**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

** **

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** **

**FORM 10-KSB**

**ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THESECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2006**

 

Commission file number: **333-125335**

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**ADVANCED BIOENERGY, LLC**

(Exact name of Small Business Issuer as Specified inits Charter)
| **Delaware**                                                                                                                           |   | **20-2281511**                        |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or Other  Jurisdiction of Incorporation or Organization)                                                                        |   | (I.R.S. Employer  Identification No.) |
|                                                                                                                                   |   |                                  |
| **10201  Wayzata Boulevard, Suite 250  Minneapolis, Minnesota 55305(877) 651-1166**                                                    |
| (Address, including zip code, and telephone number, including area  code, of Small Business Issuer’s Principal Executive Offices) |
|                                                                                                                                   |
| Securities  registered pursuant to Section 12(b) of the Act:**None**                                                                   |
|                                                                                                                                   |
| Securities  registered pursuant to Section 12(g) of the Act:**None**                                                                   |

 

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Indicate by checkmark if the issuer is not required to file reports pursuant to Section 13 orSection 15(d) of the Exchange Act. Yes oNo x

Indicate by checkmark whether the issuer: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the issuer was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days. Yes x No o

Check if there isno disclosure of delinquent filers in response to Item 405 of Regulation S-Bcontained in this form, and no disclosure will be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in part III of this Form 10-KSB or any amendment tothis Form 10-KSB. x

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes oNo x

The aggregatemarket value of membership units held by non-affiliates of the registrant wasapproximately $95,817,540 as of December 27, 2006, based upon a price of $20.00per unit, which is the proposed price of units to be sold in the Company’sproposed registered securities offering. Units held by each executive officerand director have been excluded in that such persons may under certaincircumstances be deemed to be affiliates. This determination of executiveofficer status is not necessarily a conclusive determination for otherpurposes.

State the issuer’srevenues for its most recent fiscal year: $—

As of December 27,2006, the number of outstanding units was 8,613,481.

Traditional SmallBusiness Disclosure Format (check one) Yes oNo x

 

 

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**ADVANCEDBIOENERGY, LLCFORM 10-KSBFor the Fiscal Year Ended September 30, 2006**

**INDEX**
|                | ** ** | ** **                                                                                                          | ** ** | **Page** | ** ** |
|----------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| **PART I**     | ** ** | ** **                                                                                                          | ** ** |
| Item 1.   |       | Description of  Business                                                                                            |       |     |       |
| Item 1A.  |       | Risk Factors                                                                                                        |       |     |       |
| Item 2.   |       | Description of  Properties                                                                                          |       |     |       |
| Item 3.   |       | Legal Proceedings                                                                                                   |       |     |       |
| Item 4.   |       | Submission  of Matters to a Vote of Security Holders                                                                |       |     |       |
|           |       |                                                                                                                |       |     |       |
| **PART II**    | ** ** | ** **                                                                                                          | ** ** |
| Item 5.   |       | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |       |     |       |
| Item 6.   |       | Management’s  Discussion and Analysis or Plan of Operations                                                    |       |     |       |
| Item 7.   |       | Financial  Statements                                                                                               |       |     |       |
| Item 8.   |       | Changes in and Disagreements With Accountants on  Accounting and Financial Disclosure                               |       |     |       |
| Item 8A.  |       | Controls and Procedures                                                                                             |       |     |       |
| Item 8B.  |       | Other  Information                                                                                                  |       |     |       |
|           |       |                                                                                                                |       |     |       |
| **PART III**   | ** ** | ** **                                                                                                          | ** ** |
| Item 9.   |       | Directors, Executive Officers, Promoters and Control  Persons; Compliance with Section 16(a) of the Exchange Act    |       |     |       |
| Item 10.  |       | Executive Compensation                                                                                              |       |     |       |
| Item 11.  |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                     |       |     |       |
| Item 12.  |       | Certain Relationships and Related Transactions                                                                      |       |     |       |
| Item 13.  |       | Exhibits                                                                                                            |       |     |       |
| Item 14.  |       | Principal Accountant Fees and Services                                                                              |       |     |       |
|           |       |                                                                                                                |       |     |       |
| **SIGNATURES** | ** ** | ** **                                                                                                          | ** ** |

 

**INTELLECTUALPROPERTY**

*Advanced BioEnergy*TM, our logosand the other trademarks, tradenames and service marks of Advanced BioEnergymentioned in this report are our property. This report also contains trademarksand service marks belonging to other entities.

**INDUSTRYAND MARKET DATA**

We obtained the industry, market and competitiveposition data used throughout this report from our own research, studiesconducted by third parties, independent industry associations or generalpublications and other publicly available information. In particular, we havebased much of our discussion of the ethanol industry, including governmentregulation relevant to the industry and forecasted growth in demand, oninformation published by the Renewable Fuels Association, the national tradeassociation for the U.S. ethanol industry. Because the Renewable FuelsAssociation is a trade organization for the ethanol industry, it may presentinformation in a manner that is more favorable to that industry than would bepresented by an independent source. Forecasts are particularly likely to beinaccurate, especially over long periods of time.

**ETHANOLUNITS**

All references in this report to gallons of ethanolare to gallons of denatured ethanol. Denatured ethanol is ethanol blended withapproximately 5.0% denaturant, such as gasoline, to render it undrinkable andthus not subject to alcoholic beverage taxes.

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**SPECIAL NOTEREGARDING FORWARD-LOOKING INFORMATION**

This Annual Report on Form 10-KSB containsforward-looking statements regarding our business, financial condition, resultsof operations, performance and prospects. All statements that are nothistorical or current facts are forward-looking statements and are madepursuant to the safe harbor provisions of the Private Securities LitigationReform Act of 1995. Forward-looking statements involve known and unknown risks,uncertainties and other factors, many of which may be beyond our control, thatmay cause our actual results, performance or achievements to be materiallydifferent from any future results, performances or achievements expressed orimplied by the forward-looking statements. Certain of these risks anduncertainties are described in the “Risk Factors” section of this Annual Reporton Form 10-KSB. These risks and uncertainties include, but are not limited to,the following:

·                  we were adevelopment-stage company until recently and have only begun to generaterevenue with the acquisition of a non-controlling ownership interest inHeartland Grain Fuels;

·                  our board ofdirectors has significant discretion as to the use of proceeds in our proposedregistered offering and may choose to use the proceeds in a manner that differsfrom the manner in which certain of our members would choose to use theproceeds from our proposed registered securities offering, including if we arenot able to obtain the necessary approvals for our investment in the expansionof the Aberdeen plant;

·                  we may not haveavailable capital to complete the plants discussed in this report;

·                  we may notconsummate the acquisition of Heartland Producers’ interests in Heartland GrainFuels and Dakota Fuels, which could limit our influence over Heartland GrainFuels;

·                  we may notsuccessfully integrate Heartland Grain Fuels;

·                  cashdistributions depend upon our future financial and operational performance andwill be affected by debt covenants, reserves and operating expenditures;

·                  our future plantoperations are subject to construction risks and fluctuations in the prices ofgrain, utilities and ethanol, which are affected by various factors includingweather, production levels, supply, demand, changes in technology andgovernment support and regulations;

·                  we are verydependent on Fagen, Inc. and ICM, Inc. for the construction, design andtechnology for our plants and any loss of our relationships with Fagen and ICMmay cause us to delay or abandon the projects;

·                  conflicts ofinterest may arise in the future between us, our members, our directors and thecompanies upon which we will depend;

·                  the units aresubject to a number of transfer restrictions and no public market exists forour units and none is expected to develop;

·                  members’ votingrights are limited and we are managed by a board of directors and officers; and

·                  we may elect tomodify, terminate or abandon our proposed registered securities offering priorto receiving sufficient funds to fully capitalize our proposed Aberdeen plantexpansion or our proposed Indiana plant.

In some cases, you can identify forward-lookingstatements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,”“intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,”“would,” and similar expressions intended to identify forward-lookingstatements. Forward-looking statements reflect our current views with respectto future events, are based on assumptions and are subject to risks anduncertainties. Given these uncertainties, you should not place undue relianceon these forward-looking statements. Also, forward-looking statements representour estimates and assumptions only as of the date of this report. Except as required by law, we assume noobligation to update any forward-looking statements publicly, or to update thereasons actual results could differ materially from those anticipated in anyforward-looking statements, even if new information becomes available in thefuture. Readers are urged to carefully review and consider the variousdisclosures made by us in this report and in our other reports filed from timeto time with the Securities and 

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Exchange Commission,known as the Commission, that advise interested parties of the risks andfactors that may affect our business.

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**PART I**

**ITEM 1.           DESCRIPTION OF BUSINESS**

**ITEM 2.           DESCRIPTION OFPROPERTIES**

**COMPANY OVERVIEW**

Throughout this report weuse the terms “we,” “our company” and “us” to refer to Advanced BioEnergy, LLCand all of its consolidated subsidiaries, which includes Indiana RenewableFuels, LLC, ABE Acquisition, LLC, ABE Fairmont, LLC and ABE Northfield, LLC. Italso includes Heartland Grain Fuels, LLC, which is consolidated with AdvancedBioEnergy, LLC as of November 8, 2006.

We are a Delawarelimited liability company formed for the purpose of raising capital to develop,construct, own and operate ethanol plants and other biofuel businesses. Weintend to establish a multi-plant presence across the United States in order toensure access to a variety of markets for ethanol and co-products, capitalizeon transportation and logistics advantages and reduce the impact of drought ordisease in one part of the country that could affect the supply of corn andsale of our products. We plan to take a comprehensive and geographicallydiverse approach to ethanol production while keeping our commitment to thelocal communities in which these plants operate.

We are currentlyconstructing a 100 million gallons per year dry mill corn-processing ethanolplant near Fairmont, Nebraska, known as the Nebraska plant. The Nebraska plantis expected to process approximately 36 million bushels of corn per year into100 million gallons of denatured fuel grade ethanol, 321,000 tons of drieddistillers grains with solubles and 296,000 tons of raw carbon dioxide gas. Weare also planning the construction of a 100 million gallons per year dry millcorn-processing ethanol plant near Argos or Rochester, Indiana, known as theIndiana plant, and a 100 million gallons per year dry mill corn-processingethanol plant to be located near Northfield, Minnesota, known as the Minnesotaplant. We currently have a 53% interest in Heartland Grain Fuels, L.P. and anagreement to acquire the remaining interest. Heartland Grain Fuels owns andoperates dry mill corn-processing ethanol plants in Aberdeen and Huron, SouthDakota with production capacity of nine million gallons per year and 30 milliongallons per year, respectively. Heartland Grain Fuels also has an ethanol plantwith production capacity of 40 million gallons per year under construction inAberdeen, South Dakota, adjacent to its existing plant. The Aberdeen plantexpansion is expected to be completed during the first calendar quarter of2008.

Our websiteaddress is http://www.advancedbioenergy.com. Information on our website is notincorporated into this report.

We anticipate thatour business will primarily be that of the production and marketing of ethanoland distillers dried grains. We currently do not have any other lines ofbusiness or other sources of revenue if we are unable to complete theconstruction and operation of the plants, or if we are not able to marketethanol and its by-products.

We expect that theethanol production technology we will use in our plants will be supplied byFagen, Inc. and/or ICM, Inc. and that they will either own the technology orhave obtained any license to utilize the technology that is necessary.

**COMPANY STRUCTURE**

We recently formedtwo wholly owned subsidiaries, ABE Fairmont, LLC and ABE Northfield, LLC, toown and operate the Nebraska plant and the Minnesota plant, respectively. Bothnew subsidiaries are Delaware limited liability companies. All servicecontracts, credit agreements and regulatory permits that we originally enteredinto have been assigned to the appropriate subsidiary. Title to the land ownedfor the Nebraska plant has been transferred to ABE Fairmont, LLC, and theoptions to purchase land for the Minnesota plant have been assigned to ABENorthfield, LLC. Indiana Renewable Fuels, LLC, an Indiana limited liabilitycompany acquired by us on June 15, 2006, will own and operate the Indianaplant.

Heartland GrainFuels, L.P. is a Delaware limited partnership formed in 1991. Dakota Fuels,Inc. is the sole general partner of Heartland Grain Fuels with a .818% percentageinterest in Heartland Grain Fuels. On November 8, 2006, our wholly ownedsubsidiary HGF Acquisition, LLC purchased all of the limited partnershipinterests in Heartland Grain Fuels owned by SDWG and Aventine. Additionally,HGF Acquisition acquired all of the common shares of Dakota Fuels owned bySDWG, resulting in our subsidiary owning approximately 53% of the limitedpartnership interests in Heartland Grain Fuels and 51% of the common shares ofDakota Fuels. HGF 

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Acquisition also has anagreement to purchase, subject to certain closing conditions, all of thelimited partnership interests in Heartland Grain Fuels and the common shares ofDakota Fuels owned by Heartland Producers, LLC, which would result in HGFAcquisition owning 100% of Heartland Grain Fuels and Dakota Fuels.

**NEBRASKA PLANT**

**Location of Nebraska Plant**

We areconstructing an ethanol plant near Fairmont, Nebraska, in southeasternNebraska. We exercised two options and purchased the property to construct theNebraska plant in October 2005. We selected our primary Nebraska plant sitebecause of the site’s location relative to existing grain production,accessibility to road and rail transportation and proximity to major populationcenters. The site is near the main line of the Burlington Northern Santa FeRailroad. In addition, the site is also in close proximity to the intersectionof U.S. Highways 6 and 81.

In December 2005,we commenced site preparation for construction of our Nebraska plant. We expectto have construction completed in September 2007.

The Nebraska plantis expected to have the facilities to receive grain by truck and rail and toload ethanol and distillers grains onto trucks and rail cars. In terms offreight rates, rail is currently considerably more cost effective than trucktransportation to the more distant markets. The BNSF Railroad will provide railservice to the Nebraska site. The BNSF Railroad has developed unit train ratesthat allow lower rail freight rates. The Nebraska plant will have the propertrackage to allow it to load the larger unit trains and receive lower freightrates.

**Ethanol Marketing**

On July 19, 2006,we entered into an Ethanol Fuel Marketing Agreement with Renewable ProductsMarketing Group, LLC, known as RPMG, for the sale of our ethanol produced atthe Nebraska plant. Under the terms of the agreement, RPMG has agreed to marketthe entire amount of ethanol produced by the Nebraska plant pursuant to apooling arrangement maintained by the members of RPMG. We will receive a priceequal to the actual sale price received by RPMG, less the expenses ofdistribution and a marketing fee charged per gallon of ethanol sold. If we donot produce our estimated monthly ethanol production, RPMG may, after obtainingour consent which shall not be unreasonably withheld, purchase ethanolelsewhere to cover the shortfall and charge us for any resulting financial lossor pay us any resulting gain.

The initial termof the agreement is for 12 months beginning on the first day of the month thatwe initially ship ethanol and ending at the end of March or end of September,whichever occurs first, following the initial 12-month period. After theinitial term, it will automatically renew for successive one-year terms unlessterminated by either party upon 90 days’ written notice. The agreement may alsobe terminated for an uncured breach or intentional misconduct or upon mutualagreement of the parties.

**Distillers Grains and Carbon Dioxide**

We plan to marketand sell the distillers grains from the Nebraska plant to local, regional andnational markets. We have entered into a distillers grain marketing agreementwith Commodity Specialist Company for the sale of the entire distillers driedgrains with solubles output from the Nebraska plant. We have retained the rightto independently market our wet distillers grains and modified wet distillersgrains and solubles. Under the terms of the agreement, we will receive a priceequal to 99% of the actual sale price received by Commodity Specialist Companyfrom its customers, less customary freight costs and minus an amount equal to$0.90 per ton of distillers dried grains with solubles removed from theNebraska plant.

The Nebraska plantis expected to produce approximately 296,000 tons annually of raw carbondioxide as another by-product of the ethanol production process. At this time,we do not intend to capture and market our carbon dioxide gas.

**Corn Feedstock Supply**

We anticipate thatour Nebraska plant will need approximately 36 million bushels of grain per yearfor our dry milling process. We expect the corn supply for our plant will beobtained primarily from local markets. Traditionally, corn grown in the areaaround Fairmont, Nebraska has been fed locally to livestock or exported forfeeding or processing. In 2005, in the nine-county area surrounding thelocation of our Nebraska plant, corn production was approximately 201 millionbushels. The chart below describes the amount of corn grown in Fillmore andsurrounding counties for 2001 through 2005:

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| **County**    | ** ** | **2005 Corn  Production  (bushels)** | ** ** | **2004 Corn  Production  (bushels)** | ** ** | **2003 Corn  Production  (bushels)** | ** ** | **2002 Corn  Production  (bushels)** | ** ** | **2001 Corn  Production  (bushels)** | ** ** |
|---------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| Clay, NE      |       | 26,172,200                                |       | 24,518,100                                |       | 23,195,000                                |       | 21,941,000                                |       | 23,235,000                                |       |
| Fillmore, NE  |       | 28,160,400                                |       | 29,080,600                                |       | 27,122,000                                |       | 23,981,000                                |       | 24,886,000                                |       |
| Hamilton, NE  |       | 35,198,700                                |       | 34,958,800                                |       | 34,891,000                                |       | 34,123,000                                |       | 32,212,000                                |       |
| Jefferson, NE |       | 12,284,100                                |       | 12,312,000                                |       | 9,411,000                                 |       | 7,358,000                                 |       | 10,264,000                                |       |
| Nuckolls, NE  |       | 11,984,400                                |       | 10,730,000                                |       | 8,864,000                                 |       | 7,377,000                                 |       | 9,060,000                                 |       |
| Saline, NE    |       | 14,744,900                                |       | 16,447,400                                |       | 13,228,000                                |       | 12,044,000                                |       | 13,192,000                                |       |
| Seward, NE    |       | 19,478,400                                |       | 22,425,400                                |       | 18,102,000                                |       | 14,304,000                                |       | 17,491,000                                |       |
| Thayer, NE    |       | 18,424,800                                |       | 18,658,800                                |       | 16,672,000                                |       | 14,389,000                                |       | 16,430,000                                |       |
| York, NE      |       | 34,747,800                                |       | 36,867,500                                |       | 34,973,000                                |       | 31,077,000                                |       | 32,978,000                                |       |
| **Total**     |       | 201,195,700                               |       | 205,998,600                               |       | 186,458,000                               |       | 166,594,000                               |       | 179,748,000                               |       |

*Source: USDA, NASS*

We will bedependent on the availability and price of corn. The price at which we willpurchase corn will depend on prevailing market prices. Although the areasurrounding the plant produces a significant amount of corn and we do notanticipate problems sourcing corn, there is no assurance that a shortage willnot develop, particularly if there are other ethanol plants competing for corn,an extended drought or other production problems. In addition, our financialprojections assume that we can purchase grain for prices near the ten-yearaverage for corn in the area of the plant. We have determined that the averageprice of corn in this same nine-county area surrounding the Nebraska plant overthe last ten years is $2.36 per bushel.

The followingchart shows the ten-year average corn price in the nine-county area surroundingthe Nebraska plant: 
| County           | ** ** | **10-Year Average Corn  Price ($/Bu.)** | ** ** |
|------------------|------------|--------------------------------------------------------|------------|
| Clay, NE         |       | $                                                      | 2.36       |   |
| Fillmore, NE     |       | $                                                      | 2.36       |   |
| Hamilton, NE     |       | $                                                      | 2.38       |   |
| Jefferson, NE    |       | $                                                      | 2.35       |   |
| Nuckolls, NE     |       | $                                                      | 2.37       |   |
| Saline, NE       |       | $                                                      | 2.36       |   |
| Seward, NE       |       | $                                                      | 2.33       |   |
| Thayer, NE       |       | $                                                      | 2.37       |   |
| York, NE         |       | $                                                      | 2.37       |   |
| **Total / Avg.** | ** ** | **$**                                                  | **2.36**   | ** ** |

 

Grain prices areprimarily dependent on world supply and demand and on U.S. and global corn cropproduction, which can be volatile as a result of a number of factors, the mostimportant of which are weather, current and anticipated stocks and prices,export prices and supports and the government’s current and anticipatedagricultural policy. The price of grain has fluctuated significantly in thepast and may fluctuate significantly in the future. Historically, because themarket price of ethanol is not related to grain prices, ethanol producers aregenerally not able to compensate for increases in the cost of grain feedstockthrough adjustments in prices charged for their ethanol. Therefore, weanticipate that our plant’s profitability will be negatively impacted duringperiods of high corn prices.

**Utilities**

The production ofethanol is a very energy intensive process that uses significant amounts ofelectricity and natural gas. Water supply and quality are also importantconsiderations. On November 20, 2006, we entered into an energy managementagreement and an agency authorization agreement with U.S. Energy Services, Inc.to manage our energy supplies for our Nebraska, Indiana and Minnesota plants.As a part of this agreement, U.S. Energy Services has agreed to solicit bids andnegotiate, execute and administer energy supply contracts, interstatetransportation contracts and local distribution company transportationcontracts on our behalf. We have entered into an agreement for electric serviceto the Nebraska plant and plan to enter into agreements with local gas andwater 

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utilities to provide our needed energy and water.There can be no assurance that those utilities will be able to reliably supplythe gas, electricity and water that we need.

If there is aninterruption in the supply of energy or water for any reason, such as supply,delivery or mechanical problems, we may be required to halt production. Ifproduction is halted for an extended period of time, it may have a materialadverse effect on our operations, cash flows and financial performance.

*Natural Gas*

The Nebraska plantwill require approximately 3.2 billion cubic feet of natural gas per year. Theplant will produce process steam from its own boiler systems and dry thedistillers dried grains by-product via a direct gas-fired dryer. U.S. EnergyServices has identified three possible natural gas providers that could supplygas to the Nebraska plant and is currently soliciting bids from suppliers andexisting gas distribution utilities to build, operate, manage and maintainthose natural gas services. We are currently constructing our own natural gaspipeline from a common carrier main pipeline for the Nebraska plant. Theexpected cost for this pipeline is $4.2 million. The price we will pay fornatural gas has not yet been determined. Natural gas prices are volatile andmay lead to higher operating costs. Between January 1, 2001 and June 30, 2006,the price per MMBtu of natural gas based on NYMEX has ranged from a low of$1.83 to a high of $15.38. On November 29, 2006, the price of the NYMEX futurecontract for January delivery settled at $8.871 per MMBtu. Additionally, futureweather-related events may also adversely impact the supply and/or price ofnatural gas.

*Electricity*

On April 25, 2006,we entered into a contract for electric service with Perennial Public PowerDistrict, a public corporation and political subdivision of the State ofNebraska. This agreement will remain in effect for a term of five years fromthe initial billing period. The agreement will be renewed automaticallythereafter on an annual basis unless 12 months’ written notice of terminationis given by either party. Pursuant to this agreement, we agreed to purchase,and Perennial Public Power District agreed to supply, all of the electric powerand energy needed by the Nebraska plant. Perennial has agreed to install andmaintain the subtransmission line and substation facilities needed for electricservice. As a condition to Perennial Public Power District installing therequired electric service facilities, we have agreed to pay actual constructioncosts to Perennial Public Power District that exceed $812,394. The amount thatwe must pay is currently estimated at approximately $1.2 million. Preliminaryestimates on the delivered cost of electricity are from $0.037 to $0.0385 perkWh.

*Water*

The Nebraska plantwill require approximately 1.1 million gallons per day, or approximately 775gallons per minute, of water. We anticipate that we will have adequate watersupply from the agricultural wells located on site. The site has twoagricultural wells that are currently used for pivot irrigation purposes. Thesewells will have to be converted from agricultural to industrial uses prior toour use. Depending on water quality, we may have to drill one additional deeperwell to mix water with the supply in place.

Much of the waterused in an ethanol plant is recycled back into the process. There are, however,certain areas of production where fresh water is needed. Those areas includeboiler makeup water and cooling tower water. Boiler makeup water is treatedon-site to minimize all elements that will harm the boiler, and recycled watercannot be used for this process. Cooling tower water is deemed non-contactwater because it does not come in contact with the mash, and, therefore, can beregenerated back into the cooling tower process. The makeup water requirementsfor the cooling tower are primarily a result of evaporation. Depending on thetype of technology utilized in the plant design, much of the water can berecycled back into the process, which will minimize the discharge water. Thiswill have the long-term effect of lowering wastewater treatment costs. Many newplants today are zero or near zero effluent facilities. We anticipate the designof our Nebraska plant will incorporate a bio-methanator wastewater treatmentprocess resulting in a zero discharge of plant process water. Thebio-methanator system that we intend to use is designed and constructed byPhoenix Bio-Systems. The bio-methanator is a water recovery system that allowsthe plant to be a zero process water discharge facility. It is currently usedin 38 plants in states such as Nebraska, Iowa, Minnesota, South Dakota,Wisconsin, Kansas and Illinois. The bio-methanator is a biological andanaerobic process that removes the organic acid from reclaimed water, which inturn comes from the evaporator condensate. Organic acid is a byproduct of yeastfermentation, and if the water was returned back to the cook process withoutits removal, it would reduce the effectiveness of the yeast’s ability topromote fermentation, which would lower our ethanol yield. The result of thebiological processes produces biogas, or methane, which is used as fuel in thedrying 

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process. Although we have no knowledge of any failuresof a bio-methanator, we have no assurance that it will perform as anticipatedand any failures would cause a decrease in our ethanol yield.

**Regulatory Permits**

We will be subjectto extensive air, water and other environmental regulations and we will need toobtain a number of environmental permits to construct and operate the plant. Wehave engaged ICM to coordinate and assist us with obtaining all environmentalpermits, and to advise us on general environmental compliance. Fagen isresponsible for all necessary construction permits under our lump-sumdesign-build agreement for the Nebraska plant.

Of the permitsdescribed below, we obtained the preconstruction permit to construct an aircontaminant source and the general construction stormwater discharge permitprior to starting construction on the Nebraska plant. The remaining permitswill be required shortly before or shortly after operations begin. If for anyreason any of these permits are not granted, construction costs for the plantmay increase, or the plant may not be constructed at all. In addition torequirements imposed by the State of Nebraska, the United States EnvironmentalProtection Agency, known as the EPA, could impose conditions or otherrestrictions in the permits that are detrimental to us. These changes couldinclude a modification to the emissions limits in a permit or modifications ofthe testing protocols or methods that are part of the application or reportingprocess under a permit. The EPA or state agencies could take these actions atany time before, during or after the permitting process. The State of Nebraskaand the EPA could also modify the requirements for obtaining a permit. Any suchevent would likely have a material adverse impact on our operations, cash flowsand financial performance.

Currently, the EPA’sstatutes and rules do not require us to obtain separate EPA approval inconnection with the construction and operation of the plant, because the Stateof Nebraska administers the applicable environmental programs. However, becausemany of the programs are based on federal statutes, the EPA could imposeadditional requirements in the permits. Additionally, environmental laws andregulations, both at the federal and state level, are subject to change, andchanges can be made retroactively. It is possible that more stringent federalor state environmental rules or regulations could be adopted, which couldincrease our operating costs and expenses. It also is possible that federal orstate environmental rules or regulations could be adopted that could have anadverse effect on the use of ethanol. For example, changes in the environmentalregulations regarding ethanol’s use due to currently unknown effects on theenvironment could have an adverse effect on the ethanol industry. Consequently,even if we have the proper permits at the present time, we may be required toinvest or spend considerable resources to comply with future environmentalregulations or new or modified interpretations of those regulations to thedetriment of our financial performance.

*Air Permits*

We have alreadyobtained our Permit to Construct an Air Contaminant Source from the NebraskaDepartment of Environmental Quality. Because of the activities and emissions atthe plant, we will be expected to obtain an operating air permit for thefacility emissions. Our preliminary estimates indicate these facilities will beconsidered minor sources of regulated air pollutants. There are a number ofemission sources that are expected to require an operating permit. Thesesources include the boiler, ethanol process equipment, storage tanks, scrubbersand baghouses. We expect to emit the regulated pollutants PM10, CO, NOx andVOCs from our plant. Our air construction permit is a minor source permit, andwe anticipate that the plant will be considered a minor source with respect toair operating permits as well. Our minor source status allows us to avoidhaving to obtain Title V air permits, which are subject to more regulatoryrequirements than minor source permits. There is also a risk that the area inwhich the plant is situated may be determined to be a nonattainment area for aparticular pollutant. In this event, the threshold standards that require aTitle V permit may be changed, thus requiring us to file for and obtain a TitleV air permit. The costs of compliance and documenting compliance under a TitleV air permit is higher than under a minor source operating permit. It is alsopossible that in order to comply with applicable air regulations or to avoidhaving to obtain a Title V permit, we would have to install additional airpollution control equipment such as additional or different scrubbers than arecurrently planned.

*Waste Water National Pollutant DischargeElimination System Permits (NPDES Permits)*

We expect that wewill use water to cool our closed circuit systems in the Nebraska plant.Although the water in the cooling system will be re-circulated to decreasefacility water demands, a certain amount of water will be continuously replacedto make up for evaporation and to maintain a high quality of water in thecooling tower. In addition, there will be occasional blowdown water that willhave to be discharged. The exact details regarding the 

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source of water and the amount of non-process andother wastewater that needs to be discharged will not be known until testsconfirm the water quality and quantity for the site.

Although unknownat this time, the quality and quantity of the water source for the Nebraskaplant and the specific requirements imposed by the Nebraska Department ofEnvironmental Quality for discharge will materially affect the financialperformance of the company. We expect to apply for a Nebraska PretreatmentPermit (NPP) for the discharge of the non-process wastewater. Depending on thefinal design of the plant and quality of the wastewater generated by the plant,we may also need to file for a permit to allow the discharge of wastewater froma manufacturing or commercial operation, either to a publicly owned treatment worksor for land application or surface water discharge of process wastewater. Ifthese permits are not granted, our Nebraska plant may not be allowed tooperate.

*Well Permit*

We have received aSupplemental Well Permit for the plant allowing us to withdraw water from twoexisting wells. While we anticipate that the permitted amount of withdrawalwill be sufficient for plant operations, a need for additional water in excessof a threshold amount will require us to submit another supplemental permitapplication and include a revised hydrologic evaluation. If we are unable toaccess sufficient water for our operations, this could cause restrictions onour operations and therefore negatively affect our business.

*Storm Water Discharge Permit and Storm Water PollutionPrevention Plan*

We obtained aconstruction storm water discharge permit from the Nebraska Department ofEnvironmental Quality known as General Permit NER 100000. In connection withthis permit, we must have a storm water pollution prevention plan (SWPPP) inplace that outlines various measures we plan to implement to prevent stormwater pollution. The plan must be submitted to, but need not be approved by,the Nebraska Department of Environmental Quality.

We must also filea separate application for a General Permit NER 000000 for industrial stormwater discharges. The application for this permit for industrial storm waterdischarges must be filed 24 hours prior to the start of operations. Weanticipate, but there can be no assurances, that we will be able to obtain aGeneral Permit NER 000000 industrial storm water discharge permit.

*Spill Prevention, Control and Countermeasures Plan*

Before we canbegin operations, we must prepare and implement a spill prevention control andcountermeasure plan, known as an SPCC plan, for the plant in accordance withfederal guidelines. This plan will address oil pollution prevention regulationsand must be reviewed and certified by a professional engineer. The SPCC must bereviewed and updated every three years.

*Bureau of Alcohol, Tobacco and FirearmsRequirements*

Because ethanol ismade from potentially human-consumable alcohol, we must comply with applicableBureau of Alcohol, Tobacco and Firearms regulations before we can beginoperations. These regulations require that we first make application for andobtain an alcohol fuel producer’s permit. The application must includeinformation identifying the principal persons involved in our venture and astatement as to whether any of them have ever been convicted of a felony ormisdemeanor under federal or state law. The term of the permit is indefiniteuntil terminated, revoked or suspended. The permit also requires that wemaintain certain security measures. We must also secure an operations bond.There are other taxation requirements related to special occupational tax and aspecial stamp tax. We expect to apply for these permits prior to commencementof operation of the plant.

*Risk Management Plan*

We are currentlyin the process of determining whether anhydrous ammonia or aqueous ammonia willbe used in our production process. Under the Clean Air Act, stationary sourceswith processes that contain more than a threshold quantity of a regulatedsubstance are required to prepare and implement a risk management plan. If weuse anhydrous ammonia, we must establish a plan to prevent spills or leaks ofthe ammonia and an emergency response program in the event of spills, leaks,explosions or other events that may lead to the release of the ammonia into thesurrounding area. The same requirement may also be true for denaturant. Thisdetermination will be made as soon as the exact chemical makeup of thedenaturant is obtained for the plant. We will need to conduct a hazardousassessment and prepare models to assess the impact of an ammonia and/ordenaturant release into the surrounding areas. The program will be presented atone or more public meetings. However, if we use aqueous ammonia, the risk 

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management program will only be needed for thedenaturant. In addition, it is likely that we will have to comply with theprevention requirements under OSHA’s Process Safety Management Standard. Theserequirements are similar to the risk management plan requirements. The riskmanagement plan should be filed with the EPA prior to the time that a thresholdamount of the regulated substance is in process.

**Nebraska Plant Employees**

Prior tocompletion of the construction of the Nebraska plant and commencement ofoperations, we intend to hire approximately 45 full-time employees for theNebraska plant.

The followingtable represents some of the anticipated positions within the Nebraska plantand the minimum number of individuals we expect will be full-time personnel:

| Position                                   | ** ** | **# Full-Time Personnel** | ** ** |
|--------------------------------------------|------------|-------------------------------------|------------|
| Plant Manager                              |       | 1                                   |       |
| Bookkeeper                                 |       | 1                                   |       |
| Secretary                                  |       | 1                                   |       |
| Commodity  Specialist                      |       | 2                                   |       |
| Lab Manager                                |       | 1                                   |       |
| Lab Assistant                              |       | 2                                   |       |
| Utilities,  Maintenance and Safety Manager |       | 1                                   |       |
| Licensed Boiler  Operator                  |       | 2                                   |       |
| Welder                                     |       | 1                                   |       |
| Electrician                                |       | 1                                   |       |
| Electrician  Technician                    |       | 1                                   |       |
| Maintenance  Worker                        |       | 4                                   |       |
| Production Team  Leaders                   |       | 6                                   |       |
| Team Production  I                         |       | 6                                   |       |
| Team Production  II                        |       | 6                                   |       |
| Rail Attendant                             |       | 2                                   |       |
| Truck Attendant                            |       | 4                                   |       |
| Grain Sampling  & Records              |       | 1                                   |       |
| Entry Level  Floater                       |       | 2                                   |       |
| **TOTAL**                                  | ** ** | **45**                              | ** ** |

 

The positions,titles, job responsibilities and number allocated to each position may differwhen we begin to employ individuals for each position.

**Endangered Species**

Nebraska’s Nongameand Endangered Species Conservation Act requires that the Nebraska Departmentof Natural Resources review a proposed site to determine if it will have anegative impact on endangered species. It is possible that this review willresult in requirements being imposed in order to reduce or eliminate the impacton an endangered or threatened species. It is possible that such requirementsmight increase costs and reduce our profitability and the value of yourinvestment.

**Archeological and Historical Sites**

The State HistoricPreservation Office of the Nebraska State Historical Society has reviewed thesite plan and proposed use of the site to determine if it will negativelyimpact any archeological or historical site. We do not anticipate additionalrequirements being imposed in order to reduce or eliminate the impact on anarchaeological or historical site. It is possible that such requirements, ifimposed in the future, might increase costs and reduce our profitability andthe value of your investment.

**SOUTH DAKOTA PLANTS**

**Location of Plants**

Heartland GrainFuels operates ethanol plants in Aberdeen and Huron, South Dakota. Aberdeen islocated in northeast South Dakota in the James River Valley. The Aberdeen plantis situated on a main line railroad operated by the BNSF Railroad and isadjacent to U.S. Highways 12 and 281. The present plant produces nine 

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million gallons of ethanol per year, and a 40 milliongallon per year expansion is being built adjacent to the existing ethanolplant.

Huron is locatedin east central South Dakota in the James River Valley. The Huron plant hasrecently been expanded to produce 30 million gallons of ethanol per year. TheHuron plant is served by the Dakota Minnesota & Eastern Railroad and isaccessible by the BNSF Railroad. It is located near the intersection of U.S.Highway 14 and State Highway 37.

**Ethanol Marketing**

Heartland GrainFuels sells the ethanol it produces to Aventine pursuant to an EthanolMarketing Agreement. Under the terms of the agreement, Aventine is required topurchase all of the ethanol produced at Heartland Grain Fuels’ Aberdeen andHuron plants at a price per gallon determined through a pooling of Heartland GrainFuels’ and other producers’ ethanol that is sold by Aventine to third parties,less a commission based on the net pooled price. The term of the EthanolMarketing Agreement will expire on November 30, 2008. After such term, theagreement automatically renews for successive one-year terms unless terminatedby either party upon one year’s prior written notice. Heartland Grain Fuelsdistributes ethanol (FOB Heartland Grain Fuels’ plants) via truck and rail, asdetermined by Aventine. Heartland Grain Fuels would have to find alternativemethods of selling its ethanol if Aventine is unable to fulfill its obligationsunder the Ethanol Marketing Agreement.

**Distillers Grains and Carbon Dioxide**

Heartland GrainFuels’ facilities utilize the latest production technology to produce highquality, or “golden,” dried distillers grains with solubles (DDGS), whichcommands a premium over products from older plants. Golden DDGS has a higherquantity of nutrients and is more easily digested than other products.Heartland Grain Fuels currently sells more wet distillers grain with solubles(WDGS) than DDGS because the local market near the Aberdeen and Huron plants isable to purchase the WDGS that Heartland Grain Fuels produces. However, uponcompletion of the Aberdeen plant expansion and the resulting increase in theproduction of co-products, Heartland Grain Fuels will have to increase theproduction of DDGS, as the increased production of WDGS is anticipated toexceed local market demand.

Heartland GrainFuels is a party to a by-product marketing agreement with Dakotaland Feeds,LLC, whereby Dakotaland Feeds will market locally the sale of ethanolco-products produced at Heartland Grain Fuels’ plants to third parties for anagreed-upon commission. Heartland Grain Fuels distributes its ethanolco-products (FOB Heartland Grain Fuels’ plants) via truck.****HeartlandGrain Fuels would have to find alternative methods of selling its ethanolco-products if Dakotaland Feeds is unable to fulfill its obligations under theby-product marketing agreement.

The South Dakotaplants are expected to produce an aggregate of approximately 340 tons per dayof raw carbon dioxide as another co-product of the ethanol production process.At this time, Heartland Grain Fuels does not capture and market carbon dioxidegas.

**CornFeedstock Supply**

Based on currentproduction capacity, we anticipate that the Aberdeen and Huron plants will needapproximately 3.3 million and 11.1 million bushels of corn per year,respectively, for the production of ethanol. Heartland Grain Fuels will need anadditional 14.8 million bushels of corn per year upon completion of theAberdeen plant expansion.

The chart belowshows corn production in the counties surrounding the Aberdeen and Huron plantsin 2001 through 2005.
| **County**    | ** ** | **2005 Corn  Production  (bushels)** | ** ** | **2004 Corn  Production  (bushels)** | ** ** | **2003 Corn  Production  (bushels)** | ** ** | **2002 Corn  Production  (bushels)** | ** ** | **2001 Corn  Production  (bushels)** | ** ** |
|---------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| Beadle, SD    |       | 17,200,000                                |       | 20,616,000                                |       | 8,111,000                                 |       | 5,350,000                                 |       | 10,530,000                                |       |
| Brown, SD     |       | 34,395,000                                |       | 34,932,000                                |       | 29,581,000                                |       | 26,745,000                                |       | 19,962,000                                |       |
| Clark, SD     |       | 11,941,000                                |       | 12,006,000                                |       | 9,031,000                                 |       | 6,676,000                                 |       | 7,302,000                                 |       |
| Day, SD       |       | 8,953,000                                 |       | 8,794,000                                 |       | 6,791,000                                 |       | 7,011,000                                 |       | 4,959,000                                 |       |
| Edmunds, SD   |       | 12,414,000                                |       | 12,430,000                                |       | 6,296,000                                 |       | 6,296,000                                 |       | 7,500,000                                 |       |
| Faulk, SD     |       | 6,100,000                                 |       | 7,407,000                                 |       | 4,604,000                                 |       | 4,343,000                                 |       | 4,079,000                                 |       |
| Hand, SD      |       | 8,319,000                                 |       | 9,549,000                                 |       | 3,750,000                                 |       | 2,024,000                                 |       | 6,946,000                                 |       |
| Jerauld, SD   |       | 2,897,000                                 |       | 4,051,000                                 |       | 2,738,000                                 |       | 910,000                                   |       | 3,042,000                                 |       |
| Kingsbury, SD |       | 12,932,000                                |       | 15,515,000                                |       | 14,034,000                                |       | 7,935,000                                 |       | 10,775,000                                |       |
| Marshall, SD  |       | 9,295,000                                 |       | 10,345,000                                |       | 9,377,000                                 |       | 9,086,000                                 |       | 7,440,000                                 |       |
| McPherson, SD |       | 3,283,000                                 |       | 2,200,000                                 |       | 2,267,000                                 |       | 1,204,000                                 |       | 1,616,000                                 |       |
| Sanborn, SD   |       | 4,980,000                                 |       | 8,575,000                                 |       | 7,230,000                                 |       | 3,458,000                                 |       | 2,827,000                                 |       |
| Spink, SD     |       | 23,043,000                                |       | 26,979,000                                |       | 19,202,000                                |       | 12,403,000                                |       | 17,568,000                                |       |
| Dickey, ND    |       | 13,515,000                                |       | 14,446,000                                |       | 11,170,000                                |       | 9,970,000                                 |       | 7,782,700                                 |       |
| **Total**     |       | 169,267,000                               |       | 187,845,000                               |       | 134,182,000                               |       | 93,441,000                                |       | 112,328,700                               |       |

*Source: USDA, NASS*

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On November 8,2006, Heartland Grain Fuels entered into a Grain Origination Agreement withSDWG, which owns the grain elevators adjacent to the Aberdeen and Huron plants.Based on the current design of the South Dakota plants, all corn utilized bythe South Dakota plants must pass through SDWG’s grain elevators before it canbe delivered to the plants. Pursuant to the Grain Origination Agreement, SDWGhas agreed to supply corn to the plants subject to Heartland Grain Fuels’projected use of corn. Heartland Grain Fuels may also, subject to certainrestrictions, purchase corn from third parties for delivery to the plantsthrough SDWG’s grain elevators. SDWG buys substantially all of its corn fromits producer members in the area surrounding the plants, none of whichindividually account for a material amount of the corn purchased by SDWG foruse at the plants. SDWG is a cooperative that handles approximately 65 millionbushels of corn per year from its producer members.

The followingchart shows the ten-year average corn price in the counties surrounding the Aberdeenand Huron plants:

| County           | ** ** | **10-Year Average Corn  Price ($/Bu.)** | ** ** |
|------------------|------------|--------------------------------------------------------|------------|
| Beadle, SD       |       | $                                                      | 2.12       |   |
| Brown, SD        |       | $                                                      | 2.10       |   |
| Clark, SD        |       | $                                                      | 2.10       |   |
| Day, SD          |       | $                                                      | 2.10       |   |
| Edmunds, SD      |       | $                                                      | 2.11       |   |
| Faulk, SD        |       | $                                                      | 2.12       |   |
| Hand, SD         |       | $                                                      | 2.12       |   |
| Jerauld, SD      |       | $                                                      | 2.13       |   |
| Kingsbury, SD    |       | $                                                      | 2.10       |   |
| Marshall, SD     |       | $                                                      | 2.08       |   |
| McPherson, SD    |       | $                                                      | 2.10       |   |
| Sanborn, SD      |       | $                                                      | 2.11       |   |
| Spink, SD        |       | $                                                      | 2.10       |   |
| Dickey, ND       |       | $                                                      | 2.08       |   |
| **Total / Avg.** | ** ** | **$**                                                  | **2.11**   | ** ** |

 

Grain prices areprimarily dependent on world supply and demand and on U.S. and global corn cropproduction, which can be volatile as a result of a number of factors, the mostimportant of which are weather, current and anticipated stocks and prices,export prices and supports and the government’s current and anticipatedagricultural policy. The price of grain has fluctuated significantly in thepast and may fluctuate significantly in the future. Historically, because themarket price of ethanol is not related to grain prices, ethanol producers aregenerally not able to compensate for increases in the cost of grain feedstockthrough adjustments in prices charged for their ethanol. Therefore, HeartlandGrain Fuels anticipates that its plants’ profitability will be negativelyimpacted during periods of high corn prices.

Although the areasurrounding the plants produces a significant amount of corn and HeartlandGrain Fuels does not anticipate problems sourcing corn, there is no assurancethat a shortage will not develop, particularly if there is an extended droughtor other production problems. There are six other ethanol plants producing 380million gallons per year annually that will depend on some of the corn fromthese counties to service their processing demands.

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**Utilities**

*Natural Gas*

NorthwesternEnergy currently supplies Heartland Grain Fuels with all of its natural gasrequirements for the Aberdeen and Huron plants. As part of the Aberdeenexpansion, Heartland Grain Fuels is building a new natural gas pipeline that itwill own and operate. The new pipeline will originate at the Northern Bordertransmission line and be approximately three miles in length. Total cost forthe tap and pipeline is expected to be less than $3 million. The existing andexpanded plant in Aberdeen will utilize this new pipeline for its natural gasneeds. There are no marketing agreements for natural gas at the Aberdeenfacility.

NorthwesternEnergy will continue to supply natural gas to the Huron plant. There are nospecific supply or marketing agreements in existence for the Huron plant;rather, natural gas is purchased on a month-to-month basis.

The priceHeartland Grain Fuels will pay for natural gas has not yet been determined.Natural gas prices are volatile and may lead to higher operating costs.Heartland Grain Fuels has entered into an agreement with Golden Plains EnergyGroup, LLC to assist with the gas management of its South Dakota plants.Natural gas prices and availability are affected by weather conditions andoverall economic conditions.

*Electricity*

The Aberdeen planthas been and will continue to be serviced by Northwestern Energy. Northwesternwill be providing the added power for the Aberdeen expansion without anyadditional capital investments by Heartland Grain Fuels.

Heartland GrainFuels entered into an electric supply agreement with Dakota Energy Cooperativeon October 21, 1998 to provide electrical services for the Huron plant. Thatagreement remains in effect for the Huron plant.

*Water*

Heartland GrainFuels has entered into an agreement to obtain its water for the Aberdeen plantfrom Web Water Development. Under this agreement Web will provide all theprocess and cooling water for the existing and expanded Aberdeen operation.After the Aberdeen plant expansion, the facility will utilize up to 500,000gallons of water per day and will utilize on average 400,000 gallons per day.

The Huron plantobtains its water from the City of Huron. The Huron plant utilizes up to300,000 gallons of water per day.

Both South Dakotaplants have or will have a bio-methanator wastewater treatment processresulting in a zero discharge of plant process water. The bio-methanator systemthat Heartland Grain Fuels intends to use is designed and constructed byPhoenix Bio-Systems, similar to the bio-methanator system Advanced BioEnergyintends to use at its Nebraska facility.

**Environmental**

Heartland GrainFuels is subject to federal, state and local environmental laws andregulations, including certain licensing and permitting requirements. The CleanAir Act, relating to the discharge of materials into the air, contains some ofthe most extensive laws and regulations applicable to the ethanol industry.Heartland Grain Fuels is also subject to compliance with other laws concerningthe discharge of materials into the water and ground; the generation, storage,handling, use, transportation and disposal of hazardous materials; and thehealth and safety of its employees. A violation of these laws and regulationscould result in substantial fines, natural resource damage, criminal sanctions,permit or license revocations and/or facility shutdowns. To ensure it remainsin compliance with these laws and regulations, Heartland Grain Fuels hasimplemented programs, procedures, training, and installed pollution controlequipment. Operational changes that are necessary to comply with these laws andregulations may not represent optimal production operation. Heartland GrainFuels does not anticipate a material adverse effect on its business orfinancial condition as a result of its efforts to comply with theserequirements.

There is a risk ofliability for the investigation and cleanup of environmental contamination atthe Aberdeen and Huron plants. Disposal of hazardous substances at off-sitelocations are arranged with maximum diligence to ensure proper disposal andminimize risks of future liabilities. However, changing laws and regulationscould subject disposal sites to undergo investigation and/or remediation byregulatory agencies, making Heartland Grain 

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Fuels responsible under the ComprehensiveEnvironmental Response, Compensation and Liability Act, the ResourceConservation and Recovery Act, or other future environmental laws for all orpart of the costs of investigation and/or remediation and for damage to naturalresources. Heartland Grain Fuels may also be subject to related claims byprivate parties alleging property damage and personal injury due to exposure tohazardous or other materials at or from its plants. Some of these matters mayrequire Heartland Grain Fuels to expend significant amounts for investigationand/or cleanup or other costs. At this time, Heartland Grain Fuels does nothave nor does it anticipate any environmental liabilities relating tocontamination at or from its facilities or at off-site locations where it hastransported or arranged for the disposal of hazardous substances.

As the ethanolindustry expands, new laws, new interpretations of existing laws, increasedgovernmental enforcement of environmental laws or other developments couldrequire Heartland Grain Fuels to make significant expenditures. Expandinginterest in environmental conservation and resource management could result inincreased expenditures for environmental controls at the Aberdeen and Huronplants.

Producing andtransporting products from the Aberdeen and Huron plants poses potentialhazards and risks. Included in these risks is the potential for fires, releasesdue to natural disasters, explosions, abnormal pressures, blowouts and pipelineruptures, personal injury claims, damage to property and third party claims. Tomitigate large claims, Heartland Grain Fuels maintains insurance coverageagainst some, but not all, potential losses, including physical damage toassets, employer’s liability, comprehensive general liability, automobileliability and workers’ compensation. To the best of its knowledge, HeartlandGrain Fuels’ insurance coverage is adequate and customary for the ethanolindustry. However, losses could occur for uninsurable or uninsured risks or inamounts in excess of existing insurance coverage. Heartland Grain Fuels doesnot currently have pending material claims for damages or liability to thirdparties relating to the hazards or risks of its business.

Other partiesoperating ethanol plants face similar challenges of managing environmentalrisks and potential hazards, and are subject to many of the same laws andregulations. For this reason, Heartland Grain Fuels does not foresee any futurelaws or regulations that would negatively affect its competitive position inthe ethanol industry.

**Heartland Grain Fuels Employees**

Heartland GrainFuels has 41 full-time employees and 1 part-time employee as of December 1,2006.

**PLANTS UNDER DEVELOPMENT**

**Indiana Plant**

On June 15, 2006,we acquired Indiana Renewable Fuels, LLC, an Indiana limited liability company,through the merger of our wholly owned subsidiary with and into IndianaRenewable Fuels. At the time of the acquisition, Indiana Renewable Fuels hadsigned a letter of intent with Fagen to build the Indiana plant. We acquiredIndiana Renewable Fuels to secure their land options and letter of intent tobuild the Indiana plant, as we believe that due to the demand for experiencedbuilders of ethanol plants, it would be difficult to find a builder to constructa plant for us in central Indiana on the same time frame and at the same priceas the terms set forth in the letter of intent between Indiana Renewable Fuelsand Fagen. Subsequent to our acquisition of Indiana Renewable Fuels, we orallyagreed with Fagen that it will build the Minnesota plant on the same time frameand terms as those set forth in its letter of intent with Indiana RenewableFuels for the Indiana plant, and we have entered into a letter of intent withICM, to build the Indiana plant.

We are in theprocess of evaluating sites for the proposed 100 million gallons per yearIndiana plant. We expect to build the Indiana plant on a site in north centralIndiana near Rochester in Fulton County or near Argos in Marshall County, bothof which we believe have all the necessary infrastructure and availableutilities to qualify as approved sites. We have options to purchase land inboth counties for construction of the plant. We intend to use methane gas fromthe nearby landfill operated by Allied Waste Industries to power the Indianaplant; however, we have not yet obtained any agreement with Allied WasteIndustries for supply of methane, and can not be assured that we can everobtain such an agreement. We have entered into an energy management and agencyagreement with U.S. Energy Services, Inc. to manage our energy supplies. U.S.Energy has evaluated the electrical service area and is making contact witharea electricity providers. U.S. Energy is preparing requests for proposals(RFPs) to be sent to several suppliers for natural gas service to these sites.These sites would be serviced by the Norfolk Southern Railroad. We haveretained the services of Weaver Booz Consultants to assist with the developmentof this project. To date we have completed topographical surveys, preliminarysite design and sub surface review of soil conditions. 

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We expect to begin construction of the plant in thefall of 2007, assuming the successful completion of our proposed registeredsecurities offering.

The chart belowshows corn production in the counties surrounding the possible sites for theproposed Indiana plant in 2001 through 2005.
| **County**    | ** ** | **2005 Corn  Production  (bushels)** | ** ** | **2004 Corn  Production  (bushels)** | ** ** | **2003 Corn  Production  (bushels)** | ** ** | **2002 Corn  Production  (bushels)** | ** ** | **2001 Corn  Production  (bushels)** | ** ** |
|---------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| Cass, IN      |       | 17,341,100                                |       | 17,284,600                                |       | 13,041,100                                |       | 12,637,300                                |       | 15,214,800                                |       |
| Fulton, IN    |       | 14,124,900                                |       | 13,704,800                                |       | 12,361,500                                |       | 10,110,800                                |       | 12,330,700                                |       |
| Kosciusko, IN |       | 14,869,700                                |       | 15,203,600                                |       | 15,051,900                                |       | 11,001,700                                |       | 14,570,400                                |       |
| Marshall, IN  |       | 13,401,000                                |       | 13,650,200                                |       | 12,915,500                                |       | 11,262,900                                |       | 13,537,100                                |       |
| Miami, IN     |       | 11,071,700                                |       | 11,543,700                                |       | 10,157,200                                |       | 7,788,100                                 |       | 11,334,800                                |       |
| Pulaski, IN   |       | 15,315,300                                |       | 16,628,500                                |       | 12,314,700                                |       | 14,320,500                                |       | 15,709,200                                |       |
| Starke, IN    |       | 8,247,800                                 |       | 9,055,200                                 |       | 6,951,600                                 |       | 6,698,700                                 |       | 7,399,500                                 |       |
| Wabash, IN    |       | 11,947,900                                |       | 11,922,400                                |       | 10,487,600                                |       | 6,983,500                                 |       | 11,380,400                                |       |
| **Total**     |       | 106,319,400                               |       | 108,993,000                               |       | 93,281,100                                |       | 80,803,500                                |       | 101,476,900                               |       |

*Source: USDA, NASS*

The Indiana plantwill consume approximately 36 million bushels of corn annually. Much of thiscorn will be originated locally from area producers and commercial elevators bytruck. It is expected that up to 30% of the plants’ needs will be railoriginated corn. Other area ethanol plants will also be originating a portion oftheir corn needs from the same origination area. Indiana’s corn production for2006 is forecasted at 893.5 million bushels in Indiana. According to theIndiana Agricultural Statistics Service, Indiana corn yields are expected toreach a record high of 167 bushels per acre. Some growers expect that up to 80%of Indiana’s row-crop acreage could be planted regularly with two or more yearsof continuous corn, compared with almost no continuous corn acreage now.

