UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-KSB


(Mark
one)


x
            ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934  For the Fiscal Year Ended June 30,
  2008


OR


o
            TRANSITION
      REPORT UNDER 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)
      876-2373Securities
      registered under Section 12(b) of the Act:
              None.Securities
      to be registered under Section 12(g) of the
Act:





Common Stock - $.01 Par
Value


(Title of
Class)





Check
      whether the issuer is not required to file reports under Section 13 or
      15(d) of the Exchange Act.
                        oNote:  Checking
      the box above will not relieve the registrant required to file reports
      under Section 13 or 15(d) of the4 Exchange Act from their obligations
      under those sections.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
      oIndicate
      by check mark whether the registrant is a shell company (as defined by
      Rule 12b-2 of the Exchange Act)
                        Yes
      o  No
      xCheck
      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.
                        oRevenues
      for the fiscal year ending June 30, 2008:
                        $17,947,800As
      of December 1, 2008, the number of shares outstanding of the company's
      $.01 par value common stock was 54,110,318.
                          Aggregate
      market value of the voting and non-voting common equity held by
      non-affiliates of AmerAlia as of December 1, 2008 was approximately
      $9,006,506.  The estimate is based on the last sale price per
      share of $0.85 and 10,595,889 shares held by
    non-affiliates.





Documents
incorporated by reference:  None other than those previously filed and
referenced at Item 13.













Forward Looking
Statements




The
information in this Annual Report on Form 10-KSB contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These forward-looking statements involve risks and uncertainties regarding
the intent, belief or current expectations of us, our directors or our
officers.  Any statements contained herein that are not statements of
historical facts may be deemed to be forward-looking statements. In some cases,
you can identify forward-looking statements by terminology such as "may",
"will", "should", "expect", "plan", "intend", "anticipate", "believe",
"estimate", "predict", "potential" or "continue", the negative of such terms or
other comparable terminology. Actual events or results may differ materially. In
evaluating these statements, you should consider various factors, including the
risks we outline from time to time in other reports we file with the Securities
and Exchange Commission (the “SEC”). These factors may cause our actual results
to differ materially from any forward-looking statement. We disclaim any
obligation to publicly update these statements, or disclose any difference
between our actual results and those reflected in these statements. The
information constitutes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Given these uncertainties,
readers are cautioned not to place undue reliance on such forward-looking
statements.




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
                                32.
                                Description of Properties
                                253.
                                Legal Proceedings
                                254.
                                Submission of Matters to a Vote of Security
      Holders
                                25PART
      115
                                Market for Common Equity, Related Stockholder Matters and
      Small Business Issuer Purchases of Equity Securities
                                266.
                                Management’s Discussion and Analysis or Plan of
      Operation
                                277.
                                Financial Statements
                                318.
                                Changes in and Disagreements on Accounting and Financial
      Disclosure
                                318A
                                Controls and Procedures
                                318B.
                                Other Information
                                32PART
      1119.
                                Directors, Executive Officers, Promoters, Control
      Persons and Corporate Governance; Compliance with Section 16(a) of the
      Exchange Act
                                3310.
                                Executive Compensation
                                3611.
                                Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
                                4112.
                                Certain Relationships and Related Party Transactions and
      Director Independence
                                4313.
                                Exhibits
                                4714.
                                Principal Accountant Fees and Services
                                50SIGNATURESConsolidated Financial Statements
                                F-1





2
 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
Natural Soda Holdings, Inc. (“NSHI”), in which AmerAlia holds an 18% equity
interest as of October 31, 2008.  We are also referring to Natural
Soda, Inc. (“NSI”) which became a wholly owned subsidiary of NSHI on October 31,
2008 when we completed the first stage of a restructuring agreement with the
Sentient Entities as defined and discussed more fully
below.  Previously, NSI was a 46.5% owned subsidiary of NSHI, which
was a wholly owned subsidiary of AmerAlia.  As part of the first
closing of the restructuring agreement, AmerAlia received $5,500,000 of working
capital from Sentient USA Resources Fund, L.P. (“Sentient”) in consideration for
the issuance of equity in AmerAlia.  We used $3,998,344 to repay debt
obligations. In the second closing, AmerAlia expects to receive approximately
$4.3 million of working capital in consideration for the issuance of equity in
AmerAlia.  We intend to complete the second closing following the
filing of this Form 10-KSB and the Form 10-Q for the quarter ended September 31,
2008.  These transactions, including additional issues of equity at
the first closing in settlement of debt obligations, are described more fully in
Item 1 Section 5 below.





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 access.  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 and to leverage that low
cost advantage to achieve superior profit margins.




We own
the largest BLM leases in the Piceance Creek Basin in northwest
Colorado.  The Piceance Creek Basin 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 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.




As
discussed below, deposits of oil shale lie below, above and are interspersed
within the nahcolite contained within our sodium leases.  We do not
have any rights to this resource but we plan to apply for leases to exploit all
or part of this oil shale.  Shell Frontier Oil & Gas Co. (“Shell”)
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, if it is economically feasible to do so, to develop a plan to recover
oil from the resource contained within our sodium leases.





3
 Table of Contents





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.  In
2001, the BLM renewed the lease for a further ten years.  We have
never produced sodium bicarbonate from the Rock School Lease.  The
Rock School Lease is owned by NSHI and remains an untapped asset.





In
February 2003 NSI, our then wholly owned subsidiary, successfully completed the
acquisition of our operating assets from White River Nahcolite Minerals, LLC and
IMC Chemicals Inc.   The acquisition of these operating assets
was financed by a trust and a fund managed by Sentient Asset Management, an
international private equity group specializing in the development of natural
resources.  As discussed more fully below, these loans, along with
equity in NSI and other obligations, were converted to equity of NSHI and
AmerAlia in October 2008.




Figure
      1:  Natural Soda’s Plant Operations, Rifle,
    Colorado





In May
2007, these interests held by the trust and the fund were transferred to
Sentient which 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.  At that time, AmerAlia owned all the outstanding stock of
NSHI.  The various Sentient entities held 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 as well as contractual rights for
indemnification to reimburse the Mars trust for its guaranty payments to the
Bank of America.





In
addition, Sentient II advanced a loan of $350,000 to AmerAlia in August
2007.  To provide us with additional interim funding, we agreed with
the various Sentient funds:





1.
            Effective
      as of October 31, 2007, Sentient 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’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 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.


4.
            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.





4
 Table of Contents





In June
2008 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
(“HPD”).  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.





In this
report we collectively describe Sentient, Sentient II and Sentient III as the
“Sentient Entities”.  As discussed more fully in Item 1 Section 5
below, the loans, equity and other obligations of the Sentient Entities were
contributed to Sentient which converted all these interests (except for its
AmerAlia shares) into equity of NSHI and AmerAlia on October 31,
2008.





(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.





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 we have gained extensive
mining and geological experience with the resource, however, the Cole report
remains a  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, we
believe that 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.




5
 Table of Contents




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.




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 lease 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 of our 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.  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.




6
 Table of Contents





The
Nielsen-Juhann-Hogle lease has not been permitted and would require a public
filing of a mining plan, an environmental impact study and a series of public
meetings to secure 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.





The Wolf
Ridge leases contain the unique 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.





Our
operations to recover sodium products from these leases are governed by a BLM
approved mine plan.  Currently, we are recovering sodium bicarbonate
from three cavities for which we have authority, as of December, 2008, to
recover up to approximately 300,000 tons of sodium bicarbonate.  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 can cause 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 Wolf Ridge 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




Figure
      3: A general illustration of the solution mining
  process




7
 Table of Contents





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.


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 the recently increasing oil prices (although not
presently sustained) and the need for the United States to become more self
sufficient in energy and reduce its reliance on foreign energy
sources.  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.





2.     OUR
SODIUM BICARBONATE BUSINESS





NSI
conducts our sodium bicarbonate business.  As of October 31, 2008, NSI
is a wholly-owned subsidiary of NSHI and AmerAlia owns 18% of the equity
interest in NSHI.  Between May 2007 and October 31, 2008, NSHI owned
46.5% of the equity interest of NSI and NSHI was a wholly-owned subsidiary of
AmerAlia.





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.  In CY2007 it produced 99,000 tons. 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.





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 spent liquor is reheated and recycled underground to
continue the solution mining process. The dried sodium bicarbonate is then
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.





8
 Table of Contents





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 three cavities denominated as 5H, 6H and 7H for which we
have authority to recover up to 300,000 tons of sodium
bicarbonate.  Cavity 7H has an allocation of 175,000 tons but full
extraction will be limited until full communication is established between
injection and recovery wells in that cavity.  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 will require two new
cavities to be drilled within the next two years.





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.





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.  Sales distributed through Bunnett & Company
accounted for 33% of our sales revenues in the fiscal year ended June 30, 2008
and sales distributed through Vitusa Products accounted for 23% of our sales
revenues during the same period.  A third distributor, Agri Dealers,
Inc. of Louisville, Kentucky, an animal feed distributor, accounted for 10% of
our sales revenues during the same period.  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
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 and antacid remedies; household products including
deodorizers, cleaning products, detergents, carpet cleaners, bath salts and cat
litter.  Sodium bicarbonate is also used in industrial situations 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 underrepresented 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





Our
principal competitors are Church & Dwight, manufacturers of the Arm &
Hammer brand; FMC Corporation and Solvay.  We compete with them on the
basis of service and price.





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
                  101,614
                  -  0.4Fiscal
                  Gross
      Revenues
                  %
      ChangeYear
                  ($)
                  on
      prior FY2004
                  12,609,0412005
                  14,141,500
                  +
      12.22006
                  15,293,688
                  +   8.12007
                  16,951,997
                  +
      10.82008
                  17,947,800
                  +   5.9





During
calendar year 2007, and for some of 2008, sales were 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 existence 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





Figure
      4:  Colorado River System





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”).





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 total water rights exceed
more than 100,000 acre feet per year.  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 further utilize the water rights we
own.





Agreement
with Shell Frontier Oil & Gas, Inc.





NSI
entered into a contract on January 29, 2007 with Shell, 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.  See Item 3 “Legal Proceedings” for
additional information.  Our initial sales under this agreement have
not been significant.





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 currently being used 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.




4.           OUR
OIL SHALE POTENTIAL





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).





In 2006
the BLM issued five oil shale research leases adjacent to our sodium bicarbonate
operations.  Three of these leases were issued to Shell, 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 lease or commercial oil shale lease covering
a part or all of the areas contained within the boundaries of 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 NSHI and
NSI, either on their own or in conjunction with others, intend to apply for a
commercial lease.  At present, the policy of the US Government and the
lack of regulations preclude us from applying for an oil shale
lease.





16
 Table of Contents





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.





5.           OUR
FINANCING ARRANGEMENTS





Description
of Long Term Financing Arrangement with the Sentient Entities





In
connection with the purchase of our operating assets, on March 19, 2004 we
entered into a long term financing arrangement with the Sentient Entities to
replace the short term financing arrangement that had been in place since the
purchase of our operating assets.  As part of the long term financing
arrangement, NSHI issued substantial debt securities to AmerAlia, NSI and the
Sentient Entities and preferred equity to AmerAlia.  As described
below, all of these debt securities and preferred equity securities have been
cancelled as part of the restructuring transaction which closed October 31,
2008.





Issuance of Debentures and
Preferred Equity





Pursuant
to the long term financing arrangement, NSHI issued the following debentures to
the following entities:





·
            $3,775,000
      principal amount of Series A Secured 10% Debentures issued to
      AmerAlia


·
            $5,000,000
      principal amount of Secured Series A 10% Debentures issued to the Sentient
      Entities


·
            $11,300,000
      principal amount of Secured Subordinated Series B1 Debentures issued to
      the Sentient Entities


·
            $9,700,000
      principal amount of Secured Subordinated Series B2 Convertible Debentures
      issued to the Sentient Entities and


·
            $12,000,000
      of Unsecured Subordinated Series C Debentures issued to
      AmerAlia.





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.





In
addition, NSHI issued 4,949 shares of Series A Preferred Stock having a
liquidation value of $4,949,000 to AmerAlia.





Subsequently,
in addition to the financing agreements finalized 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%.





Description of the
Debentures





The
Series A Debentures were issued March 19, 2004 and were due September 30,
2005.  The interest rate was 10% per annum and the first interest
payment was paid as required on June 30, 2004.  AmerAlia did not make
any additional interest payments and such unpaid interest continued to accrue
until the Series A Debentures were repaid in the restructuring
transaction.  The Series A Debentures were senior to all other
debentures and were 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
collateralized the Series B1 Debentures held and the Series B2 Debentures held
by the Sentient Entities.





The
Series B1 Debentures and Series B2 Debentures were subordinate to the Series A
Debentures but ranked equally with the Series C Debentures with respect to all
payments of principal and interest unless the Series B Debenture holders
declared an event of default.  The Series B1 Debentures, Series B2
Debentures and Series C Debentures had the following interest
rates:




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 had 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, provided
the Sentient Entities with an internal rate of return of 34.8766% per annum
compounded annually, using February 20, 2003 as the commencement
date.  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 owned 53.5% of NSI prior to October 31, 2008 and NSHI had no further
obligation to pay contingent interest on the Series B2 Debentures.





