Northern Ethanol (NOET) 10-Q Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2008

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

For the transition period from ______ to _______

Commission File Number: 000-51564

NORTHERN ETHANOL, INC

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction

of incorporation or organization)

34-2033194

(IRS Employer Identification No.)

193 King Street East

Suite 300

Toronto, Ontario, M5A 1J5, Canada

(Address of principal executive offices)

(416) 366-5511

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yeso No x

          As of December 23, 2008, there were 104,096,500 shares of Northern Ethanol, Inc. Common Stock, $0.0001 par value per share, issued and outstanding.

1

	PART I.	Page
	FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Consolidated Balance Sheets as of September 30, 2008 (unaudited) and December 31, 2007	F-1
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2008 and 2007 (unaudited)	F-2
	Consolidated Statements of Stockholders’ Equity (Deficiency) and Comprehensive Income for the Three and Nine-Month Periods Ended September 30, 2008 and 2007 (unaudited)	F-3
	Consolidated Statements of Cash Flows for the Three and Nine-Month Periods Ended September 30, 2008 and 2007 (unaudited)	F-4
	Notes to Consolidated Financial Statements (unaudited)	F-5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	38
Item 4.	Controls and Procedures.	38
	PART II
	OTHER INFORMATION
Item 1.	Legal Proceedings.	39
Item 1A.	Risk Factors.	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	44
Item 3.	Defaults Upon Senior Securities.	44
Item 4.	Submission of Matters to a Vote of Security Holders.	44
Item 5.	Other Information.	44
Item 6.	Exhibits.	44
Signatures		45

2

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

Northern Ethanol, Inc.

(A DEVELOPMENT STAGE COMPANY)

(Formerly BEACONSFIELD I, INC.)

Consolidated Balance Sheets

As at:	September 30, 2008			December 31, 2007
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	73		$	9,622
Accounts receivable (note 4)		45,659			30,136
Deposits (note 5)		11,505			12,307
Prepaid expenses (note 6)		317,024			327,444
Total current assets		374,261			379,509
Property under development and equipment (note 7)		932,541			1,426,882
Assets under capital lease (notes 8 and 11)		-			22,749,105
Deferred financing costs (note 9)		-			341,883
Other assets		6,030			6,473
	$	1,312,832		$	24,903,852
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
CURRENT LIABILITIES:
Bank indebtedness (note 10)	$	45,572		$	519,834
Accounts payable (note 11)		1,571,869			4,477,441
Accrued liabilities (note 11)		671,425			161,350
Due to related party (note 11)		8,443,149			1,055,871
Current portion of obligation under capital lease (note 14)		32,550			31,951
Total current liabilities		10,764,565			6,246,447
Obligation under capital lease (note 14)		17,486,275			18,808,747
		28,250,840			25,055,194
STOCKHOLDERS’ DEFICIENCY:
Preferred stock, $.0001 par value; 100,000,000 shares authorized; none issued and outstanding (note 13)		—			—
Common stock, $.0001 par value; 250,000,000 shares authorized;
(104,096,500 shares issued and outstanding as of September 30, 2008 and December 31, 2007, respectively (note 13))		10,410			10,410
Additional paid-in capital		6,787,165			6,526,827
Deficit accumulated during the development stage		(33,934,016)			(6,856,914	)
Accumulated other comprehensive income		198,433			168,335
		(26,938,008	)		(151,342	)
Going concern (note 2 a))
Commitments (note 16)
Contingencies (note 17) Subsequent events (note 18)
	$	1,312,832		$	24,903,852

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 September 30						Nine months ended September 30					Period from Nov 29, 2004 (Inception) to September 30
		2008			2007			2008			2007				2008
REVENUE	$	—		$	—		$	—		$	—			$	—
OPERATING EXPENSES
Impairment of Barrie asset (note 3)		24,415,284			-			24,415,284			-				24,415,284
Write off of deferred financing costs (note 9)		343,729			-			343,729			-				343,729
Salaries and benefits (note 12)		433,355			440,195			1,241,047			1,760,377				5,593,003
General and administrative		197,569			291,422			607,678			916,029				2,714,322
Occupancy costs		46,363			46,784			143,383			132,255				424,364
Foreign exchange loss (gain)		23,099			(58,829	)		39,714			(87,701	)			27,911
Depreciation		11,035			10,723			33,649			29,895				96,964
Interest		165,109			21,001			252,618			33,728				318,439
		25,635,543			751,296			27,077,102			2,784,583				33,934,016
NET LOSS	$	(25,635,543	)	$	(751,296	)	$	(27,077,102	)	$	(2,784,583	)		$	(33,934,016	)
BASIC AND DILUTED LOSS PER SHARE	$	(0. 25	)	$	(0.01	)	$	(0.26	)	$	(0.03	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING		104,096,500			104,096,500			104,096,500			104,096,500

See accompanying notes to unaudited consolidated interim financial statements

F-2

5

Northern Ethanol, Inc.

(A DEVELOPMENT STAGE COMPANY)

(Formerly BEACONSFIELD I, INC.)

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

(Unaudited)

Nine Months ended September 30, 2008 and September 30, 2007

	Shares		Amount		Additional Paid-In Capital		Accumulated Deficit			Accumulated Other Comprehensive Income			Total
Balances, December 31, 2006	104,096,500	$	10,410	$	5,554,459	$	(3,279,416	)	$	(63,167	)	$	2,222,286
Comprehensive Income:
Net loss for the nine months ended September 30, 2007	—		—		—		(2,784,583	)		—			(2,784,583	)
Other comprehensive income	—		—		—		—			233,491			233,491
Total comprehensive income													(2,551,092	)
Stock-based compensation	—		—		856,653		—			—			856,653
Balances, September 30, 2007	104,096,500	$	10,410	$	6,411,112	$	(6,063,999	)	$	170,324		$	527,847
Balances, December 31, 2007	104,096,500	$	10,410	$	6,526,827	$	(6,856,914	)	$	168,335		$	(151,342	)
Comprehensive Income:
Net loss for the nine months ended September 30, 2008	—		—		—		(27,077,102	)		—			(27,077,102	)
Other comprehensive income	—		—		—		—			30,098			30,098
Total comprehensive income													(27,047,004	)
Stock-based compensation	—		—		260,338		—			—			260,338
Balances, September 30, 2008	104,096,500	$	10,410	$	6,787,165	$	(33,934,016	)	$	198,433		$	(26,938,008	)

See accompanying notes to unaudited consolidated interim financial statements

F-3

6

Northern Ethanol, Inc.

(A DEVELOPMENT STAGE COMPANY)

(Formerly BEACONSFIELD I, INC.)

Consolidated Statements of Cash Flows

(Unaudited)

		Three months ended September 30						Nine months ended September 30,					Period from Nov 29, 2004 (Inception) to September 30
		2008			2007			2008			2007			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(25,635,543	)	$	(751,296	)	$	(27,077,102	)	$	(2,784,583	)	$	(33,934,016	)
Items not involving cash:
Impairment of Barrie asset		24,415,284			-			24,415,284			-			24,415,284
Write off of deferred financing costs		343,729			-			343,729			-			343,729
Depreciation		11,035			10,723			33,649			29,895			96,964
Stock-based compensation		127,875			152,762			260,338			856,653			2,901,060
Unrealized foreign exchange loss (gain)		23,984			634			36,236			26,468			36,236
Changes in non-cash working capital balances:
Accounts receivable		4,429			97,145			(18,374	)		49,240			(48,510	)
Deposits		-			(13,876	)		-			191,847			(12,307	)
Prepaid expenses		(32,261	)		175,274			(12,277	)		195,164			(339,721	)
Accounts payable		121,641			192,989			(87,650	)		532,802			801,650
Accrued liabilities		334,566			3,131			518,155			27,568			679,507
Net cash (used in) provided by operating activities		(285,261	)		(132,514	)		(1,588,012	)		(874,946	)		(5,060,124	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing costs		(558	)		(20,187	)		(558	)		(63,763	)		(264,322	)
Bank indebtedness		40,020			28,466			(472,001	)		498,656			47,833
Due to related party		694,171			580,534			7,459,607			672,536			8,515,478
Proceeds from issuance of common stock		—			—			—			—			3,896,515
Principal payment of capital lease obligation		(5,110	)		—			(64,735	)		(2,090	)		(70,560	)
Net cash (used in) provided by financing activities		728,523			588,813			6,922,313			1,105,339			12,124,944
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property under development and equipment		(12,515	)		(473,219	)		(257,226	)		(571,531	)		(1,248,417	)
Assets under capital lease		(447,907	)		—			(5,086,619	)		(237,530	)		(5,796,291	)
Other assets		—			—			—			—			(5,506	)
Net cash (used in) provided by investing activities		(460,422	)		(473,219	)		(5,343,845	)		(809,061	)		(7,050,214	)
Effect of exchange rate changes on cash		356			14,363			(5	)		11,620			(14,533	)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(16,804	)		(2,557	)		(9,549	)		(567,048	)		73
CASH AND CASH EQUIVALENTS:
Beginning of period		16,877			2,758			9,622			567,249			—
End of period	$	73		$	201		$	73		$	201		$	73
SUPPLEMENTAL CASH FLOW INFORMATION
Assets acquired under capital lease funded by current obligations	$	257,435		$	1,031,397		$	257,435		$	2,244,414		$	17,019,000
Additions to property under development and equipment		226,782			23,008			301,509			752,299			613,566
Income taxes paid		—-			—-			—-			—-			353
Interest paid		415			—-			16,345			—-			17,503