The followingchart shows the ten year average corn price in the counties surrounding thepossible sites for the proposed Indiana plant:

| County           | ** ** | **10-Year Average Corn  Price ($/Bu.)** | ** ** |
|------------------|------------|--------------------------------------------------------|------------|
| Cass, IN         |       | $                                                      | 2.40       |   |
| Fulton, IN       |       | $                                                      | 2.38       |   |
| Kosciusko, IN    |       | $                                                      | 2.36       |   |
| Marshall, IN     |       | $                                                      | 2.42       |   |
| Miami, IN        |       | $                                                      | 2.36       |   |
| Pulaski, IN      |       | $                                                      | 2.42       |   |
| Starke, IN       |       | $                                                      | 2.37       |   |
| Wabash, IN       |       | $                                                      | 2.34       |   |
| **Total / Avg.** | ** ** | **$**                                                  | **2.39**   | ** ** |

 

**Minnesota Plant**

We are in theprocess of evaluating sites for the proposed 100 million gallons per yearMinnesota plant. We expect to build our Minnesota plant on a site nearNorthfield, Minnesota in Rice County. We have options to purchase land in RiceCounty, Minnesota for construction of the plant. The proposed site providesdirect access to the Union Pacific main line, DME and Progressive railways. Wehave submitted plans for preliminary site and rail design to the variousrailroads for approval. Based on current Rice County zoning requirements, ourproposed site for the Minnesota plant may need to be rezoned, and a conditionaluse permit will likely be required. Bridgewater Township, Minnesota, where theproposed plant would be located, has adopted a one-year moratorium on ethanolplant construction while the township considers whether to adopt its own zoningcode.

U.S. Energy hasstarted utility research for this facility. To date, it has received twoproposals for electrical service for this site. RFPs have been sent to NorthernNatural Gas Pipeline Company and to two local natural gas utility companies. Wehave entered into an agreement with Summit Envirosolutions to complete thephase 1 environmental assessment and to do the hydrology study for this site.We have had test production wells drilled on this site and will be completingthe required testing to assure adequate water supply. We have also engaged 

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Westwood Professional Services to assist with sitedevelopment. Westwood has completed the ALTA survey, wetland delineation andarcheological review and has started collecting data for the environmentalassessment worksheet. ICM has started data collection at this site for variousconstruction and operating permits.

The chart belowshows corn production in several Minnesota counties in 2001 through 2005.
| **County**   | ** ** | **2005 Corn  Production  (bushels)** | ** ** | **2004 Corn  Production  (bushels)** | ** ** | **2003 Corn  Production  (bushels)** | ** ** | **2002 Corn  Production  (bushels)** | ** ** | **2001 Corn  Production  (bushels)** | ** ** |
|--------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| Carver, MN   |       | 10,037,700                                |       | 9,362,400                                 |       | 8,047,500                                 |       | 9,257,500                                 |       | 6,746,500                                 |       |
| Dakota, MN   |       | 15,294,600                                |       | 15,955,800                                |       | 12,644,000                                |       | 14,464,800                                |       | 9,419,200                                 |       |
| Goodhue, MN  |       | 23,548,800                                |       | 23,656,200                                |       | 19,592,000                                |       | 20,925,100                                |       | 16,515,500                                |       |
| Hennepin, MN |       | 2,074,800                                 |       | 2,355,600                                 |       | 1,634,800                                 |       | 2,249,600                                 |       | 1,767,300                                 |       |
| Le Sueur, MN |       | 15,200,000                                |       | 15,961,600                                |       | 13,746,000                                |       | 13,753,200                                |       | 10,988,000                                |       |
| Rice, MN     |       | 12,179,200                                |       | 12,937,000                                |       | 11,330,500                                |       | 12,952,500                                |       | 10,071,000                                |       |
| Scott, MN    |       | 5,623,500                                 |       | 6,256,000                                 |       | 5,600,700                                 |       | 6,275,500                                 |       | 4,271,400                                 |       |
| **Total**    |       | 83,958,600                                |       | 86,484,600                                |       | 72,595,500                                |       | 79,878,200                                |       | 59,778,900                                |       |

*Source: USDA, NASS*

We anticipate thisfacility will need approximately 36 million bushels of corn per year. We expectthe majority of the corn will be obtained from local markets by truck.Currently, the corn in this area is sold primarily to livestock producers andexported via barge. Area river terminals at Red Wing and Savage, Minnesotareceive most of the barge-shipped grain.

The followingchart shows the ten-year average corn price in the counties surrounding thepossible sites for the proposed Minnesota plant:

| County           | ** ** | **10-Year Average Corn  Price ($/Bu.)** | ** ** |
|------------------|------------|--------------------------------------------------------|------------|
| Carver, MN       |       | $                                                      | 2.18       |   |
| Dakota, MN       |       | $                                                      | 2.18       |   |
| Goodhue, MN      |       | $                                                      | 2.18       |   |
| Hennepin, MN     |       | $                                                      | 2.18       |   |
| Le Sueur, MN     |       | $                                                      | 2.17       |   |
| Rice, MN         |       | $                                                      | 2.17       |   |
| Scott, MN        |       | $                                                      | 2.18       |   |
| **Total / Avg.** | ** ** | **$**                                                  | **2.18**   | ** ** |

 

**EMPLOYEES**

Prior tocompletion of the construction of the Nebraska plant and commencement ofoperations at that plant, we intend to hire approximately 45 full-timeemployees for the Nebraska plant. As of December 1, 2006, we have ninefull-time employees, and Heartland Grain Fuels has 41 full-time employees and 1part-time employee. None of these employees are covered by a collective bargainingagreement.

We intend to enterinto written confidentiality and assignment agreements with our officers andemployees. Among other things, these agreements will require such officers andemployees to keep all proprietary information developed or used by us in thecourse of our business strictly confidential.

Our success willdepend in part on our ability to attract and retain qualified personnel at acompetitive wage and benefit level. We must hire qualified managers,accounting, human resources and other personnel. We operate in rural areas withlow unemployment. There is no assurance that we will be successful inattracting and retaining qualified personnel at a wage and benefit structure ator below those we have assumed in our projects. If we are unsuccessful in thisregard, we may not be competitive with other ethanol plants and your investmentmay lose value.

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**STRATEGIC PARTNERS**

**Fagen, Inc.**

Fagen, Inc. wasco-founded by Roland “Ron” Fagen, its chief executive officer and president,and originally began in 1972 as Fagen-Pulsifer Building, Inc. It became Fagen,Inc. in 1988. Fagen has more than 25 years’ experience in the ethanol industry.Fagen employed over 1,000 construction workers in 2005 and employsapproximately 120 personnel at its headquarters and two regional offices. Fagendesigns and constructs ethanol plants around the country. Fagen’s otherconstruction commitments could cause it to run out of sufficient resources totimely construct our plants. This could result in construction delays if Fagenis not able to perform according to the timetable we anticipate.

Fagen Engineering,LLC was formed in 1996 to assist Fagen, Inc. with the construction process.Fagen Engineering is a full-service design engineering firm.

The expertise ofFagen, Inc. in integrating process and facility design into the construction ofan operationally efficient facility is very important. Fagen Energy, Inc., anaffiliate of Fagen, Inc., currently owns 400,000 units of ABE.

*Design-Build Agreement with Fagen, Inc. forConstruction of the Nebraska Plant*

On March 16, 2006,we entered into a lump-sum design-build agreement with Fagen, Inc. to designand construct a 100 million gallons per year dry mill ethanol productionfacility on our site near Fairmont, Nebraska. Under the terms of thisagreement, we will pay Fagen $98.0 million (not including approximately $2million allowance for change orders), subject to any mutually agreed-uponadjustments and subject to a credit for the amount we previously paid to FagenEngineering, LLC for engineering services. Under the terms of the agreement,Fagen has guaranteed that the plant will operate at a rate of 100 milliongallons per year of denatured fuel grade ethanol.

*Phase I and Phase II Engineering Services Agreementfor Nebraska Plant with Fagen Engineering, LLC*

We have executed aphase I and phase II engineering services agreement with Fagen Engineering,LLC, an affiliate of our design-builder Fagen, Inc., for the performance ofcertain engineering and design work. Fagen Engineering performs the engineeringservices for projects constructed by Fagen. The engineering and design servicesfees are credited against the total design-build costs.

*Oral Agreement with Fagen, Inc. for Construction ofthe Minnesota Plant*

We have an oral agreementwith Fagen to enter into a design-build agreement for the design andconstruction of our proposed Minnesota ethanol plant. No definitive agreementhas been executed, and it is possible that the parties will not agree to termsand will not execute a design-build agreement.

**ICM, Inc.**

ICM is afull-service engineering and manufacturing firm based in Colwich, Kansas andfounded in 1995 by president and chief executive officer, Dave Vander Griend.We expect that ICM will serve as the design-build contractor for the Indianaplant. Based upon discussions with Fagen and ICM and provisions found in ourlump-sum design-build agreement with Fagen for the Nebraska Plant, we expectthat ICM will serve as the principal subcontractor for the Nebraska plant andprovide the process engineering operations for Fagen. Based on discussions withFagen and ICM, we currently anticipate that ICM will serve as the principalsubcontractor for the Minnesota plant and provide the process engineeringoperations for Fagen; however, we have reached no definitive agreements withICM for these services. We have also entered into binding agreements with ICMto provide certain environmental consulting services on a time and materialbasis for all three plants.

ICM has beeninvolved in the research, design and construction of ethanol plants for manyyears. ICM employs approximately 500 employees, including 75 engineers workingin the areas of project management, electrical and process engineering; 90craftsmen, welders and painters, 95 full-time field employees, and a staff ofscientists and technicians in its research and development laboratories. Todate, ICM has been involved in the design and/or construction of 82 ethanolplants in the United States; those plants are located in 17 different states.At present there are an additional 41 ICM-designed plants under construction;32 are being constructed by Fagen, Inc., and 9 by ICM, Inc. There areapproximately an additional 50 plants presently under design at Fagen and ICMthat will utilize ICM process engineering and technology.

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*Design-Build Agreement with ICM for Construction ofthe Aberdeen Plant Expansion*

Effective July 14,2006, Heartland Grain Fuels entered into a design-build agreement with ICM toestablish a 40 million gallons per year dry mill corn processing ethanolproduction facility adjacent to the current Aberdeen plant. Under the terms ofthe agreement, ICM guarantees that the plant will meet certain performancecriteria during a seven-day performance test that indicate the plant is capableof producing annually a certain amount of ethanol and distillers grains ifoperated in accordance with ICM’s instructions. Heartland Grain Fuels expectsthat the plant will be finished in the first calendar quarter of 2008. Wecurrently anticipate the construction costs for the project, including start-upcosts and working capital, will be $78.0 million, subject to any mutuallyagreed-upon adjustments.

*Letter of Intent with ICM for Construction of theIndiana Plant*

We have enteredinto a letter of intent with ICM, Inc. for the design and construction of ourIndiana ethanol plant. We expect to enter into a definitive design-buildagreement with ICM, Inc. that will set forth in detail the design andconstruction services provided by ICM. Construction of the project is expectedto take 16 months. We anticipate completion of plant construction during thefirst calendar quarter of 2009.

**CONSTRUCTION AND TIMETABLE FORCOMPLETION OF THE PLANTS**

We estimate thatthe Nebraska plant will be operational in September 2007. We estimate that theIndiana plant will be operational in the first calendar quarter of 2009. Weexpect the Aberdeen plant expansion to be completed in the first calendarquarter of 2008. We expect to begin construction of the proposed Minnesotaplant no sooner than the fall of 2007. 
| **Plant**                 | ** ** | **Start Date  (Construction)** | ** ** | **Completion  Date**            |
|---------------------------|------------|--------------------------------|------------|---------------------------------|
| Nebraska                  |       | May 2006                       |       | September 2007                  |
| Aberdeen Plant  Expansion |       | December 2006                  |       | First calendar quarter of 2008  |
| Indiana                   |       | Fall of 2007                   |       | First calendar quarter of 2009  |
| Minnesota                 |       | No sooner than fall of 2007    |       | 16 to 20 months from start date |

 

**HAZARDOUS CONDITIONS**

There can be noassurance that we will not encounter hazardous conditions at a plant site. Weare relying on Fagen to determine the adequacy of the Nebraska site forconstruction of the ethanol plant. We may encounter hazardous conditions at thechosen site that may delay the construction of the ethanol plant. Fagen willnot be responsible for any hazardous conditions encountered at the site. Uponencountering a hazardous condition, Fagen will suspend work in the affectedarea. If we receive notice of a hazardous condition, we must correct thecondition prior to continuing construction. The presence of a hazardouscondition will likely delay construction of the ethanol plant and may requiresignificant expenditure of our resources to correct the condition. In addition,Fagen will be entitled to an adjustment in price if it has been adverselyaffected by the hazardous condition. If we encounter any hazardous conditionsduring construction that require time or money to correct, such event may havea material adverse effect on our operations, cash flows and financialperformance.

**NUISANCE**

Ethanol productionhas been known to produce an odor to which surrounding residents could object.Ethanol production may also increase dust in the area due to operations and thetransportation of grain to the plant and ethanol and distillers dried grainsfrom the plant. These activities may subject us to nuisance, trespass or similarclaims by employees, property owners or residents in the vicinity of theplants. To help minimize the risk of nuisance claims based on odors related tothe production of ethanol and its by-products, we intend to install a thermaloxidizer in the plants. Nonetheless, any such claims or increased costs toaddress complaints may have a material adverse effect on us and our operations,cash flows and financial performance.

We are notcurrently involved in any litigation involving nuisance or any other claims.

**FACILITIES**

The table belowprovides a summary of our ethanol plants in operation, under construction andin development as well as projects that we are currently evaluating as ofDecember 1, 2006:

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| **Location**  | ** ** | **Status**                 | ** ** | **Ethanol  Production  Capacity**         | ** ** | **Estimated  Distillers  Grains  Production** | ** ** | **Production  Process** | ** ** | **Primary  Energy Source** | ** ** | **Builder** | ** ** |
|---------------|------------|----------------------------|------------|-------------------------------------------|------------|-----------------------------------------------|------------|-------------------------|------------|---------------------------------|------------|-------------|------------|
| ** **    | ** ** | ** **                 | ** ** | **(million gallons  per year)** | ** ** | ** **                                    | ** ** | ** **              | ** ** | ** **                      | ** ** | ** **  | ** ** |
| Nebraska      |       | Under construction(1) |       | 100                                       |       | 321,000                                       |       | Dry-Mill                |       | Natural  Gas                    |       | Fagen       |       |
| Aberdeen,  SD |       | In operation(2)       |       | 9                                         |       | 68,500  tons                                  |       | Dry-Mill                |       | Natural  Gas                    |       | Broin       |       |
| Huron,  SD    |       | In operation(2)       |       | 30                                        |       | 209,500  tons                                 |       | Dry-Mill                |       | Natural  Gas                    |       | ICM         |       |
| Aberdeen,  SD |       | Under construction(3) |       | 40                                        |       | 130,000  tons                                 |       | Dry-Mill                |       | Natural  Gas                    |       | ICM         |       |
| Indiana       |       | In development(4)     |       | 100                                       |       | 321,000                                       |       | Dry-Mill                |       | Natural  Gas/  Methane          |       | ICM         |       |
| Minnesota     |       | In development(5)     |       | 100                                       |       | 321,000                                       |       | Dry-Mill                |       | Natural Gas                     |       | Fagen       |       |

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(1)             Wecommenced site preparation activities in December 2005. We expect the plant tohave construction completed in September 2007. We believe that this facility isadequately covered by insurance.

(2)             Wecurrently have a 53% limited partnership interest in Heartland Grain Fuels,which owns the Aberdeen and Huron plants; we own 51% of the common shares ofDakota Fuels , the general partner of Heartland Grain Fuels. We have anagreement to purchase the remaining interests in Heartland Grain Fuels andcommon shares of Dakota Fuels with Heartland Producers, subject to certainconditions, including the approval of the members of Heartland Producers. Webelieve that these facilities are adequately covered by insurance.

(3)             HeartlandGrain Fuels began construction of this expansion facility in December of 2006.Heartland Grain Fuels expects the plant to be completed and in substantialoperation during the first calendar quarter of 2008. We believe that thisfacility is adequately covered by insurance.

(4)             Dependingon our success in our proposed registered securities offering, we expect tobegin site preparation activities in the spring of 2007, and to completeconstruction in the first calendar quarter of 2009.

(5)             Weintend to commence construction on this facility in the fall of 2007 and haveconstruction completed in 16 to 20 months. 

**PlantSite Selection**

We intend toutilize our experience and the skills of our strategic partners to continue thedevelopment of our existing plants, identify new sites and develop additionalplants in the future. Our site location criteria include many factors. Firstamong these are corn, water and energy supplies as inputs and ethanol and distillersgrains markets for our outputs.

We utilizein-house expertise as well as industry-leading consultation services to analyzethe feasibility of obtaining corn as feedstock for each potential site andweigh that knowledge with a similar analysis of logistical advantages anddisadvantages in moving ethanol to both existing and projected new markets. Webegin consultation with relevant rail carriers early in the process for cornsupply, ethanol and distillers grains transportation and begin equally early ourconsultation with local corn farmers and cooperatives for feedstock supply.

We contract withindustry leaders for assistance in analysis of water and natural gas forproduction processes. At the same time, we work with local electricitysuppliers to secure a plant’s electrical power. All of our plants that areeither operating or under construction are designed, engineered and constructedby Fagen or ICM in either case using ICM process technology.

**NebraskaPlant**

In October 2005,we exercised two options and purchased land near the city of Fairmont,Nebraska, on which we will construct our Nebraska plant. We expect to completeconstruction of this 100 million gallons per year ethanol production facilityon this site in September of 2007. As of December 1, 2006, the basic site workat the Nebraska plant was substantially completed. The railroad grading isnearly complete, roads have been graded, driers have been placed, the drainagesystem is nearly complete and a test water well has been completed. The site is

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accessible forconstruction operations and material deliveries. This property is owned by ABEFairmont, LLC, our wholly owned subsidiary, and is subject to a mortgage infavor of CoBank, ACB.

We selected ourprimary Nebraska plant site because of the site’s location relative to existinggrain production, accessibility to road and rail transportation and proximityto major population centers. The site is near the main line of the BurlingtonNorthern Santa Fe Railroad. In addition, the site is also in close proximity tothe intersection of U.S. Highways 6 and 81. The Nebraska plant is also locatedin close proximity to several central Nebraska feedlots, which provides us withan opportunity to sell a greater portion of our distillers grains production inmodified wet form, thus reducing our energy costs.

*Capacity*

Upon completion ofthe Nebraska plant, it will have a production capacity of 100 million gallonsper year of ethanol and approximately 321,000 tons of dried distillers grainsper year. We anticipate that our Nebraska plant will need approximately 36million bushels of grain per year for our dry milling process, which representsapproximately 18% of the 201 million bushels produced in the nine-county areasurrounding the location of our Nebraska plant in 2005. We expect the cornsupply for our plant will be obtained primarily from local markets.Traditionally, corn grown in the area around Fairmont, Nebraska has been fedlocally to livestock or exported for feeding or processing.

*Transportation*

The Nebraska plantis expected to have the facilities to receive grain by truck and rail and toload ethanol and distillers grains onto trucks and rail cars. In terms offreight rates, rail is currently considerably more cost effective than trucktransportation to the more distant markets. The BNSF Railroad will provide railservice to the Nebraska site. The BNSF Railroad has developed unit train ratesthat allow lower rail freight rates. On May 5, 2006, we entered into a trackmaterial purchase agreement with The Tie Yard of Omaha to purchase relay rail,joint bards, tie plates, cross ties and reconditioned turnouts. On May 5, 2006,we entered into a real estate purchase agreement with Fillmore Western RailwayCompany for the purchase of certain property for railroad right of way andtrack material, as well as an easement to use their right of way for thepurpose of underground pipeline and other utilities. The Nebraska plant willhave the proper trackage to allow it to load larger unit trains and receivelower freight rates.

*Energy Agreements*

On November 20,2006, we entered into an energy management agreement and an agencyauthorization agreement with U.S. Energy Services, Inc. to manage our energysupplies for our Nebraska plant. As a part of this agreement, U.S. EnergyServices has agreed to solicit bids and negotiate, execute and administerenergy supply contracts, interstate transportation contracts and localdistribution company transportation contracts on our behalf. We have enteredinto an agreement for electric service to the Nebraska plant and plan to enterinto an agreement with a local gas utility to provide our needed energy. Therecan be no assurance that those utilities will be able to reliably supply thegas and electricity that we need.

The Nebraska plantwill require approximately 3.2 billion cubic feet of natural gas per year. Theplant will produce process steam from its own boiler systems and dry thedistillers dried grains co-product via a direct gas-fired dryer. U.S. EnergyServices has identified three possible natural gas providers that could supplygas to the Nebraska plant and is currently soliciting bids from suppliers andexisting gas distribution utilities to build, operate, manage and maintainthose natural gas services. We are currently constructing our own natural gaspipeline from a common carrier main pipeline for the Nebraska plant. Theexpected cost for this pipeline is $4.2 million. The price we will pay fornatural gas has not yet been determined. Natural gas prices are volatile andmay lead to higher operating costs. Between January 1, 2001 and June 30, 2006,the price per MMBtu of natural gas based on NYMEX has ranged from a low of$1.83 to a high of $15.38. On November 29, 2006, the price of the NYMEX futurecontract for January delivery settled at $8.871 per MMBtu. Additionally, futureweather-related events may also adversely impact the supply and/or price ofnatural gas.

On April 25, 2006,we entered into a contract for electric service with Perennial Public PowerDistrict, a public corporation and political subdivision of the State ofNebraska. This agreement will remain in effect for a term of five years fromthe initial billing period. The agreement will be renewed automaticallythereafter on an annual basis unless 12 months’ written notice of terminationis given by either party. Pursuant to this agreement, we agreed to purchase,and Perennial Public Power District agreed to supply, all of the electric powerand energy needed by the Nebraska plant. Perennial has agreed to install andmaintain the subtransmission line and substation facilities needed 

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for electric service. As a condition to PerennialPublic Power District installing the required electric service facilities, wehave agreed to pay actual construction costs to Perennial Public Power Districtthat exceed $812,394. The amount that we must pay is currently estimated atapproximately $1.2 million. Preliminary estimates on the delivered cost ofelectricity are from $0.037 to $0.0385 per kWh.

*Employees and**Operations*

We expect toemploy approximately 45 individuals at the Nebraska plant.

*Financing*

In May 2006, weraised $59.4 million net of offering expenses through the sale of units.Effective February 17, 2006, we entered into various loan agreements with FarmCredit Services of America, FLCA, known as Farm Credit, establishing a seniorcredit facility with Farm Credit for the construction of the Nebraska plant. Todate, we believe we have secured sufficient debt and equity financing tocomplete the Nebraska plant.

**AberdeenPlant**

In November 2006,we acquired a non-controlling interest in Heartland Grain Fuels, which owns andoperates a 9 million gallon per year ethanol production facility in Aberdeen,South Dakota and a 30 million gallons per year ethanol production facility inHuron, South Dakota. In December 2006, construction began on a plant adjacentto the existing production facility in Aberdeen that will produce an additional40 million gallons per year of ethanol. We anticipate that construction will becomplete on that expansion facility during the first calendar quarter of 2008.Heartland Grain Fuels leases the Aberdeen property from SDWG pursuant to a99-year lease agreement, set to expire in 2090. Heartland Grain Fuels’ interestis subject to a mortgage in favor of CoBank, ACB.

*Capacity*

Heartland GrainFuels’ existing Aberdeen plant has production capacity of 9 million gallons peryear of ethanol, and 65,000 tons of wet distillers grains and 3,500 tons of drydistillers grains per year. This facility currently processes 3.3 millionbushes of corn per year. After the expansion, we expect that this facility willprocess approximately 18.1 million bushels of corn per year, which representsapproximately 10% of the approximately 169 million bushels of corn grown in thecounties surrounding the Aberdeen and Huron plants in 2005. Currently, ourneeds represent approximately 2% of the approximately 169 million bushels ofcorn grown in the counties surrounding the Aberdeen and Huron plants as of 2005.

*Transportation*

Heartland GrainFuels distributes ethanol from its Aberdeen plant (FOB Aberdeen plant) viatruck and rail, as determined by Aventine, pursuant to an ethanol marketingagreement. Heartland Grain Fuels would have to find alternative methods ofselling its ethanol if Aventine is unable to fulfill its obligations under theethanol marketing agreement.

*Energy**Agreements*

NorthwesternEnergy currently supplies Heartland Grain Fuels with all of its natural gasrequirements for the Aberdeen plant. As part of the Aberdeen expansion,Heartland Grain Fuels is building a new natural gas pipeline that it will ownand operate. The new pipeline will originate at the Northern Bordertransmission line and be approximately three miles in length. Total cost forthe tap and pipeline is expected to be less than $3 million. The existing andexpanded plant in Aberdeen will utilize this new pipeline for its natural gasneeds. There are no marketing agreements for natural gas at the Aberdeenfacility.

The price HeartlandGrain Fuels will pay for natural gas has not yet been determined. Natural gasprices are volatile and may lead to higher operating costs. Heartland GrainFuels has entered into an agreement with Golden Plains Energy Group, LLC toassist with the gas management of the Aberdeen plant. Natural gas prices andavailability are affected by weather conditions and overall economicconditions.

The Aberdeen planthas been and will continue to be serviced by Northwestern Energy. Northwesternwill be providing the added power for the Aberdeen expansion without anyadditional capital investments by Heartland Grain Fuels.

*Employees and Operations*

Heartland GrainFuels currently employ 23 full-time individuals at the Aberdeen facility.

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*Financing*

We acquiredHeartland Grain Fuels through a payment of cash and our agreement to acquireHeartland Grain Fuels subject to its existing debt. In connection with thetransaction and with our consent, Heartland Grain Fuels and Dakota Fuels,Heartland Grain Fuels’ general partner, amended various loan agreements topermit Heartland Grain Fuels to borrow up to $6.75 million and $35.25 millionunder the revolving term loan supplements and multiple advance term loansupplements, respectively. Heartland Grain Fuels intends to fund its principalliquidity requirements through cash and cash equivalents, cash provided byoperations, borrowings under its existing loan agreements and additional debtand equity. Heartland Grain Fuels believes its existing sources of liquiditywill be sufficient to meet the cash requirements of its operating and investingactivities through at least February 2007, at which time it will need to seekadditional sources of debt or obtain additional equity investments from itspartners in order to fund liquidity requirements related to the Aberdeen plantexpansion.

**HuronPlant**

In November 2006,we acquired a non-controlling interest in Heartland Grain Fuels, which owns andoperates a 9 million gallons per year ethanol production facility in Aberdeen,South Dakota and a 30 million gallons per year ethanol production facility inHuron, South Dakota. In December 2006, construction began on an plant adjacentto the existing production facility in Aberdeen that will produce an additional40 million gallons per year of ethanol. We anticipate that construction will becomplete on that expansion facility during the first calendar quarter of 2008.Heartland Grain Fuels leases the Aberdeen property from SDWG pursuant to a99-year lease agreement, set to expire in 2097. Heartland Grain Fuels’ interestis subject to a mortgage in favor of CoBank, ACB.

*Capacity*

Heartland GrainFuels existing Huron plant has production capacity of 30 million gallons peryear of ethanol and 183,000 tons of wet distillers grains and 26,500 tons ofdry distillers grains per year. This facility processes approximately 11.1million bushels of corn per year, which represents approximately 6.5% of theapproximately 169 million bushels of corn grown in the counties surrounding theAberdeen and Huron plants in 2005.

*Transportation*

Heartland GrainFuels distributes ethanol from its Huron plant (FOB Huron plant) via truck andrail, as determined by Aventine, pursuant to an ethanol marketing agreement.Heartland Grain Fuels would have to find alternative methods of selling itsethanol if Aventine is unable to fulfill its obligations under the ethanolmarketing agreement.

*Energy Agreements*

NorthwesternEnergy currently supplies Heartland Grain Fuels with all of its natural gasrequirements for the Huron plant. There are no specific supply or marketingagreements in existence for the Huron plant; rather, natural gas is purchasedon a month-to-month basis.

The priceHeartland Grain Fuels will pay for natural gas has not yet been determined.Natural gas prices are volatile and may lead to higher operating costs.Heartland Grain Fuels has entered into an agreement with Golden Plains EnergyGroup, LLC to assist with the gas management of the Huron plant. Natural gasprices and availability are affected by weather conditions and overall economicconditions.

Heartland GrainFuels entered into an electric supply agreement with Dakota Energy Cooperativeon October 21, 1998 to provide electrical services for the Huron plant. Thatagreement remains in effect for the Huron plant.

*Employees and Operations*

We currentlyemploy 20 full-time individuals at the Huron plant.

*Financing*

We acquiredHeartland Grain Fuels through a payment of cash and our agreement to acquireHeartland Grain Fuels subject to its existing debt. In connection with thetransaction and with our consent, Heartland Grain Fuels and Dakota Fuels,Heartland Grain Fuels’ general partner, amended various loan agreements topermit Heartland Grain Fuels to borrow up to $6.75 million and $35.25 millionunder the revolving term loan supplements and multiple advance term loansupplements, respectively. Heartland Grain Fuels intends to fund its principal 

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liquidity requirements through cash and cashequivalents, cash provided by operations, borrowings under its existing loanagreements and additional debt and equity. Heartland Grain Fuels believes itsexisting sources of liquidity will be sufficient to meet the cash requirementsof its operating and investing activities through at least February 2007, atwhich time it will need to seek additional sources of debt or obtain additionalequity investments from its partners in order to fund liquidity requirementsrelated to the Aberdeen plant expansion.

**AberdeenPlant Expansion**

In December 2006,construction began on a plant adjacent to the existing production facility inAberdeen that will produce an additional 40 million gallons per year ofethanol. We anticipate that construction will be complete on that expansionfacility during the first calendar quarter of 2008. Heartland Grain Fuels hasentered into an agreement to purchase property adjacent to the current Aberdeenfacility for use in the expansion.

*Capacity*

Our existingAberdeen plant has production capacity of 9 million gallons per year of ethanoland 30,000 tons of distillers grains per year. This facility currentlyprocesses 3.3 million bushes of corn per year. After the expansion, we expectthat this facility will process approximately 18.1 million bushels of corn peryear, which will represent approximately 10% of the approximately 169 millionbushels of corn grown in the counties surrounding the Aberdeen and Huron plantsin 2005.

*Transportation*

Heartland GrainFuels currently distributes ethanol from its Aberdeen plant (FOB Aberdeenplant) via truck and rail, as determined by Aventine, pursuant to an ethanolmarketing agreement. It is expected that the expanded facility will continue todistribute ethanol (FOB Expanded Aberdeen plant) via truck and rail, asdetermined by Aventine pursuant to the aforementioned ethanol marketingagreement. Heartland Grain Fuels would have to find alternative methods ofselling its ethanol if Aventine is unable to fulfill its obligations under theethanol marketing agreement.

*Energy Agreements*

NorthwesternEnergy currently supplies Heartland Grain Fuels with all of its natural gasrequirements for the Aberdeen plant. As part of the Aberdeen expansion,Heartland Grain Fuels is building a new natural gas pipeline that it will ownand operate. The new pipeline will originate at the Northern Bordertransmission line and be approximately three miles in length. Total cost forthe tap and pipeline is expected to be less than $3 million. The existing andexpanded plant in Aberdeen will utilize this new pipeline for its natural gasneeds. There are no marketing agreements for natural gas at the Aberdeenfacility.

The priceHeartland Grain Fuels will pay for natural gas has not yet been determined.Natural gas prices are volatile and may lead to higher operating costs. HeartlandGrain Fuels has entered into an agreement with Golden Plains Energy Group, LLCto assist with the gas management of the Aberdeen plant. Natural gas prices andavailability are affected by weather conditions and overall economicconditions.

The Aberdeen planthas been and will continue to be serviced by Northwestern Energy. Northwesternwill be providing the added power for the Aberdeen expansion without anyadditional capital investments by Heartland Grain Fuels.

*Employees and Operations*

Upon completion ofthe expansion we expect to employ 37 full-time individuals at the Aberdeenfacilities.

*Financing*

We acquiredHeartland Grain Fuels through a payment of cash and our agreement to acquireHeartland Grain Fuels subject to its existing debt. In connection with thetransaction and with our consent, Heartland Grain Fuels and Dakota Fuels,Heartland Grain Fuels’ general partner, amended various loan agreements topermit Heartland Grain Fuels to borrow up to $6.75 million and $35.25 millionunder the revolving term loan supplements and multiple advance term loansupplements, respectively. Heartland Grain Fuels intends to fund its principalliquidity requirements through cash and cash equivalents, cash provided byoperations, borrowings under its existing loan agreements and additional debtand equity. Heartland Grain Fuels believes its existing sources of liquiditywill be sufficient to meet the cash requirements of its operating and investingactivities through at least February 2007, at which time it will need to seekadditional sources of debt or obtain additional equity investments from itspartners in order to fund liquidity requirements related to the Aberdeen plantexpansion.

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**IndianaPlant**

On June 15, 2006,we acquired Indiana Renewable Fuels, LLC, an Indiana limited liability company,through a merger of our wholly owned subsidiary with and into Indiana RenewableFuels. At the time of the acquisition, Indiana Renewable Fuels had signed aletter of intent with Fagen to build the Indiana plant. We acquired IndianaRenewable Fuels to secure their land options and letter of intent to build theIndiana plant, as we believe that due to the demand for experienced builders ofethanol plants, it would be difficult to find a builder to construct a plantfor us in central Indiana on the same time frame and at the same price as theterms set forth in the letter of intent between Indiana Renewable Fuels andFagen. We are in the process of evaluating sites for our proposed 100 milliongallons per year Indiana plant. We expect to build the Indiana plant on a sitein north central Indiana near Rochester in Fulton County or near Argos inMarshall County, both of which we believe have all the necessary infrastructureand available utilities to qualify as approved sites. We have options topurchase land in both counties for construction of the plant. To date we havecompleted topographical surveys, preliminary site design and sub surface reviewof soil conditions. We expect to begin construction of the plant in the fall of2007, assuming the successful completion of our proposed registered securitiesoffering.

*Capacity*

When completed, weanticipate that our Indiana plant will have an output of 100 million gallonsper year of ethanol and 321,000 tons of distillers grains per year. We expectthat this facility will process approximately 36 million bushels of cornannually, which represents approximately 34% of the approximately 106 millionbushes of corn grown in the neighboring counties in 2005. Much of our corn willbe originated locally from area producers.

*Transportation*

Much of the 36million annual bushels of corn will be originated locally from area producersand commercial elevators by truck. It is expected that up to 30% of the plants’needs will be rail-originated corn.

*Energy Agreements*

On November 20,2006, we entered into an energy management agreement and an agencyauthorization agreement with U.S. Energy Services, Inc. to manage our energysupplies for our Indiana plant. As a part of this agreement, U.S. EnergyServices has agreed to solicit bids and negotiate, execute and administerenergy supply contracts, interstate transportation contracts and localdistribution company transportation contracts on our behalf.

We intend to usemethane gas from the nearby landfill operated by Allied Waste Industries topower the Indiana plant; however, we have not yet obtained any agreement withAllied Waste Industries for supply of methane, and can not be assured that wecan ever obtain such an agreement. U.S. Energy has evaluated the electricalservice area and is making contact with area electricity providers. U.S. Energyis preparing requests for proposals (RFPs) to be sent to several suppliers fornatural gas service to these sites. These sites would be serviced by theNorfolk Southern Railroad. We have retained the services of Weaver BoozConsultants to assist with the development of this project.

*Employees and Operations*

We currentlyemploy 1 individual at this facility. Upon the commencement of operations ofthe plant, we expect to employ 45 full-time employees.

*Financing*

Assuming themaximum amount is raised in our proposed registered securities offering, weexpect to generate net proceeds of at least $55.0 million to partially financethe construction and start-up costs of the Indiana plant. We intend to financethe balance of the costs for the Indiana plant through senior and subordinatedebt financing. However, no definitive agreement has been reached on this debtfinancing.

**MinnesotaPlant**

We are in theprocess of evaluating sites for the proposed 100 million gallons per yearMinnesota plant. We expect to build our Minnesota plant on a site nearNorthfield, Minnesota in Rice County. We have options to purchase land in RiceCounty, Minnesota for construction of the plant. The proposed site providesdirect access to the Union Pacific main line, DME and Progressive railways. Wehave submitted plans for preliminary site and rail design to the variousrailroads for approval. Based on current Rice County zoning requirements, ourproposed site for the Minnesota plant may need to be rezoned, and a conditionaluse permit will likely be required. Bridgewater 

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Township, Minnesota, where the proposed plant would belocated, has adopted a one-year moratorium on ethanol plant construction whilethe Township considers whether to adopt its own zoning code.

*Capacity*

When completed, weexpect that our Minnesota facility will have a capacity of 100 million gallonsper year of ethanol and 321,000 tons of distillers grains per year. Weanticipate this facility will need approximately 36 million bushels of corn peryear, which represents approximately 42.9% of the approximately 84 millionbushes of corn grown in the neighboring counties in 2005. Much of our corn willbe originated locally from area producers.

*Transportation*

Much of our cornwill be originated locally from area producers by truck.

*Energy Agreements*

U.S. Energy hasstarted utility research for this facility. To date, it has received twoproposals for electrical service for this site. RFPs have been sent to NorthernNatural Gas Pipeline Company and to two local natural gas utility companies. Wehave entered into an agreement with Summit Envirosolutions to complete thephase 1 environmental assessment and to do the hydrology study for this site.We have had test production wells drilled on this site and will be completingthe required testing to assure adequate water supply. We have also engagedWestwood Professional Services to assist with site development. Westwood hascompleted the ALTA survey, wetland delineation and archeological review and hasstarted collecting data for the environmental assessment worksheet. ICM hasstarted data collection at this site for various construction and operatingpermits.

*Employees*

Upon commencementof operations of the Minnesota plant, we expect to employ approximately 45full-time employees at this facility.

*Financing*

We have not yet determined the construction and start-up costs for theMinnesota plant. We are expecting to use a portion of the proceeds from ourproposed registered securities offering, assuming we raise the maximum amountoffered, to continue to work on the preliminary design and development of the Minnesota plant. Weanticipate that we will need to raise additional equity, senior debt andsubordinate debt to fund construction and start-up costs of the Minnesotaplant. No definitive agreements have been reached regarding this additionalfinancing. At this time, we do not know if this financing will be available tous and if it is, what business and financial conditions will be imposed on usto obtain this financing. If we do not obtain the needed financing, we maychoose not to construct the Minnesota plant.

**ProjectsUnder Evaluation**

We are alsoevaluating several additional projects. We have identified a number ofpotential sites for these projects and are currently conducting feasibilitystudies on these sites.

**OTHER PROPERTIES**

We lease ourprincipal executive offices, which are located in Minnetonka, Minnesota. Wealso lease office space in Geneva, Nebraska and in Rochester, Indiana.

**COMBINATION WITH HEARTLAND GRAINFUELS**

On November 7,2006, we entered into a partnership interest and stock purchase agreement withHeartland Grain Fuels, South Dakota Wheat Growers Association, known as SDWG,Heartland Producers and Dakota Fuels, for the purchase of 95% of thepartnership interests in Heartland Grain Fuels, known as the first purchaseagreement.

Additionally, onNovember 7, 2006 we entered into a partnership interest purchase agreement withAventine Renewable Energy, Inc., Heartland Grain Fuels, SDWG, HeartlandProducers and Dakota Fuels for the purchase of Aventine’s 5% limitedpartnership interest in Heartland Grain Fuels. We refer to this agreement asthe second purchase agreement, and we refer to the first purchase agreement andsecond purchase agreement collectively as the purchase agreements.

***TheFirst Purchase Agreement***. Pursuant to the first purchaseagreement, SDWG and Heartland Producers each agreed to sell to us 100% of theirlimited partnership interests in Heartland Grain Fuels and 100% of their stockin Dakota Fuels, the general partner of Heartland Grain Fuels. The transactionis a two-step process with two 

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separate closings. Thefirst closing took place on November 8, 2006. At the first closing, we acquired100% of SDWG’s limited partnership interest in Heartland Grain Fuels and 100%of SDWG’s stock in Dakota Fuels. As a result of these acquisitions, we ownapproximately 53% of the limited partnership interests in Heartland GrainFuels.

The second closingis slated to occur at a future date to be determined by Heartland Producers andus. Together, SDWG and Heartland Producers held 95% of the partnershipinterests in Heartland Grain Fuels, including indirect ownership of Dakota Fuels’..818% interest in Heartland Grain Fuels as general partner and 94.182% of thelimited partnership interests. Pursuant to the first purchase agreement, weagreed to pay $15,860,020 in cash and issue to SDWG and Heartland Producers atotal of 2,499,999 of our units.

At the firstclosing, we paid $8,065,895 cash and issued 1,271,452 units, 50,857 of whichwere placed in escrow to secure SDWG’s indemnification obligations. Thebalance, $7,794,124 cash and 1,228,547 units, of which 49,143 will be placed inescrow to secure Heartland Producers’ indemnification obligations, will be paidand issued at the second closing to Heartland Producers.

The first purchaseagreement contains various representation and warranties relating to HeartlandGrain Fuels and the partnership interests and common shares purchased by us aswell as certain covenants by the parties. With limited exceptions, thoserepresentations and warranties only survive for a six-month period after thefirst closing and our exclusive recourse for breach of representations andwarranties is generally limited to units that have been placed in escrow forpurposes of the indemnification obligations of SDWG and, if the second closingoccurs, Heartland Producers under the first purchase agreement. We have agreedunder certain circumstances to indemnify SDWG and, if the second closingoccurs, Heartland Producers for breach of our representations, warranties andcovenants. With limited exceptions, no party has any right to indemnificationuntil it has incurred aggregate damages in excess of $500,000 and claims fordamages are capped at $2.0 million.

The second closingis subject to various conditions, including approval of the transaction by therequisite vote of the members of Heartland Producers.

In connection withthe first closing, we entered into a grain origination agreement, an investorsrights agreement and non-solicitation agreements with SDWG.

The grainorigination agreement provides for SDWG to supply Heartland Grain Fuels withits corn requirements. The grain origination agreement was negotiated inconnection with the first purchase agreement and may or may not be as favorableto Heartland Grain Fuels as the terms generally available from an unaffiliatedthird party. In addition, this arrangement could cause SDWG to have a conflictof interest in decision making related to its ownership of our units. Theseconflicts could threaten our ability to consummate other projects ortransactions.

The investorrights agreement gives SDWG demand registration rights and the right todesignate a director of our company.

Thenon-solicitation agreement with SDWG restricts SDWG from employing any personwho was our employee or an employee of Heartland Grain Fuels during the12-month period preceding the first closing and from contacting any of oursuppliers or customers, or the suppliers or customers of Heartland Grain Fuels,during the 12-month period preceding the first closing, for the purpose ofdiverting any such supplier or customer. We have entered into a similar non-solicitationagreement with SDWG restricting our employment or diversion of SDWG employees,suppliers or customers.

In connection withthe first closing, we also entered into an employment agreement with BillPaulsen, the general manager of Heartland Grain Fuels pursuant to which hebecame our employee and will serve as vice president of production. Pursuant tothe terms of his employment agreement, Mr. Paulsen is an employee at will butis entitled to one year’s severance if he is terminated by us without cause orterminates his employment with us for good reason.

Immediatelyfollowing the first closing, the limited partnership agreement of HeartlandGrain Fuels was amended to provide that if the second closing occurs, HeartlandProducers will be allocated an amount of income or loss and credits which wouldhave been allocated to Heartland Producers if Heartland Producers would havebeen one of our members from the date of the first closing to the date of thesecond closing. In such event, Heartland Grain Fuels will distribute cash toHeartland Producers equal to the amount of cash that would have beendistributed to Heartland Producers if Heartland Producers had been one of ourmembers from the date of the first closing to the date of the second closing.The effect of this amendment is that Heartland Producers will be treated fortax purposes as though it had become a member of Advanced BioEnergy at thefirst closing and will receive allocations and 

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distributions, if any,from us between the first and second closing in accordance with its percentageownership interest of our company rather than in accordance with its percentageownership interest in Heartland Grain Fuels. If the second closing does notoccur, Heartland Producers will be entitled to allocations of income or lossand credits and to cash distributions without giving effect to this amendment(in other words, in accordance with its 46.284% interest in Heartland GrainFuels and its ownership interest in Dakota Fuels).

In connection withthe second closing, we will enter into non-solicitation agreements withHeartland Producers containing similar restrictions to the non-solicitationagreements with SDWG.

***TheSecond Purchase Agreement***. Under the second purchaseagreement, we purchased 100% of Aventine’s 5% limited partnership interest inHeartland Grain Fuels for $842,105 in cash and 131,579 newly issued units. Weclosed on the second purchase agreement with Aventine on November 8, 2006. Thesecond purchase agreement with Aventine contains various representation andwarranties relating to Aventine and its partnership interest in Aventine.Aventine has not made any representations and warranties relating to HeartlandGrain Fuels.

In connection withthe second purchase agreement, Heartland Grain Fuels entered into a secondamendment to its ethanol marketing agreement with Aventine extending the termthrough November 30, 2008, amending the timing of payment and modifying thecommission to be paid by Heartland Grain Fuels and including certain confidentialityprovisions. After the initial term, the agreement will automatically renew forsuccessive one-year terms unless terminated by either party upon one year’sprior written notice. Under the terms of this agreement, Aventine is requiredto purchase all of the ethanol produced at Heartland Grain Fuels’ South Dakotaplants at a price per gallon determined through a pooling of Heartland GrainFuels’ and other producers’ ethanol that is sold by Aventine to third parties,less a commission based on the net pooled price.

After givingeffect to the first closing and the closing of the second purchase agreement,we own 51% of the outstanding stock of Dakota Fuels and 52.898% of the limitedpartnership interests in Heartland Grain Fuels. We have appointed two membersto Dakota Fuels’ four-member board of directors. We will not have control ofHeartland Grain Fuels until the second closing occurs, at which time we will beable to appoint all four members of the board. If the second closing does notoccur, we have agreed with Heartland Producers to take all actions necessary toelect a fifth independent director acceptable to each of us.

***PurchasePrice***.******In returnfor 100% of the stock of Dakota Fuels and 100% of the general and limitedpartnership interests in Heartland Grain Fuels, we agreed to pay the HeartlandGrain Fuels’ limited partners a total of $16,702,125 in cash and 2,631,578newly issued units. At the first closing, 50,857 units were placed in escrow inconsideration for SDWG’s indemnification obligations. At the second closing,49,143 additional units will be included in escrow for a period of six monthsfollowing the date of the first closing (for a total escrow of 100,000 units).With limited exceptions, those escrowed units represent our sole recourse againstthe limited partners for breaches of representations and warranties and otherviolations of the first purchase agreement.

We will beacquiring Heartland Grain Fuels subject to all of its debt. Under the firstpurchase agreement, we agreed to permit Heartland Grain Fuels to take onindebtedness in an amount not to exceed $42.0 million.

**ITEM 1A.        RISK FACTORS**

**RISKS RELATED TO OUR BUSINESS**

**We were a development-stage company and untilrecently had no operating history, which could result in errors in managementand operations causing a reduction in the value of your investment.**

We were recentlyformed and until the first closing of the Heartland transaction had no historyof operations. We cannot provide assurance that we can manage the HeartlandGrain Fuels operations or our start-up activities effectively and properlystaff operations, and any failure to manage the Heartland Grain Fuelsoperations or to complete these start-up activities effectively could delay thecommencement of our other plant operations. A delay in these start-upoperations is likely to further delay our ability to generate adequate revenueto satisfy our debt obligations. Our proposed operations are subject to all therisks inherent in the establishment of a new business enterprise. We anticipatea period of significant growth, involving the construction and start-up ofoperations of the ethanol plants and the expansion of the Aberdeen plant. Thisperiod of growth and the start-up or expansion of the ethanol plants is likelyto be a substantial challenge to us. If we fail to manage our start-upeffectively, you could lose all or a substantial part of your investment.

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**Wemay not be able to develop or expand our business as planned.**

We plan to growour business by investing in new or existing ethanol plants. We have anapproximately 53% ownership interest in a partnership that owns two existingethanol plants, the Aberdeen and Huron plants, and plans to expand the Aberdeenplant. The Aberdeen plant of Heartland Grain Fuels is being expanded and wehave one ethanol plant under construction and two ethanol plants indevelopment. Constructing ethanol plants is subject to a number of risks, anyof which could prevent us from commencing operations at a particular plant asexpected or at all, including zoning and permitting matters, adverse weather,defects in materials and workmanship, labor and material shortages, transportationconstraints, construction change orders, site changes, labor issues and otherunforeseen difficulties. Moreover, we will need substantial additional capitalto expand our business, but we may not obtain this needed capital or it may notbe available to us on acceptable terms. If we are not able to develop or expandour business as planned, the value of your investment will decline and maybecome worthless.

**We have little to no experience in the ethanolindustry, which increases the risk of our inability to expand, build andoperate the ethanol plants.**

We are presently,and for some time are likely to continue to be, dependent upon our currentboard of directors and management team to operate our business. Most of theseindividuals are experienced in business generally but nearly all of thesepersons have very little or no experience in raising capital from the public,organizing and building an ethanol plant or governing and operating a publiccompany. With the exception of Dale Locken, who was recently appointed to ourboard as a representative of SDWG, no members of our board of directors haveexpertise in the ethanol industry. Revis L. Stephenson III, our chief executiveofficer, and Richard Peterson, our chief financial officer, also have no priorexperience in the ethanol industry. In addition, certain directors arepresently engaged in other activities that impose substantial demands on theirtime and attention. You should not purchase units unless you are willing toentrust all aspects of our management to our board of directors and management.

**We will depend on Fagen, Inc. and ICM, Inc. forexpertise in beginning operations in the ethanol industry and any loss of theserelationships could cause us delay and added expense, placing us at acompetitive disadvantage.**

We will bedependent on our relationships with Fagen, Inc., ICM, Inc. and their employees.Any loss of these relationships may prevent us from commencing operations atthe proposed plants and result in the failure of our business. The time andexpense of locating new consultants and contractors would result in unforeseenexpenses and delays. Unforeseen expenses and delays may reduce our ability togenerate revenue and obtain profitability and may significantly damage ourcompetitive position in the ethanol industry such that you could lose some orall of your investment.

**If we fail to finalize critical agreements, suchas the design-build agreements for the Indiana and Minnesota plants, ethanoland distillers grains marketing agreements and utility supply agreements, or ifthe final agreements are unfavorable when compared to what we currentlyanticipate, our projects may fail or be harmed in ways that reduce the value ofyour investment.**

You should beaware that this report makes reference to documents or agreements that are notyet final or executed and plans that have not been implemented. In someinstances these documents or agreements are not even in draft form. Thedefinitive versions of those agreements, documents, plans or proposals may containterms or conditions that vary significantly from the terms and conditionsdescribed. These tentative agreements, documents, plans or proposals may notmaterialize or, if they do materialize, may not prove to be profitable.

**Ourexisting debt financing agreements contain, and our future debt financingagreements may contain, restrictive covenants that limit distributions andimpose restrictions on the operation of our business. Our failure, or thefailure of any of our subsidiaries, to comply with applicable debt financingcovenants and agreements could have a material adverse effect on our business,results of operations and financial condition.**

We will need a significant amount ofadditional debt financing to complete our projects and operate our ethanolplants following construction, but we may not be able to obtain additional debtfinancing on acceptable terms or at all. The use of debt financing makes itmore difficult for us to operate because we must make principal and interestpayments on the indebtedness and abide by covenants contained in our debtfinancing agreements. The level of our debt may have important implications onour operations.

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The terms of our existing debt financingagreements contain, and any future debt financing agreement we enter into maycontain, financial, maintenance, organizational, operational and otherrestrictive covenants. If we are unable to comply with these covenants orservice our debt, we may lose control of our business and be forced to reduceor delay planned capital expenditures, sell assets, restructure ourindebtedness or submit to foreclosure proceedings, all of which could result ina material adverse effect upon our business, results of operations andfinancial condition. Our debt arrangements may also include subordinated debt,which may contain even more restrictions and be on less favorable terms thanour senior debt. To secure subordinated debt, we may have to give the lenderwarrants, put rights, conversion rights, the right to take control of our businessin the event of a default or other rights and benefits as the lender mayrequire. This could further dilute your ownership interest in us.

We may secure our debt financing directlyor through the wholly owned subsidiary entities we have established to operateeach of our ethanol plants. Regardless of the structure, our debt financingarrangements will contain various covenants and agreements and may containcross-acceleration and cross-default provisions. Under these provisions, adefault or acceleration of one debt agreement will result in the default andacceleration of our other debt agreements (regardless of whether we were incompliance with the terms of such other debt agreements), providing the lendersunder such other debt agreements the right to accelerate the obligations dueunder such other debt agreements. Accordingly, a default, whether by us or anyof our subsidiaries, could result in all of our outstanding debt becomingimmediately due and payable. The application of cross-acceleration or cross-defaultprovisions means that our compliance, and our subsidiaries’ compliance, withapplicable debt covenants and agreements will be interdependent and one default(including a default by one of our subsidiaries) could have a material adverseeffect on our business, results of operations and financial condition.

For a description of our existing debtarrangements, see “Management’s Discussion and Analysis and Plan of Operationfor Advanced BioEnergy — Liquidity and Capital Resources,” and “Management’sDiscussion and Analysis and Plan of Operation for Heartland Grain Fuels —Liquidity and Capital Resources.”

**Our lack of business diversification could resultin the devaluation of our units if our revenues from our primary productsdecrease.**

We expect ourbusiness to primarily consist of ethanol and distillers grains production andsales. We do not have any other lines of business or other potential sources ofrevenue. Our lack of business diversification could cause you to lose all orsome of your investment if we are unable to generate revenues by the productionand sale of ethanol and distillers grains since we do not currently expect tohave any other lines of business or alternative revenue sources.

**We have a history of losses and may not everoperate profitably.**

For the period ofJanuary 4, 2005 through September 30, 2006, we incurred an accumulated net lossof approximately $2.0 million. There is no assurance that we will be successfulin our efforts to build and operate ethanol plants. Even if we successfullymeet all of these objectives, there is no assurance that we will be able tooperate profitably.

**We aredependent on certain key personnel, and the loss of any of these persons mayprevent us from implementing our business plan in an effective and timelymanner.**

Our successdepends largely upon the continued services of our executive officers and otherkey personnel, including operational executives. Any loss or interruption ofthe services of one or more of our executive officers or these key personnelcould result in our inability to manage our operations effectively or pursueour business strategy.

**We have to recruit and retain qualified employeesto operate the plants successfully.**

Our success willdepend in part on our ability to attract and retain qualified personnel at acompetitive wage and benefit level. We must hire qualified managers,accounting, human resources and other personnel. We operate in rural areas withlow unemployment. There is no assurance that we will be successful in attractingand retaining qualified personnel at a wage and benefit structure at or belowthose we have assumed in our projects. If we are unsuccessful in this regard,we may not be competitive with other ethanol plants and your investment maylose value.

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**We have recently completed the acquisition of a 53%interest in Heartland Grain Fuels, are committed to acquiring the balance ofthe interests in Heartland Grain Fuels and may pursue other strategicacquisitions, which could have an adverse impact on our business.**

We have recentlycompleted the acquisition of a 53% interest in Heartland Grain Fuels and arecommitted to acquiring 100% of the interests in Heartland Grain Fuels pendingapproval of the members of Heartland Producers and other closing conditions. Weperiodically consider acquisitions and we may from time to time acquirecomplementary companies or businesses. Acquisitions may result in difficultiesin assimilating acquired companies, and may result in the diversion of ourcapital and our management’s attention from other business issues andopportunities. We may not be able to successfully integrate companies that weacquire, including their personnel, financial systems, distribution, operationsand plant operating procedures. If we fail to successfully integrate acquiredcompanies, our business could suffer. In addition, the integration of anyacquired business, and its financial results, into ours may adversely affectour operating results.