The
Sentient Entities also had the option to exchange the Series B1 Debentures into
shares of AmerAlia common stock.  This right to exchange the Series B1
Debentures and the NSI common stock received upon the conversion of its Series
B2 Debentures provided for the issuance to the Sentient Entities of AmerAlia
common stock at a price equal to 85% of the market price for the AmerAlia common
stock.





The
Unsecured Subordinated Series C Debentures earned the same interest rate as the
Series B1 Debentures and had the 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 ranked equally with the Series B1
Debentures with respect to all payments of principal and interest unless the
Series B1 Debenture holders declared an event of default, in which case the
Series B1 Debentures would be senior to and be repaid prior to the Series C
Debentures.  The Series C Debentures had 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.”





The
Series B1 and B2 Debentures and the Series C Debentures had a provision that if
NSHI sold 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.





AmerAlia
Funding





As part
of the long term financing arrangement, AmerAlia raised $3,500,000 from a group
of accredited investors through the issue of 10% promissory notes due September
30, 2005 (the “Notes”).  The Notes were secured by an equal value of
NSHI Series A Debentures held by AmerAlia.





As
discussed in Item 12 “Certain Relationships and Related Party Transactions”,
these investors included  Karen O. Woolard, spouse of Robert C.
Woolard, an AmerAlia director, 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 Notes 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.





Since
September 2005 a penalty rate of interest of 15% has applied to the balance of
principal and interest outstanding on all these Notes at that date.




18
 Table of Contents





Prior AmerAlia
Obligations





As part
of the long term financing arrangement, AmerAlia issued two promissory notes
with an aggregate principal amount of $2,078,417.  These notes were
secured by NSHI Series C Debentures held by AmerAlia with an aggregate principal
amount of $2,078,417 and 359 shares of NSHI Series A Preferred Stock held by
AmerAlia.  One of these promissory notes in an amount of $853,400,
secured by $765,295 of Series C Debenture and 132 shares of NSHI Series A
Preferred Stock, was issued to Mr. Robert C. Woolard now an AmerAlia
director.  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
a Series C Debenture with a principal amount of $9,921,583 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 to indemnification under the guaranty agreement.





On
February 21, 2003 we concluded a settlement agreement with U.S. Filter with
respect to a Design/Build contract that included our issuing a promissory note
for $1,200,000 to U.S. Filter.  This note was then assigned to
HPD.





Recent AmerAlia
Loans





In August
2007, Sentient II lent $350,000 to AmerAlia at 6% interest.  The loans
and accrued interest were convertible into AmerAlia common stock at 36 cents per
share.





We also
agreed to some interim funding arrangements with the Sentient
Entities:





1.
            Effective
      as of October 31, 2007, Sentient acquired from NSI its $750,000 Series A
      Secured Debenture and accrued interest of $271,215.75 for
      $1,021,215.75.


2.
            Effective
      as of March 31, 2008, Sentient III purchased AmerAlia’s rights to
      outstanding interest due on its Series A 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
      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.


4.
            AmerAlia
      issued another promissory note to Sentient III for $300,000 at 6% per
      annum interest to enable us to access funds to pay ordinary trade payables
      as approved by Sentient III.





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.  It is
our intention to utilize HPD’s services to design and construct a plant
expansion should we choose to expand the plant.





Restructuring
Transaction





In
September 2008 we issued 1,402,000 shares of restricted common stock to holders
of Series C Debenture secured promissory notes in satisfaction and cancellation
of such notes and accrued interest with a total value of
$3,311,367.  One of the holders was the Karen O. Woolard Trust, a
related party.




19
 Table of Contents





On
September 25, 2008 AmerAlia, NSHI, NSI, Bill H. Gunn and Robert van Mourik,
Directors and executive officers of AmerAlia (collectively the “AmerAlia
parties”) entered into a Restructuring Agreement with the Sentient
Entities.  On October 31, 2008 the AmerAlia Parties and the Sentient
Entities completed an Amendment to the Restructuring Agreement.  As a
result of the amendment, the restructuring transaction was divided into two
closings.  In accordance with the amended agreement the first closing
occurred as of October 31, 2008.  Prior to the first closing, the
Sentient Entities transferred their various interests to Sentient.  In
the first closing:





·
            Sentient
      exchanged all its Series A Debentures and Series B1 Debentures, accrued
      interest and rights to contingent interest thereon, its one share of NSHI
      common stock and its 53.5% of the common stock of NSI for 82% of the
      issued common stock of NSHI.


·
            AmerAlia
      exchanged its Series A Debentures and Series C Debentures, accrued
      interest thereon and its NSHI preferred stock for 12.9% of the issued
      common stock of NSHI, giving AmerAlia an aggregate ownership position in
      NSHI of 18%.


·
            Intercompany
      loans between AmerAlia and NSHI were
  extinguished.





·
            Sentient
      received an aggregate of 27,875,047 shares of AmerAlia common stock as
      follows:


o
            15,277,778
      shares of AmerAlia common stock for a total purchase price of
      $5,500,000;


o
            6,619,469
      shares in satisfaction of various promissory notes;
  and


o
            5,977,800
      shares in satisfaction of debts, rights and obligations acquired from the
      Jacqueline Badger Mars Trust in August
2007.


·
            Officers,
      Directors and holders of Notes subscribed for shares of AmerAlia Common
      Stock in satisfaction of Notes, unsecured notes and accrued compensation
      as follows:


Shareholder
                            Relationship
                            
                            Number
      of Shares
                            
                            
                            ConsiderationBill
      H Gunn
                            Chairman
      & CEO
                            
                            
                            700,000
                            
                            
                            $
                            252,000Robert
      van Mourik
                            Director,
      EVP & CFO
                            
                            
                            250,000
                            
                            
                            
                            90,000James
      V Riley Trust
                            Affiliate
      ofJames
      V. Riley, Director
                            
                            
                            1,583,333
                            
                            
                            
                            570,000J.
      Jeffrey Geldermann
                            Director
                            
                            
                            1,003,400
                            
                            
                            
                            361,224Karen
      O. Woolard Trust
                            Affiliate
      of  Robert C.Woolard,
      Director
                            
                            
                            925,000
                            
                            
                            
                            333,000Glendower
      Investments
                            Affiliate
      of Neil E.Pty
      Ltd
                            Summerson,
      Director
                            
                            
                            153,000
                            
                            
                            
                            55,080Geoffrey
      C. Murphy
                            Director
                            
                            
                            486,125
                            
                            
                            
                            175,005TOTALS:
                            
                            
                            
                            5,100,858
                            
                            
                            $
                            1,536,309





In
addition, other holders of the Notes acquired 2,433,706 shares for
$876,134.





·
            We
      allocated the $5,500,000 of cash received in the first closing as
      follows:





Recipient
                              Relationship
                              Nature
      of
                              
                              AmountObligation
                              
                              PaidKaren
      O. Woolard Trust
                              Affiliate
      of  Robert C.
                              Balance
      of Note
                              
                              $
                              977,188Woolard,
      Director
                              &
      interestRobert
      C. Woolard
                              Director
                              Directors
      fees
                              
                              
                              16,792Robert
      van Mourik
                              Director,
      EVP & CFO
                              Accrued
                              
                              
                              400,000compensation*Ahciejay
      Pty Ltd
                              Affiliate
      of
                              Promissory
      note
                              
                              
                              169,816Robert
      van Mourik
                              &
      interest*James
      V Riley Trust
                              Affiliate
      of
                              Promissory
      note
                              
                              
                              142,524James
      V. Riley,
                              interest
      & directorsDirector
                              feesJ.
      Jeffrey Geldermann
                              Director
                              Promissory
      note
                              
                              
                              88,881interest
      & directorsfeesNeil
      E. Summerson
                              Director
                              Director’s
      fees
                              
                              
                              45,915&
      expensesGeoffrey
      C. Murphy
                              Director
                              Director’s
      fees
                              
                              
                              26,550&
      expensesNote
      holders
                              Unrelated
      parties
                              Notes
      & interest
                              
                              
                              1,983,801Various
      creditors
                              None
                              Accounts
      payable
                              
                              
                              189,877TOTAL:
                              
                              
                              
                              $
                              3,998,344* Includes
      additional provision for withholding taxes




20
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The
remaining funds of $1,501,656 are being held to settle remaining obligations and
for working capital.





Following
the first closing, Sentient no longer holds any debt in either AmerAlia or
NSHI.  All Series A Debentures, Series B1 Debentures and Series C
Debentures issued by NSHI were cancelled.





The
Amendment to the Restructuring Agreement also provides for a second closing to
occur on December 5, 2008 or such other time as the parties agree.  We
anticipate this will occur following the filing of this annual report on Form
10-KSB and the filing of a quarterly report on Form 10-Q for the quarter ended
September 30, 2008.  At the second closing Sentient will purchase an
additional 12,149,628 shares of AmerAlia Common Stock for
$4,373,866.  The proceeds from the second closing will be used in the
following priority: (a) as a working capital reserve for AmerAlia of $1,000,000
(b) as a reserve solely to fund AmerAlia’s share of previously discussed capital
calls of NSHI, our share of which is $2,880,000, and additional working capital
for AmerAlia.  In addition, until the second closing and subject to
certain restrictions, AmerAlia will have the right to sell up to 1,895,708
shares for a total purchase price of $682,455 to Sentient for the purpose of
providing additional working capital for AmerAlia.  Such shares would
reduce Sentient’s option to purchase up to 5,500,000 shares of AmerAlia common
stock within the next three years.  This option to subscribe for
5,500,000 shares is only to be exercised to resolve obligations of AmerAlia that
exist at closing and are not discharged at closing, and then only if the holders
of such unpaid obligations pursue or threaten to pursue claims against AmerAlia
or its affiliates.





Shareholders
Agreement





The
Restructuring Agreement included an undertaking by the AmerAlia Parties and the
Sentient Parties to terminate the existing Securityholders
Agreement.  Accordingly, NSHI, AmerAlia and Sentient entered into a
new Shareholders Agreement dated October 31, 2008.  The agreement
contains provisions restricting transfers of shares by shareholders and a right
of first refusal on sales to third parties of the shares held by
AmerAlia.  Under the agreement, if Sentient decides to sell its NSHI
shares, it can force AmerAlia to sell its NSHI shares on the same terms and
conditions as Sentient, or “drag-along” AmerAlia, subject to any required
approval by the AmerAlia shareholders.  Correspondingly, AmerAlia has
the right to participate in any sale by Sentient of its NSHI shares on the same
terms and conditions provided, however that this right expires if the AmerAlia
shareholders do not approve the above drag-along right by December 31,
2008.  The agreement also provides for additional funding of NSHI on a
pro rata basis by AmerAlia and Sentient.  Although Sentient does not
have any contractual obligation to fund any capital contributions, if Sentient
does fund its pro rata portion, it does have the option to fund any pro rata
capital contribution that AmerAlia does not make, which would even further
dilute AmerAlia’s ownership of NSHI.





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.




21
 Table of Contents





RISK
FACTORS





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 of the assets, refurbish
our plant and sustain our activities to date.  Our accumulated losses
were approximately $105 million at June 30, 2008 and we had a deficit of
shareholders’ funds of $67 million at that date.  We will continue to
lose money unless we significantly increase our revenues.  If we
cannot operate profitably we may not be able to add or replace cavities or
improve our plant as necessary.   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.  In addition, our business has high fixed
costs.  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.  Another
customer, Agri Dealers, Inc., represented 10% of our sales and together these
three constituted approximately 64% of our sales through June 30, 2008 and about
66% of our accounts receivable at June 30, 2008.  Consequently, there
is also a concentration of credit risk associated with the continuing successful
performance of these customers.  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.





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.




22
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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.





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.





Under the Shareholders 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 and the approval of the AmerAlia shareholders is not required by Utah
law, neither the board of directors nor the AmerAlia shareholders would have any
opportunity to approve the transaction.  In this situation, Sentient
could approve a transaction which is not beneficial to the AmerAlia shareholders
or would not otherwise be approved by the AmerAlia shareholders.





We
may be unable to obtain a lease to exploit the oil shale resource that we
believe lies below, above and interspersed within the nahcolite contained within
our sodium leases.  If we are unable to obtain an oil shale lease,
that would have a material adverse effect on the value of our
assets.





The
Department of Interior has issued regulations to enable the issue of commercial
leases for the development of oil shale resources. However, there is no
guarantee that any leases will be issued or applications considered as the
incoming Obama Administration as a matter of policy may be opposed to the
commercial development of oil shale until the outcome of further research is
known.  We believe that our sodium leases have significant value based
on our ability to apply for research and/or commercial oil shale
leases.  If we cannot apply for these leases or are unable to obtain
them, we will lose the value of our sodium leases associated with these
prospective oil shale leases and lose the profits potentially available from
commercially exploiting these oil shale resources.





