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

**WASHINGTON, D.C. 20549**

 

**FORM 10-QSB**

 

Quarterly Report Under

the            Securities Exchange Act of 1934

 

For            Quarter Ended: June 30, 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 August 29, 2007, 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

 

----

**PART I.**

 

**ITEM            1. FINANCIAL STATEMENTS**

 

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

 

**INDEX TO UNAUDITED CONSOLIDATED INTERIM****FINANCIAL STATEMENTS**

 

             

|                                                                                       | **Page**    |
|--------------------------------------------------------------------------------------------|-------------|
|                                                                                       |        |
| Consolidated Balance Sheets                                                                | F-1         |
| Consolidated Statements of Operations                                                      | F-2         |
| Consolidated Statement of Changes in Stockholders’                            Equity | F-3         |
| Consolidated Statements of Cash Flows                                                      | F-4         |
| Notes to Consolidated Interim Financial                            Statements              | F-5 to F-21 |

             

             

             

             

 

 

 

 

 

 

 

 

 

 

 

2

 

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**Northern Ethanol, Inc.**

*(A            DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

**Consolidated Balance Sheets**

             

| As at:                                                                                                                                   |    | June 30, 2007 |       |   |   | December 31, 2006 |   |
|------------------------------------------------------------------------------------------------------------------------------------------|---------|---------------|------------|--------|--------|-------------------|--------|
|                                                                                                                                     |    | (Unaudited)   |       |   |   |              |   |
| ASSETS                                                                                                                                   |    |          |       |   |   |              |   |   |   |
| CURRENT ASSETS:                                                                                                                          |    |          |       |   |   |              |   |   |   |
| Cash and cash equivalents                                                                                                                |    | $             | 2,758      |   |   |              | $      | 567,249 |   |
| Accounts receivable (note 3)                                                                                                             |    |          | 174,162    |   |   |              |   | 112,636 |   |
| Deposits (note 4)                                                                                                                        | 202,056 | 402,308       |
| Prepaid expenses (note 5)                                                                                                                | 627,465 | 480,886       |
| Total current assets                                                                                                                     |    |          | 1,006,441  |   |   |              |   | 1,563,079 |   |
|                                                                                                                                     |    |          |       |   |   |              |   |   |   |
| Property under development and equipment (note                            6)                                                             |    |          | 1,246,869  |   |   |              |   | 438,467 |   |
| Assets under capital lease (notes 7 and 9)                                                                                               |    |          | 18,719,139 |   |   |              |   | 17,233,707 |   |
| Other assets                                                                                                                             |    |          | 5,506      |   |   |              |   | 5,506 |   |
|                                                                                                                                     |    | $             | 20,977,955 |   |   |              | $      | 19,240,759 |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                               |    |          |       |   |   |              |   |   |   |
| CURRENT LIABILITIES:                                                                                                                     |    |          |       |   |   |              |   |   |   |
| Bank indebtedness (note 8)                                                                                                               |    | $             | 476,309    |   |   |              | $      | 5,534 |   |
| Accounts payable                                                                                                                         |    |          | 2,649,291  |   |   |              |   | 117,371 |   |
| Accrued liabilities                                                                                                                      |    |          | 152,298    |   |   |              |   | 125,000 |   |
| Due to related party (notes 9 and 15 a))                                                                                                 |    |          | 98,000     |   |   |              |   | — |   |
| Current portion of obligation under capital lease (note                            12)                                                   |    |          | 28,005     |   |   |              |   | 18,993 |   |
| Total current liabilities                                                                                                                |    |          | 3,403,903  |   |   |              |   | 266,898 |   |
|                                                                                                                                     |    |          |       |   |   |              |   |   |   |
| Obligation under capital lease (note 12)                                                                                                 |    |          | 17,515,882 |   |   |              |   | 16,031,367 |   |
|                                                                                                                                     |    |          | 20,919,785 |   |   |              |   | 16,298,265 |   |
| STOCKHOLDERS’ EQUITY:                                                                                                              |    |          |       |   |   |              |   |   |   |
| Preferred stock, $.0001 par value; 100,000,000 shares                            authorized; none issued and outstanding (note 11)       |    |          | —    |   |   |              |   | — |   |
| Common stock, $.0001 par value; 250,000,000 shares                            authorized;                                                |    |          |       |   |   |              |   |   |   |
| (104,096,500 shares issued and outstanding as of June                            30, 2007 and December 31, 2006, respectively (note 11)) |    |          | 10,410     |   |   |              |   | 10,410 |   |
| Additional paid-in capital                                                                                                               |    |          | 6,258,350  |   |   |              |   | 5,554,459 |   |
| Deficit accumulated during the development                            stage                                                              |    |          | (5,340,348 | )      |   |              |   | (3,276,873 | ) |
| Accumulated other comprehensive income                                                                                                   |    |          | (870,242   | )      |   |              |   | 654,498 |   |
|                                                                                                                                     |    |          | 58,170     |   |   |              |   | 2,942,494 |   |
| Going concern (note 2 a))                                                                                                                |    |          |       |   |   |              |   |   |   |
| Commitments (note 14)                                                                                                                    |    |          |       |   |   |              |   |   |   |
|                                                                                                                                     |    | $             | 20,977,955 |   |   |              | $      | 19,240,759 |   |

 

See            accompanying notes to unaudited consolidated interim financial statements

 

**F-1**

 

3

 

----

 

**Northern Ethanol, Inc.**

*(A            DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

**Consolidated Statements of Operations**

**(Unaudited)**

             

|                                      |   |  

**Three months ended**

**June 30**             |   | **Six months ended**

**June 30** |                                                    | **Nov 29, 2004****(Inception) to****June 30** |   |
|-------------------------------------------|--------|---------------------------------------------------------|--------|-----------------------------------|---------------------------------------------------------|-----------------------------------------------|--------|
|                                      |   | **2007**                                                |   |                              | **2006**                                                |                                          |   | **2007** |   |   | **2006** |   |   | **2007** |   |
|                                      |   |                                                    |   |                              |                                                    |                                          |   |   |   |   |   |   |   |   |   |
| REVENUES                                  | $      | —                                                 |   | $                                 | —                                                 |                                          | $      | — |   | $ | — |   | $ | — |   |
|                                      |   |                                                    |   |                              |                                                    |                                          |   |   |   |   |   |   |   |   |   |
| COST OF GOODS SOLD                        |   | —                                                 |   |                              | —                                                 |                                          |   | — |   |   | — |   |   | — |   |
|                                      |   |                                                    |   |                              |                                                    |                                          |   |   |   |   |   |   |   |   |   |
| GROSS MARGIN                              |   | —                                                 |   |                              | —                                                 |                                          |   | — |   |   | — |   |   | — |   |
|                                      |   |                                                    |   |                              |                                                    |                                          |   |   |   |   |   |   |   |   |   |
| OPERATING EXPENSES                        |   |                                                    |   |                              |                                                    |                                          |   |   |   |   |   |   |   |   |   |
| Salaries and benefits (note 10)           |   | 659,885                                                 |   |                              | 755,352                                                 |                                          |   | 1,320,182 |   |   | 755,352 |   |   | 3,473,524 |   |
| General and administrative                |   | 353,101                                                 |   |                              | 152,410                                                 |                                          |   | 625,895 |   |   | 161,858 |   |   | 1,627,719 |   |
| Occupancy costs                           |   | 44,965                                                  |   |                              | 13,905                                                  |                                          |   | 85,471 |   |   | 13,905 |   |   | 185,115 |   |
| Depreciation                              |   | 9,861                                                   |   |                              | 5,287                                                   |                                          |   | 19,200 |   |   | 5,287 |   |   | 41,263 |   |
| Interest                                  |   | 12,727                                                  |   |                              | —                                                 |                                          |   | 12,727 |   |   | — |   |   | 12,727 |   |
|                                      |   | 1,080,539                                               |   |                              | 926,954                                                 |                                          |   | 2,063,475 |   |   | 936,402 |   |   | 5,340,348 |   |
|                                      |   |                                                    |   |                              |                                                    |                                          |   |   |   |   |   |   |   |   |   |
| NET LOSS                                  | $      | (1,080,539                                              | )      | $                                 | (926,954                                                | )                                             | $      | (2,063,475 | ) | $ | (936,402 | ) | $ | (5,340,348 | ) |
|                                      |   |                                                    |   |                              |                                                    |                                          |   |   |   |   |   |   |   |   |   |
| BASIC AND DILUTED LOSS PER SHARE          | $      | (0.01                                                   | )      | $                                 | (0.01                                                   | )                                             | $      | (0.02 | ) | $ | (0.01 | ) |   |   |   |
|                                      |   |                                                    |   |                              |                                                    |                                          |   |   |   |   |   |   |   |   |   |
| WEIGHTED AVERAGE COMMONSHARES OUTSTANDING |   |  

                             

104,096,500 |   |                              |  

                             

100,700,000 |                                          |   |  

                             

104,096,500 |   |   | 101,097,790 |   |   |   |   |

 

 

             

             

             

             

             

             

             

See            accompanying notes to unaudited consolidated interim financial statements

 

**F-2**

 

4

 

----

 

