SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-KSB


(Mark
one)


x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934  For the Fiscal Year Ended June 30,
  2006


OR


o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


Commission
File No.  0-15474










AMERALIA,
INC.


(Exact
name of Company as specified in its charter)





Utah
            
            87-0403973(State
      or other jurisdiction of
            
            (I.R.S.
      EmployerIncorporation
      or organization)
            
            Identification
      No.)





9233 Park Meadows Dr, Suite
431, Lone Tree, Colorado 80124


(Address
of Principal Executive Offices)








Company's
      telephone number, including area code:
            (720)
      876-2373Company’s
      Web Page:
            www.ameralia.comSecurities
      registered pursuant to Section 12(b) of the Act:
            None.Securities
      to be registered pursuant to Section 12(g) of the
  Act:





Common Stock - $.01 Par
Value


(Title of
Class)





Check
      whether the issuer (1) filed all reports required to be filed by Section
      13 or 15(d) of the Exchange Act during the past 12 months (or for such
      shorter period that the registrant was required to file such reports), and
      (2) has been subject to such filing requirements for the past 90
      days.Yes
      x     No
      o





Check
      if disclosure of delinquent filers in response to Item 405 of Regulation
      S-B is not contained in this form, and no disclosure will be contained, to
      the best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or
      any amendment to this Form 10-KSB.o





Revenues
      for the fiscal year ending June 30, 2006:
            $15,293,688





As
      of May 30, 2008, the number of shares outstanding of the company's $.01
      par value common stock was 17,239,437. Aggregate market value of the
      voting stock held by non-affiliates of AmerAlia as of May 30, 2008 was
      approximately $7,064,997.  The estimate is based on the last
      sale price per share and 6,995,047 shares held by
      non-affiliates.





Documents
incorporated by reference:  See Item 13.













Forward Looking
Statements





AmerAlia’s
future conduct depends on a number of factors beyond our control, so we cannot
assure you we will be able to conduct AmerAlia’s operations as we contemplate in
this report.  This report contains various statements using the terms
“may”, “expect to”, and other terms denoting future
possibilities.  They are forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995.  We cannot
guarantee the accuracy of these statements as they are subject to a variety of
risks beyond our ability to predict or control.  These risks may cause
actual results to differ materially from the projections or estimates contained
in this report.  These risks are discussed at the end of Item 1(b) and
may be identified from time to time in our filings with the Securities and
Exchange Commission.





Cautionary
Note to US Investors - The United States Securities and Exchange Commission
(SEC) limits disclosure for U.S. reporting purposes to mineral deposits that a
company can economically and legally extract or produce. The reader is cautioned
that the terms "resource," "indicated" and "inferred" are not terms recognized
by SEC guidelines for disclosure of mineral properties. Generally, "indicated"
and "inferred" estimates do not rise to the level of certainty required by SEC
guidelines.











TABLE OF CONTENTS





Item
            
            PagePART
      11.
            Description of Business
            1Our Sodium Leases
            3Our Sodium Bicarbonate Business
            7Our Water Rights
            11Our Financing Arrangements
            16Our Recapitalization Plan
            21Risk Factors
            212.
            Description of Properties
            243.
            Legal Proceedings
            244.
            Submission of Matters to a Vote of
      Securityholders
            24PART
      115
            Market for Company’s Common Equity and Related Stockholder
      Matters
            236.
            Management’s Discussion and Analysis or Plan of
      Operation
            267.
            Financial Statements
            308A.
            Changes in and Disagreements on Accounting and Financial
      Disclosure
            308B.
            Other Information
            30PART
      1119.
            Directors, Executive Officers, Promoters and Control
      Persons; Compliance with Section 16(a) of the Exchange
    Act
            3110.
            Executive Compensation
            3411.
            Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
            3812.
            Certain Relationships and Related Party
      Transactions
            4013.
            Exhibits and Reports on Form 8-K
            4414.
            Principal Accountant Fees and Services
            47SIGNATURES
            48Consolidated Financial Statements
            F-1





Table of Contents





PART I





ITEM
      1.
            DESCRIPTION OF
      BUSINESS





(a)
            Business
      Development





AmerAlia,
Inc. was incorporated in Utah on June 7, 1983 as Computer Learning Software,
Inc. and renamed AmerAlia, Inc. in January 1984.  When we use the term
“We” or “AmerAlia” in this annual report, we are referring to AmerAlia, Inc. and
its wholly-owned subsidiary, Natural Soda Holdings, Inc. (“NSHI”).  We
are also referring to Natural Soda, Inc. (“NSI”) which was a wholly owned
subsidiary of NSHI until May 31, 2007 when NSHI’s ownership was reduced to 46.5%
in settlement of various debt obligations as discussed more fully
below.





AmerAlia
is a listed public company in a strategic relationship with private equity funds
to develop natural resources.   We own Bureau of Land Management
(“BLM”) leases in Colorado covering very large deposits of naturally occurring
sodium bicarbonate.  We also own various water rights and our sodium
leases also cover deposits of oil shale to which we do not currently have
title.  Our business is to produce and sell natural sodium
bicarbonate, commonly known as baking soda, for use in a wide variety of
products and activities and to profitably further utilize our natural
resources.  Our immediate objective is to be a low cost producer of
sodium bicarbonate and related products.  Our longer term objective is
to utilize our extensive water rights and to gain title to the oil shale
resources.





We own
the largest BLM leases in the Piceance Creek basin which contain 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 in Colorado where the nahcolite beds are thickest with
greatest concentration of natural sodium bicarbonate. Consequently, we believe
our deposits are unique and capable of producing sodium bicarbonate and related
sodium products for many generations.





We have
water rights in the Piceance Creek basin, a part of the Colorado River drainage
system.  These various rights allow us under certain circumstances to
draw up to a maximum of 108,812 acre feet (35.46 million gallons) annually and
to store up to 7,980 acre feet of water.  These rights may never be
fully utilized for various reasons including the availability of sufficient
water, however, while subject to numerous limitations and conditions our water
rights can provide water far in excess of the current or future needs of the
sodium bicarbonate operations. We believe that these water rights can generate a
future revenue stream and have increasing value, especially as any prospective
development of the oil shale resources of the Piceance Creek Basin may require
very large volumes of water.





As
discussed below, deposits of oil shale are contained within our sodium
leases.  We do not have any rights to these resources but we plan to
apply for title to all or part of the oil shale that is contained within the
boundaries of our leases.  Shell Frontier Oil & Gas Co. has three
research, development and demonstration leases located next 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 intend to develop a plan to recover oil from the resource contained
within our sodium leases.





In 1989
we acquired an interest in, and subsequently, in 1992, acquired a BLM lease
known as the Rock School lease in Rio Blanco County, Colorado and devoted a
number of years of research, development and permitting activity to bring that
lease into production.  In 2001, the BLM renewed the lease for a
further ten years.  Initially, we planned to produce sodium
bicarbonate through building a solution mining and recovery facility on our Rock
School lease.  We entered into agreements to design and fabricate a
processing plant and commenced the construction of equipment.





However,
in February 2003 NSI, our then wholly owned subsidiary, successfully completed
the acquisition of the business operations of a company owning adjoining leases
already in production.  NSI purchased the assets and certain related
contracts held by White River Nahcolite Minerals, LLC (“WRNM”) and IMC Chemicals
Inc. (“IMC”).  This provided us access to an existing customer base,
production facilities and very substantial additional deposits of
nahcolite.  It also gave us ownership of very substantial
unconditional and conditional water rights.   We plan to use the
equipment and plans we have already developed to expand our production
capacity.





1
 Table of Contents





Our
acquisition was financed by Sentient Global Resource Fund I, LP and Sentient
Global Resource Trust No. 1 of George Town, Grand Cayman, Cayman
Islands.  Sentient Asset Management, the manager of these funds, is an
international private equity group specializing in the development of natural
resources.  Initially, this financing was provided short-term but was
converted into long term funding at the financial closing completed March 19,
2004.











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








In May
2007, these Sentient interests were transferred to a new Sentient affiliate
known as Sentient USA Resources Fund, LP (“Sentient I” and, collectively, the
“Sentient Entities”) and Sentient I then exercised its rights to exchange some
of its debt securities issued by NSHI and NSI for 53.5% of the outstanding
common stock of NSI.  AmerAlia owns all the outstanding stock of
NSHI.  The Sentient Entities hold a security interest in all the
outstanding NSHI common stock and the NSI shares owned by NSHI as collateral for
the repayment of its loans.





In August
2007, another Sentient affiliate, Sentient USA Resources Fund II (“Sentient
II”), a Delaware limited partnership, acquired 7,929,820 shares of AmerAlia
common stock from the Jacqueline Badger Mars Trust (the “Mars Trust”), our
previous major shareholder, and also acquired additional debt securities
previously due to the Mars Trust and to the Bank of America.





In
addition, Sentient II advanced a loan of $350,000 to AmerAlia in August
2007.  This loan and accrued interest is due July 31, 2008 and has a
right to convert into AmerAlia common stock at 36 cents per share.  We
have been continuing our discussions with Sentient and other creditors to
recapitalize our company and its subsidiaries.  Bringing these
restructuring discussions to definitive agreement firstly requires that we bring
our SEC filings current, and until that condition has been met, we do not know
what the outcome of these discussions and negotiations will
be.  Meanwhile we have agreed to some interim funding arrangements
with various Sentient funds:





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


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


3.
            In
      May 2008 Sentient I loaned AmerAlia $465,000 for the purpose of
      contributing capital to NSHI which, in turn contributed $465,000 to NSI as
      its proportionate share of $1,000,000 raised by NSI for well field
      development expenditures.





2
 Table of Contents





(b)
            Business
      of Issuer





Our
business is to profitably create value through the sale of a range of natural
products initially derived from the recovery of our natural sodium resources,
the utilization of our water rights and to seek title to oil shale resources
intermingled with our sodium resource.  These resources are located in
the Piceance Creek Basin in North West Colorado.








GENERAL
DISCUSSION





1.
            OUR SODIUM LEASES





Our Sodium Leases and
Operations





Nahcolite,
a naturally occurring mineral form of sodium bicarbonate, is only known to exist
in large quantities in the Piceance Creek basin in northwest
Colorado.  Access to these deposits is governed by the BLM, a part of
the Department of Interior, which has granted some leases to allow recovery of
the sodium bicarbonate.  NSI owns four sodium leases, collectively
known as the Wolf Ridge Mining Unit, and NSHI owns the adjoining Rock School
lease.





The
geology of the Piceance Creek basin has been described and discussed in two
reports.  In March 1983, Rex D. Cole, Ph.D. Consulting Geologist,
Grand Junction, Colorado, issued a report “Geologic Framework of Federal Sodium
Lease C-0118326, Piceance Creek Basin, Colorado”.  The lease to which
Cole refers (C-0118326)
is the Wolf Ridge lease, one of the four leases comprising the Wolf Ridge Mining
Unit.  Since the preparation of this report our company and its
predecessor entities have gained extensive mining and geological experience with
the resource, however, the Cole report remains a primary credible general
reference on the resource.  On Page 3 of “Summary and Conclusions” the
report states “Total nahcolite resources for the lease area are between 6 and 8
billion tons.”  We own four sodium leases of which the Wolf Ridge
lease is one; therefore, our holdings extend beyond the particular lease to
which Cole refers.However,
only a portion of the resource will be recoverable.





Also on
Page 3 “Summary and Conclusions” the report states “Shale-Oil resources for the
Saline zone under the lease are between 12 and 14 billion barrels.” This does
not include any provision for additional oil shale that might be expected to
exist under the Rock School lease and the other Wolf Ridge
leases.  Only a portion of the shale oil resource will be recoverable
and the extent of the recoverable shale oil is currently unknown.





A second
report by Cole, Daub & Weston entitled “Review of Geology, Mineral
Resources, and Ground-Water Hydrology of the Green River Formation,
North-Central Piceance Creek Basin, Colorado” was published by the Grand
Junction Geological Society, Grand Junction, Colorado, in 1995.  The
authors state “...subsequent drilling established that the world’s largest
deposits of naturally occurring sodium bicarbonate (nahcolite) are present in
the Piceance Creek basin” and “...the estimated in-situ resources of nahcolite and
dawsonite are placed at 29 and 19 billion tons, respectively”.





In
December 2004, Darling Environmental & Survey, Minerals Division (“Darling”)
assessed our resources in accordance with the exacting Joint Ore Reserves
Committee Code (“JORC”) of The Australian Institute of Mining and Metallurgy,
Australian Institute of Geoscientists and Minerals Council of Australia. Under
the JORC code resources are assessed as Inferred Resources, Measured Resources
and Reserves.





3
 Table of Contents







Figure
2:  AmerAlia’s Sodium Leases are located


about
54 miles northwest of Rifle, Colorado





The
report was prepared by Mr. John Mears who is a “competent person” under rule 10
of the JORC code, with the assistance of Ted Brennan & Associates,
Geologists.  They evaluated the Boise Bed which is under the Wolf
Ridge lease. They concluded, amongst other things that “The current data
distribution found within the Piceance Creek Basin of Colorado allows for a
large Inferred Resource. The current data suggests that the localized
distribution of nahcolite within the Boies Bed immediately surrounding the
current plant site and within the lease area is 80 million metric tons at a
grade of 65.0 percent.”





These
documents prepared by independent parties indicate that we own a substantial
proportion of the largest known commercial deposits of nahcolite in the
world.  Currently, we expect to produce approximately 100,000 tons per
year from a resource that can fulfill all the company’s expected production
needs into the foreseeable future.





Our
leases are located near the depositional center of the Piceance Creek basin
where the nahcolite beds are thickest with the highest concentration of
nahcolite. The Wolf Ridge Mining Unit leases issued to NSI cover a total of
8,223 acres.  When combined with the Rock School lease issued to NSHI,
we own leases covering a total of 9,543 acres.  The only other sodium
leases issued by the BLM in the Piceance Creek basin, covering a total of 7,142
acres, are the Yankee Gulch lease, previously owned by American Soda and then
owned by Solvay Chemicals (“Solvay”), and the Nielsen-Juhann-Hogle lease, now
owned by Shell Frontier Oil & Gas Co. (“Shell”).  Solvay shut down
its operations on its lease because it could not economically transport the
recovered liquor to Parachute to produce sodium carbonate and sodium bicarbonate
there. It has since sold its facilities located on the Yankee Gulch lease. The
Nielsen-Juhann-Hogle lease requires extensive government approvals before it can
be brought into production.  It follows that we have the largest
available resource of nahcolite in the Piceance Creek basin.





Unique to
the NSI leases is the Boies Bed, an interval that, while variable, averages
approximately 30 feet thick and contains over 65% nahcolite located at an
approximate depth of 1,900 feet.  During the last fourteen years, NSI
and its predecessors have been solution mining nahcolite from horizontal
cavities in the Boies Bed, the richest and most economically recoverable bed of
nahcolite in the Piceance Creek basin.  This has the advantage of
being a proven technology.





4
 Table of Contents





Our
operations to recover sodium products from these leases are governed by a BLM
approved mine plan.  Currently, we are recovering sodium bicarbonate
from two cavities for which we have authority, as of April, 2008, to recover up
to approximately 430,000 tons of sodium bicarbonate. The BLM will allow us to
mine an additional 208,000 tons from the two cavities.  Therefore, we
currently have approval to recover approximately 638,000 tons from our
resource.  As our plant has been able to produce approximately 100,000
tons per year, our current cavities have a capacity, if fully utilized, to
provide several years supply.  However, to ensure a reliable supply of
high concentration brine we need to install more cavities.  We discuss
more fully our plans for these cavities below at “Production cavities and
solution mining”.





Each of
the four Wolf Ridge leases and the Rock School lease was renewed effective July
1, 2001 for a ten year term with a preferential right to subsequent renewals
provided that sodium is being produced in paying quantities.  Under
the unit agreement, production in paying quantities from one lease is sufficient
to extend all four WRNM leases.  The leases bear a production royalty
payable to the federal government of 2.0% of the gross value of the production
exiting the processing plant.  Each of these leases contains covenants
to protect the in situ oil shale, water, and historical resources. We believe
BLM general practice is that the conduct of our activities will be sufficient to
enable lease renewals.  In order to renew the Rock School Lease we may
have to undertake some additional development of that lease.





Our Processes &
Strategic Advantage




Traditionally,
sodium bicarbonate is manufactured chemically from soda ash, however, we recover
our natural sodium bicarbonate using solution mining which we believe gives us
significant production cost advantages over chemically manufactured
product.  Solution mining requires pumping hot water approximately
1,900 feet underground, dissolving the mineral and bringing the saturated liquid
to the surface where we recrystallise the sodium bicarbonate as a fine white
crystalline powder.












Figure
3: A general illustration of the solution mining process





5
 Table of Contents





Products & Other
Potential Uses





Sodium
bicarbonate is used as a component in animal feed, human food, pharmaceutical
and industrial applications, especially as an environmentally benign cleaning
agent. Sodium bicarbonate can also be used as an agent for flue gas
desulfurization, a market that may expand in the future.





Currently,
the oil shale in the Piceance Creek basin is the subject of considerable
interest as a result of increasing oil prices.  This could open
significant new markets for water and for an expanded range of natural sodium
products.  If so, our proximity to the oil shale industry may become
an advantage whereas our remoteness from some of our sodium bicarbonate
customers has been a disadvantage.





Electrolysis
of sodium bicarbonate produces caustic soda and hydrogen.  Hydrogen
could be sold to the oil shale industry to hydrogenate its heavy oils extracted
from oil shale to produce lighter oils.  Caustic soda is a widely used
chemical that can be sold in solution or recrystallized and
packaged.  Caustic soda could be expected to be used locally for water
treatment and air pollution control for the oil shale industry.





Electrolysis
of salt produces caustic soda and chlorine.  Chlorine can be
hydrogenated to produce hydrochloric acid.  While there are salt mines
in Kansas there are no nearby caustic soda production facilities in
Colorado.  These are proven technologies.





The
recovery of sodium chloride, which is interspersed with our sodium bicarbonate
reserves, potentially enables production of ancillary animal feed
supplements.  It would remove the risk of salt contamination in sodium
bicarbonate production and improve operating efficiencies through reduced energy
costs.





Salt
production could also be used for high value water softening treatment products,
however this would require coal fired power generation sourcing coal from the
Meeker area that could also potentially reduce energy costs in sodium
bicarbonate and salt production.





Consequently,
while we do not have any plans to utilize our sodium resources beyond our
current production of sodium bicarbonate, we remain conscious that there is a
variety of alternative products we could produce and we shall pursue these
opportunities when we determine they can be realistically
accomplished.  If an oil shale industry emerges in the Piceance Creek
basin then the development of these opportunities may become more
favorable.





Oil
Shale Lease Application





The
Energy Policy Act of 2005 directed the Task Force on Strategic Unconventional
Fuels to make recommendations and develop an integrated program to coordinate
and accelerate the development of fuels from domestic unconventional fuels
resources.  The Task Force found in February, 2007:





“Global
and domestic demand for crude oil and refined products continues to expand,
driven by rapid economic growth in developing economies and domestic consumer
habits.  At the same time, finding and producing oil reserves to meet
rising demand is increasingly difficult and costly.  Companies are
failing to replace produced reserves, shrinking the world’s conventional oil
reserves base.  Excess production capacity is also shrinking, reducing
the ability to supply disruptions, increasing price volatility, and driving up
prices.  Domestic crude oil production is declining as demand rises,
increasing our dependence on imports of oil and refined
products..........Increasingly, oil and refined products must be imported from nations
unfriendly to the United States or threatened by political instability, reducing
the security and reliability of supplies critical to our economy, our military,
and our national security.” (Page ES-1).





“Oil
shale is extremely well suited for producing premium quality refinery feedstocks
for diesel and jet fuels.  The manufacturing processes can also yield
significant quantities of value-added chemical by-products.......America’s
commercial quality oil shale resources exceed 2 trillion barrels, including
about 1.5 trillion barrels of oil equivalent in high quality shales concentrated
in the Green River Formation in Colorado, Utah and Wyoming.” (Page
I-16).





6
 Table of Contents





In 2006
the BLM issued five oil shale research leases adjacent to our sodium bicarbonate
operations.  Three of these leases were issued to Shell Frontier Oil
& Gas Co, as mentioned above.  NSI made an unsuccessful attempt to
secure a research lease although we were invited to apply for a commercial lease
at an appropriate time.  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.





Also as
discussed above, we intend to apply for an oil shale research or commercial
lease covering a part or all of the areas contained within our sodium
leases.  Commercial leases are not presently available from the
Department of Interior, however, the department is drafting regulations that may
permit multi mineral leasing and may enable us to apply for a research and/or a
commercial lease.  When or if regulations are promulgated NSI, either
on its own or in conjunction with others, intends to apply for a commercial
lease.  At present, the policy of the US Government and the lack of
regulations preclude NSI from applying for an oil shale lease.





The
contribution to world energy usage by oil shale is currently minimal compared to
resources like coal and petroleum and there is no guarantee that oil can be
economically recovered from oil shale.





2.
            OUR SODIUM BICARBONATE
  BUSINESS





NSI
conducts our sodium bicarbonate business.  Since May 2007, our direct
subsidiary, NSHI, owns 46.5% of the outstanding common stock of NSI, the
remaining 53.5% is now owned by the Sentient Entities.