The
oil shale industry has attempted to exploit oil shale commercially in the past
and has been unable to do so in an economically feasible manner.  Even
if we obtain a research/commercial oil shale lease, the technology may not exist
during the term of the lease to exploit oil shale in an economically feasible
manner.  If we are unable to exploit our potential oil shale
leases the value of our assets would be materially and adversely
affected.





In the
past, the oil industry has attempted to exploit oil shale to produce commercial
quantities of oil.  Each time the industry has failed to develop
technology that would allow it to produce commercial quantities of oil in an
economically feasible manner.





23
 Table of Contents





Recently,
large volatility in the price of oil has led the oil industry to rethink the
economic feasibility for producing oil from oil shale.  However, it is
still uncertain whether production of oil from oil shale is economically viable
even with significant increases in oil prices.  It is also unclear
whether new technologies would significantly decrease the cost
of recovering oil from oil shale.





If we are
unable to cost effectively exploit oil from oil shale, the value of our assets
would be materially and adversely affected.





The
current technology for production of oil from oil shale may require a
significant amount of water.





The value
of our water rights is partly dependent on the development of commercial
production of oil from oil shale on or near our properties.  If such
commercial oil shale market does not develop, the value of our water right
assets will be materially and adversely affected.





If
NSHI’s operations require further capital and AmerAlia cannot raise funding to
provide that capital, AmerAlia’s ownership of NSHI will be diluted.





Currently,
AmerAlia owns 18% of NSHI.  Pursuant to the Shareholders Agreement, if
NSHI requires more capital for its operations, it will ask its shareholders
to contribute such capital on a pro rata basis.  If AmerAlia does not
have the funds to contribute this capital, or cannot raise funding for this
capital contribution, while Sentient invests its pro rata portion of the
capital contribution then AmerAlia’s ownership interest will be
diluted.  In addition, if Sentient invests its pro rata portion of the
capital contribution and AmerAlia does not, under the Shareholders Agreement
Sentient may also contribute AmerAlia’s pro rata portion, which would further
dilute AmerAlia’s ownership interest.  If AmerAlia’s ownership
interest is diluted it will materially and adversely affect the value of its
assets.





Pursuant
to our restructuring agreement with Sentient, Sentient has the option to
purchase and additional 5,500,000 shares of AmerAlia common stock at $.36 per
share to pay for AmerAlia indebtedness that was outstanding as of October 31,
2008.  If Sentient exercises this option, AmerAlia shareholders will
have their ownership interest diluted.





In our
restructuring transaction, we were not able to repay all indebtedness of
AmerAlia and NSHI owed to third parties.  There are also potentially
claims that we are unaware of currently.  If any third party brings a
claim prior to October 31, 2011 for amounts owed by AmerAlia or NSHI prior to
October 31, 2008, Sentient may exercise its option to purchase up to 5,500,000
shares at a purchase price of $.36 to provide AmerAlia with the funds to pay
such claim.  If Sentient exercises this option, the AmerAlia
shareholders will be diluted.





We
may have to take certain actions to avoid registration under the Investment
Company Act of 1940.





AmerAlia’s
only asset is its 18% equity interest in NSHI.  Generally, a company
must register as an investment company under the Investment Company Act and
comply with significant restrictions on operations and transactions with
affiliates if its interest in securities, other than majority owned
subsidiaries, exceeds 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.





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.





24
 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





NSI owns
water rights located in the Piceance Creek, Yellow Creek and White River basins
within Colorado.  NSI is involved in several cases pending in the
District Court in and for Water Division No. 5 (“Water Court”).  The
proceedings in Water Court pertain to applications for water rights filed by NSI
and objections to water rights applications by third parties.  In
addition, under Colorado law, the owner of conditional water rights must
periodically file an application for determination of reasonable diligence in
the development of the conditional water rights.  The proceedings
pertaining to the conditional water right must be filed within six years
following the determination by the Court regarding the prior proceeding, or the
water right is considered abandoned.





NSI is
the applicant in the following cases:  1998CW315, 2005CW41,
2006CW135,
2006CW136 and
2007CW91:





NSI has
filed a statement of opposition in the following cases:  2003CW82–Exxon Mobile
Corporation, 2003CW309–Encana Oil &
Gas (USA), Inc., 2003CW318–Encana Oil &
Gas (USA), Inc., 2004CW110–Shell Frontier Oil
& Gas, Inc., 2005CW285–Exxon Mobile Corporation, 2005CW294–Exxon Mobile
Corporation, 2006CW263–Exxon Mobile
Corporation, 2006CW265–Exxon Mobile Corporation,2007CW242–Puckett Land
Company,2007CW253–XTO Energy Inc. and 2007CW254–Williams Production RMT
Company.





Of the
cases in which NSI has filed a statement of opposition the principal one is the
objection to Shell Frontier Oil & Gas, Inc.’s application to move a water
right from a tributary of the White River to a point on the White River lower
down river than the off take point for NSI’s White River direct pumping right.
If Shell were to be successful in their application it might adversely impact
the value of our White River rights. We intend to vigorously oppose this
move.





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





None.





25
 Table of Contents





PART
II





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





(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, 2008 and subsequently are
pro­vided in the table below.  These prices reflect inter-dealer
prices and 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, 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
                0.80September
      30, 2008
                1.00
                0.60
                0.73








(b)
            Holders.





The
number of record holders of our Common Stock on June 30, 2008 was approximately
205.  This does not include shareholders holding shares in accounts
with brokers.





(c)
            Dividends.





AmerAlia
has not paid dividends on its Common Stock and has no plans to pay cash
dividends in the future.




26
 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, 2008.





Equity Compensation Plan
      Information (1)Plan
      Category and Description
                          
                          Number
      of Securities to
                            be
      issued upon exercise
                            of
      outstanding options,
                            warrants,
      and rights
                            
                            (a)
                          
                          
                          Weighted-average
                            exercise
      price of
                            outstanding
      options,
                            warrants,
      and rights
                            
                            (b)
                          
                          
                          Number
      of securities remaining
                            available
      for future issuance
                            under
      equity compensation
                            plans
      (excluding securities
                            reflected
      in column (a))
                            (c)Equity
      compensation plans approved by security holders
                          
                          
                          1,102,500
                          
                          
                          $
                          0.58
                          
                          
                          
                          460,000Equity
      compensation plans not approved by security holders (2)
                          
                          
                          200,000
                          
                          
                          $
                          3.00
                          
                          
                          
                          -0-Total
                          
                          
                          1,302,500
                          
                          
                          $
                          0.95
                          
                          
                          
                          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, 2008 other than the issue of 59,070 shares in June 2008 to some directors of
AmerAlia pursuant to the cashless exercise provisions of option agreements they
were issued under the shareholder approved Stock Option Plan as discussed at
Item 10(f).








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.  Improving our business performance is based upon achieving
three objectives (a) being a low cost producer of all grades of sodium
bicarbonate, (b) increasing our market penetration of the North American market
and (c) 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.  Even though we believe 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.  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 the following tables
show:





27
 Table of Contents





Fiscal
                                      
                                      Sales
      (tons)
                                      
                                      
                                      %
      ChangeYear
                                      
                                      
                                      
                                      
                                      on
      prior FY2004
                                      
                                      84,1032005
                                      
                                      85,038
                                      
                                      
                                      + 
      1.12006
                                      
                                      88,910
                                      
                                      
                                      +
       4.62007
                                      
                                      101,970
                                      
                                      
                                      +
      14.72008
                                      
                                      101,614
                                      
                                      
                                      -   
      0.4Fiscal
                                      
                                      Gross
      Revenues
                                      
                                      
                                      %
      ChangeYear
                                      
                                      ($)
                                      
                                      
                                      on
      prior FY2004
                                      
                                      12,609,0412005
                                      
                                      14,141,500
                                      
                                      
                                      +
      12.22006
                                      
                                      15,293,688
                                      
                                      
                                      + 8.12007
                                      
                                      16,951,997
                                      
                                      
                                      +
      10.82008
                                      
                                      17,947,800
                                      
                                      
                                      + 5.9





During
calendar year 2007, and for some of 2008, sales have been constrained by
production interruptions and cavity limitations; however the new cavity we have
recently brought into production is improving 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 its capacity under
the current configuration of the facilities would exceed 103,000 tons per
year.




28
 Table of Contents





As
discussed elsewhere in this report, the recovery of sodium products from the
sodium leases is governed by a BLM approved mine plan.  Sodium
bicarbonate is presently being recovered from three cavities denominated as 5H,
6H and 7H for which we have authority to recover up to 300,000 tons of sodium
bicarbonate.  Cavity 7H has an allocation of 175,000 tons but full
extraction will be limited until full communication is established between
injection and recovery wells in that cavity.  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 will require two new
cavities to be drilled within the next two years.





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.  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 $17,947,800 in FY2008 were 5.9% higher than the $16,951,997 earned
in FY2007 due mainly to higher prices of sodium bicarbonate and cost
recoveries.  Cost of goods sold of $16,330,335 increased by 7.6% over
FY2007 $15,180,369 due to higher production and distribution
costs.  The resulting gross profit of $1,617,465 represented an 8.7%
decrease on the previous year’s gross profit of $1,770,628.  General
and administrative expenses were 14.7% lower than the previous year; $921,392
compared with $1,080,151 as a result of a reduction in professional
fees.  Depreciation, amortization and accretion expenses were 39.8%
higher at $1,771,884 compared with $1,267,781 because during the December
quarter we commenced recognizing higher amortization costs of our well field
capital expenditures as a result of amortising construction in progress
expenditures since placed in service.    Consequently, our
loss from operations increased to $1,075,811 from $577,304, an increase of
86.4%.  Interest expense increased 706% to $45,408,935 from $5,636,448
due to the recognition at maturity of the Series B1 Debentures in February 2008
of an obligation to pay $41,318,849 in contingent interest as of June 30,
2008.  Our obligation to pay this contingent interest was satisfied in
October 2008 upon the closing of our restructuring agreement as discussed more
fully in this report.   We also recorded a gain on our minority
interest in NSI of $341,837 compared with $42,121 last year.  The
resulting net loss was $46,352,377 compared with $7,994,404 in the previous
year, an increase of 480%.




As a
result of the closing of the first stage of our recent restructuring transaction
we have repaid nearly all of our debt so that our interest expense going forward
will be considerably lower with its commensurate effect on our
profitability.




Liquidity
and Capital Resources





As
reported previously in various filings, the Sentient Entities converted their
working capital loans and Series B2 Debentures into ownership of 53.5% of the
equity of NSI in May 2007.  As reported, in August 2007 Sentient II
acquired from the Mars Trust all of the Mars Trust’s AmerAlia shares, debt
securities and contractual obligations and rights.  Thus Sentient II
replaced the Mars Trust as our major shareholder.  A condition of the
purchase was that the Mars Trust pay our debt and interest obligation to the
Bank of America of approximately $10 million as required under a guaranty
agreement between us and the Mars Trust.  Consequently, Sentient II
acquired the right under the guaranty agreement to make a claim for
indemnification against us for those monies paid by the Mars Trust to the Bank
of America.





During
the fiscal year ended June 30, 2008 we sourced funds by increasing our bank
overdraft by $51,314, increasing our factoring facility with the Wells Fargo
Bank by $960,480, selling rights to interest receivable on NSHI Series A
Debentures raising $2,428,091, receiving $535,000 as a capital contribution from
our co-shareholder in NSI, and issuing additional promissory notes with a
principal amount of $914,705 to related parties.  In addition, we
reduced our inventory by $127,912 and increased our interest payable and accrued
expenses due to related parties by $43,674,337, principally due to recognizing
additional contingent interest that became payable upon the maturity of our
Series B1 Debentures in February 2008.





29
 Table of Contents





We
utilised our funds to increase our accounts receivable by $350,652 to support
our increasing sales, other deposits and prepaid expenses by $199,607, other
accrued expenses by $23,677, paid creditors $1,139,712, applied payments of
$1,009,346 to our cavities development and $171,037 to equipment purchases,
reduced our capital leases by $51,795 and repaid other loans by
$35,277.  The net increase in cash for the year was
$32,406.





In
September 2008 we issued 1,402,000 shares of restricted common stock to holders
of Series C Debenture secured promissory notes in satisfaction and cancellation
of such notes and accrued interest with a total value of
$3,311,367.  One of the holders was a related party.





On
September 25, 2008 AmerAlia, NSHI and its then 46.5% owned subsidiary, NSI; Bill
H. Gunn and Robert van Mourik, Directors and executive officers of AmerAlia
(collectively the “AmerAlia parties”) entered into a Restructuring Agreement
with the various Sentient Entities.





On
October 31, 2008 the AmerAlia Parties and the Sentient Entities completed an
Amendment to the Restructuring Agreement.  As a result of the
amendment, the restructuring transaction was divided into two
closings.  In accordance with the amended agreement the first closing
occurred as of October 31, 2008.  Prior to the first closing, the
Sentient Entities transferred their various interests to Sentient.  In
the first closing:





·
            Sentient
      exchanged all its Series A Debentures and Series B1 Debentures, accrued
      interest and rights to contingent interest thereon, its one share of NSHI
      common stock and its 53.5% of the common stock of NSI for 82% of the
      issued common stock of NSHI.