See accompanying notes to unaudited consolidated interim financial statements

F-4

7

NORTHERN ETHANOL, 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 (pre-forward split) 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 the Company’s 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:

(i) Consolidated Interim Financial Statements:

The accompanying consolidated interim financial statements of the Company as of September 30, 2008, for the three and nine month periods ended September 30, 2008 and 2007 and for the period from November 29, 2004 (Inception) to September 30, 2008 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 consolidated 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 consolidated financial statements and notes included in the Company’s Form 10-KSB for the year ended December 31, 2007. Changes in accounting policies adopted by the Company effective January 1, 2008 are set out in note 2 n).

F-5

9

NORTHERN ETHANOL, INC.

(A DEVELOPMENT STAGE COMPANY)

(Formerly BEACONSFIELD I, INC.)

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

2. SIGNIFICANT ACCOUNTING POLICIES (continued):

(ii) Going concern:

There is substantial doubt about the Company’s ability to continue as a going concern. These consolidated financial statements have been prepared on a going concern basis, which assumes that the Company will commence ethanol producing operations in the foreseeable future and accordingly will be able to realize its assets and discharge its liabilities in the normal course of operations. The Company has no revenue, no earnings, and negative operating cash flows, and has financed its activities through bank borrowings, loans from related parties, capital lease arrangements and the issuance of shares.

The Company’s only source of financing is a line of credit provided by a related party, LDR (note 11). All draws on the LDR line of credit are subject to review and approval of the lender. On September 9, 2008, the Company was notified by LDR that its draw requests from August 15, 2008 would not be met and would be withheld until further advised.Subsequent to period end, LDR has allowed the Company to continue draw a very limited amount of the line of credit. As a result of the Company’s inability to draw sufficient amounts, it has not been able to pay its liabilities including wages for employees or engage in development activities since August 15, 2008. The Company continues to seek alternative sources of financing.

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.

(iii) 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.

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.

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

F-6

10

NORTHERN ETHANOL, INC.

(A DEVELOPMENT STAGE COMPANY)

(Formerly BEACONSFIELD I, INC.)

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

2. SIGNIFICANT ACCOUNTING POLICIES (continued):

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 14.

f) Impairment of long-lived assets:

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

g) Capitalized interest:

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

h) Deferred financing costs:

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

i) Stock-based compensation:

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

F-7

11

NORTHERN ETHANOL, INC.

(A DEVELOPMENT STAGE COMPANY)

(Formerly BEACONSFIELD I, INC.)

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

2. SIGNIFICANT ACCOUNTING POLICIES (continued):

j) 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 accumulated other comprehensive income.

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

k) Income taxes:

Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and are measured using enacted tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided when it is more likely than not that the full benefit of the deferred tax assets will not be realized. In June2006, the FASB issued FASB Interpretation No.48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No.109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, and disclosure. FIN 48 was adopted by the Company effective January 1, 2007. The adoption of FIN 48 did not have a material impact on the Company’s consolidated financial statements or results of operations.

l) Earnings (loss) per common share:

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

F-8

12

NORTHERN ETHANOL, INC.

(A DEVELOPMENT STAGE COMPANY)

(Formerly BEACONSFIELD I, INC.)

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

2. SIGNIFICANT ACCOUNTING POLICIES (continued):

m) Fair value of financial instruments:

The carrying value of cash and cash equivalents, bank indebtedness, accrued liabilities 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 in by the Company on or after January 1, 2007. The adoption SFAS No.155 did not have a material impact on the Company’s consolidated financial statements or results of operations.

n) Change in Accounting Policies:

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. The Company adopted SFAS No.157 effective January 1, 2008. The adoption of SFAS No.157 did not have a material impact on the Company’s consolidated financial statements or results of operations.

In September2006, 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 December31, 2006. The measurement requirements are effective for fiscal years ending December 31, 2008. The adoption of SFAS No.158 did not have a material impact on the Company’s consolidated financial statements or results of operations.

F-9

13

NORTHERN ETHANOL, INC.

(A DEVELOPMENT STAGE COMPANY)

(Formerly BEACONSFIELD I, INC.)

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

2. SIGNIFICANT ACCOUNTING POLICIES (continued):

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 adopted the provisions of SFAS No. 159 effective January 1, 2008. The adoption SFAS No.159 did not have a material impact on the Company’s consolidated financial statements or results of operations.

o) Recent Accounting Pronouncements:

In December 2007, the FASB issued a revised standard, SFAS No. 141R, “Business Combinations” (“SFAS No. 141R”) on accounting for business combinations. The major changes to accounting for business combinations are summarized as follows:

• SFAS No. 141R requires that most identifiable assets, liabilities, non-controlling interests and goodwill acquired in a business combination be recorded at “full fair value”

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

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

• Liabilities associated with restructuring or exit activities are recognized only if they meet the recognition criteria in SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, as of the acquisition date

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

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

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

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

F-10

14

NORTHERN ETHANOL, INC.

(A DEVELOPMENT STAGE COMPANY)

(Formerly BEACONSFIELD I, INC.)

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

2. SIGNIFICANT ACCOUNTING POLICIES (continued):

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

In March 2008, the FASB issued Statement of Financial Accounting Standards No.161, “Disclosures about Derivative Instruments and Hedging Activities – An Amendment of FASB Statement No.133”(“SFAS No. 161”). This statement requires entities to provide greater transparency in derivative disclosures by requiring qualitative disclosure about objectives and strategies for using derivatives and quantitative disclosures about fair value amounts of derivative instruments and gains and losses thereon. The statement is effective for periods beginning on or after November 15, 2008. The adoption of SFAS No.161 is not expected to have a material impact on the Company’s consolidated financial statements or results of operations.

In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). This statement identifies the sources of accounting principles and the framework for selecting the principles that are presented in conformity with generally accepted accounting principles in the United States. The statement is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. The adoption of SFAS No.162 is not expected to have a material impact on the Company’s consolidated financial statements or results of operations.

F-11

15

NORTHERN ETHANOL, INC.

(A DEVELOPMENT STAGE COMPANY)

(Formerly BEACONSFIELD I, INC.)

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

3. IMPAIRMENT OF BARRIE ASSETS:

During the third quarter ended September 30, 2008, the Company experienced significant cash flow issue (Note 2 (a) (ii)) concerning the availability of financing required to construct the Barrie facility. While the Company expects the zoning matter in (Note 17) to be resolved in its favor the persistence of the problems noted above as it relates to the lender caused management to revise its estimates of the future cash flows expected from this facility. These estimated cash flows indicate that the carrying value of the properties under development related to the Barrie facility as well as the asset under capital lease are less than their carrying value. The assets were written down to their fair value. Accordingly, the Company recorded an impairment charge in September 30, 2008 related to the Barrie facility as follows:

	September 30, 2008
Write off of Property Under Development	$	916,000
Assets Under Capital Lease	$	23,499,284
Total	$	24,415,284

4. ACCOUNTS RECEIVABLE:

	September 30, 2008		December 31, 2007
Canadian federal government Goods and Services tax receivable	$	45,659	$	30,136

F-12

16

NORTHERN ETHANOL, INC.

(A DEVELOPMENT STAGE COMPANY)

(Formerly BEACONSFIELD I, INC.)

