**U.S. SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-KSB**

 

Annual Report Under

the            Securities Exchange Act of 1934

 

For            Fiscal Year Ended:**December 31, 2007**

 

Commission File Number:**000-51564**

 

**NORTHERN ETHANOL, INC** 

(Exact name of small business issuer as specified in its            charter)

 

**Delaware**

(State or other jurisdiction

of incorporation)

             

**34-2033194**

(IRS Employer ID No.)

             

**193 King Street East**

**Suite 300**

**Toronto, Ontario, M5A 1J5, Canada**

(Address of principal executive offices)

 

**(416) 366-5511**

(Issuer’s Telephone Number)

 

Check whether the issuer (1) filed all reports required to be filed by            Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months            (or for such shorter period that the registrant was required to file such reports), and            (2) has been subject to such filing requirements for the past 90 days: Yes            __X__ No ____.

 

The            number of shares of the registrant’s only class of common stock issued and            outstanding as of April 15, 2008, was 104,096,500 shares.

 

Indicate by check mark whether the registrant is a shell company (as            defined in Rule 12b-2 of the Exchange Act) ____ YesxNo

 

Documents Incorporated by Reference: Portions of the Company’s            Definitive Proxy Statement for the Annual Meeting of Shareholders to be held June 17,            2008, are incorporated by reference in certain sections of Part III.

 

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**TABLE OF CONTENTS**

 

|     |                                                                                                                       | **PAGE**   |
|----------|----------------------------------------------------------------------------------------------------------------------------|------------|
|     | **PART I**

                                                                                                          |       |
| Item 1.  | Description of Business                                                                                                    | 3          |
| Item 2.  | Description of Property                                                                                                    | 21         |
| Item 3.  | Legal Proceedings                                                                                                          | 22         |
| Item 4.  | Submission of Matters to a Vote of Security                            Holders                                             | 22         |
|     |  

**PART II**

                                                                                                 |       |
| Item 5.  | Market For Common Equity and Related Stockholder                            Matters                                        | 22         |
| Item 6.  | Management’s Discussion and Analysis of Financial                            Condition

and Results of Operations    |  

23 |
| Item 7.  | Financial Statements                                                                                                       | 55         |
| Item 8.  | Changes In and Disagreements With Accountants on                            Accounting and

Financial Disclosure           |  

83 |
| Item 8A. | Controls and Procedures                                                                                                    | 83         |
| Item 8B. | Other Information                                                                                                          | 84         |
|     |  

**PART III**

                                                                                                |       |
| Item 9.  | Directors and Executive Officers                                                                                           | 85         |
| Item 10. | Executive Compensation                                                                                                     | 85         |
| Item 11. | Security Ownership of Certain Beneficial Owners and                            Management and

Related Stockholder Matters |  

85 |
| Item 12. | Certain Relationships and Related                            Transactions                                                  | 85         |
| Item 13. | Exhibits                                                                                                                   | 85         |
| Item 14. | Principal Accountant Fees and Services                                                                                     | 87         |
|     | Signatures                                                                                                                 | 88         |

 

 

 

 

 

 

 

 

 

 

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**PART I**

 

| **ITEM 1.** | **DESCRIPTION OF BUSINESS** |
|-------------|-----------------------------|

 

**History**

 

Northern Ethanol, Inc. (“we,” “us,”            “our” or the “Company”) was incorporated as “Beaconsfield            I, Inc.” in the State of Delaware on November 29, 2004 as a “blank            check” company for the purpose of engaging in the potential future merger or            acquisition of an unidentified target business. In April 2006 our then Board of            Directors elected to change our business plan to the development and operation of            ethanol plants in Canada, with the goal of becoming a leading, low cost supplier of            ethanol to the Central Canada and Eastern United States fuel market.

 

On December 15, 2004, we issued 150,000 shares of our Common Stock for a            total of $15 in cash. Additionally on that date, we issued 10,000,000 shares            (pre-forward split) of our Common Stock, for a total of $50,000 in cash.

 

In April 2006, in conjunction with the adoption of our new business            plan, we retained new management, including Mr. Gordon Laschinger, our Chief Executive            Officer, President and Chairman of the Board of Directors. In July 2006, Mr. Steven            Reader agreed to become our Chief Operating Officerand in            November 2006, Mr. Richard Smith became our Chief Financial Officer. From inception we            have been engaged in organizational efforts and obtaining financing. During the period            from April through September 2006, we also reconstructed our Board of Directors, adding            five persons to our Board and accepting the resignation of one of our former directors.            As a result, our current Board of Directors consists of six members, including four who            are considered “outside” directors.*See*“PART III, ITEM 9, DIRECTORS AND EXECUTIVE            OFFICERS.”

             

In July 2006, we engaged in a forward split of our Common Stock whereby            we issued ten (10) shares of our Common Stock for every one (1) share then issued and            outstanding. All references in this Report to our issued and outstanding Common Stock            are provided on a post forward split basis, unless otherwise indicated. Also in July            2006, the holders of a majority of our then issued and outstanding Common Stock            approved an amendment to our Certificate of Incorporation wherein we did change our            name to “Northern Ethanol, Inc.” to better reflect our current business            plan.

             

In July 2006, we commenced a private offering of our Common Stock. This            offering was successfully closed in September 2006. We sold an aggregate of 4,096,500            shares of our Common Stock to 48 “accredited investors” (as that term is            defined in both the Canadian and U.S. securities laws) at a price of $1.00 per share            and received aggregate net proceeds of $3,846,500 therefrom. On February 19, 2008, our            Common Stock commenced trading on the OTC Bulletin Board under the trading symbol            “NOET”. The proceeds derived from the 2006 offering have been utilized to            fund the planning efforts relating to development of two ethanol plants to be located            in Ontario, Canada, and one ethanol plant to be located in New York State as well as            for working capitalto the date of this Report.We will require additional funds in order to implement our business plan            described herein.*See*“PART            II, ITEM 6, MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND            RESULTS OF OPERATIONS –RISKFACTORS.”

 

As of the date of this Report, we have two wholly-owned subsidiaries,            Northern Ethanol, LLC, a New York limited liability company (“NELLC”), and            Northern Ethanol (Canada) Inc., a Canadian corporation, which has three wholly-owned            subsidiaries, Northern Ethanol (Barrie) Inc., Northern Ethanol

 

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(Sarnia) Inc. and Northern Ethanol Investments Inc., (“NEI”)            each of which is also a Canadian corporation. All references to our Company in this            Report include our subsidiaries, unless otherwise indicated. NEI is currently a dormant            company.

             

**Current Business**

             

We are a development stage company and are devoting substantially all of            our efforts to establishing a business of manufacturing fuel ethanol for sale to oil            refiners and other users. We have secured or are in the advanced stages of securing            sites to build ethanol processing facilities at two locations in Ontario, Canada, and            one in New York State for total planned production capacity of 324 million US gallons            per annum. Each of these locations will be the site for a state-of-the-art corn based            ethanol processing facility.

 

|   | We are implementing a strategy to grow by: |
|--------|--------------------------------------------|

 

|   | **•** | Building state of the art processing plants; |
|--------|------------|----------------------------------------------|

             

|   | **•** | Negotiating stable long term contracts with key                            suppliers; |
|--------|------------|---------------------------------------------------------------------------------------|

             

|   | **•** | Securing long term sales agreements; |
|--------|------------|--------------------------------------|

             

|   | **•** | Pursuing acquisitions of existing ethanol                            producers |
|--------|------------|--------------------------------------------------------------------------------|

             

|   | **•** | Pursuing acquisitions and/or strategic alliances with                            ethanol technology companies |
|--------|------------|---------------------------------------------------------------------------------------------------------------|

 

We are committed to investing in the latest technology to ensure that            the processing costs are as low as possible, and the outputs are of the highest            quality. The initial locations have been chosen due to proximity to supply of corn,            natural gas, and water, and are well located for the transportation of inputs and            products.

 

Effective July 24, 2006, we entered into a five-year Project Development            Agreement (the “Delta-Barrie Agreement”) with Delta-T Corporation,            Williamsburg, Virginia (“Delta”), wherein Delta shall provide us            professional advice, business and technical information, design and engineering and            related services in order to assist us in assembling all of the information, permits,            agreements and resources necessary for construction of an ethanol plant having the            capacity to produce 108 million gallons per year in Barrie, Ontario, Canada. We paid            Delta the non-refundable sum of $100,000 in advance for all such services.

 

In September 2006, we entered into a similar five-year agreement with            Delta relating to our proposed Sarnia, Ontario ethanol plant (the “Delta-Sarnia            Agreement”) and paid Delta an initial non-refundable amount of $70,000 for such            services, with the balance of $30,000 due upon issuance of an air permit by the            Province of Ontario. References to the Delta-Barrie Agreement and Delta-Sarnia            Agreement are hereinafter jointly referred to as the “Delta Agreements,”            unless otherwise indicated.

             

As of the date of this Report, we have not entered into any development            agreements with any technology provider for our proposed Niagara Falls, New York            ethanol plant.

             

The Delta Agreements provide for Delta to assist us in the development            and analysis of the operating costs, plant specifications, compliance with            environmental issues, product marketing, industry economics, technical and other            assistance. Delta’s sole remedy in the event that we breach theDelta

 

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Agreements is limited to the non-refundable fees of $170,000 paid under            the Delta Agreements. The relationship between Delta and us is deemed exclusive during            the five-year term of the Delta Agreements. We have agreed to use our best efforts to            enter into an engineering, procurement and construction (“EPC”) contract or            a technology agreement with Delta at these locations and if we fail to do so, to give            them a first right of refusal for 60 days to assume any agreements made with other            ethanol plant technology vendors.

 

Although Delta has been involved in 120 alcohol production projects for            fuel, beverage, and industrial customers on five continents, it has no previous            experience developing or constructing ethanol plants in Canada. The construction of            ethanol plants using Delta technology is carried out by construction contractors. On            March 9, 2007, we executed a term sheet for the development of an EPC contract for the            Barrie site with Aker Kvaerner Songer Canada Ltd. (“AKSC”), because of            their extensive experience in the construction of power plants in the United States and            Canada. However as we did not pay the non-refundable fee of $500,000 to AKSC for            executing the term sheet and as AKSC is no longer working with Delta, the AKSC            agreement was effectively terminated during the fourth quarter of 2007.Since that time, we have beennegotiating with            other large, experienced EPC contractors that are acceptable to Delta for construction            of ethanol plants at each of our three proposed locations. Effective March 12, 2008, we            executed a term sheet with SK Engineering & Construction Co. Ltd. (“SK            E&C’) of Seoul, South Korea for the development of an engineering,            procurement and construction (“EPC”) contract for our proposed ethanol            plant to be located in Sarnia, Ontario, Canada. We expect to receive the EPC contract            price from SK E&C within 51⁄2 months of the execution of a Phase 2 Project            Development Agreement with Delta whereby Delta will provide a basic process engineering            package to allow SK E&C to develop an EPC contact price. If that price is            acceptable we expect to execute the EPC contract within 30 days and proceed to close            financing and begin construction at the Sarnia site within 30 days thereafter.            Construction would take place over an 18 to 22 month period so ethanol production at            our Sarnia location is not expected to begin until the third quarter of 2010 at the            earliest as of the date of this Report. In the event that we do not execute an EPC            contract with SK E&C, we will be required to pay a cancellation fee of            $300,000.

 

We also expect to enter into similar arrangements with SK E&C for            our proposed ethanol plants to be located in Barrie, Ontario, and Niagara Falls, New            York. We have not yet received term sheets from SK E&C regarding these facilities            as of the date of this Report.

             

Delta’s primary role in the projects is to provide the process            technology and engineering. This will include all of the prime processes in the            receiving and milling of the corn, the cook process, fermentation process, distillation            process, molecular sieve and centrifuge process, chemical storage area, fuel and            ethanol storage and load-out as well as DDGS drying, storage and load-out. As the EPC            Contractor, SK E&C will erect the Delta process components as well as engineer,            procure and construct the balance of plant equipment for such items as the boiler            house, cooling towers, all utility tie-ins, plant fire water system, and any water            treatment systems. SK E&C will be responsible for all labor supply and project            completion risk(i.e. project completed on schedule, at the            contract price, meeting design specifications). The Delta plant design that we have            selected is based on plant designs and components currently being utilized by other            Delta customers. Any differences in our plant designs from the standard Delta design            will be to provide for higher reliability and performance. Not all current projects            undertaken by Delta appear on their website due to client preferences with regards to            confidentiality.

 

In August 2006, we contracted with Parrish & Heimbecker Ltd.            (“P&H”) to provide corn procurement and co-product merchandizing            services on a fee per shipment basis for a five-year period for our proposed Barrie and            Sarnia ethanol plants upon the opening of such plants. P&H is a privately held            grain merchant corporation that owns and operates grain elevators and has extensive            domestic and international experience in international grain origination and co-product            merchandizing. We engaged

 

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them            to source all of the corn required for the operation of the Barrie and Sarnia ethanol            facilities at competitive market prices. We expect they will assist us in negotiations            with major corn suppliers to guarantee supply and price by committing to long-term            purchase agreements or opportunistic purchases on the spot market when this can be done            at favorable rates. We will pay P&H C$1.00 per metric ton of corn procured for our            Barrie and Sarnia operations. P&H will manage the sale of our dried distiller grain            by-product. We will pay P&H C$1.00 per metric ton of DDGS sold for marketing the            sale of our product at market prices. Our agreement with P&H does not include any            minimum purchase requirements.

 

We are currently in the process of finalizing marketing contracts            covering the Barrie and Sarnia facilities with ECO Energy Inc. (“ECO”), a            privately held Tennessee corporation that provides ethanol marketing capability across            North America. ECO is a fully integrated marketing company supported by an experienced            sales force, a knowledgeable logistics and scheduling department, customer service, and            an online computer system that we will be able to access to streamline all necessary            correspondence for daily shipments and transportation transactions. We expect to engage            this marketing company to handle the sales and transportation logistics of our ethanol            production at market prices in exchange for a commission of $0.01 per gallon of ethanol            sold.

 

In addition, we will also sell a portion of the CO2            co-produced, with the balance either vented, or recovered for disposal.

 

We will be engaged in the business of producing ethanol in Ontario and            New York and selling it in Central Canada and the Eastern United States. While no            assurances can be provided, we anticipate that the long-term growth in demand for            ethanol will ensure a strong market for all of the output of our facilities.

 

***Barrie, Ontario, Canada***

 

In April 2006, we executed a 25-year lease, with two ten-year renewal            options, on a 35 acre site located in Barrie, Canada from Fercan Developments Inc., a            company owned by the same individual that owns Rosten Investments Inc.            (“Rosten”). Rosten owns 10,000,000 shares of our outstanding Common Stock,            or 9.6% interest.*See “*PART            III, ITEM 12, CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.”

             

This location is of a former brewery operated by Molson Canada that was            decommissioned in 2000. We believe that the Barrie location is well suited for ethanol            production due to its close proximity to Toronto’s gasoline markets, has            excellent rail and road transportation access, is within close driving distance of a            Great Lakes terminal and has readily available water, electricity and natural gas. The            lease allows us to utilize all existing site infrastructure and to demolish or modify            existing structures to optimize plant operations.

 

We filed the Site Plan application for our proposed Barrie plant in June            2007 but did not receive a decision from the City of Barrie within the timeframe of The            Ontario Municipal Act and in September 2007 made a request for an adjudication hearing            with the Ontario Municipal Board. On December 3, 2007, the City of Barrie passed an            Interim Control By-Law prohibiting the establishment of ethanol production facilities            on lands designated or zoned for industrial uses for a period of one year during which            the City of Barrie would conduct a study on the impact of ethanol production. On            December 21, 2007, we received a Notice of Application (“Application”)            filed by North American (Park Place) Corporation (“Applicant”) which            included Fercan Developments Inc., Northern Ethanol (Barrie) Inc., Northern Ethanol            (Canada) Inc. and the City of Barrie (hereinafter jointly referred to as the            “Respondents”), applying for a declaration that the zoning of the property            at 1 Big Bay Point Road, Barrie, Ontario does not permit the property to be used as an            ethanol production plant and for a permanent injunction

 

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prohibiting the property from being used as an ethanol production plant            and for the costs of the Application to be paid by the Respondents. The Application was            originally scheduled to be heard before a judge of the Ontario Superior Court of            Justice on March 4, 2008, but has been postponed and no new court date has been set as            of the date of this Report. We expect that the Ontario Municipal Board hearing will be            held on our Site Plan application and the Interim Control By-Law and a decision will be            reached during the third quarter of 2008. We believe that the zoning for the property            does permit the production of ethanol and that the possibility of the Applicant’s            claim being successful is remote. We intend to vigorously pursue our            defense.

             

We expect that the Ontario Municipal Board hearing will be held on our            Site Plan application and the Interim Control By-Law and a decision will be reached            during the third quarter of 2008.

 

***Sarnia, Ontario, Canada***

 

On July 30, 2007, we entered into an Agreement of Purchase and Sale with            LANXESS Inc. (“LANXESS”) wherein LANXESS agreed to sell approximately 30            acres of land located in Sarnia, Ontario to the Company for C$450,000 by June 30, 2008,            at the latest. The Agreement is conditional upon our satisfaction with our physical            inspection of the land, zoning and permitting, our entering into an EPC contract for            the construction of an ethanol plant, our obtaining financing for the land purchase and            plant construction and reaching an agreement with LANXESS and TransAlta Energy            Corporation (“TransAlta”) in respect of relief for LANXESS’            obligations under its steam supply contract with TransAlta. If our closing conditions            are met, in addition to the payment of the C$450,000 land purchase price, we will pay            LANXESS an amount of C$100,000 immediately, C$325,000 when the construction of the            ethanol plant begins and C$325,000 when the ethanol plant commences operation for a            total of $750,000 as compensation for LANXESS’ costs to re-engineer existing            infrastructure presently located on the land. If after closing of the purchase, we have            not commenced construction of the ethanol plant under an EPC contract by December 31,            2008, LANXESS has the option to reacquire the land for C$450,000. We paid a refundable            interest bearing deposit amount of C$10,000 on execution of the Agreement. This            Agreement replaced a July 2006 non-binding letter of intent with the LANXESS for this            location that provided for a 99-year lease on the property. We expect the cost of steam            under the proposed 20 year steam agreement with LANXESS and TransAlta at this site will            be materially favorable to the costs of generating steam from our own equipment. The            site is located on a major rail line, has access to a waterway dock, has excellent            highway access and is fully zoned and serviced with existing utility connections. From            this location, we believe we will be in a strong position to serve the ethanol markets            of Michigan, Ontario, Ohio, New York and other Northeastern U.S. metro            areas.

             

***Niagara Falls, New York***

             

On December 18, 2007, we entered into a Purchase and Sale Agreement with            Praxair, Inc. (“Praxair”), to acquire approximately 70 acres of land            located in Niagara Falls, NY, where we intend to build an ethanol plant. The cost of            this property is $5,000,010, payable as follows: (i) an earnest money payment of Ten            Dollars ($10) made simultaneously with the execution of the Agreement; (ii) a further            sum of $100,000 to be paid no later than one hundred and fifty (150) days after the            date of the Agreement, as per an amendment dated March 14, 2008, or within seventy-two            (72) hours after our receipt of a fully executed Brownfield Site Cleanup Agreement by            and between us and the Commission of the New York State Department of Environmental            Conservation, if such receipt occurs sooner; (iii) $3,000,000 on closing, which is to            take place on or before August 29, 2008, as per an amendment dated March 14, 2008,            unless we elect to extend the closing date in the event various conditions are not            satisfied by Praxair by said date; and (iv) the balance of $1,900,000 pursuant to a            promissory note, secured by the property, accruing interest at the rate of 7% per annum            and due on June 1, 2010.

 

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The Agreement is conditional upon our satisfaction with various            conditions, including (i) our physical inspection of the land; (ii) environmental            testing of the soil and groundwater and other related environmental testing, in order            to allow us to obtain inspection data necessary to qualify for various governmental            incentive programs; (iii) our satisfaction that the property is suitable for the            development of an ethanol plant, including environmental issues, zoning issues, the            availability and capacity of services to the property and the cost of obtaining the            same; (iv) the successful culmination of the environmental review process in accordance            with the New York State Environmental Quality Review Act and the availability of a            building permit for a structure satisfactory to meet our requirements and any and all            other licenses, approvals, permits, consents and grants as may be necessary to allow us            to build an ethanol plant and ancillary buildings on the property; (v) there being            legally and physically unobstructed pedestrian, vehicular and other transportation            ingress to and egress from the property; and (vi) the property being zoned and            permission being granted by local government and by the State of New York to allow our            proposed use of the property as an ethanol production facility. In the event these            conditions are not satisfied or we determine that any condition is not reasonably            expected to be satisfied prior to Closing, we are obligated to so advise Praxair in            writing and thereafter, either party to the Agreement has the right to cancel and            terminate the Agreement. If we terminate the Agreement due to failure to have these            conditions satisfied then we will receive a refund of our deposit together with any            interest thereon.

 

The Agreement also provides for the parties to enter into negotiations            to complete a Service Agreement whereby Praxair will provide water from its exiting            pump house in an amount sufficient to allow us to operate our proposed ethanol plant            and ancillary operations, provide easements, right-of-ways and other rights as we may            require to utilize Praxair’s river discharge facilities that are adjacent to the            property, as well as to access the property, utilize the necessary utility services            that will be required to operate the proposed ethanol facility and ancillary            operations, if permitted, assign to us the rights to utilize the existing CSX            Transportation (“CSX”) rail lines, or otherwise assist us in obtaining a            new agreement with CSX in order to allow us access to the existing rail lines. The            acquisition of the Property is not conditional upon our reaching mutually acceptable            terms with Praxair for such Service Agreement. The failure to reach such an agreement            could have a materially negative impact on our ability to develop an ethanol plant on            the Property. In the event terms of a mutually acceptable Service Agreement are not            reached and a relevant agreement executed within one hundred and fifty (150) days from            the date the Agreement as per an amendment dated March 14, 2008 was executed, either            party to the Agreement has the right to cancel and terminate the Agreement.

 

We have also agreed to enter into good faith negotiations with Praxair            whereby we will attempt to reach mutually acceptable terms to sell to Praxair            CO2 produced by us from the ethanol fermentation process. However, the            failure to enter into such an agreement in the future will not give rise to any right            to invalidate the Agreement.

 

This site is adjacent to a major rail line, has good highway access,            access to the Great Lakes for shipping purposes and is fully zoned and serviced. As of            the date of this Report we are proceeding with the finalization of the business terms            incorporating the aforementioned provisions along with other provisions for site            services, including steam energy.

             

Each of these locations will be the site for a dry mill processing            facility, using corn as the feedstock. We will begin construction at each location as            soon as we are able to secure all the necessary financing to complete construction of            each facility. We expect this financing to take the form of both debt and equity.            However, it is our intention to use leverage to the greatest extent feasible as is            typical with larger energy infrastructure projects.

 

Effective December 13, 2006, we executed an engagement letter and            indicative term sheets with West LB AG (“WestLB”) whereby WestLB has            conditionally agreed to solicit and arrangesenior            debt

 

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and            subordinate debt financing (to a maximum of approximately $365 million) for up to 75%            of the construction costs of our Barrie and Sarnia facilities on a “best            efforts” basis. The term “best efforts” means that West LB believes            that they can syndicate the debt financing we require but that there is no guarantee            that they will be successful or that the terms will be as indicated in their term            sheets until they market the transaction and receive firm commitments from a syndicate            of lenders for the funds required on acceptable terms to the Company. Among other            things, the provision of 75% financing in accordance with the terms of the engagement            letter and indicative term sheets is conditional on our obtaining subordinate debt or            equity investment for the remaining 25% of construction costs. The WestLB indicative            term sheets offer first priority senior secured construction and term financing for up            to 60% of the total capital requirements of plant construction and for working capital            for a total term of up to 7.5 years and subordinated secured construction and term            financing for up to 15% of the total capital requirements of plant construction for a            total term of up to eight years. Following conversion of the senior construction loan            to a senior term loan, the loan amount is to be repaid in equal quarterly installments            over six years. Surplus cash as defined by debt service covenant is to be swept to            accelerate the repayment of the senior term loan and to repay the subordinated term            loan. We paid a non-refundable retainer deposit of $200,000 to WestLB on execution of            the engagement letter and indicative term sheets. In the event that we chose to            terminate the WestLB engagement and we enter into a similar debt financing with another            lender within 12 months of terminating WestLB, we will pay WestLB a termination fee of            $10,000,000. If the financing contemplated in the engagement letter and indicative term            sheets is finalized with WestLB, we will pay to WestLB a structuring and arrangement            fee of the greater of $5,000,000 or 2% of the principal amount of the senior financing            and $5,000,000 or 2% of the principal amount of the subordinated financing. In            addition, we will pay a fee to market the senior and subordinate loans of 1% of the            principal amount of each. The interest rate on the senior financing will be at LIBOR            plus an anticipated spread of 325 to 350 basis points. Until the senior loan has been            fully drawn, we shall pay a commitment fee of 0.50% on the undrawn portion. The            interest rate on the subordinate financing will be at LIBOR plus an anticipated spread            of 1000 basis points. As the subordinate financing will be fully drawn on closing there            will be no commitment fees applicable on that facility. We expect other covenants,            representations and warranties will form part of the final documentation on closing of            the loan agreement. WestLB has indicated that they are interested in including our            proposed Niagara Falls, New York location in their debt syndication but we have not            received a revised engagement letter and indicative term sheet from them as of the date            of this Report.

             

With the execution of the SK E&C EPC term sheet for our Sarnia            location on March 12, 2008, a convertible bond term sheet (“Bond Term            Sheet”) dated November 14, 2007 between us and SinoUp & Rise Ltd. of Beijing,            China that contained a provision giving SinoUp & Rise Ltd. the right to nominate            the EPC Contractor became effective. Under terms of the Bond Term Sheet, on condition            of West LB successfully completing the arrangement of our senior debt and subordinate            debt financing, SinoUp & Rise Ltd. agreed to provide the 25% balance of the            financing (approximately $45 million per facility to a total maximum amount of $90            million) required for our Barrie and Sarnia ethanol facilities in the form of a 7 year            convertible bond, subordinated to the West LB senior and subordinated debt financing.            During the first two years from advance, the convertible bond will not pay interest but            will instead accrue that interest as principal at an unpaid coupon rate of LIBOR plus            10%. Thereafter, the convertible bond will pay interest at LIBOR plus 15%, and the            principal shall be repaid on a straight line basis until maturity. The convertible bond            holder shall be able to convert the unamortized amount of the bond into our common            shares at a debt to share conversion price of $3.00 per share after the first two years            from advance. For conversion purposes, the unamortized amount shall not exceed the            original principal amount of $90 million. Any conversion resulting in the convertible            bond holder holding more than 10% equity ownership of our equity ownership will result            in the convertible bond holder receiving a seat on our Board of Directors.

             

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We have had discussions with SinoUp & Rise Ltd. regarding            participating in the financing of our proposed Niagara Falls, New York location but we            have not received a term sheet from them as of the date of this Report. We have also            discussed the financing required for our proposed Niagara Falls, New York location with            investment bankers, financial institutions and private investors, but as of the date of            this Report we have received no binding commitments. We may not be able to obtain            sufficient funding from one or more investors or other financial institutions for our            proposed Niagara Falls, New York location, or if such funding is obtained, that it will            be on terms that we have anticipated or that are otherwise acceptable to us. If we are            unable to secure adequate financing, or financing on acceptable terms is unavailable            for any reason, we may be forced to abandon our construction of that planned ethanol            production facility.

             

In order to allow us to continue to implement our business plan, on            March 30, 2007, we entered into a Line of Credit Agreement with Union Capital Trust,            Nassau, Bahamas (“Union”) wherein Union agreed to provide us with a $6            million unsecured line of credit at an interest rate of twelve percent (12% per annum),            maturing on March 30, 2008. As of our year ended December 31, 2007, we have drawn down            an aggregate of $511,579 on this line of credit. Also on July 9, 2007, we entered into            a Line of Credit Agreement with Aurora Beverage Corporation, (“Aurora”)            wherein Aurora agreed to provide us with a $1 million unsecured line of credit.            Interest accrues at the rate of eight percent (8% per annum) and is payable monthly.            Principal and unpaid interest is due on or before July 8, 2008. Effective December 14,            2007, the Line of Credit Agreement with Aurora was amended to increase the maximum            principal amount of the loan to $2,000,000. On March 7, 2008, the Aurora Line of Credit            Agreement was further amended, as a result of a reorganization, to change the lender to            LDR Properties Inc. (“LDR”), to increase the loan principal amount to            $8,000,000 and to extend the due date to July 8, 2009. The balance of the terms of the            initial Line of Credit Agreement remains as originally stated. LDR, an Ontario            corporation, is a company owned by the same individual that owns Rosten Investments            Inc. (“Rosten”). Rosten owns 10,000,000 shares of the Company’s            outstanding Common Stock. We used the LDR line of credit to repay Union Capital            $526,716 at the maturity of that line of credit on March 30, 2008. As of March 31,            2008, we have drawn down an aggregate of $1,785,711 on the LDR line of credit.All draws on the LDR (formerly Aurora) line of credit are subject to            review and approval of the lender, who has not denied any of our requests to            date.

 

Upon our successful construction of multiple manufacturing facilities,            we expect to realize significant cost savings in raw materials purchasing,            transportation, engineering and operations that we expect will provide a profitability            advantage vis-à-vis other smaller and single-site ethanol producers because of            the opportunity to centralize key functions including risk management, procurement and            executive management. Also we expect that these multiple sites will provide us with            greater influence in plant design and new technologies, as well as access to capital            markets. However, there can be no assurances that our expectations will be met and we            will, in fact, realize these benefits.

 

We continue to seek out other potential sites for development of            additional ethanol plants. The manner in which we will develop future sites beyond the            initial aforementioned locations will depend upon the nature of the opportunity, the            respective needs of the parties involved, and our then corporate objectives. We have            set up a separate wholly owned subsidiary to own each ethanol plant. We may also            purchase existing ethanol producing facilities outright, acquire an ownership interest            in companies controlling existing ethanol producing facilities, issue shares in a            subsidiary company that controls the site to outside parties who control ethanol            producing facilities, or some other unidentified transactional structure.

 

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**Acquisition Activity**

 

On February 14, 2007, we executed a non-binding letter of intent            offering to invest $6.5 million into Energen Development Ltd., Kingston, Jamaica            (“EDL”) in exchange for a 70% interest in that company. EDL is currently            involved in developing an ethanol dehydration plant (Phase 1) and biodiesel plant            (Phase 2) on the island of Jamaica, for local and export sales markets. Effective March            13, 2007, the parties terminated the Letter of Intent. We intend to continue to pursue            opportunities in the Caribbean Basin to develop ethanol dehydration plants using            hydrous ethanol, if and when such opportunities become available.

 

On March 27, 2007, we entered into a non-binding letter of intent with            Quad County Corn Processors Cooperative, Galva, Iowa (“Quad”), wherein we            agreed in principle to acquire most of the assets and liabilities of Quad, including            its existing ethanol plant, for the purchase price of $105            million.Effective May 11, 2007, the parties terminated the letter            of intent. We do not intend to proceed with this proposed transaction.

             

We are continuing to review and explore other acquisitions of existing            ethanol plants, but there are no current material discussions with any third party            relating to such acquisitions and there can be no assurances that we will reach any            agreements in the future. It is likely that we will finance our participation in a            business opportunity through the issuance of Common Stock or other securities and            through the issuance of senior debt secured against the assets of each operating            location. In the case of cash acquisition, the transaction may be accomplished upon the            sole determination of management without any vote or approval by stockholders. In the            case of a statutory merger or consolidation directly involving us, it will likely be            necessary to call a stockholders’ meeting or otherwise obtain the approval of the            holders of a majority of our outstanding shares. The necessity to obtain such            stockholder approval may result in delay and additional expense in the consummation of            any proposed transaction and may also give rise to certain appraisal rights to            dissenting stockholders.

 

We plan to identify and exploit new technologies for reduced costs and            greater manufacturing yields. For example, we are examining new technologies enabling            the conversion of cellulose, which is generated predominantly from wood waste, paper            waste and agricultural waste, into ethanol which would reduce or eliminate our            dependency on corn as a primary feedstock while also helping local municipalities deal            with ever increasing demands on their garbage disposal sites.

             

**SALESANDMARKETING**

 

***Ethanol***

 

According to the Renewable Fuels Association            (www.ethanolRFA.org/industry/statistics/            ), between 90% and 95% of the ethanol in the U.S. and Canada is sold pursuant to six to            twelve month contracts, negotiated between the ethanol producer and the oil refiner or            gasoline blender. As such, we believe that we will not be able to rely on long-term            (over one year) contracts for the sale of our product. Entering in to a long-term            contract would require us to give the buyer a significant discount to current market            prices. We believe that if and when we commence operations, it will be more profitable            for us to sell into the spot market and through a mixture of short-term (less than one            year) contracts. The Chicago Board of Trade launched an ethanol futures contract in            April 2005. As of the date of this Report, there has been limited trading activity in            ethanol futures.

 

11

 

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We are currently in the process of finalizing contracts covering our            proposed facilities with ECO Energy Inc., a privately held Tennessee corporation that            provides ethanol marketing capability across North America (“ECO”). ECO is            a fully-integrated marketing company supported by an experienced sales force, a            knowledgeable logistics and scheduling department, customer service, and an online            computer system that we will be able to access to streamline all necessary            correspondence for daily shipments and transportation transactions. We expect to engage            this marketing company to handle the sales and transportation logistics of all our            ethanol production. The selling price under these non-exclusive ECO agreements is            expected to be relative to the local fuel wholesale (rack) unleaded gasoline daily spot            market. By selling on a non-exclusive basis, we expect to benefit from being able to            sell into the market with the highest spot price at the time. Currently, forward            contracting of ethanol sales is not a well-developed market.

 

***Dried Distillers Grains and Solubles (DDGS)***

 

According to the “Renewable Fuels Association: Ethanol Industry            Outlook,” the volume of North American DDGS output has expanded from 2.7 million            metric tons in 2001 to 14.6 million metric tons in 2007 with the growth in ethanol            production. Data received from Agri-Link and Farm Market News at the University of            Guelph, Ontario, shows that the price of DDGS per metric ton in the Southern Ontario            market since 2001 have ranged from a low of C$77 in September 2006 to a current high of            C$205 per metric ton in the Southern Ontario market.