**RISKS RELATED TO THE HEARTLAND TRANSACTION**

**We are relying on the members ofHeartland Producers to approve the combination with Heartland Grain Fuels.**

Our businessstrategy includes growth through acquisitions. On November 7, 2006, we enteredinto a partnership interest and stock purchase agreement, known as the first purchaseagreement, with Heartland Producers for the purchase of 100% of its partnershipinterests in Heartland Grain Fuels, a company with two fuel-grade ethanolproduction facilities and total annual output of 39 million gallons of ethanolper year. As a condition to closing on the sale of its interest in HeartlandGrain Fuels, the Heartland Producers members must first approve thecombination. If the members do not approve the combination, Heartland Producerswill remain a limited partner in Heartland Grain Fuels and will still control49% of the stock of Dakota Fuels, Inc., the general partner of Heartland GrainFuels. Should the members of Heartland Producers fail to approve thetransaction, we will be a majority owner in, but will not control, HeartlandGrain Fuels. If the members of Heartland Producers do not approve the Heartlandtransaction, we have agreed with Heartland Producers to take all necessaryaction to expand the board of the general partner, Dakota Fuels, and appoint afifth independent director who is acceptable to each of us, but it is possiblethat we will not be able to reach agreement on a fifth director or recruit orretain a fifth director.

**We do not control the board ofDakota Fuels, the general partner of Heartland Grain Fuels; therefore, we cannot be assured that Heartland Grain Fuels will act in our best interest or takeactions that are consistent with the wishes of our designees to the board ofdirectors of Dakota Fuels.**

Heartland GrainFuels is managed by its general partner, Dakota Fuels, which is managed by itsboard of directors. We currently have the right to designate two directors tothe four member board of directors. The remaining two directors are designatedby Heartland Producers. If the members of Heartland Producers do not approvethe Heartland transaction, we have agreed with Heartland Producers to take allnecessary action to expand the board and appoint a fifth independent directorwho is acceptable to each of us, but it is possible that we will not be able toreach agreement on a fifth director or recruit or retain a fifth director.

If we are not ableto recruit or retain a fifth director, there is the possibility that therecould be deadlocks on the board of Dakota Fuels, which could adversely affectHeartland Grain Fuel’s business and operations. If a fifth director isappointed, actions could be taken by the board of Dakota Fuels that are notsupported by our designees to the board. For example, the board of Dakota Fuelsmay not accept our proposed investment or accept it on terms that are not asfavorable as those we propose or the board may choose not to distribute cashfrom the profits of Heartland Grain Fuels to the partners. Any of these actionsor other actions of Dakota Fuels may decrease the value of our investment inHeartland Grain Fuels, which ultimately may have a material adverse effect onour business, results of operations and profitability.

If we do notobtain the necessary approvals, we will not be able to make additionalinvestments in Heartland Grain Fuels necessary to complete the Aberdeenexpansion and it may, as a result, not be completed. We currently do notcontrol Heartland Grain Fuels or Dakota Fuels, the general partner of HeartlandGrain Fuels. If we receive proceeds from our proposed registered securitiesoffering prior to approval of the Heartland transaction by Heartland Producers,we intend to invest proceeds from our proposed registered securities offeringas necessary in order to continue funding the Aberdeen plant expansion pendingclosing of the Heartland transaction. The terms of and our ability to make thisinvestment would be subject to approval of the Dakota Fuels board and may besubject to the approval of the senior lender to Heartland Grain Fuels, neitherof which we control. If we do not receive 

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proceeds from ourproposed registered securities offering by February 2007, we will need to raisesubordinated debt in order for Heartland Grain Fuels to continue funding theAberdeen plant expansion as scheduled. If we are able to raise subordinateddebt, we plan on contributing funds as needed in the form of debt or equity toHeartland Grain Fuels in order to enable it to continue funding the Aberdeenplant expansion. We are in the process of exploring various alternatives for subordinateddebt financing, but there are no assurances that we will be able to obtainsubordinated debt financing on acceptable terms or at all. If we are unable tosecure subordinated debt, the Aberdeen plant expansion may be delayed or maynot proceed. Further, any investment by us is subject to approval by the DakotaFuels board and may be subject to approval by the senior lender to HeartlandGrain Fuels, neither of which we control. If we do not receive the necessaryapprovals the Aberdeen expansion may be delayed or may not proceed.

**Even ifthe members of Heartland Producers approve the Heartland transaction, theparties may fail to consummate the acquisition.**

The consummationof the Heartland transaction is subject to certain closing conditions. While itis intended that the transaction be consummated as soon as possible after themembers of Heartland Producers approve the combination, there can be noassurance that the conditions required to consummate the combination will besatisfied or waived. To the extent that the parties fail to consummate thetransaction, the costs and expenses of the failed transaction, together withthe loss of potential revenue and the distraction of our management’s efforts,could materially and adversely affect our business, results of operations andfinancial condition. Furthermore, if the Heartland transaction is notconsummated and Heartland Producers continues as a partner with us, there is noguarantee that Heartland Grain Fuels will be operated in accordance with past practicesor that we will be able to change past practices if we believe that iswarranted, which could have a material adverse effect on the value of ourinvestment in Heartland Grain Fuels.

**We may have unanticipatedliabilities or have negotiated terms that prove to be unfavorable in connectionwith the Heartland transaction.**

Notwithstandingour review and investigation into Heartland Grain Fuels at the time we enteredinto the agreement to acquire the partnership interests in Heartland GrainFuels, we had limited knowledge about Heartland Grain Fuels, including itsspecific operating history and financial condition. No assurance can be giventhat we paid a reasonable price for Heartland Grain Fuels, or that wenegotiated appropriate contractual terms, including seller representations andwarranties. To the extent that we must pay for significant unanticipatedobligations of Heartland Grain Fuels, we could be materially and adverselyaffected.

**We maynot realize the anticipated benefits of acquiring****Heartland Grain Fuels.**

We entered intothe first purchase agreement and a partnership interest purchase agreement withAventine, known as the second purchase agreement, to, among other objectives,create a combined company that will serve as a more effective ethanol producerand that will achieve operating efficiencies. Achieving the anticipatedbenefits of the transaction is subject to uncertainties, including whether wecan integrate Heartland Grain Fuels in an efficient and effective manner, andgeneral competitive factors in the marketplace. Failure to achieve theseanticipated benefits could result in increased costs, decreases in expectedrevenues and diversion of our management’s time and energy and could materiallyand adversely impact our business, financial condition and results ofoperations.

**We mayexperience difficulties integrating Heartland Grain Fuels into our business***.*

IntegratingHeartland Grain Fuels’ operations into our business will be a time-consumingprocess that will require considerable attention on the part of our management.We may experience unanticipated difficulties or expenses in connection with theintegration of production, sourcing and information technology functions.Similarly, the process of consolidating information technology, communicationsand administrative functions can take longer, cost more and provide fewerbenefits than initially projected. To the extent any of these events occurs,the anticipated benefits of the combination may not be realized, or may berealized more slowly than is currently expected. In addition, any failure tointegrate the two companies in a timely and efficient manner may increase therisk that the combination will result in the loss of customers or key employeesor the continued diversion of the attention of our management.

**TheHeartland transaction may adversely affect our financial results.**

We are accountingfor the acquisition of the interest in Heartland Grain Fuels using purchaseaccounting. As a result, we have acquired substantial goodwill and will take acharge against our earnings for amortization of 

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goodwill. We may berequired to take other non-recurring charges, including write downs ofsignificant amounts of intangible assets with indefinite lives or goodwill. Ourbusiness, results of operations and financial condition may be harmed by suchcharges.

**At the closing of SDWG’s sale ofits interests in Heartland Grain Fuels and Dakota Fuels to our company,Heartland Grain Fuels entered into a grain origination agreement with SDWG,which is a significant holder of our units.**

At the closing ofSDWG’s sale of its interests in Heartland Grain Fuels and Dakota Fuels to ourcompany, we entered into a grain origination agreement with SDWG, pursuant towhich SDWG will provide the corn required for the operation of the South Dakotaplants, including the Aberdeen plant expansion. As a result of the closing ofthe SDWG transaction, SDWG became a holder of approximately 16%****of our units. The grain origination agreement with SDWG wasnegotiated in connection with the first purchase agreement and may or may notbe as favorable to Heartland Grain Fuels as the terms generally available froman unaffiliated third party, and this arrangement could cause SDWG to have aconflict of interest in decision making related to its ownership of our units.

In addition, DaleLocken, SDWG’s chief executive officer, became a member of our board ofdirectors subsequent to the execution of the grain origination agreement. Thegrain origination agreement could cause Mr. Locken to have a conflict ofinterest in decision making related to his service as a director.

**RISKS RELATED TO OUR FINANCINGPLAN**

**The growth of our business will be dependent uponthe availability of adequate capital.**

The growth of ourbusiness will depend on the availability of adequate capital, which in turnwill depend in large part on cash flow generated by our business and theavailability of equity and debt financing. To date, we have relied on equitycapital and debt financing to commence construction of the Nebraska plant.Heartland Grain Fuels has significant indebtedness on the South Dakota plants.We cannot assure you that our operations will generate positive cash flow orthat we will be able to obtain equity or debt financing necessary to complete,or even to start, our other projects on acceptable terms or at all. Our creditfacilities contain provisions that restrict our ability to incur additionalindebtedness or make substantial asset sales that might otherwise be used tofinance our expansion. Security interests in certain of our assets, which mayfurther limit our access to certain capital markets or lending sources, secureour obligations under the credit facilities. As a result, we cannot assure youthat we will be able to finance our current expansion plans.

**We may not obtain the debt financing necessary toconstruct and operate the ethanol plants, which could result in the failure ofthese projects and our company.**

In addition to theequity we hope to raise in our proposed registered securities offering and theamount of any grants we may be awarded, we will need to obtain significant debtfinancing to fully capitalize the Aberdeen plant expansion and the Indianaplant and substantial additional equity and debt financing in order to fullycapitalize the Minnesota plant. We have entered into loan agreements with banksestablishing senior credit facilities for construction of the Nebraska plantand the Aberdeen plant expansion, but these banks are only obligated to lendthe funds for construction if certain conditions are satisfied. We have nocommitments for debt financing for the Indiana plant or the Minnesota plant.

**Any agreements with lenders may require us toabide by restrictive loan covenants that may hinder our ability to operate.**

In order to implementour business plan we will incur substantial debt service requirements. Our debtload and service requirements, and the restrictive loan covenants accompanyingour debt, including any subordinate debt, could have important consequencesthat could hinder our ability to operate, including our ability to:

·                  incur additionalindebtedness;

·                  make capitalexpenditures or enter into lease arrangements in excess of prescribedthresholds;

·                  makedistributions to unitholders, or redeem or repurchase units;

·                  make certaintypes of investments;

·                  create liens onour assets;

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·                  utilize theproceeds of asset sales; and

·                  merge orconsolidate or dispose of all, or substantially all, of our assets.

In the event thatwe are unable to pay our debt service obligations, our creditors could force usto (a) reduce or eliminate distributions to unitholders (even for fundingincome tax payments on our income) or (b) reduce or eliminate needed capitalexpenditures. It is possible that we could be forced to sell assets, seek toobtain additional equity capital or refinance or restructure all or a portionof our debt. In the event that we would be unable to refinance our indebtednessor raise funds through asset sales, sales of equity or otherwise, our abilityto operate our plants would be greatly affected and we may be forced toliquidate.

**If we do not raisesufficient funding in our proposed registered securities offering, it isunlikely we will construct the Indiana plant.**

We estimate thatwe will need at least $36.0 million in equity funding to complete the Aberdeenplant expansion, $55.0 million in equity funding to build the Indiana plant andsubstantial additional equity funding to build the Minnesota plant. While weare not seeking to raise sufficient funds to build the Minnesota plant in ourproposed registered securities offering, there can be no assurance that we willraise a sufficient amount in our proposed registered securities offering toconstruct the Indiana plant. If we fail to raise the required amounts, it is unlikelythat we will locate other sources of capital that will allow us to constructthese plants.

**RISKS RELATED TO CONSTRUCTION OFTHE ETHANOL PLANTS**

**We may not be able to secure a design-buildagreement for the construction of the Indiana plant.**

We have enteredinto a letter of intent with ICM for the construction of the Indiana plant.There is no guarantee that we will enter into a definitive design-buildagreement with ICM to design and build the ethanol plant. If we are not able toexecute a definitive design-build agreement with ICM, we may not be able tofinance the project or find a design-build company willing to work on theproject, which may reduce the value of our units.

**We may not be able to secure a design-buildagreement for the construction of the Minnesota plant.**

We have an oralagreement with Fagen to enter into a design-build agreement for the design andconstruction of our proposed Minnesota ethanol plant. No definitive agreementhas been executed, and the parties might not agree to terms. If we are not ableto execute a definitive design-build agreement with Fagen, we may not be ableto finance the Minnesota plant or find a design-build company willing to workon the project, which may decrease the value of your investment.

**We expect to be highly dependentupon ICM, Inc. to complete the Aberdeen plant expansion.**

Heartland GrainFuels has entered into a lump-sum design-build agreement with ICM to constructa 40 million gallon per year fuel grade ethanol plant. The construction of thisplant is currently under way with completion expected during the first calendarquarter of 2008. Heartland Grain Fuels will be highly dependent upon ICM forits expertise in the ethanol industry during the construction, and for timelycompletion of the plants. If the expansion is built and does not operate asexpected, Heartland Grain Fuels’ right to rely on ICM to remedy anydeficiencies or defects will be limited by its contract with ICM. If theethanol plant does not operate as expected, Heartland Grain Fuels’ business maybe materially harmed without an adequate remedy against the design-buildcontractors.

**We expectto be highly dependent upon Fagen, Inc. and ICM, Inc. to design and build theIndiana and Minnesota plants.**

We have a letterof intent with ICM, Inc. to design and build the Indiana plant, and we expectto enter into a definitive design-build agreement with ICM for the Indianaplant. We have an oral agreement with Fagen to enter into a design-buildagreement for the design and construction of the Minnesota plant, although nodefinitive agreement has been executed and the parties might not agree to termsand execute an agreement. We expect that Fagen will use ICM technology in theMinnesota plant. Therefore, we expect to be highly dependent upon Fagen and ICMfor their expertise within the ethanol industry, and any loss of ourrelationship with either company couldplace us at a competitive disadvantage. We will depend on Fagen and ICM fortimely completion of the plants; however, their involvement with other projectscould delay the commencement and start-up operations of our projects. If eithercompany were to terminate its relationship with us, we might not be able tosecure a suitable replacement and our business would be materially harmed. Ifthe plants are built and do not operate as we expect, 

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our right to rely onFagen or ICM to remedy any deficiencies or defects will be limited by ourcontracts with them. If the ethanol plants do not operate as we expected, ourbusiness may be materially harmed without an adequate remedy against ourdesign-build contractors.

**We will depend on Fagen, Inc. and ICM, Inc. todesign and build our Nebraska plant, and their failure to perform could forceus to abandon business, hinder our ability to operate profitably or decreasethe value of your investment.**

We have enteredinto a lump-sum design-build agreement with Fagen and a license agreement withICM to design and build the Nebraska plant. We have also entered into a phase Iand phase II engineering services agreement with Fagen Engineering, LLC forcertain engineering and design work on the Nebraska plant. Fagen Engineering,LLC and Fagen, Inc. are both owned by Roland “Ron” Fagen. Fagen Engineering,LLC provides engineering services for projects constructed by Fagen, Inc.

We expect to behighly dependent upon Fagen’s and ICM’s experience and ability to trainpersonnel in operating the Nebraska plant. If the Nebraska plant is built anddoes not operate to the level anticipated by us in our business plan, we willrely on Fagen and ICM to adequately address any deficiency. There is noassurance that Fagen and/or ICM will be able to address a deficiency in anacceptable manner. Their failure to address deficiencies could cause us to haltor discontinue production of ethanol, which could damage our ability togenerate revenues and reduce the value of our units.

**We may need to increase cost estimates forconstruction of the ethanol plants, and these increases could result indevaluation of our units if ethanol plant construction requires additionalcapital.**

We have based ourcapital needs on a design for the Nebraska plant that will cost approximately$98.0 million (not including approximately $2 million allowance for changeorders) with additional start-up and development costs of approximately $51.6million for a total project completion cost of approximately $151.6 million,but there is no assurance that the final cost of the plant will not be higher.We have based our capital needs on a design for the Aberdeen plant expansionwith a total project completion cost, including start-up and developmentalcosts, of approximately $78.0 million, but there is no assurance that the finalcost of the plant will not be higher. We have based our capital needs on adesign for the Indiana plant that will cost approximately $175.0 million,including additional start-up and development costs, but there is no assurancethat the final cost of the plant will not be higher. We have not determined theestimated cost of the Minnesota plant.

There is noassurance that there will not be design changes or cost overruns associatedwith the construction of the plants. Initially, we expected the Nebraska plantto cost approximately $142.0 million and the Indiana plant to costapproximately $165.0 million, each including start-up and development costs.These costs have increased significantly. The rising price of steel couldaffect the final cost of construction and completion dates of the ethanolplants. Steel is a significant material utilized in the construction of ethanolplants. Due to the significant cost of steel, our contractors are not able toprovide a firm estimate of the construction costs until immediately prior tocommencement of construction. Steel prices are highly volatile and have increasedsignificantly in recent months, in part due to steel shortages. Advances andchanges in technology may require changes to our current plans in order toremain competitive. We may determine that it is necessary to change the designof the plants in order to implement new technology. Any significant increase inthe estimated construction cost of the new or expanded plants could delay ourability to generate revenues from these plants and reduce the value of ourunits because our revenue stream may not be able to adequately support theincreased cost and expense attributable to increased construction costs.

**Construction delays could result in devaluation ofour units if our production and sale of ethanol and its by-products aresimilarly delayed.**

We currentlyexpect our Nebraska plant to be operating in September 2007, the Aberdeen plantexpansion to be opening in the first calendar quarter of 2008 and our Indianaplant to be operating in the first calendar quarter of 2009; however,construction projects often involve delays in obtaining permits, constructiondelays due to weather conditions or other events that delay the constructionschedule. We do not have an estimated completion date for the Minnesota plant.Changes in interest rates or the credit environment or changes in politicaladministrations at the federal, state or local level that result in policychange towards ethanol or these projects could cause construction and operationdelays. If it takes longer to construct the plants than we anticipate, it woulddelay our ability to generate revenue from them and make it difficult for us tomeet our debt service obligations. This could reduce the value of our units.

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**Defects in plant construction could result indevaluation of our units if our plants do not produce ethanol and itsby-products as anticipated.**

There is noassurance that defects in materials and/or workmanship in the plants will notoccur. Under the terms of the design-build agreement with Fagen forconstruction of the Nebraska plant, Fagen warrants that the material andequipment furnished to build the plant will be new, of good quality and freefrom material defects in material or workmanship at the time of delivery, andFagen is required to correct all defects in material or workmanship for aperiod of one year after substantial completion of the plant. We expect suchterms to be included in the design-build agreement for construction of theMinnesota plant as well. Under the terms of the design-build agreement with ICMfor construction of the Aberdeen plant expansion, ICM warrants that thecompleted plant will achieve certain performance criteria over a seven-daytest, and ICM is required to make such changes in design, construction orequipment as required to meet the criteria. ICM agrees to correct certaindefects in material or workmanship for a period of one year after satisfactionof the performance criteria over a seven day test period. At this time, we donot know what warranty, if any, we will receive from ICM for construction of theIndiana plant. Notwithstanding any warranties, defects in material orworkmanship may still occur and could delay the commencement of operations, or,if such defects are discovered after operations have commenced, could cause usto halt or discontinue the plants’ operation. Halting or discontinuing plantoperations could delay our ability to generate revenues from these plants andreduce the value of our units.

**The Indiana and Minnesota plant sites may haveunknown environmental problems that could be expensive and time consuming tocorrect, which may delay or halt plant construction and delay our ability togenerate revenue from these plants.**

We have notcompleted environmental studies of the land that we intend to use to build theIndiana and Minnesota plants. We may determine that this land containsenvironmental hazards that will make construction costly or impossible, whichcould lead us to suspend development or construction of the plants or requireus to purchase more expensive land on which to build the plants. Fagen and ICMare not responsible for any hazardous conditions encountered at the plant site.Upon encountering a hazardous condition, Fagen or ICM will suspend work in theaffected area. If we receive notice of a hazardous condition, we must correctthe condition prior to continuing construction. The presence of a hazardouscondition will likely delay construction of the plant and may requiresignificant expenditure of our resources to correct the condition. In addition,Fagen or ICM will be entitled to an adjustment in price and time of performanceif it has been adversely affected by the hazardous condition. If we encounterany hazardous conditions during construction that require time or money tocorrect, such event could delay our ability to generate revenue from theseplants and reduce the value of our units.

**Any delay or unanticipated cost in providing railinfrastructure to the plants could significantly impact our ability to operatethe plants and reduce the value of your investment.**

We do not have anapproved rail plan from Burlington Northern Santa Fe Railroad to cover theincreased shipments that will be generated by the Aberdeen plant after theexpansion is complete. Rail service is available in Fairmont, Nebraska from theBurlington Northern Santa Fe Railroad. Our budget currently includes $7.1million in rail infrastructure costs associated with the Nebraska plant.Increased costs for rail access or a delay in obtaining rail access couldsignificantly impact our ability to operate the plant since we expect to shipmost or all of our ethanol and distillers grains by rail. As a result, thevalue of your investment could decline.

Similarly, accessto the proposed Indiana and Minnesota sites by rail service is critical to thesuccess of these plants. Any delay in obtaining rail access, or inability toobtain rail access, could significantly impact our ability to operate thoseplants.

**If wewere not able to obtain the required zoning and permits to build at theproposed sites for the Indiana and Minnesota plants, we may not be able toproceed with those plants.**

The proposed sitesin Indiana are zoned for agricultural use, and we anticipate we will need azoning change to construct an ethanol plant on either of these sites. Based oncurrent Rice County zoning requirements, our proposed site for the Minnesotaplant may need to be rezoned as well, and a conditional use permit will likelybe required. Bridgewater Township, Minnesota, where the proposed plant would belocated, has adopted a one-year moratorium on ethanol plant construction whilethe township considers whether to adopt its own zoning code. If we are not ableto have the land rezoned and obtain the required permits, we will not be ableto build the Indiana and Minnesota plants at their proposed sites and willattempt to find other locations to build the plants; however, this 

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may prove unsuccessful.No assurance can be given that we will be successful in getting the proposedsites rezoned or that we will obtain the required permits.

**Lack of a completion bond orother performance guaranty for construction of our Nebraska plant or theAberdeen plant expansion could lead to potentially adverse effects and reducethe value of your investment.**

Completion bondsor performance guaranties are not required under the terms of the financingarrangements for the Aberdeen plant expansion or the Nebraska plant. While webelieve we have sufficient cash on hand and debt financing in place to coverconstruction and related start-up costs for the Nebraska plant and that theminimum offering proceeds from our proposed registered securities offering willbe sufficient to capitalize the Aberdeen plant expansion, there is no guarantyof the completion of the entire facility and the lack of any completion bond orother performance guaranty could have an adverse effect on your investment.

**RISKS RELATED TO ETHANOLPRODUCTION**

**We may have difficulty obtaining enough corn tooperate the plants profitably.**

There may not bean adequate supply of corn produced in the area surrounding our plants tosatisfy our requirements. Even if there is an adequate supply of corn and wemake arrangements to purchase it, we could encounter difficulties finalizingthe sales transaction and securing delivery of the corn. If we do not obtaincorn in the quantities we plan to use, we may not be able to operate our plantsat full capacity. If the price of corn in our local markets is higher than thenational average, our profitability may suffer and we may incur significantlosses from operations. As a result, our ability to make a profit may decline,causing a reduction in the value of your investment.

**Our financial performance will be dependent oncorn prices and market prices for ethanol and distillers dried grains, and thevalue of your investment in us may be directly affected by changes in thesemarket prices.**

Our results ofoperations and financial condition will be significantly affected by the costand supply of corn and by the selling price for ethanol and distillers grains,which are commodities. Changes in the price and supply of these commodities aresubject to and determined by market forces over which we have no control. Asignificant reduction in the quantity of corn harvested due to adverse weather conditions, disease or other factors couldresult in increased corn costs with adverse financial consequences to us.Significant variations in actual growing conditions from normal growingconditions may adversely affect our ability to procure corn for the ethanolplants. Additionally, competition for corn origination from other ethanolplants or other buyers may increase our cost of corn and harm our financialperformance. We purchase our corn in the cash market and from time to timehedge corn price risk through futures contracts, options and over-the-counterinstruments to reduce short-term exposure to price fluctuations. There is noassurance that our hedging activities will successfully reduce the risk causedby price fluctuation, which may leave us vulnerable to high corn prices. Hedgingactivities themselves can result in costs because price movements in corncontracts are highly volatile and are influenced by many factors that arebeyond our control. We may incur these costs and they may be significant.

Generally, highercorn prices will produce lower profit margins. This is especially true ifmarket conditions do not allow us to pass through increased corn costs to ourcustomers. There is no assurance that we will be able to pass through highercorn prices. If a period of high corn prices were to be sustained for sometime, this pricing may reduce our ability to generate revenues and harm ourprofitability because of the higher cost of operating and could potentiallylead to the loss of some or all of your investment.

Our revenues willbe exclusively dependent on the market prices for ethanol and distillersgrains. These prices can be volatile as a result of a number of factors. Thesefactors include the overall supply and demand, the price of gasoline, the levelof government support and the availability and price of competing products. Forinstance, the price of ethanol tends to increase as the price of gasolineincreases, and the price of ethanol tends to decrease as the price of gasolinedecreases. Any lowering of gasoline prices will likely also lead to lowerprices for ethanol, which may decrease our ethanol sales and reduce revenues,causing a reduction in the value of your investment.

We believe thatethanol production is expanding rapidly at this time. Increased production ofethanol may lead to lower prices. The increased production of ethanol couldhave other adverse effects. For example, the increased production could lead toincreased supplies of by-products from the production of ethanol, such asdistillers grains. Those increased supplies could outpace demand, which wouldlead to lower prices for those by-

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products. Also, theincreased production of ethanol could result in increased demand for corn. Thiscould result in higher prices for corn and corn production, creating lowerprofits. There can be no assurance as to the price of ethanol or distillersgrains in the future. Any downward changes in the price of ethanol and/ordistillers grains may result in less income, which would decrease our revenuesand you could lose some or all of your investment as a result.

**Our ability to successfully operate is dependenton the availability of energy and water at anticipated prices.**

Adequate energyand water is critical to plant operations. We have not yet entered into anydefinitive agreements to obtain energy and water resources for the Indiana andMinnesota plants, and we may have to pay more than we expect to accesssufficient energy and water resources. As a result, our ability to make aprofit may decline.

**We expectto depend on natural gas energy to power the ethanol plants.**

We intend to usenatural gas as the power source for our ethanol plants. Natural gas coststraditionally represent approximately15% of the total cost of production of ethanol. Natural gas prices are volatileand may lead to higher operating costs. Between January 1, 2001 and November30, 2006, the price per million British thermal units of natural gas based onthe New York Mercantile Exchange (NYMEX), known as a MMBtu, has ranged from alow of $1.83 to a high of $15.38. On November 29, 2006, the price of the NYMEXfuture contract for January 2007 delivery settled at $8.871 per MMBtu. Anyincrease in the price of natural gas could lead to an increase in operatingcost.

**We will depend on others for sales of ourproducts, which may place us at a competitive disadvantage and reduceprofitability.**

We currently haveagreements with third-party marketing firms to market all of the ethanolproduced at the South Dakota plants and the ethanol we plan to produce at theNebraska plant, and we may hire a third-party marketing firm to market all ofthe ethanol we plan to produce at our other plants. We currently expect tomarket a portion of our own distillers grains generated by our Nebraska,Indiana and Minnesota plants locally by selling to local livestock, poultry andswine markets. However, if the local markets do not provide an adequate outletfor our distillers grains at the prices we desire, we have contracted withCommodity Specialist Company to market and sell a portion or all of ourdistillers grains generated by these plants. As a result, we expect to bedependent on the ethanol marketer and any distillers grains marketer we engage.There is no assurance that we will be able to enter into contracts with any ethanolmarketer for the ethanol at our Indiana and Minnesota plants or distillersgrains marketer on terms that are favorable to us. If the ethanol or distillersgrains marketer breaches the contract or does not have the ability, forfinancial or other reasons, to market all of the ethanol or distillers grainswe produce, we will not have any readily available means to sell our products.Our lack of a sales force and reliance on third parties to sell and market ourproducts may place us at a competitive disadvantage. Our failure to sell all ofour ethanol and distillers grains may result in less income from sales,reducing our revenue stream, which could reduce the value of your investment.

**We do not have experience marketing ethanol anddistillers grains, and we might be unsuccessful in selling any of the productswe undertake to market on our own.**

We currentlyexpect to market a portion of our own distillers grains generated by ourNebraska, Indiana and Minnesota plants locally by selling to local livestock, poultryand swine markets, and we may market the ethanol produced at the Indiana andMinnesota plants on our own. We do not have any experience marketing ethanoland distillers grains, which may make it difficult to sell these products at adesirable price or at all. Our failure to sell all of our ethanol anddistillers dried grains feed products may result in less income from sales,reducing our revenue stream, which could reduce the value of your investment.

**We have no current plan to sell the raw carbon dioxidewe produce to a third-party processor, resulting in the loss of a potentialsource of revenue.**

At this time, wehave no agreement to sell the raw carbon dioxide we produce. We cannot provideany assurances that we will sell our raw carbon dioxide at any time in thefuture. If we do not enter into agreements to sell our raw carbon dioxide, wewill have to emit it into the air. Although emission of carbon dioxide does notviolate current laws, this will result in the loss of a potential source of revenue.

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**Changes and advances in ethanol productiontechnology could require us to incur costs to update our ethanol plants orcould otherwise hinder our ability to compete in the ethanol industry oroperate profitably.**

Advances andchanges in the technology of ethanol production are expected to occur. Anyadvances and changes may make the ethanol production technology installed inour plants less desirable or obsolete. These advances could also allow ourcompetitors to produce ethanol at a lower cost than us. If we are unable toadopt or incorporate technological advances, our ethanol production methods andprocesses could be less efficient than our competitors, which could cause ourplants to become uncompetitive or completely obsolete. If our competitorsdevelop, obtain or license technology that is superior to ours or that makesour technology obsolete, we may be required or we may determine that it is inthe best interests of our company to incur significant costs to enhance oracquire new technology so that our ethanol production remains competitive.Alternatively, we may be required to seek third-party licenses, which couldalso result in significant expenditures. We cannot guarantee or assure you thatthird-party licenses will be available or, once obtained, will continue to beavailable on commercially reasonable terms, if at all. These costs couldnegatively impact our financial performance by increasing our operating costsand reducing our net income, all of which could reduce the value of yourinvestment.

**There is currently a shortage ofrail cars to transport ethanol. If we are not able to obtain rail cars atfavorable prices, we may not be able to operate profitably.**

We currentlyexpect to transport a substantial amount of the ethanol produced at our plantsby rail, which requires a sufficient supply of specialized rail cars. There iscurrently a shortage of adequate rail cars, and rail car manufacturers haveinformed us that there is a significant backlog on rail car orders; therefore,it may be costly to obtain rail cars in a timely fashion or rail cars may notbe available at all. If demand for rail cars remains high, we may be requiredto pay higher prices than we currently anticipate to purchase rail cars, whichwould limit our ability to make a profit and cause our sales to decline.Moreover, if we do not obtain rail cars in the quantities we plan to use, wemay not be able to operate our plants at full capacity, which could cause adecline in the value of our units.

**RISKS RELATED TO THE ETHANOLINDUSTRY**

**Competition from the advancement of technology maylessen the demand for ethanol and negatively impact our profitability, whichcould reduce the value of your investment.**

Alternative fuels,gasoline oxygenates and ethanol production methods are continually underdevelopment. A number of automotive, industrial and power generationmanufacturers are developing more efficient engines, hybrid engines andalternative clean power systems using fuel cells or clean burning gaseousfuels. Vehicle manufacturers are working to develop vehicles that are more fuelefficient and have reduced emissions using conventional gasoline. Vehiclemanufacturers have developed and continue to work to improve hybrid technology,which powers vehicles by engines that utilize both electric and conventionalgasoline fuel sources. In the future, the emerging fuel cell industry offers atechnological option to address increasing worldwide energy costs, thelong-term availability of petroleum reserves and environmental concerns. Fuelcells have emerged as a potential alternative to certain existing power sourcesbecause of their higher efficiency, reduced noise and lower emissions. Fuelcell industry participants are currently targeting the transportation,stationary power and portable power markets in order to decrease fuel costs,lessen dependence on crude oil and reduce harmful emissions. If the fuel celland hydrogen industries continue to expand and gain broad acceptance, andhydrogen becomes readily available to consumers for motor vehicle use, we maynot be able to compete effectively. This additional competition could reducethe demand for ethanol, which would negatively impact our profitability,causing a reduction in the value of your investment.

**Corn-based ethanol may compete with cellulose-basedethanol in the future, which could make it more difficult for us to produceethanol on a cost-effective basis and could reduce the value of yourinvestment.**

Most ethanol iscurrently produced from corn and other raw grains, such as milo or sorghum—especiallyin the Midwest. The current trend in ethanol production research is to developan efficient method of producing ethanol from cellulose-based biomass, such asagricultural waste, forest residue, municipal solid waste and energy crops. Thistrend is driven by the fact that cellulose-based biomass is generally cheaperthan corn, and producing ethanol from cellulose-based biomass would createopportunities to produce ethanol in areas that are unable to grow corn. If anefficient method of producing ethanol from cellulose-based biomass isdeveloped, we may not be able to compete effectively. We do not believe it willbe cost-effective to convert the existing South Dakota plants or the ethanolplants we are proposing to build into plants that will use cellulose-basedbiomass to produce ethanol. If we are 

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unable to produce ethanolas cost effectively as cellulose-based producers, our ability to generaterevenue will be negatively impacted and your investment could lose value.

**Volatility in gasoline selling price and productioncost may reduce our gross margins.**

Ethanol isutilized both as a fuel additive to reduce vehicle emissions and as an octaneenhancer to improve the octane rating of the gasoline with which it is blended.Therefore, the supply and demand for gasoline impacts the price of ethanol, andour business and future results of operations may be materially adverselyaffected if gasoline demand or price decreases.

**Competition in the ethanol industry could limit ourgrowth and harm our operating results.**

The market forethanol and other biofuels is highly competitive. Our current and prospectivecompetitors include many large companies that have substantially greater marketpresence, name recognition and financial, marketing and other resources than wedo. We compete directly or indirectly with large companies, such asArcher-Daniels-Midland Company and Cargill, Inc., and with other companies thatare seeking to develop large-scale ethanol plants and alliances. As of June2006, the top ten producers accounted for approximately 46% of the ethanolproduction capacity in the U.S. according to the Renewable Fuels Association.Farmer-owned cooperatives and independent firms consisting of groups ofindividual farmers and investors have been able to compete successfully in theethanol industry due in part to their ability to attract sufficient supplies ofcorn at relatively low prices. Pressure from our competitors could require usto reduce our prices or increase our spending for marketing, which would erodeour margins and could have a material adverse effect on our business, financialcondition and results of operations.

**Commencementof ethanol plant construction by other parties prior to us in the areas wherewe intend to build plants could force us to abandon one or more of our proposedplants.**

At present, thereare many individuals and groups that are attempting to build ethanol plantsthroughout the U.S. If a third party begins construction on a plant in oraround the area of one of our proposed plants, lenders may not be willing tofund the debt we would need to build in the area. In addition, Fagen, ICM andother plant builders often refuse to construct plants nearby other ethanolplants. This could cause us to abandon or relocate one of our proposed plants,which could have a material adverse effect on our business, financial conditionand results of operations.

**As domestic ethanol production continues to grow,ethanol supply may exceed demand, causing ethanol prices to decline and thevalue of your investment to be reduced.**

The number ofethanol plants being developed and constructed in the United States continuesto increase at a rapid pace. As these plants begin operations, we expectdomestic ethanol production to significantly increase. If the demand forethanol does not grow at the same pace as increases in supply, we would expectthe price for ethanol to decline. Declining ethanol prices will result in lowerrevenues and may reduce or eliminate profits, causing the value of yourinvestment to be reduced.

**Consumer resistance to the use of ethanol based onthe belief that ethanol is expensive, adds to air pollution, harms engines andtakes more energy to produce than it contributes may affect the demand forethanol, which could affect our ability to market our product and reduce thevalue of your investment.**

Certainindividuals believe that use of ethanol will have a negative impact on retailprices of gasoline. Many also believe that ethanol adds to air pollution andharms car and truck engines. Still other consumers believe that the process ofproducing ethanol actually uses more fossil energy, such as oil and naturalgas, than the amount of ethanol that is produced. These consumer beliefs couldpotentially be wide-spread. If consumers choose not to buy ethanol, it wouldaffect the demand for the ethanol we produce, which could lower demand for ourproduct and negatively affect our profitability.

**Ethanol imported from Caribbean basin countriesmay be a less expensive alternative to our ethanol, which would cause us tolose market share and reduce the value of your investment.**

Ethanol producedor processed in certain countries in Central America and the Caribbean regionis eligible for tariff reduction or elimination upon importation to the UnitedStates under a program known as the Caribbean Basin Initiative. Large ethanolproducers, such as Cargill, have expressed interest in building dehydrationplants in participating Caribbean basin countries, such as El Salvador, whichwould convert ethanol into fuel-grade ethanol for shipment to the UnitedStates. Ethanol imported from Caribbean basin countries may be a less expensive

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alternative todomestically produced ethanol. Competition from ethanol imported from Caribbeanbasin countries may affect our ability to sell our ethanol profitably, whichwould reduce the value of your investment.

**Ethanol imported from Brazil may be a lessexpensive alternative to our ethanol, which would cause us to lose market shareand reduce the value of your investment.**

Brazil iscurrently the world’s largest producer and exporter of ethanol. In Brazil,ethanol is produced primarily from sugarcane, which is also used to producefood-grade sugar. Brazil experienced a dramatic increase in ethanol productionand trade in 2004, exporting approximately 112 million gallons to the U.S.alone. Ethanol imported from Brazil may be a less expensive alternative todomestically produced ethanol, which is primarily made from corn. Tariffspresently protecting U.S. ethanol producers may be reduced or eliminated.Competition from ethanol imported from Brazil may affect our ability to sellour ethanol profitably, which would reduce the value of your investment.

**RISKS RELATED TO REGULATION ANDGOVERNMENTAL ACTION**

**Loss of or ineligibility for favorable taxbenefits for ethanol production could hinder our ability to operate at a profitand reduce the value of your investment in us.**

The ethanolindustry and our business are assisted by various federal ethanol taxincentives, including those included in the Energy Policy Act of 2005. Theprovision of the Energy Policy Act of 2005 likely to have the greatest impacton the ethanol industry is the creation of a Renewable Fuels Standard, known asthe RFS. The RFS will begin at 4 billion gallons per year in 2006, increasingto 7.5 billion gallons per year by 2012. The RFS helps support a market forethanol that might disappear without this incentive. The elimination orreduction of tax incentives to the ethanol industry could reduce the market forethanol, which could reduce prices and our revenues by making it more costly ordifficult for us to produce and sell ethanol. If the federal tax incentives areeliminated or sharply curtailed, we believe that a decreased demand for ethanolwill result, which could result in the failure of the business and thepotential loss of some or all of your investment.

Another importantprovision involves an expansion in the definition of who qualifies as a smallethanol producer. Historically, small ethanol producers were allowed a10-cents-per-gallon production income tax credit on up to 15 million gallons ofproduction annually. The size of the plant eligible for the tax credit waslimited to 30 million gallons. Under the Energy Policy Act of 2005 the sizelimitation on the production capacity for small ethanol producers increasesfrom 30 million to 60 million gallons. Because we intend to build plants withthe capacity to annually produce 100 million gallons of ethanol each, we do notexpect to qualify for this tax credit, which could hinder our ability tocompete with other plants that will receive the tax credit.

The state ofNebraska has established a production tax credit for newly constructedfacilities in production prior to June 30, 2004. As the program is currentlystructured, we are not eligible for these production tax credits since ourNebraska plant did not become operational by the June 30, 2004 productiondeadline. The program is scheduled to expire on June 30, 2012. Our inability toqualify for this production tax credit may make it more difficult to competewith other facilities in Nebraska that are eligible to receive the tax credit.This could negatively impact our profitability, causing a reduction in thevalue of your investment.

The Aberdeen plantoperated by Heartland Grain Fuels is eligible for incentive payments from theState of South Dakota that have historically been $700,000 to $800,000 peryear. There are no assurances that these incentive payments will continue.

**A change in environmental regulations orviolations thereof could result in the devaluation of our units and a reductionin the value of your investment.**

We are subject toextensive air, water and other environmental regulations, including thoserelating to the discharge of materials into the air, water and ground, thegeneration, storage, handling, use, transportation and disposal of hazardousmaterials, and the health and safety of our employees, and we will need toobtain a number of environmental permits to construct and operate the plants.In addition, it is likely that our debt financing for our plants will becontingent on our ability to obtain the various environmental permits that wewill require.

We are in theprocess of applying for the permits necessary for construction and operation ofour Nebraska plant and the Aberdeen plant expansion and have received some ofthese permits. We have not yet applied for the necessary permits for theIndiana and Minnesota plants. If for any reason any of these permits are notgranted, construction costs for the plants may increase, or the plants may notbe constructed at all. Permit conditions could 

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also restrict or limitthe extent of our operations. We cannot assure you that we will be able toobtain and comply with all necessary permits to construct and continue tooperate our ethanol plants. Failure to comply with all applicable permits andlicenses could subject us to future claims or increase costs and materiallyadversely affect our business and results of operations.

Each ethanol plantwe operate or intend to operate is subject to environmental regulation by thestate in which the plant is located and by the U.S. Environmental ProtectionAgency. These laws, regulations and permits can often require expensivepollution control equipment or operational changes to limit actual or potentialimpacts on the environment. A violation of these laws and regulations or permitconditions can result in substantial fines, natural resource damages, criminalsanctions, permit revocations and/or facility shutdowns. We may be liable forthe investigation and cleanup of environmental contamination at each of theproperties that we own or operate and at off-site locations where we arrangefor the disposal of hazardous substances. If these substances have been or aredisposed of or released at sites that undergo investigation and/or remediationby regulatory agencies, we may be responsible under the ComprehensiveEnvironmental Response, Compensation and Liability Act of 1980 or otherenvironmental laws for all or part of the costs of investigation and/orremediation, and for damages to natural resources. We may also be subject torelated claims by private parties, including our employees and property ownersor residents near our plants, alleging property damage and personal injury dueto exposure to hazardous or other materials at or from those plants.Additionally, the hazards and risks associated with producing and transportingour products (such as fires, natural disasters, explosions, abnormal pressuresand blowouts) may also result in personal injury claims by third parties ordamage to property owned by us or by third parties. We could sustain losses foruninsurable or uninsured events, or in amounts in excess of existing insurancecoverage. Events that result in significant personal injury to third parties ordamage to property owned by us or third parties or other losses that are notfully covered by insurance could have a material adverse effect on ourbusiness, results of operations and financial condition.

Additionally,environmental laws and regulations, both at the federal and state level, aresubject to change and changes can be made retroactively. Consequently, even ifobtain the required permits, we may be required to invest or spend considerableresources to comply with future environmental regulations or new or modifiedinterpretations of those regulations, which may reduce our profitability andcause you to lose some or all of your investment.

**Delays in E85 pump certificationscould decrease the market for ethanol and decrease production of flexible fuelvehicles, causing ethanol prices to decline and the value of your investment tobe reduced.**

While demand forethanol may increase as a result of increased consumption of E85 fuel (a blendof 85% ethanol and 15% unleaded gasoline) in flexible fuel vehicles, there aresome problems certifying pumps to dispense E85 fuel. In high concentrations,the alcohol in ethanol can corrode some types of metal, such as aluminum, anddamage conventional rubber fittings and hoses.

Under some statelaws, service stations will be required to have Underwriters Laboratories,Inc., known as UL, certified E85 pumps in the future. UL is a privateproduct-safety group used by fire marshals and state agencies. At this time, ULhas not certified any pumps to dispense E85 and in October 2006, it suspendedits approval of various internal pump components while it completes its review.After UL suspended approval of pump components, the fire marshal in Columbus,Ohio closed two service stations in the city. UL estimates that it could takefrom six months to two years to finish its review of E85 pumps.

Should UL fail toapprove pump components in the future, it could decrease the market for ethanoland reduce the value of your investment.

**RISKS RELATED TO OUR UNITS**

**No public trading market exists for our units andwe do not anticipate the creation of such a market, which means that it will bedifficult for you to liquidate your investment.**

There is currentlyno established public trading market for our units, and an active tradingmarket will not develop as a result of our proposed registered securitiesoffering. In order for our company to maintain its partnership tax status,unitholders may not trade the units on an established securities market orreadily trade the units on a secondary market (or the substantial equivalentthereof). Therefore, we do not expect to apply for listing of the units on anysecurities exchange following our proposed registered securities offering. As aresult, you should not expect to readily sell your units.

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**We have placed significant restrictions ontransferability of the units.**

The units aresubject to substantial transfer restrictions pursuant to our operatingagreement. In addition, transfers of the units may be restricted by federal andstate securities laws. As a result, investors may not be able to liquidatetheir investments in the units and, therefore, may be required to assume therisks of investments in us for an indefinite period of time, which may be thelife of our company. We have not developed an exit strategy.

To help ensurethat a secondary market does not develop, our operating agreement prohibitstransfers without the approval of our board of directors. The board ofdirectors will not approve transfers unless they fall within “safe harbors”contained in the publicly traded partnership rules under the tax code, whichinclude, without limitation, the following:

·                  transfers bygift to the member’s descendants;

·                  transfer uponthe death of a member;

·                  transfersbetween family members; and

·                  transfers thatcomply with the “qualifying matching services” requirements.

**There is no assurance that an investor willreceive cash distributions, which could result in an investor receiving littleor no return on his or her investment.**

Distributions arepayable at the sole discretion of our board of directors, subject to theprovisions of the Delaware Limited Liability Company Act, our operatingagreement and the requirements of our creditors. Cash distributions are notassured, and we may never be in a position to make distributions. Our board mayelect to retain future profits to provide operational financing for the plants,debt retirement and possible plant expansion, the construction or acquisitionof additional plants or other company opportunities. This means that you mayreceive little or no return on your investment and be unable to liquidate yourinvestment due to transfer restrictions and lack of a public trading market.This could result in a reduction in the value of or the loss of your entireinvestment.

**The presence of members holding 25% or more of theoutstanding units is required to take action at a meeting of our members.**

In order to takeaction at a meeting, a quorum of members holding at least 25% of theoutstanding units must be represented in person, by proxy or by mail ballot.Assuming a quorum is present, members take action by a vote of the majority ofthe units represented at the meeting and entitled to vote on the matter. Therequirement of a 25% quorum protects the company from actions being taken whenless than 25% of the members have considered the matter being voted upon.However, this also means that the unitholders of a minority of outstandingunits could pass a vote and take an action which would then bind allunitholders. Conversely, the requirement of a 25% quorum also means thatmembers will not be able to take actions which may be in the best interests ofthe company if we cannot secure the presence in person, by proxy or by mailballot of members holding 25% or more of the outstanding units.

**You have limited voting rights.**

You cannotexercise control over our daily business affairs and implement changes in ourpolicy. Subject to the provisions in our operating agreement, our board ofdirectors may modify our business plans without your consent.

In addition to theelection of directors, you may vote only in a limited number of specificinstances. These situations consist of the following matters, which require theaffirmative vote of a majority of our membership voting interests:

·                  dispositionof substantially all of our assets through merger, exchange or otherwise,except for dissolution of our company or a transfer of our assets to a whollyowned subsidiary;

·                  issuanceof more than 20 million units; or

·                  causingour company to acquire debt or equity of any director or its affiliates, orotherwise making loans to a director or its affiliates in excess of $500,000.

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**Our units are subordinate to company debts andother liabilities, resulting in a greater risk of loss for investors.**

The units areunsecured equity interests and are subordinate in right of payment to all ourcurrent and future debt. In the event of our insolvency, liquidation,dissolution or other winding up of our affairs, all of our debts, includingwinding-up expenses, must be paid in full before any payment is made to theholders of the units. In the event of our bankruptcy, liquidation, orreorganization, all units will be paid ratably with all our other equity holders,and there is no assurance that there would be any remaining funds after thepayment of all our debts for any distribution to the holders of the units.

**Our units may be subject to dilution in value.**

We may, in thefuture, adopt a unit incentive plan or otherwise grant units, options, warrantsor other securities in order to attract and retain key personnel to operate ourplants and to provide incentives to key management, consultants, directors andofficers. These actions, if taken, could lower the value of our units and causeadditional dilution to your investment and a reduction in your equity interest.

**We may decide to build or acquire additionalethanol plants or undertake additional business ventures, which could affectour profitability and result in the loss of a portion or all of yourinvestment.**

In the future, wemay explore the possibility of building or acquiring additional ethanol plantsor undertaking unrelated business ventures. If we decide to take advantage ofthese opportunities, we might issue additional equity, which could dilute ourunits and cause us to incur additional significant debt obligations in order tofund the new construction or venture. Any proposed additional plants orventures may also impose substantial additional demands on the time andattention of our executive officers and directors. If we decide to build oracquire additional plants or undertake other business ventures, we may not besuccessful, which could lead to an unrecoverable investment by us and you couldlose a portion or all of your investment. Even if we are successful, theprofitability of the operations of those additional plants and ventures willaffect the value of your investment in our company.

**RISKS RELATED TO TAX ISSUES**

**EACHPROSPECTIVE MEMBER SHOULD CONSULT HIS, HER OR ITS OWN TAX ADVISOR CONCERNINGTHE IMPACT THAT HIS, HER OR ITS PARTICIPATION IN THE COMPANY MAY HAVE ON HIS,HER OR ITS FEDERAL INCOME TAX LIABILITY AND THE APPLICATION OF STATE AND LOCALINCOME AND OTHER TAX LAWS.**

**IRS classification of the company as a corporationrather than as a partnership would result in higher taxation and reducedprofits, which could reduce the value of your investment in us.**

We are a Delawarelimited liability company that has elected to be taxed as a partnership forfederal and state income tax purposes, with income, gain, loss, deduction andcredit passed through to the holders of the units. However, if for any reasonthe IRS would successfully determine that we should be taxed as a corporationrather than as a partnership, we would be taxed on our net income at rates ofup to 35% for federal income tax purposes, and all items of our income, gain,loss, deduction and credit would be reflected only on our tax returns and wouldnot be passed through to the holders of the units. If we were to be taxed as acorporation for any reason, distributions we make to investors will be treatedas ordinary dividend income to the extent of our earnings and profits, and thepayment of dividends would not be deductible by us, thus resulting in doubletaxation of our earnings and profits. If we pay taxes as a corporation, we willhave less cash to distribute to our unitholders.

**We might elect to convert our entity status from alimited liability company to a corporation, which would increase our taxburden.**

If we elect to beorganized as a corporation, we will be subject to Subchapter C of the InternalRevenue Code. We would be taxed on our net income at rates of up to 35% forfederal income tax purposes, and all items of our income, gain, loss, deductionand credit would be reflected only on our tax returns and would not be passedthrough to the holders of the units. Distributions made to investors would betreated as ordinary dividend income to the extent of our earnings and profits,and the payment of dividends would not be deductible by us, resulting in doubletaxation of our earnings and profits. If we pay taxes as a corporation, we willalso have less cash to distribute to our unitholders.

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**The IRS may classify your investment as a passiveactivity, resulting in your inability to deduct losses associated with yourinvestment.**

It is likely thatan investor’s interest in us will be treated as a “passive activity” for taxpurposes. If an investor is either an individual or a closely held corporation,and if the investor’s interest is deemed to be a “passive activity,” then theinvestor’s allocated share of any loss we incur will be deductible only againstincome or gains the investor has earned from other passive activities. Passiveactivity losses that are disallowed in any taxable year are suspended and maybe carried forward and used as an offset against passive activity income infuture years. These rules could restrict an investor’s ability to currentlydeduct any of our losses that are passed through to such investor.

**Income allocations assigned to an investor’s unitsmay result in taxable income in excess of cash distributions, which means youmay have to pay income tax on your investment with personal funds.**

Unitholders will berequired to pay tax on their allocated shares of our taxable income. Weanticipate receiving an allocated share of the taxable income of HeartlandGrain Fuels. We do not control distributions of cash by Heartland Grain Fuels.As a result, it is likely that an investor will receive allocations of taxableincome that result in a tax liability that is in excess of any cashdistributions we may make to the investor. Among other things, this resultmight occur due to accounting methodology, lending covenants that restrict ourability to pay cash distributions, or our decision to retain the cash generatedby the business to fund our operating activities and obligations. Accordingly,investors may be required to pay some or all of the income tax on their allocatedshares of our taxable income with personal funds.

**An IRS audit could result in adjustments to ourallocations of income, gain, loss and deduction, causing additional taxliability to our members.**

The IRS may auditour income tax returns and may challenge positions taken for tax purposes andallocations of income, gain, loss and deduction to investors. If the IRS weresuccessful in challenging our allocations in a manner that reduces loss orincreases income allocable to investors, you may have additional taxliabilities. In addition, such an audit could lead to separate audits of aninvestor’s tax returns, especially if adjustments are required, which couldresult in adjustments on your tax returns. Any of these events could result inadditional tax liabilities, penalties and interest to you, and the cost offiling amended tax returns.

**Tothe extent that we hold United States real property, non-U.S. investors may besubject to U.S. federal income tax (including withholding tax) in connectionwith the disposition of our units, and U.S. investors selling our units may berequired to certify as to their status in order to avoid withholding.**

A non-U.S. holderof our units will generally be subject to withholding of U.S. federal incometax with respect to distributions made by us. Moreover, a non-U.S. holder ofour units not otherwise subject to U.S. federal income tax on gain from thesale or other disposition of our units may nevertheless be subject to U.S.federal income tax (including withholding) with respect to such sale or otherdisposition if we hold United States real property at the time of the sale ordisposition.

If we elect to bereorganized as a corporation rather than a limited liability company, anon-U.S. holder of our units will generally be subject to withholding of U.S.federal income tax with respect to distributions made by us that are treated asdividends for U.S. federal income tax purposes. In addition, if we elect to bereorganized as a corporation, a non-U.S. holder of our units not otherwisesubject to U.S. federal income tax on gain from the sale or other dispositionof our units may nevertheless be subject to U.S. federal income tax (includingwithholding) with respect to such sale or other disposition if we are, or havebeen, a United States real property holding corporation at any time within thefive-year period preceding the disposition (or the non-U.S. holder’s holdingperiod if shorter). Generally, a corporation is a U.S. real property holdingcorporation if at any time the fair market value of its U.S. real propertyinterests as defined in the Internal Revenue Code and applicable regulationsequals or exceeds 50% of the aggregate fair market value of its worldwide realproperty interests and its other assets used or held for use in a trade orbusiness.

Certain non-U.S.holders of our units may be eligible for an exception to the foregoing generalrule if our units are regularly traded on an established securities marketduring the calendar year in which the sale or disposition occurs and thenon-U.S. holder holds no more than 5% of our outstanding units, directly orindirectly, during the relevant period, known as the 5% exception. If we are aUnited States real property holding corporation during the relevant timeperiod, and the 5% exception does not apply, the buyer or other transferee ofour units will generally be required to withhold tax at the rate of 10% on thesales price or other amount realized, unless the transferor furnishes anaffidavit certifying that it is not a foreign person in the manner and formspecified in the applicable U.S. Treasury regulations.

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**RISKS RELATED TO CONFLICTS OFINTEREST**

**Our directors have other business and managementresponsibilities which may cause conflicts of interest in the allocation oftheir time and services to our business.**

Our directors haveother management responsibilities and business interests apart from ourbusiness. Therefore, our directors may experience conflicts of interest inallocating their time and services between us and their other businessresponsibilities.

