
to:
 
 ·
              Pre-approve
      all audit services that the auditor may provide to AmerAlia or any
      subsidiary (including, without limitation, providing comfort letters in
      connection with securities underwritings or statutory audits) as required
      by §10A(i)(1)(A) of the Securities Exchange Act of 1934 (as amended by the
      Sarbanes-Oxley Act of 2002).
 ·
              Pre-approve
      all non-audit services (other than certain de minimis services
      described in §10A(i)(1)(B) of the Securities Exchange Act of 1934 (as
      amended by the Sarbanes-Oxley Act of 2002) that the auditors propose to
      provide to AmerAlia or any of its
subsidiaries.
 
 The
independent auditors are engaged by the Audit Committee subject to the auditors
providing an estimate of their fees for their services.  The Audit
Committee subjects all audit related services to this pre-approval
policy.
  47
 Table of Contents
  SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned there­unto duly authorized.
 
 AMERALIA,
      INC.By:/s/ Bill
      H. Gunn
              Date:
      July 18, 2008Bill
      H. Gunn, President
 
 KNOW ALL
PEOPLE BY THESE PRESENTS, that each of the persons whose signature appears below
hereby constitutes and appoints Bill H. Gunn and Robert van Mourik, each acting
individually, as his attorney-in-fact, each with the full power of substitution,
for him in any and all capacities, to sign any and all amendments to this Annual
Return on Form 10-KSB, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact, and each of them, full power and authority
to do and perform each and every act and things requisite and necessary to be
done in and about the premises as fully as to all intents and purposes as he
might or could do in person, hereby ratifying and confirming our signatures as
they may be signed by our said attorney-in-fact and any and all amendments to
this Annual Report on Form 10-KSB.
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following per­sons on behalf of AmerAlia and in the
capacities and on the dates indicated.
  
 /s/ Bill H.
      Gunn
              Chairman,
      President and Director
              Date:
      July 18, 2008Bill
      H. Gunn
              (Principal
      Executive Officer)/s/ Robert van
      Mourik
              Executive
      Vice President, Chief Financial
              Date:
      July 18, 2008Robert
      C. J. van Mourik
              Officer,
      Secretary, Treasurer and Director(Principal
      Financial and Accounting Officer)/s/  Neil E.
      Summerson
              Director
              Date:
      July 18, 2008Neil
      E. Summerson/s/  Geoffrey
      C. Murphy
              Director
              Date:
      July 18, 2008Geoffrey
      C. Murphy/s/  James
      V. Riley
              Director
              Date:
      July 18, 2008James
      V. Riley/s/  Robert
      C. Woolard
              Director
              Date:
      July 18, 2008Robert
      C. Woolard/s/  J.
      Jeffrey Geldermann
              Director
              Date:
      July 18, 2008J.
      Jeffrey Geldermann





48
 Table of Contents





AMERALIA, INC. AND SUBSIDIARIES





CONSOLIDATED
FINANCIAL STATEMENTS





June
30, 2007





F-1
 Table of Contents





C O N T E
N T S





Report
      of Independent Registered Public Accounting Firm
            F-3Consolidated
      Balance Sheets
            F-4Consolidated
      Statements of Operations
            F-6Consolidated
      Statements of Stockholders’ Equity (Deficit)
            F-7Consolidated
      Statements of Cash Flows
            F-8Notes
      to the Consolidated Financial Statements
            F-10




F-2
 Table of Contents





REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM







Board of
Directors and Shareholders of


AmerAlia,
Inc. and Subsidiaries


Lone
Tree, Colorado





We have
audited the accompanying consolidated balance sheets of AmerAlia, Inc. and
Subsidiaries as of June 30, 2007 and 2006, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
years then ended.  These consolidated financial statements are the
responsibility of the Company’s management.  Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.





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





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of AmerAlia, Inc. and
Subsidiaries as of June 30, 2007 and 2006, and the consolidated results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of
America.





The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern.  As discussed in Note 19
to the consolidated financial statements, the Company has suffered losses from
operations, has a stockholders’ deficit and minimal working
capital.  Together these factors raise substantial doubt about the
Company’s ability to continue as a going concern.  Management’s plans
in regard to these matters are also described in Note 19.  The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.








/s/ HJ
& Associates, LLC


HJ &
Associates, LLC


Salt Lake
City, Utah


July 16,
2008





F-3
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Consolidated
Balance Sheet





ASSETS





For
      the years ended June 30,2007
            
            
            2006CURRENT
      ASSETSCash
            
            $
            10,968
            
            
            $
            176,223Accounts
      receivable, net (Note 1)
            
            
            2,896,131
            
            
            
            2,777,271Inventories
      (Note 2)
            
            
            870,672
            
            
            
            816,364Prepaid
      expenses (Note 3)
            
            
            294,891
            
            
            
            518,659Total
      Current Assets
            
            
            4,072,662
            
            
            
            4,288,517FIXED
      ASSETSProperty,
      plant & equipment, net (Notes 1 and 4)
            
            
            10,006,384
            
            
            
            10,148,948Cavities
      and well development, net (Note 4)
            
            
            5,296,943
            
            
            
            4,663,411Mineral
      leases (Note 4)
            
            
            4,167,471
            
            
            
            4,167,471Total
      Fixed Assets
            
            
            19,470,798
            
            
            
            18,979,830OTHER
      ASSETSWater
      rights (Note 8)
            
            
            3,150,582
            
            
            
            3,150,582Patents
      (Note 5)
            
            
            30,545
            
            
            
            35,014Well
      and well development RSL (Note 6)
            
            
            595,000
            
            
            
            595,000Engineering
      drawings (Note 7)
            
            
            1,876,000
            
            
            
            1,876,000Equipment
      held and not yet in service (Note 7)
            
            
            3,197,842
            
            
            
            3,197,842Deferred
      financing and acquisition costs, net (Note 1)
            
            
            809,793
            
            
            
            848,771Rock
      School lease and reserves (Note 6)
            
            
            3,300,000
            
            
            
            3,300,000Deposits
      and bonds
            
            
            16,000
            
            
            
            20,000Restricted
      funds (Note 1)
            
            
            134,863
            
            
            
            42,863Total
      Other Assets
            
            
            13,110,625
            
            
            
            13,066,072TOTAL
      ASSETS
            
            $
            36,654,085
            
            
            $
            36,334,419


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




F-4
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Consolidated
Balance Sheet (Continued)





LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)





For
      the years ended June 30,2007
            
            
            2006CURRENT
      LIABILITIESAccounts
      payable
            
            $
            3,443,649
            
            
            $
            2,232,820Bank
      overdraft
            
            
            3,017
            
            
            
            -Royalties
      payable (Note 8)
            
            
            871,789
            
            
            
            899,562Accrued
      expenses (Note 9)
            
            
            1,625,992
            
            
            
            1,516,421Accrued
      expenses due to related parties (Note 10)
            
            
            2,180,011
            
            
            
            1,405,954Current
      portion of notes payable to related parties (Note 10)
            
            
            5,430,255
            
            
            
            2,970,357Current
      portion of notes payable (Note 11)
            
            
            32,514,540
            
            
            
            21,542,869Current
      portion of capital lease obligations (Note 12)
            
            
            55,847
            
            
            
            43,429Interest
      payable
            
            
            5,515,331
            
            
            
            4,595,534Total
      Current Liabilities
            
            
            51,640,431
            
            
            
            35,206,946LONG
      TERM LIABILITIESNotes
      payable to related parties (Note 10)
            
            
            -
            
            
            
            853,400Notes
      Payable (Note 11)
            
            
            18,681
            
            
            
            22,507,634Capital
      lease obligations (Note 12)
            
            
            64,058
            
            
            
            97,972Asset
      retirement obligations (Note 13)
            
            
            898,000
            
            
            
            871,845Total
      Long Term Liabilities
            
            
            980,739
            
            
            
            24,330,851TOTAL
      LIABILITIES
            
            
            52,621,170
            
            
            