DDGS are a protein ingredient in animal feed and as such, DDGS prices            track very closely to the price of soybean meal, which is the most widely used protein            source in livestock feed. Our biggest competition in this market comes from other            nearby ethanol plants, as we hope to sell a portion of our DDGS in the local feed            market. We plan on selling the balance of our DDGS to developed feed markets in the            United States and Europe. It is expected that the price of DDGS will fluctuate relative            to the market price of soybean meal, which is an actively traded commodity.

We have entered into a non-exclusive merchandizing agreement with            Parrish & Heimbecker for all of our anticipated production volume for at least            three (3) years. The selling price under this agreement is expected to be at the local            and international spot market. By entering in to a non-exclusive agreement for the sale            of DDGS, we will benefit from being able to sell into the market with the highest price            at the time. In addition, this will allow us to sell to markets in both North America            and Europe, depending on which is more profitable at the time of sale. We will pay            Parrish & Heimbecker C$1.00 per metric ton of DDGS sold for marketing the sale of            our product. Our agreement with P&H does not include any minimum purchase            requirements.

 

***Carbon Dioxide (CO2)***

 

                          We have entered into discussions with major local users of CO2, includingPraxair, for            the sale of our CO2 by-product. Carbon dioxide is sold principally to the food and            beverages markets, and also to the industrial market. The CO2 market is very            concentrated, with a large share of the supply coming from a few large players. To            effectively compete in the CO2 market, producers must be located within a reasonable            distance of the end user because transportation costs usually represent about 50% of            the delivered price of CO2. The selling price under these agreements is expected to be            at the local spot market. We expect a portion of the CO2 production to be sold, with            the balance either vented, or recovered for disposal.

             

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**INDUSTRYOVERVIEW**

 

*In 1908, Henry Ford commenced building the Model T and it had the            ability to run on ethanol as well as gasoline*.*He had a vision of affordable fuel for North American drivers, which            was to be produced by farmers and therefore would be a shot in the arm to rural            economies.*

 

Ethanol cuts the emissions of unburned hydrocarbons and carbon monoxide.            There is a net reduction in harmful ozone forming emissions and greenhouse gases with            the use of ethanol blended gasoline since growing corn removes carbon dioxide from the            air and in the manufacturing process, carbon dioxide is extracted and commercially            utilized. Ethanol use is approved by all vehicle manufacturers and is used across            Canada and the United States.

 

Producing ethanol increases the supply of high protein animal feed            ingredients through the distillation process; this creates new agricultural business            opportunities centered on the plant, and helps offset imports of soybean meal and other            animal feeds.

 

Fuel ethanol benefits the economy as well as the environment. Production            of fuel ethanol in Canada (and around the world) has produced a new market for            agricultural products, improving financial stability and security for farmers, in            addition to direct and indirect employment opportunities from farming to transportation            and manufacturing.

 

Brazil is a world leader in the use of fuel ethanol with nearly half of            its cars operating on pure ethanol. In response to the oil crisis of the mid            1970’s, the Brazilian government in cooperation with private industry created a            national program to produce alcohol from sugar cane and to build ethanol compatible            engines. Today, many countries around the world are testing oxygenated and (near 100%)            alcohol fuels. In some parts of the U.S., projects are underway to test the viability            of replacing diesel fuel with ethanol.

 

North American governments have been engaged in creating programs to            encourage the use of ethanol to reduce dependence on oil, to achieve higher            environmental standards and to stimulate rural economies and as a result, ethanol            production has been growing steadily in recent years. The health of the ethanol            industry remains closely tied to government programs that provide tax incentives,            tariff exemptions and regulatory mandates that favor ethanol’s use as a fuel            additive.

 

Effective January 1, 2007, the Ontario Government has mandated a minimum            average of 5% ethanol in gasoline as a way to support agriculture, improve air quality,            and reduce dependence on petroleum. On December 20, 2006, the Canadian Federal            government announced a regulation that will require all gasoline sold in Canada to have            5% renewable content by 2010. This legislation will create a substantially larger            market than at present for fuel ethanol in Canada since ethanol is the primary renewal            fuel option available.

 

As illustrated in the following chart of current publicly available data            on Canadian ethanol production and consumption from 1996 to 2003, ethanol fuel            consumption in Canada grew substantially from approximately 50 million litres (13            million gallons) in 1997 to approximately 275 million litres (72 million gallons) in            2003.

 

13

 

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|   | 1) | Economic, Financial, Social Analysis and Public Policies                            for Fuel Ethanol - Phase 1; Natural Resources Canada, November 2004                            (http://www.greenfuels.org/ethanol/pdf/OConnor-Report-Ethanol-2004.pdf) |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

According to Statistics Canada            (http://www40.statcan.ca/l01/cst01/trade37b.htm), gasoline consumption in Canada in            2006 was 39.7 billion litres (10.5 billion gallons), of which 15.5 billion litres (4            billion gallons) was consumed in Ontario. Based on this, management estimates that            ethanol demand in Ontario reached approximately 780 million litres (200 million            gallons) in 2007 due to the requirements of a 5% average Ontario ethanol blend.            According to the Canadian Renewable Fuels Association, current ethanol production            capacity in Canada is approximately 735 million litres (194 million gallons), of which            428 million litres (113 million gallons) was located in Ontario            (http://www.greenfuels.org/lists.php#ethProd            ). We believe that this led to an excess of demand over domestic supply in Ontario in            2007.

 

According to the Renewable Fuels Association (“RFA”)            (http://www.ethanolrfa.org/industry/statistics/            ), the United States ethanol industry has experienced significant production growth in            recent years from 1.3 billion gallons produced in 1996 to 4.9 billion gallons in 2006.            Total U.S. demand for ethanol in 2006 was approximately 5.4 billion gallons. The            following chart has been developed by the Company from data obtained from the RFA and            illustrates the growth in U.S. ethanol production from 1996 to 2006. US ethanol            consumption data was only available from 2002 onward.

             

14

 

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Ethanol is typically blended at 5% to 10% by volume in the United            States, but is also blended at up to 85% (known as E-85) by volume for vehicles            designed to operate on 85% ethanol. Compared to gasoline, ethanol is generally            considered to be less expensive and cleaner burning. Ethanol is widely marketed across            the United States as a high quality octane enhancer and oxygenate capable of reducing            air pollution and improving automobile performance. In spark ignition engines, ethanol            emits significantly less carbon monoxide and air toxic pollution than gasoline            therefore reducing the amount of harmful emissions released into the atmosphere. We            anticipate that the increasing demand for transportation fuels coupled with limited            opportunities for gasoline refinery expansions and the growing importance of reducing            CO2 emissions through the use of renewable fuels will generate additional            growth in the ethanol market.

 

Regulation of the ethanol industry in Canada is not materially different            from that of the United States. Canadian taxation law currently provides for a $0.10            per litre excise tax exemption on the ethanol portion of ethanol blended gasoline. The            Canadian Federal Government Budget, tabled in the House of Commons on March 19, 2007,            proposed to repeal this exemption for renewable fuels effective April 1, 2008 but            allocated a C$1.5 billion operating incentive over seven years to “producers of            renewable alternatives to gasoline, such as ethanol.” “Incentive rates will            be up to $0.10 per litre for renewable alternatives to gasoline, for the first three            years, then decline thereafter. In order to ensure companies do not earn excessive            profits, government support will not be provided when rates of return exceed 20 per            cent, determined annually. Support under the program to individual companies will be            capped to ensure that benefits are provided to a wide range of participants in the            sector – not just the largest oil-producing companies.” On June 22, 2007            this Budget was passed in the Senate and became law. As of the date of this Report, the            final details of the application of the incentive program are being reviewed by Natural            Resources Canada with the Canadian ethanol industry. We will pursue this incentive            funding for our Barrie and Sarnia plants once the program is finalized. In Ontario,            there is also a C$0.147 per litre Provincial Fuel Tax exemption on the ethanol portion            of blended gasoline until 2010.

 

The fuel ethanol business benefits significantly from tax incentive            policies and environmental regulations that favor the use of ethanol in motor fuel            blends in the United States. Currently, a gasoline marketer that sells gasoline without            ethanol must pay a federal tax of $0.18 per gallon compared to $0.13 per gallon for            gasoline that is blended with 10% ethanol. Smaller credits are available for gasoline            blended with lesser percentages of ethanol. The repeal or substantial modification of            excise tax exemptions for ethanol-blended gasoline or, to a lesser extent, other            federal, state or provincial policies

 

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and            regulations that encourage the use of ethanol could have a detrimental effect on the            ethanol production and marketing industry and materially and adversely affect our sales            and profitability.

 

On December 19, 2007, President George W. Bush signed into law the            Energy Independence and Security Act (EISA) of 2007. This legislation included an            increase in the Renewable Fuels Standard of 7.5 billion gallons by 2012 as mandated by            the Energy Policy Act of 2005 to a new standard of 36 billion gallons by 2022. From 9.0            billion gallons in 2008, the new standard minimum amount of renewable fuels that must            be used by fuel refiners increases progressively to 2022. Of this new standard, up to            15 billion gallons may be derived from conventional biofuel sources such as corn based            ethanol, with the balance expected to come from advanced alternative biofuels such as            cellulosic ethanol.

 

The U.S. Clean Air Act Amendments of 1990 (“CAAA90”)            established special standards effective January 1, 1995, for the most polluted ozone            non-attainment areas: Los Angeles Basin, Baltimore, Chicago Area, Houston Area,            Milwaukee Area, New York-New Jersey, Hartford Region, Philadelphia Area and San Diego,            with provisions to add other areas in the future if conditions warrant.            California’s Central Valley was added in 2002. At the outset of the program there            were a total of 96 Metropolitan and Micropolitan Statistical Areas (“MSAs”)            not in compliance with clean air standards for ozone, which currently represents            approximately 60% of the national market.

 

The legislation requires a minimum of 2.0% oxygen by weight in            reformulated gasoline as a means of reducing carbon monoxide pollution and replacing            octane lost by reducing aromatics that are high-octane portions of refined oil. The            Reformulated Gasoline Program (“RFG”) also includes a provision that allows            individual states to “opt into” the federal program by request of the            governor, to adopt standards promulgated by California that are stricter than federal            standards, or to offer alternative programs designed to reduce ozone levels. Nearly the            entire Northeast and middle Atlantic areas from Washington, D.C. to Boston not under            the federal mandate have “opted into” the federal standards.

 

Gasoline is oxygenated because the oxygen makes gasoline burn cleaner            thereby reducing ozone forming compounds and carbon monoxide. The two available            oxygenates to meet both oxy-fuel and RFG requirements have been MTBE (methyl tertiary            butyl ether) and ethanol. MTBE is an ether made from methanol produced from natural gas            and, until recently, has been the most widely used oxygenate to meet CAAA90            requirements.

 

Because of its favorable handling qualities and the fact that it is a            petroleum product, MTBE has been the preferred oxygenate for the petroleum industry.            However, MTBE has shown significant adverse environmental and health safety            characteristics that have led to the decision by several key States to ban its use.            Specifically, MTBE is highly persistent (i.e. it has a very long half-life) and has            been identified as a potential carcinogen. MTBE has been detected in drinking water            supplies in almost all areas where it is used. Reflecting these issues, California, New            York, Connecticut, New Jersey and more than twenty other States have banned the use of            MTBE.

 

**COMPETITION**

 

The ethanol production industry is becoming increasingly competitive. We            believe that our ability to successfully compete depends on many factors including but            not limited to the economics of feedstock supply, proximity to major customers and            extent of transportation infrastructure. Organizations that we deem our principal            competition are currently producing ethanol or are currently constructing ethanol            production capacity on a significant scale within our local target markets of Ontario,            New York, Michigan and Ohio.

 

We believe our principal competition in these markets is as            follows:

 

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| **Company**                             |   |   |   | **Location**            |   |   |   | **Feedstock**    |   |   |   | **Current Capacity (mgy)** |   |   |   | **Under Construction/ Expansion (mgy)** |   |
|-----------------------------------------|--------|--------|--------|-------------------------|--------|--------|--------|------------------|--------|--------|--------|----------------------------|--------|--------|--------|-----------------------------------------|--------|
|                                    |   |   |   |                    |   |   |   |             |   |   |   |                       |   |   |   |                                    |   |
| Collingwood Ethanol                     |   |   |   | Collingwood, ON, Canada |   |   |   | Corn             |   |   |   | 13                         |   |   |   |                                    |   |
| GreenField Ethanol                      |   |   |   | Varennes, QC, Canada    |   |   |   | Corn             |   |   |   | 32                         |   |   |   |                                    |   |
| GreenField Ethanol                      |   |   |   | Chatham, ON, Canada     |   |   |   | Corn             |   |   |   | 49                         |   |   |   |                                    |   |
| GreenField Ethanol                      |   |   |   | Tiverton, ON, Canada    |   |   |   | Corn             |   |   |   | 7                          |   |   |   |                                    |   |
| GreenField Ethanol                      |   |   |   | Johnstown, ON, Canada   |   |   |   | Corn             |   |   |   |                       |   |   |   | 53                                      |   |
| GreenField Ethanol                      |   |   |   | Hensall, ON, Canada     |   |   |   | Corn             |   |   |   |                       |   |   |   | 53                                      |   |
| Suncor Energy Products                  |   |   |   | Sarnia, ON, Canada      |   |   |   | Corn             |   |   |   | 53                         |   |   |   |                                    |   |
|                                    |   |   |   |                    |   |   |   |             |   |   |   |                       |   |   |   |                                    |   |
|                                    |   |   |   |                    |   |   |   | **Canada total** |   |   |   | **154**                    |   |   |   | **106**                                 |   |
|                                    |   |   |   |                    |   |   |   |             |   |   |   |                       |   |   |   |                                    |   |
| Indiana BioEnergy                       |   |   |   | Bluffton, IN            |   |   |   | Corn             |   |   |   |                       |   |   |   | 101                                     |   |
| The Andersons Clymers Ethanol, LLC      |   |   |   | Clymers, IN             |   |   |   | Corn             |   |   |   | 110                        |   |   |   |                                    |   |
| Cardinal Ethanol                        |   |   |   | Harrisville, IN         |   |   |   | Corn             |   |   |   |                       |   |   |   | 100                                     |   |
| ASAlliances Biofuels, LLC               |   |   |   | Linden, IN              |   |   |   | Corn             |   |   |   |                       |   |   |   | 100                                     |   |
| Central Indiana Ethanol, LLC            |   |   |   | Marion, IN              |   |   |   | Corn             |   |   |   | 40                         |   |   |   |                                    |   |
| Premier Ethanol                         |   |   |   | Portland, IN            |   |   |   | Corn             |   |   |   |                       |   |   |   | 60                                      |   |
| Iroquois Bio-Energy Company, LLC        |   |   |   | Rensselaer, IN          |   |   |   | Corn             |   |   |   | 40                         |   |   |   |                                    |   |
| New Energy Corp.                        |   |   |   | South Bend, IN          |   |   |   | Corn             |   |   |   | 102                        |   |   |   |                                    |   |
| The Andersons Albion Ethanol LLC        |   |   |   | Albion, MI              |   |   |   | Corn             |   |   |   | 55                         |   |   |   |                                    |   |
| Michigan Ethanol, LLC                   |   |   |   | Caro, MI                |   |   |   | Corn             |   |   |   | 50                         |   |   |   |                                    |   |
| Marysville Ethanol, LLC                 |   |   |   | Marysville, MI          |   |   |   | Corn             |   |   |   |                       |   |   |   | 50                                      |   |
| Global Ethanol/Midwest Grain Processors |   |   |   | Riga, MI                |   |   |   | Corn             |   |   |   | 57                         |   |   |   |                                    |   |
| US BioEnergy Corp.                      |   |   |   | Woodbury, MI            |   |   |   | Corn             |   |   |   |                       |   |   |   |                                    |   |
| Western New York Energy, LLC            |   |   |   | Shelby, NY              |   |   |   | Corn             |   |   |   | 50                         |   |   |   |                                    |   |
| Northeast Biofuels                      |   |   |   | Volney, NY              |   |   |   | Corn             |   |   |   |                       |   |   |   | 114                                     |   |
| ASAlliances Biofuels, LLC               |   |   |   | Bloomingburg, OH        |   |   |   | Corn             |   |   |   |                       |   |   |   | 100                                     |   |
| Coshoctan Ethanol, OH                   |   |   |   | Coshoctan, OH           |   |   |   | Corn             |   |   |   | 60                         |   |   |   |                                    |   |
| The Andersons Marathon Ethanol, LLC     |   |   |   | Greenville, OH          |   |   |   | Corn             |   |   |   | 110                        |   |   |   |                                    |   |
| Summit Ethanol                          |   |   |   | Leipsic, OH             |   |   |   | Corn             |   |   |   |                       |   |   |   | 60                                      |   |
| Greater Ohio Ethanol, LLC               |   |   |   | Lima, OH                |   |   |   | Corn             |   |   |   |                       |   |   |   | 54                                      |   |
|                                    |   |   |   |                    |   |   |   |             |   |   |   |                       |   |   |   |                                    |   |
|                                    |   |   |   |                    |   |   |   | **US total**     |   |   |   | **674**                    |   |   |   | **739**                                 |   |
|                                    |   |   |   |                    |   |   |   |             |   |   |   |                       |   |   |   |                                    |   |
|                                    |   |   |   |                    |   |   |   | **Combined**     |   |   |   | **828**                    |   |   |   | **845**                                 |   |

             

Our most significant competitor in Ontario and upper New York State is            expected to beGreenField            Ethanol.It            hascurrent production and capacity under construction of 162            million gallons, or 10% of the total current production and capacity under construction            in the above table. If we are successful in constructing our two initial production            facilities in Ontario and New York State, we expect to compete directly with GreenField            Ethanol for the sale of our ethanol and co-products in Ontario and upper New York            State. Even though Suncor Energy also has ethanol production in Ontario, we            expect

 

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that            we will not compete directly with them, as we believe they are currently producing            ethanol primarily for distribution to their own network of retail gasoline            stations.

 

There can be no assurances that we will be successful in developing our            proposed ethanol plants, or if so developed, that we will become a competitive force in            the industry.

 

**GOVERNMENTREGULATIONS**

 

Our existing and proposed business operations are subject to extensive            and frequently changing federal, state, provincial and local laws and regulations            relating to the protection of the environment. These laws, the underlying regulatory            requirements and the enforcement thereof, some of which are described below, impact, or            may impact, our proposed business operations by imposing:

 

|   | **•** | Restrictions on our existing and proposed business                            operations and/or the need to install enhanced or additional                            controls; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | **•** | The need to obtain and comply with permits and                            authorizations; |
|--------|------------|-------------------------------------------------------------------------------------------|

             

|   | **•** | Liability for exceeding applicable permit limits or                            legal requirements in certain cases for the remediation of contaminated                            soil and groundwater at our facilities, contiguous and adjacent                            properties and other properties owned and/or operated by third parties;                            and |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | **•** | Specifications for the ethanol we market and plan to                            produce. |
|--------|------------|------------------------------------------------------------------------------------------|

 

In addition, some of the governmental regulations to which we are            subject are helpful to our ethanol marketing business and proposed ethanol production            business. The ethanol fuel industry is greatly dependent upon tax policies and            environmental regulations that favor the use of ethanol in motor fuel blends in North            America. Some of the governmental regulations applicable to our ethanol marketing            business and proposed ethanol production business are briefly described            below.

 

In Ontario, grain elevator licensing for ethanol plants falls under            provincial jurisdiction. We will need to obtain grain elevator licenses for Barrie and            Sarnia from Agricorp, a provincial government agency. In Sarnia, we will also need to            obtain a marine terminal license from the Canadian Grain Commission due to the fact            that the site has a dock facility. Parrish & Heimbecker has offered their            assistance in obtaining these licenses, which they have said are quite simple to            acquire. The annual cost of a Grain Elevator License is C$1,200. These licenses will            require us to post security in an amount to be determined by Agricorp and the Canadian            Grain Commission. The purpose of this security is to ensure that the licensee has the            financial capability to fulfill its purchases from Canadian grain suppliers.

 

To construct an ethanol plant in Ontario a Site Plan Approval permit and            an Environmental permit are required. The Site Plan Approval permit process entails            submitting a detailed layout of the proposed plant including a landscape plan and items            such as building finishes and artists rendering showing what the plant will look like            from various street level views. The general time period required for this permit is 90            days. We filed the Site Plan application for our proposed Barrie plant in June 2007 but            did not receive a decision from the City of Barrie within the timeframe of The Ontario            Municipal Act and in September 2007 made a request for an adjudication hearing with the            Ontario Municipal Board. On December 3, 2007, the City of Barrie passed an Interim            Control By-Law prohibiting the establishment of ethanol production facilities on lands            designated or zoned for industrial uses for a period of one year during which the City            of Barrie would conduct a study on the impact of ethanol production. We expect that the            Ontario Municipal Board hearing will be held on our Site Plan application and the            Interim Control By-Law and a decision will be reached during the third quarter of 2008.            For the Sarnia site, we

 

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have            recently commenced this process and expect to receive our Site Plan Approval permit            from the City of Sarnia during the second quarter of 2008.

 

The other permit that is required is an Environmental Permit from the            Ministry of Environment of Ontario. In March 2007, we applied for this permit for the            Barrie plant and we expect to receive the final permit once we resolve our Site Plan            issue with the City of Barrie. We expect that our environmental permit for Sarnia, once            submitted, will be processed within a shorter time frame than the Barrie permit, given            that the Sarnia plant will be similar to the Barrie plant and we have our experience            with the Barrie application to draw upon.

             

As of the date of this Report, we had not begun the permitting process            for our proposed Niagara Falls, New York location.

 

Other permits that will be required are standard building permits that            the EPC contractor will obtain as part of their EPC contract.

 

The Canadian Wheat Board has no jurisdiction over Canadian corn based            ethanol producers. Under the North American Free Trade Agreement (NAFTA), ethanol            produced in Canada is allowed to enter the U.S. duty-free. The same is true for ethanol            produced in the U.S. entering Canada. In Canada, ethanol may also be sold            inter-provincially without duties or other restrictions. According to the Canadian            Renewable Fuels Association there are no restrictions on Canadian ethanol entering            Europe.

 

Federal support in Canada for ethanol dates back to the mid-1990s when            the Canadian government removed the excise tax on the ethanol portion of blended            gasoline and established a program to protect producers from any future change in this            policy. In December 1994, the Canadian federal government announced the National            Biomass Ethanol Program (NBEP) designed to support the development of a domestic            ethanol industry. The program established a C$70 million line of credit for qualified            ethanol producers to access in the event that all, or part, of the gasoline tax            exemption on ethanol was removed during the period 1999 to 2005.

 

On December 20, 2006, the Canadian federal government announced a            regulation that will require all gasoline sold in Canada to have 5% renewable content            by 2010. This requirement is a flexible means of promoting increased ethanol content in            the Canadian gasoline market. Driven by Canada’s Clean Air Act, this legislation            will strengthen the government’s ability to take action on reducing air pollution            and greenhouse gases. In Canada, the ethanol portion of blended gasoline receives an            exemption from the Federal Excise Tax of C$0.10 cents per litre on gasoline. The            Canadian Federal Government Budget, tabled in the House of Commons on April 19, 2007,            proposed to repeal this exemption for renewable fuels effective April 1, 2008 but            allocated a C$1.5 billion operating incentive over seven years to “producers of            renewable alternatives to gasoline, such as ethanol.” “Incentive rates will            be up to $0.10 per litre for renewable alternatives to gasoline, for the first three            years, then decline thereafter. In order to ensure companies do not earn excessive            profits, government support will not be provided when rates of return exceed 20 per            cent, determined annually. Support under the program to individual companies will be            capped to ensure that benefits are provided to a wide range of participants in the            sector – not just the largest oil-producing companies.” On June 22, 2007            this Budget was passed in the Senate and became law. In Ontario, there is also a            C$0.147 cent per litre ($CDN) exemption on Provincial Fuel Tax until 2010.

 

***Ontario Renewable Fuels Standard***

 

In November 2005, the Ontario Government enacted legislation known as            the Renewable Fuel Standard (“RFS”), which mandates a 5% ethanol blend in            all gasoline sold in the province after January 1,

 

19

 

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2007. The RFS is a flexible, market orientated means of achieving            increased ethanol content in the Ontario gasoline pool. The RFS will increase the            demand for fuel ethanol in Ontario to approximately 700 million litres per            year.

 

***U.S. Federal Excise Tax Exemption***

 

In the U.S., ethanol blends have been either wholly or partially exempt            from the federal excise tax (“FET”) on gasoline since 1978. The exemption            has ranged from $0.04 to $0.06 per gallon of gasoline during that 25-year period.            Current law provides a $0.051 per gallon exemption from the $0.183 per gallon FET on            gasoline if the taxable product is blended in a mixture containing at least 10%            ethanol. The FET exemption was revised and its expiration date was extended for the            sixth time since its inception as part of the Jumpstart Our Business Strength            (“JOBS”) Act enacted in October 2004. The new expiration date of the FET            exemption is December 31, 2010. We believe that it is highly likely that this tax            incentive will be extended beyond 2010 if Congress deems it necessary for the continued            growth and prosperity of the ethanol industry.

 

***Clean Air Act Amendments of 1990            (“CAAA90”)***

 

In November 1990, a comprehensive amendment to the Clean Air Act of 1977            established a series of requirements and restrictions for gasoline content designed to            reduce air pollution in identified problem areas of the United States. The two            principal components affecting motor fuel content are the Oxygenated Fuels Program,            which is administered by states under federal guidelines and a federally supervised            RFG.

 

***Oxygenated Fuels Program***

 

Federal law requires the sale of oxygenated fuels in certain carbon            monoxide non-attainment Metropolitan and Micropolitan Statistical Areas            (“MSA”) during at least four winter months, typically November through            February. An MSA as defined by the U.S. Office of Management and Budget: 1) a county or            group of contiguous counties that contains at least one city of 50,000 inhabitants or            more, or 2) an urbanized area of at least 50,000 inhabitants and a total MSA population            of at least 100,000 inhabitants (75,000 in New England). Contiguous counties are            included in an MSA if, according to certain criteria, they are essentially metropolitan            in character and are socially and economically integrated with the central city or            cities. In New England, MSAs consist of towns and cities rather than counties.            Additionally, any MSA not in compliance for a period of two consecutive years in            subsequent years may also be included in the program. The EPA Administrator is afforded            flexibility in requiring a shorter or longer period of use depending upon available            supplies of oxygenated fuels or the level of non-attainment.

 

***Reformulated Gasoline Program            (“RFG”)***

 

The CAAA090 established special standards effective January 1, 1995, for            the most polluted ozone non-attainment areas: Los Angeles Basin, Baltimore, Chicago            Area, Houston Area, Milwaukee Area, New York-New Jersey, Hartford Region, Philadelphia            Area and San Diego, with provisions to add other areas in the future if conditions            warrant. California’s Central Valley was added in 2002. At the outset of the            program there were a total of 96 MSAs not in compliance with clean air standards for            ozone, which currently represents approximately 60% of the national market.

 

The legislation requires a minimum of 2.0% oxygen by weight in            reformulated gasoline as a means of reducing carbon monoxide pollution and replacing            octane lost by reducing aromatics that are high-octane portions of refined oil. The RFG            also includes a provision that allows individual states to “opt into” the            federal program by request of the governor, to adopt standards promulgated by            California

 

20

 

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that            are stricter than federal standards, or to offer alternative programs designed to            reduce ozone levels. Nearly the entire Northeast and middle Atlantic areas from            Washington, D.C. to Boston not under the federal mandate have “opted into”            the federal standards.

 

***National Energy Bill Legislation***

 

On December 19, 2007, President George W. Bush signed into law the            Energy Independence and Security Act (EISA) of 2007. This legislation included an            increase in the Renewable Fuels Standard of 7.5 billion gallons by 2012 as mandated by            the Energy Policy Act of 2005 to a new standard of 36 billion gallons by 2022. From 9.0            billion gallons in 2008, the new standard minimum amount of renewable fuels that must            be used by fuel refiners increases progressively to 2022. Of this new standard, up to            15 billion gallons may be derived from conventional biofuel sources such as corn based            ethanol, with the balance expected to come from advanced alternative biofuels such as            cellulosic ethanol.

 

***Additional Environmental Regulations***

 

In addition to the governmental regulations applicable to the ethanol            marketing and production industries described above, our business is subject to            additional federal, state, provincial and local environmental regulations, including            regulations established by the EPA, the California Air Quality Management District, the            San Joaquin Valley Air Pollution Control District and the California Air Resources            Board, or CARB. We cannot predict the manner or extent to which these regulations will            harm or help our business or the ethanol production and marketing industry in            general.

 

**EMPLOYEES**

 

As of the date of this Report, we employ eight persons, including three            members of management, two in administration and three in operations. Upon the            development of our proposed ethanol plants, we anticipate that the number of persons we            employ will increase significantly, specifically in the areas of plant operations. We            expect to recruit additional employees of high skill, and our success will depend in            part upon our ability to retain such employees and attract new qualified employees who            are in great demand. None of our employees are members of a union. We consider our            employee labor relations to be good.

 

| **ITEM 2.** | **DESCRIPTION OF PROPERTY** |
|-------------|-----------------------------|

 

Our principal executive offices are located at 193 King Street East,            Suite 300, Toronto, Ontario, M5A 1J5, Canada, telephone: (416) 366-5511. These offices            consist of a 7,200 square foot space leased under an agreement dated April 20, 2006,            between our wholly owned subsidiary company, Northern Ethanol (Canada) Inc., and Fercan            Developments Inc.*See*“PART            III, ITEM 12, CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.” The initial lease            term is for five years at a monthly lease payment of C$15,000 with an option to extend            for an additional five years.

 

Also on April 20, 2006, our wholly-owned subsidiary company, Northern            Ethanol (Barrie) Inc., entered into a 25 year lease, with two ten year optional renewal            periods, on a 35 acre industrial property located in Barrie, Ontario, Canada, on which            it intends to construct an ethanol processing facility. This property was also leased            from Fercan Developments Inc at an initial monthly lease payment of C$276,667.            Effective January 24, 2007, under agreement with Fercan Developments Inc., these            monthly lease payments were deferred until the completion of an engineering study to            determine the extent of the renovation of the buildings on the leased property. This            study and any amendment to the lease are expected to be completed in 2008.*See*“PART I, ITEM 1, DESCRIPTION OF            BUSINESS” and “PART III, ITEM 12, CERTAIN RELATIONSHIPS AND RELATED            TRANSACTIONS.”

 

21

 

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| **ITEM 3.** | **LEGAL PROCEEDINGS** |
|-------------|-----------------------|

 

On December 21, 2007, we received a Notice of Application            (“Application”) between North American (Park Place) Corporation            (“Applicant”) and Fercan Developments Inc., Northern Ethanol (Barrie) Inc.,            Northern Ethanol (Canada) Inc. and the City of Barrie (“Respondents”),            applying for a declaration that the zoning of the property at 1 Big Bay Point Road,            Barrie, Ontario does not permit the property to be used as an ethanol production plant,            for a permanent injunction prohibiting the property from being used as an ethanol            production plant and for the costs of the Application to be paid by the Respondents.            The Application was originally scheduled to be heard before a judge of the Ontario            Superior Court of Justice on March 4, 2008, but has been postponed. No new court date            has been set as of the date of this Report. We expect that the Ontario Municipal Board            hearing will be held on our Site Plan application and the Interim Control By-Law and a            decision will be reached during the third quarter of 2008.

             

We believe that the zoning for the property does permit the production            of ethanol and that the possibility of the Applicant’s claim being successful is            remote. We intend to vigorously pursue our defense.

 

| **ITEM 4.** | **SUBMISSION OF MATTERS TO A VOTE OF SECURITY                            HOLDERS** |
|-------------|------------------------------------------------------------------------------------|

 

None.

             

**PART II**

 

| **ITEM 5.** | **MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER                            MATTERS** |
|-------------|-----------------------------------------------------------------------------------------|

             

There was no market for our securities as of December 31, 2007.            Beginning in September 2007 we took certain steps to cause Empire Financial Group Inc.,            a NASD licensed market maker, to file an application with the NASD to list our Common            Stock for trading on the OTC Bulletin Board (“OTCBB”). This application was            approved effective February 19, 2008. As of the date of this Report, our Common Stock            traded at a bid price of $1.40, $1.55 asked.

 

We expect that we will take certain steps to cause a licensed market            maker to file an application to list our Common Stock for trading on the Toronto Stock            Exchange in the near future. There can be no assurances that our Common Stock will be            approved for such listing. If we so decide, we will need to meet certain capital and            operational requirements to qualify. If we do qualify, we expect that this listing will            take approximately 8 to 10 months to complete. There are no assurances that our Common            Stock will be approved for listing on this or any other stock exchange in the            future.*See*“RISK            FACTORS.”

 

As of the date of this Report, there are 104,096,500 shares of our            Common Stock issued and outstanding. We have 58 shareholders, not including those            shareholders who hold their shares in “street name.”

 

We have not paid cash dividends in the past, nor do we expect to pay            cash dividends for the foreseeable future. We anticipate that earnings, if any, will be            retained for the development of our business.

 

22

 

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| **ITEM 6.** | **MANAGEMENT’S DISCUSSION AND ANALYSIS                            OF** |
|-------------|------------------------------------------------------------------------------|

|   | **FINANCIAL CONDITION AND RESULTS OF                            OPERATIONS** |
|--------|------------------------------------------------------------------------------|

 

*The following discussion should be read in conjunction with our            consolidated financial statements and notes thereto included herein. In connection            with, and because we desire to take advantage of, the “safe harbor”            provisions of the Private Securities Litigation Reform Act of 1995, we caution readers            regarding certain forward looking statements in the following discussion and elsewhere            in this report and in any other statement made by, or on our behalf, whether or not in            future filings with the Securities and Exchange            Commission*.*Forward-looking            statements are statements not based on historical information and which relate to            future operations, strategies, financial results or other            developments*.*Forward looking            statements are necessarily based upon estimates and assumptions that are inherently            subject to significant business, economic and competitive uncertainties and            contingencies, many of which are beyond our control and many of which, with respect to            future business decisions, are subject to change*.*These uncertainties and contingencies can affect actual results and            could cause actual results to differ materially from those expressed in any            forward-looking statements made by, or on, our behalf*.*We disclaim any obligation to update forward-looking            statements.*

 

**OVERVIEW**

 

We were incorporated as “Beaconsfield I, Inc.” in the State            of Delaware on November 29, 2004, as a “blank check” companyfor the purpose of engaging in the potential future merger or            acquisition of an unidentified target business.

 

On December 15, 2004, we issued 150,000 shares of our Common Stock for a            total of $15 in cash. Additionally on that date, we issued 10,000,000 shares            (pre-forward split) of our Common Stock, for a total of $50,000 in cash.