Description
of the WRNM Acquisition





Since
1992, various companies have owned and operated a production facility situated
on sodium leases adjoining our Rock School lease.  In February 2003,
NSI acquired all of the assets and all of the liabilities related to this
business for a total purchase price of $20.6 million. This provided us access to
a very large deposit of nahcolite and exclusive ownership of the desirable Boies
Bed described above.  In addition, we acquired substantial conditional
and unconditional water rights in the area.  IMC and WRNM assigned to
NSI all of their interests in the assets including property, plant, equipment,
water rights, accounts receivable and the four federal sodium leases issued by
the BLM.  NSI assumed WRNM's accounts payable, and employed all of the
22 employees previously working for WRNM.  We have accounted for the
acquisition as a purchase under the provisions of SFAS No.
141.  Accordingly, we recorded the assets acquired and the liabilities
assumed at their fair market values.  The excess purchase price has
been allocated to the assets purchased.  No amount was allocated to
goodwill.





Description
of the Assets





The
principal assets NSI acquired from WRNM are four federal sodium leases (Federal
Sodium Mineral Leases C-0118326, C-37474, C-0118327 and C-0119986) and the
26,500 square foot processing plant located on one of the
leases.  These sodium leases are discussed more fully above at “Our
Sodium Leases”.  NSI also acquired federal rights of way, operating
permits, water rights, ownership of an existing water reservoir, rights with
respect to an additional potential reservoir site, approximately 3,900 tons of
inventory and receivables.  In order to transfer the operations of the
business at the closing, we posted reclamation bonds and other financial
security with federal and state agencies totalling $959,480. NSI also assumed
WRNM's accounts payables and other liabilities of approximately $2,240,000, as
well as equipment and other leases necessary for the business
operations.  The leases and the plant are located about 54 miles
northwest of Rifle, Colorado, and are accessible all year by paved
road.





The
Plant





The
26,500 square foot processing plant located on one of the Wolf Ridge Leases
consists of a single building with crystallizers, boilers, centrifuge, dryers
and other equipment capable of producing various grades of sodium
bicarbonate.  The plant has a name plate capacity of 125,000 tons per
year although the most it has ever produced was nearly 102,000 tons in
FY2007.  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
debottle-necking and then, provided that product demand is sufficient, we intend
to reengineer and expand the production capacity of the plant by a significant
amount.





7
 Table of Contents





There are
also several other buildings associated with the plant - one building of
approximately 50 feet in diameter used for bulk storage with a storage capacity
of 3,000 tons - and three small sheds (lube storage shed, fire pump house shed
and hazardous materials shed).  The plant, the bulk storage facility
and one of the sheds are of metal construction; the other two sheds are of wood
construction, each on concrete pads.





Production Cavities and
Solution Mining





Sodium
bicarbonate is produced from nahcolite recovered by solution mining underground
cavities.  Solution mining requires pumping hot water into the
nahcolite-bearing rock zone at a depth of approximately 1,900
feet.  The nahcolite dissolves and is pumped to the surface in near
saturated solution (known as a pregnant liquor) and brought into the plant for
the sodium bicarbonate to be crystallized, dried, graded and packaged or stored
in bulk.  The barren liquor is reheated and recycled underground to
continue the solution mining process. The dried sodium bicarbonate is then
dried, screened and stored for bulk sales or is bagged at the plant in 50 pound
or 2,000 pound bags.  The plant is capable of producing all grades of
sodium bicarbonate except that used for kidney dialysis.




As
mentioned above, the recovery of sodium products from the sodium leases is
governed by a BLM approved mine plan.  Sodium bicarbonate is presently
being recovered from two cavities denominated as 5H and 6H for which we have
authority to recover up to 638,000 tons of sodium bicarbonate.  The
BLM has also authorised recovery of up to 320,000 tons of sodium bicarbonate
from a new cavity, 7H, which has been drilled and which we expect will be
brought into production within the next month. We are presently completing 7H at
an estimated cost of $1,000,000.  The 5H and 6H cavities are joined
and share one injection well and two recovery wells.  If completed
satisfactorily, 7H will have one injection and one active recovery
well.  At current production rates the plant will then be adequately
supplied with pregnant brine solution for the existing surface
facilities.  When cavity 7H is successfully completed, we intend to
obtain approval to drill another new production cavity in accordance with the
mine plan to further support our plans to expand production capacity and to
ensure a continuous supply of high quality brine to the plant.





Historically,
the plant has shipped up to approximately 55% of its production as bulk product
and the remainder as bagged product.





There is
no rail transportation to the plant.  Product that is to be shipped by
rail must be transported by truck to a rail loading facility in Rifle, Colorado
that is operated by a third party.  Historically, about 25% of the
plant's production has been shipped to its final destination by truck rather
than by rail.





Water
Rights





WRNM also
transferred all of its water rights to NSI, including the production well used
to obtain water for solution mining operations, conditional well water
rights  associated with 13 wells located on the land covered by the
federal sodium leases, absolute surface water rights from the White River
drainage, a water storage reservoir and rights relating to future expansion of
the reservoir, and rights associated with an augmentation plan governing
substitution and exchange of water withdrawn from wells located on the sodium
leases.  These water rights are discussed more fully
below.





Fee
Property





WRNM
transferred to NSI real property owned in fee simple known as the Larsen
Reservoir that is used for the existing water storage reservoir of about 35.8
acres, about 25 miles east of the plant.





Other
Assets





In
addition to the federal sodium leases and the assets associated with the plant,
NSI acquired approximately 3,900 tons of sodium bicarbonate inventory in storage
at the plant site and in a warehouse located in Rifle. NSI leases the warehouse
from an unaffiliated landlord.





8
 Table of Contents





US Filter
assigned equipment to NSI that it had fabricated for AmerAlia in consideration
for settling obligations due to US Filter under a May 1999 Design/Build
Contract.  This equipment includes a centrifuge, six silos, a dryer
system, baghouse equipment, air compressors, pumps and pump parts now located at
or near to the NSI plant. We originally intended to use this equipment in the
plant we had contemplated constructing for production from the Rock School
lease, however, we now plan to use this equipment to expand the existing NSI
plant.  On February 21, 2003 we concluded a settlement agreement with
U.S. Filter with respect to the Design/Build contract that included our issuing
a promissory note for $1,200,000 that we have not repaid and is now past
due.





Marketing
Arrangements





We sell
animal feed grade product through five independent distributors.  The
largest of these is Bunnett & Company of Austin, Texas which represents the
largest part of our animal feed sales. The majority of our industrial and USP
grade products is distributed by an agent, Vitusa Products, Inc. of Berkeley
Heights, New Jersey.  Bunnett & Company and Vitusa Products
account for 33% and 23% of our sales revenues respectively. While there is a
written distribution agreement with Bunnett, there is no written agreement with
Vitusa.  There are no other significant marketing relationships that
constitute more than 10% of our sales.





We
package product in various crystal sizes in 50 lb. bags, 2000 lb. “supersacks”,
or in bulk and transport to our customers by truck or rail.   We
are capable of producing more than 100,000 tons per year.  We sell
most of our products throughout the United States, Canada and
Mexico.  Our principal competitors are Church & Dwight,
manufacturers of the Arm & Hammer brand; FMC Corporation and Solvay
Chemicals.  We compete with them on the basis of service and
price.





Our
products have many uses and applications.  They include sales to the
animal feed, industrial, food and pharmaceutical grade
markets.  Sodium bicarbonate is used in baking products, personal care
products including toothpaste, antacid remedies; household products including
deodorizers, cleaning products, detergents, carpet cleaners, bath salts and cat
litter; and in industrial situations and uses such as leather tanning, fire
extinguishers, blast media and waste water treatment.





The Sodium Bicarbonate
Market





The
market for sodium bicarbonate in North America is about 640,000 tons per year
and grows at the rate of 2 to 3% per year.  There are five producers
with Church & Dwight being the largest with over 60% of capacity and market
share.  NSI is the second largest producer with approximately 15% of
capacity.  NSI is the only producer of sodium bicarbonate from
nahcolite, the naturally occurring form of sodium bicarbonate.  All
other production of sodium bicarbonate utilizes trona, a mixed form of sodium
bicarbonate and sodium carbonate, from Green River, Wyoming.  We
believe that NSI is the lowest cash cost producer.





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





9
 Table of Contents





The
market use is dominated by the food industry (baking soda) and animal nutrition
(rumen buffer), accounting for a majority of the total market.  The
remaining market is split between a variety of uses from pharmaceuticals,
personal care (toothpaste), deodorizers, cleaning products, chemical, blasting
media, etc.  Presently, NSI’s share of the animal feed and food
segments is in line with its share of industry production capacity, however, it
is significantly under represented in the specialty segments.





Competitive
Advantage





Traditionally,
sodium bicarbonate is produced by carbonating sodium carbonate, commonly called
soda ash, with carbon dioxide.  The sodium carbonate can be sourced
from natural resources by processing minerals such as the mixed carbonate called
trona that is mined at Green River in Wyoming.   The alternative
method is to produce sodium carbonate synthetically from sodium chloride in an
industrial plant.   We believe that both these production methods
are more expensive than the solution mining and simple re-crystallisation of
sodium bicarbonate from naturally occurring nahcolite we employ.





Sales
and Revenue Performance





Fiscal
year 2004 was the first complete fiscal year of our ownership of the
plant.  Our annual sales in tonnages and gross revenues are shown in
the following tables:


Fiscal
            
            Sales
      (tons)
            
            
            %
      ChangeYear
            
            
            
            
            on
      prior FY2004
            
            
            84,1032005
            
            
            85,038
            
            
            
            +
      1.12006
            
            
            88,910
            
            
            
            +
      4.62007
            
            
            101,970
            
            
            
            +14.7





Calendar
            
            Sales
      (tons)
            
            
            %
      ChangeYear
            
            
            
            
            on
      prior CY2004
            
            
            79,3132005
            
            
            87,746
            
            
            
            +10.62006
            
            
            94,858
            
            
            
            + 8.12007
            
            
            102,702
            
            
            
            + 8.3





Fiscal
            
            Gross
      Revenues
            
            
            %
      ChangeYear
            
            ($)
            
            
            on
      prior FY2004
            
            
            12,609,0412005
            
            
            14,141,500
            
            
            
            +
      11.12006
            
            
            15,293,688
            
            
            
            + 8.12007
            
            
            16,989,579
            
            
            
            +
      11.1





10
 Table of Contents





This
performance is illustrated on a quarterly basis in the following
graph.









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,
as well as one water right decreed for diversion out of the Yampa
River.  These streams flow into the headwaters of the White River
which flows into the Colorado River.  Yellow Creek flows through our
property; Piceance Creek, Yampa River and the White River are
nearby.  These rights incorporate direct pumping rights, direct flow
water rights and pumping rights to the White River. We also have a reservoir
right associated with the White River pumping rights called the Wolf Ridge
Reservoir and we own the Larson Reservoir at the headwaters of Piceance
Creek.





The
Colorado River Basin covers 244,000 square miles and provides water for 30
million people.   The river has an average flow of around 14
million acre feet per year which occasionally increases to 18 million in good
years and decreases to about 12 million in bad years.





On the
basis of the Colorado River Compact of 1922, the Colorado River Basin is divided
into the Upper Colorado River Basin and Lower Colorado River Basin at Lee’s
Ferry (just below the confluence of the Paria River and the Colorado River near
the Utah-Arizona boundary).  The upper basin and the lower basin were
each apportioned a consumptive use of 7.5 million acre feet of water annually,
based on an assumption of 15 million acre feet of totally available water for
the Colorado River.   The assumption was demonstrated to be an
overestimate and reduced to 12 million acre feet in a hydrologic study by the
Bureau of Reclamation (CWCB 2004).  In the Upper Colorado River Basin
Compact of 1948, the water of the Upper Colorado River Basin was further
allocated among the states of Arizona, Colorado, New Mexico, Utah, and Wyoming.
Arizona has a fixed allocation of 50,000 acre feet annually.  The
remainder is shared by Colorado (51.75%), New Mexico (11.25%), Utah (23%), and
Wyoming (14%).





11
 Table of Contents





By
treaty, Mexico must get 1.5 million acre feet annually.  California
has a right to a minimum of 4.4 million acre feet while the upper basin where
NSI is located has an accumulated withdrawal allotment of around 3.6 million
acre feet.   The Central Arizona Project, a 335 mile canal and
the largest water transfer system ever built, has the capacity to withdraw more
than 2 million acre feet. State by State allotments are shown in the following
table:





Water
      Allocation from The Colorado River SystemState
            Allocation
              (Acre
      Feet per year)California
            4,400,000Colorado
            3,881,250Arizona
            2,800,000Utah
            1,725,000Mexico
            1,500,000Wyoming
            1,050,000New
      Mexico
            845,750Nevada
            300,00016,502,000





The
United States requires that removed groundwater be augmented (i.e. replaced)
from surface water sources.  Thus, new groundwater pumping rights
cannot be used for any length of time without an approved plan to augment, over
time, the water removed from the groundwater wells.





Colorado
operates under the “Prior Appropriation Doctrine” with respect to water
rights.  The Prior Appropriation Doctrine essentially provides that
any person or entity that diverts water and applies the water to beneficial use
before another person or entity has the first and prior right to divert water
under the water right.  The doctrine is also commonly known as the
“First in Time – First in Right”.  To the extent that a water right
was appropriated prior to another water right, the Prior Appropriation Doctrine
provides that a senior water right is entitled to be fully satisfied before the
junior water right is allowed to take any water.  The Colorado General
Assembly requires the claimants of a water right to create documentary evidence
by obtaining a decree from a court confirming the existance of the water
right.





NSI’s
water rights were all 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”) while our
total water rights exceed more than 100,000 acre feet per year as shown below at
“Identification of water rights”.





There are
other factors independent of the Decree that enhance the value of our water
rights.  First, no other plan for augmentation has been approved by
the Water Court within the Piceance Creek basin thereby providing us a
significant competitive advantage in the water supply available to our
activities.  There is also a value associated with having the
augmentation plan approved in our Decree completed.  Litigation is
always an uncertain venture, and any new augmentation plan application that is
filed will be scrutinized by all the other water right owners in the Piceance
Creek and Yellow Creek basins, including the major oil companies that have a
presence in these basins.  Potential users of our water rights may
find that constructing a pipeline for delivery of water may be more reliable and
cheaper than obtaining a judicially approved plan for
augmentation.  As more mining and industrial operations develop in the
Piceance Creek and Yellow Creek area, there may be more interest in purchasing
or leasing an interest in our water rights.





13
 Table of Contents





As we
discussed in Item 1(a) “Business Development”, our water rights can provide
water far in excess of the current or future needs of the sodium bicarbonate
operations. We believe that these water rights can generate a future revenue
stream and have increasing value, especially as any prospective development of
the oil shale resources of the Piceance Creek Basin may require very large
volumes of water.  It is our objective to develop and utilize the
water rights we own and we are pursuing various ways in which we can generate
revenue from these assets.





Agreement
with Shell Frontier Oil & Gas, Inc.





NSI
entered into a contract on January 29, 2007 with Shell Frontier Oil & Gas,
Inc., effective January 1, 2007, to sell up to 120 acre feet of water per year
at a price equal to $8,146 per acre foot.  Shell has been awarded
three 160 acre oil shale research and development leases by the Bureau of Land
Management over land adjoining our sodium leases.  If Shell purchases
any water, it will remove the water using water transport trucks or by
constructing a pipeline at its own expense.





Natural
Soda will provide water to Shell from one of its existing water
wells.  The water will be recovered from the geologic formation
commonly known as the “A Groove” and the quality of the water shall be “as is”
upon withdrawal from the geologic formation without any treatment by
NSI.  The initial term of the agreement is five years and renewable
thereafter with the purchase price adjusted according to a formula based on
movement in the consumer price index.  A condition of the agreement is
that we may sell water to other users provided that such delivery is subordinate
to the delivery of water to Shell.





The
agreement will be extended automatically for successive periods of five years
although Shell may elect to terminate the agreement by providing written notice
prior to the end of the initial term or each subsequent renewal date. Similarly,
NSI can terminate the agreement by providing written notice on the same
basis.  In addition, the agreement terminates if NSI ceases to have an
interest in the sodium leases.





Our
initial sales under this agreement have not been significant and we intend to
devote more attention to generating more sales from this resource.





Appraisals





AmerAlia
has 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 highest value component of this appraisal relates to the
Wolf Ridge Reservoir and Pipeline Water rights.  These rights produce
a large quantity of water that may be used for commercial
purposes.  They could be separately developed and are not required for
mining purposes.  The market value of the Wolf Ridge Rights is a
function of the amount of fully consumable water available under these water
rights.  We have been advised that since this water can be used for
industrial purposes, their value may be in the order of $3,000 to $4,500 per
acre foot of fully consumable water.





The Wolf
Ridge Reservoir and Pipeline Water right allows us to construct a reservoir and
pipeline for storage of 7,379.70 acre feet of water, fed by the pipeline at the
rate of 100 CFS, equivalent to 44,800 gallons per minute.  The
appraisers found that the gross value of these rights is potentially in the
approximate range of $22 million to $33 million and that deducting the
anticipated construction costs results in a valuation range of $7.7 million to
$8.2 million.





However,
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(cu
      ft/sec)
            (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.





15
 Table of Contents





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
c.f.s.  (44,800 gallons per minute).  This is equivalent to
72,396 acre feet per year from the White River.





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 de-silting and extending it to provide
greater storage capacity.





Future Uses and Development
of Water Rights





We are
conscious of the increased public interest in water rights generally, their
scarcity and value.  It is our objective to develop and utilize the
water rights we own.  We are pursuing various ways in which we can
generate revenue from these assets.








4.
            OURFINANCING
ARRANGEMENTS





Description
of the Short-Term Financing





At the
time the asset purchase agreement with IMC was due for completion, AmerAlia and
the Sentient Entities had not yet finalized their own agreements on their final
structure and commercial arrangements.  Therefore, as an interim
measure, AmerAlia and the Sentient Entities entered into a "Closing Agreement"
which provided for temporary funding until replaced by the long term funding
structure when the final structure and commercial arrangements were
resolved.





Consequently,
the Sentient Entities loaned $24,000,000 to NSHI.  NSHI used these
funds to pay the purchase price of approximately $20.6 million to WRNM, pay
deposits to certain suppliers, pay a portion of the fee to US Filter for
termination of the May 1999 Design/Build Contract, pay for transaction costs and
provide working capital.





The
Sentient Entities loaned the funds to NSHI on a short-term basis and took a
security interest in all the outstanding shares of NSI capital
stock.  The Sentient Entities and NSHI completed their agreements on
March 19, 2004 for the financial closing and long term financing for the
acquisition as discussed below.





16
 Table of Contents





Long
Term Financing Agreements





On March
19, 2004 NSHI and the Sentient Entities completed their arrangements known as
the financial closing.  The principal agreement is the Debenture
Purchase Agreement which provided for the repayment of the short term financing
and raising additional funding.  A Securityholder Agreement between
AmerAlia, NSHI, NSI and the Sentient Entities defines their mutual expectations
and conduct with respect to the restrictions on transfer of the debentures and
other securities issued in the transaction; board representations and
appointment of management; budget approvals and minimum voting majority;
limitations on the actions of NSHI and NSI; restrictions on transfer of
securities and/or a trade sale including drag along/tag along rights;
forbearance agreements; agreements for the conversion of Series B2 Debentures
into 49% of NSI common stock and exchange of the NSI common stock for AmerAlia
common stock; exchange of the Series B1 and Series B2 Debentures for AmerAlia
common stock and dispute resolution procedures.  The agreements
included a Management & Cost Reimbursement Agreement whereby AmerAlia would
provide management services for a fee through September 30,
2005.  This agreement was pledged to US Filter as security for moneys
owed to US Filter.  Finally, in consideration for amending the terms
of the original closing agreement completed with the Sentient Entities on
February 20, 2003 to allow a closing, AmerAlia granted the Sentient Entities
warrants to purchase 600,000 shares of its restricted common stock exercisable
at $1.00 per share until March 19, 2009.





Under
these agreements, NSHI raised additional debt of $5,500,000 through the issue of
new debentures, as follows:


·
            AmerAlia
      received $3,500,000 in NSHI Series A Secured 10% Debentures utilizing
      funds it raised from accredited investors (see “AmerAlia Funding”, below);
      and


·
            The Sentient Entities invested an
      additional $2,000,000 in NSHI Secured Series A 10%
      Debentures.





In
addition at the financial closing, NSHI issued to the Sentient Entities in
exchange for its $24 million short term loan:


·
            $3,000,000
      in Secured Series A 10% Debentures;


·
            $11,300,000
      in Secured Subordinated Series B1 Debentures;
  and


·
            $9,700,000
      in Secured Subordinated Series B2 Convertible Debentures (these debentures
      and their accrued interest have since been exchanged for 49% of the equity
      of NSI as described below)





NSHI also
issued to AmerAlia in cancellation of its loan to NSHI of approximately
$17,678,100:


·
            $275,000
      of Secured Series A 10% Debentures;


·
            $12,000,000
      of Unsecured Subordinated Series C
Debentures;


·
            4,949
      shares of Series A Preferred Stock having a liquidation value of
      $4,949,000; and


·
            an
      additional issue of common stock bringing the total common stock held by
      AmerAlia to 51,000 shares, being all the common stock
    issued.