**Northern Ethanol, Inc.**

*(A            DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

**Consolidated Statement of Stockholders’ Equity and            Comprehensive Income**

**(Unaudited)**

Six            Months ended June 30, 2007 and June 30, 2006

 

|                                                                       |   | **Common Stock** |   |   |   |       |          |    |   |                                 |   |      |   |                       |   |   |          |                                                |   |
|----------------------------------------------------------------------------|--------|------------------|--------|--------|--------|------------|---------------|---------|--------|--------------------------------------|--------|-----------|--------|----------------------------|--------|--------|---------------|-----------------------------------------------------|--------|
|                                                                       |   | **Shares**       |   |   |   | **Amount** |          |    |   | **Additional****Paid-In****Capital** |   |      |   | **Accumulated****Deficit** |   |   |          | **Accumulated****Other****Comprehensive****Income** |   |   |   | **Total** |   |
|                                                                       |   |             |   |   |   |       |          |    |   |                                 |   |      |   |                       |   |   |          |                                                |   |   |   |   |   |   |   |   |   |   |
| Balances, December 31, 2005                                                |   | 101,500,000      |   |   |   | $          | 10,150        |    |   |                                 | $      | 39,865    |   |                       |   | $      | (31,473       | )                                              |   |   | $ | — |   |   |   | $ | 18,542 |   |
| Shares cancelled                                                           |   | (800,000    | )      |   |   |       | (80           | )  |   |                                 |   | 80   |   |                       |   |   | —  |                                                |   |   |   | —  |   |   |   |   | —  |   |
| Stock-based compensation                                                   |   | —     |   |   |   |       | —  |    |   |                                 |   | 657,379   |   |                       |   |   | —  |                                                |   |   |   | —  |   |   |   |   | 657,379 |   |
| Stock issued for cash, net of issuance costs                               |   | —     |   |   |   |       | —  |    |   |                                 |   | 1,500,000 |   |                       |   |   | —  |                                                |   |   |   | —  |   |   |   |   | 1,500,000 |   |
| Cumulative translation adjustment                                          |   | —     |   |   |   |       | —  |    |   |                                 |   | —   |   |                       |   |   | —       |                                                |   |   |   | (4,472 | ) |   |   |   | (4,472 | ) |
| Net loss for the six months ended June 30,                            2006 |   | —          |   |   |   |       | —       |    |   |                                 |   | —   |   |                       |   |   | (936,402      | )                                              |   |   |   | — |   |   |   |   | (936,402 | ) |
| Balances, June 30, 2006                                                    |   | 100,700,000      |   |   |   | $          | 10,070        |    |   |                                 | $      | 2,197,324 |   |                       |   | $      | (967,875      | )                                              |   |   | $ | (4,472 | ) |   |   | $ | 1,235,047 |   |
|                                                                       |   |             |   |   |   |       |          |    |   |                                 |   |      |   |                       |   |   |          |                                                |   |   |   |   |   |   |   |   |   |   |
| Balances, December 31, 2006                                                |   | 104,096,500      |   |   |   | $          | 10,410        |    |   |                                 | $      | 5,554,459 |   |                       |   | $      | (3,276,873)   |                                                |   |   | $ | 654,498 |   |   |   | $ | 2,942,494 |   |
| Stock-based compensation                                                   |   | —          |   |   |   |       | —       |    |   |                                 |   | 703,891   |   |                       |   |   | —       |                                                |   |   |   | — |   |   |   |   | 703,891 |   |
| Cumulative translation adjustment                                          |   | —          |   |   |   |       | —       |    |   |                                 |   | —   |   |                       |   |   | —       |                                                |   |   |   | (1,524,740 | )  |   |   |   | (1,524,740 | )  |
| Net loss for the six months ended June 30,                            2007 |   | —          |   |   |   |       | —       |    |   |                                 |   | —   |   |                       |   |   | (2,063,475    | )                                                   |   |   |   | — |   |   |   |   | (2,063,475 | ) |
| Balances, June 30, 2007                                                    |   | 104,096,500      |   |   |   | $          | 10,410        |    |   |                                 | $      | 6,258,350 |   |                       |   | $      | (5,340,348)   |                                                |   |   | $ | (870,242 | ) |   |   | $ | 58,170 |   |

 

 

See            accompanying notes to unaudited consolidated interim financial statements

             

**F-3**

 

5

 

----

             

**Northern Ethanol, Inc.**

*(A            DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

**Consolidated Statements of Cash Flows**

**(Unaudited)**

 

|                                                                             | **For the three months ended****June 30,**

                              | **For the six months ended****June 30,** | **November 29, 2004 (Inception) to****June 30,**

                              |
|----------------------------------------------------------------------------------|--------------------------------------------------------------------------------|------------------------------------------|--------------------------------------------------------------------------------------|
|                                                                             |                                                                           | **2007**                                 |                                                                                 |   |   | **2006** |   |   |   | **2007** |   |   | **2006** |   |   |   | **2007** |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                            |                                                                           |                                     |                                                                                 |   |   |   |   |   |   |   |   |   |  

                              |   |   |   |   |   |
| Net loss                                                                         | $                                                                              | (1,080,539                               | )                                                                                    | $ | (926,954 | ) |   | $ | (2,063,475 | ) |   | $ | (936,402 | ) |   | $ | (5,340,348 | )  |
| Items not involving cash:                                                        |                                                                           |                                     |                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Depreciation                                                                     |                                                                           | 9,861                                    |                                                                                 |   | 5,287  |   |   |   | 19,200 |   |   |   | 5,287 |   |   |   | 41,263 |   |
| Stock-based compensation                                                         |                                                                           | 318,428                                  |                                                                                 |   | 657,379  |   |   |   | 703,891 |   |   |   | 657,379 |   |   |   | 2,372,245 |   |
| Changes in non-cash working capital balances:                                    |                                                                           |                                     |                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Accounts receivable                                                              |                                                                           | (80,672                                  | )                                                                                    |   | (33,659 | ) |   |   | (61,526 | ) |   |   | (33,659 | )  |   |   | (174,162 | ) |
| Deposits                                                                         |                                                                           | 274                                      |                                                                                 |   | (750,000 | ) |   |   | 200,252 |   |   |   | (750,000 | ) |   |   | (202,056 | )  |
| Prepaid expenses                                                                 |                                                                           | (69,514                                  | )                                                                                    |   | (266,805 | ) |   |   | (146,579 | ) |   |   | (263,680 | ) |   |   | (627,465 | )  |
| Accounts payable                                                                 |                                                                           | 506,930                                  |                                                                                 |   | 72,354  |   |   |   | 1,059,470 |   |   |   | 70,334 |   |   |   | 1,176,841 |   |
| Accrued liabilities                                                              |                                                                           | 60,404                                   |                                                                                 |   | -  |   |   |   | 27,298 |   |   |   | 3,600 |   |   |   | 152,298 |   |
| Other                                                                            |                                                                           | (35,171                                  | )                                                                                    |   | (4,472 | ) |   |   | (42,105 | ) |   |   | (4,472 | ) |   |   | (95,077 | )  |
| Net cash (used in) provided by operating                            activities   |                                                                           | (369,999                                 | )                                                                                    |   | (1,246,890 | ) |   |   | (303,574 | ) |   |   | (1,251,613 | ) |   |   | (2,696,461) |   |
|                                                                             |                                                                           |                                     |                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                            |                                                                           |                                     |                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Bank indebtedness                                                                |                                                                           | 474,424                                  |                                                                                 |   | - |   |   |   | 470,775 |   |   |   | - |   |   |   | 476,309 |   |
| Due to related party                                                             |                                                                           | 98,000                                   |                                                                                 |   | - |   |   |   | 98,000 |   |   |   | - |   |   |   | 98,000 |   |
| Proceeds from issuance of common stock                                           |                                                                           | -                                        |                                                                                 |   | 1,500,000 |   |   |   | - |   |   |   | 1,500,000 |   |   |   | 3,896,515 |   |
| Principal payment of capital lease obligation                                    |                                                                           | -                                        |                                                                                 |   | -  |   |   |   | (2,090 | ) |   |   | -  |   |   |   | (5,825) |   |
| Net cash (used in) provided by financing                            activities   |                                                                           | 572,424                                  |                                                                                 |   | 1,500,000  |   |   |   | 566,685 |   |   |   | 1,500,000  |   |   |   | 4,464,999  |   |
|                                                                             |                                                                           |                                     |                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                            |                                                                           |                                     |                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Additions to property under development and                            equipment |                                                                           | (213,781                                 | )                                                                                    |   | (160,298 | ) |   |   | (827,602 | ) |   |   | (160,298 | ) |   |   | (1,288,132 | )  |
| Assets under capital lease                                                       |                                                                           | -                                        |                                                                                 |   | - |   |   |   | - |   |   |   | - |   |   |   | (472,142 | )  |
| Other assets                                                                     |                                                                           | -                                        |                                                                                 |   | - |   |   |   | - |   |   |   | - |   |   |   | (5,506 | )  |
| Net cash (used in) provided by investing                            activities   |                                                                           | (213,781                                 | )                                                                                    |   | (160,298 | ) |   |   | (827,602 | ) |   |   | (160,298 | ) |   |   | (1,765,780 | )  |
|                                                                             |                                                                           |                                     |                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NET (DECREASE) INCREASE IN CASH AND CASH                            EQUIVALENTS  |                                                                           | (11,356                                  | )                                                                                    |   | 92,812  |   |   |   | (564,491 | ) |   |   | 88,089 |   |   |   | 2,758 |   |
|                                                                             |                                                                           |                                     |                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS:                                                       |                                                                           |                                     |                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Beginning of period                                                              |                                                                           | 14,114                                   |                                                                                 |   | 8,667  |   |   |   | 567,249 |   |   |   | 13,390 |   |   |   | — |   |
| End of period                                                                    | $                                                                              | 2,758                                    |                                                                                 | $ | 101,479  |   |   | $ | 2,758 |   |   | $ | 101,479  |   |   | $ | 2,758 |   |
|                                                                             |                                                                           |                                     |                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| SUPPLEMENTAL CASH FLOW INFORMATION                                               |                                                                           |                                     |                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Assets acquired under capital lease                                              | $                                                                              | 772,556                                  |                                                                                 | $ | 16,761,565 |   |   | $ | 1,485,432 |   |   | $ | 16,761,565 |   |   | $ | 17,236,911 |   |
| Cash paid for income taxes                                                       |                                                                           | -                                        |                                                                                 |   | -  |   |   |   | - |   |   |   | - |   |   |   | 353 |   |
|                                                                                  |                                                                                |                                          |                                                                                      |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

