10-K/A 1 earthenergy10k10am1.txt FORM 10-K FOR THE YEAR ENDED JUNE 30, 2010 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Amendment 1 to FORM 10-K [X] 15, ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: June 30, 2010 OR [ ] 15, TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 000-51489 Earth Energy Reserves, Inc. (formerly Asian American Business Development Company) (Exact name of registrant in its charter) Nevada 75-3000774 (State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) 621 17TH Street #1640 Denver, CO 80293 (Address of principal executive offices) (Zip Code) Registrant's Telephone number, including area code: (303) 297-0500 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.0001 par value Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [x] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange act Yes [ ] No [x] Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.406 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [x] No [ ] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or such shorter period that Dale the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the part 90 days. Yes [ ] No[x] 2 Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained hereof, and will not be contained, to 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-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated file" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [x] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x] State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter. The market value of the registrant's voting $.0001 par value common stock held by non-affiliates of the registrant was approximately $0.00. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. The number of shares outstanding of the registrant's only class of common stock, as of September 30, 2010 was 11,059,982 shares of its $.0001 par value common stock. No documents are incorporated into the text by reference. Explanatory Note This amendment is being filed to correct the reference to the framework used to evaluate the effectiveness of our internal control over financial reporting and a typo in certification under Section 906 of the Sarbanes-Oxley. 3 EARTH ENERGY RESERVES, INC. Form 10-K For the Fiscal Year Ended June 30, 2010 Table of Contents Part I ITEM 1. BUSINESS 4 ITEM 1A. RISK FACTORS 8 ITEM 1B. UNRESOLVED STAFF COMMENTS 8 ITEM 2. PROPERTIES 8 ITEM 3. LEGAL PROCEEDINGS 8 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 8 Part II ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 9 ITEM 6. SELECTED FINANCIAL DATA 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 13 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 14 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 36 ITEM 9A. CONTROLS AND PROCEDURES 36 ITEM 9B. OTHER INFORMATION 37 Part III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT 38 ITEM 11. EXECUTIVE COMPENSATION 42 ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS 44 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 45 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 46 Part IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 47 4 PART I ITEM 1. BUSINESS Earth Energy Reserves, Inc. was incorporated in the State of Nevada on February 12, 2002 as Wiltex First, Inc. On March 10, 2005, Earth Energy filed a certificate of amendment with the State of Nevada changing its name to Asian American Business Development Company. On March 13, 2006, Earth Energy filed a certificate of amendment with the State of Nevada changing its name to Earth Energy Reserves, Inc. On December 16, 2005, Earth Energy elected to be regulated as a Business Development Company as that term is defined in Section 54 of the Investment Company Act. As a BDC, Earth Energy was subject to the laws and regulations contained in the Investment Company Act of 1940. As a BDC, Earth Energy became subject to significant regulation of its activities. On February 10, 2006, the board of directors unanimously approved a proposal to withdraw Earth Energy's election to be treated as a BDC as soon as practicable, so that it might again conduct business as a regular company rather than as a BDC subject to the Investment Company Act. Our current business plan has changed the nature of Earth Energy's business from investing, reinvesting, owning, holding, or trading in investment securities to an independent oil and gas company focused on the acquisition, drilling and production of oil and gas in the United States. The board of directors believed that BDC regulation would be inappropriate for such activities. Our principal geophysical areas of interest are Louisiana, Texas, Oklahoma, Alabama, Montana, West Virginia, New Mexico and Wyoming. Our Business Strategy We intend to invest primarily in domestic oil and gas interests, including prospects, leases, wells, mineral rights, working interests, royalty interests, overriding royalty interests, net profits interests, production payments, farm-ins, drilling to earn arrangements, partnerships, easements, rights of way, licenses and permits. We intend to produce and market production from the oil and gas interests and may enter into operating, product marketing, and other such arrangements in connection with such production and marketing. Our primary strategy is to acquire leaseholds that are unexplored or over looked in unconventional gas areas and hold low-risk promise of large and wide-spread accumulations of natural gas reserves. We will also target select producing gas fields that we identify as under- developed by their current operator and will seek well-above average returns by re-developing these unconventional opportunities. We will also seek to be a low-cost developer of unconventional fields by applying the latest multi-lateral horizontal drilling methods, in combination with non-damaging under-balanced drilling techniques. Our objective will be to optimize capital efficiency as we develop the full 5 reserve potential of each field. While our horizontal applications are today more proven for a CBM reservoir, we may acquire shale gas resources as well. We may acquire producing properties based on our view of the pricing cycles of oil and gas and available exploitation opportunities of proved, probable and possible reserves. As of September 30, 2010, we had not acquired any such additional properties. We intend to control our overhead expenses and up-front costs in seismic data, hardware, software, geological and geophysical overhead and prospect generation. We also intend to outsource our geological, geophysical, reservoir engineering and land functions and to maintain tight control over general and administrative expenses. Planned Property Acquisition. On July 29, 2010, Earth Energy entered into a letter of intent with an energy company to purchase various interests in producing oil and gas leases located in the state of Louisiana. Until the definitive purchase agreement is executed by both companies, either company may terminate the negotiations regarding this proposed transaction, with or without cause. The estimated purchase price is $5,800,000. There can be no assurance that the financing for this proposed transaction can be obtained or that the proposed transaction will be closed. Marketing and Pricing Our future revenues will be derived principally from the sale of CBM natural gas. As a result, our revenues will be determined, to a large degree, by prevailing market prices for the gas. We intend to sell our gas under contractual arrangements or on the spot market at prevailing market prices. The price for gas is based on supply and demand, and we cannot accurately predict or control the price we may receive for our production. Price decreases would adversely affect our revenues, cash flow, profits and the value of our reserves. Historically, and particularly in recent times, these commodity prices have fluctuated widely. Among the factors that can cause this volatility are: - The domestic and foreign supplies of oil and gas, - Overall economic conditions, - Product demand, - Weather conditions, - The price and availability of competitive fuels, - Political and economic conditions in the Middle East and other producing regions, - The level of oil and gas imports, - Domestic and foreign governmental regulations, - Potential price controls, and - Environmental issues. 6 We may enter into hedging arrangements to reduce our exposure to decreases in the prices of oil and gas. Hedging arrangements may expose us to risk of financial loss in circumstances where: - There is a change in the expected differential between the hedge price and the actual price of gas; - Our production and/or sales are less than expected; and/or - The counter party to the hedging contract defaults on its contractual obligations. In addition, hedging arrangements may limit the benefit we would receive from increases in the prices of our production. On the other hand, we may choose not to engage in hedging transactions in the future. As a result, we may be more adversely affected by changes in prices than producers who engage in hedging transactions. Competition We will compete with numerous other companies in virtually all facets of our business. Our competitors in the exploration, development, acquisition and production business include major integrated companies as well as numerous large and small independents, including many that have significantly greater financial resources and in-house technical personnel. Government Regulations - Federal Income Tax. Federal income tax laws significantly affect oil and gas operators. The principal provisions that will affect us are those that permit us to deduct as incurred, rather than to capitalize and amortize, our intangible drilling and development costs and to claim 15% depletion on a portion of our oil and gas production. - Environmental Matters. Oil and gas operations are subject to extensive federal regulation and, with respect to federal leases, to interruption or termination by governmental authorities on account of environmental and other considerations such as the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) also known as the "Super Fund Law." The trend towards stricter standards in environmental legislation and regulation could increase our costs and others in the industry. Oil and gas lessees are subject to liability for the costs of clean-up of pollution resulting from a lessee's operations, and may also be subject to liability for pollution damages. We intend to obtain insurance against costs of clean-up operations, but we have no such insurance at this time and it is unlikely that we will be able to fully insure against all such risks. A serious incident of pollution may also