 

In July 2006, we engaged in a forward split of our Common Stock whereby            we issued ten (10) shares of our Common Stock for every one (1) share then issued and            outstanding. Also in July 2006, the holders of a majority of our then issued and            outstanding Common Stock approved an amendment to our Certificate of Incorporation            wherein we did change our name to “Northern Ethanol, Inc.” to better            reflect our current business plan that is described under            “PLANOFOPERATION” below. We are currently considered a            “development stage” company.

 

We have two wholly-owned subsidiaries, Northern Ethanol, LLC, a New York            limited liability company and Northern Ethanol (Canada) Inc., a Canadian corporation,            which has three wholly-owned subsidiaries, Northern Ethanol (Barrie) Inc., Northern            Ethanol (Sarnia) Inc. and Northern Ethanol Investments Inc., each of which is also a            Canadian corporation.

 

**RESTATEMENTOFPREVIOUSLYISSUEDFINANCIALSTATEMENTS**

 

Subsequent to the issuance of our consolidated financial statements for            the year ended December 31, 2006, we determined that the accounting for the foreign            currency translation of our Canadian subsidiaries was not in accordance with SFAS No.            52 and required revisions. The effects of the restatement on the consolidated balance            sheet as of December 31, 2006 and the consolidated statement of operations and the            consolidated statement of cash flows for the year ended December 31, 2006 are as            follows:

 

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| **Consolidated balance sheet as at December 31,                            2006** |   | **As previously reported** |   |   | **Restatements** |   |   | **As restated** |   |
|-----------------------------------------------------------------------------------|--------|----------------------------|--------|--------|------------------|--------|--------|-----------------|--------|
|                                                                              |   |                       |   |   |             |   |   |            |   |
| ASSETS                                                                            |   |                       |   |   |             |   |   |            |   |
| Property under development and equipment                                          | $      | 438,467                    |   | $      | (12,581          | )      | $      | 425,886         |   |
| Assets under capital lease                                                        |   | 17,233,707                 |   |   | (707,627         | )      |   | 16,526,080      |   |
|                                                                              |   |                       |   |   |             |   |   |            |   |
| STOCKHOLDERS’ EQUITY (DEFICIENCY):                                          |   |                       |   |   |             |   |   |            |   |
| Deficit accumulated during the development                            stage       |   | (3,276,873                 | )      |   | (2,543           | )      |   | (3,279,416      | )      |
| Accumulated other comprehensive income                                            |   | 654,498                    |   |   | (717,665         | )      |   | (63,167         | )      |

             

             

| **Consolidated statement of operations for the year                            ended December 31, 2006** |   | **As previously reported** |   |   | **Restatement** |   |   | **As restated** |   |
|----------------------------------------------------------------------------------------------------------|--------|----------------------------|--------|--------|-----------------|--------|--------|-----------------|--------|
|                                                                                                     |   |                       |   |   |            |   |   |            |   |
| OPERATING EXPENSES                                                                                       |   |                       |   |   |            |   |   |            |   |
| Foreign exchange loss                                                                                    | $      | —                    |   | $      | 2,536           |   | $      | 2,536           |   |
| Depreciation                                                                                             |   | 22,063                     |   |   | 7               |   |   | 22,070          |   |
|                                                                                                     |   |                       |   |   |            |   |   |            |   |
| NET LOSS                                                                                                 | $      | (3,245,400                 | )      | $      | (2,543          | )      | $      | (3,247,943      | )      |
|                                                                                                     |   |                       |   |   |            |   |   |            |   |
| BASIC AND DILUTED LOSS PER SHARE                                                                         | $      | (0.03                      | )      | $      | —         |   | $      | (0.03)          |   |

 

 

| **Consolidated statement of cash flows for the year                            ended December 31, 2006** |   | **As previously reported** |   |   | **Restatement** |   |   | **As restated** |   |
|----------------------------------------------------------------------------------------------------------|--------|----------------------------|--------|--------|-----------------|--------|--------|-----------------|--------|
|                                                                                                     |   |                       |   |   |            |   |   |            |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                                    |   |                       |   |   |            |   |   |            |   |
| Net loss                                                                                                 | $      | (3,245,400                 | )      | $      | (2,543          | )      | $      | (3,247,943      | )      |
| Items not involving cash:                                                                                |   |                       |   |   |            |   |   |            |   |
| Depreciation                                                                                             |   | 22,063                     |   |   | 7               |   |   | 22,070          |   |
|                                                                                                     |   |                       |   |   |            |   |   |            |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                                    |   |                       |   |   |            |   |   |            |   |
| Purchase of property under development and                            equipment                          |   | (460,530                   | )      |   | (105            | )      |   | (460,635        | )      |
|                                                                                                     |   |                       |   |   |            |   |   |            |   |
| Effect of exchange rate changes on cash                                                                  |   | (52,972                    | )      |   | 2,641           |   |   | (50,331         | )      |

 

There are no current and deferred income tax implications to this            restatement.

             

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**RESULTSOFOPERATIONS**

 

*Comparison of Results of Operations for the year ended December 31,            2007 and 2006*

 

During the years ended December 31, 2007 and 2006, we did not generate            any revenues. We do not expect to begin generating revenues until such time as the            ethanol plants described herein become operational, or we successfully acquire an            existing ethanol plant.

             

During the year ended December 31, 2007, we incurred costs and expenses            totaling $3,577,498, including $2,198,615 in salaries and benefits, $1,104,823 in            general and administrative expense, $181,337 in occupancy costs, $14,339 in foreign            exchange gains, $41,245 in depreciation expense and $65,817 in interest            expense.

             

The general and administrative expense of $1,104,823 included legal and            accounting fees of $435,893, consulting fees of $307,379, travel related costs of            $117,961 and other miscellaneous costs totaling $243,590. Occupancy costs of $181,337            are the costs of rent, utilities, insurance and maintenance for our head office            location that we began leasing on April 20, 2006.

             

During the year ended December 31, 2006, we incurred costs and expenses            totaling $3,247,943, including $2,153,342 in salaries and benefits, $970,351 in general            and administrative expense, $99,644 in occupancy costs, $2,536 in foreign exchange            losses and $22,070 in depreciation expense. Salaries and benefits increased $45,273 in            the year ended December 31, 2007 from the prior year as a $695,986 decline in stock            based compensation expense was more than offset by a $741,259 rise in wage and benefit            costs associated with increased staff levels and a full year of operation. General and            administrative expenses increased $134,472 in the 2007 year over the 2006 year            primarily due to a $128,898 increase in legal and accounting fees associated with due            diligence work on the aborted Quad County Corn Processors acquisition and the            registration those shares of our Common Stock sold in our private offering discussed            above. Occupancy costs increased $81,693 in the year ended December 31, 2007 from the            prior year as rent payments on our head office lease did not begin until June 1, 2006.            The foreign exchange gain of $14,339 in 2007 occurred due to the impact of the            weakening of the US$ dollar against the C$ dollar during the year on the C$ dollar            expenses of our Canadian subsidiaries. In 2006 we experienced a foreign exchange loss            of $2,536 when the US$ dollar strengthened against the C$ dollar during the year. There            were no interest costs in the year ended December 31, 2006, as we did not borrow funds            during the year.

             

As a result, we incurred a net loss of $3,577,498 for the year ended            December 31, 2007 ($0.03 per share),compared to a net loss of            $3,247,943 for the year ended December 31, 2006 ($0.03 per share).

 

**PLANOFOPERATION**

 

As of the date of this Report we have adopted a business plan to            initially construct and operate threeethanol plants. Our goal is            to produce ethanol in Ontario and New York State and to market and sell ethanol in            Central Canada and the Eastern United States. In this regard we have secured or are in            advanced stages of securing sites to build ethanol processing facilities at two            locations in Ontario, Canada (Barrie and Sarnia) and one in Niagara Falls, New York for            total planned production capacity of approximately 324 million gallons per annum. Each            of these locations will be the site for a corn-based ethanol processing facility. The            plants that we intend to build will be dry mill plants. The reason for selecting this            method of milling over a wet mill process is that a majority of ethanol plants in North            America use the dry mill process and have found that this method of milling is reliable            and runs well with fewer problems than the wet mill process. The ethanol technology            provider process that we will select

 

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will            utilize dry milling and will also provide us with performance guarantees in the            engineering, procurement and construction (“EPC”) contracts. The facilities            currently envisaged are expected to be completed and operational over the next two            years.

 

We have secured, or are in the advanced stages of securing, sites to            build ethanol processing facilities at the following locations, in the capacities            indicated:

 

|   | **•** | *Barrie, Ontario, Canada; 108 million                            gallons*– This 35 acre site has                            been obtained under a 25 year lease with two ten year renewal options                            at the then current market for comparable properties. The lease allows                            us to utilize all existing site infrastructure and demolish or modify                            existing structures to optimize plant operations. We are leasing our                            Barrie site and our Head Office space from Fercan Developments Inc., a                            company owned by the same individual that owns Rosten Investments Inc.                            (“Rosten”). Rosten owns 10,000,000 shares of our                            outstanding Common Stock, or 9.6% interest.*See “*PART III, ITEM                            12, CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.” |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | **•** | *Sarnia, Ontario, Canada; 108 million                            gallons*– Effective July 30, 2007,                            we entered into an Agreement of Purchase and Sale (the “Lanxess                            Agreement”) with Lanxess, Inc., a Canadian corporation                            (“Lanxess”), to acquire approximately 30 acres of land                            located in Sarnia, Ontario, Canada where we intend to build an ethanol                            plant. The Lanxess Agreement replaced a July 2006 non-binding letter of                            intent with Lanxess for this location that provided for a 99-year lease                            on the property. The cost of this acquisition is C$450,000 (C$15,000                            per acre), subject to adjustment upon the issuance of a                            surveyor’s certificate confirming the actual acreage of the                            property. The Lanxess Agreement is conditional, among other things,                            upon Lanxess obtaining the consent of its Board of Directors. This                            consent was received August 14, 2007 and the Lanxess Agreement is now                            effective. Closing of this acquisition is to take place no later than                            June 30, 2008. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

The Lanxess Agreement is also conditional, among other things, upon our            satisfaction with our physical inspection of the land, zoning and permitting, our            entering into an Engineering, Procurement and Construction contract (the “EPC            Contract”) for the construction of our ethanol plant, our obtaining financing for            the land purchase our ethanol plant construction, execution of an acceptable            Remediation and Indemnity Agreement once Lanxess completes certain remediation actions            to bring the land into compliance with existing environmental laws and our reaching an            agreement with Lanxess and TransAlta Energy Corporation (“TransAlta”) in            respect of relief for Lanxess’s obligations under its existing steam supply            contract with TransAlta requiring the purchase of a minimum of 900,000 MMBTU of steam            per year. The Lanxess Agreement also requires for us to enter into a Services Agreement            with Lanxess, whereby Lanxess will provide us with water intake and output facilities            as reasonably required to allow for the construction, operation and maintenance of our            proposed ethanol plant.

             

The Agreement also provides for additional payments to Lanxess of            C$750,000 in consideration for Lanxess’ efforts to undertake significant efforts            to re-engineer existing infrastructure presently located on the property as required to            allow for the construction of our ethanol plant, as well as support necessary for            technical interfaces with our development of the land. The Lanxess Agreement provides            for us to partially compensate Lanxess for these efforts by payment of the aggregate            sum of C$750,000, with C$100,000 of this amount to be paid upon our satisfaction and            waiver of the conditions discussed above. The remaining C$650,000 shall be paid in two            equal installments of C$325,000. The first such installment shall be paid on or before            the date which is the date the contractor under the EPC Contract begins construction of            our ethanol plant and the second such installment shall be paid on or before            commencement of the operation of our proposed ethanol plant. If after closing of the            Lanxess Agreement we have not commenced

             

26

             

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construction of our ethanol plant under the EPC Contract by December 31,            2008, Lanxess has the option to reacquire the land for C$450,000. We paid the            refundable interest bearing deposit amount of C$10,000 on execution of the Lanxess            Agreement.On Closing, this deposit amount shall be credited to            the purchase price.

             

The Agreement also provides us with an option to acquire certain            additional adjacent property owned by Lanxess if it elects to sell or otherwise            transfer this property in the future on terms to be agreed in the future.

             

This site is adjacent to a major rail line, has good highway access,            access to the Great Lakes for shipping purposes and is fully zoned and serviced. As of            the date of this Report we are proceeding with the finalization of the business terms            incorporating the aforementioned provisions along with other provisions for site            services, including steam energy.

             

|   | **•** | *Niagara Falls, New York; 108 million                            gallons*– On December 18, 2007 and                            as amended on March 14, 2008, we entered into a Purchase and Sale                            Agreement with Praxair, Inc. (“Praxair”), to acquire                            approximately 70 acres of land located in Niagara Falls, NY, where we                            intend to build an ethanol plant. The cost of this property is                            $5,000,010, payable as follows: (i) an earnest money payment of Ten                            Dollars ($10) made simultaneously with the execution of the Agreement;                            (ii) a further sum of One Hundred Thousand Dollars ($100,000) to be                            paid no later than one hundred and fifty (150) days after the date of                            the Agreement, or within seventy-two (72) hours after our receipt of a                            fully executed Brownfield Site Cleanup Agreement by and between us and                            the Commission of the New York State Department of Environmental                            Conservation, if such receipt occurs sooner; (iii) the sum of Three                            Million Dollars ($3,000,000) on closing, which is to take place on or                            before August 29, 2008, unless we elect to extend the closing date in                            the event various conditions are not satisfied by Praxair by said date;                            and (iv) the balance of One Million Nine Hundred Thousand Dollars                            ($1,900,000) pursuant to a promissory note, secured by the property,                            accruing interest at the rate of 7% per annum and due on June 1,                            2010. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

The Agreement is also conditional upon our satisfaction with various            conditions, including (i) our physical inspection of the land; (ii) environmental            testing of the soil and groundwater and other related environmental testing, in order            to allow us to obtain inspection data necessary to qualify for various governmental            incentive programs; (iii) our satisfaction that the property is suitable for the            development of an ethanol plant, including environmental issues, zoning issues, the            availability and capacity of services to the property and the cost of obtaining the            same; (iv) the successful culmination of the environmental review process in accordance            with the New York State Environmental Quality Review Act and the availability of a            building permit for a structure satisfactory to meet our requirements and any and all            other licenses, approvals, permits, consents and grants as may be necessary to allow us            to build an ethanol plant and ancillary buildings on the property; (v) there being            legally and physically unobstructed pedestrian, vehicular and other transportation            ingress to and egress from the property; and (vi) the property being zoned and            permission being granted by local government and by the State of New York to allow our            proposed use of the property as an ethanol production facility. In the event these            conditions are not satisfied or we determine that any condition is not reasonably            expected to be satisfied prior to Closing, we are obligated to so advise Praxair in            writing and thereafter, either party to the Agreement has the right to cancel and            terminate the Agreement. If we terminate the Agreement due to failure to have these            conditions satisfied then we will receive a refund of our deposit together with any            interest thereon.

 

The Agreement also provides for the parties to enter into negotiations            to complete a Service Agreement whereby Praxair will provide water from its exiting            pump house in an amount

             

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sufficient to allow us to operate our proposed ethanol plant and            ancillary operations, provide easements, right-of-ways and other rights as we may            require to utilize Praxair’s river discharge facilities that are adjacent to the            property, as well as to access the property, utilize the necessary utility services            that will be required to operate the proposed ethanol facility and ancillary            operations, if permitted, assign to us the rights to utilize the existing CSX            Transportation (“CSX”) rail lines, or otherwise assist us in obtaining a            new agreement with CSX in order to allow us access to the existing rail lines. The            acquisition of the Property is not conditional upon our reaching mutually acceptable            terms with Praxair for such Service Agreement. The failure to reach such an agreement            could have a materially negative impact on our ability to develop an ethanol plant on            the Property. In the event terms of a mutually acceptable Service Agreement are not            reached and a relevant agreement executed within one hundred and fifty (150) days from            the date the Agreement was executed, either party to the Agreement has the right to            cancel and terminate the Agreement.

 

We have also agreed to enter into good faith negotiations with Praxair            whereby we will attempt to reach mutually acceptable terms to sell to Praxair            CO2 produced by us from the ethanol fermentation process. However, the            failure to enter into such an agreement in the future will not give rise to any right            to invalidate the Agreement.

 

This site is adjacent to a major rail line, has good highway access,            access to the Great Lakes for shipping purposes and is fully zoned and serviced. As of            the date of this Report we are proceeding with the finalization of the business terms            incorporating the aforementioned provisions along with other provisions for site            services, including steam energy.

             

Each of these locations will be the site for an ethanol processing            facility, using corn as the feedstock. Our proposed plants will be designed to            incorporate many of the newest technological innovations, including molecular sieves            for dehydrating ethanol and continuous fermentation processing. The Barrie location            represents a conversion of an existing site’s servicing infrastructure from a            former brewery.As of the date of this Report we plan on renovating existing structures,            demolishing those that are not germane to our proposed operations at the Barrie site            and to utilize the rail spur and the utility connections. The Sarnia location offers an            existing rail spur, steam connection from a neighboring power plant, utility            connections and dock facilities. The Niagara Falls location offers an existing rail            spur, the possibility of a steam connection from a neighboring power plant and utility            connections.

 

We have selected these sites because of our belief that in order to be            competitive with both existing and proposed new ethanol plants the following criteria            needs to be considered:

 

|   | **•** | Local access to feedstock |
|--------|------------|---------------------------|

|   | **•** | Access to end users |
|--------|------------|---------------------|

|   | **•** | Access to skilled labor market |
|--------|------------|--------------------------------|

|   | **•** | Status of infrastructure |
|--------|------------|--------------------------|

|   | **•** | Zoning |
|--------|------------|--------|

 

Our proposed facilities are to be located on industrial zoned sites.            There are three primary means of transporting ethanol in North America, including rail,            truck or barge and not all of these transportation modes are available to all our            competitors. All of our proposed locations have ease of access to all three modes,            which are expected to reduce our transportation costs. We believe the sites we have            chosen provide access to a number of available local gasoline blending facilities owned            by major refiners including Getty Oil, Imperial Oil (Exxon), PetroCanada, Shell and            Suncor.

 

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The potential drawbacks of these locations include higher transportation            costs for feedstock and higher property costs. We believe that this will be offset by            the reduced cost of transporting ethanol because of proximity to the end use            market.

             

Based on the target price range of $180 million to $200 million stated            in the EPC term sheet we executed March 9, 2007 with Aker Kvaerner Songer Canada Ltd.            (“AKSC”) for our Barrie plant, a maximum price of $204 million stated in            the EPC term sheet we executed March 12, 2008 with SK Engineering & Construction            Co. Ltd. (“SK E&C”) for our Sarnia plant, discussions with Delta-T, and            our indicative term sheet executed December 13, 2006 with WestLB AG,            (“WestLB”), each discussed below, we estimate that the Barrie, Sarnia and            Niagara Falls plants will cost $688 million combined as per the following            table:

 

| **Items**                               |   |   | **Barrie** |        |   | **Sarnia** |   |        |   | **Niagara** |   | **Total**   |   |   |        |
|-----------------------------------------|--------|--------|------------|-------------|--------|------------|--------|-------------|--------|-------------|--------|-------------|--------|--------|-------------|
| Fixed Price EPC Contract Costs:         |   |   |       |        |   |       |   |        |   |        |   |        |   |   |        |   |   |   |
|                                    |   |   |       |        |   |       |   |        |   |        |   |        |   |   |        |   |   |   |
| EPC Price Materials                     |   |   | $          | 128,000,000 |   |       | $      | 120,000,000 |   |        | $      | 120,000,000 |   | $      | 244,000,000 |   |   |   |
| EPC Price Labor                         |   |   |       | 67,000,000  |   |       |   | 65,000,000  |   |        |   | 65,000,000  |   |   | 136,000,000 |   |   |   |
| Total EPC Costs                         |   |   |       | 195,000,000 |   |       |   | 185,000,000 |   |        |   | 185,000,000 |   |   | 380,000,000 |   |   |   |
|                                    |   |   |       |        |   |       |   |        |   |        |   |        |   |   |        |   |   |   |
| Owners Costs:                           |   |   |       |        |   |       |   |        |   |        |   |        |   |   |        |   |   |   |
| Land                                    |   |   |       | -           |   |       |   | 1,200,000   |   |        |   | 5,000,000   |   |   | 6,200,000   |   |   |   |
| Project Management                      |   |   |       | 745,000     |   |       |   | 710,000     |   |        |   | 710,000     |   |   | 2,165,000   |   |   |   |
| Infrastructure Upgrades                 |   |   |       | 1,627,000   |   |       |   | 805,000     |   |        |   | 10,805,000  |   |   | 13,237,000  |   |   |   |
| Permitting (Environmental and Building) |   |   |       | 460,000     |   |       |   | 134,000     |   |        |   | 134,000     |   |   | 728,000     |   |   |   |
| Insurance During Construction           |   |   |       | 662,000     |   |       |   | 659,000     |   |        |   | 659,000     |   |   | 1,980,000   |   |   |   |
| Owners Engineer                         |   |   |       | 219,000     |   |       |   | 202,000     |   |        |   | 202,000     |   |   | 623,000     |   |   |   |
| Startup Materials& Labor            |   |   |       | 658,000     |   |       |   | 640,000     |   |        |   | 640,000     |   |   | 1,938,000   |   |   |   |
| Spare Parts                             |   |   |       | 570,000     |   |       |   | 552,000     |   |        |   | 552,000     |   |   | 1,674,000   |   |   |   |
| Lenders Engineer                        |   |   |       | 319,000     |   |       |   | 319,000     |   |        |   | 319,000     |   |   | 957,000     |   |   |   |
| Other Miscellaneous Costs               |   |   |       | 368,000     |   |       |   | 368,000     |   |        |   | 368,000     |   |   | 1,104,000   |   |   |   |
| Total Owners Costs                      |   |   |       | 5,628,000   |   |       |   | 5,589,000   |   |        |   | 19,389,000  |   |   | 30,606,000  |   |   |   |
|                                    |   |   |       |        |   |       |   |        |   |        |   |        |   |   |        |   |   |   |
| SubTotal Costs                          |   |   |       | 200,628,000 |   |       |   | 190,589,000 |   |        |   | 204,389,000 |   |   | 595,606,000 |   |   |   |
|                                    |   |   |       |        |   |       |   |        |   |        |   |        |   |   |        |   |   |   |
| Contingency                             |   |   |       | 16,050,000  |   |       |   | 15,247,000  |   |        |   | 16,351,000  |   |   | 47,648,000  |   |   |   |
| Interest During Construction            |   |   |       | 14,536,000  |   |       |   | 13,822,000  |   |        |   | 16,546,000  |   |   | 44,904,000  |   |   |   |
| Total Costs                             |   |   | $          | 231,214,000 |   |       | $      | 219,658,000 |   |        | $      | 237,286,000 |   | $      | 688,158,000 |   |   |   |

 

The actual costs of construction may vary from these cost estimates as            we will not be able to confirm the EPC price until we negotiate and enter into a            contract with an EPC contractor and the owner’s costs estimates are subject to            change depending on the actual construction start date, length of construction and            receipt of final supplier invoices. The final cost of construction could be 10% to 15%            higher or lower than these estimates.

 

We will need to raise this $688 million amount in equity and/or debt            financing to complete construction of the Barrie and Sarnia ethanol production            facilities. Effective December 13, 2006, we executed an engagement letter and            indicative term sheets with WestLB whereby WestLB has conditionally agreed to provide            arrangement, placement and underwriting services onsenior debt            and subordinate debt financing for up to 75% of the construction costs (to a maximum of            approximately $365

 

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million) of our Barrie and Sarnia facilities on a “best            efforts” basis. The term “best efforts” means that WestLB believes            that they can syndicate the debt financing we require but that there is no guarantee            that they will be successful or that the terms will be as indicated in their term            sheets until they market the transaction and receive firm commitments from a syndicate            of lenders for the funds required on acceptable terms to us. Among other things, the            engagement letter and indicative term sheets are conditional on our obtaining            subordinate debt or equity investment for the remaining 25% of construction            costs.

             

The WestLB indicative term sheets offer first priority senior secured            construction and term financing for up to 60% of the total capital requirements of            plant construction and for working capital for a total term of up to 7.5 years and            subordinated secured construction and term financing for up to 15% of the total capital            requirements of plant construction for a total term of up to eight years. Following            conversion of the senior construction loan to a senior term loan, the loan amount is to            be repaid in equal quarterly installments over 6 years. Surplus cash as defined by debt            service covenant is to be swept to accelerate the repayment of the senior term loan and            to repay the subordinated term loan.

             

We paid a non-refundable retainer deposit of $200,000 to WestLB on            execution of the engagement letter and indicative term sheets using funds from the net            proceeds of $3,846,500 received from our September 2006 private placement. In the event            that we chose to terminate the WestLB engagement and we enter into a similar debt            financing with another lender within twelve months of terminating WestLB, we will pay            WestLB a termination fee of $10,000,000. If the financing contemplated in the            engagement letter and indicative term sheets is finalized with WestLB, we will pay to            WestLB a structuring and arrangement fee of the greater of $5,000,000 or 2% of the            principal amount of the senior financing and $5,000,000 or 5% of the principal amount            of the subordinated financing. In addition, we will pay a fee to market the senior and            subordinate loans of 1% of the principal amount of each. The interest rate on the            senior financing will be at LIBOR plus an anticipated spread of 325 to 350 basis            points. Until the senior loan has been fully drawn, we shall pay a commitment fee of            0.50% on the undrawn portion. The interest rate on the subordinate financing will be at            LIBOR plus an anticipated spread of 1000 basis points. As the subordinate financing            will be fully drawn on closing there will be no commitment fees applicable on that            facility. We expect other covenants, representations and warranties will form part of            the final documentation on closing of the loan agreement. We also agreed to pay            WestLB’s costs and expenses in connection with the financing. As of the date of            this Report, we have paid $106,297 for costs incurred by WestLB’s legal and            engineering advisors from funds borrowed under our Line of Credit Agreements with            Aurora Beverage Corporation and Union Capital Trust. There is no termination date to            the WestLB engagement letter. WestLB has indicated that they are interested in            including our proposed Niagara Falls, New York location in their debt syndication but            we have not received a revised engagement letter and indicative term sheet from them as            of the date of this Report.

             

With the execution of the SK E&C EPC term sheet for our Sarnia            location on March 12, 2008, a convertible bond term sheet (“Bond Term            Sheet”) dated November 14, 2007 between us and SinoUp & Rise Ltd. of Beijing,            China that contained a provision giving SinoUp & Rise Ltd. the right to nominate            the EPC Contractor became effective. Under the terms of the Bond Term Sheet, on            condition of West LB successfully completing the arrangement of our senior debt and            subordinate debt financing, SinoUp & Rise Ltd. agreed to provide the 25% balance of            the financing (approximately $45 million per facility to a maximum total amount of $90            million) required for our Barrie and Sarnia ethanol facilities in the form of a 7 year            convertible bond, subordinated to the West LB senior and subordinated debt financing.            During the first two years from advance, the convertible bond will not pay interest but            will instead accrue that interest as principal at an unpaid coupon rate of LIBOR plus            10%. Thereafter, the convertible bond will pay interest at LIBOR plus 15%, and the            principal shall be repaid on a straight line basis until maturity. The convertible bond            holder shall be able to convert the unamortized amount of the bond into shares of our            Common Stock at a debt to share conversion price of $3.00 per share after the first two            years from

 

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advance. For conversion purposes, the unamortized amount shall not            exceed the original principal amount of $90 million. Any conversion resulting in the            convertible bond holder holding more than 10% of our equity ownership will result in            the convertible bond holder receiving a seat on our Board of Directors.

             

We have had discussions with SinoUp & Rise Ltd. regarding            participating in the financing of our proposed Niagara Falls, New York location but we            have not received a term sheet from them as of the date of this Report. We have also            discussed the financing required for our proposed Niagara Falls, New York location with            investment bankers, financial institutions and private investors, but as of the date of            this Report we have received no binding commitments. We may not be able to obtain            sufficient funding from one or more investors or other financial institutions for our            proposed Niagara Falls, New York location, or if such funding is obtained, that it will            be on terms that we have anticipated or that are otherwise acceptable to us. If we are            unable to secure adequate financing, or financing on acceptable terms is unavailable            for any reason, we may be forced to abandon our construction of that planned ethanol            production facility.

 

Effective July 24, 2006, we entered into a five-year Project Development            Agreement (the “Delta-Barrie Agreement”) with Delta-T Corporation,            Williamsburg, Virginia (“Delta”), wherein Delta agreed to provide us            professional advice, business and technical information, design and engineering and            related services in order to assist us in assembling all of the information, permits,            agreements and resources necessary for construction of an ethanol plant having the            capacity to produce 108 million gallons per year in Barrie, Ontario, Canada. We paid            Delta the non-refundable sum of $100,000 for their services.

 

In September 2006, we entered into a similar five-year agreement with            Delta relating to our proposed Sarnia ethanol plant (the “Delta-Sarnia            Agreement”) and paid Delta an initial non-refundable amount of $70,000 for such            services, with the balance of $30,000 due upon issuance of an air permit by the            Province of Ontario. We have not paid the $30,000 balance as of the date of this Report            as we did not wish to incur the cost of applying to the Ministry of Environment of            Ontario for an air permit until we had secured the Sarnia property. As of the date of            this Report, we have not applied for our air permit for our Sarnia property. References            to the Delta-Barrie Agreement and Delta-Sarnia Agreement are hereinafter jointly            referred to as the “Delta Agreements,” unless otherwise            indicated.

 

The Delta Agreements provide for Delta to assist us in the development            and analysis of the operating costs, plant specifications, compliance with            environmental issues, product marketing, industry economics, technical and other            assistance. Delta’s sole remedy in the event that we breach theDelta Agreements is limited to the non-refundable fees of $170,000 paid            under the Delta Agreements. The relationship between Delta and us is deemed exclusive            during the five-year term of the Delta Agreements. We have agreed to use our best            efforts to enter into an EPC contract or a technology agreement with Delta at these            locations and if we fail to do so, to give them a first right of refusal for 60 days to            assume any agreements made with other ethanol plant technology vendors.

             

Although Delta has been involved in 120 alcohol production projects for            fuel, beverage, and industrial customerson five continents, it            has no previous experience developing or constructing ethanol plants in Canada. The            construction of ethanol plants using Delta technology is carried out by construction            contractors. On March 9, 2007, we executed a term sheet for the development of an            engineering, procurement and construction (“EPC”) contract for the Barrie            site with Aker Kvaerner Songer Canada Ltd. (“AKSC”), because of their            extensive experience in the construction of power plants in the United States and            Canada, However as we did not pay the non-refundable fee of $500,000 to AKSC for            executing the term sheet and as AKSC is no longer working with Delta, the AKSC            agreement was effectively terminated during the fourth quarter of 2007.Since that time, we have beennegotiating with            other large, experienced EPC contractors that are acceptable to Delta for construction            of ethanol plants at

 

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each            of our three proposed locations. Effective March 12, 2008, we executed a term sheet            with SK Engineering & Construction Co. Ltd. (“SK E&C’) of Seoul,            South Korea for the development of an engineering, procurement and construction            (“EPC”) contract for our proposed ethanol plant to be located in Sarnia,            Ontario, Canada. We expect to receive the EPC contract price from SK E&C within            51⁄2 months of the execution of a Phase 2 Project Development Agreement with Delta            whereby Delta will provide a basic process engineering package to allow SK E&C to            develop an EPC contact price. If that price is acceptable we expect to execute the EPC            contract within 30 days and proceed to close financing and begin construction at the            Sarnia site within 30 days thereafter. Construction would take place over an 18 to 22            month period so ethanol production at our Sarnia location is not expected to begin            until the third quarter of 2010 at the earliest as of the date of this Report. In the            event that we do not execute an EPC contract with SK E&C, we will be required to            pay a cancellation fee of $300,000.

 

We also expect to enter into similar arrangements with SK E&C for            our proposed ethanol plants to be located in Barrie, Ontario, and Niagara Falls, New            York. We have not yet received term sheets from SK E&C regarding these facilities            as of the date of this Report.

             

Delta’s primary role in the projects is to provide the process            technology and engineering. This will include all of the prime processes in the            receiving and milling of the corn, the cook process, fermentation process, distillation            process, molecular sieve and centrifuge process, chemical storage area, fuel and            ethanol storage and load-out as well as DDGS drying, storage and load-out. As the EPC            Contractor, SK E&C will erect the Delta process components as well as engineer,            procure and construct the balance of plant equipment for such items as the boiler            house, cooling towers, all utility tie-ins, plant fire water system, and any water            treatment systems. SK E&C will be responsible for all labor supply and project            completion risk(i.e. project completed on schedule, at the            contract price, meeting design specifications). The Delta plant design that we have            selected is based on plant designs and components currently being utilized by other            Delta customers. Any differences in our plant designs from the standard Delta design            will be to provide for higher reliability and performance. Not all current projects            undertaken by Delta appear on their website due to client preferences with regards to            confidentiality.

 

In August 2006, we contracted with Parrish & Heimbecker Ltd.            (“P&H”) to provide corn procurement and co-product merchandizing            services on a fee per shipment basis for a five-year period for our proposed Barrie and            Sarnia ethanol plants upon the opening of such plants. P&H is a privately held            grain merchant corporation that owns and operates grain elevators and has extensive            domestic and international experience in international grain origination and co-product            merchandizing. We engaged them to source all of the corn required for the operation of            the Barrie and Sarnia ethanol facilities at competitive market prices. We expect they            will assist us in negotiations with major corn suppliers to guarantee supply and price            by committing to long-term purchase agreements or opportunistic purchases on the spot            market when this can be done at favorable rates. We will pay P&H C$1.00 per metric            ton of corn procured for our Barrie and Sarnia operations. P&H will manage the sale            of our dried distiller grain by-product. We will pay P&H C$1.00 per metric ton of            DDGS sold for marketing the sale of our product at market prices. Our agreement with            P&H does not include any minimum purchase requirements.

 

We are currently in the process of finalizing marketing contracts            covering the Barrie and Sarnia facilities with ECO Energy Inc. (“ECO”), a            privately held Tennessee corporation that provides ethanol marketing capability across            North America. ECO is a fully integrated marketing company supported by an experienced            sales force, a knowledgeable logistics and scheduling department, customer service, and            an online computer system that we will be able to access to streamline all necessary            correspondence for daily shipments and transportation transactions. We expect to engage            this marketing company to handle the sales and transportation logistics of our ethanol            production at market prices in exchange for a commission of $0.01 per gallon of ethanol            sold.