Our directors,officers or other affiliates may hold a substantial percentage of our units,which may result in a conflict of interest between their responsibilities to usand their own personal interests. Conflicts of interest may arise if thedirectors and officers, or other affiliates, either individually orcollectively, hold a substantial percentage of the units because of theirposition to substantially influence our business and management.

Our directorsRevis L. Stephenson III (who is also our chief executive officer) and Robert W.Holmes each hold a substantial percentage of our outstanding units. Mr.Stephenson currently owns a total of 299,000 of our units while Mr. Holmes isthe beneficial owner of 145,000 units, including 115,000 units held through theHolmes Residuary Trust. These totals include restricted units we havetransferred to Mr. Stephenson and Mr. Holmes pursuant to a project developmentfee agreement. To date, we have issued Mr. Stephenson and Mr. Holmes anaggregate of 125,000 restricted units in exchange for their efforts to organizeand develop our company. These 125,000 units are subject to certainrestrictions on ownership including a lock-up agreement impairing the transferof these units until May 10, 2008. Mr. Stephenson may be entitled under thisagreement to additional units, currently estimated at 26,580, up to 1% of thedifference between $1.25 million and the total project cost on the date theNebraska plant begins producing ethanol if the actual project development costexceeds $1.25 million.

We entered intodeferred unit agreements with entities owned by Revis L. Stephenson III andDonald E. Gales, our chief executive officer and chief operating officer,respectively, pursuant to their employment agreements. For each additionalethanol production or co-production facility we acquire or build on or prior toApril 3, 2009 in addition to the Nebraska plant, Stephenson Holdings, Inc., anentity owned by Mr. Stephenson, has the right to receive one newly issued unitper 1,000 gallons of ethanol production capacity acquired or built, and GalesHoldings, Inc., an entity owned by Mr. Gales, has the right to receive 0.15newly issued units per 1,000 gallons of ethanol production capacity acquired orbuilt. The maximum grant under these agreements will be 300,000 and 45,000units, respectively.

Our directorRobert W. Holmes is the current president of one of our depositories,Timberwood Bank, located in Tomah, Wisconsin.

Larry Cerny, oursecretary and a member of our board of directors, is the co-founder andchairman of the board of Geotechnical Services, Inc., a geotech andenvironmental engineering firm. We have engaged Geotechnical Services toperform soil testing, geotechnical investigation services and a phase Ienvironmental site assessment update for the site of the Nebraska plant.

The agreementswith Messrs. Stephenson and Gales, our relationship with an affiliate of Mr.Holmes and our agreement with an affiliate of Mr. Cerny were not negotiated atarm’s length and may or may not be as favorable to us as those generallyavailable from an unaffiliated third party. In addition, these arrangementscould cause Messrs. Stephenson, Gales, Holmes and Cerny conflicts of interestin decision making related to our financing plan. These conflicts couldthreaten our ability to capitalize projects if these directors put theirpersonal interests ahead of our best interests related to funding projects.

At the closing ofSDWG’s sale of its interests in Heartland Grain Fuels and Dakota Fuels to ourcompany, we entered into a grain origination agreement with SDWG, pursuant towhich SDWG will provide the corn required for the operation of the South Dakotaplants, including the Aberdeen plant expansion. Subsequent to the execution ofthis agreement, Dale Locken, the chief executive officer of SDWG, became amember of our board of directors. The grain origination agreement could causeMr. Locken a conflict of interest in decision making related to the operationof the South Dakota plants.

**We may have conflicting financial interests withFagen, Inc. and ICM, Inc., which could cause Fagen, Inc. and ICM, Inc. to putits financial interests ahead of ours.**

Most of the costof our projects will be paid to Fagen, Inc. and ICM, Inc. for the design andconstruction of our Nebraska, Indiana and Minnesota plants and the Aberdeenplant expansion. Fagen and ICM may experience 

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conflicts of interestthat cause them to put their financial interest in the design and constructionof our plants ahead of our best interests. For example, they may seek highprofit margins or seek additional funds to complete construction in lieu ofabsorbing certain costs. In addition, because of the extensive roles that Fagenand ICM will have in the construction and operation of the plants, it may bedifficult or impossible for us to enforce claims that we may have against them.Such conflicts of interest may reduce our profitability and the value of theunits.

Fagen, ICM andtheir affiliates may also have conflicts of interest with us because employeesor agents of Fagen and ICM are involved as owners, creditors, builders anddesigners and in other capacities with other ethanol plants in the UnitedStates. We cannot require Fagen or ICM to devote their full time or attentionto our activities. As a result, Fagen and ICM may have, or come to have, aconflict of interest in allocating personnel, materials and other resources toour plants.

**Our transactions with WDB, Inc.and Bettger Brothers Partnership may or may not be as favorable to us as thosegenerally available from unaffiliated third parties.**

We acquired anoption to purchase real estate from WDB, Inc., which is owned by the brother ofone of our directors, Robert Bettger, for our Nebraska plant. In connectionwith this real estate option, we entered into a planting agreement with BettgerBrothers Partnership, which is owned in part by Mr. Bettger. In that agreement,Bettger Brothers Partnership agreed to change its crop rotation and plantsoybeans for the crop year 2005 instead of hybrid seed corn in exchange for ouragreement to compensate it for associated lost profits. We subsequentlyexercised this option and purchased 112 acres from WDB, Inc. for a total of$672,000.

**Our consulting agreement with BioEnergyCapital Consultants, LLC may or may not be as favorable to us as thosegenerally available from unaffiliated third parties.**

We entered into aconsulting agreement with BioEnergy Capital Consultants, LLC, Lake Preston,South Dakota, as a project development and equity consultants. BioEnergyCapital Consultants provided to us assistance with negotiation of variouscontracts and assistance in the planning of our initial equity marketingeffort. In consideration of these consulting services, we issued 50,000 unitsto BioEnergy Capital Consultants. In addition, we paid to BioEnergy CapitalConsultants $1,500 weekly or $375 daily on an as-needed basis for certainrequested services. BioEnergy Capital Consultants is owned and operated in partby one of our former directors, John T. Porter, and we entered into thisagreement when Mr. Porter was a member of our board of directors.

**ITEM 3.           LEGAL PROCEEDINGS**

None.

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

No matters weresubmitted to a vote of security holders during the fourth quarter of fiscalyear 2006.

**PART II**

**ITEM 5.****                                 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATEDSTOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITYSECURITIES**

Our units aresubject to substantial restrictions on transfer and are not traded on anysecurities exchange.

**Holders**

There were 821holders of record of our units as of December 27, 2006.

**IssuerPurchases of Equity Securities**

We did not makeany purchases of our equity securities during the fourth quarter of fiscal year2006.

**Distributions**

We have not madeany cash distributions since our inception and we do not intend to declare anyadditional unit distributions or any cash distributions until after we satisfyany loan covenants required by our lenders. On 

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November 8, 2006, weclosed on the acquisition of approximately 53% of the ownership interests inHeartland Grain Fuels and expect to generate earnings through our ownershipinterest. However, until we acquire the balance of the ownership interests inHeartland Grain Fuels and Dakota Fuels, its general partner, we will not havethe ability to cause Heartland Grain Fuels to make distributions. Distributionsare payable at the sole discretion of our board of directors. After operationof the Nebraska plant currently under construction begins, we may also receivenet cash flow from the operations of the Nebraska plant. Subject to any loancovenants or restrictions with any lenders, we may elect to make a distributionby distributing “net cash flow” to our members in proportion to the units thateach member holds relative to the total number of units outstanding. Subject toapproval of distributions by the board of Heartland Grain Fuels, we may receivenet cash flow from Heartland Grain Fuels. “Net cash flow” means our gross cashproceeds less any portion, as determined by the board of directors in theirsole discretion, used to pay or establish reserves for operating expenses, debtpayments, capital improvements, replacements and contingencies. However, therecan be no assurance that we will ever be able to pay any distributions to theunitholders. Our board may elect to retain future profits to provideoperational financing for the plants, debt retirement, implementation of newtechnology and various expansion plans, including the possible construction ofadditional plants and development of new product lines. Additionally, ourlenders may further restrict our ability to make distributions. Unitholderswill be required to report on their income tax return their allocable share ofthe income, gains, losses and deductions we have recognized without regard towhether we make any cash distributions to our members.

**Units That May Be Issued Under Equity CompensationPlans**

The followingtable depicts the units that were available for issuance under our equitycompensation plans as of September 30, 2006. None of our equity compensationplans have been approved by our members.
| ** **                                             | ** ** | **Number of units to be  issued upon exercise of  outstanding options,  warrants and rights (1)** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of units  remaining available  for future issuance  under equity  compensation plans  (excluding units  reflected in column a)** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans not approved by unitholders |       | 356,730                                                                                                                                                  |       | not  applicable                                                                                             |       | —                                                                                                                                                                                           |       |

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(1)             Includes30,000 restricted units to be issued to Donald E. Gales pursuant to Mr. Gales’employment agreement, an estimated 26,580 units that may be issued to Revis L.Stephenson III pursuant to a project development fee agreement and up to345,000 units that may be issued to entities affiliated with Mr. Stephenson andMr. Gales pursuant to restricted unit agreements. As of the date of thisreport, 44,850 units have been issued pursuant to the restricted unit agreements.Mr. Gales’ employment agreement, the project development fee agreement and therestricted unit agreements are described under Item 10 — “ExecutiveCompensation.”

**ITEM 6****.****                                 MANAGEMENT’SDISCUSSION AND ANALYSIS OR PLAN OF OPERATION**

Thefollowing discussion may contain forward-looking statements regarding us, ourbusiness prospects and our results of operations that are subject to certainrisks and uncertainties posed by many factors and events that could cause ouractual business, prospects and results of operations to differ materially fromthose that may be anticipated by such forward-looking statements. Factors thatcould cause or contribute to such differences include, but are not limited to,those described in Item 1A. - “Risk Factors.” Readers are cautioned not toplace undue reliance on these forward-looking statements, which speak only asof the date of this report. We undertake no obligation to revise anyforward-looking statements in order to reflect events or circumstances that maysubsequently arise. Readers are urged to carefully review and consider thevarious disclosures made by us in this report and in our other reports filedwith the Commission that advise interested parties of the risks and factorsthat may affect our business.

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**MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION FOR ADVANCEDBIOENERGY**

**OVERVIEW**

**Thisreport contains forward-looking statements that involve risks anduncertainties. Actual events or results may differ materially from thoseindicated in such forward-looking statements. The following discussion of thefinancial condition and results of our operations should be read in conjunctionwith the financial statements and related notes thereto included elsewhere inthis report.**

We are a start-upDelaware limited liability company formed on January 4, 2005 for the purpose ofconstructing and operating plants to produce ethanol and distillers grains, aswell as to operate other related biofuel businesses. We are currentlyconstructing a 100 million gallons per year dry mill corn-processing ethanolplant near Fairmont, Nebraska, known as the Nebraska plant. We are alsoplanning to construct a 100 million gallons per year dry mill corn-processingethanol plant to be located near Argos or Rochester, Indiana, known as theIndiana plant, as well as a 100 million gallons per year dry millcorn-processing ethanol plant to be located near Northfield, Minnesota, knownas the Minnesota plant. We do not expect to generate any revenue from a plantuntil that plant is completely constructed and operational.

On November 8,2006, we closed on the acquisition of approximately 53% of the ownershipinterests in Heartland Grain Fuels, and we have agreed to purchase the balanceof such interests, subject to certain closing conditions. Heartland Grain Fuelsowns two existing ethanol plants, the Aberdeen and Huron plants, and plans toexpand the Aberdeen plant. We expect to generate earnings through our ownershipinterest. Please see “Management’s Discussion and Analysis and Plan of Operationfor Heartland Grain Fuels,” which follows this section, for more information onHeartland Grain Fuels’ financial condition and operations.

Based uponengineering specifications produced by Fagen, the Nebraska plant will annuallyconsume approximately 36 million bushels of corn and annually produceapproximately 100 million gallons of fuel grade ethanol and 321,000 tons ofdistillers grains for animal feed. We currently estimate completing theconstruction of the Nebraska plant in September 2007. We expect the Nebraskaplant will cost approximately $151.6 million to complete. This includesapproximately $98.0 million (not including approximately $2 million allowancefor change orders) to build the plant and an additional $51.6 million in othercapital expenditures, start-up costs, working capital and interest. We arestill in the construction phase, and until the Nebraska plant is operational,we will generate no revenue from the Nebraska plant.

Based uponengineering specifications produced by ICM, the Indiana plant will annuallyconsume approximately 36 million bushels of corn and annually produceapproximately 100 million gallons of fuel grade ethanol and 321,000 tons ofdistillers grains for animal feed. We currently estimate that it will take 16 monthsfrom the date that we begin construction, which assumes we successfullycomplete our proposed registered securities offering and obtain our debtfinancing, and all necessary permits, to complete the construction of theIndiana plant. We expect the Indiana plant will cost approximately $175.0million to complete. This includes start-up costs, working capital andinterest. We are still in the development phase, and until the proposed Indianaplant is operational, we will generate no revenue from the Indiana plant.

Based uponengineering specifications produced by Fagen, the Minnesota plant will annuallyconsume approximately 36 million bushels of corn and annually produceapproximately 100 million gallons of fuel grade ethanol and 321,000 tons ofdistillers grains for animal feed. We currently estimate that it will take 14to 16 months from the date that we begin construction, which assumes wesuccessfully complete our proposed registered securities offering and obtainour additional equity and debt financing, and all necessary permits, tocomplete the construction of the Minnesota plant. We have not yet determinedthe construction and start-up costs for the Minnesota plant. We are still inthe early planning phase, and until the proposed Minnesota plant isoperational, we will generate no revenue from the Minnesota plant.

In the future, wemay explore the possibility of developing and building, or acquiring, one ormore additional ethanol plants, or we may choose to enter other biofuelbusinesses. If we decide to take advantage of one or more of theseopportunities, we may use a portion of the equity from our proposed registeredsecurities offering, or we may issue additional equity, which could dilute yourunits. Additionally, we may incur additional significant debt obligations inorder to fund new construction or acquisitions. Any proposed additional plantsor businesses may also impose substantial additional demands on the time andattention of our directors and officers. If we decide to build or acquire oneor more additional plants or enter into other biofuel businesses, we may not besuccessful, which could lead to a decline in our profitability and you couldlose a portion or all of your investment. Even if we are successful in buildingor acquiring additional plants or entering into other biofuel businesses, theprofitability of 

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the operations of thoseadditional plants or businesses will affect the value of your investment. Inthe event we do develop and build, or acquire, additional ethanol plants orother businesses and those plants or businesses are more or less profitablethan the South Dakota plants, Nebraska plant, Indiana plant and Minnesotaplant, it may have a negative effect on the value of your investment and youmay lose a portion or all of your investment.

**PLAN OF OPERATION THROUGHDECEMBER 2007**

We expect to spendthe period of time concluding in December 2007 focused primarily on operationof Heartland Grain Fuels’ Aberdeen and Huron plants, as well as expansion ofthe Aberdeen plant, plant construction for the Nebraska plant, projectcapitalization, site acquisition and development and plant construction for theIndiana plant, and project capitalization and site acquisition and developmentfor the Minnesota plant.

We believe we havesufficient cash on hand to cover all costs associated with construction of theNebraska plant, including, but not limited to, site acquisition anddevelopment, utilities, construction and equipment acquisition. We will need toraise additional debt and equity to make significant progress on our othergoals.

As of December 1,2006, we have nine full-time employees and anticipate adding approximately 45additional employees in connection with the commencement of operations at theNebraska plant in September 2007. We also plan to hire additional employees asour company expands. As of December 1, 2006, Heartland Grain Fuels has 41full-time employees and 1 part-time employee.

For a descriptionof the project capitalization and discussion of plant construction relating tothe Aberdeen plant expansion being pursued by Heartland Grain Fuels, see “Management’sDiscussion and Analysis and Plan of Operation for Heartland Grain Fuels.”

**Nebraska Plant**

*Project Capitalization*

We estimate thatit will cost approximately $151.6 million to complete the Nebraska plant andcommence operations. These estimates are based on discussions with Fagen. Thefollowing figures are intended to be estimates only, and the actual costs mayvary significantly from the descriptions given below due to changes to ourdesign or to a variety of other factors described elsewhere in this report.
| **Nebraska Plant**                      | ** ** |
|----------------------------------------------|------------|
| **Project Requirement**                 | ** ** | **Estimated Cost** | ** ** | **Percent** | ** ** |
| Plant construction,  land and infrastructure |       | $ | 122,900,000 |   | 81.08 | % |
| Construction insurance  costs                |       | 220,000 |   | 0.15 | % |
| Construction  contingency                    |       | 1,710,000 |   | 1.13 | % |
| Capitalized interest                         |       | 2,000,000 |   | 1.32 | % |
| Rolling stock                                |       | 400,000 |   | 0.26 | % |
| Financing and  pre-production period costs   |       | 3,350,000 |   | 2.21 | % |
| Organization costs                           |       | 3,000,000 |   | 1.98 | % |
| Working Capital                              |       | 18,000,000 |   | 11.87 | % |
| **Total**                                    |       | $ | 151,580,000 |   | 100 | % |

 

In March 2006, weraised $59.4 million net of offering expenses through the sale of units. Todate, we believe we have secured sufficient debt and equity financing tocomplete the Nebraska plant.

Effective February17, 2006, we entered into various loan agreements with Farm Credit Services ofAmerica, FLCA, known as Farm Credit, establishing a senior credit facility withFarm Credit for the construction of the Nebraska plant. The constructionfinancing was in the amount of $79.5 million consisting of a $58.5 million termloan and a $21.0 million revolving term loan. Farm Credit has also establisheda $5.0 million revolving credit facility for financing eligible grain inventoryand equity in Chicago Board of Trade futures positions that will not beeffective until we begin operations. Farm Credit is only obligated to lend thefunds for construction if certain conditions are satisfied. These conditionsinclude, among others, the total cost of the project being within a specifiedamount, the receipt of engineering and construction contracts and aprocess/yield guarantee from the design engineer and contractor acceptable toFarm Credit, evidence of the issuance of all permits, acceptable insurancecoverage and title commitment, the contribution of at least $60.0 million ofequity and the delivery of attorney opinions. Farm Credit has appointed CoBank,ACB, to serve as its agent with regard to these loans.

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Effective November10, 2006, we assigned all of our rights and obligations under the loanagreements described in the preceding paragraph to our wholly owned subsidiary,ABE Fairmont, LLC. Following this assignment, Farm Credit and ABE Fairmontamended those agreements to extend the period during which ABE Fairmont maydraw down funds, to shorten the period for their repayment and to extend theperiod during which a prepayment fee would be owed.

Effective November20, 2006, ABE Fairmont and Farm Credit also entered into additional loanagreements, the effect of which is to provide an additional $6.5 million termloan and an additional $4.0 million revolving term loan for construction of theNebraska plant. The terms and conditions of these loan agreements aresubstantially similar to those described above.

On April 1, 2006,we entered into a loan and trust agreement with the County of Fillmore, Stateof Nebraska and Wells Fargo, N.A. wherein Fillmore County issued and sold $7.0million of subordinate exempt facilities revenue bonds, the interest on whichis expected to be exempt from inclusion as gross income of the holder of thebonds for federal and state income tax purposes. Fillmore County has loaned theproceeds from the sale of these bonds to us, which proceeds are held in escrowby Wells Fargo pending release of the funds for qualified expenses.

We are seekingapproximately $7.0 million in tax increment financing from the Village ofFairmont, Nebraska. Tax increment financing is a program created by statestatute and provides city councils with the power to use all of the realproperty tax resulting from the increase in taxable valuation due to theconstruction of new industrial or commercial facilities to provide economicincentives. We obtained approval from the city council of the Village ofFairmont of the redevelopment agreement in February 2006 and we anticipate thatannexation of our plant site by the Village of Fairmont will be completed andclosing will occur in the fourth calendar quarter of 2006. However, there is noguarantee that we will obtain tax increment financing or that if we do it willbe in the amount currently anticipated.

We have received a$305,000 community development block grant to assist Fillmore County with roadpaving leading to the plant. Fillmore County will draw down directly on communitydevelopment block grant funds.

*Plant Construction and Start-Up of Nebraska PlantOperations*

In order to buildthe Nebraska plant, in October 2005, we purchased 112 acres of land nearFairmont, Nebraska from WDB, Inc. for $672,000. In the same month, we purchased148 acres of land in Fillmore County from Doris Gwen Ogden for $740,000.

In December 2005,we commenced site preparation for construction of the Nebraska plant. Our plantsite consists of two adjacent parcels. We selected the site because of itslocation relative to existing grain production, accessibility to road and railtransportation and proximity to major population centers. The site is near themainline BNSF railroad. In addition, the site is also in close proximity to theintersection of U.S. Highway 6 and 81. Our activities at this site for the next12 months will include completion of final design and development of the plant.We also plan to negotiate and execute final contracts concerning the provisionof necessary natural gas and marketing agreements for distillers grains.

Effective March16, 2006, we entered into a lump-sum design-build agreement with Fagen toestablish a 100 million gallons per year dry grind ethanol production facilityon our plant site. Under the terms of the agreement, Fagen guarantees that theplant will operate at a rate of 100 million gallons per year of denatured fuelgrade ethanol. We expect that the plant will be substantially complete bySeptember 2007, which is approximately 16 months after commencement ofconstruction. Under the terms of the agreement, we will pay Fagen $98.0 million(not including approximately $2 million allowance for change orders), subjectto any mutually agreed-upon adjustments and subject to a credit for any sumspaid to Fagen Engineering, LLC for engineering performed pursuant to the phaseI and phase II engineering services agreement. Fagen and Fagen Engineering, LLCare related entities.

On May 5, 2006, weentered into a track material purchase agreement with The Tie Yard Of Omaha topurchase relay rail, joint bards, tie plates, cross tie and reconditionedturnouts for approximately $1.6 million. On May 5, 2006, we entered into a realestate purchase agreement with Fillmore Western Railway Company for thepurchase of certain property for railroad right of way and track material, aswell as an easement to use their right of way for the purpose of undergroundpipeline and other utilities. The purchase price for the property is $500,000.

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On April 25, 2006,we entered into a contract for electric service with Perennial Public PowerDistrict, a public corporation and political subdivision of the State ofNebraska, whereby Perennial will supply all of the electric power and energyneeded by the Nebraska plant. Perennial has agreed to install and maintain thesubtransmission line and substation facilities needed for electric service.

**Indiana Plant**

*Project Capitalization*

On June 15, 2006we acquired Indiana Renewable Fuels, LLC, an Indiana limited liability company,through the merger of our wholly owned subsidiary with and into IndianaRenewable Fuels, LLC. Indiana Renewable Fuels has a letter of intent with ICMto construct a 100 million gallons per year dry mill corn-processing ethanolplant near Argos or Rochester, Indiana. We estimate that we will needapproximately $175.0 million to cover all capital expenditures necessary toconstruct and complete the Indiana plant, make the Indiana plant operational,provide working capital for the plant and produce revenue. The followingfigures are intended to be estimates only, and the actual cost may varysignificantly from the descriptions given below due to changes to our design orto a variety of other factors described elsewhere in this report.
| **Indiana Plant**                       | ** ** |
|----------------------------------------------|------------|
| **Project Requirement**                 | ** ** | **Estimated Cost** | ** ** | **Percent** | ** ** |
| Plant  construction, land and infrastructure |       | $ | 147,030,000 |   | 84.02 | % |
| Construction  performance bond               |       | 650,000 |   | 0.37 | % |
| Construction  insurance costs                |       | 250,000 |   | 0.14 | % |
| Construction  contingency                    |       | 2,000,000 |   | 1.14 | % |
| Capitalized  interest                        |       | 3,000,000 |   | 1.71 | % |
| Rolling stock                                |       | 400,000 |   | 0.23 | % |
| Financing and  pre-production period costs   |       | 3,500,000 |   | 2.00 | % |
| Working capital                              |       | 18,170,000 |   | 10.38 | % |
| **Total**                                    |       | $ | 175,000,000 |   | 100 | % |

 

Assuming themaximum is raised, our proposed registered securities offering is expected togenerate net proceeds of at least $55.0 million to partially finance theconstruction and start-up costs of the Indiana plant. We intend to finance thebalance of the costs for the Indiana plant through senior and subordinate debtfinancing. However, no definitive agreement has been reached on this debtfinancing. At this time, we do not know if the equity and debt financing willbe available to us and if it is, what business and financial conditions will beimposed on us to obtain the financing. If we do not obtain the neededfinancing, we may:

·                  commenceconstruction of the plant using all or a part of the equity funds raised whilewe seek other financing sources;

·                  hold the equityfunds raised indefinitely in an interest-bearing account while we seek anotherfinancing source; or

·                  use the funds onanother project.

In any of thesesituations, we may not successfully construct and commence operations of ourproposed Indiana plant.

*Indiana Site Acquisition and Development*

While we do notyet own any real property in Indiana, we have options to acquire two separateparcels of real property near Rochester and Argos, Indiana. Pending completionof our proposed registered securities offering, we expect to continue work onthe preliminary design and development of our proposed Indiana plant, siteassessment, obtaining the necessary construction permits, identifying potentialsources of debt financing and negotiating the corn supply, ethanol anddistillers grains marketing, utility and other contracts.

*Plant Construction and Start-Up of Indiana PlantOperations*

Assuming we obtainthe necessary financing to complete the Indiana plant, we expect to commenceconstruction in the fall of 2007 and complete construction of the proposedIndiana plant and commence operations in the first calendar quarter of 2009.Our work will include completion of the final design and development of theIndiana plant. We also plan to negotiate and execute finalized contractsconcerning the construction of the Indiana 

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plant, provision of necessaryelectricity, natural gas and other power sources and marketing agreements forethanol and distillers grains prior to completion of construction.

**Minnesota Plant**

We have an oralagreement with Fagen to enter into a design-build agreement to construct a 100million gallons per year dry mill corn-processing ethanol plant nearNorthfield, Minnesota. No definitive agreement has been executed, and it ispossible that the parties will not agree to terms and will not execute adesign-build agreement. Over the next 12 months, we expect to continue work onthe preliminary design and development of our proposed Minnesota plant,obtaining the necessary construction permits, identifying potential sources offinancing and negotiating the design-build, corn supply, ethanol and distillersgrains marketing, utility and other contracts.

*Project Capitalization*

We have not yetdetermined the construction and start-up costs for the Minnesota plant. We areexpecting to use a portion of the proceeds from our proposed registeredsecurities offering, assuming we raise the maximum amount offered, to continueto work on the preliminary design and development of the Minnesota plant. Weanticipate that we will need to raise additional equity, senior debt andsubordinate debt to fund construction and start-up costs of the Minnesotaplant. No definitive agreements have been reached regarding this additionalfinancing. At this time, we do not know if this financing will be available tous and if it is, what business and financial conditions will be imposed on usto obtain this financing. If we do not obtain the needed financing, we maychoose not to construct the Minnesota plant.

*Minnesota Site Acquisition and Development*

We expect tocontinue work on the preliminary design and development of our proposedMinnesota plant, obtaining the necessary construction permits, identifyingpotential sources of equity and debt financing and negotiating thedesign-build, corn supply, ethanol and distillers grains marketing, utility andother contracts.

Based on currentRice County zoning requirements, our proposed site for the Minnesota plant mayneed to be rezoned, and a conditional use permit will likely be required.Bridgewater Township, Minnesota, where the proposed plant would be located, hasadopted a one-year moratorium on ethanol plant construction while the townshipconsiders whether to adopt its own zoning code. If we are not able to have theland rezoned and obtain the required permits, we will not be able to build theMinnesota plant at its proposed site and will attempt to find another locationto build the plant; however, this may prove unsuccessful. No assurance can begiven that we will be successful in getting the proposed site rezoned or thatwe will obtain the required permits.

*Plant Construction and Start-Up of Minnesota PlantOperations*

Assuming we obtainthe necessary financing and permits to complete the Minnesota plant, we expectto begin construction of the proposed Minnesota plant no sooner than the fallof 2007 and commence operations between 14 and 16 months after constructionbegins. Over the next 12 months, we plan to complete final design of theMinnesota plant and negotiate and execute finalized contracts concerning theconstruction of the Minnesota plant, provision of necessary electricity,natural gas and other power sources and marketing agreements for ethanol anddistillers grains.

**TRENDS AND UNCERTAINTIESIMPACTING THE ETHANOL INDUSTRY AND OUR FUTURE OPERATIONS**

We are subject toindustry-wide factors that affect the operating and financial performance ofthe South Dakota plants and will affect the operating and financial performanceof the plants under development once they begin operations. These factorsinclude, but are not limited to, the available supply and cost of corn fromwhich the ethanol and distillers grains is processed; the cost of natural gas,which is used in the production process; dependence on our ethanol marketer anddistillers grains marketer to market and distribute our products; the intenselycompetitive nature of the ethanol industry; possible legislation at thefederal, state and/or local level; changes in federal ethanol tax incentivesand the cost of complying with extensive environmental laws that regulate ourindustry.

We expect ethanolsales to constitute the bulk of our revenues. Ethanol prices have recently beenmuch higher than their ten-year average. However, due to the increase in thesupply of ethanol from the number of new ethanol plants scheduled to beginproduction and the expansion of current plants, we do not expect currentethanol prices to be sustainable in the long term. Areas where we believedemand may increase are new markets in New Jersey, Pennsylvania, Maryland,Massachusetts, North Carolina, South Carolina, Michigan, Tennessee, Louisiana 

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and Texas. Minnesota mayalso generate additional demand due to the recent passage of state legislationmandating a 20% ethanol blend in its gasoline. Montana passed a similarmandate, but it will not go into effect until 55 million gallons of ethanol areproduced in the state.

We expect tobenefit from federal ethanol supports and federal tax incentives. Changes tothese supports or government incentives could significantly impact demand forethanol. On August 8, 2005, the Energy Policy Act of 2005 was signed into lawcontaining a renewable fuel standard, known as the RFS. The RFS is a nationalprogram that will ensure that gasoline sold or introduced into commerce in theUnited States contains a particular volume of renewable fuel. The program willapply to refineries, blenders, distributors and importers as appropriate, butwill not restrict the geographic areas in which renewable fuels may be used.The applicable volume of renewable fuel under the RFS will begin at 4 billiongallons in 2006 and increase to 7.5 billion gallons by 2012. According to theRenewable Fuels Association, the Energy Policy Act is expected to lead toapproximately $6 billion in new investment in ethanol plants across thecountry. An increase in the number of new plants will bring an increase in thesupply of ethanol. Thus, while the Energy Policy Act may cause ethanol pricesto increase in the short term due to additional demand, supply could outweighthe demand for ethanol in the future. This would have a negative impact on ourearnings in the long term.

Demand for ethanolmay increase as a result of increased consumption of E85 fuel. E85 fuel is ablend of 85% ethanol and 15% unleaded gasoline for use in flexible fuelvehicles (FFVs). According to estimates of the Energy InformationAdministration, E85 consumption increased from a national total of 12.4 milliongallons in 2000 to 23 million gallons in 2004. In the United States, there arecurrently about 3 million flexible fuel vehicles capable of operating on E85 andover 1,000 retail stations supplying it. Automakers have indicated plans toproduce an estimated 2 million more flexible fuel vehicles per year.

Ethanol productioncontinues to grow as additional plants become operational. Demand for ethanolhas been supported by higher prices for oil and its refined components and bythe federal Clean Air Act and federal regulations requiring the use ofreformulated gasoline, known as RFG. RFG, which often contains ethanol, must beused in metropolitan areas with the most severe air pollution and in otherareas where air quality is not in attainment with national standards. The CleanAir Act and federal regulations also require the use of oxygenated gasolineduring the winter months in certain urban areas to reduce carbon monoxideemissions. The intent of the reformulated gasoline and oxygenated gasolinerequirements is to reduce harmful emissions into the air. The application ofthe reformulated gasoline requirement to at least two metropolitan areas hasbeen challenged and is currently at various stages of review. The EPA isengaged in rulemaking that will resolve the issue for Atlanta and will likelyresult in the eventual phase-out of the RFG requirement for Atlanta. Thecomment period for this rulemaking has closed, but no final rule has beenissued. With respect to the other metropolitan area, Baton Rouge, Louisiana,the courts have sent the issue back to the EPA for reconsideration as towhether the RFG requirement should apply to that area. In the future, thecombination of additional supply, successful challenges to the application ofthe RFG program and stagnant or reduced demand may damage our ability togenerate revenues and maintain positive cash flows.

Consumerresistance to the use of ethanol may affect the demand for ethanol, which couldaffect our ability to market our product and reduce the value of yourinvestment. Certain individuals believe that use of ethanol will have anegative impact on prices at the pump. Many also believe that ethanol adds toair pollution and harms car and truck engines. Still other consumers believethat the process of producing ethanol actually uses more fossil energy, such asoil and natural gas, than the amount of ethanol that is produced. Theseconsumer beliefs could potentially be wide-spread. If consumers choose not tobuy ethanol, it would affect the demand for the ethanol we produce, which couldnegatively affect our ability to sell our product and negatively affect ourprofitability.

We expect ethanolprices will be positively impacted by blenders and refineries increasing theiruse of ethanol in response to environmental liability concerns about methyltertiary butyl ether or MTBE and increased consumer acceptance and exposure ofethanol. For instance, if gasoline prices continue to trend higher, consumerswill look for lower priced alternative fuels. The Consumer Federation ofAmerica recently published a report that states that consumers could save up to$0.08 per gallon at the pump if ethanol were blended at 10%. Since ethanol-blendedfuel is expected to be a less expensive alternative for consumers, the demandfor such ethanol-blended fuel could increase, thus increasing the overalldemand for ethanol. This could positively affect our earnings.

However, therecent voluntary shift away from MTBE to ethanol has put increased focus onAmerica’s ethanol and gasoline supplies. Legislation was recently introduced inthe U.S. Senate and House of Representative that would strike the $0.54secondary tariff on imported ethanol due to concerns that the recent spikes inretail 

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gasoline prices are aresult of ethanol supplies. Management believes these concerns over ethanolsupplies are misguided. The Energy Information Administration estimates that130,000 barrels per day of ethanol will be needed to replace the volume of MTBErefiners have chosen to remove from the gasoline pool. According to the U.S.International Trade Association, U.S. fuel ethanol production has soared to333,000 barrels per day in September 2006, clearly enough ethanol to meet thenew MTBE replacement demand while continuing to supply existing markets.Further, ethanol production capacity continues to increase as new plants comeon-line. Nevertheless, if the legislation is passed, the price of ethanol maydecrease, negatively affecting our earnings.

**TECHNOLOGY DEVELOPMENTS**

A new technologyhas recently been introduced to remove corn oil from concentrated thin stillage(a by-product of “dry milling” ethanol processing facilities). The oil couldthen be used as an animal feed supplement or possibly as an input forbio-diesel production. Although the recovery of oil from the thin stillage maybe economically feasible, it fails to produce the advantages of removing theoil prior to the fermentation process. The FWS Group of Companies,headquartered out of Canada with offices in the United States, is currentlyworking on a starch separation technology that would economically separate acorn kernel into its main components. The process removes the germ, pericarpand tip of the kernel, leaving only the endosperm of kernel for the productionof ethanol. This technology has the capability to reduce drying costs and theloading of volatile organic compounds. The separated germ would also beavailable through this process for other uses such as high oil feeds orbio-diesel production. Each of these new technologies is currently in its earlystages of development. There is no guarantee that either technology will besuccessful or that we will be able to implement the technology in our ethanolplants.

Most ethanol iscurrently produced from corn and other raw grains, such as milo orsorghum—especially in the Midwest. The current trend in ethanol productionresearch is to develop an efficient method of producing ethanol from cellulose-basedbiomass, such as agricultural waste, forest residue, municipal solid waste andenergy crops. This trend is driven by the fact that cellulose-based biomass isgenerally cheaper than corn, and producing ethanol from cellulose-based biomasswould create opportunities to produce ethanol in areas that are unable to growcorn. If an efficient method of producing ethanol from cellulose-based biomassis developed, we may not be able to compete effectively. We do not believe itwill be cost-effective to convert the existing South Dakota plants or theethanol plants we are proposing to build into plants that will usecellulose-based biomass to produce ethanol. If we are unable to produce ethanolas cost effectively as cellulose-based producers, our ability to generaterevenue will be negatively impacted and your investment could lose value.

**LIQUIDITY AND CAPITAL RESOURCES**

As of September30, 2006, we have total assets of approximately $87.6 million consistingprimarily of cash, prepaid expenses, deferred offering and financing costs andconstruction in progress. We have current liabilities of approximately $16.0million consisting primarily of our accounts payable and long-term debt of $7.0million consisting of our tax-exempt and subordinated bonds and other debtfinancing. Since our inception through September 30, 2006 we have anaccumulated deficit of approximately $2.0 million. Total members’ equity as ofSeptember 30, 2006 was approximately $64.6 million. Since our inception, wehave generated no revenue from operations. For the period from inception toSeptember 30, 2006, we had a net loss of approximately $2.0 million, primarilydue to start-up business costs and related professional fees.

Based on ourbusiness plan and current construction cost estimates, we believe the Nebraskaplant will cost approximately $151.6 million to construct and start operations,the Indiana plant will cost approximately $175.0 million to construct and startoperations and the Aberdeen plant expansion will cost approximately $78.0 millionto construct and start operations. We have not yet determined the constructionand start-up costs for the Minnesota plant. We believe we have sufficientequity, debt financing, government incentives and grants to complete theNebraska plant. We expect to require significant equity and debt financing tocomplete the Indiana and Minnesota plants and Aberdeen plant expansion.

**Senior Credit Facility for the Nebraska Plant**

Effective February17, 2006, we entered into a loan agreement with Farm Credit establishing asenior credit facility with Farm Credit for the construction of a 100 milliongallons per year ethanol plant. The construction financing is in the amount of$79.5 million consisting of a $58.5 million term loan, known as term loan A,and a $21.0 million revolving term loan, known as term loan B. Farm Credit alsoextended to us a $5.0 million revolving credit facility for financing eligiblegrain inventory and equity in Chicago Board of Trade futures positions, which 

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will not be effectiveuntil we begin operations. Farm Credit has appointed CoBank, ACB, to serve asits agent with regard to these loans.

Effective November10, 2006, we assigned all our rights and obligations under the loan agreementsdescribed in the preceding paragraph to our wholly owned subsidiary, ABEFairmont, LLC. Immediately following this assignment, Farm Credit and ABEFairmont amended those agreements to extend the period during which ABEFairmont may draw down funds, to shorten the period for their repayment and toextend the period during which a prepayment fee would be owed.

Effective November20, 2006, ABE Fairmont and Farm Credit also entered into additional loanagreements, the effect of which is to provide an additional $6.5 million termloan, known as term loan C, and an additional $4.0 million revolving term loan,known as term loan D for construction of the Nebraska plant. The terms andconditions of these loan agreements are substantially similar to thosedescribed above.

We paid anorigination fee of $397,500 to Farm Credit for term loan A. A commitment fee ata rate of 0.625% per annum is payable on a monthly basis on the unused portionof term loan B. For the grain inventory and futures revolving credit facility,we paid an origination fee of $12,500. A commitment fee of 0.25% per annum ispayable on a monthly basis on the unused portion of the grain inventory andfutures revolving credit facility. ABE Fairmont paid an origination fee of$72,500 to Farm Credit for term loan C. A commitment fee at a rate of 0.625%per annum is payable on a monthly basis on the unused portion of term loan D.

ABE Fairmont mayselect a rate of interest for each term loan at CoBank’s announced base rateplus 0.5%, a fixed rate to be quoted by CoBank or at LIBOR plus 3.4% per annum.ABE Fairmont may select a rate of interest for the grain inventory and futuresrevolving credit facility at CoBank’s announced base rate, a fixed rate to bequoted by CoBank or at LIBOR plus 3.1% per annum.

Farm Credit isonly obligated to lend the funds for construction if certain conditions aresatisfied. These conditions include, among others, the total cost of theproject being within a specified amount, the receipt of engineering andconstruction contracts and a process/yield guarantee from the design engineerand contractor acceptable to Farm Credit, evidence of the issuance of allpermits, acceptable insurance coverage and title commitment, the contributionof at least $49.1 million of equity (less any tax increment financing proceedsand the proceeds we receive from the sale of subordinate exempt facilitiesrevenue bonds issued by Fillmore County, Nebraska) and the delivery of attorneyopinions.

ABE Fairmont mustrepay term loan A as follows: 25 equal quarterly installments of $2,250,000with the first installment due February 20, 2008 and the last installment dueFebruary 20, 2014, followed by a final installment in an amount equal to theremaining unpaid principal balance on May 20, 2014. For each fiscal year endingin 2007 through 2010, ABE Fairmont must pay an additional amount equal to thelesser of $6 million or 75% of its free cash flow, not to exceed $12 million inthe aggregate for all of these cash flow payments.

On the earlier ofDecember 1, 2014 or six months following complete repayment of term loan A, ABEFairmont will begin repayment of term loan B in $5.0 million increments dueevery six months. ABE Fairmont will repay the grain inventory and futuresrevolving credit facility the earlier of March 1, 2008 or 12 months after thedate on which ABE Fairmont borrows funds.

ABE Fairmont mustrepay term loan C and term loan D in full on June 1, 2009.

In November 2006,we assigned all of our right, title and interest in the Nebraska plant to ABEFairmont. The loans owed to Farm Credit are secured by a first mortgage on allof ABE Fairmont’s real estate and a lien on all of ABE Fairmont’s personalproperty. ABE Fairmont has agreed to purchase $1,000 worth of stock in FarmCredit Services of America, ACA that will also be pledged as security for theloans. If ABE Fairmont prepays any portion of term loan A or term loan Bthrough a refinancing prior to July 1, 2009, ABE Fairmont will pay a prepaymentcharge of 3% of the amount prepaid in addition to certain surcharges. If ABEFairmont prepays any portion of term loan C or term loan D through arefinancing prior to June 1, 2009, ABE Fairmont will pay a prepayment charge of3% of the amount prepaid in addition to certain surcharges.

While the creditfacilities are outstanding, ABE Fairmont will be subject to certain financialloan covenants consisting of minimum working capital, minimum net worth andmaximum debt service coverage ratios. After the construction phase, ABEFairmont will not be allowed to make capital expenditures of more than $600,000without prior approval. ABE Fairmont is also prohibited from makingdistributions to Advanced BioEnergy except as follows: (i) for each fiscal yearcommencing with the fiscal year ending September 30, 2007, ABE Fairmont may 

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make a distribution toAdvanced BioEnergy of 50% of ABE Fairmont’s net profit for the applicablefiscal year if Farm Credit has received audited financial statements for theapplicable fiscal year and (ii) ABE Fairmont may make distributions to AdvancedBioEnergy exceeding 50% of its net income if it has made the required cash flowpayment for that fiscal year. ABE Fairmont must also be in compliance with allfinancial ratio requirements and loan covenants before and after anydistributions to Advanced BioEnergy.

Upon theoccurrence of an event of default or an event that will lead to a default, FarmCredit may upon notice terminate its commitment to loan funds to ABE Fairmontand declare the entire unpaid principal balance of the loans, plus accruedinterest, immediately due and payable. An event of default includes, but is notlimited to, ABE Fairmont’s failure to make payments when due, insolvency, anymaterial adverse change in ABE Fairmont’s financial condition or ABE Fairmont’sbreach of any of the covenants, representations or warranties its has given inconnection with the loans.

**Fillmore County Subordinate Exempt FacilitiesRevenue Bonds for the Nebraska Plant**

On April 1, 2006,we entered into a loan and trust agreement with the County of Fillmore, Stateof Nebraska and Wells Fargo, N.A. wherein Fillmore County issued and sold $7.0million of subordinate exempt facilities revenue bonds, the interest on whichis expected to be exempt from inclusion as gross income of the holder of thebonds for federal and state income tax purposes. Fillmore C ounty has loanedthe proceeds from the sale of these bonds to us, the net proceeds of whichequal approximately $5.6 million.

We agreed to repaythe loan by making loan payments to Fillmore County in an amount equal to theaggregate principal amount of the bonds from time to time outstanding, and thepremium, if any, and interest thereon on December 1, 2017, upon redemption,upon acceleration or when otherwise payable. Our obligation to make the loanpayments under the loan and trust agreement is evidenced by the execution anddelivery of a promissory note. Repayment of the bonds and the security for thebonds is subordinate to our senior credit facility with CoBank and Farm Credit.

The proceeds ofthe bonds are to be used, in order (i) to provide financing for a portion ofthe costs of the acquisition and installation of certain eligible solid wastedisposal facilities at the Nebraska plant; (ii) to fund a debt service reservefund; (iii) to pay interest during construction in an amount approximately equalto 20 months’ interest on the bonds; and (iv) to pay a portion of the costs ofissuance of the bonds.

Defaults under theloan and trust agreement include, but are not limited to: (i) failure to payany installment of principal or any payment of interest or premium on the loanor the note; (ii) failure to observe or perform any of the covenants,agreements or conditions contained in the loan and trust agreement or in thesecurity documents; and (iii) falseness of any representation or warranty inany material adverse respect as of the time made or given. Upon the occurrenceof a default, Wells Fargo may declare all loan repayments for the remainder ofthe term of the loan and trust agreement to be immediately due and payable byus and may declare the entire outstanding principal balance of the loan,together with all interest accrued thereon, to be due and payable and takewhatever action at law or in equity to collect the loan repayments then due andthereafter to become due or to enforce performance and observance of anyobligation, agreement or covenant under the loan and trust agreement. However,the ability of Wells Fargo to take these actions upon default is also subjectto certain terms and conditions found in a debt subordination agreement betweenCoBank, us and Wells Fargo.

The bonds aresecured by a subordinate deed of trust and security agreement granted by us toWells Fargo pursuant to which we conveyed to Wells Fargo a mortgage lien on thereal property and fixtures constituting the Nebraska plant and securityinterests in all tangible personal property located on the mortgaged realproperty or used in connection with the Nebraska plant as security forrepayment of the bonds. The lien of the subordinate deed of trust shall besubordinate to the lien of a deed of trust and security agreement given by usin favor of CoBank and Farm Credit.

**Tax Increment Financing for theNebraska Plant**

We are seeking netproceeds of approximately $5.3 million in tax increment financing from theVillage of Fairmont, Nebraska. Tax increment financing is a program created bystate statute that provides city councils the power to use all of the realproperty tax resulting from the increase in taxable valuation due to theconstruction of new industrial or commercial facilities to provide economicincentives. We obtained approval from the city council of the Village ofFairmont of the redevelopment agreement in February 2006 and we anticipate thatannexation of our plant site by the Village of Fairmont will be completed and closingwill occur in the fourth calendar quarter of 

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2006. However, there isno guarantee that we will obtain tax increment financing or that if we do itwill be in the amount currently anticipated.

**Community Development Block Grantfor the Nebraska Plant**

We have received a$305,000 community development block grant to assist Fillmore County with roadpaving leading to the plant. Fillmore County will draw down directly oncommunity development block grant funds.

**FUTURE CAPITAL REQUIREMENTS**

We believe that wehave secured sufficient funds to complete construction and start-up of theNebraska plant. Our future capital requirements will primarily depend on thecost and timing to complete the Aberdeen plant expansion, Indiana plant andMinnesota plant and the number of additional plants we construct or acquire,the timing of those plant openings or acquisitions within a given fiscal yearand the need to fund operating losses, as well as the terms of any othercorporate opportunities we undertake. These requirements will include costsdirectly related to constructing or acquiring new ethanol plants and may alsoinclude costs necessary to ensure that our infrastructure, including technologyand distribution capabilities, is able to support multiple plants. We can provideno assurances at this time as to the timing of such an expansion, or whethersuch an expansion will occur.

Based on ourbusiness plan and current construction cost estimates, we believe the Aberdeenplant expansion construction and start-up (including working capital) will costapproximately $78.0 million, we believe the Indiana plant construction andstart-up (including working capital) will cost approximately $175.0 million,and we do not yet have cost estimates for the Minnesota plant. We are seekingto raise a maximum of $100.0 million of equity in our proposed registeredsecurities offering. Depending on the level of equity raised in our proposedregistered securities offering, we expect to require significant debt financingto fund the Aberdeen plant expansion and the Indiana plant, as well asadditional equity and debt financing to fund the Minnesota plant. If we raiseonly the $40.0 million minimum in our proposed registered securities offering,we will need to raise significant additional equity financing (at least $51million), to complete the Indiana plant. Even if we raise $100.0 million in ourproposed registered securities offering, we will still need to raisesignificant additional equity financing to construct the Minnesota plant.

If we receiveproceeds from the offering prior to approval of the Heartland transaction byHeartland Producers, we intend to invest proceeds from the offering asnecessary in order to continue funding the Aberdeen plant expansion pendingclosing of the Heartland transaction. The terms of and our ability to make thisinvestment would be subject to approval of the Dakota Fuels board and may besubject to the approval of the senior lender to Heartland Grain Fuels, neitherof which we control. If we do not receive proceeds from the offering byFebruary 2007, we will need to raise subordinated debt in order for HeartlandGrain Fuels to continue funding the Aberdeen plant expansion as scheduled. Ifwe are able to raise subordinated debt, we plan on contributing funds as neededin the form of debt or equity to Heartland Grain Fuels in order to enable it tocontinue funding the Aberdeen plant expansion. We are in the process ofexploring various alternatives for subordinated debt financing, but there areno assurances that we will be able to obtain subordinated debt financing onacceptable terms or at all or if we can obtain it, whether we will be able toobtain the approvals necessary to finance the Aberdeen plant expansion.

We do not havedefinitive contracts with any bank, lender or financial institution for debtfinancing for the Indiana plant or the Minnesota plant and there is noassurance that we will be able to secure this financing. Completion of theIndiana plant relies entirely on our ability to attract these loans and closeon sufficient funds in our proposed registered securities offering. Completionof the Minnesota plant relies in part on our ability to raise sufficient equityand debt financing.

With the placementof the subordinated exempt facilities revenue bonds to Fillmore County, we havean obligation that may require funding if our cash flows from operations willnot cover repayment of these bonds.

We intend tosatisfy our capital requirements in fiscal 2007 with existing cash and fundsavailable under our credit facility, cash generated from operations, primarilyfrom our South Dakota plants, assuming that Heartland Grain Fuels makesdistributions, and the proceeds from our proposed registered securitiesoffering. However, if capital requirements for our business strategy change, orother factors change our capital requirements, we may need to seek additionaldebt or equity financing in the public or private markets. There is noassurance that financing will be available to us on acceptable terms or at all.

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**INTEREST RATERISK**

Our earnings inthe future may be affected by changes in interest rates due to the impact thosechanges have on our interest expense on borrowings under our credit facility.Our outstanding subordinated exempt facilities revenue bonds carry a fixed rateof interest. As of September 30, 2006, we had no floating rate indebtedness. Wehave not contracted for any derivative financial instruments. We have nointernational sales. Substantially all of our purchases are denominated in U.S.dollars.

**HEDGING ANDOTHER RISK MITIGATION STRATEGIES**

We manage ourexposure to various risks through a risk management policy, which calls for thequantification and evaluation of market-based risk. We also have a riskmanagement committee that monitors compliance with the risk management policyand advises the board of directors on forward pricing and risk managementissues.

To mitigate pricerisk caused by market fluctuations in commodities such as corn, ethanol,natural gas and distillers grains, we may enter into exchanged tradedcommodities futures, options, cash contracts and over-the-counter instrumentsfrom time to time. These hedging instruments also expose us to unrealized gainsand losses, which are offset by physical positions in the cash market. Fixedprice contracts present the risk of financial loss in situations of default bythe other party.

**IMPACT OF INFLATION**

We believe thatinflation has not had a material impact on our results of operations sinceinception. We cannot assure you that inflation will not have an adverse impacton our operating results and financial condition in future periods.

**OFF-BALANCE SHEET ARRANGEMENTS**

Advanced BioEnergyhas no off-balance sheet arrangements.

**SUMMARY OF CRITICAL ACCOUNTINGPOLICIES**

Management usesestimates and assumptions in preparing our financial statements in accordancewith generally accepted accounting principles. These estimates and assumptionsaffect the reported amounts of assets and liabilities, the disclosure ofcontingent assets and liabilities and the reported revenues and expenses.

Subsequent to ourseed capital offering, our original two members received compensation in theform of restricted equity units valued at $1.25 million (equivalent to $10 per unit) for their efforts indeveloping the Nebraska plant. The restriction will be removed as services areprovided and selected milestones are achieved. The earned portion of the $1.25million is being expensed as start-up expenses. As of September 30, 2006,$1,011,905 had been earned and expensed with the remaining $238,095 included inunearned compensation.

We will deferoffering costs relating to our proposed registered securities offering untilthe sale of units is completed. Upon issuance of the units, these costs will benetted against the proceeds received. If our proposed registered securitiesoffering is not completed, such costs will be expensed.

**POSSIBLE FUTURE GRANTS,GOVERNMENT PROGRAMS, TAX CREDITS AND TAX INCREMENT FINANCING**

We plan to applyfor tax incentives available under the Employment and Investment Growth Actavailable for economic development in Nebraska. We plan to apply for a projectdevelopment grant from the U.S. Department of Agriculture. Although we mayapply under several programs simultaneously and may be awarded grants or otherbenefits from more than one program, it must be noted that some combinations ofprograms are mutually exclusive. Under some state and federal programs, awardsare not made to applicants in cases where construction on the project hasstarted prior to the award date. There is no guarantee that applications willresult in awards of grants or loans.

**MANAGEMENT’SDISCUSSION AND ANALYSIS OR PLAN OF OPERATION FOR HEARTLAND GRAIN FUELS**

**OVERVIEW**

**Thisreport contains forward-looking statements that involve risks anduncertainties. Actual events or results may differ materially from thoseindicated in such forward-looking statements. The following**

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**discussion of the financialcondition and results of operations should be read in conjunction with thefinancial statements and related notes thereto included elsewhere in thisreport.**

Heartland GrainFuels owns and operates ethanol plants located in Aberdeen and Huron, SouthDakota, with a combined ethanol production capacity of approximately 39 milliongallons per year. In addition to producing ethanol, Heartland Grain Producersproduces and sells wet distillers grains, dry distillers grains and condenseddistillers solubles as ethanol co-products. Assuming the successful completionof our proposed registered securities offering, we expect to complete anexpansion of Heartland Grain Fuels’ Aberdeen plant during the first calendarquarter of 2008, which will increase Heartland Grain Fuels’ production capacityby approximately 40 million gallons per year.

The table belowprovides an overview of Heartland Grain Fuels’ ethanol plants that are inoperation or under construction as of December 1, 2006. 
| ** **                                           | ** ** | **Aberdeen Plant** | ** ** | **Huron Plant(1)** | ** ** | **Aberdeen Expansion(2)** | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|--------------------------------|------------|
| Location                                             |       | Aberdeen,  South Dakota |       | Huron,  South Dakota    |       | Aberdeen,  South Dakota        |       |
| Year completed or  scheduled to be completed         |       | 1992                    |       | 1999                    |       | First  Calendar Quarter 2008   |       |
| Annual ethanol capacity  (in millions of gallons)    |       | 9                       |       | 30                      |       | 40                             |       |
| Primary energy source                                |       | Natural  Gas            |       | Natural  Gas            |       | Natural  Gas                   |       |
| Estimated distillers  grains production per year (3) |       | 30,000  tons            |       | 95,000  tons            |       | 130,000  tons                  |       |
| Estimated corn processed per year                    |       | 3.3 million bushels     |       | 11.1 million bushels    |       | 14.8 million bushels           |       |

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(1)             Theproduction capacity of the Huron plant was expanded from 12 million gallons peryear to 30 million gallons per year in July 2006.

(2)             Constructionof the Aberdeen plant expansion commenced in 2006.

(3)             Amountsrepresent the aggregate production of wet and dry distillers grains, convertedto dry equivalent tons.