result in the Department of the Interior requiring lessees under federal leases to suspend or cease operation in the affected area. The Oil Pollution Act of 1990 and regulations hereunder impose a variety of regulations on "responsible parties" related to the prevention of oil spills and liability for damages resulting from such spills in United States waters. The OPA assigns liability to each 7 responsible party for oil removal costs and a variety of public and private damages. While liability limits apply in some circumstances, a party cannot take advantage of liability limits if the spill was caused by gross negligence or willful misconduct or resulted from violation of federal safety, construction or operating regulations. Few defenses exist to the liability imposed by the OPA. In addition, to the extent we acquire offshore leases and those operations affect state waters, we may be subject to additional state and local clean-up requirements or incur liability under state and local laws. The OPA also imposes ongoing requirements on responsible parties, including proof of financial responsibility to cover at least some costs in a potential spill. We cannot predict whether the financial responsibility requirements under the OPA amendments will adversely restrict our proposed operations or impose substantial additional annual costs to us or otherwise materially adversely affect us. Our operations will be subject to numerous federal, state and local laws and regulations controlling the discharge of materials into the environment or otherwise relating to the protection of the environment. Such laws and regulations, among other things, impose absolute liability on the lessee for the cost of clean-up of pollution resulting from a lessee's operations, subject the lessee to liability for pollution damages, may require suspension or cessation of operations in affected areas, and impose restrictions on the injection of liquids into subsurface aquifers that may contaminate groundwater. Such laws could have a significant impact on our operating costs, as well as the oil and gas industry in general. Federal, state and local initiatives to further regulate the disposal of oil and gas wastes are also pending in certain jurisdictions, and these initiatives could have a similar impact on us. Our operations will also be subject to additional federal, state and local laws and regulations relating to protection of human health, natural resources, and the environment pursuant to which we may incur compliance costs or other liabilities. Other Laws and Regulations. Various laws and regulations often require permits for drilling wells and also cover spacing of wells, the prevention of waste of gas and oil including maintenance of certain gas/oil ratios, rates of production and other matters. The effect of these laws and regulations, as well as other regulations that could be promulgated by the jurisdictions in which we have production, could be to limit the number of wells that could be drilled on our properties and to limit the allowable production from the successful wells completed on our properties, thereby limiting our revenues. Employees As of September 30, 2010, we had five employees, including the chairman of the board of directors, president and chief executive officer, executive vice president and chief financial officer, vice president internal relations and vice president administration. We intend to use the services of independent consultants and contractors to perform various professional services, including reservoir engineering, land, legal, accounting, environmental and tax 8 services. We will also seek alliances in the areas of geological and geophysical services and prospect generation, evaluation and prospect leasing. We intend to rely on third parties to drill, produce and market our gas and oil. We believe that by limiting our personnel costs, we should be able to better control total costs and retain project management flexibility. We intend to add full time management and operations personnel in the future, as our business strategy is implemented. ITEM 1A. RISK FACTORS Not applicable ITEM 1B. UNRESOLVED STAFF COMMENTS Not applicable ITEM 2. PROPERTIES Our corporate headquarters office is located at 621 17th Street, #1640, Denver, Colorado 80293. These offices are approximately 2,357 square feet. These premises are leased on a 30 month basis commencing in August 2010 for the average monthly lease payment of $2,884. ITEM 3. LEGAL PROCEEDINGS. The registrant is not involved in any legal proceedings at this date. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS For the six months ended June 30, 2010 and during the last quarter of the fiscal year ended December 31, 2009, no matters were submitted to a vote of the registrant's security holders, through the solicitation of proxies. 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Item 5(a) a) Market Information. The registrant's common stock is not traded over the counter. We may apply for the listing of our common stock within the next twelve months. b) Holders. At September 30, 2010, there were approximately 100 shareholders of the registrant. c) Dividends. Holders of the registrant's common stock are entitled to receive such dividends as may be declared by its board of directors. No dividends on the registrant's common stock have ever been paid, and the registrant does not anticipate that dividends will be paid on its common stock in the foreseeable future. d) Securities authorized for issuance under equity compensation plans. Not applicable. e) Performance graph. Not applicable. f) Sale of unregistered securities. During the six months ended June 30, 2010, Earth Energy engaged in a private placement equity capital raising program to finance the initial costs of executing its business strategy. As of June 30, 2010, 1,466,000 Series 1 units, comprised of one share of common stock and one three year warrant to purchase one share of common stock at $1.50 per share were sold. The offering was terminated on June 30, 2010. These securities were sold pursuant to an exemption from registration under Rule 506, Regulation D of the Securities Act of 1933 to accredited investors. Item 5(b) Use of Proceeds. Not applicable. Item 5(c) Purchases of Equity Securities by the issuer and affiliated purchasers. None. ITEM 6. SELECTED FINANCIAL DATA Not applicable to a smaller reporting company. 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Trends and Uncertainties. Earth Energy is an independent company engaged in the acquisition, drilling and production of CBM natural gas in the United States. Our future operations may be adversely affected by fluctuating oil and gas prices, changing domestic and foreign economic and political environments and any prolonged recessionary periods. As long-term compensation incentive, Earth Energy has granted stock options to its officers and directors. As a result, these grants will have a negative impact on our financial statements. Investing Activities. For the six months ended June 30, 2010 and the year ended December 31, 2009, Earth Energy did not pursue any investing activities. During the year ended December 31, 2008, Earth Energy sold oil and gas leases of $63,202 resulting in net cash flows provided by investing activities of $63,202. Financing Activities. During the six months ended June 30, 2010, Earth Energy sold common stock and common stock subscriptions representing a total of 1,466,000 shares; issued 25,000 shares for rent; and repurchased 15,000 shares of preferred stock resulting in net cash provided by financing activities of $471,000 and common stock subscription receivables of $965,000 which were subsequently collected in cash. During the year ended December 31, 2009, Earth Energy sold 45,000 shares of common stock for $45,000 resulting in net cash provided by financing activities of $45,000. During the year ended December 31, 2008, Earth Energy sold 25,000 shares of common stock for $25,000 and repurchased 5,000 shares of common stock for $5,000 resulting in aggregate net cash provided by financing activities of $65,000. Results of Operations. During the six months ended June 30, 2010, Earth Energy engaged in a private placement equity capital raising program to finance the initial costs of executing its business strategy. As of June 30, 2010, 1,466,000 Series 1 units, comprised of one share of common stock and one three year warrant to purchase one share of common stock at $1.50 per share were sold. The offering was terminated on June 30, 2010. The total net cash proceeds of $1,466,000 received from this equity financing are being used to fund: - geological and geophysical research expenses; - legal, accounting and other professional services; - salaries; - and general and administrative expenses. 11 These expenses are related to the identification, evaluation and acquisition of CBM natural gas properties for development and on-going capital raising activities. In addition, $100,000 was used for a deposit related to the planned property acquisition of two Northern Louisiana working interest leaseholds. Earth Energy has not had any material revenue since its inception. All expenses prior to December 31, 2009 were paid by the majority shareholder or a related party owned by the majority shareholder and from capital raised from private investors in 2007 and 2006. Total general and administrative expenses of $208,460 were incurred during the six months ended June 30, 2010 relating to the new Earth Energy business strategy, including: - $78,000 of legal and professional services, - $49,000 of travel, - compensation of $30,000, - two years advance office rent of $26,000, - telephone of $5,000 and - other general office and supplies of $20,000. The 118% increase in these expenses of $113,000 over the prior year ended December 31, 2009 was directly attributable to the increased level of business activity. For the year ended December 31, 2009, Earth Energy did not earn any revenues. For the year ended December 31, 2008, Earth Energy earned revenues of $3,592. General and administrative expenses for the year ended December 31, 2009 consisted mainly of travel of $33,000, management fees of $12,000 and consulting fees of $41,000. General and administrative expenses decreased from $150,577 for the year ended December 31, 2008 to $95,700 for the year ended December 31, 2009. The decrease in general and administrative expenses was due mainly to a significant reduction in business activities. Interest expense increased slightly from $16,939 for the year ended December 31, 2008 to $18,332 for the year ended December 31, 2009. The increase of $1,393 was due to interest expense payable to a related party and majority shareholder. Earth Energy, together with its new management group, is presently in the process of raising additional capital which effort, if successful, will be used to partially finance its contemplated future gas and oil business activities. Recent Accounting Pronouncements In January 2010, the Financial Accounting Standards Board issued Accounting Standards Update 2010-06, "Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures about Fair Value Measurements." This ASU requires some new disclosures and clarifies 12 some existing disclosure requirements about fair value measurement as set forth in Accounting Standards Codification 820. ASU 2010-06 amends ASC 820 to now require: (1) a reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and (2) in the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements. In addition, ASU 2010-06 clarifies the requirements of existing disclosures. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early application is permitted. The Company will comply with the additional disclosures required by this guidance upon its adoption in January 2010. In June 2009, the FASB issued guidance under ASC 105, "Generally Accepted Accounting Principles." This guidance established a new hierarchy of GAAP sources for non-governmental entities under the FASB Accounting Standards Codification. The Codification is the sole source for authoritative U.S. GAAP and supersedes all accounting standards in U.S. GAAP, except for those issued by the SEC. The guidance was effective for financial statements issued for reporting periods ending after September 15, 2009. The adoption had no impact on the Company's financial position, cash flows or results of operations. In August 2009, the FASB issued ASU No. 2009-05, "Fair Value Measurements and Disclosures (Topic 820) - Measuring Liabilities at Fair Value," related to fair value measurement of liabilities. This update provides clarification that in circumstances in which a quoted price in an active market for an identical liability is not available, a reporting entity is required to measure fair value using one or more valuation techniques. This guidance is effective for the first reporting period beginning after issuance In April 2009, the FASB updated its guidance under ASC 820, "Fair Value Measurements and Disclosures," related to estimating fair value when the volume and level of activity for an asset or liability have significantly decreased and identifying circumstances that indicate a transaction is not orderly. The guidance was effective for interim and annual reporting periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The adoption of this guidance did not have any impact on the Company's results of operations Also in April 2009, the FASB updated its guidance under ASC 825, "Financial Instruments," which requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This guidance also requires those disclosures in summarized financial information at interim reporting periods. The guidance was effective for interim reporting periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. 13 On December 31, 2008, the SEC published final rules and interpretations updating its oil and gas reporting requirements. Many of the revisions are updates to definitions in the existing oil and gas rules to make them consistent with the Petroleum Resource Management System, which is a widely accepted standard for the management of petroleum resources that was developed by several industry organizations. Key revisions include the ability to include nontraditional resources in reserves, the use of new technology for determining reserves, permitting disclosure of probable and possible reserves, and changes to the pricing used to determine reserves based on a 12-month average price rather than a period end spot price. The average is to be calculated using the first day-of-the-month price for each of the 12 months that make up the reporting period. The new rules are effective for annual reports for fiscal years ending on or after December 31, 2009. Early adoption is not permitted. In the opinion of management, these statements will have no material effect on the financial statements of the registrant. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable 14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA EARTH ENERGY RESERVES, INC. Index to the Financial Statements Report of Independent Registered Public Accounting Firm 15 Financial Statements of Earth Energy Reserves, Inc.: Balance Sheets June 30, 2010 and December 31, 2009 and 2008 16 Statements of Operations for the six month period ended June 30, 2010 and for the years ended December 31, 2009 and 2008 17 Statements of Changes of Stockholders' Equity (Deficit) For the six months period ended June 30, 2010 and for the years Ended December 31, 2009 and 2008 18 Statements of Cash Flows for the six month period ended and for the years ended December 31, 2009 and 2008 20 Notes to Financial Statements 22 15 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Earth Energy Reserves, Inc. Estes Park, Colorado We have audited the accompanying balance sheets of Earth Energy Reserves, Inc. as of June 30, 2010, December 31, 2009 and 2008, and the related statements of operations, changes of stockholders' equity (deficit), and cash flows for the six month period ended June 30, 2010 and the years ended December 31, 2009 and 2008. Earth Energy Reserves, Inc.'s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Earth Energy Reserves, Inc. as of June 30, 2010, December 31, 2009 and 2008, and the results of its operations and its cash flows for the six month period ended June 30, 2010 and the years ended December 31, 2009 and 2008 in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has generated minimal revenues from operations, has accumulated deficit and working capital deficiency at December 31, 2009 and 2008, which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. These financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/Killman, Murrell & Company, P.C. Killman, Murrell & Company, P.C. Odessa, Texas October 13, 2010 16 Earth Energy Reserves, Inc. Balance Sheets ASSETS ------ December 31, June 30, ----------------- 2010 2009 2008 ---- ---- ---- Current Assets Cash $ 329,773 $ 940 $ 8,394 ---------- ---------- ---------- Total Current Assets 329,773 940 8,394 ---------- ---------- ---------- Total Assets $ 329,773 $ 940 $ 8,394 ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) --------------------------------------------- Current Liabilities: Compensation Payable $ - $ 75,000 $ 75,000 Note Payable, Related Party - 96,960 78,223 Advances from Majority Shareholder - 32,450 32,450 Accrued Expenses 103,426 62,134 30,893 Accrued Interest - 24,732 15,732 Accrued Interest - Majority Shareholder - 5,192 2,596 ---------- ---------- ---------- Total Current Liabilities 103,426 296,468 234,894 ---------- ---------- ---------- Stockholders' Equity (Deficit) Series A Preferred Stock $.0001 Par Value, Authorized 10,000,000 shares, 123,191 Shares Issued and Outstanding 12 - - Common Stock, $.0001 Par Value, Authorized 90,000,000 Shares Issued and Outstanding 11,059,982, 9,467,000 and 9,422,000 Shares in 2010, 2009 and 2008, respectively 1,106 947 942 Additional Paid-In Capital 7,248,355 5,547,353 5,502,358 Retained Deficit (6,058,126) (5,843,828) (5,729,800) ---------- ---------- ---------- 1,191,347 (295,528) (226,500) Less Common Stock Subscriptions Receivable (965,000) - - ---------- ---------- ---------- Total Stockholders' Equity (Deficit) 226,347 (295,528) (226,500) ---------- ---------- ---------- Total Liabilities and Stockholders' Equity (Deficit) $ 329,773 $ 940 $ 8,394 ========== ========== ==========

The accompanying notes are an integral part of these financial statements. 17 EARTH ENERGY RESERVES, INC. STATEMENTS OF OPERATIONS Six Months Years Ended December 31, Ended ----------------------- June 30, 2010 2009 2008 ------------- ---- ---- INCOME Oil and Gas Income $ - $ - $ 3,592 ---------- ---------- ---------- EXPENSES Production Taxes - - 143 General and Administrative 208,460 95,696 150,577 ---------- ---------- ---------- Total Operating Expenses 208,460 95,696 150,720 ---------- ---------- ---------- NET OPERATING LOSS (208,460) (95,696) (147,128) OTHER INCOME (EXPENSE) Impairment Loss on Unproved Property - - (53,747) Loss on Sale of Proved Property - - (9,948) Interest Expense (5,838) (18,332) (16,939) ---------- ---------- ---------- LOSS BEFORE INCOME TAXES (214,298) (114,028) (227,762) ---------- ---------- ---------- INCOME TAXES - - - ---------- ---------- ---------- NET LOSS $ (214,298) $ (114,028) $ (227,762) ---------- ---------- ---------- BASIC AND DILUTED LOSS PER SHARE $ (0.02) $ (0.01) $ (0.02) ---------- ---------- ---------- WEIGHTED AVERAGE NUMER OF COMMON SHARES OUTSTANDING - BASIC AND DILUTED 9,797,000 9,456,000 10,051,000 ========== ========== ==========

The accompanying notes are an integral part of these financial statements. 18 EARTH ENERGY RESERVES, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) Years ended December 31, 2008 and 2009 and Six Months ended June 30, 2010 Series A Preferred Common ----------------------- ----------------------- Number Par Value Number Par Value ---------- ---------- ---------- ---------- BALANCE, December 31, 2007 - $ - 10,927,000 $ 1,093 Stock Re-purchase - - (5,000) (1) Sale of Common Shares - - 25,000 2 Common Shares returned to the Company - - (1,525,000) (152) Net Loss - - - - ---------- --------- ----------- ---------- BALANCE, December 31, 2008 - - 9,422,000 942 Sale of Common Shares - - 45,000 5 Net Loss - - - - ---------- --------- ---------- ---------- BALANCE, December 31, 2009 - - 9,467,000 947 Common Shares Issued for Rent - - 25,000 3 Sale of Common Shares as part of Private Placement Memorandum, Net of Sales Commissions of $15,000 - - 501,000 49 Debt Settlement for Common Shares - - 101,982 10 Debt Settlement for Preferred Shares 138,191 14 - - Re-purchased and Retired Preferred Treasury Shares (15,000) (2) - - Common Stock Subscriptions Receivable - - 965,000 97 Net Loss - - - - ---------- --------- ---------- ---------- Balance, June 30, 2010 123,191 $ 12 11,059,982 $ 1,106 ========== ========= ========== ==========