·
            AmerAlia
      exchanged its Series A Debentures and Series C Debentures, accrued
      interest thereon and its NSHI preferred stock for 12.9% of the issued
      common stock of NSHI, giving AmerAlia an aggregate ownership position in
      NSHI of 18%.





·
            Intercompany
      loans between AmerAlia and NSHI were
  extinguished.





·
            Sentient
      received an aggregate of 27,875,047 shares of AmerAlia common stock as
      follows:


o
            15,277,778
      shares of AmerAlia common stock for a total purchase price of
      $5,500,000;


o
            6,619,469
      shares in satisfaction of various promissory notes;
  and


o
            5,977,800
      shares in satisfaction of debts, rights and obligations acquired from the
      Jacqueline Badger Mars Trust in August
2007.





Officers,
Directors and holders of Series A Debenture Secured Promissory Notes acquired
shares of AmerAlia Common Stock in satisfaction of Notes, unsecured notes and
accrued compensation at $0.36 per share to satisfy $1,536,309 of obligations as
discussed above and at Item 12 “Certain Relationships and Related Party
Transactions”.  In addition, other holders of the Notes acquired
2,433,706 shares for $876,134.





Following
the first closing, Sentient no longer holds any debt in either AmerAlia or
NSHI.  All Series A Debentures, Series B1 Debentures and Series C
Debentures issued by NSHI were cancelled.  Following the first closing
NSI is again a wholly-owned subsidiary of NSHI.





The
Amendment to the Restructuring Agreement also provides for a second closing to
occur on or before December 5, 2008 or such other time as the parties
agree.  At the second closing Sentient will purchase an additional
12,149,628 shares of AmerAlia Common Stock for $4,373,866.  The
proceeds from the second closing will be used in the following priority: (a) as
a working capital reserve for AmerAlia of $1,000,000 (b) as a reserve solely to
fund AmerAlia’s share of previously discussed capital calls of NSHI, AmerAlia’s
share of which is $2,880,000, and additional working capital for
AmerAlia.  In addition, until the second closing and subject to
certain restrictions, AmerAlia will have the right to sell up to 1,895,708
shares for a total purchase price of $682,455 to Sentient for the purpose of
providing additional working capital for AmerAlia.  Such shares would
reduce Sentient’s option to purchase up to 5,500,000 shares of AmerAlia common
stock within the next three years.  This option to subscribe for
5,500,000 shares is only to be exercised to resolve obligations of AmerAlia that
exist at closing and are not discharged at closing, and then only if the holders
of such unpaid obligations pursue or threaten to pursue claims against AmerAlia
or its affiliates.




30
 Table of Contents




Following
the first
closing of therestructuring, Sentient owns 66% of our common stock which
resulted in a change of control of the Company and restrictions on the Company’s
use of its net operating loss carryforwards.  In addition, pursuant to
the Restructuring Agreement, Sentient has the right to nominate Peter Cassidy
and up to three additional suitably qualified persons for election by the
shareholders as directors of AmerAlia.





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.





(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.  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 our Chief Executive Officer and our Chief
Financial Officer as appropriate, to allow timely decisions regarding required
disclosure.





Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Securities Exchange Act
Rule 13a-15(f).   Our internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.   Our
internal control over financial reporting includes those policies and procedures
that: (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of our
assets; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with U.S.
generally accepted accounting principles, and that our receipts and expenditures
are being made only in accordance with authorizations of our management and
directors; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our assets that
could have a material effect on the financial statements.




31
 Table of Contents




Our
management, including our Chief Executive Officer and Chief Financial Officer,
assessed the effectiveness of our internal control over financial reporting as
of June 30, 2008.  In making our assessment of internal control over
financial reporting, our management used the criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).   Based on this assessment, our
management concluded that our internal control over financial reporting had
material weaknesses and was therefore not effective.





Our
material weaknesses in our disclosure controls relate to our failure
to retain sufficient qualified accounting professionals, insufficient
segregation of duties and improper implementation of appropriate processes for
recording transactions.  Throughout 2006 and 2007 we 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 fulfill that
role.  A lack of financial resources and personnel caused insufficient
segregation of duties and an inability to properly record transactions and
ensure (i) the accuracy of our financial reports without requiring additional
analyses and other post-closing procedures and (ii) compliance with generally
accepted accounting principles.





In
response to these material weaknesses we have been strengthening our accounting
functions and have provided additional resources for its
operation.  We have implemented several improvements to our procedures
and we are continuing to train staff and introduce new procedures to overcome
these deficiencies.





This
annual report does not include an attestation report of our public accounting
firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by our
register public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only management’s report in
this annual report.





There has
been no change in our internal control over financial reporting, except as
described above, during the financial year ended June 30, 2008 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.





ITEM
8B.                      OTHER
INFORMATION





None.





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 Table of Contents





PART
III





ITEM
      9.
            DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS
      AND CORPORATE
      GOVERNANCE; 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.





Each of
Mr. Summerson, Mr. Riley, Mr. Murphy, Mr. Woolard and Mr. Geldermann are
independent as that term is defined in Rule 4200(a)(15) of the Nasdaq listing
standards.





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.





33
 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 in Kenilworth, Illinois.He is no longer active in any
business endeavors.Mr. Murphy graduated with a
Bachelor’s degree from Dartmouth College, and a Master’s of Business
Administration from the Amos Tuck School of Business Administration at Dartmouth
College.





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.





Under the
Restructuring Agreement, discussed in Item 1(b), Sentient also has the right to
nominate Peter Cassidy and up to three additional suitably qualified persons for
election by the shareholders as directors of AmerAlia.





(b)           Identification
of Significant Employees.





In
addition to the executive officers discussed above, NSI employs two significant
employees.  They are Robert (“Bob”) Warneke, Director of
Manufacturing, and Bradley (“Brad”) Bunnett, Vice President – Commercial
Operations.




34
 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.





(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 4200(a)(15) of the
Nasdaq listing standards.  The committee met formally once during the
year ended June 30, 2008 and has met twice since.




35
 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 did not meet during fiscal year ended June 30, 2008 nor
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.





Appointment
of directors





At each
annual meeting of our shareholders the current board proposes nominees for
election as directors.  We do not have any procedure by which
shareholders can nominate candidates other than through an approach to the
board.





Code
of Ethics





We have
not yet adopted a code of ethics that applies to our principal executive,
financial and accounting officers because our limited resources have been
applied to negotiating and closing our restructuring transaction.





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, 2007
through June 30, 2008, 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,
2008.  Messrs. Gunn and van Mourik were the only executive officers
receiving or accruing compensation exceeding $100,000 during fiscal year 2008,
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 until we complete the second closing of the
restructuring agreement discussed in Item 1.





36
 Table of Contents





Name
      and
                      Principal
      Position
                      (a)
                    Year
                      (b)
                    Salary (1)
                      $
                      (c)
                    Bonus
                      $
                      (d)
                    Stock
      Awards
                      $
                      (e)
                    Option
      Awards
                      $
                      (f)
                    Non-equity
      incentive plan compensation
                      $
                      (g)
                    Non-qualified
      deferred compensation earnings
                      $
                      (h)
                    All
      other compensation
                      $
                      (i)
                    Total
                      $
                      (j)Bill
      H. Gunn
                    2008
                    214,000
                    -0-
                    -0-
                    -0-
                    -0-
                    -0-
                    -0-
                    214,000President
      &
                    2007
                    214,000
                    -0-
                    -0-
                    -0-
                    -0-
                    -0-
                    -0-
                    214,000Chief
      ExecutiveOfficerRobert
      van Mourik
                    2008
                    164,000
                    -0-
                    -0-
                    -0-
                    -0-
                    -0-
                    -0-
                    164,000Chief
      Financial
                    2007
                    164,000
                    -0-
                    -0-
                    -0-
                    -0-
                    -0-
                    -0-
                    164,000Officer
      & ExecutiveVice
      President





(1)
            At
      June 30, 2008 we owed $219,065 of compensation, interest, expenses claims
      and advances to Bill H. Gunn and we owed $616,342 of compensation,
      interest, expenses claims and advances to Robert van Mourik (at June 30,
      2007: $243,661 and $430,518 respectively).  These amounts also
      include $14,000 director’s fees due annually.  During the year
      ended June 30, 2008, Mr. Gunn received $214,000 for his salary and
      directors fees and a further $43,206 of his accrued
      compensation.  All of Mr. van Mourik’s salary and director’s
      fees of $164,000 was accrued without any payments made during the fiscal
      year ended June 30, 2008.  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.





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.  While AmerAlia has no retirement plans, NSI
contributes matching contributions to a 401(k) plan for Mr. Gunn.





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, 2008.  The following table
summarizes information with respect to each person’s outstanding stock options
at June 30, 2008.





37
 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 Mourik
                                                270,000
                                                -
                                                -
                                                0.71
                                                4/18/2009
                                                
                                                -
                                                -
                                                -
                                                -50,000
                                                -
                                                -
                                                3.00
                                                6/30/09
                                                
                                                -
                                                -
                                                -
                                                -




· All these
options have now vested





Compensation
of Directors





Our
directors are authorized to receive $14,000 cash compensation per year for their
services as directors.  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.  The option awards data represent 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.




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
                      $
                      (h)Neil
      E.Summerson
                    2008
                    20,000
                    -0-
                    13,319
                    -0-
                    -0-
                    -0-
                    33,319Geoffrey
      C.Murphy
                    2008
                    20,000
                    -0-
                    13,319
                    -0-
                    -0-
                    -0-
                    33,319James
      V.Riley
                    2008
                    18,000
                    -0-
                    13,319
                    -0-
                    -0-
                    -0-
                    31,319Robert
      C.Woolard
                    2008
                    14,000
                    -0-
                    13,319
                    -0-
                    -0-
                    -0-
                    27,319J.
      JeffreyGeldermann
                    2008
                    14,000
                    -0-
                    13,319
                    -0-
                    -0-
                    -0-
                    27,319




38
 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, 2008.




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
                      -
                      0.42
                      6/30/0937,500
                      -
                      0.40
                      6/30/10Geoffrey
      C. Murphy
                      25,000
                      -
                      3.00
                      6/30/0937,500
                      -
                      0.42
                      6/30/0937,500
                      -
                      0.40
                      6/30/10James
      V. Riley
                      25,000
                      -
                      3.00
                      6/30/0937,500
                      -
                      0.42
                      6/30/0937,500
                      -
                      0.40
                      6/30/10Robert
      C. Woolard
                      25,000
                      -
                      3.00
                      6/30/0937,500
                      -
                      0.42
                      6/30/0937,500
                      -
                      0.40
                      6/30/10J.
      Jeffrey Geldermann
                      37,500
                      -
                      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.





39
 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.





These
options vest on January 1, 2009.





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, 2008 and 2007 an
allowance for interest on unpaid outstanding compensation, directors fees and
expenses reimbursement was accrued as follows:





Director
                              
                              Fiscal
      year ended June 30,2008
                              
                              
                              2007Robert
      van Mourik
                              
                              $
                              61,545
                              
                              
                              $
                              69,946Bill
      H. Gunn
                              
                              
                              26,959
                              
                              
                              
                              29,003Geoffrey
      C. Murphy
                              
                              
                              19,697
                              
                              
                              
                              15,358Neil
      E. Summerson
                              
                              
                              8,294
                              
                              
                              
                              4,758James
      V. Riley
                              
                              
                              7,794
                              
                              
                              
                              4,933Robert
      C. Woolard
                              
                              
                              7,203
                              
                              
                              
                              4,862J.
      Jeffrey Geldermann
                              
                              
                              6,904
                              
                              
                              
                              4,594Total:
                              
                              $
                              138,396
                              
                              
                              $
                              133,454





(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.





40
 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
December 1, 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 December 1, 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
                    2,687,475   (1)
                    4.9%219
      Eagle Pointe Drive, Branson, MOJames
      V. Riley
                    2,301,983   (2)
                    4.2%875
      No Michigan Ave, Suite 3100 Chicago ILBill
      H. Gunn
                    1,378,060   (3)
                    2.5%Aspen,
      ColoradoJ.
      Jeffrey Geldermann
                    1,317,000   (4)
                    2.4%535
      Kenilworth Ave, Kenilworth ILRobert
      van Mourik
                    921,384   (5)
                    1.7%St
      Lucia, Queensland, AustraliaGeoffrey
      C. Murphy
                    675,243   (6)
                    1.2%514
      Meadow Rd, Winnetka ILNeil
      E. Summerson
                    530,917   (7)
                    1.0%Yeronga,
      Queensland, AustraliaOfficers
      & Directors as a Group (7 persons)
                    9,812,062   (8)
                    17.5%Sentient
      USA Resources Fund, LP
                    54,054,495   (9)
                    74.7%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
      21,932 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:  options to acquire 400,000 shares at
      $1.00 until March 19, 2009 held by Karen O Woolard, his spouse; 21,937
      shares held in an IRA account for Karen O Woolard and 2,106,106 shares
      held by the Karen O Woolard Trust.