 

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None of our current management has any experience in developing or            operating ethanol plants. Our Chief Operating Officer and Vice President Development,            Steven Reader, and our Director of Project Management and Operations, Gordon Langille,            have extensive experience in the construction and operation of North American power            plants and pipelines.

 

We are implementing a growth strategy by:

             

| **•** | Building state of the art processing plants;                                                                   |
|------------|----------------------------------------------------------------------------------------------------------------|
|       |                                                                                                           |
| **•** | Negotiating stable long term contracts with key                            suppliers;                          |
|       |                                                                                                           |
| **•** | Securing long term sales agreements;                                                                           |
|       |                                                                                                           |
| **•** | Pursuing acquisitions of existing ethanol producers;                            and                            |
|       |                                                                                                           |
| **•** | Pursuing acquisitions and/or strategic alliances with                            ethanol technology companies. |

             

We are committed to investing in the latest technology to ensure that            the processing costs are as low as possible, and the outputs are of the highest            quality. The initial locations have been chosen due to proximity to supply of corn,            natural gas, and water and are well located for the transportation of inputs and            products.

 

The manner in which we intend to develop future sites beyond the initial            aforementioned locations will depend on the nature of the opportunity, the respective            needs of the parties involved, and ourselves. We have set up a separate subsidiary to            own each ethanol plant. We may purchase ethanol producing facilities outright, acquire            an ownership interest in companies controlling ethanol producing facilities, or issue            shares in the subsidiary company that controls the site to outside parties who control            ethanol producing facilities. We were in negotiations to acquire an existing ethanol            plant site in the Province of Quebec, Canada. We made a fully refundable deposit to the            prospective sellers’ solicitor, in trust, in the amount of $750,000. But we            elected to terminate this potential acquisition and the deposit has been returned to            us.

             

We plan to identify and exploit new technologies for reduced costs and            greater manufacturing yields. For example, we are examining new technologies enabling            the conversion of cellulose, which is generated predominantly from wood waste, paper            waste and agricultural waste, into ethanol which would reduce or eliminate our            dependency on corn as a primary feedstock while also helping local municipalities deal            with ever increasing demands on their garbage disposal sites.

 

**LIQUIDITYANDCAPITALRESOURCES**

 

At December 31, 2007, we had $9,622 in cash and cash            equivalents.

 

In July 2006, we engaged in a forward split of our Common Stock whereby            we issued ten (10) shares of our Common Stock for every one (1) share then issued and            outstanding. Following the aforesaid forward stock split, we commenced a private            offering of our Common Stock. We closed this offering in September 2006 after selling            an aggregate of 4,096,500 shares of our Common Stock at a price of $1.00 per share and            received aggregate net proceeds of $3,846,500 therefrom. The proceeds from our private            placement that closed September 2006 financed our working capital requirements,            including salaries and benefits, lease commitments, and capital expenditures on            property, plant and equipment through March 31, 2007.

 

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In order to allow us to continue to implement our business plan, on            March 30, 2007, we entered into a Line of Credit Agreement with Union Capital Trust,            Nassau, Bahamas (“Union”) wherein Union agreed to provide us with a $6            million unsecured line of credit at an interest rate of twelve percent (12% per annum),            maturing on March 30, 2008. As of our year ended December 31, 2007, we have drawn down            an aggregate of $511,579 on this line of credit. The trustee of the Union Capital Trust            Line of Credit is Ronald Wyles. Ronald Wyles owns 10,000,000 shares of our outstanding            Common Stock or 9.6% interest.*See            “*PART III, ITEM 12, CERTAIN RELATIONSHIPS AND RELATED            TRANSACTIONS.”

             

On July 9, 2007, we entered into a Line of Credit Agreement with Aurora            Beverage Corporation, (“Aurora”) wherein Aurora has agreed to provide us            with a $1 million unsecured line of credit. Interest accrues at the rate of eight            percent (8% per annum) and is payable monthly. Principal and unpaid interest is due on            or before July 8, 2008. Effective December 14, 2007, the Line of Credit Agreement with            Aurora was amended to increase the maximum principal amount of the loan to $2,000,000.            On March 7, 2008, the Aurora Line of Credit Agreement was further amended, as a result            of a reorganization, to change the lender to LDR Properties Inc. (“LDR”),            to increase the loan principal amount to $8,000,000 and to extend the due date to July            8, 2009. The balance of the terms of the initial Line of Credit Agreement remains as            originally stated. LDR, an Ontario corporation, is a company owned by the same            individual that owns Rosten Investments Inc. (“Rosten”). Rosten owns            10,000,000 shares of the Company’s outstanding Common Stock or 9.6%            interest.*See “*PART III, ITEM            12, CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.”

 

We used the LDR line of credit to repay Union Capital $526,716 at the            maturity of that line of credit on March 30, 2008. As of March 31, 2008, we have drawn            down an aggregate of $1,785,711 on the LDR line of credit. All draws on the LDR            (formerly Aurora) line of credit are subject to review and approval of the lender, who            has not denied any of our requests to date.

             

We believe that the amended LDR line of credit will provide sufficient            monies to fund our expected working capital requirements for project development            (approximately $1,500,000 per quarter) until we are in a position to begin construction            at one or more of our proposed sties and draw on the proposed WestLB line of credit            described above herein.

             

We estimate that we will require $688 million in additional debt and or            equity capital to complete the construction and commissioning of the Barrie, Sarnia and            Niagara Falls facilities, and there are no assurances that we will be able to raise            this capital when needed.

             

Effective December 13, 2006, we executed an engagement letter and            indicative term sheets with WestLB whereby WestLB has conditionally agreed to provide            arrangement, placement and underwriting services on senior debt and subordinate debt            financing for up to 75% of the construction costs (to a maximum of approximately $365            million) of our Barrie and Sarnia facilities on a “best efforts” basis. The            term “best efforts” means that WestLB believes that they can syndicate the            debt financing we require but that there is no guarantee that they will be successful            or that the terms will be as indicated in their term sheets until they market the            transaction and receive firm commitments from a syndicate of lenders for the funds            required on acceptable terms to us. Among other things, the provision of the 75%            financing in accordance with engagement letter and the indicative term sheets is            conditional on our obtaining subordinate debt or equity investment for the remaining            25% of construction costs.

             

The WestLB indicative term sheets offer first priority senior secured            construction and term financing for up to 60% of the total capital requirements of            plant construction and for working capital for a total term of up to 7.5 years and            subordinated secured construction and term financing for up to 15% of

 

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the            total capital requirements of plant construction for a total term of up to eight years.            Following conversion of the senior construction loan to a senior term loan, the loan            amount is to be repaid in equal quarterly installments over six years. Surplus cash as            defined by debt service covenant is to be swept to accelerate the repayment of the            senior term loan and to repay the subordinated term loan.

             

We paid a non-refundable retainer deposit of $200,000 to WestLB on            execution of the engagement letter and indicative term sheets. In the event that we            chose to terminate the WestLB engagement and we enter into a similar debt financing            with another lender within 12 months of terminating WestLB, we will pay WestLB a            termination fee of $10,000,000. If the financing contemplated in the engagement letter            and indicative term sheets is finalized with WestLB, we will pay to WestLB a            structuring and arrangement fee of the greater of $5,000,000 or 2% of the principal            amount of the senior financing and $5,000,000 or 5% of the principal amount of the            subordinated financing. In addition, we will pay a fee to market the senior and            subordinate loans of 1% of the principal amount of each. The interest rate on the            senior financing will be at LIBOR plus an anticipated spread of 325 to 350 basis            points. Until the senior loan has been fully drawn, we shall pay a commitment fee of            0.50% on the undrawn portion. The interest rate on the subordinate financing will be at            LIBOR plus an anticipated spread of 1000 basis points. As the subordinate financing            will be fully drawn on closing there will be no commitment fees applicable on that            facility. Other covenants, representations and warranties will form part of the final            documentation on closing of the loan agreement. WestLB has indicated that they are            interested in including our proposed Niagara Falls, New York location in their debt            syndication but we have not received a revised engagement letter and indicative term            sheet from them as of the date of this Report.

             

With the execution of the SK E&C EPC term sheet for our Sarnia            location on March 12, 2008, a convertible bond term sheet (“Bond Term            Sheet”) dated November 14, 2007 between the Company and SinoUp & Rise Ltd. of            Beijing, China that contained a provision giving SinoUp & Rise Ltd. the right to            nominate the EPC Contractor became effective. Under terms of the Bond Term Sheet, on            condition of West LB successfully completing the arrangement of the Company’s            senior debt and subordinate debt financing, SinoUp & Rise Ltd. agreed to provide            the 25% balance of the financing (approximately $45 million per facility to a maximum            total amount of $90 million) required for our Barrie and Sarnia ethanol facilities in            the form of a 7 year convertible bond, subordinated to the West LB senior and            subordinated debt financing. During the first two years from advance, the convertible            bond will not pay interest but will instead accrue that interest as principal at an            unpaid coupon rate of LIBOR plus 10%. Thereafter, the convertible bond will pay            interest at LIBOR plus 15%, and the principal shall be repaid on a straight line basis            until maturity. The convertible bond holder shall be able to convert the unamortized            amount of the bond into the Company’s common shares at a debt to share conversion            price of $3.00 per share after the first two years from advance. For conversion            purposes, the unamortized amount shall not exceed the original principal amount of $90            million. Any conversion resulting in more than 10% equity ownership in the Company will            result in the convertible bond holder receiving a board seat.

             

We have had discussions with SinoUp & Rise Ltd. regarding            participating in the financing of our proposed Niagara Falls, New York location but we            have not received a term sheet from them as of the date of this Report. We have also            discussed the financing required for our proposed Niagara Falls, New York location with            investment bankers, financial institutions and private investors, but as of the date of            this Report we have received no binding commitments. We may not be able to obtain            sufficient funding from one or more investors or other financial institutions for our            proposed Niagara Falls, New York location, or if such funding is obtained, that it will            be on terms that we have anticipated or that are otherwise acceptable to us. If we are            unable to secure adequate financing, or financing on acceptable terms is unavailable            for any reason, we may be forced to abandon our construction of that planned ethanol            production facility.

             

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Our lease commitments for our head office space and for our Barrie plant            are as follows:

             

| **Fiscal Year**              |   |   |   |   | **Barrie Lease** |       |   |   |   | **Head Office****Lease** |   |    |   |   | **Total** |   |
|------------------------------|--------|--------|--------|--------|------------------|------------|--------|--------|--------|--------------------------|--------|---------|--------|--------|-----------|--------|
| 2008                         |   |   |   | $      |             | 2,289,926  |   |   |   | $                        |   | 181,580 |   |   |      | $      |   | 2,471,506 |   |
| 2009                         |   |   |   |   |             | 2,289,926  |   |   |   |                     |   | 181,580 |   |   |      |   |   | 2,471,506 |   |
| 2010                         |   |   |   |   |             | 2,289,926  |   |   |   |                     |   | 181,580 |   |   |      |   |   | 2,471,506 |   |
| 2011                         |   |   |   |   |             | 2,289,926  |   |   |   |                     |   | 75,658  |   |   |      |   |   | 2,365,584 |   |
| 2012                         |   |   |   |   |             | 2,289,926  |   |   |   |                     |   | — |   |   |      |   |   | 2,289,926 |   |
| Thereafter                   |   |   |   |   |             | 48,354,099 |   |   |   |                     |   | — |   |   |      |   |   | 48,354,099 |   |
| Total minimum lease payments |   |   |   | $      |             | 59,803,729 |   |   |   | $                        |   | 620,398 |   |   |      | $      |   | 60,424,127 |   |

             

However, effective January 24, 2007, under agreement with the lessor,            the monthly lease payments under the Barrie lease were deferred until the completion of            an engineering study to determine the extent of the demolition of the buildings on the            leased property. This study and any amendment to the lease are expected to be completed            later in 2007. We anticipate that we will be able to satisfy our current lease            commitments through the Union and Aurora lines of credit. Thereafter we expect to            satisfy these commitments with the proceeds from the senior construction and term            financing provided by WestLB pursuant to an engagement letter and indicative term            sheets effective December 13, 2006, and from additional subordinate debt or equity to            be raised. There are no assurances that we will be able to raise additional subordinate            debt or equity on terms acceptable to us, or at all. In the event we are unable to            raise additional funds on acceptable terms, we will need to reconsider our objectives            and undertake efforts to reduce costs. Once construction of our Barrie, Sarnia and            Niagara Falls plants is complete, we expect to satisfy the lease commitments with cash            flow generated from the operations of these plants.

 

**INFLATION**

 

Although our operations are influenced by general economic conditions,            we do not believe that inflation had a material effect on our results of operations            during the year ended December 31, 2007.

 

**CRITICALACCOUNTINGESTIMATES**

 

The discussion and analysis of our financial condition and results of            operations are based upon our consolidated financial statements, which have been            prepared in accordance with accounting principles generally accepted in the United            States. The preparation of these consolidated financial statements requires us to make            estimates and judgments that affect the amounts of assets, liabilities, revenues and            expenses, and related disclosure of contingent assets and liabilities. On an on-going            basis, we evaluate our estimates based on historical experience and on various other            assumptions that are believed to be reasonable under the circumstances, the results of            which form the basis for making judgments about the carrying values of assets and            liabilities that are not readily apparent from other sources. Actual results may differ            from these estimates under different assumptions or conditions. The following            represents a summary of our critical accounting policies, defined as those policies            that we believe are the most important to the portrayal of our financial condition and            results of operations and that require management’s most difficult, subjective or            complex judgments, often as a result of the need to make estimates about the effects of            matters that are inherently uncertain.

 

***Leases***– We follow the            guidance in SFAS No. 13 “*Accounting for            Leases*,” as amended, which requires us to evaluate the            lease agreements we enter into to determine whether they represent operating or capital            leases at the inception of the lease.

 

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***Assets under capital lease***- Assets            under capital lease consist of land and buildings located in Barrie, Ontario to be            developed for ethanol producing operations. We determined that the fair value of the            land at the Barrie site was less than 25% of the fair value of the leased property at            the inception of the lease and therefore considered the land and building as a single            unit for purposes of determining whether the lease should be classified as a capital            lease in accordance with SFAS No. 13. We concluded that the present value of the            minimum lease payments, excluding any executory costs to be paid by the lessor, equals            or exceeded 90% of the fair value of the leased property. We used our incremental            borrowing rate of 12% to measure the present value of the minimum lease            payments.

 

The buildings under capital lease at the Barrie site cannot currently be            used to carry out the business of the Company without extensive renovation and            construction activities. As such, we consider that the assets are not available for            their intended use. Specifically, we expect to make substantial renovations to portions            of the existing building to provide the space needed to construct an ethanol processing            facility. The portion of the building that will eventually serve as the administrative            offices requires extensive renovation in order to bring it up to standard for            occupation. Our examination of the infrastructure items has indicated that substantial            additional expenditures will be required to ensure that rail lines are serviceable, and            in correct locations, and that the gas and water lines can be expanded to provide the            required capacity for the plant operations. Before commencing demolition and            construction activities, we will use the findings of an engineering study that will be            performed, with detailed recommendations on the usefulness of individual            assets.

 

***Capitalized Interest***– In            accordance with SFAS No. 34, the interest costs associated with our capital lease            obligation will be capitalized to assets under capital lease until the Barrie plant is            substantially complete and ready for the production of ethanol.

             

***Deferred financing costs***–            Deferred financing costs are costs and all related fees incurred to obtain debt            financing and will be amortized as interest expense over the term of the related            financing using the effective interest rate method.

             

***Foreign currency translation***–            Our functional currency is United States dollars and the functional currency of our            Canadian subsidiaries is currently Canadian dollars. The operations of our Canadian            subsidiaries are translated into U.S. dollars in accordance with SFAS No. 52,            “*Foreign Currency            Translation*,” as follows:

             

|   | (i) | Assets and liabilities at the rate of exchange in effect                            at the balance sheet date; and |
|--------|-----|--------------------------------------------------------------------------------------------------------------------|

|   | (ii) | Revenue and expense items at the average rate of                            exchange prevailing during the period. |
|--------|------|--------------------------------------------------------------------------------------------------------------------|

 

Translation adjustments are included as a separate component of            stockholders’ equity (deficiency) as a component of comprehensive income or loss.            We expect the functional currency of our Canadian subsidiaries to change to the United            States dollar once our planned ethanol production facilities in Canada commence ethanol            producing operations, as debt, operating revenues and costs of our Canadian            subsidiaries will primarily be denominated in United States dollars.

 

We and our subsidiaries translate foreign currency transactions into the            Company’s functional currency at the exchange rate effective on the transaction            date. Monetary items denominated in foreign currencies are translated into the            functional currency at exchange rates in effect at the balance sheet date. Foreign            exchange gains and losses are included in income.

 

***Stock-based compensation*****–**Effective January 1, 2006, we            adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting            Standard (SFAS) No. 123R, “*Share Based            Payment*.” SFAS 123R requires a public entity to measure            the cost of employee services received in

 

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exchange for an award of equity instruments based on the grant-date fair            value of the award. That cost is recognized on a straight-line basis over the employee            service period (usually the vesting period). That cost is measured based on the fair            value of the equity or liability instruments issued using the Black-Scholes option            pricing model.

             

***Income taxes***- Deferred income tax            assets and liabilities are recognized for the estimated future tax consequences            attributable to temporary differences between the financial statement carrying amounts            of existing assets and liabilities and their respective tax bases, and are measured            using enacted tax rates expected to apply in the years in which those temporary            differences are expected to be recovered or settled. A valuation allowance is provided            when it is more likely than not that the full benefit of the deferred tax assets will            not be realized.

             

In June 2006, the FASB issued FASB Interpretation No. 48,            “Accounting for Uncertainty in Income Taxes – an interpretation of FASB            Statement No. 109”(“FIN 48”). FIN 48            clarifies the accounting for uncertainty in income taxes by prescribing a recognition            threshold and measurement attribute for the financial statement recognition and            measurement of a tax position taken or expected to be taken in a tax return. The            interpretation also provides guidance on de-recognition, classification, interest and            penalties, accounting in interim periods, and disclosure. We adopted FIN 48 effective            January 1, 2007. The adoption of FIN 48 did not have a material impact on our            consolidated financial statements or results of operations.    

 

***Recent accounting pronouncements*****–**In September 2006, the FASB            issued SFAS No. 157,*“Fair Value            Measurements.”*SFAS No. 157 defines fair value,            establishes a framework for measuring fair value and requires enhanced disclosures            about fair value measurements. SFAS No. 157 requires companies to disclose the            fair value of their financial instruments according to a fair value hierarchy as            defined in the standard. Additionally, companies are required to provide enhanced            disclosure regarding financial instruments in one of the categories (level 3),            including a reconciliation of the beginning and ending balances separately for each            major category of assets and liabilities. SFAS No.157 is effective for our consolidated            financial statements issued for fiscal years beginning after November 15, 2007,            and interim periods within those fiscal years. The adoption of SFAS No. 157 is not            expected to have a material impact on our consolidated financial statements or results            of operations.

 

In September 2006, the FASB issued SFAS No. 158,            “*Employers’ Accounting for Defined Benefit Pension            and Other Postretirement Plans.”*SFAS No. 158 requires            the recognition of the funded status of a defined benefit plan in the balance sheet;            the recognition in other comprehensive income of gains or losses and prior service            costs or credits arising during the period but which are not included as components of            periodic benefit cost; the measurement of defined benefit plan assets and obligations            as of the balance sheet date; and disclosure of additional information about the            effects on periodic benefit cost for the following fiscal year arising from delayed            recognition in the current period. In addition, SFAS No. 158 amends SFAS No. 87,            “*Employers’ Accounting for            Pensions*,” and SFAS No. 106,            “*Employers’ Accounting for Postretirement Benefits            Other Than Pensions*,” to include guidance regarding            selection of assumed discount rates for use in measuring the benefit obligation. The            recognition and disclosure requirements of SFAS No. 158 are effective for our year            ended December 31, 2006. The measurement requirements are effective for fiscal years            ending December 31, 2008. We do not believe the adoption of SFAS 158 will have a            material impact on our consolidated financial statements.

             

In February 2007, the FASB issued SFAS No. 159,            “*The Fair Value Option for Financial Assets and            Financial Liabilities*” (SFAS No. 159). Under the            provisions of SFAS No. 159, companies may choose to account for eligible financial            instruments, warranties and insurance contracts at fair value on a contract-by-contract            basis. Changes in fair value will be recognized in earnings each reporting period. SFAS            No. 159 is effective for financial statements issued for fiscal years beginning after            November 15,

 

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2007, and interim periods within those fiscal years. We are required to            adopt the provisions of SFAS No. 159 effective January 1, 2008. The adoption of SFAS            No. 159 is not expected to have a material impact on our consolidated financial            statements or results of operations.

             

In December 2007, the FASB issued a revised standard, SFAS            141R*,*Business Combinations on            accounting for business combinations. The major changes to accounting for business            combinations are summarized as follows:

             

|   | **•** | SFAS 141R requires that most identifiable assets,                            liabilities, noncontrolling interests and goodwill acquired in a                            business combination be recorded at “full fair                            value” |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Most acquisition-related costs would be recognized as                            expenses as incurred |
|--------|------------|-------------------------------------------------------------------------------------------------------|

|   | **•** | Obligations for contingent consideration would be                            measured and recognized at fair value at the acquisition                            date |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Liabilities associated with restructuring or exit                            activities are recognized only if they meet the recognition criteria in                            SFAS 146, Accounting for Costs Associated with Exit or Disposal                            Activities, as of the acquisition date |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | An acquisition date gain is reflected for a                            “bargain purchase” |
|--------|------------|-------------------------------------------------------------------------------------------------------|

|   | **•** | For step acquisitions, the acquirer re-measures its                            non-controlling equity investment in the acquiree at fair value as of                            the date control is obtained and recognizes any gain or loss in                            income |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | A number of other significant changes from the previous                            standard including related to taxes and contingencies |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------|

             

The statement is effective for business combinations occurring in the            first annual reporting period beginning on or after December 15, 2008. The adoption of            SFAS No. 141R is not expected to have a material impact on our consolidated            financial statements or results of operations.

 

In December 2007, the FASB issued a revised standard SFAS 160,            Non-controlling Interests in Consolidated Financial Statements, on accounting for            non-controlling interests and transactions with non-controlling interest holders in            consolidated financial statements. This statement specifies that non-controlling            interests are to be treated as a separate component of equity, not as a liability or            other item outside of equity. Because non-controlling interests are an element of            equity, increases and decreases in the parent’s ownership interest that leave            control intact are accounted for as capital transactions rather than as a step            acquisition or dilution gains or losses. The carrying amount of the non-controlling            interests is adjusted to reflect the change in ownership interests, and any difference            between the amount by which the non-controlling interests are adjusted and the fair            value of the consideration paid or received is recognized directly in equity            attributable to the controlling interest. This standard requires net income and            comprehensive income to be displayed for both the controlling and the non-controlling            interests. Additional required disclosures and reconciliations include a separate            schedule that shows the effects of any transactions with the non-controlling interests            on the equity attributable to the controlling interest. The statement is effective for            periods beginning on or after December 15, 2008. SFAS 160 will be applied prospectively            to all non-controlling interests, including any that arose before the effective date.            The adoption of SFAS No. 160 is not expected to have a material impact on our            consolidated financial statements or results of operations.

 

 

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**RISKFACTORS**

 

*An investment in our Common Stock is a risky            investment*.*Prospective investors            should carefully consider the following risk factors before purchasing shares of our            Common Stock*.*We believe that we            have included all material risks.*

 

***RISKSRELATEDTOOURPROPOSEDOPERATIONS***

 

**We have incurred losses in the past and expect to incur greater            losses until our ethanol production begins****.**We are a development stage company and we have not yet commenced            operations. As of December 31, 2007, we had an accumulated deficit of $6,856,914. For            the year ended December 31, 2007, we incurred a net loss of $3,577,498. We expect to            incur significantly greater losses at least until the completion of our initial ethanol            production. We estimate that the earliest completion date of one of our proposed            locations and, as a result, our earliest date of ethanol production will not occur            until the third quarter of 2010. Until then, we expect to rely on cash from debt and            equity financing to fund all of the cash requirements of our business. Until we            successfully build and begin operating our proposed ethanol plants we will experience            negative cash flow. Once our ethanol plants are built and become operational, there are            no assurances that we will be able to attain, sustain or increase profitability on a            quarterly or annual basis. A downturn in the demand for ethanol would significantly and            adversely affect our sales and profitability.

 

**Ethanol competes with other existing products and other            alternative products could also be developed for use as fuel            additives**. Our revenue will be derived primarily from            sales of ethanol. Ethanol competes with MTBE (methyl tertiary butyl ether) as an            oxygenate in gasoline to meet both oxy-fuel and reformulated gasoline requirements.            Until recently, MTBE has been the most widely used oxygenate to meet the requirements            of the Clean Air Act Amendments of 1990. Because of its favorable handling qualities            and the fact that it is a petroleum product, MTBE has been the preferred oxygenate for            the petroleum industry. However, MTBE has shown significant adverse environmental and            health safety characteristics that have led to the decision by several key States to            ban its use. Specifically, MTBE is highly persistent and has been identified as a            potential carcinogen. MTBE has been detected in drinking water supplies in almost all            areas where it is used. Reflecting these issues, California, New York, Connecticut, New            Jersey and more than twenty other States have banned the use of MTBE.

             

We expect to be completely focused on the production and marketing of            ethanol and its co-products for the foreseeable future. We may be unable to shift our            business focus away from the production and marketing of ethanol to other renewable            fuels or competing products. Accordingly, an industry shift away from ethanol or the            emergence of new competing products may reduce the demand for ethanol. A downturn in            the demand for ethanol would significantly and adversely affect our sales and            profitability*.*

             

**In addition to selling ethanol, we also intend to sell the            co-products of ethanol production – dried distillers grains (DDGS) and carbon            dioxide (“CO2”) and the markets for these products may decrease            in the future.**The primary use of DDGS is for livestock            feed as a replacement for traditional animal feeds such as soy-meal. In the United            States, cattle (both dairy and beef) have so far been the primary users of DDGS as            livestock feed, but larger quantities of DDGS are making their way into the feed            rations of hogs and poultry. In 2007, ethanol dry mills in the United States produced            approximately 14.6 million metric tons of distillers grains. Of this, approximately 84%            was fed to dairy and cattle, 11% to swine, and 5% to poultry. Due to the fact that DDGS            have a long shelf life, they are suitable for transportation to markets all over the            world. In 2007, the United States exported more than 2 million tons of distillers            grains. In recent years, large markets for DDGS have developed in Europe, led by            Ireland

 

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and            the United Kingdom, as well as in Canada, Mexico, China, Japan, and Taiwan. Asia has a            long history of importing U.S. grain because of its large population and limited space            in which to grow crops. Worldwide, there is a large market for animal feed but DDGS            generally need to displace other feeds as buyers will base their selection primarily on            cost competitiveness. As increasing volumes of ethanol production come on-line, the            amount of DDGS in the marketplace should increase proportionately. This may put            downward pressure on prices and presents a risk to our business. At today’s            prices, it is estimated that DDGS sales will represent approximately 20% of our total            sales.

 

Carbon dioxide is produced during the fermentation stage of the ethanol            production process. This excess gas is captured and sold to carbon dioxide resellers.            The carbon dioxide market is well established and consists of three major segments: the            beverage market (27%), the food market (43%), and the industrial market (30%). The            market is cyclical in that demand increases during the summer as beverage and food            demands create shortages and higher spot prices. Transportation is a limiting factor            when sourcing carbon dioxide. On average, transportation costs account for 50% of the            delivered cost of carbon dioxide. For that reason, customers generally must be within            200 miles of the plant. As increasing volumes of ethanol production come on-line, it is            possible that the market prices for CO2 will soften due to a finite amount            of demand and an increasing supply. At today’s prices, it is estimated that            CO2 sales will represent approximately 0.4% of our total sales.

             

**Carbon dioxide is believed to contribute to global            warming**.**Future government            regulations to reduce carbon dioxide emissions may impact our ability to produce            ethanol**. Carbon dioxide is the most common of the            compounds collectively referred to as greenhouse gases. In the recently released            Summary for Policymakers, the Intergovernmental Panel on Climate Change (IPCC)            indicated that “*most of the observed increase in            globally averaged temperatures since the mid-20th century is very likely due            to the observed increase in anthropogenic greenhouse gas            concentrations*” (IPCC, 2007). The IPCC assigns a rating            of “very likely” when the expected outcome of a result is greater than            90%.

             

A number of proposals are being considered around the world to combat            increased greenhouse gas emissions. The specifics of these proposals vary. Typically,            one of their overarching objectives is to reduce anthropogenic greenhouse gas            emissions. Proposals include methods as varied as improving energy efficiency, adopting            energy sources that create minimal greenhouse gas emissions (e.g., generating            electricity from wind or solar energy), or shifting from fossil fuels to alternatives            fuels derived from renewable sources (e.g., deriving ethanol from corn). Therefore,            current proposals to combat global warming do not appear to be contrary to, or pose a            risk of a material adverse impact on, the proposed project to derive ethanol from            corn.

             

**In order to complete the construction of our planned ethanol            production facilities, we will require the infusion of significant additional debt and            equity funding**. We anticipate that we will need to raise            approximately $688 million in equity and/or debt financing to complete construction of            our three proposed ethanol production facilities in Barrie and Sarnia, Ontario and            Niagara Falls, New York.*See*“Part II, Item 6, MANAGEMENT’S DISCUSSION AND ANALYSIS OF            FINANCIAL CONDITION AND RESULTS OF OPERATIONS –PLANOFOPERATION.” There are no            assurances that we will be able to obtain this financing and/or investment.

 

Effective December 13, 2006, we executed an engagement letter and            indicative term sheets with West LB AG (“West LB”) whereby West LB has            conditionally agreed to solicit and arrange debt financing for 75% of the cost of            constructing our Barrie and Sarnia facilities up to a maximum of $1.35 per gallon of            annual plant capacity in senior debt and $0.34 per gallon of annual plant capacity in            subordinated debt. Combined the Barrie and Sarnia plants are expected to have annual            plant capacity of 216 million gallons on an undenatured basis. As such, West LB would            conditionally provide up to $365 million of financing. 75% of the combined construction            cost estimate of $451 million for the Barrie and

 

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Sarnia facilities would equate to $338 million. Interest during            construction of the two plants of $28 million was estimated at the interest rate on the            senior financing conditionally offered at London Interbank Offering Rate            (“LIBOR”) plus an anticipated spread of 325 to 350 basis points and at            LIBOR plus an anticipated spread of 1000 basis points on the subordinate financing.            Currently LIBOR is at 2.7%, so that the interest rate on the senior financing would be            5.95% to 6.2% and the interest rate on the subordinate financing would be 12.7%. On a            construction cost of $451 million, the senior financing would total $270,600,000 and            would be repaid in quarterly installments over 6 years following completion of            construction. The subordinate financing would amount to $67,650,000 and would be repaid            over 8 years from advance, with repayment terms to be negotiated. WestLB has indicated            that they are interested in including our proposed Niagara Falls, New York location in            their debt syndication but we have not received a revised engagement letter and            indicative term sheet from them as of the date of this Report.

             

With the execution of the SK E&C EPC term sheet for our Sarnia            location on March 12, 2008, a convertible bond term sheet (“Bond Term            Sheet”) dated November 14, 2007 between us and SinoUp & Rise Ltd. of Beijing,            China that contained a provision giving SinoUp & Rise Ltd. the right to nominate            the EPC Contractor became effective. Under terms of the Bond Term Sheet, on condition            of West LB successfully completing the arrangement of our senior debt and subordinate            debt financing, SinoUp & Rise Ltd. agreed to provide the 25% balance of the            financing (approximately $45 million per facility to a maximum total amount of $90            million) required for our Barrie and Sarnia ethanol facilities in the form of a 7 year            convertible bond, subordinated to the West LB senior and subordinated debt financing.            During the first two years from advance, the convertible bond will not pay interest but            will instead accrue that interest as principal at an unpaid coupon rate of LIBOR plus            10%. Thereafter, the convertible bond will pay interest at LIBOR plus 15%, and the            principal shall be repaid on a straight line basis until maturity. At current LIBOR            rates, the interest on the convertible bond financing would be 17.7%. The convertible            bond holder shall be able to convert the unamortized amount of the bond into shares of            our Common Stock at a debt to share conversion price of $3.00 per share after the first            two years from advance. For conversion purposes, the unamortized amount shall not            exceed the original principal amount of $90 million. Any conversion resulting in the            convertible bond holder holding more than 10% of our equity ownership will result in            the convertible bond holder receiving a seat on our Board of Directors.

             

We have had discussions with SinoUp & Rise Ltd. regarding            participating in the financing of our proposed Niagara Falls, New York location but we            have not received a term sheet from them as of the date of this Report. We have also            discussed the financing required for our proposed Niagara Falls, New York location with            investment bankers, financial institutions and private investors, but as of the date of            this Report we have received no binding commitments. We may not be able to obtain            sufficient funding from one or more investors or other financial institutions for our            proposed Niagara Falls, New York location, or if such funding is obtained, that it will            be on terms that we have anticipated or that are otherwise acceptable to us. If we are            unable to secure adequate financing, or financing on acceptable terms is unavailable            for any reason, we may be forced to abandon our construction of that planned ethanol            production facility. (See a complete description of the terms under “Part II,            Item 6, MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS            OF OPERATIONS –PLANOFOPERATION” in this Report.)

 

**Holders of our Common Stock may suffer significant dilution in the            future**. As of the date of this Report we do not have            sufficient capital available to allow us to build the three ethanol plants discussed            herein. As a result, it is possible that we may elect to raise additional equity            capital by selling shares of our Common Stock or other securities in the future to            raise the funds necessary to allow us to implement our business plan. If we do so,            investors will suffer significant dilution.