**RECENTDEVELOPMENTS**

**Combination with Advanced BioEnergy**

On November 8,2006 the first closing of the Heartland Grain Fuels transaction occurred. As aresult of the acquisition, SDWG and Aventine received cash and units inexchange for all of their limited partnership interests in Heartland GrainFuels, and the common shares of Dakota Fuels owned by SDWG. After giving effectto the first closing, we own approximately 53% of the limited partnershipinterests in Heartland Grain Fuels and 51% of the common shares of DakotaFuels. We also have an agreement to purchase all of the limited partnershipinterest in Heartland Grain Fuels and the common shares of Dakota Fuels ownedby Heartland Producers, which would result in our owning 100% of HeartlandGrain Fuels and Dakota Fuels. Subject to the approval of Heartland Producers’members and satisfaction of certain closing conditions, we expect to close thetransaction with Heartland Producers during the first calendar quarter of 2007.

**Marketing Arrangements**

As a member of theAventine marketing alliance, all of Heartland Grain Fuels’ ethanol is sold toAventine and priced through a pooling of Heartland Grain Fuels and otherproducers’ ethanol that is sold by Aventine to third parties. In connectionwith our purchase of Aventine’s limited partnership interests in HeartlandGrain Fuels, Heartland Grain Fuels amended its marketing agreement withAventine, effective December 1, 2006, to extend the term until November 2008,amend the timing of payment and modify the commission to be paid by HeartlandGrain Fuels, and to include certain confidentiality provisions. After theinitial term, the agreement will automatically renew for successive one-yearterms unless terminated by either party upon one year’s prior written notice.

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**Grain Origination**

In connection withour purchase of SDWG’s limited partnership interests in Heartland Grain Fuelsand common shares in Dakota Fuels, Heartland Grain Fuels entered into a newgrain origination agreement with SDWG. The term of the grain originationagreement is 10 years unless terminated earlier in accordance with its terms.SDWG has agreed to sell corn to Heartland Grain Fuels’ plants based on itsprojected use of corn. Heartland Grain Fuels may also purchase corn from otherparties, subject to certain restrictions.

**Credit Facility**

Heartland GrainFuels indirectly borrows funds from CoBank, ACB through an arrangement withDakota Fuels. Pursuant to this arrangement, Heartland Grain Fuels borrows fundsfrom Dakota Fuels pursuant to a master loan agreement, revolving term loansupplement and multiple advance term loan supplement. Dakota Fuels obtainsfunds to be loaned to Heartland Grain Fuels pursuant to loan agreements withCoBank that are substantially similar to the loan agreements between HeartlandGrain Fuels and Dakota Fuels.

In connection withour combination with Heartland Grain Fuels, Heartland Grain Fuels and DakotaFuels entered into an amendment to the master loan agreement dated October 27,2005, a revolving term loan supplement, and a multiple advance term loansupplement. Dakota Fuels and CoBank also entered into an amendment to themaster loan agreement dated October 27, 2005, a revolving term loan supplementand a multiple advance term loan supplement. Pursuant to the amended loanagreements, Heartland Grain Fuels may borrow up to $6.75 million and $35.25million under the revolving term loan supplements and multiple advance termloan supplements, respectively. Amounts borrowed under the revolving term loansupplements may be repaid and reborrowed. Amounts borrowed under the multipleadvance term loan supplement and later repaid may not be reborrowed. Amountsborrowed are due on January 20, 2008. Currently, Heartland Grain Fuels andDakota Fuels have $3.4 million of funds available to borrow under these loans.

**COMPONENTS OFREVENUES AND EXPENSES**

**Total Revenues**

Heartland GrainFuels’ primary source of revenue is the sale of ethanol produced at itsAberdeen and Huron plants. Sales of ethanol accounted for 88% of HeartlandGrain Fuels’ sales in 2005 and 85% of Heartland Grain Fuels’ sales in 2004.Heartland Grain Fuels’ other sales are generated from the sale of distillersgrains and condensed distillers solubles, which are co-products of the ethanolproduction process. The selling price Heartland Grain Fuels realizes for itsethanol is largely determined by the market supply and demand for ethanol. Theselling price of co-products is largely determined by the market supply anddemand of livestock protein feed supply, including alternatives to co-productsof the ethanol production process. Recently, the demand for ethanol co-productshas been lower than in previous years due to increased supplies of soy hulls inthe livestock protein feed marketplace. The demand and markets for ethanol andethanol co-products are independent of one another.

**Cost of Sales and GrossIncome**

Heartland GrainFuels’ gross income is derived from its sales less cost of sales. HeartlandGrain Fuels’ cost of sales is mainly affected by the cost of corn and naturalgas. Corn is Heartland Grain Fuels’ most significant raw material cost. Theprice of corn is influenced by weather conditions and other factors affectingcrop yields, farmer planting decisions and general economic, market andregulatory factors. These factors include government policies and subsidieswith respect to agriculture and international trade, and global and localdemand and supply. The spot price of corn tends to rise during the springplanting season in May and June and tends to decrease during the fall harvestin October and November. Heartland Grain Fuels purchases natural gas to powersteam generation in its ethanol production process and to dry its distillersgrains. Natural gas represents Heartland Grain Fuels’ second largest cost. Theprice of natural gas is affected by weather conditions and general economic,market and regulatory factors. Historically, corn costs have accounted forapproximately 53.0% of total cost of sales, while natural gas costs haveaccounted for approximately 17.5% of total cost of sales. Expenses for wagesand benefits, depreciation, interest expense, enzymes, chemicals, electricity,water and repairs and maintenance comprise the remaining 29.5% of total cost ofsales.****Heartland Grain Fuels expects interestexpense, net of interest capitalized as part of the Aberdeen plant expansion,to increase significantly as a result of its increased debt incurred inconnection with the transactions with Advanced BioEnergy.

**General andAdministrative Expenses**

General andadministrative expenses consist of telephone, postage, professional fees,contributions, dues and subscriptions and office supplies.

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**Other Operating Income**

Other operatingincome includes state incentive income, interest income and miscellaneousincome. The State of South Dakota pays an incentive to operators of ethanolplants to encourage the growth of the ethanol industry. Each plant is eligibleto receive an aggregate of $10 million, payable up to $1 million per year.Heartland Grain Fuels generally receives payment between $700,000 and $800,000per plant per year. The amounts are dependent on annual allocations by theState of South Dakota and the number of eligible plants. This incentiveterminated for the Aberdeen plant in 2004. Heartland Grain Fuels expects thisincentive to terminate for the Huron plant in 2011. Heartland Grain Fuels doesnot expect to receive this incentive for the Aberdeen plant expansion.

**RESULTS OFOPERATIONS**

Heartland GrainFuels did not complete the expansion of its Huron plant from 12 to 30 milliongallons per year until July 2006. The Aberdeen plant expansion is scheduled tobe completed during the first calendar quarter of 2008. The results for thehistorical periods presented are not representative of the results thatHeartland Grain Fuels expects to achieve in the future due in part to itsexpanded Huron plant and the expansion of its Aberdeen plant.

The followingtable sets forth, for the periods indicated, revenues, expenses and net income,and the percentage relationship to sales of specified items in Heartland GrainFuels’ consolidated income statement: 
| ** **                          | ** ** | **Year Ended December 31,**                     | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                          | ** ** | **2003**                                                       | ** ** | **2004**                                                | ** ** | **2005** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                          | ** ** | ** **                                                     | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **(unaudited)** | ** ** |
| ** **                          | ** ** | **(in thousands, except percentage data)** | ** ** |
| Sales                               |       | $                                                              | 31,321     |                                                    | 100        | % | $ | 36,043 |   | 100 | % | $ | 36,501 |   | 100 | % | $ | 27,474 |   | 100 | % | $ | 38,001 |   | 100 | % |
| Cost of sales                       |       | 32,458                                                         |       | 103.6                                                   |       | 35,462 |   | 98.4 |   | 33,453 |   | 9.2 |   | 25,129 |   | 91.5 |   | 28,095 |   | 73.8 |   |
| Gross income (loss)                 |       | (1,137                                                         | )          | (3.6                                                    | )          | 581 |   | 1.6 |   | 3,048 |   | 8.4 |   | 2,345 |   | 8.5 |   | 9,906 |   | 26.2 |   |
| Other operating income              |       | 1,638                                                          |       | 5.2                                                     |       | 1,367 |   | 3.8 |   | 765 |   | 2.1 |   | 494 |   | 1.8 |   | 632 |   | 1.7 |   |
| General and administrative expenses |       | 175                                                            |       |                                                    |       | 148 |   |   |   | 148 |   |   |   | 115 |   |   |   | 187 |   |   |   |
| Operating net income                |       | 325                                                            |       | 1.0                                                     |       | 1,800 |   | 5.0 |   | 3,665 |   | 10.0 |   | 2,724 |   | 9.9 |   | 10,351 |   | 27.4 |   |
| Patronage dividend income           |       | 74                                                             |       |                                                    |       | 87 |   |   |   | 139 |   |   |   | 81 |   |   |   | 53 |   |   |   |
| Net  income                         |       | $                                                              | 399        |                                                    | 1.3        | % | $ | 1,887 |   | 5.2 | % | $ | 3,805 |   | 10.4 | % | $ | 2,805 |   | 10.2 | % | $ | 10,404 |   | 27.5 | % |

 

**NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO NINE MONTHS ENDEDSEPTEMBER 30, 2005**

**Sales**

Sales for the ninemonths ended September 30, 2006 were $38.0 million, compared to $27.4 millionfor the nine months ended September 30, 2005, an increase of $10.6 million or38.7%. The increase in sales was primarily the result of record high ethanolprices, which were approximately 55 cents per gallon higher during the firstnine months of 2006 compared to the same period in 2005. Sales also increaseddue to increased production at the Huron plant in August and September 2006 asa result of the expansion.

Sales fromco-products decreased $0.6 million, or 21.8%, to $2.9 million for the ninemonths ended September 30, 2006 from $3.5 million for the nine months endedSeptember 30, 2005. The decrease in co-product sales was primarily the resultof a weaker livestock protein feed market due to an excess supply of soybeanco-products.

**Cost of Sales**

Cost of sales forthe nine months ended September 30, 2006 was $28.1 million, compared to $25.1million 

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for the nine months endedSeptember 30, 2005, an increase of $3.0 million or 12.0%. This increase wasprimarily the result of increased cost of sales for the Huron plant due to thecompletion of the expansion in July 2006. The cost of sales for the Aberdeenplant was relatively unchanged when comparing the first nine months of 2006 and2005.

Corn costsincreased $0.5 million, or 3.8%, to $13.7 million for the nine months endedSeptember 30, 2006 from $13.2 million for the nine months ended September 30,2005. Corn costs represented 49.2% of cost of sales for the nine months endedSeptember 30, 2006 and 52.5% of cost of sales for the nine months endedSeptember 30, 2005. The increase in corn costs was due to an increase in numberof bushels purchased as a result of the Huron expansion, which was offset bythe fact that the average price paid per bushel was approximately $0.05 lessduring the first nine months of 2006 compared to the same period in 2005.

Natural gas costsincreased $0.4 million, or 8.7%, to $5.0 million and accounted for 18.0% ofcost of sales for the nine months ended September 30, 2006 from $4.6 millionand 18.5% of cost of sales for the nine months ended September 30, 2005. Theincreased cost of natural gas was primarily attributable to increased volumepurchased as a result of the Huron plant expansion.

The remaining $2.1million increase in cost of sales was due primarily to increased depreciation,interest expense, wages and benefits, and denaturant costs in 2006 whencompared to 2005 due primarily to the expansion of the Huron plant.

**Gross Income**

Gross incomeincreased $7.5 million from $2.3 million or 8.5% of sales for the nine monthsended September 30, 2005 to $9.9 million or 26.1% of sales for the same periodin 2006. This increase was primarily a result of the record-high ethanol pricesduring the first nine months of 2006 and a decrease in the per bushel price of cornduring the same period.

**Other Operating Income**

Other operatingincome increased $.1 million, or 27.9%, to $.6 million for the nine monthsended September 30, 2006 from $.5 million for the nine months ended September30, 2005. The increase was primarily the result of interest income earned oncash and cash equivalents.

**General andAdministrative Expenses**

The increase ingeneral and administrative expenses to $187,000 for the nine months endedSeptember 30, 2006 from $115,000 for the nine months ended September 30, 2005is primarily attributable to higher professional fees in 2006 in connectionwith the combination of Heartland Grain Fuels and Advanced BioEnergy.

**YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004**

**Sales**

Sales for 2005 were$36.5 million, compared to $36.0 million for 2004, an increase of $0.5 millionor 1.3%. The increase in sales was due to slightly higher ethanol prices andslightly higher production for 2005 compared to 2004. The weighted averageprice realized on Heartland Grain Fuels’ sales of ethanol increased to $1.45per gallon, or 2.8%, for 2005 from $1.41 per gallon for 2004. Accordingly,sales from ethanol increased $1.7 million, or 5.6%, to $32.0 million for 2005from $30.3 million for 2004. Heartland Grain Fuels produced a total of 22.2million gallons of fuel ethanol in 2005, compared to 21.4 million gallons in2004.

Sales fromco-products decreased $1.5 million, or 24.5%, to $4.5 million for 2005 from$6.0 million for 2004. Co-product sales decreased primarily due to lower pricesin the livestock protein feeds market for ethanol co-products. The drop inprices resulted from an increase in the supply of soy hulls due to an increasedamount of soybeans being crushed for oil and various other uses.

**Cost of Sales**

Cost of sales for2005 was $33.5 million, compared to $35.5 million for 2004, a decrease of $2.0million or 5.7%, due primarily to a decrease in the cost of corn in 2005compared to 2004. However, higher natural gas costs in 2005 offset some of thecorn savings.

Corn costsdecreased $4.2 million, or 19.8%, to $16.9 million for 2005 from $21.1 millionin 2004. Corn costs represented 50.6% of cost of sales for 2005 and 59.4% ofcost of sales for 2004. This decrease was primarily 

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the result of a 55 centper bushel decrease in the cost of corn in 2005 compared to 2004.

Natural gas costsincreased $1.8 million, or 34.5%, to $7.0 million, and accounted for 20.9% ofcost of sales for 2005 and accounted for 15.5% of cost of sales for 2004. Theincreased cost of natural gas as a percentage of cost of sales was primarilyattributable to increased natural gas prices during the year.

**Gross Income**

Gross incomeincreased $1.9 million from $1.9 million or 5.4% of sales for the year endedDecember 31, 2004 to $3.8 million or 10.4% of sales for the same period in2005. This increase wasprimarily the result of decreased corn costs and a slight increase in ethanolprices, which were partially offset by higher natural gas costs.

**Other Operating Income**

Other operatingincome decreased $0.60 million, or 44.0%, to $0.77 million for 2005 from $1.37million for 2004. The decrease was primarily the result of the Aberdeen plantreceiving the maximum aggregate amount of state incentive money attributable toproduction during 2004. Heartland Grain Fuels received an aggregate of $10million in incentives with respect to the Aberdeen plant late in 2004. TheHuron plant has approximately $6 million of incentives to recover as ofDecember 31, 2005.

**YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003**

**Sales**

Sales for 2004were $36.0 million, compared to $31.3 million for 2003, an increase of $4.7million or 15.1%. The increase in sales was primarily the result of a 22 centper gallon increase in the price of ethanol in 2004 compared to 2003. HeartlandGrain Fuels produced a total of 21.4 million gallons of fuel ethanol in 2004,compared to 21.3 million gallons in 2003.

Sales fromco-products increased $0.5 million, or 7.7%, to $6.0 million for 2004 from $5.5million for 2003. The increase was the result of slightly higher co-productprices due in part to the fact that more co-products were sold locally in 2004.

**Cost of Sales**

Cost of sales for2004 was $35.5 million, compared to $32.5 million for 2003, an increase of $3.0million or 9.3%, due primarily to an increase in the cost of corn in 2004compared to 2003.

Corn costsincreased $3.5 million, or 19.9%, to $21.1 million for 2004 from $17.6 millionin 2003. Corn costs represented 59.4% of cost of sales for 2004 and 54.2% ofcost of sales for 2003. This increase was primarily the result of a 42 cent perbushel increase in the cost of corn in 2004 compared to 2003, as natural gascosts only increased $0.2 million, or 4.0%, to $5.2 million, accounted for14.7% of cost of sales for 2004, and accounted for 15.5% of cost of sales for2003.

**Gross Income (Loss)**

Gross incomeincreased $1.4 million from $0.5 million or 1.6% of sales for the year endedDecember 31, 2003 to $1.9 million or 5.4% of sales for the same period in 2004.This increase wasprimarily the result of higher ethanol prices, which were partially offset byhigher corn prices.

**Other Operating Income**

Other operatingincome decreased $0.27 million, or 16.5%, to $1.37 million for 2004 from $1.64million for 2003. The decrease was primarily the result of the Aberdeen plantreceiving the maximum aggregate amount of state incentive money attributable toproduction during late 2004, as well as the state incentive program being underfunded in 2004.

**FLUCTUATIONSIN QUARTERLY RESULTS AND SEASONALITY**

Heartland GrainFuels’ quarterly operating results are influenced by seasonal fluctuations inthe price it pays for corn and natural gas, and the price it receives forethanol. The spot price of corn historically increases during the springplanting season in May and June, and historically decreases during the fallharvest in October and November. The price for natural gas, however, tends tomove opposite that of corn and historically is lower in the spring and summerand higher in the fall and winter. In addition, Heartland Grain Fuels’ ethanolprices are 

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substantially correlatedwith the price of unleaded gasoline, which tends to increase during the summerand winter seasons.

As a result ofquarterly and seasonal fluctuations, Heartland Grain Fuels believes comparisonsof operating measures between consecutive quarters is not as meaningful ascomparisons between longer periods and should not be relied on as indicators ofits future performance.

**HEDGING ANDOTHER RISK MITIGATION STRATEGIES**

Heartland GrainFuels seeks to mitigate its exposure to commodity price fluctuations byentering into forward purchase contracts for a portion of its corn and naturalgas requirements on a fixed price basis. Heartland Grain Fuels’ corn andnatural gas requirements are forecasted to take into account its expectedproduction of ethanol. Heartland Grain Fuels believes its strategy of managingexposure to commodity price fluctuations will reduce somewhat the volatility ofits results, but will also reduce its ability to benefit from favorable changesin prices.

As of September30, 2006, Heartland Grain Fuels had entered into forward purchase contracts for10.5 million bushels of corn through September 30, 2007 and 90,000 MMBtu ofnatural gas through March 31, 2007, which represents 75% and 20% of itsestimated requirements of corn and natural gas for the respective periods oftime. Heartland Grain Fuels has fixed the purchase price it will pay for 6.7million bushels of such corn for the period from November 2006 through July2007.

The extent towhich Heartland Grain Fuels enters into forward purchase contracts for corn andnatural gas during the year may vary substantially from time to time based on anumber of factors, including supply and demand, the needs of customers topurchase ethanol or suppliers to sell Heartland Grain Fuels raw materials on afixed basis, Heartland Grain Fuels’ forecasting of future market trends,seasonal factors and the costs of forward contracts. For example, HeartlandGrain Fuels would expect to purchase forward a smaller percentage of its cornrequirements for the fall months when prices tend to be lower, and would expectto enter into forward purchase contracts for its natural gas requirementsduring the fall and winter months when prices tend to be higher.

**LIQUIDITY ANDCAPITAL RESOURCES**

The followingtable is presented as a measure of Heartland Grain Fuels’ liquidity andfinancial condition: 
| ** **                                           | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Cash and cash  equivalents                           |       | $                            | 2,488,338  |                        | $          | 474,442 |   |
| Working capital                                      |       | (303,955                     | )          | 141,176                     |       |
| Amounts  available under loan agreements             |       | 3,400,000                    |       | 15,000,000                  |       |
| Long-term debt                                       |       | 18,000,000                   |       | 5,755,820                   |       |
| Net cash  provided by operating activities           |       | 11,889,810                   |       | 6,090,707                   |       |
| Net cash (used  in) investing activities             |       | (23,917,688                  | )          | (6,533,018                  | )          |
| Net cash provided by  (used in) financing activities |       | 14,041,775                   |       | (2,759,088                  | )          |
|                                                      |            |                              |            |                             |            |  |  |

 

Heartland GrainFuels’ principal sources of liquidity consist of cash and cash equivalents,cash provided by operations and available borrowings under its loan agreements.In addition to funding operations, Heartland Grain Fuels’ principal uses ofcash have been, and are expected to be, the debt service requirements of itsindebtedness, the expansion of its plants, capital expenditures and generaloperations.

Heartland GrainFuels financed its operations in the first three quarters of 2006 primarilythrough cash flow provided by operations and financing activities. At September30, 2006, Heartland Grain Fuels had total cash and cash equivalents of $2.5 millioncompared to $0.5 million at December 31, 2005. Cash provided by operatingactivities was $11.9****million forthe nine months ended September 30, 2006, compared to $4.3 million for the ninemonths ended September 30, 2005. The increase in operating cash flow was dueprimarily to increased profits in 2006 as a result of record high ethanolprices, which was offset by increases in accounts receivable. The increase inaccounts receivable was due primarily to the timing of payments received fromAventine for the sale of ethanol and the increase in ethanol prices.

Heartland GrainFuels financed its operations for 2005 primarily through cash provided byoperating activities. At December 31, 2005, Heartland Grain Fuels had totalcash and cash equivalents of $0.5 million 

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compared to $3.7 millionat December 31, 2004. Cash provided by operating activities was $6.1 millionfor 2005 compared to cash provided by operating activities of $4.4 million for2004. The increase in operating cash flow was due to a number of factors,including an increase in net income, an increase in accounts payable and adecrease in inventories, which were partially offset by a decrease in accountsreceivable and an increase in prepaid expenses. Net income increased $1.9million primarily due to decreased corn costs, which were partially offset byincreased natural gas costs. Accounts payable increased $0.9 million in 2005compared to a marginal decrease in accounts payable in 2004. The increase inaccounts payable in 2005 was due primarily to increased expenditures inconnection with the expansion of the Huron plant. Inventories decreased $0.2million in 2005 compared to an increase in inventories of $0.3 million in 2004.The changes in inventories for the two years were due to normal fluctuations inethanol inventories based on the timing of shipments. Accounts receivableincreased $0.3 million in 2005 compared to a decrease in accounts receivable of$1.0 million in 2004. The changes in accounts receivable for the two years weredue primarily to the timing of payments received from Aventine for the sale ofethanol. Prepaid expenses increased $0.2 million in 2005 compared to a marginaldecrease in prepaid expenses in 2004. The increase in prepaid expenses in 2005was due primarily to a shift in Heartland Grain Fuels’ business insurance fromcalendar year policies to policies covering twelve-month periods beginningNovember 1 of each year.

Cash used ininvesting activities was $23.9 million for the nine months ended September 30,2006 compared to $2.3 million for the nine months ended September 30, 2005. Theincrease was primarily due to cash payments for the Huron plant expansion, aswell as preliminary cash payments for the Aberdeen plant expansion.

Cash used ininvesting activities was $6.5 million for 2005 compared to $0.3 million for2004. The increase primarily resulted from cash payments in connection with theHuron plant expansion.

Cash provided byfinancing activities for the nine months ended September 30, 2006 was $14.0million, compared to $2.9 million used in financing activities for the ninemonths ended September 30, 2005. The 2005 period included debt retirement of$1.8 million and an equity distribution to Heartland Grain Fuels’ partners of$1.0 million, while the 2006 period included increased borrowings for the Huronplant expansion.

Cash used infinancing activities was $2.8 million for 2005 compared to $0.9 million for2004. The increase primarily resulted from a larger distribution to HeartlandGrain Fuels’ partners and increased payoff of indebtedness in 2005.

Heartland GrainFuels’ financial position and liquidity are, and will be, influenced by avariety of factors, including:

·                  its ability tocontinue to generate cash flows from operations;

·                  the availabilityof funds under its loan agreements, the level of its outstanding indebtednessand the interest it is obligated to pay on this indebtedness; and

·                  its capitalexpenditure requirements, which consist primarily of costs associated with theexpansion of its Aberdeen plant.

Heartland GrainFuels intends to fund its principal liquidity requirements through cash andcash equivalents, cash provided by operations, borrowings under its existingloan agreements and additional debt and equity. Heartland Grain Fuels believesits existing sources of liquidity will be sufficient to meet the cashrequirements of its operating and investing activities through at leastFebruary 2007, at which time it will need to seek additional sources of debt orobtain additional equity investments from its partners in order to fundliquidity requirements related to the Aberdeen plant expansion.

Heartland GrainFuels has not currently identified additional sources of debt nor does it havecommitments from its partners to provide additional equity investment. Inaddition, Advanced BioEnergy does not control Heartland Grain Fuels or DakotaFuels, the general partner of Heartland Grain Fuels. If we receive proceedsfrom our proposed registered securities offering prior to approval of theHeartland transaction by Heartland Producers, we intend to invest proceeds fromthe offering as necessary in order to continue funding the Aberdeen plantexpansion pending closing of the Heartland transaction. The terms of and ourability to make this investment would be subject to approval of the DakotaFuels board and may be subject to the approval of the senior lender toHeartland Grain Fuels, neither of which we control. If we do not receiveproceeds from our proposed registered securities offering by February 2007,Advanced BioEnergy may need to raise subordinated debt in order for HeartlandGrain Fuels to continue funding the Aberdeen plant expansion as scheduled. Ifwe are able to raise subordinated debt, we plan on contributing funds as neededin the form of debt or equity to Heartland Grain Fuels in order to enable it tocontinue 

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funding the Aberdeenplant expansion. We are in the process of exploring various alternatives forsubordinated debt financing, but there are no assurances that we will be ableto obtain subordinated debt financing on acceptable terms or at all.

Any investment byus is subject to approval by the Dakota Fuels board and may be subject toapproval by the senior lender to Heartland Grain Fuels, neither of which wecontrol. If we do not receive the necessary approvals, the Aberdeen expansionmay be delayed or may not proceed.

In connection withthe first closing of the Heartland transaction, the board of directors ofDakota Fuels approved an $8,757,400 distribution to the Heartland Grain Fuels’members. In addition, Heartland Grain Fuels increased its indebtedness by $13.0million at the first closing of the Heartland transaction to fund, in part,construction of the Aberdeen plant expansion.

**Capital Expenditures**

Heartland GrainFuels expects to make capital expenditures of approximately $55.0 million and$5.0 million in 2007 and 2008, respectively, primarily for the expansion of itsAberdeen plant.

**Aberdeen Plant Expansion**

*Project Capitalization*

Heartland GrainFuels estimates that it will cost approximately $78.0 million to complete theAberdeen plant expansion and commence operations, of which approximately $8.7million had been paid as of December 1, 2006. The following figures areintended to be estimates only, and the actual costs may vary significantly fromthe descriptions given below due to changes to our design or to a variety ofother factors described elsewhere in this report. 
| **Aberdeen Plant Expansion**       | ** ** |
|----------------------------------------------|------------|
| **Project Requirement**                 | ** ** | **Estimated Cost** | ** ** | **Percent** | ** ** |
| Plant  construction, land and infrastructure |       | $ | 69,860,000 |   | 89.56 | % |
| Construction  insurance costs                |       | 110,000 |   | 0.14 | % |
| Construction  contingency                    |       | 750,000 |   | 0.96 | % |
| Capitalized  interest                        |       | 1,200,000 |   | 1.54 | % |
| Financing and  pre-production period costs   |       | 550,000 |   | 0.71 | % |
| Working capital                              |       | 5,530,000 |   | 7.09 | % |
| **Total**                                    |       | $ | 78,000,000 |   | 100 | % |

 

*Construction of the Aberdeen Plant Expansion*

Effective July 14,2006, Heartland Grain Fuels entered into a design-build agreement with ICM toestablish a 40 million gallons per year dry mill ethanol production facilityadjacent to the current Aberdeen plant. Under the terms of the agreement, ICMguarantees that the plant will meet certain performance criteria during aseven-day performance test that indicate the plant is capable of producingannually a certain amount of ethanol and distillers grains if operated inaccordance with ICM’s instructions. Heartland Grain Fuels expects that theplant will be finished in the first calendar quarter of 2008. Heartland GrainFuels anticipates having sufficient funds to pay these costs through at leastFebruary 2007, at which time it will need to seek additional sources of debt orobtain additional equity investments from its partners in order to fundliquidity requirements related to the Aberdeen plant expansion.

**Loan Agreements**

Upon the closingof our acquisition of limited partnership interests in Heartland Grain Fuelsand common shares of Dakota Fuels on November 8, 2006, Heartland Grain Fuels’had borrowed $6.75 million and $30.75, resulting in $0 and $4.5 million ofavailable funds, under the revolving term loan supplements and multiple advanceterm loan supplements, respectively. Amounts borrowed under the loan agreementsmature on January 20, 2008. Dakota Fuels’ obligations under the loan agreementswith CoBank are guaranteed by Heartland Grain Fuels and are secured by a firstlien on all equity that Dakota Fuels may now own or hereafter acquire inHeartland Grain Fuels and on all now owned or subsequently acquired personalproperty of Dakota Fuels. Heartland Grain Fuels’ guarantee is secured by afirst lien on all now owned and subsequently acquired personal property andreal estate of 

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Heartland Grain Fuels.The loan agreements contain customary covenants, including minimum net worthrequirements for Heartland Grain Fuels. In addition, Heartland Grain Fuels andDakota Fuels are required to provide to CoBank on or before May 1, 2007 arefinance plan acceptable to CoBank. The loan agreements also contain certaincustomary events of default including defaults based on cross-defaults to otherindebtedness.

**OFF-BALANCESHEET ARRANGEMENTS**

Heartland GrainFuels has no off-balance sheet arrangements.

**SUMMARY OFCRITICAL ACCOUNTING POLICIES**

Heartland GrainFuels’ discussion and analysis of its financial condition and results ofoperations are based on the financial statements included in this report, whichhave been prepared in conformity with generally accepted accounting principlesin the United States. Note 2 to the Financial Statements for 2005, 2004 and2003 included in this report contains a summary of Heartland Grain Fuels’significant accounting policies, many of which require the use of estimates andassumptions. Accounting estimates are an integral part of the preparation offinancial statements and are based upon management’s current judgment. Theprocess used by management encompasses its knowledge and experience about pastand current events and certain assumptions on future events. The judgments andestimates regard the effects of matters that are inherently uncertain and thataffect the carrying value of Heartland Grain Fuels’ assets and liabilities.Heartland Grain Fuels believes that of its significant accounting policies, thefollowing are noteworthy because changes in these estimates or assumptionscould materially affect its financial position and results of operations.

**Revenue Recognition**

Revenue from theproduction of ethanol and its co-products is recorded when title transfers tocustomers. Ethanol and its co-products are generally shipped FOB HeartlandGrain Fuels’ plants. In accordance with Heartland Grain Fuels’ marketingagreement with Aventine, sales are recorded net of commissions retained byAventine at the time payment is remitted.

**Derivative Instrumentsand Hedging Activities**

Statement ofFinancial Accounting Standards No. 133, *Accounting for DerivativeInstruments and Hedging Activities*, requires a company to evaluateits contracts to determine whether the contracts are derivatives. Certainderivative contracts may be exempt under SFAS No. 133 as normal purchases ornormal sales, which are contracts that provide for the purchase or sale ofsomething other than a financial instrument or derivative instrument that willbe delivered in quantities expected to be used or sold over a reasonable periodin the normal course of business. At this time, Heartland Grain Fuels’ forwardcontracts related to the purchase of corn and natural gas are considered normalpurchases and, therefore, are exempted from the accounting and reportingrequirements of SFAS No. 133.

**IMPACT OFINFLATION**

Inflation has notsignificantly affected Heartland Grain Fuels’ operating results. However, costsfor construction, taxes, repairs, maintenance and insurance are all subject toinflationary pressures and could affect Heartland Grain Fuels’ ability tomaintain its plants adequately and expand its existing plants.

**STATE OFSOUTH DAKOTA INCENTIVES**

The State of SouthDakota pays an incentive to operators of ethanol plants to encourage the growthof the ethanol industry. Each plant is eligible to receive an aggregate of $10million, payable up to $1 million per year. Heartland Grain Fuels generallyreceives payment between $700,000 and $800,000 per plant per year. Thisincentive terminated for the Aberdeen plant in 2004. The amounts are dependenton annual allocations by the State of South Dakota and the number of eligibleplants. Heartland Grain Fuels expects this incentive to terminate for the Huronplant in 2011. Heartland Grain Fuels does not expect to receive this incentivefor the Aberdeen plant expansion.

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**ITEM 7.           FINANCIAL STATEMENTS**
| Financial Statements                                                              | ** ** | **Page** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------|------------|
| **Advanced  BioEnergy, LLC**                                                           |       |     |       |
| Report of Independent Registered Public Accounting Firm  dated November 28, 2006       |       |     |       |
| Financial  Statements as of September 30, 2006                                         |       |     |       |
| Consolidated Balance Sheets                                                            |       |     |       |
| Consolidated Statements of Operations                                                  |       |     |       |
| Consolidated Statement of Changes in Members’ Equity                              |       |     |       |
| Consolidated Statements of Cash Flows                                                  |       |     |       |
| Notes to Financial Statements                                                          |       |     |       |
|                                                                                   |       |     |       |
| **Heartland  Grain Fuels, L.P.**                                                       |       |     |       |
| Financial  Statements as of September 30, 2006 and September 30, 2005                  |       |     |       |
| Balance Sheets                                                                         |       |     |       |
| Statements of Income                                                                   |       |     |       |
| Statements of Partners’ Equity                                                    |       |     |       |
| Statements  of Cash Flows                                                              |       |     |       |
| Notes to Financial Statements                                                          |       |     |       |
|                                                                                   |       |     |       |
| Independent  Auditors’ Report dated January 25, 2006                              |       |     |       |
| Financial  Statements as of December 31, 2005, December 31, 2004 and December 31, 2003 |       |     |       |
| Balance Sheets                                                                         |       |     |       |
| Statements of Income                                                                   |       |     |       |
| Statements of Partners’ Equity                                                    |       |     |       |
| Statements  of Cash Flows                                                              |       |     |       |
| Notes to Consolidated Financial Statements                                             |       |     |       |

 

Allother schedules are omitted because they are not applicable or the requiredinformation is shown in the financial statements or notes thereto.

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**Report ofIndependent Registered Public Accounting Firm**

To the Board of DirectorsAdvanced BioEnergy, LLCMinneapolis, Minnesota

We have audited theaccompanying consolidated balance sheets of Advanced BioEnergy, LLC &subsidiaries (a development stage company) as of September 30, 2006 and 2005,and the related consolidated statements of operations, changes in members’equity and cash flows for the year ended September 30, 2006 and for the periodsfrom January 4, 2005 (date of inception) to September 30, 2006 and 2005. Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of Advanced BioEnergy, LLC & subsidiariesas of September 30, 2006 and 2005, and the results of their operations andtheir cash flows for the year ended September 30, 2006 and for the periods fromJanuary 4, 2005 (date of inception) to September 30, 2006 and 2005, inconformity with U.S. generally accepted accounting principles.

/s/ McGladrey &Pullen, LLP

Des Moines, IowaNovember 28, 2006

 

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**ADVANCEDBIOENERGY, LLC & SUBSIDIARIES(A DEVELOPMENT STAGE COMPANY)CONSOLIDATED BALANCE SHEETS**
| ** **                                                                                                                                               | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                                                                               | ** ** | **2006**               | ** ** | **2005**               | ** ** |
| **ASSETS**                                                                                                                                               | ** ** | ** **             | ** ** | ** **             | ** ** |
|                                                                                                                                                     |       |                   |       |                   |       |
| **CURRENT ASSETS**                                                                                                                                       |       |                   |       |                   |       |
| Cash and cash  equivalents                                                                                                                               |       | $                      | 10,814,561 |                   | $          | 893,587 |   |
| Prepaid expenses                                                                                                                                         |       | 130,518                |       | 58,230                 |       |
| Other receivable                                                                                                                                         |       | 151,750                |       | 2,358                  |       |
| **TOTAL  CURRENT ASSETS**                                                                                                                                |       | 11,096,829             |       | 954,175                |       |
| ** **                                                                                                                                               |       |                   |       |                   |       |
| **PROPERTY AND EQUIPMENT**                                                                                                                               |       |                   |       |                   |       |
| Land                                                                                                                                                     |       | 1,460,051              |       | —                 |       |
| Office equipment                                                                                                                                         |       | 313,254                |       | 38,685                 |       |
| Leasehold  improvement                                                                                                                                   |       | 10,113                 |       | 8,513                  |       |
| Construction in  process                                                                                                                                 |       | 38,156,059             |       | —                 |       |
|                                                                                                                                                     |       | 39,939,477             |       | 47,198                 |       |
| Less accumulated  depreciation                                                                                                                           |       | (30,534                | )          | (2,275                 | )          |
|                                                                                                                                                     |       | 39,908,943             |       | 44,923                 |       |
| **OTHER ASSETS**                                                                                                                                         |       |                   |       |                   |       |
| Cash for plant  construction                                                                                                                             |       | 32,500,000             |       | —                 |       |
| Land option  deposits                                                                                                                                    |       | 62,500                 |       | 30,000                 |       |
| Other assets                                                                                                                                             |       | 3,400                  |       | 26,400                 |       |
| Financing costs  and deferred offering costs, net of accumulated amortization 2006 29,792;  2005 none                                                    |       | 1,219,736              |       | 354,013                |       |
| Intangible                                                                                                                                               |       | 2,811,531              |       | —                 |       |
|                                                                                                                                                     |       | 36,597,167             |       | 410,413                |       |
| **TOTAL  ASSETS**                                                                                                                                        |       | $                      | 87,602,939 |                   | $          | 1,409,511 |   |
|                                                                                                                                                     |       |                   |       |                   |       |
| **LIABILITIES AND MEMBERS’ EQUITY**                                                                                                                 |       |                   |       |                   |       |
|                                                                                                                                                     |       |                   |       |                   |       |
| **CURRENT LIABILITIES**                                                                                                                                  |       |                   |       |                   |       |
| Accounts payable                                                                                                                                         |       | $                      | 15,680,595 |                   | $          | 193,673 |   |
| Accrued expenses                                                                                                                                         |       | 372,076                |       | 5,972                  |       |
| **TOTAL  CURRENT LIABILITIES**                                                                                                                           |       | 16,052,671             |       | 199,645                |       |
| ** **                                                                                                                                               |       |                   |       |                   |       |
| **LONG-TERM DEBT**                                                                                                                                       |       | 7,000,000              |       | —                 |       |
|                                                                                                                                                     |       |                   |       |                   |       |
| **MEMBERS’ EQUITY**                                                                                                                                 |       |                   |       |                   |       |
| Members’  capital, no par value, authorized 20,000,000 units, 7,165,600 and 625,000  units outstanding at September 30, 2006 and 2005, respectively |       | 66,820,932             |       | 3,174,098              |       |
| Deficit  accumulated during development stage                                                                                                            |       | (2,032,569             | )          | (914,232               | )          |
| Unearned  compensation                                                                                                                                   |       | (238,095               | )          | (1,050,000             | )          |
|                                                                                                                                                     |       | 64,550,268             |       | 1,209,866              |       |
| **TOTAL  LIABILITIES AND MEMBERS’ EQUITY**                                                                                                          |       | $                      | 87,602,939 |                   | $          | 1,409,511 |   |

 

See notes to consolidated financial statements.

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**ADVANCEDBIOENERGY, LLC & SUBSIDIARIES(A DEVELOPMENT STAGE COMPANY)CONSOLIDATED STATEMENTS OF OPERATIONS**
| ** **                                     | ** ** | **Year Ended  September 30,  2006** | ** ** | **Period from  Inception  (January 4, 2005)  to September 30,  2005** | ** ** | **Period from  Inception  (January 4, 2005)  to September 30,  2006** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|
| **REVENUES**                                   | ** ** | **$**                                         | **—** | ** **                                                                                     | **$**      | **—**                                                                                     | ** ** | **$** | **—** | ** ** |
| ** **                                     | ** ** | ** **                                    | ** ** | ** **                                                                                     | ** ** | ** **                                                                                     | ** ** |
| **OPERATING EXPENSES**                         | ** ** | ** **                                    | ** ** | ** **                                                                                     | ** ** | ** **                                                                                     | ** ** |
| Start-up  expenses                             |       | 517,348                                       |       | 723,750                                                                                        |       | 1,241,098                                                                                      |       |
| Accounting                                     |       | 148,100                                       |       | 3,765                                                                                          |       | 151,865                                                                                        |       |
| Consulting fees                                |       | 222,036                                       |       | 73,666                                                                                         |       | 295,702                                                                                        |       |
| Legal                                          |       | 454,065                                       |       | 34,791                                                                                         |       | 488,856                                                                                        |       |
| Directors’  meetings and expenses         |       | 264,063                                       |       | 40,229                                                                                         |       | 304,292                                                                                        |       |
| Meetings and  travel expenses                  |       | 26,957                                        |       | —                                                                                         |       | 26,957                                                                                         |       |
| Office expenses                                |       | 42,873                                        |       | 6,825                                                                                          |       | 49,698                                                                                         |       |
| Office labor                                   |       | 606,776                                       |       | 10,381                                                                                         |       | 617,157                                                                                        |       |
| Contract labor                                 |       | 21,245                                        |       | **—**                                                                                     |       | 21,245                                                                                         |       |
| Payroll tax  expense                           |       | 30,074                                        |       | 721                                                                                            |       | 30,795                                                                                         |       |
| Insurance                                      |       | 69,791                                        |       | 7,341                                                                                          |       | 77,132                                                                                         |       |
| Utilities                                      |       | 27,757                                        |       | 4,190                                                                                          |       | 31,947                                                                                         |       |
| Rent                                           |       | 27,067                                        |       | 2,100                                                                                          |       | 29,167                                                                                         |       |
| Advertising and  promotion                     |       | 6,180                                         |       | 3,192                                                                                          |       | 9,372                                                                                          |       |
| Licenses and  fees                             |       | 47,922                                        |       | 807                                                                                            |       | 48,729                                                                                         |       |
| Depreciation                                   |       | 28,259                                        |       | 2,275                                                                                          |       | 30,534                                                                                         |       |
| Bank charges                                   |       | 20,422                                        |       | **—**                                                                                     |       | 20,422                                                                                         |       |
| Crop expense                                   |       | 7,653                                         |       | **—**                                                                                     |       | 7,653                                                                                          |       |
| Land option  expense                           |       | 12,000                                        |       | **—**                                                                                     |       | 12,000                                                                                         |       |
| Miscellaneous                                  |       | 21,086                                        |       | 199                                                                                            |       | 21,285                                                                                         |       |
|                                           |       | 2,601,674                                     |       | 914,232                                                                                        |       | 3,515,906                                                                                      |       |
|                                           |       |                                          |       |                                                                                           |       |                                                                                           |       |
| **LOSS FROM OPERATIONS**                       |       | (2,601,674                                    | )          | (914,232                                                                                       | )          | (3,515,906                                                                                     | )          |
| ** **                                     | ** ** | ** **                                    | ** ** | ** **                                                                                     | ** ** | ** **                                                                                     | ** ** |
| **OTHER INCOME (EXPENSE)**                     | ** ** | ** **                                    | ** ** | ** **                                                                                     | ** ** | ** **                                                                                     | ** ** |
| Other income                                   |       | 12,000                                        |       | **—**                                                                                     |       | 12,000                                                                                         |       |
| Rent income                                    |       | 2,750                                         |       | **—**                                                                                     |       | 2,750                                                                                          |       |
| Interest income                                |       | 1,517,738                                     |       | **—**                                                                                     |       | 1,517,738                                                                                      |       |
| Interest  (expense)                            |       | (49,151                                       | )          | **—**                                                                                     |       | (49,151                                                                                        | )          |
|                                           |       |                                          |       |                                                                                           |       |                                                                                           |       |
| **LOSS ACCUMULATED DURING  DEVELOPMENT STAGE** |       | $                                             | (1,118,337 | )                                                                                              | $          | (914,232                                                                                       | )          | $ | (2,032,569 | ) |
|                                           |       |                                          |       |                                                                                           |       |                                                                                           |       |
| **Weighted Average Units  Outstanding**        |       | 3,717,635                                     |       | 362,794                                                                                        |       | 2,066,738                                                                                      |       |
|                                           |       |                                          |       |                                                                                           |       |                                                                                           |       |
| **Net (Loss) Per Unit - Basic and  Diluted**   |       | $                                             | (0.30      | )                                                                                              | $          | (2.52                                                                                          | )          | $ | (0.98 | ) |
| ** **                                     | ** ** | ** **                                    | ** ** | ** **                                                                                     | ** ** | ** **                                                                                     | ** ** |

 

See notes toconsolidated financial statements.

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**ADVANCEDBIOENERGY, LLC & SUBSIDIARIES(A DEVELOPMENT STAGE COMPANY)CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ EQUITYPeriod from January 4, 2005 (Date of Inception)to September 30, 2006**
| ** **                                                                         | ** ** | ** **        | ** **     | **Deficit**     | ** ** | ** **       | ** ** | ** ** | ** **     |
|------------------------------------------------------------------------------------|------------|-------------------|----------------|-----------------|------------|------------------|------------|------------|----------------|
| ** **                                                                         | ** ** | ** **        | ** **     | **Accumulated** | ** ** | ** **       | ** ** | ** ** | ** **     |
| ** **                                                                         | ** ** | ** **        | ** **     | **During**      | ** ** | ** **       | ** ** | ** ** | ** **     |
| ** **                                                                         | ** ** | **Members’** | ** **     | **Development** | ** ** | **Unearned**     | ** ** | ** ** | ** **     |
| ** **                                                                         | ** ** | **Capital**       | ** **     | **Stage**       | ** ** | **Compensation** | ** ** | **Total**  | ** **     |
|                                                                               | ** ** | ** **        | ** **     | ** **      | ** ** | ** **       | ** ** | ** ** | ** **     |
| **MEMBERS’ EQUITY - January 4,  2005**                                        |       | $                 | —         |            | $          | —           |       | $          | —         | ** ** | $ | — |   |
| ** **                                                                         |       |              |           |            |       |             |       |       |           |
| Issuance of  450,000 membership units                                              |       | 1,500,000         |           | —          |       | —           |       | 1,500,000  |           |
| Issuance of  7,500 membership units                                                |       | 25,000            |           | —          |       | —           |       | 25,000     |           |
| Issuance of  125,000 restricted membership units                                   |       | 1,250,000         |           | —          |       | (1,250,000       | )          | —     |           |
| Issuance of  42,500 restricted membership units                                    |       | 425,000           |           | —          |       | (425,000         | )          | —     |           |
| Amortization of  unearned compensation                                             |       | —            |           | —          |       | 625,000          |       | 625,000    |           |
| Costs of raising  capital incurred in connection with private placement memorandum |       | (25,902           | )              | —          |       | —           |       | (25,902    | )              |
| Net loss                                                                           |       | —            |           | (914,232        | )          | —           |       | (914,232   | )              |
|                                                                               |       |              |           |            |       |             |       |       |           |
| **MEMBERS’ EQUITY - September 30,  2005**                                     | ** ** | **$**             | **3,174,098**  | ** **      | **$**      | **(914,232**     | **)**      | **$**      | **(1,050,000** | **)** | **$** | **1,209,866** | ** ** |
| ** **                                                                         |       |              |           |            |       |             |       |       |           |
| Issuance of  6,048,400 membership units                                            |       | 60,484,000        |           | —          |       | —           |       | 60,484,000 |           |
| Amortization of  unearned compensation                                             |       | —            |           | —          |       | 811,905          |       | 811,905    |           |
| Cost of raising  capital - public offering                                         |       | (1,068,166        | )              | —          |       | —           |       | (1,068,166 | )              |
| Issuance of  492,200 membership units, of which 75,000 units are held in escrow    |       | 4,172,000         |           | —          |       | —           |       | 4,172,000  |           |
| Unit  compensation expense                                                         |       | 59,000            |           | —          |       | —           |       | 59,000     |           |
| Net loss                                                                           |       | —            |           | (1,118,337      | )          | —           |       | (1,118,337 | )              |
|                                                                               |       |              |           |            |       |             |       |       |           |
| **MEMBERS’ EQUITY - September 30, 2006**                                      | ** ** | **$**             | **66,820,932** | ** **      | **$**      | **(2,032,569**   | **)**      | **$**      | **(238,095**   | **)** | **$** | **64,550,268** | ** ** |

 

See notes toconsolidated financial statements.

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**ADVANCEDBIOENERGY, LLC & SUBSIDIARIES(A DEVELOPMENT STAGE COMPANY)CONSOLIDATED STATEMENTS OF CASH FLOWS**
| ** **                                                                                                                 | ** ** | **Year Ended  September 30, 2006** | ** ** | **Period from  Inception  (January 4, 2005)  to September 30, 2005** | ** ** | **Period from  Inception  (January 4, 2005)  to September 30, 2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                 | ** ** | ** **                                        | ** ** | ** **                                                                                         | ** ** | ** **                                                                                         | ** ** |
| ** **                                                                                                                 | ** ** | ** **                                        | ** ** | ** **                                                                                         | ** ** | ** **                                                                                         | ** ** |
| **OPERATING ACTIVITIES**                                                                                                   | ** ** | ** **                                        | ** ** | ** **                                                                                         | ** ** | ** **                                                                                         | ** ** |
| Net (loss)                                                                                                                 |       | $                                                 | (1,118,337 | )                                                                                                  | $          | (914,232                                                                                           | )          | $ | (2,032,569 | ) |
| Adjustments to  reconcile net (loss) to net cash (used in) operating activities:                                           |       |                                              |       |                                                                                               |       |                                                                                               |       |
| Depreciation                                                                                                               |       | 28,259                                            |       | 2,275                                                                                              |       | 30,534                                                                                             |       |
| Unit compensation  expense                                                                                                 |       | 59,000                                            |       | —                                                                                             |       | 59,000                                                                                             |       |
| Consulting  services exchanged for membership units                                                                        |       | 386,905                                           |       | 625,000                                                                                            |       | 1,011,905                                                                                          |       |
| Changes in  assets and liabilities, net of effects from purchases of Indiana Renewable  Fuels, LLC:                        |       |                                              |       |                                                                                               |       |                                                                                               |       |
| Prepaid expenses                                                                                                           |       | (66,953                                           | )          | (58,230                                                                                            | )          | (125,183                                                                                           | )          |
| Other  receivables                                                                                                         |       | (149,392                                          | )          | (2,358                                                                                             | )          | (151,750                                                                                           | )          |
| Accounts payable                                                                                                           |       | 212,809                                           |       | 80,107                                                                                             |       | 292,916                                                                                            |       |
| Accrued expenses                                                                                                           |       | 366,104                                           |       | 5,972                                                                                              |       | 372,076                                                                                            |       |
| **NET CASH (USED IN) OPERATING  ACTIVITIES**                                                                               |       | (281,605                                          | )          | (261,466                                                                                           | )          | (543,071                                                                                           | )          |
|                                                                                                                       |       |                                              |       |                                                                                               |       |                                                                                               |       |
| **INVESTING ACTIVITIES**                                                                                                   | ** ** | ** **                                        | ** ** | ** **                                                                                         | ** ** | ** **                                                                                         | ** ** |
| Payment of  deposit                                                                                                        |       | —                                            |       | (26,400                                                                                            | )          | (26,400                                                                                            | )          |
| Purchase of  other assets                                                                                                  |       | (2,000                                            | )          | —                                                                                             |       | (2,000                                                                                             | )          |
| Purchase of  property and equipment                                                                                        |       | (23,536,491                                       | )          | (46,835                                                                                            | )          | (23,583,326                                                                                        | )          |
| Increase in  cash, for plant construction                                                                                  |       | (32,500,000                                       | )          | —                                                                                             |       | (32,500,000                                                                                        | )          |
| Net cash  received from acquisition of assets                                                                              |       | 1,306,287                                         |       | —                                                                                             |       | 1,306,287                                                                                          |       |
| Payment of land  option deposits                                                                                           |       | (42,500                                           | )          | (30,000                                                                                            | )          | (72,500                                                                                            | )          |
| **NET CASH (USED IN) INVESTING  ACTIVITIES**                                                                               |       | (54,774,704                                       | )          | (103,235                                                                                           | )          | (54,877,939                                                                                        | )          |
|                                                                                                                       |       |                                              |       |                                                                                               |       |                                                                                               |       |
| **FINANCING ACTIVITIES**                                                                                                   | ** ** | ** **                                        | ** ** | ** **                                                                                         | ** ** | ** **                                                                                         | ** ** |
| Proceeds from  sale of membership units                                                                                    |       | 60,484,000                                        |       | 1,500,000                                                                                          |       | 61,984,000                                                                                         |       |
| Payments on  short-term debt                                                                                               |       | (1,270,800                                        | )          | —                                                                                             |       | (1,270,800                                                                                         | )          |
| Proceeds from  long-term debt                                                                                              |       | 7,000,000                                         |       | —                                                                                             |       | 7,000,000                                                                                          |       |
| Payment of cost  of raising capital                                                                                        |       | —                                            |       | (19,462                                                                                            | )          | —                                                                                             |       |
| Payment of  deferred offering and financing costs                                                                          |       | (1,235,917                                        | )          | (222,250                                                                                           | )          | (1,477,629                                                                                         | )          |
| **NET CASH PROVIDED BY FINANCING  ACTIVITIES**                                                                             |       | 64,977,283                                        |       | 1,258,288                                                                                          |       | 66,235,571                                                                                         |       |
| **NET INCREASE IN CASH AND CASH  EQUIVALENTS**                                                                             |       | 9,920,974                                         |       | 893,587                                                                                            |       | 10,814,561                                                                                         |       |
| ** **                                                                                                                 | ** ** | ** **                                        | ** ** | ** **                                                                                         | ** ** | ** **                                                                                         | ** ** |
| **CASH AND CASH EQUIVALENTS -  beginning of period**                                                                       |       | 893,587                                           |       | —                                                                                             |       | —                                                                                             |       |
| ** **                                                                                                                 | ** ** | ** **                                        | ** ** | ** **                                                                                         | ** ** | ** **                                                                                         | ** ** |
| **CASH AND CASH EQUIVALENTS - end  of period**                                                                             |       | $                                                 | 10,814,561 |                                                                                               | $          | 893,587                                                                                            |       | $ | 10,814,561 |   |
|                                                                                                                       |       |                                              |       |                                                                                               |       |                                                                                               |       |
| **SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION****,**  cash paid for interest net of capitalized interest of $199,688 |       | $                                                 | 49,151     |                                                                                               | $          | —                                                                                             |       | $ | 49,151 |   |
|                                                                                                                       |       |                                              |       |                                                                                               |       |                                                                                               |       |
| **SUPPLEMENTAL DISCLOSURES OF  NONCASH INVESTING AND FINANCING ACTIVITIES**                                                | ** ** | ** **                                        | ** ** | ** **                                                                                         | ** ** | ** **                                                                                         | ** ** |
| ** **                                                                                                                 | ** ** | ** **                                        | ** ** | ** **                                                                                         | ** ** | ** **                                                                                         | ** ** |
| Accounts payable  incurred for cost of raising capital                                                                     |       | $                                                 | —     |                                                                                               | $          | 6,440                                                                                              |       | $ | — |   |
| ** **                                                                                                                 | ** ** | ** **                                        | ** ** | ** **                                                                                         | ** ** | ** **                                                                                         | ** ** |
| Accounts payable  incurred for deferred offering costs                                                                     |       | $                                                 | 390,967    |                                                                                               | $          | 106,763                                                                                            |       | $ | 390,967 |   |
| ** **                                                                                                                 | ** ** | ** **                                        | ** ** | ** **                                                                                         | ** ** | ** **                                                                                         | ** ** |
| Membership units issued  for acquisition of assets                                                                         |       | $                                                 | 4,172,000  |                                                                                               | $          | —                                                                                             |       | $ | 4,172,000 |   |
|                                                                                                                       |       |                                              |       |                                                                                               |       |                                                                                               |       |
| Accounts payable  incurred for construction in process and office equipment                                                |       | $                                                 | 14,990,966 |                                                                                               | $          | 363                                                                                                |       | $ | 14,990,966 |   |
|                                                                                                                       |       |                                              |       |                                                                                               |       |                                                                                               |       |
| Membership units issued  as deferred offering costs                                                                        |       | $                                                 | —     |                                                                                               | $          | 1,075,000                                                                                          |       | $ | 25,000 |   |
|                                                                                                                       |       |                                              |       |                                                                                               |       |                                                                                               |       |
| Land option applied to  land purchase                                                                                      |       | $                                                 | 20,000     |                                                                                               | $          | —                                                                                             |       | $ | 20,000 |   |
|                                                                                                                       |       |                                              |       |                                                                                               |       |                                                                                               |       |
| Land acquired through  issuance of note payable                                                                            |       | $                                                 | 1,270,800  |                                                                                               | $          | —                                                                                             |       | $ | 1,270,800 |   |
|                                                                                                                       |       |                                              |       |                                                                                               |       |                                                                                               |       |
| Deposit transferred to  financing costs                                                                                    |       | $                                                 | 25,000     |                                                                                               | $          | —                                                                                             |       | $ | 25,000 |   |
|                                                                                                                       |       |                                              |       |                                                                                               |       |                                                                                               |       |
| Unearned compensation  provided as deferred offering costs                                                                 |       | $                                                 | 425,000    |                                                                                               | $          | —                                                                                             |       | $ | 425,000 |   |
|                                                                                                                       |       |                                              |       |                                                                                               |       |                                                                                               |       |
| Deferred offering cost  transferred to cost of raising capital                                                             |       | $                                                 | 1,068,166  |                                                                                               | $          | —                                                                                             |       | $ | 1,068,166 |   |
|                                                                                                                       |       |                                              |       |                                                                                               |       |                                                                                               |       |
| Financing costs amortized to construction in process                                                                       |       | $                                                 | 29,792     |                                                                                               | $          | —                                                                                             |       | $ | 29,792 |   |

 

See notes toconsolidated financial statements.