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

5. DEPOSITS:

	September 30, 2008		December 31, 2007
Refundable deposit on non-binding letter of intent for Sarnia land purchase	$	9,397	$	10,088
Refundable deposit on head office lease utilities		1,118		1,200
Refundable deposit on non-binding letter of intent for Sarnia lease		980		1,009
Refundable deposit on non-binding letter of intent for Niagara Falls land purchase		10		10
	$	11,505	$	12,307

6. PREPAID EXPENSES:

	September 30, 2008		December 31, 2007
Prepaid rent for Barrie and head office leases (note 14)	$	277,555	$	297,966
Prepaid insurance		34,539		21,452
Prepaid other		4,930		8,026
	$	317,024	$	327,444

7. PROPERTY UNDER DEVELOPMENT AND EQUIPMENT:

September 30, 2008	Cost		Accumulated Depreciation		Net book Value
Properties under development	$	754,173	$	—	$	754,173
Computer equipment and software		49,913		36,198		13,715
Furniture and equipment		185,677		43,457		142,220
Leasehold improvements		40,138		17,705		22,433
	$	1,029,901	$	97,360	$	932,541

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

F-13

17

NORTHERN ETHANOL, INC.

(A DEVELOPMENT STAGE COMPANY)

(Formerly BEACONSFIELD I, INC.)

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

7. PROPERTY UNDER DEVELOPMENT AND EQUIPMENT (continued):

During the nine months ended September 30, 2008, the Company capitalized $485,388 of engineering and site design costs and $74,162 of legal advisory costs to the cost of property under development at the Barrie, Ontario, Sarnia, Ontario and Niagara Falls, New York locations that are being developed into ethanol production facilities. The Company will not capitalize costs to property under development beyond what is recoverable from operations. Depreciation of property under development will commence once the property has been determined to be available for its intended use. The assets will be depreciated over their estimated useful lives. During the three months ended September 30, 2008, the Company determined that the assets related to the Barrie site were not recoverable and an impairment of $916,000 was recorded (note 3)

8. ASSETS UNDER CAPITAL LEASE:

September 30, 2008	Cost		Asset impairment (note 3)		Net book Value
Assets under capital lease	$	23,499,284	$	(23,499,284)	$	-

December 31, 2007	Cost		Accumulated Depreciation		Net book Value
Assets under capital lease	$	22,749,105	$	—	$	22,749,105

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.

During the nine months ended September 30, 2008, the Company capitalized interest costs of $1,636,591, lessor’s operating cost charges of $450,427 and property tax of $321,733 to the cost of the assets under capital lease at the Barrie property that may be developed into an ethanol production facility. . See Note 3 for impairment of Barrie asset.

F-14

18

NORTHERN ETHANOL, INC.

(A DEVELOPMENT STAGE COMPANY)

(Formerly BEACONSFIELD I, INC.)

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

9. DEFERRED FINANCING COSTS:

	September 30, 2008		December 31, 2007
Non-refundable retainer paid to WestLB AG (note 16 c)		-		200,000
Deferred financing costs for WestLB AG commitment (note 16 c)		-		141,883
	$	-	$	341,883

As a result of the cash flow problems experienced by the Company as described in note 2 (a) (ii) and note 3 the Company determined that the deferred financing costs previously deferred should be written off.

10. BANK INDEBTEDNESS:

	September 30, 2008		December 31, 2007
Indebtedness under unauthorized bank overdraft	$	36,256	$	—
Indebtedness under Line of Credit Agreement		—		511,579
Indebtedness under corporate credit card		9,316		8,255
	$	45,572	$	519,834

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 of $469,192 and interest of $57,524 was repaid at the maturity of the Line of Credit Agreement on March 31, 2008 with funds borrowed under the Company’s line of credit with LDR Properties Inc. (note 11).

11. RELATED PARTY BALANCES AND TRANSACTIONS:

	September 30, 2008		December 31, 2007
Indebtedness under LDR Line of Credit Agreement	$	8,443,149	$	1,055,871

On July 9, 2007, the Company entered into a Line of Credit Agreement with Aurora Beverage Corporation (“Aurora”), wherein Aurora 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 was due on or before July 8, 2008. Effective December 14, 2007, the Line of Credit Agreement with Aurora was amended (the “First Amendment”) to increase the maximum principal amount of the loan to $2 million. On March 7, 2008, the Company entered into an amendment (the “Second Amendment”) wherein as a result of a reorganization, the lender was changed to LDR Properties Inc. (“LDR”), the line of credit was increased from $2,000,000 to $8,000,000 and the due date for this line of credit was amended from July 8, 2008, to July 8, 2009. Effective June 30, 2008, the Line of Credit Agreement with LDR was amended (the “Third Amendment”) to increase the maximum principal amount of the loan to $12 million. The principal and interest outstanding on this line of credit is now due on July 8, 2009. The balance of the terms of the initial Line of Credit Agreement remains as originally stated. As of September 30, 2008, a principal amount of $8,443,149 was outstanding under this LDR line of credit and interest of $261,416 was accrued as an accrued liability.

F-15

19

NORTHERN ETHANOL, INC.

(A DEVELOPMENT STAGE COMPANY)

(Formerly BEACONSFIELD I, INC.)

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

11. RELATED PARTY TRANSACTIONS (continued):

All draws on the LDR line of credit are subject to review and approval of the lender. On September 9, 2008, the Company was notified by LDR that its draw requests from August 15, 2008 would not be met and would be withheld until further advised.Subsequent to period end, LDR allowed the Company to continue to draw a very limited amount of the line of credit. As the LDR Line of Credit is the Company’s only source of financing and the Company is unable to draw sufficient funds, it has not been able to pay its liabilities including wages of employees or engage in development activities since August 15, 2008. The company continues to have the LDR line of credit in place however the draws are constrained. The Company is seeking alternative sources of financing.

Aurora Beverage Corporation and LDR Properties Inc, both Ontario corporations, are companies owned by the same individual that owns Fercan Developments Inc. (“Fercan”). Fercan owns 10,000,000 shares of the Company’s outstanding Common Stock or 9.6% interest.

During the nine months ended September 30, 2008, the Company received advances of $482,005 from the Company’s Chairman, President and Chief Executive Officer that were repaid on June 30, 2008 from advances under the LDR line of credit. The Company has not reimbursed the Company’s Chairman, President and Chief Executive Officer for expenses in the amount of $116,518 incurred on behalf of the Company. This amount is included in accounts payable at September 30, 2008.

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

In April 2006, the Company, through a Canadian subsidiary, entered into a lease for its head office space, as further discussed in note 14. Also in April 2006, the Company, through another Canadian subsidiary, entered into the Barrie lease for property to be used as an ethanol processing facility, as further discussed in note 14. These leases were entered into with Fercan. During the nine months ended September 30, 2008, lease payments due to Fercan of $3,366,522 that were included in accounts payable at December 31, 2007 and lease payments of 2,302,199 for the period up to August 31, 2008 were paid from advances under the LDR line of credit.

In September 2006, the Company deposited $200,000 in trust with Aurora, 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.

During the nine months ended September 30, 2008, the Company incurred legal fees and expenses of $39,250 (2007 - $87,652) with Andrew I. Telsey, P.C. for corporate and securities counsel. The amount due to Andrew I. Telsey, P.C of $75,863 was included in accounts payable at September 30, 2008. Andrew I. Telsey, the Company’s Corporate Secretary and one of its directors, is the sole shareholder of Andrew I. Telsey, P.C.

During the nine months ended September 30, 2008, the Company incurred consulting fees of $66,266 (2007 - $61,098) with Frank Klees. An amount of $63,428 due to Frank Klees was included in accrued liabilities at September 30, 2008 and an additional amount of $44,822 was included in accounts payable at September 30, 2008. Frank Klees is one of the Company’s directors.

During the nine months ended September 30, 2008, the Company purchased $nil (2007 - $2,024) 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. All transactions with related parties are at arm’s length.

F-16

20

NORTHERN ETHANOL, INC.

(A DEVELOPMENT STAGE COMPANY)

(Formerly BEACONSFIELD I, INC.)

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

12. STOCK OPTIONS:

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

A summary of the status of Company’s stock option plan as of September 30, 2008 and of changes in options outstanding under the Company’s plan during the nine month period ended September 30, 2008 is as follows:

	Number of Shares		Weighted Average Exercise Price
Outstanding at September 30, 2008 and December 31, 2007	5,090,000	$		1.00
Options exercisable at September 30, 2008	4,225,196	$		1.00
Non-vested options at September 30, 2008	864,804	$		1.00

Stock options outstanding as of September 30, 2008, 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	5,090,000	2.95	$	1.00	4,225,196	$	1.00

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

Risk-free interest rate	4.2% to 5.1	%
Volatility factor of the future expected market price of the Company’s common shares	86.6	%
Weighted average expected life in years	5.0
Weighted average forfeiture rate	3.2	%
Expected dividends	None

The fair value of the options granted as determined above was $3,387,382, of which $260,338 was expensed during the nine month period ended September 30, 2008 (September 30, 2007 – $856,653). The weighted average fair value per share for the options granted above was $0.66.