NSHI also
issued $750,000 of Secured Series A 10% Debentures to NSI in exchange for an
obligation by NSI to pay $750,000 to NSHI.  The purpose of the issue
of the $750,000 Series A Debenture to NSI was to enable NSI to provide the
debenture as collateral to the Mars Trust for its bonding support as discussed
in Item 12 “Certain Relationships and Related Party Transactions”.





Subsequently,
in addition to the financing agreements finalised in March 2004, the Sentient
Entities provided a further $1 million working capital loan to NSI in November
2005.  In May 2007, in accordance with the terms of the loan, this
loan and its accrued interest were converted into 4.5% equity interest in
NSI.  Also, as discussed below, in May 2007 the Sentient Entities
converted their B2 debentures into 49% of the equity of NSI thus increasing
their ownership of NSI to 53.5%.  This ownership interest is held by
Sentient I.





17
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In
addition, we agreed to expand the boards of directors of NSHI and of NSI to five
members comprising two representatives from AmerAlia, two representatives from
the Sentient Entities and one member with industry experience mutually
acceptable to all parties.  Currently, the NSI board comprises Mr.
Bill H. Gunn, Chairman and CEO of AmerAlia, and Mr. Peter Cassidy and Mr. Mark
Jackson, representatives of the Sentient Entities, who were appointed in June
2007 after Sentient exercised its rights to convert some of their loans to
equity in NSI as discussed further below.  The NSHI board of directors
comprises Mr. Bill H. Gunn and Mr. Robert van Mourik, CFO and Executive Vice
President of AmerAlia, Inc.





Description of the
Debentures





The
Series A Debentures were issued March 19, 2004 and were due September 30,
2005.  The interest rate is 10% per annum and the first interest
payment was paid as required on June 30, 2004 but since then the unpaid interest
has been accruing.  The Series A Debentures are senior to all other
debentures and are collateralized by all of the assets of NSI and NSHI, as well
as by all of NSHI’s common stock of NSI.  These assets also
collateralize the Series B1 Debentures held and the Series B2 Debentures
previously held by the Sentient Entities.  Sentient Resources USA,
Inc. acted as agent holding the collateral for the benefit of all of the secured
debenture holders until November 2006 when its responsibilities were assigned to
Sentient Asset Management USA, Inc.





The
Series B1 Debentures are (and Series B2 Debentures were) subordinate to the
Series A Debentures but rank equally with the Series C Debentures with respect
to all payments of principal and interest unless the Series B Debenture holders
declare an event of default.  The Series B1, Series B2 and Series C
debentures were issued March 19, 2004, pay interest quarterly and have interest
rates as follows:





Period
            Interest
      Rate per AnnumMarch
      19, 2004 – June 30, 2004
            1.5%July
      1, 2004 – June 30, 2005
            4.5%July
      1, 2005 – June 30, 2006
            7.5%July
      1, 2006 – June 30, 2007
            10.5%July
      1, 2007 – February 19, 2008
            13.5%





The
Series B1 Debentures have a right to earn “Contingent Interest” which means a
payment of additional interest, which when added to the other payments of
principal and interest on the Debentures held by the Sentient Entities, could
provide the Sentient Entities with an internal rate of return of 34.8766% per
annum compounded annually, using February 20, 2003 as the commencement
date.  Contingent Interest shall be paid on the amounts represented by
the Series B1 Debentures to the Sentient Entities on the Maturity Date of the
Series B1 Debentures.  In addition to the quarterly payments of
interest in accordance with the interest rate table above, a mandatory
prepayment of principal of $4,029,760 was required on September 30,
2005.  This mandatory prepayment was not made as
required.





The
Series B2 Debentures had similar terms and conditions as the Series B1
Debentures except that the “Contingent Interest” internal rate of return was
thirty percent (30%) per annum compounded annually, commencing February 20,
2003.  The Sentient Entities also had an option to convert the Series
B2 Debentures and their accrued interest and rights to contingent interest into
49% of the common stock of NSI.  They exercised this right in May 2007
at the same time they exercised their right to convert their $1 million loan and
accrued interest into 4.5% of NSI’s capital.  Hence, the Sentient
Entities now own 53.5% of NSI and NSHI has no further obligation to pay
contingent interest on the Series B2 Debentures.





The
Sentient Entities also have the option to exchange the Series B1 Debentures into
shares of AmerAlia common stock.  This right to exchange the
debentures (and/or the underlying NSI common stock that the Sentient Entities
acquired through their conversion of the Series B2 Debentures) provides for the
issuance of AmerAlia common stock at a price equal to 85% of the market price
for the AmerAlia common stock.  If the Sentient Entities were to
exchange these debentures, they would acquire a significant majority of
AmerAlia’s shares based on today’s stock prices and could exercise control of
AmerAlia.





18
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The
Unsecured Subordinated Series C Debentures held by AmerAlia earn the same
interest rate as the Series B Debentures and have a right to earn contingent
interest up to a total internal rate of return of fifteen per cent (15%) per
annum compounded annually, commencing February 20, 2003.  They rank
equally with the Series B1 and Series B2 Debentures with respect to all payments
of principal and interest unless the Series B Debenture holders declare an event
of default, in which case the Series B1 and Series B2 Debentures will be senior
to and be repaid prior to the Series C Debentures.  The Series C
Debentures have been pledged by AmerAlia to secure guarantees and loans as
discussed below under “Other Loans” and “Continuing Guarantee of Bank of America
Indebtedness”.  As discussed below in Item 12 at “Sentient purchases
from Mars Trust“, Sentient II acquired various AmerAlia debt obligations and
thereby acquired the Mars Trust’s right to this Series C debenture as
collateral.





The
Series B and the Series C Debentures have a provision that if NSHI sells NSI or
substantially all of the assets of NSI in a trade sale, then the proceeds must
be used to repay the Series A Debentures, then the Series B1 Debentures and then
the Series C Debentures.





Current Status of Series A
and B1 Debentures.





The dates
for the due repayment of these debentures have passed and the Sentient Entities
have rights to serve notices of default on us.  They have not done so
and, as discussed below at “Our Recapitalization Plan”, we are exploring with
Sentient plans to recapitalize these obligations.





Drag Along & Tag Along
Rights





The drag
along and tag along rights apply to the Sentient Entities and to AmerAlia if the
Sentient Entities own NSI common stock and the remaining Series B1 Debentures
have been repaid.  They are defined in the Securityholder
Agreement.





Under the
drag along rights, if the Sentient Entities wish to sell all (and not less than
all) of the shares of NSI common stock they own, the Sentient Entities shall
make a written offer to sell the shares to AmerAlia naming a price and the terms
of purchase.  If AmerAlia does not elect irrevocably and in writing to
purchase the shares within 30 days, the Sentient Entities may complete the sale
of the shares to a third party at the same price and on the same terms within 90
days of AmerAlia’s receipt of the written offer.  The Sentient
Entities may further require that AmerAlia or NSHI sell all the shares of NSI
common stock they own to the third party on the same terms.  If the
AmerAlia shareholders are required to approve the sale of the NSI common stock
by AmerAlia and fail to do so, then there is a mechanism whereby the Sentient
Entities can gain a majority of the board and a majority of the common stock of
NSHI.  Thereafter, the Sentient Entities shall have 90 days to
complete the sale of the shares to the third party.  If the Sentient
Entities are unable to complete the sale within that time, the Sentient Entities
will rescind the actions that gave them control.





Alternatively,
under the tag along rights, if AmerAlia wishes to sell the NSI shares of common
stock it owns, AmerAlia shall make a written offer to the Sentient Entities
naming a price and terms.  If the Sentient Entities do not elect
irrevocably and in writing to purchase the shares within 30 days, AmerAlia may
complete the sale of the shares to a third party at the same price and on the
same terms within 90 days of the Sentient Entities receipt of the written offer,
provided that the Sentient Entities may require the purchaser to purchase its
shares at the same price and on the same terms.  If the purchaser will
not buy the shares held by the Sentient Entities, AmerAlia may not sell its
shares unless AmerAlia buys the Sentient Entities shares on the same terms and
conditions.





Management & Cost
Reimbursement Agreement





This
agreement provided for the payment of $700,000 per year commencing October 1,
2003 for two years to AmerAlia for providing management services to NSHI and
NSI.  The agreement also provided for indemnification of NSHI and the
Sentient Entities from certain AmerAlia creditors.  AmerAlia’s rights
to this agreement were pledged as security to U.S. Filter under its settlement
agreement with U.S. Filter completed on February 21, 2003 and discussed in
AmerAlia’s filings on Form 8-K.  This agreement ended on September 30,
2005.





19
 Table of Contents





AmerAlia
Funding





As part
of the financial closing, AmerAlia raised $3,500,000 from a group of accredited
investors through the issue of 10% promissory notes due September 30, 2005 and
also granted four warrants for each $10 of their promissory notes to subscribe
for shares of its restricted common stock at $1.00 per share until March 19,
2009.  The Promissory notes are secured by an equal value of NSHI
Series A Debentures held by AmerAlia.  The warrant agreements are on
the same terms and conditions as the warrants issued to the Sentient
Entities.  A total of 1,400,000 warrants were granted to these
accredited investors.  Consequently, as a result of her participation
in this funding, Mrs. Karen O. Woolard, spouse of Mr. Robert C. Woolard, now an
AmerAlia director, became a five percent shareholder.





As
discussed in Item 12 “Certain Relationships and Related Party Transactions”,
these investors also included James V. Riley, an AmerAlia director, and J.
Jeffrey Geldermann who was elected a director on June 25,
2004.  Subsequently in fiscal year 2005, we raised a further $500,000
through the issue of additional 10% promissory notes and grant of warrants on
the same terms as before to James V. Riley, J. Jeffrey Geldermann and affiliates
of  Robert van Mourik and Bill H Gunn; all directors of the
company.  At the date of this filing, Sentient has not completed
documentation to support the issue of these notes and the issue of an additional
Series A debenture to AmerAlia hence the collateral security to support the new
promissory notes has not been perfected.





Since
September 2005 a penalty rate of interest of 15% applies to the balance of
principal and interest outstanding on all these secured notes at that
date.





Other
Loans





Prior to
the financial closing, AmerAlia was obliged under guaranty and loan agreements
to two accredited investors who had provided loan funds with accrued interest
totalling $2,317,692 at the time of the financial closing.  AmerAlia
met these obligations by issuing 121,295 shares of restricted common stock in
satisfaction of outstanding guarantee fees to each of two accredited investors,
one of them Mrs. Karen O. Woolard; and two promissory notes secured by
$2,078,417 of AmerAlia’s Series C Debentures and 359 shares of its NSHI Series A
Preferred Stock.  One of these promissory notes in an amount of
$853,400, secured by $765,295 of Series C Debenture and 132 shares of Series A
Preferred Stock, has been issued to Mr. Robert C. Woolard now an AmerAlia
director.  Any interest, contingent interest, dividends or principal
repayments received by AmerAlia from the pledged securities must be applied to
meeting the obligations on these notes.  In May 2005, Mr Woolard
assigned his rights to this debenture to the Karen O. Woolard
Trust.





In
addition, AmerAlia had a long term debt due to the Bank of America that was
guaranteed by the Mars Trust.  The terms of this debt and the guaranty
agreement are 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 and Sentient II”, Sentient II then acquired from the
Mars Trust its rights under the guaranty agreement.





In August
2007, Sentient II lent $350,000 to AmerAlia at 6% interest until December 31,
2007 and this maturity date was subsequently extended to July 31,
2008.  The loans and accrued interest are convertible into AmerAlia
common stock at 36 cents per share.





We have
agreed some interim funding arrangements with various Sentient
funds.  In May 2008:





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


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





20
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3.
            Sentient
      I loaned AmerAlia $465,000 for the purpose of contributing capital to NSHI
      which, in turn contributed $465,000 to NSI as its proportionate share of
      $1,000,000 raised by NSI for well field development
      expenditures.





5.
            OURRECAPITALIZATION
PLAN





We
believe we have accomplished many milestones since we acquired the WRNM assets
from IMC in February, 2003 and the subsequent financial closing with the
Sentient Entities in March 2004.  Meanwhile, we have found that our
current financial structure and obligations described above have hindered our
ability to raise new equity or debt.  However, it is the achievement
of these milestones that has enabled us to formulate a plan to recapitalize the
company.  This plan requires the simultaneous agreement of a number of
parties to establish a simplified structure and more conventional financing
arrangements.  In Item 1(a) “Business of the Issuer” we indicated that
we are discussing restructuring options with Sentient and other creditors but
also that advancing these discussions further first requires we become current
in our SEC filings.   We are working to bring these filings
current as soon as possible.  However, we cannot guarantee this
restructuring plan will be successful or even will be accomplished.





EMPLOYEES





AmerAlia’s
day to-day business activities are managed by Mr. Bill H. Gunn, Chairman and
President; and Mr. Robert van Mourik, Executive Vice President and Chief
Financial Officer.    See Item 10 “Executive
Compensation”.  NSI has 39 employees in production, sales &
marketing, financial, environmental compliance and humans resources
roles.





RISK FACTORS





·           NSHI and its operations are highly
leveraged which increases the risk of default and the loss of collateral to our
lenders.





NSHI debt
comprises $16 million due to the Sentient Entities and a further $4.375 million
of senior debt and $12 million of subordinated debt due to
AmerAlia.  All of this debt bears interest at various rates up to 34%
per annum as described above under “Long-Term Financing
Agreements”.  However, if there is a default on any debenture then we
are obliged to repay the Series A and B debentures, including all contingent
interest, before any other debentures are repaid.  The $10,125,000 of
Series A Debentures were due September 30, 2005.  If Sentient were to
declare a default on our failure to repay the debentures, we would lose all of
our interest in all of our assets including the assets we previously held as
well as all of the assets acquired from WRNM.  We have not paid any
interest at all on these debentures since 2004.  We cannot offer any
assurance that NSHI will be able to repay its obligations.





In
addition, we retain approximately $23 million of debt and creditor obligations
of which $4.25 million is due to the investors who subscribed the new funding,
approximately $14 million due to Sentient II which includes obligations
previously due to the Bank of America and the Mars Trust, approximately $4
million due to officers, directors and other accredited investors and the $1.2
million note due to U.S. Filter.  If we default in paying our other
creditors, the Sentient Entities have a right to declare a default on the
debentures and foreclose on our assets.  If the Sentient Entities
declare a default and foreclose on our assets, we will have no operating assets
and our equity will have no value.





·           Our ability to service our debt
obligations will be entirely dependent on payments we receive from the interest
earned from the debentures and dividends on the preferred and common stock, or
else from new debt or equity offerings.





AmerAlia
is obliged to pay all this interest income to the promissory note holders and
other debt providers. Our only other income has been from the fees we received
under the management agreement which expired September 30, 2005.  US
Filter held a security interest in this agreement but we have not paid our
obligation due to them. There can be no assurance that AmerAlia will receive
sufficient cash flow to meet its financial obligations because of the
significant amount of these obligations burdening AmerAlia.  Any
default by AmerAlia in servicing its long term financing obligations will cause
a default under the debentures issued by NSHI and the possible loss of all
collateral for such debentures.





21
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AmerAlia
is also required to repay or else refinance its obligations now held by Sentient
II which were previously due to the Bank of America and due in June 30, 2007.
AmerAlia had pledged its Series C Debentures to the Mars Trust as guarantor of
this loan.  This security is now held by Sentient II.  If we
fail to repay this loan Sentient II can foreclose and take possession of the
Series C-1 Debenture under its guaranty agreement.  This would cause
all debentures to fall into default, in which case the Sentient Entities will
foreclose on our assets.





·           AmerAlia has large accumulated
losses, we expect future losses and we may not achieve or maintain
profitability.





We have
incurred substantial losses and used substantial cash to support our activities
through the development stage, complete our acquisition, refurbish our plant and
sustain our activities to date.  Our net losses were approximately $51
million through June 30, 2006 and we had a deficit of shareholders’ funds of $23
million at that date.  We will continue to lose money unless we
significantly increase our revenues and repay our debt with new
equity.  We cannot predict when, if ever, we will operate
profitably.





·           AmerAlia relies 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.





·           AmerAlia’s pricing of its products
is determined in a competitive environment in which we are not generally able to
lead prices.





Our
industry is dominated by Church & Dwight, a long time manufacturer of the
Arm & Hammer brand of baking soda and related products.  Our major
competitors also include FMC and Solvay, major corporations with considerable
resources, marketing expertise and broader access to customers than we
do.  Consequently, if there is a price war with the major companies
that dominate the industry our margins and profitability may be
threatened.  From time to time, we may need to reduce prices for some
of our products to respond to competitive and customer pressures and to maintain
market share. Consequently, our operating results may suffer.





·
            The loss of any of our
      principal customers could significantly lower our sales and
      profitability.





We
primarily sell our animal feed grade product through customers who act as
distributors.  The largest of these in tonnages and revenues is
Bunnett & Company who account for the majority of our animal feed
sales.  In addition, we sell most of our higher grade products through
Vitusa Products, Inc. of Berkeley Heights, New Jersey.  These two
constituted approximately 56% of our sales through June 30, 2006 and represented
about 54% of our accounts receivable at June 30, 2006.  Consequently,
there is also a concentration of credit risk associated with the continuing
successful performance of these customers.  We have a written
distribution agreement with Bunnett but do not have one with
Vitusa.  The loss of all or part of their business could be injurious
to our sales, margins and profitability.





·           AmerAlia may not be able to continue
to recover sodium bicarbonate economically or at all from the sodium leases and
if so, we cannot service our debt obligations.





This is a
high fixed cost business and if there are underground production problems 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 be unviable.  Our resource of
naturally occurring sodium bicarbonate also includes pockets of sodium
chloride.  The presence of too much sodium chloride in our pregnant
liquor adversely impacts plant productivity and potentially may cause a
reduction in the amount of sodium bicarbonate that might be recovered from a
cavity.





22
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·           AmerAlia 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.





·
            Increasing gas, power and fuel
      costs could erode our profit margins and harm operating
      results.





Energy
costs and transport costs represent a major component of our cost
structure.  It may be difficult to pass on increased costs to our
customers so that our profitability may be adversely impacted.  This
could harm the company’s financial condition and operating results.





·           NSI’s operations are subject to a
significant amount of regulatory scrutiny and regulation from federal and state
authorities.





NSI’s
mining and processing operations operate under permits from several state and
federal authorities, including the Environmental Protection Agency, the Bureau
of Land Management, and the Colorado Division of Minerals and Geology.Failure to comply with
government conditions and permitting requirements may cause these permits to be
revoked with material and adverse effects on NSI, NSHI and
AmerAlia.  If we lose our permits we may have to cease operations
while we seek their renewal.  If we cannot do this, we will be out of
business.





·           The long-term financing agreements
allow the conversion and exchange of the Sentient debentures for AmerAlia stock
that may result in the issuance of a significant number of shares which would
dilute the ownership of the current AmerAlia shareholders.





One exit
strategy for the Sentient Entities is to exchange their interests in the Series
B1 debentures and NSI shares for AmerAlia common stock at a value equal to 85%
of market prices.  This could result in the issuance of more than 185
million shares of AmerAlia common stock at their current prices.  This
could substantially increase the number of shares of AmerAlia common stock
currently outstanding and could result in a substantial dilution in the
interests of the existing AmerAlia shareholders.  If issued, the
Sentient Entities would control AmerAlia.  Furthermore, the existence
of the large number of shares potentially issuable may make it more difficult
for AmerAlia to raise the financing that it may require in the
future.





·           Under the Securityholder Agreement,
AmerAlia has granted Sentient the right to force the sale of its economic
interests in NSHI and its business operations on the same terms and conditions
agreed to by Sentient for its interests.





If this
occurs, neither the board of directors nor the AmerAlia shareholders will have
any opportunity to approve the transaction.  The Sentient Entities may
approve a transaction which is beneficial to them but not to the remaining
stockholders.





23
 Table of Contents





ITEM 2.
            DESCRIPTION OF
      PROPERTIES





AmerAlia
through its subsidiaries is a lessee of United States Sodium Mineral Leases
C-0118326, C-37474, C-0118327 and C-0119986 covering 8,223 acres and Sodium
Lease No. C-0119985 covering 1,320 acres in Rio Blanco County, Colorado,
USA.  These are described more fully in Item 1. - "Business",
above.





The plant
consists of a single building with boilers, centrifuge, and other equipment
capable of producing various grades of sodium bicarbonate at approximately
100,000 tons per year.  There are also several other buildings
associated with the plant which are used for bulk storage (one building of
approximately 50 feet in diameter with a storage capacity of 3,000 tons) and
three small sheds (lube storage shed, fire pump house shed, and hazardous
materials shed).  The plant, the bulk storage facility and one of the
sheds are of metal construction and the other two sheds are of wood
construction, each on concrete pads.  In management’s opinion, the
plant facilities are adequately insured.





NSI has
real property owned in fee simple that is used for the existing water storage
reservoir of about 35.8 acres, about 25 miles east of the plant.  NSI
also leases a 21,517 square-foot warehouse in Rifle, Colorado, from an
unaffiliated landlord.