 

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**Our capital structure will be highly leveraged because we plan to            fund a substantial majority of the construction costs of our planned ethanol production            facilities through the issuance of a significant amount of            debt**. Our debt levels and debt service requirements could            have important consequences which could reduce the value of your investment,            including:

             

| **•** | limiting our ability to borrow additional amounts for                            operating capital or other purposes and causing us to be able to borrow                            additional funds only on unfavorable terms; |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                            |
| **•** | reducing funds available for operations and                            distributions because a substantial portion of our cash flow will be                            used to pay interest and principal on our debt;          |
|       |                                                                                                                                                                                                                            |
| **•** | making us vulnerable to increases in prevailing interest                            rates;                                                                                                                                      |
|       |                                                                                                                                                                                                                            |
| **•** | placing us at a competitive disadvantage because we may                            be substantially more leveraged than some of our                            competitors;                                                     |
|       |                                                                                                                                                                                                                            |
| **•** | subjecting all or substantially all of our assets to                            liens, which means that there may be no assets left for our                            stockholders in the event of a liquidation; and          |
|       |                                                                                                                                                                                                                            |
| **•** | limiting our ability to adjust to changing market                            conditions, which could increase our vulnerability to a downturn in our                            business or general economic conditions.        |

             

If cash flow from operations is insufficient to pay our debt service            obligations it is possible that we could be forced to sell assets, seek to obtain            additional equity capital or refinance or restructure all or a portion of our debt on            substantially less favorable terms. In the event that we are unable to refinance all or            a portion of our debt or raise funds through asset sales, sales of equity or otherwise,            we may be forced to liquidate and you could lose your entire investment. However, while            no assurances can be provided, based upon our discussions and negotiations with            financing entities as of the date of this Report, we do believe that our proposed            business plan is viable and that we will obtain the additional financing necessary to            develop our ethanol plants.

             

**If we are unable to raise the required senior debt and subordinate            debt financing with WestLB, we will lose our non-refundable retainer deposit and we may            be liable to pay significant termination fees.**In            December 2006, we paid a non-refundable retainer deposit of $200,000 to WestLB on            execution of the engagement letter and indicative term sheets. We also agreed to pay            all of WestLB’s expenses in connection with arrangement, placement and            underwriting of the financing. As of the date of this Report, we have paid $106,297 for            costs incurred by WestLB’s legal and engineering advisors. If WestLB is unable to            secure adequate financing, or financing on acceptable terms is unavailable for any            reason, we will lose the $200,000 non-refundable retainer deposit and we will not be            able to recover expenses paid. In the event that we chose to terminate the WestLB            engagement and we enter into a similar debt financing with another lender within 12            months of terminating WestLB, we will be required to pay WestLB a termination fee of            $10,000,000.

             

**Our success depends, to a significant extent, upon the continued            services of Gordon Laschinger, our President and Chief Executive Officer, who has no            prior experience in the ethanol industry****.**While Mr. Laschinger has developed key personal relationships with            our expected suppliers and customers, most of these individuals have significantly more            experience than Mr. Laschinger in the ethanol industry. This may place us at a            competitive disadvantage because we will greatly rely on these relationships in the            conduct of our proposed operations and the execution of our business strategies. The            loss of Mr. Laschinger could also result in the loss of our favorable            relationships with one or more of our suppliers and customers. Although we have entered            into an employment agreement with Mr. Laschinger,

 

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that            agreement terminates April 30, 2009. We expect to renew this agreement upon            termination, but there are no assurances that the parties will reach an agreement. In            addition, we do not maintain “key person” life insurance covering            Mr. Laschinger or any other executive officer. The loss of Mr. Laschinger            could also significantly delay or prevent the achievement of our business            objectives.

 

**We will be competing with other established ethanol production and            marketing companies who have greater experience and resources than we currently            have**. We will have several significant competitors in the            ethanol production industry including GreenField Ethanol Inc. (formerly Commercial            Alcohols Inc.), currently the largest producer of ethanol in Canada,            Archer-Daniels-Midland Company, (“ADM”), the largest producer of ethanol in            the United States, VeraSun Energy, Corp. and Aventine Renewable Energy Holdings, Inc,            both large U.S. ethanol producers, and Suncor Energy Inc.,            whichhas an ethanol plant in Sarnia, and others. These companies            are presently producing ethanol in substantial volume, have greater financial resources            and have more experienced personnel than we presently do. We are not currently            producing any ethanol. Those competitors who are presently producing ethanol have            greater capital resources than we currently do. As a result, this will be a significant            obstacle that we will need to overcome in order to become successful. In addition, our            lack of experience in our chosen industry relative to many of our significant            competitors may cause us to fail to anticipate or respond adequately to new            developments and other competitive pressures. This failure could reduce our            competitiveness and cause a decline in our market share, sales and            profitability.

 

**We will be competing with other ethanol production companies,            animal farmers and other corn users for our            feedstock****.**The principal raw            material we expect to use to produce ethanol and its co-products is corn. We expect            that corn feedstock costs will represent approximately 79% of operating costs. The            profitability of our business fluctuates greatly with changes in the price of corn. For            each $0.10 per bushel increase in the cost of corn, our total corn cost increases by            $8,059,701 per year. Significant increases in the price of corn will have substantial            negative impacts on the profitability of our plants.

 

Feedstock costs may rise in the future as a result of the increased            competition from additional ethanol plants beginning production and continued growth            and demand from other users such as animal farmers and corn oil manufacturers. The            supply of corn may be insufficient to meet this competing demand and as a result corn            prices may rise, resulting in lower profit margins or making the production of ethanol            uneconomical. Corn prices as measured by the United States Department of Agriculture,            or USDA, increased from under $2 per bushel in 2005 to $3.40 per bushel in 2007.            According to the USDA during the 2006/07 crop year, over 2 billion bushels of corn (19            percent of the harvested crop) were used to produce ethanol, a 30-percent increase from            the previous year. Increasing ethanol capacity could further boost demand for corn and            result in sustained prices at current levels or a further increase in corn            prices.

             

**The development of our three proposed ethanol plants will result            in a period of rapid growth that will impose a significant burden on our current            administrative and operational resources**. If we are able            to obtain the financing necessary to implement our business plan, of which there can be            no assurance, our ability to effectively manage our growth will require us to            substantially expand the capabilities of our administrative and operational resources            by attracting, training, managing and retaining additional qualified personnel,            including additional members of management, technicians and others. To successfully            develop our two proposed ethanol plants, we will need to manage the construction of            these facilities, as well as operating, producing, marketing and selling the end            products generated by these facilities. There can be no assurances that we will be able            to do so. Our failure to successfully manage our growth will have a negative impact on            our anticipated results of operations.

             

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**Our proposed business of producing and selling ethanol is subject            to significant supply and demand fluctuations**.**An increase in production of ethanol could have a negative impact            on our anticipated revenues**. We may increase inventory            levels in anticipation of rising ethanol prices and decrease inventory levels in            anticipation of declining ethanol prices. As a result, we are subject to the risk of            ethanol prices moving in unanticipated directions, which could result in declining or            even negative gross profit margins for this segment of our business. Accordingly, this            segment of our business would be subject to fluctuations in the price of ethanol and            these fluctuations may result in lower or even negative gross margins and which could            materially and adversely affect our profitability.

 

We believe that the production of ethanol is expanding rapidly.            According to the Renewable Fuels Association, current ethanol production capacity in            the United States stands at 7,888mm gallons per year. According to the Canadian            Renewable Fuels Association, in Canada, current production capacity is roughly 194mm            gallons per year. There is capacity under construction of 5,536mm gallons in the United            States and 192mm gallons in Canada. In our immediate market, consisting of Ontario,            Quebec, Indiana, Ohio, Pennsylvania, New York and New Jersey, there is current            production capacity of 828mm gallons per year, with capacity under construction of            845mm gallons per year.

 

*US Ethanol Production 2001-2008*

 

|                        |   | **January 2001** |   | **January 2002** |   | **January 2003** |   | **January 2004** |   | **January 2005** |   | **January 2006** |   | **January 2007** |   | **January 2008** |   |
|-----------------------------|--------|------------------|--------|------------------|--------|------------------|--------|------------------|--------|------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                        |   |             |   |             |   |             |   |             |   |             |   |             |   |             |   |             |   |
| Total Ethanol Plants        |   | 56               |   | 61               |   | 68               |   | 72               |   | 81               |   | 95               |   | 110              |   | 139              |   |
|                        |   |             |   |             |   |             |   |             |   |             |   |             |   |             |   |             |   |
| Ethanol Production Capacity |   | 1921.9 mgy       |   | 2347.3 mgy       |   | 2706.8 mgy       |   | 3100.8 mgy       |   | 3643.7 mgy       |   | 4336.4 mgy       |   | 5493.4 mgy       |   | 7888.4mgy        |   |
|                        |   |             |   |             |   |             |   |             |   |             |   |             |   |             |   |             |   |
| Plants Under Construction   |   | 5                |   | 13               |   | 11               |   | 15               |   | 16               |   | 31               |   | 73               |   | 61               |   |
|                        |   |             |   |             |   |             |   |             |   |             |   |             |   |             |   |             |   |
| Capacity Under Construction |   | 64.7 mgy         |   | 390.7 mgy        |   | 483 mgy          |   | 598 mgy          |   | 754 mgy          |   | 1778 mgy         |   | 6129 mgy         |   | 5536 mgy         |   |

_______________________

 

Source:            Renewable Fuels Association - http://www.ethanolrfa.org/industry/statistics/

 

Increases in the demand for ethanol may not be commensurate with            increasing supplies of ethanol. Thus, increased production of ethanol may lead to lower            ethanol prices. The increased production of ethanol could also have other adverse            effects. For example, increased ethanol production will lead to increased supplies of            co-products from the production of ethanol, such as DDGS and CO2. Those            increased supplies could lead to lower prices for those co-products. We cannot predict            the future price of ethanol or DDGS. Any material decline in the price of ethanol or            DDGS will adversely affect our sales and profitability. Also, the increased production            of ethanol could result in increased demand for corn. This could result in higher            prices for corn and cause higher ethanol production costs. Additionally, due to the            fact that the price of ethanol usually moves with the price of wholesale unleaded            gasoline, we will not be able to pass any increases in corn costs on to the customer.            This presents a risk to us as our margin will suffer greatly if corn prices increase            while gasoline prices decrease.

             

**We cannot rely on long-term ethanol orders or commitments by our            customers for protection from the negative financial effects of a decline in the price            for ethanol**. The ethanol

 

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industry does not use fixed price long-term contracts. According to the            Renewable Fuels Association (www.ethanolRFA.org/industry/statistics/), between 90% and            95% of the ethanol in the U.S. and Canada is sold pursuant to six to twelve month            contracts, negotiated between the ethanol producer and the oil refiner or gasoline            blender. As such, we believe that we will not be able to rely on long-term (over one            year) contracts for the sale of our product. Entering in to a long-term contract would            require us to give the buyer a significant discount to current market prices. We            believe that if and when wecommence operations, it will be more            profitable for us to sell into the spot market and through a mixture of short-term            (less than one year) contracts. The Chicago Board of Trade launched an ethanol futures            contract in March 2005. As of the date of this Report, there has been limited trading            activity in ethanol futures. There is no certainty that this market will develop            sufficient liquidity to provide an effective means of hedging against a decline in            ethanol prices. As a result, the limited certainty of ethanol orders can make it            difficult for us to forecast our sales and allocate our resources in a manner            consistent with our actual sales. Our expense estimates are based in part on our            expectations of future sales and, if our expectations regarding future sales are            inaccurate, we may be unable to reduce costs in a timely manner to adjust for sales            shortfalls.

             

The market for fuel ethanol in Canada is extremely similar to the market            in the United States. With free trade the border is essentially invisible to ethanol            producers and cross-border selling is common. We intend to sell our product in the            market that nets us the highest price at the time.

             

**We will be dependent on a small number of customers because there            are a finite number of petroleum refiners and mixers in North            America**. We intend to sell our ethanol to petroleum            refiners and gasoline blenders in the Northeastern United States and Central Canada.            According to Eco Energy Inc., there are upwards of fifty potential customers in our            target market with whom they currently work. Our proposed Barrie location is close to            Imperial Oil’s facility in Toronto, Ontario and Petro-Canada’s facility in            Oakville, Ontario, Canada. The Sarnia site is in close proximity to large refineries            owned by Shell Canada and Suncor Energy. The Niagara Falls, New York site is close            Getty Oil’s refinery in Pennsylvania. This comparatively small group of potential            customers represents a risk compared to if our sales were less concentrated within a            larger number of customers because a smaller group of customers can exert greater            influence on our selling prices and if we lose a customer or a customer becomes            insolvent, we could experience a significant decrease in revenue. As many of our costs            and expenses will be relatively fixed, a reduction in revenue could decrease our profit            margins and adversely affect our business, financial condition and results of            operations. We expect that the costs of transportation will allow us to ship our            ethanol production competitively within a 300 mile radius of our Barrie, Sarnia and            Niagara Falls facilities, although if there are shortages in markets outside of this            area, market conditions at times may allow us to ship beyond this radius.

             

**We have not conducted any significant business operations as yet            and have been unprofitable to date**. Accordingly, there is            no prior operating history by which to evaluate the likelihood of our success or our            contribution to our overall profitability. We may never complete construction of an            ethanol production facility and commence significant operations or, if we do complete            the construction of an ethanol production facility, it may not be successful in            contributing positively to our profitability.

 

**The market price of ethanol is dependent on many factors,            including the price of gasoline, which is in turn dependent on the price of petroleum.            These fluctuations may cause our results of operations to fluctuate            significantly.**Petroleum prices are highly volatile and            difficult to forecast due to frequent changes in global politics and the world economy.            The distribution of petroleum throughout the world is affected by incidents in unstable            political environments, such as Iraq, Iran, Kuwait, Saudi Arabia, the former U.S.S.R.            and other countries and regions. The industrialized world depends critically on oil            from these areas and any disruption or other reduction in oil supply can cause            significant fluctuations in the prices of oil and gasoline. As we cannot predict the            future price of oil or wholesale gasoline, this may

 

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lead            to unprofitable prices for the sale of ethanol due to significant fluctuations in            market prices. For example, the New York spot price of wholesale unleaded gasoline and            ethanol rose from approximately $1.70 per gallon and $2.00 per gallon, respectively, in            December 2005 to approximately $2.30 and over $4.00 per gallon, respectively, in June            2006. As of March 31,2008, wholesale gasoline prices were            approximately $2.68 per gallon while spot ethanol prices have fallen to approximately            $2.60 per gallon. If the price of gasoline and petroleum declines, we believe that the            price of ethanol may be adversely affected. Fluctuations in the market price of ethanol            may cause our profitability to fluctuate significantly.

 

**We will be subject to extensive air, water and other environmental            regulations in connection with the construction and operation of our planned ethanol            production facilities. We cannot predict in what manner or to what extent governmental            regulations will harm our business or the ethanol production and marketing industry in            general****.**Our proposed            business is subject to extensive regulation by federal and provincial governmental            agencies in Canada and the US. The production and sale of ethanol is subject to            regulation by agencies of the US Federal Government, including, but not limited to, the            Environmental Protection Agency (the “EPA”) in the US as well as other            agencies in each jurisdiction in which ethanol is produced, sold, stored or            transported. In Canada, the production and sale of ethanol is subject to regulation by            Environment Canada, through the Canadian Environmental Protection Act 1999, and in            Ontario as well by the Ontario Ministry of the Environment.

 

Environmental laws and regulations that are expected to affect our            planned operations are extensive and have become progressively more stringent.            Applicable laws and regulations are subject to change, which could be made            retroactively. Violations of environmental laws and regulations or permit conditions            can result in substantial penalties, injunctive orders compelling installation of            additional controls, civil and criminal sanctions, permit revocations and/or facility            shutdowns. If significant unforeseen liabilities arise for corrective action or other            compliance, our sales and profitability could be materially and adversely            affected.

 

In addition, the production of ethanol involves the emission of various            airborne pollutants, including particulates, carbon monoxide, oxides of nitrogen and            volatile organic compounds. We also may be required to obtain various other            water-related permits, such as a water discharge permit and a storm-water discharge            permit, a water withdrawal permit and a public water supply permit. If for any reason            we are unable to obtain any of the required permits, construction costs for our planned            ethanol production facilities are likely to increase. In addition, the facilities may            not be fully constructed at all. Compliance with regulations may be time-consuming and            expensive and may delay or even prevent sales of ethanol.

             

**We will need to obtain various construction permits relating to            our proposed ethanol plants and there can be no assurances that we will be able to            obtain these permits, or that we will not incur significant delay in obtaining the            same****.**As of the date of this            Report we have begun obtaining those permits required relating to the construction of            our proposed ethanol plants. Each of our proposed locations is located on an existing            industrial site. Existing industrial sites typically require fewer permits because they            already have road and rail access permits, water intake and discharge permits. For our            proposed Ontario locations, we will be required to obtain a Site Plan Approval. The            Site Plan Approval process entails submitting a detailed layout of the proposed plant            including a landscape plan and items such as building finishes and an artist’s            rendering showing what the plant will look like from various street level views. While            we do not believe that we will encounter any problem obtaining this permit from the            local municipalities because the sites have existing fire suppression and storm water            management systems in place, there can be no assurances that we will not experience a            problem or delay in obtaining these permits. The general time period required for this            permit is 90 days. We filed the Site Plan application for our proposed Barrie plant in            June 2007 but did not receive a decision from the City of Barrie within the timeframe            of The Ontario Municipal Act and in September 2007 made a request for an

 

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adjudication hearing with the Ontario Municipal Board. On December 3,            2007, the City of Barrie passed an Interim Control By-Law prohibiting the establishment            of ethanol production facilities on lands designated or zoned for industrial uses for a            period of one year during which the City of Barrie would conduct a study on the impact            of ethanol production. We expect that the Ontario Municipal Board hearing will be held            on our Site Plan application and the Interim Control By-Law and a decision will be            reached during the third quarter of 2008. For the Sarnia site, we have recently            commenced this process and expect to receive our Site Plan Approval permit from the            City of Sarnia during the second quarter of 2008.

 

For our two proposed Ontario locations, Environmental Permits are issued            by the Ministry of the Environment of Ontario. In March 2007, we applied for this            permit for the Barrie plant and we expect to receive the final permit once we resolve            our Site Plan issue with the City of Barrie. We expect that our environmental permit            for Sarnia, once submitted, will be processed within a shorter time frame than the            Barrie permit, given that the Sarnia plant will be similar to the Barrie plant and we            have our experience with the Barrie application to draw upon.

             

As of the date of this Report, we had not begun the permitting process            for our proposed Niagara Falls, New York location.

             

The receipt of environmental permits on existing industrial sites tends            to be less onerous than on greenfield sites. Other permits that will be required are            standard building permits that our EPC contractor will obtain as part of the            obligations included in the EPC contract. There can be no assurances that we will            obtain all permits in a timely manner, or at all. Failure to obtain all necessary            permits will have a significant negative impact on our proposed plan of            operation.

             

**We face a risk that the Government of Canada may institute a corn            countervailing duty that could increase feedstock costs for our proposed Canadian            plants****.**The Ontario corn            market relies on imports from the United States to increase liquidity. The most recent            corn countervailing duty was brought about in September 2005, by the Ontario Corn            Producers. Originally, the Corn Producer’s successfully lobbied for a provisional            countervailing duty that was effective from December 15, 2005 until April 18, 2006. On            April 17, 2006, the Canadian International Trade Tribunal (CITT) found that the            importation of grain corn from the U.S. had not caused and is not threatening to cause            material injury to domestic Canadian corn producers despite a determined legal and            public relations effort by Canadian corn producers to persuade the CITT that U.S.            subsidies, together with alleged dumping by U.S. producers of corn in Canadian markets            were indeed causing such injury. In the event that a corn countervailing duty is            enacted again, it is not expected to apply to product shipped back to the United            States. Therefore, if we import U.S. corn into Canada and then export ethanol and DDGS            to the U.S. we expect that we will be able to draw the duty back. However, we would not            be able to recover the corn countervailing duty on any US produced corn used to make            ethanol for sale in the Canadian market and we could be faced with higher corn prices            in Ontario given the Ontario market’s reliance on imported US corn.

 

**Delays in our ability to obtain the financing necessary to            commence construction of our proposed ethanol plants, delays in the construction of our            planned ethanol production facilities or defects in materials and/or workmanship may            occur**. As of the date of this Report we have not begun            construction of our proposed ethanol plants, nor do we have any commitment for all of            the financing that is required to begin construction. No assurances can be provided            that we will obtain the same.

             

Further, construction projects often involve delays in obtaining permits            and encounter delays due to weather conditions, fire, the provision of materials or            labor or other events. In addition, changes in interest rates or the credit environment            or changes in political administrations at the federal, provincial, state or local            levels that result in policy change towards ethanol or our project in particular, could            cause

 

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construction and operation delays. Any of these events may adversely            affect our ability to commence our proposed operations, which may expose us to            additional unknown risks that arise due to such a delay.

 

As of the date of this Report, we expect the timeframe to the            commencement of ethanol production at our planned Sarnia facility to be as            follows:

 

|   | 1. | Based on discussions with City of Sarnia officials,                            receive site plan approval in June 2008. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Based on EPC term sheet signed March 12, 2008 with SK                            E&C, develop and negotiate EPC contract and receive EPC pricing by                            August 2008. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | Based on discussions with Ontario Ministry of                            Environment officials, receive Ontario Ministry of Environment permit                            in September 2008. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4. | Finalize EPC contract by September 2008. |
|--------|----|------------------------------------------|

|   | 5. | Based on requirements of WestLB indicative term sheets                            dated December 13, 2006, close debt and or equity financing in October                            2008. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 6. | With financing closed, give SK E&C full notice to                            proceed with detailed engineering work in October 2008. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------|

|   | 7. | Based on discussions with SK E&C, completion of site                            preparation work in November 2008. |
|--------|----|------------------------------------------------------------------------------------------------------------------------|

|   | 8. | Based on discussions with SK E&C, SK E&C                            mobilizes to site in November 2008. |
|--------|----|-----------------------------------------------------------------------------------------------------------------|

|   | 9. | Based on discussions with SK E&C, first pour of                            concrete in December 2008. |
|--------|----|-----------------------------------------------------------------------------------------------------------|

|   | 10. | Based on discussions with SK E&C and Delta-T, start                            of plant commissioning in June 2010. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------|

|   | 11. | Based on EPC term sheet signed March 9, 2007 with SK                            E&C and Delta-T full operations of plant in September                            2010. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

We expect the permitting process for the Barrie plant will be completed            following an Ontario Municipal Board hearing by the third quarter of 2008 and that            plant completion will be within three months of the Sarnia plant. We have not begun the            permitting process for our proposed Niagara Falls, New York location as of the date of            this Report but based on our preliminary discussions with local representatives, we            believe that we could commence construction at that location later in 2008 as            well.

 

**Any significant increase in the final construction costs of our            proposed facilities will adversely affect our capital            resources****.**We have estimated            that the construction cost of our proposed three facilities to be approximately $688            million. The estimated cost of these facilities is based on the target EPC price range            included in the aborted AKSC term sheet executed on March 9, 2007 for our Barrie plant,            the maximum price range estimated by SK E&C in the term sheet executed on March 12,            2008 for our Sarnia plant, on discussions with Delta-T, engineering estimates, and on            WestLB’s experience with other ethanol construction projects that they have            financed, but the final construction cost of the facility may be significantly higher            when firm EPC prices are received. We expect to receive a fixed EPC contract price from            SK E&C for our Sarnia Plant in August 2008 and approximately three months            thereafter for our Barrie and Niagara Falls Plants. Once executed, the EPC contracts            will guarantee a fixed price for the plants and that they will achieve 95% of their            design capacity. Final construction costs however may vary from EPC contract prices due            to possible price escalation factors that may be agreed to in the EPC contract on            certain material inputs, force majeure events that the EPC contractor can not control            and that may be exempted in the EPC contract from the fixed price guarantee, and change            orders that we may request over the course of construction. While we intend to seek            additional funding to deal with any adverse contingencies that may arise before            construction is completed, or at the very least have such potential sources of funding            in place if this situation occurs, there can be no assurances that we will be able to            raise this additional capital to fund the cost of these variances if they            occur.

 

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**There is a risk that, because of the proposed location of our            ethanol plants, we may incur additional costs for corn, water, electricity and natural            gas, the raw materials required for the production of            ethanol****.**The September 2006            Muse Stancil report, commissioned by us to assess the feasibility of its Barrie and            Sarnia locations for ethanol production, estimated that these facilities will process            approximately 78 million bushels of corn each year at expected annual production of 216            million gallons of ethanol and will require significant and uninterrupted supplies of            water, electricity and natural gas. The prices for corn, electricity and natural gas            have fluctuated significantly in the past and may fluctuate significantly in the            future. In addition, droughts, severe winter weather and other problems may cause            delays or interruptions of various durations in the delivery of corn to our facilities,            reduce corn supplies and increase corn prices.

 

In 2006, approximately 218 million bushels of corn were grown in Ontario            and an additional 96 million bushels were grown in Quebec. We anticipate sourcing            approximately one-third (26,865,670 bushels) of our corn needs locally, with the            balance (53,731,340 bushels) being purchased from the United States. The study            performed by Muse Stancil & Co. suggests that we should expect to incur freight            costs of $0.18 per bushel or $4,835,820 annually from Ohio to Sarnia, Ontario, and            $0.70 per bushel or $18,805,969 annually from Ohio to Barrie, Ontario. To date we have            not had a study performed on the corn sourcing or freight costs to our Niagara Falls            location, but we expect that it would be similar to that of the Sarnia location. The            transportation of a large proportion of our corn presents a risk to Northern Ethanol as            we would be negatively affected by increases in transportation            costs.1

 

These freight costs may be higher than expected in the event of severe            winter weather conditions. The locations chosen for our plants present a weather risk            to Northern Ethanol because significant snowfalls may result in transportation delays.            Sarnia, Ontario receives annual snowfall of 51 inches on average, Barrie, Ontario            receives average annual snowfall of 128 inches and Niagara Falls, New York receives            average annual snowfall of 93 inches. We believe that having three ways to transport            corn (via truck, rail, and freighter on the Great Lakes) will help reduce the risk of            weather-related delays.2

 

Local water, electricity and gas utilities may not be able to reliably            supply the water, electricity and natural gas that our facilities will need or may not            be able to supply such resources on acceptable terms. Although a stable supply exists            for gas, water and electricity in the Barrie, Sarnia and Niagara Falls areas, localized            conditions such as drought or severe weather conditions may affect the supply of raw            materials to these areas from time to time over the life of the plant. Each proposed            plant will require approximately 10,500 cubic ft. of gas per day, 1,000,000 US gallons            of water per day and an average of 16 MW/hr of electricity. The loss of any of these            utilities would cause us to shut down the plant until normal utilities are restored. We            may not be able to successfully anticipate or mitigate fluctuations in the prices of            raw materials and energy through the implementation of hedging and contracting            techniques. Our hedging and contracting activities may not lower our prices of raw            materials and energy, and in a period of declining raw materials or energy prices,            these hedging and contracting strategies may result in our paying higher prices than            our competitors. In addition, we may be unable to pass increases in the prices of raw            materials and energy to our customers. Higher raw materials and energy prices will            generally cause lower profit margins and may even result in losses. Accordingly, our            potential sales and profitability may be significantly and adversely affected by the            prices and supplies of raw materials and energy.

_________________________

1 SOURCES:            http://www.statcan.ca/Daily/English/061207/d061207a.htm

Muse            Stancil & Co., Corn and Distillers Grains Report – pg 3

2 SOURCES:            http://www.theweathernetwork.com/weather/stats/pages/C02022.htm?CAON0040

 

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**We may be exposed to potential risks relating to our internal            controls over financial reporting and our ability to have those controls attested to by            our independent auditors****.**As            directed by Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX 404”), the            Securities and Exchange Commission adopted rules requiring public companies to include            a report of management on the company’s internal controls over financial            reporting in their annual reports, including Form 10-KSB. We have evaluated the            effectiveness of the Company’s disclosure controls and procedures, as a required            part of our annual report on Form 10-KSB beginning with our reports for the fiscal year            ended December 31, 2007. In addition, the independent registered public accounting firm            auditing our company’s financial statements must also attest to and report on            management’s assessment of the effectiveness of the company’s internal            controls over financial reporting as well as the operating effectiveness of the            company’s internal controls for the fiscal year ended December 31,            2009.

 

While we have expended resources in identifying financial reporting            risks, and controls that address themasrequired by SOX 404, there can be no positive assurance that we will            receive a positive attestation from our independent auditors.

 

In the event we are unable to receive a positive attestation from our            independent auditors with respect to our internal controls, investors and others may            lose confidence in the reliability of our financial statements and our ability to            obtain equity or debt financing could suffer.

 

***RISKSRELATEDTOOURCOMMONSTOCK***

 

**There is a limited trading market for our securities and there can            be no assurance that such a market will develop in the            future.**On February 19, 2008 our Common Stock was approved            for trading on the Over-the-Counter Electronic Bulletin Board (“OTCBB”)            operated by the Financial Industry Regulatory Authority (“FINRA”), f/k/a            the National Association of Securities Dealers, Inc. As of the date of this report,            trading in our Common Stock is limited. There is no assurance that a market will            develop in the future or, if developed, that it will continue.

             

**We do not have significant financial reporting experience, which            may lead to delays in filing required reports with the Securities and Exchange            Commission and suspension of quotation of our securities on the OTCBB, which will make            it more difficult for you to sell your            securities****.**TheOTCBB limits quotations to securities of issuers that are current in            their reports filed with the Securities and Exchange Commission (the            “SEC”). Because we do not have significant financial reporting experience,            we may experience delays in filing required reports with the SEC. Because issuers whose            securities are qualified for quotation on the OTCBB are required to file these reports            with the SEC in a timely manner, the failure to do so may result in a suspension of            trading or delisting from the OTCBB. We have been late in filing some of the reports we            have been required to file with the SEC but are reviewing our internal procedures to            insure that future reports are filed in a timely manner.

 

**There are no automated systems for negotiating trades on the OTCBB            and it is possible for the price of a stock to go up or down significantly during a            lapse of time between placing a market order and its execution, which may affect your            trades in our securities****.**Because there are no automated systems for negotiating trades on the            OTCBB, they are conducted via telephone. In times of heavy market volume, the            limitations of this process may result in a significant increase in the time it takes            to execute investor orders. Therefore, when investors place market orders, an order to            buy or sell a specific number of shares at the current market price, it is possible for            the price of a stock to go up or down significantly during the lapse of time between            placing a market order and its execution.

 

51

 

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**Our stock will be considered a “penny stock” so long            as it trades below $5.00 per share, This can adversely affect its            liquidity**. Our Common Stock will be considered a            “penny stock,” so long as it trades below $5.00 per share and as such,            trading in our Common Stock will be subject to the requirements of Rule 15g-9 under the            Securities Exchange Act of 1934. Under this rule, broker/dealers who recommend            low-priced securities to persons other than established customers and accredited            investors must satisfy special sales practice requirements. The broker/dealer must make            an individualized written suitability determination for the purchaser and receive the            purchaser’s written consent prior to the transaction.

 

SEC regulations also require additional disclosure in connection with            any trades involving a “penny stock,” including the delivery, prior to any            penny stock transaction, of a disclosure schedule explaining the penny stock market and            its associated risks. In addition, broker-dealers must disclose commissions payable to            both the broker-dealer and the registered representative and current quotations for the            securities they offer. The additional burdens imposed upon broker-dealers by such            requirements may discourage broker-dealers from recommending transactions in our            securities, which could severely limit the liquidity of our securities and consequently            adversely affect the market price for our securities. In addition, few broker-dealers            are likely to undertake these compliance activities. Other risks associated with            trading in penny stocks could also be price fluctuations and the lack of a liquid            market.

 

**We do not anticipate payment of dividends, and investors will be            wholly dependent upon the market for the Common Stock to realize economic benefit from            their investment**. As holders of our Common Stock, you            will only be entitled to receive those dividends that are declared by our Board of            Directors out of retained earnings. We do not expect to have retained earnings            available for declaration of dividends in the foreseeable future. There is no assurance            that such retained earnings will ever materialize to permit payment of dividends to            you. Our Board of Directors will determine future dividend policy based upon our            results of operations, financial condition, capital requirements, reserve needs and            other circumstances.

 

**Any adverse effect on the market price of our Common Stock could            make it difficult for us to raise additional capital through sales of equity securities            at a time and at a price that we deem            appropriate****.**Holders of our            shares of Common Stock registered pursuant to our Form SB-2 registration statement            which became effective on September 26, 2007, are permitted, subject to few            limitations, to freely sell these shares of Common Stock. Sales of substantial amounts            of Common Stock, including shares issued upon the exercise of stock options issued            pursuant to the Stock Plan we have adopted, or in anticipation that such sales could            occur, may materially and adversely affect prevailing market prices for our Common            Stock. In addition to the shares of Common Stock registered on our Form SB-2            registration statement, there is an aggregate of 4,393,434 shares of our Common Stock            underlying options that have been issued and which may be exercised over the next 12            month period. Also, an aggregate of 100,000,000 shares of our Common Stock have been            held by certain non-affiliates of our Company (as that term is defined under the            Securities Act of 1933, as amended) for a period sufficient to allow them to sell their            shares. If they do so, such sales could have a material and adverse affect on the            prevailing market prices for our Common Stock, if and when such a market            develops.

             

**The market price of our Common Stock may fluctuate significantly            in the future****.T**he market price of our Common Stock may            fluctuate in response to one or more of the following factors, many of which are beyond            our control:

 

| **•** | the volume and timing of the receipt of orders for                            ethanol from major customers; |
|------------|-------------------------------------------------------------------------------------------------------------|
|       |                                                                                                        |
| **•** | competitive pricing pressures;                                                                              |
|       |                                                                                                        |

 

 

52

 

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| **•** | our ability to produce, sell and deliver ethanol on a                            cost-effective and timely basis;                 |
|------------|-----------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                              |
| **•** | our inability to obtain construction, acquisition,                            capital equipment and/or working capital financing; |
|       |                                                                                                                              |
| **•** | the introduction and announcement of one or more new                            alternatives to ethanol by our competitors;       |
|       |                                                                                                                              |
| **•** | changing conditions in the ethanol and fuel                            markets;                                                   |
|       |                                                                                                                              |
| **•** | changes in market valuations of similar                            companies;                                                     |
|       |                                                                                                                              |
| **•** | stock market price and volume fluctuations                            generally;                                                  |
|       |                                                                                                                              |
| **•** | regulatory developments;                                                                                                          |
|       |                                                                                                                              |
| **•** | future sales of our Common Stock or other                            securities.                                                  |

             

Furthermore, adverse economic conditions in our market area could have a            negative impact on our results of operations. Demand for ethanol could also be            adversely affected by a slow-down in overall demand for oxygenate and gasoline additive            products. The levels of our ethanol production and purchases for resale will be based            upon forecasted demand. Accordingly, any inaccuracy in forecasting anticipated revenues            and expenses could adversely affect our business. Furthermore, we recognize revenues            from ethanol sales at the time of delivery. The failure to receive anticipated orders            or to complete delivery in any quarterly period could adversely affect our results of            operations for that period. Quarterly results are not necessarily indicative of future            performance for any particular period, and we may not experience revenue growth or            profitability on a quarterly or an annual basis.