Subsequent to the period end September 30, 2008, the Company extended the term of outstanding stock options granted to members of the Company’s Board of Directors under the Company’s 2006 Stock Option Plan for an additional period of two years. The effect of the amendment will be determined in the fourth quarter of 2008. In addition, as a result of the resignation of the Company’s employees, options to purchase an aggregate of 489,000 shares of the Company’s Common Stock terminated pursuant to their terms.

F-17

21

NORTHERN ETHANOL, INC.

(A DEVELOPMENT STAGE COMPANY)

(Formerly BEACONSFIELD I, INC.)

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

13. CAPITAL STOCK:

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

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

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

14 LEASE AGREEMENTS:

On April 20, 2006, the Company entered into a lease agreement through its wholly-owned subsidiary, Northern Ethanol (Barrie) Inc, for a 25 year lease, with two ten-year optional renewal periods on the same terms and conditions and at market rates for similar properties in the area at renewal, 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. See note 3 for Barrie asset impairment.

The terms of the leases require the following minimum payments:

Fiscal Year		Barrie Lease			Head Office Lease		Total
Balance of 2008	$		533,265	$	42,285	$	575,550
2009			2,133,062		169,141		2,302,203
2010			2,133,062		169,141		2,302,203
2011			2,133,062		70,475		2,203,537
2012			2,133,062		—		2,133,062
Thereafter			45,041,739		—		45,041,739
Total minimum lease payments	$		54,107,252	$	451,042	$	54,558,294
Less amount representing interest of 12%			36,588,427
			17,518,825
Less current portion			32,550
	$		17,486,275

F-18

22

NORTHERN ETHANOL, INC.

(A DEVELOPMENT STAGE COMPANY)

(Formerly BEACONSFIELD I, INC.)

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

14. LEASE AGREEMENTS (continued):

The Barrie lease payments are due on a monthly basis starting in November 2006. Upon commissioning of the ethanol facility at the Barrie location, the carrying value of the assets under capital lease will be amortized on a straight line basis over the period remaining in the 25 year term. The interest cost implicit in the capital lease obligation 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 lease requires total payments of C$57,580,935 ($54,107,252) over the remaining term of the lease, of which C$38,937,401 ($36,588,427) is interest and C$18,643,534 ($17,518,825) is the repayment of the capital lease principal amount. The capital lease principal will be paid down by C$34,640 ($32,550) as a result of monthly lease payments that will be made over the next year.

During the nine months ended September 30, 2008,the outstanding monthly lease payments under the Barrie lease totaling C$5,256,667 ($4,939,548) and under the Head Office lease totaling C$225,000 ($211,426) that had been previously deferred under agreement with the lessor from February 2007 and June 2007 respectively, were paid up to the period ended August 31, 2008. Under agreement with the lessor, monthly lease payments under the Barrie and Head Office leases from September 1, 2008 have been deferred until the LDR line of credit is made available or the Company obtains alternative financing.

15. 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.

16. COMMITMENTS:

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

In September 2006, the Company entered into a similar agreement with Delta relating to the construction of an ethanol plant having a production capacity of 108 million gallons per year in Sarnia, Ontario, Canada. Delta was paid an initial amount of $70,000 and that non-refundable amount was recorded as a prepaid expense at December 31, 2006 and then reclassified and capitalized to property under development on July 30, 2007 with the execution of the Agreement of Purchase and Sale with LANXESS Inc. described in note 16 d). The remaining balance of $30,000 due to 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.

F-19

23

NORTHERN ETHANOL, INC.

(A DEVELOPMENT STAGE COMPANY)

(Formerly BEACONSFIELD I, INC.)

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

16. COMMITMENTS (continued):

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.

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 services on 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 sheets is conditional on the Company obtaining subordinate debt or equity investment for the remaining 25% of construction costs.

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

The Company paid a non-refundable retainer deposit of $200,000 to WestLB on execution of the engagement letter and indicative term sheets to be used towards WestLB’s costs and expenses in connection with financing. The Company will also pay WestLB’s costs and expenses in connection with the financing. During the nine months ended September 30, 2008, the Company incurred $4,284 towards WestLB’s costs and expenses. As a result of the cash flow problems experienced by the Company as described in Note 2(a) (ii) and Note 3, the deferred financing costs previously deferred and incurred during the nine months ended September 30, 2008 were written off. See Note 9. In the event that the 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.

F-20

24

NORTHERN ETHANOL, INC.

(A DEVELOPMENT STAGE COMPANY)

(Formerly BEACONSFIELD I, INC.)

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

16. COMMITMENTS (continued):

Until the senior loan has been fully drawn, the Company shall pay a commitment fee of 0.50% on the unutilized portion. The interest rate on the subordinate financing will be at LIBOR plus an anticipated spread of 1000 basis points. As the subordinate financing will be fully drawn on closing there will be no commitment fees applicable on that facility. Other covenants, representations and warranties will form part of the final documentation on closing of the loan agreement.

d) On July 30, 2007 and as amended on June 26, 2008, 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 ($441,306) by March 31, 2009, 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 ($422,853), it will pay LANXESS a non-refundable amount of C$100,000 ($93,967) immediately, C$325,000 ($305,394) when the construction of the ethanol plant begins and C$325,000 ($305,394) when the ethanol plant commences operation for a total of C$750,000 ($704,755) 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 June 30, 2009, LANXESS has the option to reacquire the land for C$450,000 ($422,853). The Company paid a refundable interest bearing deposit amount of C$10,000 ($9,397) on execution of the Agreement.

e) On December 18, 2007 and as first amended on March 14, 2008 and as second amended on May 16, 2008, the Company entered into a Purchase and Sale Agreement with Praxair Inc. (“Praxair”), to acquire approximately 70 acres of land located in Niagara Falls, NY. The cost of this property is $5,000,010, payable as follows: (i) a refundable payment of $10 on execution of the Agreement; (ii) $100,000 to be paid within ten (10) days after receipt of a fully executed Brownfield Site Cleanup Agreement by and between the Company and the Commission of the New York State Department of Environmental Conservation, (iii) the sum of Four Million Nine Hundred Thousand ($4,900,000) on the date that funding is available to the Company under all agreements related to the financing of the construction of an ethanol production facility at this location. The Agreement is conditional upon the Company’s satisfaction with its physical inspection of the land, the environmental test data necessary to qualify for the New York State Brownfield Cleanup Program Governmental Incentive Program, the zoning and permitting for use as an ethanol production facility and the Company obtaining financing for the land purchase and plant construction. If the Company terminates the Agreement due to failure to have these conditions satisfied then it will receive a refund of its deposits together with any interest thereon.

F-21

25

NORTHERN ETHANOL, INC.

(A DEVELOPMENT STAGE COMPANY)

(Formerly BEACONSFIELD I, INC.)

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

16. COMMITMENTS (continued):

f) On March 12, 2008, the Company entered into a term sheet with SK Engineering & Construction Co. Ltd. (“SK E&C”) for the development of an engineering, procurement and construction (“EPC”) contract for its proposed ethanol plant to be located in Sarnia, Ontario, Canada. The term sheet provides that SK E&C will deliver an EPC contract price within 5½ months of the execution of a Phase 2 Project Development Agreement with Delta (Note 16 g)) whereby Delta will provide a basic process engineering package to allow SK E&C to develop an EPC contact price. On October 9, 2008, SK E&C notified the Company that due to delays, the EPC contract price will be delivered in January 2009. If that price is acceptable and the Company has sufficient funds available, the Company expects to execute the EPC contract within 30 days and proceed to close financing and begin construction at the Sarnia site within 30 days thereafter. In the event that the Company does not execute an EPC contract with SK E&C, it will be required to pay a cancellation fee of $300,000.

g) Effective May 5, 2008, the Company executed a Phase 2 Project Development Agreement (“Phase 2 Agreement”) with Delta for the Company’s proposed ethanol plant to be located in Sarnia, Ontario, Canada on the payment of a $200,000 non-refundable fee. Under this Phase 2 Agreement, Delta will provide a preliminary site layout, a preliminary mass and energy balance and a preliminary process flow diagram for the proposed plant, as well as process emissions data to assist with environmental permitting, system design specifications and a basic process engineering package suitable for estimating construction cost. A further non-refundable fee of $200,000 to Delta is included in accounts payable at September 30, 2008 with the September 2008 delivery of the basic process engineering package. These costs have been capitalized as part of Property under development. The Company will also reimburse Delta for all travel and related expenses incurred in connection with this Phase 2 Agreement. Delta’s sole remedy in the event the Phase 2 Agreement is breached by the Company is limited to the non-refundable fees of $400,000. The relationship between Delta and the Company is exclusive during the five-year term of the Phase 2 Agreement whereby the Company has agreed to use its best efforts to enter into an engineering procurement and construction contract or a technology agreement with Delta at the Sarnia location and if it fails to do so, to give Delta a first right of refusal for 60 days to assume any agreement made with another ethanol plant technology vendor.