ITEM 3.
            LEGAL
      PROCEEDINGS





In June
2002, the El Paso County, Colorado, District Court entered judgment against
AmerAlia in AmerAlia, Inc. v.
Marvin H. Hudson (case no. 99-CV-3050) in the amount of
$374,100.  This case developed from a dispute between AmerAlia and Mr.
Hudson regarding the existence of an employment contract and certain of Mr.
Hudson’s actions taken while an officer of AmerAlia.  In August, 2007
we completed an agreement with Mr. Hudson to settle this judgement for a cash
payment of $300,000.





In
September 2005, Mr. Joseph Pecherski filed a suite against AmerAlia and Natural
Soda in the District Court, Arapahoe County, for alleged unpaid compensation
(Case number
2005CV3361).  We reached an agreement with Mr. Pecherski to
settle this matter in December 2006 and have now fulfilled our remaining
obligations under that agreement.








ITEM4.
            SUBMISSION OF MATTERS
      TO A VOTE OF SECURITY
HOLDERS





None.





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 Table of Contents





PART
II





ITEM 5.
            MARKET FOR COMPANY'S
      COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS




(a)
            Market
      Information.





From
August 1987 until August 2002, our Common Stock was publicly traded under the
symbol “AALA” on the Nasdaq SmallCap Market, operated by the National
Association of Securities Dealers, Inc.   Since August 20, 2002,
AmerAlia was listed on the OTC Bulletin Board until its shares were transferred
to the over the counter market in late 2005.  The highest, lowest and
average closing prices for AmerAlia's common stock as provided by an online
service for the past two fiscal years up to June 30, 2006 are pro­vided in
the table below.  These prices do not include allowance for retail
mark-up or mark-down, commissions or other transaction costs.





Highest
      Price
            
            
            Lowest
      Price
            
            
            Average
      ReportedFor
      the Quarter Ended
            
            For
      the Quarter ($)
            
            
            For
      the Quarter ($)
            
            
            Last
      Sale Price ($)September
      30, 2004
            
            
            0.85
            
            
            
            0.46
            
            
            
            0.71December
      31, 2004
            
            
            0.95
            
            
            
            0.95
            
            
            
            0.87March
      31, 2005
            
            
            0.95
            
            
            
            0.95
            
            
            
            0.85June
      30, 2005
            
            
            0.65
            
            
            
            0.65
            
            
            
            0.52September
      30, 2005
            
            
            1.05
            
            
            
            0.38
            
            
            
            0.68December
      31, 2005
            
            
            0.98
            
            
            
            0.25
            
            
            
            0.67March
      31, 2006
            
            
            1.02
            
            
            
            0.20
            
            
            
            0.61June
      30, 2006
            
            
            0.90
            
            
            
            0.30
            
            
            
            0.49





(b)
            Holders.





The
number of record holders of our Common Stock on June 30, 2006 was approximately
414.





(c)
            Dividends.





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





(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, 2006.





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
            
            
            1,065,000
            
            
            $
            0.63
            
            
            
            460,000Equity
      compensation plans not approved by security holders (2)
            
            
            200,000
            
            
            $
            3.00
            
            
            
            -0-Total
            
            
            1,265,000
            
            
            $
            1.01
            
            
            
            460,000





25
 Table of Contents





(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.





The
following table and accompanying notes sets forth information regarding sales of
unregistered securities within the past year as required by Item 701 of
Regulation S-B.  In each case, the issuance refers to AmerAlia’s
common stock.





Date
      of Issue
            
            No.
      of shares
            
            Recipients
            
            Consideration
            
            Reliance
      on exemptions
            
            Conversion
      terms
            
            Notes(a)
            
            (a)
            
            (b)
            
            (c)
            
            (d)
            
            (e)Sept.
      2004
            
            26,470
            
            Retired
      director of AmerAlia
            
            Cashless
      option exercise
            
            See
      Note 1
            
            None
            
            2Oct.
      2004
            
            15,833
            
            Director
      of AmerAlia
            
            Cashless
      option exercise
            
            See
      Note 1
            
            None
            
            2June
      2005
            
            75,000
            
            Directors
      of AmerAlia
            
            Exercise
      of options for accrued compensation owed
            
            See
      Note 1
            
            None
            
            3Sept.
      2005
            
            8,333
            
            An
      accredited investor
            
            Creditor
      settlement
            
            See
      Note 1
            
            None
            
            4Dec.
      2005
            
            150,000
            
            Directors
      of AmerAlia
            
            $76,375
      cash
            
            See
      Note 1
            
            None60,000
            
            An
      accredited investor
            
            Creditor
      settlement
            
            See
      Note 1
            
            None
            
            4June
      2006
            
            50,000
            
            Directors
      of AmerAlia
            
            Exercise
      of options for accrued compensation owed
            
            See
      Note 1
            
            None
            
            3





Notes:


1.
            No
      underwriters were involved in the transactions.  The issuance of
      the shares was accomplished pursuant to the exemptions from registration
      contained in Sections 4(2) and 4(6) of the Securities Act of
      1933.


2.
            Under
      the cashless exercise provisions of the shareholder approved Stock Option
      Plan options can be surrendered as consideration for the exercise of
      options.


3.
            Directors
      accepted a reduction in the amount of unpaid compensation owed to them as
      consideration for the exercise of
options.


4.
            We
      issued shares of restricted stock in part settlement of outstanding
      claims.





In
addition to these issues of our shares of common stock, we have issued various
promissory notes as discussed above under at Item 1(b) at “Our Financing
Arrangements”.





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





(b)
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations





Our
business is to be a profitable natural products company through our ownership of
our natural sodium leases and water rights.  We are currently involved
in the production of various grades of sodium bicarbonate recovered from our
resource of nahcolite using solution mining.  Nahcolite is a naturally
occurring form of sodium bicarbonate.  We have directed our efforts to
improve our business performance toward our twin objectives of being a low cost
producer of all grades of sodium bicarbonate and increasing our market
penetration of the North American market.  We believe that NSI is now
the second largest supplier of sodium bicarbonate in North
America.  We consider that we have demonstrated progress toward these
objectives but 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.





26
 Table of Contents





It is now
five years since we acquired the majority of our assets from IMC and four years
since we concluded our financing arrangements with the Sentient Entities, our
private equity financial partners.  In that time we have accomplished
much to develop our business.  Fiscal year 2004 was the first complete
fiscal year of our ownership.  Our annual sales in tonnages and gross
revenues have grown as shown in the following tables:





Fiscal
            
            Sales
      (tons)
            
            
            %
      ChangeYear
            
            
            
            
            on
      prior FY2004
            
            
            84,1032005
            
            
            85,038
            
            
            
            +
      1.12006
            
            
            88,910
            
            
            
            +
      4.62007
            
            
            101,970
            
            
            
            +14.7





Calendar
            
            Sales
      (tons)
            
            
            %
      ChangeYear
            
            
            
            
            on
      prior CY2004
            
            
            79,3132005
            
            
            87,746
            
            
            
            +10.62006
            
            
            94,858
            
            
            
            + 8.12007
            
            
            102,702
            
            
            
            + 8.3





Fiscal
            
            Gross
      Revenues
            
            
            %
      ChangeYear
            
            ($)
            
            
            on
      prior FY2004
            
            
            12,609,0412005
            
            
            14,141,500
            
            
            
            +
      11.12006
            
            
            15,293,688
            
            
            
            + 8.12007
            
            
            16,989,579
            
            
            
            +
      11.1








This
performance is illustrated on a quarterly basis in the following
graph.











27
 Table of Contents





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 adequate
brine and the limitations of the market, never produced at or near nameplate
capacity.  Its highest production was nearly 103,000 tons in
CY2007.  Since the plant has never produced at nameplate capacity we
are unable to determine the actual current capacity of the mine and plant
although we believe that its capacity under the current configuration of the
facilities would exceed 103,000 tons per year.





As
discussed elsewhere in this report, our objective is to further increase our
production capacity to support our growing sales.  The recovery of
sodium products from our leases is governed by a BLM approved mine plan and we
have authority to recover up to 638,000 tons of sodium bicarbonate from our
existing cavities.  The BLM has also authorised recovery of up to
320,000 tons of sodium bicarbonate from a new cavity which has been drilled but
not yet brought into production. We are presently undertaking a program to
complete this cavity at an estimated cost of $1,000,000.  We then
intend to obtain approval to drill another new production cavity in accordance
with the mine plan to further support our plans to expand production capacity
and to ensure a continuous supply of high quality brine to the
plant.





In
addition to the development of our sodium bicarbonate business, we have
identified value in our extensive water rights and while we have completed an
agreement to sell water to our neighbor, Shell, for its oil shale investigation
facility, our initial sales have not been significant and we intend to devote
more attention to generating more sales from this resource.  Our
leases are situated in an area that is receiving extensive interest and
publicity for the prospective development of its oil shale
resources.  If an oil shale industry develops it will likely require
access to large quantities of water which we are capable of
supplying.  However, we have rights to far greater volumes of water
than we anticipate will be required for this purpose and we are investigating
how we can exploit this significant asset.  We also plan to seek a
research lease and ultimately a commercial lease to exploit the oil shale
resource, most likely in partnership with suitably qualified
organizations.





During
2007 we determined that the values of various assets and liabilities were not
correctly recorded as at June 30, 2005.  Consequently, we have revised
the balances of inventories, property plant & equipment, well cavities,
obligations for accrued expenses, obligations due to related parties and asset
retirement obligations as at June 30, 2005 for errors recorded in our accounts
for the years ended June 30, 2003 through 2005.  The net effect of
these adjustments was to increase our operating loss in FY2005 by $34,098 and
our retained losses by a further $40,193 which together represent $0.004 per
share.  A comprehensive breakdown of these adjustments is shown in
Note 19 to the financial statements that accompany this report.





Gross
revenues of $15,293,688 in FY2006 were 8.1% higher than the $14,141,500 earned
in FY2005 due mainly to higher prices and cost recoveries.  Cost of
goods sold of $14,611,153 also increased by 8.3% over FY2005 $13,487,793 due to
higher production and distribution costs.  The resulting gross profit
of $682,535 represented a 4.4% increase on the previous year’s gross profit of
$653,707.  General and administrative expenses were 10.8% lower than
the previous year; $1,093,523 compared with $1,226,373.  Depreciation,
amortization and accretion expenses were 4.2% higher at $1,158,700 compared with
$1,112,332 as a result of higher levels of production.  Consequently,
the loss from operations was reduced to $1,569,688 from $1,684,998, a reduction
of 6.8%.  Interest expense increased 57.0% to $4,263,677 from
$2,716,179 although the amortisation of financing costs was reduced to $300,185
from $1,845,702, a reduction of 83.7%.  These financing costs
represent the amortisation of outlays previously capitalised and the remaining
balance of these capitalised deferred financing costs was amortised in the
September 2005 quarter.  Interest costs increased in FY2006 as the
interest payable under the Sentient debentures increases in accordance with the
graduated terms of those debentures.  During the year we reviewed the
carrying value of our engineering drawings and some of our assets previously
acquired for the development of facilities in the Rock School lease and recorded
an impairment charge on these assets totalling $1,843,281 compared with $458,087
in the previous year.  The resulting net loss was $7,822,468 compared
with $6,684,130 in the previous year, an increase of 17.0%.





28
 Table of Contents





Liquidity
and Capital Resources





Our
financing arrangements when we bought this business were structured as debt with
very onerous interest obligations.  Our management’s attention was
necessarily focused on developing the new business activity and creating
value.  The fruits of our efforts are now becoming apparent in the
increasing profitability of our operations and in the additional recognition of
our asset values.





While NSI
established a good credit reputation over time with its suppliers, NSHI and
AmerAlia have stayed in business through the support of our lenders, suppliers,
directors and executive officers who have both advanced further funds to the
company and have not received compensation and reimbursement of expenses
properly due to them.  The Sentient Entities have allowed us to accrue
unpaid interest on their debentures and, similarly, AmerAlia has not received
interest on its debentures.  Consequently, AmerAlia has been unable to
pay the interest required on its outstanding promissory notes.  These
straitened circumstances led to our inability to pay our auditors and attorneys
in a timely manner and our consequent failure to file our reports to the SEC on
time.





The
Sentient Entities supported our capital expenditure programmes in NSI by
allowing NSI to borrow funds in 2005 from the Wells Fargo Bank using NSI’s
accounts receivable as security and by making available a $1,000,000 working
capital loan in November 2006.  Meanwhile, in May 2007 the Sentient
Entities converted their working capital loans and Series B2 debentures into
ownership of 53.5% of the equity of NSI.  Also, in August 2007 another
Sentient affiliate (“Sentient II”) acquired from the Mars Trust all of its
AmerAlia shares and the debt securities it held, together with its guaranty
rights resulting from the Trust meeting our obligations to the Bank of
America.   Sentient II also loaned us $350,000 at 6% interest
until July 31, 2008 for working capital purposes.  In addition, we
have agreed some interim arrangements with various Sentient funds:





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


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


3.
            In
      May 2008 Sentient I loaned AmerAlia $465,000 for the purpose of
      contributing capital to NSHI which, in turn contributed $465,000 to NSI as
      its proportionate share of $1,000,000 raised by NSI for well field
      development expenditures.





All these
activities are discussed more comprehensively in this report at Item 1 –
“Business of the Issuer” and at Item 12 – “Certain Relationships and Related
Party Transactions”.





As we
have indicated in our recent filings, we have been holding discussions with
Sentient and various creditors with a view to recapitalizing the
company.  These discussions have not yet resulted in any restructuring
agreements for the company and its subsidiaries and they may not result in any
agreements but we have reached a point where those discussions cannot proceed
any further unless we bring our SEC reports and audited financial statements up
to date.  We are currently engaged in this task and anticipate that we
shall soon file a report on Form 10-KSB for the fiscal year ended June 30, 2007
as well as any necessary subsequent reports on Form 10-QSB.





During
the fiscal year ended June 30, 2006 we sourced funds by raising $1,140,937
through the issue of promissory notes to Sentient and vendors; $646,925 through
the issue of promissory notes to related parties; through increasing our
reliance on creditors and increased accruals ($191,842); the accrual of interest
payable ($2,937,773); the accrual of compensation, expenses and advances from
related parties (totalling $669,865); reducing our restricted cash by $288,400
and releasing $827,645 from our accounts receivable.  We also raised
$76,375 in cash through some of our directors exercising their
options.  We utilized our funds in further investment in property and
equipment ($365,309), cavity and well development ($2,547,602), increases in
prepaid expenses and inventory ($193,826), payments on capital leases and loans
($85,946) and funding our operating loss.





29
 Table of Contents





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 niche opportunities for our products though
being focused on our customers and their needs.





(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 NSI enters into forward purchases of gas in order to secure gas
supplies at fixed prices for up to 75% of its 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.





ITEM8A.
            CONTROLS AND
      PROCEDURES





As
required by Rule 13a-15 under the Securities Exchange Act of 1934 and Item 307
of Regulation S-B, within the 90 days prior to the filing date of this report,
AmerAlia carried out an evaluation of the effectiveness of the design and
operation of AmerAlia’s disclosure controls and procedures.  This
evaluation was carried out under the supervision and with the participation of
AmerAlia’s Chief Executive Officer and its Chief Financial Officer, who
concluded that AmerAlia’s disclosure controls and procedures are
effective.  There have been no significant changes in AmerAlia’s
internal controls or in other factors, which could significantly affect internal
controls subsequent to the date AmerAlia carried out its
evaluation.





Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in AmerAlia’s 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 AmerAlia’s reports filed under the
Exchange Act is accumulated and communicated to management, including its Chief
Executive Officer and to the Chief Financial Officer as appropriate, to
allow timely decisions regarding required disclosure.





ITEM 8B.
            OTHER
      INFORMATION





None.





30
 Table of Contents





PART
III





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





(a)
            Identification
      of Directors and Executive
Officers.





The
following table sets forth the names and ages of all the Directors of AmerAlia,
positions held by each such person, and when such person was first elected or
appointed.  The directors each serve until their successors are duly
elected and qualified; officers are appointed by, and serve at the pleasure of,
the Board of Directors.





Name
      & Age
            
            Position
            
            First
      ElectedOr
      AppointedBill
      H. Gunn (66)
            
            Chairman
      of the Board,
            
            02/84President
      & CEO of AmerAlia, Inc.
            
            09/90Robert
      C.J. van Mourik (55)
            
            Director, Executive
      Vice President & Chief Financial Officer, Secretary
      & Treasurer of AmerAlia, Inc.
            
            01/89Neil
      E. Summerson (60)
            
            Director
      (1)
            
            09/90Geoffrey
      C. Murphy (66)
            
            Director
      (1,2)
            
            06/99James
      V. Riley (71)
            
            Director
      (1,2)
            
            10/01Robert
      C. Woolard (72)
            
            Director
      (2)
            
            05/04J.
      Jeffrey Geldermann (58)
            
            Director
      (2)
            
            06/04


(1)
                Members
      of the Audit Committee.
 (2)
                  Members
      of the Compensation Committee


There are
no family relationships among the officers or directors.  No
arrangement exists between any of the above officers and directors pursuant to
which any one of those persons was elected to such office or
position.





Directors
hold office until the next annual meeting of share­holders and a successor
is elected and qualified, or until their resignation.  Executive
officers are elected at annual meetings of the Board of
Directors.  Each such officer holds office for one year or until a
successor has been duly elected and qualified or until death, resignation or
removal.





A brief
summary of the business experience of each person who is currently an officer or
director of AmerAlia, and their service with us is as follows:





BILL H.
GUNN





Mr. Gunn
graduated in Commerce from the University of Queensland, Australia in 1963,
achieving his Accounting Certificate from the University of Queensland in the
same year.  Subsequently, he was admitted as a member of the
Australian Society of Certified Practising Accountants and has successfully
completed and passed the examinations for admittance as a Certified Public
Accountant (CPA) in the USA.





Mr. Gunn
has been a self-employed investor, CPA, and a director of several Australian
Stock Exchange listed public companies, as well as a number of majority owned
private corporations.   Since February 1984 he has been Chairman,
CEO and President of AmerAlia.





31
 Table of Contents





ROBERT VAN
MOURIK





Mr. van
Mourik has served as Executive Vice President, Chief Financial Officer,
Treasurer and Secretary of AmerAlia since 1989 and was elected a director in
September 1990.  He graduated in 1974 with a Bachelor of Applied
Science (Applied Chemistry) from the Victoria Institute of Colleges, Australia
and in 1981 with a Master’s Degree in Business Administration from the
University of Newcastle, Australia.  He is a Fellow of the Australian
Institute of Company Directors.





NEIL E.
SUMMERSON





Until
July 1997, Mr. Summerson is a director of several Australian listed and unlisted
public companies and closely held, private companies.  He is a
director of Bank of Queensland Ltd, Moore Stephens (Qld) Limited, Pioneer
Permanent Building Society Limited, Home Building Society Limited, PQ Lifestyles
Limited and Australian Made Campaign Limited; Australian public
companies.  He was the Senior Partner, and for five years prior was
Managing Partner, in the international accounting firm of Ernst & Young, at
its offices in Brisbane, Australia.  Mr. Summerson received his
Bachelor of Commerce degree from the University of Queensland in
1968.  He is a Fellow of the Institute of Chartered
Accountants





GEOFFREY C.
MURPHY





From September 1, 2001 to
September 30, 2004Mr. Murphywas employed as the Senior
Vice President of Citrico Holdings, Inc., a company engaged in the manufacture
of lemon-based products.  Previously, he was, for more than five
years, a principal of Coloney Von Soosten + Associates Inc., a consulting firm
located inKenilworth,Illinois.He is no longer active in any
business endeavors.Mr. Murphy graduated with a
Bachelor’s degree fromDartmouthCollege, and a Master’s of Business
Administration from the Amos Tuck School of Business Administration atDartmouthCollege.





JAMES V.
RILEY





In 1975,
Mr. Riley founded Transportation Media, Inc. and served as its President and
Chief Executive Officer until the company was sold to Clear Channel
Communications in February 1998.  The corporation, now known as Clear
Channel Airports, specializes in the operation, marketing and sales of media
programs at airports.  Mr. Riley retired as the Chairman of Clear
Channel Airports in March 2005.





ROBERT C.
WOOLARD





Mr.
Woolard retired in August 2003 after being in the brokerage and investment
banking business for 45 years.  His last 5 years were spent at Stifel,
Nicolaus & Company, a member firm of the New York Stock Exchange as a
Vice-President/Account Supervisor in the Investment Banking
Department.





J. JEFFREY
GELDERMANN





Mr. Geldermann
is and has been since 1997, President of Credentials, Inc., a company offering
computer based electronic academic qualifications verification services used by
colleges and universities.





(b)
            Identification
      of Significant Employees.





In
addition to the executive officers discussed above, AmerAlia employs in its
Natural Soda subsidiary two significant employees.  They are Robert
(“Bob”) Warneke, Director of Manufacturing, and Brad Bunnett, Director of Sales
and Marketing.





32
 Table of Contents





Bob
Warneke joined NSI in August 2007.  He has 29 years of manufacturing
experience in industrial, chemical and mineral industries.  He was
employed by FMC Corporation for 14 years until 1993 progressing in engineering
and management.  In his last assignment with FMC, Bob managed the
start up of a new sodium bicarbonate facility in Green River,
Wyoming.  In 1993 he joined North American Chemical Company and its
successor companies as the plant manager of a new sodium bicarbonate plant in
Rifle which is now the NSI plant.  Bob transferred from IMC Chemical
Company in 2000 to become plant manager of their soda ash facility in California
until his return to Colorado in early 2007.