            59,537,797COMMITMENTS
      AND CONTINGENT LIABILITIES (Note 16)
            
            
            -
            
            
            
            -MINORITY
      INTEREST
            
            
            15,183,822
            
            
            
            -STOCKHOLDERS’
      EQUITY (DEFICIT)Preferred
      stock, $0.05 par value; 1,000,000 authorised;82 issued and
      outstanding
            
            
            4
            
            
            
            4Common
      stock, $0.01 par value; 100,000,000 shares authorized; 17,239,437 issued
      and outstanding
            
            
            172,394
            
            
            
            172,394Additional
      paid in capital
            
            
            27,716,551
            
            
            
            27,669,676Accumulated
      deficit
            
            
            (59,039,856
            )
            
            
            (51,045,452
            )Total
      Stockholders’ Equity (Deficit)
            
            
            (31,150,907
            )
            
            
            (23,203,378
            )TOTAL
      LIABILITIES & STOCKHOLDERS’ EQUITY
            
            $
            36,654,085
            
            
            $
            36,334,419




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




F-5
 Table of Contents




AMERALIA,
INC. AND SUBSIDIARIES


Consolidated
Statements of Operations





For
      the years ended June 30,2007
            
            
            2006REVENUES
            
            $
            16,951,997
            
            
            $
            15,293,688COST
      OF GOODS SOLD
            
            
            15,180,369
            
            
            
            14,611,153GROSS
      PROFIT (DEFICIT)
            
            
            1,770,628
            
            
            
            682,535EXPENSESGeneral
      and administrative
            
            
            1,080,151
            
            
            
            1,093,523Depreciation,
      amortization and accretion expense
            
            
            1,267,781
            
            
            
            1,158,700Total
      Expenses
            
            
            2,347,932
            
            
            
            2,252,223LOSS
      FROM OPERATIONS
            
            
            (577,304
            )
            
            
            (1,569,688
            )OTHER
      INCOME (EXPENSE)Interest
      income
            
            
            2,348
            
            
            
            1,031Gain
      (Loss) on settlement of debt
            
            
            (1,832,300
            )
            
            
            201,965Other
      income
            
            
            7,179
            
            
            
            7,852Interest
      expense
            
            
            (5,636,448
            )
            
            
            (4,263,677
            )Loss
      on disposal of assets
            
            
            -
            
            
            
            (56,485
            )Loss
      on impairment
            
            
            -
            
            
            
            (1,843,281
            )Other
      financing costs
            
            
            -
            
            
            
            (300,185
            )Total
      Other Income (Expense)
            
            
            (7,459,221
            ))
            
            
            (6,252,780
            )LOSS
      BEFORE MINORITY INTEREST AND INCOME TAX EXPENSE
            
            
            (8,036,525
            )
            
            
            (7,822,468
            )Minority
      interest in net loss of subsidiary
            
            
            42,121
            
            
            
            -LOSS
      BEFORE INCOME TAX EXPENSE
            
            
            (7,994,404
            )
            
            
            (7,822,468
            )Income
      tax expense
            
            
            -
            
            
            
            -NET
      LOSS
            
            $
            (7,994,404
            )
            
            $
            (7,822,468
            )BASIC
      LOSS PER SHARE
            
            $
            (0.46
            )
            
            $
            (0.46
            )WEIGHTED
      AVERAGE NUMBER OF SHARES OUTSTANDING
            
            
            17,239,437
            
            
            
            17,022,896




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




F-6
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Consolidated
Statements of Stockholders' Equity (Deficit)





AdditionalPreferred
      Stock
            
            
            Common
      Stock
            
            
            Paid-In
            
            
            AccumulatedShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            DeficitBalance,
      June 30, 2005
            
            
            82
            
            
            $
            4
            
            
            
            16,983,604
            
            
            $
            169,836
            
            
            $
            27,434,275
            
            
            $
            (43,222,984
            )Options
      granted
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            86,835
            
            
            
            -Options
      exercised
            
            
            -
            
            
            
            -
            
            
            
            187,500
            
            
            
            1,875
            
            
            
            102,000
            
            
            
            -Stock
      issued in settlement ofObligations
            
            
            -
            
            
            
            -
            
            
            
            68,333
            
            
            
            683
            
            
            
            46,566
            
            
            
            -Net
      loss for the year endedJune 30, 2006
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (7,822,468
            )Balance,
      June 30, 2006
            
            
            82
            
            
            $
            4
            
            
            
            17,239,437
            
            
            $
            172,394
            
            
            $
            27,669,676
            
            
            $
            (51,045,452
            )Options
      granted
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            46,875
            
            
            
            -Net
      loss for the year endedJune 30, 2007
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (7,994,404
            )Balance,
      June 30, 2007
            
            
            82
            
            
            $
            4
            
            
            
            17,239,437
            
            
            $
            172,394
            
            
            $
            27,716,551
            
            
            $
            (59,039,856
            )




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





F-7
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Consolidated
Statements of Cash Flows





For
      the Years ended June 30,2007
            
            
            2006CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
            
            $
            (7,994,404
            )
            
            $
            (7,822,468
            )Adjustments to
      reconcile net loss to net cash used
      by operating activities:Options
      granted
            
            
            46,875
            
            
            
            86,835Depreciation
      and amortization
            
            
            1,267,781
            
            
            
            1,158,700Loss
      on disposal and impairment
            
            
            -
            
            
            
            1,899,766Amortization
      of acquisition and financing costs
            
            
            -
            
            
            
            300,185(Gain)
      on settlement of debt
            
            
            1,832,300
            
            
            
            (201,965
            )Minority
      interest – Net loss
            
            
            (42,121
            )
            
            
            -Change
      in Operating Assets and Liabilities:(Increase)
      decrease in restricted funds
            
            
            (92,000
            )
            
            
            464,449(Increase)
      decrease in accounts receivable
            
            
            (142,011
            )
            
            
            827,645(Increase)
      in inventory
            
            
            (54,308
            )
            
            
            (145,782
            )(Increase)
      decrease in prepaid expenses
            
            
            223,768
            
            
            
            (48,044
            )Increase
      in accounts and royalties payable
            
            
            698,870
            
            
            
            990,839Increase
      in accrued expenses due to related parties
            
            
            974,057
            
            
            
            669,865Increase
      in accrued expenses
            
            
            109,571
            
            
            
            191,842Increase
      in interest payable
            
            
            3,613,440
            
            
            
            2,937,773Net
      Cash Used in Operating Activities
            
            
            441,818
            
            
            
            1,309,640CASH
      FLOWS FROM INVESTING ACTIVITIESCavities
      and well development
            
            
            (628,294
            )
            
            
            (2,547,602
            )Purchase
      of property and equipment
            
            
            (544,429
            )
            
            
            (365,309
            )Net
      Cash Used in Investing Activities
            
            $
            (1,172,723
            )
            
            $
            (2,912,911
            )




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




F-8
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Consolidated
Statements of Cash Flows (Continued)





For
      the Years ended June 30,2007
            
            
            2006CASH
      FLOWS FROM FINANCING ACTIVITIESBank
      overdraft
            
            $
            3,017
            
            
            $
            -Payments
      on capital leases
            
            
            (49,736
            )
            
            
            (68,905
            )Proceeds
      from notes payable
            
            
            -
            
            
            
            1,140,937Payments
      on debt
            
            
            (154,129
            )
            
            
            (17,041
            )Proceeds
      from related party notes payable
            
            
            766,498
            
            
            
            646,925Proceeds
      from exercise of stock options
            
            
            -
            
            
            
            76,375Net
      Cash Provided by Financing Activities
            
            
            565,650
            
            
            
            1,778,291NET
      INCREASE (DECREASE) IN CASH
            
            
            (165,255
            )
            
            
            175,020CASH
      AT BEGINNING OF YEAR
            
            
            176,223
            
            
            