The accompanying notes are an integral part of these financial statements. 19 EARTH ENERGY RESERVES, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) Years ended December 31, 2009 and 2008 and Six Months ended June 30, 2010 (Continued) Additional Paid-In Retained Capital Deficit Totals ---------- ---------- --------- BALANCE, December 31, 2007 $5,482,207 $(5,502,038) $ (18,738) Stock Re-purchase (4,999) - (5,000) Sale of Common Shares 24,998 - 25,000 Common Shares returned to the Company 152 - - Net Loss - (227,762) (227,762) ---------- ----------- ---------- BALANCE, December 31, 2008 5,502,358 (5,729,800) (226,500) Sale of Common Shares 44,995 - 45,000 Net Loss - (114,028) (114,028) ---------- ----------- ---------- BALANCE, December 31, 2009 5,547,353 (5,843,828) (295,528) Common Shares Issued for Rent 24,997 - 25,000 Sale of Common Shares as part of Private Placement Memorandum, Net of Sales Commissions of $15,000 485,951 - 486,000 Debt Settlement for Common Shares 101,972 - 101,982 Debt Settlement for Preferred Shares 138,177 - 138,191 Re-purchased and Retired Preferred Treasury Shares (14,998) - (15,000) Common Stock Subscriptions Receivable 964,903 - 965,000 Net Loss - (214,298) (214,298) ---------- ----------- ---------- Balance, June 30, 2010 $7,248,355 $(6,058,126) $1,191,347 ========== =========== ==========

The accompanying notes are an integral part of these financial statements. 20 EARTH ENERGY RESERVES, INC. STATEMENTS OF CASH FLOWS Six Months Years Ended Ended December 31, June 30, ----------------- 2010 2009 2008 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net Loss $(214,298) $(114,028) $(227,762) Adjustments to Reconcile Net Loss to Net Cash Used by Operating Activities Interest Expense - Related Party 1,939 6,737 5,350 Interest Expense - Majority Shareholder 1,650 2,596 2,596 Interest Expense - Compensation Payable 2,250 9,000 9,000 Impairment of Unproved Property - - 53,747 Loss on Sale of Proved Property - - 9,948 Common Shares Issued for Rent 25,000 - - Changes in Operating Assets and Liabilities Accounts Receivable - - 2,204 Advance from Related Party - 12,000 12,000 Accrued Expenses 41,292 31,241 13,020 ---------- ----------- --------- Net Cash Used By Operating Activities (142,167) (52,454) (119,897) CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from Sale of Proved Property - - 63,202 ---------- ----------- --------- Net Cash Provided by Investing Activities - - 63,202 ---------- ----------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Sale of Common Shares 486,000 45,000 25,000 Re-purchase and Retirement of Series A Preferred Stock (15,000) - - Re-purchase of Common Shares - - (5,000) ---------- ----------- --------- Net Cash Provided By Financing Activities 471,000 45,000 20,000 ---------- ----------- --------- NET INCREASE (DECREASE) IN CASH 328,833 (7,454) (36,695) CASH AT BEGINNING OF PERIOD 940 8,394 45,089 ---------- ----------- --------- CASH AT END OF PERIOD $ 329,773 $ 940 $ 8,394 ========== =========== ========= 21 SUPPLEMENTAL CASH FLOW DISCLOSURES Cash Paid During the Year for Interest $ - $ - $ - ---------- ----------- ---------- Income taxes $ - $ - $ - ---------- ----------- ---------- Non-cash Investing and Financing Activities Common Stock Par Value $ 10 $ - $ (152) Preferred Stock Par Value 14 - - Additional Paid in Capital 240,149 - 152 Notes Payable Related Party (129,410) - - Compensation Payable (75,000) - - Accrued Interest-Related Party (8,780) - - Accrued Interest (26,983) - - Common Stock Subscriptions Receivable (965,000) - - Common Shares 97 - - Additional Paid in Capital for Sale of Stock Subscriptions 964,903 - - ---------- ----------- ---------- $ - $ - $ - ---------- ----------- ----------

The accompany notes are an integral part of these financial statements. 22 EARTH ENERGY RESERVES, INC. NOTES TO FINANCIAL STATEMENTS June 30, 2010 NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization Earth Energy Reserves, Inc., (the "Company") formerly Asian American Business Development Company was incorporated in the State of Nevada on February 12, 2002 as Wiltex First, Inc. On March 10, 2005, the Company filed a certificate of amendment with the State of Nevada changing its name to Asian American Business Development Company and on March 13, 2006, the Company's name was changed to Earth Energy Reserves, Inc. On August 11, 2010, the Company changed its fiscal year to June 30. These financial statements include the audited financial statements for the years ended December 31, 2009 and 2008, and the six month transition period ended June 30, 2010. A related company owned by the major shareholder and the major shareholder of the Company, have managed and financed the Company since inception. Purpose In July 2007, the management of the Company made the decision to concentrate its efforts to enter the oil and gas industry. The Company intends to become an independent oil and natural gas company engaged in the acquisition, drilling and production of oil and gas, with areas of interest primarily in Texas, Oklahoma, Louisiana, Montana, and Wyoming. In 2007 the Company purchased two oil and gas leases and recognized its first oil revenues in November 2007. In 2008 these leases were either sold or impaired. Basis of Presentation The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States for annual and transitional financial information and with the instructions to Form 10-K and Article 3 and 3-A of Regulations S-X. Income Taxes The Company provides for income taxes by utilizing the asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the period in which the differences are expected to effect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. 23 EARTH ENERGY RESERVES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 2010 NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Use of Estimates and Assumptions Management uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses. Actual results could vary from the estimates used. Net Loss Per Common Share Diluted net (loss) earnings per share reflects the potential dilution of securities by adding common stock equivalents, including warrants in the weighted-average number of common shares outstanding for a period, if dilutive. All potentially dilutive securities have been excluded from the computation, as their effect is anti-dilutive for the six month transition period ended June 30, 2010 and for the years ended December 31, 2009 and 2008. Cash and Cash Equivalents The Company considers any highly liquid investments with maturities of three months or less on the date of purchase to be cash equivalents. The Company had no cash equivalents at June 30, 2010. Concentration of Credit Risk and Fair Value of Financial Instruments The Company maintains cash balances at financial institutions, which at times exceed federally insured amounts. The Company has not experienced any losses in such accounts. The carrying amounts of financial instruments including cash, compensation payables, advances from shareholder and notes payables approximate fair values at June 30, 2010, December 31, 2009 and 2008. In 2008, the Company adopted ASC 820 to increase consistency and comparability in fair value measurements and to expand disclosures about fair value measurements. ASC 820 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. ASC 820 applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. ASC 820 specifies a valuation hierarchy based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's own assumptions. These three types of inputs have created the following fair value hierarchy: Level 1 Quoted prices in active markets for identical assets or liabilities. 24 EARTH ENERGY RESERVES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 2010 NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Concentration of Credit Risk and Fair Value of Financial Instruments - (continued) Level 2 Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted price for identical or similar assets and liabilities in markets that are not active; or other input that are observable or can be corroborated by observable market date. Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. The following table summarizes our financial assets and liabilities measured and reported in the Company's statement of financial position at fair value as of June 30, 2010 segregated among the appropriate levels within the fair value hierarchy: Fair Value Measurements June 30, 2010 ------------------------------------- Quoted Prices in Active Markets for Significant Other Significant Identical Assets Observable Inputs Unobservable Inputs (Level 1) (Level 2) (Level 3) ------------------ ----------------- ------------------- ~~Common Stock Issued for Rent $ - $ 25,000 $ -~~

The common shares issued for rent expense were priced at $1.00 per share which represented the current selling price of such shares to new investors. Revenue Recognition Oil, gas, and natural gas liquid revenues are recognized when the products are sold and delivery to the purchaser has occurred. Oil and Gas Properties The Company has adopted the full cost method of accounting for oil and gas properties. Accordingly, all costs associated with acquisition, exploration, development of oil and gas reserves, including directly related overhead costs and related asset retirement costs, are capitalized. 25 EARTH ENERGY RESERVES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 2010 NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Oil and Gas Properties(continued) All capitalized costs of oil and gas properties, including the estimated future costs to develop proved reserves, are amortized on the unit-of-production method using estimates of proved reserves. Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized. In addition, the capitalized costs are subject to a "ceiling test", which basically limits such costs to the aggregate of the "estimated present value," discounted at a 10 percent interest rate of future net revenues from proved reserves, based on current economic and operating conditions, plus the lower of cost or fair market value of unproved properties. Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in income. Abandonments of properties are accounted for as adjustments of capitalized costs with no loss recognized. Reclassification Certain previously reported financial information has been reclassified to conform to the current year's presentation. The impact of such reclassification was not significant to the prior years' overall presentation. Impairment of Long-Lived Assets The Company adheres to guidance under ASC 360 in accounting for the impairment or disposal of long-lived assets. The guidance evaluates the carrying value of its oil and gas leases and equipment whenever a change in circumstances indicates that the carrying value may not be recoverable from the undiscounted future cash flows. If an impairment exists, the net book values are reduced to fair values as warranted. During 2008, the Company recorded an impairment charge of $53,747 to write down the value of an undeveloped oil and gas lease. Recent Accounting Pronouncements In January 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2010-06, "Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures about Fair Value Measurements." This ASU requires some new disclosures and 26 EARTH ENERGY RESERVES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 2010 NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Recent Accounting Pronouncements (continued) clarifies some existing disclosure requirements about fair value measurement as set forth in Accounting Standards Codification ("ASC") 820. ASU 2010-06 amends ASC 820 to now require: (1) a reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and (2) in the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements. In addition, ASU 2010-06 clarifies the requirements of existing disclosures. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early application is permitted. The Company has complied with the additional disclosures required by this guidance upon its adoption in January 2010. In June 2009, the FASB issued guidance under ASC 105, "Generally Accepted Accounting Principles." This guidance established a new hierarchy of GAAP sources for non-governmental entities under the FASB Accounting Standards Codification. The Codification is the sole source for authoritative U.S. GAAP and supersedes all accounting standards in U.S. GAAP, except for those issued by the SEC. The guidance was effective for financial statements issued for reporting periods ending after September 15, 2009. The adoption had no impact on the Company's financial position, cash flows or results of operations. In August 2009, the FASB issued ASU No. 2009-05, "Fair Value Measurements and Disclosures (Topic 820) - Measuring Liabilities at Fair Value," related to fair value measurement of liabilities. This update provides clarification that in circumstances in which a quoted price in an active market for an identical liability is not available, a reporting entity is required to measure fair value using one or more valuation techniques. This guidance is effective for the first reporting period beginning after issuance. In April 2009, the FASB updated its guidance under ASC 820, "Fair Value Measurements and Disclosures," related to estimating fair value when the volume and level of activity for an asset or liability have significantly decreased and identifying circumstances that indicate a transaction is not orderly. The guidance was effective for interim and annual reporting periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The adoption of this guidance had no impact on the Company's results of operations. 27 EARTH ENERGY RESERVES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 2010 NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Recent Accounting Pronouncements (continued) Also in April 2009, the FASB updated its guidance under ASC 825, "Financial Instruments," which requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This guidance also requires those disclosures in summarized financial information at interim reporting periods. The guidance was effective for interim reporting periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The adoption of this guidance had no impact on the Company's results of operations. On December 31, 2008, the SEC published final rules and interpretations updating its oil and gas reporting requirements. Many of the revisions are updates to definitions in the existing oil and gas rules to make them consistent with the Petroleum Resource Management System, which is a widely accepted standard for the management of petroleum resources that was developed by several industry organizations. Key revisions include the ability to include nontraditional resources in reserves, the use of new technology for determining reserves, permitting disclosure of probable and possible reserves, and changes to the pricing used to determine reserves based on a 12-month average price rather than a period end spot price. The average is to be calculated using the first day-of-the-month price for each of the 12 months that make up the reporting period. The new rules are effective for annual reports for fiscal years ending on or after December 31, 2009. Early adoption is not permitted. In the opinion of management, these topics have no impact on the financial statements of the Company. NOTE 2: GOING CONCERN The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which contemplates continuation of the Company as a going concern. Since inception, the Company has incurred net operating losses. The future success of the Company will depend on its ability to attain additional capital, or to find an acquisition to add value to its present shareholders and ultimately, upon its ability to attain future profitable operations. Although the Company has sold common stock with proceeds of $1,466,000 in a private placement as of October 13, 2010, there can be no assurance that the Company will be successful in obtaining additional financing, or that it will attain positive cash flow from operations. 28 EARTH ENERGY RESERVES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 2010 NOTE 3: LEON RIVER ENERGY AND WALKER CREEK UNIT LEASEHOLDS As of December 31, 2007, the Company owned a 26.37% working interest and a 19.78% net revenue interest in the Leon River Energy leasehold and a 20% interest in the Walker Creek Unit leasehold for a total of $126,897. In February 2008, the Company sold the Walker Creek Unit back to its original owner due to poor production and recognized a $9,948 loss. The Leon River Energy leasehold, an unproved property, was reviewed for impairment. After the review of pertinent facts surrounding the lease, the management of the Company determined that the leasehold was impaired. The Company recorded an impairment loss of $53,747 at December 31, 2008. NOTE 4: RELATED PARTY TRANSACTIONS In March 2010, the Company issued 138,191 of its Series A Preferred Stock in settlement of outstanding related party debt of $129,411 plus accrued interest of $8,780. In the six month period ended June 30, 2010, 15,000 shares of Series A Preferred Stock were re-purchased at $1.00 per share. The preferred shares were issued to the Company's majority shareholder and an entity wholly owned by that same shareholder. The preferred shares were valued and are redeemable at $1 per share. Valuation of these shares was based on the subscription price of common shares sold. The following is a detail of that transaction: Accrued Advances from Interest- Note Payable Majority Majority Series A Related Party Shareholder Shareholder Preferred Stock ------------- ----------- ----------- ------------- Balance, December 31, 2007 $ 60,873 $ 32,450 $ - Management Fees 12,000 - - Accrued Interest at 8% 5,350 - 2,596 --------- --------- --------- Balance, December 31, 2008 78,223 32,450 2,596 Management Fees 12,000 - - Accrued Interest at 8% 6,737 - 2,596 --------- --------- --------- Balance, December 31, 2009 96,960 32,450 5,192 Accrued Interest at 8% - - 3,589 --------- --------- --------- Related Party Debt Converted to Series A Preferred Stock $ 96,960 $ 32,450 $ 8,781 $ 138,191 ========= ========= ========= =========

29 EARTH ENERGY RESERVES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 2010 NOTE 5: FEDERAL INCOME TAXES Total income tax benefit is less than the amount computed by multiplying the loss before income taxes by the statutory federal income tax rate. The reasons for the difference and the related tax effects for the six month period ended June 30, 2010 and for the years ended December 31, 2009 and 2008 are: 2010 2009 2008 ---- ---- ---- Tax Benefit at statutory rates of 34% $ 72,861 $ 38,770 $ 77,439 Non-deductible expense (8,500) - - Change in valuation allowance (64,361) (38,770) (77,439) -------- -------- -------- Net income tax benefit $ - $ - $ - ======== ======== ========

The components of the deferred tax assets are as follows: December 31, June 30, ----------- 2010 2009 2008 ------- ---- ---- Deferred Tax Assets Net Operating Loss Carryforward $ 342,169 $ 277,808 $ 239,038 Other 18,274 18,274 18,274 --------- --------- --------- Total Deferred Tax Assets 360,443 296,082 257,312 Less Valuation Allowance (360,443) (296,082) (257,312) --------- --------- --------- $ - $ - $ - ========= ========= =========

The Company has no deferred tax liabilities. At June 30, 2010, the Company had federal income tax net operating loss carryforwards of approximately $1,006,000 to offset future taxable income, which begins to expire in 2024; therefore, there was no income tax expense or payable as of June 30, 2010. 30 EARTH ENERGY RESERVES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 2010 NOTE 6: STOCK HOLDERS' EQUITY In March 2005, the Company amended its charter to provide for 90,000,000 authorized shares of common stock with a par value of $0.0001 and 10,000,000 authorized shares of Series A preferred stock with a par value of $0.0001. The Series A preferred shares are redeemable at the option of the Company at $1.00 per share. At December 31, 2009 and 2008 there were no outstanding shares of preferred stock. In 2008 the Company sold 25,000 shares of its $0.0001 par value common stock to one individual and repurchased 5,000 shares of its common stock from one individual. All shares sold and repurchased were priced at $1.00 per share. In April 2008 an executive officer of the Company returned 1,000,000 shares of the Company's common stock due to not being able to provide services to the Company. In addition another 525,000 shares of common stock, previously issued for services, was returned to the Company by various shareholders. In 2009 the Company sold 45,000 shares of its $0.0001 par value common stock to three individuals. All shares sold were priced at $1.00 per share. The Company had the following stock transactions during the six month period ended June 30, 2010. - Issued 101,982 shares of the Company's common stock in settlement of accrued compensation of $75,000 plus accrued interest $26,982. - Issued 138,191 shares of Company's Series A Preferred Stock in settlement of outstanding related party debt of ($129,411) plus accrued interest ($8,780). The shares were issued to the Company's majority shareholder and an entity which is one hundred percent (100%) owned by the majority shareholder. The preferred shares are redeemable at the option of the Company in the future at $1.00 per share. - The Company repurchased and retired 15,000 shares of its Series A Preferred Stock. The preferred shares were re-purchased at $1.00 per share. - The Company issued 25,000 of its Series 1 units for office rent valued at $1.00 per unit ($25,000). Each unit consists of one common share and one warrant to purchase one common share at an exercise price of $1.50 per common share. - In order to raise additional capital in 2010, the Company sold 1,466,000 Series 1 