Brad
Bunnett was Vice President of Sales & Marketing for Energy Supplements
International in Fullerton, California from July 2002 until he joined NSI in
April 2004.   From January 2001 until July 2002, he was Vice
President of Sales and Marketing for Austin-Tetra, Inc. of Irving, Texas and
previously a Vice President of Sales for Computer Associates managing a sales
team with a $43 million sales budget.





(c)
            Family
      Relationships.





There are
no family relationships among the officers or directors.





(d)
            Involvement
      in Certain Legal Proceedings:





During
the past five years, no director or executive officer of AmerAlia
has:





(d)(1)       Filed
or has had filed against him a petition under the federal bankruptcy laws or any
state insolvency law, nor has a receiver, fiscal agent or similar officer been
appointed by a court for the business or property of such person, or any
partnership in which he was a general partner, or any corporation or business
association of which he was an executive officer at or within two years before
such filings;





(d)(2)       Been
convicted in a criminal proceeding or is a named subject of a pending criminal
proceeding (excluding traffic violations and other minor offences);





(d)(3)       Been
the subject of any order, judgment, or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently or
temporarily en­joining, barring, suspending or otherwise
limiting his involvement in any type of business, securities or bankingactivities;





(d)(4)       Been
found by a court of competent jurisdiction in a civil action or by the
Securities and Exchange Commission, or by the Commodity Futures Trading
Commission to have violated a federal or state securities or commodities law,
and the judgment has not been reversed, suspended, or vacated.





(e)
            Audit
      Committee Financial Expert.





The Board
of directors has determined that Messrs. Neil E. Summerson and Geoffrey C.
Murphy are both qualified to be and are Financial Experts on the Audit
Committee.





(f)
            Identification
      of the Audit Committee.





Members
of the Audit Committee are Messrs. Neil E. Summerson (Chairman), Geoffrey C.
Murphy and James V. Riley.  The purpose of the Audit Committee is to
provide assistance to the corporate directors in fulfilling their responsibility
to the shareholders, potential shareholders and the investment community
relating to corporate accounting, reporting practices and the quality and
integrity of the company’s financial reports.  The committee engages
the services of the auditors.  Each of the members of the audit
committee is independent as that term is defined in Rule 4400(a)(15) of the
Nasdaq listing standards.  The committee held four formal meetings
during the fiscal year ended June 30, 2005 but then did not meet formally during
the year ended June 30, 2006.





33
 Table of Contents





(g)
            Compensation
      Committee.





A
compensation committee comprising the non-executive directors of the Board of
Directors was first formed early in 1993 and determined the compensation payable
to Messrs. Gunn and van Mourik, as set out below.  The compensation
committee now comprises Messrs. Murphy, Riley, Woolard and Geldermann; none has
been an officer nor an employee of AmerAlia or any of our subsidiaries during
the fiscal year ended June 30, 2005, or subsequently.  None of Mr.
Murphy, Mr. Riley, Mr. Woolard or Mr. Geldermann has any other direct or
indirect relationship with AmerAlia requiring disclosure by us pursuant to Item
401 of Regulation S-K.  Furthermore, no executive officer of AmerAlia
served as a member of the compensation committee (or similar committee) of
another entity that dealt with compensation paid to any member of our
compensation committee, or with which any other interlocking relationship
exists.





The
compensation committee held one formal meeting during the fiscal year ended June
30, 2005 and held two meetings during fiscal year ended June 30,
2006.  The compensation committee has the authority to review and make
recommendations to our Board of Directors with respect to the compensation of
our executive officers.





Section
16(a) Beneficial Ownership Reporting Compliance.





Section
16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) requires
AmerAlia’s directors and officers and persons who own more than 10% of
AmerAlia’s equity securities to file reports of ownership and changes in
ownership with the Securities and Exchange Commission (the
“SEC”).  Directors, officers, and greater-than-10% shareholders are
required by SEC regulation to furnish AmerAlia with copies of all Section 16(a)
reports filed.





Based
solely on its review of the copies of the reports it received from persons
required to file, AmerAlia believes that during the period from July 1, 2005
through June 30, 2006, all filing requirements applicable to officers,
directors, and greater-than-10% shareholders were met in accordance with the
requirements of Section 16(a).





ITEM 10.
            EXECUTIVE
      COMPENSATION





(a)
            General.





The
following sets forth the compensation information in accordance with the
requirements of Item 402 of Regulation S-B in effect as of June 30,
2006.





(b)
            Summary
      Compensation Table.





The
following table sets forth information regarding compensation paid to our
executive officers during the three fiscal years ended June 30,
2006.  Messrs. Gunn and van Mourik were the only executive officers
receiving or accruing compensation exceeding $100,000 during fiscal year 2006,
as shown below.  None of our executive officers are subject to
employment agreements.





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.





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Annual
      Compensation (a)
            
            
            Long
      Term CompensationAwards
            
            
            PayoutName
              &
              Position
            Year
            
            Salary
            
            
            Bonus
            
            
            Other
            
            
            Restricted
              Awards
            
            
            Options
              &
      SARs
            
            
            LTIP
              Payout
            
            
            All
      Other
              CompensationBill
      H. Gunn,
            2006
            
            $
            200,000
            
            
            
            -0-
            
            
            $
            14,000
            (b)
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-President
      &
            2005
            
            $
            200,000
            
            
            
            -0-
            
            
            $
            14,000
            (b)
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-Chief
      Executive
            2004
            
            $
            200,000
            
            
            
            -0-
            
            
            $
            14,000
            (b)
            
            
            320,000
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-OfficerRobert
      van
      Mourik,
            2006
            
            $
            150,000
            
            
            
            -0-
            
            
            $
            14,000
            (b)
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-Chief
      Financial
            2005
            
            $
            150,000
            
            
            
            -0-
            
            
            $
            14,000
            (b)
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-Officer
      & Executive
            2004
            
            $
            150,000
            
            
            
            -0-
            
            
            $
            14,000
            (b)
            
            
            320,000
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-Vice
      President





Notes:
                (a)
                At
      June 30, 2006 accrued unpaid compensation, expenses and advances to the
      company of $225,576 and $444,812 were due to Bill H. Gunn and Robert van
      Mourik (at June 30, 2005: $160,216 and $258,402
    respectively).


(b)
                  Directors
      fees





(c)
              Options/SAR
      Granted During Year Ended June 30,
2006





2001 Stock Option
Plan:





In March
2001, the Board of Directors also 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 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.





(d)
            Aggregated
      Option/SAR Exercises and Fiscal Year-End Option/SAR Value
      Table.





No
officer exercised stock options during the fiscal year ended June 30, 2006, or
since.  The following table sets forth information regarding the
year-end value of options held by the Chief Executive Officer and the other
named officers on June 30, 2006.No other Stock
Appreciation Rights have been granted, or are held by, any such
person.





Name
            Shares
      acquired
              on
      exercise
            Value
              realized
            #
      of unexercised options at FY end
              (exercisable/unexercisable)
            Value
      of in-the-money options at FY end
              (exercisable/
      unexercisable)Bill
      H. Gunn
            -0-
            -0-
            320,000/-0-
            -0-/-0-Robert
      van Mourik
            -0-
            -0-
            320,000/-0-
            -0-/-0-








(e)
            Long
      Term Incentive Plan -- Awards in Last Fiscal
  Year





AmerAlia
has 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.





35
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AmerAlia
does not have a group medical insurance plan for its executive officers although
Mr. Gunn receives one half of his compensation from NSI which has a
comprehensive group medical insurance plan for its employees.  We
currently have no stock ownership, other profit-sharing or pension plans, but
may adopt such plans in the future.  We have no retirement plans and,
therefore, have not made contributions to any such plan on behalf of the named
officers.





(f)
            Compensation
      of Directors





(f)(1)
            Standard
      Arrangements.





Our
directors are authorized to receive $14,000 cash compensation per year for their
services as directors each year.  In addition, the Chairman of the
Audit Committee receives $6,000 per year and other Audit Committee members
$4,000 per year; the Chairman of the Compensation Committee receives an
additional $2,000 per year.  These additional arrangements were
approved September 10, 2002 as of July 1, 2002.  We also reimburse
directors for expenses incurred on behalf of AmerAlia.





(f)(2)
            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, 2006 and 2005 an
allowance for interest on unpaid outstanding compensation, directors fees and
expenses reimbursement was accrued as follows:





June
      30Director
            
            2006
            
            
            2005Robert
      van Mourik
            
            $
            42,761
            
            
            $
            33,023Bill
      H. Gunn
            
            
            22,538
            
            
            
            16,455Geoffrey
      C. Murphy
            
            
            11,965
            
            
            
            8,436Neil
      E. Summerson
            
            
            4,230
            
            
            
            3,832James
      V. Riley
            
            
            2,325
            
            
            
            2,357Robert
      C. Woolard
            
            
            2,700
            
            
            
            846J.
      Jeffrey Geldermann
            
            
            2,466
            
            
            
            638Total:
            
            $
            88,985
            
            
            $
            65,587





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.





On July
1, 2004, we granted 37,500 options to acquire shares of Common Stock at $0.53
per share until June 30, 2007 to each of the following the non-executive
directors:


·
            Geoffrey
      C. Murphy


·
            Neil
      E. Summerson


·
            James
      V Riley


·
            Robert
      C. Woolard and


·
            J.
      Jeffrey Geldermann.





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 Table of Contents





During
the fiscal year ended June 30, 2005 Messrs. Summerson and Riley each exercised
options to acquire 37,500 shares at $0.55 per share.





On July
1, 2005, we granted 37,500 options to acquire shares of Common Stock at $0.54
per share until June 30, 2008 to each of the following the 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, 2006 Messrs. Summerson, Murphy and Riley each
exercised options to acquire 37,500 shares at $0.55 per share and Mr. Geldermann
exercised options to acquire 75,000 shares at $0.56 per share.





On July
1, 2006, we granted 37,500 options to acquire shares of Common Stock at $0.42
per share until June 30, 2009 to each of the following the non-executive
directors:


·
            Geoffrey
      C. Murphy


·
            Neil
      E. Summerson


·
            James
      V Riley


·
            Robert
      C. Woolard and


·
            J.
      Jeffrey Geldermann.





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 the non-executive
directors:


·
            Geoffrey
      C. Murphy


·
            Neil
      E. Summerson


·
            James
      V Riley


·
            Robert
      C. Woolard and


·
            J.
      Jeffrey Geldermann.





(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.





(h)
            Report
      on Repricing of Options/SARs.





Not
applicable, as no options or SARs were repriced during the fiscal year ended
June 30, 2006.





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 Table of Contents





ITEM 11.
              SECURITY OWNERSHIP OF
      CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT AND RELATED
      STOCKHOLDER MATTERS





(a)
      and (b)
            Security
      Ownership of Certain Beneficial Owners and
  Management





At March
31, 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 March 31, 2008 on the ownership of the Common Stock for
all directors, individually, all executive officers named in the compensation
table, all executive officers and directors as a group, and all beneficial
owners of more than five percent of the Common.  The following
shareholders have sole voting and investment power with respect to the shares
unless indicated otherwise.





Name
      & Address
            Amount
      & Nature
            Percent
      ofof
      Beneficial Owner
            of
      Beneficial Ownership
            Common
      Stock*Robert
      C. Woolard
            1,368,293   (1)
            7.7%James
      V. Riley
            703,233   (2)
            4.0%Bill
      H. Gunn
            676,060   (3)
            3.9%Robert
      van Mourik
            671,384   (4)
            3.8%Neil
      E. Summerson
            362,500   (5)
            2.1%Geoffrey
      C. Murphy
            295,000   (6)
            1.7%J.
      Jeffrey Geldermann
            313,600   (7)
            1.8%Officers
      & Directors as a Group (7 persons)
            4,594,570   (8)
            22.7%Sentient
      USA Resources Fund II, LP
            8,937,122   (9)
            49.0%George
      Town, Grand Cayman, Cayman IslandsKaren
      O. Woolard
            1,368,293
      (10)
            7.7%219
      Eagle Pointe Drive, Branson, MO  65616Charles
      D. O’Kieffe
            1,113,293
      (11)
            6.3%523
      Washington Ave, Wilmette, IL 60091Sentient
      USA Resources Fund, LP
            185,031,265
      (12)
            91.5%George
      Town, Grand Cayman, Cayman Islands




* 
      Percent of common stock is calculated individually (or as a group)
      assuming an individual (or all members of a group) exercises its options
      or any other rights it might have to take up additional common
      stock.  The calculations assume that other holders of equity
      interests do not exercise their rights unless they are part of the same
      group.












(1)
            Includes
      166,875 shares held by the Robert C Woolard Trust, 22,000 shares held in
      Mr. Woolard's IRA account, options to acquire 37,500 shares at $0.54 until
      June 30, 2008, 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 25,000 shares at $3.00 until
      June 30, 2009. Also includes the following shares in which Mr. Woolard
      disclaims any beneficial interest:  392,295 shares and options
      to acquire 400,000 shares at $1.00 until March 19, 2009 held by Karen O
      Woolard, his spouse; 22,000 shares held in an IRA account for Karen O
      Woolard and 252,623 shares held by the Karen O Woolard
    Trust.


(2)
            Includes
      365,733 shares of Common Stock held by the James V. Riley Revocable Trust,
      options held directly to acquire 37,500 shares of Common Stock at $0.54
      per share exercisable through June 30, 2008, options to acquire 37,500
      shares of Common Stock at $0.42 per share exercisable through June 30,
      2009, options to acquire 37,500 shares at $0.40 until June 30, 2010 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.





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 Table of Contents





(4)
            Includes
      240,759 shares of Common Stock owned by Ahciejay Pty. Ltd. as trustee for
      The R.C.J. Trust, and 54,125 shares of Common Stock owned by the R.C.J.
      Superannuation Fund, as to both of which Mr. van Mourik and his family are
      beneficiaries.  Also includes options to acquire 56,000 shares
      at $1.00 until March 19, 2008 held by Ahciejay Pty Ltd and options held
      directly to acquire 270,000 shares at $0.71 per share until April 18, 2009
      and options to acquire 50,000 shares at $3.00 until June 30,
      2009.


(5)
            Includes
      150,000 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 $0.54 expiring June 30,
      2008, options to acquire 37,500 shares of Common Stock at $0.42 per share
      exercisable through June 30, 2009, options to acquire 37,500 shares at
      $0.40 until June 30, 2010 and options to acquire 25,000 shares at $3.00
      until June 30, 2009.


(6)
            Includes
      options to acquire 37,500 shares at $0.54 expiring June 30, 2008, options
      to acquire 37,500 shares of Common Stock at $0.42 per share exercisable
      through June 30, 2009, options to acquire 37,500 shares at $0.40 until
      June 30, 2010 and options to acquire 25,000 shares at $3.00 until June 30,
      2009.


(7)
            Includes
      options to acquire 120,000 shares of common stock at $1.00 per share until
      March 19, 2009, options to acquire 37,500 shares at $0.54 until June 30,
      2008,options to acquire 37,500 shares at $0.42 until June 30, 2009 and
      options to acquire 37,500 shares at $0.40 until June 30,
    2010.


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


(9)
            Sentient USA Resources Fund
      II, LP: Includes 7,929,820 shares of Common Stock and the right to
      convert a $350,000 promissory note and interest to shares at 36 cents per
      share calculated as at March 31,
2008.


(10)
            Mrs.
      Woolard is Mr. Woolard's spouse and these shares include 252,623 shares
      held by the Karen O Woolard Trust, 22,000 shares held in Mrs. Woolard's
      IRA account and options to acquire 400,000 shares at $1.00 until March 19,
      2009 held directly.  Also includes the following shares in which
      Mrs. Woolard disclaims any beneficial interest: 166,875 shares held by the
      Robert C Woolard Trust, 22,000 shares held in an IRA account for Robert C
      Woolard, options to acquire 37,500 shares at $0.54 until June 30, 2008,
      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
      25,000 shares at $3.00 until June 30, 2009 held by Robert C.
      Woolard.


(11)
            Includes
      options to acquire 440,000 shares at $1.00 until March 19,
      2009.  Also includes 121,295 shares held in a trust for the
      benefit of Mrs. Cornelia O’Kieffe in which Mr. O’Kieffe disclaims any
      beneficial interest.


(12)
            This
      fund is a Delaware limited partnership which does not own any AmerAlia
      shares; it has the right to acquire 185,031,265 shares upon exercise of an
      exchange right and warrants. The partnership comprises Sentient Global
      Resources Fund I, LP (the “Fund”) and Sentient Global Resources Trust No.
      1 (the “Trust”).  These rights were originally acquired by the
      Fund and the Trust in connection with loans made by the Fund and the Trust
      to NSHI.  These loans and rights have since been transferred to
      Sentient USA Resources Fund, LP.  If it exercises these exchange
      rights and warrants it will have the sole right to vote or to direct the
      vote and the sole right to dispose of or direct the disposition of the
      shares that it has the right to acquire. There is no shared voting or
      disposition rights.  The exact number of shares of Common Stock
      that may be acquired pursuant to the exchange rights depends on several
      factors, none of which can be determined until the exchange right has been
      exercised: (i) the amount of unpaid principal and interest on Series B1
      debentures (including whether Contingent Interest is payable thereon),
      (ii) the value of the shares of NSI which is determined by the Adjusted
      EBITDA of Natural Soda, Inc., and (iii) the Exchange Price (which is 85%
      of the average between the bid and the asked prices of the Common Stock of
      the Issuer during the 30 calendar days prior to exercise of the exchange
      rights) and the other terms and conditions of the exchange rights,
      conversion rights and warrant purchase rights. The numbers shown are
      copied from the Sentient Entities’ Schedule 13D filing with the Securities
      and Exchange Commission dated August 22,
2007.





To the best of our knowledge, there are
no arrangements, understandings or agreements relative to the disposition of any
of our securities, the operation of which would at a subsequent date result in a
change in control of AmerAlia, other than the exchange provisions of the
Securityholder agreement with the Sentient Entities which is discussed more
fully above and in the following paragraph.





39
 Table of Contents





(c)
            Changes
      in Control.





In
addition to the shares now owned by Sentient II, since October 31, 2004 the
Sentient Entities also have the right to exchange the Series B1 Debentures and
the shares of NSI they own into shares of AmerAlia’s common
stock.  This right to exchange the debentures and the NSI common stock
provides for the issuance of AmerAlia’s common stock at a price equal to 85% of
the market price for AmerAlia’s common stock.  If the Sentient
Entities were to exchange these debentures and shares, they would acquire a
significant majority of AmerAlia’s shares based on today’s stock prices and
could exercise control of AmerAlia.





ITEM 12.
            CERTAIN RELATIONSHIPS
      AND RELATED PARTY
TRANSACTIONS





(a)
      and (b)
            Transactions
      with Management and Others.





The
following sets out information regarding transactions between officers,
directors and significant shareholders of AmerAlia during the most recent two
fiscal years and subsequently.





Corporate
Loans – Loans to AmerAlia:





During
the fiscal years ended June 30, 2006 and 2005, 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, 2006Robert
      van Mourik
            
            $
            444,812Bill
      H. Gunn
            
            
            225,576Geoffrey
      C. Murphy
            
            
            113,783Neil
      E. Summerson
            
            
            30,199James
      V. Riley
            
            
            32,366Robert
      C. Woolard
            
            
            32,216J.
      Jeffrey Geldermann
            
            
            31,104Total:
            
            $
            910,056





During
the fiscal year ended June 30, 2005 officers and directors of the company
subscribed for additional issues of Series A Debenture Secured Promissory Notes
for working capital purposes and received warrants on the same terms as
previously granted to investors at the financial closing. The balances of such
notes as of June 30, 2006, are as follows:





June
      30, 2006,Series
      A Debenture Secured Promissory Notes:James
      V. Riley Trust, an affiliate of Mr. Riley
            
            $
            500,000J.
      Jeffrey Geldermann
            
            
            300,000Ahciejay
      Pty Ltd, an affiliate of Mr. van Mourik
            
            
            140,000Gunn
      Development Pty Ltd, an affiliate of Mr. Gunn
            
            
            60,000$
            1,000,000Interest
      accruedJames
      V. Riley Trust, an affiliate of Mr. Riley
            
            $
            97,969J.
      Jeffrey Geldermann
            
            
            56,244Ahciejay
      Pty Ltd, an affiliate of Mr. van Mourik
            
            
            23,879Gunn
      Development Pty Ltd, an affiliate of Mr. Gunn
            
            
            10,234$
            188,326





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 Table of Contents





Letters
of Forbearance and General Release:





A
condition to the financial closing on March 19, 2004 was that Mr. Bill H. Gunn,
Chairman and CEO, and Mr. Robert van Mourik, Executive Vice President and Chief
Financial Officer of AmerAlia sign letters forgoing their rights to take action
against the Company to recover unpaid compensation, expenses and advances made
to the Company.  In May 2008, a condition to the closing of the
debenture and interest purchase agreements was that Mr. Gunn and Mr. van Mourik
sign a general release as at December 31, 2007 in favour of Sentient and its
affiliates with the exception of any claims they have and are identified
in our financial statements as at December 31, 2007.





