**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

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**FORM10-KSB**

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| x          |   | **Annual report under Section 13 or 15(d) of the  Securities Exchange Act of 1934.**                                                                                                                                                      |
|------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   | ** **                                                                                                                                                                                                                                |
| ** ** |   | **For the fiscal year ended December 31, 2006**                                                                                                                                                                                           |
| ** ** |   | ** **                                                                                                                                                                                                                                |
| o          |   | **Transition report under Section 13 or 15(d) of  the Exchange Act of 1934.**                                                                                                                                                             |
|       |   | ** **                                                                                                                                                                                                                                |
| ** ** |   | **For the transition period from                    to                 ** |

**Commissionfile number 333-136353**

**BLACKHAWK BIOFUELS, LLC**

(Name of small businessissuer in its charter)

** **

| **Delaware**                                                      |   | **20-2760722**                        |
|-------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of   incorporation or organization) |   | (I.R.S. Employer  Identification No.) |

 

| **22 South Chicago Avenue**               |   | ** ** |
|-------------------------------------------|--------|------------|
| **Freeport,  Illinois**                   |   | **61032**  |
| (Address of  principal executive offices) |   | (Zip Code) |

** **

**(815) 235-2461**

(Issuer’s telephonenumber)

 

Securities registeredunder Section l2(b) of the Exchange Act:

**None**

 

Securities registeredunder Section l2(g) of the Exchange Act:

**Class ALimited Liability Company Units**

Check whether the issuer(1) filed all reports required to be filed by Section 13 or l5(d) of theExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. xYes o No

Check if there is nodisclosure of delinquent filers in response to Item 405 of Regulation S-B isnot contained 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. x

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). oYes x No

State issuer’s revenuesfor its most recent fiscal year.   None

State the aggregatemarket value of the voting and non-voting common equity held by non-affiliatescomputed by reference to the price at which the common equity was sold, or theaverage bid and asked price of such common equity, as of a specified datewithin the past 60 days. (See definition of affiliate in Rule 12b-2 of theExchange Act.)

As of March 31, 2007 theaggregate market value of the Units held by non-affiliates (computed byreference to the most recent offering price of such Units) was $6,065,000.

As of March 31, 2007there were 3,500,000 Units outstanding.

**DOCUMENTSINCORPORATED BY REFERENCE**

**None**

Transitional Small Business Disclosure Format (Check one):   oYes x No

 

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**TABLEOF CONTENTS**
| **PART I** | ** **                                                                                                                                          | ** **                                                                                                                                                                                                                                                     |       |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|       | **ITEM  1. DESCRIPTION OF BUSINESS**                                                                                                                | ** **                                                                                                                                                                                                                                                     | ** ** |
|       | **ITEM 1A.  RISK FACTORS**                                                                                                                          | ** **                                                                                                                                                                                                                                                     | ** ** |
|       | **ITEM  2. DESCRIPTION OF PROPERTY**                                                                                                                | ** **                                                                                                                                                                                                                                                     | ** ** |
|       | **ITEM  3. LEGAL PROCEEDINGS**                                                                                                                      | ** **                                                                                                                                                                                                                                                     | ** ** |
|       | **ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**                                                                                    | ** **                                                                                                                                                                                                                                                     | ** ** |
|       | **PART II**                                                                                                                                         | ** **                                                                                                                                                                                                                                                     | ** ** |
|       | **ITEM 5. MARKET  FOR COMMON EQUITY AND RELATED MEMBER MATTERS**                                                                                    | ** **                                                                                                                                                                                                                                                     | ** ** |
|       | **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, CONTROL PERSONS AND CORPORATE  GOVERNANCE; 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  MEMBER MATTERS**                                            | ** **                                                                                                                                                                                                                                                     | ** ** |
|       | **ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE**                                                              | ** **                                                                                                                                                                                                                                                     | ** ** |
|       | **ITEM 13. EXHIBITS**                                                                                                                               | ** **                                                                                                                                                                                                                                                     | ** ** |
|       | **ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES**                                                                                                | ** **                                                                                                                                                                                                                                                     | ** ** |
|       | ** **                                                                                                                                          | ** **                                                                                                                                                                                                                                                     | ** ** |
|       | **SIGNATURES**                                                                                                                                      |                                                                                                                                                                                                                                                           |       |
|       | ** **                                                                                                                                          |                                                                                                                                                                                                                                                           |       |
|       | **SUPPLEMENTAL INFORMATION**                                                                                                                        |                                                                                                                                                                                                                                                           |       |
|       | ** **                                                                                                                                          |                                                                                                                                                                                                                                                           |       |
|       | **EXHIBIT INDEX**                                                                                                                                   |                                                                                                                                                                                                                                                           |       |
|       | ** **                                                                                                                                          |                                                                                                                                                                                                                                                           |       |
|       | **EXHIBITS FILED WITH THIS REPORT:**                                                                                                                |                                                                                                                                                                                                                                                           |       |
|       |                                                                                                                                                |                                                                                                                                                                                                                                                           |
|       | 10.13                                                                                                                                               | Agreement  between the Registrant and Ebenezer Mgmt, LLC dated February 15, 2007.                                                                                                                                                                              |       |   |
|       |                                                                                                                                                |                                                                                                                                                                                                                                                           |       |
|       | 10.14                                                                                                                                               | Construction  Project Labor Agreement for Blackhawk Biodiesel Plant in Freeport, Illinois  between Weitz Industrial, LLC and the Craft Local Unions Affiliated with the  Northwestern Illinois Building and Construction Trades Council dated March  16, 2007. |       |
|       |                                                                                                                                                |                                                                                                                                                                                                                                                           |       |
|       | 10.15                                                                                                                                               | Second Amendment  to Real Estate Option Agreement between the Registrant and Freeport Area  Economic Development Foundation dated March 20, 2007.                                                                                                              |       |
|       |                                                                                                                                                |                                                                                                                                                                                                                                                           |       |
|       | 14.1                                                                                                                                                | Code of Ethics  and Business Conduct.                                                                                                                                                                                                                          |       |
|       |                                                                                                                                                |                                                                                                                                                                                                                                                           |       |
|       | 31.1                                                                                                                                                | Certificate  pursuant to 17 CFR 240 15d-14(a).                                                                                                                                                                                                                 |       |
|       |                                                                                                                                                |                                                                                                                                                                                                                                                           |       |
|       | 31.2                                                                                                                                                | Certificate  pursuant to 17 CFR 240 15d-14(a).                                                                                                                                                                                                                 |       |
|       |                                                                                                                                                |                                                                                                                                                                                                                                                           |       |
|       | 32.1                                                                                                                                                | Certificate pursuant  to 18 U.S.C. Section 1350.                                                                                                                                                                                                               |       |
|            |                                                                                                                                                     |                                                                                                                                                                                                                                                                |            |  |  |  |  |  |

 

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**FORWARD LOOKINGSTATEMENTS**

This report containsforward-looking statements involving future events, future business, industryand other conditions, our future performance, and our plans and expectationsfor future operations and actions.  In manycases, you can identify forward-looking statements by the use of words such as “believe,”“expect,” “anticipate,” “intend,” “plan,” “estimate,” “predict,” “hope,” “should,”“could,” “may,” “future,” “continue,” “potential,” or other forms or thenegatives of these terms or other similar expressions.  Many of these forward-looking statements arelocated in this report under the headings “Description of Business,” “RiskFactors,” “Description of Property” and “Management’s Discussion and Analysisor Plan of Operations,” but they may appear in other sections as well.

These forward-lookingstatements are based on assumptions that we believe to be reasonable, beliefsand expectations in reliance on information currently available to managementand our estimates regarding future results, trends and uncertainties.  Important factors that could significantlyaffect our assumptions, plans, anticipated actions and future financial andother results include, among others, those matters set forth in the section ofthis report entitled “Risk Factors.”  Youare urged to consider all of those risk factors when evaluating anyforward-looking statement, and we caution you not to put undue reliance on anyforward-looking statements.

You should read thisreport thoroughly with the understanding that our actual results may differmaterially from those set forth in the forward-looking statements for manyreasons, including events beyond our control and assumptions that prove to beinaccurate or unfounded.  We cannotprovide any assurance with respect to our future performance or results.  Although we believe that our plans andobjectives, as reflected in or suggested by the forward-looking statements, arereasonable, we may never achieve our plans or objectives.  Actual results may differ from anticipated ordesired results due to many possible unforeseen developments, includingdevelopments arising from or relating to the following:

·                  The suitability of our biodieselplant site, availability of required infrastructure and construction of ourplant;

·                  Competition and technologicaldevelopments in the biodiesel industry and the energy market generally;

·                  Economic, competitive and businessconditions in our local and regional markets and in the national andinternational marketplace;

·                  The availability and continuance ofenvironmental and other permits, licenses and incentives;

·                  The impact of or changes in laws orregulations relating to the biodiesel or energy industry, environmental mattersand taxation;

·                  Our ability to generate cash flow to meetour operating needs, repay indebtedness and make distributions to our Unitholders;

·                  The performance of our consultants,contractors and suppliers;

·                  The actions of national, state andlocal legislative, regulatory and judicial bodies and authorities;

·                  Delays or interruptions in theconstruction or operation of our plant due to inadequate financing, design ormaterial failures, environmental issues, lack of raw materials, transportationblockages, weather and other factors;

·                  The necessity to modify or upgradeour plant, expand or curtail our operations, obtain additional capital orchange our business strategy; and

·                  Other factors discussed in thesection entitled “Risk Factors” and elsewhere in this report.

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The forward-lookingstatements contained in this report speak as of the date of this report and aresubject to events and developments occurring after the date of thisreport.  Except as may be required underthe federal securities laws, we do not undertake any obligation to update anyforward-looking statements in this report to reflect future events ordevelopments.

We are not under any dutyto update the forward-looking statements contained in this report.  We cannot guarantee future results, levels ofactivity, performance or achievements. We caution you not to put undue reliance on any forward -lookingstatements, which speak only as of the date of this report.  You should read this report and the documentsthat we reference in this report and have filed as exhibits completely and withthe understanding that our actual future results may be materially differentfrom what we currently expect.  Wequalify all of our forward-looking statements by these cautionary statements.

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# **PART I**

**Item 1. DESCRIPTIONOF BUSINESS.**

**Business Development**

Blackhawk Biofuels, LLC(referred to herein as “we,” “us,” the “company” or “Blackhawk Biofuels, LLC”)is a limited liability company organized under the laws of the State ofDelaware on April 28, 2005.

We intend to constructand operate a 30 million gallon biodiesel production plant in StephensonCounty, Illinois.  Currently, we are adevelopment stage company with no revenues from operations.  To date, our efforts have been devotedprincipally to developing plans for our project, engaging service providers andrelated activities.  We will not generaterevenue until we complete construction of our proposed plant, which we aretargeting for the second quarter of 2008, or earlier if possible.

We estimate the capitalthat we will require to design and construct our plant and commence operationswill be approximately $62,000,000.  Wehave received approximately $3,600,000 in seed capital, grants and other income.  We are presently seeking additional equitycapital of $20,000,000 to $35,000,000, senior debt financing of approximately$20,000,000 to $32,500,000 and subordinated debt financing of up to anestimated $2,500,000 to finance the project. The amount of senior debt financing that we will require will dependupon how much equity we raise and the debt to equity ratio that the seniorlender will require us to maintain.  Thesubordinated debt would most likely be required if the proceeds from our equityoffering are in the lower range of what we are seeking.

We commenced an offeringof our units to raise equity capital in December 2006 and as of March 30, 2007had received subscriptions for Units totaling approximately $19,600,000.  Subscriptions will be held in escrow until wehave received (a) $20,000,000 or more in offering proceeds, in cash andpromissory notes, exclusive of interest, (b) written commitments to providesenior debt and subordinated debt which, combined with the offering proceedsand funds from grants and other resources, would equal at least $58,400,000,and (c) the air emission source permit required to commence construction of ourplant.

Our proposed plant wouldproduce 30 million gallons of biodiesel annually and have the ability toutilize multiple feed stocks, all readily available in the immediate area.  The primary feed stock will be soybean oilwith capabilities to utilize other vegetable oils and animal fats.  The primary product will be fuel gradebiodiesel meeting American Society of Testing and Materials (“ASTM”) D6751standards.  The plant will also producethe co-product glycerin.

Biodiesel is a rapidlygrowing renewable fuel in the United States with an average annual growth ratein excess of 100% per year over the last five-year period.  An environmentally friendly product,biodiesel is renewable and mixes easily with diesel fuel at rates between 2%and 100%.  In addition, biodieselimproves the lubricity of petroleum based diesel fuel significantly at levelsas low as 2%, and therefore is a substitute for sulfur, currently found in allpetroleum diesel and legislated to be removed in the next decade.

We believe that thebiodiesel industry is still in its infancy with considerable room forgrowth.  Annual domestic diesel fuelconsumption is currently 62 billion gallons, with the current biodieselindustry contributing approximately 250 million gallons of biodiesel or 0.40%of the U.S. diesel fuel market.

We have an option topurchase a site for our plant at the Mill Race Industrial Park, located twomiles east of Freeport, in Stephenson County, Illinois.  See Item 2 “Description of Property” belowfor information regarding that site and related information.

We have entered into apre-construction services agreement and a management and operational servicesagreement with Renewable Energy Group, Inc. (“REG”) to assist us in planning,constructing and operating our biodiesel plant and establishing us in therenewable fuels marketplace.  We expectto enter into a design-build agreement with REG for the construction of ourplant at the time we complete our equity and debt financing.  The design-build agreement will set forth indetail the final design and construction services to be provided by REG.

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REG has providedus with a preliminary budget for the design, engineering and construction ofour plant at a total estimated cost of $50,600,000.  The cost of plant construction could exceedthe estimate provided in the preliminary budget.  If that occurs, we would seek to provide theadditional funds necessary from our budgeted construction contingency, fromsupplemental loans or from supplemental equity investments.  If funds from those sources are unavailableor inadequate to complete our plant, we could be forced to sell our project orgo out of business.

We estimate that constructionof our plant will require approximately 12 months.  We hope to have sufficient equity and debtfinancing for our project and to receive required pre-construction permits byMay 2007.  If these targets are met, weexpect to substantially complete construction of the plant and begin productionby the second quarter of 2008, or earlier if possible.

After we commenceoperations at our plant, we expect to sell all of the biodiesel and glycerinthat we produce.  Our management andoperational services agreement with REG provides for REG to sell our productionin regional or national markets.  Theagreement provides for compensation to REG in an amount of $.0625 per gallon ofbiodiesel produced plus a bonus of 6% of our net income.  REG will also attempt to market the glycerinproduced by our plant in the northern Illinois regional market.

**Principal Products and Markets**

The biodiesel productionprocess produces three products: biodiesel, glycerin and a small amount offatty acid residues.  Biodiesel is theprincipal product from the production process, usually in a quantity of about98% of the amount of input feedstock. The chemical name for this product is methyl ester when methanol is usedto replace the glycerin backbone of the triglyceride feedstock.  Biodiesel is a purified methyl ester thatmeets quality specifications for a motor fuel established by the AmericanSociety of Testing and Materials (“ASTM”).

***Biodiesel***

Biodiesel is an enginefuel produced from vegetable oils and animal fats which has favorableenvironmental and lubrication characteristics when used as a blend with oralternative for petroleum based diesel fuel. Federal and state environmental requirements and incentives,particularly the federal renewable fuels program, have encouraged theproduction and use of biodiesel in recent years.  Biodiesel production in 2005 wasapproximately 75 million gallons and the industry is expected to produce 150million gallons in 2006.

Rudolph Diesel designedthe diesel engine in 1894 to run on peanut oil. Until recently, however, vegetable oils (biodiesel) have not been asignificant source of energy for the diesel engine.  Instead, petroleum based distillate fuelsbecame the primary energy source for a variety of heating, diesel fuel andelectric power generation uses. According to the Energy Information Administration, the United Statesconsumed a total of 61 billion gallons of distillate fuel in 2004.  Diesel fuel makes up approximately two-thirdsof the distillate fuel use and fuel oil approximately one-third.  The major distillate market segments include:“on-highway” with 62% of the market, “residential” with 10%, “farm andcommercial” with approximately 5% each and “railroad and off-highway” withapproximately 4% each.

***ProductAttributes***

*Environmental Benefits*

Biodiesel can be used asa fuel in its pure form or blended with petroleum in any percentage.  Fuel grade biodiesel must be produced instrict compliance with specifications set forth by the ASTM, in ASTM D6751, toinsure proper performance in diesel engines. According to the National Biodiesel Board, biodiesel is the onlyalternative fuel to fully complete the Health Effects testing requirements ofthe 1990 Clean Air Act Amendments. Biodiesel that meets ASTM D6751 biodiesel requirements is a legal motorfuel that may be sold and distributed in the United States.  ASTM D6751 has been registered as a fuel andfuel additive with the EPA and meets clean diesel standards established by theCalifornia Air Resources Board. According to the National Biodiesel Board, the Department of Energy andthe Department of Transportation have designated biodiesel, in pure form, as analternative fuel.

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Based on a comprehensivedraft technical report of biodiesel emissions data released by the EPA, the useof 100% (pure) biodiesel fuel can reduce emissions of particulate matter by upto 47% compared to petroleum diesel in unmodified diesel engines.  The report also verified a 67% reduction inunburned hydrocarbons and a 48% reduction in carbon monoxide with purebiodiesel.  There was, however, a 10%increase in nitrogen oxides emissions compared to petroleum diesel fuel.  The technical report is a compilation of 39separate scientific studies.  Thefollowing table sets forth the results of the studies when comparing purebiodiesel fuel and diesel fuel with a 20% blend of biodiesel to petroleumdiesel fuel.

**BIODIESEL EMISSIONS**
|                              | ** ** | **Decrease/Increase Compared to Diesel Fuel** | ** ** |
|------------------------------|------------|-------------------------------------------------------------------|------------|
| **Emission**                 | ** ** | **Pure Biodiesel (B100)**                               | ** ** | **20% Biodiesel Blend (B20)** | ** ** |
|                         |       |                                                              |       |   |   |
| Total Unburned  Hydrocarbons |       | -67                                                               | %          | -20 | % |
| Carbon Monoxide              |       | -48                                                               | %          | -12 | % |
| Particulate  Matter          |       | -47                                                               | %          | -12 | % |
| Nitrogen Oxides              |       | +10                                                               | %          | +2 | % |

 

***Source: U.S. Environmental Protection Agency***

In June 2000, biodieselbecame the first and only alternative fuel to successfully complete the Tier Iand Tier II Health Effects testing requirements of the Clean Air Act Amendmentsof 1990.  The Tier I testing involved adetailed analysis of biodiesel emissions. The Tier II testing involved a 90-day subchronic inhalation study ofbiodiesel exhaust with specific health assessments.  The results of the tests concluded thatbiodiesel is non-toxic, biodegradable and poses no known threat to humanhealth.

*Lubricity*

A significant benefit ofbiodiesel is its lubricity.  All dieselfuel injection equipment depends on diesel fuel for lubrication of internalmoving parts, which reduces equipment wear and premature breakdown.  Processes that target the reduction of sulfurand aromatics in diesel fuel must often remove lubrication components(polyaromatics and nitrogen compounds) to achieve lower emissions.  Biodiesel, however, provides lubricitywithout sacrificing air quality. According to the National Biodiesel Board, bench scale testing has shownthat a 2% biodiesel blend can improve the lubricity of diesel fuel by up to65%, depending on the base diesel fuel product and the characteristics of thebiodiesel feedstock.

***Production andSupplies***

According to the NationalBiodiesel Board, as of January 31, 2007 there were estimated to be approximately105 active biodiesel plants each with a capacity greater than 50,000 gallonsper year and another 85 are under construction or expansion.  An additional 35 plants have been announcedas proposed or actively under consideration. These existing plants are typically located in areas with access tobiodiesel feedstock.  That feedstock isusually soybean oil in the Midwest, but in other areas it could be other typesof virgin or recycled vegetable oil or animal fats.  The map below indicates the locations ofcurrent biodiesel producers in the U.S. according to the National BiodieselBoard.

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**COMMERCIAL BIODIESEL PRODUCTION PLANTS**

***Source: NationalBiodiesel Board (January 31, 2007)***

The larger commercialfacilities are between 5 million to 50 million gallons of annual capacity.  Historically there have not been plantsbigger than around 12 million gallons, but many of the commercial plantscurrently being built are between 30 million and 50 million gallons of annualcapacity.  At January 31, 2007, totalcommercial capacity was estimated to be approximately 864.4 million gallons ofbiodiesel annually, with about 50 million gallons of capacity not dedicated tobiodiesel.  Oleo chemical companies,chemical companies, soap companies and fatty acid companies often have theability to make biodiesel although it is not their primary business and thereis little economic incentive for them to change their focus.  In comparison, the biodiesel capacity in theEuropean Union is estimated to be over 650 million gallons annually.

***Description of the Biodiesel Production Process***

The production ofbiodiesel, or methyl esters, is a well-known chemical process that has beenused for decades in the soaps and detergents industry.  Any vegetable oil or animal fat (triglycerides)can serve as a feedstock for biodiesel production.  There are three basic chemical routes toproduce methyl esters from renewable oils and fats:

·                  Base catalyzed transesterification ofoil with methanol,

·                  Direct acid catalyzed esterificationof oil with methanol, and

·                  Conversion of the oil to fatty acids,and then to methyl esters with an acid catalyst.

Most methyl ester is produced using the base catalyzedreaction, which is also the most economical, because:

·                  It is a low temperature (160-180°F) and low pressure (15 to 30 psi) chemical process, and

·                  It yields high conversion (98%) withminimal side reactions when low free fatty acid feedstocks are used.

In basic terms, for every100 pounds of a triglyceride feedstock, 10 pounds of methanol in the presenceof a base catalyst is added to produce almost 100 pounds of methyl esters(biodiesel) and 10 pounds of glycerin. 

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Because themethanol is charged in excess to assist in quick conversion, the excess isrecovered for reuse.  The catalyst isusually sodium hydroxide pre-mixed with methanol (sodium methylate).

**BIODIESEL PRODUCTION PROCESS**

The transesterificationprocess consists of the following steps:

·                  *OilFeedstock Pre-Treatment* – depending on the quality of the feedstock,it may need to be pre-treated to yield “neutral oil.”

·                  *CatalystPreparation* – in most cases the sodium hydroxide is pre-mixed withmethanol.

·                  *Reaction*– The methanol/catalyst mix is then continuously charged into the first of tworeactors and the feedstock is added. Heated by steam, the reactor causes rapid transesterification tooccur.  Excess methanol is added toensure high levels of conversion of the triglyceride to methyl esters.

·                  *MethanolRecovery* – excess methanol is boiled off and condensed via a vacuumdistillation tower.

·                  *Product Separation* – once the reaction iscomplete and methanol removed, two major products exist: glycerin and methylesters.  Because these two products havedifferent gravities, the products separate in a gravity separator, called a decanter.  The heavier crude glycerin is drawn off thebottom.  The lighter methyl esters at thetop of the decanter may be treated to a second reaction phase to assurevirtually complete conversion.  A secondseparation phase occurs and the methyl esters are then pumped to a wash column.

·                  *Washing*– once separated from the glycerin, the methyl esters are acid neutralized andwashed with warm water to remove residual catalyst and soaps.

·                  *BiodieselFinishing* – the washed methyl esters are sent to a distillationcolumn to remove any remaining water and methanol and are then cooled andfiltered.  The excess water and methanolare recycled back into the process.

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·                  *GlycerinFinishing* – the glycerin is also washed and distilled, resulting incrude glycerin of approximately 80% purity and marketable to users.

***Feedstock Supplies***

Over 90% of the biodieselcurrently being produced in the U.S. is produced from a soybean oilfeedstock.  The majority of plants, andcertainly the largest biodiesel producers utilize soybean oil.  This is expected to change over time as moreplants are designed with flexible feedstock capability.  Of plants currently in production andcurrently under construction or expansion, we estimate that less than 40% havedual or multiple feedstock capability.

Currently very fewbiodiesel plants are vertically integrated back to the virgin oil feedstocksupply.  The majority of existing plantsare “stand-alone” facilities that purchase their feedstock from oilseedprocessing firms or third-party marketing firms.

The predominant feedstockused for biodiesel production in the U.S. is soybean oil because of itsabundance and availability (approximately 80% of the oil produced in the U.S.is soybean oil).  Alternative feedstocksinclude other vegetable oils, rendered animal fats and recycled cooking oils orgrease (known as “yellow grease”).

**U.S. EDIBLE OILS AND FATS PRODUCTION**

**(Million Pounds)**
| ** **   | ** ** | **1996**   | ** ** | **1997**   | ** ** | **1998**   | ** ** | **1999**   | ** ** | **2000**   | ** ** | **2001**   | ** ** | **2002**   | ** ** | **2003**   | ** ** | **2004(1)** | ** ** | **2005(2)** | ** ** |
|--------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|-------------|------------|-------------|------------|
| **Oils**     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** |
| Canola       |       | 356        |       | 342        |       | 451        |       | 548        |       | 617        |       | 641        |       | 582        |       | 496        |       | 601         |       | 776         |       |
| Corn         |       | 2,231      |       | 2,335      |       | 2,374      |       | 2,501      |       | 2,403      |       | 2,461      |       | 2,453      |       | 2,396      |       | 2,392       |       | 2,450       |       |
| Cottonseed   |       | 1,216      |       | 1,224      |       | 832        |       | 939        |       | 847        |       | 876        |       | 725        |       | 874        |       | 957         |       | 951         |       |
| Peanut       |       | 221        |       | 176        |       | 145        |       | 229        |       | 179        |       | 231        |       | 286        |       | 173        |       | 126         |       | 219         |       |
| Safflower    |       | 103        |       | 115        |       | 111        |       | 91         |       | 88         |       | 76         |       | 84         |       | 92         |       | 56          |       | 56          |       |
| Soybean      |       | 15,752     |       | 18,143     |       | 18,078     |       | 17,825     |       | 18,420     |       | 18,898     |       | 18,430     |       | 17,080     |       | 19,360      |       | 20,393      |       |
| Sunflower    |       | 840        |       | 959        |       | 1,177      |       | 1,046      |       | 873        |       | 673        |       | 345        |       | 595        |       | 265         |       | 588         |       |
| **Subtotal** |       | 20,719     |       | 23,294     |       | 23,168     |       | 23,180     |       | 23,426     |       | 23,856     |       | 22,905     |       | 21,707     |       | 23,757      |       | 25,433      |       |
| **Fats**     |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |        |       |        |       |
| Lard         |       | 671        |       | 732        |       | 740        |       | 723        |       | 716        |       | 743        |       | 744        |       | 775        |       | 775         |       | 795         |       |
| Tallow       |       | 1,407      |       | 1,517      |       | 1,677      |       | 1,792      |       | 1,764      |       | 1,932      |       | 2,068      |       | 1,781      |       | 1,779       |       | 1,780       |       |
| **Subtotal** |       | 2,078      |       | 2,249      |       | 2,417      |       | 2,515      |       | 2,480      |       | 2,675      |       | 2,812      |       | 2,556      |       | 2,554       |       | 2,575       |       |
| **TOTAL**    | ** ** | **22,797** | ** ** | **25,543** | ** ** | **25,585** | ** ** | **25,695** | ** ** | **25,906** | ** ** | **26,531** | ** ** | **25,717** | ** ** | **24,263** | ** ** | **26,311**  | ** ** | **28,008**  | ** ** |

 

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(1)  Preliminary andestimated.

(2)  Forecast.