(2)
            Includes
      1,964,483 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.


(4)
            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.




41
 Table of Contents




(5)
            Includes
      240,759 shares of Common Stock owned by Ahciejay Pty. Ltd. as trustee for
      The R.C.J. Trust, and 304,125 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.


(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
      393,417 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.


(8)
            Includes
      beneficial ownership of Messrs. Woolard, Riley, Gunn, Geldermann, van
      Mourik, Murphy andSummerson, as described in notes 1, 2, 3, 4, 5, 6 and 7,
      above.


(9)
            Includes
      35,804,867 shares of Common Stock and the right to purchase 12,149,628
      shares for $4,373,866 at the second closing of the restructuring
      agreement, options to subscribe for 600,000 shares at $1.00 until March
      19,, 2009 and the right to purchase 5,500,000 shares for $0.36 each
      subject to certain conditions as discussed in Item
  1.





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..




42
 Table of Contents





(c)         Changes
in Control.





None.





ITEM
      12.
            CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS,
              AND DIRECTOR
      INDEPENDENCE





(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, 2008, 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, 2008Robert
      van Mourik
                      
                      $
                      616,342Bill
      H. Gunn
                      
                      
                      219,065Geoffrey
      C. Murphy
                      
                      
                      188,838Neil
      E. Summerson
                      
                      
                      90,568James
      V. Riley
                      
                      
                      81,093Robert
      C. Woolard
                      
                      
                      73,281J.
      Jeffrey Geldermann
                      
                      
                      70,602Total:
                      
                      $
                      1,339,789





At the
financial closing in March 2004 and again during the fiscal year ended June 30,
2005, officers and directors of the company subscribed for 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, 2008Series
      A Debenture Secured Promissory Notes:Karen
      O. Woolard Trust, an affiliate of Mr. Robert C. Woolard
                                        
                                        $
                                        1,000,000James
      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$
                                        2,000,000Interest
      accruedKaren
      O. Woolard Trust, an affiliate of Mr. Robert C. Woolard
                                        
                                        $
                                        193,438James
      V. Riley Trust, an affiliate of Mr. Riley
                                        
                                        
                                        96,719J.
      Jeffrey Geldermann
                                        
                                        
                                        57,090Ahciejay
      Pty Ltd, an affiliate of Mr. van Mourik
                                        
                                        
                                        25,764Gunn
      Development Pty Ltd, an affiliate of Mr. Gunn
                                        
                                        
                                        11,042$
                                        384,053





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, 2008 the balance of principal and interest
due on this note was $225,810.





43
 Table of Contents




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, 2008 the balance of these advances totalled
$1,973,759.  Interest accrued 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.   In August 2007 Sentient 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.  Total accrued interest on these various notes
was $368,117 at June 30, 2008.  Natural Soda then substituted bonds
from its own resources and the Mars Trust was released from its bonding
obligations.





On
October 31, 2008 as part of the restructuring agreement AmerAlia issued
5,977,800 shares to Sentient in satisfaction of these obligations, as discussed
below.




Sentient
Entities:





In August
2007, Sentient II acquired from the Mars Trust all its shares of common stock of
AmerAlia.  Consequently, Sentient II became AmerAlia’s new major
shareholder.





During
the year, we agreed to some interim arrangements with the Sentient
Entities:





·
            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 October 31,
      2008.  The note and interest were convertible into AmerAlia
      common stock at 36 cents per share.





·
            Effective
      as of March 31, 2008, 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 to pay some of the outstanding
      interest owed to the holders of its Series A Debenture Secured promissory
      notes.  Sentient III also acquired Sentient’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.  We
      received these funds in May.





·
            In
      May 2008 Sentient 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 September 30, 2008 to enable us to
      access funds to pay ordinary trade payables as approved by Sentient
      III.  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.





44
 Table of Contents





On
September 25, 2008 AmerAlia, NSHI and its then 46.5% owned subsidiary, NSI; Bill
H. Gunn and Robert van Mourik, Directors and executive officers of AmerAlia
(collectively the “AmerAlia parties”) entered into a Restructuring Agreement
with the various Sentient Entities.





On
October 31, 2008 the AmerAlia Parties and the Sentient Entities completed an
Amendment to the Restructuring Agreement.  As a result of the
amendment, the restructuring transaction was divided into two
closings.  In accordance with the amended agreement the first closing
occurred as of October 31, 2008.  Prior to the first closing, the
Sentient Entities transferred their various interests to Sentient.  In
the first closing:





·
            Sentient
      exchanged all its NSHI Secured Series A and B1 debentures, accrued
      interest and rights to contingent interest thereon, its one share of NSHI
      common stock and its 53.5% of the common stock of NSI for 82% of the
      issued common stock of NSHI.





·
            AmerAlia
      exchanged its NSHI Series A and C Debentures, accrued interest thereon and
      its NSHI preferred stock for 12.9% of the issued common stock of NSHI,
      giving AmerAlia an aggregate ownership position in NSHI of
      18%.





·
            Intercompany
      loans between AmerAlia and NSHI were
  extinguished.





·
            Sentient
      received an aggregate of 27,875,047 shares of AmerAlia common stock as
      follows:


o
            15,277,778
      shares of AmerAlia common stock for a total purchase price of
      $5,500,000;


o
            6,619,469
      shares in satisfaction of various promissory notes;
  and


o
            5,977,800
      shares in satisfaction of debts, rights and obligations acquired from the
      Mars Trust in August 2007.





Repayment
of obligations due to Officers and Directors:





In
September 2008 we issued 495,820 shares of restricted common stock to the Karen
O. Woolard Trust, an affiliate of our director, Robert C. Woolard, in
satisfaction and cancellation of a Series C Debenture Secured Promissory Note
and accrued interest with a total value of $1,175,889.





On
October 31, 2008 Officers, Directors and holders of Notes subscribed for shares
of AmerAlia Common Stock in satisfaction of Notes, unsecured notes and accrued
compensation as follows:





Shareholder
                          Relationship
                          
                          Number
      of Shares
                          
                          
                          ConsiderationBill
      H Gunn
                          Chairman
      & CEO
                          
                          
                          700,000
                          
                          
                          $
                          252,000Robert
      van Mourik
                          Director,
      EVP & CFO
                          
                          
                          250,000
                          
                          
                          
                          90,000James
      V Riley Trust
                          Affiliate
      ofJames
      V. Riley, Director
                          
                          
                          1,583,333
                          
                          
                          
                          570,000J.
      Jeffrey Geldermann
                          Director
                          
                          
                          1,003,400
                          
                          
                          
                          361,224Karen
      O. Woolard
                          Affiliate
      of  Robert C.Trust
                          Woolard,
      Director
                          
                          
                          925,000
                          
                          
                          
                          333,000Glendower
      Investments
                          Affiliate
      of Neil E.Pty
      Ltd
                          Summerson,
      Director
                          
                          
                          153,000
                          
                          
                          
                          55,080Geoffrey
      C. Murphy
                          Director
                          
                          
                          486,125
                          
                          
                          
                          175,005TOTALS:
                          
                          
                          
                          5,100,858
                          
                          
                          $
                          1,536,309




45
 Table of Contents





We
allocated the $5,500,000 of cash received in the first closing as
follows:





Recipient
                            Relationship
                            Nature
      of
                            
                            AmountObligation
                            
                            PaidKaren
      O. Woolard Trust
                            Affiliate
      of  Robert C.
                            Balance
      of Note
                            
                            $
                            977,188Woolard,
      Director
                            &
      interestRobert
      C. Woolard
                            Director
                            Directors
      fees
                            
                            
                            16,792Robert
      van Mourik
                            Director,
      EVP & CFO
                            Accrued
                            
                            
                            400,000compensation*Ahciejay
      Pty Ltd
                            Affiliate
      of
                            Promissory
      note
                            
                            
                            169,816Robert
      van Mourik
                            &
      interest*James
      V Riley Trust
                            Affiliate
      of
                            Promissory
      note
                            
                            
                            142,524James
      V. Riley,
                            interest
      & directorsDirector
                            feesJ.
      Jeffrey Geldermann
                            Director
                            Promissory
      note
                            
                            
                            88,881interest
      & directorsfeesNeil
      E. Summerson
                            Director
                            Director’s
      fees
                            
                            
                            45,915&
      expensesGeoffrey
      C. Murphy
                            Director
                            Director’s
      fees
                            
                            
                            26,550&
      expensesNote
      holders
                            Unrelated
      parties
                            Notes
      & interest
                            
                            
                            1,983,801Various
      creditors
                            None
                            Accounts
      payable
                            
                            
                            189,877TOTAL:
                            
                            
                            
                            $
                            3,998,344* Includes
      provision for withholding taxes





The
remaining funds of $1,501,656 were held to settle remaining obligations and
working capital.





Following
the first closing, Sentient no longer holds any debt in either AmerAlia or
NSHI.  All Series A Debentures, Series B1 Debentures and Series C
Debentures issued by NSHI have been cancelled.  NSI is now a
wholly-owned subsidiary of NSHI.





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 through its ownership of 66% of our outstanding common
stock.  As discussed above at “Risk Factors”, under the Shareholders
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, subject to any required
approval by the AmerAlia shareholders.   If this occurs and the
approval of the AmerAlia shareholders is not required by Utah law, neither the
board of directors nor the AmerAlia shareholders would have any opportunity to
approve the transaction.  In this situation, Sentient could approve a
transaction which is not beneficial to the AmerAlia shareholders or would not
otherwise be approved by the AmerAlia shareholders.








(d)           Transactions with
Promoters:  Not applicable.





46
 Table of Contents





ITEM
      13.
            EXHIBITS





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:




ExhibitNumber
                      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.
  47
 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.10.52
      (aa)
                        Restructuring
      Agreement between AmerAlia Parties and Sentient Entities dated September
      25, 2008.10.53
      (ab)
                        Form
      of Letter Offer of Shares.10.54
      (ac)
                        Amendment
      to Restructuring Agreement between AmerAlia Parties and Sentient Entities
      dated October 31, 200810.55
      (ac)
                        Shareholders
      Agreement between Natural Soda Holdings, Inc., AmerAlia, Inc. and Sentient
      USA Resources Fund 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  pursuant to 18 U.S.C. Section 10A,
      as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
      (filed herewith).32.2
                        Certification
      of 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).
  48
 Table of Contents
  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%.(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.(aa)
                        Incorporated
      by reference from AmerAlia’s Form 8-K reporting an event of September 25,
      2008.(ab)
                        Incorporated
      by reference from AmerAlia’s Form 8-K reporting an event of October 13,
      2008.(ac)
                        Incorporated
      by reference from AmerAlia’s Form 8-K reporting an event of October 31,
      2008.
  49
 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, 2008 and 2007 HJ &
Associates has billed the Company the following amounts for services provided.


Year
      ended June 30,2008
                    
                    
                    2007Audit
      fees
                    
                    $
                    132,000
                    
                    
                    $
                    93,500Audit
      related fees
                    
                    
                    -
                    
                    
                    
                    -Tax
                    
                    
                    22,300
                    
                    
                    
                    11,380Other
                    
                    
                    -
                    
                    
                    
                    -





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.





50
 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:
      December 22, 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:
      December 22, 2008Bill
      H. Gunn
            
            (Principal
      Executive Officer)/s/ Robert van Mourik
            
            Executive
      Vice President, Chief Financial
            
            Date:
      December 22, 2008Robert
      C. J. van Mourik
            
            Officer,
      Secretary, Treasurer and Director(Principal
      Financial and Accounting Officer)/s/  Neil E.
      Summerson
            
            Director
            
            Date:
      December 22, 2008Neil
      E. Summerson/s/  Geoffrey C.
      Murphy
            
            Director
            
            Date:
      December 22, 2008Geoffrey
      C. Murphy/s/  James V.
    Riley
            
            Director
            
            Date:
      December 22, 2008James
      V. Riley/s/  Robert C.
      Woolard
            
            Director
            
            Date:
      December 22, 2008Robert
      C. Woolard/s/  J. Jeffrey
      Geldermann
            
            Director
            
            Date:
      December 22, 2008J.
      Jeffrey Geldermann





51
 Table of Contents




AMERALIA, INC. AND SUBSIDIARIES





CONSOLIDATED
FINANCIAL STATEMENTS





June
30, 2008





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, 2008 and 2007, 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, 2008 and 2007, 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.





We were
not engaged to examine management’s assertion about the effectiveness of
AmerAlia Inc.’s internal control over financial reporting as of June 30, 2008,
and accordingly, we do not express an opinion.