70

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**ADVANCEDBIOENERGY, LLC & SUBSIDIARIES(A DEVELOPMENT STAGE COMPANY)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2006 AND 2005**

**NOTE A: SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

**PRINCIPAL BUSINESS ACTIVITY**— Advanced BioEnergy, LLC (ABE), its wholly owned subsidiaries, ABE Fairmont,LLC, ABE Northfield, LLC and Indiana Renewable Fuels, LLC (IRF) are developmentstage limited liability companies (collectively, the Company). The Company wasorganized to build ethanol plants and undertake other biofuel projects.Construction of a 100 million gallon per year ethanol plant near Fairmont,Nebraska is under way and is expected to be completed in September 2007. A 100million gallon per year ethanol plant to be located near Rochester or Argos,Indiana is in the design stage, and a 100 million gallon per year ethanol plantto be located near Northfield, Minnesota is in the development stage.

Advanced BioEnergy, LLCrecently formed ABE Fairmont, LLC and ABE Northfield, LLC to own and operatethe Nebraska plant and the Minnesota plant, respectively. All servicecontracts, credit agreements and regulatory permits that were originallyentered into by Advanced BioEnergy, LLC have been assigned to the appropriatesubsidiary. Title to the land owned for the Nebraska plant has been transferredto ABE Fairmont, LLC, and the options to purchase land for the Minnesota planthave been assigned to ABE Northfield, LLC. IRF was acquired by AdvancedBioEnergy, LLC on June 15, 2006, and IRF will own and operate the Indianaplant. The operations of IRF have been included in these financial statementsfrom the time of the acquisition.

**CONSOLIDATION POLICY**— The accompanying consolidated financial statements include the accounts ofABE, its wholly owned subsidiaries, ABE Fairmont, LLC, ABE Northfield, LLC andIRF. All significant intercompany account balances and transactions have beeneliminated.

**ASSET ACQUISITION**— On May 11, 2006, ABE entered into an Agreement and Plan of Merger thatprovides, among other things, for ABE’s wholly owned subsidiary to be mergedwith and into IRF. As a result of the merger, which closed on June 15, 2006,the outstanding membership units of IRF could be converted, at the election ofeach individual holder of IRF membership units, into the right to receiveeither: (a) 500 ABE membership units or (b) $5,000 in cash. As a result of themerger, the outstanding membership units of IRF were converted into anaggregate of 492,200 membership units of ABE, of which 75,000 are held inescrow, and $25,000 in cash (see Note E). The units held in escrow will bereleased upon successful completion of the following: the Company successfullyraising adequate equity to fund construction of the Indiana plant, theexecution of a written agreement between the Company and the landfill locatednear the Indiana plant providing for the purchase and delivery of methane tothe Indiana plant and the establishment of terms on which rail transportationwill be provided to the Indiana plant.

**UNEARNED UNIT COMPENSATION**— Subsequent to the Company’s seed capital offering, the original two membersreceived compensation in the form of the restricted equity units valued at$1.25 million (equivalent to $10 per unit) for their efforts in developing theCompany’s plant to be located near Fairmont, Nebraska. The restriction will beremoved as services are provided and selected milestones are achieved. Theearned portion of the $1.25 million is being expensed as start-up expenses. Asof September 30, 2006, $1,011,905 had been earned and expensed with theremaining $238,095 included as unearned compensation.

During the 4th quarter of2006, the Company began to recognize an additional expense related to 26,580units, $265,800, that will be issued to a member based on the estimated totalcost of the ethanol plant near Fairmont, Nebraska. The Company is amortizingthis as unit compensation expense over the remaining construction period. As ofSeptember 30, 2006, $231,800 remains to be amortized.

**CASH AND CASH EQUIVALENTS**— The Company considers all highly liquid investments with a maturity of threemonths or less to be cash equivalents. The Company’s cash balances aremaintained in bank depositories and periodically exceed federally insuredlimits. The Company has not experienced losses in these accounts.

**FAIR VALUE OF FINANCIALINSTRUMENTS** — Financial instruments include cash and cashequivalents, other receivables, accounts payable, accrued expenses andlong-term debt. Management believes the fair value of each of these financialinstruments approximates their carrying value in the balance sheet as of thebalance sheet date. The fair value of current financial instruments isestimated to approximate carrying value due to the short-term 

71

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nature of theseinstruments. The fair value of the long-term debt is estimated based onanticipated interest rates which management believes would currently beavailable to the Company for similar issues of debt, taking into account thecurrent credit risk of the Company and the other market factors.

**DEFERRED OFFERING AND FINANCINGCOSTS**— The Company defers costs incurred to raise equity anddebt financing until the related equity or debt is issued. At the time ofissuance of such new equity, the deferred offering costs will be netted againstthe proceeds received. The financing costs will be amortized over the term ofthe debt. Unamortized financing costs totaled approximately $836,000 and noneat September 30, 2006 and 2005, respectively.

**FINANCING COSTS**— The financing costs will be amortized over the term of the debt.

**LOSS PER UNIT** —Basic and diluted loss per unit are computed using the weighted-average numberof vested units outstanding during the period. Unvested restricted units andunits held in escrow are considered unit equivalents; however, they have not beenincluded in the computation of diluted loss per unit as their effect would beanti-dilutive.

**RESTRICTED UNITS**— The Company has issued restricted units to certain directors for servicesoutside their role as directors at fair value under the Financial AccountingStandards Board (FASB) Statement No. 123R. All restricted units issued aresubject to various restriction requirements. 305,000 membership units arerestricted by a lock-up agreement between the two founding members and arelated party development company. The lock-up agreement prohibits the transferof the shares until May 2008. Of the 305,000 units issued, 263,333 are vestedbut remain restricted and 41,667 are unvested and restricted.

**PROPERTY AND EQUIPMENT**— Property and equipment is stated at the lower of cost or fair value.Maintenance and repairs are charged to expense as incurred; major improvementsand betterments are capitalized. Depreciation is computed using thestraight-line method over the estimated useful lives.

Construction in progressconsists of expenditures for construction of the Nebraska ethanol plant. Theseexpenditures will be depreciated using the straight-line method over variousestimated useful lives once construction is completed and the assets are placedinto service.

**CASH FOR PLANT CONSTRUCTION**— The cash that will be used for the construction of the ethanol plant has beenclassified as long-term according to its estimated use, including the proceedsfrom the revenue bonds which are restricted for use in plant construction.

**INTANGIBLE** —The intangible asset represents the value of the construction contract that waspurchased. The contract value will be capitalized as part of the ethanol plantupon completion.

**NOTE B: RELATED PARTYTRANSACTIONS**

The Company paid adevelopment consulting company owned by two of its directors for assistancewith negotiating contracts, planning the spring 2006 equity marketing effortand securing debt financing. As of September 30, 2006, the Company had incurredconsulting charges of approximately $496,000.

A director of the Companyis currently the president of one of the Company’s bank depositories.

**NOTE C: FINANCING**

On February 17, 2006, theCompany entered into a $79.5 million loan agreement with a lending institutionconsisting of a $58.5 million term loan and a $21.0 million revolving termloan. In addition, the Company also received a $5.0 million revolving creditfacility for financing eligible grain inventory and equity in Chicago Board ofTrade futures positions. The loan agreement is collateralized by substantiallyall the assets of the Company. As of September 30, 2006, the Company has notdrawn on these loans.

The term loan hasinterest rate options of a base rate plus one-half percent, a fixed rate quotedby the lender or LIBOR plus 3.4% per annum. Advances are available until May 1,2007 with principal payments to commence on December 20, 2007 and quarterlythereafter with any remaining balance due on September 20, 2014 at the latest.

The revolving loan hasinterest rate options of a base rate plus one-half percent, a fixed rate quotedby the lender or LIBOR plus 3.4% per annum. The Company is required to pay acommitment fee on the daily unused portion of the commitment at a rate of..0625% per annum. The loan is effective through March 1, 2017.

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The revolving creditfacility has interest rate options of a base rate, a fixed rate quoted by thelender or LIBOR plus 3.1% per annum. The Company is required to pay acommitment fee on the daily unused portion of the commitment at a rate of .25%per annum. The loan is effective through March 1, 2008.

The Company has $7.0million of Subordinate Exempt Facilities Revenue Bonds outstanding under asubordinated loan and trust agreement with the County of Fillmore, Nebraska andWells Fargo, N.A. The loan agreement is collateralized by the Nebraska plantassets.

The Company has agreed torepay the loan by making loan payments to the issuer in an amount equal to theaggregate principal amount of the bonds from time to time outstanding, and thepremium, if any, and interest thereon at maturity, upon redemption, uponacceleration, or when otherwise payable. The Company’s obligation to make theloan payments under the loan and trust agreement is evidenced by its executionand delivery of a promissory note. The Company’s repayment of the bonds and thesecurity for the bonds are subordinate to the Company’s senior loan and creditfacility. Annual principal payments of $815,000 are required starting inDecember 2010 through December 2016, with the remainder due December 2017.

**NOTE D: COMMITMENTS ANDCONTINGENCIES**

Construction contracts

The total cost of theNebraska plant, including the construction of the ethanol plant and start-upexpenses, is expected to approximate $151.6 million. The Company has a lump-sumdesign-build agreement with a related party general contractor for $98.0million, with the price to be adjusted based on changes agreed upon by theCompany. The design-build agreement includes a provision whereby the generalcontractor receives an early completion bonus for each day the construction iscomplete prior to the estimated completion date up to a maximum amount. Thecontract may be terminated by the Company upon a ten-day written notice subjectto payment for work completed, termination fees and any applicable costs andretainage.

The total cost of theIndiana plant, including the construction of the ethanol plant and start-upexpenses, is expected to approximate $175.0 million for a natural gas poweredethanol plant. Subsequent to year-end, the Company signed a letter of intentwith a contractor to design and build the ethanol plant.

The Company has anagreement with an electric company to provide electrical service to itsNebraska plant. The Company is required to make a non-refundable payment in aidof construction for the facilities the electrical cooperative will install forthe benefit of the Company. The amount of this payment will be approximately$1.2 million. The Company is to pay half prior to placing the order for thesubstation and the remaining amount upon the completion of the construction ofall facilities. The agreement shall remain in effect for a term of five yearsfrom the initial billing period and will be renewed automatically thereafter onan annual basis unless terminated by either party giving 12 months’ writtennotice.

On May 5, 2006, theCompany entered into a track material purchase agreement to purchase relayrail, joint bards, tie plates, cross tie and reconditioned turnouts. Thepurchase price of the track material is approximately $1.6 million.

On May 5, 2006, theCompany entered into a real estate purchase agreement with Fillmore WesternRailway Company (Fillmore) for the purchase by the Company of certain property,including all real property and the 100-foot railroad right of way, includingany “extra width” railroad right of way, and all other easements appurtenant tothe use of the real estate, together with all track, ties, ballast, other trackmaterial and other improvements thereon owned, possessed, or claimed byFillmore from milepost 1.7 to milepost 3.7 on the Fillmore line. In addition,pursuant to the real estate purchase agreement, Fillmore conveyed to theCompany an easement to use its right of way for the purpose of undergroundpipeline and other utilities. The purchase price for the property is $500,000to be paid at closing. The purchase price for the easement is $10,000.

On July 14, 2006, theCompany entered into an agreement for installation of the auger cast piling forits Fairmont, Nebraska ethanol plant for approximately $0.9 million.

On July 20, 2006, theCompany entered into an agreement for engineering and design/build services fora pipeline for an amount not to exceed $4,200,000. The agreement shall beeffective upon execution by both parties and can be terminated only with causeby either party with 30 days’ notice.

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Land

The Company has variousoptions to purchase approximately 271 acres in Indiana, 274 acres in Minnesotaand 206 acres in Ohio for a total of approximately $1.8 million, $2.7 millionand $3.4 million, respectively.

Consulting

The Company has anagreement with a related party for assistance with negotiation of contracts,planning of the Company’s equity marketing effort and securing debt financing.The agreement began upon execution and shall continue through the closing dateas defined in the agreement. The development consultant will receivecompensation as follows: 7,500 unrestricted membership units at execution,$1,500 per week from execution through the closing of the equity financing(which occurred in May 2006) and $375 per day after the closing of the equityfinancing, plus reimbursement of approved expenses up to a weekly maximumreimbursement of $750. In addition, the development consultant receivedcompensation of 42,500 restricted membership units subsequent to the close ofthe Company’s seed capital offering. The Company may only terminate thisagreement for cause as defined in the consulting agreement. The consultant mayterminate this agreement with 14 days’ written notice.

The Company has anagreement to compensate the original two members of the Company for developmentfees in a total sum of 1% of the total project cost for the Company’s plantunder construction near Fairmont, Nebraska to be paid in membership units inexchange for their efforts to organize and develop this project. These fees arecurrently estimated at $1,515,800, or 151,580 units, of which 125,000 unitswere issued on May 19, 2005 and any additional units will be issued uponsubstantial completion of construction of the plant based on the actual projectcosts. These membership units will be considered restricted until certainrequirements within the agreement are reached. If the Company files articles ofdissolution or another event prevents successful ethanol production by theCompany, these members will be required to return the restricted units to theCompany without payment of consideration.

Employment agreements

In April 2006, theCompany entered into an employment agreement with a member who is Chairman andChief Executive Officer of the Company. The employee is to receive an annualbase salary of $300,000 plus benefits. In addition he is eligible to receive anannual performance bonus, a strategic bonus (payable in units) and the use ofan automobile provided by the Company. The term of the agreement is for aperiod of three years from the effective date of the agreement with successiveautomatic one-year extensions.

In April 2006, theCompany entered into an employment agreement with a member who is President andChief Operating Officer of the Company. The employee is to receive an annualbase salary of $250,000 plus benefits. In addition, he is eligible to receivean annual performance bonus, a strategic bonus (payable in units), the use of anautomobile provided by the Company and reimbursement for moving expenses up to$70,000. As a signing bonus, the employee received the right to acquire 30,000units. These units would be issued in an amount equal to 6,000 units on eachanniversary of the effective date, with termination of employment resulting inforfeiture of the right to receive any units that remain unissued. The term ofthe agreement is for a period of three years from the effective date of theagreement with successive automatic one-year extensions. The Company hasrecognized $25,000 in unit compensation expense as of September 30, 2006 andwill recognize an additional $275,000 of unit compensation expense over theremaining term of the agreement.

We have entered intorestricted unit agreements with entities owned by the Chief Executive Officerand the President of the Company. For each additional ethanol production orco-production facility they acquire or build on prior to April 3, 2009 inaddition to the Nebraska plant, the entities on a combined basis have the rightto receive 1.15 newly issued unit per 1,000 gallons of ethanol productioncapacity acquired or built. The maximum grant under these agreements is 345,000units.

Marketing agreement

In May 2006, the Companyentered into a marketing agreement to purchase distillers dried grains withsolubles (DDGS) the Company is expected to produce. The buyer agrees to pay theCompany a percentage of the selling price minus an amount per ton. Theagreement commences when the Company begins producing DDGS and continues forone year initially and thereafter may be terminated by either party with 120days’ written notice.

In July 2006, the Companyentered into a marketing agreement for the sale of the ethanol that the Company’sFairmont, Nebraska plant produces. The Company will receive a price equal tothe actual sale price less expenses and less a marketing fee charged pergallon. The initial term of the agreement is for at least 12 months beginningon the first day of the month of the first shipment of ethanol and ending atthe end of March or end of September, whichever occurs first following the12-month period. After the initial term, it will automatically renew for 

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successive one-year termsunless terminated by either party upon 90 days’ written notice. The agreementmay also be terminated for an uncured breach, intentional misconduct or uponmutual agreement of the parties.

**NOTE E: ACQUISITION**

Effective June 15,2006, the Company acquired all of the outstanding units of IRF. The aggregate purchaseprice was $4,197,000 of which $4,172,000 was paid by the issuance of 417,200ABE units and $25,000 was paid in cash. The acquisition has been accounted foras an asset purchase. At the time of acquisition, IRF was a development stagecompany. The purchase price was allocated based on the fair value of the netassets acquired as follows:

| **Assets acquired:**                   |       |      |          |
|----------------------------------------|------------|-----------|---------------|
| Cash                                   |       | $         | 1,331,287     |   |
| Prepaid expenses                       |       | 5,335     |          |
| Land options                           |       | 10,000    |          |
| Intangible assets                      |       | 2,811,531 |          |
| Property and equipment                 |       | 44,593    |          |
|                                   |       | $         | 4,202,746     |   |
| Liabilities  assumed, accounts payable |       | (5,746    | )             |
| **Net purchase price**                 | ** ** | **$**     | **4,197,000** | ** ** |

 

As discussed in Note A,the Company also has 75,000 units valued at $750,000 that are held in escrowand being treated as contingent consideration that will be recognized whenreleased from escrow.

**NOTE F: LEASE COMMITMENT**

The Company leasesvarious autos and an office facility under operating lease agreements with thefollowing approximate future minimum rental commitments:

| 2007   |   | $       | 152,000 |   |
|--------|--------|---------|---------|--------|
| 2008   |   | 137,000 |    |
| 2009   |   | 140,000 |    |
| 2010   |   | 43,000  |    |
|   |   | $       | 472,000 |   |

 

The Company recognizedrent expense related to the above leases of approximately $35,000 and for theyear ended September 30, 2006 and none for the period from inception toSeptember 30, 2005.

**NOTE G: SUBSEQUENT EVENTS**

On October 17, 2006, theCompany entered into an agreement for services for relocation and protection ofpipeline facilities for approximately $475,000. The Company is to make fullpayment in advance of any work on the project beginning. In the event that theactual costs differ from the estimated cost, payment will be made by theCompany or a refund will be paid by the developer.

On October 18, 2006, theCompany entered into an agreement for medium voltage electrical work forapproximately $1,170,000.

On November 7, 2006, inan effort to continue to expand operations, the Company entered into aPartnership Interest and Stock Purchase Agreement with HGF Acquisition, LLC, anewly formed subsidiary of ABE, Heartland Grain Fuels, L.P., HeartlandProducers, LLC, South Dakota Wheat Growers Association, and Dakota Fuels, Inc.providing for the acquisition of all of the limited partnership interests ofHeartland Grain Fuels held by South Dakota Wheat Growers Association andHeartland Producers, which constitutes 94% of the partnership interests inHeartland Grain Fuels, together with their stock in Dakota Fuels, whichconstitutes all of the stock of Dakota Fuels. Dakota Fuels owns approximately1% of the partnership interests in Heartland Grain Fuels.

On November 7, 2006, theCompany entered into a Partnership Interest Purchase Agreement with HGFAcquisition, LLC, Aventine Renewable Energy, Inc., Dakota Fuels, South DakotaWheat Growers Association, Heartland Producers and Heartland Grain Fuelsproviding for the acquisition of all of the partnership interests of HeartlandGrain Fuels held by Aventine, which constitutes 5% of the partnership interestsin Heartland Grain Fuels.

The closing of thepurchase of the limited partnership interests of Heartland Grain Fuels owned byAventine and South Dakota Wheat Growers Association and the stock of DakotaFuels owned by South Dakota Wheat Growers Association occurred on November 8,2006. The interests of Aventine and South Dakota Wheat Growers

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Association in HeartlandGrain Fuels and the stock of Dakota Fuels owned by South Dakota Wheat GrowersAssociation were purchased for an aggregate of $8,908,000 in cash and theissuance of 1,403,031 membership units of the Company.

The closing of thepurchase of the limited partnership interests in Heartland Grain Fuels whichconstitutes 46% of the partnership interests in Heartland Grain Fuels, and thestock of Dakota Fuels, which constitutes 49% of the stock of Dakota Fuels,owned by Heartland Producers is subject to regulatory approval and approval ofthe transaction by the members of Heartland Producers. The interests ofHeartland Producers in Heartland Grain Fuels and its stock in Dakota Fuels willbe purchased for an aggregate of $7,794,124 in cash and the issuance of1,228,547 membership units of the Company.

The Company is in theprocess of allocating the purchase price and will finalize this after theapproval of the second part of the acquisition is complete and valuations arecompleted.

Subsequent to year-end,the Company assigned all rights and obligations under the loan agreementsdescribed in Note C with the lending institution to ABE Fairmont. Immediatelyfollowing such assignment, the agreements were amended to extend the periodduring which ABE Fairmont may draw down funds, to shorten the period forrepayment and to extend the period during which a prepayment fee would be owed.

Effective November 20,2006, ABE Fairmont also entered into additional loan agreements, the effect ofwhich is to provide an additional $6.5 million term loan and an additional $4.0million revolving term loan for construction of the Nebraska plant. The termsand conditions of these loan agreements are substantially similar to the termloans described in Note C with repayment in full on June 1, 2009.

ABE Fairmont may select arate of interest for Term Loan A, Term Loan B, Term Loan C and Term Loan D atCoBank’s announced base rate plus 0.5%, a fixed rate to be quoted by CoBank, orat LIBOR plus 3.4% per annum. ABE Fairmont may select a rate of interest forthe revolving credit facility at CoBank’s announced base rate, a fixed rate tobe quoted by CoBank, or at LIBOR plus 3.1% per annum.

The Lender is onlyobligated to lend the funds for construction if certain conditions aresatisfied. These conditions include, among others, the total cost of theproject being within a specified amount, the receipt of engineering andconstruction contracts and a process/yield guarantee from the design engineerand contractor acceptable to the Lender, evidence of the issuance of allpermits, acceptable insurance coverage and title commitment, the contributionof at least $49.1 million of equity (less any tax increment financial proceedsand the proceeds we receive from the sale of subordinate exempt facilitiesrevenue bonds issued by Fillmore County, Nebraska) and the delivery of attorneyopinions.

ABE Fairmont must repaythe $58.5 million revolving term loan as follows: 25 equal quarterlyinstallments of $2,250,000 with the first installment due February 20, 2008 andthe last installment due February 20, 2014, followed by a final installment inan amount equal to the remaining unpaid principal balance on May 20, 2014. Foreach fiscal year ending in 2007 through 2010, ABE Fairmont must pay anadditional amount equal to the lessor of $6 million or 75% of its free cashflow, not to exceed $12 million in the aggregate for all such payments.

On the earlier ofDecember 1, 2014 or six months following complete repayment of the $58.5 millionterm loan, ABE Fairmont will begin repayment of the $21.0 million loan in $5.0million increments due every six months. ABE Fairmont will repay the revolvingcredit facility the earlier of March 1, 2008 or 12 months after the date onwhich ABE Fairmont borrows funds.

While the creditfacilities are outstanding, ABE Fairmont will be subject to certain financialloan covenants consisting of minimum working capital, minimum net worth andmaximum debt service coverage ratios. After the construction phase, ABEFairmont will not be allowed to make capital expenditures of more than $600,000without prior approval. ABE Fairmont is also prohibited from makingdistributions except as follows: (i) for each fiscal year commencing with thefiscal year ending September 30, 2007, ABE Fairmont may make a distribution of50% of ABE Fairmont’s net profit for the applicable fiscal year if the lenderhas received audited financial statements for the applicable fiscal year and(ii) ABE Fairmont may make distributions exceeding 50% of its net income if ithas made the required additional cash flow payment for the fiscal year. ABEFairmont must also be in compliance with all financial ratio requirements andloan covenants before and after any distributions to us.

In connection with theacquisition of Heartland Grain Fuels and Dakota Fuels, ABE will be issuingapproximately 44,850 restricted units in accordance with the restricted unitagreements discussed in Note D. Heartland Grain Fuels also has a design buildagreement to expand its existing plant in Aberdeen, South Dakota in place as ofthe acquisition date.

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**Independent Auditors’ Report**

To the Board of DirectorsHeartland Grain Fuels, L.P.Aberdeen, South Dakota

We have audited the accompanying balance sheets ofHeartland Grain Fuels, L.P., Aberdeen, South Dakota, as of December 31, 2005,2004 and 2003, and the related statements of income, partners’ equity and cashflows for the years then ended. These financial statements are theresponsibility of the Partnership’s management. Our responsibility is toexpress an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditingstandards generally accepted in the United States of America. Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred toabove present fairly, in all material respects, the financial position ofHeartland Grain Fuels, L.P., Aberdeen, South Dakota, as of December 31, 2005,2004 and 2003, and the results of its operations and cash flows for the yearsthen ended, in conformity with accounting principles generally accepted in theUnited States of America.

January 25, 2006

/s/ Gardiner Thomsen, P.C.

 

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**HEARTLAND GRAINFUELS, L.P.Aberdeen, South Dakota**

**BALANCE SHEETS**

**December 31, 2005, 2004 and 2003**

**ASSETS**
| ** **                         | ** ** | **December 31,  2005** | ** **     | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|------------------------------------|------------|-----------------------------|----------------|-----------------------------|------------|-----------------------------|------------|
| **CURRENT ASSETS**                 | ** ** | ** **                  |           |                        |       |                        |       |
| Cash                               | ** ** | **$**                       | **474,442**    |                        | $          | 3,675,841                   |       | $ | 477,787 |   |
| Receivables                        | ** ** | ** **                  |           |                        |       |                        |       |
| Trade                              | ** ** | **670,687**                 |           | 371,572                     |       | 1,171,825                   |       |
| Other                              | ** ** | **240,338**                 |           | 245,113                     |       | 407,023                     |       |
| Inventories                        | ** ** | **809,698**                 |           | 968,264                     |       | 709,022                     |       |
| Supplies                           | ** ** | **290,909**                 |           | 289,693                     |       | 284,065                     |       |
| Prepaid Expenses                   | ** ** | **261,868**                 |           | 17,325                      |       | 30,925                      |       |
| Total Current  Assets              | ** ** | **2,747,942**               |           | 5,567,808                   |       | 3,080,647                   |       |
|                               | ** ** | ** **                  |           |                        |       |                        |       |
| **PROPERTY, PLANT AND EQUIPMENT**  | ** ** | ** **                  |           |                        |       |                        |       |
| Land                               | ** ** | **96,441**                  |           | 96,441                      |       | 96,441                      |       |
| Buildings                          | ** ** | **10,428,733**              |           | 10,415,525                  |       | 9,933,220                   |       |
| Process  Equipment                 | ** ** | **19,116,532**              |           | 18,835,747                  |       | 18,218,164                  |       |
| Office Equipment                   | ** ** | **231,292**                 |           | 207,920                     |       | 188,583                     |       |
|                               | ** ** | **29,872,998**              |           | 29,555,633                  |       | 28,436,408                  |       |
| Accumulated  Depreciation          | ** ** | **(16,478,179**             | **)**          | (14,749,407                 | )          | (12,889,340                 | )          |
| Undepreciated  Cost                | ** ** | **13,394,819**              |           | 14,806,226                  |       | 15,547,068                  |       |
| Construction in  Process           | ** ** | **6,209,291**               |           | —                      |       | 797,167                     |       |
| Net Property,  Plant and Equipment | ** ** | **19,604,110**              |           | 14,806,226                  |       | 16,344,235                  |       |
|                               | ** ** | ** **                  |           |                        |       |                        |       |
| **OTHER ASSETS**                   | ** ** | ** **                  |           |                        |       |                        |       |
| Long-Term  Receivables             | ** ** | **526**                     |           | 1,767                       |       | —                      |       |
| Investment in  Cooperatives        | ** ** | **580,704**                 |           | 473,583                     |       | 408,700                     |       |
| Critical  Replacement Parts        | ** ** | **555,846**                 |           | 548,242                     |       | 543,288                     |       |
| Total Other  Assets                | ** ** | **1,137,076**               |           | 1,023,592                   |       | 951,988                     |       |
| ** **                         | ** ** | ** **                  | ** **     | ** **                  |       |                        |       |
| **TOTAL ASSETS**                   | ** ** | **$**                       | **23,489,128** |                        | $          | 21,397,626                  |       | $ | 20,376,870 |   |

 

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**HEARTLAND GRAIN FUELS, L.P.Aberdeen, South Dakota**

**BALANCESHEETS**

**December 31, 2005, 2004 and 2003**

**LIABILITIES AND PARTNERS’ EQUITY**
| ** **                                      | ** ** | **December 31,  2005** | ** **     | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------------------------------------|------------|-----------------------------|----------------|-----------------------------|------------|-----------------------------|------------|
| **CURRENT LIABILITIES**                         | ** ** | ** **                  | ** **     | ** **                  |       |                        |       |
| Current  Maturities of Long-Term Debt           | ** ** | **$**                       | **2,405**      |                        | $          | 1,509,273                   |       | $ | 858,607 |   |
| Payables                                        | ** ** | **2,034,598**               |           | 1,093,164                   |       | 1,149,002                   |       |
| Accrued Expenses                                | ** ** | ** **                  |           |                        |       |                        |       |
| Property Taxes                                  | ** ** | **235,865**                 |           | 231,637                     |       | 251,362                     |       |
| Interest                                        | ** ** | **33,568**                  |           | 41,470                      |       | 43,406                      |       |
| Payroll                                         | ** ** | **300,330**                 |           | 192,227                     |       | 122,149                     |       |
| Total Current  Liabilities                      | ** ** | **2,606,766**               |           | 3,067,771                   |       | 2,424,526                   |       |
|                                            | ** ** | ** **                  |           |                        |       |                        |       |
|                                            | ** ** | ** **                  |           |                        |       |                        |       |
|                                            | ** ** | ** **                  |           |                        |       |                        |       |
| ** **                                      | ** ** | ** **                  |           |                        |       |                        |       |
| **LONG-TERM LIABILITIES**                       | ** ** | ** **                  |           |                        |       |                        |       |
| Notes Payable —  Net of Current Maturities | ** ** | **5,755,820**               |           | 6,008,040                   |       | 7,517,339                   |       |
|                                            | ** ** | ** **                  |           |                        |       |                        |       |
|                                            | ** ** | ** **                  |           |                        |       |                        |       |
|                                            | ** ** | ** **                  |           |                        |       |                        |       |
|                                            | ** ** | ** **                  |           |                        |       |                        |       |
| **PARTNERS’ EQUITY**                       | ** ** | ** **                  |           |                        |       |                        |       |
| South Dakota  Wheat Growers Association         | ** ** | **7,245,313**               |           | 5,901,904                   |       | 4,998,160                   |       |
| Heartland  Producers, LLC.                      | ** ** | **7,001,167**               |           | 5,703,027                   |       | 4,829,736                   |       |
| Aventine  Renewable Energy, Inc.                | ** ** | **756,327**                 |           | 616,091                     |       | 521,750                     |       |
| Dakota Fuels,  Inc.                             | ** ** | **123,735**                 |           | 100,793                     |       | 85,359                      |       |
| Total Partners’  Equity                    | ** ** | **15,126,542**              |           | 12,321,815                  |       | 10,435,005                  |       |
|                                            | ** ** | ** **                  |           |                        |       |                        |       |
| ** **                                      | ** ** | ** **                  |           |                        |       |                        |       |
| ** **                                      | ** ** | ** **                  |           |                        |       |                        |       |
| **TOTAL LIABILITIES AND PARTNERS’ EQUITY** | ** ** | **$**                       | **23,489,128** |                        | $          | 21,397,626                  |       | $ | 20,376,870 |   |

 

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**HEARTLAND GRAIN FUELS, L.P.Aberdeen, South Dakota**

**STATEMENTS OF INCOME**

**Years Ended December 31, 2005, 2004 and 2003**
| ** **                             | ** ** | **2005**       | ** **     | **2004**   | ** ** | **2003**   | ** **    |
|----------------------------------------|------------|----------------|----------------|------------|------------|------------|---------------|
| Sales                                  | ** ** | ** **     |           |       |       |       |          |
| Ethanol                                | ** ** | **$**          | **31,995,848** |       | $          | 30,306,276 |          | $ | 25,781,426 |   |
| By-Products                            | ** ** | **4,505,088**  |           | 5,965,623  |       | 5,539,353  |          |
| Total Sales                            | ** ** | **36,500,936** |           | 36,042,939 |       | $          | 31,320,779.00 |   |
|                                   | ** ** | ** **     |           |       |       |       |          |
| Cost of Sales                          | ** ** | ** **     |           |       |       |       |          |
| Raw Materials                          | ** ** | **27,078,478** |           | 28,992,147 |       | 26,043,412 |          |
| Utilities                              | ** ** | **874,758**    |           | 879,041    |       | 824,185    |          |
| Repairs &  Maintenance             | ** ** | **562,161**    |           | 586,349    |       | 668,489    |          |
| Lease                                  | ** ** | **59,674**     |           | 60,816     |       | 59,725     |          |
| Personnel Costs                        | ** ** | **2,157,682**  |           | 1,936,286  |       | 1,846,426  |          |
| Depreciation                           | ** ** | **1,728,772**  |           | 1,860,067  |       | 1,840,568  |          |
| Interest                               | ** ** | **418,044**    |           | 510,168    |       | 406,411    |          |
| Insurance                              | ** ** | **228,246**    |           | 330,053    |       | 344,864    |          |
| Property Taxes                         | ** ** | **232,765**    |           | 225,137    |       | 241,851    |          |
| Permits and Fees                       | ** ** | **33,814**     |           | 31,394     |       | 56,799     |          |
| Advertising  & Promotion           | ** ** | **35,823**     |           | 15,235     |       | 17,292     |          |
| Other                                  | ** ** | **42,917**     |           | 35,204     |       | 107,876    |          |
| Total Cost of  Sales                   | ** ** | **33,453,134** |           | 35,461,897 |       | 32,457,898 |          |
|                                   | ** ** | ** **     |           |       |       |       |          |
| Gross Income (Loss) on  Sales          | ** ** | **3,047,802**  |           | 581,042    |       | (1,137,119 | )             |
|                                   | ** ** | ** **     |           |       |       |       |          |
| Other Income                           | ** ** | ** **     |           |       |       |       |          |
| State Incentives                       | ** ** | **676,153**    |           | 1,081,856  |       | 1,608,530  |          |
| CCC Bioenergy  Payments                | ** ** | **244**        |           | 261,527    |       | 21,675     |          |
| Interest                               | ** ** | **69,067**     |           | —     |       | —     |          |
| Other                                  | ** ** | **19,704**     |           | 23,600     |       | 7,342      |          |
| Total Other  Income                    | ** ** | **765,168**    |           | 1,366,983  |       | 1,637,547  |          |
|                                   | ** ** | ** **     |           |       |       |       |          |
| Total Gross Income                     | ** ** | **3,812,970**  |           | 1,948,025  |       | 500,428    |          |
|                                   | ** ** | ** **     |           |       |       |       |          |
| General &  Administrative Expenses | ** ** | **147,725**    |           | 147,948    |       | 175,338    |          |
|                                   | ** ** | ** **     |           |       |       |       |          |
| Operating Net Income                   | ** ** | **3,665,245**  |           | 1,800,077  |       | 325,090    |          |
|                                   | ** ** | ** **     |           |       |       |       |          |
| Patronage Dividend  Income             | ** ** | **139,482**    |           | 86,733     |       | 73,960     |          |
|                                   | ** ** | ** **     |           |       |       |       |          |
| Net Income                             | ** ** | **$**          | **3,804,727**  |       | $          | 1,886,810  |          | $ | 399,050 |   |

 

80

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**HEARTLANDGRAIN FUELS, L.P.Aberdeen, South Dakota**

**STATEMENTS OF PARTNERS’ EQUITY**

**Years Ended December 31, 2005, 2004 and 2003**
| ** **                        | ** ** | **South**   | ** ** | ** **     | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|-------------|------------|----------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                        | ** ** | **Dakota**  | ** ** | ** **     | ** ** | **Aventine**  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Wheat**   | ** ** | **Heartland**  | ** ** | **Renewable** | ** ** | **Dakota** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Growers** | ** ** | **Producers,** | ** ** | **Energy,**   | ** ** | **Fuels,** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Assoc.**  | ** ** | **LLC**        | ** ** | **Inc.**      | ** ** | **Inc.**   | ** ** | **Total**  | ** ** |
| Balance — December 31,  2002 |       | $           | 4,807,022  |           | $          | 4,645,040     |       | $          | 501,798    |       | $          | 82,095 |   | $ | 10,035,955 |   |
|                              |       |        |       |           |       |          |       |       |       |       |       |
| Allocation of Income              |       | 191,138     |       | 184,696        |       | 19,952        |       | 3,264      |       | 399,050    |       |
|                              |       |        |       |           |       |          |       |       |       |       |       |
| Balance — December 31,  2003 |       | 4,998,160   |       | 4,829,736      |       | 521,750       |       | 85,359     |       | 10,435,005 |       |
|                              |       |        |       |           |       |          |       |       |       |       |       |
| Allocation of Income              |       | 903,744     |       | 873,291        |       | 94,341        |       | 15,434     |       | 1,886,810  |       |
|                              |       |        |       |           |       |          |       |       |       |       |       |
| Balance — December 31,  2004 |       | 5,901,904   |       | 5,703,027      |       | 616,091       |       | 100,793    |       | 12,321,815 |       |
|                              |       |        |       |           |       |          |       |       |       |       |       |
| Distribution to  Partners         |       | (478,980    | )          | (462,840       | )          | (50,000       | )          | (8,180     | )          | (1,000,000 | )          |
| Allocation of Income              |       | 1,822,389   |       | 1,760,980      |       | 190,236       |       | 31,122     |       | 3,804,727  |       |
|                              |       |        |       |           |       |          |       |       |       |       |       |
| Balance — December 31, 2005  |       | $           | 7,245,313  |           | $          | 7,001,167     |       | $          | 756,327    |       | $          | 123,735 |   | $ | 15,126,542 |   |

 

81

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**HEARTLAND GRAIN FUELS, L.P.Aberdeen, South Dakota**

**STATEMENTS OF CASH FLOWS**

**Year Ended December 31, 2005, 2004 and 2003**
| ** **                                             | ** ** | **2005**       | ** **    | **2004**   | ** ** | **2003**   | ** ** |
|--------------------------------------------------------|------------|----------------|---------------|------------|------------|------------|------------|
| **CASH FLOWS FROM OPERATING  ACTIVITIES**              | ** ** | ** **     | ** **    | ** ** |       |       |       |
| Net Income                                             | ** ** | **$**          | **3,804,727** |       | $          | 1,886,810  |       | $ | 399,050 |   |
| Adjustments to  Reconcile Net Income to Net Cash       | ** ** | ** **     |          |       |       |       |       |
| Provided by  Operating Activities                      | ** ** | ** **     |          |       |       |       |       |
| Depreciation                                           | ** ** | **1,728,772**  |          | 1,860,067  |       | 1,840,568  |       |
| Patronage  Dividends Received as Equity                | ** ** | **(107,122**   | **)**         | (64,883    | )          | (53,001    | )          |
| Change in Assets  and Liabilities                      | ** ** | ** **     |          |       |       |       |       |
| (Increase)  Decrease in Receivables                    | ** ** | **(294,340**   | **)**         | 962,163    |       | (382,060   | )          |
| (Increase)  Decrease in Inventories                    | ** ** | **158,566**    |          | (259,242   | )          | (59,603    | )          |
| (Increase)  Decrease in Supplies                       | ** ** | **(1,216**     | **)**         | (5,628     | )          | 23,680     |       |
| (Increase)  Decrease in Prepaid Expenses               | ** ** | **(244,543**   | **)**         | 13,600     |       | 78,945     |       |
| Increase (Decrease)  in Payables                       | ** ** | **941,434**    |          | (55,838    | )          | (5,522     | )          |
| Increase in  Accrued Expenses                          | ** ** | **104,429**    |          | 48,417     |       | 120,295    |       |
| Net Cash  Provided by Operating Activities             | ** ** | **6,090,707**  |          | 4,385,466  |       | 1,962,352  |       |
|                                                   | ** ** | ** **     |          |       |       |       |       |
| **CASH FLOWS FROM INVESTING  ACTIVITIES**              | ** ** | ** **     |          |       |       |       |       |
| Expenditures for  Property, Plant & Equipment      | ** ** | **(6,526,655** | **)**         | (322,058   | )          | (335,001   | )          |
| (Increase)  Decrease in Long-Term Receivables          | ** ** | **1,241**      |          | (1,767     | )          | 167        |       |
| (Increase)  Decrease in Other Assets                   | ** ** | **(7,604**     | **)**         | (4,954     | )          | 19,367     |       |
| Net Cash Used in  Investing Activities                 | ** ** | **(6,533,018** | **)**         | (328,779   | )          | (315,467   | )          |
|                                                   | ** ** | ** **     |          |       |       |       |       |
| **CASH FLOWS FROM FINANCING  ACTIVITIES**              | ** ** | ** **     |          |       |       |       |       |
| Net Repayments  of Line-of-Credit Agreement            | ** ** | **—**     |          | **—** |       | (500,000   | )          |
| Distributions of  Partners’ Equity                | ** ** | **(1,000,000** | **)**         | **—** |       | **—** |       |
| Retirement of  Long-Term Debt                          | ** ** | **(1,759,088** | **)**         | (858,633   | )          | (690,840   | )          |
| Net Cash Used in  Financing Activities                 | ** ** | **(2,759,088** | **)**         | (858,633   | )          | (1,190,840 | )          |
|                                                   | ** ** | ** **     |          |       |       |       |       |
| Net Increase (Decrease)  in Cash                       | ** ** | **(3,201,399** | **)**         | 3,198,054  |       | 456,045    |       |
| Cash — Beginning of the  Year                     | ** ** | **3,675,841**  |          | 477,787    |       | 21,742     |       |
| Cash — End of Year                                | ** ** | **$**          | **474,442**   |       | $          | 3,675,841  |       | $ | 477,787 |   |
|                                                   | ** ** | ** **     |          |       |       |       |       |
|                                                   | ** ** | ** **     |          |       |       |       |       |
|                                                   | ** ** | ** **     |          |       |       |       |       |
| **SUPPLEMENTAL DISCLOSURES OF  CASH FLOW INFORMATION** | ** ** | ** **     |          |       |       |       |       |
| Cash Paid During  the Year for:                        | ** ** | ** **     |          |       |       |       |       |
| Interest                                               | ** ** | **$**          | **425,946**   |       | $          | 512,104    |       | $ | 391,767 |   |

 

82

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**Notes to FinancialStatements**

***Note 1: Organization and Nature of Business***

The Partnership is organized as a limited partnershipunder the laws of the state of Delaware. The Partnership operates ethanolplants in Aberdeen and Huron, South Dakota with 22,000,000 gallon of productioncapability. These plants process corn, which produces ethanol, to be sold forblending with gasoline, and by-products to be used in the manufacturing offeed.

Approximately 88% of the Partnership’s sales and otherincome were generated by ethanol and E-85 production and marketing and theremaining 12% were from by-product production and other miscellaneous income.

***Note 2: Summary of Significant Accounting Policies***

The significant accounting practices and policies aresummarized below.

USE OF ESTIMATES

The preparation of financial statements in conformitywith generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements and reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

FINANCIAL STATEMENT RECLASSIFICATION

For comparability, certain amounts in the prior year’sfinancial statements may have been reclassified, where appropriate, to conformwith the current year’s financial statement presentation.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

Bad debts are provided for on the reserve method basedon historical experience and management’s evaluation of outstanding receivablesat the end of the year. No allowance for doubtful accounts were considerednecessary for the years ended December 31, 2005, 2004 and 2003, respectively.

INVENTORY VALUATIONS

Raw material inventories are valued at the lower ofcost (first-in, first-out method) or market price. Work-in-process and finishedgoods inventories are valued at market price multiplied by their respectivepercentage of completion.

DERIVATIVE FINANCIAL INSTRUMENTS

The Partnership has only limited involvement withderivative financial instruments and does not use them for trading purposes.They are used to manage well-defined commodity price risks. The Partnership mayuse futures, forward, option and swap contracts to reduce the market volatilityof grain and finished products. These contracts permit final settlement bydelivery of the specified commodity. Unrealized gains or losses are recognizedin the valuation of the respective commodity’s ending inventory.

83

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***Note 2: Summary of Significant Accounting Policies (continued)***

PROPERTY, PLANT AND EQUIPMENT

Land, buildings and equipment are stated at cost.Depreciation methods and estimated useful lives of assets are discussed in Note6.

Maintenance and repairs are expensed as incurred.Expenditures for new facilities and those which increase the useful lives ofthe buildings and equipment are capitalized. When assets are sold or otherwisedisposed of, the related cost and accumulated depreciation are removed from theaccounts and gains or losses on the dispositions are recognized in earnings.

LONG-LIVED ASSETS

Long-lived assets to be held and used are reviewed forimpairment whenever events or changes in circumstances indicate that therelated carrying amount may not be recoverable. When required, impairmentlosses on assets to be held or used are recognized based on the fair value ofthe asset and long-lived assets to be disposed of are reported at the lower oftheir carrying amount or their fair value less selling costs.

ADVERTISING

The Partnership expenses advertising and promotioncosts as they are incurred, which amounted to $35,823, $15,235 and $17,292 forthe years ended December 31, 2005, 2004 and 2003, respectively.

ENVIRONMENTAL EXPENDITURES

Environmental compliance costs would include ongoingmaintenance, monitoring and similar costs. Such costs will be expensed asincurred. Environmental remediation costs would be accrued, except to theextent costs can be capitalized, when environmental assessments and/or remedialefforts are probable, and the cost could be reasonably estimated. Environmentalcosts which improve the condition of the property as compared to the conditionwhen constructed or acquired and create future revenue generation arecapitalized.

PATRONAGE DIVIDEND INCOME

Patronage dividend income from cooperatives isrecognized as income in the year the Partnership receives formal notificationfrom the distributing cooperative.

INCOME TAXES

The Partnership, as a limited partnership, is notsubject to income taxes. Income is taxed directly to its partners.

DISTRIBUTION OF NET INCOME (LOSS)

In accordance with the Partnership’s agreement oflimited partnership, the Partnership will allocate net income (loss) andalcohol credits in accordance with their respective percentage interests.

84

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***Note 3: Significant Concentrations of Risk***

CREDIT RISK - FINANCIAL INSTITUTIONS

The Partnership maintains cash balances with local andnational financial institutions, which may at times exceed the $100,000coverage by the U.S. Federal Deposit Insurance Corporation (FDIC). At December31, 2005, cash balances exceeded FDIC coverage by $989,977.

CREDIT RISK - RECEIVABLES

The Partnership issues credit to customers,substantially all of whom are ethanol wholesalers or E-85 retailers, underindustry standard terms without collateral in most cases.

***Note 4: Related Party Transactions***

The Partnership has significant transactions with itslimited partners and their affiliates for the years ended December 31, 2005,2004 and 2003 which include:

a)              An agreement to purchase corn from a limitedpartner at their cost plus 10¢ per bushel (11¢ at the Huron facility).

b)             An agreement with a limited partner to market thetotal output of ethanol produced by the Aberdeen and Huron facilities.

c)              An agreement with a limited partner affiliate tomarket the total output of by-products produced by the Aberdeen and Huronfacilities.

d)             Various purchases, services and financingarrangements.

| Summary of Related Party Transactions | ** ** | ** ** | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003** | ** ** |
|-----------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------|------------|
| Sales to —  Ethanol                                  |       | $          | 31,230,024 |       | $          | 30,108,319 |       | $        | 25,779,532 |   |
| Cost of Sales  from — Materials & Services       |       | 17,148,773 |       | 21,165,129 |       | 17,676,160 |       |
| Receivables —  Due from                              |       | 520,478    |       | 217,550    |       | 1,003,944  |       |
| Payables — Due  to                                   |       | 292,357    |       | 421,597    |       | 616,126    |       |
| Notes Payable — Due to                               |       | 5,750,000  |       | —     |       | —     |       |
|                                                           |            |            |            |            |            |            |            |          |            |  |  |  |

 

***Note 5: Inventory***

The major components of inventory as of December 31, 2005, 2004 and 2003were as follows:

|                 | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------|------------|----------|------------|----------|------------|----------|------------|
| Raw Materials   |       | $        | 86,661     |     | $          | 316,861  |       | $ | 231,704 |   |
| Work in Process |       | 354,300  |       | 59,298   |       | 239,303  |       |
| Finished Goods  |       | 368,737  |       | 592,105  |       | 238,015  |       |
|            |       | $        | 809,698    |     | $          | 968,264  |       | $ | 709,022 |   |

 

85

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***Note 6: Property, Plant and Equipment***

Depreciation is computed over the estimated usefullives of the individual assets using the straight-line method. The estimateduseful lives of depreciable assets is as follows:

| Buildings                  |   | 10-40 years |   |
|----------------------------|--------|-------------|--------|
| Process and Lab  Equipment |   | 5-20 years  |   |
| Office Equipment           |   | 5-20 years  |   |

 

Depreciation expense for the years ended December 31,2005, 2004 and 2003 amounted to $1,728,772, $1,860,067 and $1,840,568,respectively.

|                                                                | ** ** | **Costs**  | ** ** | **Budgeted**     | ** ** |
|----------------------------------------------------------------|------------|------------|------------|------------------|------------|
| **Construction in Process**                          | ** ** | ** ** | ** ** | **To Date** | ** ** | **Cost** | ** ** |
| **2005**                                                       |       |       |       |             |       |
|  Huron Plant Expansion — 30,000,000 Gallon  Capacity |       | $          | 6,209,291  |             | $          | 17,480,545 |   |
|                                                           |       |       |       |             |       |
| **2003**                                                       |       |       |       |             |       |
| Aberdeen —  Firewall & Water Tank                     |       | $          | 154,223    |             | $          | 226,470 |   |
| Huron — Plant  Expansion                                  |       | 642,944    |       | 4,512,000        |       |
|                                                           |       | $          | 797,167    |             | $          | 4,738,470 |   |
|                                                                |            |            |            |                  |            |  |  |  |  |

 

***Note 7: Investments in Cooperatives***

Investments in cooperatives are recorded at cost, plusunredeemed patronage dividends received in the form of capital stock and otherequities. Cooperative stocks normally are not transferable, thereby precludingany market value, but they may be used as collateral in securing loans. Anyimpairment of equities normally is not recognized by the Partnership untilformal notification is received. Redemption of these equities is at thediscretion of the various organizations. A substantial portion of the businessof these cooperatives is dependent upon the agribusiness economic sector.

At December 31, 2005, 2004 and 2003, the Partnershiphad investments in cooperatives as follows:

|                            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|
| CoBank, ACB                |       | $        | 452,829    |     | $          | 404,288  |       | $ | 353,305 |   |
| Dakota Energy  Cooperative |       | 125,700  |       | 67,120   |       | 53,220   |       |
| Country Hedging,  Inc.     |       | 2,175    |       | 2,175    |       | 2,175    |       |
|                       |       | $        | 580,704    |     | $          | 473,583  |       | $ | 408,700 |   |

 

86

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***Note 8: Financing Arrangements***

Financing arrangements at December 31, 2005, 2004 and2003 were as follows:
| ** **                                                                                                                                         | ** ** | **Interest** | ** ** | **Balance** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|-------------|------------|
| **Lender**                                                                                                                                         | ** ** | **Rate**     | ** ** | **2005**    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Dakota Fuels, Inc.                                                                                                                                 |       |         |       |        |       |   |   |   |   |
| Aberdeen, South Dakota                                                                                                                             |       |         |       |        |       |   |   |   |   |
| Term  (RIA475T02-HGF)                                                                                                                              |       | 6.76         | %          |        |       |   |   |   |   |
| $6,750,000  commitment, revolving term loan with a quarterly commitment reduction of  $750,000 starting 09-01-11, with the balance due on 06-01-13 |       |         |       | $           | 5,750,000  |   | $ | — |   | $ | — |   |
|                                                                                                                                               |       |         |       |        |       |   |   |   |   |
| Term  (RIA475T03-HGF)                                                                                                                              |       | 7.61         | %*         |        |       |   |   |   |   |
| $15,000,000  commitment, term loan with a quarterly payment of $750,000, starting  09-01-06, with with balance due on 06-01-11                     |       |         |       | —      |       | — |   | — |   |
|                                                                                                                                               |       |         |       |        |       |   |   |   |   |
| CoBank, ACB                                                                                                                                        |       |         |       |        |       |   |   |   |   |
| Omaha, Nebraska                                                                                                                                    |       |         |       |        |       |   |   |   |   |
| Term (A475T02B)  —                                                                                                                            |       | 6.76         | %          |        |       |   |   |   |   |
| Revolving term  loan with a quarterly commitment reduction of $375,000 starting 9-01-04,  balance due 12-01-08                                     |       |         |       | —      |       | 7,500,000 |   | 8,250,000 |   |
|                                                                                                                                               |       |         |       |        |       |   |   |   |   |
| Greater Huron  Development Corporation                                                                                                             |       |         |       |        |       |   |   |   |   |
| Huron, South Dakota                                                                                                                                |       |         |       |        |       |   |   |   |   |
| Federal Rural  Develop. Program                                                                                                                    |       | 4.00         | %          |        |       |   |   |   |   |
| Monthly payment  of $4,374 includes interest, balance due 05-31-04                                                                                 |       |         |       | —      |       | — |   | 21,653 |   |
|                                                                                                                                               |       |         |       |        |       |   |   |   |   |
| Community  Development Fund                                                                                                                        |       | 4.00         | %          |        |       |   |   |   |   |
| Monthly payment  of $230 includes interest, balance due 05-31-04                                                                                   |       |         |       | —      |       | — |   | 1,139 |   |
|                                                                                                                                               |       |         |       |        |       |   |   |   |   |
| Beadle County  Community Development Fund                                                                                                          |       | 3.00         | %          |        |       |   |   |   |   |
| Monthly payment  of $7,098, includes interest, balance due 01-31-05                                                                                |       |         |       | —      |       | 7,053 |   | 90,674 |   |
|                                                                                                                                               |       |         |       |        |       |   |   |   |   |
| Dakota Energy  Cooperative                                                                                                                         |       |         |       |        |       |   |   |   |   |
| Huron, South Dakota                                                                                                                                |       |         |       |        |       |   |   |   |   |
| Purchase  Agreement                                                                                                                                |       | 0.00         | %          |        |       |   |   |   |   |
| Monthly payment  of $185, with balance due 08-31-09                                                                                                |       |         |       | 8,225       |       | 10,260 |   | 12,480 |   |
|                                                                                                                                               |       |         |       |        |       |   |   |   |   |
| US Bank                                                                                                                                            |       |         |       |        |       |   |   |   |   |
| St. Paul, Minnesota                                                                                                                                |       |         |       |        |       |   |   |   |   |
| Commercial Note                                                                                                                                    |       | 7.07         | %*         |        |       |   |   |   |   |
| $500,000  Commitment — ends 12-31-05                                                                                                          |       |         |       | $           | —     |   | $ | — |   | $ | — |   |
|                                                                                                                                               |       |         |       | 5,758,225   |       | 7,517,313 |   | 8,375,946 |   |
| Less: Current  Portion                                                                                                                             |       |         |       | 2,405       |       | 1,509,273 |   | 858,607 |   |
| Total Long-Term  Liabilities                                                                                                                       |       |         |       | $           | 5,755,820  |   | $ | 6,008,040 |   | $ | 7,517,339 |   |

----

* Denotes continuously variable interest rate

87

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***Note 8: Financing Arrangements (continued)***

The Partnership, in 2005, entered into anAdministrative Agency Agreement with Dakota Fuels, Inc. and CoBank, ACB, whereCoBank, ACB has been appointed as the administrative agent for the loandocuments and security agreements with the Partnership. CoBank, ACB has agreedto undertake the obligations as administrative agent for these loans.