***Source: U.S.Department of Agriculture***

The various feedstockoils have different supply and demand characteristics, but their price rangesare generally correlated because of their substitutability.  The twenty-year average value of soybean oilis approximately $.21 per pound.  Thepremium oils, like safflower and tung oils, are typically more than $.50premium over soybean oil.  The main tierof competing oils is $.02 to $.05 premiums on average over soybean oil.  Cottonseed oil is a light oil preferred bythe snack food industry.  It carries a$.05 premium.  Next are palm and canola,which each carry about a $.04 premium over soy oil.  Corn oil is the closest, carrying a premiumjust over $.02.  Rendered oil, of thequality that would go into a biodiesel facility, would typically cost $.03 to$.08 per pound less than crude soybean oil. Animal fats carry a $.035 discount to soy oil.  Because of the dominance of soy oil in thedomestic market, most other vegetable oils and oil seeds correlate with the soyoil and soybean markets.

Residual oils, greasesand animal fats are used principally in domestic feed manufacturing, thechemical industry and some food applications. Generally animal fats trade at a discount of $.05 to $.08 to that ofcrude

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soybean oil.  Relative price discounts are determined byfactors such as moisture and impurity contents. For example, tallow oil will trade at a premium over choice and yellowgreases.

**U.S. OIL AND FAT FEEDSTOCK PRICES**

**(Dollars per pound)**

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*(1)        Yearsbeginning October 1*

*(2)        Calendaryears; prices are estimates*

*(3)        Calendaryears; 2005 price is preliminary*

***Source:U.S Department of Agriculture***

The cost of the feedstockused in biodiesel accounts for 75% to 85% of the overall cost of producingbiodiesel.  The following chart indicatesthe effect of feedstock cost on the cost of biodiesel (not including biodieselproduction costs).

**BIODIESELFEEDSTOCK COST SENSITIVITY**

For example, if yellowgrease feedstock costs $.15 per pound, the feedstock cost per gallon ofbiodiesel produced would be $1.125 per gallon. If soybean oil costs $.25 per pound, the feedstock cost would be $1.875per

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gallon ofbiodiesel.  Processing conversion costand gross margins would need to be added to the feedstock price to arrive at abiodiesel value.

The principal positiveand negative attributes that animal oils and fats provide biodiesel arise fromthe higher level of saturated fats contained in them compared to vegetable oilswhich have a high content of unsaturated fatty acids.  The increased amount of saturated fatty acidyields greater oxidation stability and substantially enhanced lubricity,resulting in better diesel engine efficiencies and reduced exhaust emissions,particularly at higher operating temperatures. On the other hand, at cold temperature, the saturated fatty acids have atendency to solidify, decreasing engine efficiencies and generating concernsabout engine damage among users. Blenders will consider and utilize these characteristics to makesignificant improvements in the lubricity rating of ULSD in normal operating conditionswhile reducing or avoiding blends that may lead to operating problems in coldtemperatures.

Crude soybean oil and allanimal fats need to be pretreated before being processed into biodiesel.  Pretreatment takes virgin oil and any animalfat or grease and removes the impurities and prepares the feedstock to gothrough the biodiesel process.  Somefeedstocks need more treatment than others. For example, virgin soybean oil is easier and cheaper to pretreat thanturkey fat and turkey fat is easier and cheaper to pretreat than beeftallow.  The cost of the process isdriven by the structure of the feedstock and the impurities in thefeedstock.  In the case of soybean oilthe pretreatment process results in refined, bleached and deodorized (RBD)oil.  The price differential between RBDoil and crude soy oil ranges from $.03 to $.05 per pound.  This adds another $0.225 to $0.375 to thecosts discussed above.

The rapid expansion ofthe biodiesel market is beginning to put some pressure on the oil feedstock markets,but more material price pressure is likely to begin to be felt in late 2006 andinto 2008 assuming “normal” crop yields. There are two different dynamics involved in the expansion of biodieselcapacity on oil feedstock prices.  Therewill be regional impacts based on the available supply of feedstocks, biodieselcapacity expansion and regional oilseed crushing markets.  There will also be an overall market effectas the demand for feedstock oil expands and impacts different segments of theoil market.  Because of the seasonalityof the soybean crop, significant seasonal supply variations can alsooccur.  One of the most significant risksto feedstock oil prices is the possibility of a short soybean crop (seasonalvolatility) over the next several years.

It is estimated thatapproximately 750 million gallons of vegetable oils, rendered oils and residualoil are exported annually.  Theinternational market will be the least sensitive to demand from the domesticbiodiesel industry, although export prices could increase if global oil demandis high, supply is low or dollar exchange rates weaken materially.  It is also important to note that the worldoil seed complex is the fastest growing of all crop groups.  World oilseed production is growing almost fourtimes faster than course grains, the next fastest growing category.  Because this growth is due to the demands ofthe growing world population, it is difficult to predict the impact of expandedworld production on oil availability to the biodiesel market.

Another market that willsee competition from the biodiesel expansion is the domestic rendered andresidual oil market.  About 1.5 billiongallons of those types of oil are being used in the U.S.  However, some users of residual oils willhave a harder time parting with their residual oil due to internalrequirements.  Some of these integratedoperations will likely continue to use their internal rendered oil even asprices rise.  Assuming 1/3 of this marketretains its residual oil, the quantity available to the market falls to 1billion gallons.

Feedstock oil use inbiodiesel beyond these levels (1 to 2 billion gallons) would likely drive upoil prices materially.  Demand for oilfor biodiesel will likely struggle to compete with the consumer market, wherethe majority of oil is used or consumed today. Domestic human users and consumers are not sensitive to price increaseslike the export and residual oil markets, and can be expected to bid up oilprices rather than consume less or find substitutes.  This will likely increase the average pricethe biodiesel industry will be required to pay for feedstocks, which in turnwill make biodiesel less competitive against petroleum-based diesel fuel.

Even though there islittle question that biodiesel expansion will put increased price pressure onfeedstock oils, higher prices may drive the oil markets to realign andrestructure as they begin to realize higher returns from selling oil.  The factors that may keep feedstock oilprices at the levels described above will be an expansion in higher gradeoilseed production and processing (canola, mustard and other), realignment andexpansion of the existing oilseed

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crushing industry,increased reliance of domestic users of residual oils on foreign markets andthe substitution of imports like palm oil for products in the domestic consumermarket.

As with otheragricultural commodities, the market supply and price of vegetable oilfeedstocks can be affected by risks to crops and yields, including weather anddisease.  Asian soybean rust is a fungusthat attacks certain plants including soybeans. The presence of Asian soybean rust in the United States has recentlybeen confirmed.  Left untreated, it canreduce soybean harvests by as much as 80%. Although it can be killed with chemicals, the treatment increasesproduction costs by approximately 20%. The future impact of this fungus on U.S. soybean production cannot bepredicted.  Increases in production costsand reduced soybean supplies could cause the price of soybeans to rise andincrease the cost of soybean oil as a feedstock to the biodiesel industry.

***Market***

The biodiesel market hasgrown at an impressive pace in recent years, stimulated largely by federal andstate government environmental regulations and incentives.  According to the National Biodiesel Board,estimated biodiesel production increased from 2 million gallons in 2000, to 25million gallons in 2004, to 75 million gallons in 2005 and 250 million gallonsin 2006.  This illustrates the creationof an industry and shows a ten-fold increase in volume in the two years from2004 to 2006.  The National BiodieselBoard reports that as of January 31, 2007 there were 105 biodiesel facilitiesoperating in 35 different states with the capacity to produce approximately 864.4million gallons of biodiesel annually, with an additional 1.7 billion gallonsof capacity under construction or expansion. Texas has 15 biodiesel plants; Iowa has 9 plants; California andTennessee each have 7 plants; Colorado, Georgia, Minnesota, North Carolina,Pennsylvania and Virginia each have 4 plants; Indiana, Missouri and Ohio eachhave 3 plants; 13 states each have 2 plants; and 9 states have 1 plant each.

The future demand forbiodiesel will depend in part on whether federal and state governmentincentives and mandates are maintained and expanded and on the demand fordiesel fuel in general.  The diesel fuelmarket is relatively large and growing slowly.

The following mapillustrates the location of retail biodiesel outlets in the United States.

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**BIODIESELRETAIL LOCATIONS**

***Source:National Biodiesel Board (March 30, 2007)***

***Market Characteristics***

The biggest change in thediesel fuel market in the past decade has been the requirement to decreaseregulated emissions, principally in the “on-highway” portion of themarket.  This has required diesel fuelrefineries to produce fuel with lower sulfur content.  Effective June 2006, all diesel fuel wasrequired to have a sulfur content of less than 15 parts per million (“ultra lowsulfur diesel or “ULSD”).  A problemencountered with ULSD is decreased lubricity of the fuel.  With better emissions and lubricitycharacteristics, biodiesel has emerged as an attractive alternative fuel orblending source.  Lubricity of ULSD canbe improved with as little as 1% biodiesel. Subject to the adaptability of the engine or use, biodiesel can beblended or used in any ratio, ranging from 1% (B1) to 100% (B100).

The federal governmentbegan encouraging biodiesel production in 2000. The 2002 Energy Bill provided producers of biodiesel a tax credit ofeighty cents per gallon, and mandated all federal, state and local governmentswith diesel powered vehicles and diesel powered equipment use a mixture of 2%biodiesel.  The mandate calls for use at5% in 2007 and 10% in 2010.  Today that2% level equates to approximately 1.2 billion gallons, which grows to 3 billiongallons in 2007 and 6 billion gallons by 2010. In 2006 the industry produced approximately 250 million gallons ofbiodiesel.  By 2010 it is estimated that productionwill increase to 800 million to 1 billion gallons.

***Supply Trends***

Supported by governmentincentives, the biodiesel industry has expanded significantly in recent years,but it remains only a fraction of one percent of the combined distillate fuel/biodieselmarket.  According to the NationalBiodiesel Board, estimated biodiesel production increased from 2 milliongallons in 2000, to 25 million gallons in 2004, to 75 million gallons in 2005and 250 million gallons in 2006.  In 2005there were approximately 42 biodiesel plants, most of which were 3 to 5 mmgycapacity plants.  At the end of 2005, twoplants were capable of producing 30 mmgy and six were capable of producing 20mmgy.  As of January 31, 2007, theNational Biodiesel Board reports that 105 plants nationally have the capacityto produce 864.4 million gallons of biodiesel per year and that plants underconstruction or expansion would add an additional 1.7 billion gallons ofcapacity.  Thirty million

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gallons ofcapacity appears to be the most popular size for new plants but plants havingup to 100 million gallons of capacity are under construction.

The most significantnegative item that is impacting the industry today is the issue of productquality.  As a result, the industry isencouraging producers to adhere to BQ-9000 certification for productionstandards.  The National Biodiesel Boardhas demanded that the industry meet their standards for BQ-9000certification.  Plants that do not havethis certification are likely to find it more difficult to market theirproduction.  We believe that BQ-9000certification is needed to support the future confidence for the petroleumindustry to purchase and blend biodiesel.

***Pricing and Price Trends***

Over the past severalyears, biodiesel prices have tended to correlate with wholesale diesel fuelprices.  At the same time, price chartsfor biodiesel and prices for feedstocks such as soy oil show that biodieselprices do not move with vegetable oil prices. For example, when soy oil prices increased in 2003, biodiesel prices didnot increase substantially.  Further,when soy oil decreased in 2004, biodiesel prices did not decrease.  Soy oil pricing has historically beenaffected by crop conditions, and, because it was a by product of the soy mealindustry, livestock numbers.  The lack ofcorrelation between soy oil prices (approximately 80% of our estimated cost ofproduction) and biodiesel prices (approximately 98% of our estimated revenue)is a significant risk inherent in our business.

Although the sellingprice of biodiesel is directly related to the price of diesel fuel, the capitalrequired to establish biodiesel production facilities and the cost of producingbiodiesel have resulted in biodiesel being priced higher than diesel fuel, asillustrated in the following chart. Notwithstanding the price differential, the current demand for biodieselhas outstripped supply due to currently high petroleum prices, the biodieseltax credit and special incentive programs in states such as Illinois andMinnesota.  Because biodiesel is such asmall part of the currently estimated 62 billion gallon distillate market, theexpanding biodiesel supply has almost no identifiable impact on biodieselprices.

**CHICAGO WHOLESALE BIODIESEL AND DIESEL PRICES**

***Major Market Factors***

Biodiesel is one of thefastest growing alternative fuels in the country.  In January 1999, there were only a few fleetsbuying and using biodiesel.  According tothe National Biodiesel Board, by January 2002, there were well

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over 100 majorfleets that implemented biodiesel programs across the country, includingfederal fleets such as the US Postal Service, the US Air Force, the US Army,the US Department of Energy and NASA; state fleets in Ohio, Iowa, Virginia,Missouri, Delaware and New Jersey; city buses such as Cincinnati Metro inCincinnati, Ohio and the Bi-State in St. Louis, Missouri; and major publicutility fleets such as Commonwealth Edison, Florida Power and Light, DukeEnergy, Georgia Power, Alabama Power and others.  According to the National Biodiesel Board,this growth is spurred in part by three principal factors: standardsestablished by the American Society of Testing and Materials (“ASTM”), healtheffects testing criteria by the federal Environmental Protection Administration(“EPA”) and the necessity to comply with standards established under the EnergyPolicy Act of 1992 (“Energy Policy Act”).

*American Society of Testing and Materials Standards*

The American Society ofTesting and Materials (“ASTM”) is the premier standard-setting organization forfuels and additives in the United States. In December 2001, the ASTM issued a specification for biodiesel fueldesignated as ASTM D6751.  Thisdevelopment is deemed crucial in standardizing fuel quality for biodiesel inthe United States market and increasing the confidence of consumers and enginemakers.

To assist in assuringthat biodiesel is produced and maintained at the ASTM D6751 industry standard,the National Biodiesel Board created the National Biodiesel AccreditationCommission to certify producers of biodiesel blends of B2 or greater thatsuccessfully meet the accreditation criteria as an “Accredited Producer.”  Accreditation is awarded following asuccessful formal review and audit of the capacity and commitment of theapplicant to produce or market biodiesel fuel that meets the ASTM D6751specification for Biodiesel Fuel (B100) Blend Stock for Distillate Fuels.  The accreditation process is comprehensiveand includes a detailed review of the applicant’s quality system documentation,followed by a formal audit of the applicant’s conformance to its system.  We intend to apply for Accredited Producerstatus once we are operational.

*EPA Health Effects Testing Program*

Under Section 211(b) ofthe Clean Air Act, the EPA has established a Health Effects testing program toassess the health impacts of various materials and products.  In May 2000, biodiesel became the onlyalternative fuel in the country to have successfully completed the EPA’s Tier I*and*Tier II Health Effectstesting.  The Tier I testing conclusivelydemonstrated biodiesel’s significant reductions in most currently regulatedemissions as well as most unregulated emissions – especially those associatedwith cancer and lung disease.  Tier IItesting demonstrated biodiesel’s non-toxic effect on health.

*Energy Policy Act Compliance*

Effective November 1998,Congress approved B20, a blend of 20% biodiesel and 80% petroleum diesel, as anEnergy Policy Act compliance strategy. The legislation allowed fleets subject to the Act to meet theiralternative fuel vehicle purchase requirements simply by purchasing 450 gallonsof pure biodiesel and burning it in new or existing diesel vehicles in at leasta 20% blend with diesel fuel.  TheCongressional Budget Office and the Department of Defense confirmed that thebiodiesel option is the lowest cost alternative fuel option to meet the federalgovernment’s Energy Policy Act compliance requirements.

***Engine Manufacturer Guidelines***

Most major enginemanufacturers have established guidelines for biodiesel use in theirengines.  The National Biodiesel Boardmaintains a list of manufacturer statements regarding biodiesel usage.  These statements outline the acceptablequantity and quality of biodiesel that each manufacturer will allow in enginesmanufactured by it without voiding applicable warranties.** **Mostof these manufacturers state that the use of blends up to B20 (20% biodiesel)will not void their parts and workmanship warranties.

***Principal Market Growth Factors***

The principal factorsthat will influence biodiesel growth in the next few years are expected to bethe following:

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·                  Expectation of continued strongpetroleum prices over the next five to ten years (above historical averagesprior to 2000).

·                  Renewal of the Biodiesel Tax Creditbeyond 2008.

·                  Reinstatement of the Commodity CreditCorporation Bioenergy Program to facilitate new supply.

·                  Marketplace perception of biodieselas a good remedy for ULSD lubricity problems.

·                  Avoidance of quality problems thatcould give biodiesel a negative reputation in the marketplace.

·                  Continued unrest in petroleumproducing regions of the world and a resulting desire for alternatives topetroleum.

·                  No sustained rally in feedstockprices that could threaten supply.

·                  No change in policies ortechnological resolution regarding ozone and nitrogen oxide emissions.

·                  Availability of adequate biodieselsupplies.

The inability to predictthe impact of the foregoing factors makes biodiesel market predictions verydifficult to make.  For instance, therange in two national projections for biodiesel use in 5 years is between 175million gallons (U.S. Department of Agriculture) and 944 million gallons(National Renewable Energy Lab).

With an interest inexpanding the biodiesel market, the top priorities of the National BiodieselBoard are to extend the biodiesel tax credit, secure a place for biodiesel inRenewable Fuels Standard (RFS) provisions of the pending energy bill andreinstate the recently expired Commodity Credit Corporation Bioenergy Programwith biodiesel included.

The Commodity CreditCorporation Bioenergy Program was developed by the Department of Agriculture in2001 to provide financial incentives to help offset a portion of the capitalinvestment required to increase production capacity of biodiesel and ethanol.  The Program expired on September 30,2006.  Over the initial three-yearhistory of the program, the Commodity Credit Corporation issued payments forapproximately 24 million gallons of new biodiesel production.

***Current IndustryProgress and Initiatives***

*Ultra Low Sulfur Diesel*

In January 2001, the EPAfinalized a rule requiring sulfur levels in diesel fuel to be reduced from 500ppm at the pump to 15 ppm by 2006 and 10 ppm by 2011.  The EPA, the petroleum industry and equipmentmanufacturers all recognized during the rulemaking process that the refinerychanges necessary to meet this requirement would also dramatically reducelubricity of diesel fuel.  Lubricity isthe characteristic in diesel fuel necessary to keep diesel fuel systemsproperly lubricated.  Fuel that lackslubricity can cause premature wear or malfunction to the vehicle andequipment.  We believe that biodiesel isuniquely positioned to address ultra low-sulfur diesel fuel because biodieselhas extremely low sulfur (2-3 ppm) and currently meets the 2006 standard.  Moreover, biodiesel offers superior lubricityeven in very low blends.  According tothe National Biodiesel Board, tests show that a 2% blend of biodiesel canimprove lubricity by as much as 65%.

*Political and Public Support*

Biodiesel is now includedin major state and nationwide legislative efforts, which are providing amechanism to quantify the benefits of the fuel and make biodiesel acost-competitive option for achieving many national and statewide goals.  In 2001, 15 states passed legislationfavoring the use and production of biodiesel, including Arizona, Hawaii, Iowa,Missouri, Montana, Nevada, North Dakota, South Dakota and Oregon.

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*Low Blend Development*

Low blends of biodiesel(5% and lower) have become increasingly popular.  The fuel’s excellent lubricity offers aperformance benefit.  Low blends are alsopopular with farmers, and an increasing number of diesel distributors aremaking low blends available for farm use. Iowa alone has approximately 80 locations making biodieselavailable.  Additionally, since 1997, atleast eight companies released premium additive packages containing biodieselas a lubricity additive.  The success ofthese products demonstrates biodiesel’s effectiveness as a lubricity additive.

*Future Market Dynamics*

As the EPA and fuel andequipment industry groups move to improve performance and emissions of dieseltechnology, diesel fuel is likely to continue to be the preferred platform forheavy-duty applications for the foreseeable future.  Furthermore, global warming and greenhousegases will continue to gain attention. Because biodiesel is compatible and complimentary to these goals andfuture technology, biodiesel is positioned to provide benefits in all theseareas, which we believe will further increase the fuel’s economiccompetitiveness.

*Technological Development*

Research in the basictechnologies of biodiesel production may result in changes in theindustry.  On January 31, 2006, PresidentBush announced the Advanced Energy Initiative, which will fund additionalresearch in biodiesel technology.  Newtechnologies may develop that would become viable means of biodiesel productionin the future.  For instance, Iowa StateUniversity is developing nanotechnology that results in faster chemical conversionto biodiesel, with a catalyst that can be recycled and elimination of the washstep in the production process.  Thisnanotechnology can also be used with a catalyst to efficiently convert animalfats into biodiesel by creating a mixed oxide catalyst that has both acidic andbasic catalytic sites.  Acidic catalystson the particle can convert the free fatty acids to biodiesel while catalystscan convert the oils into fuel.

***Sales and Marketing***

Prior to commencingoperations at our plant, we will develop a sales and marketing plan.  The marketsegments for our biodiesel product will depend in part on the buyers andmarketers we work with and their size and geographic reach.  These customers vary in terms of where theydistribute the biodiesel and the transportation methods and costs associatedwith delivering the biodiesel to their facilities.  We believe that a significant portion of ourbiodiesel will be sold into regional markets in the Midwest and into nationalmarkets.  We will seek to deliveras much product as possible to local markets, which would help minimize ourfreight costs.  Biodiesel sold into local and regional markets will typically ship by truckand biodiesel sold into national markets will typically ship by rail.  The availability of rail transportation wouldenable us to quickly and cost effectively move large quantities of biodieselinto various markets, which we hope will allow us to access markets with thebest prices.

Under our management andoperational services agreement with REG, REG will be responsible for marketingand selling the total production of our plant.

***Glycerin***

***ProductCharacteristics***

Glycerin is the principal co-product of the biodieselproduction process.  Glycerin is splitfrom the triglyceride in the conversion step, usually in a quantity of about10% of the amount of input feedstock. Glycerin, sometimes spelled glycerine, is a commercial product whoseprincipal component is glycerol.  Theterms glycerin, glycerine, and glycerol are often used interchangeably.  Biodiesel producers typically sell glycerinin the “salt crude” form for further refining and purification by others.

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Glycerin possesses a unique combination of physicaland chemical properties that are utilized in a myriad of products.  Glycerin has over 1,500 known end uses,including many applications as an ingredient or processing aid in cosmetics,toiletries, personal care, pharmaceuticals and food products.  A clean, odorless, viscous liquid with asweet taste, glycerin is highly stable under typical storage conditions,compatible with many other chemical materials, virtually non-toxic andnon-irritating in its varied uses, and has no known negative environmentaleffects.  These qualities enable glycerinto be used as a humectants, plasticizer, emollient, thickener, solvent,dispersing medium, lubricant, sweetener, bodying agent, antifreeze andprocessing aid.  Glycerin is used in themanufacture of soft drinks, candy, cakes, casings for meats and cheese,margarine, salad dressings and dry pet foods. It is not unusual for glycerin to contribute two or more features orattributes to a product or application. Glycerin is derived from both natural and petrochemical feedstocks.

In recent years there has been a significant amount ofresearch dedicated toward further development of glycerin applications andthere is currently strong support from fat and oil associations, governmentsand producers to develop innovative technologies.  This research has accelerated due to thelong-term increase in biodiesel production and increasing supplies.  REG has been active in research anddevelopment for additional glycerin uses. For example, REG has contributed to the research for the use of glycerinas an aircraft deicer.

***Markets***

Glycerin is an important market globally withapproximately one million metric tons (2.24 billion lbs) of production andconsumption in 2004.  The glycerin marketis largely supply driven and glycerin is produced irrespective of marketdemand.

Overall glycerin supplies are forecasted to grow at a7.7% per annum rate through 2010, primarily driven by increased production inthe biodiesel industry.  Approximately11% of glycerin is produced as a co-product of biodiesel production or 120,000metric tons per annum in 2003.  Theportion of glycerin produced as a co-product of biodiesel is expected to morethan triple over the next 7 years with projected average growth rates of 26%per annum.

Over 40% of glycerin production is located in Europe,25% in the Pacific Rim, and approximately 32% of the glycerin capacity is inthe U.S.  The U.S. is a net importer ofglycerin, supplied primarily from Europe and the Pacific Rim.  Europe continues to lead the market forbiodiesel production and subsequently, will remain a net exporter of glyceringlobally.

Historically, refined glycerin pricing has ranged from$0.38 to $1.08/lb for USP 99.5% glycerin (spot market bulk shipments) over thelast 25 years.  Crude glycerin hashistorically sold at about a $.15 to $.20 discount to refined glycerin.  The volatility in market prices has beenprimarily a result of oversupply of glycerin rather than radical changes indemand.

Due to overcapacity in the glycerin market, caused inlarge part by expansion of the biodiesel industry, glycerin prices havedeclined significantly in recent months. As a result, market prices for crude glycerin in late 2006 have beenreported at between $0.00 (no value) to $0.05 per pound.  Refined glycerin is priced marginally higher.The price differential between kosher glycerin, produced without animal fat,and non-kosher glycerin is minimal.  Salvage values of crude glycerin for use as a protein source in animalfeed have been reported at $0.02 to $0.03 per pound.  If the U.S. biodiesel industry continues toexpand, glycerin can be expected to remain in an oversupply position in themarketplace and prices will remain depressed subject to the development of newuses or economically attractive alternative uses for the product.

We expect that our plantwill produce approximately 15,000 tons of crude glycerin annually.  We do not intend to refine our glycerinbecause the return on refined glycerin cannot justify the expense ofproduction.  Because we intend to processanimal fat, the glycerin we produce will be non-kosher.  Glycerin sales are forecast to represent lessthan 1.0% of our gross sales.

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***Sales andMarketing***

Local and regionalmarkets for our glycerin remain to be developed and formalized.  REG will be responsible for marketing ourglycerin production in available markets

***FattyAcid***

Fatty acid is a small-volume co-product (about 1% ofthe feedstock, and less with RBD oil) that is separated from the glycerin afterit is acidified.  It is typically soldfor use in the animal feed industry.  Wedo not anticipate that fatty acid will be a significant source of revenue forour plant.

**Governmental Incentivesand Regulations**

Recognizing the need for a cleaner source of energyand appreciating that biodiesel is renewable and can be produced in the UnitedStates, the federal government and various state governments created incentiveprograms to encourage biodiesel production. The federal incentive programs include direct payments to eligibleproducers for increased biodiesel production. State incentive programs include income tax credits and sales or excisetax exemptions.  These programs, however,are not without controversy.  Suchcontroversy is due, in part, to the cost of such programs.  Increases in the use of biodiesel willincrease the amount of excise tax credits available to blenders, whichtranslates into lower federal tax revenues. The direct payment program is a significant expenditure and Congress maychoose not to fully fund the program in any given fiscal year.  These federal programs may be affected by thepassage of energy legislation in the future.

*Energy Policy Act of 2005*

The recently enacted Energy Policy Act of 2005 (the “EnergyPolicy Act”) established a national renewable fuel standard (“RFS”) that sets anational minimum usage requirement for renewable fuels that increases from 4billion gallons per year in 2006 to 7.5 billion gallons per year by the year2012.  Although it is anticipated thatethanol will account for the largest share of renewable fuel produced and usedunder the RFS, the RFS is also expected to stimulate the production ofbiodiesel fuel as a result of the Energy Policy Act’s extension of thevolumetric excise tax credit for biodiesel through December 31, 2008.  This credit is allowed to the first blenderand is reflected as a higher value for the B100 (100% biodiesel) that isblended into pure diesel fuel.  Thiscredit is available for blenders to receive a total income tax credit orfederal excise fuel tax credit in the aggregate amount of $1.00 per gallon ofagri-biodiesel for blending B100 in a diesel fuel mixture at the minimum of onetenth of 1% of B100.  Most B100 producersinclude the economic benefit of the credit in the price of their B100 and giveblenders the right to claim the credit. Another tax credit established in the Energy Policy Act is a $0.10 pergallon income tax credit for biodiesel made from soy oil up to 15 milliongallons of production annually.  Weexpect to qualify for this federal tax credit.