            1,203CASH
      AT END OF YEAR
            
            $
            10,968
            
            
            $
            176,223SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW
      INFORMATIONIncome
      taxes
            
            $
            -
            
            
            $
            -Interest
            
            $
            731,498
            
            
            $
            1,063,835




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




F-9
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Notes to
the Consolidated Financial Statements


June 30,
2007 and 2006





NOTE 1
-        ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES





a.  General
Development of the Business





AmerAlia,
Inc. (AmerAlia) was originally incorporated as Computer Learning Software, Inc.
under the laws of the State of Utah on June 7, 1983 and renamed AmerAlia, Inc.
in January 1984.  During November 2000, AmerAlia formed a wholly owned
subsidiary Natural Soda, Inc., subsequently renamed Natural Soda Holdings, Inc.
(NSHI) in February 2003.  NSHI is the parent of a new Natural Soda,
Inc., previously named Natural Soda AALA, Inc., (NSI) which purchased the assets
of White River Natural Minerals, LLC (WRNM) in February 2003.  In May
2007 NSHI exchanged 49% of its ownership of NSI in settlement of convertible
debt obligations.  Also in May 2007, NSI issued shares of its common
stock representing 4.5% of its ownership in exchange for certain debt
obligations.  See Note 20 for related discussion.  The
consolidated financial statements present the consolidated financial position,
results of operations and cash flows of AmerAlia, its wholly owned subsidiary,
NSHI and its 46.5% owned subsidiary, NSI.  Collectively, they are
referred to herein as “the Company”.  Although AmerAlia’s ownership
interest in NSI is less than 50% as a result of these transactions and discussed
and disclosed in Note 20, the financial position, operations and cash flows of
NSI have been included in the consolidated financial statements primarily
because NSI represents AmerAlia’s principle business activity; the management
and oversight of NSI and it’s operations remain unchanged and under the
direction of the officers and directors of AmerAlia; and consolidation of NSI is
more informative to the reader of the consolidated financial
statements.  The “Minority Interest” ownership of the Sentient
Entities in NSI has been reflected separately in the consolidated balance sheet
along with it’s “Minority Interest” share of losses from operations for the
period May 30, 2007 through June 30, 2007.  All material inter-company
accounts and transactions have been eliminated in the consolidation
accounts.





The
Company had been a development stage company since July 1, 1992 and exited the
development stage on June 30, 2003.   The Company exited the
development stage and began planned principal operations with the purchase of
the assets and related liabilities of WRNM on February 20, 2003.





The
Company uses solution mining to recover sodium bicarbonate for sale to the
animal feed, human food, pharmaceutical, personal products and industrial uses,
including for flue gas desulfurization.   The Company proposes to
expand its existing NSI operations by increasing in stages the design capacity
of the facility.  These stages will be principally determined by
increases in market demand.





b.      Accounting
Method





The
Company’s consolidated financial statements are prepared using the accrual
method of accounting.  The Company and its subsidiaries have elected a
June 30 year-end.





c.      Principles
of Consolidation





The
consolidated financial statements of the Company include the accounts of its
wholly owned subsidiary, NSHI and its 46.5% owned subsidiary, NSI.  
All significant inter-company balances and transactions have been
eliminated.





d.      Cash
and Restricted Cash





The
Company considers all highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents.





The
Company had $134,863 and $42,863 in restricted cash at June 30, 2007 and 2006,
respectively, comprising certificates of deposit with banks to secure bonds
associated with the water monitoring wells and the restoration of the sodium
leases.





F-10
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Notes to
the Consolidated Financial Statements


June 30,
2007 and 2006





NOTE
      1 -
            ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  (Continued)





e.    Fixed
Assets





Property,
plant, and equipment are stated at cost.  The costs of replacements or
renewals, which improve or extend the life of existing property, are
capitalized.  Maintenance and repairs are expensed as
incurred.  Depreciation and amortization are provided for on the
straight-line method over the following estimated useful lives.  The
Company has elected to expense all purchases under $3,000 as maintenance and
repairs.





Buildings
      and improvements
            25
      to 40 yearsMachinery
      and equipment
            10
      to 30 yearsWell
      cavities and development
            Units
      of productionFurniture
      and fixtures
            3
      to 5 years





f.      Income
Taxes





Deferred
Taxes are provided on a liability method whereby deferred tax assets are
recognized for deductible temporary differences and operating loss and tax
credit carry-forwards and deferred tax liabilities are recognized for taxable
temporary differences.  Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax
bases.  Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized.  Deferred tax
assets and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment.





Net
deferred tax liabilities consist of the following components:





June
      30, 2007
            
            
            June
      30, 2006Deferred
      tax assets:NOL
      Carryover
            
            $
            17,367,500
            
            
            $
            14,868,100Related
      Party
            
            
            1,311,000
            
            
            
            887,800Allowance
      for Doubtful Accounts
            
            
            62,300
            
            
            
            -Deferred
      tax liabilities:Depreciation
            
            
            (407,300
            )
            
            
            (547,100
            )Valuation
      allowance
            
            
            (18,333,500
            )
            
            
            (15,208,800
            )Net
      deferred tax asset
            
            $
            -
            
            
            $
            -





The
income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax income from continuing
operations for the years ended June 30, 2007 and 2006 due to the
following:





June
      30, 2007
            
            
            June
      30, 2006Book
      Income
            
            $
            (3,134,245
            )
            
            $
            (3,050,762
            )Stock
      for service accounts
            
            
            18,281
            
            
            
            33,866Penalties
            
            
            24,432
            
            
            
            5,688Meals
      & Entertainment
            
            
            4,083
            
            
            
            2,181Loss
      on impairment
            
            
            -
            
            
            
            718,880Accrued
      expenses
            
            
            -
            
            
            
            (705,805
            )Depreciation
            
            
            -
            
            
            
            171,975Accretion
            
            
            10,200
            
            
            
            -Sale
      of Assets
            
            
            -
            
            
            
            15,585Valuation
      allowance
            
            
            3,077,249
            
            
            
            2,808,392$
            -
            
            
            $
            -




F-11
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Notes to
the Consolidated Financial Statements


June 30,
2007 and 2006





NOTE
      1 -
            ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  (Continued)





f.      Income
Taxes (Continued)





At June
30, 2007, the Company had net operating loss carry-forwards of $45,532,000 that
may be offset against future taxable income from the year 2007 through
2027.  No tax benefit has been reported in the June 30, 2007
consolidated financial statements since the potential tax benefit is offset by a
valuation allowance of the same amount.





Due to
the change in ownership provisions of the Tax Reform Act of 1986, net operating
loss carry-forwards for Federal income tax reporting purposes are subject to
annual limitations.  Should a change in ownership occur, use of net
operating loss carry-forwards may be limited in future years.





g.      Use
of Estimates





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





h.      Basic
Net Loss Per Share





The
computations of basic loss per share of common stock are based on the weighted
average number of shares outstanding during the period of the consolidated
financial statements as follows:





June
      30, 2007
            
            
            June
      30, 2006Loss
      (numerator)
            
            $
            (7,994,404
            )
            
            $
            (7,822,468
            )Shares
      (denominator)
            
            
            17,239,437
            
            
            
            17,022,896Per
      share amount
            
            $
            (0.46
            )
            
            $
            (0.46
            )





The
Company's outstanding stock purchase warrants and options have been excluded
from the basic net loss per share calculation as they are
anti-dilutive.  The Company has excluded 3,615,000 and 3,690,000
common stock equivalents as at June 30, 2007 and 2006,
respectively.





i.      Concentrations
of Risk





The
Company sells its products in North America through distributors to
manufacturers and users. Financial instruments consisting of trade accounts
receivable potentially subject the Company to concentrations of credit
risk.  Generally, the Company does not require security when trade
credit is granted to customers.  Credit losses are provided for in the
Company’s financial statements and consistently have been within management’s
expectations.  During the fiscal year ended June 30, 2007 the Company
had two customers that individually constituted more than 10% of our total
revenues.  These customers had revenues representing 26% and 27% of
our total revenues and receivables balances representing 28% and 27%
respectively of our total trade accounts receivable balance at June 30,
2007.  During the fiscal year ended June 30, 2006 the Company had the
same two customers that individually constituted more than 10% of our total
revenues.  These customers had revenues representing 23% and 33% of
our total revenues and receivables balances representing 28% and 26%
respectively of our total trade accounts receivable balance at June 30,
2006.





j.      Accounts
Receivable





Accounts
receivable are carried at original invoice amount less an estimate made for
doubtful receivables based on a review of all outstanding amounts on a monthly
basis.  Management determines the allowance for doubtful accounts by
identifying troubled accounts and by reviewing and considering individual
customer receivables, customer’s financial condition, credit history, aging of
accounts and current economic conditions. Accounts receivable are written off
when deemed uncollectible.  Recoveries of accounts receivable
previously written off are recorded when received.