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
implementation of these plans is described in Note 22.  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


December
19, 2008





F-3
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Consolidated
Balance Sheet








ASSETS





For
      the years ended June 30,2008
                
                
                2007CURRENT
      ASSETSCash
                
                $
                43,374
                
                
                $
                10,968Accounts
      receivable, net (Note 1)
                
                
                2,898,121
                
                
                
                2,896,131Inventories
      (Notes 1 and 2)
                
                
                742,760
                
                
                
                870,672Prepaid
      expenses (Note 3)
                
                
                494,498
                
                
                
                294,891Total
      Current Assets
                
                
                4,178,753
                
                
                
                4,072,662FIXED
      ASSETSProperty,
      plant & equipment, net (Notes 1 and 4)
                
                
                9,463,356
                
                
                
                10,006,384Cavities
      and well development, net (Note 4)
                
                
                5,862,227
                
                
                
                5,296,943Mineral
      leases (Note 4)
                
                
                4,167,471
                
                
                
                4,167,471Total
      Fixed Assets
                
                
                19,493,054
                
                
                
                19,470,798OTHER
      ASSETSWater
      rights
                
                
                3,150,582
                
                
                
                3,150,582Patents
      (Note 5)
                
                
                26,238
                
                
                
                30,545Well
      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)
                
                
                770,816
                
                
                
                809,793Rock
      School lease and reserves (Note 6)
                
                
                3,300,000
                
                
                
                3,300,000Deposits
      and bonds
                
                
                12,000
                
                
                
                16,000Restricted
      funds (Note 1)
                
                
                1,122,843
                
                
                
                134,863Total
      Other Assets
                
                
                14,051,321
                
                
                
                13,110,625TOTAL
      ASSETS
                
                $
                37,723,128
                
                
                $
                36,654,085









F-4
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Consolidated
Balance Sheet (Continued)








LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)





For
      the years ended June 30,2008
                
                
                2007CURRENT
      LIABILITIESAccounts
      payable
                
                $
                2,594,453
                
                
                $
                3,443,649Bank
      overdraft
                
                
                54,331
                
                
                
                3,017Royalties
      payable (Note 8)
                
                
                971,760
                
                
                
                871,789Accrued
      expenses (Note 9)
                
                
                1,602,315
                
                
                
                1,625,992Accrued
      expenses due to related parties (Note 10)
                
                
                51,952,899
                
                
                
                2,180,011Current
      portion of notes payable to related parties (Note 10)
                
                
                24,392,339
                
                
                
                21,730,255Current
      portion of notes payable (Note 11)
                
                
                5,709,963
                
                
                
                16,214,540Current
      portion of capital lease obligations (Note 12)
                
                
                64,674
                
                
                
                55,847Interest
      payable
                
                
                1,007,274
                
                
                
                5,515,331Total
      Current Liabilities
                
                
                88,350,008
                
                
                
                51,640,431LONG
      TERM LIABILITIESNotes
      Payable (Note 11)
                
                
                15,561
                
                
                
                18,681Capital
      lease obligations (Note 12)
                
                
                3,436
                
                
                
                64,058Asset
      retirement obligations (Note 13)
                
                
                1,036,640
                
                
                
                898,000Total
      Long Term Liabilities
                
                
                1,055,637
                
                
                
                980,739TOTAL
      LIABILITIES
                
                
                89,405,645
                
                
                
                52,621,170COMMITMENTS
      AND CONTINGENT LIABILITIES (Note 16)MINORITY
      INTEREST
                
                
                15,376,985
                
                
                
                15,183,822STOCKHOLDERS’
      EQUITY (DEFICIT)Preferred
      stock, $0.05 par value; 1,000,000 authorized; 82 issued and
      outstanding
                
                
                4
                
                
                
                4Common
      stock, $0.01 par value; 100,000,000 shares authorized; 17,298,507 and
      17,239,437 issued and outstanding
                
                
                172,985
                
                
                
                172,394Additional
      paid in capital
                
                
                38,159,742
                
                
                
                27,716,551Accumulated
      deficit
                
                
                (105,392,233
                )
                
                
                (59,039,856
                )Total
      Stockholders’ Equity (Deficit)
                
                
                (67,059,502
                )
                
                
                (31,150,907
                )TOTAL
      LIABILITIES & STOCKHOLDERS’ EQUITY/(DEFICIT)
                
                $
                37,723,128
                
                
                $
                36,654,085







F-5
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Consolidated
Statements of Operations








For
      the years ended June 30,2008
                      
                      
                      2007REVENUES
                      
                      $
                      17,947,800
                      
                      
                      $
                      16,951,997COST
      OF GOODS SOLD
                      
                      
                      16,330,335
                      
                      
                      
                      15,180,369GROSS
      PROFIT (DEFICIT)
                      
                      
                      1,617,465
                      
                      
                      
                      1,770,628EXPENSESGeneral
      and administrative
                      
                      
                      921,392
                      
                      
                      
                      1,080,151Depreciation,
      amortization and accretion expense
                      
                      
                      1,771,884
                      
                      
                      
                      1,267,781Total
      Expenses
                      
                      
                      2,693,276
                      
                      
                      
                      2,347,932LOSS
      FROM OPERATIONS
                      
                      
                      (1,075,811
                      )
                      
                      
                      (577,304
                      )OTHER
      INCOME (EXPENSE)Interest
      income
                      
                      
                      4,044
                      
                      
                      
                      2,348Gain
      (Loss) on settlement of debt
                      
                      
                      -
                      
                      
                      
                      (1,832,300
                      )Other
      income
                      
                      
                      16,206
                      
                      
                      
                      7,179Interest
      expense
                      
                      
                      (45,408,935
                      )
                      
                      
                      (5,636,448
                      )Other
      financing costs
                      
                      
                      (229,718
                      )
                      
                      
                      -Total
      Other Income (Expense)
                      
                      
                      (45,618,403
                      )
                      
                      
                      (7,459,221
                      )LOSS
      BEFORE MINORITY INTEREST AND INCOME TAX EXPENSE
                      
                      
                      (46,694,214
                      )
                      
                      
                      (8,036,525
                      )Minority
      interest in net loss of subsidiary
                      
                      
                      341,837
                      
                      
                      
                      42,121LOSS
      BEFORE INCOME TAX EXPENSE
                      
                      
                      (46,352,377
                      )
                      
                      
                      (7,994,404
                      )Income
      tax expense
                      
                      
                      -
                      
                      
                      
                      -NET
      LOSS
                      
                      $
                      (46,352,377
                      )
                      
                      $
                      (7,994,404
                      )BASIC
      LOSS PER SHARE
                      
                      $
                      (2.69
                      )
                      
                      $
                      (0.46
                      )WEIGHTED
      AVERAGE NUMBER OF SHARES OUTSTANDING
                      
                      
                      17,239,437
                      
                      
                      
                      17,239,437







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, 2006
                                                                                                                        
                                                                                                                        
                                                                                                                        82
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        4
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        17,239,437
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        172,394
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        27,669,676
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        (51,045,452
                                                                                                                        )Options
      granted
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        46,875
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -Net
      loss for the year ended June 30, 2007
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        (7,994,404
                                                                                                                        )Balance,
      June 30, 2007
                                                                                                                        
                                                                                                                        
                                                                                                                        82
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        4
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        17,239,437
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        172,394
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        27,716,551
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        (59,039,856
                                                                                                                        )Options
      granted
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        66,593
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -Premium
      on convertible note
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        439,168
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -Related
      party contribution tocapital on debt
    settlement
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        9,938,021
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -Issue
      of shares on settlementof options
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        59,070
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        591
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        (591
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        -Net
      loss for the year endedJune 30, 2008
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        (46,352,377
                                                                                                                        )Balance,
      June 30, 2008
                                                                                                                        
                                                                                                                        
                                                                                                                        82
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        4
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        17,298,507
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        172,985
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        38,159,742
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        (105,392,233
                                                                                                                        )







F-7
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Consolidated
Statements of Cash Flows








For
      the Years ended June 30,2008
                    
                    
                    2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                    
                    $
                    (46,352,377
                    )
                    
                    $
                    (7,994,404
                    )Adjustments
      to reconcile net loss to net cashused
      by operating activities:Options
      granted
                    
                    
                    66,593
                    
                    
                    
                    46,875Depreciation
      and amortization
                    
                    
                    1,771,884
                    
                    
                    
                    1,267,781Amortization
      of debt discount
                    
                    
                    229,719
                    
                    
                    
                    -(Gain)
      on settlement of debt
                    
                    
                    -
                    
                    
                    
                    1,832,300Minority
      interest – Net income
                    
                    
                    (341,837
                    )
                    
                    
                    (42,121
                    )Change
      in Operating Assets and Liabilities:(Increase)
      in restricted funds
                    
                    
                    (987,980
                    )
                    
                    
                    (92,000
                    )(Increase)
      in accounts receivable
                    
                    
                    (350,652
                    )
                    
                    
                    (142,011
                    )(Increase)
      decrease in inventory
                    
                    
                    127,912
                    
                    
                    
                    (54,308
                    )(Increase)
      decrease in prepaid expenses
                    
                    
                    (199,607
                    )
                    
                    
                    223,768Increase
      (decrease) in accounts and royalties payable
                    
                    
                    (1,139,712
                    )
                    
                    
                    698,870Increase
      in accrued expenses due to related parties
                    
                    
                    43,674,337
                    
                    
                    
                    974,057Increase
      (decrease) in accrued expenses
                    
                    
                    (23,677
                    )
                    
                    
                    109,571Increase
      (decrease) in interest payable
                    
                    
                    (64,332
                    )
                    
                    
                    3,613,440Net
      Cash Used in Operating Activities
                    
                    
                    (3,589,729
                    )
                    
                    
                    441,818CASH
      FLOWS FROM INVESTING ACTIVITIESCavities
      and well development
                    
                    
                    (1,009,346
                    )
                    
                    
                    (628,294
                    )Purchase
      of property and equipment
                    
                    
                    (171,037
                    )
                    
                    
                    (544,429
                    )Net
      Cash Used in Investing Activities
                    
                    $
                    (1,180,383
                    )
                    
                    $
                    (1,172,723
                    )





F-8
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Consolidated
Statements of Cash Flows (Continued)








For
      the Years ended June 30,2008
                      
                      
                      2007CASH
      FLOWS FROM FINANCING ACTIVITIESBank
      overdraft
                      
                      $
                      51,314
                      
                      
                      $
                      3,017Payments
      on capital leases
                      
                      
                      (51,795
                      )
                      
                      
                      (49,736
                      )Proceeds
      from notes payable
                      
                      
                      960,480
                      
                      
                      
                      -Proceeds
      from sale of debenture and interest
                      
                      
                      2,428,091
                      
                      
                      
                      -Capital
      contribution from majority interest
                      
                      
                      535,000
                      
                      
                      
                      -Payments
      on debt
                      
                      
                      (35,277
                      )
                      
                      
                      (154,129
                      )Proceeds
      from related party notes payable
                      
                      
                      914,705
                      
                      
                      
                      766,498Net
      Cash Provided by Financing Activities
                      
                      
                      4,802,518
                      
                      
                      
                      565,650NET
      INCREASE (DECREASE) IN CASH
                      
                      
                      32,406
                      
                      
                      
                      (165,255
                      )CASH
      AT BEGINNING OF YEAR
                      
                      
                      10,968
                      
                      
                      
                      176,223CASH
      AT END OF YEAR
                      
                      $
                      43,374
                      
                      
                      $
                      10,968SUPPLEMENTAL
      DISCLOSURE OF CASHFLOW INFORMATIONIncome
      taxes
                      
                      $
                      -
                      
                      
                      $
                      -Interest
                      
                      $
                      526,512
                      
                      
                      $
                      731,498





F-9
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Notes to
the Consolidated Financial Statements


June 30,
2008 and 2007





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 its “Minority Interest” share of losses from operations for the
fiscal year ended June 30, 2008.  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.





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 $1,122,843 and $134,863 in restricted cash at June 30, 2008 and
2007, 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,
2008 and 2007





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, 2008
                    
                    
                    June
      30, 2007Deferred
      tax assets:NOL
      Carryover
                    
                    $
                    30,820,913
                    
                    
                    $
                    17,367,500Related
      Party
                    
                    
                    1,668,551
                    
                    
                    
                    1,311,000Allowance
      for Doubtful Accounts
                    
                    
                    13,649
                    
                    
                    
                    62,300Deferred
      tax liabilities:Depreciation
                    
                    
                    (1,250,374
                    )
                    
                    
                    (407,300
                    )Valuation
      allowance
                    
                    
                    (31,252,739
                    )
                    
                    
                    (18,333,500
                    )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, 2008 and 2007 due to the
following:





June
      30, 2008
                    
                    
                    June
      30, 2007Book
      Income
                    
                    $
                    (18,077,427
                    )
                    
                    $
                    (3,134,245
                    )Stock
      for service accounts
                    
                    
                    25,971
                    
                    
                    
                    18,281Penalties
                    
                    
                    10,911
                    
                    
                    
                    24,432Meals
      & Entertainment
                    
                    
                    579
                    
                    
                    
                    4,083Accretion
                    
                    
                    10,507
                    
                    
                    
                    10,200Gain
      on debt settlement
                    
                    
                    3,875,829
                    
                    
                    
                    -Valuation
      allowance
                    
                    
                    14,153,630
                    
                    
                    
                    3,077,249$
                    -
                    
                    
                    $
                    -





F-11
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Notes to
the Consolidated Financial Statements


June 30,
2008 and 2007





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





f.
            Income
      Taxes (Continued)





At June
30, 2008, the Company had net operating loss carry-forwards of approximately
$79,000,000 that may be offset against future taxable income from the year 2008
through 2028.  No tax benefit has been reported in the June 30, 2008
consolidated financial statements since the potential tax benefit is offset by a
valuation allowance of the same amount.  The actual tax treatment of
the related party transactions potentially may differ from what has been
reported on the audit.