units at $1 per unit to accredited investors. Each unit consisted of one common share and one warrant to purchase one common share at an exercise price of $1.50 per common share. The warrants were immediately exercisable for a term of three years. - As of June 30, 2010, the Company had recorded proceeds of $501,000 from stock sales and recorded another $965,000 in common stock subscriptions. Cash proceeds from the common stock subscriptions were received by the Company subsequent to year end. 31 EARTH ENERGY RESERVES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 2010 NOTE 6: STOCK HOLDERS' EQUITY (continued) Warrants In 2006 and thereafter when the Company sold common stock to investors, each investor also received three year warrants to purchase an equal number of shares of common stock for a price of $1.50 per share. The following is a summary of warrant activity: Number of Warrants ----------- Warrants Outstanding, December 31, 2007 522,000 Issuances 25,000 Expirations (5,000) --------- Warrants Outstanding, December 31, 2008 542,000 Issuances 45,000 Expirations (482,000) --------- Warrants Outstanding, December 31, 2009 105,000 Issuances 1,491,000 Expirations (10,000) --------- Warrants Outstanding, June 30, 2010 1,586,000 ========= The 482,000 warrants issued in 2006 expired in calendar year 2009. Warrants issued in 2007 expire in 2010 and warrants issued in 2008, 2009 and 2010 expire in 2011, 2012, and 2013 respectively. NOTE 7: STOCK OPTION PLAN On May 1, 2005, the Board of Directors adopted the Company's 2005 non- statutory stock option plan ("Plan") whereby the Company reserved 5,000,000 of its authorized but un-issued common stock for issuance under the Plan. As of June 30, 2010, December 31, 2009 and 2008, no stock options were granted under the Plan. NOTE 8: UNAUDITED FINANCIAL STATEMENTS FOR JUNE 30, 2009 In August 2010, the Company changed its year end from a calendar year end to a June 30 fiscal year end. The following unaudited financial statements are to be used in comparison with these June 30, 2010 transitional financial statements. 32 EARTH ENERGY RESERVES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 2010 NOTE 8: UNAUDITED FINANCIAL STATEMENTS FOR JUNE 30, 2009 (continued) EARTH ENERGY RESERVES, INC. BALANCE SHEET JUNE 30, 2009 CURRENT ASSETS - Cash $ 12,864 ========== CURRENT LIABILITIES Other Debt $ 126,125 Related Party Debt 123,806 ---------- TOTAL CURRENT LIABILITIES 249,931 ---------- STOCKHOLDERS' (DEFICIT) Series A Preferred Stock, $0.0001 Par Value, Authorized 10,000,000 Shares, None Issued - Common Stock, $0.0001 Par Value, Authorized 90,000,000 Shares, Issued and Outstanding 9,467,000 in 2009 947 Additional Paid-in Capital 5,547,353 Accumulated (Deficit) (5,785,367) ---------- TOTAL STOCKHOLDERS' (DEFICIT) (237,067) ---------- TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) $ 12,864 ========== EARTH ENERGY RESERVES, INC. STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2009 INCOME $ - EXPENSES 46,531 ---------- NET OPERATING (LOSS) (46,531) ---------- OTHER (EXPENSE) (9,035) ---------- LOSS BEFORE INCOME TAXES (55,566) ---------- INCOME TAXES - ---------- NET LOSS $ (55,566) ========== BASIC AND DILUTED LOSS PER SHARE $ (0.01) ========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC AND DILUTED $9,447,000 ========== 33 EARTH ENERGY RESERVES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 2010 NOTE 9: SUBSEQUENT EVENTS In May 2009, the FASB issued SFAS No. 165 (ASC 855), subsequent events ("ASC 855"). ASC 855 establishes general standards of accounting for and disclosure of events after the balance sheet date but before financial statements are issued or are available to be issued. The adoption of ASC 855 in the fourth quarter of 2009 did not have any impact on the Company's financial statements. Accordingly, the Company evaluated subsequent events through October 13, 2010, the date the financial statements were issued. The following is a summary of significant events affecting the Company subsequent to June 30, 2010: - Effective July 1, 2010 and with shareholder approval, the Company entered into a quasi-reorganization (also referred to as a corporate adjustment). As a result of the quasi-reorganization all prior period losses charged to retained deficit were eliminated against additional paid-in capital. A quasi-reorganization requires that retained earnings be dated for ten years after the quasi-reorganization takes place. 34 EARTH ENERGY RESERVES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 2010 NOTE 9: SUBSEQUENT EVENTS (continued) The following is an example of the effect of a quasi-reorganization of the Company if the quasi-reorganization had occurred on June 30, 2010: Subsequent Prior to Quasi- to Quasi- Reorganization Adjustment Reorganization --------------- ---------- -------------- Series A Preferred Stock $ 12 $ - $ 12 Common Stock 1,106 - 1,106 Additional Paid-In Capital 7,248,355 (6,058,126) 1,190,229 Retained Deficit (6,058,126) 6,058,126 - Retained Earnings - Since Quasi-Reorganization of June 30, 2010 - - - ----------- ------------ ---------- Total Stockholders' Equity $ 1,191,347 $ - $1,191,347 =========== ============ ==========

- On August 1, 2010, the Company changed its year end from a calendar year end to a fiscal year end of June 30. This financial statement includes the audited financial statements for the years ended December 31, 2009 and 2008, and the six month transition period ended June 30, 2010. - Effective on July 1, 2010 the Company entered into an employment agreement with its new President and Chief Executive Officer. The employment agreement has a four year term and provides the following: 1. Base annual salary of $260,000 plus potential incentives to be determined in the future. 2. A grant of nonqualified incentive stock options to purchase 1,000,000 shares of the Company's common stock at an exercise price of $1 per share. 100,000 options vest immediately and 100,000 of the options vests on January 1, 2011, and each January 1 thereafter until all such incentive options are vested. Options fully vest on the date of his termination if not vested before. 3. A grant of 4,000,000 shares of the Company's common stock at a purchase price of $400 subject to certain vesting and termination restrictions. - Effective July 1, 2010, the Company entered into an Offer of Employment letter with its Executive Vice President and Chief Financial Officer. The Offer of Employment letter was signed and accepted on July 31, 2010. 35 EARTH ENERGY RESERVES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 2010 NOTE 9: SUBSEQUENT EVENTS (continued) The Offer of Employment letter provides for the following: 1. Beginning base salary of $125,000 per year until the Company has successfully raised $5 million in capital, at which time the salary will be raised to $175,000. 2. An initial grant of 2,000,000 shares of restricted Company common stock to vest over a four year period. 3. A grant of stock options for 75,000 shares of Company common stock with an exercise price of $1.00 expiring in ten years. Options vest quarterly over three years of service. - Effective July 1, 2010, the Company entered into an Offer of Employment letter with the Vice President of Administration. The Offer of Employment letter was signed and accepted on September 14, 2010. The Offer of Employment letter provides for an annual salary of $120,000, 50,000 stock options, and a grant of 200,000 shares of the Company's restricted common shares to be earned over a two year vesting schedule. Stock options have a ten year expiration, a $1.00 exercise price, and a three year vesting schedule. - Effective July 1, 2010, the Company granted 75,000 stock options to its Chairman of the Board and 50,000 stock options to a Company Vice President. Stock options have a ten year expiration, a $1.00 exercise price, and a three year vesting schedule. - On July 29, 2010 the Company entered into a letter of intent with an energy company to purchase various interests in producing oil and gas leases located in the state of Louisiana. Until the definitive purchase agreement is executed by both companies, either company may terminate the negotiations regarding this proposed transaction, with or without cause. The estimated purchase price is $5,800,000. 36 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures: James E. Hogue, chairman of the board, who was chief executive officer and chief financial officer and, therefore, responsible for all financial and accounting matters during this reporting period has concluded that the disclosure controls and procedures were not effective as of June 30, 2010. These controls are meant to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms and to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Earth Energy had not filed its SEC filings since the third quarter of 2008. Management has only recently prepared and filed the required SEC reports. Management intends to implement internal controls to ensure that similar situations do not occur in the future and that required SEC filings will be timely. Management's Annual Report on Internal Control over Financial Reporting: Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is the process designed by and under the supervision of James Hogue, chairman of the board, who was chief executive officer and chief financial officer, or the persons performing similar functions, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external reporting in accordance with accounting principles generally accepted in the United States of America. Mr. Hogue has evaluated the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework. Mr. Hogue assessed the effectiveness of our internal control over financial reporting as of June 30, 2010, and concluded that it is not effective for the reasons discussed above. This annual report does not include an attestation report of the registrant's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject 37 to attestation by the registrant's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the registrant to provide only management's report in this annual report. Evaluation of Changes in Internal Control over Financial Reporting: James Hogue, chairman of the board, who was chief executive officer and chief financial officer has evaluated changes in our internal controls over financial reporting that occurred during the six months ended June 30, 2010. Based on that evaluation, Mr. Hogue, or those persons performing similar functions, did not identify any change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Important Considerations: The effectiveness of our disclosure controls and procedures and our internal control over financial reporting