F-12
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Notes to
the Consolidated Financial Statements


June 30,
2007 and 2006





NOTE
      1 -
            ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  (Continued)





j.      Accounts
Receivable (Continued)





An
account receivable is considered to be past due if any portion of the receivable
balance is outstanding for more than 90 days.  At June 30, 2007 the
net accounts receivable balance included $3,050,926 for trade receivables with a
$159,795 allowance for doubtful accounts and $5,000 due from
employees.  At June 30, 2006 the net accounts receivable balance
included $2,847,491 for trade receivables, a $75,220 allowance for doubtful
accounts and $5,000 due from employees.





k.      Inventories





Inventories
consist of sodium bicarbonate which is stated at the lower of production costs
or market. Production costs include all identifiable costs of the plant,
including depreciation, royalties, and rental on the sodium
leases.  Inventories also include packaging materials which are stated
at the lower of cost (first-in, first-out cost method) or market.





l.
            Environmental
      Costs





Environmental
costs are accrued at the time the exposure becomes known and costs can be
reasonably estimated.  The Company does not accrue liabilities for
unasserted claims that are not probable of assertion, nor does it provide for
environmental clean-up costs, if any, at the end of the useful lives of its
facilities because, given the long lives of its mineral properties, it is not
practical to estimate such costs.





m.
            Shipping
      and Handling Fees and Costs





The
Company records all shipping and handling costs in cost of sales.





n.
            Mineral
      Properties and Patents





Mineral
properties include costs associated with the development of the mining and
processing facility.  Such items include the cost of leases, access
road, and electric power lines.   Costs involved in registering,
developing, and defending patents related to the solution mining process are
capitalized and amortized on a straight-line basis over the life of the
patents.





o.
            New
      Accounting Pronouncements





During
the year ended June 30, 2007 and subsequently, the FASB has issued a number of
financial accounting standards, none of which did or are expected to have a
material impact on the Company’s results of operations, financial position, or
cash flows, with exception of:





SFAS
160.  In December 2007, the FASB issued SFAS 160, Non-controlling Interests in
Consolidated Financial Statements, which amended ARB 51, to establish
accounting and reporting standards for the non-controlling interest in a
subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is
scheduled to become effective for the Company for financial statements issued
for fiscal year 2009.  We are currently evaluating the effects, if any,
that this statement will have on our future financial statements and related
financial position, results of operations and operating cash flows.





FAS 141
(Revised December 2007).  The objective of this Statement is to
improve the relevance, representational faithfulness, and comparability of the
information that a reporting entity provides in its financial reports about a
business combination and its effects.  To accomplish that, this
Statement establishes principles and requirements for how the
acquirer:


a)
            recognizes
      and measures in its financial statements the identifiable assets acquired,
      the liabilities assumed, and any noncontrolling interest in the
      acquiree


b)
            recognizes
      and measures the goodwill acquired in the business combination or a gain
      from a bargain purchase


c)
            determines
      what information to disclose to enable users of the financial statements
      to evaluate the nature and financial effects of the business
      combination.





F-13
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Notes to
the Consolidated Financial Statements


June 30,
2007 and 2006





NOTE
      1 -
            ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  (Continued)





o.      New
Accounting Pronouncements (Continued).





SFAS No.
141 is scheduled to become effective for the Company for financial statements
issued for fiscal year 2009.  We
are currently evaluating the effects, if any, that this statement will have on
our future financial statements and related financial position, results of
operations and operating cash flows.





FIN
48.  In July 2006, the FASB issued Financial Interpretation No. 48,
Accounting for Uncertainty in
Income Taxes (“FIN 48”),which applies to all
tax positions related to income taxes subject to No. 109 (SFAS 109), Accounting for Income Taxes.
This includes tax positions considered to be “routine” as well as those with a
high degree of uncertainty. FIN 48 utilizes a two-step approach for evaluating
tax positions. Recognition (step one) occurs when an enterprise concludes that a
tax position, based solely on its technical merits, is more-likely-than-not to
be sustained upon examination. Measurement (step two) is only addressed if step
one has been satisfied (i.e., the position is more-likely-than-not to be
sustained). Under step two, the tax benefit is measured as the largest amount of
benefit, determined on a cumulative probability basis that is
more-likely-than-not to be realized upon ultimate settlement. FIN 48’s use of
the term “more-likely-than-not” in steps one and two is consistent with how that
term is used in SFAS 109 (i.e., a likelihood of occurrence greater than 50
percent).




Those tax
positions failing to qualify for initial recognition are recognized in the first
subsequent interim period they meet the more-likely-than-not standard, or are
resolved through negotiation or litigation with the taxing authority, or upon
expiration of the statute of limitations. Not recognizing a tax position that
was previously recognized would occur when a company subsequently determines
that a tax position no longer meets the more-likely-than-not threshold of being
sustained. FIN 48 specifically prohibits the use of a valuation allowance as a
substitute for not recognizing tax positions. Additionally, FIN 48 requires
expanded disclosure requirements, which include a tabular roll forward of the
beginning and ending aggregate unrecognized tax benefits as well as specific
detail related to tax uncertainties for which it is reasonably possible the
amount of unrecognized tax benefit will significantly increase or decrease
within twelve months.
These disclosures are required at each annual reporting period unless a
significant change occurs in an interim period. FIN 48 is effective for fiscal
years beginning after December 15, 2006 (our fiscal year 2008). We do not
believe the adoption will have a material impact on our results of
operation.





p.      Stock
Options





During
the year ended June 30, 2005 the Company applied Accounting Principles Board
(“APB”) 25, “Accounting for Stock Issued to Employees,” and related
interpretations in accounting for all stock option plans. Under APB 25,
compensation cost is recognized for stock options granted to employees when the
option price is less than the market price of the underlying common stock on the
date of grant.





FASB
Statement 123, “Accounting for Stock-Based Compensation” (SFAS No. 123) as
amended by SFAS No. 148, requires the Company to provide pro-forma information
regarding net income (loss) and net income (loss) per share as if compensation
costs for the Company’s stock option plans and other stock awards had been
determined in accordance with the fair value based method prescribed in SFAS No.
123.  The Company has applied the disclosure requirements of SFAS No.
148.





On
      July 1, 2005, we adopted Statement of Financial Accounting Standards No.
       (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which
      requires the measurement and recognition of compensation expense for all
      share-based payments to employees and directors including employee stock
      options and stock purchases related to the Company’s employee stock
      option and award plans based on estimated fair values.  SFAS 123
      (R) supersedes our previous accounting under Accounting Principles Board
      Option No. 25, “Accounting for Stock Issued to Employees” (“APB25”) for
      periods beginning in fiscal 2006. In March 2005, the Securities and
      Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”)
      relating to SFAS 123 (R). We have applied the provisions of SAB 107 in our
      adoption of SFAS 123 (R).