h) In August 2008, the Company committed to pay bonuses to its employees within ten business days of the financial closing of the Company’s first ethanol production facility. The bonuses are in recognition of the employees’ contribution to the Company’s development and are to be calculated based on an agreed percentage of the employees’ base salary from the date of commencement of employment to the date of the financial closing of the Company’s first ethanol production facility. If the financial closing for the Sarnia plant were to occur as described in Note 16 f), the amount of the contingent bonus payable would have be C$1,074,000 ($1,009,000), however most of these employees are no longer with Company.

i) On August 19, 2008, the Company entered into an agreement with DEMC Capital LLC (“DEMC”) to compensate DEMC for introducing the Company to potential financing sources for the proposed ethanol plants and to potential purchasers of the anticipated ethanol and dried distillers grain production. The agreement with DEMC provides for payment of an amount equal to 8% of the total amount that is financed through entities introduced to the Company by DEMC and that agree to provide such financing. The Company has agreed to pay DEMC a $200,000 retainer, plus an additional $100,000 when an equity financing commitment letter is produced and accepted by WestLB. The DEMC agreement also provides for the Company to pay a bi-monthly retainer of $5,000. All amounts paid to DEMC shall be applied against the 8% payment previously discussed. Subsequent to period end, the Company paid DEMC $75,000 and thereafter the agreement was terminated.

F-22

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NORTHERN ETHANOL, INC.

(A DEVELOPMENT STAGE COMPANY)

(Formerly BEACONSFIELD I, INC.)

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

17. CONTINGENCIES:

(a) On October 7, 2008, North American (Park Place) Corporation (“Applicant”) withdrew its Notice of Application (“Application”) against Fercan Developments Inc., Northern Ethanol (Barrie) Inc., Northern Ethanol (Canada) Inc. and the City of Barrie (“Respondents”), applying for a declaration that the zoning of the property at 1 Big Bay Point Road, Barrie, Ontario does not permit the property to be used as an ethanol production plant, for a permanent injunction prohibiting the property from being used as an ethanol production plant and for the costs of the Application to be paid by the Respondents.

(b) In December 2008 an action was commenced against the Company by three former senior management employees requesting a total of $946,169 for wages, insurance benefits, vacation pay, car allowances and a claim for wrongful dismissal. The complaint also includes claims for bad faith, malice punitive and exemplary damages, pre and post judgment interest and costs. These claims arose as a result of the Company’s inability to pay wages to its employees commencing in approximately August 2008. The Company will be defending these actions.

18. SUBSEQUENT EVENTS:

On October 3, 2008, the Company received a loan of $100,000 from GLSK Consultants Inc. The loan is interest bearing at a rate of 1% per month, is unsecured and is repayable on January 2, 2009. The Company is currently negotiating the extension of the loan term. In addition, GLSK Consultants Inc., received 500,000 common share purchase warrants, each exercisable to purchase one share of the Company’s Common Stock at an exercise price of $0.01 per share with an expiry date of October 3, 2013. The warrants shall be protected against future retraction/consolidation events, if any. In the event of a dilution event, the amount of warrants issuable to GLSK Consultants Inc. shall increase to reflect the same percentage holding of Northern Ethanol, Inc. common shares as before the dilution event.

In November all but two of the Company’s employees resigned as a result of the Company’s failure to pay wages.

F-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. You should carefully consider all of the risks and all other information contained in or incorporated by reference in this report and in our filings with the SEC. These risks are not the only ones we face. Additional risks and uncertainties not presently known to us, or which we currently consider immaterial, also may adversely affect us. If any of these risks actually occur, our business, financial condition and results of operations could be materially and adversely affected.

OVERVIEW

We were 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, we issued 150,000 shares (pre-forward split) 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 then business plan that is described herein. 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.

RESULTS OF OPERATIONS

Comparison of Results of Operations for the three months ended September 30, 2008 and 2007

          During the three-month periods ended September 30, 2008 and 2007, we did not generate any revenues.

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During the three-month period ended September 30, 2008, we incurred costs and expenses totaling $25,635,543, including $24,415,284 for Barrie asset impairment, $343,729 for write off of the deferred financing costs, $433,355 in salaries and benefits, $197,569 in general and administrative expense, $46,363 in occupancy costs, a foreign exchange loss of $23,099, $11,035 in depreciation expense and $165,109 in interest expense.

During the three month period ended September 30, 2008, we experienced significant cash flow issues concerning the availability of finance required to construct our Barrie facility resulting in our recording an impairment of $24,415,284 relating to the Barrie asset under lease and Barrie property under development. We also wrote off the deferred financing costs of $343,729 previously deferred as a result of these cash flow problems.

The general and administrative expense of $197,569 included legal and accounting fees of $40,152, consulting fees of $101,580, travel related costs of $9,268 and other miscellaneous costs totaling $46,569. Occupancy costs of $46,363 are the costs of rent, utilities, insurance and maintenance for our head office location that we began leasing on April 20, 2006. The foreign exchange loss of $23,099 occurred due to the impact of the strengthening of the US$ dollar against the C$ dollar during the period on the C$ dollar expenses of our Canadian subsidiaries. Net interest costs of $165,109 arose largely on an accrual of $165,005 on funds borrowed from the LDR Properties Inc. (“LDR”) line of credit. The interest rate on the LDR line of credit is 8% per annum.

During the three-month period ended September 30, 2007, our total expenses were $751,296, including $440,195 in salaries and benefits, $291,422 in general and administrative expense, $46,784 in occupancy costs, a foreign exchange gain of $58,829, $10,723 in depreciation expense and $21,001 in interest expense. Salaries and benefits declined $6,840 in the three-month period ended September 30, 2008 from the same period in 2007 due to a $24,887 decline in stock based compensation expense in the current period, partially offset by an increase in the rate of exchange on the translation of our Canadian dollar based compensation. General and administrative expenses fell $93,853 from the same period due to a $99,808 reduction in legal and accounting fees incurred on a pending registration statement with the SEC and a $14,582 increase in consulting costs when we incurred additional $50,000 for advice on equity financing and off-take agreements in 2008 with an offsetting decrease in amounts of $22,318 associated with due diligence on the aborted Quad County Corn Processors acquisition and of $9,541 for community relations work in Barrie incurred during the same period in 2007. A foreign exchange gain was recorded in the three-month period ended September 30, 2007 as the Canadian dollar appreciated against the US dollar in the period whereas in the same three-month period in 2008 it weakened resulting in a foreign exchange loss. Interest costs in three-month period ended September 30, 2008 increased $144,109 over the same period in the prior year due to borrowings growth needed to fund continued development and due to the utilization of the LDR line of credit on June 30, 2008 to pay past due rent on the Barrie and Head Office leases from February 2007 and June 2007 respectively.

          As a result, we incurred a net loss of $25,635,543 for the three-month period ended September 30, 2008 ($0.25 per share), compared to a net loss of $751,296 for three-month period ended September 30, 2007 ($.01 per share).

Comparison of Results of Operations for the nine months ended September 30, 2008 and 2007

During the nine-month periods ended September 30, 2008 and 2007, we did not generate any revenues.

During the nine-month period ended September 30, 2008, we incurred costs and expenses totaling $27,077,102, including $24,415,284 for Barrie asset impairment, $343,729 for write off of the deferred

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financing costs, $1,241,047 in salaries and benefits, $607,678 in general and administrative expense, $143,383 in occupancy costs, a foreign exchange loss of $39,714, $33,649 in depreciation expense and $252,618 in interest expense.

During the nine month period ended September 30, 2008, we experienced significant cash flow issues concerning the availability of finance required to construct our Barrie facility resulting in our recording an impairment of $24,415,284 relating to the Barrie asset under lease and Barrie property under development. We also wrote off the deferred financing costs of $343,729 previously deferred as a result of these cash flow problems.