See            accompanying notes to unaudited consolidated interim financial statements

 

**F-4**

 

6

 

----

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL            STATEMENTS**

 

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

             

In July 2006, the holders of a majority of the then issued and            outstanding Common Stock approved an amendment to the Certificate of Incorporation            wherein the Company’s name was changed to “Northern Ethanol, Inc.” to            better reflect its current business plan. Northern Ethanol, Inc. is currently            considered a development stage company.

             

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

 

Interim Financial Statements:

The accompanying interim financial statements of the Company as of June            30, 2007, for the three and six month periods ended June 30, 2007 and 2006 and for the            period from November 29, 2004 (Inception) to June 30, 2007 have been prepared in            accordance with United States accounting principles generally accepted for interim            financial statement presentation and in accordance with the rules and regulations of            the United States Securities and Exchange Commission for small business users.            Accordingly, these interim financial statements do not include all of the information            and footnotes required by accounting principles generally accepted in the United States            of America for annual financial statement presentation. In the opinion of management,            all adjustments necessary for a fair statement of the results of operations and            financial position for the interim period presented have been included. All such            adjustments are of a normal recurring nature. The results of operations for the interim            periods are not necessarily indicative of the results to be expected for a full year.            This financial information should be read in conjunction with the financial statements            and notes included in the Company’s Form 10-KSB for the year ended December 31,            2006.

             

**F-5**

 

7

 

----

             

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL            STATEMENTS**

 

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

             

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 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.

             

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 these 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 depreciated on            a straight-line basis over their estimated useful life of three years.

 

**F-6**

 

8

----

 

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL            STATEMENTS**

 

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

             

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

             

Leasehold improvements are recorded at cost and 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.

 

|   | 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 7 and 12.

 

|   | 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) | 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-7**

 

9

 

----

 **NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL            STATEMENTS**

 

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

 

|   | i) | Foreign currency translation: |
|--------|----|-------------------------------|

 

The functional currency of the Company is United States dollars and the            functional currency of its Canadian subsidiaries is Canadian dollars. 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.

 

|   | j) | 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.  

 

|   | k) | 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-8**

 

10

 

----

 

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL            STATEMENTS**

 

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

 

|   | l) | Fair value of financial instruments: |
|--------|----|--------------------------------------|

 

The carrying value of cash and cash equivalents, other current assets,            accrued expenses and accounts payable approximates fair value 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 Financial Standards Board            (“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 No. 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.

             

|   | m) | Financial statement misstatements: |
|--------|----|------------------------------------|

             

In September 2006, the SEC issued Staff Accounting Bulletin            No. 108, “*Considering the Effects of Prior Year            Misstatements When Quantifying Misstatements in Current Year Financial            Statements”*(“SAB 108”). SAB No. 108            addresses how to quantify the effect of an error on the financial statements and            requires a dual approach to compute the materiality of the misstatement. Specifically,            the amount of the misstatement is to be computed using both the “rollover”            method (i.e., the current year income statement perspective) and the “iron            curtain” method (i.e., the year-end balance sheet perspective). SAB 108 is            effective for fiscal years ending after November 15, 2006, and accordingly, the            Company adopted SAB No. 108 in the fourth quarter of 2006. The adoption of SAB 108            did not have a material impact on the Company’s consolidated financial            statements.

             

|   | 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            adoption of SFAS No. 157 is not expected to have a material impact on the            Company’s consolidated financial statements or results of operations.

 

**F-9**

 

11

 

----

**NORTHERNETHANOL,INC.**

*(A DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL            STATEMENTS**

 

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

 

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

 

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 were effective for the Company’s year ended December 31,            2006. The measurement requirements are effective for fiscal years ending December 31,            2008. The Company does not believe the adoption of SFAS No.158 will have a material            impact on its 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, 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 Company            is currently assessing the impact of the adoption of SFAS No. 159.

 

| **3.** | **ACCOUNTS RECEIVABLE:** |
|--------|--------------------------|

 

|                                                                                     |   | **June 30, 2007** |    | **December 31, 2006** |
|------------------------------------------------------------------------------------------|--------|-------------------|---------|-----------------------|
|                                                                                     |   |              |    |                  |   |   |
| Canadian federal government Goods and Services tax                            receivable |   | $                 | 174,162 |                  | $ | 110,062 |
| Overpayment of legal fee                                                                 |   |              | — |                  |   | 2,574 |
|                                                                                     |   | $                 | 174,162 |                  | $ | 112,636 |

 

| **4.** | **DEPOSITS:** |
|--------|---------------|

 

|                                                                                           |   | **June 30, 2007** |    | **December 31, 2006** |
|------------------------------------------------------------------------------------------------|--------|-------------------|---------|-----------------------|
|                                                                                           |   |              |    |                  |   |   |
| Non-refundable retainer deposit paid to WestLB AG (note                            14 c)       |   | $                 | 200,000 |                  | $ | 200,000 |
| Other non-refundable deposit                                                                   |   |              | — |                  |   | 429 |
| Refundable deposit on storage tanks paid to related                            party (note 9)  |   |              | — |                  |   | 200,000 |
| Refundable deposit on head office lease                            utilities                   |   |              | 1,117   |                  |   | 1,021 |
| Refundable deposit on non-binding letter of intent for                            Sarnia lease |   |              | 939     |                  |   | 858 |
|                                                                                           |   | $                 | 202,056 |                  | $ | 402,308 |

 

**F-10**

 

12

 

----

**NORTHERNETHANOL,INC.**

*(A DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL            STATEMENTS**

 

 

| **5.** | **PREPAID EXPENSES:** |
|--------|-----------------------|

 

|                                                                                    |   | **June 30, 2007** |    | **December 31, 2006** |
|-----------------------------------------------------------------------------------------|--------|-------------------|---------|-----------------------|
|                                                                                    |   |              |    |                  |   |   |
| Prepaid rent for Barrie and head office leases (note                            12)     |   | $                 | 277,242 |                  | $ | 253,454 |
| Prepaid development costs for planned Sarnia                            location        |   |              | 226,103 |                  |   | 202,479 |
| Prepaid financing costs for WestLB AG commitment (note                            14 c) |   |              | 123,104 |                  |   | — |
| Prepaid insurance                                                                       |   |              | 828     |                  |   | 22,025 |
| Prepaid other                                                                           |   |              | 188     |                  |   | 2,928 |
|                                                                                    |   | $                 | 627,465 |                  | $ | 480,886 |

 

| **6.** | **PROPERTY UNDER DEVELOPMENT AND                            EQUIPMENT:** |
|--------|--------------------------------------------------------------------------|

 

| **June 30, 2007**               |   | **Cost** |      | **Accumulated****Depreciation** |   | **Net book****Value** |   |
|---------------------------------|--------|----------|-----------|---------------------------------|--------|-----------------------|--------|
|                            |   |     |      |                            |   |                  |   |   |   |   |
| Computer equipment and software |   | $        | 44,048    |                            | $      | 15,044                |   | $ | 29,004 |   |
| Furniture and equipment         |   |     | 175,130   |                            |   | 18,946                |   |   | 156,184 |   |
| Leasehold improvements          |   |     | 38,100    |                            |   | 7,273                 |   |   | 30,827 |   |
| Property under development      |   |     | 1,030,854 |                            |   | —               |   |   | 1,030,854 |   |
|                            |   | $        | 1,288,132 |                            | $      | 41,263                |   | $ | 1,246,869 |   |

 

| **December 31, 2006**           |   | **Cost** |    | **Accumulated****Depreciation** |   | **Net book****Value** |   |
|---------------------------------|--------|----------|---------|---------------------------------|--------|-----------------------|--------|
|                            |   |     |    |                            |   |                  |   |   |   |   |
| Computer equipment and software |   | $        | 37,966  |                            | $      | 8,307                 |   | $ | 29,659 |   |
| Furniture and equipment         |   |     | 168,894 |                            |   | 10,286                |   |   | 158,608 |   |
| Leasehold improvements          |   |     | 34,958  |                            |   | 3,470                 |   |   | 31,488 |   |
| Property under development      |   |     | 218,712 |                            |   | —               |   |   | 218,712 |   |
|                            |   | $        | 460,530 |                            | $      | 22,063                |   | $ | 438,467 |   |

             

During the six months ended June 30, 2007, the Company capitalized a            $500,000 deposit for the development of an engineering, procurement and construction            contract, $252,441 of engineering and site design costs, $49,330 of legal advisory            costs and $10,371 of permit application costs to the cost of property under development            at the Barrie location that is being developed into an ethanol production facility. 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 life.