*State Incentives*

AgriFIRST is an Illinois Department of Agriculture’seconomic development program for value added agriculture.  Approved grants can provide up to 10% of theproject’s total capital construction cost not to exceed $5 million, includingbut not limited to:  purchasing land; purchasing, constructing orrefurbishing buildings; purchasing or refurbishing machinery or equipment;installation; repairs; labor; and working capital.  We expect to apply for a grant or grantsunder the AgriFIRST program but have no assurance that we will be successful inreceiving any grants.

The Renewable Fuels Development Program (RFDP) wasestablished to provide grants for the construction of new biofuels productionfacilities in Illinois.  Currentlegislation provides for $15 million in total funding; pending legislationcalls for raising that total to $25 million. The minimum eligible facility size is 30 million gallons per year.  A Project Labor Agreement is required to beeligible to receive a grant award. Maximum RFDP grant award is $6.5 million, including up to $1.5 millionin rural economic development incentives. The total grant award cannot exceed 10% of the total construction costsof the facility.  The program provides a$.10 per gallon incentive for the

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construction of newfacilities up to the maximum grant award of $6.5 million. ** **Weexpect to apply for a grant under the RFDP program but cannot predict the resultof any application that we make.

We believe that we may be entitled to benefit fromcertain tax and other incentives through the Enterprise Zone Program createdpursuant to the Illinois Enterprise Act. The Enterprise Zone Program, which is administered by the IllinoisDepartment of Commerce and Economic Opportunity (the “DCEO”), is a programdesigned to stimulate economic activity and neighborhood revitalization inareas designated as “enterprise zones” by providing state and local taxincentives, regulatory relief and improved governmental services.  Our Mill Race Industrial Park site inStephenson County is in an Enterprise Zone, but we cannot predict whatbenefits, if any, may result from locating our plant there.

**We do not consider state taxincentives essential to our budget or business plan and the availability orlack of tax incentives are not the most important considerations in ourselection of a site.**

**Competition**

***Producersof Biodiesel***

We will be in direct competition with numerous otherbiodiesel plants that produce the same products that we do.  Many of these producers have significantlygreater resources than we do and we expect the number of competitors toincrease significantly.  The developmentof other biodiesel plants, particularly those in close proximity to ourproposed plant, will increase the supply of biodiesel and may result in lowerlocal biodiesel and glycerin prices and higher costs for supplies offeedstocks.

The National Biodiesel Board estimates that as ofJanuary 31, 2007, there were approximately 105 active biodiesel productionplants in the United States, with an additional 85 plants under construction orexpansion and many more under consideration. These plants, when completed, will increase the competition for variousfeedstocks, and price competition for biodiesel delivered from our area islikely to increase.

The largest biodiesel producers include MemphisBiofuels, LLC with a 50 mmgy plant in Memphis, Tennessee and Cargill, Inc. (“Cargill”)with a 37.5 mmgy plant in Iowa Falls, Iowa.  Seven other producers each have a 30 mmgy plant: AGP of Sergeant Bluff,Iowa; Western Iowa Energy of Wall Lake, Iowa; Soymor of Albert Lea, Minnesota,Minnesota Soybean Processors of Brewster, Minnesota, Peter Cremer ofCincinnati, Ohio, Carolina Biofuels, LLC of Taylor, South Carolina; and OrganicFuels, LLC of Galena Park, Texas. Several larger plants are under construction or expansion, led by BioEnergy of America in Edison, New Jersey (100 mmgy), Imperium Grays Harbor inGrays Harbor, Washington (100 mmgy), Archer Daniels Midland Company (“ADM”) inVelva, North Dakota (85 mmgy), Louis Dreyfus Agricultural Industries, LLC (“Dreyfus”)in Claypool, Indiana (80 mmgy), East Fork Biodiesel, LLC in Algona, Iowa (60mmgy), Biodiesel of Las Vegas, in Las Vegas, Nevada (55 mmgy), Owensboro Grainin Owensboro, Kentucky (50 mmgy), Beatrice Biodiesel, LLC  in Beatrice, Nebraska (50 mmgy) and DomesticEnergy Partners, Spanish Fork, Utah (46 mmgy). Several additional plants in the 30 mmgy range are under construction.

The entry of ADM, Cargill and Dreyfus to the biodieselindustry represents a significant change in the competitive environment.  The biodiesel industry has been characterizedby companies which established plants ranging from very low capacity to 30 mmgyin the localities of their ownership, feedstocks and markets.  ADM, Cargill and Dreyfus are majorinternational agribusiness corporations with the financial, sourcing andmarketing resources to become formidable competitors in the industry, withoutgeographical, funding or feedstock restraints. ADM has its headquarters and major ethanol and other operations inDecatur, Illinois and may consider placing a biodiesel plant in that location.  We must expect that ADM, Cargill and Dreyfus,and perhaps other large corporations, will be significant competitors in thebiodiesel industry in the future.

Regionally, we will also face competition from anumber of other producers of varying sizes and resources.  Within a 150 mile radius of our site, StephanCompany has a 22 mmgy plant in Millsdale, Illinois, Clinton County Bioenergyhas a 10 mmgy plant in Clinton, Iowa, and Incobrasa Industries, Ltd. has a 31mmgy plant in Gilman, Illinois, all of which use soy oil as their principalfeedstock.  There are several otheroperating biodiesel plants in

17

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Illinois, Iowa andWisconsin which are beyond the 150 mile radius from our proposed plant.  There are several other plants presentlybeing planned or under consideration in northern Illinois and nearby areas of Iowaand Wisconsin which could have an aggregate capacity of over 200 mmgy.  We expect that additional biodiesel producerswill enter the market if the regulatory environment remains favorable and thedemand for biodiesel continues to increase. All of these plants will compete with us for feedstocks and customers inour regional market.

The following table identifies U.S. biodieselproducers and their production capacities.

**U.S. BIODIESEL PLANTS AND PRODUCTION CAPACITY**

**(Gallonsper year)**
| **Location**       | ** ** | **Company**                              | ** ** | **Primary Feedstock** | ** ** | **Annual   Production   Capacity  (gallons) (1)** | ** ** | **Annual   Capacity Under   Construction or   Expansion  (gallons) (1)** | ** ** |
|--------------------|------------|------------------------------------------|------------|----------------------------|------------|------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|
| Birmingham, AL     |       | Allied Renewable Energy, LLC             |       | Soybean oil                |       | 15,000,000                                                       |       | —                                                                                                 |       |
| Moundville, AL     |       | Alabama Biodiesel Corporation            |       | Soybean oil                |       | *                                                                |       | —                                                                                                 |       |
| Perdue Hill, AL    |       | Independence Renewable Energy Corp       |       | Multi feedstock            |       | —                                                           |       | 40,000,000                                                                                             |       |
| Batesville, AR     |       | FutureFuel Chemical Company              |       | Multi feedstock            |       | 24,000,000                                                       |       | —                                                                                                 |       |
| Helena, AR         |       | Delta American Fuel, LLC                 |       | Multi feedstock            |       | —                                                           |       | 40,000,000                                                                                             |       |
| McGehee, AR        |       | Ag Bio Energy                            |       | Soybean oil                |       | —                                                           |       | *                                                                                                      |       |
| Stuttgart, AR      |       | Patriot Biofuels                         |       | Multi feedstock            |       | 3,000,000                                                        |       | —                                                                                                 |       |
| Coolidge, AZ       |       | Optimum Biofuels, LLC                    |       | Soybean oil                |       | —                                                           |       | 2,000,000                                                                                              |       |
| Anaheim, CA        |       | So Cal Biofuel                           |       | Yellow grease              |       | 1,100,000                                                        |       | —                                                                                                 |       |
| Big Oak Flat, CA   |       | Evergreen Biodiesel                      |       | Recycled cooking  oil      |       | 50,000                                                           |       | —                                                                                                 |       |
| Coachella, CA      |       | Imperial Western Products                |       | Multi feedstock            |       | 8,000,000                                                        |       | —                                                                                                 |       |
| Commerce, CA       |       | Noil Energy Group                        |       | Multi feedstock            |       | —                                                           |       | 5,000,000                                                                                              |       |
| Gonzales, CA       |       | Energy Alternative Solutions, Inc.       |       | Multi feedstock            |       | 500,000                                                          |       | —                                                                                                 |       |
| Martinez, CA       |       | Bay Biodiesel, LLC                       |       | Soybean oil                |       | —                                                           |       | 2,500,000                                                                                              |       |
| Oakland, CA        |       | Blue Sky Bio-Fuels, Inc.                 |       | Multi feedstock            |       | *                                                                |       | —                                                                                                 |       |
| Port Hueneme, CA   |       | Biodiesel Industries of Port Hueneme     |       | Multi feedstock            |       | 3,000,000                                                        |       | 12,000,000                                                                                             |       |
| Richmond, CA       |       | LC Biofuels                              |       | Multi feedstock            |       | —                                                           |       | 365,000                                                                                                |       |
| Sanger, CA         |       | Silicon Valley Biodiesel, Inc.           |       | Multi feedstock            |       | —                                                           |       | 7,000,000                                                                                              |       |
| Ukiah, CA          |       | Yokayo Biofuels, Inc.                    |       | Recycled cooking  oil      |       | 200,000                                                          |       | —                                                                                                 |       |
| Berthoud, CO       |       | Rocky Mountain Biodiesel Industries, LLC |       | Multi feedstock            |       | 3,000,000                                                        |       | 7,000,000                                                                                              |       |
| Burlington, CO     |       | American Agri-diesel LLC                 |       | Soybean oil                |       | 6,000,000                                                        |       | —                                                                                                 |       |
| Commerce City,  CO |       | Bio Energy of America                    |       | Soybean oil                |       | 10,000,000                                                       |       | —                                                                                                 |       |
| Denver, CO         |       | Bio Energy of America                    |       | Soybean oil                |       | 8,000,000                                                        |       | —                                                                                                 |       |
| Denver, CO         |       | Great White Bottling, Inc.               |       | Soybean oil                |       | —                                                           |       | 4,000,000                                                                                              |       |
| Bethlehem, CT      |       | Bio-Pur Inc.                             |       | *                          |       | *                                                                |       | —                                                                                                 |       |
| Southington, CT    |       | BioDiesel One Ltd                        |       | Recycled cooking  oil      |       | —                                                           |       | 4,000,000                                                                                              |       |
| Clayton, DE        |       | Mid-Atlantic Biodiesel                   |       | Multi feedstock            |       | 6,500,000                                                        |       | —                                                                                                 |       |
| Kissimmee, FL      |       | Xenerga, Inc.                            |       | Recycled cooking  oil      |       | —                                                           |       | 5,000,000                                                                                              |       |
| Lakeland, FL       |       | Purada Processing, LLC                   |       | Soybean oil                |       | 18,000,000                                                       |       | —                                                                                                 |       |

 

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| Camilla, GA         |   | Sunshine BioFuels, LLC                     |   | Soybean oil           |   | 6,000,000  |   | —     |   |
|---------------------|--------|--------------------------------------------|--------|-----------------------|--------|------------|--------|------------|--------|
| Chatsworth, GA      |   | Eco Solutions, LLC                         |   | Multi feedstock       |   | —     |   | 25,000,000 |   |
| East Dublin, GA     |   | Middle Georgia Biofuels                    |   | Multi feedstock       |   | 2,500,000  |   | —     |   |
| Rome, GA            |   | Peach State Labs                           |   | Soybean oil           |   | *          |   | —     |   |
| Rome, GA            |   | US Biofuels Inc.                           |   | Multi feedstock       |   | 10,000,000 |   | —     |   |
| Honolulu, HI        |   | Pacific Biodiesel                          |   | Recycled cooking  oil |   | 1,000,000  |   | —     |   |
| Kahului, HI         |   | Pacific Biodiesel                          |   | Recycled cooking  oil |   | 200,000    |   | —     |   |
| Rupert, ID          |   | Premier Fuel Company, Inc.                 |   | Multi feedstock       |   | —     |   | *          |   |
| Gilman, IL          |   | Incobrasa Industries, Ltd.                 |   | Soybean oil           |   | 31,000,000 |   | —     |   |
| Marion, IL          |   | Heartland Biodiesel, Inc.                  |   | Soybean oil           |   | —     |   | 5,000,000  |   |
| Millsdale, IL       |   | Stepan Company                             |   | Soybean oil           |   | 22,000,000 |   | —     |   |
| South Roxanna,  IL  |   | Midwest Biodiesel Products                 |   | Soybean oil           |   | —     |   | 30,000,000 |   |
| Claypool, IN        |   | Louis Dreyfus Agricultural Industries, LLC |   | Soybean oil           |   | —     |   | 80,000,000 |   |
| Flora, IN           |   | Heartland Biofuel                          |   | Multi feedstock       |   | 450,000    |   | —     |   |
| Hammond, IN         |   | Evergreen Renewables                       |   | Soybean oil           |   | 5,000,000  |   | —     |   |
| Middletown, IN      |   | e-biofuels, LLC                            |   | Soybean oil           |   | —     |   | 25,000,000 |   |
| Morristown, IN      |   | Integrity Biofuels                         |   | Soybean oil           |   | 10,000,000 |   | —     |   |
| Newburgh, IN        |   | SNEBio, LLC                                |   | Soybean oil           |   | —     |   | 15,000,000 |   |
| Algona, IA          |   | East Fork Biodiesel, LLC                   |   | Multi feedstock       |   | —     |   | 60,000,000 |   |
| Clinton, IA         |   | Clinton County BioEnergy, LLC              |   | Soybean oil           |   | 10,000,000 |   | —     |   |
| Crawfordsville,  IA |   | Riksch BioFuels, LLC                       |   | Multi feedstock       |   | 10,000,000 |   | —     |   |
| Farley, IA          |   | Western Dubuque Biodiesel                  |   | Soybean oil           |   | —     |   | 30,000,000 |   |
| Iowa Falls, IA      |   | Cargill, Inc.                              |   | Soybean oil           |   | 37,500,000 |   | —     |   |
| Keokuk, IA          |   | Tri-City Energy, LLC                       |   | Soybean oil           |   | 5,000,000  |   | —     |   |
| Mason City, IA      |   | Freedom Fuels, LLC                         |   | Soybean oil           |   | —     |   | 30,000,000 |   |
| Milford, IA         |   | Soy Solutions                              |   | Soybean oil           |   | 2,000,000  |   | —     |   |
| Newton, IA          |   | Central Iowa Energy                        |   | Multi feedstock       |   | —     |   | 30,000,000 |   |
| Ralston, IA         |   | Renewable Energy Group, Inc.               |   | Soybean oil           |   | 12,000,000 |   | —     |   |
| Sergeant Bluff,  IA |   | AGP                                        |   | Soybean oil           |   | 30,000,000 |   | 15,000,000 |   |
| Sioux Center, IA    |   | Sioux Biochemical, Inc.                    |   | Corn oil              |   | 2,000,000  |   | —     |   |
| Wall Lake, IA       |   | Western Iowa Energy                        |   | Multi feedstock       |   | 30,000,000 |   | —     |   |
| Washington, IA      |   | Iowa Renewable Energy, LLC                 |   | Multi feedstock       |   | —     |   | 30,000,000 |   |
| Butler, KY          |   | Griffin Industries                         |   | Multi feedstock       |   | 2,000,000  |   | —     |   |
| Sturgis, KY         |   | Union County Biodiesel Company, LLC        |   | Soybean oil           |   | 5,000,000  |   | —     |   |
| Owensboro, KY       |   | Owensboro Grain                            |   | Soybean oil           |   | —     |   | 50,000,000 |   |
| Berlin, MD          |   | Maryland Biodiesel                         |   | Soybean oil           |   | 1,000,000  |   | —     |   |
| Adrian, MI          |   | Adrian Biofuels                            |   | Multi feedstock       |   | —     |   | 20,000,000 |   |

 

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| Bangor, MI         |   | Michigan Biodiesel, LLC                |   | Soybean oil           |   | 10,000,000 |   | —     |   |
|--------------------|--------|----------------------------------------|--------|-----------------------|--------|------------|--------|------------|--------|
| Detroit, MI        |   | Biodiesel Industries of Detroit        |   | Multi feedstock       |   | —     |   | *          |   |
| Gladstone, MI      |   | Ag Solutions, Inc.                     |   | Multi feedstock       |   | 5,000,000  |   | —     |   |
| Albert Lea, MN     |   | Soymor                                 |   | Soybean oil           |   | 30,000,000 |   | —     |   |
| Brewster, MN       |   | Minnesota Soybean Processors           |   | Soybean oil           |   | 30,000,000 |   | —     |   |
| Ironton, MN        |   | Green Range Renewable Energy           |   | Recycled cooking  oil |   | 150,000    |   | —     |   |
| Redwood Falls,  MN |   | FUMPA BioFuels                         |   | Multi feedstock       |   | 3,000,000  |   | —     |   |
| Columbus, MS       |   | CFC Transportation, Inc                |   | Multi feedstock       |   | 1,500,000  |   | —     |   |
| Gulfport, MS       |   | Channel Chemical Corporation           |   | Soybean oil           |   | 5,000,000  |   | —     |   |
| Natchez, MS        |   | Delta Biofuels, Inc.                   |   | Mutli feedstock       |   | —     |   | 72,000,000 |   |
| New Albany, MS     |   | North Mississippi Biodiesel            |   | Soybean oil           |   | —     |   | 7,000,000  |   |
| Bethel, MO         |   | Missouri Bio-Products                  |   | Multi feedstock       |   | 2,000,000  |   | —     |   |
| Bunceton, MO       |   | Missouri Better Bean                   |   | Multi feedstock       |   | 15,000,000 |   | —     |   |
| Deerfield, MO      |   | Prairie Pride                          |   | Soybean oil           |   | —     |   | 30,000,000 |   |
| Dexter, MO         |   | Global Fuels, LLC                      |   | Multi feedstock       |   | —     |   | 3,000,000  |   |
| Hayti, MO          |   | Natural Biodiesel Plant, LLC           |   | Multi feedstock       |   | —     |   | 5,000,000  |   |
| High Hill, MO      |   | High Hill Biodiesel, Inc.              |   | Multi feedstock       |   | —     |   | 5,000,000  |   |
| Lilbourn, MO       |   | Great River Soy Processing Cooperative |   | Soybean oil           |   | —     |   | 5,000,000  |   |
| Mexico, MO         |   | Mid America Biofuels, LLC              |   | Soybean oil           |   | 30,000,000 |   | —     |   |
| St. Joseph, MO     |   | AGP                                    |   | Soybean oil           |   | —     |   | 30,000,000 |   |
| Beatrice, NE       |   | Beatrice Biodiesel, LLC                |   | Soybean oil           |   | —     |   | 50,000,000 |   |
| Fremont, NE        |   | Horizon Biofuels, Inc.                 |   | Multi feedstock       |   | —     |   | 5,000,000  |   |
| Scribner, NE       |   | Northeast Biodiesel                    |   | Soybean oil           |   | —     |   | *          |   |
| Las Vegas, NV      |   | Biodiesel of Las Vegas                 |   | Multi feedstock       |   | 5,000,000  |   | 55,000,000 |   |
| Minden, NV         |   | Bently Biofuels                        |   | Multi feedstock       |   | 1,000,000  |   | —     |   |
| Edison, NJ         |   | Bio Energy of America                  |   | Soybean oil           |   | —     |   | 45,000,000 |   |
| Elizabeth, NJ      |   | Fuel Bio One, LLC                      |   | Multi feedstock       |   | —     |   | 50,000,000 |   |
| Newark, NJ         |   | Eastern Biofuels, LLC                  |   | Soybean oil           |   | 24,000,000 |   | —     |   |
| Anthony, NM        |   | Rio Valley Biofuels, LLC               |   | Multi feedstock       |   | *          |   | —     |   |
| Bohemia, NY        |   | North American Biofuels Company, Inc.  |   | Multi feedstock       |   | 2,500,000  |   | —     |   |
| Fulton, NY         |   | NextGen Fuel, Inc                      |   | Soybean oil           |   | —     |   | 5,000,000  |   |
| Asheville, NC      |   | Blue Ridge Biofuels                    |   | Multi feedstock       |   | 2,000,000  |   | —     |   |
| Autryville, NC     |   | Filter Specialty Bioenergy LLC         |   | Multi feedstock       |   | —     |   | 1,600,000  |   |
| Leland, NC         |   | American Distillation, Inc.            |   | Soybean oil           |   | —     |   | 5,000,000  |   |
| Lenoir, NC         |   | Foothills Bio-Energies, LLC            |   | Multi Feedstock       |   | 5,000,000  |   | —     |   |
| Pittsboro, NC      |   | Piedmont Biofuels Industrial           |   | Multi feedstock       |   | 1,000,000  |   | —     |   |
| Seaboard, NC       |   | North Carolina BioFuels, LLC           |   | Soybean oil           |   | —     |   | 1,000,000  |   |
| Wilson, NC         |   | Evans Environmental Energies, Inc.     |   | *                     |   | —     |   | 6,000,000  |   |

 

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| Wilson, NC              |   | Triangle Biofuels Industries, Inc.    |   | Multi feedstock |   | —     |   | 5,000,000  |   |
|-------------------------|--------|---------------------------------------|--------|-----------------|--------|------------|--------|------------|--------|
| Winston Salem,  NC      |   | Gortman Biofuel, LLC                  |   | *               |   | 100,000    |   | —     |   |
| Velva, ND               |   | Archer Daniels Midland Company        |   | Canola oil      |   | —     |   | 85,000,000 |   |
| York, ND                |   | All American Biodiesel                |   | Soybean oil     |   | —     |   | 2,000,000  |   |
| Bremen, OH              |   | Agrifuels, LLC                        |   | Soybean oil     |   | —     |   | 4,000,000  |   |
| Cincinnati, OH          |   | Peter Cremer                          |   | Soybean oil     |   | 30,000,000 |   | —     |   |
| Cleveland, OH           |   | Center Alternative Energy Company     |   | Soybean oil     |   | —     |   | 5,000,000  |   |
| Defiance, OH            |   | American Ag Fuels, LLC                |   | Multi feedstock |   | 1,500,000  |   | 5,500,000  |   |
| Hicksville, OH          |   | PEC Biofuels                          |   | Soybean oil     |   | 7,500,000  |   | —     |   |
| Miamisburg, OH          |   | Jatrodiesel Inc.                      |   | Multi feedstock |   | —     |   | 5,000,000  |   |
| Chelsea, OK             |   | Green Country Biodiesel, Inc          |   | Multi feedstock |   | 2,500,000  |   | —     |   |
| Durant, OK              |   | Earth Biofuels, Inc.                  |   | Multi feedstock |   | 10,000,000 |   | —     |   |
| Guymon, OK              |   | High Plains Bioenergy                 |   | Multi feedstock |   | —     |   | 30,000,000 |   |
| Tulsa, OK               |   | Best Energy Solutions, LLC            |   | Soybean oil     |   | —     |   | 1,000,000  |   |
| Klamath Falls,  OR      |   | Green Fuels of Oregon, Inc.           |   | *               |   | —     |   | *          |   |
| Salem, OR               |   | SeQuential-Pacific Biodiesel, LLC     |   | Multi feedstock |   | 1,000,000  |   | 4,000,000  |   |
| Erie, PA                |   | Lake Erie Biofuels                    |   | Soybean oil     |   | —     |   | 45,000,000 |   |
| Middletown, PA          |   | Middletown Biofuels, LLC              |   | Soybean oil     |   | —     |   | 2,000,000  |   |
| New Oxford, PA          |   | Soy Energy, Inc.                      |   | Soybean oil     |   | —     |   | 1,500,000  |   |
| Pittsburg, PA           |   | PA Biofuels, LLC                      |   | Multi feedstock |   | —     |   | 5,000,000  |   |
| Pittsburg, PA           |   | United Oil Company                    |   | Multi feedstock |   | 2,000,000  |   | —     |   |
| Shiremanstown,  PA      |   | Keystone BioFuels, Inc.               |   | Soybean oil     |   | *          |   | *          |   |
| South  Williamsport, PA |   | Choice FuelCorp Inc.                  |   | Multi feedstock |   | —     |   | 2,000,000  |   |
| White Deer, PA          |   | Biodiesel of Pennsylvania, Inc.       |   | Soybean oil     |   | —     |   | 1,500,000  |   |
| York, PA                |   | United Biofuels, Inc.                 |   | Soybean oil     |   | 1,500,000  |   | —     |   |
| Westerly, RI            |   | Mason Biodiesel, LLC                  |   | Soybean oil     |   | —     |   | 2,500,000  |   |
| Charleston, SC          |   | Southeast BioDiesel, LLC              |   | Multi feedstock |   | 6,000,000  |   | —     |   |
| Taylor, SC              |   | Carolina Biofuels, LLC                |   | Soybean oil     |   | 30,000,000 |   | —     |   |
| Warrenville, SC         |   | Farmers & Truckers Biodiesel, LLC |   | Soybean oil     |   | —     |   | 5,000,000  |   |
| Alexandria, SD          |   | Midwest BioDiesel Producers, LLC      |   | Soybean oil     |   | 7,000,000  |   | —     |   |
| Counce, TN              |   | NuOil                                 |   | Soybean oil     |   | 1,500,000  |   | —     |   |
| Louisburg, TN           |   | Agri-Energy, Inc                      |   | Soybean oil     |   | 5,000,000  |   | —     |   |
| Madison, TN             |   | Freedon Biofuels, Inc.                |   | Soybean oil     |   | —     |   | 12,000,000 |   |
| Manchester, TN          |   | TN Bio Energy                         |   | Soybean oil     |   | *          |   | *          |   |
| Memphis, TN             |   | Memphis Biofuels, LLC                 |   | Multi feedstock |   | 50,000,000 |   | —     |   |
| Memphis, TN             |   | Milagro Biofuels of Memphis           |   | Soybean oil     |   | 5,000,000  |   | —     |   |
| Pulaski, TN             |   | BIG Biodiesel, LLC                    |   | Soybean oil     |   | 250,000    |   | —     |   |

 