The term note (RIA475T02-HGF) with Dakota Fuels, Inc.is a revolving term note that the Partnership may borrow against and repay attheir discretion except for any portion of note principal with fixed interestrates. The revolving term note has fixed interest rates on term debt rangingfrom 5.93% to 7.29% with a weighted average of 6.76%. The current variableinterest rate is 7.61%.

The term note (RIA475T03-HGF) commitment with DakotaFuels, Inc. is available through 08-01-06 or such later date as authorized bythe administrative agent.

The purchase agreement with Dakota Energy Cooperativeis secured by a perfected security interest in Auto-Var Capacitor Bankspurchased for the Huron facility.

The loans administered by the Greater HuronDevelopment Corporation are secured with a security agreement under the UniformCommercial Code covering specified equipment at the Huron Facility.

Term notes with Dakota Fuels, Inc. are secured byCoBank, ACB’s first mortgage lien covering real property owned by thePartnership, together with CoBank, ACB’s security agreement under the UniformCommercial Code covering substantially all personal property owned by thePartnership, including receivables, inventories and equipment subject toperfected security interests. The Partnership also has $452,829 of equity inCoBank, ACB at December 31, 2005, which is held as additional collateral.

Restrictive covenants on the loan agreements withDakota Fuels, Inc. provide, among other things, (1) restrictions on incurringadditional indebtedness, (2) restrictions on the ability to mortgage, pledge,assign or grant security interest in any assets to any other party, (3) minimumworking capital balances of at least $3,500,000, except that in determiningcurrent assets, any available commitment not considered due in the next yearmay be included, (4) minimum net worth balances of at least $12,500,000, and(5) restrictions on scheduled payments made to lessors during each fiscal year.

88

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***Note 8: Financing Arrangements (continued)***

The commercial note with US Bank is unsecured with avariable interest rate (2.5% plus current one month “LIBOR” rate). Totalinterest expense charged to operations amounted to $418,044, $510,168 and$406,411 for the years ended December 31, 2005, 2004 and 2003, respectively.

Aggregate annual maturities of the long-term debtoutstanding at December 31, 2005 are as follows:

| Maturity Date —              | ** ** | **Total**      | ** ** | **Unadvanced** | ** ** | **Net Annual** | ** ** |
|---------------------------------------------|------------|----------------|------------|----------------|------------|---------------------|------------|
| **Year Ending December 31,** | ** ** | **Commitment** | ** ** | **Commitment** | ** ** | **Maturities**      | ** ** |
| 2006                                        |       | $              | 1,502,405  |           | $          | 1,500,000           |       | $ | 2,405 |   |
| 2007                                        |       | 3,002,220      |       | 3,000,000      |       | 2,220               |       |
| 2008                                        |       | 3,002,220      |       | 3,000,000      |       | 2,220               |       |
| 2009                                        |       | 3,001,380      |       | 3,000,000      |       | 1,380               |       |
| 2010                                        |       | 3,000,000      |       | 3,000,000      |       | —              |       |
| 2011 &  Thereafter                      |       | 8,250,000      |       | 2,500,000      |       | 5,750,000           |       |
|                                        |       | $              | 21,758,225 |           | $          | 16,000,000          |       | $ | 5,758,225 |   |

 

***Note 9: Pension Plans***

The Partnership participates in the “Co-op RetirementPlan”, administered by the United Benefits Group, which is a multiple-employerdefined benefit plan that is funded by contributions from employees and thePartnership. The Partnership intends to participate in the plan indefinitely;however it may voluntarily discontinue the plan at anytime. The plan, which hasno funding deficiencies, used the aggregate cost method of valuation. Underthis method, the normal cost is adjusted each year to reflect the experienceunder the plan, automatically spreading gains or losses over future years. Therelative position of each employer associated with the plan, with respect tothe actuarial present value of accumulated benefits, is not determinable.

The Partnership made contributions and paidadministration fees for the defined benefit retirement plans totaling $131,775,$135,535 and $132,817 for the years ended December 31, 2005, 2004 and 2003,respectively.

The Partnership had a contributory defined benefitretirement plan which had been administrated by Mid-America Retirement Plan.Effective on April 1, 2003 the Mid-America Retirement Plan dissolved andtransferred all assets and obligations to the “Co-op Retirement Plan”. As aresult of this, the Partnership expensed the prepaid pension costs of $76,470brought forward from the prior year. The data necessary for the prepaid pensioncomputation is no longer available.

The Partnership participates in a defined contributionthrift plan (401(k)). Under the terms of the plan, qualifying employees mayelect to contribute to the plan a percentage of their compensation, suchcontributed compensation may be partially matched by the Partnership, up to amaximum of 4%. The Partnership contributed $45,305, $36,821 and $37,433 to thethrift plan for the years ended December 31, 2005, 2004 and 2003, respectively.

89

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***Note 10: Operating Leases***

The Partnership has certain cancelable andnon-cancelable operating leases and rental agreements on land and equipment of$60,174, $61,316 and $60,725 for the years ended December 31, 2005, 2004 and2003, respectively.

The future required annual lease and rental paymentsare as follows:

| 2006                   |   | $      | 31,526 |   |
|------------------------|--------|--------|--------|--------|
| 2007                   |   | 17,569 |   |
| 2008                   |   | 500    |   |
| 2009                   |   | 500    |   |
| 2010                   |   | 500    |   |
| 2011 &  Thereafter |   | 43,500 |   |
|                   |   | $      | 94,095 |   |

 

***Note 11: Contingencies and Commitments***

a)              The Partnership is subject to various federal andstate regulations regarding the care, delivery and containment of productswhich the Partnership handles and has handled. The Company is contingentlyliable for any associated costs which could arise from the handling, deliveryand containment of these products. These costs cannot be determined at present.While resolution of any such costs in the future may have an effect on theCompany’s financial results for a particular period, management believes anysuch future costs will not have a material adverse effect on the financialposition of the Company as a whole.

b)             The Partnership is aware of initiatives by the EPAseeking to require best available control technology (BACT) on ethanol plants.The EPA’s position is that ethanol plants are major sources of hazardous airpollutants based upon different test methods from the ones used when theethanol plants initially obtained air permits. Under this method, emissionsexceed the allowed thresholds. The EPA is currently reviewing South Dakotaethanol plants. The EPA has imposed penalties and required BACT installed onethanol plants in other states. The EPA and South Dakota DENR have yet todetermine what, if any, control technology will be required and whether anyenforcement action will commence.

90

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**HEARTLAND GRAIN FUELS, L.P.Aberdeen, South Dakota**

**BALANCE SHEETS**

**September 30, 2006 and 2005(unaudited)**

**ASSETS**
| ** **                         | ** **   | **September 30,  2006** | ** **     | **September 30,  2005** | ** ** |
|------------------------------------|--------------|------------------------------|----------------|------------------------------|------------|
| **CURRENT ASSETS**                 | ** **   | ** **                   |           |                         |       |
| Cash                               | ** **   | **$**                        | **2,488,339**  |                         | $          | 2,872,308 |   |
| Receivables                        | ** **   | ** **                   |           |                         |       |
| Trade                              | ** **   | **1,802,909**                |           | 998,410                      |       |
| Other                              | ** **   | **293,807**                  |           | 247,178                      |       |
| Inventories                        | ** **   | **1,088,406**                |           | 547,325                      |       |
| Supplies                           | ** **   | **305,969**                  |           | 302,802                      |       |
| Prepaid Expenses                   | ** **   | **25,189**                   |           | 68,488                       |       |
| Total Current  Assets              | ** **   | **6,004,619**                |           | 5,036,511                    |       |
|                               | *** *** | *** ***                 |           |                         |       |
| **PROPERTY, PLANT AND EQUIPMENT**  | ** **   | ** **                   |           |                         |       |
| Land                               | ** **   | **96,441**                   |           | 96,441                       |       |
| Buildings                          | ** **   | **10,050,908**               |           | 9,950,957                    |       |
| Process  Equipment                 | ** **   | **19,907,988**               |           | 19,477,423                   |       |
| Office Equipment                   | ** **   | **268,115**                  |           | 236,073                      |       |
|                               | ** **   | **30,323,452**               |           | 29,760,894                   |       |
| Accumulated  Depreciation          | ** **   | **(18,524,758**              | **)**          | (16,099,406                  | )          |
| Undepreciated  Cost                | ** **   | **11,798,694**               |           | 13,661,488                   |       |
| Construction in  Process           | ** **   | **29,668,206**               |           | 2,023,193                    |       |
| Net Property,  Plant and Equipment | ** **   | **41,466,900**               |           | 15,684,681                   |       |
|                               | ** **   | ** **                   |           |                         |       |
| **OTHER ASSETS**                   | ** **   | ** **                   |           |                         |       |
| Investment in  Cooperatives        | ** **   | **602,734**                  |           | 522,123                      |       |
| Critical  Replacement Parts        | ** **   | **564,691**                  |           | 572,830                      |       |
| Total Other  Assets                | ** **   | **1,167,425**                |           | 1,094,953                    |       |
| ** **                         | ** **   | ** **                   |           |                         |       |
| **TOTAL ASSETS**                   | ** **   | **$**                        | **48,638,944** |                         | $          | 21,816,145 |   |

 

91

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**HEARTLAND GRAIN FUELS, L.P.Aberdeen, South Dakota**

**BALANCESHEETS**

**September 30, 2006 and 2005(unaudited)**

**LIABILITIES AND PARTNERS’ EQUITY**
| ** **                                      | ** ** | **September 30,  2006** | ** **     | **September 30,  2005** | ** ** |
|-------------------------------------------------|------------|------------------------------|----------------|------------------------------|------------|
| **CURRENT LIABILITIES**                         | ** ** | ** **                   |           |                         |       |
| Current  Maturities of Long-Term Debt           | ** ** | **$**                        | **3,000,000**  |                         | $          | 877,220 |   |
| Payables                                        | ** ** | **2,890,407**                |           | 1,636,897                    |       |
| Accrued Expenses                                | ** ** | ** **                   |           |                         |       |
| Property Taxes                                  | ** ** | **176,899**                  |           | 179,882                      |       |
| Interest                                        | ** ** | **144,669**                  |           | 32,642                       |       |
| Payroll                                         | ** ** | **82,947**                   |           | 69,254                       |       |
| Other                                           | ** ** | **13,651**                   |           | 11,992                       |       |
| Total Current  Liabilities                      | ** ** | **6,308,573**                |           | 2,807,887                    |       |
|                                            | ** ** | ** **                   |           |                         |       |
| **LONG-TERM LIABILITIES**                       | ** ** | ** **                   |           |                         |       |
| Notes Payable —  Net of Current Maturities | ** ** | **18,000,000**               |           | 4,881,375                    |       |
|                                            | ** ** | ** **                   |           |                         |       |
| **PARTNERS’ EQUITY**                       | ** ** | ** **                   |           |                         |       |
| South Dakota  Wheat Growers Association         | ** ** | **6,670,537**                |           | 5,422,924                    |       |
| Heartland  Producers, LLC.                      | ** ** | **6,445,759**                |           | 5,240,187                    |       |
| Aventine  Renewable Energy, Inc.                | ** ** | **696,327**                  |           | 566,091                      |       |
| Dakota Fuels,  Inc.                             | ** ** | **113,919**                  |           | 92,613                       |       |
| Current Income                                  | ** ** | **10,403,829**               |           | 2,805,068                    |       |
| Total Partners’  Equity                    | ** ** | **24,330,371**               |           | 14,126,883                   |       |
| ** **                                      | ** ** | ** **                   |           |                         |       |
| **TOTAL LIABILITIES AND PARTNERS’ EQUITY** | ** ** | **$**                        | **48,638,944** |                         | $          | 21,816,145 |   |

 

92

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**HEARTLAND GRAIN FUELS, L.P.Aberdeen, South Dakota**

**STATEMENT OF INCOME**

**Nine-Month Periods Ended September 30, 2006 and 2005(unaudited)**
| ** **                             | ** ** | **2006**       | ** **     | **2005**   | ** ** |
|----------------------------------------|------------|----------------|----------------|------------|------------|
| Sales                                  | ** ** | ** **     |           |       |       |
| Ethanol                                | ** ** | **$**          | **35,130,730** |       | $          | 23,941,198 |   |
| By-Products                            | ** ** | **2,870,303**  |           | 3,532,808  |       |
| Total Sales                            | ** ** | **38,001,033** |           | 27,474,006 |       |
|                                   | ** ** | ** **     |           |       |       |
| Cost of Sales                          | ** ** | ** **     |           |       |       |
| Raw Materials                          | ** ** | **21,645,962** |           | 20,501,438 |       |
| Utilities                              | ** ** | **733,353**    |           | 664,150    |       |
| Repairs &  Maintenance             | ** ** | **492,297**    |           | 379,178    |       |
| Lease                                  | ** ** | **61,359**     |           | 36,428     |       |
| Personnel Costs                        | ** ** | **1,688,608**  |           | 1,460,728  |       |
| Depreciation                           | ** ** | **2,046,579**  |           | 1,350,000  |       |
| Interest                               | ** ** | **929,722**    |           | 318,110    |       |
| Insurance                              | ** ** | **224,359**    |           | 160,471    |       |
| Property Taxes                         | ** ** | **168,659**    |           | 176,782    |       |
| Permits and Fees                       | ** ** | **21,691**     |           | 11,912     |       |
| Advertising  & Promotion           | ** ** | **24,967**     |           | 25,223     |       |
| Other                                  | ** ** | **57,426**     |           | 44,274     |       |
| Total Cost of  Sales                   | ** ** | **28,094,982** |           | 25,128,694 |       |
|                                   | ** ** | ** **     |           |       |       |
| Gross Income on Sales                  | ** ** | **9,906,051**  |           | 2,345,312  |       |
|                                   | ** ** | ** **     |           |       |       |
| Other Income                           | ** ** | ** **     |           |       |       |
| State Incentives                       | ** ** | **506,292**    |           | 426,153    |       |
| CCC Bioenergy  Payments                | ** ** | **317**        |           | —     |       |
| Interest                               | ** ** | **115,643**    |           | 49,757     |       |
| Other                                  | ** ** | **9,586**      |           | 18,125     |       |
| Total Other  Income                    | ** ** | **631,838**    |           | 494,035    |       |
|                                   | ** ** | ** **     |           |       |       |
| Total Gross Income                     | ** ** | **10,537,889** |           | 2,839,347  |       |
|                                   | ** ** | ** **     |           |       |       |
| General &  Administrative Expenses | ** ** | **186,654**    |           | 115,181    |       |
|                                   | ** ** | ** **     |           |       |       |
| Operating Net Income                   | ** ** | **10,351,235** |           | 2,724,166  |       |
|                                   | ** ** | ** **     |           |       |       |
| Patronage Dividend  Income             | ** ** | **52,594**     |           | 80,902     |       |
|                                   | ** ** | ** **     |           |       |       |
| Net Income                             | ** ** | **$**          | **10,403,829** |       | $          | 2,805,068 |   |

 

93

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**HEARTLANDGRAIN FUELS, L.P.Aberdeen, South Dakota**

**STATEMENTS OF PARTNERS’ EQUITY**

**Nine-Month Periods Ended September 30, 2006 and 2005(unaudited)**
| ** **                         | ** ** | **Balance**  | ** ** | ** **        | ** ** | **Current** | ** ** | **Balance**  | ** ** |
|------------------------------------|------------|--------------|------------|-------------------|------------|-------------|------------|--------------|------------|
| ** **                         | ** ** | **12-31-05** | ** ** | **Distributions** | ** ** | **Income**  | ** ** | **09-30-06** | ** ** |
| South Dakota Wheat  Growers Assoc. |       | $            | 7,245,313  |              | $          | (574,776    | )          | $            | —     |   | $ | 6,670,537 |   |
|                               |       |         |       |              |       |        |       |         |       |
| Heartland Producers,  LLC          |       | 7,001,167    |       | (555,408          | )          | —      |       | 6,445,759    |       |
|                               |       |         |       |              |       |        |       |         |       |
| Aventine Renewable  Energy, Inc.   |       | 756,327      |       | (60,000           | )          | —      |       | 696,327      |       |
|                               |       |         | ** ** |              |       |        |       |         |       |
| Dakota Fuels, Inc.                 |       | 123,735      |       | (9,816            | )          | —      |       | 113,919      |       |
|                               |       |         |       |              |       |        |       |         |       |
| Current Income                     |       | 0            |       | 0                 |       | 10,403,829  |       | 10,403,829   |       |
|                               |       |         |       |              |       |        |       |         |       |
|                               |       | $            | 15,126,542 |              | $          | (1,200,000  | )          | $            | 10,403,829 |   | $ | 24,330,371 |   |

 
| ** **                         | ** ** | **Balance**  | ** ** | ** **        | ** ** | **Current** | ** ** | **Balance**  | ** ** |
|------------------------------------|------------|--------------|------------|-------------------|------------|-------------|------------|--------------|------------|
| ** **                         | ** ** | **12-31-04** | ** ** | **Distributions** | ** ** | **Income**  | ** ** | **09-30-05** | ** ** |
| South Dakota Wheat  Growers Assoc. |       | $            | 5,901,904  |              | $          | (478,980    | )          | $            | —     |   | $ | 5,422,924 |   |
|                               |       |         |       |              |       |        |       |         |       |
| Heartland Producers,  LLC          |       | 5,703,027    |       | (462,840          | )          | —      |       | 5,240,187    |       |
|                               |       |         |       |              |       |        |       |         |       |
| Aventine Renewable  Energy, Inc.   |       | 616,091      |       | (50,000           | )          | —      |       | 566,091      |       |
|                               |       |         |       |              |       |        |       |         |       |
| Dakota Fuels, Inc.                 |       | 100,793      |       | (8,180            | )          | —      |       | 92,613       |       |
|                               |       |         |       |              |       |        |       |         |       |
| Current Income                     |       | 0            |       | 0                 |       | 2,805,068   |       | 2,805,068    |       |
|                               |       |         |       |              |       |        |       |         |       |
|                               |       | $            | 12,321,815 |              | $          | (1,000,000  | )          | $            | 2,805,068  |   | $ | 14,126,883 |   |

 

94

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**HEARTLAND GRAIN FUELS, L.P.Aberdeen, South Dakota**

**STATEMENTS OF CASH FLOWS**

**Nine-Month Periods Ended September 30, 2006 and 2005(unaudited)**
| ** **                                             | ** ** | **2006**        | ** **     | **2005**   | ** ** |
|--------------------------------------------------------|------------|-----------------|----------------|------------|------------|
| **CASH FLOWS FROM OPERATING  ACTIVITIES**              | ** ** | ** **      |           |       |       |
| Net Income                                             | ** ** | **$**           | **10,403,829** |       | $          | 2,805,068 |   |
| Adjustments to  Reconcile Net Income to Net Cash       | ** ** | ** **      |           |       |       |
| Provided by  Operating Activities                      | ** ** | ** **      |           |       |       |
| Depreciation                                           | ** ** | **2,046,579**   |           | 1,350,000  |       |
| Patronage  Dividends Received as Equity                | ** ** | **(22,030**     | **)**          | (48,541    | )          |
| Change in Assets  and Liabilities                      | ** ** | ** **      |           |       |       |
| Increase in  Receivables                               | ** ** | **(1,185,691**  | **)**          | (628,903   | )          |
| (Increase)  Decrease in Inventories                    | ** ** | **(278,708**    | **)**          | 420,939    |       |
| Increase in  Supplies                                  | ** ** | **(15,060**     | **)**          | (13,109    | )          |
| (Increase)  Decrease in Prepaid Expenses               | ** ** | **236,679**     |           | (51,163    | )          |
| Increase in  Payables                                  | ** ** | **855,809**     |           | 543,733    |       |
| Decrease in  Accrued Expenses                          | ** ** | **(151,597**    | **)**          | (171,564   | )          |
| Net Cash  Provided by Operating Activities             | ** ** | **11,889,810**  |           | 4,206,460  |       |
|                                                   | ** ** | ** **      |           |       |       |
| **CASH FLOWS FROM INVESTING  ACTIVITIES**              | ** ** | ** **      |           |       |       |
| Expenditures for  Property, Plant & Equipment      | ** ** | **(23,909,369** | **)**          | (2,228,454 | )          |
| Decrease in  Long-Term Receivables                     | ** ** | **526**         |           | 1,767      |       |
| Increase in  Other Assets                              | ** ** | **(8,845**      | **)**          | (24,588    | )          |
| Net Cash Used in  Investing Activities                 | ** ** | **(23,917,688** | **)**          | (2,251,275 | )          |
|                                                   | ** ** | ** **      |           |       |       |
| **CASH FLOWS FROM FINANCING  ACTIVITIES**              | ** ** | ** **      |           |       |       |
| Additional  Long-Term Borrowing                        | ** ** | **15,250,000**  |           | —     |       |
| Distributions of  Partners’ Equity                | ** ** | **(1,200,000**  | **)**          | (1,000,000 | )          |
| Retirement of  Long-Term Debt                          | ** ** | **(8,225**      | **)**          | (1,758,718 | )          |
| Net Cash  Provided by Financing Activities             | ** ** | **14,041,775**  |           | (2,758,718 | )          |
|                                                   | ** ** | ** **      |           |       |       |
| Net Increase (Decrease)  in Cash                       | ** ** | **2,013,897**   |           | (803,533   | )          |
| Cash — Beginning of the  Period                   | ** ** | **474,442**     |           | 3,675,841  |       |
| Cash — End of Period                              | ** ** | **$**           | **2,488,339**  |       | $          | 2,872,308 |   |
|                                                   | ** ** | ** **      |           |       |       |
|                                                   | ** ** | ** **      |           |       |       |
| **SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION** | ** ** | ** **      |           |       |       |
| Cash Paid During the Year for:                         | ** ** | ** **      |           |       |       |
| Interest                                               | ** ** | **$**           | **818,621**    |       | $          | 326,938 |   |

 

95

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**Notes to UnauditedFinancial Statements**

***Note 1: Organization and Nature of Business***

The Partnership is organized as a limited partnershipunder the laws of the state of Delaware. The Partnership operates ethanolplants in Aberdeen and Huron, South Dakota with 39,000,000 gallon of productioncapability. These plants process corn, which produces ethanol, to be sold forblending with gasoline, and by-products to be used in the manufacturing offeed.

Approximately 92% of the Partnership’s sales and otherincome were generated by ethanol and E-85 production and marketing and theremaining 8% were from by-product production and other miscellaneous income.

***Note 2: Summary of Significant Accounting Policies***

The significant accounting practices and policies aresummarized below.

UNAUDITED FINANCIAL STATEMENTS

The accompanying financial statements as of September30, 2006 and September 30, 2005 and the nine months then ended are unauditedand reflect all adjustments (consisting only of normal recurring adjustments)which are, in the opinion of management, necessary for a fair representation ofthe financial position and operating results for the interim periods. Theinterim financial statements should be read in conjunction with the auditedfinancial statements and notes thereto, contained in the registration statementon Form SB-2 to which these financial statements are included. The results ofoperations for the nine months ended September 30, 2006 are not necessarilyindicative of the results for the fiscal year ending December 31, 2006.

USE OF ESTIMATES

The preparation of financial statements in conformitywith generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements and reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

Bad debts are provided for on the reserve method basedon historical experience and management’s evaluation of outstanding receivablesat the end of the year. No allowance for doubtful accounts were considerednecessary for the nine-month periods ended September 30, 2006 and 2005,respectively.

INVENTORY VALUATIONS

Raw material inventories are valued at the lower ofcost (first-in, first-out method) or market price. Work-in-process and finishedgoods inventories are valued at market price multiplied by their respectivepercentage of completion.

96

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***Note 2: Summary of Significant Accounting Policies (continued)***

DERIVATIVE FINANCIAL INSTRUMENTS

The Partnership has only limited involvement withderivative financial instruments and does not use them for trading purposes. Theyare used to manage well-defined commodity price risks. The Partnership may usefutures, forward, option and swap contracts to reduce the market volatility ofgrain and finished products. These contracts permit final settlement bydelivery of the specified commodity. Unrealized gains or losses are recognizedin the valuation of the respective commodity’s ending inventory.

ADVERTISING

The Partnership expenses advertising and promotioncosts as they are incurred, which amounted to $24,967 and $25,223 for thenine-month periods ended September 30, 2006 and 2005, respectively.

PROPERTY, PLANT AND EQUIPMENT

Land, buildings and equipment are stated at cost.Depreciation methods and estimated useful lives of assets are discussed in Note6.

Maintenance and repairs are expensed as incurred.Expenditures for new facilities and those which increase the useful lives ofthe buildings and equipment are capitalized. When assets are sold or otherwisedisposed of, the related cost and accumulated depreciation are removed from theaccounts and gains or losses on the dispositions are recognized in earnings.

LONG-LIVED ASSETS

Long-lived assets to be held and used are reviewed forimpairment whenever events or changes in circumstances indicate that therelated carrying amount may not be recoverable. When required, impairmentlosses on assets to be held or used are recognized based on the fair value ofthe asset and long-lived assets to be disposed of are reported at the lower oftheir carrying amount or their fair value less selling costs.

ENVIRONMENTAL EXPENDITURES

Environmental compliance costs would include ongoingmaintenance, monitoring and similar costs. Such costs will be expensed asincurred. Environmental remediation costs would be accrued, except to theextent costs can be capitalized, when environmental assessments and/or remedialefforts are probable, and the cost could be reasonably estimated. Environmentalcosts which improve the condition of the property as compared to the conditionwhen constructed or acquired and create future revenue generation arecapitalized.

PATRONAGE DIVIDEND INCOME

Patronage dividend income from cooperatives isrecognized as income in the year the Partnership receives formal notificationfrom the distributing cooperative.

97

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***Note 2: Summary of Significant Accounting Policies (continued)***

INCOME TAXES

The Partnership, as a limited partnership, is notsubject to income taxes. Income is taxed directly to its partners.

DISTRIBUTION OF NET INCOME (LOSS)

In accordance with the Partnership’s agreement oflimited partnership, the Partnership will allocate net income (loss) andalcohol credits in accordance with their respective percentage interests.

***Note 3: Significant Concentrations of Risk***

CREDIT RISK - RECEIVABLES

The Partnership issues credit to customers,substantially all of whom are ethanol wholesalers or E-85 retailers, underindustry standard terms without collateral in most cases.

CREDIT RISK - FINANCIAL INSTITUTIONS

The Partnership maintains cash balances with local andnational financial institutions, which may at times exceed the $100,000coverage by the U.S. Federal Deposit Insurance Corporation (FDIC).

***Note 4: Related Party Transactions***

The Partnership has significant transactions with itslimited partners and their affiliates for the nine-month periods endedSeptember 30, 2006 and 2005, respectively which include:

e)              An agreement to purchase corn from a limitedpartner at their cost plus 10¢ per bushel (11¢ at the Huron facility).

f)                An agreement with a limited partner to market thetotal output of ethanol produced by the Aberdeen and Huron facilities.

g)             An agreement with a limited partner affiliate tomarket the total output of by-products produced by the Aberdeen and Huronfacilities.

h)             Various purchases, services and financingarrangements.

98

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***Note 5: Inventory***

The major components of inventory as of September 30, 2006 and 2005 wereas follows:

|                 | ** ** | **2006**   | ** ** | **2005** | ** ** |
|-----------------|------------|------------|------------|----------|------------|
| Raw Materials   |       | $116,462   |       | $102,155 |       |
| Work in Process |       | 519,738    |       | 253,971  |       |
| Finished Goods  |       | 452,206    |       | 191,199  |       |
|            |       | $1,088,406 |       | $547,325 |       |

 

***Note 6: Property, Plant and Equipment***

Depreciation is computed over the estimated usefullives of the individual assets using the straight-line method. The estimateduseful lives of depreciable assets is as follows:

| Buildings                  |   | 10-40 years |   |
|----------------------------|--------|-------------|--------|
| Process and Lab  Equipment |   | 5-20 years  |   |
| Office Equipment           |   | 5-20 years  |   |

 

Depreciation expense for the nine-month periods endedSeptember 30, 2006 and 2005 amounted to $2,046,579 and $1,350,000,respectively.

|                                                                | ** ** | **Costs**   | ** ** | **Budgeted** | ** ** |
|----------------------------------------------------------------|------------|-------------|------------|--------------|------------|
| **Construction in Process at September 30,  2006**             | ** ** | **To Date** | ** ** | **Cost**     | ** ** |
|  Huron Plant Expansion —  30,000,000 Gallon Capacity |       | $22,050,745 |       | $24,000,000  |       |
|  Aberdeen Plant Expansion —  40,000,000 Gallon Plant |       | 7,617,461   |       | 78,000,000   |       |
|                                                           |       | $29,668,206 |       | $102,000,000 |       |

 

***Note 7: Investments in Cooperatives***

Investments in cooperatives are recorded at cost, plusunredeemed patronage dividends received in the form of capital stock and otherequities. Cooperative stocks normally are not transferable, thereby precludingany market value, but they may be used as collateral in securing loans. Anyimpairment of equities normally is not recognized by the Partnership untilformal notification is received. Redemption of these equities is at thediscretion of the various organizations. A substantial portion of the businessof these cooperatives is dependent upon the agribusiness economic sector.

At September 30, 2006 and 2005, the Partnership hadinvestments in cooperatives as follows:

|                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
| CoBank, ACB                |       | $        | 452,829    |     | $          | 452,829 |   |
| Dakota Energy  Cooperative |       | 147,730  |       | 67,119   |       |
| Country Hedging,  Inc.     |       | 2,175    |       | 2,175    |       |
|                       |       | $        | 602,734    |     | $          | 522,123 |   |

 

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***Note 8: Financing Arrangements***

Financingarrangements at September 30, 2006 and 2005 were as follows:

|                                                                                                                                                                                | ** ** | **Interest** | ** ** | **Balance** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|-------------|------------|
| **Lender**                                                                                                                                                                     | ** ** | **Rate**     | ** ** | **2006**    | ** ** | **2005** | ** ** |
| Dakota Fuels, Inc.                                                                                                                                                             |       |         |       |        |       |   |   |
| Aberdeen, South Dakota                                                                                                                                                         |       |         |       |        |       |   |   |
| Term (RIA475T02-HGF) —  $6,750,000 commitment, revolving term loan with a quarterly commitment  reduction of $750,000 starting 09-01-11, with the balance due on 06-01-13 |       | 7.397        | %          | $           | 6,750,000  |   | $ | — |   |
|                                                                                                                                                                           |       |         |       |        |       |   |   |
| Dakota Fuels, Inc.                                                                                                                                                             |       |         |       |        |       |   |   |
| Term (RIA475T03-HGF) —  $15,000,000 commitment, term loan with a quarterly payment of $750,000,  starting 09-01-06, with balance due on 06-01-11                          |       | 8.679        | %*         | 14,250,000  |       | — |   |
|                                                                                                                                                                           |       |         |       |        |       |   |   |
| CoBank, ACB                                                                                                                                                                    |       |         |       |        |       |   |   |
| Omaha, Nebraska                                                                                                                                                                |       |         |       |        |       |   |   |
| Term (A475T02B) — Revolving  term loan with a quarterly commitment reduction of $375,000 starting 9-01-04,  balance due 12-01-08                                          |       | 6.76         | %*         | —      |       | 5,750,000 |   |
|                                                                                                                                                                           |       |         |       |        |       |   |   |
| Dakota Energy Cooperative                                                                                                                                                      |       |         |       |        |       |   |   |   |
| Huron, South Dakota                                                                                                                                                            |       |         |       |        |       |   |   |   |
| Purchase Agreement Monthly  payment of $185, with balance due 08-31-09                                                                                                         |       | 0.00         | %          | —      |       | 8,595 |   |   |
|                                                                                                                                                                           |       |         |       |        |       |   |   |   |
| US Bank                                                                                                                                                                        |       |         |       |        |       |   |   |   |
| St. Paul, Minnesota                                                                                                                                                            |       |         |       |        |       |   |   |   |
| Commercial Note — Commitment  of $500,000 ending 12-31-06                                                                                                                 |       | 7.72         | %*         | —      |       | — |   |   |
|                                                                                                                                                                           |       |         |       | 21,000,000  |       | 5,758,595 |   |   |
| Less: Current Portion                                                                                                                                                          |       |         |       | 3,000,000   |       | 877,220 |   |   |
| Total Long-Term  Liabilities                                                                                                                                                   |       |         |       | $           | 18,000,000 |   | $ | 4,881,375 |   |   |

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* Indicates a continuously variable interest rate

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***Note 8: Financing Arrangements (continued)***

The Partnership, in 2005, entered into anAdministrative Agency Agreement with Dakota Fuels, Inc. and CoBank, ACB, whereCoBank, ACB has been appointed as the administrative agent for the loandocuments and security agreements with the Partnership. CoBank, ACB has agreedto undertake the obligations as administrative agent for these loans.

The term note (RIA475T02-HGF) with Dakota Fuels, Inc.is a revolving term note that the Partnership may borrow against and repay attheir discretion except for any portion of note principal with fixed interestrates. The revolving term note has fixed interest rates on term debt rangingfrom 6.40% to 7.29% with a weighted average of 7.397%, which includes$2,000,000 of term debt at the current variable interest rate of 8.50%.

Term notes with Dakota Fuels, Inc. are secured byCoBank, ACB’s first mortgage lien covering real property owned by thePartnership, together with CoBank, ACB’s security agreement under the UniformCommercial Code covering substantially all personal property owned by thePartnership, including receivables, inventories and equipment subject toperfected security interests. The Partnership also has $452,829 of equity inCoBank, ACB at September 30, 2006, which is held as additional collateral.

The purchase agreement with Dakota Energy Cooperativeis secured by a perfected security interest in Auto-Var Capacitor Bankspurchased for the Huron facility.

Restrictive covenants on the loan agreements withDakota Fuels, Inc. provide, among other things, (1) restrictions on incurringadditional indebtedness, (2) restrictions on the ability to mortgage, pledge,assign or grant security interest in any assets to any other party, (3) minimumworking capital balances of at least $3,500,000, except that in determiningcurrent assets, any available commitment not considered due in the next year maybe included, (4) minimum net worth balances of at least $12,500,000, and (5)restrictions on scheduled payments made to lessors during each fiscal year.

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***Note 8: Financing Arrangements (continued)***

The commercial note with US Bank is unsecured with avariable interest rate (2.5% plus current one month “LIBOR” rate).

Total interest expense charged to operations amountedto $929,722 and $318,110 for the nine-month periods ended September 30, 2006and 2005, respectively.

Aggregate annual maturities of the long-term debtoutstanding at September 30, 2006 are as follows:

| Maturity Date —               | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|
| **Year Ending September 30,** | ** ** | ** ** | ** ** |
| 2007                                         |       | $          | 3,000,000  |   |
| 2008                                         |       | 3,000,000  |       |
| 2009                                         |       | 3,000,000  |       |
| 2010                                         |       | 3,000,000  |       |
| 2011                                         |       | 3,000,000  |       |
| 2012 & Thereafter                        |       | 6,000,000  |       |
|                                         |       | $          | 21,000,000 |   |

 

***Note 9: Pension Plans***

The Partnership participates in a defined contributionthrift plan (401(k)). Under the terms of the plan, qualifying employees mayelect to contribute to the plan a percentage of their compensation, such contributedcompensation may be partially matched by the Partnership, up to a maximum of4%. The Partnership contributed $40,884 and $35,273 to the thrift plan for thenine-month periods ended September 30, 2006 and 2005, respectively.

The Partnership participates in the “Co-op RetirementPlan”, administered by the United Benefits Group, which is a multiple-employerdefined benefit plan that is funded by contributions from employees and thePartnership. The Partnership intends to participate in the plan indefinitely;however it may voluntarily discontinue the plan at anytime. The plan, which hasno funding deficiencies, used the aggregate cost method of valuation. Underthis method, the normal cost is adjusted each year to reflect the experienceunder the plan, automatically spreading gains or losses over future years. Therelative position of each employer associated with the plan, with respect tothe actuarial present value of accumulated benefits, is not determinable.

The Partnership made contributions and paid administrationfees for the defined benefit retirement plans totaling $105,947 and $98,181 forthe nine-month periods ended September 30, 2006 and 2005, respectively.

***Note 10: Operating Leases***

The Partnership has certain cancelable andnon-cancelable operating leases and rental agreements on land and equipment of$61,859 and $36,928 for the nine-month periods ended September 30, 2006 and2005, respectively.

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***Note 11: Contingencies and Commitments***

c)              The Partnership is subject to various federal andstate regulations regarding the care, delivery and containment of productswhich the Partnership handles and has handled. The Company is contingentlyliable for any associated costs which could arise from the handling, deliveryand containment of these products. These costs cannot be determined at present.While resolution of any such costs in the future may have an effect on theCompany’s financial results for a particular period, management believes anysuch future costs will not have a material adverse effect on the financialposition of the Company as a whole.

d)             The Partnership is aware of initiatives by the EPAseeking to require best available control technology (BACT) on ethanol plants.The EPA’s position is that ethanol plants are major sources of hazardous airpollutants based upon different test methods from the ones used when theethanol plants initially obtained air permits. Under this method, emissionsexceed the allowed thresholds. The EPA is currently reviewing South Dakotaethanol plants. The EPA has imposed penalties and required BACT installed onethanol plants in other states. The EPA and South Dakota DENR have yet todetermine what, if any, control technology will be required and whether anyenforcement action will commence.

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**ITEM 8.           CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTINGAND FINANCIAL DISCLOSURE**

None.

**ITEM 8A.        CONTROLS AND PROCEDURES**

**Disclosure Controls and Procedures**

As of the end of the period covered by this report,our management conducted an evaluation, under the supervision and with theparticipation of our chief executive officer and chief financial officer of theeffectiveness of our disclosure controls and procedures (as defined in Rule13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based onthis evaluation, the officers concluded that our disclosure controls andprocedures are effective to ensure that information required to be disclosed byour company in reports that we file or submit under the Securities Exchange Actof 1934 is recorded, processed, summarized and reported within the time periodsspecified in Commission rules and forms.

**Changes in Internal Controls over FinancialReporting**

Our management, with the participation of the chiefexecutive officer and chief financial officer, performed an evaluation as towhether any change in the internal controls over financial reporting (asdefined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934)occurred during the period covered by this report. Based on that evaluation,the chief executive officer and chief financial officer concluded that nochange occurred in the internal controls over financial reporting during theperiod covered by this report that materially affected, or is reasonably likelyto materially affect, the internal controls over financial reporting.

**ITEM 8B.        OTHER INFORMATION**

None.

**PART III**

**ITEM 9.           DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROLPERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT**

Our operating agreement provides that our initialboard of directors will be comprised of no fewer than three and no more than 13members. However, at the first annual or special meeting of the membersfollowing the date on which substantial operations of the Nebraska plantcommences, the number of directors shall be reduced and become fixed at nine.The initial board of directors will serve until the first annual or specialmeeting of the members following the date on which substantial operations ofthe Nebraska plant commences. The operating agreement provides for a classifiedboard consisting of three classes, with all directors serving staggeredthree-year terms.

**IDENTIFICATION OF DIRECTORS,EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES**

The following table shows our directors and officersas of December 21, 2006:
| **Person**               | ** ** | **Age** | ** ** | **Offices**                                                           | ** ** | **Director  Since** |
|--------------------------|------------|---------|------------|-----------------------------------------------------------------------|------------|---------------------|
| Revis L.  Stephenson III |       | 40      |       | Chairman and  Chief Executive Officer                                 |       | 2005                |
| Donald E. Gales          |       | 44      |       | Chief Operating  Officer and President                                |       | —              |
| Richard Peterson         |       | 41      |       | Vice President  of Accounting and Finance and Chief Financial Officer |       | —              |
| Robert W. Holmes         |       | 59      |       | Director                                                              |       | 2005                |
| Larry L. Cerny           |       | 65      |       | Secretary and  Director                                               |       | 2005                |
| Robert E.  Bettger       |       | 59      |       | Director                                                              |       | 2005                |
| Richard W.  Hughes       |       | 54      |       | Director                                                              |       | 2005                |
| Dale Locken              |       | 53      |       | Director                                                              |       | 2006                |
| John E.  Lovegrove       |       | 51      |       | Director                                                              |       | 2005                |
| Troy Otte                |       | 39      |       | Director                                                              |       | 2005                |
| Keith E. Spohn           |       | 58      |       | Director                                                              |       | 2005                |

 

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**BUSINESS EXPERIENCE OF DIRECTORSAND OFFICERS**

The following is a brief description of the businessexperience and background of our officers and directors.

*Revis L. StephensonIII*has over 17 years’experience in the investment industry. During his career he has gainedexperience in the public and private markets where his responsibilitiesincluded placement of equity and debt, assisting with structuring, and pricing.Mr. Stephenson served as vice president institutional sales, for the fixedincome originations group of Oppenheimer & Co., a New York based financialservices firm, from June 2002 to September 2006, when he joined our company aschief executive officer. Prior to that, he was vice president investments forMJSK Securities for five years. He was also with Piper Jaffray Inc., where heleft as managing director, investments, for seven years before joining MJSKSecurities.

*Donald E. Gales* served as vice president of Archer-Daniels-MidlandGrain Co. Western Division from August 2004 until March 2006 when he joined ourcompany as chief operating officer and president. As vice president, Mr. Galeswas responsible for Archer-Daniels-Midland’s grain assets in six states, alongwith sitting on the board of directors of Skyland Grain, LLC, United Prairie AgLLC, Hutchinson Fertilizer LLC, Norkan Fertilizer LLC and FSC/ADM LLC. Prior toassuming the role of vice president of Archer-Daniels-Midland Grain Co. WesternDivision, Mr. Gales was president of ADM-Collingwood for over a year. Beforejoining Archer-Daniels-Midland, Mr. Gales was the chief executive officer ofSDWG from December 1998 to August 2002. Mr. Gales previously served as adirector of Farmland Industries, Inc., which filed for chapter 11 protectionunder the Federal Bankruptcy Act in May 2002. Mr. Gales resigned from the boardof Farmland Industries, Inc. in June 2002.

*Richard Peterson*joined our company as vice president of accountingand finance and chief financial officer in November 2006. From July 2001 untilNovember 2006, Mr. Peterson served as the director of finance, North AmericanOperations for Nilfisk Advance, Inc. Prior to joining Nilfisk Advance, Mr.Peterson served as the chief financial officer for PPT Vision, Inc. from April1999 to July 2001 and the chief financial officer of Premis Corporation fromDecember 1996 to April 1999.

*Robert W. Holmes*founded Timberwood Bank in 2003, where he iscurrently chairman of the board, president and a principal shareholder. Forfive years prior, he managed an insurance agency which he also founded.

*Larry L. Cerny*owned and operated a supermarket in Geneva, Nebraskafor 35 years. He was part-owner of supermarkets in Minden, Waverly, Falls City,Hickman and Neligh, Nebraska, and Sabetha, Kansas. In 1972, he co-foundedGeotechnical Services Inc., a geotech and environmental engineering firm, withoffices in Omaha, Lincoln and Grand Island, Nebraska, Wichita, Kansas, and DesMoines, Iowa where Mr. Cerny has served as chairman of the board for the past20 years. Mr. Cerny serves on the board of governors for Fillmore County,Nebraska.

*Robert E. Bettger*has owned and operated a farm near Fairmont, Nebraskafor over 30 years that consists of 5,000 acres in irrigated corn and soybeans.Mr. Bettger currently serves on the Agriculture Congressional Staff forCongressman Tom Osborne. Past appointments in which Mr. Bettger has servedinclude the Nebraska Water Board, Department of Energy — Renewable ResourcesBiomass Advisory Group and National Corn Growers.

*Richard W. Hughes*has owned and operated a family farm for over 30years in the Geneva, Nebraska area consisting of 1,500 acres of corn andsoybeans.

*Dale Locken*has been the chief executive officer of SDWG sinceDecember 2002. Prior to joining SDWG, he was the director of U.S. sales andstrategic accounts for BASF Corporation from July 2001 to November 2002. Mr.Locken serves on the board of directors of the South Dakota Association ofCooperatives and Petroleum Partners, LLC.

*John E. Lovegrove*has been a life-long farmer in Fillmore County,Nebraska. He operates a family farm along with two brothers consisting of 8,000acres of irrigated corn, soybeans and Pioneer Hy-Brid International seed corn.

*Troy Otte*has been involved in a family-owned farm in theFillmore County, Nebraska area since 1990. The current operation consists of5,000 acres of corn, soybeans and wheat, with both irrigated and dry landacres.

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*Keith E. Spohn* has been an active farmer for the past 37 years. Hisfarming operations have included 4,000 acres of corn, soybeans and seed corn.

**FAMILYRELATIONSHIPS**

Mr. Bettger and Mr. Lovegrove are first cousins.

**COMMITTEES OF THE BOARD OFDIRECTORS**

The board of directors has four standing committees:the audit committee, compensation committee, executive committee and riskmanagement committee.

The audit committee consists of Messrs. Bettger, Cernyand Otte. The audit committee’s function is one of oversight and, in thatregard, the audit committee meets with our management and independentregistered accounting firm to review and discuss our financial reporting andour controls respecting accounting. None of the audit committee members is an “auditcommittee financial expert” as that term is defined in Item 401(e)(2) of RegulationSB.

The compensation committee consists of Messrs. Cerny,Holmes and Otte. The compensation committee is responsible for discharging theboard’s responsibilities relating to compensation of the company’s executiveofficers.

The executive committee consists of Messrs. Bettger,Holmes, Lovegrove and Otte. The executive committee’s function is to facilitatecommunication between management and the board of directors.

The risk management committee consists of Messrs.Lovegrove, Otte and Spohn from the board of directors and Revis L. StephensonIII, our chief executive officer, Donald E. Gales, our chief operating officer,and Tom Murray, our vice president of risk management. The risk managementcommittee’s function is to assist the board of directors in assessing andmanaging the risks associated with managing the company’s processing margin andthe purchase and sale of commodities required in connection with or produced asa result of the company’s production of ethanol.

We have adopted a code of ethics for the guidance ofour principal executive, financial and accounting officers and our controller(if we eventually hire one). Our code ethics is posted on our website atwww.AdvancedBioEnergy.com. We intend to post on our website any amendments to, orwaivers from, our code of ethics within five business days of the amendment orwaiver.

**ITEM 10.         EXECUTIVE COMPENSATION**

**Summary Compensation Table**

The following table shows, for our chief executiveofficer and the other executive officer of our company who earned over $100,000during our fiscal year ended September 30, 2006, who are referred to as thenamed executive officers, information concerning annual and long-termcompensation earned for services in all capacities during fiscal year 2006. 
| ** **                                                        | ** ** | ** **           | ** ** | **Annual Compensation** | ** ** | **Long-Term  Compensation** | ** ** | ** **                           | ** ** |
|-------------------------------------------------------------------|------------|----------------------|------------|------------------------------|------------|-----------------------------|------------|--------------------------------------|------------|
| ** **                                                        | ** ** | ** **           | ** ** | ** **                   | ** ** | ** **                  | ** ** | ** **                           | ** ** | **Awards** | ** ** | ** ** | ** ** |
| **Name and Principal Position**                    | ** ** | **Fiscal Year** | ** ** | **Salary ($)**          | ** ** | **Bonus ($)**          | ** ** | **Other  Annual  Compensation  ($)** | ** ** | **Restricted  Unit  Award(s)  ($) (1)** | ** ** | **All Other  Compensation  ($)** | ** ** |
| Revis L. Stephenson Ш*Chairman and Chief Executive Officer* |       | 2006                 |       | 161,538                      |       | 33,333                      |       | —                               |       | 6,000,000 |   | 10,797 | (2) |
| Donald  E. Gales (3)*President and Chief Operating Officer*       |       | 2006                 |       | 134,615                      |       | 29,167                      |       | —                               |       | 1,200,000 |   | 83,770 | (4) |

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(1)                      Consists of(a) 300,000 restricted units that may be issued to an affiliate of Mr.Stephenson pursuant to a restricted unit agreement, which are valued at $20 perunit for purposes of this table as there was no market 

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for the restrictedunits on the date of grant (39,000 of which have been issued) and (b) 30,000restricted units issued to Mr. Gales pursuant to his employment agreement,which are valued at $10 per unit for purposes of this table as there was nomarket for the restricted units on the date of grant, and 45,000 restrictedunits that may be issued to an affiliate of Mr. Gales pursuant to a restrictedunit agreement, which are valued at $20 per unit for purposes of this table asthere was no market for the restricted units on the date of grant (5,850 ofwhich have been issued). At the end of the fiscal year, Mr. Stephenson or hisaffiliates held 139,000 restricted units and the right to receive 261,000restricted units, which are valued at $2,780,000 and $5,220,000, respectively,or $20 per unit for purposes of this table as there was no market for therestricted units on the date of grant. At the end of the fiscal year, Mr. Galesor his affiliates held 35,850 restricted units and the right to receive 39,150restricted units, which are valued at $717,800 and $783,000, respectively, or$20 per unit for purposes of this table as there was no market for therestricted units on the date of grant. The restricted unit agreements for thegrants described in the table above provide that for each additional ethanolproduction or co-production facility we acquire or build on or prior to April3, 2009 in addition to the Nebraska plant, one newly issued restricted unitwill vest for each 1,000 gallons of ethanol production capacity acquired orbuilt for the benefit of Stephenson Holdings, Inc., an entity owned by Mr.Stephenson, and 0.15 newly issued restricted units will vest for each 1,000gallons of ethanol production capacity acquired or built for the benefit ofGales Holdings, Inc., an entity owned by Mr. Gales. The maximum number ofrestricted units that will vest under these agreements will be 300,000 and45,000 units, respectively. To date, 39,000 restricted units have been grantedto Stephenson Holdings, Inc. and 5,850 restricted units have been granted toGales Holdings, Inc. due to our acquisition of approximately 53% of thepartnership interests of Heartland Grain Fuels. Half of the units grantedvested immediately, and the other half are presently subject to forfeiture andwill vest in equal parts on the first and second anniversaries of the date ofgrant.

(2)                                  Amountsconsist of $1,129 for continuation of health benefits and $9,668 for personaluse of company-owned vehicle, including fuel, insurance and maintenanceexpenses.

(3)                                  Mr.Gales joined us in April 2006.

(4)                                  Amountsconsist of $2,733 for continuation of health benefits, $9,850 for personal useof company-owned vehicle, including fuel, insurance and maintenance expenses,and $71,187 for relocation to the Minneapolis, Minnesota area.

**AggregatedOption/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option Values**
| ** **              | ** ** | **Units  Acquired on** | ** ** | **Value  Realized** | ** ** | **Number of Securities  Underlying Unexercised  Options/SARs at**  Fiscal Year-End (#) | ** ** | **Value of Unexercised   In-the-Money  Options/SARs at**  Fiscal Year-End ($) (1) | ** ** |
|-------------------------|------------|-----------------------------|------------|---------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|
| **Name**                | ** ** | **Exercise (#)**       | ** ** | **($)**             | ** ** | **Exercisable**                                                                                                      | ** ** | **Unexercisable**                                                                                                    | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| Revis L. Stephenson III |       | —                      |       | —              |       | —                                                                                                               |       | 26,580                                                                                                               |       | — |   | 531,600 |   |
| Donald  E. Gales        |       | —                      |       | —              |       | —                                                                                                               |       | —                                                                                                               |       | — |   | — |   |

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(1)                                  Value at fiscal year-end is based on $20 perunit, the price of units in our proposed registered securities offering. These units are issuable pursuant to a projectdevelopment fee agreement and the number set forth in the table above is basedon an estimated cost to construct the Nebraska plant of approximately$151,580,000.

**DIRECTOR COMPENSATION**

In connection with their service on our board ofdirectors, for fiscal 2006 each of our non-employee directors received a$10,000 annual retainer and an additional $250 for each meeting of the board ofdirectors attended and $250 for each committee meeting attended. We currentlyanticipate that these fees will remain the same for fiscal 2007. All directorsare reimbursed for their reasonable out-of-pocket expenses incurred inattending meetings of the board of directors and committees.

**PROJECT DEVELOPMENT FEE PAID TOEXECUTIVE OFFICERS**

Revis L. Stephenson III is currently serving as ourchairman and chief executive officer and Robert W. Holmes is currently servinga member of our board of directors. We entered into a project development feeagreement on May 19, 2005 with Messrs. Stephenson and Holmes to pay themtogether, a total fee equal to 1% of the total project cost for the Nebraskaplant. Based on our current estimated project cost of $151,580,000, we 

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currently estimate the total fee we will pay at151,580 units, as the fee is payable in units at a price of $10 per unit. Wehave already transferred 125,000 of these units to Messrs. Stephenson andHolmes in exchange for their efforts to organize and develop our company. Wemay be obligated to pay additional units to Mr. Stephenson upon substantialcompletion of the Nebraska plant if the actual total cost of the projectexceeds $125.0 million. Likewise, Mr. Stephenson may be required to forfeitunits back to us if the actual total project cost is less than $125.0 million.

These 125,000 units aresubject to the following restrictions:

·                  upon thedissolution, bankruptcy or insolvency of our company or our inability generallyto pay debts as they become due, or an assignment by us for the benefit ofcreditors, or the commencement of any case or proceeding in respect of ourcompany under any bankruptcy, insolvency or similarly laws, Messrs. Stephensonand Holmes shall return the restricted units to the company without payment ofconsideration by the company and the restricted units shall be deemed to havebeen forfeited by Messrs. Stephenson and Holmes;

·                  upon voluntaryresignation as a member of our board of directors by Mr. Stephenson and/or Mr.Holmes, Mr. Stephenson and/or Mr. Holmes shall return the restricted units tous without payment of consideration by us and the restricted units shall bedeemed to have been forfeited by Mr. Stephenson and/or Mr. Holmes; and

·                  the restrictedunits may not be sold, transferred, assigned, pledged, encumbered or otherwisealienated or hypothecated unless the restrictions have lapsed.

All of the above restrictions on the units shall lapseon the date upon which our Nebraska plant begins producing ethanol for sale.Additionally, the number of units subject to the restriction concerningvoluntary resignation of Mr. Stephenson and/or Mr. Holmes has been reduced bytwo-thirds following the filing of the Registration Statement on Form SB-2 onMay 23, 2005 and the execution of definitive debt financing documents.