F-14
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Notes to
the Consolidated Financial Statements


June 30,
2007 and 2006





NOTE
      1 -
            ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  (Continued)





p.      Stock
Options
(Continued)





We
adopted SFAS 123(R) using the modified prospective transition method, which
requires the application of the accounting standard as of July 1, 2005, the
first day of our fiscal year 2006. Our financial statements as of and for the
fiscal year ended June 30, 2007 and 2006 reflect the impact of SFAS 123
(R).  Stock-based compensation expense recognized under SFAS 123 (R)
for the fiscal year ended June 30, 2007 was $46,875 and for the fiscal year
ended June 30, 2006 was $86,835, and related to employee stock options issued
during those fiscal years.





SFAS 123
(R) requires companies to estimate the fair value of share-based payment awards
on the date of grant using an option-pricing model. The value of the portion of
the award that is ultimately expected to vest is recognized as expense over the
requisite service periods in our Statement of Operations. Prior to the adoption
of SFAS 123 (R), we accounted for stock-based awards to employees and directors
using the intrinsic value method in accordance with APB 25 as allowed under
Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based
Compensation” (“SFAS 123”). Under the intrinsic value method, no stock-based
compensation expense had been recognized in our Statement of Operations because
the exercise price of the stock options granted to employees and directors
equaled the fair market value of the underlying stock at the date of
grant.





Stock-based
compensation expense recognized during the period is based on the value of the
portion of share-based payment awards that is ultimately expected to vest during
the period.  Stock-based compensation expense recognized in our
Statements of Operations for the fiscal years ended June 30, 2007 and 2006 only
include compensation expense for share-based payment awards granted, but not yet
vested after July 1, 2005, and are based on the grant date fair value estimated
in accordance with SFAS 123 (R).





Stock-based
compensation expense recognized in our Statements of Operations for fiscal year
ended June 30, 2007 assume all awards will vest, therefore no reduction has been
made for estimated forfeitures.





q.      Advertising





The
Company follows the policy of charging the costs of advertising to expense as
incurred.  Advertising expense for the years ended June 30, 2007 and
2006 was $nil and $nil, respectively.





r.
            Revenue
      Recognition





The
Company recognizes revenue from the sodium bicarbonate sales when persuasive
evidence of a sale exists, the product has been shipped and delivered as
determined by the bill of sale, collection is reasonably assumed and no further
company obligation to perform exists.





s.
            Deferred
      Financing Costs





Deferred
financing costs include the costs of sourcing long term debt financing for the
WRNM Acquisition and its associated capital requirements.  These costs
include finders fees, legal fees and fees paid for due diligence
costs.





t.      Reclassification
of Prior Year Balances





Certain
reclassifications have been made to the 2006 financial statements in order for
them to conform to the classifications used for the 2007 financial
statement presentation.





F-15
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Notes to
the Consolidated Financial Statements


June 30,
2007 and 2006





NOTE
      1 -
            ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  (Continued)





u.
            Impairment
      of Long-Lived Assets





Management
reviews the net carrying value of all property and equipment and other
long-lived assets on a periodic basis. We estimate the net realizable value of
each asset based on the estimated undiscounted future cash flows that will be
generated from operations at each property.  These estimates of
undiscounted future cash flows are dependent upon the estimates of sodium
bicarbonate to be recovered, future production cost estimates and future sodium
bicarbonate price estimates over the estimated remaining life of the
property.





If
undiscounted cash flows are less than the carrying value of a property, an
impairment loss will be recognized based upon the estimated expected future cash
flows from the property discounted at an interest rate commensurate with the
risk involved.





Management’s
estimates of sodium bicarbonate prices, and other factors are subject to risks
and uncertainties of change affecting the recoverability of our investment in
various projects.  Although management believes it has made a
reasonable estimate of these factors based on current conditions and
information, it is reasonably possible that changes could occur in the near term
which could adversely affect management’s estimate of net cash flows expected to
be generated and the need for asset impairment write-downs.





The
Company has hired expert appraisers to assess the fair market value of the
Company’s assets.  These fair market valuations are compared against
the cost basis of the Company’s asset to further determine if any impairment
exists.





v.
            Acquisition
      Costs





Acquisition
costs are being amortized over a 25 year period.  The Company recorded
amortized acquisition expense of $38,978 and $38,978 for the years ended June
30, 2007 and 2006, respectively.








NOTE
      2 -
            INVENTORIES





Inventories
consisted of the following:




June
      30, 2007
            
            
            June
      30, 2006Raw
      materials and supplies
            
            $
            368,856
            
            
            $
            315,546Finished
      goods
            
            
            501,816
            
            
            
            500,818$
            870,672
            
            
            $
            816,364








NOTE
      3 -
            PREPAID
      EXPENSES





Prepaid expenses consisted of the
following:


June
      30, 2007
            
            
            June
      30, 2006Prepaid
      natural gas costs
            
            $
            -
            
            
            $
            154,111Prepaid
      construction costs
            
            
            227,500
            
            
            
            227,500Other
      prepayments & deposits
            
            
            67,391
            
            
            
            137,048$
            294,891
            
            
            $
            518,659




F-16
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Notes to
the Consolidated Financial Statements


June 30,
2007 and 2006





NOTE
      4 -
            FIXED
      ASSETS





Fixed
assets consist of the following amounts:




June
      30, 2007
            
            
            June
      30, 2006Property
      plant and equipment
            
            $
            12,509,529
            
            
            $
            11,994,914Cavities
      and well development
            
            
            7,453,095
            
            
            
            6,340,616Furniture
      and fixtures
            
            
            129,489
            
            
            
            71,436Mineral
      leases
            
            
            4,167,471
            
            
            
            4,167,471Subtotal
            
            
            24,259,584
            
            
            
            22,574,437Less
      accumulated depreciation and amortization
            
            
            (4,788,786
            )
            
            
            (3,594,607
            )Total
            
            $
            19,470,798
            
            
            $
            18,979,830





Depreciation
and amortization expense for the years ended June 30, 2007 and 2006 was
$1,194,179and
$1,082,677 respectively.








NOTE
      5 -
            PATENTS





Patents
consisted of the following:


June
      30, 2007
            
            
            June
      30, 2006Patents
      acquired from IMC at fair value
            
            $
            50,000
            
            
            $
            50,000Less
      accumulated amortization
            
            
            (19,455
            )
            
            
            (14,986
            )Net
      Patents
            
            $
            30,545
            
            
            $
            35,014





The
patents are being amortized on a straight line basis over a period of the
remaining life of the patent up to 20 years.  Amortization expense for
the years ended June 30, 2007 and 2006 was $4,469 and $8,818,
respectively.  The amortization expenses to be recognized over the
next five years are as follows:





Fiscal Year
            
            Amount2007
            
            $
            4,4692008
            
            
            4,4692009
            
            
            4,4692010
            
            
            4,4692011
      and subsequent
            
            
            12,669Total
            
            $
            30,545





NOTE
      6 -
            ROCK
      SCHOOL LEASE AND WELL COSTS





In
December 1992, the Company acquired from an unrelated party, E. E. Kinder Co.
(Kinder), BLM Sodium Lease C-0119985 known as the Rock School Lease, covering
1,320 acres, in Rio Blanco County, Colorado, USA.  The Company
acquired the Rock School Lease for consideration comprising (i) a cash payment
of $600,000; (ii) the issuance of 50,000 shares of common stock valued at $3.00
per share or $150,000; and (iii) commencing July 1, 1994, the reservation of a
production royalty of $2 per ton which was amended January 1, 1996 to $1.50 per
ton for all production, due and payable on the last day of the month following
the month of production provided that a minimum annual royalty of $100,000
(which was changed to $75,000 on January 1, 1996) be paid monthly in
arrears.





Kinder
assigned all of its rights, title and interest in the federal lease to the
Company.  Kinder also agreed to provide all documentation, files, and
records in its possession pertaining to the exploration of and development plans
for the Rock School Lease; warranted that it had not assigned to any third party
or dealt in any way with its interest in the Rock School Lease and granted the
Company an option to acquire its royalty interests.  The assignment of
the interest in the Rock School Lease from Kinder was approved by the BLM on
January 1, 1996.