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| Wartburg, TN     |   | Blue Sky Biodiesel, Inc.                          |   | Multi feedstock |   | 3,000,000  |   | —      |   |
|------------------|--------|---------------------------------------------------|--------|-----------------|--------|------------|--------|-------------|--------|
| Channelview, TX  |   | AgriMax Fuels, LLC                                |   | Soybean oil     |   | —     |   | 3,000,000   |   |
| Channelview, TX  |   | ECO Friendly Products, Inc.                       |   | Multi feedstock |   | —     |   | *           |   |
| Channelview, TX  |   | NMM, Ltd                                          |   | Multi feedstock |   | 1,000,000  |   | —      |   |
| Cleburne, TX     |   | Smithfield Bioenergy LLC                          |   | Multi feedstock |   | 12,000,000 |   | —      |   |
| Conroe, TX       |   | SAFE Fuels, Inc.                                  |   | Multi feedstock |   | 18,000,000 |   | 12,000,000  |   |
| Converse, TX     |   | Bio-Renewable Technologies, LLC                   |   | Multi feedstock |   | —     |   | 1,000,000   |   |
| Dallas, TX       |   | New Fuel Company                                  |   | Multi feedstock |   | 250,000    |   | —      |   |
| Denton, TX       |   | Biodiesel Industries of Greater Dallas-Fort Worth |   | Multi feedstock |   | 3,000,000  |   | 7,000,000   |   |
| Euless, TX       |   | Direct Fuels                                      |   | Multi feedstock |   | —     |   | 10,000,000  |   |
| Galena Park, TX  |   | Organic Fuels, LLC                                |   | Multi feedstock |   | 30,000,000 |   | —      |   |
| Galveston, TX    |   | BioSelect Fuels (GBBLP)                           |   | Multi feedstock |   | —     |   | 21,000,000  |   |
| Giddings, TX     |   | Central Texas Biofuels                            |   | Soybean oil     |   | 1,500,000  |   | —      |   |
| Gonzales, TX     |   | GeoGreen Fuels                                    |   | Multi feedstock |   | 3,000,000  |   | —      |   |
| Hillsboro, TX    |   | Pacific Biodiesel Texas                           |   | Multi feedstock |   | 2,000,000  |   | —      |   |
| Houston, TX      |   | Johann Haltermann Ltd                             |   | Soybean oil     |   | 20,000,000 |   | —      |   |
| Houston, TX      |   | Green Diesel, LLC                                 |   | Soybean oil     |   | —     |   | *           |   |
| Houston, TX      |   | Green Earth Fuels, LLC                            |   | Multi feedstock |   | —     |   | 43,000,000  |   |
| Laredo, TX       |   | South Texas Blending                              |   | Tallow          |   | 5,000,000  |   | —      |   |
| League City, TX  |   | Momentum Biofuels, Inc.                           |   | Soybean oil     |   | —     |   | 20,000,000  |   |
| Pasadena, TX     |   | Huish Detergents                                  |   | *               |   | 15,000,000 |   | —      |   |
| Pasadena, TX     |   | Kemlink Energy, Inc.                              |   | Multi feedstock |   | 2,500,000  |   | —      |   |
| Poteet, TX       |   | SMS Envirofuels                                   |   | Soybean oil     |   | 6,000,000  |   | —      |   |
| Ralls, TX        |   | Brownfield Biodiesel, LLC                         |   | Cottonseed oil  |   | 2,000,000  |   | —      |   |
| Richmond, TX     |   | Fuel & Lube, LLC                              |   | Multi feedstock |   | —     |   | 5,000,000   |   |
| Sealy, TX        |   | Ag Fuels Ltd                                      |   | Multi feedstock |   | —     |   | 3,600,000   |   |
| Spanish Fork, UT |   | Domestic Energy Partners                          |   | Multi feedstock |   | 9,000,000  |   | —      |   |
| New Kent, VA     |   | Virginia Biodiesel Refinery                       |   | Soybean oil     |   | 2,000,000  |   | —      |   |
| Richmond, VA     |   | RECO Biodiesel, LLC                               |   | Soybean oil     |   | 10,000,000 |   | —      |   |
| Ridgeway, VA     |   | Chesapeake Custom Chemical                        |   | Soybean oil     |   | 5,000,000  |   | —      |   |
| South Boston, VA |   | Renroh Environmental Company                      |   | *               |   | 80,000     |   | —      |   |
| Ellensburg, WA   |   | Central Washington Biodiesel, LLC                 |   | Canola oil      |   | 3,000,000  |   | —      |   |
| Grays Harbor, WA |   | Imperium Grays Harbor                             |   | Multi feedstock |   | —     |   | 100,000,000 |   |
| Poulsbo, WA      |   | Olympic Biofuels                                  |   | Multi feedstock |   | —     |   | 500,000     |   |
| Seattle, WA      |   | Seattle Biodiesel                                 |   | Multi feedstock |   | 5,000,000  |   | —      |   |
| Clyman, WI       |   | Badger Biodiesel Inc.                             |   | Multi feedstock |   | —     |   | 5,000,000   |   |
| Deforest, WI     |   | Sanimax Energy                                    |   | Multi feedstock |   | —     |   | 20,000,000  |   |

 

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| Eau Claire, WI                                         |       | WRR Environmental Services    |       | Multi feedstock |       | *                      |       | —     |   |
|--------------------------------------------------------|------------|-------------------------------|------------|-----------------|------------|------------------------|------------|------------|--------|
| Evansville, WI                                         |       | North Prairie Productions LLC |       | Soybean oil     |       | —                 |       | 45,000,000 |   |
| Manitowoc, WI                                          |       | Renewable Alternatives        |       | Soybean oil     |       | *                      |       | —     |   |
|                                                   |       |                          |       |            |       |                   |       |       |   |
| **Total Current Capacity (105 plants)**                |       |                          |       | **864,400,000** | **(2)**    |                   |       |
| **Total Under Construction or Expansion (85  plants)** |       |                          |       | ** **      | ** ** | **1,700,000,000**      | **(2)**    |
| ** **                                             |       |                          |       | ** **      | ** ** | ** **             | ** ** |
| **Total  Annual Capacity**                             | ** ** | ** **                    | ** ** | ** **      | ** ** | **2,564,400,000  (2)** | ** ** |

 

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*Not available.

(1)             Annual production capacity refersonly to the reported maximum production capacity of the facility.  It does not indicate how many gallons ofbiodiesel were actually produced at each plant. Annual production capacity figures are as of January 31, 2007; underconstruction or expansion figures are as of January 31, 2007.

(2)             Total annual production capacityincludes estimated production capacity for plants that have not made capacityfigures available.  It is important tonote that production capacity differs from the actual number of gallons sold.

***Source:  National Biodiesel Board***

***Producers ofPetroleum-Based Diesel Fuels***

The biodiesel industry generally is in competitionwith the petroleum industry and particularly the diesel fuel portion of thepetroleum industry.  The biodieselindustry is a fraction of 1% of the size of the diesel fuel industry and isable to compete principally as a consequence of government environmentalregulations and incentives, assisted by currently high petroleum and dieselfuel prices.

The capital and operating costs of producing biodieselmake it prohibitive to compete with diesel fuel based on price.  If the diesel fuel industry is able toproduce diesel fuel with acceptable environmental characteristics, or ifgovernment regulations change in favor of diesel fuel, biodiesel producerswould find it extremely difficult to compete. Petroleum refiners are continually attempting to develop diesel fuelswith low sulfur and other clean burning attributes, together with lubricity andother characteristics necessary for the diesel engines in the marketplace.  It is not possible to predict what successthe petroleum industry may experience in making diesel fuel more acceptable orthe impact these efforts may have on the biodiesel industry.

**Sources and Availabilityof Raw Materials**

***Oil and Fat Feedstock Supplies***

We will not own or have control of our own feedstocksupplies and expect to purchase our feedstocks from oilseed processingcompanies or third-party marketing firms. Although our lack of captive feedstock supplies may expose us to greaterfeedstock supply and cost risks, we will also have the opportunity to takeadvantage of the lower feedstock costs when they occur.  Our agreement with REG, which gives REG theresponsibility for feedstock procurement, will allow us to benefit from REG’sinfrastructure for feedstock procurement, REG’s ability to purchase feedstockson a volume basis and other opportunities in the marketplace.

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Our plant will have pretreatment capabilities thatwill enable it to use a wide range of vegetable oil and animal fat feedstocks,including crude soy oil and virtually any fat or grease.  Our procurement strategy will be to leveragethe regional oilseed crushers and rendered oil suppliers to procure ingredientscompetitively that meet stringent quality specifications.  Our primary feedstocks will be refined soyoil, crude degummed soy oil and rendered fats such as lard and beef tallow.

The most frequently used feedstock for biodieselplants today is soy oil, which is extracted from soybeans at commercial crushingfacilities.  Practically any other newlyproduced vegetable oil can be used for biodiesel, but soy oil is generallypriced marginally lower than competing oils. We will also have the capability to utilize liquid animal fats, whichyield biodiesel with slightly different characteristics than vegetable oilbased biodiesel.  These animal fats arerendered from a variety of liquid and solid materials, such as tallow and wasteproducts from slaughterhouses.  Recycledvegetable oils such as cooking oils from restaurants, often known as “yellowgrease,” can also be used to produce biodiesel. However, due to contaminants and particulate matter typically present inyellow grease, we do not intend to use yellow grease as a feedstock.  All of the foregoing types of feedstocks areavailable in the northern Illinois market.

We anticipate that our plant will need approximately118,750 tons per year of mixed feedstocks to supply our production at our 30mmgy design capacity.  We expect that soyoil will be the principal component of our feedstocks with animal fatssupplying 30% of our feedstock requirements. Commodity prices and other factors could significantly alter theseexpected percentages in the future.

***Soy Oil***

Soybeans are the second largest cultivated agriculturalcrop in Illinois by acreage, after corn, and we anticipate that soybeanproduction and crushing in the region will continue into the future in largeenough quantities to meet the demand for food and feed uses with suppliesremaining available for reasonably expected biodiesel production.  Soybean production in Illinois in recentyears has varied based on weather (principally heat and moisture) factors, croprotation and the relative price of soybeans compared to other crops,principally corn.  The production of soyoil produced by Illinois crushing plants and the price of soy oil in Illinoishas varied as a result.  Soybean and soyoil prices are also affected by supplies and prices in the U.S. andinternational markets.  The followingfigures are based on reports from the Illinois Agricultural Statistics Serviceand the Chicago Board of Trade.

**ILLINOISSOYBEAN AND SOY OIL PRODUCTION AND PRICING 2002-2006**
|                                | ** ** | **2002**    | ** ** | **2003**    | ** ** | **2004**    | ** ** | **2005**    | ** ** | **2006**    | ** ** |
|--------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| Soybean acreage  planted       |       | 10,600,000  |       | 10,300,000  |       | 9,950,000   |       | 9,500,000   |       | 10,100,000  |       |
| Bushels of  soybeans harvested |       | 453,650,000 |       | 379,620,000 |       | 495,000,000 |       | 439,425,000 |       | 482,400,000 |       |
| Soybean price  per bushel (1)  |       | $           | 5.66       |        | $          | 7.51        |       | $           | 5.84       |        | $          | 5.76 |   | $ | 6.40 |   |
| Soy oil price per pound  (2)   |       | $           | 0.22       |        | $          | 0.30        |       | $           | 0.23       |        | $          | 0.23 |   | NA |   |
|                                |            |             |            |             |            |             |            |             |            |             |            |  |  |  |  |  |

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(1)    Annualaverage price.

(2)    Annualaverage price at Decatur, Illinois for marketing years beginning October 1 ofyear stated.

***Source: U.S.Department of Agriculture***

There are 9 soybean crushing facilities in thenorthern and central Illinois area, with 8 additional facilities in adjacentareas of Wisconsin and Iowa.  Theseplants have the capacity to crush an estimated 450 million bushels of soybeansper year and produce an estimated 380 million gallons of soy oil per year.  These plants each produce 5 to 85 milliongallons of soy oil annually.  Theprincipal crushing companies in the region are Cargill and ADM.  Because we do not intend to develop our owncrushing facility, we will rely on soy oil produced principally in the Illinoisand adjacent market areas, with access to a wider U.S. market depending onsupplies and prices.

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Although we presently have no agreements to purchasesoy oil or other vegetable oils from companies with crushing facilities orcommodity trading companies, we anticipate that we will be able to obtainsupplies of oil in the regional market. The price at which we will purchase soy oil and any other new vegetableoil will depend on prevailing market prices. We may enter into supply agreements with crushers or commodity tradersor utilize hedging arrangements to protect our supplies and feedstockcosts.  However, it will always bepossible that a shortage of soy and other vegetable oils could develop,particularly in the event of a drought or other production problems, dedicationof acreage to other uses and competition from other biodiesel plants enteringthe market.  Thus, there can be noassurance that we will be able to obtain adequate supplies of vegetable oils onacceptable terms.

The price range of crude soy oil in the area typicallyranges from even with soy oil futures to $.01 per pound over soy oilfutures.  Refined, bleached anddeodorized (RBD) oil typically runs $.03 to $.05 per pound premium over crudesoy oil.  We believe that all of the soybeanprocessors will be willing to sell soy oil to us.  The challenge may come in the type of oilthey will sell regularly.  Cargill andADM have each expressed the wish to sell refined oil in order to keep theirrefining assets utilized.  If our plantis forced to purchase RBD oil instead of competitively priced crude soy oil, itwould mean a $.01 to $.02 per pound oil premium over anticipated crude oilprocurement cost.

Prices for soy oil in the Illinois market havetypically been higher than soy oil prices in high soybean production statessuch as Iowa and Minnesota where much of the new biodiesel plant constructionis taking place.  Higher soy oil pricesin Illinois means that the cost to for us to produce biodiesel in our locationcould be approximately $0.0375 to $0.075 per gallon higher than other locationsin states west and north of us where cash soybean and soy oil prices are lower.

Soy and other vegetable oil prices are also affectedgreatly by U.S. and global oil seed and oil commodity supply and demand andU.S. and global oil seed crop production, which can be volatile as a result ofa number of factors such as weather, current and anticipated stocks and prices,export prices and supports and the government’s current and anticipatedagricultural policy.  The price of oilseeds and vegetable oils has fluctuated significantly in the past and can beexpected to fluctuate significantly in the future.  Because the market price of biodiesel is notrelated to oil seed or oil prices, there is no assurance that we will be ableto compensate for increases in the cost of our oil supplies through adjustmentsin prices charged for biodiesel.  Thus,our plant’s profitability may be negatively impacted during periods of high oilseed and vegetable oil prices.

***Animal Fats***

The use of animal fats in biodiesel provides theproduct with a higher degree of lubricity than vegetable oils.  This is a consequence of the chemicalcomposition of the triglyceride found in animal fats.  Thus, designing our plant to be able to processanimal fats as well as vegetable oils will give us a basis on which to providea product which will function at optimum levels in a wider range of operatingconditions than biodiesel based solely on vegetable oils.

Animal fats, including declining supplies of animalfat based cooking oils, have typically been sold to rendering companies byslaughterhouses and the restaurant and commercial cooking industries.  These rendering companies are the same asthose which handle used vegetable oils. Because of the variety of fats available in the market, there is a widerange of prices for different products.

There are four hog processing plants and four beefprocessing plants within a 150 mile radius of our plant site with an estimatedproduction greater than 50 million gallons of oil per year.  Most, if not all, of those plants rendertheir oil on site and sell the bulk either in their integrated production andprocessing system or sell to local feed mills. Typically rendered oil, of the quality that would go into a biodieselfacility, would cost $.03 per pound to $.08 per pound under crude soybeanoil.  There are also a very large numberof renderers in the region (especially around Chicago) that have expressed aninterest in further discussions.

Somewhat greater care in handling and use is necessaryfor animal fats due to the greater risk of spoilage, contamination and diseasetransmission.  Some very durable fats maynot be usable in biodiesel plants. Nevertheless, we believe that the benefit that animal fats can bring toour biodiesel product will make it an important

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feedstock source forus.  We have no agreements with anyrendering companies, slaughterhouses or other sources for animal fats, but willconsider such agreements in the future.

**Risk Management**

We have entered into a management and operationalservices agreement with REG which, among other responsibilities, provides forREG to manage the scheduling and purchase of feedstock supplies for our plantand to market the biodiesel and glycerin that we produce.  REG is required to assure the consistentscheduling of feedstock deliveries and schedule product sales anddeliveries.  We expect that REG willutilize forward contracting and hedging strategies, including strategiesutilizing futures and option contracts, to manage our commodity risk exposureand optimize finished product pricing on our behalf.  Much of our vegetable oil supplies may beacquired in this manner.  Alternatively,REG may facilitate the negotiation of longer-term supply agreements intended tolock in favorable quantities, quality and pricing of supplies for us.  Hedging is used to attempt to reduce the riskcaused by price fluctuation.

Hedging is a means of protecting the price at which webuy feedstocks and the price at which we will sell our products in thefuture.  The effectiveness of hedgingactivities will depend on, among other things, the cost of feedstocks and ourability to sell enough biodiesel and glycerin to use all of the feedstockssubject to futures and option contracts that we purchase as part of our hedgingstrategy.  Although we will attempt tolink hedging activities to sales plans and pricing activities, hedgingactivities themselves can result in costs because price movements in commoditycontracts are highly volatile and are influenced by many factors that arebeyond our control.  We may incur thesecosts and these costs may be significant.

Our largest expenditure, oil feedstocks, and ourbiggest revenue source, biodiesel, are in relatively volatile markets.  We realize that trading commodities can be arisky endeavor if not managed properly. We acknowledge that as a biodiesel producer, we will be exposed to pricerisk as a by-product of our core business. Thus, we expect REG to develop and employ a risk management plan forus.  There will be many opportunities tolock in the price of our inputs and outputs for a profit.  We believe that we must be prepared to actupon the opportunities when they are presented to us, and act to take advantageof them through forward or futures contracts.

We also believe that an integral component of aneffective risk management program is to establish firm and measurableperformance benchmarks.  Such a programwill help assure that our internal competencies are well positioned to meet thechallenges of the marketplace.

**Transportation andDelivery**

Our biodiesel plant will have facilities to receiveoil and fat feedstocks by truck and rail and to load biodiesel and glycerinonto trucks and rail cars.  We expect tohave storage capacity for at least ten days’ requirements of feedstocks.  We expect that most of our feedstocks will beobtained in the regional market and will arrive by tanker truck.  We anticipate that most of our biodiesel willbe sold in the regional market, particularly in metropolitan Chicago.  Thus, our biodiesel is also likely to beshipped in tanker trucks.

Highway transportation is the most efficient andtimely means of delivery from and to nearby markets.  Our Mill Race Industrial Park site is locatedwithin 2 miles of U.S. Highway 20 which, approximately 30 miles to the east,provides access to Interstate Highways 90 and 39.  Interstate 90 leads east to the Chicagomarket and north to Wisconsin. Interstate 39 leads south and serves central Illinois.  Highway 20 also serves the area west ofFreeport and eastern Iowa.  These majorarteries connect with additional Interstate and U.S. highways which will allowour plant efficient highway access to any feedstock or product market.

Rail transportation is more cost effective than trucktransportation to more distant markets. The Mill Race Industrial Park is served by the main line of the CanadianNational Railway Company and we expect to be able to extend a spur line to oursite.  The Canadian National Railroad hasone of the best operating ratios in the industry.  Since its acquisition of Illinois Central in1999, the CN provides shippers with more options and greater reach in therapidly expanding market for north-south trade and it is the only railroad thatcrosses the continent east-west and north-south, serving ports on the Atlantic,Pacific and Gulf coasts.  The CN’snorth-south rail corridor intersects and

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provides access to allother east-west railroad lines.  The CNmainline is a 286,000 pound track with recent major improvements.  We have not entered into any writtenagreements with the CN, however based on conversations with the CN we believethat the CN will enter into a written agreement with us for track access to oursite and provide us with 6-day per week service.

***Utilities***

The production of biodiesel is an energy intensiveprocess that uses significant amounts of natural gas, electricity andwater.  We expect to enter intonegotiations, and to the extent practical, enter into agreements with variousutility service providers before we begin construction of our plant.  If there is any interruption in our supply ofenergy or water for any reason, such as insufficient supply, deliverydifficulties or mechanical problems, we may be required to haltproduction.  If production is halted foran extended period of time, it may have a material adverse effect on ouroperations, cash flows and financial performance.

***Natural Gas***

Our plant will require a significant and uninterruptedsupply of natural gas for its operations. Natural gas will be needed principally to fire our boiler which willprovide steam for our biodiesel production process.  Natural gas will be a critical resource forus and will be a significant component of our cost structure.  Natural gas prices have risen significantlyin the past and can be expected to continue to rise in the foreseeable future.

We expect that our natural gas needs will be suppliedby Nicor, one of the largest natural gas distributors in the UnitedStates.  Nicor has 6-inch, 8-inch and16-inch pipelines within one-half mile of our Mill Race Industrial Parksite.  We will need to construct a newfeeder pipeline from the Nicor pipeline to our site.  Thus, if we locate our plant at that site, wewould expect our capital expense for this purpose to be minimal.  We do not yet have an agreement with Nicor toprovide us the natural gas that we need.

The cost of natural gas has been increasing, as shownon the accompanying graph.  Natural gasprices have exhibited considerable volatility within calendar years, and fromseason to season, but generally show no sign of declining in the near-term.

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***Electricity***

The plant will also require a continuous supply ofelectricity.  We currently have noagreement with any service provider for the electrical services that weneed.  The price of electricity, like anycommodity, could fluctuate and increase significantly as it has in thepast.  Based on engineeringspecifications, we anticipate the proposed plant will require approximately sixmillion kilowatts of electricity annually.

Electricity to our Stephenson County site is availablethrough Commonwealth Edison (“ComEd”) transmission lines.  To service our plant, we expect that we willneed to construct a one-half mile high voltage line and an on-site substationto access the nearest transmission line. The electricity would be purchased in the national electric energymarket.  We believe that the price atwhich we will be able to purchase electric services will be competitive withother high-use commercial rates.

***Water***

We will require a significant supply of fresh water tomaintain consistent operations of our plant. Engineering specifications show our plant maximum water requirements tobe approximately 100 gallons per minute. That is approximately 144,000 gallons per day.  Stephenson County has advised us that itintends to drill a well or wells to supply fresh water to the Mill RunIndustrial Park.  However, we do not havea firm agreement with the county for our water supply and the county will berequired to obtain a license to drill any well and to comply with applicableenvironmental regulations before any water from that source will be availableto us.  In the event water would not beavailable from Stephenson County, we may be able to obtain our water suppliesfrom the City of Freeport via mains which could be constructed to serve theMill Run Industrial Park.  We have nounderstanding with the City of Freeport with respect to water supplies.

Our boiler and cooling tower are major areas of productionthat require fresh water.  Creation ofboiler makeup water generates a waste stream, as the contaminants from the rawwater, such as dissolved minerals like calcium and magnesium, are removed viathis waste stream.  Making steam withoutfirst removing the solids would foul the boiler and cause it to fail.  The makeup water requirements for the coolingtower are primarily a result of evaporation, just like the boiler, but nearerto ambient temperatures.  As with theboiler, operating the cooling water system without treatment will cause it andthe cooling heat exchangers through which the cooling water is circulated tofoul.  The quantity of the water used andwastewater discharged is dependent upon the quality of the raw water.  Our water source will need to be evaluated todetermine what treatment processing and equipment we will require.  The water used in our plant process would berecycled to the extent feasible.

***Wastewater and StormwaterTreatment and Disposal***

Stephenson County has advised us that it intends toconstruct a centralized wastewater pretreatment facility to serve Mill RaceIndustrial Park.  Wastewater from ourplant would be treated at this facility and then pumped to the City of Freeport’swastewater treatment plant.  Specificdetails and cost information relating to this facility and the treatmentprocess have not been finalized.

The County also intends to construct a stormwaterdetention facility to serve the industrial park.

**Environmental and OtherRegulatory Matters**

Under laws and regulations administered by the UnitedStates Environmental Protection Agency (“EPA”) and Illinois EPA (“IEPA”),before we begin construction we will be required to perform certain studies,satisfy regulatory standards and obtain various environmental, construction andoperating permits, as discussed below. Even if we receive all IEPA environmental permits for construction andoperation of the plant, we will also be subject to oversight activities by theEPA.  There is always a risk that the EPAmay enforce certain rules and regulations differently than the IEPA’senvironmental administrators.  IEPA andEPA rules and regulations are subject to change, and any changes may result ingreater regulatory burdens for us.

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We anticipate that REG, as our design-buildcontractor, will be responsible for the construction permits and registrationsand we will be required to obtain the necessary air, water and operatingpermits.  If permitting delays occur,construction of our plant may be delayed. If we are unable to obtain necessary permits or to comply with therequirements of such permits or any environmental regulations, we may not beable to construct or operate our proposed plant and our project may be delayed,relocated or terminated.

The following is a list of the principal federal andstate actions and permits that are or may be required depending on the locationof our plant site:

***Federal Permits***

Clean Air Act Requirements

·                  Preventionof Significant Deterioration (PSD) and New Source Construction Permits

·                  ApplicableFederal New Source Performance Standards (NSPS)

·                  ApplicableNational Emission Standards for Hazardous Air Pollutants (NESHAPS)

·                  TitleV Operating Permit of the Clean Air Act Amendments of 1990

·                  RiskManagement Plan

Clean Water Act Requirements

·                  OSHA1910 Process Safety Management (PSM) Plan Clean Water Act Requirements

·                  Illinois/NationalPollutant Discharge Elimination System Permits (includes utility waterdischarge, storm water pollution prevention during construction and storm waterpollution prevention during operation)

·                  OilPollution Prevention and Spill Control Countermeasure Plan

Comprehensive Environmental Response Compensation andLiability Act & Emergency Planning and Community Right to Know Act(CERCLA/EPCRA) Requirements

·                  TierII Forms – listing of potentially hazardous chemicals stored on-site

·                  EPCRASection 313 and 304 and CERCLA Section 103. These reports track use and release of regulated substances abovethreshold and/or designated quantities annually.

***State/Local Permits and Licenses***

·                  Airquality permits;

·                  Storagetank permits;

·                  Waterquality permits;

·                  Statemotor fuels permits and licenses;

·                  Statedepartment of transportation (highway access permit; possible easement rights);

·                  Stateboiler license;

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·                  Stateblender license;

·                  Waterappropriation permits;

·                  Otherwater and wetland considerations;

·                  LocalZoning/Building Permits; and

·                  LocalFire Department Hazardous Materials Notification.

***Regulatory Permits***

We will be subject to extensive air, water and otherenvironmental regulations and we will need to obtain a number of environmentalpermits, which include an air construction permit, Notice of Intent andNational Pollution Discharge Elimination System (NPDES) permit and preparationof a stormwater pollution prevention plan. Stormwater Industrial water permit, hydrostatic test water dischargepermit, spill prevention control and countermeasure plan, above ground storagetank permit, risk management plan, endangered species, archaeological andcultural/historical review, and alcohol, tobacco tax and trade bureau permit inorder to construct and operate the plant. In addition, it is likely that our senior debt financing will becontingent on our ability to obtain the various required environmentalpermits.  We have engaged REG tocoordinate and assist us with obtaining the air permit, and to advise us ongeneral environmental compliance.  REG isexpected to be responsible for all necessary construction permits.

Of the permits described below, we must obtain the AirEmission Source Construction Permit and the Construction Storm Water DischargePermit, applicable zoning and building permits and approvals, endangeredspecies, archaeological and historical review prior to starting construction.  The remaining permits will be required beforeor shortly after we can begin to operate the plant.  If for any reason any of these permits arenot granted, construction costs for the plant may increase, or the plant maynot be constructed at all.  In additionto the state requirements, the EPA has oversight authority and could imposeconditions or other restrictions in the permits that are detrimental to us orwhich increase permit requirements or the testing protocols and methodsnecessary to obtain a permit either before, during or after the permittingprocess.  The State of Illinois and theIEPA could also modify the requirements for obtaining a permit.  This would likely have a material adverseimpact on our operations, cash flows and financial performance.

Even if we receive all required permits from the Stateof Illinois, we may also be subject to regulations on emissions from the EPAfor which the state of Illinois has been delegated enforcement authority.  In the event that the EPA is unsatisfied withenforcement of air emission rules and regulations, it has the authority tooverfile and directly enforce the federal rules delegated to the state ofIllinois.  Currently, the EPA’s statutesand rules do not require us to obtain separate EPA approval in connection withthe construction and operation of the proposed plant.  Additionally, environmental laws andregulations, both at the federal and state level, are subject to change, andchanges can be made retroactively. Consequently, even if we have the proper permits at the present time, wemay be required to invest or spend considerable resources to comply with futureenvironmental regulations or new or modified interpretations of thoseregulations to the detriment of our financial performance.

We have started the process to obtain the required airquality permit and believe this process will be completed sometime in earlyDecember 2006.  The required permits tocommence earth work have already been obtained by the Mill Race IndustrialPark.  It is our belief that we will haveall permits required to commence construction by the end of the first quarterof 2007.