             

The price at which you purchase shares of our Common Stock may not be            indicative of the price that will prevail in the trading market. You may be unable to            sell your shares of Common Stock at or above your purchase price, which may result in            substantial losses to you and which may include the complete loss of your investment.            In the past, securities class action litigation has often been brought against a            company following periods of stock price volatility. We may be the target of similar            litigation in the future. Securities litigation could result in substantial costs and            divert management’s attention and our resources away from our business. Any of            the risks described above could adversely affect our sales and profitability and also            the price of our Common Stock.

***RISKSRELATEDTOOURCOMPANY***

 

**Provisions of our Certificate of Incorporation and Bylaws may            delay or prevent a take-over that may not be in the best interests of our            stockholders****.**Provisions of            our Certificate of Incorporation and Bylaws may be deemed to have anti-takeover            effects, which include when and by whom special meetings of our stockholders may be            called, and may delay, defer or prevent a takeover attempt. In addition, certain            provisions of the General Corporation Law of Delaware also may be deemed to have            certain anti-takeover effects which include that control of shares acquired in excess            of certain specified thresholds will not possess any voting rights unless these voting            rights are approved by a majority of a corporation’s disinterested            stockholders.

 

53

 

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In addition, our Certificate of Incorporation authorizes the issuance of            up to 25,000,000 shares of Preferred Stock with such rights and preferences determined            from time to time by our Board of Directors. No shares of our Preferred Stock are            currently outstanding. Our Board of Directors may, without stockholder approval, issue            Preferred Stock with dividends, liquidation, conversion, voting or other rights that            could adversely affect the voting power or other rights of the holders of our Common            Stock.

 

**Our management and principal shareholders have the ability to            significantly influence or control matters requiring a shareholder vote and other            shareholders may not have the ability to influence corporate            transactions****.**Currently, our            principal shareholders, in the aggregate, own approximately 95% of our outstanding            Common Stock. As a result, these shareholders, acting together, have the ability to            determine the outcome on all matters requiring approval of our shareholders, including            the election of directors and approval of significant corporate            transactions.

 

**We cannot predict whether we will successfully effectuate our            current business plan. Each prospective purchaser is encouraged to carefully analyze            the risks and merits of an investment in our Common Stock and should take into            consideration when making such analysis, among others, the Risk Factors discussed            above****.**

             

 

54

 

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**ITEM            7.**        **FINANCIAL STATEMENTS**

 

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 

             

|                                                                                                                                                                                                                                                                                           | **Page**                                        |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------|
|                                                                                                                                                                                                                                                                                           |                                            |
| Report of Independent Registered Public Accounting                            Firm                                                                                                                                                                                                             | F-2                                             |
| Consolidated Balance Sheets as of December 31, 2007 and                            2006                                                                                                                                                                                                        | F-3                                             |
| Consolidated Statements of Operations for the years                            ended December 31, 2007 and 2006

and from November 29, 2004, date of inception, to                            December 31, 2007                                                                                |  

F-4                                     |
| Consolidated Statements of Stockholders’ Equity                            (Deficiency) and Comprehensive Income for the years ended December 31,                            2007and 2006 and from November 29, 2004, date of inception, to December                            31, 2007 |  

                             

F-5 |
| Consolidated Statements of Cash Flows for the years                            ended December 31, 2007 and                                   2006 and from November 29,                            2004, date of inception, to December 31, 2007            |  

F-6                                     |
| Notes to Consolidated Financial Statements                                                                                                                                                                                                                                                     | F-7 to F-28                                     |

             

             

             

             

 

 

 

 

 

 

 

 

 

 

 

 

**F-1**

 

55

 

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REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

             

To the            Shareholders and Board of Directors of Northern Ethanol, Inc.

 

We have audited the accompanying consolidated balance sheets of Northern            Ethanol, Inc. and subsidiaries (a development stage company) as of December 31, 2007            and the related consolidated statements of operations, stockholders’ equity            (deficiency) and comprehensive income (loss) and cash flows for the years ended            December 31, 2007 and the restated consolidated balance sheet as of December 31, 2006            and related restated consolidated statements of operations, restated            stockholders’ equity (deficiency) and restated comprehensive income (loss) and            restated cash flows for the year ended December 31, 2006 and from November 29, 2004,            date of inception, to December 31, 2007. These consolidated financial statements are            the responsibility of the Company’s management. Our responsibility is to express            an opinion on these consolidated 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. An audit includes examining, on a test            basis, evidence supporting the amounts and disclosures in the financial statements. An            audit also includes 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 consolidated financial statements referred to above            present fairly, in all material respects, the financial position of Northern Ethanol,            Inc. and subsidiaries (a development stage company) as of December 31, 2007 and 2006            and the results of their operations and their cash flows for the years ended December            31, 2007 and 2006 and from November 29, 2004, date of inception, to December 31, 2007,            in conformity with United States generally accepted accounting principles.

 

The accompanying consolidated financial statements have been prepared            assuming that the Company will continue as a going concern. As discussed in note 2 a)            to the consolidated financial statements, the Company is a development stage company            and has no revenue, no earnings, and negative operating cash flows. These factors raise            substantial doubt about the Company’s ability to continue as a going concern.            These consolidated financial statements do not include any adjustments that might            result from the outcome of this uncertainty.

             

Our previous report dated April 26, 2007 has been withdrawn and the            consolidated financial statements have been restated as explained in note 3.

             

s/ KPMG            LLP

 

Chartered Accountants, Licensed Public Accountants

 

Toronto, Canada

| April 14, 2008 |
|----------------|

 

 

 

 

**F-2**

 

56

 

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**Northern Ethanol, Inc.**

*(A            DEVELOPMENT STAGE COMPANY)*

 

**Consolidated Balance Sheets**

**as of December 31, 2007 and 2006**

             

|                                                                                                                               |    | **2007** |       |   |   | **2006** |   |
|------------------------------------------------------------------------------------------------------------------------------------|---------|----------|------------|--------|--------|----------|--------|
| ASSETS                                                                                                                             |    |     |       |   |   |     |   | (as restated –note3) |   |
| CURRENT ASSETS:                                                                                                                    |    |     |       |   |   |     |   |   |   |
| Cash and cash equivalents                                                                                                          |    | $        | 9,622      |   |   |     | $      | 567,249 |   |
| Accounts receivable (note 4)                                                                                                       |    |     | 30,136     |   |   |     |   | 112,636 |   |
| Deposits (note 5)                                                                                                                  | 12,307  | 202,308  |
| Prepaid expenses (note 6)                                                                                                          | 327,444 | 480,886  |
|                                                                                                                               |    |     | 379,509    |   |   |     |   | 1,363,079 |   |
|                                                                                                                               |    |     |       |   |   |     |   |   |   |
| Property under development and equipment (note                            7)                                                       |    |     | 1,426,882  |   |   |     |   | 425,886 |   |
| Assets under capital lease (note 8)                                                                                                |    |     | 22,749,105 |   |   |     |   | 16,526,080 |   |
| Deferred financing costs (note 9)                                                                                                  |    |     | 341,883    |   |   |     |   | 200,000 |   |
| Other assets                                                                                                                       |    |     | 6,473      |   |   |     |   | 5,506 |   |
|                                                                                                                               |    | $        | 24,903,852 |   |   |     | $      | 18,520,551 |   |
|  

LIABILITIES AND STOCKHOLDERS’ EQUITY                            (DEFICIENCY)                                         |    |     |       |   |   |     |   |   |   |
| CURRENT LIABILITIES:                                                                                                               |    |     |       |   |   |     |   |   |   |
| Bank indebtedness (note 10)                                                                                                        |    | $        | 519,834    |   |   |     | $      | 5,534 |   |
| Accounts payable                                                                                                                   |    |     | 4,477,441  |   |   |     |   | 117,371 |   |
| Accrued liabilities                                                                                                                |    |     | 161,350    |   |   |     |   | 125,000 |   |
| Due to related party (note 11)                                                                                                     |    |     | 1,055,871  |   |   |     |   | — |   |
| Current portion of obligation under capital lease (note                            12)                                             |    |     | 31,951     |   |   |     |   | 18,993 |   |
|                                                                                                                               |    |     | 6,246,447  |   |   |     |   | 266,898 |   |
|                                                                                                                               |    |     |       |   |   |     |   |   |   |
| Obligation under capital lease (note 12)                                                                                           |    |     | 18,808,747 |   |   |     |   | 16,031,367 |   |
|                                                                                                                               |    |     | 25,055,194 |   |   |     |   | 16,298,265 |   |
|  

STOCKHOLDERS’ EQUITY (DEFICIENCY):                                                                                   |    |     |       |   |   |     |   |   |   |
| Preferred stock, $.0001 par value; 100,000,000 shares                            authorized; none issued and outstanding (note 13) |    |     | —    |   |   |     |   | — |   |
| Common stock, $.0001 par value; 250,000,000 shares                            authorized;                                          |    |     |       |   |   |     |   |   |   |
| (104,096,500 shares issued and outstanding as of                            December 31, 2007 and 2006, respectively (note 13))    |    |     | 10,410     |   |   |     |   | 10,410 |   |
| Additional paid-in capital                                                                                                         |    |     | 6,526,827  |   |   |     |   | 5,554,459 |   |
| Deficit accumulated during the development                            stage                                                        |    |     | (6,856,914 | )      |   |     |   | (3,279,416 | ) |
| Accumulated other comprehensive income                                                                                             |    |     | 168,335    |   |   |     |   | (63,167 | ) |
|                                                                                                                               |    |     | (151,342   | )      |   |     |   | 2,222,286 |   |
| Going concern (note 2 a))                                                                                                          |    |     |       |   |   |     |   |   |   |
| Commitments (note 14)                                                                                                              |    |     |       |   |   |     |   |   |   |
|                                                                                                                               |    | $        | 24,903,852 |   |   |     | $      | 18,520,551 |   |

See            accompanying notesto consolidated financial            statements

**F-3**

 

57

 

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**Northern Ethanol, Inc.**

*(A            DEVELOPMENT STAGE COMPANY)*

Consolidated Statements of Operations

For            the years ended December 31, 2007 and 2006 and from November 29, 2004, date of            inception, to December 31, 2007

 

             

|                                      |   | **For the years ended**

**December 31** |        | **November 29, 2004****(Inception) to****December 31** |   |
|-------------------------------------------|--------|------------------------------------------|-------------|--------------------------------------------------------|--------|
|                                      |   |                                     | **2007**    |                                                   |   | **2006** |   |   | **2007** |   |
|                                      |   |                                     |        |                                                   |   | (as restated –note3) |   |   |   |   |
|                                      |   |                                     |        |                                                   |   |   |   |   |   |   |
| OPERATING EXPENSES                        |   |                                     |        |                                                   |   |   |   |   |   |   |
| Salaries and benefits (note 10)           |   |                                     | 2,198,615   |                                                   |   | 2,153,342 |   |   | 4,351,956 |   |
| General and administrative                |   |                                     | 1,104,823   |                                                   |   | 970,351 |   |   | 2,106,644 |   |
| Occupancy costs                           |   |                                     | 181,337     |                                                   |   | 99,644 |   |   | 280,981 |   |
| Foreign exchange loss (gain)              |   |                                     | (14,339     | )                                                      |   | 2,536 |   |   | (11,803 | ) |
| Depreciation                              |   |                                     | 41,245      |                                                   |   | 22,070 |   |   | 63,315 |   |
| Interest                                  |   |                                     | 65,817      |                                                   |   | — |   |   | 65,821 |   |
|                                      |   |                                     | 3,577,498   |                                                   |   | 3,247,943 |   |   | 6,973,390 |   |
|                                      |   |                                     |        |                                                   |   |   |   |   |   |   |
|                                      |   |                                     |        |                                                   |   |   |   |   |   |   |
| NET LOSS                                  |   | $                                        | (3,577,498  | )                                                      | $      | (3,247,943 | ) | $ | (6,856,914 | ) |
|                                      |   |                                     |        |                                                   |   |   |   |   |   |   |
| BASIC AND DILUTED LOSS PER SHARE          |   | $                                        | (0.03       | )                                                      | $      | (0.03 | ) |   |   |   |
|                                      |   |                                     |        |                                                   |   |   |   |   |   |   |
| WEIGHTED AVERAGE COMMONSHARES OUTSTANDING |   |                                     | 104,096,500 |                                                   |   | 102,534,308 |   |   |   |   |
|                                      |   |                                     |        |                                                   |   |   |   |   |   |   |
|                                      |   |                                     |        |                                                   |   |   |   |   |   |   |

 

 

See            accompanying notes to consolidated financial statements

             

 

 

 

 

**F-4**

 

58

 

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**Northern Ethanol, Inc.**

*(A            DEVELOPMENT STAGE COMPANY)*

Consolidated Statements of Stockholders’ Equity (Deficiency) and            Comprehensive Income

For            the years ended December 31, 2007 and 2006 and from November 29, 2004, date of            inception, to December 31, 2007

 

 

|                                                                                                  |   | **Common Stock** |   |   |   |       |    |   |   |                                 |   |      |   |                       |   |   |       |                                                                      |   |
|-------------------------------------------------------------------------------------------------------|--------|------------------|--------|--------|--------|------------|---------|--------|--------|--------------------------------------|--------|-----------|--------|----------------------------|--------|--------|------------|---------------------------------------------------------------------------|--------|
|                                                                                                  |   | **Shares**       |   |   |   | **Amount** |    |   |   | **Additional****Paid-In****Capital** |   |      |   | **Accumulated****Deficit** |   |   |       | **Cumulative translation adjustment****Other****Comprehensive****Income** |   |   |   | **Total** |   |
|                                                                                                  |   |             |   |   |   |       |    |   |   |                                 |   |      |   |                       |   |   |       |                                                                      |   |   |   |   |   |   |   |   |   |   |
| Inception, November 29, 2004Stock issued for cash                                                     |   | 101,500,000      |   |   |   | $          | 10,150  |   |   |                                 | $      | 39,865    |   |                       |   | $      | —    |                                                                      |   |   | $ | — |   |   |   | $ | 50,015 |   |
|                                                                                                  |   |             |   |   |   |       |    |   |   |                                 |   |      |   |                       |   |   |       |                                                                      |   |   |   |   |   |   |   |   |   |   |
| Net loss for the period November 29, 2004 (inception) to                            December 31, 2004 |   | —          |   |   |   |       | — |   |   |                                 |   | —   |   |                       |   |   | (3,708     | )                                                                         |   |   |   | — |   |   |   |   | (3,708 | ) |
|                                                                                                  |   |             |   |   |   |       |    |   |   |                                 |   |      |   |                       |   |   |       |                                                                      |   |   |   |   |   |   |   |   |   |   |
| Balances, December 31, 2004                                                                           |   | 101,500,000      |   |   |   | $          | 10,150  |   |   |                                 | $      | 39,865    |   |                       |   | $      | (3,708     | )                                                                         |   |   | $ | — |   |   |   | $ | 46,307 |   |
|                                                                                                  |   |             |   |   |   |       |    |   |   |                                 |   |      |   |                       |   |   |       |                                                                      |   |   |   |   |   |   |   |   |   |   |
| Net loss for the year ended December 31, 2005                                                         |   | —          |   |   |   |       | — |   |   |                                 |   | —   |   |                       |   |   | (27,765    | )                                                                         |   |   |   | — |   |   |   |   | (27,765 | ) |
|                                                                                                  |   |             |   |   |   |       |    |   |   |                                 |   |      |   |                       |   |   |       |                                                                      |   |   |   |   |   |   |   |   |   |   |
| Balances, December 31, 2005                                                                           |   | 101,500,000      |   |   |   | $          | 10,150  |   |   |                                 | $      | 39,865    |   |                       |   | $      | (31,473    | )                                                                         |   |   | $ | — |   |   |   | $ | 18,542 |   |
|                                                                                                  |   |             |   |   |   |       |    |   |   |                                 |   |      |   |                       |   |   |       |                                                                      |   |   |   |   |   |   |   |   |   |   |
| Shares cancelled (note 11)                                                                            |   | (1,500,000       | )      |   |   |       | (150    | )      |   |                                 |   | 150       |   |                       |   |   | —    |                                                                      |   |   |   | — |   |   |   |   | — |   |
| Stock-based compensation                                                                              |   | —          |   |   |   |       | — |   |   |                                 |   | 1,668,354 |   |                       |   |   | —    |                                                                      |   |   |   | — |   |   |   |   | 1,668,354 |   |
| Stock issued for cash,net of issuance costs                                                           |   | 4,096,500        |   |   |   |       | 410     |   |   |                                 |   | 3,846,090 |   |                       |   |   | —    |                                                                      |   |   |   | — |   |   |   |   | 3,846,500 |   |
| Other comprehensive income (as restated- note                            3)                           |   | —          |   |   |   |       | — |   |   |                                 |   | —   |   |                       |   |   | —    |                                                                      |   |   |   | (63,167 | ) |   |   |   | (63,167 | ) |
| Net loss for the year ended December 31, 2006 (as                            restated - note 3)       |   | —          |   |   |   |       | — |   |   |                                 |   | —   |   |                       |   |   | (3,247,943 | )                                                                         |   |   |   | — |   |   |   |   | (3,247,943 | ) |
|                                                                                                  |   |             |   |   |   |       |    |   |   |                                 |   |      |   |                       |   |   |       |                                                                      |   |   |   |   |   |   |   |   |   |   |
| Balances, December 31, 2006                                                                           |   | 104,096,500      |   |   |   | $          | 10,410  |   |   |                                 | $      | 5,554,459 |   |                       |   | $      | (3,279,416 | )                                                                         |   |   | $ | (63,167 | ) |   |   | $ | 2,222,286 |   |
|                                                                                                  |   |             |   |   |   |       |    |   |   |                                 |   |      |   |                       |   |   |       |                                                                      |   |   |   |   |   |   |   |   |   |   |
| Stock-based compensation                                                                              |   | —          |   |   |   |       | — |   |   |                                 |   | 972,368   |   |                       |   |   | —    |                                                                      |   |   |   | — |   |   |   |   | 972,368 |   |
| Other comprehensive income                                                                            |   | —          |   |   |   |       | — |   |   |                                 |   | —   |   |                       |   |   | —    |                                                                      |   |   |   | 231,502 |   |   |   |   | 231,502 |   |
| Net loss for the year ended December 31, 2007                                                         |   | —          |   |   |   |       | — |   |   |                                 |   | —   |   |                       |   |   | (3,577,498 | )                                                                         |   |   |   | — |   |   |   |   | (3,577,498 | ) |
|                                                                                                  |   |             |   |   |   |       |    |   |   |                                 |   |      |   |                       |   |   |       |                                                                      |   |   |   |   |   |   |   |   |   |   |
| Balances, December 31, 2007                                                                           |   | 104,096,500      |   |   |   | $          | 10,410  |   |   |                                 | $      | 6,526,827 |   |                       |   | $      | (6,856,914 | )                                                                         |   |   | $ | 168,335 |   |   |   | $ | (151,342 | ) |
|                                                                                                  |   |             |   |   |   |       |    |   |   |                                 |   |      |   |                       |   |   |       |                                                                      |   |   |   |   |   |   |   |   |   |   |
|                                                                                                  |   |             |   |   |   |       |    |   |   |                                 |   |      |   |                       |   |   |       |                                                                      |   |   |   |   |   |   |   |   |   |   |

             

             

See            accompanying notes to consolidated financial statements

             

             

             

             

             

             

             

**F-5**

 

59

 

----

**Northern Ethanol, Inc.**

*(A            DEVELOPMENT STAGE COMPANY)*

Consolidated Statements of Cash Flows

For            the years ended December 31, 2007, 2006 and from November 29, 2004, date of inception,            to December 31, 2007

 

|                                                                            |   | **For the years ended****December 31,** |       |   | **November 29, 2004 (Inception) to****December 31,** |     |
|---------------------------------------------------------------------------------|--------|-----------------------------------------|------------|--------|------------------------------------------------------|----------|
|                                                                            |   | **2007**                                |       |   |                                                 | **2006** |   |   | **2007** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                           |   |                                    |       |   |                                                 |     |   | (as restated –note3) |   |   |   |   |   |
| Net loss                                                                        |   | $                                       | (3,577,498 | )      |                                                 |     | $ | (3,247,943 | ) |   | $ | (6,856,914 | ) |
| Items not involving cash:                                                       |   |                                    |       |   |                                                 |     |   |   |   |   |   |   |   |
| Depreciation                                                                    |   |                                    | 41,245     |   |                                                 |     |   | 22,070 |   |   |   | 63,315 |   |
| Stock-based compensation                                                        |   |                                    | 972,368    |   |                                                 |     |   | 1,668,354 |   |   |   | 2,640,722 |   |
| Changes in non-cash working capital balances:                                   |   |                                    |       |   |                                                 |     |   |   |   |   |   |   |   |
| Accounts receivable                                                             |   |                                    | 82,500     |   |                                                 |     |   | (112,636 | ) |   |   | (30,136 | ) |
| Deposits                                                                        |   |                                    | 190,001    |   |                                                 |     |   | (202,308 | ) |   |   | (12,307 | ) |
| Prepaid expenses                                                                |   |                                    | 153,442    |   |                                                 |     |   | (470,636 | ) |   |   | (327,444 | ) |
| Accounts payable                                                                |   |                                    | 771,931    |   |                                                 |     |   | 115,371 |   |   |   | 889,302 |   |
| Accrued liabilities                                                             |   |                                    | 36,350     |   |                                                 |     |   | 121,902 |   |   |   | 161,350 |   |
| Net cash used in operating activities                                           |   |                                    | (1,329,661 | )      |                                                 |     |   | (2,105,826 | ) |   |   | (3,472,112 | ) |
|                                                                            |   |                                    |       |   |                                                 |     |   |   |   |   |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                           |   |                                    |       |   |                                                 |     |   |   |   |   |   |   |   |
| Deferred financing costs                                                        |   |                                    | (63,764    | )      |                                                 |     |   | (200,000 | ) |   |   | (263,764 | ) |
| Bank indebtedness                                                               |   |                                    | 514,300    |   |                                                 |     |   | 5,534 |   |   |   | 519,834 |   |
| Due to related party                                                            |   |                                    | 1,055,871  |   |                                                 |     |   | — |   |   |   | 1,055,871 |   |
| Principal payment of capital lease obligation                                   |   |                                    | (2,090     | )      |                                                 |     |   | (3,735 | ) |   |   | (5,825 | ) |
| Proceeds from issuance of common stock                                          |   |                                    | —    |   |                                                 |     |   | 3,846,500 |   |   |   | 3,896,515 |   |
| Net cash provided by financing activities                                       |   |                                    | 1,504,317  |   |                                                 |     |   | 3,648,299 |   |   |   | 5,202,631 |   |
|                                                                            |   |                                    |       |   |                                                 |     |   |   |   |   |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                           |   |                                    |       |   |                                                 |     |   |   |   |   |   |   |   |
| Purchase of property under development and                            equipment |   |                                    | (530,556   | )      |                                                 |     |   | (460,635 | ) |   |   | (991,191 | ) |
| Assets under capital lease                                                      |   |                                    | (237,530   | )      |                                                 |     |   | (472,142 | ) |   |   | (709,672 | ) |
| Other assets                                                                    |   |                                    | -          |   |                                                 |     |   | (5,506 | ) |   |   | (5,506 | ) |
| Net cash used in investing activities                                           |   |                                    | (768,086   | )      |                                                 |     |   | (938,283 | ) |   |   | (1,706,369 | ) |
|                                                                            |   |                                    |       |   |                                                 |     |   |   |   |   |   |   |   |
| Effect of exchange rate changes on cash                                         |   |                                    | 35,803     |   |                                                 |     |   | (50,331 | ) |   |   | (14,528 | ) |
|                                                                            |   |                                    |       |   |                                                 |     |   |   |   |   |   |   |   |
| NET (DECREASE) INCREASE IN CASH AND CASH                            EQUIVALENTS |   |                                    | (557,627   | )      |                                                 |     |   | 553,859 |   |   |   | 9,622 |   |
|                                                                            |   |                                    |       |   |                                                 |     |   |   |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS:                                                      |   |                                    |       |   |                                                 |     |   |   |   |   |   |   |   |
| Beginning of period                                                             |   |                                    | 567,249    |   |                                                 |     |   | 13,390 |   |   |   | — |   |
| End of period                                                                   |   | $                                       | 9,622      |   |                                                 |     | $ | 567,249 |   |   | $ | 9,622 |   |
|                                                                            |   |                                    |       |   |                                                 |     |   |   |   |   |   |   |   |
| SUPPLEMENTAL CASH FLOW INFORMATION:                                             |   |                                    |       |   |                                                 |     |   |   |   |   |   |   |   |
|                                                                            |   |                                    |       |   |                                                 |     |   |   |   |   |   |   |   |
| Assets under capital lease                                                      |   |                                    | 3,035,512  |   |                                                 |     |   | 16,761,565 |   |   |   | 19,797,077 |   |
| Income taxes paid                                                               |   |                                    | —    |   |                                                 |     |   | — |   |   |   | 353 |   |
| Interest paid                                                                   |   |                                    | 1,158      |   |                                                 |     |   | — |   |   |   | 1,158 |   |

 

See            accompanying notes to consolidated financial statements

 

**F-6**

 

60

 

----

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006**

**AND FROM NOVEMBER 29, 2004, DATE OF INCEPTION, TO DECEMBER 31,            2007**

 

| **1.** | **OVERVIEW:** |
|--------|---------------|

 

The Company was incorporated as “Beaconsfield I, Inc.” in            the State of Delaware on November 29, 2004, as a “blank check” company for            the purpose of engaging in the potential future merger or acquisition of an            unidentified target business.

             

On December 15, 2004, the Company issued 150,000 (pre-forward split)            shares of its Common Stock for a total of $15 in cash. Additionally on that date, the            Company issued 10,000,000 shares of its Common Stock, for a total of $50,000 in            cash.

             

In July 2006, the Company engaged in a forward split of its Common            Stock, whereby it issued ten shares of its Common Stock for every one (1) share then            issued and outstanding. All references in these consolidated financial statements and            notes to our issued and outstanding Common Stock are provided on a post-forward split            basis, unless otherwise indicated.

             

On July 5, 2006, the Company affected a ten-for-one forward stock split            of its Common Stock to holders of record on that date. The number of common shares and            options presented in these consolidated financial statements and notes has been revised            for the ten-for-one stock split, unless otherwise indicated.

             

The Company has two wholly owned subsidiaries, Northern Ethanol, LLC, a            New York limited liability company and Northern Ethanol (Canada) Inc., a Canadian            corporation, which has three wholly owned subsidiaries, Northern Ethanol (Barrie) Inc.,            Northern Ethanol (Sarnia) Inc. and Northern Ethanol Investments Inc., each of which is            also a Canadian corporation.

 

| **2.** | **SIGNIFICANT ACCOUNTING POLICIES:** |
|--------|--------------------------------------|

 

|   | a) | Basis of presentation: |
|--------|----|------------------------|

             

Going concern:

             

There is substantial doubt about the Company’s ability to continue            as a going concern.

             

These consolidated financial statements have been prepared on a going            concern basis, which assumes that the Company will commence ethanol producing            operations in the foreseeable future, and accordingly, will be able to realize its            assets and discharge its liabilities in the normal course of operations. The Company            has no revenue, no earnings, and negative operating cash flows, and has financed its            activities through bank borrowings, loans from related parties, the issuance of shares            and capital lease arrangements. The Company’s ability to continue as a going            concern is dependent on obtaining investment capital and achieving profitable            operations. There can be no assurance that the Company will be successful in raising            sufficient investment capital to commence ethanol producing operations and to generate            sufficient cash flows to continue as a going concern. These consolidated financial            statements do not reflect the adjustments that might be necessary to the carrying            amount of reported assets, liabilities and revenue and expenses and the balance sheet            classification used if the Company were unable to commence ethanol producing operations            in accordance with this assumption.

**F-7**

 

61

 

----

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006**

**AND FROM NOVEMBER 29, 2004, DATE OF INCEPTION, TO DECEMBER 31,            2007**

 

| **2.** | **SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                            (continued):** |
|--------|----------------------------------------------------------------------------------------|

 

|   | a) | Basis of presentation (continued): |
|--------|----|------------------------------------|

 

Consolidation:

             

The consolidated financial statements include the accounts of the            Company and its wholly owned subsidiaries. All intercompany balances and transactions            are eliminated on consolidation.

             

Comparatives:

             

Certain items in the comparative statements have been reclassified to be            consistent with the presentation in the current year.

 

|   | b) | Use of estimates: |
|--------|----|-------------------|

 

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

 

|    | c) | Cash and cash equivalents: |
|--------------|----|----------------------------|

 

Cash and cash equivalents consist of all highly liquid investments with            an original maturity of three months or less. Such investments are stated at cost plus            accrued interest, which approximates market value.

 

|   | d) | Property under development and equipment: |
|--------|----|-------------------------------------------|

 

Computer equipment and software are recorded at cost and are depreciated            on a straight-line basis over their estimated useful life of three years.

             

Furniture and equipment are recorded at cost and are depreciated on a            straight-line basis over their estimated useful life of ten years.

 

Leasehold improvements are recorded at cost and are depreciated on a            straight-line basis over the shorter of the term of the lease and their estimated            useful life.

 

Property under development consists of engineering, site design,            permitting, and other development costs related to preparation for the construction of            ethanol production facilities.

             

Depreciation and amortization commences at the time when the assets are            available for use in operations.

             

**F-8**

 

62

 

----

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006**

**AND FROM NOVEMBER 29, 2004, DATE OF INCEPTION, TO DECEMBER 31,            2007**

 

| **2.** | **SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                            (continued):** |
|--------|----------------------------------------------------------------------------------------|

 

|   | e) | Leases: |
|--------|----|---------|

 

The Company follows the guidance in Statement of Financial Accounting            Standard (“SFAS”) No. 13, “Accounting for Leases”, as amended,            which requires the Company to evaluate the lease agreements it enters into to determine            whether they represent operating or capital leases at the inception of the lease. The            application of this policy is described in notes 8 and 14.

 

|   | f) | Impairment of long-lived assets: |
|--------|----|----------------------------------|

 

Long-lived assets are reviewed for impairment at least annually or            whenever events or changes in circumstance indicate that the carrying amount of the            asset may not be recoverable. Recoverability is measured by a comparison of the            carrying amount of an asset to estimated undiscounted cash flows expected to be            generated by the long-lived asset. If the carrying amount of an asset exceeds the            estimated future cash flows from operations and residual value of the asset, an            impairment charge is recognized for the amount that the carrying amount exceeds the            fair value of the particular assets.

 

|   | g) | Capitalized interest: |
|--------|----|-----------------------|

             

In accordance with SFAS No. 34, the interest costs associated with the            Company’s capital lease obligation are being capitalized to assets under capital            lease until the Barrie plant is substantially complete and ready for the production of            ethanol.

             

|   | h) | Deferred Financing Costs: |
|--------|----|---------------------------|

 

Deferred financing costs are costs and all related fees incurred to            obtain debt financing and will be amortized as interest expense over the term of the            related financing using the effective interest rate method.

             

             

|   | i) | Stock-based compensation: |
|--------|----|---------------------------|

 

Effective January 1, 2006, the Company adopted Financial Accounting            Standards Board (“FASB”) SFAS No. 123R, “Share Based Payment”.            SFAS 123R requires a public entity to measure the cost of employee services received in            exchange for an award of equity instruments based on the grant-date fair value of the            award. That cost is recognized on a straight-line basis over the vesting period. That            cost is measured based on the fair value of the equity or liability instruments issued            using the Black-Scholes option pricing model.

 

 

 

**F-9**

 

63

 

----

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006**

**AND FROM NOVEMBER 29, 2004, DATE OF INCEPTION, TO DECEMBER 31,            2007**

 

| **2.** | **SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                            (continued):** |
|--------|----------------------------------------------------------------------------------------|

 

|   | j) | Foreign currency translation: |
|--------|----|-------------------------------|

 

The functional currency of the Company is the United States            dollarand the functional currency of its Canadian subsidiaries            is the Canadian dollar. The operations of the Canadian subsidiaries are translated into            U.S. dollars in accordance with SFAS No. 52, “Foreign Currency            Translation,” as follows:

|   | (i)  | Assets and liabilities at the rate of exchange in effect                            at the balance sheet date; and |   |
|--------|------|--------------------------------------------------------------------------------------------------------------------|--------|
|   | (ii) | Revenue and expense items at the average rate of                            exchange prevailing during the period. |

 

Translation adjustments are included as a separate component of            stockholders’ equity (deficiency) as a component of comprehensive income or            loss.

             

The Company and its subsidiaries translate foreign currency transactions            into the Company’s functional currency at the exchange rate effective on the            transaction date. Monetary items denominated in foreign currencies are translated into            the functional currency at exchange rates in effect at the balance sheet date. Foreign            exchange gains and losses are included in income.

 

|   | k) | Income taxes: |
|--------|----|---------------|

 

Deferred income tax assets and liabilities are recognized for the            estimated future tax consequences attributable to temporary differences between the            financial statement carrying amounts of existing assets and liabilities and their            respective tax bases, and are measured using enacted tax rates expected to apply in the            years in which those temporary differences are expected to be recovered or settled. A            valuation allowance is provided when it is more likely than not that the full benefit            of the deferred tax assets will not be realized.

             

In June 2006, the FASB issued FASB Interpretation No. 48,            “Accounting for Uncertainty in Income Taxes – an interpretation of FASB            Statement No. 109”(“FIN 48”). FIN 48            clarifies the accounting for uncertainty in income taxes by prescribing a recognition            threshold and measurement attribute for the financial statement recognition and            measurement of a tax position taken or expected to be taken in a tax return. The            interpretation also provides guidance on de-recognition, classification, interest and            penalties, accounting in interim periods, and disclosure. FIN 48 was adopted by the            Company effective January 1, 2007. The adoption of FIN 48 did not have a material            impact on the Company’s consolidated financial statements or results of            operations.    

 

|   | l) | Earnings (loss) per common share: |
|--------|----|-----------------------------------|

 

The Company computes net loss per common share using SFAS No. 128,            “Earnings Per Share.” Basic loss per common share is computed based on the            weighted average number of shares outstanding for the period. Diluted loss per share is            computed by dividing net loss by the weighted average common shares outstanding            assuming all dilutive potential common shares were issued.