The Rock
School Lease was renewed July 1, 2001 for a period of ten years and is renewable
under the terms and conditions prescribed by the Secretary of the
Interior.  The lease is currently undeveloped.





F-17
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Notes to
the Consolidated Financial Statements


June 30,
2007 and 2006





NOTE
      6 -
            ROCK
      SCHOOL LEASE AND WELL COSTS
(Continued)





During
the years ended June 30, 1993 through June 30, 2003, the Company capitalized
lease acquisition, exploration and development costs of
$3,066,917.  Since then, no further expenditures have been
capitalized.  The Company has also installed five water monitoring
wells and has collected base line data required by the Division of Minerals and
Geology.  The last data was collected in February 2001, completing the
regulatory requirements necessary to begin solution-mining
activities.





The
Company has recorded the value of the Rock School Lease and Reserves at
$3,300,000.  The value of the monitoring wells is
$595,000.








NOTE
      7 -
            ENGINEERING
      DRAWINGS AND EQUIPMENT HELD





The
Company entered into a Design/Build agreement on May 14, 1999 with a Delaware
corporation doing business as U.S. Filter Corporation and HPD Products (US
Filter) to design, manage and construct a sodium bicarbonate solution mining and
production plant for an amount not to exceed $33,200,000.  The
agreement was not completed although engineering drawings were prepared and some
equipment constructed.  As of June 30, 2004 the Company had the
drawings valued at $2,800,000 and the equipment valued at
$4,700,000.  The Company performed an impairment analysis on these
assets and determined an impairment charge on the equipment in fiscal year 2005
of $458,087.  The Company also placed $80,093 of the equipment in
service during the year which resulted in a $4,161,820 value beingrecorded on
the books as of June 30, 2005.  During fiscal year 2006 the Company
placed $44,697 of the equipment in service and completed an impairment analysis
which resulted in an impairment of $924,000 on the engineering drawings and
$919,281 on the equipment, leaving a $1,876,000 and a $3,197,842 account balance
being recorded on the books as of June 30, 2006.  During fiscal year
2007 no equipment was placed in service and no impairment recorded on these
assets.  Therefore, no changes were made to the account balances as at
June 30, 2007.  The equipment is being held in storage until it is
brought into service.








NOTE
      8 -
            ROYALTIES
      PAYABLE





Royalties
payable consist of amounts owed to Kinder and the Bureau of Land Management as
at June 30, 2007.  They represent the amount of minimum guaranteed
royalties payable (Note 6) due to Kinder and the monthly royalties due to the
BLM.  The balance due at June 30, 2007 and 2006 was $871,789 and
$899,562, respectively.  Royalty expense for the years ended June 30,
2007 and 2006 was $333,839 and $497,847, respectively.








NOTE
      9 -
            ACCRUED
      EXPENSES





Accrued
      expenses comprise the following:




June
      30, 2007
            
            
            June
      30, 2006Salaries
      and wages
            
            $
            316,984
            
            
            $
            244,993Judgment
      payable (Hudson)
            
            
            300,000
            
            
            
            300,000Freight
            
            
            57,894
            
            
            
            114,148Property
      tax
            
            
            68,045
            
            
            
            63,000Employment
      taxes
            
            
            864,398
            
            
            
            623,032State
      taxes
            
            
            -
            
            
            
            2,544Other
            
            
            18,671
            
            
            
            168,704Total
            
            $
            1,625,992
            
            
            $
            1,516,421





On August
16, 2002, the Colorado District Court for Arapahoe County, Colorado (Civil
Action No. 99-CV-2207) entered judgment for Marvin Hudson, a former officer and
employee of the Company in the amount of $374,100 with 8% interest payable on
$322,900 of that amount.  The judgment was settled in August 2007 for
$300,000 paid in cash.





F-18
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Notes to
the Consolidated Financial Statements


June 30,
2007 and 2006





NOTE
      10 -
            DUE
      TO RELATED PARTIES





Accrued liabilities due to related
parties comprise the following:





June
      30, 2007
            
            
            June
      30, 2006Accrued
      officer and director compensation, expenses and advances
            
            $
            1,042,670
            
            
            $
            911,056Accrued
      interest on Series A Debenture secured promissory notes
            
            
            705,737
            
            
            
            262,415Accrued
      interest on Series C Debenture secured promissory note
            
            
            182,344
            
            
            
            92,737Provision
      for accrued but unpaid interest due onJacqueline Badger Mars Trust
      promissory notes
            
            
            242,100
            
            
            
            132,919Accrued
      interest on promissory note due to an accredited related party
      investor
            
            
            333
            
            
            
            -Unsecured
      advance repayable to JacquelineBadger Mars
            
            
            6,827
            
            
            
            6,827$
            2,180,011
            
            
            $
            1,405,954





Accrued
directors fees and officer and director compensation also includes interest
expense totaling $133,454 for the year ended June 30, 2007 allowed on unpaid
loan account balances.  Interest expense of $88,985 was included in
the year ended June 30, 2006.





Notes
payable to related parties comprise the following:





June
      30, 2007
            
            
            June
      30, 2006Note
      and interest payable to Jacqueline Badger Mars Trust; principal and
      interest due December 31, 2005; interest at 7%; unsecured
            
            $
            469,628
            
            
            $
            469,628Various
      guaranty promissory notes payable to Jacqueline Badger Mars Trust due
      December 31,  2005; Interest at various rates between
      4.5%  and 4.99%; unsecured
            
            
            1,907,227
            
            
            
            1,140,729Secured
      notes payable to accredited related party investors; 10% interest payable
      quarterly; due September 30, 2005
            
            
            2,000,000
            
            
            
            1,360,000Unsecured
      promissory note payable to an accredited related party investor due July
      31, 2008
            
            
            200,000
            
            
            
            -Series
      C Debenture Secured Promissory Note payable to an accredited related party
      investor; due March 19, 2008
            
            
            853,400
            
            
            
            853,400Total
      related party notes payable
            
            
            5,430,255
            
            
            
            3,823,757Less
      current portion
            
            
            5,430,255
            
            
            
            2,970,357Total
      related party notes payable long term
            
            $
            -
            
            
            $
            853,400





F-19
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Notes to
the Consolidated Financial Statements


June 30,
2007 and 2006





NOTE
      11 -
            NOTES
      PAYABLE





Notes payable comprise the
following:





June
      30, 2007
            
            
            June
      30, 2006NSHI
      Series A Secured 10% Debentures payable to the Sentient Entities; due
      September 30, 2005
            
            $
            5,000,000
            
            
            $
            5,000,000NSHI
      Secured Subordinated Series B1 Debentures payable to the Sentient
      Entities;due February 19, 2008
            
            
            11,300,000
            
            
            
            11,300,000NSHI
      Secured Subordinated Series B2 Debentures payable to the Sentient
      Entities;due February 19, 2008
            
            
            -
            
            
            
            9,700,000Sentient
      working capital loans
            
            
            -
            
            
            
            1,000,000AmerAlia
      Series A Debenture Secured Promissory notes payable to accredited
      investors; 10% interest payable quarterly; due September 30,
      2005
            
            
            2,250,000
            
            
            
            2,890,000AmerAlia
      Series C Debenture Secured Promissory note payable to an accredited
      investor,due March 19, 2008
            
            
            1,464,292
            
            
            
            1,464,292Wells
      Fargo factoring facility with fees payable according to time taken to
      collect each receivable
            
            
            1,230,723
            
            
            
            1,253,874Note
      payable to financial institution; principal and interest due June 30,
      2006; interest at 7.22% at June 30, 2006; secured by a related party
      guaranty agreement
            
            
            9,921,583
            
            
            
            9,921,583Note
      payable to equipment manufacturer, unsecured, interest only at 8% payable
      onMarch
      31, of each year, entire principal due December 31, 2005.
            