***Air Pollution Standards and Permits***

There are a number of standards that may affect theconstruction and operation of the plant. Title V of the Clean Air Act, the EPA’s New Source Performance Standardsthat apply to the plant’s boilers, and the EPA’s Prevention of SignificantDeterioration (“PSD”) regulations create stringent and complex requirements forobtaining the necessary construction permits.

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We believe that we will be required to obtain a permitfor our plant as a minor source of regulated air pollutants, in which case theplant will not be subject to PSD requirements under the Clean Air Act.  However, there is the risk that the EPA willconsider us to be a major source of air emissions, making the plant subject toPSD requirements, which are more stringent and cumbersome that those for minorsources of air emissions.  If the EPAconsiders the plant to be a major source of air emissions, we may be requiredto invest or spend considerable resources to comply with the PSD requirements.

We believe that all other pollutants will be emittedat minor source levels.  The air permitwill have terms and conditions that include strict emission limits that must bemaintained and monitoring and recordkeeping requirements that must be providedor made available to environmental officials. Any failure to comply with these requirements can result in a notice ofviolation and penalties which can include fines and even a requirement to ceaseplant operations until the violation is remedied.

***Prevention of SignificantDeterioration (PSD)***

In addition to other permitting requirements, if theplant is considered to be a major source of air emissions, the plant must demonstrateas part of its permit application that the emissions it will add to theenvironment will not rise to levels that cause the air quality in the area todeteriorate by more than the amounts prescribed by law.  This may be demonstrated by using approvedatmospheric dispersion models that simulate the transport and fate of thepollutants coming from the plant.  If theemissions cannot be demonstrated to be within the PSD limits, changes must bemade to reduce the predicted levels or a permit to construct the facility willnot be issued.

***National Pollution DischargeElimination System Permit (Individual NPDES Permit)***

We will use water to cool our closed circuit systemsin the proposed plant.  Although thewater in the cooling system will be re-circulated to decrease plant waterdemands, a certain amount of water will be continuously replaced to make up forevaporation and to maintain a high quality of water in the cooling tower.  In addition, there will be occasionalblowdown water that will have to be discharged. Depending upon the water quality, up to 55,000 gallons of water per daywill be discharged.  This figure couldincrease to as much as 300,000 gallons of water per day depending upon thequality of the water available at the site. We expect to apply for a National Pollutant Discharge Elimination System(NPDES) permit from the State of Illinois. Although we expect to receive the permit, we cannot assure that it willbe granted.  If this permit is notgranted, then our plant may not be allowed to operate.

REG has been engaged to assist us with obtaining thenecessary water discharge permits.  REG’sservices will include preparation of preliminary evaluations of our waste waterdischarge system, field investigations, follow-up waste management optionsscreening and assistance with permit applications as well as other on-callservices.

***Water Permit***

We expect to obtain our water needs from StephensonCounty which has announced an intention to drill a water well or wells tosupply the Mill Race Industrial Park.  Inorder to drill wells, the county will need to obtain a permit from the IllinoisDepartment of Public Health.  The permitprocess will establish a monitoring mechanism for water usage in the area.

***StormWater Discharge Permit and Storm Water Pollution Prevention Program (GeneralNPDES Permits)***

Before we can begin construction of our proposedbiodiesel plant, we must obtain a construction storm water discharge permitfrom the IEPA (“General Permit No. 2”). This permit application must be filed 90 days before constructionbegins.  In connection with this permit,we must have a Stormwater Pollution Prevention Plan in place that outlinesvarious measures we plan to implement to prevent storm water pollution.  The plan must be submitted to but does notneed to be approved by the IEPA.  Weanticipate, but there can be no assurance, that we will be able to obtain aGeneral Permit No. 2 storm water discharge permit.  We must also either file a separateapplication for a General Permit No. 1 storm water discharge permit or addthe information to our individual NPDES permit application should we also filean individual NPDES permit application for process water discharge.  The 

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application for theGeneral Permit No. 1 must be filed 24 hours prior to the start ofoperations.  We anticipate, but there canbe no assurance, that we will be able to obtain a General Permit No. 1storm water discharge permit.

***Spill Prevention, Control andCountermeasure Plan***

Before we can begin operations, we must prepare andimplement a Spill Prevention Control and Countermeasure (“SPCC”) plan.  This plan will address oil pollutionprevention regulations and must be reviewed and certified by a professionalengineer.  The SPCC must be reviewed andupdated every three years.

***Environmental RiskManagement Plan***

Under the Clean Air Act, stationary sources withprocesses that contain more than a threshold quantity of a regulated substanceare required to prepare and implement a Risk Management Plan.  We must establish a plan to prevent spills orleaks of any regulated substance and an emergency response program in the eventof spills, leaks, explosions or other events that may lead to the release ofthe regulated substance into the surrounding area.  We will need to conduct a hazardous assessmentand prepare models to assess the impact of any release of a regulated substanceinto the surrounding area.  The programwill be presented at one or more public meetings.  These requirements are similar to the RiskManagement Plan requirements.  The RiskManagement Plan should be filed before operations begin.  REG will provide assistance with our RiskManagement Plan as part of REG’s services under its management and operationalservices agreement with us.

***Endangered Species***

We will be subject to the state and federal threatenedand endangered species requirements and will consult with both state andfederal agencies to determine whether the project will impact any state orfederal threatened and endangered species. The state requirement comes from the Illinois Endangered Species Act andis implemented by the Illinois Department of Natural Resources through their “ConsultationProcedures for Assessing Impacts of Agency Actions on Endangered and ThreatenedSpecies and Natural Areas.”  The federalrequirement is derived from the Endangered Species Act and is implemented byregulations and policies of the U.S. Fish and Wildlife Service.

The purpose of consulting with the state and federalagencies is to ensure the protection of threatened and endangered species.  We expect to be able to fully comply with thethreatened and endangered requirements without substantially altering the scopeand operating characteristics of our plant. While we will work to fulfill the threatened and endangered speciesrequirements in a manner that will not delay the project or significantlychange its scope, it is possible that circumstances, unforeseen at this time,could cause delay in construction or modifications to the project plans,including the plant’s location.

***Nuisance***

Biodiesel production has been known to produce an odorto which surrounding residents could object. Our plant may also increase dust in the area due to operations and thetransportation of feedstocks to the plant and products from the plant.  These activities may subject us to nuisance,trespass or similar claims by employees, property owners or residents in thevicinity of the plant.  However, anyclaims or increased costs to address complaints may have a material adverseeffect on us and on our operations, cash flow and financial performance.

***Costs ofEnvironmental Compliance***

Compliance with federal and state environmental lawsand regulations, including permit application procedures, will result insignificant costs to us.

The two regulations with the biggest impact are theClean Air Act and the Clean Water Act. We will spend approximately $2,000,000 to design, construct andimplement a nitrogen blanket system to prevent any hazardous material (largelymethanol) from escaping into the atmosphere and then venting any excess gasesto a flare to be burned to destroy any potential emissions.

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We will closely monitor all wastewater to assure thatno contaminated water reaches any fresh water supplies.  We intend to discharge our wastewater intothe city of Freeport’s wastewater system and have budgeted $1,000,000 to complywith the city’s regulations.

We will also apply for and closely follow the Illinoisstorm water runoff requirement during and after construction of our plant tominimize any surface water runoff that could potentially contaminate statewaters.  The cost to install surfacewater control devices is estimated at $500,000.

The cost of complying with these regulations isincluded in our plant construction estimate from REG or has been added to ourproposed budget by us.

**Employees**

Prior to completion of the plant construction andcommencement of operations, we plan to hire a chief executive officer and achief financial officer with overall responsibilities for the administration ofour company.  In addition, we intend toobtain the services of approximately 28 additional full-time employees throughREG.  We expect that two of theseemployees will be involved primarily in management and administration and theremainder will be involved primarily in plant operations.  We expect to fill the general managerposition by the beginning of construction. We do not presently offer an employee benefits package and expect thatany benefits for personnel provided by REG will be made available through REGplans.

### **ITEM1A. RISK FACTORS.**

***You should carefully read andconsider the risks and uncertainties below and the other information containedin this report.  The risks anduncertainties described below are not the only ones we may face.  The following risks, together with additionalrisks and uncertainties not currently known to us or that we currently deemimmaterial could impair our financial condition and results of operation.***

**Risks Related to OurFinancial Plan**

***Evenif we raise a substantial amount of equity, if we do not secure the debtfinancing necessary to construct and operate our plant, we would very likely beunable to proceed with our project and may be required to modify our financialplan substantially or to liquidate.***

In addition to the $20,000,000 to $35,000,000 inequity capital that we hope to raise, we will require $20,000,000 to$32,500,000 in senior debt financing and may require up to an estimated$2,500,000 in subordinated debt financing to construct and commence operationsof our proposed plant.  We may also needto obtain additional debt financing to operate our plant followingconstruction.  Although we presently haveone commitment from a financial institution for debt financing, there is noassurance that we will obtain financing from that source or that we will notseek a commitment or commitments with different terms or from other banks,financial institutions or lenders.   Wewill not release subscriptions in our equity offering from escrow until wereceive written debt financing commitments in an amount which, together withour offering proceeds, would equal the $58,400,000 that, together with theproceeds of our seed equity financing and grants and other resources, webelieve would be sufficient for us to construct and commence operations of ourplant.  If we are unable to obtaincommitments for debt financing in a sufficient total amount and on acceptableterms, we will likely be forced to abandon our project and return subscriptionsreceived in our equity offering.

Although our receipt of debt financing commitments isa condition to the release of subscriptions from escrow in our equity offering,the lender or lenders will not be fully bound by the commitments.  A commitment letter is a conditionalagreement to lend, typically subject to several terms and conditions and to thenegotiation, execution and delivery of a loan agreement and other agreementsand documents required by the lender. The lender could decline to provide financing if the terms andconditions in the commitment letter are not satisfied.  Thus, subscriptions will very likely bereleased from escrow and we may begin spending the proceeds of our equityoffering before there is 

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complete assurance thatloan commitments received by us will result in adequate or satisfactory debtfinancing for our project.

If for any reason expected debt financing fails orbecomes unavailable after subscriptions have been released from escrow, we maybe unable to construct the plant, we may need to seek alternative lenders orinvite other equity investors to participate in our project on termsunfavorable to us and our existing Unit holders, our ownership of the projector the interest of our Unit holders in us could be substantially diluted, anydistributions made by us could be greatly reduced, we may be forced to sell ourentire interest in the project at a price which reflects a minimal asset valueand the value of our Units would very likely decline significantly or be lostentirely.

The terms of any debt or supplemental equity financingmay require us to issue warrants to the lender or investor.  If we issue warrants to purchase additionalUnits, an investment in our Units would be diluted and the value of our Unitscould be reduced, particularly if the purchase price for Units in the warrantsis lower than the price for Units paid by our Unit holders.

***Ourdebt financing agreements will contain restrictive covenants that will limitdistributions and impose restrictions on our use of working capital, and theserestrictions could hinder our operations and reduce the value of our Units.***

Under the terms of any debt financing agreementssigned by us, lenders may require that we spend the proceeds we raise in ourequity offering before they release any loan proceeds to us.  Thus, the invested funds of our Unit holderswill very likely be at risk prior to funds from debt financing sources.  In addition, the terms of our debt financingagreements will contain financial, maintenance, organizational, operational andother restrictive covenants.  Thesecovenants may make it more difficult for us to operate because they will havesignificant impacts on our operations, such as:

·                  Reducingfunds available for operations and distributions because a substantial portionof our cash flow must be used to service the debt;

·                  Limitingour ability to obtain additional debt financing, enter into lease financingarrangements or place liens on our assets;

·                  Makingus vulnerable to increases in prevailing interest rates;

·                  Placingus at a competitive disadvantage because we may be substantially more leveragedthan some of our competitors;

·                  Limitingour ability to make capital expenditures or investments in excess of prescribedamounts;

·                  Subjectingall or substantially all of our assets to liens, with the result that there maybe virtually no assets left for Unit holders in the event of a liquidation;

·                  Limitingour ability to adjust to changing market conditions, which could make us morevulnerable to a downturn in the general economic conditions of our business;

·                  Limitingour ability to make distributions to our Unit holders, even for the purpose ofcovering tax liabilities, or to redeem or repurchase Units; and

·                  Restrictingour freedom to merge or consolidate with or to sell our assets to anothercompany or entity.

If we are unable to service our debt, we may be forcedto reduce or delay planned capital expenditures, sell assets, restructure ourindebtedness or seek additional equity capital. In addition, if we default on the debt, we may be forced to liquidate orthe lender may foreclose on the debt and sell our plant and other assets for anamount less than the outstanding debt. If that occurs, our Units could be worth little or nothing.

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***Significantincreases in the cost of the plant may require us to obtain additional debtfinancing, which may be difficult and expensive to obtain, or may not beavailable at all.***

Certain events and conditions, including among others,delays, change orders we may submit and site conditions that may differ fromwhat we expect, could lead to significant increases in our plant costs.  Delays and changes are not uncommon in majorconstruction projects.  We may change thelocation of the plant if we do not move forward with our primary proposed site,if we find another site that better suits our needs, or if we cannot obtainnecessary permits and approvals or utilities and other services, or cannotobtain them at a reasonable cost. Changing the location of the plant from our primary site may increasethe cost of the plant and delay construction and start-up operations of theplant.  Increases in the cost of theplant will require us to procure additional debt financing, which may bedifficult and expensive to obtain, or may not be available at all.

**Risks Related to us as aDevelopment-Stage Company**

***Weare a recently formed company, have no operating history or experienceoperating a biodiesel plant and may have difficulties successfully completingand operating the plant.***

We are a recently organized company with no operatinghistory and limited resources.  We aresubject to all of the risks typically encountered by development stagecompanies.  Our lack of an operatinghistory and inexperience may make it difficult for us to successfully develop,complete and operate our biodiesel plant. If we do not manage the development, construction and start-up of ourplant successfully, our ability to generate operating income, meet our debtobligations and make distributions on our Units could be adversely affected andthe value of our Units could be reduced significantly.

***Ourmanagers and officers have very limited experience in the biodiesel industryand in managing a public company, which increases the risk that we will beunable to manage our development and operate successfully.***

We are highly dependent on our managers and officersto develop and operate our plant and manage our business.  Our managers and officers have substantialbusiness experience but have little or no experience in raising large amountsof equity and debt capital, building and operating a biodiesel plant, ormanaging a public company.  Our managersand officers have very little or no experience in the biodiesel industry.  Our managers and officers have other businesscommitments that will continue to require most of their time andattention.  Although we expect to hireadditional personnel and enter into agreements with contractors and consultantsto assist us in constructing our plant and with respect to all aspects of ouroperations, there is no assurance that we will be able to hire employees orsign agreements satisfactory to us.  Ifour managers and officers are unable or find it difficult to manage ourdevelopment and operations successfully, our potential to succeed as a businessand the value of our Units will be adversely affected.

***Wewill depend on key service providers for assistance and expertise in beginningoperations and any failure or loss of these relationships could delay ouroperations, increase our expenses and hinder our success.***

We must establish and maintain relationships withseveral providers for contracting, consulting and other services.  REG, with which we have a pre-constructionservices agreement and expect to have a design-build agreement to construct ourplant, is and will continue to be an essential provider during ourconstruction, development and start-up phase. Other consultants, such as REG, will provide services relating tosecuring transportation and utility services, ensuring environmental complianceand obtaining required permits, contracting for feedstock supplies and,eventually, marketing our biodiesel and glycerin.  If we should lose our relationship with anyof these key providers, particularly REG, or if any of these providers shouldfail to perform, we would be forced to locate and retain alternativeproviders.  As a consequence, due to thecritical nature of these services, our commencement of operations could be veryseriously delayed, our start-up expenses could be significantly increased and ourbusiness could be greatly harmed, even to the point of failure of our company.

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***Thereare several agreements and relationships that remain to be negotiated, executedand implemented which will have a critical impact on our operations, expensesand profitability.***

We have several agreements, documents andrelationships that remain to be negotiated, executed and implemented before wecan develop and construct our plant and commence operations.  In some cases, the parties with whom we wouldneed to establish a relationship have yet to be identified.  Examples include agreements with debtfinancing sources, a definitive design-build contract with REG to construct ourplant, agreements to supply us with access to transportation facilities,agreements to supply us with feedstocks and natural gas, contracts with otherutilities, contracts to sell our production and agreements with numerousconsultants.  Our expectations regardingthe likely terms of these agreements and relationships, as discussed in thisreport, could vary greatly from the terms of any agreement or relationship thatmay eventually be executed or established. If we are unable to enter into these agreements or relationships onsatisfactory terms, or if revisions or amendments to existing terms becomenecessary, our plant and commencement of operations could be delayed, ourexpenses could be increased, our profitability and the likelihood ofdistributions to our Unit holders could be adversely affected and the value ofan investment in our Units could decline or vanish.

***Wehave incurred losses since we were organized and may never operate profitably.***

During the period from April 28, 2005, when we wereorganized as a Delaware limited liability company, to December 31, 2006, weincurred a loss from operations of approximately $282,612.  We will continue to incur significant lossesuntil we commence operations of our plant and begin to sell ourproduction.  If we are unable to commenceoperations, we will never generate a profit. Even if we commence operations and sell our production, expenses,competition and other factors may make it impossible for us to operateprofitably.  In that case, the value ofan investment in our Units would likely be quite small.

**Risks Related toConstruction of our Biodiesel Plant**

***Althoughwe are relying on REG to design and build our plant, we currently have nobinding construction agreement with REG and if we are unable to finalize anagreement with REG or if REG fails to complete our plant to operate at designcapacity, we could be forced to terminate and liquidate our business.***

We are relying on REG, utilizing technology developedby REG and Crown Iron Works, to design and build our plant and to train ourpersonnel to operate the plant.  Thus, wewill be highly dependent upon REG.  Wehave entered into a pre-construction services agreement with REG for design andengineering services, but we currently have no definitive constructionagreement with REG.  We must negotiateand enter into a definitive design-build agreement with REG which will setforth the final design and detailed construction services to be provided byREG, and other terms of our relationship with REG.  Under that agreement, REG would serve as ourgeneral contractor.  There is, however,no assurance that we can successfully negotiate and execute a binding agreementwith REG.  If we are not able to executea design-build contract with REG, or if REG terminates its relationship withus, there is no assurance that we would be able to obtain a replacement generalcontractor.  In that case, we could be forcedto terminate our project and liquidate our company.

We are aware that REG has executed letters of intentor agreements to provide construction services for other biodiesel productionfacilities.  REG’s commitment to otherbiodiesel projects could delay the completion of our plant and our ability tocommence operations.  Any delay in theconstruction of our plant or commencement of our operations would delay ourability to generate revenue, service our debt, compete effectively and makedistributions to our Unit holders.

If the plant is built and does not operate to itsdesign capacity, we would expect REG to correct the deficiency.  However, there can be no assurance that REGwould be able to resolve any deficiency successfully.  A failure to resolve any deficiency couldcause us to operate at reduced capacity or discontinue our production, eitherof which could have a very negative impact on our revenues and profitabilityand on the value of our Units.

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***Thecost of construction for our biodiesel plant could increase and, if an increaseoccurs, our reserves may be depleted and the additional debt or equity capitalthat may be required could delay and diminish our profitability and decreasethe value of our Units.***

REG has provided us with a preliminary budget whichcontemplates construction of our biodiesel plant at an estimated cost of$50,600,000.  Our financial plan is basedon this estimated cost, plus the cost of site acquisition and improvements, andstart-up and development costs and reserves estimated of approximately$11,400,000, resulting in total estimated capital requirements of$62,000,000.  If the cost of thedesign-build contract or other costs increase due to economic factors, designmodifications, construction delays or overruns, the total cost of our projectand capital required could increase, perhaps significantly.  If that occurs, we would seek to provide theadditional funds necessary from our budgeted construction contingency, fromsupplemental loans or from supplemental equity investments.  If funds from those sources are unavailableor inadequate to complete our plant, we could be forced to sell our project orgo out of business.  In these events, ourprofitability and potential distributions could be delayed and decreased oreliminated and the value of our Units could be reduced, potentially to nothing.

***Delaysdue to, among others, weather, labor or material shortages, permitting orzoning delays, or opposition from local groups, may hinder our ability totimely commence operations and service our debt.***

Our construction timetable, which we believe to bereasonable, assumes the commencement of construction approximately two monthsafter our required equity and debt financing and air permit are available to usand a construction period of approximately 12 months, resulting in thecommencement of biodiesel production in the first quarter of 2008, or earlierif possible.  Our schedule depends uponseveral assumptions, including the effectiveness of agreements that remain tobe negotiated and signed, including our design-build agreement with REG.  We could also incur delays in theconstruction of our plant if we need to change the site for our plant due topermitting or zoning delays, opposition from local groups, adverse weatherconditions, labor or material shortages, defects in materials or workmanship orother causes.  In addition, theavailability of financing, changes in interest rates or the credit environmentor changes in political administrations at the federal, state or local levelthat result in policy changes towards biodiesel or our plant could result indelays in our timetable for construction and commencement of operations.  Delays will hinder our ability to commenceoperations, generate revenue and service our debt.  If this occurs, we may have to seekpermission to reschedule payment of our debt, and this could be expensive.  The value of our Units could be reducedsignificantly as a result.

***Defectsin the construction or performance of our plant could result in a reduction inour revenues and profitability and in the value of our Units.***

We anticipate that the design-build contract that weexpect to enter into with REG for construction of our biodiesel plant willcontain warranties with respect to materials and workmanship and assurancesthat the plant will operate at design capacity. However, defects in the construction or performance of the plant couldoccur and there is no assurance that REG could correct any problem that occurs.  If our plant does not perform at or above designspecifications, we will find it difficult to compete in a competitivemarketplace.  If defects delay theconstruction or hinder the operations of the plant, our operations, revenues,profitability and the value of our Units could be materially adverselyaffected.  If defects require a lengthyor permanent discontinuance of production, our Units could have very little orno value.

***Acquisitionof a plant site may be delayed for environmental or other reasons, resulting indelays or interruptions in site acquisition or plant construction andadditional costs, which may delay our ability to generate revenues and reducethe value of our Units.***

We have an option to purchase a site for our plant inthe Mill Race Industrial Park, located two miles east of Freeport, inStephenson County, Illinois.  This siteappears to be suitable for the construction of our plant.  The option expires on June 30, 2007.  If we are unable to exercise or extend thisoption prior to our ability to release subscriptions in our equity offeringfrom escrow, we may find it necessary to pay more than the currently agreedpurchase price for the site or to locate an alternative site.  We have not identified or obtained options topurchase any other potential sites for our plant.  There is no assurance that after fullinvestigation we will determine that the Mill Race Industrial Park site or anyother potential site will be suitable for our plant or be acquired for thatpurpose.  

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**Ourboard of managers reserves the right to change the location of the site for ourplant, in its sole discretion, for any reason.**  A new site may be located outside StephensonCounty and could even be located outside the state of Illinois.  Although zoning has been completed andpreliminary environmental reviews have been made at our Mill Race IndustrialPark site, there is no assurance that zoning requirements, environmentalconditions or archaeological artifacts at any site will not delay theconstruction of our plant.  The presenceof a serious environmental problem or archaeological artifacts would verylikely delay construction of our plant and could require us to locate adifferent site, either of which would result in substantially increased costsand delays.  Among other cost factors,REG may be entitled to an increase in its design-build cost if construction isdelayed for unanticipated environmental reasons.  These delays and increased costs couldrequire additional financial resources, would very likely delay our commencementof operations, reduce our profitability and substantially diminish the value ofour Units and could force us to terminate our plans and liquidate atsubstantial cost to the value of our Units.

***OurUnit holders will have no role in the selection of an alternative site for ourplant in the event that we decide our Mill Race Industrial Park site is not thebest location for our plant.***

Our board of managersreserves the right to change the location of the site for our plant, in itssole discretion, for any reason. Although the site that we have subject to option in the Mill RaceIndustrial Park appears to be suitable for the construction of our plant, siteconditions, environmental issues, acquisition costs, anticipated constructiondifficulties, the availability of transportation facilities and utilities, andother reasons may cause our board of managers to change the site for ourplant.  Any such change would likely needto be made quickly and our board of managers has the power under our Amendedand Restated Limited Liability Company Agreement to change our plant sitewithout the participation or consent of our members.  As a consequence, our Unit holders will haveno role in the selection of an alternative site which could have a significanteffect on our anticipated operations and financial results.

***Anydelay in or increased costs for rail access could delay the construction andoperation of our plant, reducing our profitability and the value of our Units.***

We may ship a substantial amount of our biodiesel byrail.  The Canadian National Railroad hasrail service available near our Mill Race Industrial Park site.  However, we have not negotiated rail accessfrom the railroad or the construction of the rail spurs which would benecessary to provide service to our plant. We have budgeted $745,000 for rail access and construction costs.  Any delay in securing rail access orincreased costs could adversely affect our construction timetable, commencementof operations and profitability, resulting in a decrease in the value of ourUnits.

***We will require improved road access to our plant, whichwill depend on action by local authorities and may require significant expensefor us.***

The Mill Race Industrial Park site that we presentlyhave subject to an option to purchase for our plant, and any other potentialsites, will require improved road access, including relocation of existingroads and upgrading of capacity to weight limits required for our use.  Local authorities must approve any roadwaychanges that we need and are likely to require us to fund a substantial part orall of the cost of relocating and improving these roads.  This additional expense will increase ourcosts of construction and increase the capital required by us.

**Risks Related to OurOperations and Market**

***Ourbusiness will not be diversified because we will be primarily dependent uponone product.  As a consequence, we maynot be able to adapt to changing market conditions or endure any decline in thebiodiesel industry.***

We expect our business to solely consist of biodieseland glycerin production and sales.  We donot have any other lines of business or other sources of revenue to rely uponif we are unable to produce and sell biodiesel and glycerin, or if the marketsfor those products decline.  Our plantwill not have the ability to produce any other products.  Our lack of diversification means that we maynot be able to adapt to changing market conditions or to withstand anysignificant decline in the biodiesel industry. The value of our Units will be subject to this risk.

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***Ourfinancial results will greatly depend on prices for our feedstock supplies andmarket prices for the biodiesel and glycerin that we produce, and the value ofour Units will be impacted by changes in those prices.***

The cost that we incur for our supplies of soy andother vegetable oils and rendered animal fats and the market prices for thebiodiesel and glycerin that we produce and sell will have a major impact on ourfinancial results and profitability.  Soyoil and other input feedstocks, which comprise a major portion of our operatingexpenses, do not have a direct price relationship to the price of biodiesel inthe marketplace.  For an operatingbiodiesel plant, falling biodiesel prices, coupled with a rise in feedstockprices, can result in significant reductions in cash flow.  These prices will change based on availablesupplies, the supply and market prices for alternative products and many othermarket factors.  For instance, increasedsupplies of biodiesel may lead to lower prices for both biodiesel and glycerin,regardless of the price of feedstocks. In addition, increased production of biodiesel could result in increaseddemand for soy oil and other feedstocks, resulting in higher operating costsand lower profits for us.  There can beno assurance as to the price of these commodities in the future, and anyincrease in feedstock prices or decrease in the price of biodiesel and glycerinwould very likely result in less profitability for us and a reduction in thevalue of our Units.

***Ouroperating costs could be higher than we expect, and this could reduce ourincome and any distributions we may make.***

In addition to general economic conditions, marketfluctuations and commodity prices, significant operating cost increases couldadversely affect us due to numerous factors, many of which are beyond ourcontrol.  These increases could arise forseveral reasons, such as:

·                  Higherprices for feedstocks of soy oil, animal fats and other biodiesel resources;

·                  Highernatural gas prices, due to rising energy prices in general or increased demandson available supplies of natural gas;

·                  Increasedcosts for electricity, water and other utilities;

·                  Highertransportation costs for required feedstocks and for our biodiesel and glycerinproducts due to rising fuel costs and greater demands on truck and railtransportation services; and

·                  Risinglabor costs, particularly if any labor shortage should occur.