is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time. Because of these limitations, there can be no assurance that any system of disclosure controls and procedures or internal control over financial reporting will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management. ITEM 9B. OTHER INFORMATION None 38 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Our management consists of: Name Title Term ---- ----- ---- James E. Hogue, age 74 Chairman of the Board Inception to present Chief Executive Officer, Controller, Chief Inception to Financial Officer June 30, 2010 James R. Phillips, age 62 Vice President, Secretary/ Inception to Treasurer and Director present Steven A. Kranker, age 49 Chief Executive Officer, July 1, 2010 President and Director to present Doyle Pennington, age 65 V.P. of Administration and Investor Relations July 1, 2010 and Director to present Interim Chief Financial November 2, 2010 Officer to present James E. Hogue, Chairman and President Mr. Hogue has served as chairman and president of Earth Energy since inception. From 1991 to 1996, Mr. Hogue has served as president of Martex Oil and Gas, Inc. From 1996 to 1999, Mr. Hogue became president, chief operating officer and a director of Cotton Valley Resources Corporation, a publicly traded AMEX company (KTN). Mr. Hogue has served as chairman, president and chief financial officer of Galaxy Partners Ltd. Corporation, a consulting firm, since 1995. James R. Phillips, Jr., Vice President, Secretary, Treasurer and Director Mr. Phillips has served as vice president, secretary, treasurer and director of Earth Energy since March 2005. From 1993 to 2004, Mr. Phillips was a financial consultant, registered investment advisor of E.F. Hutton and Raymond James and Associates, Inc., Waco, Texas. Mr. Phillips graduated from Texas Tech University in 1970 with a Bachelor of Business Administration in Finance & Banking. Steven A. Kranker, Chief Executive Officer, President and Director Mr. Kranker has over 25 years of broad oil and gas experience with major and large independent E&P companies in roles of increasing responsibility. Prior to joining EER, he served as the Corporate Engineering Manager for Forest Oil Corp., with expertise in acquisition 39 and divestiture evaluation, petroleum property optimization and valuation studies, SEC reserve reporting and associated bank credit facilities. Mr. Kranker was responsible for the oil and gas reserves and economic evaluations in $4 billion in acquisition transactions and $3 billion in divestitures during the past five years, with recent emphasis on the assessment of horizontal drilling in unconventional gas plays. Previous service includes Senior Reservoir Engineer in numerous locations with exposure to a variety of petroleum reservoirs with Brunei Shell Petroleum, Arco Alaska, Maxus Exploration, Conoco and Shell. He holds a Bachelor of Science degree in Petroleum Engineering from the Colorado School of Mines. Doyle Pennington, Interim Chief Financial Officer, Vice President of Administration and Investor Relations and Director Mr. Pennington specializes in strategic planning and management of domestic and international special projects for non-profit organizations. He has worked for agencies of the Southern Baptist Convention and other non-profit organizations including the Religious Heritage of America Foundation, Mission America Coalition, the Consortium for Global Education, the International Evangelism Association, Touch the World Ministries, Global Resources Ministries, and the National Christian Foundation. Mr. Pennington has established mission funds to ten state conventions and has managed and coordinated numerous projects and special events for various agencies of the Southern Baptist Convention. He has been a hotel owner-operator of Holiday Inns and apartment complexes, and has developed, owned and managed commercial real estate properties for many years. Mr. Pennington holds a BBA from the University of Mississippi. All directors hold office until the completion of their term of office, which is not longer than three years, or until their successors have been elected and have been qualified. All officers are appointed annually by the board of directors and, subject to existing employment agreements, serve at the discretion of the board. Currently, directors receive no compensation. Committees of the Board of Directors Concurrent with having sufficient members and resources, Earth Energy's board of directors will establish an audit committee, investment committee and a compensation committee. The audit committee will review the results and scope of the audit and other services provided by the independent auditors and review and evaluate the system of internal controls. The investment committee will review and approve all investments in excess of $25,000 and assist in determining the carrying values of portfolio investments. The compensation committee will manage the stock option plan and review and recommend compensation arrangements for the officers. No final determination has yet been made as to the memberships of these committees or when we will have sufficient members to establish committees. 40 All directors will be reimbursed by Earth Energy for any expenses incurred in attending directors' meetings provided that Earth Energy has the resources to pay these fees. Earth Energy will consider applying for officers and directors liability insurance at such time when it has the resources to do so. Stock Option Plan On May 1, 2005, the board of directors adopted Earth Energy 2005 non- statutory stock option plan whereby Earth Energy reserved 5,000,000 of its authorized but un-issued common stock for issuance under the Plan. As of June 30, 2010, December 31, 2009 and 2008, no stock options were granted under the plan. Section 16(a) Beneficial Ownership Reporting Compliance Under Section 16(a) of the Securities Exchange Act of 1934, as amended, an officer, director, or greater-than-10% shareholder of the registrant must file a Form 4 reporting the acquisition or disposition of registrant's equity securities with the Securities and Exchange Commission no later than the end of the second business day after the day the transaction occurred unless certain exceptions apply. Transactions not reported on Form 4 must be reported on Form 5 within 45 days after the end of the registrant's fiscal year. Such persons must also file initial reports of ownership on Form 3 upon becoming an officer, director, or greater-than-10% shareholder. To our knowledge, based solely on a review of the copies of these reports furnished to it, our officers, directors and 10% control persons have not complied with applicable Section 16(a) filing requirements during the six months ended June 30, 2010. The officers, directors and 10% control persons have represented that the required reports will be filed on or before March 31, 2011 Code of Ethics Policy We have not yet adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. Corporate Governance There have been no changes in any state law or other procedures by which security holders may recommend nominees to our board of directors. In addition to having no nominating committee for this purpose, we currently have no specific audit committee and no audit committee financial expert. Based on the fact that our current business affairs are simple, any such committees are excessive and beyond the scope of our business and needs. Indemnification The registrant shall indemnify to the fullest extent permitted by, and in the manner permissible under the laws of the State of Nevada, any person made, or threatened to be made, a party to an action or proceeding, whether criminal, civil, administrative or investigative, 41 by reason of the fact that he is or was a director or officer of the registrant, or served any other enterprise as director, officer or employee at the request of the registrant. The board of directors, in its discretion, shall have the power on behalf of the registrant to indemnify any person, other than a director or officer, made a party to any action, suit or proceeding by reason of the fact that he/she is or was an employee of the registrant. Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the registrant, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceedings) is asserted by such director, officer, or controlling person in connection with any securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issues. INDEMNIFICATION OF OFFICERS OR PERSONS CONTROLLING THE REGISTRANT FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF 1933, IS HELD TO BE AGAINST PUBLIC POLICY BY THE SECURITIES AND EXCHANGE COMMISSION AND IS THEREFORE UNENFORCEABLE. ITEM 11. EXECUTIVE COMPENSATION As of June 30, 2010, no officer, director or employee had received any cash compensation, and no director, officer or employee had a contract or commitment to receive annual compensation in excess of $100,000. Employment Agreement for Steven A. Kranker In July 2010, we entered into an employment agreement with Mr. Steven A. Kranker, our president and chief executive officer. Mr. Kranker's employment agreement is a four year term and provides that he will receive: (1) $260,000 per annum base salary (which amount may be increased or decreased under certain circumstances), plus bonus payments or incentive compensation as may be determined from time to time by our board of directors; (2) a grant of nonqualified stock options to purchase 1,000,000 shares of our common stock, at an exercise price of $1.00 per share. 100,000 of the options vested on the date of the agreement, and 100,000 of the options will vest on January 1, 2011 and each January 1 thereafter until all such nonqualified stock options are fully vested. If any 42 nonqualified stock options have not vested and Mr. Kranker ceases to be employed by us, the unvested options will fully vest on the date of such termination; (3) 4,000,000 Earth Energy common shares, fully paid and nonassessable, for a purchase price of $400, payable in cash at the time of issue, which restricted shares shall remain unvested and subject to forfeiture upon termination of Mr. Kranker's employment unless one of the following events occurs prior to such termination: (a) Mr. Kranker continues to be employed by us on February 1, 2013, in which event 665,000 shares will vest on that date and become nonforfeitable, with the remaining shares vesting in equal installments of 667,000 shares on the first day of every third month thereafter so long as Mr. Kranker continues to be employed by us; or (b) Our common shares are traded on a national stock exchange and the average reported closing price of our common shares on the principal stock exchange or other market is $5.00 or more for 20 consecutive trading days, in which event (i) 50% of the shares will become vested and nonforfeitable on that date, and (ii) the remaining 50% of the shares will become vested and nonforfeitable on the January 1 immediately following the date on which the first 50% of the shares vested. Upon Mr. Kranker's termination or demotion coincident with a change of control, all unvested shares shall immediate become vested and nonforeitable. Effective July 1, 2010, the Company entered into an offer of employment letter with its Executive Vice President and Chief Financial Officer. The offer of employment letter provides for the following: 1. Beginning base salary of $125,000 per year until the Company has successfully raised $5 million in capital, at which time the salary will be raised to $175.000. 