The general and administrative expense of $607,678 included legal and accounting fees of $151,686, consulting fees of $206,266, travel related costs of $91,427 and other miscellaneous costs totaling $158,299. Occupancy costs of $143,383 are the costs of rent, utilities, insurance and maintenance for our head office location that we began leasing on April 20, 2006. The foreign exchange loss of $39,714 occurred due to the impact of the strengthening of the US$ dollar against the C$ dollar during the period on the C$ dollar expenses of our Canadian subsidiaries. Net interest costs of $252,618 arose on the Union Capital Trust (“Union”), LDR Properties Inc. (“LDR”) lines of credit and on advances from our Chairman, President and Chief Executive Officer. The Union line of credit was repaid at the maturity of the Line of Credit Agreement on March 31, 2008 with funds borrowed under the Company’s line of credit with LDR and the advances from our Chairman, President and Chief Executive Officer were repaid on June 30, 2008 also by funds borrowed from LDR. The interest rate on the Union line of credit is 12% per annum and on the LDR line of credit and the advances from our Chairman, President and Chief Executive Officer the rate is 8% per annum. Interest amounts of $15,137, $228,404 and $8,604 were accrued on funds borrowed from these financing sources respectively during the nine-month period ended September 30, 2008.

During the nine-month period ended September 30, 2007, our total expenses were $2,784,583, including $1,760,377 in salaries and benefits, $916,029 in general and administrative expense, $132,255 in occupancy costs, a foreign exchange gain of $87,701, $29,895 in depreciation expense and $33,728 in interest expense. Salaries and benefits declined $519,330 in the nine-month period ended September 30, 2008 from the same period in 2007 primarily due to a $596,315 decline in stock based compensation expense in the current period, that was partially offset by the impact of the 8% appreciation of the Canadian dollar against the US dollar on salaries and benefits paid in Canadian dollars. There was no change in the number of employees or the Canadian dollar salary amounts paid from the same nine-month period in 2007. General and administrative expenses fell $308,351 from the same period last year when we incurred legal and accounting costs of $110,835 associated with due diligence on the aborted Quad County Corn Processors acquisition, legal and accounting costs of $62,515 in regard to a pending registration statement with the SEC, general corporate legal costs of $62,755, legal costs of $11,073 prior to securing a land purchase agreement in Sarnia and consulting costs of $61,687 for assistance with establishing our corporate governance and human resource policies, and of $9,541 for community relations work in Barrie incurred in 2007 with an offsetting increase in $50,000 additional amounts relating to advice on equity financing and off-take agreements incurred during the same period in 2008. A foreign exchange gain was recorded in the nine-month period ended September 30, 2007 as the Canadian dollar appreciated against the US dollar in the period whereas in the same nine-month period in 2008 it weakened resulting in a foreign exchange loss. Interest costs in the nine-month period ended September 30, 2008 increased $218,890 over the same period in the prior year due to borrowings growth needed to fund continued development and due to the utilization of the LDR line of credit on June 30, 2008 to pay past due rent on the Barrie and Head Office leases from February 2007 and June 2007 respectively.

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As a result, we incurred a net loss of $27,077,102 for the nine-month period ended September 30, 2008 ($0.26 per share), compared to a net loss of $2,784,583 for nine-month period ended September 30, 2007 ($0.03 per share).

We do not expect to begin generating revenues until such time as our ethanol plants described herein under “Plan of Operation” become operational, assuming that we are able to commence development of these proposed ethanol plants. As of the date of this report we are reviewing the feasibility of continuing our business plan. See “Plan of Operation” below. If we do elect to proceed with our business plan we cannot estimate when we will commence construction, or when any of these plants will become operational. Following is our Plan of Operation.

PLAN OF OPERATION

In July 2006 we adopted a business plan to initially construct and operate threeethanol plants. Our goal was to produce ethanol in Ontario and New York State and to market and sell ethanol in Central Canada and the Eastern United States. In this regard we identified three proposed sites on which to build ethanol processing facilities including two locations in Ontario, Canada (Barrie and Sarnia) and one in Niagara Falls, New York for total planned production capacity of approximately 324 million gallons per annum. Each of these locations was expected to be the site for a corn-based ethanol processing facility. However, as a result of our lack of working capital, our management is currently reviewing the feasibility of our existing business plan. While no definitive decisions have been reached regarding our future endeavors, to date we have engaged in various discussions and negotiations with third parties who have expressed an interest in purchasing our proposed ethanol plant locations, either in the aggregate or individually. These possible sales will include all of the assets of each location, including all permits obtained to date, contract rights, intellectual engineering schematics and other intellectual property and miscellaneous computers and furniture. There are no assurances that any of our assets will be sold on favorable terms, or at all. If these assets are sold, we will utilize the net proceeds derived from such sale(s) to pay our past due accounts payable and other obligations. Our management will then consider other possible business ventures if the same is deemed feasible.

To date, we have secured, or have contractual rights to secure, sites to build ethanol processing facilities at the following locations, in the capacities indicated. As discussed above, all or a portion of these sites may be sold in the foreseeable future. We have intentionally limited the following discussion to describe the various assets and contractual obligations that currently exist. For a more detailed discussion of these matters, investors should review our prior reports filed with the Securities and Exchange Commission:

• Barrie, Ontario, Canada; 108 million gallons – This 35 acre site has been obtained under a 25 year lease with two ten year renewal options at the then current market for comparable properties. The lease allows us to utilize all existing site infrastructure and demolish or modify existing structures to optimize plant operations. We are leasing our Barrie site and our Head Office space from Fercan Developments Inc., a company that owns 10,000,000 shares of our outstanding Common Stock, or 9.6% interest. As of the date of this Report, a portion of the existing structures at the Barrie site have been demolished by the lessor for safety reasons.

Because of our limited financial resources and as Barrie is no longer our prime development site, it is doubtful that we will be able to afford to develop the Barrie site. As a result, we recorded an impairment charge of $24,415,284 relating to the Barrie asset under lease and Barrie property under development during the three month period ended September 30, 2008.

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• Sarnia, Ontario, Canada; 108 million gallons – Effective July 30, 2007 and as amended on June 26, 2008, 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. 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. Closing of this acquisition is required to take place no later than March 31, 2009. The Sarnia location offers an existing rail spur, steam connection from a neighboring power plant, utility connections and dock facilities.

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 a non-refundable amount of C$100,000 to be paid upon our satisfaction and waiver of the conditions discussed above. The remaining C$650,000 shall be paid in two equal installments of C$325,000. The first such installment shall be paid on or before the date which is the date the contractor under the EPC Contract begins construction of our ethanol plant and the second such installment shall be paid on or before commencement of the operation of our proposed ethanol plant. If after closing of the Lanxess Agreement we have not commenced construction of our ethanol plant under the EPC Contract by June 30, 2009, 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.

• Niagara Falls, New York; 108 million gallons – On December 18, 2007 and as first amended on March 14, 2008 and as second amended on May 16, 2008, we entered into a Purchase and Sale Agreement with Praxair, Inc. (“Praxair”), to acquire approximately 70 acres of land located in Niagara Falls, NY. The cost of this property is $5,000,010, payable as follows: (i) an earnest money payment of Ten Dollars ($10) made simultaneously with the execution of the Agreement; (ii) a further sum of One Hundred Thousand Dollars ($100,000) to be paid within ten (10) days after our receipt of a fully executed Brownfield Site Cleanup Agreement by and between us and

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the Commission of the New York State Department of Environmental Conservation; (iii) the sum of Four Million Nine Hundred Thousand Dollars ($4,900,000) on the date that funding is available. The Niagara Falls location offers an existing rail spur, the possibility of a steam connection from a neighboring power plant and utility connections.

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

The Agreement also provides for the parties to enter into negotiations to complete a Service Agreement whereby Praxair will provide water from its exiting pump house in an amount sufficient to allow us to operate our proposed ethanol plant and ancillary operations, provide easements, right-of-ways and other rights as we may require to utilize Praxair’s river discharge facilities that are adjacent to the property, as well as to access the property, utilize the necessary utility services that will be required to operate the proposed ethanol facility and ancillary operations, if permitted, assign to us the rights to utilize the existing CSX Transportation (“CSX”) rail lines, or otherwise assist us in obtaining a new agreement with CSX in order to allow us access to the existing rail lines. The acquisition of the Property is not conditional upon our reaching mutually acceptable terms with Praxair for such Service Agreement. The failure to reach such an agreement could have a materially negative impact on our ability to develop an ethanol plant on the Property. In the event terms of a mutually acceptable Service Agreement are not reached and a relevant agreement executed within ten (10) days prior to closing, either party to the Agreement has the right to cancel and terminate the Agreement.