Operating the plant will also subject us to ongoingcompliance with applicable governmental regulations, such as those governingpollution control, occupational safety and other matters.  We may have difficulty complying with theseregulations and our compliance costs could increase significantly.  Increases in operating costs would have anegative impact on our operating income, and could result in substantiallydecreased earnings or a loss from our operations, little or no distributions toour Unit holders and substantially decreased value of our Units.

***Themarket price of biodiesel has followed the price of petroleum fuels, such asdiesel fuel, and decreases in the price of petroleum-based fuels would verylikely decrease the price of biodiesel, resulting in reductions in ourrevenues, profits, distributions and Unit values.***

Historically, biodiesel prices have generally paralleledmovements in petroleum prices.  Petroleumprices in the international market have been difficult to forecast due to theimpact of wars and other political factors, economic uncertainties, exchangerates and natural disasters.  Just as asmall reduction in the real or anticipated supply of crude oil can have asignificant upward impact on the price of petroleum-based fuels, a perceivedreduction of such threats can result in a significant reduction in petroleumfuel prices.  Because biodiesel costs ofproduction are relatively high compared to petroleum production and refiningcosts, a reduction in petroleum-based fuel prices can have a significantlyadverse effect on biodiesel revenues and profits, which would reduce ourdistributions and the value of our Units.

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***Thebiodiesel and biofuels industry is very competitive.***

Competition in the biodiesel industry is strong andgrowing more intense as more production facilities are built and the industryexpands.  Our business will facecompetitive challenges from larger facilities that can produce a wider rangeand larger quantity of products than we can, and from other plants similar toour proposed plant.  The biodieselindustry has been characterized by companies which established plants rangingfrom very low capacity to 30 mmgy in the localities of their ownership,feedstocks and markets.  In Illinois andadjacent areas of Wisconsin, Iowa and Indiana, there are several plants inoperation, with 182 mmgy of capacity, and several more under construction, with157 mmgy of estimated capacity.  All ofthese plants will compete with us for feedstocks and customers in our regionalmarket.  We expect that additionalbiodiesel producers will enter the market if the regulatory environment remainsfavorable and the demand for biodiesel continues to increase.

The construction of plants by Archer Daniels MidlandCompany (“ADM”) and Cargill, Inc. (“Cargill”) will bring significant additionalcompetitors into the biodiesel industry. ADM and Cargill are major international agribusiness corporations withthe financial, sourcing and marketing resources to become formidablecompetitors in the industry, without geographical, funding or feedstockrestraints.  ADM has its headquarters andmajor ethanol and other operations in Decatur, Illinois and may considerplacing a biodiesel plant in that location. We must expect that ADM and Cargill, and perhaps other largecorporations, will be significant competitors in the biodiesel industry in thefuture.  Nationally, the biodiesel industrygenerally is likely to become more competitive given the substantial initialconstruction and expansion that is occurring in the industry.  Competition for feedstocks and customers willhave a direct impact on our profitability and value of our Units.

***Asmore biodiesel plants are built, biodiesel production will increase and, ifdemand does not sufficiently increase, this could result in lower prices forbiodiesel and glycerin, which will decrease the amount of revenue we maygenerate.***

A significant number of biodiesel plants are currentlybeing planned and built in the United States. As a consequence, biodiesel production is expected to increase rapidlyin the next two to three years.  Thatrate of increase may continue.  Thedemand for biodiesel is dependent upon numerous factors such as governmentalregulations, governmental incentives, whether existing incentives for theproduction and use of biodiesel continues and the development of othertechnologies or products that may compete with biodiesel.  If the demand for biodiesel does notsufficiently increase, then increased biodiesel production may lead to lowerbiodiesel prices.  In addition, becausebiodiesel production produces glycerin as a co-product, increased biodieselproduction will also lead to increased supplies of glycerin.  Demand for glycerin depends upon variousfactors, the most significant of which is oversupply.  A further increase in the supply of glycerin,without offsetting increases in demand, could continue the trend to lower pricesin the glycerin market.  Decreases in themarket price of biodiesel and glycerin will result in lower revenues for us,would decrease our profitability, could result in operating losses and wouldreduce the value of our Units.

***Technologicaladvances and changes in production methods in the biodiesel industry couldrender our plant obsolete and adversely affect our ability to compete and thevalue of our Units.***

Technological advances could significantly decreasethe cost of producing biodiesel.  If weare unable to adopt or incorporate technological advances into our operations,our plant could become uncompetitive or obsolete.  We expect that technological advances inbiodiesel production methods will continue to occur.  If improved technologies become available toour competitors, they may be able to produce biodiesel at a lower cost than ourplant.  If that occurs, we may berequired to acquire new technology and retrofit our plant so that we remaincompetitive.  There is no assurance thatthird-party licenses for any new technologies would be available oncommercially reasonable terms or that any new technologies could beincorporated into our plant.  The costsof upgrading our technology and plant could be substantial.  If we are unable to obtain, implement orfinance new technologies, our plant could be uncompetitive and our operatingincome, funds available for distribution and the value of our Units could besubstantially reduced.

Research in the basic technologies of biodieselproduction may result in even greater changes in the industry.  On January 31, 2006, President Bush announcedthe Advanced Energy Initiative, which will fund additional research inbiodiesel technology.  New technologiesmay develop that would become viable means of biodiesel 

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production in thefuture.  For example, development ofnanotechnology processes to make the conversion of oils and fats into biodieselfaster and more efficient could significantly change the biodiesel productionprocess.  Because we may be unable toincorporate these advances into our operations, our cost of producing biodieselcould be significantly higher than new competitors, which could make our plantobsolete and cause our Units to decrease in value or become worthless.

***Thedevelopment of alternative fuels and energy sources may reduce the demand forbiodiesel, resulting in a reduction in our profitability and the value of ourUnits.***

Alternative fuels, including a variety of energyalternatives to biodiesel, are continually under development.  Petroleum based fuels and other energysources that can compete with biodiesel in the marketplace are already in useand more acceptable alternatives may be developed in the future, which maydecrease the demand for biodiesel or the type of biodiesel that we expect toproduce.  Technological advances inengine and exhaust system design and performance could reduce the use ofbiofuels, which would reduce the demand for biodiesel.  Further advances in power generationtechnologies, based on cleaner hydrocarbon based fuels, fuel cells and hydrogenare actively being researched and developed. If these technological advances and alternatives prove to beeconomically feasible, environmentally superior and accepted in the marketplace,the market for biodiesel could be significantly diminished or replaced, whichcould substantially reduce our revenues and profitability and the value of ourUnits.

***Consumerperceptions of biodiesel and other fuels may have a negative impact on theacceptability of biodiesel in the market, reducing our revenues and the valueof our Units.***

There is a prevalent understanding that usingbiodiesel in cold weather can cause vehicle engines to operate lessefficiently, become clogged with biodiesel residues and suffer damage.  Some expect that biodiesel, particularly ifuse is mandated, will result in higher fuel prices.  These and similar perceptions couldnegatively impact the acceptability and price of  biodiesel in the marketplace, reducing marketvolumes and prices, and resulting in greater competition, lower revenues for usand less value for our Units.

***Becausethe glycerin market generally is characterized by oversupply, the price atwhich we may sell our glycerin in the market may be quite low and unrelated tothe cost of production, with the result that revenues and earnings from ourglycerin production could be minimal or could negatively affect our financialresults.***

Glycerin is produced as a co-product or by-product ofseveral manufacturing processes and can be produced as a primary product.  Notwithstanding the number of uses forglycerin, the market for glycerin has been characterized by oversupply and lowprices.  Expected increases in biodieselproduction are likely to result in further downward pressure on the price ofglycerin.  Decreases in the market priceof glycerin will result in our generating less revenue from glycerin and theproduction of glycerin could become unprofitable, resulting in a reduction inour earnings and a negative impact on our distributions and Unit values.

***Our feedstockprices will fluctuate and could increase significantly in the future, whichwill increase our operating costs and adversely affect our operating results.***

We will require significant amounts of soy oil, othervegetable oils and rendered animal fats to produce biodiesel.  The availability and price of thesefeedstocks will significantly influence our financial performance.  The price of soy oil and other vegetableoils, as with most other crops, is affected by weather, disease, changes ingovernment incentives, demand and other factors.  A significant reduction in the supply of soyoil and other vegetable oils because of weather or disease, or increases in thedemand for vegetable oils because of increased biodiesel production or otherfactors, could result in higher vegetable oil prices.  The supplies and prices of rendered animalfats have also fluctuated greatly in the marketplace.  Because there is little correlation betweenthe prices of these feedstocks and the price of biodiesel (which tends to trackwith petroleum prices), increases in feedstock prices generally produce lowerprofit margins for biodiesel producers. The prices of vegetable oils and rendered animal fats have fluctuatedsignificantly in the past and may fluctuate significantly in the future.  If feedstock prices increase, our productioncosts will increase and our profit margins will likely decrease because we maynot be able to pass any of the increased costs on to our customers.

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***Wewill not have marketing agreements with our members to assure us a source forsoy and other vegetable oils and feedstocks which would protect us from pricefluctuations in our feedstock supplies.***

Many producers of alternative energy products havegrain delivery programs which require their members or stockholders to deliverspecified quantities of feedstocks to the producer at established, formula ormarket prices.  These agreements mayprotect producers from supply and price fluctuations.  We do not expect to have any feedstockdelivery agreements and will be required to acquire substantial quantities ofsoy and other vegetable oils and feedstocks in the marketplace based uponprevailing market prices.  If thesupplies of oils and other feedstocks in the vicinity of our plant are notadequate, we may not be able to procure adequate supplies at reasonableprices.  This could result in autilization of less than the full capacity of our plant, reduced revenues,higher operating costs, reduced income or losses, and a reduction in the valueof our Units.

***Hedgingtransactions could significantly increase our operating costs if we incorrectlyestimate our oil and other feedstock requirements and are not able to utilizeall of the feedstocks subject to our futures contracts.***

We may attempt to minimize the effects of fluctuationsin the price of soy and other vegetable oils and alternative feedstocks on ouroperations by taking hedging positions in the futures markets.  Hedging is a means of protecting the price atwhich we will buy feedstocks in the future. In a hedging transaction, we will purchase futures contracts that lockin the amount and price of oil or other feedstock that we will purchase at afuture date.  There is no assurance thatour hedging activities will successfully reduce the risk caused by market pricefluctuations.  Whether our hedgingactivities are successful will depend upon, among other things, the cost ofeach feedstock and our ability to sell sufficient amounts of biodiesel toutilize all of the feedstock subject to the futures contracts.  Although we will attempt to link hedgingactivities to sales plans and pricing activities, hedging activities can resultin significant costs, especially if we cannot use all of the feedstocks subjectto our futures contracts.

***Ouroperations will depend on the availability of natural gas at acceptable prices;any interruption in the supply of natural gas may force us to halt operationsand may harm our business and the value of our Units.***

We will require a consistent supply of natural gas tooperate our plant.  Although we expectnatural gas to be available to us at our Freeport, Illinois site, and ourselection of any alternate site would depend on access to a natural gaspipeline, the supply and price of natural gas could subject our operations torisks.  The price of natural gas hasincreased significantly in the past and may continue to increase, both in realterms and in relation to other sources of energy.  As the demand for natural gas increases inthe national and regional markets, interruptions in supplies, particularly forindustrial use, may occur.  Natural gassupply agreements may provide for interruptible service or, at higher prices,priority service.  Any significantincrease in the price of natural gas will result in lower profit margins for usif we are unable to pass the higher costs on to our customers.  Because natural gas will be the only thermalheating source for our plant, if there is any interruption in our natural gassupply, we would have to halt operations. Interruptions of a frequent or ongoing nature could substantially harmour business and the value of our Units. Alternative energy sources may not be available to us.  Even if an alternative energy source isavailable, costly engineering and design changes to our plant may be requiredto meet energy production, biodiesel processing and environmentalrequirements.  The costs andinterruptions in our operations and cost of installing new energy systems wouldreduce our ability to operate profitably and cause our Units to lose value.

***Wewill require electricity, water and other utilities for our operations; we donot have assured supplies of these resources and related costs will affect ourprofitability.***

We will require a consistent supply of electricity andplentiful supplies of water for our operations. We have not yet entered into any definitive agreements to obtainsupplies of electricity, water and other resources.  We, or others for our benefit, have also notyet obtained required water usage and discharge permits.  The availability of these resources will beessential to our operations and the associated costs will impact ourprofitability.

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***Ifwe are unable to obtain the services of third-party marketers, or wesubsequently lose those services, we may not be able to sell the biodiesel andglycerin that we produce.***

We do not intend to hire a sales staff to market ourbiodiesel and glycerin.  We expect toenter into agreements with third-party marketers to market and sell ourbiodiesel and glycerin.  The cost ofutilizing independent marketers could place us at a competitivedisadvantage.  We presently have nocontracts with any marketers for the sale of our products.  If we are unable to secure the services ofthird-party marketers or if any of the marketers that we contract with breachesor terminates our agreement or is unable to provide any of the servicescontracted for, we may not have any readily available means to sell ourbiodiesel and glycerin.  Further, thesethird-party marketers will likely have relationships and agreements with otherbiodiesel producers.  It is possible thata marketer’s ability or willingness to market and sell our products could beimpaired by agreements that the marketer has with other entities not related tous.  Consequently, we may not obtain thebest possible prices for our products. We will depend upon the financial health and performance of themarketers with whom we contract and our failure to sell all of our biodieseland glycerin may result in less income from sales, reduced distributions to ourUnit holders and reduction in the value of our Units.

***Competitionfor qualified personnel in the biodiesel industry is intense and we may not beable to hire and retain qualified managers, engineers and operators to operateour plant efficiently.***

When construction of the proposed plant nearscompletion, we will need a significant number of employees to operate theplant.  Our success depends in part onour ability to attract and retain competent personnel.  We must hire or otherwise engage qualifiedmanagers, engineers and accounting, human resources, operations and otherpersonnel.  Competition for employees inthe biodiesel industry is intense.  If weare unable to hire, train and retain qualified and productive personnel, we maynot be able to operate the plant efficiently and the amount of biodiesel weproduce and market may decrease.

****There is a possibility of aleak, fire or explosion at the plant, which would significantly increase ourcosts and decrease the value of our Units.****

Because biodiesel is a combustible product, a leak,fire or explosion may occur at the plant which could result in damage to theplant and nearby properties, injury to employees and others, and interruptionof our operations.  If such an eventoccurs, we may incur significant additional costs including, among otherthings, clean-up, liability for damages or injuries, legal, and reconstructionexpenses.  Any significant increase inour expenses will impact our profitability and decrease the value of our Units.

**Risks Related toRegulation and Governmental Action**

***Lossof favorable tax benefits for biodiesel production could hinder our ability tooperate at a profit and reduce the value of an investment in our Units.***

The biodiesel industry has been aided by federal taxincentives.  These incentives havesupported a market for biodiesel that might disappear without theincentives.  The federal tax incentiveswere scheduled to expire December 31, 2006. However, pursuant to legislation signed in August 2005, Congress hasextended the incentives to December 31, 2008. These tax incentives may not continue beyond their scheduled expirationdate or, if they continue, the incentives may not be at the same level.  The elimination or reduction of taxincentives to the biodiesel industry could reduce the market for biodiesel,which could reduce prices and our revenues by making it more costly ordifficult for us to produce and sell biodiesel. If the government eliminates or sharply curtails these tax incentives,we believe that a decreased demand for biodiesel could result, which couldresult in the failure of less efficient or highly leveraged plants and thepotential loss of some or all of an investment in our Units.

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***Thereduction or termination of favorable environmental regulations that favor theuse of biofuels in motor fuel blends would adversely affect the market for ourbiodiesel product and reduce the value of our Units.***

The biofuels industry in the United States currentlydepends on the existence of federal environmental regulations which favor theuse of blended fuels, including biodiesel. The cost of production of biofuels, including biodiesel, hashistorically been higher than the cost of producing and refining petroleumbased fuels.  Federal governmentincentives have the effect of mitigating the impact of higher biodieselproduction costs.  Thus, the repeal orsubstantial modification of these environmental regulations could have amaterially detrimental effect on the biodiesel industry and on our operationsand financial results.

***Theunavailability or loss of state tax incentives in Illinois would increase ourcost of production and reduce our operating results, decreasing funds that maybe available for distribution and reducing the value of our Units.***

Illinois tax incentives that may be available to ourplant include investment tax credits, jobs tax credits, sales tax exemptions onconstruction materials, exemptions from taxes on utilities used and anexemption from taxes on interest on funds borrowed by us will depend on thesite chosen for our plant and could be repealed in the future.  However, we do not consider state taxincentives essential to our budget or business plan and the availability orlack of tax incentives are not the most important considerations in our selectionof a site.  The unavailability or loss ofthese incentives will directly adversely affect our operating results,distributions and Unit values.

***Thenecessity to obtain permits prior to construction or operation of our plant andto comply with new and existing environmental laws and regulations couldsignificantly increase our construction and start-up costs, and force us todelay or halt construction or operation.***

To construct the plant, we will need to obtain andcomply with a number of permitting requirements.  We may have difficulties obtaining thepermits we need.  As a condition ofgranting necessary permits, regulators could make additional demands thatincrease our costs of construction and operations, in which case we could beforced to obtain additional debt or equity capital.  In addition, it is likely that our seniordebt financing will be contingent on our ability to obtain the variousenvironmental permits that we will require. Environmental issues, such as contamination and compliance withapplicable environmental standards, could arise at any time during theconstruction and operation of the plant. If this occurs, it would require us to spend significant resources toremedy the issues and may delay or prevent construction or operation of theplant.  This would significantly increasethe cost of the plant.  We cannot assureyou that we will be able to obtain and comply with all necessary permits toconstruct and operate the plant.

***Ourbusiness is subject to extensive and potentially costly environmentalregulations that could change and significantly increase our operating costs.***

We are subject to environmental regulations of theUnited States Environmental Protection Agency (“EPA”) and the IllinoisEnvironment Protection Agency (“IEPA”).  Compliance with these regulations may requirea significant investment of resources, including both financial resources andpersonnel time and expertise.  The EPA orthe IEPA may seek to implement additional regulations or implement stricterinterpretations of existing regulations. The nature and scope of future legislation, regulations and programscannot be predicted.  Recently, the EPAcautioned biodiesel producers that it is prepared to sue companies whose plantsdo not comply with applicable laws and regulations.  In a recent test of certain biodiesel plants,the EPA expressed concerns over the discovery of certain “volatile organiccompounds,” some of which may be carcinogenic. While our plant will use technology designed to limit the amount of emissions,there still may be risks that the environmental laws and regulations may changewith respect to emissions by our plant. Changes in environmental laws or regulations or stricter interpretationof existing regulations may require significant additional capital expendituresor increase our operating costs and may cause the loss of some or all of aninvestment in our Units.

Our plant could also be subject to environmentalnuisance or related claims by employees, property owners or residents near theplant arising from air or water discharges. Such environmental and public nuisance claims, or tort claims based onemissions, could also increase our operating costs.

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***Wewill be subject to Federal and State laws and regulations regardingoccupational safety; these regulations will increase our operating costs.***

Compliance with federal and state occupational lawsand regulations, such as the federal Occupational Safety and HealthAdministration (“OSHA”) regulations, will increase our operating costs.  The most significant OSHA issue is processsafety management, a 14 point analysis system to minimize releases of hazardouschemicals.  Other OSHA standards dealwith the management of contractors, ongoing training procedures and anemergency action plan.  The possibleadoption of stricter regulations and standards in this area could furtherincrease our costs and adversely impact our operating results.

**Risks Related to theUnits**

***OurUnits have no public market and no public market is expected to develop.***

There is no established public trading market for ourUnits, and we do not expect one to develop in the foreseeable future.  To maintain our partnership tax status, we donot intend to list the Units on any stock exchange or automatic quotationsystem such as The NASDAQ Stock MarketTM. As a result, our Units will not be readily marketable and our Unitholders may be required to hold their Units indefinitely.

***Thereare significant restrictions on the transfer of our Units.***

To protect our status as a partnership for taxpurposes and to assure that no public trading market in our Units develops, ourUnits are subject to significant restrictions on transfer and transfers aresubject to approval by our board of managers. All transfers of Units must comply with the transfer provisions of ourAmended and Restated Limited Liability Company Agreement and a Unit transferpolicy adopted by our board of managers. Our board of managers will not approve transfers which could cause us tolose our tax status or violate federal or state securities laws.  As a result, our Unit holders may not be ableto complete transfers that they wish to make and may be required to assume therisks of an investment in us for an indefinite period of time.

***Thereis no assurance that we will be able to make distributions to our Unit holders,which means that our Unit holders could receive little or no return on aninvestment in our Units.***

Distributions of our net cash flow may be made at thesole discretion of our board of managers, subject to the provisions of theDelaware Limited Liability Company Act, our Amended and Restated LimitedLiability Company Agreement and restrictions imposed by our creditors.  There is no assurance that we will generateany distributable cash from operations. Although our intention is to make cash distributions sufficient todischarge our members’ anticipated tax liabilities arising from any taxableincome generated, our board may elect to retain cash for operating purposes,debt retirement, plant improvements or expansion.  Consequently, our Unit holders may receivelittle or no return on an investment in our Units.

***Wemay authorize and issue Units of new classes which could be superior to oradversely affect holders of our Class A Units.***

Our board of managers has the power to authorize andissue Units of classes which have voting powers, designations, preferences,limitations and special rights, including preferred distribution rights,conversion rights, redemption rights and liquidation rights, different from orsuperior to those of the Class A Units. These Units may be issued at a price and on terms determined by ourboard of managers.  The terms of theUnits and the terms of issuance of the Units could have an adverse impact onthe rights of our Unit holders and could dilute the financial interest of ourUnit holders in us.

***OurUnits represent both financial and membership rights, and loss of status as amember would result in the loss of voting and other rights and would allow usto redeem the Units of the affected former member.***

Holders of our Units will be entitled to certainfinancial rights, such as the right to any distributions, and to membershiprights, such as the right to vote as a member. If a Unit holder does not qualify as a member or if a 

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member’s status as amember is terminated, the Unit holder or former member would lose certainrights, such as voting rights, and we could redeem the Units of the Unit holderor former member.  The minimum number ofClass A Units required for membership is 12,500 Units.  In addition, a member may be terminated as amember if the member dies or ceases to exist, violates our Amended and RestatedLimited Liability Company Agreement or takes actions contrary to our interests,and for other reasons.

Although our Amended and Restated Limited LiabilityCompany Agreement does not define what actions might be contrary to ourinterests, and our board of managers has not adopted a policy on the subject,such actions might include providing confidential information about us to acompetitor, taking a board or management position with a competitor or takingaction which results in significant financial harm to us in the marketplace.Our board of managers does not presently intend to amend our Amended andRestated Limited Liability Company Agreement or adopt a further policy toclarify the policy as stated in the language contained in our Amended andRestated Limited Liability Company Agreement.

 If a member isterminated as a member (other than upon death, dissolution or a completetransfer), our board of managers will have the right, but not the obligation,to redeem the Units of the former member at 80% of the average sale price forUnits, as determined by our board of managers, in the six months immediatelyprior to the board’s decision to redeem the former member’s Units.  We may exercise our right to redeem the Unitsof a former member at any time following termination.  Our Amended and Restated Limited LiabilityCompany Agreement does not contain any provision for advance notification withrespect to termination of membership or redemption or any formal procedure toaddress or oppose such termination or redemption with our board ofmanagers.  A member who wished to contesttermination or redemption would be required to demonstrate in a courtproceeding that our board of managers had insufficient grounds to terminate themember or that the redemption was improper.

***Ourboard of managers has the primary power and responsibility to govern and directthe management of our business and affairs.***

Our members have the right to participate in theelection of managers and have the power to propose and approve amendments toour Amended and Restated Limited Liability Company Agreement or to cause us todissolve.  Without approval or consent byour members, our board of managers is authorized to issue additional Units ofany authorized class, admit additional persons as members, add managers to ourboard of managers, adopt and amend a Unit transfer policy regulating thetransfer of Units, and amend provisions of our Amended and Restated LimitedLiability Company Agreement relating to allocations of profit and loss,distributions and tax matters.  As aconsequence, our board of managers has the primary power and responsibility togovern and direct the management of our business and affairs.  Our members have no significant role in ourgovernance or management beyond their right to participate in the election ofmanagers and to vote on amendments to our Amended and Restated LimitedLiability Company Agreement, to dissolve and on other matters that our boardsubmits to the vote of our members.

***Votingrights of members are not necessarily equal and are subject to certainlimitations.***

Members who are holders of Class A Units are entitledto one vote for each Class A Unit held. Cumulative voting for managers is not allowed, which makes itsubstantially less likely that a minority of members could elect a member tothe board of managers.  However, we mayagree to give members or lenders who supply significant amounts of equity ordebt capital to us the right to designate managers to serve on our board ofmanagers.  If Units of any other classare issued in the future, holders of Units of that other class will have thevoting rights that are established for that class by the board of managerswithout the approval of our members. Members do not have dissenter’s rights. This means that they will not have the right to dissent and seek paymentfor their Units in the event we merge, consolidate, exchange or otherwisedispose of all or substantially all of our property.  Holders of Units who are not members have novoting rights.  These provisions maylimit the ability of members to change the governance and policies of ourcompany.

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***Thepresence of members holding as little as 10% of our outstanding Units willconstitute a quorum at meetings of our members, and a majority vote of theUnits represented may generally take action on matters presented.***

A quorum of members holding 10% or more of theoutstanding Units represented in person, or 20% if the board of managers hasauthorized the use of mail ballots or proxies, is required at meetings of ourmembers.  Unless a higher percentage isrequired by our Amended and Restated Limited Liability Company Agreement orDelaware law, members take action by a majority vote of the Units representedand entitled to vote.  This means thatthe holders of a small minority of outstanding Units could take an action whichwould not necessarily be in the best interests of all Unit holders.  The quorum requirement also means that wemust secure the presence of members holding at least 10%, or 20% if mailballots or proxies are authorized, of the outstanding Units in order to takeactions which may be in the best interests of our company.

***Wewill have substantial indebtedness and our Units will be subordinate to all ofour debts and liabilities, which increases the risk that our Unit holders couldlose their entire investment.***

Our Units are equity interests which will besubordinate to all of our current and future indebtedness with respect toclaims on our assets.  In anyliquidation, all of our debts and liabilities must be paid before any paymentis made to the holders of our Units.  Weexpect to incur substantial indebtedness to finance the construction of ourplant and commencement of operations. The amount of that financing, plus possible additional borrowings andoperating liabilities, creates a substantial risk that in the event of ourbankruptcy, liquidation or reorganization, we may have no assets remaining fordistribution to our Unit holders after payment of our debts.

***Weare not required to deliver annual reports or proxy statements to Unit holders,our managers, officers and significant Unit holders will not be required tofile ownership reports, and in certain circumstances our obligation to filereports with the Securities and Exchange Commission could be terminated, all ofwhich may limit the access of our Unit holders to information about us.***

Except for our obligation to provide audited annualfinancial statements to our members upon request pursuant to our Amended andRestated Limited Liability Company Agreement, we are not required to deliver anannual report to our Unit holders.  Weare also not required to furnish proxy statements to our Unit holders and ourmanagers, officers and holders of 5% or more of our Units are not required tofile information regarding their holdings with the SEC.  Although we are required to file publiclyavailable reports containing annual and quarterly financial statements andother information about us with the SEC, this obligation will be suspended ifwe have fewer than 300 Unit holders. These factors, particularly the possible suspension of our obligation tofile reports with the SEC, may significantly limit access by our Unit holdersto financial and other information regarding us and our operations.