Satisfaction
of Bonding Requirements:





AmerAlia
was not able to complete the asset acquisition and the financial closing of the
assets of WRNM without the assistance of its majority shareholder at that time,
the Mars Trust, which had provided support for AmerAlia in the past, including
providing a letter of credit to support a $400,000 reclamation bond required for
the maintenance of the Rock School lease.  In order to complete the
asset acquisition, AmerAlia’s subsidiaries, NSHI and NSI had to provide bonds or
other financial security covering various federal permits, totalling
approximately $960,000, including the prior bond for the Rock School lease which
was reduced to $35,000, as follows:





BLM
      Mineral Lease Bonds
            -
      NSI leases
            
            $
            542,000-
      Rock School lease
            
            
            35,000Letter
      of credit re: EPA underground injection control permit
            
            
            231,730Letter
      of credit re: DMG mining permit
            
            
            150,750$
            959,480





Neither
AmerAlia nor NSHI had the financial capability to satisfy the bonding
requirements imposed by the government agencies. The Mars Trust agreed to
provide support for these bonding requirements to NSHI and NSI subject to their
agreement to:


·
            reimburse
      the Mars Trust for its expenses in obtaining these bonds (which totalled
      approximately $24,000);


·
            pay
      the Mars Trust a fee of $75,000 per year to maintain the bonds;
      and


·
            remove
      the Mars Trust from liability for the bonds within two
    years.





As part
of the financial closing, NSI pledged a $750,000 Series A Debenture to the Mars
Trust to collateralize any indemnification obligation that might arise under the
bonds.  The $75,000 due to the Mars Trust under this agreement for the
first year of the agreement was paid at the financial closing and NSI paid the
second year fee of $75,000 soon thereafter.





Subsequently,
in August 2007 when Sentient II bought the AmerAlia shares owned by the Mars
Trust and all the debt securities previously due to the Trust and the Trust’s
rights under its guaranty agreements, Natural Soda substituted bonds from its
own resources and the Mars Trust was released from its obligations.





Continuing
Guarantee of Bank of America Indebtedness:





The Mars
Trust arranged a loan for AmerAlia from the Bank of America in 1999 and
guaranteed its repayment.  The loan had been renewed on a year-to-year
basis and was most recently due June 30, 2007.  Over time, the amount
of the loan had increased to $9,921,583.  Under an agreement to amend
the terms of the Third and Fourth Amended and Restated Guaranty Agreements, the
Mars Trust and AmerAlia agreed:


·
            AmerAlia
      shall pledge Series C Debentures to the Mars Trust in the current amount
      of the loan ($9,921,583);


·
            The
      Trust shall receive the interest and any contingent interest or principal
      on the Series C Debenture and use any amounts received to pay any
      outstanding interest or principal under the Bank of America loan and to
      reduce amounts owed by AmerAlia to the
Trust;





41
 Table of Contents





·
            If
      the amount of interest paid by the Trust to the Bank of America exceeded
      the amount of interest received by the Trust from the pledged Series C
      Debentures, the Trust agreed, upon AmerAlia’s written notice, to pay (i)
      65% of the total amount of interest due on the Bank of America loan during
      calendar year 2004, and; (ii) 50% of the total amount of interest due on
      the Bank of America loan during calendar year 2005.  Such
      interest paid by the Trust using its own funds would become an AmerAlia
      obligation evidenced by a promissory
note;


·
            To
      the extent that the Series C Debenture interest exceeded the Bank of
      America interest payments, the Trust would allow AmerAlia to reduce the
      outstanding interest and principal due under the promissory note issued to
      the Trust at the financial closing.  After all the outstanding
      interest and principal due under any additional promissory notes and the
      promissory note issued at the financial closing had been paid, any excess
      Series C interest may be kept by the Trust as consideration for providing
      the guaranty; and


·
            The
      Mars Trust released its existing security interest in NSHI and AmerAlia
      upon the financial closing.





Since the
financial closing in March 2004, the Trust made a number of advances to AmerAlia
to enable the company to meet its bank loan fees and monthly interest payments
to the Bank of America.  At June 30, 2006 the balance of these
advances totalled $1,140,729.  Interest accrues on these notes at 4.5%
per annum; the notes were originally due December 31, 2005.





In
addition, at the time of the financial closing 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.





Total
accrued interest on these various notes was $132,919 at June 30,
2006.  As discussed below, the Trust assigned its interests in these
various notes and guaranties to Sentient II in August 2007.





Sentient
Entities (now Sentient I), Sentient II and Sentient III:





In order
to facilitate the completion of the WRNM Purchase and subsequent financial
closing, the Sentient Entities and the Mars Trust entered into an Agreement to
Share Proceeds.  This agreement provided that if NSHI defaulted on its
obligations to the Sentient Entities and the Sentient Entities recovered any
proceeds from a disposal of the Rock School lease, then the Sentient Entities
and the Mars Trust would share those proceeds.





There was
a shareholder voting agreement with Ms. Jacqueline Badger Mars in her capacity
as trustee, at that time our major shareholder.  This agreement provided
that the directors of AmerAlia could require the Mars Trust to be present
by proxy at any meeting requiring a vote of the common stockholders to
ensure a quorum was present.  This agreement further provided that the
Mars Trust would abstain from voting any of its shares of common
stock, provided that if the Sentient Entities requested that the Mars Trust
vote its shares of common stock, then the Mars Trust would vote its shares in
the same proportion as the other shareholders voted their shares.  This
restriction on the right of the Mars Trust to vote its stock expired March 19,
2006.





As
reported above, in August 2007 Sentient II acquired from the Mars Trust all its
shares of common stock of AmerAlia, the various promissory notes described above
and assumed the Trust’s rights under the guaranty agreements. This included the
debt previously due to the Bank of America which the Trust had paid out under
its guaranty obligation.  Consequently, Sentient II became AmerAlia’s
new major shareholder.  Sentient I and Sentient II each disclaim any
beneficial interest in the securities held by the other.





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 April 30, 2008.  The note and
interest are convertible into AmerAlia common stock at 36 cents per
share.





In May
2008 we completed agreements with Sentient as follows:


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





42
 Table of Contents





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


3.
            On
      May 27, 2008 Sentient I loaned AmerAlia $465,000 for the purpose of
      contributing capital to NSHI which, in turn contributed $465,000 to NSI as
      its proportionate share of $1,000,000 raised by NSI for well field
      development expenditures.  The loan is at 6% interest, is due
      July 31, 2008 and the principal and interest are convertible into AmerAlia
      shares at 36 cents per share.





No
Other Relationships:





No
nominee or director of AmerAlia is, or has been, a partner or executive officer
of any investment banking firm that has performed services for AmerAlia during
the last fiscal year or that AmerAlia proposes to have perform services during
the current year.





(c)
            List
      All Parents of the Company





Under
Rule 405 of Regulation C, the term “parent” when used with respect to AmerAlia
means an affiliate controlling AmerAlia directly or indirectly through one or
more intermediaries.  One entity that has the ability to potentially
control AmerAlia (other than its board of directors and shareholders generally)
is Sentient II through its ownership of 46% of our outstanding common
stock.  The Sentient Entities also have the ability to control
AmerAlia if they choose to exercise their rights to convert or exchange their
holdings of Series B debentures and NSI shares into AmerAlia common stock as
discussed above in Item 1 under “Description of Debentures” and in Item 1 under
“Risk Factors”.





(d)
            Transactions with
      Promoters:  Not
applicable.





43
 Table of Contents





ITEM 13.
            EXHIBITS




The
      exhibits required by Item 601 of Regulation S-B are as
      follows.





Certain
      of the following exhibits are hereby incorporated by reference pursuant to
      Rule 12b-23 as promulgated under the Securities and Exchange Act of 1934,
      as amended, from the reports noted
below:





Exhibit
      Number
            
            Description3.1
      (b)
            
            Restated
      Articles of Incorporation3.2
      (a)
            
            Bylaws
      of AmerAlia, Inc.10.6
      (e)
            
            Form
      of Distributor agreements for marketing of sodium
    bicarbonate.10.7
      (e)
            
            General
      Services Agreement with Raytheon Engineers & Constructors,
      Inc.10.8
      (f)
            
            First
      Amendment to Special Warranty Assignment, Royalty Reservation, and Minimum
      Royalty Payment between AmerAlia and E.E. Kinder Co.10.9
      (f)
            
            Consulting
      Agreement between AmerAlia and E.E. Kinder Co.10.10
      (f)
            
            U.S.
      Government Sodium Lease10.11
      (g)
            
            Design/Build
      Contract with U.S. Filter Corp.10.12
      (b)
            
            Amended
      and Restated Guaranty Agreement with the Jacqueline Badger Mars
      Trust10.13
      (d)
            
            Second
      Amended and Restated Guaranty Agreement with the Jacqueline Badger Mars
      Trust10.14
      (c)
            
            AmerAlia,
      Inc. 2001 Directors’ Incentive Plan10.15
      (c)
            
            AmerAlia,
      Inc. 2001 Stock Option Plan10.16
      (h)
            
            Third
      Amended and Restated Guaranty Agreement with the Jacqueline Badger Mars
      Trust10.17
      (i)
            
            Fourth
      Amended and Restated Guaranty Agreement with the Jacqueline Badger Mars
      Trust10.18
      (i)
            
            Guaranty
      Agreement – Messrs Woolard and O’Kieffe.10.19
      (j)
            
            Asset
      Purchase Agreement between AmerAlia, Inc., Natural Soda, Inc., White River
      Nahcolite Minerals, LLC., and IMC Global, Inc. dated January 9,
      2003.10.19
      (j)
            
            Amendment
      dated February 10, 2003 to the Asset Purchase
Agreement.10.20
      (j)
            
            Closing
      Agreement dated February 20, 2003, between AmerAlia, Inc., Natural Soda
      Holdings, Inc., Sentient Global Resources Fund I, LP and Sentient Global
      Resources Trust No. 1; Promissory note from Natural Soda Holdings, Inc. to
      Sentient Global Resource Fund I, LP and Sentient Global Resource Trust No.
      1; and Pledge Agreement from Natural Soda Holdings, Inc. to Sentient
      Global Resources Fund I, LP and Sentient Global Resources Trust No.
      1.10.21
      (k)
            
            Extension
      Agreement dated March 24, 2003 between AmerAlia, Inc., Natural Soda
      Holdings, Inc., Sentient Global Resource Fund I, LP and Sentient Global
      Resource Trust No. 1.10.22
      (l)
            
            Second
      Extension Agreement dated April 22, 2003 between AmerAlia, Inc., Natural
      Soda Holdings, Inc., Sentient Global Resource Fund I, LP and Sentient
      Global Resource Trust No. 1.10.23
      (m)
            
            Third
      Extension Agreement dated May 31, 2003 between AmerAlia, Inc., Natural
      Soda Holdings, Inc., Sentient Global Resource Fund I, LP and Sentient
      Global Resource Trust No. 1.10.24
      (n)
            
            Fourth
      Extension Agreement dated June 30, 2003 between AmerAlia, Inc., Natural
      Soda Holdings, Inc., Sentient Global Resource Fund I, LP and Sentient
      Global Resource Trust No. 1.10.25
      (o)
            
            Fifth
      Extension Agreement dated July 31, 2003 between AmerAlia, Inc., Natural
      Soda Holdings, Inc., Sentient Global Resource Fund I, LP and Sentient
      Global Resource Trust No. 1.10.27
      (p)
            
            Sixth
      Extension Agreement dated August 31, 2003 between AmerAlia, Inc., Natural
      Soda Holdings, Inc., Sentient Global Resource Fund I, LP and Sentient
      Global Resource Trust No. 1.10.28
      (q)
            
            Seventh
      Extension Agreement dated September 30, 2003 between AmerAlia, Inc.,
      Natural Soda Holdings, Inc., Sentient Global Resource Fund I, LP and
      Sentient Global Resource Trust No.
1.




44




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
            
            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.10.49
            
            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.31.1
            
            Certification
      of Chief Executive Officer pursuant to 15 U.S.C. Section 10A, as adopted
      pursuant to Section 302 of the Sarbanes Oxley Act of 2002 (filed
      herewith).31.2
            
            Certification
      of Chief Financial Officer pursuant to 15 U.S.C. Section 10A, as adopted
      pursuant to Section 302 of the Sarbanes Oxley Act of 2002 (filed
      herewith).32.1
            
            Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. Section 10A, as adopted pursuant to Section 906 of the Sarbanes
      Oxley Act of 2002 (filed herewith).




45




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.




46
 Table of Contents





ITEM 14.
            PRINCIPAL ACCOUNTANT
      FEES AND SERVICES





HJ &
Associates, LLC, Certified Public Accountants, are the Company’s independent
auditors.  For the fiscal years ended June 30, 2006 and 2005 HJ &
Associates has billed the Company the following amounts for services provided.





Year
      ended June 30,2006
            
            
            2005Audit
      fees
            
            $
            173,500
            
            
            $
            127,200Audit
      related fees
            
            
            -
            
            
            
            -Tax
            
            
            22,165
            
            
            
            7,472Other
            
            
            -
            
            
            
            -





The Board
of Directors has adopted an Audit Committee Charter which is reviewed annually
and amended if considered necessary.  It was last amended September 9,
2002.  The Audit Committee’s responsibilities include responsibility
to:





·
            Pre-approve
      all audit services that the auditor may provide to AmerAlia or any
      subsidiary (including, without limitation, providing comfort letters in
      connection with securities underwritings or statutory audits) as required
      by §10A(i)(1)(A) of the Securities Exchange Act of 1934 (as amended by the
      Sarbanes-Oxley Act of 2002).


·
            Pre-approve
      all non-audit services (other than certain de minimis services
      described in §10A(i)(1)(B) of the Securities Exchange Act of 1934 (as
      amended by the Sarbanes-Oxley Act of 2002) that the auditors propose to
      provide to AmerAlia or any of its
subsidiaries.





The
independent auditors are engaged by the Audit Committee subject to the auditors
providing an estimate of their fees for their services.  The Audit
Committee subjects all audit related services to this pre-approval
policy.





47
 Table of Contents





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned there­unto duly authorized.





AMERALIA,
      INC.By:
      /s/ Bill H.
      Gunn
            Date:
      June 5, 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
            
            Principal
      Executive
            
            Date:
      June 5, 2008Bill
      H. Gunn
            
            Officer
      and Director/s/ Robert van
      Mourik
            
            Secretary,
      Treasurer
            
            Date:
      June 5, 2008Robert
      C. J. van Mourik
            
            Principal
      Financial and Accounting Officerand
      Director/s/  Neil E.
      Summerson
            
            Director
            
            Date:
      June 5, 2008Neil
      E. Summerson/s/  Geoffrey
      C. Murphy
            
            Director
            
            Date:
      June 5, 2008Geoffrey
      C. Murphy/s/  James
      V. Riley
            
            Director
            
            Date:
      June 5, 2008James
      V. Riley/s/  Robert
      C. Woolard
            
            Director
            
            Date:
      June 5, 2008Robert
      C. Woolard/s/  J.
      Jeffrey Geldermann
            
            Director
            
            Date:
      June 5, 2008J.
      Jeffrey Geldermann


48
 Table of Contents




AMERALIA, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
FINANCIAL STATEMENTS
 
 June
30, 2006
  F-1
 Table of Contents
  C O N T E
N T S
 
 
 Report
      of Independent Registered Public Accounting Firm
              F-3Consolidated
      Balance Sheet
              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
 Centennial,
Colorado
 
 We have
audited the accompanying consolidated balance sheets of AmerAlia, Inc. and
Subsidiaries as of June 30, 2006 and 2005, 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, 2006 and 2005, and the consolidated results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of
America.
 
 The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern.  As discussed in Note 20
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 20.  The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
 
 As
discussed in Note 19, the June 30, 2005 consolidated financial statements have
been restated as a result of corrections made to properly record inventories,
property and equipment, well cavities, obligations for certain accrued expenses
and obligations due to related parties along with asset retirement
obligations.
 
 
 HJ
      & Associates, LLCSalt
      Lake City, UtahJune
      4, 2008
 
 
 American
Institute of Certified Public Accountants
 Member of
Public Company Accounting Oversight Board
  F-3
 Table of Contents
  AMERALIA,
INC. AND SUBSIDIARIES
 Consolidated
Balance Sheet
 
 
 ASSETS
 
 For
      the Years Ended June 30,2006
              
              
              2005(Restated)CURRENT
      ASSETSCash
              
              $
              174
              
              
              $
              1,203Restricted
      cash (Note 1)
              
              
              218,912
              
              
              
              507,312Accounts
      receivable, net (Note 1)
              
              
              2,777,271
              
              
              
              2,351,042Inventories
      (Note 2)
              
              
              816,364
              
              
              
              670,582Prepaid
      expenses (Note 3)
              
              
              518,659
              
              
              
              470,615Total
      Current Assets
              
              
              4,331,380
              
              
              
              4,000,754FIXED
      ASSETSProperty,
      plant & equipment, net (Notes 1 and 4)
              
              
              10,148,948
              
              
              
              10,638,988Cavities
      and well development, net (Note 4)
              
              
              4,663,411
              
              
              
              2,240,067Mineral
      leases (Note 4)
              
              
              4,167,471
              
              
              
              4,167,471Total
      Fixed Assets
              
              
              18,979,830
              
              
              
              17,046,526OTHER
      ASSETSWater
      rights (Note 8)
              
              
              3,150,582
              
              
              
              3,150,582Patents
      (Note 5)
              
              
              35,014
              
              
              
              43,832Well
      and well development RSL (Note 6)
              
              
              595,000
              
              
              
              595,000Engineering
      drawings (Note 7)
              
              
              1,876,000
              
              
              
              2,800,000Equipment
      held and not yet in service (Note 7)
              
              
              3,197,842
              
              
              
              4,161,820Deferred
      financing and acquisition costs, net (Note 1)
              
              
              848,771
              
              
              
              1,187,933Rock
      School lease and reserves (Note 6)
              
              
              3,300,000
              
              
              
              3,300,000Deposits
      and bonds
              
              
              20,000
              
              
              
              24,000Total
      Other Assets
              
              
              13,023,209
              
              
              
              15,263,167TOTAL
      ASSETS
              
              $
              36,334,419
              
              
              $
              36,310,447
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-4
 Table of Contents
  AMERALIA,
INC. AND SUBSIDIARIES
 Consolidated
Balance Sheet (Continued)
 
 
 LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)
 
 For
      the Years Ended June 30,2006
              
              
              2005(Restated)CURRENT
      LIABILITIESAccounts
      payable
              
              $
              2,232,820
              
              
              $
              1,477,547Royalties
      payable (Note 8)
              
              
              899,562
              
              
              
              760,710Accrued
      expenses (Note 9)
              
              
              1,516,421
              
              
              
              1,504,580Accrued
      expenses due to related parties (Note 10)
              
              
              1,405,954
              
              
              
              736,089Current
      portion of notes payable to related parties (Note 10)
              
              
              2,970,357
              
              
              
              2,323,432Current
      portion of notes payable (Note 11)
              
              
              21,542,869
              
              
              
              19,133,583Current
      portion of capital lease obligations (Note 12)
              
              
              43,429
              
              
              
              68,905Interest
      payable
              
              
              4,595,534
              
              
              
              1,657,761Total
      Current Liabilities
              
              
              35,206,946
              
              
              
              27,662,607LONG
      TERM LIABILITIESNotes
      payable to related parties (Note 10)
              
              
              853,400
              
              
              
              853,400Notes
      Payable (Note 11)
              
              
              22,507,634
              
              
              
              22,464,292Capital
      lease obligations (Note 12)
              
              
              97,972
              
              
              
              141,401Asset
      retirement obligations (Note 13)
              
              
              871,845
              
              
              
              807,616Total
      Long Term Liabilities
              
              
              24,330,851
              
              
              
              24,266,709TOTAL
      LIABILITIES
              
              
              59,537,797
              
              
              
              51,929,316COMMITMENTS
      AND CONTINGENT LIABILITIES (Note 16)
              
              
              -
              
              
              
              -STOCKHOLDERS’
      EQUITY (DEFICIT)Preferred
      stock, $0.05 par value; 1,000,000 authorised; 82 issued and
      outstanding
              
              
              4
              
              
              
              4Common
      stock, $0.01 par value; 100,000,000 shares authorized; 17,239,437 issued
      and outstanding
              
              
              172,394
              
              
              
              169,836Additional
      paid in capital
              
              
              27,669,676
              
              
              
              27,434,275Accumulated
      deficit
              
              
              (51,045,452
              )
              
              
              (43,222,984
              )Total
      Stockholders’ Equity (Deficit)
              
              
              (23,203,378
              )
              
              
              (15,618,869
              )TOTAL
      LIABILITIES & STOCKHOLDERS’ EQUITY
              
              $
              36,334,419
              
              
              $
              36,310,447
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-5
 Table of Contents
  AMERALIA,
INC. AND SUBSIDIARIES
 Consolidated
Statements of Operations
 
 
 For
      the Years Ended June 30,2006
              
              
              2005(Restated)REVENUES
              
              $
              15,293,688
              
              
              $
              14,141,500COST
      OF GOODS SOLD
              
              
              14,611,153
              
              
              