 

 

**F-11**

 

13

----

 

 

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL            STATEMENTS**

 

| **7.** | **ASSETS UNDER CAPITAL LEASE:** |
|--------|---------------------------------|

 

| **June 30, 2007**          |   | **Cost** |       | **Accumulated****Depreciation** |   | **Net book****Value** |   |
|----------------------------|--------|----------|------------|---------------------------------|--------|-----------------------|--------|
| Assets under capital lease |   | $        | 18,719,139 |                            | $      | —               |   | $ | 18,719,139 |   |
|                            |        |          |            |                                 |        |                       |        |  |  |  |

 

| **December 31, 2006**      |   | **Cost** |       | **Accumulated****Depreciation** |   | **Net book****Value** |   |
|----------------------------|--------|----------|------------|---------------------------------|--------|-----------------------|--------|
| Assets under capital lease |   | $        | 17,233,707 |                            | $      | —               |   | $ | 17,233,707 |   |
|                            |        |          |            |                                 |        |                       |        |  |  |  |

             

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. The Company will write-off any            portion of the buildings that may be demolished.

             

During the six months ended June 30, 2007, the Company capitalized            interest costs of $1,011,694, lessor’s operating cost charges of $276,347 and            property tax of $197,391 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 lease beyond what is recoverable from            operations. Depreciation of assets under capital lease 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 life or the remaining lease term.

             

             

**F-12**

 

14

 

----

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL            STATEMENTS**

             

| **8.** | **BANK INDEBTEDNESS:** |
|--------|------------------------|

             

|                                        |   | **June 30, 2007** |    | **December 31, 2006** |
|---------------------------------------------|--------|-------------------|---------|-----------------------|
|                                        |   |              |    |                  |   |   |
| Indebtedness under Line of Credit Agreement |   | $                 | 469,192 |                  | $ | — |
| Indebtedness under corporate credit card    |   |              | 7,117   |                  |   | 5,534 |
|                                        |   | $                 | 476,309 |                  | $ | 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 twelve            percent (12% per annum) and is payable monthly. Principal and unpaid interest is due on            or before March 30, 2008. As at June 30, 2007, a principal amount of $469,192 was            outstanding under this line of credit and interest of $12,495 was accrued as an accrued            liability.

             

| **9.** | **RELATED PARTY TRANSACTIONS:** |
|--------|---------------------------------|

 

During the six months ended June 30, 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 six months ended June 30, 2006, the Company utilized the            office space and equipment of a stockholder at no cost. In April 2006, the Company            entered into a lease for office space, as further discussed in note 12. 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 12.            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 9.5%            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.

             

The trustee of the Union Capital Trust Line of Credit (note 8) is Ronald            Wyles. Ronald Wyles owns 10,000,000 shares of the Company’s outstanding Common            Stock or 9.5% 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 9.5% interest. In June 2007, the            Company, received loan advances from Aurora totaling $98,000. In July 2007, the Company            entered into a Line of Credit Agreement with Aurora as further discussed in note 15            a).

 

**F-13**

 

 

15

----

 

 

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL            STATEMENTS**

 

| **9.** | **RELATED PARTY TRANSACTIONS                            (continued):** |
|--------|------------------------------------------------------------------------|

 

During the six months ended June 30, 2007, the Company paid Andrew I.            Telsey, P.C. $37,503 (June 30, 2006 – $5,000) in fees and expenses for corporate            and securities counsel. Of this amount $10,157 was included in accounts payable at June            30, 2007. Andrew I. Telsey, the Company’s Corporate Secretary and one its            directors, is the sole shareholder of Andrew I. Telsey, P.C.

             

During the six months ended June 30, 2007, the Company purchased $2,024            (June 30, 2006 – $26,881) 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.

 

| **10.** | **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 $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 $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.

             

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.

 

**F-14**

 

16

 

----

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL            STATEMENTS**

             

| **10.** | **STOCK OPTIONS (Continued):** |
|---------|--------------------------------|

             

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.

             

A summary of the status of Company’s stock option plan as of June            30, 2007 and of changes in options outstanding under the Company’s plan during            the six month period ended June 30, 2007 is as follows:

 

|                                 |   | **Number of Shares** |   |   |   | **Weighted Average Exercise Price** |    |
|--------------------------------------|--------|----------------------|--------|--------|--------|-------------------------------------|---------|
| Outstanding at December 31, 2006     |   | 4,139,000            |   |   |   | $                                   | 1.00    |   |
| Granted                              |   | 300,000              |   |   |   |                                | 1.00    |   |
| Exercised                            |   | —              |   |   |   |                                | — |   |
| Forfeited                            |   | —              |   |   |   |                                | — |   |
| Outstanding at June 30, 2007         |   | 4,439,000            |   |   |   | $                                   | 1.00    |   |
|                                 |   |                 |   |   |   |                                |    |   |
| Options exercisable at June 30, 2007 |   | 2,414,710            |   |   |   | $                                   | 1.00    |   |
| Non-vested options at June 30, 2007  |   | 2,024,290            |   |   |   | $                                   | 1.00    |   |

 

 

 

 

**F-15**

 

 

17

 

----

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL            STATEMENTS**

 

| **10.** | **STOCK OPTIONS (Continued):** |
|---------|--------------------------------|

             

Stock options outstanding as of June 30, 2007, were as            follows: 

             

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

                             

**Exercise Price** |   | **Number Outstanding**  |      | **Weighted Average Remaining****Contractual Life** |   | **Weighted-Average****Exercise****Price** |   | **Number****Exercisable** |   | **Weighted****Average****Exercise****Price** |   |
| $                                                              | 1.00   |                    | 4,439,000 |                                               | 4.06   |   | $ | 1.00 |   | 2,414,710 |   | $ | 1.00 |   |
|                                                           |   |                    |      |                                               |   |   |   |   |   |   |   |   |   |   |

             

The fair value of each option granted during the six months ended June            30, 2007 and during the year ended December 31, 2006, was estimated on the date of the            grant using the Black-Scholes option pricing model with the following            assumptions:

             

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

             

The fair value of the options granted as determined above was            $2,952,611, of which $703,891 was expensed during the six month period ended June 30,            2007 (June 30, 2006 – $657,379). The weighted average fair value per share for            the options granted above was $0.66.

 

| **11.** | **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.

 

**F-16**

 

 

18

 

----

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL            STATEMENTS**

             

| **11.** | **CAPITAL STOCK (Continued):** |
|---------|--------------------------------|

             

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.

 

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.

 

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.

             

| **12.** | **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.

             

 

 

 

 

**F-17**

 

 

19

 

----

**NORTHERNETHANOL,INC.**

*(A DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL            STATEMENTS**

             

| **12.** | **LEASE AGREEMENTS (continued):** |
|---------|-----------------------------------|

             

The terms of the leases require the following minimum            payments:

 

|  

**Fiscal Year**                  |   |   | **Barrie Lease** |       |   | **Head Office****Lease** |   |    | **Total** |   |
|------------------------------------------|--------|--------|------------------|------------|--------|--------------------------|--------|---------|-----------|--------|
| Balance of 2007                          |   |   | $                | 1,065,329  |   |                     | $      | 84,475  |      |   | $ | 1,149,804 |   |
| 2008                                     |   |   |             | 2,130,659  |   |                     |   | 168,951 |      |   |   | 2,299,610 |   |
| 2009                                     |   |   |             | 2,130,659  |   |                     |   | 168,951 |      |   |   | 2,299,610 |   |
| 2010                                     |   |   |             | 2,130,659  |   |                     |   | 168,951 |      |   |   | 2,299,610 |   |
| 2011                                     |   |   |             | 2,130,659  |   |                     |   | 70,396  |      |   |   | 2,201,055 |   |
| Thereafter                               |   |   |             | 47,121,666 |   |                     |   | — |      |   |   | 47,121,666 |   |
| Total minimum lease payments             |   |   | $                | 56,709,631 |   |                     | $      | 661,724 |      |   | $ | 57,371,355 |   |
| Less amount representing interest of 12% |   |   |             | 39,165,744 |   |                     |   |    |      |   |   |   |   |
|                                     |   |   |             | 17,543,887 |   |                     |   |    |      |   |   |   |   |
| Less current portion                     |   |   |             | 28,005     |   |                     |   |    |      |   |   |   |   |
|                                     |   |   | $                | 17,515,882 |   |                     |   |    |      |   |   |   |   |

 

 

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 will be recognized at the 12% rate implicit in the lease, and            will be 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$60,418,441 ($56,709,631)            over the remaining term of the lease, of which C$41,727,183 ($39,165,744) is interest            and C$18,691,258 ($17,543,887) is the repayment of the capital lease amount. The            capital lease principal will be paid down by C$29,837 ($28,005) 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            later in 2007.