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

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

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• 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 other ethanol companies. All of the aforesaid locations have ease of access to all three modes, which are expected to reduce transportation costs. We believe the sites we have chosen provide access to a number of available local gasoline blending facilities owned by major refiners including Getty Oil, Imperial Oil (Exxon), PetroCanada, Shell and Suncor.

The potential drawbacks of these locations include higher transportation costs for feedstock and higher property costs. While no assurances can be provided, we believe that this will be offset by the reduced cost of transporting ethanol because of proximity to the end use market.

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

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

We will need to raise this $688 million amount in equity and/or debt financing to complete construction of the Barrie, Sarnia and Niagara Falls 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 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 engagement letter and indicative term sheets are conditional on our obtaining subordinate debt or equity investment for the remaining 25% of construction costs. There is no agreement with WestLB pertaining to our proposed Niagara Falls location.

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 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

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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 $110,581 for costs incurred by WestLB’s legal and engineering advisors from funds borrowed under our Line of Credit Agreements with LDR Properties Inc. (formerly Aurora Beverage Corporation) and Union Capital Trust. There is no termination date to the WestLB engagement letter. WestLB had indicated that they are interested in including our proposed Niagara Falls, New York location in their debt syndication but we have not received a revised engagement letter and indicative term sheet from them as of the date of this Report.

As previously reported with the execution of the SK E&C EPC term sheet for our Sarnia location on March 12, 2008, a convertible bond term sheet (“Bond Term Sheet”) dated November 14, 2007 between us and SinoUp & Rise Ltd. (“Sino”) of Beijing, China that contained a provision giving Sino the right to nominate the EPC Contractor became effective. Under the terms of the Bond Term Sheet, on condition of WestLB successfully completing the arrangement of our senior debt and subordinate debt financing, Sino agreed to provide the 25% balance of the financing (approximately $45 million per facility to a maximum total amount of $90 million) required for our Barrie and Sarnia ethanol facilities in the form of a 7 year convertible bond, subordinated to the WestLB senior and subordinated debt financing. As of the date of this Report Sino has advised that they are no longer interested in participating with us on these proposed projects, which is part of the reason why we are considering the alternatives described above.

We previously reported that we have had discussions with Sino regarding their participating in the financing of our proposed Niagara Falls, New York location. We have also discussed the financing required for our proposed Niagara Falls, New York location with investment bankers, financial institutions and private investors, but as of the date of this Report we have received no binding commitments. As of the date of this Report Sino has advised that they are no longer interested in participating with us on these proposed projects, which is part of the reason why we are considering the alternatives described above.

We may not be able to obtain sufficient funding from one or more investors or other financial institutions for our proposed locations. If such funding is obtained, it may not be on terms that we have anticipated or that are otherwise acceptable to us. It appears unlikely that we will be able to secure adequate financing, or financing on acceptable terms and as a result, we may be forced to abandon our construction of our planned ethanol production facilities. See “Risk Factors.”

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2008, we had $73 in cash and cash equivalents.

There is substantial doubt about our ability to continue as a going concern. The consolidated financial statements have been prepared on a going concern basis, which assumes that we will commence

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ethanol producing operations in the foreseeable future and accordingly will be able to realize its assets and discharge its liabilities in the normal course of operations. The Company has no revenue, no earnings, and negative operating cash flows, and has financed its activities through bank borrowings, loans from related parties, capital lease arrangements and the issuance of shares.

The Company’s only source of financing is a line of credit provided by a related party, LDR Properties. (See details below).

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 we 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.

          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. The trustee of the Union Capital Trust Line of Credit is Ronald Wyles. Ronald Wyles owns 10,000,000 shares of our outstanding Common Stock or 9.6% interest. Principal and accrued interest of $526,716 outstanding under the Union line of credit was repaid at maturity on March 31, 2008 with funds borrowed under our line of credit with LDR Properties Inc. as described herein.

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 was due on or before July 8, 2008. Effective December 14, 2007, the Line of Credit Agreement with Aurora was amended to increase the maximum principal amount of the loan to $2,000,000. On March 7, 2008, the Aurora Line of Credit Agreement was further amended, as a result of a reorganization, to change the lender to LDR Properties Inc. (“LDR”), to increase the loan principal amount to $8,000,000 and to extend the due date to July 8, 2009. Effective June 30, 2008, the Line of Credit Agreement with LDR was amended to increase the maximum principal amount of the loan to $12,000,000. The balance of the terms of the initial Line of Credit Agreement remains as originally stated. All draws on the LDR (formerly Aurora) line of credit are subject to review and approval of the lender. On September 9, 2008, we were notified by LDR that our draw requests from August 15, 2008 would not be met and would be withheld until further advised.As of the date of this report, LDR has allowed us to continue to draw a very limited amount of our line of credit. Each of our submissions to draw down on this line of credit is reviewed by LDR and thereafter, we are advised whether such submission will be honored. We have been relying upon this line of credit arrangement to remain in business. As a result of our inability to draw down sufficient sums to allow us to pay our obligations as they become due, we have been forced to reconsider our business plan and begin discussions with various third parties to sell our existing assets. LDR, an Ontario corporation, is a company owned by the same individual that owns Fercan Developments Inc. (“Fercan”). Fercan owns 10,000,000 shares of our outstanding Common Stock, or

36

9.6%. As the LDR Line of Credit is our only source of financing, we have not been able to pay our liabilities, including wages for our employees or engage in any further development activities since August 15, 2008. In November 2008 most of our employees elected to resign their positions with us due to nonpayment of wages and other benefits we had been providing to them. As of the date of this report we only have two employees left, including Mr. Gord Laschinger, our Chief Executive Officer and Chief Financial Officer. We are seeking alternative sources of financing. To date we have been unable to secure any alternative source of financing and it is doubtful we will be able to do so in the foreseeable future.

On October 27, 2008 we obtained a three month unsecured loan from GSLK Consultants Inc. in the principal amount of $100,000 that bears interest at the rate of 1% per month and is repayable on January 9, 2009. We are currently negotiating the extension of the loan term. As additional consideration for this loan we issued 500,000 common stock purchase warrants, each warrant exercisable to purchase one share of our common stock at an exercise price of $0.01 per warrant. These warrants expire October 2, 2013. The warrants are protected against future retraction/consolidation event, if any. In the event of a dilution event, the number of warrants shall increase to reflect the same percentage holding of our common shares as before the dilution event We utilized the loan proceeds of this loan for operating expenses.

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 2008	$		533,265	$	42,285	$	575,550
2009			2,133,062		169,141		2,302,203
2010			2,133,062		169,141		2,302,203
2011			2,133,062		70,475		2,203,537
2012			2,133,062		—		2,133,062
Thereafter			45,041,739		—		45,041,739
Total minimum lease payments	$		54,107,252	$	451,042	$	54,558,294

We do not anticipate that we will be able to satisfy our current lease commitments.

INFLATION

          Although our operations are influenced by general economic conditions, we do not believe that inflation had a material effect on our results of operations during the nine-month period ended September 30, 2008.

CRITICAL ACCOUNTING ESTIMATES

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

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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 of the remaining structures and construction activities, we will use the findings of an engineering study that will be performed, with detailed recommendations on the usefulness of individual assets.

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

Deferred financing costs - Costs incurred to obtain debt financing, including all related fees are amortized as interest expense over the term of the related financing using the straight-line method which approximates the interest rate method. To the extent these fees relate to facility construction, a portion is capitalized with the related interest expense into construction in progress until such time as the facility is placed into operation.

Foreign currency translation – Our functional currency is United States dollars and the functional currency of our Canadian subsidiaries is 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

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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.

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

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

Recent accounting pronouncements – In December 2007, the FASB issued a revised standard, SFAS No. 141R, “Business Combinations” (“SFAS No. 141R”) on accounting for business combinations. The major changes to accounting for business combinations are summarized as follows:

• SFAS No. 141R requires that most identifiable assets, liabilities, non-controlling interests and goodwill acquired in a business combination be recorded at “full fair value”

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

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

• Liabilities associated with restructuring or exit activities are recognized only if they meet the recognition criteria in SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, as of the acquisition date

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

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

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

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

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

In March 2008, the FASB issued Statement of Financial Accounting Standards No.161, “Disclosures about Derivative Instruments and Hedging Activities – An Amendment of FASB Statement No.133”(“SFAS No. 161”). This statement requires entities to provide greater transparency in derivative disclosures by requiring qualitative disclosure about objectives and strategies for using derivatives and quantitative disclosures about fair value amounts of derivative instruments and gains and losses thereon. The statement is effective for periods beginning on or after November15, 2008. The adoption of SFAS No.161 is not expected to have a material impact on our consolidated financial statements or results of operations.