Due to
the change in ownership provisions of the Tax Reform Act of 1986, net operating
loss carryforwards for Federal income tax reporting purposes are subject to
annual limitations.  As a result of the change in ownership described
in Note 22 the 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, 2008
                        
                        
                        June
      30, 2007Loss
      (numerator)
                        
                        $
                        (46,352,377
                        )
                        
                        $
                        (7,994,404
                        )Shares
      (denominator)
                        
                        
                        17,239,437
                        
                        
                        
                        17,239,437Per
      share amount
                        
                        $
                        (2.69
                        )
                        
                        $
                        (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 3,615,000
common stock equivalents as at June 30, 2008 and 2007,
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, 2008 the Company
had three customers that individually constituted more than 10% of our total
revenues.  These customers had revenues representing 28%, 10% and 26%
of our total revenues and receivables balances representing 31%, 10% and 25%
respectively of our total trade accounts receivable balance at June 30,
2008.  During the fiscal year ended June 30, 2007 the Company had two
of these same 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.





F-12
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Notes to
the Consolidated Financial Statements


June 30,
2008 and 2007





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





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.





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, 2008 the
net accounts receivable balance included $2,928,119 for trade receivables with a
$34,998 allowance for doubtful accounts and $5,000 due from
employees.  At June 30, 2007 the net accounts receivable balance
included $3,050,926 for trade receivables, a $159,795 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.





F-13
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Notes to
the Consolidated Financial Statements


June 30,
2008 and 2007





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





o.      New
Accounting Pronouncements





During
the year ended June 30, 2008 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
157.  In September 2006 FASB issued SFAS 157, Fair Value
Measurements.It defines fair value and establishes a
framework for measuring fair value in generally accepted accounting principles
(GAAP), and expands disclosures about fair value measurements.  This
Statement applies under other accounting pronouncements that require or permit
fair value measurements, The Board having previously concluded in those
accounting pronouncements that fair value is the relevant measurement
attribute.  Accordingly, this Statement does not require any new fair
value measurements.  However, for some entities, the application of
this Statement will change current practice.  SFAS 157 is effective
for fiscal years beginning after November 15, 2007.





SFAS
159.  Issued February 2007, SFAS 159 Fair Value Option for Financial
Assets and Financial Liabilities (Including an amendment of FASB Statement No.
115).SFAS
159 is effective for fiscal years beginning after November 15,
2007.  This Statement permits entities to choose to measure many
financial instruments and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This Statement is expected to expand the use of fair value
measurement, which is consistent with the Board’s long-term measurement
objectives for accounting for financial instruments.





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.




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.





F-14
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Notes to
the Consolidated Financial Statements


June 30,
2008 and 2007





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





p.     Stock
Options





On July
1, 2005, we adopted Statement of Financial Accounting Standards No.
123 (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).





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, 2008 and 2007 reflect the impact of SFAS 123
(R).  Stock-based compensation expense recognized under SFAS 123 (R)
for the fiscal year ended June 30, 2008 was $66,593 and for the fiscal year
ended June 30, 2007 was $46,875, 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, 2008 and 2007 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, 2008 and 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, 2008 and
2007 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.





F-15
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Notes to
the Consolidated Financial Statements


June 30,
2008 and 2007





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





t.
            Reclassification
      of Prior Year Balances





Certain
reclassifications have been made to the 2007 financial statements in order for
them to conform to the classifications used for the 2008 financial
statements.





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.





u.
            Acquisition
      Costs





Acquisition
costs are being amortized over a 25 year period.  The Company recorded
amortized acquisition expense of $38,977 and $38,978 for the years ended June
30, 2008 and 2007, respectively.





NOTE
      2 -
            INVENTORIES





Inventories
consisted of the following:





June
      30, 2008
                      
                      
                      June
      30, 2007Raw
      materials and supplies
                      
                      $
                      443,276
                      
                      
                      $
                      368,856Finished
      goods
                      
                      
                      299,484
                      
                      
                      
                      501,816$
                      742,760
                      
                      
                      $
                      870,672





NOTE
      3 -
            PREPAID
      EXPENSES





Prepaid
expenses consisted of the following:





June
      30, 2008
                  
                  
                  June
      30, 2007Prepaid
      natural gas costs
                  
                  $
                  243,259
                  
                  
                  $
                  -Prepaid
      construction costs
                  
                  
                  227,500
                  
                  
                  
                  227,500Other
      prepayments & deposits
                  
                  
                  23,739
                  
                  
                  
                  67,391$
                  494,498
                  
                  
                  $
                  294,891





F-16
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Notes to
the Consolidated Financial Statements


June 30,
2008 and 2007





NOTE
      4 -
            FIXED
      ASSETS





Fixed
assets consist of the following amounts:





June
      30, 2008
                    
                    
                    June
      30, 2007Property
      plant and equipment
                    
                    $
                    12,716,015
                    
                    
                    $
                    12,509,529Cavities
      and well development
                    
                    
                    8,962,704
                    
                    
                    
                    7,453,095Furniture
      and fixtures
                    
                    
                    133,312
                    
                    
                    
                    129,489Mineral
      leases
                    
                    
                    4,167,471
                    
                    
                    
                    4,167,471Subtotal
                    
                    
                    25,979,502
                    
                    
                    
                    24,259,584Less
      accumulated depreciation and amortization
                    
                    
                    (6,486,448
                    )
                    
                    
                    (4,788,786
                    )Total
                    
                    $
                    19,493,054
                    
                    
                    $
                    19,470,798





Depreciation
and amortization expense for the years ended June 30, 2008 and 2007 was
$1,697,662 and $1,194,179respectively.





NOTE
      5 -
            PATENTS





Patents
consisted of the following:


June
      30, 2008
                  
                  
                  June
      30, 2007Patents
      acquired from IMC at fair value
                  
                  $
                  50,000
                  
                  
                  $
                  50,000Less
      accumulated amortization
                  
                  
                  (23,762
                  )
                  
                  
                  (19,455
                  )Net
      Patents
                  
                  $
                  26,238
                  
                  
                  $
                  30,545





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, 2008 and 2007 was $4,307 and $4,469,
respectively.  The amortization expenses to be recognized over the
next five years are as follows:





Fiscal Year
                    
                    Amount2009
                    
                    $
                    3,3522010
                    
                    
                    3,3522011
                    
                    
                    3,3522012
                    
                    
                    3,3522013
      and subsequent
                    
                    
                    12,830Total
                    
                    $
                    26,238





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,
2008 and 2007





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 years
2007 and 2008 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, 2008.  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, 2008 and 2007 was $971,760 and
$871,789, respectively.  Royalty expense for the years ended June 30,
2008 and 2007 was $357,717 and $408,839, respectively.





NOTE
      9 -
            ACCRUED
      EXPENSES





Accrued
expenses comprise the following:





June
      30, 2008
                    
                    
                    June
      30, 2007Salaries
      and wages
                    
                    $
                    294,729
                    
                    
                    $
                    316,984Judgment
      payable (Hudson)
                    
                    
                    -
                    
                    
                    
                    300,000Freight
                    
                    
                    34,628
                    
                    
                    
                    57,894Property
      tax
                    
                    
                    225,180
                    
                    
                    
                    68,045Employment
      taxes
                    
                    
                    1,016,279
                    
                    
                    
                    864,398Other
                    
                    
                    31,499
                    
                    
                    
                    18,671Total
                    
                    $
                    1,602,315
                    
                    
                    $
                    1,625,992





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,
2008 and 2007





NOTE
      10 -
            DUE
      TO RELATED PARTIES





Accrued liabilities due to related
parties comprise the following:


June
      30, 2008
                    
                    
                    June
      30, 2007Accrued
      officer and director compensation, expenses and advances
                    
                    $
                    1,339,789
                    
                    
                    $
                    1,042,670Accrued
      interest on Series A Debenture secured promissory notes
                    
                    
                    384,053
                    
                    
                    
                    705,737Accrued
      interest on Series C Debenture secured promissory note
                    
                    
                    297,553
                    
                    
                    
                    182,344Provision
      for accrued but unpaid interest due on Jacqueline Badger Mars Trust
      promissory notes
                    
                    
                    -
                    
                    
                    
                    242,100Accrued
      interest and contingent interest due on various promissory notes and
      debentures issued to Sentient entities
                    
                    
                    49,905,694
                    
                    
                    
                    -Accrued
      interest on promissory note due to an accredited related party
      investor
                    
                    
                    25,810
                    
                    
                    
                    333Unsecured
      advance repayable to Jacqueline Badger Mars
                    
                    
                    -
                    
                    
                    
                    6,827$
                    51,952,899
                    
                    
                    $
                    2,180,011





Accrued
directors fees and officer and director compensation also includes interest
expense totaling $138,396 for the year ended June 30, 2008 accrued on unpaid
loan account balances.  Interest expense of $133,454 was included in
the year ended June 30, 2007.





Notes
payable to related parties comprise the following:





June
      30, 2008
                  
                  
                  June
      30, 2007Note
      and interest payable to Jacqueline Badger Mars Trust; principal and
      interest due December 31, 2005; interest at 7%; unsecured
                  
                  $
                  -
                  
                  
                  $
                  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
                  
                  
                  -
                  
                  
                  
                  1,907,227Various
      guaranty promissory notes acquired by Sentient Entities from Jacqueline
      Badger Mars Trust due December 31, 2005; Interest at various rates between
      4.5% and 4.99%; unsecured
                  
                  
                  2,443,387
                  
                  
                  
                  -NSHI
      Series A Secured 10% Debentures payable to the Sentient Entities due
      September 30, 2005
                  
                  
                  5,750,000
                  
                  
                  
                  5,000,000NSHI
      Secured Subordinated Series B1 Debentures payable to the Sentient Entities
      due February 19, 2008; interest at 34.8766%
                  
                  
                  11,300,000
                  
                  
                  
                  11,300,000Various
      unsecured promissory notes payable to Sentient Entities at 6% interest due
      October 31, 2008
                  
                  
                  1,845,552
                  
                  
                  
                  -Secured
      notes payable to accredited related party investors; 10% interest payable
      quarterly; due September 30, 2005
                  
                  
                  2,000,000
                  
                  
                  
                  2,000,000Unsecured
      promissory note payable to an accredited related party investor due July
      31, 2008; interest at 12%
                  
                  
                  200,000
                  
                  
                  
                  200,000





F-19
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Notes to
the Consolidated Financial Statements


June 30,
2008 and 2007





NOTE
      10 -
            DUE
      TO RELATED PARTIES (Continued)





June
      30, 2008
                  
                  
                  June
      30, 2007Series
      C Debenture Secured Promissory Note payable to an accredited related party
      investor;  due March 19, 2008; interest at 13.5%
                  
                  $
                  853,400
                  
                  
                  $
                  853,400Total
      related party notes payable
                  
                  
                  24,392,339
                  
                  
                  
                  21,730,255Less
      current portion
                  
                  
                  24,392,339
                  
                  
                  
                  21,730,255Total
      related party notes payable long term
                  
                  $
                  -
                  
                  
                  $
                  -





NOTE
      11 -
            NOTES
      PAYABLE





Notes payable comprise the
following:




June
      30, 2008
                    
                    
                    June
      30, 2007NSHI
      Series A Secured 10% Debentures payable to payable quarterly; due
      September 30, 2005
                    
                    $
                    2,250,000
                    
                    
                    $
                    2,250,000AmerAlia
      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
                    
                    
                    1,842,563
                    
                    
                    
                    1,230,723Note
      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
                    
                    
                    -
                    
                    
                    
                    9,921,583Note
      payable to equipment manufacturer, unsecured, interest only at 8% payable
      on March 31, of each year, entire principal due December 31,
      2005.
                    
                    
                    -
                    
                    
                    
                    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
                    
                    
                    
                    18,000Motor
      vehicle loans at 0.9% p.a. interest due February and March 2009 secured by
      motor vehicles
                    
                    
                    46,669
                    
                    
                    
                    44,623Note
      payable to investor; unsecured, due on demand; at 10%
      interest.
                    
                    
                    4,000
                    
                    
                    
                    4,000Total
      notes payable
                    
                    
                    5,725,524
                    
                    
                    
                    16,233,221Less
      current portion
                    
                    
                    5,709,963
                    
                    
                    
                    16,214,540Total
      long-term debt
                    
                    $
                    15,561
                    
                    
                    $
                    18,681




The
aggregate principal maturities of notes payable at June 30, 2008 are as
follows:





Fiscal Year
                    
                    Amount2009
                    
                    $
                    5,709,9632010
                    
                    
                    15,5612011
                    
                    
                    -2012
                    
                    
                    -Total
                    
                    $
                    5,725,524





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.