             

| **13.** | **INCOME TAXES:** |
|---------|-------------------|

 

The Company has incurred losses resulting from start-up costs. A            valuation allowance has been recorded to fully offset any deferred tax asset because            the future realization of the related income tax benefits is uncertain.

 

**F-18**

 

20

 

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**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL            STATEMENTS**

             

| **14.** | **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. The remaining                            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-19**

 

 

21

 

----

 

 

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL            STATEMENTS**

             

| **14.** | **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. This payment has been recorded as a deposit at December                            31, 2006. 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. The                            Company will also pay WestLB’s costs and expenses in connection                            with the financing. Other covenants, representations and warranties                            will form part of the final documentation on closing of the loan                            agreement. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

             

             

             

**F-20**

 

22

 

----

 

**NORTHERNETHANOL,INC.**

*(A            DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL            STATEMENTS**

             

| **14.** | **COMMITMENTS (continued):** |
|---------|------------------------------|

 

|   | d) | On March 9, 2007 the Company executed a term sheet with                            Aker Kvaerner Songer Canada Ltd. (“AKSC”) for the                            development of an engineering, procurement and construction                            (“EPC”) contract using Delta technology for the Barrie                            site. The Company has not paid a non-refundable fee of $500,000 to AKSC                            for executing the term sheet and is reviewing its options on ethanol                            plant technology providers and engineering procurement and construction                            contractors. In the event the Company accepts another ethanol plant                            technology provider’s offer, Delta has a first right of refusal                            for 60 days to assume any agreements made with other ethanol plant                            technology vendors. If the Company continues with Delta, it expects to                            pay the non-refundable fee of $500,000 to AKSC for executing the term                            sheet and to pay AKSC a further non-refundable fee of $500,000 on                            receipt of the fixed EPC contract price for the Barrie plant. If Delta                            decides not to assume the agreement negotiated with another ethanol                            plant technology provider, the Company expects to engage an EPC                            contractor acceptable to the other ethanol plant technology provider                            and establish an EPC contract price. Providing the EPC contract price                            is acceptable and financing is obtained, the Company expects to execute                            the EPC contract(“AKSC-EPC”) within 60 days of receiving                            the fixed EPC contract price and commence construction at the Barrie                            site immediately thereafter. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

**15. SUBSEQUENT EVENTS:**

             

|   | a) | On July 9, 2007, the Company entered into a Line of                            Credit Agreement with Aurora Beverage Corporation                            (“Aurora’), a related party (note 9), wherein Aurora has                            agreed to provide 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.

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | b) | 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 ($421,822) 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 ($421,822), it will pay LANXESS an amount of                            C$100,000 ($93,738) immediately, C$325,000 ($304,649) when the                            construction of the ethanol plant begins and C$325,000 ($304,649) when                            the ethanol plant commences operation for a total of C$750,000                            ($703,036) 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 ($421,822). The Company paid a refundable interest                            bearing deposit amount of C$10,000 ($9,374) on execution of the                            Agreement. |

 

 

**F-21**

 

 

23

 

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| **ITEM 2.** | **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.

 

**RESULTSOFOPERATIONS**

 

*Comparison of Results of Operations for the three months ended June            30, 2007 and 2006*

 

|   | During the three-month periods ended June 30, 2007 and                            2006, we did not generate any revenues. |
|--------|---------------------------------------------------------------------------------------------------------------------------|

             

During the three-month period ended June 30, 2007, we incurred costs and            expenses totaling $1,080,539, including $659,885 in salaries and benefits, $353,101 in            general and administrative expense, $44,965 in occupancy costs, $9,861 in depreciation            expense and $12,727 in interest expense.

             

The general and administrative expense of $353,101 included legal and            accounting fees of $157,303, consulting fees of $83,874, travel related costs of            $28,058 and other miscellaneous costs

 

24

 

----

totaling $83,866. Occupancy costs of $44,965 are the costs of rent,            utilities, insurance and maintenance for our head office location that we began leasing            on April 20, 2006. Total interest costs of $12,727 arose in the three-month period            ended June 30, 2007, with the drawdown of $469,192 on the Union Capital Trust line of            credit during the period at an interest rate of 12% per annum and with the drawdown of            $98,000 on the Aurora Beverage Corporation line of credit at an interest rate of 8% per            annum.

             

During the three-month period ended June 30, 2006, our total expenses            were $926,954, including $755,352 in salaries and benefits, $152,410 in general and            administrative expense, $13,905 in occupancy costs and $5,887 in depreciation expense.            Salaries and benefits declined $95,467 in the three-month period ended June 30, 2007            from the same period last year as a $338,951 decline in stock based compensation            expense more than offset a $243,484 increase in wage and benefit costs associated with            increased staff levels. General and administrative expenses rose $200,691 from the same            period last year due to a $89,198 increase in legal and accounting costs primarily            associated with our due diligence costs incurred of $79,043 on the aborted Quad County            Corn Processors acquisition in the current period, a $41,815 increase in consulting            costs with the growth of our business development activities, a $11,965 increase in            travel and a $57,469 increase in other miscellaneous costs attributed to additional            staff levels. Occupancy costs increased $31,060 in the current period from the same            period last year as the first month’s rent on the head office location under the            April 20, 2006 lease did not begin until June 2006. There were no interest costs in            three-month period ended June 30, 2006, as we were not borrowing funds.

             

As a result, we incurred a net loss of $1,080,539 for the three-month            period ended June 30, 2007 ($0.01 per share),compared to a net            loss of $926,954 for three-month period ended June 30, 2006 ($.01 per            share).

             

*Comparison of Results of Operations for the six months ended June 30,            2007 and 2006*

 

|   | During the six-month periods ended June 30, 2007 and                            2006, we did not generate any revenues. |
|--------|-------------------------------------------------------------------------------------------------------------------------|

             

During the six-month period ended June 30, 2007, we incurred costs and            expenses totaling $2,063,475, including $1,320,182 in salaries and benefits, $625,895            in general and administrative expense, $85,471 in occupancy costs, $19,200 in            depreciation expense and $12,727 in interest expense.

             

The general and administrative expense of $625,895 included legal and            accounting fees of $248,829, consulting fees of $164,701, travel related costs of            $79,194 and other miscellaneous costs totaling $133,171. Occupancy costs of $85,471 are            the costs of rent, utilities, insurance and maintenance for our head office location            that we began leasing on April 20, 2006. During the six-month period ended June 30,            2006, our total expenses were $936,402. This significant increase in operating expenses            from the same period in 2006 is a direct result of our commencement of our new business            plan in April 2006, described herein.

             

As a result, we incurred a net loss of $2,063,475 for the six-month            period ended June 30, 2007 ($0.02 per share),compared to a net            loss of $936,402 for six-month period ended June 30, 2006 ($.01 per share). Because we            do not expect to begin generating revenues until such time as our ethanol plants            described herein under “Plan of Operation” become operational, which is not            expected to occur until mid 2009, or we successfully acquire an operating ethanol            plant, following is our Plan of Operation.

 

**PLANOFOPERATION**

 

In April 2006 we adopted a new business plan to initially construct and            operate twoethanol plants. Our goal is to produce ethanol in Ontario, Canada and 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

 

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build ethanol processing facilities at two locations in Ontario, Canada            (Barrie and Sarnia) for total planned production capacity of approximately 216 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 will utilize dry            milling and will also provide us with performance guarantees in the engineering,            procurement and construction (“EPC”) contracts for Barrie and Sarnia. The            two facilities currently envisaged for Ontario 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 secured 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 9.5% interest. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | **•** | *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

             

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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 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.

             

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. Both locations have been zoned for industrial            use.

 

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                         |

 

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. The Barrie and Sarnia 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 Imperial Oil (Exxon), Shell, PetroCanada            and Suncor.

 

The potential drawbacks of these locations include higher transportation            costs for feedstock and higher property costs. See “RISKFACTORS.” 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,

 

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discussions with other EPC contractors and ethanol plant technology            providers,preliminary engineering estimates and our indicative            term sheet executed December 13, 2006 with WestLB AG, (“WestLB”), each            discussed below, we estimate that the Barrie and Sarnia plants will cost $454 million            combined as per the following table:

 

| **Items**                               |   |   |   |   |   |   |   | **Barrie** |        |   |   |   |   | **Sarnia** |   |        |   |   |   | **Total** |   |   |        |
|-----------------------------------------|--------|--------|--------|--------|--------|--------|--------|------------|-------------|--------|--------|--------|--------|------------|--------|-------------|--------|--------|--------|-----------|--------|--------|-------------|
| Fixed Price EPC Contract Costs:         |   |   |   |   |   |   |   |       |        |   |   |   |   |       |   |        |   |   |   |      |   |   |        |   |   |   |
|                                    |   |   |   |   |   |   |   |       |        |   |   |   |   |       |   |        |   |   |   |      |   |   |        |   |   |   |
| EPC Price Materials                     |   |   |   |   |   |   |   | $          | 124,000,000 |   |   |   |   |       | $      | 120,000,000 |   |   |   |      |   | $      | 244,000,000 |   |   |   |
| EPC Price Labor                         |   |   |   |   |   |   |   |       | 66,000,000  |   |   |   |   |       |   | 70,000,000  |   |   |   |      |   |   | 136,000,000 |   |   |   |
| Total EPC Costs                         |   |   |   |   |   |   |   |       | 190,000,000 |   |   |   |   |       |   | 190,000,000 |   |   |   |      |   |   | 380,000,000 |   |   |   |
|                                    |   |   |   |   |   |   |   |       |        |   |   |   |   |       |   |        |   |   |   |      |   |   |        |   |   |   |
| Owner’s Costs:                    |   |   |   |   |   |   |   |       |        |   |   |   |   |       |   |        |   |   |   |      |   |   |        |   |   |   |
|                                    |   |   |   |   |   |   |   |       |        |   |   |   |   |       |   |        |   |   |   |      |   |   |        |   |   |   |
| Project Management                      |   |   |   |   |   |   |   |       | 745,000     |   |   |   |   |       |   | 710,000     |   |   |   |      |   |   | 1,455,000   |   |   |   |
| Infrastructure Upgrades                 |   |   |   |   |   |   |   |       | 1,627,000   |   |   |   |   |       |   | 805,000     |   |   |   |      |   |   | 2,432,000   |   |   |   |
| Permitting (Environmental and Building) |   |   |   |   |   |   |   |       | 143,000     |   |   |   |   |       |   | 134,000     |   |   |   |      |   |   | 277,000     |   |   |   |
| Insurance During Construction           |   |   |   |   |   |   |   |       | 662,000     |   |   |   |   |       |   | 659,000     |   |   |   |      |   |   | 1,321,000   |   |   |   |
| Owners Engineer                         |   |   |   |   |   |   |   |       | 219,000     |   |   |   |   |       |   | 202,000     |   |   |   |      |   |   | 421,000     |   |   |   |
| Startup Materials & Labor           |   |   |   |   |   |   |   |       | 658,000     |   |   |   |   |       |   | 640,000     |   |   |   |      |   |   | 1,298,000   |   |   |   |
| Spare Parts                             |   |   |   |   |   |   |   |       | 570,000     |   |   |   |   |       |   | 552,000     |   |   |   |      |   |   | 1,122,000   |   |   |   |
| Lenders Engineer                        |   |   |   |   |   |   |   |       | 319,000     |   |   |   |   |       |   | 319,000     |   |   |   |      |   |   | 638,000     |   |   |   |
| Other Miscellaneous Costs               |   |   |   |   |   |   |   |       | 368,000     |   |   |   |   |       |   | 368,000     |   |   |   |      |   |   | 736,000     |   |   |   |
| Total Owners Costs                      |   |   |   |   |   |   |   |       | 5,311,000   |   |   |   |   |       |   | 4,389,000   |   |   |   |      |   |   | 9,700,000   |   |   |   |
|                                    |   |   |   |   |   |   |   |       |        |   |   |   |   |       |   |        |   |   |   |      |   |   |        |   |   |   |
| SubTotal Costs                          |   |   |   |   |   |   |   |       | 195,311,000 |   |   |   |   |       |   | 194,389,000 |   |   |   |      |   |   | 389,700,000 |   |   |   |
|                                    |   |   |   |   |   |   |   |       |        |   |   |   |   |       |   |        |   |   |   |      |   |   |        |   |   |   |
| Contingency                             |   |   |   |   |   |   |   |       | 15,625,000  |   |   |   |   |       |   | 15,551,000  |   |   |   |      |   |   | 31,176,000  |   |   |   |
| Interest During Construction            |   |   |   |   |   |   |   |       | 16,601,000  |   |   |   |   |       |   | 16,523,000  |   |   |   |      |   |   | 33,124,000  |   |   |   |
| Total Costs                             |   |   |   |   |   |   |   | $          | 227,537,000 |   |   |   |   |       | $      | 226,463,000 |   |   |   |      |   | $      | 454,000,000 |   |   |   |

 

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 $454 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 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.

 

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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 $87,378 for costs incurred by WestLB’s legal and            engineering advisors from funds borrowed under a Line of Credit Agreement with Union            Capital Trust. There is no termination date to the WestLB engagement letter.

             

We have had discussions with investment bankers, financial institutions            and private investors about obtaining the 25% subordinate debt or equity investment            required to complete the project financing 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 lenders, or if such funding is obtained, there are no            assurances that it will be on terms that we have anticipated or that are otherwise            acceptable to us. See “RISKFACTORS.”

 

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. References to the            Delta-Barrie Agreement and Delta-Sarnia Agreement are hereinafter jointly referred to            as the “Delta Agreements,” unless otherwise indicated.

 

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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 projects 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. We have selected Aker Kvaerner Songer Canada Ltd. (“AKSC”) as            the construction contractor for our Barrie and Sarnia facilities because of their            extensive experience in the construction of power plants in the United States and            Canada. Delta and AKSC’s US affiliate are currently working jointly on the            development and construction of two other ethanol plants in the United            States.

             

On March 9, 2007, we executed a term sheet with AKSC for the development            of an EPC contract for the Barrie site. We have not paid the non-refundable fee of            $500,000 to AKSC for executing the term sheet and as of the date of this Report we are            reviewing our options on ethanol plant technology providers and engineering procurement            and construction contractors. As we have not paid this fee, AKSC is under no obligation            to provide a fixed price contract. We are in discussions with other ethanol plant            technology providers and we may pursue offers from them. In the event that we accept            another ethanol plant technology provider’s offer, Delta has a 60 day first right            of refusal to assume any agreements made with other ethanol plant technology vendors.            If we continue with Delta, we expect to pay the non-refundable fee of $500,000 to AKSC            for executing the term sheet and to pay AKSC a further non-refundable fee of $500,000            on receipt of the fixed EPC contract price for our Barrie plant. If Delta decides not            to assume our agreement with another ethanol plant technology provider, we will engage            an EPC contractor acceptable to the other ethanol plant technology provider and            establish an EPC contract price. Providing the EPC contract price is acceptable and            financing is obtained, we expect to execute the EPC contract within 60 days of            receiving the fixed EPC contract price and commence construction at the Barrie site            immediately thereafter. We are also reviewing our options on ethanol plant technology            providers and engineering procurement and construction contractors for our Sarnia            location. We have not received a term sheet from AKSC regarding the Sarnia facility at            this time.

             

AKSC is a multinational EPC firm with extensive experience erecting and            constructing facilities in Canada. Delta’s primary role in the projects will be            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. AKSC 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.            AKSC 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 EPC            contract will be guaranteed by AKSC’s parent company, Aker Kvaerner ASA of            Baerum,Norway, a leading global provider of engineering and construction            services, technology products and integrated solutions with NOK14 billion            (approximately $2.3 billion) in annual revenue. 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.

 

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In August 2006, we retained the services of the engineering firm of            Charles G. Turner & Associates for an initial term to December 31, 2006 to monitor            the design, equipment selection, construction and commissioning phases of the projects            on a hourly fee basis. This agreement is continuing in effect on a month–to-month            basis.

 

Also 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 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. 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., 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            our ethanol production.

 

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.

 

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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 also had plans to develop a third ethanol facility located in Upstate            New York. We were in negotiations with a steam supplier at a site in Lewiston, New York            but we were unable to negotiate an appropriate steam agreement as the supplier was at            the end of their power purchase agreement with the utility. As the supplier has been            unable to negotiate a new electric agreement there is was no way to assure ourselves            that the steam supply would be there for the life of the plant and as such we have            stopped considering this site for now, or at least until the supplier is in a position            to guarantee a firm and reliable steam supply to our plant. We will continue to            investigate alternative sites in upper New York State.

             

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 no definitive agreements have been reached 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.

 

 

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**LIQUIDITYANDCAPITALRESOURCES**

 

At June 30, 2007, we had $2,758, 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.

 

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 has agreed to provide us with a $6            million unsecured line of credit. Interest accrues at the rate of twelve percent (12%            per annum) and is payable monthly. Principal and unpaid interest is due on or before            March 30, 2008. As of the date of this Report, we have drawn down an aggregate of            $469,192 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 the Company’s outstanding            Common Stock or 9.5% interest.

             

Also 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. As of the date of this Report, we have drawn down an            aggregate of $348,000 on this line of credit. Aurora is 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 9.5% interest. We believe that            this Union and Aurora lines of credit will provide sufficient monies to fund the            expected $1,000,000 deposits required on each of our EPC contracts for Barrie and            Sarnia and our expected working capital requirements for project development            (approximately $1,500,000 per quarter) until we are in a position to begin construction            at Barrie and draw on the proposed WestLB line of credit described above            herein.

             

We estimate that we will require $454 million in additional debt or            equity capital to complete the construction and commissioning of the Barrie and Sarnia            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 andthe 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

 

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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 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. We have had discussions with investment            bankers, financial institutions and private investors about obtaining the 25%            subordinate debt or equity investment required to complete the project financing 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 lenders, or if such funding            is obtained, that it will be on terms that we have anticipated or that are otherwise            acceptable to us.*See*“RISKFACTORS.”