In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). This statement identifies the sources of accounting principles and the framework for selecting the principles that are presented in conformity with generally accepted accounting principles in the United States. The statement is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. The adoption of SFAS No.162 is not expected to have a material impact on our consolidated financial statements or results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable

ITEM 4T. CONTROLS AND PROCEDURES.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As of the end of the period covered by this quarterly report, our Chief Executive Officer/Chief Financial Officer conducted an evaluation of our disclosure controls and procedures. Based on his

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evaluation, our Chief Executive Officer/Chief Financial Officer has concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the applicable Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer/ Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

CHANGES IN INTERNAL CONTROLS

          We have remedied internal control weakness during our third fiscal quarter ended September 30, 2008 by filing amendments to our Form 10Q for the fiscal quarter June 30, 2008 to follow the disclosure requirements of Item 308T and to direct our management to maintain a current and in-depth knowledge on the disclosure requirements of the United States Securities and Exchange Commission.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On December 21, 2007, we received a Notice of Application (the “Application”) between North American (Park Place) Corporation (the “Applicant”) and Fercan Developments Inc., Northern Ethanol (Barrie) Inc., Northern Ethanol (Canada) Inc. and the City of Barrie (“Respondents”), applying for a declaration that the zoning of the property at 1 Big Bay Point Road, Barrie, Ontario does not permit the property to be used as an ethanol production plant, for a permanent injunction prohibiting the property from being used as an ethanol production plant and for the costs of the Application to be paid by the Respondents. The Application was withdrawn to be heard before a judge of the Ontario Superior Court of Justice on October 7, 2008.

We believe that the current zoning for the property does permit the production of ethanol and the possibility of the Applicant’s claim being successful is remote. Interim and proposed city by-law prohibit ethanol production. Our site plan application was done in June 2007. Therefore, management is of the opinion that our site application is grandfathered and therefore zoning will permit ethanol production. We have been and intend to continue to vigorously pursue our defense.

Subsequent Event

In December 2008 an action was commenced against us in the Ontario Superior Court of Justice, Ontario, Canada, Case NO. CV-08-00367734, by Messrs. Langille, Reader and Smith, all of whom were former members of our Company’s upper management and requests relief in the amounts of $300,142.75, $337,918.12 and $308,108.15, respectively, including wages, insurance benefits, vacation pay, car allowances and a claim for wrongful dismissal. The relevant complaint also includes claims for bad faith, malice punitive and exemplary damages, pre and post judgment interest and costs. These claims arose as a result of our inability to pay wages to our employees commencing approximately August 2008. We are defending these actions. See “Plan of Operation.” There are no assurances that we will be able to sell these locations, or if we are so successful, that we will be able to negotiate a mutually acceptable settlement with any of these former employees. We are relying on LDR for any costs associated incurred in defending these actions.

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ITEM 1A. RISK FACTORS

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.

RISKS RELATED TO OUR PROPOSED OPERATIONS

Most of our requests to draw down on our line of credit with LDR have been refused. As a result, we have been unable to pay salaries or other obligations as they become due in the normal course of business.In November 2008 most of our employees elected to resign their positions with us due to nonpayment of wages and other benefits we had been providing to them. As of the date of this report we only have two employees left, including Mr. Gord Laschinger, our Chief Executive Officer and Chief Financial Officer. We have also ceased all development activities applicable to our proposed ethanol plants and have begun negotiations and discussions with third parties to sell our existing assets. There are no assurances that we will be able to consummate a sale of these assets on favorable terms, or at all. If we are unable to sell these assets it is highly unlikely we will be able to continue in business. If we are successful in selling these assets and derive sufficient funds from such sale to pay our existing obligations, or reach settlement terms with our creditors, we may elect to change our business purpose. As of the date of this report no activity has been undertaken in this regard and so long as we have significant liabilities there can be no assurances that we will adopt a new business plan.

We have incurred losses in the past and expect to incur greater losses in the future. We are a development stage company and we have not yet commenced operations and do not expect that we will be financially able to develop our proposed ethanol plants. As of September 30, 2008, we had an accumulated deficit of $33,934,016. For the nine-month period ended September 30, 2008, we incurred a net loss of $27,077,102, and for the year ended December 31, 2007, we incurred a net loss of $3,577,498. While we no longer expect to incur costs associated with the development of our proposed ethanol plants with the lack of financing and our general and administrative expenses will decrease as a result of our losing our employees, we do expect to incur losses because we do not have any source of income.

In order to complete the construction of our planned ethanol production facilities, we needed the infusion of significant additional debt and equity funding which we have been unable to obtain. We anticipate that we will need to raise approximately $688 million in equity and/or debt financing to complete construction of our three proposed ethanol production facilities in Barrie and Sarnia, Ontario and Niagara Falls, New York. Because we have been unable to secure this financing we are currently attempting to sell our existing assets. There are no assurances we will be able to sell these assets on favorable terms, or at all. If we do not sell these assets we will be forced to go out of business.

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 any of the three ethanol plants discussed herein. As a result, we may elect to change our business plan to one that does not involve the development of ethanol plants. If we are able to sell our assets and pay off or otherwise settle our outstanding liabilities and adopt a new business plan, 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 a new business plan. If we do so, investors will suffer significant dilution.

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

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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 $110,581 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. Mr. Laschinger is the only management level employee that remains in our employ. The loss of Mr. Laschinger could result in our ceasing operations unless another person is retained, which is doubtful given our lack of working capital. 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 prevent the achievement of our business objectives.

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 will probably never complete construction of an ethanol production facility and commence significant operations in the ethanol industry.

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-K. We have evaluated our internal control systems in order to allow our management to report on our internal controls, as a required part of our annual report on Form 10-K that began with our reports for the fiscal year ended December 31, 2007. In addition, the independent registered public accounting firm auditing our company’s financial statements must also attest to and report on management’s assessment of the effectiveness of the company’s internal controls over financial reporting as well as the operating effectiveness of the company’s internal controls for the fiscal year ended December 31, 2009.

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

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

RISKS RELATED TO OUR COMMON STOCK

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

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of this report, trading in our Common Stock is limited. There is no assurance that a market will develop in the future or, if developed, that it will continue.

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

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

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

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

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

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Any adverse effect on the market price of our Common Stock could make it difficult for us to raise additional capital through sales of equity securities at a time and at a price that we deem appropriate. Holders of our shares of Common Stock registered pursuant to our Form SB-2 registration statement which became effective on September 26, 2007, are permitted, subject to few limitations, to freely sell these shares of Common Stock. Sales of substantial amounts of Common Stock, including shares issued upon the exercise of stock options issued pursuant to the Stock Plan we have adopted, or in anticipation that such sales could occur, may materially and adversely affect prevailing market prices for our Common Stock. In addition to the shares of Common Stock registered on our Form SB-2 registration statement, there is an aggregate of 4,720,667 shares of our Common Stock underlying options that have been issued and which may be exercised over the next 12 month period. Also, an aggregate of 100,000,000 shares of our Common Stock have been held by certain non-affiliates of our Company (as that term is defined under the Securities Act of 1933, as amended) for a period sufficient to allow them to sell their shares. If they do so, such sales could have a material and adverse affect on the prevailing market prices for our Common Stock, if and when such a market develops.

The market price of our Common Stock may decrease significantly in the future. The market price of our Common Stock may decrease as a result of our inability to successfully develop our proposed ethanol plant locations.

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.

RISKS RELATED TO OUR COMPANY

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

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

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

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have the ability to determine the outcome on all matters requiring approval of our shareholders, including the election of directors and approval of significant corporate transactions.

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

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On October 27, 2008 we obtained a three month unsecured loan from GSLK Consultants Inc. in the principal amount of $100,000 that bears interest at the rate of 1% per month and is repayable on January 9, 2009. We are currently negotiating the extension of the loan term. As additional consideration for this loan we issued 500,000 common stock purchase warrants, each warrant exercisable to purchase one share of our common stock at an exercise price of $0.01 per warrant. These warrants expire October 2, 2013. The warrants are protected against future retraction/consolidation event, if any. In the event of a dilution event, the amount of warrants shall increase to reflect the same percentage holding of our common shares as before the dilution event. We utilized the proceeds of this loan for operating expenses.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

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

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SIGNATURES

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

NORTHERN ETHANOL, INC.

Dated: December 23, 2008 By: s/Gordon Laschinger______________________ Gordon Laschinger, Chief Executive Officer & Chief Financial Officer

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