These units and others received by Messrs. Stephensonand Holmes in the distribution of two units for every one unit issued andoutstanding, are also subject to an agreement executed by Messrs. Stephensonand Holmes wherein they have agreed that the units are subject to restrictionson transfer until May 10, 2008.

We entered into a consulting agreement with BioEnergyCapital Consultants, LLC, Lake Preston, South Dakota, as a project developmentconsultant. In exchange for services and as provided in this agreement, wetransferred 7,500 unrestricted units in our company to BioEnergy CapitalConsultants, LLC. Following our previous seed capital private placement, weperformed a unit distribution to all unitholders, including BioEnergy CapitalConsultants, LLC equal to two additional units for every one unit issued andoutstanding. Subsequent to performing this distribution, BioEnergy CapitalConsultants, LLC received an additional 42,500 restricted units in our companyfor a total of 50,000 units.

These arrangements could cause Messrs. Stephenson andHolmes conflicts of interest in decision making related to our financing plan.These conflicts could threaten our ability to capitalize the Nebraska plant ifthese directors put their personal interests ahead of our best interestsrelated to funding the Nebraska plant.

**EMPLOYMENT AGREEMENTS WITHEXECUTIVE OFFICERS**

We have entered into an employment agreement withRevis L. Stephenson III, pursuant to which, the term of Mr. Stephenson’semployment commenced on April 7, 2006 and shall end on the third anniversary ofthe date of the agreement, unless terminated pursuant to the employmentagreement. Thereafter, Mr. Stephenson’s employment shall be automaticallyextended for successive one-year periods unless terminated pursuant to theemployment agreement. While Mr. Stephenson is employed by our company, Mr.Stephenson will be nominated by the board of directors to serve on the board ofdirectors. Upon election, Mr. Stephenson will serve with no other compensationother than that provided for by the employment agreement.

Mr. Stephenson will receive an annual base salary of$300,000. In addition, Mr. Stephenson will receive (i) an annual performancebonus based on achievement of certain criteria established by our compensationcommittee; (ii) a strategic bonus, payable in units, based on additionalproduction of ethanol by our company; (iii) the right to participate in allemployee benefit plans and programs of our company; (iv) use of an automobilewhile employed by our company; (v) reimbursement for all reasonable andnecessary out-of-pocket business, travel and entertainment expenses incurred byhim in the performance of his employment; (vi) reimbursement for reasonablefees and expenses of annual tax return preparation and planning by anindependent public accounting firm; and (vii) 

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paid vacation time off in accordance with the normalpolicies of our company, but not less than four weeks of vacation per year.

Mr. Stephenson has agreed, as part of the employmentagreement, that (a) he will not divulge our confidential information or anyknow-how or trade secret information conceived or originated by him during hisemploy; (b) he will not take a corporate opportunity from our company; (c) hewill not engage in competition with our company; (d) he will not attempt tohire an employee of our company during Mr. Stephenson’s employ or during a12-month period thereafter; (e) he will not solicit our customers or suppliersduring his employ or during the 24-month period thereafter; and (f) he willdisclose to, and give all rights and ownership to, us in any improvements,inventions or copyrightable material he conceives during his employ andrelating to our business.

In the event of termination of Mr. Stephenson’semployment, as determined by the employment agreement, Mr. Stephenson shallreceive certain severance payments and benefits, including, but not limited to:(aa) a lump-sum amount equal to two times Mr. Stephenson’s annual base salaryat the highest rate in effect at any time in the one-year period precedingtermination of employment plus a performance bonus to be determined pursuant tothe employment agreement; (bb) health, dental and life insurance benefits forMr. Stephenson and his dependents for a 24-month period, to the extent thatsuch benefits were in effect at termination, unless Mr. Stephenson obtains suchcoverage through any other employer; (cc) a payment equal to the pro rataportion of any annual incentive bonus that would have been payable to Mr.Stephenson during the fiscal year in which the termination occurs; and (dd) allother applicable post-termination benefits under benefit plans and programsthen applicable to Mr. Stephenson in accordance with such plans and programs.Upon termination, Mr. Stephenson shall promptly deliver to us any and allcompany records and property in his possession or under his control.

We have also entered into an employment agreement withDonald E. Gales, pursuant to which the term of Mr. Gales’ employment commencedon April 7, 2006 and shall end on April 7, 2009, unless terminated pursuant tothe employment agreement. Thereafter, Mr. Gales’ employment shall beautomatically extended for successive one-year periods unless terminatedpursuant to the employment agreement. Mr. Gales will receive an annual basesalary of $250,000. In addition, Mr. Gales will receive (i) an annualperformance bonus based on achievement of certain criteria established by ourcompensation committee; (ii) a strategic bonus, payable in units, based onadditional production of ethanol by our company; (iii) the right to participatein all employee benefit plans and programs of our company; (iv) use of anautomobile while employed by our company; (v) reimbursement for expensesrelated to Mr. Gales’ relocation to the Minneapolis, Minnesota metropolitanarea; (vi) the right to receive 6,000 units at each anniversary of theeffective date of the agreement, up to a maximum of 30,000 units; (vii)reimbursement for all reasonable and necessary out-of-pocket business, traveland entertainment expenses incurred by him in the performance of hisemployment; and (viii) paid vacation time off in accordance with our normalpolicies, but not less than three weeks of vacation per year.

Mr. Gales has agreed, as part of the employmentagreement, that (a) he will not divulge our confidential information or anyknow-how or trade secret information conceived or originated by him during hisemploy; (b) he will not take a corporate opportunity from our company; (c) hewill not engage in competition with our company; (d) he will not attempt to hirean employee of our company during his employ or during a 12-month periodthereafter; (e) he will not solicit our customers or suppliers during hisemploy or during the 24-month period thereafter; and (f) he will disclose to,and give all rights and ownership to, us in any improvements, inventions orcopyrightable material he conceives during his employ and relating to ourbusiness.

In the event of termination of Mr. Gales’ employment,as determined by the employment agreement, Mr. Gales shall receive certainseverance payments and benefits, including, but not limited to: (aa) a lump-sumamount equal to Mr. Gales’ annual base salary at the highest rate in effect atany time in the one-year period preceding termination of employment, plus aperformance bonus to be determined pursuant to the employment agreement; (bb)health, dental and life insurance benefits for Mr. Gales and his dependents fora 24-month period, to the extent that such benefits were in effect attermination, unless Mr. Gales obtains such coverage through any other employer;(cc) a payment equal to the pro rata portion of any annual incentive bonus thatwould have been payable to Mr. Gales during the fiscal year the terminationoccurs; and (dd) all other applicable post-termination benefits under benefitplans and programs then applicable to Mr. Gales in accordance with such plansand programs. Upon termination, Mr. Gales shall promptly deliver to us any andall company records and property in his possession or under his control.

We have also entered into an employment agreement withRichard Peterson on October 17, 2006, pursuant to which Mr. Peterson willreceive an annual base salary of $175,000. In addition, Mr. Peterson willreceive (i) a 

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signing bonus of $65,000 payable on or before January8, 2007, which must be repaid if Mr. Peterson voluntarily resigns hisemployment before May 13, 2007; (ii) the right to participate in all employeebenefit plans and programs of our company; (iii) use of an automobile whileemployed by our company; and (iv) paid vacation time off in accordance with ournormal policies, but not less than three weeks of vacation per year. For eachcomplete calendar year that Mr. Peterson is employed by our company, he will beeligible for an annual bonus in the discretion of our board of directors.

Mr. Peterson has agreed, as part of the employmentagreement, that (a) he will not divulge our confidential information or anyknow-how or trade secret information conceived or originated by him during hisemploy; (b) he will not take a corporate opportunity from our company; (c) hewill not engage in competition with our company; (d) he will not attempt tohire an employee of our company during his employ or during a 24-month periodthereafter; (e) he will not solicit our customers or suppliers during hisemploy or during the 24-month period thereafter; and (f) he will disclose to,and give all rights and ownership to, us in any improvements, inventions orcopyrightable material he conceives during his employ and relating to ourbusiness.

In the event of termination of Mr. Peterson’semployment, as determined by the employment agreement, Mr. Peterson shallreceive certain severance payments and benefits, including, but not limited toa lump-sum amount equal to 52 weeks of Mr. Peterson’s annual base salary at thetime of termination of employment. Upon termination, Mr. Peterson shallpromptly deliver to us any and all company records and property in hispossession or under his control.

**RESTRICTED UNIT GRANTS**

We have entered into restricted unit agreements withentities owned by Revis L. Stephenson III and Donald E. Gales, respectively.For each additional ethanol production or co-production facility we acquire orbuild on or prior to April 3, 2009 in addition to the Nebraska plant, one newlyissued restricted unit will vest for each 1,000 gallons of ethanol productioncapacity acquired or built for the benefit of Stephenson Holdings, Inc., anentity owned by Mr. Stephenson, and 0.15 newly issued restricted units willvest for each 1,000 gallons of ethanol production capacity acquired or builtfor the benefit of Gales Holdings, Inc., an entity owned by Mr. Gales. Themaximum number of restricted units that will vest under these agreements willbe 300,000 and 45,000 units, respectively. To date, 39,000 restricted unitshave been granted to Stephenson Holdings, Inc. and 5,850 restricted units havebeen granted to Gales Holdings, Inc. due to our acquisition of approximately53% of the partnership interests of Heartland Grain Fuels. Half of the unitsgranted vested immediately, and the other half are presently subject toforfeiture and will vest in equal parts on the first and second anniversariesof the date of grant.

**ITEM 11.         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT AND RELATEDSTOCKHOLDER MATTERS**

**SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS**

The following table sets forth,as of December 27, 2006, the ownership of units by each member whom we know toown beneficially more than 5% of the outstanding units, each director, eachexecutive officer and all executive officers and directors as a group. At theclose of business on December 27, 2006, there were 8,613,481 units issued andoutstanding, each of which is entitled to one vote.

Unless otherwise indicated, thelisted beneficial owner has sole voting power and investment power with respectto such units and the mailing address for each person listed in thetable is 10201 Wayzata Blvd., Suite 250, Minneapolis, MN 55305.

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| **Name of Beneficial Owner**                                    | ** ** | **Amount and Nature of  Beneficial Ownership** | ** ** | **Percent of Class** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------------|------------|
| ***Non-Employee Directors:***                                                  |       |                                                               |       |                           |       |
| Robert Bettger                                                                 |       | 38,000                                                             |       | *                              |       |
| Larry L. Cerny                                                                 |       | 30,000                                                             | (2)        | *                              |       |
| Richard Hughes                                                                 |       | 34,000                                                             | (3)        | *                              |       |
| John E.  Lovegrove                                                             |       | 43,000                                                             | (4)        | *                              |       |
| Troy Otte                                                                      |       | 34,500                                                             |       | *                              |       |
| Keith Spohn                                                                    |       | 20,000                                                             | (5)        | *                              |       |
| Robert W. Holmes                                                               |       | 145,000                                                            | (6)        | 1.7                            | %          |
| Dale Locken                                                                    |       | 1,271,452                                                          | (7)        | 14.8                           | %          |
|                                                                           |       |                                                               |       |                           |       |
| ***Executive Officers:***                                                      |       |                                                               |       |                           |       |
| Revis L.  Stephenson III                                                       |       | 299,000                                                            | (8)        | 3.5                            | %          |
| Donald E. Gales                                                                |       | 19,350                                                             | (9)        | *                              |       |
| Richard Peterson                                                               |       | —                                                             |       | *                              |       |
| Executive officers and directors as a group (11 persons)                       |       | 1,934,302                                                          |       | 22.4                           | %          |
|                                                                           |       |                                                               |       |                           |       |
| ***Other beneficial owners:***                                                 |       |                                                               |       |                           |       |
| South Dakota  Wheat Growers Association  110 6th Avenue SE  Aberdeen, SD 57402 |       | 1,271,452                                                          |       | 14.8                           | %          |
| Heartland Producers,  LLC  1715 S. 8th Street  Aberdeen, SD 57401              |       | 1,228,547                                                          | (10)       | 12.5                           | %          |

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*                                         Less than 1%.

(1)                                  Includesthe units issued to the directors and officers through December 27, 2006.Assumes no additional purchases in our proposed registered securities offering.

(2)                                  Unitsare owned by the Larry L. Cerny Trust, and Larry L. Cerny, our director, is thecreator of the trust.

(3)                                  Unitsare owned jointly with Mr. Hughes’ spouse. Certain of these units are pledgedas collateral to secure a loan, the proceeds of which were used to finance thepurchase of the units.

(4)                                  Includesunits owned jointly with Mr. Lovegrove’s spouse. Certain of these units arepledged as collateral to secure a loan, the proceeds of which were used tofinance the purchase of the units.

(5)                                  Includesunits owned jointly with Mr. Spohn’s spouse. Certain of these shares arepledged as collateral to secure a loan, the proceeds of which were used tofinance the purchase of the units.

(6)                                  Includes115,000 units held in the name of the Holmes Residuary Trust, and RobertHolmes, our director, is the creator of the trust. Of these 115,000 units,25,000 were issued under a development fee agreement and subject to forfeitureunder the terms of that agreement. Also includes 5,000 units held in the nameof Mr. Holmes’ spouse as custodian for his minor child.

(7)                                  Includes1,271,452 units held by SDWG. Mr. Locken serves on the board of directors ofSDWG. Mr. Locken disclaims beneficial ownership of these securities.

(8)                                  Includes39,000 restricted units issued under a restricted unit agreement to anaffiliate of Mr. Stephenson and 40,000 restricted units that we expect will beissued to an affiliate of Mr. Stephenson upon successful completion of ourproposed registered securities offering and the determination by our board thatwe are reasonably likely to be able to finance the Aberdeen plant expansion. Alsoincludes 100,000 units issued under a development fee agreement and subject toforfeiture under the terms of that agreement. The development fee agreementfurther provides that if the actual project cost for the Nebraska plant exceeds$125 million, Mr. Stephenson is entitled to receive additional units valued at1% of the difference between the actual project cost and $125 million. Based onthe current estimated cost of the Nebraska plant at $151.6 million, Mr.Stephenson will be entitled to receive 26,580 additional units; these 26,580units are not included in the table. The table also does not include up to221,000 restricted units that may be issued to an affiliate of Mr. Stephensonpursuant to a restricted unit agreement.

(9)                                  Includes5,850 restricted units issued under a restricted unit agreement to an affiliateof Mr. Gales and 6,000 restricted units that we expect will be issued to anaffiliate of Mr. Gales upon successful completion of our proposed registeredsecurities offering and the determination by our board that we are reasonablylikely to be able to finance the Aberdeen plant expansion. Does not include upto 30,000 restricted units to be issued to Mr. Gales between April 7, 2007 andApril 7, 2011 as a signing bonus under Mr. Gales’ employment agreement. Thetable also does not include up to 33,150 restricted units that may be issued toan affiliate of Mr. Gales pursuant to a restricted unit agreement.

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(10)                            Includesin the pro forma columns 1,228,547 units to be issued to Heartland Producers onconsummation of the second closing under the Heartland transaction.

**PROMOTERS**

The term “promoter” is defined in Rule 405 under theSecurities Act of 1933 to include, with reference to an issuer such as ourcompany, any person who, acting alone or in conjunction with one more persons,directly or indirectly takes initiative in founding and organizing the businessof the issuer, as well as any person who, in connection with the founding andorganizing of the business of the issuer, directly or indirectly receives inconsideration of services and/or property, 10 percent or more of any class ofsecurities of the issuer or 10 percent or more of the proceeds from the sale ofany class of such securities. However, a person who receives such securities orproceeds solely in consideration of property shall not be deemed a promoter ifsuch person does not otherwise take part in founding or organizing theenterprise.

Our directors, other than Dale Locken, are consideredpromoters of our company, having taken initiative in organizing our currentbusiness. Our directors previously participated as promoters in connection withour 2005 private placement of units. The primary purpose of that privateplacement was to raise seed capital to start our business. In that offering, weraised a total of $1.5 million from 14 investors, eight of whom are directorsor entities affiliated with our directors. Following completion of our seedcapital private placement, we paid Revis L. Stephenson III and Robert W. Holmesa development fee equal to 125,000 restricted membership units in exchange fortheir efforts to organize and develop our company. These units are restrictedpursuant to a lock-up agreement.

Our directors, other than Dale Locken, previouslyparticipated as promoters in connection with our public offering of units thatclosed in March 2006. The primary purpose of that offering was to raise capitalto fund construction of the Nebraska plant. In that offering, we raised a totalof $60.5 million from 748 investors.

All of the foregoing payments constituting our use ofnet offering proceeds were direct or indirect payments to persons or entitiesother than our directors, officers or unitholders owning 10% or more of ourunits, except for amounts paid to our officers for their service as employeesof our company. No underwriting or other commissions were paid to our promoters(or others) in connection with this offering. To date, the proceeds have beeninvested primarily in the construction of our Nebraska plant, as well as for theacquisition of Indiana Renewable Fuels, LLC and general operating expenses.

We entered into a project development fee agreementwith Revis L. Stephenson III and Robert W. Holmes for the payment of adevelopment fee equal to 1% of the total project cost for the Nebraska plant,which is currently estimated at $151,580,000 or 151,580 units. These units arerestricted pursuant to the project development fee agreement between us and Mr.Stephenson and Mr. Holmes. We may be obligated to pay additional units, currentlyestimated at 26,580, to Mr. Stephenson upon substantial completion of theNebraska plant if the actual total cost of the project exceeds $125.0 million.Likewise, Mr. Stephenson may be required to forfeit units back to us if theactual total project cost is less than $125.0 million.

The information under the heading “Units That May BeIssued Under Equity Compensation Plans” under Item 5 — “Market for Registrant’sCommon Equity, Related Stockholder Matters and Small Business Issuer Purchasesof Equity Securities” is incorporated by reference in this Item 11.

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

**TRANSACTIONS WITH REVIS L.STEPHENSON III AND ROBERT W. HOLMES**

Revis L. Stephenson III is currently serving as ourchairman and chief executive officer and Robert W. Holmes is currently servingas a member of our board of directors. We entered into a project developmentfee agreement with Mr. Stephenson and Mr. Holmes for the payment of adevelopment fee equal to 1% of the total project cost for the Nebraska plant,which is currently estimated at $151,580,000 or 151,580 units. Followingcompletion of our seed capital private placement, we paid these two directors adevelopment fee equal to 125,000 restricted membership units in exchange for theirefforts to organize and develop our company. These units are restrictedpursuant to the project development fee agreement between us and Mr. Stephensonand Mr. Holmes and pursuant to a related lock-up agreement. We may be obligatedto pay additional units to Mr. Stephenson upon substantial completion of theNebraska plant if the actual total cost of the project exceeds $125.0 million.Likewise, Mr. Stephenson may be required to forfeit units back to us if theactual total project cost is less than $125.0 million. 

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The terms of our agreement with Mr. Stephenson and Mr.Holmes may or may not be as favorable to us as those generally available fromunaffiliated third parties. However, a majority of our independent directorsapproved this agreement with Mr. Stephenson and Mr. Holmes abstaining. Thisincluded at least two directors who have no interest in the transaction and hadaccess to our legal counsel. We will require that all future transactions withMr. Stephenson and Mr. Holmes will be no less favorable to us as thosegenerally available from unaffiliated third parties and will also be approvedby the majority of independent directors.

Robert W. Holmes is currently the president of one ofour depositories, Timberwood Bank of Tomah, Wisconsin. The terms of ourarrangements with Timberwood Bank may or may not be as favorable to us as thosegenerally available from unaffiliated third parties. However, a majority of ourindependent directors ratified these arrangements, including at least twodirectors who have no interest in the transaction and had access to our legalcounsel. We will require that all future transactions will be no less favorableto us as those generally available from unaffiliated third parties and willalso be approved by the majority of independent directors.

**TRANSACTION WITH BIOENERGYCAPITAL CONSULTANTS, LLC**

We entered into a consulting agreement with BioEnergyCapital Consultants, LLC, Lake Preston, South Dakota, as a project developmentand equity consultant. BioEnergy Capital Consultants is owned and operated inpart by one of our former directors, John T. Porter. In anticipation of thereceipt of consulting services, we issued 50,000 units to BioEnergy CapitalConsultants, LLC. In exchange, BioEnergy Capital Consultants, LLC provided tous assistance with negotiation of various contracts and assistance in theplanning of our initial equity marketing effort. The entire 50,000 units aresubject to a lock-up agreement that restricts transfer of the units until May10, 2008. In addition, we paid to BioEnergy Capital Consultants, LLC, $1,500weekly or $375 daily on an as-needed basis for certain requested services.

The terms of our agreement with BioEnergy CapitalConsultants may or may not be as favorable to us as those generally availablefrom unaffiliated third parties. However, a majority of our independentdirectors approved this agreement with BioEnergy Capital Consultants. We willrequire that all future transactions with BioEnergy Capital Consultants will beno less favorable to us as those generally available from unaffiliated thirdparties and will also be approved by the majority of independent directors.

**TRANSACTIONS WITH WDB, INC. ANDBETTGER BROTHERS PARTNERSHIP**

We acquired an option to purchase real estate fromWDB, Inc., which is owned by the brother of one of our directors, RobertBettger. We paid $10,000 for the option, which allowed us to purchase between75 and 112 acres for $6,000 per acre. The real estate makes up a portion of oursite for the Nebraska plant. In connection with this real estate option, weentered into a planting agreement with Bettger Brothers Partnership, which isowned in part by Robert Bettger. In that agreement, Bettger BrothersPartnership agreed to change its planned crop rotation and plant soybeans forthe crop year 2005 instead of hybrid seed corn in exchange for our agreement tocompensate it for associated lost profits. We would not have had the ability toaccess the site if it were planted with hybrid seed corn due to the nature ofthe crop. By this agreement, we gained the access to the property that werequired in order to prepare the site for construction. We subsequentlyexercised this option and purchased 112 acres from WDB, Inc. for a total of$672,000. Of the total purchase price, $604,800 was recorded as a note payable,with interest at a rate of 7% per annum, which has been paid in full.

These agreements may or may not be as favorable to usas those generally available from unaffiliated third parties. However, amajority of our independent directors ratified these agreement, including atleast two directors who have no interest in the transaction and had access toour legal counsel. We will require that all future transactions will be no lessfavorable to us as those generally available from unaffiliated third partiesand will also be approved by the majority of independent directors.

**TRANSACTIONS WITH DIRECTORS INSEED CAPITAL OFFERING**

During our seed capital offering, we issued membershipunits to certain investors, some of whom were directors or entities affiliatedwith directors. These membership units were issued in exchange for payment of asplit-adjusted purchase price of $3.33 per unit. The number of units purchasedby each of our directors or affiliated entities in the seed capital offeringand the purchase price paid is detailed in the chart below.

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|                              | ** ** | **Number of Split-Adjusted** | ** ** | ** **              | ** **    |
|------------------------------|------------|----------------------------------------|------------|-------------------------|---------------|
| ** **                   | ** ** | **Units Purchased in**       | ** ** | ** **              | ** **    |
| **Name of Member** | ** ** | **Seed Capital Offering**    | ** ** | **Purchase Price** | ** **    |
| Revis L. Stephenson III      |       | 105,000                                |       | $                       | 350,000       |   |
| Holmes Residuary Trust       |       | 90,000                                 |       | $                       | 300,000       |   |
| Robert E. Bettger            |       | 18,000                                 |       | $                       | 60,000        |   |
| Larry L. Cerny Trust         |       | 15,000                                 |       | $                       | 50,000        |   |
| Richard W. Hughes            |       | 19,500                                 |       | $                       | 65,000        |   |
| John E. Lovegrove            |       | 18,000                                 |       | $                       | 60,000        |   |
| Troy Otte                    |       | 19,500                                 |       | $                       | 65,000        |   |
| Keith E. Spohn               |       | 15,000                                 |       | $                       | 50,000        |   |
| **Total**                    | ** ** | **300,000**                            | ** ** | **$**                   | **1,000,000** | ** ** |

 

The per unit price paid by our initial directors inthe seed capital offering is the same price that the units were offered toother investors in our seed capital offering. A majority of our directorsapproved the subscription agreements executed by each of our initial directorsfor the purchase of these membership units.

**TRANSACTION WITH OPPENHEIMER& CO. INC.**

We engaged Oppenheimer & Co. Inc. to act asinvestment banker/placement agent for the structuring and sale of exemptfacility revenue bonds issued by the County of Fillmore, State of Nebraska . Wealso engaged Oppenheimer & Co, Inc. to act as placement agent for our taxincrement financing issued by the Village of Fairmont, Nebraska. Revis L.Stephenson III was a Vice President at Oppenheimer & Co. Inc. at that time.Mr. Stephenson did not receive a commission or finders fee in connection withthe engagement.

**LOCK-UP AGREEMENT WITH REVIS L.STEPHENSON III, HOLMES RESIDUARY TRUST AND BIOENERGY CAPITAL CONSULTANTS, LLC**

We have entered into a lock-up agreement with Revis L.Stephenson III, the Holmes Residuary Trust and BioEnergy Capital Consultants asa condition of registering units in the state of Nebraska. The lock-upagreement restricts certain transfers of certain units owned by these partiesprior to May 10, 2008. The agreement restricts transfers of 170,000 units ownedby Mr. Stephenson, 85,000 units owned by the Holmes Residuary Trust and 50,000units owned by BioEnergy Capital Consultants. Under the lock-up agreement,these parties agreed to put a restrictive legend on the unit certificates andfile the agreement with us. The lock-up agreement does not impair theunitholders’ voting rights or rights to receive distributions associated withthese units.

**RESTRICTED UNIT GRANTS**

Pursuant to their employment agreements, we enteredinto restricted unit agreements with entities owned by Revis L. Stephenson IIIand Donald E. Gales, respectively. For each additional ethanol production orco-production facility we acquire or build on or prior to April 3, 2009 inaddition to the Nebraska plant, one newly issued restricted unit will vest foreach 1,000 gallons of ethanol production capacity acquired or built for thebenefit of Stephenson Holdings, Inc., an entity owned by Mr. Stephenson, and0.15 newly issued restricted units will vest for each 1,000 gallons of ethanolproduction capacity acquired or built for the benefit of Gales Holdings, Inc.,an entity owned by Mr. Gales. The maximum number of restricted units that willvest under these agreements will be 300,000 and 45,000 units, respectively. Todate, 39,000 of the restricted units owned by Stephenson Holdings, Inc. haveissued and 5,850 of the restricted units owned by Gales Holdings, Inc. havebeen issued due to our acquisition of approximately 53% of the partnershipinterests of Heartland Grain Fuels.

**TRANSACTIONS WITH GEOTECHNICALSERVICES, INC.**

Larry Cerny, our secretary and a member of our boardof directors, is the co-founder and chairman of the board of GeotechnicalServices, Inc., a geotech and environmental engineering firm. As of November 7,2006, we have paid Geotechnical Services $76,090 for soil testing andgeotechnical investigation services and the performance of a phase Ienvironmental site assessment update for the site of the Nebraska plant. Weaccepted bids from unaffiliated parties before contracting with GeotechnicalServices, and a majority of unaffiliated directors approved the transaction. Wewill require that all future transactions with Geotechnical Services will be noless favorable to us as those generally available from unaffiliated thirdparties and will also be approved by the majority of independent directors.

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**TRANSACTIONS WITH SOUTH DAKOTA WHEAT GROWERS ASSOCIATION**

At the closing of SDWG’s sale of its interests inHeartland Grain Fuels and Dakota Fuels to our company, we entered into a grainorigination agreement with SDWG, pursuant to which SDWG will provide the cornrequired for the operation of the South Dakota plants, including the Aberdeenplant expansion. Subsequent to the execution of this agreement, Dale Locken,the chief executive officer of SDWG, became a member of our board of directors.

**ITEM 13.         EXHIBITS**
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1         |       | Partnership Interest Purchase Agreement with HGF  Acquisition, LLC, Aventine Renewable Energy, Inc., Dakota Fuels, Inc., South  Dakota Wheat Growers Association, Heartland Producers, LLC, and Heartland  Grain Fuels, L.P. dated as of November 7,  2006 (A) |
| 2.2         |       | Partnership Interest and Stock Purchase Agreement  with HGF Acquisition, LLC, Heartland Grain Fuels, L.P, Heartland Producers,  LLC, South Dakota Wheat Growers Association and Dakota Fuels, Inc. dated as of November 7, 2006 (B)                            |
| 3.1         |       | Certificate of Formation (C)                                                                                                                                                                                                                                   |
| 3.2         |       | Third Amended and Restated Operating Agreement dated  February 1, 2006 (D)                                                                                                                                                                                     |
| 4.1         |       | Form of Membership Unit Certificate (E)                                                                                                                                                                                                                        |
| 4.2         |       | Subscription Agreement of Registrant (F)                                                                                                                                                                                                                       |
| 10.1        |       | Promissory Note (Operating Loan) and Loan Agreement  with Farm Credit Services of America PCA dated February 13, 2006 (G)                                                                                                                                      |
| 10.2        |       | Master Loan Agreement with Farm Credit Services of  America, FLCA dated February 17, 2006 (H)                                                                                                                                                                  |
| 10.3        |       | Amendment to Master Loan Agreement with Farm Credit  Services of America, FLCA dated April 11, 2006 (I)                                                                                                                                                        |
| 10.4        |       | Statused Revolving Credit Supplement with Farm  Credit Services of America, FLCA dated February 17, 2006 (J)                                                                                                                                                   |
| 10.5        |       | Construction and Revolving Term Loan Supplement with  Farm Credit Services of America, FLCA dated February 17, 2006 (K)                                                                                                                                        |
| 10.6        |       | Construction and Term Loan Supplement with Farm  Credit Services of America, FLCA dated February 17, 2006 (JJ)                                                                                                                                                 |
| 10.7        |       | Loan and Trust Agreement with the County of  Fillmore, State of Nebraska and Wells Fargo N.A. dated April 1, 2006 (L)                                                                                                                                          |
| 10.8        |       | Promissory Note issued to the County of Fillmore,  State of Nebraska dated April 27, 2006 (M)                                                                                                                                                                  |
| 10.9        |       | Deed of Trust and Security Agreement with Wells  Fargo Bank dated April 27, 2006 (N)                                                                                                                                                                           |
| 10.10       |       | Lump-Sum Design Build Agreement with Fagen, Inc.  dated March 16, 2006 (MM)*                                                                                                                                                                                   |
| 10.11       |       | License Agreement with ICM, Inc. dated March 16,  2006 (O)                                                                                                                                                                                                     |
| 10.12       |       | Contract for Electrical Service with Perennial  Public Power District dated April 25, 2006 (P)                                                                                                                                                                 |
| 10.13       |       | Employment Agreement with Revis L. Stephenson III  dated April 7, 2006 (Q) +                                                                                                                                                                                   |
| 10.14       |       | Employment Agreement with Don Gales dated April 7,  2006 (R) +                                                                                                                                                                                                 |
| 10.15       |       | Track Material Purchase Agreement with the Tie Yard  of Omaha dated May 5, 2006 (S)                                                                                                                                                                            |
| 10.16       |       | Consulting Agreement with BioEnergy Capital  Consultants, LLC dated March 22, 2005 (T)                                                                                                                                                                         |
| 10.17       |       | Project Development Fee Agreement with Robert W.  Holmes and Revis L. Stephenson III dated May 19, 2005 (U)                                                                                                                                                    |
| 10.18       |       | Planting Agreement for Crop Year 2005 with Bettger  Brothers Partnership (V)                                                                                                                                                                                   |
| 10.19       |       | Lock-Up Agreement with Revis L. Stephenson III,  BioEnergy Capital Consultants LLC, Holmes Residuary Trust dated November 4,  2005 (W)                                                                                                                         |
| 10.20       |       | Letter Agreement with Oppenheimer & Co. Inc.  dated November 22, 2005 (X)                                                                                                                                                                                  |
| 10.21       |       | Ethanol Fuel Marketing Agreement with Renewable  Products Marketing Group, L.L.C. dated July 19, 2006 (Y)                                                                                                                                                      |
| 10.22       |       | Distiller’s Grain Marketing Agreement with Commodity  Specialist Company dated May 31, 2006 (KK)                                                                                                                                                          |
| 10.23       |       | Farm Lease and Security Agreement with Bettger  Brothers Partnership dated April 30, 2006(LL)                                                                                                                                                                  |

 

115

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| 10.24 |   | Agreement between Owner and Design/Builder dated  July 14, 2006*, **                                                                                                                                     |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.25 |   | Letter of Intent with ICM, Inc. dated December 19,  2006 (QQ)*                                                                                                                                                |
| 10.26 |   | Investor Rights Agreement with South Dakota Wheat  Growers Association dated as of November 7, 2006 (Z)                                                                                                       |
| 10.27 |   | Employment Agreement with Richard Peterson dated  October 17, 2006 (AA) +                                                                                                                                     |
| 10.28 |   | Restricted Unit Agreement with Stephenson Holdings,  Inc. dated November 7, 2006 (BB) +                                                                                                                       |
| 10.29 |   | Restricted Unit Agreement with Gales Holdings, Inc.  dated November 7, 2006 (CC) +                                                                                                                            |
| 10.30 |   | South Dakota Grain Fuels. L.P. Agreement of Limited  Partnership dated August 27, 1991 (NN)                                                                                                                   |
| 10.31 |   | Amendment to the Agreement of Limited Partnership of  Heartland Grain Fuels, L.P. dated November 8, 2006 (OO)                                                                                                 |
| 10.32 |   | Master Loan Agreement between Farm Credit Services  of America, FLCA and ABE Fairmont, LLC dated as of November 20, 2006 (DD)                                                                                 |
| 10.33 |   | Construction and Term Loan Supplement to the Master  Loan Agreement between Farm Credit Services of America, FLCA and ABE  Fairmont, LLC entered into as of November 20, 2006 (EE)                            |
| 10.34 |   | Construction and Revolving Term Loan Supplement to  the Master Loan Agreement between Farm Credit Services of America, FLCA and  ABE Fairmont, LLC entered into as of November 20, 2006 (FF)                  |
| 10.35 |   | Amendment to the Construction and Term Loan  Supplement to the Master Loan Agreement between Farm Credit Services of  America, FLCA and ABE Fairmont, LLC entered into as of November 20, 2006 (GG)           |
| 10.36 |   | Amendment to the Construction and Revolving Term  Loan Supplement to the Master Loan Agreement between Farm Credit Services of  America, FLCA and ABE Fairmont, LLC entered into as of November 20, 2006 (HH) |
| 10.37 |   | Administrative Agency Agreement among Farm Credit  Services of America, FLCA, CoBank, ACB and ABE Fairmont, LLC dated as of  November 20, 2006 (II)                                                           |
| 14    |   | Code of Ethics for Chief Executive and Senior  Financial Officers **                                                                                                                                          |
| 21    |   | List of Subsidiaries of the Registrant (PP)                                                                                                                                                                   |
| 24    |   | Powers of Attorney (included in signature page)                                                                                                                                                               |
| 31.1  |   | Rule 13a-14(a)/15d-14(a) Certification by Principal  Executive Officer**                                                                                                                                      |
| 31.2  |   | Rule 13a-14(a)/15d-14(a) Certification by Principal  Financial and Accounting Officer**                                                                                                                       |
| 32.1  |   | Section 1350 Certification by Principal Executive  Officer**                                                                                                                                                  |
| 32.2  |   | Section 1350 Certification by Principal Financial  Officer**                                                                                                                                                  |

----

*                                         Materialhas been omitted pursuant to a request for confidential treatment and suchmaterials have been filed separately with the Commission.

+                                         Managementcompensatory plan or arrangement.

**                                  Filedherewith.

(A)                              Incorporatedherein by reference to Exhibit 2.1 to the Registrant’s Current Report on Form8-K, filed on November 8, 2006 (File No. 333-125335).

(B)                                Incorporatedherein by reference to Exhibit 2.2 to the Registrant’s Current Report on Form8-K, filed on November 8, 2006 (File No. 333-125335).

(C)                                Incorporatedherein by reference to Exhibit 3.1 to the Registrant’s Registration Statementon Form SB-2, filed on May 23, 2005 (File No. 333-125335).

(D)                               Incorporatedherein by reference to Exhibit 3.2 to the Registrant’s Post Effective AmendmentNo. 1 to Registration Statement on Form SB-2, filed on February 10, 2006 (FileNo. 333-125335).

(E)                                 Incorporatedherein by reference to Exhibit 4.1 to the Registrant’s Registration Statementon Form SB-2, filed on May 23, 2005 (File No. 333-125335).

(F)                                 Incorporatedherein by reference to Annex C to the Registrant’s Pre-Effective Amendment No.2 to Registration Statement on Form SB-2, filed on December 20, 2006 (File No.333-137299).

116

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(G)                                Incorporatedherein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report onForm 10-QSB, filed on May 15, 2006 (File No. 333-125335).

(H)                               Incorporatedherein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report onForm 10-QSB, filed on May 15, 2006 (File No. 333-125335).

(I)                                    Incorporatedherein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report onForm 10-QSB, filed on May 15, 2006 (File No. 333-125335).

(J)                                   Incorporatedherein by reference to Exhibit 10.4 to the Registrant’s Quarterly Report onForm 10-QSB, filed on May 15, 2006 (File No. 333-125335).

(K)                               Incorporatedherein by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form10-QSB, filed on May 15, 2006 (File No. 333-125335).

(L)                                 Incorporatedherein by reference to Exhibit 10.6 to the Registrant’s Quarterly Report onForm 10-QSB, filed on May 15, 2006 (File No. 333-125335).

(M)                            Incorporatedherein by reference to Exhibit 10.7 to the Registrant’s Quarterly Report onForm 10-QSB, filed on May 15, 2006 (File No. 333-125335).

(N)                               Incorporatedherein by reference to Exhibit 10.8 to the Registrant’s Quarterly Report onForm 10-QSB, filed on May 15, 2006 (File No. 333-125335).

(O)                               Incorporatedherein by reference to Exhibit 10.10 to the Registrant’s Quarterly Report onForm 10-QSB, filed on May 15, 2006 (File No. 333-125335).

(P)                                 Incorporatedherein by reference to Exhibit 10.11 to the Registrant’s Quarterly Report onForm 10-QSB, filed on May 15, 2006 (File No. 333-125335).

(Q)                               Incorporatedherein by reference to Exhibit 10.12 to the Registrant’s Quarterly Report onForm 10-QSB, filed on May 15, 2006 (File No. 333-125335).

(R)                                Incorporatedherein by reference to Exhibit 10.13 to the Registrant’s Quarterly Report onForm 10-QSB, filed on May 15, 2006 (File No. 333-125335).

(S)                                 Incorporatedherein by reference to Exhibit 10.16 to the Registrant’s Quarterly Report onForm 10-QSB, filed on May 15, 2006 (File No. 333-125335).

(T)                                Incorporatedherein by reference to Exhibit 10.9 to the Registrant’s Registration Statementon Form SB-2, filed on May 23, 2005 (File No. 333-125335).

(U)                               Incorporatedherein by reference to Exhibit 10.10 to the Registrant’s Registration Statementon Form SB-2, filed on May 23, 2005 (File No. 333-125335).

(V)                                Incorporatedherein by reference to Exhibit 10.11 to the Registrant’s Pre-EffectiveAmendment No. 1 to Registration Statement on Form SB-2, filed on August 12,2005 (File No. 333-125335).

(W)                           Incorporatedherein by reference to Exhibit 10.15 to the Registrant’s Pre-EffectiveAmendment No. 4 to Registration Statement on Form SB-2, filed on November 7,2005 (File No. 333-125335).

(X)                               Incorporatedherein by reference to Exhibit 10.19 to the Registrant’s Post-EffectiveAmendment No. 1 to Registration Statement on Form SB-2, filed on February 10,2006 (File No. 333-125335).

(Y)                                Incorporatedherein by reference to Exhibit 10 to the Registrant’s Quarterly Report on Form10-QSB, filed on August 14, 2006 (File No. 333-125335).

(Z)                                Incorporatedherein by reference to Exhibit 10 to the Registrant’s Current Report on Form8-K, filed on November 8, 2006 (File No. 333-125335).

(AA)                    Incorporatedherein by reference to Exhibit 10 to the Registrant’s Current Report on Form8-K, filed on November 9, 2006 (File No. 333-125335).

(BB)                        Incorporatedherein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form8-K, filed on November 7, 2006 (File No. 333-125335).

(CC)                        Incorporatedherein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form8-K, filed on November 7, 2006 (File No. 333-125335).

(DD)                      Incorporatedherein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form8-K, filed on November 28, 2006 (File No. 333-125335).

(EE)                          Incorporatedherein by reference to Exhibit 10.3 to the Registrant’s Current Report on Form8-K, filed on November 28, 2006 (File No. 333-125335).

(FF)                          Incorporatedherein by reference to Exhibit 10.3 to the Registrant’s Current Report on Form8-K, filed on November 28, 2006 (File No. 333-125335).

(GG)                        Incorporatedherein by reference to Exhibit 10.4 to the Registrant’s Current Report on Form8-K, filed on November 28, 2006 (File No. 333-125335).

(HH)                      Incorporatedherein by reference to Exhibit 10.5 to the Registrant’s Current Report on Form8-K, filed on November 28, 2006 (File No. 333-125335).

117

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(II)                                Incorporatedherein by reference to Exhibit 10.6 to the Registrant’s Current Report on Form8-K, filed on November 28, 2006 (File No. 333-125335).

(JJ)                              Incorporatedherein by reference to Exhibit 10.6 to the Registrant’s Registration Statementon Form SB-2, filed on September 13, 2006 (File No. 333-137299).

(KK)                      Incorporatedherein by reference to Exhibit 10.22 to the Registrant’s Registration Statementon Form SB-2, filed on September 13, 2006 (File No. 333-137299).

(LL)                          Incorporatedherein by reference to Exhibit 10.23 to the Registrant’s Registration Statementon Form SB-2, filed on September 13, 2006 (File No. 333-137299).

(MM)                Incorporatedherein by reference to Exhibit 10.10 to the Registrant’s Pre-EffectiveAmendment No. 2 to Registration Statement on Form SB-2, filed on December 20,2006 (File No. 333-137299).

(NN)                      Incorporatedherein by reference to Exhibit 10.30 to the Registrant’s Pre-EffectiveAmendment No. 2 to Registration Statement on Form SB-2, filed on December 20,2006 (File No. 333-137299).

(OO)                      Incorporatedherein by reference to Exhibit 10.31 to the Registrant’s Pre-EffectiveAmendment No. 2 to Registration Statement on Form SB-2, filed on December 20,2006 (File No. 333-137299).

(PP)                          Incorporatedherein by reference to Exhibit 21 to the Registrant’s Pre-Effective AmendmentNo. 2 to Registration Statement on Form SB-2, filed on December 20, 2006 (FileNo. 333-137299).

(QQ)                      Incorporatedherein by reference to Exhibit 10 to the Registrant’s Current Report on Form8-K/A, filed on December 22, 2006 (File No. 333-125335).

**ITEM 14.         PRINCIPAL ACCOUNTANT FEES AND SERVICES**

**FeesBilled by McGladrey & Pullen LLP**

In addition toreimbursement for certain out-of-pocket expenses, the following table presentsthe aggregate fees billed for professional services by McGladrey & PullenLLP in fiscal 2006 and the period from inception to September 30, 2005 (fiscal2005) for these various services: 
| **Description of Fees**   | ** ** | **Fiscal 2006  Amount** | ** ** | **Fiscal 2005  Amount** | ** ** |
|-------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| Audit Fees                          |       | $                            | 121,900    |                         | $          | 79,175 |   |
| Audit-Related Fees                  |       | —                       |       | —                       |       |
| Total Audit and  Audit-Related Fees |       | 121,900                      |       | 79,175                       |       |
| Tax Fees:                           |       |                         |       |                         |       |
| Tax Compliance  Fees                |       | —                       |       | —                       |       |
| Tax Consultation  and Advice Fees   |       | —                       |       | —                       |       |
| Total Tax Fees                      |       | —                       |       | —                       |       |
| All Other Fees                      |       | —                       |       | —                       |       |
| Total                               |       | $                            | 121,900    |                         | $          | 79,175 |   |

 

*AuditFees*

The audit fees set forth above for fiscal 2006 andfiscal 2005 consist of fees billed by McGladrey & Pullen LLP for auditservices in connection with their review of our interim financial statementsfor the first three quarters of the 2006 fiscal year and for the audit of ourfiscal year-end financial statements, in addition to fees for audit servicesthat are normally provided by an independent registered public accounting firmin connection with statutory and regulatory filings or engagements, such ascomfort letters, consents related to Securities and Exchange Commissionregistration statements (including our registration statements on Form SB-2),and other services related to Securities and Exchange Commission matters forthe fiscal year.

*Audit-RelatedFees*

We were not billed any amounts by McGladrey &Pullen LLP for audit-related services during fiscal 2006 or fiscal 2005.

118

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*TaxFees*

Wewere not billed any amounts by RSM McGladrey, Inc. or entities associated withMcGladrey & Pullen LLP for tax services during fiscal 2006 or fiscal 2005.

*AllOther Fees*

Wewere not billed any amounts by McGladrey & Pullen LLP for other productsand services during fiscal 2006 or fiscal 2005.

**Approvalof Independent Registered Public Accounting Firm Services and Fees**

The audit committeecharter requires that our audit committee approve the retention of ourindependent registered public accounting firm for any non-audit service andconsider whether the provision of these non-audit services by our independentregistered public accounting firm is compatible with maintaining ourindependent auditor’s independence, prior to engagement for these services. Ouraudit committee actively monitors the relationship between audit and non-auditservices provided.

119

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**SIGNATURES**

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized, on December 29, 2006.
| ** ** | **ADVANCED BIOENERGY, LLC** |
|------------|-----------------------------|
|       | (Registrant)                |
|       |                        |
|       | By:                         | /s/ Revis L. Stephenson III |
|       |                        | Revis L. Stephenson III |
| * *   |                        | *Chief Executive Officer* |

 

Each of the undersignedhereby appoints Revis L. Stephenson and Richard Peterson, and each of them(with full power to act alone), as attorneys and agents for the undersigned,with full power of substitution, for and in the name, place and stead of theundersigned, to sign and file with the Securities and Exchange Commission underthe Securities Act of 1934, any and all amendments and exhibits to this annualreport on Form 10-KSB and any and all applications, instruments, and otherdocuments to be filed with the Securities and Exchange Commission pertaining tothis annual report on Form 10-KSB or any amendments thereto, with full powerand authority to do and perform any and all acts and things whatsoeverrequisite and necessary or desirable. Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities indicatedon December 28, 2006.
| Signature                   | ** ** | **Title**                                                                     |
|-----------------------------|------------|-------------------------------------------------------------------------------|
| ** **                  | ** ** | ** **                                                                    |
| /s/ Revis L. Stephenson III |       | Chairman, Chief Executive Officer and Director  (Principal Executive Officer) |
| Revis L. Stephenson III     |       |                                                                          |
|                        |       |                                                                          |
| /s/ Richard Peterson        |       | Chief Financial Officer and Vice President of  Accounting and                 |
| Richard Peterson            |       | Finance (Principal Financial and Accounting Officer)                          |
|                        |       |                                                                          |
| /s/ Robert W. Holmes        |       | Director                                                                      |
| Robert W. Holmes            |       |                                                                          |
|                        |       |                                                                          |
| /s/ Robert Bettger          |       | Director                                                                      |
| Robert Bettger              |       |                                                                          |
|                        |       |                                                                          |
| /s/ Larry L. Cerny          |       | Corporate Secretary and Director                                              |
| Larry L. Cerny              |       |                                                                          |
|                        |       |                                                                          |
| /s/ Richard Hughes          |       | Director                                                                      |
| Richard Hughes              |       |                                                                          |
|                        |       |                                                                          |
| /s/ Dale Locken             |       | Director                                                                      |
| Dale Locken                 |       |                                                                          |
|                        |       |                                                                          |
| /s/ John E. Lovegrove       |       | Director                                                                      |
| John E. Lovegrove           |       |                                                                          |
|                        |       |                                                                          |
| /s/ Troy Otte               |       | Director                                                                      |
| Troy Otte                   |       |                                                                          |
|                        |       |                                                                          |
| /s/ Keith Spohn             |       | Director                                                                      |
| Keith Spohn                 |       |                                                                          |

 

120

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**EXHIBIT INDEX**
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                              |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1         |       | Partnership Interest Purchase Agreement with HGF  Acquisition, LLC, Aventine Renewable Energy, Inc., Dakota Fuels, Inc., South  Dakota Wheat Growers Association, Heartland Producers, LLC, and Heartland  Grain Fuels, L.P. dated as of November 7,  2006++ |
| 2.2         |       | Partnership Interest and Stock Purchase Agreement  with HGF Acquisition, LLC, Heartland Grain Fuels, L.P, Heartland Producers,  LLC, South Dakota Wheat Growers Association and Dakota Fuels, Inc. dated as of November 7, 2006++                            |
| 3.1         |       | Certificate of Formation++                                                                                                                                                                                                                                   |
| 3.2         |       | Third Amended and Restated Operating Agreement dated  February 1, 2006++                                                                                                                                                                                     |
| 4.1         |       | Form of Membership Unit Certificate++                                                                                                                                                                                                                        |
| 4.2         |       | Subscription Agreement of Registrant++                                                                                                                                                                                                                       |
| 10.1        |       | Promissory Note (Operating Loan) and Loan Agreement  with Farm Credit Services of America PCA dated February 13, 2006++                                                                                                                                      |
| 10.2        |       | Master Loan Agreement with Farm Credit Services of  America, FLCA dated February 17, 2006++                                                                                                                                                                  |
| 10.3        |       | Amendment to Master Loan Agreement with Farm Credit  Services of America, FLCA dated April 11, 2006++                                                                                                                                                        |
| 10.4        |       | Statused Revolving Credit Supplement with Farm  Credit Services of America, FLCA dated February 17, 2006++                                                                                                                                                   |
| 10.5        |       | Construction and Revolving Term Loan Supplement with  Farm Credit Services of America, FLCA dated February 17, 2006++                                                                                                                                        |
| 10.6        |       | Construction and Term Loan Supplement with Farm  Credit Services of America, FLCA dated February 17, 2006++                                                                                                                                                  |
| 10.7        |       | Loan and Trust Agreement with the County of  Fillmore, State of Nebraska and Wells Fargo N.A. dated April 1, 2006++                                                                                                                                          |
| 10.8        |       | Promissory Note issued to the County of Fillmore,  State of Nebraska dated April 27, 2006++                                                                                                                                                                  |
| 10.9        |       | Deed of Trust and Security Agreement with Wells  Fargo Bank dated April 27, 2006++                                                                                                                                                                           |
| 10.10       |       | Lump-Sum Design Build Agreement with Fagen, Inc.  dated March 16, 2006++*                                                                                                                                                                                    |
| 10.11       |       | License Agreement with ICM, Inc. dated March 16,  2006++                                                                                                                                                                                                     |
| 10.12       |       | Contract for Electrical Service with Perennial  Public Power District dated April 25, 2006++                                                                                                                                                                 |
| 10.13       |       | Employment Agreement with Revis L. Stephenson III  dated April 7, 2006++                                                                                                                                                                                     |
| 10.14       |       | Employment Agreement with Don Gales dated April 7,  2006++                                                                                                                                                                                                   |
| 10.15       |       | Track Material Purchase Agreement with the Tie Yard  of Omaha dated May 5, 2006++                                                                                                                                                                            |
| 10.16       |       | Consulting Agreement with BioEnergy Capital  Consultants, LLC dated March 22, 2005++                                                                                                                                                                         |
| 10.17       |       | Project Development Fee Agreement with Robert W.  Holmes and Revis L. Stephenson III dated May 19, 2005++                                                                                                                                                    |
| 10.18       |       | Planting Agreement for Crop Year 2005 with Bettger  Brothers Partnership++                                                                                                                                                                                   |
| 10.19       |       | Lock-Up Agreement with Revis L. Stephenson III,  BioEnergy Capital Consultants LLC, Holmes Residuary Trust dated November 4,  2005++                                                                                                                         |
| 10.20       |       | Letter Agreement with Oppenheimer & Co. Inc.  dated November 22, 2005++                                                                                                                                                                                  |
| 10.21       |       | Ethanol Fuel Marketing Agreement with Renewable  Products Marketing Group, L.L.C. dated July 19, 2006++                                                                                                                                                      |
| 10.22       |       | Distiller’s Grain Marketing Agreement with Commodity  Specialist Company dated May 31, 2006++                                                                                                                                                           |
| 10.23       |       | Farm Lease and Security Agreement with Bettger  Brothers Partnership dated April 30, 2006++                                                                                                                                                                  |
| 10.24       |       | Agreement between Owner and Design/Builder dated  July 14, 2006*,  **                                                                                                                                                                                        |
| 10.25       |       | Letter of Intent with ICM, Inc. dated December 19,  2006++*                                                                                                                                                                                                  |
| 10.26       |       | Investor Rights Agreement with South Dakota Wheat  Growers Association dated as of November 7, 2006++                                                                                                                                                        |
| 10.27       |       | Employment Agreement with Richard Peterson dated  October 17, 2006++                                                                                                                                                                                         |
| 10.28       |       | Restricted Unit Agreement with Stephenson Holdings,  Inc. dated November 7, 2006++                                                                                                                                                                           |
| 10.29       |       | Restricted Unit Agreement with Gales Holdings, Inc.  dated November 7, 2006++                                                                                                                                                                                |
| 10.30       |       | South Dakota Grain Fuels. L.P. Agreement of Limited  Partnership dated August 27, 1991++                                                                                                                                                                     |
| 10.31       |       | Amendment to the Agreement of Limited Partnership of  Heartland Grain Fuels, L.P. dated November 8, 2006++                                                                                                                                                   |

 

121

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| 10.32 |   | Master Loan Agreement between Farm Credit Services  of America, FLCA and ABE Fairmont, LLC dated as of November 20, 2006++                                                                                 |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.33 |   | Construction and Term Loan Supplement to the Master  Loan Agreement between Farm Credit Services of America, FLCA and ABE  Fairmont, LLC entered into as of November 20, 2006++                            |
| 10.34 |   | Construction and Revolving Term Loan Supplement to  the Master Loan Agreement between Farm Credit Services of America, FLCA and  ABE Fairmont, LLC entered into as of November 20, 2006++                  |
| 10.35 |   | Amendment to the Construction and Term Loan  Supplement to the Master Loan Agreement between Farm Credit Services of  America, FLCA and ABE Fairmont, LLC entered into as of November 20, 2006++           |
| 10.36 |   | Amendment to the Construction and Revolving Term  Loan Supplement to the Master Loan Agreement between Farm Credit Services of  America, FLCA and ABE Fairmont, LLC entered into as of November 20, 2006++ |
| 10.37 |   | Administrative Agency Agreement among Farm Credit  Services of America, FLCA, CoBank, ACB and ABE Fairmont, LLC dated as of  November 20, 2006++                                                           |
| 14    |   | Code of Ethics for Chief Executive and Senior  Financial Officers**                                                                                                                                        |
| 21    |   | List of Subsidiaries of the Registrant++                                                                                                                                                                   |
| 24    |   | Powers of Attorney (included in signature page)                                                                                                                                                            |
| 31.1  |   | Rule 13a-14(a)/15d-14(a) Certification by Principal  Executive Officer**                                                                                                                                   |
| 31.2  |   | Rule 13a-14(a)/15d-14(a) Certification by Principal  Financial and Accounting Officer**                                                                                                                    |
| 32.1  |   | Section 1350 Certification by Principal Executive  Officer**                                                                                                                                               |
| 32.2  |   | Section 1350 Certification by Principal Financial  Officer**                                                                                                                                               |

----

*                                         Materialhas been omitted pursuant to a request for confidential treatment and suchmaterials have been filed separately with the Commission.

**                                  Filedherewith.

++                                  Incorporatedby reference.

122

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