            
            1,200,000
            
            
            
            1,200,000Note
      payable to an investor, on call at 4.5%
            
            
            100,000
            
            
            
            100,000Note
      payable to McFarland Dewey Securities Co; unsecured, interest at 4%; due
      May 18, 2004
            
            
            18,000
            
            
            
            18,000Note
      payable to vendor, nil interest rate
            
            
            -
            
            
            
            130,938Motor
      vehicle loans at 0.9% p.a. interest dueFebruary
      and March 2009 secured by motor vehicles
            
            
            44,622
            
            
            
            67,816Note
      payable to investor; unsecured, due on demand; at 10%
      interest.
            
            
            4,000
            
            
            
            4,000Total
      notes payable
            
            
            32,540,481
            
            
            
            44,050,503Less
      current portion
            
            
            32,514,540
            
            
            
            21,542,869Total
      long-term debt
            
            $
            18,681
            
            
            $
            22,507,634





The aggregate principal maturities of
notes payable at June 30, 2007 are as follows:





Fiscal Year
            
            Amount2008
            
            $
            32,514,5402009
            
            
            18,6812010
            
            
            -2011
            
            
            -2012
            
            
            -Total
            
            $
            32,540,481





F-20
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Notes to
the Consolidated Financial Statements


June 30,
2007 and 2006





NOTE
      11 -
            NOTES
      PAYABLE (Continued)





On May
29, 2007, the Sentient Entities exchanged the $9,700,000 NSHI Secured
Subordinated Series B2 Debentures along with $2,063,080 of related accrued
interest for 1,308 shares of NSI common stock held by NSHI. Also on May 29,
2007, NSI issued to the Sentient Entities 120 shares of common stock in exchange
for the $1,000,000 of Sentient Entities working capital loans together with
accrued interest totaling $630,563. See Note 20 for related
discussion.





NOTE
      12 -
            CAPITAL
      LEASE OBLIGATIONS





June
      30, 2007
            
            
            June
      30, 2006Total
      minimum lease payments
            
            $
            130,873
            
            
            $
            159,516Less
      interest and taxes
            
            
            (10,968
            )
            
            
            (18,114
            )Present
      value of net minimum lease payments
            
            
            119,905
            
            
            
            141,401Less
      current portion
            
            
            (55,847
            )
            
            
            (43,429
            )Long-term
      portion of capital lease obligations
            
            $
            64,058
            
            
            $
            97,972





The aggregate principal maturities of
capital leases at June 30, 2007 are as follows:





Fiscal Year
            
            Amount2007
            
            $
            55,8472008
            
            
            60,6222009
            
            
            3,4362010
            
            
            -2011
            
            
            -Total
            
            $
            119,905





NOTE
      13 -
            ASSET
      RETIREMENT OBLIGATION





The asset
retirement obligation (ARO) represents the estimated current fair value of the
costs to plug the wells, remove buildings and return the site to its natural
condition.  The Company recorded the fair value of the ARO at the date
of the purchase of the assets and liabilities of White River and is accreting
the balance at the current inflation rate of 3%.  The ARO value at
June 30, 2007 is $898,000, an increase of $26,155 on the prior year’s balance
for accretion.  The ARO value at June 30, 2006 was $871,845, an
increase of $64,229 on the prior year’s balance made up of $24,229 in accretion
and $40,000 for the estimated cost of plugging and abandoning a new well placed
in service during fiscal year 2006.





NOTE
      14 -
            OPERATING
      LEASES





The
Company has signed seven leases for a total of 59 railway hopper
cars.  Three of these leases terminate in June 2010, two terminate in
December 2009, one terminates in September 2010 and the other terminates in
December 2007.  These leases require monthly payments of $425 to $540
per car.  The Company has signed a lease for a 29,988 square foot
warehouse in Rifle, Colorado.  The lease terminates May 2009 and
requires monthly payments of $9,651, increasing by 3% in January of each
year.





The
following is a schedule of future minimum lease payments required by the
non-cancelable operating lease agreements at June 30, 2007:





Year ended June 30
            
            Amount2008
            
            
            412,3812009
            
            
            336,4672010
            
            
            192,3002011
            
            
            32,400Total
            
            $
            973,548





The
rental expense component of these lease payments was $477,855 for financial year
2007 and $257,996 for financial year 2006.





F-21
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Notes to
the Consolidated Financial Statements


June 30,
2007 and 2006





NOTE
      15 -
            OUTSTANDING
      STOCK OPTIONS AND PURCHASE WARRANTS





As a
result of applying SFAS No. 123(R) to stock options granted to board members,
the Company recorded expenses of $46,875 and $86,835 for the year ended
June 30, 2007 and 2006, respectively.These expenses are
included in the selling, general and administrative amount in the statement of
operations.





Under
FASB Statement 123(R), the Company estimated the fair value of each stock award
at the grant date by using the Black-Scholes option pricing model with the
following weighted average assumptions used for each of the grants,
respectively; dividend yield of zero percent for all years; expected volatility
of 170.53% and 165.94%; risk-free interest rates of 4.375% and 3.75% and
expected lives of 3.0 years.





A summary
of the status of the Company’s stock options and warrants as of June 30, 2006
and changes during the year ended June 30, 2007 is presented below:





Options,
      Warrants and SAR’s
            
            
            Weighted
      Average Exercise PriceOutstanding,
      June 30, 2006
            
            
            3,690,000
            
            
            $
            0.96Granted
            
            
            187,500
            
            
            $
            0.42Expired/Canceled
            
            
            (262,500
            )
            
            $
            0.57Exercised
            
            
            -
            
            
            
            -Outstanding,
      June 30, 2007
            
            
            3,615,000
            
            
            $
            0.96Exercisable,
      June 30, 2007
            
            
            3,615,000
            
            
            $
            0.96





The
following summarizes the exercise price per share and expiration date of the
Company's outstanding options and warrants to purchase common stock at June 30,
2007:





Expiration
      Date
            
            Price
            
            
            NumberJune
      30, 2008
            
            $
            0.54
            
            
            
            187,500March
      19, 2009
            
            $
            1.00
            
            
            
            2,500,000April
      18, 2009
            
            $
            0.71
            
            
            
            540,000April
      18, 2009
            
            $
            3.00
            
            
            
            200,000June
      30, 2009
            
            $
            0.42
            
            
            
            187,5003,615,000





During
the year ended June 30, 2007, 187,500 options were granted and 262,500 options
expired.





In
      June 2001, the Shareholders approved the 2001 Directors’ Incentive Plan
      whereby each director (who is not an employee or officer) is granted an
      option to purchase 75,000 shares at a current market price when a person
      joins the Board of Directors.  In addition, options to purchase
      37,500 shares are granted to each such director sitting at July 1 of each
      year.  The exercise price for these options is the average
      market price during the month of June preceding each grant date, and the
      options have a three-year term.  All options under this plan
      vest and are exercisable six months after the date of
    grant.





F-22
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Notes to
the Consolidated Financial Statements


June 30,
2007 and 2006





NOTE
      16 -
            COMMITMENTS
      AND CONTINGENT LIABILITIES





The
Company is a party to certain claims and lawsuits arising from its business
activities.





On
December 10, 1992, the Company acquired the Rock School Lease from Kinder (See
Note 6); the acquisition terms were amended by Kinder and the Company on January
1, 1996.  As amended, the acquisition agreement provides for the
following consideration:





1.
            Commencing
      January 1, 1996, the reservation of a production royalty of $1.50 per ton
      for all production, due and payable on the last day of the month following
      the month of production subject to a minimum annual royalty of $75,000 in
      arrears;


2.
            Starting
      January 1, 1996, the establishment of a consulting arrangement between
      Kinder and the Company providing for an annual consulting fee of $25,000
      payable monthly in arrears.





Minimum
amounts due are as follows:





Year ended June 30
            
            Amount2008
            
            $
            100,0002009
            
            
            100,0002010
            
            
            100,0002011
            
            
            100,000Total
            
            $
            400,000





The
unpaid portion of these obligations is recorded in accounts and royalties
payable as current liabilities, however, future obligations are not included as
they are future operating expenses.