 

**F-10**

 

64

 

----

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006**

**AND FROM NOVEMBER 29, 2004, DATE OF INCEPTION, TO DECEMBER 31,            2007**

 

| **2.** | **SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                            (continued):** |
|--------|----------------------------------------------------------------------------------------|

 

|   | m) | Fair values of financial instruments: |
|--------|----|---------------------------------------|

 

The carrying values of cash and cash equivalents, bank indebtedness, due            to related parties, other current assets, accrued expenses and accounts payable            approximate fair values due to the short period of time to maturity. The carrying value            of the obligation under capital lease approximates fair value as the discount rate of            12% in the capital lease approximates current market rates of interest available to the            Company for the same or similar debt instruments.

             

In February 2006, the FASB issued SFAS No. 155,            “*Accounting for Certain Hybrid Financial Instruments -            an amendment of FASB Statements No.* *133 and 140.*” SFAS No. 155 allows            financial instruments that contain an embedded derivative and that otherwise would            require bifurcation to be accounted for as a whole on a fair value basis, at the            holders’ election. SFAS No. 155 also clarifies and amends certain other            provisions of SFAS Nos. 133 and 140. This statement is effective for all financial            instruments acquired or issued by the Company on or after January 1 2007. The adoption            SFAS No. 155 did not have a material impact on the Company’s consolidated            financial statements or results of operations.  

             

|   | n) | Recent Accounting Pronouncements: |
|--------|----|-----------------------------------|

             

In September 2006, the FASB issued SFAS No. 157,*“Fair Value Measurements.”*SFAS            No. 157 defines fair value, establishes a framework for measuring fair value and            requires enhanced disclosures about fair value measurements. SFAS No. 157 requires            companies to disclose the fair value of their financial instruments according to a fair            value hierarchy as defined in the standard. Additionally, companies are required to            provide enhanced disclosure regarding financial instruments in one of the categories            (level 3), including a reconciliation of the beginning and ending balances separately            for each major category of assets and liabilities. SFAS No.157 is effective for the            Company’s consolidated financial statements issued for fiscal years beginning            after November 15, 2007, and interim periods within those fiscal years. The            Company is required to adopt the provisions of SFAS No. 157 effective January 1, 2008.            The adoption of SFAS No. 157 is not expected to have a material impact on the            Company’s consolidated financial statements or results of operations.             

 

In February 2007, the FASB issued SFAS No. 159,*The Fair Value Option for Financial Assets and Financial            Liabilities*(“SFAS No. 159”). Under the            provisions of SFAS No. 159, companies may choose to account for eligible financial            instruments, warranties and insurance contracts at fair value on a contract-by-contract            basis. Changes in fair value will be recognized in earnings each reporting period. SFAS            No. 159 is effective for financial statements issued for fiscal years beginning after            November 15, 2007 and interim periods within those fiscal years. The Company is            required to adopt the provisions of SFAS No. 159 effective January 1, 2008. The            adoption of SFAS No. 159 is not expected to have a material impact on the            Company’s consolidated financial statements or results of operations.             

 

 

**F-11**

 

65

 

----

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006**

**AND FROM NOVEMBER 29, 2004, DATE OF INCEPTION, TO DECEMBER 31,            2007**

 

| **2.** | **SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                            (Continued):** |
|--------|----------------------------------------------------------------------------------------|

 

|   | n) | Recent Accounting Pronouncements (continued): |
|--------|----|-----------------------------------------------|

             

In December 2007, the FASB issued a revised standard, SFAS            141R*,*Business Combinations on            accounting for business combinations. The major changes to accounting for business            combinations are summarized as follows:

|   | **•** | SFAS 141R requires that most identifiable assets,                            liabilities, noncontrolling interests and goodwill acquired in a                            business combination be recorded at “full fair                            value” |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Most acquisition-related costs would be recognized as                            expenses as incurred |
|--------|------------|-------------------------------------------------------------------------------------------------------|

|   | **•** | Obligations for contingent consideration would be                            measured and recognized at fair value at the acquisition                            date |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Liabilities associated with restructuring or exit                            activities are recognized only if they meet the recognition criteria in                            SFAS 146, Accounting for Costs Associated with Exit or Disposal                            Activities, as of the acquisition date |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | An acquisition date gain is reflected for a                            “bargain purchase” |
|--------|------------|-------------------------------------------------------------------------------------------------------|

|   | **•** | For step acquisitions, the acquirer re-measures its                            noncontrolling equity investment in the acquiree at fair value as of                            the date control is obtained and recognizes any gain or loss in                            income |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | A number of other significant changes from the previous                            standard including related to taxes and contingencies |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------|

The statement is effective for business combinations occurring in the            first annual reporting period beginning on or after December 15, 2008. The adoption of            SFAS No. 141R is not expected to have a material impact on the Company’s            consolidated financial statements or results of operations.

 

In December 2007, the FASB issued a revised standard SFAS 160,            Noncontrolling Interests in Consolidated Financial Statements, on accounting for            noncontrolling interests and transactions with noncontrolling interest holders in            consolidated financial statements. This statement specifies that noncontrolling            interests are to be treated as a separate component of equity, not as a liability or            other item outside of equity. Because noncontrolling interests are an element of            equity, increases and decreases in the parent’s ownership interest that leave            control intact are accounted for as capital transactions rather than as a step            acquisition or dilution gains or losses. The carrying amount of the noncontrolling            interests is adjusted to reflect the change in ownership interests, and any difference            between the amount by which the noncontrolling interests are adjusted and the fair            value of the consideration paid or received is recognized directly in equity            attributable to the controlling interest. This standard requires net income and            comprehensive income to be displayed for both the controlling and the noncontrolling            interests. Additional required disclosures and reconciliations include a separate            schedule that shows the effects of any transactions with the noncontrolling interests            on the equity attributable to the controlling interest. The statement is effective for            periods beginning on or after December 15, 2008. SFAS 160 will be applied prospectively            to all noncontrolling interests, including any that arose before the effective date.            The adoption of SFAS No. 160 is not expected to have a material impact on the            Company’s consolidated financial statements or results of operations.

 

**F-12**

 

66

 

----

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006**

**AND FROM NOVEMBER 29, 2004, DATE OF INCEPTION, TO DECEMBER 31,            2007**

 

| **3.** | **RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL                            STATEMENTS:** |
|--------|---------------------------------------------------------------------------------------|

 

Subsequent to the issuance of the Company’s consolidated financial            statements for the year ended December 31, 2006, the Company determined that the            accounting for the foreign currency translation of its Canadian subsidiaries was not in            accordance with SFAS No. 52 and required revisions. The effects of the restatement on            the consolidated balance sheet as of December 31, 2006 and the consolidated statement            of operations and the consolidated statement of cash flows for the year ended December            31, 2006 are as follows:

             

| **Consolidated balance sheet as at December 31,                            2006** |   | **As previously reported** |   |   | **Restatement** |   |   | **As restated** |   |
|-----------------------------------------------------------------------------------|--------|----------------------------|--------|--------|-----------------|--------|--------|-----------------|--------|
| ASSETS                                                                            |   |                       |   |   |            |   |   |            |   |
| Property under development and equipment                                          | $      | 438,467                    |   | $      | (12,581         | )      | $      | 425,886         |   |
| Assets under capital lease                                                        |   | 17,233,707                 |   |   | (707,627        | )      |   | 16,526,080      |   |
| STOCKHOLDERS’ EQUITY (DEFICIENCY):                                          |   |                       |   |   |            |   |   |            |   |
| Deficit accumulated during the development                            stage       |   | (3,276,873                 | )      |   | (2,543          | )      |   | (3,279,416      | )      |
| Accumulated other comprehensive income                                            |   | 654,498                    |   |   | (717,665        | )      |   | (63,167         | )      |

 

| **Consolidated statement of operations for the year                            ended December 31, 2006** |   | **As previously reported** |   |   | **Restatement** |   |   | **As restated** |   |
|----------------------------------------------------------------------------------------------------------|--------|----------------------------|--------|--------|-----------------|--------|--------|-----------------|--------|
| OPERATING EXPENSES                                                                                       |   |                       |   |   |            |   |   |            |   |
| Foreign exchange loss                                                                                    | $      | —                    |   | $      | 2,536           |   | $      | 2,536           |   |
| Depreciation                                                                                             |   | 22,063                     |   |   | 7               |   |   | 22,070          |   |
|                                                                                                     |   |                       |   |   |            |   |   |            |   |
| NET LOSS                                                                                                 | $      | (3,245,400                 | )      | $      | (2,543          | )      | $      | (3,247,943      | )      |
|                                                                                                     |   |                       |   |   |            |   |   |            |   |
| BASIC AND DILUTED LOSS PER SHARE                                                                         | $      | (0.03                      | )      | $      | —         |   | $      | (0.03)          |   |

 

| **Consolidated statement of cash flows for the year                            ended December 31, 2006** |   | **As previously reported** |   |   | **Restatement** |   |   | **As restated** |   |
|----------------------------------------------------------------------------------------------------------|--------|----------------------------|--------|--------|-----------------|--------|--------|-----------------|--------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                                    |   |                       |   |   |            |   |   |            |   |
| Net loss                                                                                                 | $      | (3,245,400                 | )      | $      | (2,543          | )      | $      | (3,247,943      | )      |
| Items not involving cash:                                                                                |   |                       |   |   |            |   |   |            |   |
| Depreciation                                                                                             |   | 22,063                     |   |   | 7               |   |   | 22,070          |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                                    |   |                       |   |   |            |   |   |            |   |
| Purchase of property under development and                            equipment                          |   | (460,530                   | )      |   | (105            | )      |   | (460,635        | )      |
| Effect of exchange rate changes on cash                                                                  |   | (52,972                    | )      |   | 2,641           |   |   | (50,331         | )      |

             

There are no current and deferred income tax implications to this            restatement.

 

**F-13**

 

67

 

----

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006**

**AND FROM NOVEMBER 29, 2004, DATE OF INCEPTION, TO DECEMBER 31,            2007**

 

| **4.** | **ACCOUNTS RECEIVABLE:** |
|--------|--------------------------|

 

 

|                                                                                     |   |   |   | **December 31, 2007** |   |   |    | **December 31, 2006** |   |
|------------------------------------------------------------------------------------------|--------|--------|--------|-----------------------|--------|--------|---------|-----------------------|--------|
|                                                                                     |   |   |   |                  |   |   |    |                  |   |   |   |   |   |
| Canadian federal government goods and services tax                            receivable |   |   |   | $                     |   |   | 30,136  |                  |   |   | $ |   |   | 110,062 |   |
| Overpayment of legal fee                                                                 |   |   |   |                  |   |   | — |                  |   |   |   |   |   | 2,574 |   |
|                                                                                     |   |   |   | $                     |   |   | 30,136  |                  |   |   | $ |   |   | 112,636 |   |

 

| **5.** | **DEPOSITS:** |
|--------|---------------|

 

 

|                                                                                                          |   |   |   | **December 31, 2007** |   |   |    | **December 31, 2006** |   |
|---------------------------------------------------------------------------------------------------------------|--------|--------|--------|-----------------------|--------|--------|---------|-----------------------|--------|
|                                                                                                          |   |   |   |                  |   |   |    |                  |   |   |   |   |   |
| Refundable deposit on non-binding letter of intent for                            Sarnia land purchase        |   |   |   | $                     |   |   | 10,088  |                  |   |   | $ |   |   | — |   |
| Refundable deposit on storage tanks paid to related                            party (note 11)                |   |   |   |                  |   |   | — |                  |   |   |   |   |   | 200,000 |   |
| Refundable deposit on head office lease                            utilities                                  |   |   |   |                  |   |   | 1,200   |                  |   |   |   |   |   | 1,021 |   |
| Refundable deposit on non-binding letter of intent for                            Sarnia lease                |   |   |   |                  |   |   | 1,009   |                  |   |   |   |   |   | 858 |   |
| Refundable deposit on non-binding letter of intent for                            Niagara Falls land purchase |   |   |   |                  |   |   | 10      |                  |   |   |   |   |   | — |   |
| Other non-refundable deposit                                                                                  |   |   |   |                  |   |   | — |                  |   |   |   |   |   | 429 |   |
|                                                                                                          |   |   |   | $                     |   |   | 12,307  |                  |   |   | $ |   |   | 202,308 |   |

 

 

| **6.** | **PREPAID EXPENSES:** |
|--------|-----------------------|

 

|                                                                                |   | **December 31, 2007** |    | **December 31, 2006** |
|-------------------------------------------------------------------------------------|--------|-----------------------|---------|-----------------------|
|                                                                                |   |                  |    |                  |   |   |
| Prepaid rent for Barrie and head office leases (note                            14) |   | $                     | 297,966 |                  | $ | 253,454 |
| Prepaid development costs for planned Sarnia                            location    |   |                  | — |                  |   | 202,479 |
| Prepaid insurance                                                                   |   |                  | 21,452  |                  |   | 22,025 |
| Prepaid other                                                                       |   |                  | 8,026   |                  |   | 2,928 |
|                                                                                |   | $                     | 327,444 |                  | $ | 480,886 |

 

 

**F-14**

 

68

 

----

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006**

**AND FROM NOVEMBER 29, 2004, DATE OF INCEPTION, TO DECEMBER 31,            2007**

 

| **7.** | **PROPERTY UNDER DEVELOPMENT AND                            EQUIPMENT:** |
|--------|--------------------------------------------------------------------------|

 

| **December 31, 2007**           |   | **Cost** |      | **Accumulated****Depreciation** |   | **Net Book****Value** |   |
|---------------------------------|--------|----------|-----------|---------------------------------|--------|-----------------------|--------|
|                            |   |     |      |                            |   |                  |   |   |   |   |
| Properties under development    |   | $        | 1,203,619 |                            |   | -                     |   | $ | 1,203,619 |   |
| Computer equipment and software |   |     | 50,784    |                            |   | 25,697                |   |   | 25,087 |   |
| Furniture and equipment         |   |     | 199,331   |                            |   | 31,702                |   |   | 167,629 |   |
| Leasehold improvements          |   |     | 43,090    |                            |   | 12,543                |   |   | 30,547 |   |
|                            |   | $        | 1,496,824 |                            | $      | 69,942                |   | $ | 1,426,882 |   |

 

 

| **December 31, 2006 (restated – note                            3)** |   |  

**Cost** |    | **Accumulated****Depreciation** |   | **Net Book****Value** |   |
|----------------------------------------------------------------------------|--------|------------------|---------|---------------------------------|--------|-----------------------|--------|
|                                                                       |   |             |    |                            |   |                  |   |   |   |   |
| Property under development                                                 |   | $                | 213,818 |                            | $      | -                     |   | $ | 213,818 |   |
| Computer equipment and software                                            |   |             | 36,544  |                            |   | 8,097                 |   |   | 28,447 |   |
| Furniture and equipment                                                    |   |             | 163,468 |                            |   | 10,028                |   |   | 153,440 |   |
| Leasehold improvements                                                     |   |             | 33,539  |                            |   | 3,358                 |   |   | 30,181 |   |
|                                                                       |   | $                | 447,369 |                            | $      | 21,483                |   | $ | 425,886 |   |

 

During the year ended December 31, 2007, the Company capitalized            $771,206 (2006 - $206,393) of engineering and site design costs, $136,085 (2006 -            $12,319) of legal advisory costs and $10,371 (2006 - $nil) of permit application costs            to the cost of property under development at the Barrie, Niagara Falls, NY and Sarnia            locations that are being developed into ethanol production facilities. The Company will            not capitalize costs to property under development beyond what is recoverable from            operations. Depreciation of property under development will commence once the property            has been determined to be available for its intended use. The assets will be            depreciated over their estimated useful lives.

 

 

 

 

 

 

 

**F-15**

 

69

 

----

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006**

**AND FROM NOVEMBER 29, 2004, DATE OF INCEPTION, TO DECEMBER 31,            2007**

 

| **8.** | **ASSETS UNDER CAPITAL LEASE:** |
|--------|---------------------------------|

 

| **December 31, 2007**      |   | **Cost** |       | **Accumulated****Depreciation** |   | **Net Book****Value** |   |
|----------------------------|--------|----------|------------|---------------------------------|--------|-----------------------|--------|
| Assets under capital lease |   | $        | 22,749,105 |                            | $      | —               |   | $ | 22,749,105 |   |
|                            |        |          |            |                                 |        |                       |        |  |  |  |

 

| **December 31, 2006 (restated – note                            3)** |   | **Cost** |       | **Accumulated****Depreciation** |   | **Net Book****Value** |   |
|----------------------------------------------------------------------------|--------|----------|------------|---------------------------------|--------|-----------------------|--------|
| Assets under capital lease                                                 |   | $        | 16,526,080 |                            | $      | —               |   | $ | 16,526,080 |   |
|                                                                            |        |          |            |                                 |        |                       |        |  |  |  |

 

Assets under capital lease consist of land and buildings located in            Barrie, Ontario to be developed for ethanol-producing operations. Management determined            that the fair value of the land at the Barrie site was less than 25% of the fair value            of the leased property at the inception of the lease and, therefore, considered the            land and building as a single unit for purposes of determining whether the lease should            be classified as a capital lease in accordance with SFAS No. 13. Management concluded            that the present value of the minimum lease payments, excluding any executory costs to            be paid by the lessor, equals or exceeded 90% of the fair value of the leased property.            The Company used its incremental borrowing rate of 12% to measure the present value of            the minimum lease payments.

 

The buildings under capital lease at the Barrie site cannot currently be            used to carry out the business of the Company without extensive renovation and            construction activities. As such, management considers that the assets are not            available for their intended use. Specifically, management expects to make substantial            renovations to portions of the existing building to provide the space needed to            construct an ethanol processing facility. The portion of the building that will            eventually serve as the administrative offices requires extensive renovation in order            to bring it up to standard for occupation.

 

Management’s initial examination of the infrastructure items has            indicated that substantial additional expenditures will be required to ensure that rail            lines are serviceable, and in correct locations, and that the gas and water lines can            be expanded to provide the required capacity for the plant operations. Before            commencing demolition and construction activities, the Company will use the findings of            an engineering study that will be performed, with detailed recommendations on the            usefulness of individual assets.

             

During the year ended December 31, 2007, the Company capitalized            interest costs of $2,111,208 (2006- $321,979), lessor’s operating cost charges of            $576,855 (2006 - $87,595) and property tax of $412,039 (2006 - $62,568) to the cost of            the assets under capital lease at the Barrie property that is being developed into an            ethanol production facility. The Company will not capitalize costs to assets under            capital leases beyond what is recoverable from operations. Depreciation of capital            assets will commence once they are determined to be available for their intended use.            The assets will be depreciated over the lesser of their estimated useful lives or the            remaining lease term.

 

 

**F-16**

 

70

 

----

             

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006**

**AND FROM NOVEMBER 29, 2004, DATE OF INCEPTION, TO DECEMBER 31,            2007**

             

| **9.** | **DEFERRED FINANCING COSTS:** |
|--------|-------------------------------|

 

|                                                                                     |   |   |   | **December 31, 2007** |   |   |    | **December 31, 2006** |   |
|------------------------------------------------------------------------------------------|--------|--------|--------|-----------------------|--------|--------|---------|-----------------------|--------|
|                                                                                     |   |   |   |                  |   |   |    |                  |   |   |   |   |   |
| Non-refundable retainer deposit paid to WestLB AG (note                            16 c) |   |   |   | $                     |   |   | 200,000 |                  |   |   | $ |   |   | 200,000 |   |
| Deferred financing costs for WestLB AG commitment (note                            16 c) |   |   |   |                  |   |   | 141,883 |                  |   |   |   |   |   | — |   |
|                                                                                     |   |   |   | $                     |   |   | 341,883 |                  |   |   | $ |   |   | 200,000 |   |

             

| **10.** | **BANK INDEBTEDNESS:** |
|---------|------------------------|

 

|                                        |   |   |   | **December 31, 2007** |   |   |    | **December 31, 2006** |   |
|---------------------------------------------|--------|--------|--------|-----------------------|--------|--------|---------|-----------------------|--------|
|                                        |   |   |   |                  |   |   |    |                  |   |   |   |   |   |
| Indebtedness under Line of Credit Agreement |   |   |   | $                     |   |   | 511,579 |                  |   |   | $ |   |   | — |   |
| Indebtedness under corporate credit card    |   |   |   |                  |   |   | 8,255   |                  |   |   |   |   |   | 5,534 |   |
|                                        |   |   |   | $                     |   |   | 519,834 |                  |   |   | $ |   |   | 5,534 |   |

             

On March 30, 2007, the Company entered into a Line of Credit Agreement            with Union Capital Trust, Nassau, Bahamas (“Union”) wherein Union agreed to            provide a $6 million unsecured line of credit. Interest accrues at the rate of 12% per            annum and is payable monthly. Principal and unpaid interest is due on or before March            30, 2008. As at December 31, 2007, principal of $469,192 and interest of $42,387            thereon was outstanding under this line of credit.

 

| **11.** | **RELATED PARTY TRANSACTIONS:** |
|---------|---------------------------------|

 

During the year ended December 31, 2006, the Company repaid $2,000 to            Corsair Advisors, Inc., an entity owned by a stockholder, for advances it had made on            behalf of the Company prior to

December 31, 2005.

             

During the year ended December 31, 2006, the Company utilized the office            space and equipment of a stockholder at no cost, until April 2006 when the Company            entered into a lease for office space, as further discussed in note 14. Also in April            2006, the Company, through a Canadian subsidiary, entered into the Barrie lease for            property to be used as an ethanol processing facility, as further discussed in note 14.            These leases were entered into with Fercan Developments Inc., a company owned by the            same individual that owns Rosten Investments Inc. (“Rosten”). Rosten owns            10,000,000 shares of the Company’s outstanding Common Stock or 9.6%            interest.

             

In September 2006, the Company deposited $200,000 in trust with Aurora            Beverage Corporation (“Aurora”), a company owned by the same individual            that owns Rosten, to hold storage tanks for possible use in ethanol production. This            refundable deposit gave the Company a right of first refusal to purchase the tanks for            a period of 180 days at a price to be negotiated. Following a decision not to utilize            these storage tanks, the Company was refunded this deposit in February 2007.

             

**F-17**

 

71

 

----

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006**

**AND FROM NOVEMBER 29, 2004, DATE OF INCEPTION, TO DECEMBER 31,            2007**

 

| **11.** | **RELATED PARTY TRANSACTIONS                            (continued):** |
|---------|------------------------------------------------------------------------|

             

The trustee of the Union Capital Trust Line of Credit (note 10) is            Ronald Wyles. Ronald Wyles owns 10,000,000 shares of the Company’s outstanding            Common Stock or 9.6% interest.

             

In May 2007, the Company received loan advances of $24,000 from Aurora            and $20,000 from Richard Brezzi that were repaid. Richard Brezzi owns 10,000,000 shares            of the Company’s outstanding Common Stock or 9.6% interest. On July 9, 2007, the            Company entered into a Line of Credit Agreement with Aurora, wherein Aurora agreed to            provide a $1 million unsecured line of credit. Interest accrues at the rate of eight            percent per annum and is payable monthly. Principal and unpaid interest is due on or            before July 8, 2008. Effective December 14, 2007, the Line of Credit Agreement with            Aurora was amended to increase the maximum principal amount of the loan to $2 million.            As at December 31, 2007, a principal amount of $1,055,871 was outstanding under this            line of credit and interest of $24,482 was accrued as an accrued liability. All draws            on the Aurora line of credit are subject to review and approval of the lender, who has            not denied any of our requests to date.

             

During the year ended December 31, 2007, the Company incurred legal fees            and expenses of $102,659 (2006 - $86,324) with Andrew I. Telsey, P.C. for corporate and            securities counsel. Of this amount, $50,468 was included in accounts payable at            December 31, 2007. Andrew I. Telsey, the Company’s Corporate Secretary and one of            its directors, is the sole shareholder of Andrew I. Telsey, P.C.

             

During the year ended December 31, 2007, the Company purchased $2,024            (2006 -$59,202) in furniture and design services from Dragonfly Design Group, a company            owned by the adult daughter of the Company’s Chairman, President and Chief            Executive Officer.

             

| **12.** | **STOCK OPTIONS:** |
|---------|--------------------|

 

On April 4, 2006, the Company approved the 2006 Stock Plan (the            “Plan”) and reserved 8,000,000 shares of common stock for issuance under            the Plan.

             

On April 12, 2006, pursuant to an employment agreement, the Company            granted options to purchase an aggregate of 2,000,000 shares of the Company’s            Common Stock at an exercise price equal to USD $1.00, to its Chief Executive Officer.            The options will vest in equal amounts each quarter over the next two years from the            date of grant. The options expire five years following the date of grant.

 

On April 21, 2006, pursuant to an employment agreement, the Company            granted options to purchase an aggregate of 500,000 shares of the Company’s            Common Stock at an exercise price equal to USD $1.00, to its Chief Financial Officer.            The options were to vest in equal amounts each quarter over the next two years from the            date of grant. The options were to expire five years following the date of grant. These            options were forfeited with the resignation of the Chief Financial Officer on October            31, 2006.

 

             

**F-18**

 

72

 

----

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006**

**AND FROM NOVEMBER 29, 2004, DATE OF INCEPTION, TO DECEMBER 31,            2007**

 

| **12.** | **STOCK OPTIONS (Continued):** |
|---------|--------------------------------|

             

On May 1, 2006 and on June 8, 2006, the Company granted options to            purchase an aggregate of 224,000 shares of the Company’s Common Stock at an            exercise price equal to $1.00, to certain new employees. The options will vest in equal            amounts each quarter over the next two years from the date of grant. The options expire            five years following the date of grant.

             

On July 15, 2006, pursuant to an employment agreement, the Company            granted options to purchase an aggregate of 300,000 shares of the Company’s            Common Stock at an exercise price equal to $1.00, to its Chief Operating Officer. The            options will vest in equal amounts each quarter over the next three years from the date            of grant. The options expire five years following the date of grant.

             

On September 8, 2006, the Company granted options to purchase an            aggregate of 250,000 shares of the Company’s Common Stock at an exercise price            equal to $1.00, to the non-salaried Directors of the Company. The options vested            immediately at the date of grant. The options expire five years following the date of            grant. Also on September 8, 2006, pursuant to a consulting agreement, the Company            granted options to purchase an aggregate of 200,000 shares of the Company’s            Common Stock at an exercise price equal to $1.00, to a Director. The options will vest            at a rate of 50,000 shares in equal amounts each quarter over the first year from the            date of grant, 50,000 shares in equal amounts each quarter over the second year from            the date of grant and 100,000 shares in equal amounts each quarter over the third year            from the date of grant. The options expire five years following the date of            grant.

             

On November 2, 2006, the Company granted options to purchase an            aggregate of 900,000 shares of the Company’s Common Stock at an exercise price            equal to $1.00 to non-employees. The options will vest in equal amounts each quarter            over one year from the date of grant. The options expire five years following the date            of grant.

             

Also on November 2, 2006, the Company granted options to purchase            100,000 shares of the Company’s Common Stock at an exercise price equal to $1.00,            to a non-salaried Director of the Company. The options will vest in equal amounts            annually over the next three years from the date of grant. The options expire five            years following the date of grant.

             

Additionally, on November 2, 2006, pursuant to an employment agreement,            the Company granted options to purchase an aggregate of 90,000 shares of the            Company’s Common Stock at an exercise price equal to $1.00, to its new Chief            Financial Officer. The options will vest in equal amounts each quarter over the next 27            months from the date of grant. Also on November 2, 2006, pursuant to an employment            agreement, the Company granted options to purchase an aggregate of 75,000 shares of the            Company’s Common Stock at an exercise price equal to $1.00, to a new employee.            The options will vest in equal amounts annually over the next three years from the date            of grant. The options expire five years following the date of grant.

             

On June 6, 2007, the Company granted options to purchase an aggregate of            300,000 shares of the Company’s Common Stock at an exercise price equal to $1.00,            to the non-salaried Directors of the Company. The options will vest in equal amounts on            the date of grant and annually over the next two years from the date of grant. The            options expire five years following the date of grant.

             

**F-19**

 

73

 

----

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006**

**AND FROM NOVEMBER 29, 2004, DATE OF INCEPTION, TO DECEMBER 31,            2007**

 

| **12.** | **STOCK OPTIONS (Continued):** |
|---------|--------------------------------|

             

On September 28, 2007, the Company granted options to purchase an            aggregate of 651,000 shares of the Company’s Common Stock at an exercise price            equal to $1.00 to its Chief Financial Officer, Chief Operating Officer and other            employees. The options will expire five years following the date of grant and will vest            annually from the date of grant as follows:

 

|                    |   |   |   | **Total Options** |   |   |   | **Vesting Schedule** |   |
|-------------------------|--------|--------|--------|-------------------|--------|--------|--------|----------------------|--------|
|                    |   |   |   |              |   |   |   | **1st Year**         |   |   |   | **2nd Year** |   |   |   | **3rd Year** |   |
| Chief Financial Officer |   |   |   | 200,000           |   |   |   | 50,000               |   |   |   | 50,000 |   |   |   | 100,000 |   |
| Chief Operating Officer |   |   |   | 150,000           |   |   |   | 40,000               |   |   |   | 40,000 |   |   |   | 70,000 |   |
| Other employees         |   |   |   | 301,000           |   |   |   | 80,000               |   |   |   | 80,000 |   |   |   | 141,000 |   |
|                    |   |   |   | 651,000           |   |   |   | 170,000              |   |   |   | 170,000 |   |   |   | 311,000 |   |

             

A summary of the status of Company’s stock option plan as of            December 31, 2007 and of changes in options outstanding under the Company’s Plan            during the year is as follows:

 

|                                     |   | **Number of Shares** |   |   |   | **Weighted Average Exercise Price** |    |
|------------------------------------------|--------|----------------------|--------|--------|--------|-------------------------------------|---------|
| Outstanding at December 31, 2005         |   | —              |   |   |   |                                |    |   |
| Granted                                  |   | 4,639,000            |   |   |   | $                                   | 1.00    |   |
| Exercised                                |   | —              |   |   |   |                                |    |   |
| Forfeited                                |   | 500,000              |   |   |   |                                | 1.00    |   |
| Outstanding at December 31, 2006         |   | 4,139,000            |   |   |   | $                                   | 1.00    |   |
| Granted                                  |   | 951,000              |   |   |   |                                | 1.00    |   |
| Exercised                                |   | —              |   |   |   |                                | — |   |
| Forfeited                                |   | —              |   |   |   |                                | — |   |
| Outstanding at December 31, 2007         |   | 5,090,000            |   |   |   | $                                   | 1.00    |   |
|                                     |   |                 |   |   |   |                                |    |   |
| Options exercisable at December 31, 2007 |   | 3,512,407            |   |   |   | $                                   | 1.00    |   |
| Non-vested options at December 31, 2007  |   | 1,577,593            |   |   |   | $                                   | 1.00    |   |

 

Stock options outstanding as of December 31, 2007, were as            follows: 

             

|                                                           |   | **Options Outstanding** |      | **Options Exercisable**                                    |   |
|----------------------------------------------------------------|--------|-------------------------|-----------|------------------------------------------------------------|--------|
|  

                             

**Exercise Price** |   | **Number Outstanding**  |      | **Weighted Average Remaining****Contractual Life (years)** |   | **Weighted Average****Exercise****Price** |   | **Number****Exercisable** |   | **Weighted****Average****Exercise****Price** |   |
| $                                                              | $1.00  |                    | 5,090,000 |                                                       | 3.71   |   | $ | 1.00 |   | 3,512,407 |   | $ | 1.00 |   |
|                                                                |        |                         |           |                                                            |        |  |  |  |  |  |  |  |  |  |

             

             

**F-20**

 

74

 

----

             

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006**

**AND FROM NOVEMBER 29, 2004, DATE OF INCEPTION, TO DECEMBER 31,            2007**

             

| **12.** | **STOCK OPTIONS (Continued):** |
|---------|--------------------------------|

             

The fair value of each option granted was estimated on the date of the            grant using the Black-Scholes option pricing model with the following            assumptions:

             

|                                                                                                                 | **December 31, 2007** |   | **December 31, 2006** |   |
|----------------------------------------------------------------------------------------------------------------------|-----------------------|--------|-----------------------|--------|
| Risk-free interest rate                                                                                              | 4.2 to 5.1            | %      | 5.1                   | %      |
| Volatility factor of the future expected market                            priceof the Company’s common shares | 86.6                  | %      | 86.6                  | %      |
| Weighted average expected life in years                                                                              | 5.0                   |   | 5.0                   |   |
| Weighted average forfeiture rate                                                                                     | 2.8                   | %      | 2.8                   | %      |
| Expected dividends                                                                                                   | None                  |   | None                  |   |

             

The fair value of the options granted as determined above was $3,387,382            (2006 - $2,746,874), of which $972,368 was expensed in the year ended December 31,            2007(2006 - $1,668,354). The weighted average fair value per            share for the options granted above was $0.66 (2006 - $0.66).

 

| **13.** | **CAPITAL STOCK:** |
|---------|--------------------|

 

Holders of shares of Common Stock are entitled to cast one vote for each            share held at all stockholders’ meetings for all purposes, including the election            of directors. The Common Stock does not have cumulative voting rights.

             

The preferred stock of the Company shall be issued by the Board of            Directors of the Company in one or more classes or one or more series within any class,            and such classes or series shall have such voting powers, full or limited or no voting            powers, and such designations, preferences, limitations or restrictions as the Board of            Directors of the Company may determine, from time to time.

             

Holders of stock of any class shall not be entitled as a matter of right            to subscribe for or purchase or receive any part of any new or additional issue of            shares of stock of any class, or of securities convertible into shares of stock of any            class, whether now hereafter authorized or whether issued for money, for consideration            other than money, or by way of dividend.

             

During the year ended December 31, 2006, the Company received gross            proceeds of $4,096,500 under the terms of a unit subscription agreement that provided            for the purchase of one share of Common Stock for $1.00 in a private placement. Cost of            issuance related to raising these funds amounted to $250,000. In September 2006, sales            of the units of the Company’s Common Stock under these agreements were completed            and 4,096,500 shares of Common Stock were issued. The Company did not grant            registration rights to these investors.

             

On May 19, 2006, three founding shareholders of the Company, each owning            500,000 shares of the Common Stock of the Company, agreed to surrender a portion of            their stock ownership to the Company for cancellation. In total, 1,150,000 shares were            surrendered. The Company transferred $115 from Common Stock to additional paid-in            capital.

**F-21**

 

75

 

----

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006**

**AND FROM NOVEMBER 29, 2004, DATE OF INCEPTION, TO DECEMBER 31,            2007**

             

| **13.** | **CAPITAL STOCK (continued):** |
|---------|--------------------------------|

             

Effective July 3, 2006, the Company’s shareholders approved an            increase in the authorized capital stock of the Company from 80,000,000 shares of            $0.0001 par value stock to 350,000,000 shares of authorized capital stock, consisting            of 250,000,000 shares of Common Stock having a par value of $0.0001 per share, and            100,000,000 shares of preferred stock, having a par value of $0.0001 per            share.