 

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

             

| **Fiscal Year**              |   |   |   |   | **Barrie Lease** |       |   |   |   | **Head Office****Lease** |   |    |   |   | **Total** |   |
|------------------------------|--------|--------|--------|--------|------------------|------------|--------|--------|--------|--------------------------|--------|---------|--------|--------|-----------|--------|
| Balance of 2007              |   |   |   | $      |             | 1,065,329  |   |   |   | $                        |   | 84,475  |   |   |      | $      |   | 1,149,804 |   |
| 2008                         |   |   |   |   |             | 2,130,659  |   |   |   |                     |   | 168,951 |   |   |      |   |   | 2,299,610 |   |
| 2009                         |   |   |   |   |             | 2,130,659  |   |   |   |                     |   | 168,951 |   |   |      |   |   | 2,299,610 |   |
| 2010                         |   |   |   |   |             | 2,130,659  |   |   |   |                     |   | 168,951 |   |   |      |   |   | 2,299,610 |   |
| 2011                         |   |   |   |   |             | 2,130,659  |   |   |   |                     |   | 70,396  |   |   |      |   |   | 2,201,055 |   |
| Thereafter                   |   |   |   |   |             | 47,121,666 |   |   |   |                     |   | — |   |   |      |   |   | 47,121,666 |   |
| Total minimum lease payments |   |   |   | $      |             | 56,709,631 |   |   |   | $                        |   | 661,724 |   |   |      | $      |   | 57,371,355 |   |

             

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 line 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 and Sarnia plants is complete,            we expect to satisfy the lease commitments with cash flow generated from the operations            of these plants.

 

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**INFLATION**

 

Although our operations are influenced by general economic conditions,            we do not believe that inflation had a material affect on our results of operations            during the six-month period ended June 30, 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.

 

***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. We            will write-off any portion of the buildings that may be demolished.

 

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***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.

             

***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 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.

 

***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

 

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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, 2007, and interim periods within those fiscal years. We are required to            adopt the provisions of SFAS No. 159 effective January 1, 2008. We are currently            assessing the impact of the adoption of SFAS No. 159.

 

**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 June 30, 2007, we had an accumulated deficit of $5,340,348. For the            six-month period ended June 30, 2007, we incurred a net loss of $2,063,475, and for the            year ended December 31, 2006, we incurred a net loss of $3,245,400. We expect to incur            significantly greater losses at least until the completion of our initial ethanol            production facility in Barrie, Ontario. We estimate that the earliest completion date            of this facility and, as a result, our earliest date of ethanol production will not            occur until the second quarter of 2009. 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

 

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ethanol. A downturn in the demand for ethanol would significantly and            adversely affect our sales and profitability.

             

**In addition to selling ethanol, we will also 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 2005, ethanol dry mills in the United            States produced approximately 9 million tons of distillers grains. Of this,            approximately 75-80% was fed to dairy and cattle, 18-20% to swine, and 3-5% 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 2005, the United States exported more than 1 million            tons of distillers grains. In recent years, large markets for DDGS have developed in            Europe, led by Ireland 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 19% 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 in 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.

             

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**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 $454 million in equity and/or debt            financing to complete construction of our initial two ethanol production facilities in            Barrie and Sarnia, Ontario.*See*“PLANOFOPERATION,” above. 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 WestLB AG (“WestLB”) whereby WestLB has            conditionally agreed to provide arrangement, placement and underwriting services on            senior debt and subordinate debt 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, WestLB would conditionally            provide up to $365 million of financing. 75% of the combined construction cost estimate            of $454 million for the Barrie and Sarnia facilities would equate to $340 million.            Interest during construction of the two plants of $33 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 5.4%, so that the interest rate on the senior            financing would be 8.65% to 8.9% and the interest rate on the subordinate financing            would be 15.4%. On a construction cost of $454 million, the senior financing would            total $272,400,000 , bear an annual interest cost of approximately $24.2 million at            current rates when fully drawn and would be repaid in quarterly installments over 6            years following completion of construction. The subordinate financing would amount to            $68,100,000, bear an annual interest cost of approximately $10.5 million at current            rates when fully drawn and would be repaid over 8 years from advance, with repayment            terms to be negotiated. Among other things, the provision of the WestLB financing in            accordance with the engagement letter and indicative term sheets isconditional on our            obtaining subordinate debt or equity investment for the remaining 25% of construction            costs. We have had discussions with investment bankers, financial institutions and            private investors about obtaining subordinate debt or equity investment 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,            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 one or more, or even all, of our planned ethanol production            facilities. (See a complete description of the terms under            “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 two            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.

 

**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; |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                            |

 

 

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| **•** | 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 $87,378 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, 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.

 

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**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, reported as prices received, had increased 57% over the previous year by            December 2006. The USDA’s December 2006 crop report estimated that corn bought by            ethanol plants will represent approximately 17% of the 2006/2007 crop year’s            total corn supply, up from 13% in the prior crop year. Increasing ethanol capacity            could boost demand for corn and result in sustained prices at a current levels or a            further increase in corn prices.

             

**The development of our two 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.

             

**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

 

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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 5,633mm gallons per year. According to the Ethanol Producer            Magazine, in Canada, current production capacity is roughly 198mm gallons per year.            There is capacity under construction of 6,194mm gallons in the United States and 180mm            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            395mm gallons per year, with capacity under construction of 1,170mm gallons per            year.

 

*US Ethanol Production 1999-2006*

 

 

|                        |   | **January 1999** |   | **January 2000** |   | **January 2001** |   | **January 2002** |   | **January 2003** |   | **January 2004** |   | **January 2005** |   | **January 2006** |   |
|-----------------------------|--------|------------------|--------|------------------|--------|------------------|--------|------------------|--------|------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                        |   |             |   |             |   |             |   |             |   |             |   |             |   |             |   |             |   |
| Total Ethanol Plants        |   | 50               |   | 54               |   | 56               |   | 61               |   | 68               |   | 72               |   | 81               |   | 95               |   |
|                        |   |             |   |             |   |             |   |             |   |             |   |             |   |             |   |             |   |
| Ethanol Production Capacity |   | 1701.7 mgy       |   | 1748.7 mgy       |   | 1921.9 mgy       |   | 2347.3 mgy       |   | 2706.8 mgy       |   | 3100.8 mgy       |   | 3643.7 mgy       |   | 4336.4 mgy       |   |
|                        |   |             |   |             |   |             |   |             |   |             |   |             |   |             |   |             |   |
| Plants Under Construction   |   | 5                |   | 6                |   | 5                |   | 13               |   | 11               |   | 15               |   | 16               |   | 31               |   |
|                        |   |             |   |             |   |             |   |             |   |             |   |             |   |             |   |             |   |
| Capacity Under Construction |   | 77 mgy           |   | 91.5 mgy         |   | 64.7 mgy         |   | 390.7 mgy        |   | 483 mgy          |   | 598 mgy          |   | 754 mgy          |   | 1778 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 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

 

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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. 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 and Sarnia 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 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. Recently wholesale            gasoline and ethanol prices have moved in the same range, trading at approximately            $1.99 and $1.86 per gallon, respectively, as of August 15,2007. 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

 

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extensive regulation by federal and provincial governmental agencies in            Canada, where we intend to initially produce and sell ethanol. In addition, we have            recently signed a non-binding letter of intent to acquire an existing ethanol plant in            Quad County, Iowa. If we are successful in consummating this acquisition, of which            there can be no assurance, or we acquire a different ethanol plant in the US or elect            to build a new ethanol facility in the US, this business will also be subject to such            extensive regulation. 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 in Ontario or in other            jurisdictions.

 

**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. 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 have filed the            application for the relevant permits on our proposed Barrie plant and expect to receive            site plan approval by August 2007. For the Sarnia site, we have recently commenced this            process and expect to receive our Site Plan Approval permit in 2007.

 

For our two proposed 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 expect to receive the final permit in July 2007. We expect that            our Site Plan Approval permit and environmental permits for Sarnia, once submitted,            will be processed within the same time frame as the Barrie permits. 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

 

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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 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 Barrie facility to be as            follows:

 

|   | **1.** | Based on Ontario Ministry of Environment guidelines and                            communications, receive Ontario Ministry of Environment permit in                            September 2007. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **2.** | Based on consulting engineer’s experience, receive                            City of Barrie site plan approval in September 2007. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------|

|   | **3.** | Based on EPC term sheet signed March 9, 2007 with AKSC                            and discussions with other EPC contractor and ethanol plant technology                            providers, develop and negotiate EPC contract and receive EPC pricing                            from EPC contractor and ethanol plant technology provider in October                            2007. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **4.** | If another EPC contractor and ethanol plant technology                            provider selected, allow 60 days for Delta to decide whether to assume                            agreement. Sign an EPC contract with AKSC and Delta or another                            combination of EPC contractor and ethanol plant technology provider by                            December 2007. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **5.** | Based on requirements of WestLB indicative term sheets                            dated December 13, 2006, close debt and or equity financing in December                            2007. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **6.** | With financing closed, give EPC contractor full notice                            to proceed with detailed engineering work in December 2007. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|

 

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|   | **7.** | Based on discussions with AKSC and other EPC                            contractors, completion of site preparation work in February                            2008. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **8.** | Based on discussions with AKSC and other EPC                            contractors, EPC contractor mobilizes to site in February                            2008. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **9.** | Based on discussions with AKSC and other EPC                            contractors, first pour of concrete in March 2008. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------|

|   | **10.** | Based on discussions with AKSC and other EPC                            contractors, start of plant commissioning in March 2009. |
|--------|---------|----------------------------------------------------------------------------------------------------------------------------------|

|   | **11.** | Based on EPC term sheet signed March 9, 2007 with AKSC                            and discussions with other EPC contractor and ethanol plant technology                            providers, full operations of plant in June 2009. |
|--------|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

We expect the Sarnia plant start up will follow the Barrie timeline by            approximately 3 months.