Natural
Soda, Inc. enters into forward purchases of gas to secure supplies at fixed
prices in the normal course of its business operations.  These
purchases are used to cover up to 75% of the estimated gas needs for a given
period.  The purchases fall under the normal use exception provided by
SFAS No. 133 “Accounting for Derivative Instruments and Hedging
Activities”.  Accordingly, no fair value has been assigned to these
forward contracts.





NOTE
      17 -
            PREFERRED
      STOCK





There are
82 shares of Series E preferred stock outstanding at June 30, 2007 and 2006
which carry a 10% dividend payable quarterly when declared by the directors of
the Company. Each share of the preferred stock was convertible into 1,000 shares
of common stock until October 31, 2000.  Since October 31, 2000 the 82
shares have not been convertible into common stock and have no voting
rights.





NOTE
      18 -
            OFFICER
      COMPENSATION





At June
30, 2007 accrued unpaid compensation, expenses and advances to the company of
$243,661 and $430,518 were due to Bill H. Gunn and Robert van Mourik
respectively (at June 30, 2006: $225,576 and $444,812,
respectively).  These amounts also include $14,000 director’s fees due
annually.  During the year ended June 30, 2007, Mr. Gunn received all
his salary and directors fees and $11,045 that had previously been
accrued.  Mr. van Mourik received all his salary and directors fees
and $73,369 that had previously been accrued.  During the year ended
June 30, 2006, Mr. Gunn received $171,888 of his salary and directors fees while
$28,112 was not paid and accrued.  All of Mr. van Mourik’s salary and
director’s fees was not paid and accrued.





Mr. Bill
H. Gunn is Chairman and President of AmerAlia, and Mr. Robert van Mourik is
Executive Vice President, Chief Financial Officer, Secretary and
Treasurer.





F-23
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Notes to
the Consolidated Financial Statements


June 30,
2007 and 2006





NOTE 19
-      GOING CONCERN





The
Company's financial statements are prepared using accounting principles
generally accepted in the United States of America applicable to a going concern
which contemplates the realization of assets and liquidation of liabilities in
the normal course of business.  However, the Company has had no
significant operations since inception.  As reported in the financial
statements, the Company has an accumulated deficit of approximately $59 million
as of June 30, 2007. The Company has not yet established revenues sufficient to
cover its operating costs, which creates doubt as to whether it can continue as
a going concern.





The
ability of the Company to continue as a going concern is dependent on the
Company obtaining adequate capital to fund operating losses.  If the
Company is unable to obtain adequate capital, it could be forced to cease
operations.  In order to continue as a going concern, the Company will
have to refinance its debt due to the Sentient Entities and secure additional
capital resources.  Management’s plans to obtain such resources for
the Company are based on having accomplished many of its immediate objectives
since acquiring the WRNM operations that are now leading to improved
profitability.  These actions include:


·
            enhancing
      the management team with recruitments in production, marketing, finance
      and customer relations


·
            implementing
      new accounting and management information
  systems


·
            revitalizing
      and repairing production facilities thereby increasing efficiency and
      production capacity


·
            gaining
      government permits to expand solution mining
  activity





Consequently,
      management has reduced operating costs and has implemented a number of
      marketing initiatives to gain higher volumes of sales.  As this
      is a business with high fixed costs, management expects that additional
      increases in revenues as a result of these higher volumes and price
      increases will impact significantly on
      profitability.  Management is now also engaging in discussions
      with Sentient and other note holders to settle all debt, accrued interest
      and rights to contingent interest for equity in AmerAlia and/or its
      subsidiaries.  If completed, these transactions will
      substantially remove much of our debt and most of our creditor obligations
      except for normal trade credit.  The existence of the contingent
      interest obligations in particular has previously made the task of raising
      new debt or equity capital impossible. To progress this recapitalization
      plan the Company must first file its annual report on form 10-KSB with the
      Securities and Exchange Commission.





The
ability of the Company to continue as a going concern is dependent upon its
ability to successfully accomplish the se plans described above.  The
accompanying financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.








NOTE
      20 -
            EXCHANGE
      AND ISSUANCE OF NSI COMMON STOCK FOR DEBT OBLIGATIONS AND RELATED
      “MINORITY INTEREST”





In May
2007, Sentient I exercised its right to convert $1,000,000 of working capital
loans together with $630,563 of accrued interest in exchange for newly issued
shares of NSI shares of common stock representing a 4.5% ownership in NSI. In
addition, also in May 2007, Sentient I exercised its right to convert $9,700,000
of NSHI Series B2 Convertible Secured Debentures along with related accrued
interest totaling $2,063,080 into NSI common stock held by NSHI representing 49%
of the ownership of NSI. These transactions resulted in a combined loss on
settlement of debt obligations when compared to the net book value of NSI at the
date of the transaction. These transactions resulted in a “Minority Interest”
value of $15,225,943. Coupled with the $42,121 “Minority Interest” portion of
the net loss from the date of the transactions through June 30, 2007, the ending
“Minority Interest” value at June 30, 2007 as reflected in the accompanying
consolidated balance sheet is $15,183,822.





F-24
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Notes to
the Consolidated Financial Statements


June 30,
2007 and 2006





NOTE
      21 -
            SUBSEQUENT
      EVENTS





On July
1, 2007 we granted options to Non-executive Directors to acquire 187,500 shares
at $0.40 per share until June 30, 2009 in accordance with the 2001 Directors’
Incentive Plan.





In
August, 2007 a Sentient affiliate (“Sentient II”) acquired all the debt and
equity securities, including the debt previously owed to the Bank of America,
owned by the Mars Trust.  Also, in August 2007, Sentient II lent
$350,000 to AmerAlia at 6% interest due December 31, 2007 subsequently extended
to July 31, 2008.  The principal and interest is convertible to shares
of AmerAlia common stock at 36 cents per share.





In August
2007 we settled the outstanding judgement in favor of Hudson for a cash payment
of $300,000.





In August
2007 we utilized our factoring facility with Wells Fargo to borrow $960,000 that
we placed on deposit with Wells Fargo Bank to secure letters of credit to
support our bonding obligations with the BLM, the United States Environment
Protection Agency and the State of Colorado.





Effective
as of October 31, 2007, Sentient I acquired from NSI its $750,000 Series A
Secured debenture and accrued interest of $271,215.75.





Effective
as of March 31, 2008, Sentient USA Resources Fund III LP (“Sentient III”)
purchased AmerAlia’s rights to outstanding interest due on its Series A Secured
10% Debentures for $1,406,875. AmerAlia used these funds for the purpose of
paying some of the outstanding interest owed to the holders of its Series A
Debenture Secured promissory notes.  Sentient III also acquired
Sentient I’s rights to interest owed on its Series A debentures, including the
interest due on the debenture previously owned by NSI, for
$2,076,334.20.





In May,
2008 Sentient I loaned AmerAlia $465,000 for the purpose of contributing capital
to NSHI which, in turn contributed $465,000 to NSI as its proportionate share of
$1 million for well field development expenditures.  The loan is at 6%
interest and is due July, 31, 2008.  The principal and interest is
convertible to shares of AmerAlia common stock at 36 cents per
share.





In June,
2008 we issued Sentient III a promissory note for $300,000 for working capital
purposes subject to drawing down the loan for approved purposes.  We
drew down $80,000 to pay audit fees.  The loan is at 6% interest and
is due July, 31, 2008.





In June
2008, the $1,200,000 promissory note held by HPD, LLC was acquired by Sentient
III.





In June
2008 we issued 59,070 shares to non-executive directors pursuant to the net
exercise provisions of their option agreements.





On July
1, 2008 we granted options to Non-executive Directors to acquire 187,500 shares
at $0.88 per share until June 30, 2011 in accordance with the 2001 Directors’
Incentive Plan.






F-25