             

On July 5, 2006, the Company affected a ten-for-one forward stock split            of its Common Stock to holders of record on that date. The number of common shares and            options presented in these consolidated financial statements and notes has been revised            for the ten-for-one stock split, unless otherwise indicated.

             

On September 8, 2006, the three founding shareholders of the Company,            each owning 500,000 shares of the Common Stock of the Company, agreed to surrender the            balance of their stock ownership to the Company for cancellation. In total, 350,000            shares were surrendered. The Company transferred $35 from Common Stock to additional            paid-in capital.

             

| **14.** | **LEASE AGREEMENTS:** |
|---------|-----------------------|

 

On April 20, 2006, the Company entered into a lease agreement through            its wholly owned subsidiary, Northern Ethanol (Barrie) Inc., for a 25-year lease, with            two ten-year optional renewal periods, on an industrial property located in Barrie,            Ontario, Canada (the “Barrie Lease”), on which it intends to construct an            ethanol processing facility.

             

The Company also entered into a five-year lease on April 20, 2006            through its wholly owned subsidiary, Northern Ethanol (Canada) Inc., for office            premises located in Toronto, Ontario, Canada to be used for its head office (the            “Head Office Lease”). The terms of the office lease at the Toronto location            require it to be accounted for as an operating lease.

             

The terms of the leases require the following minimum            payments:

 

|  

**Fiscal Year**                  |   |   | **Barrie Lease** |       |   | **Head Office****Lease** |   |    | **Total** |   |
|------------------------------------------|--------|--------|------------------|------------|--------|--------------------------|--------|---------|-----------|--------|
| 2008                                     |   |   | $                | 2,289,926  |   |                     | $      | 181,580 |      |   | $ | 2,471,506 |   |
| 2009                                     |   |   |             | 2,289,926  |   |                     |   | 181,580 |      |   |   | 2,471,506 |   |
| 2010                                     |   |   |             | 2,289,926  |   |                     |   | 181,580 |      |   |   | 2,471,506 |   |
| 2011                                     |   |   |             | 2,289,926  |   |                     |   | 75,658  |      |   |   | 2,365,584 |   |
| 2012                                     |   |   |             | 2,289,926  |   |                     |   | — |      |   |   | 2,289,926 |   |
| Thereafter                               |   |   |             | 48,354,099 |   |                     |   | — |      |   |   | 48,354,099 |   |
| Total minimum lease payments             |   |   | $                | 59,803,729 |   |                     | $      | 620,398 |      |   | $ | 60,424,127 |   |
| Less amount representing interest of 12% |   |   |             | 40,963,031 |   |                     |   |    |      |   |   |   |   |
|                                     |   |   |             | 18,840,698 |   |                     |   |    |      |   |   |   |   |
| Less current portion                     |   |   |             | 31,951     |   |                     |   |    |      |   |   |   |   |
|                                     |   |   | $                | 18,808,747 |   |                     |   |    |      |   |   |   |   |

**F-22**

 

76

 

----

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006**

**AND FROM NOVEMBER 29, 2004, DATE OF INCEPTION, TO DECEMBER 31,            2007**

             

| **14.** | **LEASE AGREEMENTS (continued):** |
|---------|-----------------------------------|

 

The Barrie Lease payments are due on a monthly basis starting in            November 2006. Upon commissioning of the ethanol facility at the Barrie location, the            carrying value of the assets under capital lease will be amortized on a straight-line            basis over the period remaining in the 25-year term. The interest cost implicit in the            capital lease obligation is recognized at the 12% rate implicit in the lease, and is            calculated on a monthly basis on the balance outstanding at each month end. Since the            lease payments are in Canadian dollars, the actual amortization and interest cost            reflected in the account will vary as the exchange rate changes.

             

The Barrie Lease provides for two renewal periods of ten years under the            same terms and conditions, at the market rates for similar properties in the area at            the time of renewal. The lease requires total payments of C$59,283,437 ($59,803,729)            over the remaining term of the lease, of which C$40,606,653 ($40,963,031) is interest            and C$18,676,784 ($18,840,698) is the repayment of the capital lease amount. The            capital lease principal will be paid down by C$31,673 ($31,951) as a result of monthly            lease payments that will be made over the next year.

             

Effective January 24, 2007, under agreement with the lessor, the monthly            lease payments under the Barrie Lease were deferred until the completion of an            engineering study to determine the extent of the renovation of the buildings on the            leased property. This study and any amendment to the lease are expected to be completed            in 2008.

             

| **15.** | **INCOME TAXES:** |
|---------|-------------------|

 

The tax effect of temporary differences that give rise to significant            portions of deferred tax assets and liabilities as at December 31 are as            follows:

 

|                                     |   |   |   | **2007** |       |   |   | **2006** |   |
|------------------------------------------|--------|--------|--------|----------|------------|--------|--------|----------|--------|
| Deferred tax assets:                     |   |   |   |     |       |   |   |     |   | (as restated –note3) |   |
| Obligation under capital lease           |   |   |   | $        | 6,783,000  |   |   |     | $      | 5,778,000 |   |
| Start-up costs – United States     |   |   |   |     | 186,000    |   |   |     |   | 116,000 |   |
| Non-capital loss – Canada          |   |   |   |     | 2,885,000  |   |   |     |   | 710,000 |   |
|                                     |   |   |   |     | 9,854,000  |   |   |     |   | 6,604,000 |   |
| Deferred tax liabilities:                |   |   |   |     |       |   |   |     |   |   |   |
| Property under development and equipment |   |   |   |     | (426,000   | )      |   |     |   | (76,000 | ) |
| Assets under capital lease               |   |   |   |     | (8,190,000 | )      |   |     |   | (5,949,000 | ) |
|                                     |   |   |   |     | (8,616,000 | )      |   |     |   | (6,025,000 | ) |
|                                     |   |   |   |     |       |   |   |     |   |   |   |
|                                     |   |   |   |     | 1,238,000  |   |   |     |   | 579,000 |   |
| Less: valuation allowance                |   |   |   |     | (1,238,000 | )      |   |     |   | (579,000 | ) |
| Net deferred tax asset                   |   |   |   | $        | —    |   |   |     | $      | — |   |
|                                          |        |        |        |          |            |        |        |          |        |  |  |  |

 

 

**F-23**

 

77

 

----

**NORTHERNETHANOL,INC.**

*(A DEVELOPMENT STAGE COMPANY)*

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006**

**AND FROM NOVEMBER 29, 2004, DATE OF INCEPTION, TO DECEMBER 31,            2007**

 

| **15.** | **INCOME TAXES (continued):** |
|---------|-------------------------------|

 

The            Company has available Canadian non-capital loss carryforwards of approximately            C$7,945,000 ($8,015,000). These losses expire in 2026 C$2,299,000 ($2,319,000) and in            2027 C$5,646,000 ($5,696,000).

             

| **16.** | **COMMITMENTS:** |
|---------|------------------|

 

|   | a) | Effective July 24, 2006, the Company entered into a                            five-year Project Development Agreement with Delta-T Corporation,                            Williamsburg, Virginia (“Delta”), wherein Delta agreed to                            provide professional advice, business and technical information, design                            and engineering and related services to assist in assembling all of the                            information, permits, agreements and resources necessary for the                            construction of an ethanol plant having a production capacity of 108                            million gallons per year in Barrie, Ontario, Canada. Delta was paid                            $100,000 in advance for their future services and the non-refundable                            amount was capitalized to property under development. In September                            2006, the Company entered into a similar agreement with Delta relating                            to the construction of an ethanol plant having a production capacity of                            108 million gallons per year in Sarnia, Ontario, Canada. Delta was paid                            an initial amount of $70,000 and that non-refundable amount was                            recorded as a prepaid expense at December 31, 2006 and then                            reclassified and capitalized to property under development on July 30,                            2007 with execution of the Agreement of Purchase and Sale with LANXESS                            Inc. described in note 16 d). The remaining accrued balance of $30,000                            due Delta will be paid upon issuance of an air permit by the Province                            of Ontario. No further amounts are payable under the terms of the Delta                            agreements. The relationship between Delta and the Company is exclusive                            during the five-year term of the Agreement whereby the Company agreed                            to use its best efforts to enter into an engineering procurement and                            construction contract or a technology agreement with Delta at these                            locations and if it fails to do so, to give Delta a first right of                            refusal for 60 days to assume any agreements made with other ethanol                            plant technology vendors. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | b) | On August 18, 2006, the Company entered an Agreement for                            Procurement and Merchandizing Services with Parrish & Heimbecker,                            Ltd. (“P&H”), wherein P&H shall provide the Company                            with a commodity and currency hedging system in order to protect the                            Company from the risk of currency and raw material price fluctuations.                            In addition, P&H will source all the corn required for the                            operation of the Company’s planned plants in Barrie and Sarnia,                            Ontario at the best possible prices and in a pattern that meets the                            plants’ processing requirements. P&H will also manage the                            sale of the Company’s dried distiller grain by-product. The                            Company will pay P&H C$1.00 per metric tonne of corn procured and                            C$1.00 per metric tonne of dried distiller grain sold for its Barrie                            and Sarnia operations. There are no minimum purchase quantities to                            P&H. The term of the Agreement is five years. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

 

 

 

**F-24**

 

78

 

----

 

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006**

**AND FROM NOVEMBER 29, 2004, DATE OF INCEPTION, TO DECEMBER 31,            2007**

             

| **16.** | **COMMITMENTS (continued):** |
|---------|------------------------------|

 

|   | c) | Effective December 13, 2006, the Company executed an                            engagement letter and indicative term sheets with WestLB AG                            (“WestLB”), whereby WestLB has conditionally agreed to                            provide arrangement, placement and underwriting serviceson senior debt and subordinate debt financing for up to                            75% of the construction costs (to a maximum of approximately $365                            million) of the Company’s Barrie and Sarnia facilities on a                            “best efforts” basis. The term “best efforts”                            means that WestLB believes that they can syndicate the debt financing                            the Company requires but that there is no guarantee that they will be                            successful or that the terms will be as indicated in their term sheets                            until they market the transaction and receive firm commitments from a                            syndicate of lenders for the funds required on acceptable terms to the                            Company. Among other things, the provision of the 75% financing in                            accordance with the engagement letter and the indicative term                            sheetsis conditional on the Company obtaining                            subordinate debt or equity investment for the remaining 25% of                            construction costs.

                             

The WestLB indicative term sheets offer first priority                            senior secured construction and term financing for up to 60% of the                            total capital requirements of plant construction and for working                            capital for a total term of up to 7.5 years and subordinated secured                            construction and term financing for up to 15% of the total capital                            requirements of plant construction for a total term of up to eight                            years. Following conversion of the senior construction loan to a senior                            term loan, the loan amount is to be repaid in equal quarterly                            installments over six years. Surplus cash as defined by debt service                            covenant is to be swept to accelerate the repayment of the senior term                            loan and to repay the subordinated term loan.

                             

The Company paid a non-refundable retainer deposit of                            $200,000 to WestLB on execution of the engagement letter and indicative                            term sheets to be used towards West LB’s costs and expenses in                            connection with financing. The Company will also pay WestLB’s                            costs and expenses in connection with the financing. During the year                            ended December 31, 2007, the Company incurred an additional $141,883                            towards West LB’s costs and expenses. This payment has been                            recorded as a deferred financing cost at December 31, 2007. In the                            event that WestLB engagement is terminated by the Company and it enters                            into a similar debt financing with another lender within 12 months of                            terminating WestLB, the Company will pay WestLB a termination fee of                            $10,000,000. If the financing contemplated in the engagement letter and                            indicative term sheets is finalized with WestLB, the Company will pay                            to WestLB a structuring and arrangement fee of the greater of                            $5,000,000 or 2% of the principal amount of the senior financing and                            $5,000,000 or 5% of the principal amount of the subordinated financing.                            In addition, the Company will pay a fee to market the senior and                            subordinate loans of 1% of the principal amount of each. The interest                            rate on the senior financing will be at LIBOR plus an anticipated                            spread of 325 to 350 basis points. Until the senior loan has been fully                            drawn, the Company shall pay a commitment fee of 0.50% on the                            unutilized portion. The interest rate on the subordinate financing will                            be at LIBOR plus an anticipated spread of 1000 basis points. As the                            subordinate financing will be fully drawn on closing there will be no                            commitment fees applicable on that facility. Other covenants,                            representations and warranties will form part of the final                            documentation on closing of the loan agreement. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

**F-25**

 

79

 

----

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006**

**AND FROM NOVEMBER 29, 2004, DATE OF INCEPTION, TO DECEMBER 31,            2007**

             

| **16.** | **COMMITMENTS (continued):** |
|---------|------------------------------|

 

|   | d)     | On July 30, 2007, the Company entered into an Agreement                            of Purchase and Sale with LANXESS Inc. (“LANXESS”), wherein                            LANXESS agreed to sell approximately 30 acres of land located in                            Sarnia, Ontario to the Company for C$450,000 ($453,949) by June 30,                            2008, at the latest. The Agreement is conditional upon the                            Company’s satisfaction with its physical inspection of the land,                            zoning and permitting, the Company entering into an Engineering,                            Procurement and Construction contract for the construction of an                            ethanol plant, the Company obtaining financing for the land purchase                            and plant construction and the Company and LANXESS entering into an                            agreement with TransAlta Energy Corporation (“TransAlta”)                            in respect of relief for LANXESS’s obligations under its steam                            supply contract with TransAlta. If the Company’s closing                            conditions are waived, in addition to the payment of the land purchase                            price of C$450,000 ($453,949), it will pay LANXESS an amount of                            C$100,000 ($100,878) immediately, C$325,000 ($327,852) when the                            construction of the ethanol plant begins and C$325,000 ($327,852) when                            the ethanol plant commences operation for a total of C$750,000                            ($756,582) as compensation for LANXESS’s costs to re-engineer                            existing infrastructure presently located on the land. If after closing                            of the purchase, the Company has not commenced construction of the                            ethanol plant under an Engineering, Procurement and Construction                            contract by December 31, 2008, LANXESS has the option to reacquire the                            land for C$450,000 ($453,949). The Company paid a refundable                            interest-bearing deposit amount of C$10,000 ($10,088) on execution of                            the Agreement. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | e)     | On                            December 18, 2007 and as amended on March 14, 2008, the Company entered                            into a Purchase and Sale Agreement with Praxair Inc.                            (“Praxair”), to acquire approximately 70 acres of land                            located in Niagara Falls, NY. The cost of this property is $5,000,010,                            payable as follows: (i) a refundable payment of $10 on execution of the                            Agreement; (ii) $100,000 to be paid no later than 150 days after the                            date of the Agreement, or within 3 days after receipt of a fully                            executed Brownfield Site Cleanup Agreement between the Company and the                            Commission of the New York State Department of Environmental                            Conservation, if such receipt occurs sooner; (iii) $3,000,000 on                            closing, which is to take place on or before August 29, 2008, unless                            the closing date is extended in the event various conditions are not                            satisfied by Praxair by said date; and (iv) the balance of $1,900,000                            pursuant to a secured promissory note, secured by the property,                            accruing interest at the rate of 7% per annum and due on June 1, 2010.                            The Agreement is conditional upon the Company’s satisfaction with                            its physical inspection of the land, the environmental test data                            necessary to qualify for the New York State Brownfield Cleanup Program                            Governmental Incentive Program, the zoning and permitting for use as an                            ethanol production facility and the Company obtaining financing for the                            land purchase and plant construction. If the Company terminates the                            Agreement due to failure to have these conditions satisfied then it                            will receive a refund of its deposits together with any interest                            thereon.                                                                                                                                   |

 

 

 

 

 

**F-26**

 

80

 

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**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006**

**AND FROM NOVEMBER 29, 2004, DATE OF INCEPTION, TO DECEMBER 31,            2007**

 

| **17.** | **CONTINGENCY:**

                              |
|---------|------------------------------------------------------|
|    |                                                 | On December 21, 2007, the Company received a Notice of                            Application (“Application”) between North American (Park                            Place) Corporation (“Applicant”) and Fercan Developments                            Inc., Northern Ethanol (Barrie) Inc., Northern Ethanol (Canada) Inc.                            and the City of Barrie (“Respondents”), applying for a                            declaration that the zoning of the property at 1 Big Bay Point Road,                            Barrie, Ontario does not permit the property to be used as an ethanol                            production plant, for a permanent injunction prohibiting the property                            from being used as an ethanol production plant and for the costs of the                            Application to be paid by the Respondents. The Application was                            originally scheduled to be heard before a judge of the Ontario Superior                            Court of Justice on March 4, 2008, but has been postponed and no new                            court date has been set.

                             

The Company believes that the current zoning for the                            property does permit the production of ethanol and the possibility of                            the Applicant’s claim being successful is remote. The Company                            intends to vigorously pursue its defense. |

 

| **18.** | **SUBSEQUENT EVENTS:** |
|---------|------------------------|

 

|   | a)     | On March 7, 2008, the Company entered into an amendment                            to the Aurora Line of Credit dated July 9, 2007 and as amended on                            December 14, 2007, wherein as a result of a reorganization, the lender                            was changed to LDR Properties Inc. (“LDR”), the line of                            credit was increased from $2,000,000 to $8,000,000 and the due date for                            this line of credit was amended from

July 8, 2008, to July 8, 2009.

                             

The balance of the terms of the initial Line of Credit                            Agreement remains as originally stated. As of December 31, 2007, the                            Company had drawn down an aggregate of $1,055,871 on this line of                            credit. All draws on the LDR line of credit are subject to review and                            approval of the lender, who has not denied any of our requests to                            date.

                             

LDR Properties Inc, an Ontario corporation, is a company                            owned by the same individual that owns Rosten. Rosten owns 10,000,000                            shares of the Company’s outstanding Common Stock.

                             

The LDR line of credit was used to repay Union Capital                            $526,716 at the maturity of that line of credit on March 30,                            2008. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | b)     | On March 12, 2008, the Company entered into a term sheet                            with SK Engineering & Construction Co. Ltd. (“SK                            E&C’) for the development of an engineering, procurement and                            construction (“EPC”) contract for its proposed ethanol                            plant to be located in Sarnia, Ontario, Canada. The term sheet provides                            that SK E&C will deliver an EPC contract price within 51⁄2                            months of the execution of a Phase 2 Project Development Agreement with                            Delta whereby Delta will provide a basic process engineering package to                            allow SK E&C to develop an EPC contact price. If that price is                            acceptable, the Company expects to execute the EPC contract within 30                            days and proceed to close financing and begin construction at the                            Sarnia site within 30 days thereafter. In the event that the Company                            does not execute an EPC contract with SK E&C, it will be required                            to pay a cancellation fee of $300,000.

                                                                                                                                                                                                                                                            |

 

 

**F-27**

 

81

 

----

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006**

**AND FROM NOVEMBER 29, 2004, DATE OF INCEPTION, TO DECEMBER 31,            2007**

 

| **18.** | **SUBSEQUENT EVENTS (continued):** |
|---------|------------------------------------|

 

 

|   | c) | With the execution of the SK E&C term sheet                            described in note 18 b), the Company satisfied a condition of a                            convertible bond financing term sheet (“Bond Term Sheet”)                            dated November 14, 2007 with SinoUp & Rise Ltd., making that Bond                            Term Sheet effective as of March 12, 2008. Under terms of the Bond Term                            Sheet, on condition of West LB successfully completing the arrangement                            of the Company’s senior debt and subordinate debt financing,                            SinoUp & Rise Ltd. agreed to provide the 25% balance of the                            financing (approximately $45 million per facility to a maximum total                            amount of $90 million) required for our Barrie and Sarnia ethanol                            facilities in the form of a 7 year convertible bond, subordinated to                            the West LB senior and subordinated debt financing. During the first                            two years from advance, the convertible bond will not pay interest but                            will instead accrue that interest as principal at an unpaid coupon rate                            of LIBOR plus 10%. Thereafter, the convertible bond will pay interest                            at LIBOR plus 15%, and the principal shall be repaid on a straight line                            basis until maturity. The convertible bond holder shall be able to                            convert the unamortized amount of the bond into the Company’s                            common shares at a debt to share conversion price of $3.00 per share                            after the first two years from advance. For conversion purposes, the                            unamortized amount shall not exceed the original principal amount of                            $90 million. Any conversion resulting in more than 10% equity ownership                            in the Company will result in the convertible bond holder receiving a                            board seat.

                              |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**F-28**

 

82

 

----

| **ITEM 8.** | **CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON                            ACCOUNTING AND FINANCIAL DISCLOSURE** |
|-------------|---------------------------------------------------------------------------------------------------------------------|

 

On July 19, 2006, the firm of Raich Ende Malter & Co. LLP            (“REM”), our independent accountant during the period from November 29,            2004 (inception) through July 19, 2006, was dismissed. Our Board of Directors            authorized this action. REM had audited our financial statements for the fiscal year            ended December 31, 2005, and for the period from November 29, 2004 (inception) to            December 31, 2004, and reviewed our financial statements for the period ended March 31,            2006.

 

In connection with the audits of our financial statements from November            29, 2004 (inception) to December 31, 2004 and for the year ended December 31, 2005 and            during the interim period through July 19, 2006, there were no disagreements with REM            on any matter of accounting principles or practices, financial statement disclosure, or            auditing scope of procedures, which disagreements, if not resolved to the satisfaction            of REM, would have caused them to make reference in connection with its reports to the            subject matter of the disagreements.

             

The audit report of REM on our financial statements from November 29,            2004 (inception) to December 31, 2004 and as of and for the year ended December 31,            2005, did not contain an adverse opinion or disclaimer of opinion, nor was it qualified            or modified as to uncertainty, audit scope, or accounting principles.

             

Effective July 19, 2006, we retained the firm of KPMG LLP as our            auditors. There were no consultations between us and KPMG prior to their            appointment.

 

| **ITEM 8A.** | **CONTROLS AND PROCEDURES** |
|--------------|-----------------------------|

 

**EVALUATIONOFDISCLOSURECONTROLSANDPROCEDURES**

             

Management with the participation of our Chief Executive Officer and            Principal Financial Officer, has evaluated the effectiveness our disclosure controls            and procedures, as such term is defined in Rules 13a- 15(e) and 15d-15(e) under the            Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the            end of the period covered by this Annual Report on Form 10KSB. Based on that            evaluation, our Chief Executive Officer and Principal Financial Officer have concluded            that our disclosure controls and procedures are effective to ensure that information            required to be disclosed by us in reports that we file or submit under the Securities            Exchange Act of 1934 are (i) recorded, processed, summarized and reported within the            time periods specified in the applicable Securities and Exchange Commission rules and            forms, and (ii) accumulated and communicated to our management, including our Chief            Executive Officer and our Principal Financial Officer, as appropriate, to allow timely            decisions regarding required disclosure.

             

In the course of preparing our 2007 financial statements, management has            identified the following weaknesses:

             

|   | **•** | Segregation of Duties– Given our limited staff level, certain duties                            within the accounting and finance department cannot be properly                            segregated resulting in a weakness in the area of segregation of duties                            which could result in a material misstatement in our financial                            statements. This weakness is considered to be a common area of                            deficiencies for many smaller listed companies. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

83

 

----

|   | **•** | Financial Reporting Process– A weakness existed in regard to our financial                            reporting process as it related to accounting for foreign currency                            translations beginning in 2006 that necessitated the restatement of                            results for the year ended December 31, 2006. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

We rely on certain compensating controls, including substantive periodic            review of the financial statements by our Chief Executive Officer and Audit            Committee.

             

Our independent registered accountants have not conducted an audit of            the effectiveness of internal controls over financial reporting as of December 31,            2007.

             

On December 7, 2006, and as amended on December 26, 2006, we filed            reports on Forms 8-K and 8-KA1 to advise that our Form 10-QSB filed on November 21,            2006, consisting of the unaudited interim consolidated balance sheets at September 30,            2006 and December 31, 2005, and the unaudited interim consolidated statements of            operations, stockholders’ equity and cash flows for the three-months and            nine-months period ended September 30, 2006 and 2005 and for the period November 29,            2004 (inception) to September 30, 2006 and the related Management’s Discussion            and Analysis, had been withdrawn and should no longer be relied upon. We were formally            notified via a letter dated November 30, 2006 that KPMG LLP, our independent registered            public accountants, did not complete their review of such interim financial statements            despite the fact that our management believed that such review had been completed.            Further, management wished to consider the possible impact of the SEC’s comment            letter dated November 14, 2006 relating to our registration statement on Form SB-2,            filed on October 12, 2006, regarding various matters pertaining to our aforesaid report            on Form 10-QSB. Our Audit Committee of the Board of Directors has approved such action            and has discussed the matters disclosed in this filing with our independent registered            public accountants. We have discussed the circumstances of the misunderstanding with            our independent registered public accountants and have implemented procedures to ensure            that we will not make such future filings without written sign-off from our independent            registered public accountants.

 

**CHANGESININTERNALCONTROLS**

 

There have been no changes in our internal controls or in other factors            that could significantly affect these controls and procedures during the year ended            December 31, 2007.

 

| **ITEM 8B.** | **OTHER INFORMATION** |
|--------------|-----------------------|

 

None.

 

84

 

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**PART III**

 

| **ITEM 9.** | **DIRECTORS AND EXECUTIVE OFFICERS** |
|-------------|--------------------------------------|

 

Information concerning our directors and officers is incorporated by            reference to our Definitive Proxy Statement on Schedule 14A to be filed with the            Securities and Exchange Commission within 120 days after the end of our fiscal            year.

 

| **ITEM 10.** | **EXECUTIVE COMPENSATION** |
|--------------|----------------------------|

 

Information concerning executive and director compensation is            incorporated by reference to our Definitive Proxy Statement on Schedule 14A to be filed            with the Securities and Exchange Commission within 120 days after the end of our fiscal            year.

 

| **ITEM 11.** | **SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS                            AND** |
|--------------|------------------------------------------------------------------------------------|

|   | **MANAGEMENT AND RELATED STOCKHOLDER                            MATTERS** |
|--------|---------------------------------------------------------------------------|

 

Information concerning security ownership of each person known by us to            own beneficially more than 5% of the outstanding shares of our Common Stock, of each of            our directors and all officers and directors as a group and of our equity compensation            plans is incorporated by reference to our Definitive Proxy Statement on Schedule 14A to            be filed with the Securities and Exchange commission within 120 days after the end of            our fiscal year.

 

| **ITEM 12.** | **CERTAIN RELATIONSHIPS AND RELATED                            TRANSACTIONS** |
|--------------|-------------------------------------------------------------------------------|

 

Information concerning certain relationships and related transactions is            incorporated by reference to our Definitive Proxy Statement on Schedule 14A to be filed            with the Securities and Exchange Commission within 120 days after the end of our fiscal            year.

 

| **ITEM 13.** | **EXHIBITS** |
|--------------|--------------|

 

 

| **EXH.**

**NO.** |  

**DESCRIPTION**                                                                                  |  

**FILEDWITH**                      |  

**DATE**                   |
|-------------------|----------------------------------------------------------------------------------------------------------|--------------------------------------------|------------------------------------|
|              |                                                                                                     |                                       |                               |
| 3.1               | Certificate of Incorporation                                                                             | Form 10-SB12G

Form 10-SB12G/A1            | October 7, 2005

November 10, 2005 |
| 3.2               | Bylaws                                                                                                   | Form 10-SB12G

Form 10-SB12G/A1            | October 7, 2005

November 10, 2005 |
| 3.3               | Certificate of Amendment to Certificate of Incorporation                            dated August 2, 2006 | Form SB-2 Registration Statement           | October 12, 2006                   |
|              |                                                                                                     |                                       |                               |
| 4.1               | 2006 Stock Plan                                                                                          | Form S-8 Registration Statement            | October 5, 2006                    |
|              |                                                                                                     |                                       |                               |
| 10.1              | Lease dated April 20, 2006 for proposed Barrie                            facility                       | Form 10-QSB – Quarter Ended 03/31/06 | May 24, 2006                       |
| 10.2              | Lease dated April 11, 2006 for Toronto                            offices                                | Form 10-QSB – Quarter Ended 03/31/06 | May 24, 2006                       |
|              |                                                                                                     |                                       |                               |

 

 

85

 

----

 

|   |                                                                                                                                                                             |                                       |                                                                                   |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------|----------------------------------------------------------------------------------------|
| 10.3   | Employment Agreement of Gordon Laschinger dated April                            12, 2006                                                                                        | Form 10-QSB – Quarter Ended 03/31/06 | May 24, 2006                                                                           |
| 10.5   | Employment Agreement of Steven Reader dated July 17,                            2006r                                                                                            | Form 8-K – Event Dated 07/17/06      | August 7, 2006                                                                         |
| 10.6   | Project Development Agreement with Delta-T Corporation,                            Williamsburg, Virginia dated July 27, 2006                                                    | Form SB-2 Registration Statement           | October 12, 2006                                                                       |
| 10.7   | Project Development Agreement with Delta-T Corporation,                            Williamsburg, Virginia dated September 7, 2006                                                | Form SB-2 Registration Statement           | October 12, 2006                                                                       |
| 10.8   | Agreement with Parrish & Heimbecker, Limited dated                            August 18, 2006t                                                                               | Form SB-2 Registration Statement           | October 12, 2006                                                                       |
| 10.9   | Employment Agreement of Richard Smith dated December 13,                            2006                                                                                         | Form SB-2/A1 Registration Statement        | January 19, 2007                                                                       |
| 10.10  | Line of Credit Agreement with Union Capital                            Trust                                                                                                     | Form 10-KSB – Year Ended 12/31/06    | April 27, 2007                                                                         |
| 10.11  | Letter of Intent with Quad County Corn Processors                            Cooperative dated March 27, 2007                                                                    | Form 10-KSB – Year Ended 12/31/06    | April 27, 2007                                                                         |
| 10.12  | Engagement Letter with West LB AG dated December 5,                            2006                                                                                              | Form SB-2/A2 Registration Statement        | May 4, 2007                                                                            |
| 10.13  | Fee Letter with West LB AG dated December 5,                            2006                                                                                                     | Form SB-2/A2 Registration Statement        | May 4, 2007                                                                            |
| 10.14  | Term Sheet with Aker Kvaerner Songer Canada Ltd. dated                            March 9, 2007                                                                                  | Form SB-2/A2 Registration Statement        | May 4, 2007                                                                            |
| 10.15  | Line of Credit Agreement with Aurora Beverage                            Corporation dated July 9, 2007                                                                          | Form 8-K – Event Dated 07/09/07      | July 23, 2007                                                                          |
| 10.16  | Agreement of Purchase and Sale with Lanxess, Inc. Dated                            July 23, 2007                                                                                 | Form 8-K – Event Dated 07/23/07      | August 17, 2007                                                                        |
| 10.17  | Purchase and Sale Agreement With Praxair, Inc. dated                            December 18, 2007                                                                                | Form 8-K – Event Dated 12/18/07      | January 4, 2008                                                                        |
| 10.18  | First Amendment to Line of Credit Agreement with Aurora                            Beverage Corporation dated January 23, 2008                                                   | Form 8-K – Event Dated 01/25/08      | January 31, 2008                                                                       |
| 10.19  | Second Amendment to Line of Credit

Agreement with LDR Properties, Inc.

(f/k/a Aurora Beverage Corporation) dated March 7,                            2008                      | Form 8-K – Event Dated 03/07/08      | March 10, 2008                                                                         |
| 10.20  | Engineering, Procurement and Construction Term Sheet                            with SK Engineering & Construction Co., Ltd. dated March 12,                            2008 | Form 8-K – Event Dated 03/12/08      | March 25, 2008                                                                         |
| 10.21  | Convertible Bond Term Sheet with SinoUp & Rise Ltd.                            Dated November 14, 2007                                                                       | Form 8-K – Event Dated 03/12/08      | March 25, 2008

                             

                              |
|   |                                                                                                                                                                             |                                       |                                                                                   |
| 21.1   | List of Subsidiaries                                                                                                                                                             | Form SB-2 Registration Statement           | October 12, 2006                                                                       |
|   |                                                                                                                                                                             |                                       |                                                                                   |

 

 

86

 

----

 

|   |                                                                                                                          |           |   |
|--------|-------------------------------------------------------------------------------------------------------------------------------|----------------|--------|
| 31.1   | Certification of Chief Executive Officer Pursuant to                            Section 302 of the Sarbanes-Oxley Act of 2002 | Filed Herewith |   |
| 31.2   | Certification of Chief Financial Officer Pursuant to                            Section 302 of the Sarbanes-Oxley Act of 2002 | Filed Herewith |   |
| 32.1   | Certificate of Chief Executive Officer Pursuant to                            Section 906 of the Sarbanes-Oxley Act of 2002   | Filed Herewith |   |
| 32.2   | Certification of Chief Financial Officer Pursuant to                            Section 906 of the Sarbanes-Oxley Act of 2002 | Filed Herewith |   |

 

| **ITEM 14.** | **PRINCIPALACCOUNTANTFEESANDSERVICES** |
|--------------|----------------------------------------|

 

Information concerning principal accountant fees and services is            incorporated by reference to our Definitive Proxy Statement on Schedule 14A to be filed            with the Securities and Exchange Commission within 120 days after the end of our fiscal            year.

 

87

 

----

**SIGNATURES**

 

In accordance with Section 13 or 15(d) of the Securities Exchange Act of            1934, the Company caused this Report to be signed on its behalf by the undersigned,            thereunto duly authorized, on April 16, 2008.

 

|   | **NORTHERN ETHANOL, INC.**

(Registrant)

                             

                             

By: __s/Gordon                            Laschinger_____________

Gordon Laschinger

Chief Executive Officer & President |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

In accordance with the Exchange Act, this Report has been signed below            by the following persons on behalf of the registrant and in the capacities indicated on            April 16, 2008.

 

|  

                             

s/Gordon                            Laschinger___________________

Gordon Laschinger, Director |   |
|--------------------------------------------------------------------------------------------------------------------------------------------|--------|
|  

                             

s/Andrew I.                            Telsey_____________________

Andrew I. Telsey, Director |   |
|  

                             

s/Andrew M.                            Gertler___________________

Andrew M. Gertler, Director |   |
|  

                             

s/Robert                            Richards_____________________

Robert Richards, Director   |   |
|  

                             

s/Paul T.                            Durst_______________________

Paul T. Durst, Director     |   |
|  

                             

s/Frank F.                            Klees______________________

Frank F. Klees, Director    |   |

 

 

88