**Risks Related to TaxIssues**

**EACH UNIT HOLDER SHOULD CONSULT THE UNIT HOLDER’SOWN TAX ADVISOR WITH RESPECT TO THE FEDERAL AND STATE TAX CONSEQUENCES OF ANINVESTMENT IN THE COMPANY AND IMPACT ON THE UNIT HOLDER’S TAX REPORTINGOBLIGATIONS AND LIABILITY.**

***InternalRevenue Service classification of us as a corporation rather than as apartnership would result in higher taxation and reduced profits, which couldreduce the value of an investment in us.***

We are a Delaware limited liability company and expectto be taxed as a partnership for federal and state income tax purposes, withincome, gain, loss, deduction and credit passed through to the holders of theUnits.  This means that we will pay nofederal or state income tax and Unit holders will pay tax on their allocatedshares of our net income.  Treasuryregulations classify a limited liability company as a partnership for taxpurposes unless the entity affirmatively elects to be taxed as a corporation orthe entity is considered a publicly traded partnership because of the manner inwhich its units are transferred.  We willnot elect to be taxed as a corporation and will endeavor to avoidclassification as a publicly traded partnership.

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However, if for any reason the IRS would successfullydetermine that we should be taxed as a corporation rather than as apartnership, 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.  Ifwe were to be taxed as a corporation for any reason, distributions we make toUnit holders will be treated as ordinary dividend income to the extent of ourearnings and profits, and the payment of dividends would not be deductible byus, thus resulting in double taxation of our earnings and profits.  If we pay taxes as a corporation, we willhave less cash to distribute to our Unit holders.

***OurUnit holders may not be able to fully deduct their share of our losses orinterest expense.***

It is likely that an interest in us will be treated asa “passive activity” for federal income tax purposes.  In the case of Unit holders who areindividuals or personal services corporations, this means that a Unit holder’sshare of any loss incurred by us will be deductible only against the holder’sincome or gains from other passive activities, e.g., S corporations andpartnerships that conduct a business in which the holder is not a materialparticipant.  Some closely held Ccorporations have more favorable passive loss limitations.  Passive activity losses that are disallowedin any taxable year are suspended and may be carried forward and used as anoffset against passive activity income in future years.  Upon disposition of a taxpayer’s entireinterest in a passive activity to an unrelated person in a taxable transaction,suspended losses with respect to that activity may then be deducted.

Interest paid on any borrowings incurred to purchaseUnits may not be deductible in whole or in part because the interest must beaggregated with other items of income and loss that the Unit holder hasindependently experienced from passive activities and subjected to limitationson passive activity losses.

***Thetax liability from a Unit holder’s share of our taxable income may exceed anycash distributions  received by the Unitholder, which means that the Unit holder may have to satisfy this tax liabilityusing the Unit holder’s personal funds.***

Because we expect to be treated as a partnership forfederal income tax purposes, we do not expect to pay any federal tax, and allof our profits and losses will “pass through” to our Unit holders.  Our Unit holders must pay tax on the Unitholder’s allocated share of our taxable income every year.  Our Unit holders may not receive cashdistributions from us sufficient to satisfy these tax liabilities.  This may occur because of various factors,including accounting methodology, lending covenants that restrict our abilityto pay cash distributions, or if we decide to retain cash generated by thebusiness to fund our activities or other obligations.  Accordingly, our Unit holders may be requiredto satisfy these tax liabilities out of their personal funds.

***OurUnit holders may be subject to federal alternative minimum tax in the earlyyears of our operations.***

While we do not presently intend to adopt acceleratedmethods of depreciation, we may do so. If we do so, we anticipate that in the early years of our operationtaxable income for alternative minimum tax purposes will exceed regular taxableincome passed through to the members. Such excess alternative minimum taxable income passed through to ourUnit holders may subject our Unit holders to the federal alternative minimumtax.  Our Unit holders are encouraged andexpected to consult with their individual tax advisors to analyze and determinethe effect on their individual tax situation of the alternative minimum taxableincome that may be allocated to Unit holders in the early years of ouroperations.

***Anyaudit of our tax returns resulting in adjustments could cause the InternalRevenue Service to audit the tax returns of our Unit holders, which couldresult in additional tax liability and expense to our Unit holders.***

The IRS may audit our tax returns and may disagreewith the tax positions we take on our returns. The rules regarding partnership taxation are complex.  If challenged by the IRS, the courts may notsustain the position taken by us on our tax returns.  An audit of our tax returns could lead toseparate audits of the tax returns of our Unit holders, especially ifadjustments are required.  This couldresult in adjustments on the tax returns of our Unit holders and in additionaltax liabilities, penalties, interest and expense to our Unit holders.

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**Risks Related toConflicts of Interest**

***Thereare conflicts of interest in our business because we have relationships withand may enter into additional transactions with our officers, managers andaffiliates, which could impair an interested officer’s or manager’s ability toact in our best interest.***

Conflicts of interest exist and may arise in thefuture because of the relationships between and among our officers, managers,their affiliates and us, and the fact that we may from time to time enter intotransactions with our officers, managers and their affiliates.  Conflicts of interest could cause ourmanagers and officers to put their personal interests ahead of the bestinterests of our company and our Unit holders.

Conflicts of interest could result in transactionswith related parties having terms less favorable to us than those that could havebeen obtained in an arm’s-length transaction. Conflicts of interest could also result in related parties receivingmore favorable treatment in the event of a dispute than an unaffiliated thirdparty would receive.

Our managers and officers, and certain of theiraffiliates, are presently owners of Units. They may purchase additional Units in the future, including in ourcurrent equity offering, and may acquire additional Units in connection withour compensation arrangements.  If ourmanagers, officers and affiliates individually or collectively own asignificant percentage of our Units, their voting power could increase thelikelihood of conflicts of interest and reduce the ability of members toreplace them as managers and officers.

Our Amended and Restated Limited Liability CompanyAgreement provides that a transaction involving a conflict of interest with amanager or a manager’s affiliates is not void or voidable if the facts of theconflict are disclosed and the transaction is approved by a two-thirds vote ofdisinterested managers.  We have notestablished any additional formal procedures to evaluate or resolve conflictsof interest.  Although we intend toexamine all conflicts of interest that may arise from time to time, anyconflicts of interest that occur could harm our business and reduce the valueof our Units.

***Ourmanagers and officers have other business interests that may receive a greatershare of their time and attention than they will devote to us.***

Our managers and officers have other businessinterests and responsibilities that may be given priority over the time andattention that they are willing to devote to us.  Although they are committed to dedicate thetime necessary to make us successful, they have significant responsibilities intheir primary occupations, principally farming, and consequently have limitedtime to devote to us. This could result in errors of management and governancethat could adversely affect our operations, financial results and the value ofour Units.

***Ourconsultants and contractors may have financial and other interests whichconflict with our interests, and they may place their interests ahead of ours.***

Entities and individuals who are engaged or may in thefuture be engaged by us as consultants and contractors will have financialinterests which may conflict with our interests and the interests of our Unitholders.  Each of our consultants andcontractors is likely to be a creditor of ours, which could affect their adviceand commitment of time and resources to us. In addition, it is possible that some of our consultants andcontractors, or their affiliates, may invest in our current equity offering, inwhich case they may be in a position to influence our decisions and actions infavor of their own interests.

In particular, REG will have roles of major importancein the development, construction, commencement of operations and management ofour plant and business.  REG’srecommendations and actions will be critical to our success and, if it placesits own interests ahead of ours, we could be harmed as a result.  REG or its affiliates may have interests inother biodiesel plants, as owners, creditors and in other capacities.  REG may be involved in constructing ormanaging other plants in our geographic area in the future and may havesubstantial financial interests in those plants.  As a result, REG may have conflicts ofinterest as it allocates personnel, materials and other resources to our plantand others.  See “Certain Relationshipsand Related Party Transactions.”

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**Item 2. DESCRIPTIONOF PROPERTY.**

We presently expect that our plant will be built on asite in the Mill Race Industrial Park which is located two miles east ofFreeport, in Stephenson County, Illinois. The Mill Race Industrial Park is being developed by the Freeport AreaEconomic Development Foundation, an Illinois not-for-profit corporation, withthe support of Stephenson County, to provide a stimulus to economic developmentin the Freeport, Illinois area.  The siteis 23.14 acres in size, allowing for easy placement of the facility footprintand the needed rail and road additions. This site can easily be served by road and rail transportationfacilities and by sources of natural gas, water and other utilities.  We expect that infrastructure capitalexpenses to obtain access to utilities and rail service will cost approximately$1,150,000.  On the basis of our presentsite design, we will have approximately seven acres to expand our operations infuture years, which would allow us to double our plant capacity includingadditional tank farm storage.  The MillRace Industrial Park is located approximately 110 miles west of Chicago and thelocation will give us access to regional supplies of soy oil, other processedvegetable oils, animal fats and similar feedstocks and an accessible urbanmarket for our biodiesel.

We have an option from the Freeport Area EconomicDevelopment Foundation to acquire the Mill Race Industrial Park site at apurchase price of $347,100.  The optionwas signed on June 20, 2006 and provides for option payments of $825 per monthcommencing August 1, 2006.  The originalexpiration date of the option was December 31, 2006.  On November 27, 2006 the option was extendedto March 31, 2007.  On March 20, 2007 itwas extended again and it presently expires on June 30, 2007.  The option does not contain any provisionsfor further extension.

Preliminary investigations indicate that the siteappears to be suitable for construction of a biodiesel plant.  A phase I archaeological reconnaissancestatement has been completed with a finding of no significant impact and theproposed land uses did not require preparation of an environmental impactstatement.  The Illinois HistoricPreservation Agency has determined that no significant historic, architecturalor archaeological resources are located in the project area.  Both the Illinois Environmental ProtectionAgency and the Illinois Department of Natural Resources have reviewed the sitedocumentation and have given their approval for the development toproceed.  Further investigations relatingto environmental and archeological conditions are underway.  REG has indicated on a preliminary basis itsapproval of the site for purposes of its willingness to build our plant.  The site is presently zoned in the M-1manufacturing classification required for our plant by the Stephenson Countyboard.  Although other permits arerequired, we are optimistic regarding our ability to obtain all permitsnecessary to build the plant.

Because the Mill Race Industrial Park is located in anIllinois Enterprise Zone, we may be able to secure tax exemptions from thestate of Illinois for the construction and operations of our plant.  Illinois tax incentives that may be availableto our plant include investment tax credits, jobs tax credits, sales taxexemptions on construction materials, exemptions from taxes on utilities usedand an exemption from taxes on interest on funds borrowed by us will depend onthe site chosen for our plant and could be repealed in the future.  However, we do not consider state taxincentives essential to our budget or business plan and the availability orlack of tax incentives are not the most important considerations in ourselection of a site.

We have not identified any other possible sites whichmay be suitable for our plant and have no options on any other sites.  Accordingly, we presently believe and intendthat our plant will be built on the Mill Race Industrial Park site.  However, if for any reason our Mill RaceIndustrial Park site would prove unsuitable for our plant or if our option onthat site expires before we have our equity and debt financing available toacquire that site, we may find it necessary to pay more than the optionpurchase price for the site or to locate an alternative site.  There is no assurance that after fullinvestigation we will determine that our Mill Race Industrial Park site or anyother site that we may identify will be suitable for our plant or will beacquired for that purpose.  A new sitecould be located outside Stephenson County and could even be located outsidethe state of Illinois.  **Our board of managers reserves the right to change thelocation of the site for our plant, in its sole discretion, for any reason.**  A final determination regarding our plantsite will be made after our investigations regarding the suitability of theMill Race Industrial Park site and any other potential sites are complete.  Access to road and rail transportationfacilities, availability of utilities, environmental considerations andregulatory permits required will impact significantly our site and constructiondecisions.  Our goal, working withconsultants, will be to confirm the suitability of and obtain permits for thesite or identify the best alternative site for our use so we will be in aposition to acquire the site immediately upon successful completion of ourequity and debt financing.

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We may modify or change the location of the plant ifwe find another site that better suits our needs, or if we cannot obtain the necessarypermits and approvals or utilities and other services, or cannot obtain them ata reasonable cost.  Changing the locationof the plant from our proposed site may increase the cost of the plant anddelay construction and start-up operation of the plant.  Certain events and conditions, includingamong others, delays, change orders we may submit and site conditions thatdiffer from what we expect could lead to significant increases in our plantcosts.  Delays and changes are notuncommon in major construction projects. Increases in the cost of the plant will require us to procure additionaldebt financing, which may be difficult and expensive to obtain, or may not beavailable at all.

There can be no assurance that we will not encounterhazardous conditions at the plant site. We are relying on REG to determine the adequacy of the site forconstruction of our biodiesel plant.  Wemay encounter hazardous conditions at the chosen site that may delay theconstruction of the plant.  We do notexpect that REG will be responsible for any hazardous conditions encountered atthe site.  Upon encountering a hazardouscondition, REG may suspend work in the affected area.  If we receive notice of a hazardouscondition, we may be required to correct the condition prior to continuingconstruction.  The presence of ahazardous condition will likely delay construction of the biodiesel plant andmay require significant expenditure of our resources to correct the condition.  If we encounter any hazardous conditionsduring construction that require time or money to correct, it may have amaterial adverse effect on our operations, cash flows and financialperformance.

We expect that substantially all of our tangible andintangible property will serve as collateral for the debt financing which wewill incur to construct our plant.

**Item 3. LEGALPROCEEDINGS.**

In the ordinary course of our business, we may benamed as a defendant in legal proceedings related to various matters, includingworker’s compensation claims, tort claims and contractual disputes.  In addition, the operation of the plant couldgive rise to litigation or administrative proceedings relating to nuisance,environmental matters and the like.  Weare currently involved in no legal proceedings and are not aware of any claimsthat could result in the commencement of legal proceedings.  We intend to carry insurance that willprovide protection against some types and amounts of claims that we mightencounter.

**Item 4. SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS.**

We did not submit any matter to a vote of our Unitholders through the solicitation of proxies or otherwise during the fourthfiscal quarter of 2006.

**PART II**

**Item 5. MARKETFOR COMMON EQUITY AND RELATED MEMBER MATTERS.**

There is no public trading market for our Units.

As of December 31, 2006, we had 104 Unit holders ofrecord.

We have not declared or paid any distributions on theUnits.  We do not expect to generateearnings until after our plant commences operations, which is expected to occurapproximately 12 months after we start construction.  We cannot predict the amount of cash, if any,that we may generate from operations. Distributions are payable at times and in aggregate amounts determinedby our board of managers in its sole discretion, subject to any loan covenantsor restrictions imposed by senior and subordinated lenders.  Subject to the availability of cash, theboard’s discretion and lenders’ limitations, we intend to make cashdistributions of “net cash flow” sufficient to discharge our members’anticipated combined federal, state and local income tax liabilities (based onthe board’s estimate of anticipated federal and Illinois statutory rates)arising from allocations to them of taxable income by us.  Our board of managers may also declare furtherdistributions from time to time. However, in the exercise of its discretion, our board of managers mayelect to retain cash to finance operations, retire debt, improve our plant orexpand our

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business.  Consequently, we cannot provide any assurancethat we will ever be able to make any cash distributions to our Unit holders orthat we will not use available cash for other purposes.

Distributions to holders of Class A Units will be madein proportion to the Units that each Unit holder holds relative to the totalnumber of Class A Units outstanding.  IfUnits of any other class are issued in the future, each Unit of that otherclass will have the distribution rights that are established for that class bythe board of managers without member approval. “Net cash flow” means the gross cash proceeds of our operations less theportion thereof used to pay or establish reserves for all of our expenses,debts, obligations and liabilities, including capital improvements,replacements and contingencies, as reasonably determined by our board ofmanagers.  Net cash flow is not reducedby depreciation, amortization, cost recovery deductions or similar allowances,but is increased by any reductions of reserves previously established.  The definition of net cash flow may beamended by the affirmative vote of a majority of our board of managers, withouta vote of our members.

On August 7, 2006we filed a registration statement on Form SB-2 for the initial public offeringof our Units (registration file no. 333-136353).  The registration statement was declaredeffective on December 15, 2006.  Theoffering commenced following filing of the definitive prospectus for theoffering on December 22, 2006.  Theoffering is being made by our executive officers and managers and nounderwriter has been retained for the offering. Our executive officers and managers are not compensated for theiractivities in connection with the offering.

The offering isbeing made for a minimum of 10,000,000 Units and a maximum of 17,500,000 Units,to be sold at $2.00 per unit, resulting in a minimum offering of $20,000,000and a maximum offering of $35,000,000. All subscriptions received have been deposited in an escrow account andwill be held in escrow until we have received (a) $20,000,000 or more inoffering proceeds, in cash and promissory notes, exclusive of interest, (b)written commitments to provide senior debt and subordinated debt which,combined with the offering proceeds and funds from grants and other resources,would equal at least $58,400,000, and (c) the air emission source permitrequired to commence construction of our plant. If we have received $20,000,000 or more in offering proceeds by theclosing of the offering, we will have until March 14, 2008 to satisfy the debtfinancing and permit conditions to release subscriptions from the escrow.  If we fail to satisfy the terms of the escrowor if we decide to terminate and abandon the offering at any time, we willpromptly return the subscriptions to subscribers, with interest on the cashpayments held in escrow.  We may requirepayment of the promissory notes at any time after we have received $20,000,000or more in subscriptions.

The equityoffering will close upon the earlier to occur of (1) our acceptance ofsubscriptions for Units for the maximum offering amount of $35,000,000; or (2)December 15, 2007.  We may also decide toclose the offering any time after we have sold the $20,000,000 minimum offeringamount if we determine that the offering proceeds, together with available debtfinancing, are sufficient to capitalize our project.  If we satisfy the conditions for the releaseof subscriptions from escrow and the escrow is closed, we may neverthelesselect to continue to offer any remaining Units up to the maximum number to be solduntil the offering closes.  We reservethe right to modify or terminate the offering, to reject subscriptions forUnits in whole or in part and to waive conditions to the purchase of Units.

As of March 30,2007 we had received subscriptions for Units totaling approximately$19,600,000.

As of December 31,2006 we had deferred offering costs relating to the offering of $432,435.  If the offering is successful, these costswill be netted against the offering proceeds in our financial statements.  All expenses were directly or indirectlyincurred and paid to unrelated parties. Executive officers and managers received reimbursement for some expensesincurred and paid to unrelated third parties by them.

Because theoffering is continuing and we have not yet received any proceeds of theoffering, none of such proceeds have been spent by us.

**Item 6.  MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLANOF OPERATIONS.**

**Overview**

**This report contains forward-lookingstatements that involve significant risks and uncertainties.  The following discussion, which focuses onour plan of operation through the commencement of operations of our plant,consists almost entirely of forward-looking information and statements.  Actual events or results may differmaterially from those indicated or anticipated, as discussed in the sectionentitled “Forward Looking Statements.” This may occur as a result of many factors, including those set forth inthe section entitled “Risk Factors.”  Thefollowing discussion of our financial condition and plan of operation shouldalso be read in conjunction with our financial statements and notes tofinancial statements contained in this report.**

Blackhawk Biofuels, LLC (referred to herein as “we,” “us,”the “company” or “Blackhawk Biofuels, LLC”) is a limited liability companyorganized under the laws of the State of Delaware on April 28, 2005.  We intend to construct and operate a 30million gallon biodiesel production plant in Stephenson County, Illinois (the “plant”).  Currently, we are a development stage companywith no revenues from operations.  Todate, our efforts have been devoted principally to developing plans for ourproject, engaging service providers and related activities.

Early in 2005, a group of farmers and businessmen inthe Stephenson County area committed to take advantage of opportunities toexpand value added agriculture by turning to the biodiesel industry.  In February 2006 we received a Value AddedProducer Grant from the US Department of Agriculture to assist in funding ourproject development efforts.  Afeasibility study conducted by Ascendant Partners, Inc. of Greenwood Village,Colorado was delivered to our board of managers in March of 2006.  Upon evaluating the study, our board assessedcurrent market conditions and thoroughly discussed the opportunity with WestCentral Cooperative (“WCC”) and Renewable Energy Group, LLC, the predecessorsof Renewable Energy Group, Inc. (“REG”) of Ralston, Iowa, and with othercompanies and persons knowledgeable about the biodiesel industry.  As a result, our board decided to pursueconstruction of our plant at an approximate cost of $58,000,000.  A successful equity seed capital offering wascompleted on April 12, 2006 with $3,500,000 raised to continue our projectdevelopment.

We have also taken the steps necessary to establish aconstruction slot and start preliminary engineering drawings by entering into apre-construction services agreement with REG. This agreement calls for REG to complete pre-construction services,including engineering such as process and instrumentation diagrams, pipingisometric drawings, general arrangement drawings, architectural drawings, sitecivil drawings, initial site engineering, tank drawings, engineering forelectrical drawings and engineering for mechanical drawings.  REG will also start the necessary permittingprocess and place orders for long lead time equipment.  The agreement also required us to pay REG$2,500,000 to start these essential services. By raising sufficient seed capital we were able to make this payment toREG and avoid construction delays.

The plant will have a design capacity to produce 30million gallons of biodiesel per year (“mmgy”). In addition, we expect the plant will produce approximately 15,000 tonsof glycerin each year.  The plant willconsist principally of a materials handling and storage area, atransesterification reactor in which the biodiesel is produced, a storage andloading area for biodiesel and glycerin, truck scales and an administrativeoffice.

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The plant will have the ability to utilize multiplefeedstocks, all readily available in the immediate area.  The primary feedstock will be soybean oilwith capabilities to utilize other vegetable oils and animal fats.  The primary product will be fuel gradebiodiesel meeting American Society of Testing and Materials (“ASTM”) D6751standards.

We will not generate revenue until we completeconstruction of our plant, which we are targeting for the second quarter of2008, or earlier if possible.  We intendto use the proceeds of our current equity offering to pay for a portion of thedevelopment, construction and start-up costs we expect to incur in connectionwith the construction and operation of our plant.  We will also need a significant amount ofdebt financing in order to complete the plant. We anticipate that our losses will continue until the plant hascommenced operations.

Assuming we raise the equity we need to obtain debtfinancing, we intend to seek and close on our debt financing and obtain allnecessary permits by May 2007.  We expectthe time required to progress from groundbreaking to mechanical completion ofthe plant to be approximately 12 months. We estimate the total capital required to construct the plant andcommence operations to be approximately $62,000,000.  This includes approximately $50,600,000 tobuild the plant and approximately $11,400,000 for other capital expenditures,working capital and reserves.

**Business Strategy**

Our business strategy revolves around two main goals:utilization of low-cost feedstocks and production of a high quality biodieselproduct.  We have also made two keyassumptions regarding the future of the biodiesel industry: that biodieseldemand will continue to grow and that we can rely successfully on the marketfor our feedstock supplies.

Our assumption that biodiesel demand will continue togrow is based on our belief that legislation providing for subsidies to thebiodiesel industry will continue.  Thissupport will be critical for the foreseeable future.  The cost of production of biofuels, includingbiodiesel, has historically been higher than the cost of producing and refiningpetroleum based fuels.  Federalincentives have the effect of mitigating the impact of higher biodieselproduction costs.  The elimination orreduction of tax incentives to the biodiesel industry, which are presentlyscheduled to expire on December 31, 2008, could reduce the market forbiodiesel, which could reduce prices and our revenues by making it more costlyor difficult for us to produce and sell biodiesel.  The biofuels industry also depends on federalenvironmental regulations which favor the use of blended fuels, includingbiodiesel.  The repeal or substantialmodification of these environmental regulations could also have a very detrimentaleffect on the biodiesel industry and on our operations and financial results.

The assumption that we can rely on the market forfeedstock supplies is based on the current abundance of available feedstocks inour region.  Because of the current abundanceof soybean crush capacity in our area, the capital required to construct acrush facility and other barriers to entry, we believe that implementing ourown captive feedstock supply is not an attractive alternative.  Similarly, the abundance of availablefeedstocks in the region has led us to conclude that it would be unnecessary toestablish a captive relationship with any one or two suppliers.  This will allow us to consider both short andlong-term supply arrangements as they present themselves.

In the event that reduced production or increaseddemand adversely affect feedstock supplies, prices are likely to increase.  As a consequence, our production costs willincrease.  Because there is littlecorrelation between feedstock prices and the price of biodiesel (which tends totrack with petroleum prices), increases in feedstock prices generally producelower profit margins for biodiesel producers. In addition, if we are unable to acquire the quantities of feedstocksnecessary to operate our plant, we might be required to curtail ouroperations.  That would have a veryadverse effect on our profitability.

To reach our goal of using the lowest cost feedstocks,we will incorporate feedstock pretreatment capabilities in our facility.  This will allow us to process both crudevegetable oils and animal fats.  Webelieve that the approximate $12,410,000 capital cost for the pretreatmentequipment and infrastructure will be offset by the value of being able to usevirtually any feedstock.  We estimatethat a $.01 per pound cost savings in oil feedstock will result in over$2,000,000 annual savings on our soy oil costs. If we use animal fat for approximately 30% of our feedstock, we estimatethat we could realize over $3,200,000 in annual savings.

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Our goal to provide high quality biodiesel has led usto enter into a management and operational services agreement with WCC.  In a consent to assignment dated October 26,2006, REG assumed full responsibility for WCC’s obligations under themanagement and operational services agreement. The services under this agreement will include overall management of theplant, placement of a general manager and an operations manager at the plant,acquisition of feedstocks and chemicals necessary for the operation of thefacility, and performance of administrative, sales and marketing functions forus.  The cost of this management contractwill be $.0625 per gallon of biodiesel produced, plus an incentive bonus equalto 6% of our net income.  We believe thatthis cost is justified in view of REG’s ability to acquire feedstocks on avolume purchase basis and to obtain premium pricing for product controlled byREG.

Our board feels this cost is justified for threereasons.  First, because REG willpurchase feedstocks for all of the plants it manages, we expect that volumenegotiating and purchasing will benefit us with lower overall input costs.  Second, we believe that REG has a favorablereputation for the production of quality biodiesel, represented by itsSoypower® brand.  REG’s productionfacility is accredited under the National Biodiesel Accreditation ProgramBQ-9000 standards (“BQ-9000”) and of the two other facilities that REG manages,one has already achieved BQ-9000 accreditation and the other is in theaccreditation review process.  BQ-9000Quality Management Program accreditation is awarded by the National BiodieselAccreditation Commission following a successful formal review and audit of thecapacity and commitment of the applicant to produce or market biodiesel fuelthat meets the ASTM D6751 Specification for Biodiesel Fuel Blend Stock (B100)for Middle Distillate Fuels.  Theaccreditation process is comprehensive and includes a detailed review of theapplicant’s Quality System documentation, followed by a formal audit of theapplicant’s conformance to its System. Third, we believe that REG has substantial marketing expertise and thatits existing terminal infrastructure is a significant positive factor in itsbiodiesel marketing activities.

With the current incentives in place for blendingbiodiesel, we have made initial plans to also have blending facilities onsite.  This will allow us to take fulladvantage of the blender’s credit, and give us the flexibility to market towholesalers that may not choose to blend themselves.  The blender’s credit is available forblenders to receive a total income tax credit or federal excise fuel tax creditin the aggregate amount of $1.00 per gallon of biodiesel for blending biodieselin a diesel fuel mixture.