 

**Any significant increase in the final construction costs of our            proposed facilities will adversely affect our capital            resources****.**Based upon            discussions that we have had with AKSC, with other EPC contractor and ethanol plant            technology providers and WestLB, all of whom are experienced in constructing ethanol            plants, we have estimated that the construction cost of our proposed two facilities to            be approximately $454 million. The estimated cost of these facilities is based on the            target EPC price range included in the AKSC term sheet executed on March 9, 2007 for            our Barrie plant on discussions with other EPC contractor and ethanol plant technology            providers, 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 AKSC or other EPC contractor and ethanol plant            technology providers for our Barrie Plant in August 2007 and approximately 90 days            later for Sarnia. Once executed, the EPC contracts will guarantee a fixed price for the            Barrie and Sarnia 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.

 

**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 the Company 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. A 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. The transportation of a            large proportion of our corn

 

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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 and Barrie, Ontario            receives average annual snowfall of 128 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 Barrie and Sarnia 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 and Sarnia 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.

 

**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. In addition, the independent            registered public accounting firm auditing a 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. We have not yet been subject to            these requirements. We are evaluating our internal control systems in order to allow            our management to report on, and our independent auditors attest to, our internal            controls, as a required part of our annual report on Form 10-KSB beginning with our            reports for the fiscal year ended December 31, 2007. A recent release from the SEC has            indicated that newly public companies may be granted an additional year, after becoming            public to demonstrate the effectiveness of their internal controls as required under            SOX 404.

 

While we expect to expend significant resources in developing the            necessary documentation and testing procedures required by SOX 404, there is a risk            that we will not comply with all of the requirements imposed thereby. At present, there            is no precedent available with which to measure

_________________________

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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compliance adequacy. Accordingly, there can be no positive assurance            that we will receive a positive attestation from our independent auditors.

 

In the event we identify significant deficiencies or material weaknesses            in our internal controls that we cannot remediate in a timely manner or 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 no trading market for our securities and there can be no            assurance that such a market will develop in the            future****.**We have filed a            registration statement on Form SB-2 with the Securities and Exchange Commission            pursuant to the Securities Act of 1933, as amended, registering those shares that we            issued in our recent private offering. In addition, an application to have our Common            Stock listed for trading on the OTC Electronic Bulletin Board operated by the National            Association of Securities Dealers, Inc. has also been filed and is currently being            reviewed. The process of obtaining a listing for our Common Stock on the OTCBB involves            a market maker submitting an application with the NASD. The NASD then reviews the            application and issues comments, or questions, concerning our Company and the class of            stock (Common Stock) for which a listing has been requested. There is no assurance that            our application for listing on the OTCBB will be approved, or if so approved that a            market will develop in the future or, if developed, that it will continue. In the            absence of a public trading market, an investor may be unable to liquidate his            investment in our Company.

 

**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****.**If we are            successful in listing our Common Stock for trading on the OTCBB, of which there can be            no assurance, the OTCBB limits quotations to securities of issuers that are current in            their reports filed with the Securities and Exchange Commission. Because we do not have            significant financial reporting experience, we may experience delays in filing required            reports with the Securities and Exchange Commission (the “SEC”) following            the effectiveness of our registration statement. Because issuers whose securities are            qualified for quotation on the OTCBB are required to file these reports with the            Securities and Exchange Commission 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.

 

**If we are successful in listing our Common Stock for trading on            the OTCBB, 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.

 

**Our stock will be considered a “penny stock” so long            as it trades below $5.00 per share, This can adversely affect its            liquidity****.**If and when            trading commences 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

 

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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****.**If and when our            registration statement is declared effective, holders of our shares of Common Stock            that are registered pursuant to our registration statement will be permitted, subject            to few limitations, to freely sell these shares of Common Stock. At that time, 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 being registered, there is an            aggregate of 3,404,333 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 subject to those limitations            provided by Rule 144 promulgated under the Securities Act of 1933, as amended. In            January 2007, these limitations ceased and these holders are entitled to sell their            shares of our Common Stock at their discretion. 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****.**If our Common            Stock is approved for trading, of which there can be no assurance, the 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;                                                                              |

 

 

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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;                                                                                                          |
|       |                                                                                                                              |
| **•** | fluctuations in our quarterly or annual operating                            results;                                             |
|       |                                                                                                                              |
| **•** | additions or departures of key personnel; and                                                                                     |
|       |                                                                                                                              |
| **•** | future sales of our Common Stock or other                            securities.                                                  |

             

Furthermore, adverse economic conditions in Ontario and other            jurisdictions 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.

 

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**ITEM            3.**        **CONTROLS AND PROCEDURES**

**EVALUATIONOFDISCLOSURECONTROLSANDPROCEDURES.**

             

We maintain disclosure controls and procedures that are designed to            ensure that information required to be disclosed in our reports filed pursuant to the            Securities Exchange Act of 1934, as amended (the “Exchange Act”), is            recorded, processed, summarized and reported within the time periods specified in the            Securities and Exchange Commission’s rules, regulations and related forms, and            that such information is accumulated and communicated to the our principal executive            officer and principal financial officer, as appropriate, to allow timely decisions            regarding required disclosure.

             

In the course of evaluating our internal controls over financial            reporting as at June 30, 2007, management has identified a weakness in the area of            segregation of duties that could result in a material misstatement in our financial            statements. Given our limited staff level, certain duties within the accounting and            finance department cannot be properly segregated. However, none of the segregation of            duties deficiencies resulted in a misstatement to the financial statements as we rely            on certain compensating controls, including substantive periodic review of the            financial statements by the Chief Executive Officer and Audit Committee. This weakness            is considered to be a common area of deficiencies for many smaller listed            companies.

 

On December 7, 2006 and as amended on December 26, 2006, we filed Forms            8-K, and 8-K/A1to advise that our Form 10Q-SB 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.

             

On April 23, 2007, we filed a Form 8-K/A2 advising that all outstanding            issues have been resolved with KPMG LLP, our independent registered public accountants,            and that investors may rely upon our 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 contained in our Form 10-QSB filed on            November 21, 2006.

 

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**CHANGESININTERNALCONTROLS**

 

There have been no changes in our internal controls or in other factors            that could significantly affect these controls and procedures during the six-month            period ended June 30, 2007.

 

**PART II. OTHER INFORMATION**

 

| **ITEM 1.** | **LEGAL PROCEEDINGS**-                            None |
|-------------|--------------------------------------------------------|

 

| **ITEM 2.** | **CHANGES IN SECURITIES**-                            None |
|-------------|------------------------------------------------------------|

 

| **ITEM 3.** | **DEFAULTS UPON SENIOR SECURITIES**- None |
|-------------|-------------------------------------------|

 

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

 

On June 6, 2007, we conducted our annual meeting of shareholders in            Toronto, Ontario, Canada. At that meeting our shareholders re-elected our current Board            of Directors, to hold office until the next annual meeting of our shareholders, their            resignation or removal, whichever comes first. Our shareholders also approved the            appointment of KPMG LLP as our independent auditors for our fiscal year ended December            31, 2007.

| **ITEM 5.** | **OTHER INFORMATION-**None |
|-------------|----------------------------|

 

| **ITEM 6.** | **EXHIBITS AND REPORTS ON FORM 8-K -** |
|-------------|----------------------------------------|

 

|   | **(a)** | **Exhibits** |
|--------|---------|--------------|

 

| **Exhibit No.** | **Description**                                                                                                                |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------|
|            |                                                                                                                           |
| 31.1            | Certification of Chief Executive Officer Pursuant to                            Section 302 of the Sarbanes-Oxley Act of 2002  |
|            |                                                                                                                           |
| 31.2            | Certification of Chief Financial Officer Pursuant to                            Section 302 of the Sarbanes-Oxley Act of 2002  |
|            |                                                                                                                           |
| 32.1            | Certification of Chief Executive Officer Pursuant to                            Section 906 of the Sarbanes-Oxley Act of 2002. |
|            |                                                                                                                           |
| 32.2            | Certification of Chief Financial Officer Pursuant to                            Section 906 of the Sarbanes-Oxley Act of 2002  |

 

|   | **(b)** | **Reports on Form 8-K.** |
|--------|---------|--------------------------|

 

On April 23, 2007 we filed a report on Form 8-K/A2,**a**dvising that all outstanding issues            between ourselves and KPMG LLP relating to our Form 10-QSB for the nine month period            ended September 30, 2006 had been resolved and investors may rely upon said            report.

             

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**SUBSEQUENTEVENTS**

 

On August 1, 2007 we filed a report on Form 8-K, advising that 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.

 

On August 20, 2007 we filed a report on Form 8-K, advising that we            entered into a Purchase and Sale Agreement with Lanxess Inc., (“LANXESS”)            wherein LANXESS has agreed to sell us approximately 30 acres of land in Sarnia, Ontario            for an amount of C$450,000.

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**SIGNATURES**

 

Pursuant to the requirements of Section 12 of the Securities and            Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its            behalf by the undersigned, thereunto duly authorized.

 

 

| Dated: August 29, 2007 | **NORTHERN ETHANOL, INC.**

(Registrant)

                             

                             

By: __Gordon                            Laschinger________________

Gordon Laschinger,

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

 

 

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