F-20
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Notes to
the Consolidated Financial Statements


June 30,
2008 and 2007





NOTE
      12 -
            CAPITAL
      LEASE OBLIGATIONS





June
      30, 2008
                  
                  
                  June
      30, 2007Total
      minimum lease payments
                  
                  $
                  71,619
                  
                  
                  $
                  130,873Less
      interest and taxes
                  
                  
                  (3,509
                  )
                  
                  
                  (10,968
                  )Present
      value of net minimum lease payments
                  
                  
                  68,110
                  
                  
                  
                  119,905Less
      current portion
                  
                  
                  (64,674
                  )
                  
                  
                  (55,847
                  )Long-term
      portion of capital lease obligations
                  
                  $
                  3,436
                  
                  
                  $
                  64,058


The
aggregate principal maturities of capital leases at June 30, 2008 are as
follows:





Year ended June 30
                    
                    Amount2009
                    
                    $
                    64,6742010
                    
                    
                    3,436Total
                    
                    $
                    68,110





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, 2008 is $1,036,640, an increase of $138,640 on the previous year’s
balance of $898,000.  An amount of $26,940 was added to the prior
year’s balance for accretion, $142,045 was added as an estimate of additional
reclamation costs and $30,345 was expended in reclamation
activities.





NOTE
      14 -
            OPERATING
      LEASES





The
Company has signed six leases for a total of 46 railway hopper cars.  Three
of these leases terminate in September 2010, one terminates in November 2008,
one terminates in December 2009 and the other terminates in June 2010. 
These leases require monthly payments of $385 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 $10,239,
increasing by 3% in January of each year.





The
following is a schedule of future minimum lease payments required by the
non-cancellable operating lease agreements at June 30, 2008:





Year ended June 30
                      
                      Amount2009
                      
                      $
                      241,5502010
                      
                      
                      192,3002011
                      
                      
                      32,400Total
                      
                      $
                      466,250





The
rental expense component of these lease payments was $475,279 for financial year
2008 and $477,855 for financial year 2007.





F-21
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Notes to
the Consolidated Financial Statements


June 30,
2008 and 2007





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 $66,593 and $46,875 for the year ended
June 30, 2008 and 2007, 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 165.59% and 170.53%; risk-free interest rates of 4.500% and 4.375% and
expected lives of 3.0 years.





A summary
of the status of the Company’s stock options and warrants as of June 30, 2007
and changes during the year ended June 30, 2008 is presented below:





WeightedOptions,
                                  
                                  
                                  AverageWarrants
                                  
                                  
                                  Exerciseand
      SAR’s
                                  
                                  
                                  PriceOutstanding,
      June 30, 2007
                                  
                                  
                                  3,615,000
                                  
                                  
                                  $
                                  0.96Granted
                                  
                                  
                                  187,500
                                  
                                  
                                  $
                                  0.40Expired/Canceled
                                  
                                  
                                  (37,500
                                  )
                                  
                                  $
                                  0.54Exercised
                                  
                                  
                                  (150,000
                                  )
                                  
                                  $
                                  0.54Outstanding,
      June 30, 2008
                                  
                                  
                                  3,615,000
                                  
                                  
                                  $
                                  1.01Exercisable,
      June 30, 2008
                                  
                                  
                                  3,615,000
                                  
                                  
                                  $
                                  1.01





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,
2008:





Expiration Date
                    
                    Price
                    
                    
                    NumberMarch
      19, 2009
                    
                    $
                    1.00
                    
                    
                    
                    2,500,000April
      18, 2009
                    
                    $
                    0.71
                    
                    
                    
                    540,000April
      18, 2009
                    
                    $
                    3.00
                    
                    
                    
                    200,000June
      30, 2009
                    
                    $
                    0.42
                    
                    
                    
                    187,500June
      30, 2010
                    
                    $
                    0.40
                    
                    
                    
                    187,5003,615,000





During
the year ended June 30, 2008, 187,500 options were granted and we issued 59,070
shares to non-executive directors pursuant to the net exercise provisions of
their option agreements over 187,500 shares.





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,
2008 and 2007





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
                    
                    Amount2009
                    
                    $
                    100,0002010
                    
                    
                    100,0002011
                    
                    
                    100,0002012
                    
                    
                    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, 2008 and 2007
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, 2008 accrued unpaid compensation, interest, expenses and advances to the
company of $219,065 and $616,342 were due to Bill H. Gunn and Robert van Mourik
respectively (at June 30, 2007: $243,661 and $430,518,
respectively).  These amounts also include $14,000 director’s fees due
annually.  During the year ended June 30, 2008, Mr. Gunn received
$214,000 for his salary and directors fees and a further $43,206 of his accrued
compensation.  All of Mr. van Mourik’s salary and director’s fees of
$164,000 was accrued with no payments made on the amounts in the fiscal year
ending June 30, 2008.  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.





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,
2008 and 2007





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 $67 million
as of June 30, 2008. 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.





On
October 31, 2008 the Company completed the first stage of a Restructuring
Agreement with the Sentient Entities as discussed more fully in Note 22
“Subsequent Events”.  Under this agreement Sentient exchanged all its
various promissory notes, debentures, rights to interest and it 53.5% share of
NSI for 82% of the equity of NSHI and shares of the Company.  Sentient
also subscribed $5,500,000 in cash for additional shares of the Company’s common
stock and certain officers, directors and creditors exchanged obligations due to
them for shares.  Consequently, many creditors have been
repaid.  The Amendment to the Restructuring Agreement also provides
for a second closing to be held December 5, 2008 or such other time as the
parties agree when Sentient will purchase an additional 12,149,628 shares of
AmerAlia Common Stock for $4,373,866.  The Company anticipates this
will occur following the filing of the Company’s annual report on Form 10-KSB
for the year ended June 30, 2008.





The
ability of the Company to continue as a going concern is dependent upon its
ability to raise sufficient capital to sustain its investment in NSHI and meet
its operating expenses.  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 was $15,183,822 at June 30,
2007.  The change in minority interest for the fiscal year ended June
30, 2008 was $193,163 which is the net effect of a capital contribution of
$535,000 from the majority interest less its share of the income of $341,837
resulting in an ending “Minority Interest” value of $15,376,985 at June 30,
2008.








NOTE
      21 -
            INCOME
      TAXES





The
Financial Accounting Standards Board ("FASB") has issued Financial
Interpretation No. 48, Accounting for Uncertainty in Income Taxes - An
Interpretation of FASB Statement No.109 (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with FASB Statement No. 109, Accounting for
Income Taxes. FIN 48 requires a company to determine whether it is more likely
than not that a tax position will be sustained upon examination based upon the
technical merits of the position. If the more-like1y-than-not threshold is met,
a company must measure the tax position to determine the amount to recognize in
the financial statements. As a result of the implementation of FIN 48, the
Company performed a review of its material tax positions in accordance with
recognition and measurement standards established by FIN 48.





F-24
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Notes to
the Consolidated Financial Statements


June 30,
2008 and 2007





NOTE
      21 -
            INCOME
      TAXES (Continued)





At the
adoption date of January 1, 2007, the Company had no unrecognized tax benefit
which would affect the effective tax rate if recognized.





The
Company includes interest and penalties arising from the underpayment of income
taxes in the consolidated statements of operations in the provision for income
taxes. As of June 30, 2008, the Company had no accrued interest or penalties
related to uncertain tax positions.





The
Company files income tax returns in the U.S. federal jurisdiction and in the
state of Colorado. With few exceptions, the Company is no longer subject to U.S.
federal, state and local, or non-U.S. income tax examinations by tax authorities
for years before 2004.





NOTE
      22 -
            SUBSEQUENT
      EVENTS





On July
1, 2008 the Company 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.





In
September 2008 the Company issued 1,402,000 shares of restricted common stock to
holders of Series C Debenture secured promissory notes in satisfaction and
cancellation of such notes and accrued interest with a total value of
$3,311,367.  One of the holders was a related party.





On
September 25, 2008 AmerAlia, NSHI and its currently 46.5% owned subsidiary, NSI;
Bill H. Gunn and Robert van Mourik, Directors and executive officers of AmerAlia
(collectively the “AmerAlia parties”) entered into a Restructuring Agreement
with the Sentient Entities..





On
October 31, 2008 the AmerAlia Parties and the Sentient Entities completed an
Amendment to the Restructuring Agreement.  As a result of the
amendment, the restructuring transaction was divided into two
closings.  In accordance with the amended agreement the first closing
occurred as of October 31, 2008.  Prior to the first closing, the
Sentient Entities transferred their various interests to Sentient.  In
the first closing:


1.
              Sentient
      exchanged all its NSHI Secured Series A and B1 debentures, accrued
      interest and rights to contingent interest thereon, its one share of NSHI
      common stock and its 53.5% of the common stock of NSI for 82% of the
      issued common stock of NSHI.
 
 2.
              AmerAlia
      exchanged its NSHI Series A and C Debentures, accrued interest thereon and
      its NSHI preferred stock for 12.9% of the issued common stock of NSHI,
      giving AmerAlia an aggregate ownership position in NSHI of
      18%.
 
 3.
              Intercompany
      loans between AmerAlia and NSHI were
  extinguished.
 
 4.
              Sentient
      received an aggregate of 27,875,047 shares of AmerAlia common stock as
      follows:
 (a)
              15,277,778
      shares of AmerAlia common stock for a total purchase price of
      $5,500,000;
 (b)
              6,619,469
      shares in satisfaction of various promissory notes
  and
 (c)
              5,977,800
      shares in satisfaction of debts, rights and obligations acquired from the
      Jacqueline Badger Mars Trust in August
2007.
 
 5.
              Officers,
      Directors and holders of Series A Debenture Secured Promissory Notes (the
      “Notes” or individually a “Note” as applicable) subscribed for shares of
      AmerAlia Common Stock in satisfaction of Notes, unsecured notes and
      accrued compensation as
follows:




F-25
 Table of Contents





AMERALIA,
INC. AND SUBSIDIARIES


Notes to
the Consolidated Financial Statements


June 30,
2008 and 2007





NOTE
      22 -
            SUBSEQUENT
      EVENTS (Continued)





Shareholder
                          Relationship
                          
                          Number
      of Shares
                          
                          
                          ConsiderationBill
      H Gunn
                          Chairman
      & CEO
                          
                          
                          700,000
                          
                          
                          $
                          252,000Robert
      van Mourik
                          Director,
      EVP & CFO
                          
                          
                          250,000
                          
                          
                          
                          90,000James
      V Riley Trust
                          Affiliate
      ofJames
      V. Riley, Director
                          
                          
                          1,583,333
                          
                          
                          
                          570,000J.
      Jeffrey Geldermann
                          Director
                          
                          
                          1,003,400
                          
                          
                          
                          361,224Karen
      O. Woolard Trust
                          Affiliate
      of  Robert C.Woolard,
      Director
                          
                          
                          925,000
                          
                          
                          
                          333,000Glendower
      Investments
                          Affiliate
      of Neil E.Pty
      Ltd
                          Summerson,
      Director
                          
                          
                          153,000
                          
                          
                          
                          55,080Geoffrey
      C. Murphy
                          Director
                          
                          
                          486,125
                          
                          
                          
                          175,005TOTALS:
                          
                          
                          
                          5,100,858
                          
                          
                          $
                          1,536,309





In
addition, other holders of the Notes acquired 2,433,706 shares for
$876,134.





Following
the first closing, Sentient no longer holds any debt in either AmerAlia or
NSHI.  All Series A Debentures, Series B1 Debentures and Series C
Debentures issued by NSHI were cancelled.  Following the first closing
NSI is again a wholly-owned subsidiary of NSHI.





The
Amendment to the Restructuring Agreement also provides for a second closing to
occur on or before December 5, 2008 or such other time as the parties
agree.  At the second closing Sentient will purchase an additional
12,149,628 shares of AmerAlia Common Stock for $4,373,866.  The
proceeds from the second closing will be used in the following priority: (a) as
a working capital reserve for AmerAlia of $1,000,000 (b) as a reserve solely to
fund AmerAlia’s share of previously discussed capital calls of NSHI, AmerAlia’s
share of which is $2,880,000, and additional working capital for
AmerAlia.  In addition, until the second closing and subject to
certain restrictions, AmerAlia will have the right to sell up to 1,895,708
shares for a total purchase price of $682,455 to Sentient for the purpose of
providing additional working capital for AmerAlia.  Such shares would
reduce Sentient’s option to purchase up to 5,500,000 shares of AmerAlia common
stock within the next three years.





Following
the restructuring, Sentient beneficially owns 66% of the Company’s common stock,
resulting in a change of control of the Company and restrictions on the
Company’s use of its net operating loss carryforwards.  In addition,
pursuant to the Restructuring Agreement, Sentient has the right to nominate
Peter Cassidy and up to three additional suitably qualified persons for election
by the shareholders as directors of AmerAlia.






F-26