              13,487,793GROSS
      PROFIT (DEFICIT)
              
              
              682,535
              
              
              
              653,707EXPENSESGeneral
      and administrative
              
              
              1,093,523
              
              
              
              1,226,373Depreciation,
      amortization and accretion expense
              
              
              1,158,700
              
              
              
              1,112,332Total
      Expenses
              
              
              2,252,223
              
              
              
              2,338,705LOSS
      FROM OPERATIONS
              
              
              (1,569,688
              )
              
              
              (1,684,998
              )OTHER
      INCOME (EXPENSE)Interest
      income
              
              
              1,031
              
              
              
              7,222Gain
      on settlement of debt
              
              
              201,965
              
              
              
              4,406Other
      income
              
              
              7,852
              
              
              
              9,208Interest
      expense
              
              
              (4,263,677
              )
              
              
              (2,716,179
              )Loss
      on disposal of assets
              
              
              (56,485
              )
              
              
              -Loss
      on impairment
              
              
              (1,843,281
              )
              
              
              (458,087
              )Other
      financing costs
              
              
              (300,185
              )
              
              
              (1,845,702
              )Total
      Other Income (Expense)
              
              
              (6,252,780
              )
              
              
              (4,999,132
              )LOSS
      BEFORE INCOME TAX EXPENSE
              
              
              (7,822,468
              )
              
              
              (6,684,130
              )Income
      tax expense
              
              
              -
              
              
              
              -NET
      LOSS
              
              $
              (7,822,468
              )
              
              $
              (6,684,130
              )BASIC
      LOSS PER SHARE
              
              $
              (0.46
              )
              
              $
              (0.40
              )WEIGHTED
      AVERAGE NUMBER OF SHARES OUTSTANDING
              
              
              17,022,896
              
              
              
              16,898,237
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-6
 Table of Contents
  AMERALIA,
INC. AND SUBSIDIARIES
 Consolidated
Statements of Stockholders' Equity (Deficit)
 
 
 AdditionalPreferred
      Stock
              
              
              Common
      Stock
              
              
              Paid-In
              
              
              AccumulatedShares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Capital
              
              
              DeficitBalance,
      June 30, 2004 (Restated)
              
              
              82
              
              
              $
              4
              
              
              
              16,866,301
              
              
              $
              168,663
              
              
              $
              27,187,121
              
              
              $
              (36,538,854
              )Options
      granted
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              87,903
              
              
              
              -Warrants
      granted
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              82,424
              
              
              
              -Options
      exercised
              
              
              -
              
              
              
              -
              
              
              
              117,303
              
              
              
              1,173
              
              
              
              76,827
              
              
              
              -Net
      loss for the year endedJune 30, 2005
    (Restated)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (6,684,130
              )Balance,
      June 30, 2005
              
              
              82
              
              
              $
              4
              
              
              
              16,983,604
              
              
              $
              169,836
              
              
              $
              27,434,275
              
              
              $
              (43,222,984
              )Options
      granted
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              86,835
              
              
              
              -Options
      exercised
              
              
              -
              
              
              
              -
              
              
              
              187,500
              
              
              
              1,875
              
              
              
              102,000
              
              
              
              -Stock
      issued in settlement of obligations
              
              
              -
              
              
              
              -
              
              
              
              68,333
              
              
              
              683
              
              
              
              46,566
              
              
              
              -Net
      loss for the year ended
      June 30,
      2006
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (7,822,468
              )Balance,
      June 30, 2006
              
              
              82
              
              
              $
              4
              
              
              
              17,239,437
              
              
              $
              172,394
              
              
              $
              27,669,676
              
              
              $
              (51,045,452
              )
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-7
 Table of Contents
  AMERALIA,
INC. AND SUBSIDIARIES
 Consolidated
Statements of Cash Flows
 
 
 For
      the Years Ended June 30,2006
              
              
              2005(Restated)CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
              
              $
              (7,822,468
              )
              
              $
              (6,684,130
              )Adjustments
      to reconcile net loss to net cash used
      by operating activities:Options
      granted
              
              
              86,835
              
              
              
              124,653Depreciation
      and amortization
              
              
              1,158,700
              
              
              
              1,112,332Loss
      on disposal and impairment
              
              
              1,899,766
              
              
              
              458,087Amortization
      of acquisition and financing costs
              
              
              300,185
              
              
              
              1,845,702(Gain)
      on settlement of debt
              
              
              (201,965
              )
              
              
              -Change
      in Operating Assets and Liabilities:Decrease
      in restricted cash
              
              
              288,400
              
              
              
              1,819,511(Increase)
      decrease in accounts receivable
              
              
              827,645
              
              
              
              (529,565
              )(Increase)
      decrease in inventory
              
              
              (145,782
              )
              
              
              59,079(Increase)
      decrease in prepaid expenses
              
              
              (48,044
              )
              
              
              225,790Increase
      (decrease) in accounts and royalties payable
              
              
              990,839
              
              
              
              393,316Increase
      in accrued expenses due to related parties
              
              
              669,865
              
              
              
              (29,190
              )Increase
      in accrued expenses
              
              
              191,842
              
              
              
              392,187Increase
      in interest payable
              
              
              2,937,773
              
              
              
              1,265,581Decrease
      in asset retirement obligation
              
              
              -
              
              
              
              (279,483
              )Net
      Cash Used in Operating Activities
              
              
              1,133,591
              
              
              
              173,870CASH
      FLOWS FROM INVESTING ACTIVITIESCavities
      and well development
              
              
              (2,547,602
              )
              
              
              (562,419
              )Purchase
      of property and equipment
              
              
              (365,309
              )
              
              
              (608,591
              )Net
      Cash Used in Investing Activities
              
              $
              (2,912,911
              )
              
              $
              (1,171,010
              )
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-8
 Table of Contents
  AMERALIA,
INC. AND SUBSIDIARIES
 Consolidated
Statements of Cash Flows (Continued)
 
 
 For
      the Years Ended June 30,2006
              
              
              2005(Restated)CASH
      FLOWS FROM FINANCING ACTIVITIESPayments
      on capital leases
              
              $
              (68,905
              )
              
              $
              (57,343
              )Proceeds
      from notes payable
              
              
              1,140,937
              
              
              
              600,000Payments
      on debt
              
              
              (17,041
              )
              
              
              -Proceeds
      from related party notes payable
              
              
              646,925
              
              
              
              411,256Proceeds
      from exercise of stock options
              
              
              76,375
              
              
              
              41,250Net
      Cash Provided by Financing Activities
              
              
              1,778,291
              
              
              
              995,163NET
      INCREASE (DECREASE) IN CASH
              
              
              (1,029
              )
              
              
              (1,977
              )CASH
      AT BEGINNING OF YEAR
              
              
              1,203
              
              
              
              3,180CASH
      AT END OF YEAR
              
              $
              174
              
              
              $
              1,203SUPPLEMENTAL
      DISCLOSURE OF CASHFLOW
      INFORMATIONIncome
      taxes
              
              $
              -
              
              
              $
              -Interest
              
              $
              1,063,835
              
              
              $
              820,407NON-CASH
      FINANCING AND INVESTING ACTIVITIESCommon
      stock issued for financing costs
              
              $
              -
              
              
              $
              -Conversions
      of notes payable to equity
              
              $
              -
              
              
              $
              -Contribution
      of interest payable to capital
              
              $
              -
              
              
              $
              -Common
      stock issued for payment of obligation
              
              $
              -
              
              
              $
              -Warrants
      granted in conjunction with debt instruments
              
              $
              -
              
              
              $
              82,424Common
      stock issued for extinguishments of related party debts
              
              $
              -
              
              
              $
              41,250
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-9
 Table of Contents
  AMERALIA,
INC. AND SUBSIDIARIES
 Notes to
the Consolidated Financial Statements
 June 30,
2006 and 2005
 
 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.  The
consolidated financial statements present the consolidated financial results of
AmerAlia, NSHI and NSI.  Collectively, they are referred to herein as
“the Company”.  All material inter-company accounts and transactions
have been eliminated in the consolidation accounts.
 
 The
Company had been a development stage company since July 1, 1992 and exited the
development stage on June 30, 2003.   The Company exited the
development stage and began planned principal operations with the purchase of
the assets and related liabilities of WRNM on February 20, 2003.
 
 The
Company uses solution mining to recover sodium bicarbonate for sale to the
animal feed, human food, pharmaceutical, personal products and industrial uses,
including  for flue gas desulfurization,.   The Company
proposes to expand its existing NSI operations by increasing in stages the
design capacity of the facility .  These stages will be principally
determined by increases in market demand.
 
 b.     Accounting
Method
 
 The
Company’s consolidated financial statements are prepared using the accrual
method of accounting.  The Company and its subsidiaries have elected a
June 30 year-end.
 
 c.     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 $218,912 and $507,312 in restricted cash at June 30, 2006 and 2005,
respectively, comprising $42,863 held in a certificate of deposit with a bank
(to cover costs associated with the water monitoring wells and the restoration
of the Rock School Lease) and the balance is cash held in checking and money
market accounts held by NSHI and NSI.  The management of these funds
is governed by a Securityholder Agreement between the Company and the Sentient
Entities.  Consequently, they are considered “restricted
cash”.
 
 d.     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-10
 Table of Contents
  AMERALIA,
INC. AND SUBSIDIARIES
 Notes to
the Consolidated Financial Statements
 June 30,
2006 and 2005
 
 NOTE
      1 -
              ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  (Continued)
 
 e.     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, 2006
              
              
              June
      30, 2005(Restated)Deferred
      tax assets:NOL
      Carryover
              
              $
              14,868,100
              
              
              $
              12,062,100Related
      Party
              
              
              887,800
              
              
              
              1,593,600Deferred
      tax liabilities:Depreciation
              
              
              (547,100
              )
              
              
              (591,400Valuation
      allowance
              
              
              (15,208,800
              )
              
              
              (13,064,300Net
      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, 2006 and 2005 due to the
following:
 
 June
      30, 2006
              
              
              June
      30, 2005(Restated)Book
      Income
              
              $
              (3,050,762
              )
              
              $
              (2,593,513
              )Stock
      for service accounts
              
              $
              33,866
              
              
              
              115,043Penalties
              
              
              5,688
              
              
              
              -Meals
      & Entertainment
              
              
              2,181
              
              
              
              579Loss
      on impairment
              
              
              718,880
              
              
              
              -Accrued
      expenses
              
              
              (705,805
              )
              
              
              910,568Depreciation
              
              
              171,975
              
              
              
              676,705Sale
      of Assets
              
              
              15,585
              
              
              
              -Valuation
      allowance
              
              
              2,808,392
              
              
              
              890,618$
              -
              
              
              $
              -
 
 At June
30, 2006, the Company had net operating loss carry-forwards of $38,000,000 that
may be offset against future taxable income from the year 2006 through
2026.  No tax benefit has been reported in the June 30, 2006
consolidated financial statements since the potential tax benefit is offset by a
valuation allowance of the same amount.
 
 Due to
the change in ownership provisions of the Tax Reform Act of 1986, net operating
loss carry-forwards for Federal income tax reporting purposes are subject to
annual limitations.  Should a change in ownership occur, use of net
operating loss carry-forwards may be limited in future years.
  F-11
 Table of Contents
  AMERALIA,
INC. AND SUBSIDIARIES
 Notes to
the Consolidated Financial Statements
 June 30,
2006 and 2005
 
 NOTE
      1 -
              ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  (Continued)
 
 f.     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.
 
 g.     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, 2006
              
              
              June
      30, 2005(Restated)Loss
      (numerator)
              
              $
              (7,822,468
              )
              
              $
              (6,684,130
              )Shares
      (denominator)
              
              
              17,022,896
              
              
              
              16,898,237Per
      share amount
              
              $
              (0.46
              )
              
              $
              (0.40
              )
 
 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 3,690,000 and 3,525,000
common stock equivalents as at June 30, 2006 and 2005,
respectively.
 
 h.     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, 2006 the Company
had two customers that individually constituted more than 10% of our total
revenues.  These customers had revenues representing 23% and 33 % of
our total revenues and receivables balances representing 28% and 26%
respectively of our total trade accounts receivable balance at June 30,
2006.  The Company had sales amounting to approximately 71% of total
sales from five customers for the year ended June 30, 2005.  At June
30, 2005, approximately 72% of the Company’s trade accounts receivable were from
these customers.
 
 i.     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, 2006 the
net accounts receivable balance included $2,847,491 for trade receivables, a
$75,220 allowance for doubtful accounts and $5,000 due from
employees.  At June 30, 2005 the net accounts receivable balance
included $2,351,042 for trade receivables with no allowance for doubtful
accounts.
 
 j.     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.
  F-12
 Table of Contents
  AMERALIA,
INC. AND SUBSIDIARIES
 Notes to
the Consolidated Financial Statements
 June 30,
2006 and 2005
 
 NOTE
      1 -
              ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  (Continued)
 
 k.     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.
 
 l.     Shipping
      and Handling Fees and Costs
 
 The
Company records all shipping and handling costs in cost of sales.
 
 m.     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.
 
 n.     New
      Accounting Pronouncements
 
 During
the year ended June 30, 2006 and subsequently, the FASB has issued a number of
financial accounting standards, none of which did or are expected to have a
material impact on the Company’s results of operations, financial position, or
cash flows, with exception of SFAS 160. In December 2007, the FASB issued SFAS
160, Non-controlling Interests
in Consolidated Financial Statements, which amended ARB 51, to establish
accounting and reporting standards for the non-controlling interest in a
subsidiary and for the deconsolidation of a subsidiary.  SFAS No. 160 is
scheduled to become effective for the Company for financial statements issued
for fiscal year 2009.  We are currently evaluating the effects, if any,
that this statement will have on our future financial statements and related
financial position, results of operations and operating cash flows.
 
 o.     Stock
Options
 
 During
the year ended June 30, 2005 the Company applied Accounting Principles Board
(“APB”) 25, “Accounting for Stock Issued to Employees,” and related
interpretations in accounting for all stock option plans. Under APB 25,
compensation cost is recognized for stock options granted to employees when the
option price is less than the market price of the underlying common stock on the
date of grant.
 
 FASB
Statement 123, “Accounting for Stock-Based Compensation” (SFAS No. 123) as
amended by SFAS No. 148, requires the Company to provide pro-forma information
regarding net income (loss) and net income (loss) per share as if compensation
costs for the Company’s stock option plans and other stock awards had been
determined in accordance with the fair value based method prescribed in SFAS No.
123.  The company has applied the disclosure requirements of SFAS No.
148.
 
 On July
1, 2005, we adopted Statement of Financial Accounting Standards No.
 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires the
measurement and recognition of compensation expense for all share-based payments
to employees and directors including employee stock options and stock
purchases related to the Company’s employee stock option and award plans based
on estimated fair values.  SFAS 123 (R) supersedes our previous
accounting under Accounting Principles Board Option No. 25, “Accounting for
Stock Issued to Employees” (“APB25”) for periods beginning in fiscal 2006. In
March 2005, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 107 (“SAB 107”) relating to SFAS 123 (R). We have applied the
provisions of SAB 107 in our adoption of SFAS 123 (R).
  F-13
 Table of Contents
  AMERALIA,
INC. AND SUBSIDIARIES
 Notes to
the Consolidated Financial Statements
 June 30,
2006 and 2005
 
 NOTE
      1 -
              ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  (Continued)
 
 o.     Stock
Options (Continued)
 
 We
adopted SFAS 123(R) using the modified prospective transition method, which
requires the application of the accounting standard as of July 1, 2005, the
first day of our fiscal year 2006. Our financial statements as of and for the
fiscal year ended June 30, 2006 reflect the impact of SFAS 123 (R). In
accordance with the modified prospective transition method, our financial
statements for the fiscal year ended June 30, 2005 have not been restated to
reflect, and do not include, the impact of SFAS 123 (R). Stock-based
compensation expense recognized under SFAS 123 (R) for the fiscal year ended
June 30, 2006 was $86,835, and related to employee stock options issued during
that fiscal year. There was no stock-based compensation expense related to
employee stock options recognized during the fiscal year ended June 30,
2005.
 
 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. At June 30, 2005, we had no unvested share-based payment awards for
which compensation expense needed to be recognized in subsequent
periods.  Stock-based compensation expense recognized in our
Statements of Operations for the fiscal year ended June 30, 2006 only include
compensation expense for share-based payment awards granted, but not yet vested
after July 1, 2005, and are based on the grant date fair value estimated in
accordance with SFAS 123 (R).
 
 Stock-based
compensation expense recognized in our Statements of Operations for fiscal year
ended June 30, 2006 assume all awards will vest, therefore no reduction has been
made for estimated forfeitures.
 
 p.     Advertising
 
 The
Company follows the policy of charging the costs of advertising to expense as
incurred.  Advertising expense for the years ended June 30, 2006 and
2005 was $nil and $nil, respectively.
 
 q.     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.
 
 r.     
      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.
 
 s.    
Reclassification of Prior Year Balances
 
 Certain
reclassifications have been made to the 2005 financial statements in order for
them to conform to the classifications used for the 2006 financial
statement presentation.
  F-14
 Table of Contents
  AMERALIA,
INC. AND SUBSIDIARIES
 Notes to
the Consolidated Financial Statements
 June 30,
2006 and 2005
 
 NOTE
      1 -
              ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  (Continued)
 
 t.    
       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, 2006 and 2005, respectively.
 
 
 NOTE
      2 -
              INVENTORIES
 
 Inventories
consisted of the following:
 June
      30, 2006
              
              June
      30, 2005(Restated)Raw
      materials and supplies
              
              $
              315,546
              
              
              $
              282,529Finished
      goods
              
              
              500,818
              
              
              
              388,053$
              816,364
              
              
              $
              670,582
 
 
 NOTE
      3 -
              PREPAID
      EXPENSES
 
 Prepaid
expenses consisted of the following:
 June
      30, 2006
              
              
              June
      30, 2005Prepaid
      natural gas costs
              
              $
              154,111
              
              
              $
              94,732Prepaid
      insurance
              
              
              -
              
              
              
              18,567Prepaid
      construction costs
              
              
              227,500
              
              
              
              227,500Other
      prepayments & deposits
              
              
              137,048
              
              
              
              129,816$
              518,659
              
              
              $
              470,615
  F-15
 Table of Contents
  AMERALIA,
INC. AND SUBSIDIARIES
 Notes to
the Consolidated Financial Statements
 June 30,
2006 and 2005
 
 NOTE
      4 -
              FIXED
      ASSETS
 
 Fixed
assets consist of the following amounts:
 June
      30, 2006
              
              
              June
      30, 2005(Restated)Property
      plant and equipment
              
              $
              11,994,914
              
              
              $
              11,828,682Cavities
      and well development
              
              
              6,340,616
              
              
              
              3,506,096Furniture
      and fixtures
              
              
              71,436
              
              
              
              71,436Mineral
      leases
              
              
              4,167,471
              
              
              
              4,167,471Subtotal
              
              
              22,574,437
              
              
              
              19,573,685Less
      accumulated depreciation and amortization
              
              
              (3,594,607
              )
              
              
              (2,527,159
              )Total
              
              $
              18,979,830
              
              
              $
              17,046,526
 
 Depreciation
and amortization expense for the years ended June 30, 2006 and 2005 was $1,082,677 and $1,043,215
respectively.
 
 NOTE
      5 -
              PATENTS
 
 Patents
consisted of the following:
 June
      30, 2006
              
              
              June
      30, 2005Patents
      acquired from IMC at fair value
              
              $
              50,000
              
              
              $
              50,000Less
      accumulated amortization
              
              
              (14,986
              )
              
              
              (6,168
              )Net
      Patents
              
              $
              35,014
              
              
              $
              43,832
 
 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, 2006 and 2005 was $8,818 and $2,616,
respectively.  The amortization expenses to be recognized over the
next five years are as follows:
 
 Fiscal
      Year
              
              Amount2007
              
              $
              4,4692008
              
              
              4,4692009
              
              
              4,4692010
              
              
              4,4692011
      and subsequent
              
              
              17,138Total
              
              $
              35,014
 
 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-16
 Table of Contents
  AMERALIA,
INC. AND SUBSIDIARIES
 Notes to
the Consolidated Financial Statements
 June 30,
2006 and 2005
 
 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 being recorded 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, respectively.  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, 2006.  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, 2006 and 2005 was $899,562 and
$760,710, respectively.  Royalty expense for the years ended June 30,
2006 and 2005 was $497,847 and $461,670, respectively.
 