2. An initial grant of 2,000,000 shares of restricted Company common stock to vest over a four year period. 3. A grant of nonqualified stock options for 75,000 shares of Company stock with an exercise price of $1.00 expiring in ten years. Options vest quarterly over three years of service. W.A. Sikora was terminated as Executive Vice Preesident and Chief Financial Officer on October 28, 2010. Effective July 1, 2010, the Company entered into an offer of employment letter with its Chairman of the Board. The terms of the offer of employment letter provide for an annual salary of $175,000 and a grant of 75,000 nonqualified stock options. Stock options have a 10 year expiration, a $1.00 exercise price, and a 3 year vesting schedule. Effective July 1, 2010, the Company entered into an offer of employment letter with the Vice President of Administration. The offer of employment letter provides for an annual salary of $120,000, 50,000 nonqualified stock options, and a grant of 200,000 shares of the 43 Company's restricted common shares to be earned over a 2 year vesting schedule. Stock options have a 10 year expiration, a $1.00 exercise price, and a 3 year vesting schedule. Board of Directors Compensation. Currently board members receive no special compensation for meetings or time incurred. Director liability insurance may be provided to all members of the board of directors. Outstanding Equity Awards The following table sets forth the outstanding stock options to the registrant's officers and directors: Option Awards In July 2010, we issued incentive stock options to purchase 1,250,000 common shares to our officers and directors. Outstanding Equity Awards at September 30, 2010 Number of Number of Securities Securities Underlying Underlying Unexercised Unexercised Option Option Options/ Options/ Exercise Expiration Name Exercisable Unexercisable Price Date ---- ----------- ------------- -------- ---------- James E. Hogue 75,000 - 1.00 - James Phillips 50,000 - 1.00 - Steven A. Kranker 1,000,000 1.00 (1) W.A. Sikora(2) 75,000 - 1.00 Doyle Pennington 50,000 1.00

(1)100,000 of the options vested on date of agreement and 100,000 of the options will vest on January 1, 2011 and each January 1 thereafter until all options are vested. (2)W.A. Sikora was terminated as Executive Vice President and Chief Financial Officer on October 28, 2010 The registrant does not compensate its directors for their services as such. The registrant reimburses the directors for their reasonable out-of pocket expenses for attending meetings of the board of directors. ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS The following table sets forth certain information regarding the beneficial ownership of common shares as of September 30, 2010 by: (i) each current director and nominee for director; (ii) all executive officers and current directors of Earth Energy as a group; and (iii) all stockholders known by Earth Energy to be beneficial owners of more than five percent of the outstanding common shares or preferred shares. The information in this table is based solely on a review by Earth 44 Energy of its capital stock transfer records and on publicly available filings made with the SEC by or on behalf of the stockholders listed below, and is based on 11,059,982 outstanding common shares. Name and Address of Number of Shares Beneficial Owner Beneficially Owned Percent of Class James E. Hogue 671 Heinz Parkway Estes Park, CO 80517 4,000,000 36.2% James R. Phillips 6801 Sanger Avenue Suite 101 Waco, TX 76710 1,540,000 13.9% Steven Kranker(1) 621 17th Street Denver, CO 80293 0 0.0% Doyle Pennington(2) 2850 Wildwood Lane Estes Park, CO 80517 101,000 .9% Officers and Directors as a group (4 members) 5,641,000 51.0%

(1)In July 2010, Earth Energy authorized a restricted stock grant to Mr. Kranker of 4,000,000 common shares subject to vesting terms over a four year period and forfeiture in the even of certain employment termination conditions. (2)In July 2010, Earth Energy authorized a restricted stock grant to Mr. Pennington of 200,000 common shares subject to vesting terms over a four year period and forfeiture in the even of certain employment termination conditions. Unless otherwise indicated, Earth Energy believes that all persons named in the table have sole voting and investment power with respect to all common shares beneficially owned by them. A person is deemed to be the beneficial owner of securities which may be acquired by such person within 60 days from the date indicated above upon the exercise of options, warrants or convertible securities. Each beneficial owner's percentage ownership is determined by assuming that options, warrants or convertible securities that are held by such person (but not those held by any other person) and which are exercisable within 60 days of the date indicated above, have been exercised. Warrants. There are 1,586,000 warrants issued and outstanding at June 30, 2010, held by approximately 100 warrant holders. The warrants enable holders to purchase common stock at $1.50 per share at any time prior to expiration 35,000 warrants expire in 2010, 25,000 warrants expire in 2011, 45,000 warrants expire in 2012; and 1,481,000 warrants expire in 2013. 45 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. The note payable to a related party and major shareholder represents amounts paid by the related party for general and administrative expenses. The note is due on demand and bears interest at the rate of eight percent calculated on the average outstanding monthly balance. The advance from the major shareholder represents cash advanced to the Company from the major shareholder of the Company. The advance is due on demand and interest was accrued on the $32,450 balance at eight per cent in 2009 and 2008. The debt was converted to 138,191 preferred stock during the six months ended June 30, 2010. The detail of the activity in the note payable to related party is as follows: 2009 2008 ---- ---- Balance, beginning of period $78,233 $60,873 General and administrative expenses advanced Management fees 12,000 12,000 ------- ------- Total general and administrative Expenses 12,000 12,000 Interest expense 6,727 5,350 ------- ------- Total change during period 18,727 17,350 ------- ------- Balance, end of period $96,960 $78,223 ======= ======= Director Independence Earth Energy's board of directors consists of James Hogue, James Phillips, Steven Kranker and Doyle Pennington. None of the directors are independent as such term is defined by a national securities exchange or an inter-dealer quotation system. For the six months ended June 30, 2010 and for fiscal years ended December 31, 2009 and 2008, there were no transactions with related persons other than as described in the section above entitled "Item 11. Executive Compensation". ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. Audit Fees. We incurred aggregate fees and expenses of approximately $0, $27,293 and $49,728 respectively, from Killman, Murrell & Company, PC for the 2009 and 2008 fiscal years and for the six months ended June 30, 2010. Such fees included work completed for our annual audits and for the review of our financial statements included in our Forms 10-Q. 46 Tax Fees. We did not incur any aggregate tax fees and expenses from Killman, Murrell & Company, PC for the six months ended June 30, 2010, 2009 and 2008 fiscal years for professional services rendered for tax compliance, tax advice, and tax planning. All Other Fees. We did not incur any other fees from Killman, Murrell & Company, PC for the six months ended June 30, 2010, fiscal 2009 and 2008. The board of directors, acting as the Audit Committee considered whether, and determined that, the auditor's provision of non-audit services was compatible with maintaining the auditor's independence. All of the services described above for the six months ended June 30, 2010, fiscal years 2009 and 2008 were approved by the board of directors pursuant to its policies and procedures. 47 Part IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a)(1) List of Financial statements included in Part II hereof Balance Sheets, June 30, 2010, December 31, 2009 and 2008 Statements of Operations for the six months ended June 30, 2010 and years ended December 31, 2009 and 2008 Statements of Stockholders' Equity (Deficit) for the six months ended June 30, 2010 and years ended December 31, 2009 and 2008 Statements of Cash Flows for the six months ended June 30, 2010 and years ended December 31, 2009 and 2008 Notes to the Financial Statements (a)(2) List of Financial Statement schedules included in Part IV hereof: None (a)(3) Exhibits The following of exhibits are filed with this report: (31) 302 certification (32) 906 certification 48 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, Earth Energy has duly caused this Report to be signed on its behalf by the undersigned duly authorized person. Date: February 16, 2010 Earth Energy Reserves, Inc. /s/Steven A. Kranker ------------------------------ By: Steven A. Kranker, President Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of Earth Energy and in the capacities and on the dates indicated. /s/James E. Hogue Chairman of the Board 2/16/11 ------------------------ James E. Hogue(1) /s/Steven A. Kranker Chief Executive Officer 2/16/11 ------------------------ Director Steven A. Kranker(2) /s/James R. Phillips, Jr. Vice President, Secretary 2/16/11 ------------------------ Treasurer and Director James R. Phillips, Jr. /s/Doyle Pennington Interim Chief Financial 2/16/11 ------------------------ V.P. of Administration and Investor Relations Director

(1)Mr. Hogue was Chief Executive Officer and Chief Financial Officer during this reporting period. (2)Appointed officer of Earth Energy Reserves effective July 1, 2010 (3)Appointed interim chief financial officer of Earth Energy Reserves effective November 2, 2010

Earth Energy Reserves, Inc. 10-K/A