 
 NOTE
      9 -
              ACCRUED
      EXPENSES
 
 Accrued
expenses comprise the following:
 June
      30, 2006
              
              
              June
      30, 2005(Restated)Salaries
      and wages
              
              $
              244,993
              
              
              $
              218,919Judgment
      payable (Hudson)
              
              
              300,000
              
              
              
              454,169Freight
              
              
              114,148
              
              
              
              107,701Property
      tax
              
              
              63,000
              
              
              
              72,000Employment
      taxes
              
              
              623,032
              
              
              
              526,600State
      taxes
              
              
              2,544
              
              
              
              2,544Other
              
              
              168,704
              
              
              
              122,647Total
              
              $
              1,516,421
              
              
              $
              1,504,580
 
 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-17
 Table of Contents
  AMERALIA,
INC. AND SUBSIDIARIES
 Notes to
the Consolidated Financial Statements
 June 30,
2006 and 2005
 
 NOTE
      10 -
              DUE
      TO RELATED PARTIES
 
 Accrued
liabilities due to related parties comprise the following:
 June
      30, 2006
              
              
              June
      30, 2005(Restated)Accrued
      officer and director compensation, expenses and advances
              
              $
              911,056
              
              
              $
              577,100Accrued
      interest for secured promissory notes to accredited
    investors
              
              
              262,415
              
              
              
              64,351Accrued
      interest on Series C Debenture secured promissory note
              
              
              92,737
              
              
              
              28,732Provision
      for accrued but unpaid interest due on Jacqueline Badger Mars Trust
      promissory notes
              
              
              132,919
              
              
              
              59,079Unsecured
      advance repayable to Jacqueline Badger Mars
              
              
              6,827
              
              
              
              6,827$
              1,405,954
              
              
              $
              736,089
 
 Accrued
directors fees and officer and director compensation also includes interest
expense totaling $88,985 for the year ended June 30, 2006 allowed on unpaid loan
account balances.  Interest expense of $65,587 was included in the
year ended June 30, 2005.
 
 Notes
payable to related parties comprise the following:
 June
      30, 2006
              
              
              June
      30, 2005(Restated)Note
      and interest payable to Jacqueline Badger Mars Trust; principal and
      interest due December 31, 2005; interest at 7%; unsecured
              
              $
              469,628
              
              
              $
              469,628Various
      guaranty promissory notes payable to Jacqueline Badger Mars Trust due
      December 31, 2005; Interest at various rates between 4.5%and 4.99%;
      unsecured
              
              
              1,140,729
              
              
              
              493,804Secured
      notes payable to accredited related party investors; 10% interest payable
      quarterly; due September 30, 2005
              
              
              1,360,000
              
              
              
              1,360,000Series
      C Debenture Secured Promissory Note payable to an accredited related party
      investor; due March 19, 2008
              
              
              853,400
              
              
              
              853,400Total
      related party notes payable
              
              
              3,823,757
              
              
              
              3,176,832Less
      current portion
              
              
              2,970,357
              
              
              
              2,323,432Total
      related party notes payable long term
              
              $
              853,400
              
              
              $
              853,400
  F-18
 Table of Contents
  AMERALIA,
INC. AND SUBSIDIARIES
 Notes to
the Consolidated Financial Statements
 June 30,
2006 and 2005
 
 NOTE
      11 -
              NOTES
      PAYABLE
 
 Notes
payable comprise the following:
 June
      30, 2006
              
              
              June
      30, 2005NSHI
      Series A Secured 10% Debentures payable to the Sentient Entities; due
      September 30, 2005
              
              $
              5,000,000
              
              
              $
              5,000,000NSHI
      Secured Subordinated Series B1 Debentures payable to the Sentient
      Entities; due February 19, 2008
              
              
              11,300,000
              
              
              
              11,300,000NSHI
      Secured Subordinated Series B2 Debentures payable to the Sentient
      Entities; due February 19, 2008
              
              
              9,700,000
              
              
              
              9,700,000Sentient
      working capital loans
              
              
              1,000,000
              
              
              
              -AmerAlia
      Secured Promissory Note payable to an accredited investor; 10% interest
      payable
              
              
              2,890,000
              
              
              
              2,890,000AmerAlia
      Series C Debenture Secured Promissory note payable to an accredited
      investor, due March 19, 2008
              
              
              1,464,292
              
              
              
              1,464,292Wells
      Fargo factoring facility with fees payable according to time taken to
      collect each receivable
              
              
              1,253,874
              
              
              
              -Note
      payable to financial institution; principal and interest due June 30,
      2006;interest at 7.22% at June 30, 2006;secured by a related party
      guaranty agreement
              
              
              9,921,583
              
              
              
              9,921,583Note
      payable to equipment manufacturer, unsecured, interest only at 8% payable
      onMarch
      31, of each year, entire principal due December 31, 2005.
              
              
              1,200,000
              
              
              
              1,200,000Note
      payable to an investor, on call at 4.5%
              
              
              100,000
              
              
              
              100,000Note
      payable to McFarland Dewey Securities Co; unsecured, interest at 4%; due
      May 18, 2004
              
              
              18,000
              
              
              
              18,000Note
      payable to vendor, nil interest rate
              
              
              130,938
              
              
              
              -Motor
      vehicle loans at 0.9% p.a. interest due February and March 2009secured by
      motor vehicles
              
              
              67,816
              
              
              
              -Note
      payable to investor; unsecured, due on demand; at 10%
      interest.
              
              
              4,000
              
              
              
              4,000Total
      notes payable
              
              
              44,050,503
              
              
              
              41,597,875Less
      current portion
              
              
              21,542,869
              
              
              
              19,133,583Total
      long-term debt
              
              $
              22,507,634
              
              
              $
              22,464,292
 
 The
aggregate principal maturities of notes payable at June 30, 2006 are as
follows:
 
 Fiscal
      Year
              
              Amount2007
              
              $
              21,542,8692008
              
              
              22,507,6342009
              
              
              -2010
              
              
              -2011
              
              
              -Total
              
              $
              44,050,503
  F-19
 Table of Contents
  AMERALIA,
INC. AND SUBSIDIARIES
 Notes to
the Consolidated Financial Statements
 June 30,
2006 and 2005
 
 NOTE
      12 -
              CAPITAL
      LEASE OBLIGATIONS
 
 June
      30, 2006
              
              
              June
      30, 2005Total
      minimum lease payments
              
              $
              159,516
              
              
              $
              243,525Less
      interest and taxes
              
              
              (18,114
              )
              
              
              (33,219
              )Present
      value of net minimum lease payments
              
              
              141,401
              
              
              
              210,306Less
      current portion
              
              
              (43,429
              )
              
              
              (68,905
              )Long-term
      portion of capital lease obligations
              
              $
              97,972
              
              
              $
              141,401
  The
aggregate principal maturities of capital leases at June 30, 2006 are as
follows:
 
 Fiscal
      Year
              
              Amount2007
              
              $
              43,4292008
              
              
              47,0342009
              
              
              50,9382010
              
              
              -2011
              
              
              -Total
              
              $
              141,401
 
 
 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, 2006 is $871,845, an increase of $64,229 on the prior year’s balance
made up of $24,229 in accretion and $40,000 for the estimated cost of plugging
and abandoning a new well placed in service during fiscal year
2006.  The ARO value at June 30, 2005 is $807,616, a reduction of
$255,960 from the prior year’s balance.  This reduction was due to
accretion of $23,523 and the plugging and remediation of some of the wells
during the fiscal year ended June 30, 2005 for $279,483.
 
 
 NOTE
      14 -
              OPERATING
      LEASES
 
 The
Company has signed seven leases for a total of 59 railway hopper
cars.  Three of these leases terminate in June 2010, two terminate in
December 2009, one terminates in September 2010 and the other terminates in
December 2007.  These leases require monthly payments of $425 to $540
per car.  The Company has signed a lease for a 29,988 square foot
warehouse in Rifle, Colorado.  The lease terminates May 2009 and
requires monthly payments of $9,651, increasing by 3% in January of each
year.
 
 The
following is a schedule of future minimum lease payments required by the
non-cancelable operating lease agreements at June 30, 2006:
 
 Year ended June
      30
              
              Amount2007
              
              $
              477,8552008
              
              
              412,3812009
              
              
              336,4672010
              
              
              192,3002011
              
              
              32,400Total
              
              $
              1,451,403
 
 The
rental expense component of these lease payments was $257,996 for financial year
2006 and $141,255 for financial year 2005.
  F-20
 Table of Contents
  AMERALIA,
INC. AND SUBSIDIARIES
 Notes to
the Consolidated Financial Statements
 June 30,
2006 and 2005
 
 NOTE
      15 -
              OUTSTANDING
      STOCK OPTIONS AND PURCHASE WARRANTS
 
 As a
result of applying SFAS No. 123(R) to stock options granted as inducements to
two individuals to become new board members, the Company recorded expenses of
$86,835 for the year
ended June 30, 2006.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 165.94% and 178.60%; risk-free interest rates of 3.75% and 3.13% and expected
lives of 3.0 years.
 
 Had
compensation cost for the Company’s stock options granted to directors and
employees been based on the fair value as determined by the Black-Scholes option
pricing model at the grant date under the accounting provisions of SFAS No. 123,
the Company would have recorded an additional expense of $87,903 for the year
ended June 30, 2005.  Also under these same provisions, the Company’s
net loss would have been changed by the pro forma amounts indicated
below:
 
 
 June
      30, 2006
              
              June
      30, 2005(Restated)Net
      loss:As
      reported
              
              $
              (7,822,468
              )
              
              $
              (6,684,130
              )Pro
      forma
              
              $
              (7,822,468
              )
              
              $
              (6,772,033
              )June
      30, 2006
              
              June
      30, 2005(Restated)Basic
      loss per share:As
      reported
              
              $
              (0.46
              )
              
              $
              (0.40
              )Pro
      forma
              
              $
              (0.46
              )
              
              $
              (0.40
              )
 
 
 A summary
of the status of the Company’s stock options and warrants as of June 30, 2005
and changes during the year ended June 30, 2006 is presented below:
 WeightedOptions,
              
              
              AverageWarrants
              
              
              Exerciseand
      SAR’s
              
              
              PriceOutstanding,
      June 30, 2005
              
              
              4,265,000
              
              
              $
              0.96Granted
              
              
              187,500
              
              
              $
              0.54Expired/Canceled
              
              
              (575,000
              )
              
              $
              1.32Exercised
              
              
              (187,500
              )
              
              $
              0.52Outstanding,
      June 30, 2006
              
              
              3,690,000
              
              
              $
              0.96Exercisable,
      June 30, 2006
              
              
              3,690,000
              
              
              $
              0.96
 
  F-21
 Table of Contents
  AMERALIA,
INC. AND SUBSIDIARIES
 Notes to
the Consolidated Financial Statements
 June 30,
2006 and 2005
 
 NOTE
      15 -
              OUTSTANDING
      STOCK OPTIONS AND PURCHASE WARRANTS
(Continued)
 
 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,
2006:
 
 Expiration
      Date
              
              Price
              
              
              NumberMay
      18, 2007
              
              $
              0.66
              
              
              
              75,000June
      30, 2007
              
              $
              0.53
              
              
              
              187,500June
      30, 2008
              
              $
              0.54
              
              
              
              187,500March
      19, 2009
              
              $
              1.00
              
              
              
              2,500,000April
      18, 2009
              
              $
              0.71
              
              
              
              540,000April
      18, 2009
              
              $
              3.00
              
              
              
              200,0003,690,000
 
 During
the year ended June 30, 2006, 187,500 options were granted, 187,500 options were
exercised and 575,000 options expired.
 
 In June
2001, the Shareholders approved the 2001 Directors’ Incentive Plan whereby each
director (who is not an employee or officer) is granted an option to purchase
75,000 shares at a current market price when a person joins the Board of
Directors.  In addition, options to purchase 37,500 shares are granted
to each such director sitting at July 1 of each year.  The exercise
price for these options is the average market price during the month of June
preceding each grant date, and the options have a three-year
term.  All options under this plan vest and are exercisable six months
after the date of grant.
 
 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
              
              Amount2007
              
              $
              100,0002008
              
              
              100,0002009
              
              
              100,0002010
              
              
              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.
  F-22
 Table of Contents
  AMERALIA,
INC. AND SUBSIDIARIES
 Notes to
the Consolidated Financial Statements
 June 30,
2006 and 2005
 
 NOTE
      17 -
              PREFERRED
      STOCK
 
 There are
82 shares of Series E preferred stock outstanding at June 30, 2006 and 2005
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
 
 During
the year ended June 30, 2006, Mr. Gunn’s salary was $200,000, of which, $171,888
was paid and $28,112 was accrued.  Mr. van Mourik’s salary was
$150,000 all of which was accrued.
 
 During
the year ended June 30, 2005, Mr. Gunn’s salary was $200,000, of which, $114,145
was paid and $85,855 was accrued.  Mr. van Mourik’s salary was
$150,000 of which $52,624 was paid and $97,376 was accrued.
 
 Each of
the above individuals is also due $14,000 per year for directors’ fees in the
years ended June 30, 2006 and 2005 respectively.  These amounts have
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.
 
 
 NOTE  19
      -
              CORRECTION
      OF 2005 FINANCIAL STATEMENTS
 
 After the
original issue of the June 30, 2005 financial statements, the Company determined
that inventories, property plant and equipment, well cavities, obligations for
accrued expenses, obligations due to related parties and asset retirement
obligations were not properly recorded in the Company’s accounts for the year
ended June 30, 2005.  Correction of these errors had the following
effect on the previously reported Assets, Liabilities, Stockholders’ Equity and
Net Loss of the Company as of and for the year ended June 30, 2005:
 
 Originally
              
              
              As
              
              
              Difference
              
              
              NoteReported
              
              
              RestatedBALANCE
      SHEET:Inventories
              
              
              756,728
              
              
              
              670,582
              
              
              
              (86,146
              )
              
              
              (1
              )Property,
      plant and equipment, net
              
              
              14,800,808
              
              
              
              10,638,988
              
              
              
              (4,161,820
              )
              
              
              (2
              )Cavities
      and well development
              
              
              1,792,817
              
              
              
              2,240,067
              
              
              
              383,320
              
              
              
              (7
              )63,930
              
              
              
              (3
              )Equipment
      held and not yet in service
              
              
              -
              
              
              
              4,161,820
              
              
              
              4,161,820
              
              
              
              (2
              )Accrued
      expenses
              
              
              995,409
              
              
              
              1,504,580
              
              
              
              298,293
              
              
              
              (4
              )210,878
              
              
              
              (5
              )Accrued
      expenses due to related parties
              
              
              1,086,650
              
              
              
              736,089
              
              
              
              (298,293
              )
              
              
              (4
              )(52,268
              )
              
              
              (5
              )Asset
      retirement obligation
              
              
              530,830
              
              
              
              807,616
              
              
              
              276,786
              
              
              
              (3
              )Accumulated
      deficit
              
              
              (43,148,692
              )
              
              
              (43,222,984
              )
              
              
              (86,146
              )
              
              
              (1
              )197,919
              
              
              
              (7
              )(151,966
              )
              
              
              (5
              )(34,098
              )
              
              
              (8
              )
  F-23
 Table of Contents
  AMERALIA,
INC. AND SUBSIDIARIES
 Notes to
the Consolidated Financial Statements
 June 30,
2006 and 2005
 
 NOTE
      19 -
              CORRECTION
      OF 2005 FINANCIAL STATEMENTS
(Continued)
 
 INCOME
      STATEMENT:General
      and administrative expense
              
              
              1,234,744
              
              
              
              1,226,373
              
              
              
              (8,371
              )
              
              
              (5
              )Depreciation,
      amortization and accretion expense
              
              
              1,542,964
              
              
              
              1,112,332
              
              
              
              212,856
              
              
              
              (3
              )(185,401
              )
              
              
              (7
              )(458,087
              )
              
              
              (6
              )Loss
      on impairment
              
              
              -
              
              
              
              458,087
              
              
              
              458,087
              
              
              
              (6
              )Interest
      expense
              
              
              2,701,165
              
              
              
              2,716,179
              
              
              
              15,014
              
              
              
              (5
              )Net
      loss
              
              
              (6,650,032
              )
              
              
              (6,684,130
              )
              
              
              (34,098
              )
              
              
              (8
              )Loss
      per share
              
              
              (0.39
              )
              
              
              (0.40
              )
              
              
              (0.01
              )
              
              
              (9
              )
 
 Notes1
              
              To
      properly state value of finished goods inventory using production costs
      instead of total costs, recorded as an increase in the accumulated deficit
      as of June 30, 2005.2
              
              To
      reclassify held equipment as its own line item rather than having it
      included in Property Plant and Equipment.3
              
              To
      properly record the Asset Retirement Obligation, which resulted in an
      increase to the costs to be amortized in the Cavities and Well Development
      account, and to properly record the accretion of the Asset Retirement
      Obligation in FY2005.4
              
              To
      recognize obligations to remit withholding taxes on compensation
      previously paid.  Results in reclassification of liabilities due
      to related parties to the provision for employment tax
      obligations.5
              
              To
      recognize additional provisions for employment taxes due to penalties and
      interest for late payment of taxes and provision for employment taxes on
      accrued but unpaid compensation.  Results in an increase in
      accrued expenses of $210,878, an increase in accrued expenses due to
      related parties of $52,268, a decrease of $8,371 in General and
      Administrative expenses, an increase of $15,014 in Interest expense, and
      expenses of $151,966 being recognized in prior periods, thus increasing
      accumulated deficit at June 30, 2005.6
              
              To
      reclassify depreciation expense as loss on impairment.7
              
              To
      properly record well and cavity amortization and
  depletion.8
              
              Cumulative
      effect of all restatement entries made to the FY2005 statement of
      operations9
              
              Loss
      per share increased by $0.01 per share as a result of the cumulative
      effect of  restatement entries made to the FY2005 statement of
      operations
 
 NOTE
      20 -
              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 $51 million
as of June 30, 2006. The Company has not yet established revenues sufficient to
cover its operating costs, which creates doubt as to whether it can continue as
a going concern.
 
 The
ability of the Company to continue as a going concern is dependent on the
Company obtaining adequate capital to fund operating losses.  If the
Company is unable to obtain adequate capital, it could be forced to cease
operations.  In order to continue as a going concern, the Company will
have to refinance its debt due to the Sentient Entities and secure additional
capital resources.  Management’s plans to obtain such resources for
the Company are based on having accomplished many of its immediate objectives
since acquiring the WRNM operations that are now leading to improved
profitability.  These actions include:
 ·
              enhancing
      the management team with recruitments in production, marketing, finance
      and customer relations
 ·
              implementing
      new accounting and management information
  systems
 ·
              revitalizing
      and repairing production facilities thereby increasing efficiency and
      production capacity
 ·
              gaining
      government permits to expand solution mining
  activity
  F-24
 Table of Contents
  AMERALIA,
INC. AND SUBSIDIARIES
 Notes to
the Consolidated Financial Statements
 June 30,
2006 and 2005
 
 NOTE
      20 -
              GOING
      CONCERN (Continued)
 
 Consequently,
management has reduced operating costs and has implemented a number of marketing
initiatives to gain higher volumes of sales.  As this is a business
with high fixed costs, management expects that additional increases in revenues
as a result of these higher volumes and price increases will impact
significantly on profitability.  Management is now also engaging in
discussions with Sentient and other note holders to settle all debt, accrued
interest and rights to contingent interest for equity in AmerAlia and/or its
subsidiaries.  If completed, these transactions will substantially
remove much of our debt and most of our creditor obligations except for normal
trade credit.  The existence of the contingent interest obligations in
particular has previously made the task of raising new debt or equity capital
impossible. To complete this recapitalization plan, the Company must first bring
its SEC filings current and is currently engaged in fulfilling this
requirement.
 
 The
ability of the Company to continue as a going concern is dependent upon its
ability to successfully accomplish the se plans described above.  The
accompanying financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
 
 NOTE
      21 -
              SUBSEQUENT
      EVENTS
 
 On July
1, 2006 we granted options to Non-executive Directors to acquire 187,500 shares
at $0.42 per share until June 30, 2008 in accordance with the 2001 Directors’
Incentive Plan.
 
 In May,
2007 the Sentient Entities converted their Series B2 debentures into 49% of the
equity of NSI thus increasing their ownership of NSI to 53.5%.
 
 On July
1, 2007 we granted options to Non-executive Directors to acquire 187,500 shares
at $0.40 per share until June 30, 2009 in accordance with the 2001 Directors’
Incentive Plan.
 
 In
August, 2007 a Sentient affiliate (“Sentient II”) acquired all the debt and
equity securities, including the debt previously owed to the Bank of America,
owned by the Mars Trust.  Also, in August 2007, Sentient II lent
$350,000 to AmerAlia at 6% interest due December 31, 2007 subsequently extended
to July 31, 2008.  The principal and interest is convertible to shares
of AmerAlia common stock at 36 cents per share.
 
 In August
2007 we settled the outstanding judgement in favor of Hudson for a cash payment
of $300,000.
 
 Effective
as of October 31, 2007, Sentient I acquired from NSI its $750,000 Series A
Secured debenture and accrued interest of $271,215.75.
 
 Effective
as of March 31, 2008, Sentient USA Resources Fund III LP (“Sentient III”)
purchased AmerAlia’s rights to outstanding interest due on its Series A Secured
10% Debentures for $1,406,875. AmerAlia used these funds for the purpose of
paying some of the outstanding interest owed to the holders of its Series A
Debenture Secured promissory notes.  Sentient III also acquired
Sentient I’s rights to interest owed on its Series A debentures, including the
interest due on the debenture previously owned by NSI, for
$2,076,334.20.
 
 In May,
2008 Sentient I loaned AmerAlia $465,000 for the purpose of contributing capital
to NSHI which, in turn contributed $465,000 to NSI as its proportionate share of
$1 million for well field development expenditures.  The loan is at 6%
interest and is due July, 31, 2008.  The principal and interest is
convertible to shares of AmerAlia common stock at 36 cents per
share.
   F-25