**Plan of Operations UntilPlant Start-Up**

From the present to the second quarter of 2008, orearlier if possible, we will be actively involved in five principal tasks:

(1)          Raising our equity andsecuring debt capital;

(2)          Acquiring and preparingour plant site;

(3)          Completing constructionagreements and securing necessary permits;

(4)          Constructing our plant;and

(5)          Arranging andnegotiating agreements for the purchase of our feedstocks and utility servicesand for marketing our biodiesel and glycerin products.

Assuming that we successfully complete our equityoffering and obtain adequate debt financing, we believe that we will havesufficient cash resources to cover all of our expenses associated with theconstruction and commencement of operations of the plant, including site acquisitionand development, installation of road and rail access and utilities,application for and receipt of permits, equipment acquisition and plantconstruction.  We also believe that wewill have sufficient operating capital to cover our staff, office, audit,legal, compliance, training and other start-up expenses during thisperiod.  We estimate that we will needapproximately $62,000,000 to complete the project.

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***Equity and Debt Capital***

We expect that the project will cost approximately$62,000,000.  We have already received$3,500,000 in proceeds from a seed equity financing and approximately $100,000in grants.  In our current equityoffering, we plan to raise a minimum of $20,000,000 and a maximum of$35,000,000.  Depending upon the amountof equity capital raised, we need to raise an additional $20,000,000 to$35,000,000 in debt financing.  Weanticipate that if the equity we raise is in the range of $22,500,000 to$35,000,000, senior debt financing in the $20,000,000 to $32,500,000 range maybe available.  If the amount of equityraised is closer to the $20,000,000 minimum, senior debt lenders may beunwilling to provide all of the debt financing required by us and we wouldlikely find it necessary to supplement the senior debt financing withsubordinated debt in an amount of $2,500,000 or more.

We made the decision to obtain debt financing toassist in financing our plant because we believe that the financial leverageprovided by debt capital is likely to provide better returns to holders of ourUnits than would be the case if we financed our plant entirely with equitycapital.  The use of debt financingincreases the risk, however, that if the plant is unsuccessful, holders of ourdebt obligations will have claims on our assets ahead of holders of our Units.

We commenced an offering of our units to raise equitycapital in December 2006 and as of March 29, 2007 had received subscriptionsfor Units totaling approximately $19,000,000. Subscriptions in our equity offering will be held in escrow until wehave received (a) $20,000,000 or more in offering proceeds, in cash andpromissory notes, exclusive of interest, (b) written commitments to providesenior debt and subordinated debt which, combined with the offering proceedsand funds from grants and other resources, would equal at least $58,400,000,and (c) the air emission source permit required to commence construction of ourplant.  If we have received $20,000,000or more in offering proceeds by the closing of the offering, we will have untilMarch 14, 2008 to satisfy the debt financing and permit conditions to releasesubscriptions from the escrow.  If wefail to satisfy the terms of the escrow or if we decide to terminate andabandon the offering at any time, we will promptly return the subscriptions tosubscribers, with interest on the cash payments held in escrow.  We may require payment of the promissorynotes at any time after we have received $20,000,000 or more in subscriptions.

The equity offering will close upon the earlier tooccur of (1) our acceptance of subscriptions for Units for the maximumoffering amount of $35,000,000; or (2) December 15, 2007.  We may also decide to close the offering anytime after we have sold the $20,000,000 minimum offering amount if we determinethat the offering proceeds, together with available debt financing, aresufficient to capitalize our project.  Ifwe satisfy the conditions for the release of subscriptions from escrow and theescrow is closed, we may nevertheless elect to continue to offer any remainingUnits up to the maximum number to be sold until the offering closes.  We reserve the right to modify or terminatethe offering, to reject subscriptions for Units in whole or in part and towaive conditions to the purchase of Units.

In the event that a material change to the equityoffering occurs, we will file a post-effective amendment to the registrationstatement for the offering which we have filed with the Securities and ExchangeCommission.  Changes in the material termsof the offering after the effectiveness of the registration statement mayrequire us to terminate the offering or to give investors an opportunity torequest the return of their subscriptions or to confirm their subscriptionsafter notice of the change.  Materialchanges may include the following: (1) an extension of the offering beyondDecember 15, 2007; (2) a change in the offering price for the Units;(3) a change in the conditions required to be satisfied beforesubscriptions held in escrow can be released; and (4) a material change inthe stated purpose for which the offering proceeds will be used.

After the equity offering, we will have 13,500,000Units issued and outstanding if we sell the minimum number of Units offered inthe offering and 21,000,000 Units issued and outstanding if we sell the maximumnumber of Units offered.  These amountsinclude 3,500,000 Units issued in our previous seed capital financings.

We have received a term sheet proposal from 1st Farm Credit Services, an Illinois basedagricultural finance institution (“FCS”), for debt financing in a maximumamount of $25,000,000.   The FCS proposalprovides for construction and term loan facilities and is subject to a varietyof terms and conditions which may or may not be acceptable to us.  There is no assurance that the FCS proposalwill result in receipt by us of an acceptable commitment or the debt financingthat we will require, or that we will not seek a commitment or commitments with

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different terms or fromother banks, financial institutions or lenders.   The FCS terms and conditions, as presentlystated, include the following: (a) we will have a minimum of $35,000,000 inequity; (b) the term loan will be repayable in equal installments of principaland interest over a 10 year term; (c) interest rates will be partially fixed ata rate to be determined and partially variable based on LIBOR; and (d)covenants will include working capital, equity, net worth, debt servicecoverage, distributions, capital expenditures, borrowings, and other operating,management and reporting requirements and limitations.  The proposal also provides that FCS willprovide an operating line of credit for us in a maximum amount of$5,000,000.  The financing and all termsand conditions are subject to the negotiation, execution and delivery of a masterloan agreement and related documentation between FCS and us and funding will becontingent on satisfaction of closing conditions typical for such financings.

We have contacted and have had limited discussionswith other prospective lenders, but have no agreement with any other lender forthe senior debt financing that we need. We presently have no sources for subordinated debt financing.  Even if our equity offering is successful, ifwe do not secure the debt financing that we require, we will not be able toconstruct our plant and will be forced to abandon our plans.

At any time after we have received at least$20,000,000 in subscriptions from investors in our equity offering, even if wehave not yet satisfied the other conditions to release the subscription fundsfrom escrow, we may require investors to pay the balance of their subscriptionsrepresented by promissory notes into the escrow account.  However, we will not release any funds fromescrow until all of the release conditions have been satisfied.  At any time after we satisfy all of theconditions to release the subscription funds from escrow, we may release thesubscription funds, complete our debt financing, execute the design-buildagreement and commence construction of our plant.

We may terminate our equity offering at any time afterwe have reached the minimum $20,000,000 in subscriptions.  However, even if we have satisfied all of theconditions to release subscriptions from escrow, we may continue the offeringwith the intent to raise additional funds, up to the $35,000,000 maximum amountof the offering, and thereby reduce the amount of debt financing required forour project.  In that case, we mayrequire such additional subscriptions to be paid entirely in cash and, if othersubscriptions have been released from escrow, we may require new subscriptionsto be paid directly to us.

***Site Acquisition andDevelopment***

We presently expect that our plant will be built on asite near Freeport, Illinois.  We have anoption to acquire that site at a purchase price of $347,100 from the FreeportArea Economic Development Foundation, an Illinois not-for-profitcorporation.  The option was signed onJune 20, 2006 and provides for option payments of $825 per month commencingAugust 1, 2006.  The original expirationdate of the option was December 31, 2006. On November 27, 2006 the option was extended to March 31, 2007.  On March 20, 2007 it was extended again andit presently expires on June 30, 2007. The option does not contain any provisions for further extension.  Preliminary engineering reports indicate thatthe site is suitable for construction of a biodiesel plant.  Further investigations relating toenvironmental and archeological conditions are underway.  The site has been zoned in the M-1 manufacturingclassification required for our plant by the Stephenson County board.  Although other permits are required, we areoptimistic regarding our ability to obtain all permits necessary for us tobuild our plant.  REG has indicated on apreliminary basis its approval of the site for purposes of its willingness tobuild our plant.  We have not identifiedany other possible sites which may be suitable for our plant and have nooptions on any other sites.  Accordingly,we presently believe and intend that our plant will be built on the Freeportsite.

Our Freeport site is located in the Mill RaceIndustrial Park, located two miles east of Freeport, in Stephenson County,Illinois.  This industrial park is beingdeveloped by the Freeport Area Economic Development Foundation, with thesupport of Stephenson County, to improve economic opportunities in thearea.  Our discussions with local utilityproviders, including the county, have led us to believe that the estimatedcosts to bring natural gas and electricity to our site is approximately$150,000; water and fire protection is estimated at $250,000; and our share ofthe cost to complete rail lines and access to the Canadian National Railroad isestimated at $745,000.  Our site is 23.14acres in size, allowing for easy placement of the facility footprint, tank farmand the needed rail and road additions, which we estimate will occupy 16acres.  This would leave approximatelyseven acres for future expansion of our operations, which would allow us todouble our plant capacity including additional tank farm

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storage.  Because the Mill Race Industrial Park islocated in an Illinois Enterprise Zone, we may be able to secure tax exemptionsfrom the state of Illinois for the construction and operations of our plant.

Illinois tax incentives that may be available to ourplant include investment tax credits, jobs tax credits, sales tax exemptions onconstruction materials, exemptions from taxes on utilities used and anexemption from taxes on interest on funds borrowed by us will depend on thesite chosen for our plant and could be repealed in the future.  However, we do not consider state taxincentives essential to our budget or business plan and the availability orlack of tax incentives are not the most important considerations in ourselection of a site.

If for any reason our Freeport site would proveunsuitable for our plant or if our option on that site expires before we haveour equity and debt financing available to acquire that site, we may find itnecessary to pay more than the option purchase price for the site or to locatean alternative site.  There is noassurance that after full investigation we will determine that our Freeportsite or any other site that we have identified will be suitable for our plantor will be acquired for that purpose.  Anew site could be located outside Stephenson County and could even be locatedoutside the state of Illinois.  **Our board of managers reserves the right to change thelocation of the site for our plant, in its sole discretion, for any reason.**  We are continuing the permitting process onour Freeport site, and, if necessary, may conduct investigations on othersites, including overall suitability for our plant, environmental matters androad and rail access considerations.  Ifwe are required to locate a site other than our Freeport site, our siteacquisition and plant construction schedule could be delayed.  Our goal, working with consultants, will beto confirm the suitability of and obtain permits for the Freeport site or identifythe best alternative site for our use so we will be in a position to acquirethe site immediately upon successful completion of our equity and debtfinancing.

Prior to or upon acquisition of our plant site, weexpect to enter into agreements for site preparation, road access andupgrading, utility services and rail access and service.  This work would commence as soon aspracticable after execution of the agreements and would continue during theconstruction of our plant.  Prior tocompletion of our equity and debt financings, this work would be funded usingthe proceeds of our seed capital financings. We believe that our existing funds will permit us to continue ourpreliminary activities through the end of our equity offering.  If we are unable to close on our equityoffering by that time or otherwise obtain other funds, we may need todiscontinue operations.

***Construction Agreementsand Permits***

We have entered into a pre-construction servicesagreement with REG to assist us in planning and designing our biodiesel plantand expect to enter into a design-build agreement with REG for the constructionof our plant.  The agreement providesthat REG will prepare engineering diagrams and drawings for our site, plant, utilitiesand process systems, assist us in obtaining permits for the construction of ourplant, establish final project specifications, contract documents and contractpricing and place orders on our behalf for equipment, particularly equipmentwith lengthy order lead times.

The agreement also requires REG to negotiate with usin good faith to enter into a definitive design-build agreement for theconstruction of our plant.  We anticipatethat the design-build agreement will state the complete set of design andconstruction services to be provided by REG to construct a 30 mmgy biodieselplant for us, state the allocated costs of the work to be performed, state themanner in which increased costs due to equipment and materials expenseincreases and change orders requested by us would be allocated, state theresponsibility for REG and us to acquire permits, provide a timetable forconstruction, and include warranties and guarantees with respect to plantcapacity and operation, payment terms and similar matters.

We are continuing to work with REG on the preliminarydesign of the plant and intend to negotiate the final terms of the design-buildagreement with REG so construction may be commenced as soon as possiblefollowing successful completion of our equity and debt financings.  Concurrently, we will seek necessaryconstruction permits, environmental permits and other contracts and permitsnecessary for the construction of our plant. If we are unable to reach final agreement with REG or if any criticalagreement or permit is unavailable to us on reasonable terms, we may need toseek alternatives, which could delay our operations, affect our ultimatesuccess or even curtail our business objectives.

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***Plant Construction andStart-up of Plant Operations***

Construction of our plant will include completion andapproval of the final design for the plant, final site preparation,installation of underground piping, conduits and footings, structural framing,installation of tanks, equipment and above-ground piping, enclosing structures,installation of outside yard facilities, loading docks and related structures,and a variety of other tasks.  Theconstruction phase will include testing of the plant through certification bythe construction engineers.  Commencementof operations will include training of plant operations personnel andincorporation of operational testing, quality control and safetyprocedures.  We expect to completeconstruction of our plant approximately 12 months after completion of ourequity offering, execution of loan agreements for our necessary debt financingand receipt of the principal air emissions permit for our plant.

Pre-construction engineering, which includescompletion of the design for the plant, began in May 2006 and is expected to becompleted in April 2007 at a cost of approximately $2,500,000 under ourpre-construction services agreement with REG. The permit application process for the air emissions, construction andother permits necessary to commence construction began in September 2006 underour agreement with REG and is also expected to be completed by May 2007.  We expect to acquire our site in the MillRace Industrial Park in June 2007 at a cost of approximately $350,000.  Site preparation and rail sub-ballast work isexpected to commence and be completed in February 2006 at an estimated cost of$250,000.  All of these expenses havebeen or will be funded with existing cash resources and will not be funded withthe proceeds of our equity offering.

We are continuing discussions with potential debtfinancing sources with a view to receiving a debt financing commitment letterbefore, upon or very shortly after completion of our equity offering.  Although there is always the possibility ofdelay in one or more facets of our schedule, our goal will be to complete ourequity offering, secure our debt financing commitment letter, secure our airemission and construction permits, complete negotiations and sign ourdesign-build plant construction agreement and negotiate and sign our definitivedebt financing agreements as early in 2007 as possible.  If we were able to complete these tasks byApril 2007, we believe that REG would be able to move its crews and equipmentto our site and commence construction in May 2007.

The construction process will commence with thecompletion of final grading for all plant structures and our tank farm,installation of underground plumbing and construction of footings and otherconcrete work.  Subject to weatherconditions, we expect that this work can be completed in approximately onemonth, at an aggregate cost of approximately $4,750,000.  Immediately thereafter, construction willproceed on the construction of our biodiesel process building and otherstructures, a task that will take approximately two months at an estimated costof $4,870,000.  Throughout these phasesof construction work would continue on our railroad access, includinginstallation of sidings and switches, with completion expected approximatelyfour months after the commencement of construction at an estimated cost to usof $745,000.

With the completion of the process building, the nextsix months will be dedicated to the installation of piping and wiring, erectionof our tank farm and installation of process and other equipment.  Including related labor, piping will costapproximately $9,100,000, electrical wiring about $5,525,000, the tank farm$4,935,000 and equipment, the largest single category, approximately$11,610,000.  The final phase ofconstruction, extending to include an additional month of work, will includethe installation of heat tracing equipment and insulation, office build-out,painting and landscaping at a total cost of approximately $3,000,000.  During this extended period, we and REG willalso commence the process to obtain our operating permits, which will involvepreparing and submitting applications, working with regulatory authorities andcoordinating site inspections and preliminary equipment testing.

With construction complete, we will move to the plantstart-up phase, which will involve complete start-up and testing of allequipment and facilities, including any adjustments necessary.  This process will take approximately onemonth and will cost approximately $1,000,000. Assuming the availability of final operating permits, and following afinal capacity test run and certification by our construction engineers, theplant will be turned over to us and REG for the commencement of commercialoperations.  If we were able to startconstruction in May 2007, we would anticipate commencement of operations in thesecond quarter of 2008.

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***Supply and MarketingAgreements***

During and after our equity offering, and during theconstruction of our plant, we expect to confirm sources of supply for theoperating requirements of our plant and markets for our products.  In particular, we intend to consider ways toassure the supply and price of feedstocks such as soy and other vegetable oilsand animal fats for our plant, which might include supply or purchaseagreements and hedging instruments and accounts.  We also expect to negotiate agreements forsupplies of natural gas, electricity and other operating needs.  We intend to survey local, regional andnational markets for our biodiesel and glycerin and may enter into marketingagreements for the sale of those products.

Sourcing of oils and fats is part of our managementand operational services agreement with REG and will include all aspects of theprocurement of feedstocks.  We understandthat REG typically enters into agreements with major national and internationaloil suppliers and that purchases for our plant will be part of REG’s overalloil procurement program.  In someinstances, REG may purchase oil specifically for our plant, particularly whenoil is available at attractive prices in our local and regional market.  In general, REG will have the responsibilityto manage the supply of oils and fats for our use.

The management and operational services agreement withREG also provides for REG to market the biodiesel produced by us.  The biodiesel produced by our plant will bemarketed under REG’s Soypower trade name. REG will also market by-products of our plant, including the glycerinand soapstock produced by us.  We believethat REG has the expertise required to manage the sale of our biodiesel andby-products and obtain favorable results for us.

**Our board of managers will assistREG when needed to establish contacts with potential suppliers of feedstocksand potential purchasers of biodiesel and by-products in our local and regionalmarkets.**

**Site Infrastructure andImprovements**

We will need to make infrastructure improvements tothe site we select in order to construct and operate the plant.  Some of the improvements that we anticipatemaking are described below, however, the full extent of the improvements andthe exact costs will not be known until we finalize our site selection, acquirethe site and commence site development.

***Roadway Improvements***

Any site for our plant is likely to requiresignificant roadway improvements.  At ourMill Race Industrial Park site, we will have easy access from county highwaysand the site is located only 2 miles from U.S. Highway 20.  The Mill Race Industrial Park is upgradingaccess roads to 80,000 pound load capacity. Accordingly, we do not expect significant roadway expenses at thatsite.  Other sites may requiresubstantial expenditures to extend and upgrade roadways and local officialscould expect us to contribute some or all of the funds required to make thenecessary roadway improvements.  Any decisionby local officials with respect to roadway improvements may involve publichearings and an opportunity for local residents to object to and delay oursiting process.

***Rail Access***

We expect that the Canadian National Railroad (the “CN”)will provide rail service to our site. However, we will need to have a spur line constructed to our site from aproposed parallel spur line (lead track) of the railroad.  As part of its infrastructure developmentplans, the Mill Race Industrial Park is working with the CN on the railadditions that would allow rail access by us. These additions would include the sub-ballast groundwork for the spursto our site and on our site as well as the spur construction itself.

The CN has indicated that it will provide us withsix-day per week service in both directions.  We expect that Stephenson County will pay forone mainline spur switch and we will be required to pay for the other.  Stephenson County has also indicated that itwill also pay for the construction of the proposed parallel lead track; we willneed to pay for the spur into our site and any associated switches.  The estimated cost to us of this railinfrastructure is

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approximately $745,000,which will give us sufficient delivery, storage and loading track for 55 cars,which includes a 30 car-length delivery and storage track and a 25 car-lengthproduct loading track.

***Site Grading and DirtWork***

Topographical survey work has been completed for ourMill Race Industrial Park site that we have subject to option.  We expect that REG will be responsible forthe site stability evaluation, grading and preparation under our design-buildcontract with REG.  REG will prepare theplans and specifications for these improvements and perform the work or selectsubcontractors for that purpose.  Weexpect that REG will be responsible for soil testing, compaction testing, andany other site related work.  We estimatethe cost of site improvements at $390,000 for the plant site.  Stephenson County will bear the cost of therailroad subgrade.

**Employees**

Prior to completion of the plant construction andcommencement of operations, we plan to hire a chief executive officer and achief financial officer with overall responsibilities for the administration ofour company.  In addition, we intend toobtain the services of approximately 28 additional full-time employees throughREG.  We expect that two of theseemployees will be involved primarily in management and administration and theremainder will be involved primarily in plant operations.  We expect to fill the general manager positionby the beginning of construction.  We donot presently offer an employee benefits package and expect that any benefitsfor personnel provided by REG will be made available through REG plans.

The following table lists the positions which weexpect will be required to operate our company and plant and the minimum numberof individuals that we expect will be full-time personnel:

| Position                         | ** ** | **Number of  Full-Time Personnel** | ** ** |
|----------------------------------|------------|----------------------------------------------|------------|
| Chief Executive  Officer         |       | 1                                            |       |
| Chief Financial  Officer         |       | 1                                            |       |
| General Manager                  |       | 1                                            |       |
| Operations  Manager              |       | 1                                            |       |
| Financial  Assistant             |       | 1                                            |       |
| Logistics/Scale  Operator        |       | 1                                            |       |
| Electrical/Control  Maintenance  |       | 1                                            |       |
| Facility  Maintenance Mechanical |       | 1                                            |       |
| Lab Technician                   |       | 1                                            |       |
| Biodiesel/Pretreatment  Leadman  |       | 4                                            |       |
| Operations  Specialist           |       | 12                                           |       |
| Load/Receive  Leadman            |       | 1                                            |       |
| Load/Receive  Specialist         |       | 4                                            |       |
|                             |       |                                         |       |
| **Total**                        | ** ** | **30**                                       | ** ** |

 

The positions, titles, job responsibilities and numberallocated to each position may differ when we begin to employ individuals foreach position.

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

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Our success will depend, in part, on our ability toattract and retain qualified personnel at competitive wage and benefitlevels.  We must hire qualified managers,accounting, human resources and other personnel.  We operate in a rural area with lowunemployment.  There is no assurance thatwe will be successful in attracting and retaining qualified personnel at a wageand benefit structure at or below those wages budgeted for the operation of ourplant.  If we are unsuccessful in thisregard, we may not be competitive with other biodiesel plants and an investmentin our Units may lose value.

**Trends and UncertaintiesImpacting the Biodiesel Industry and Our Future Operations**

***Biodiesel, Petroleum andFeedstock Prices***

Market prices for biodiesel normally follow prices forpetroleum-based fuels and do not correlate with the prices for soy oil, othervegetable oils, recycled cooking oil and animal fat feedstocks consumed by thebiodiesel industry.  There are historicalpatterns to these markets; however, each of these commodities has unrelatedvariables that influence their respective prices.  Biodiesel prices could decline while soy oilprices rise, causing losses to our operation.

Because feedstock prices are expected to representapproximately 80% of our cost of operations and biodiesel sales will representapproximately 98% of our revenues, price movements in these markets will be asignificant risk of our business.  Goodrisk management practices will help mitigate some of this risk with hedges ofvegetable oil and biodiesel prices on the Chicago Board of Trade together withforward price contracts with the end users of our biodiesel production.

Because of the rapid expansion of the biodieselindustry, soybean oil markets are beginning to react more in line with conventionalfossil fuel markets.  In historicalterms, soy oil stocks today are very large, yet the price of soy oil hasremained relatively strong as the market anticipates additional biodieselproduction coming on line.  Until thebiodiesel market reaches an equilibrium point between supply and demand,volatility will remain in soy oil prices. This volatility may impact our profitability; there may be instanceswhen we cannot obtain oils or animal fats to run the plant at full capacity.

Because there are fewer plants that utilize animalfats, the market for animal fats such as tallow have followed a more historicalpattern, with price declines into the summer months.  Though the price for animal fats hasincreased it has not increased as significantly as the price for soy oil andhas not shown higher prices together with higher supplies.

After being stable for many years, energy prices ingeneral have become more volatile in the past decade due to the narrowing ofthe band between supply and demand trend lines, the perception of decliningsupplies in a growing world market and the significant price impacts that canbe stimulated by slight changes in supply and demand.  The prices of all petroleum-based fuels havealso been influenced by political uncertainties that affect world markets.

Because oil seed production and the availability ofsoy and other vegetable oils has generally been characterized by highproduction and supplies while energy and biodiesel have been associated withgrowing demand and diminishing supplies, a market opportunity has existed forbiodiesel in the past decade and appears to be continuing.  However, there can be no guarantee that thesupply relationship between biodiesel feedstocks and competing fuels will notinvert for short or even long periods of time due to, among other things,weather, political, environmental and tax policies, international events,economic factors and new technologies.

***Soybean and other OilSeed Acreage Trends***

In the past two decades, soybean acreage in the U.S.has varied between 58 million acres and 75 million acres.  Shifts from one year to the next have notbeen dramatic and have been as much a function of government support programsas soybean and soy oil prices.  Croprotation has traditionally supplied the most palatable economics for soybeanproducers and they have in the past been very reluctant to change thoserotations.  Soybean and soy oil demand inthe domestic markets and international markets has been increasing, in part dueto increasing demand for biodiesel in the domestic market and for food suppliesin the international market.  Risinglong-term yield trends

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have been meetingincreases in demand with slightly increased soybean acreage.  Some soybean producing regions haveexperienced pressure from increasing demands for corn production, to someextent based on demand from the ethanol industry.  Changes in tillage, planting, pest controland hybridization technologies in both the corn and soybean industries mayaffect supplies in both markets by reducing crop rotations and increasing useof marginal growing environments.  Thattechnology could swing corn acres dramatically higher if the economics dictateda need for those acres.  Similarly, theprices of energy, nitrogen, other fertilizers and similar inputs have increasedsignificantly and are likely to continue to increase, resulting in negativereturns for soybeans on marginal acres. Weather factors can also have a dramatic effect on production, andextremes in drought, changes in government support programs for soybeans orrising energy and other input costs due to energy could result in reducedsoybean acreage without regard for increasing demand from the biodieselindustry.

***Acceptance of Biodieselas a Substitute for Petroleum-Based Fuel***

Biodiesel has developed a reputation for beingrenewable, environmentally friendly and safe. The principal benefit of biodiesel is the reduction or elimination ofseveral hazardous substances and pollutants found in other fuels, with aresulting significant benefit to the environment and public health.  Economic benefits focus on employmentopportunities in the biodiesel industry, the addition of a significant newproduct to our agriculture industry and strengthening of the economy of ruralareas of the country.  Biodiesel is alsoviewed as an alternative to imported petroleum-based fuels, as a positivecontributor to our balance of trade and as an enhancement to our energysecurity.

Nationwide many city fleetshave switched to biodiesel because of its overall acceptance and environmentalbenefits.  A recent survey conducted bythe National Biodiesel Board show public awareness of biodiesel has grown from27 percent in 2004 to 41 percent in 2005. More than half of consumers surveyed are willing to pay more per gallonfor biodiesel than regular fuel.  Fourout of five consumers support a tax incentive that will make biodiesel costcompetitive with regular diesel fuel.

The reliability of biodiesel in low operatingtemperatures has emerged as an issue in the market.  During the winter of 2005-2006 operatingdifficulties experienced by diesel trucks using biodiesel blends at outsidetemperatures below zero degrees Fahrenheit were attributed to the biodieselcomponent of the fuel, particularly the presence of glycerin in the fuel.  Whether the cause was intrinsic to thebiodiesel fuel or to deficiencies in the production and quality controls atcertain biodiesel facilities was not conclusively determined.  In the event, the state of Minnesotasuspended its biodiesel content requirement for 51 days until warmer weatherresolved the perceived problem.  Anycontinuing difficulties in the usage of biodiesel during cold weatherconditions could result in both reduced usage of biodiesel and more generalacceptability issues in the marketplace.

***Competition from FutureConstruction***

According to the National Biodiesel Board, as ofJanuary 31, 2007 there were 105 biodiesel plants in production in the UnitedStates, with a capacity of 864.4 million gallons per year, and approximately 85more plants under construction which would add an estimated 1.7 billion gallonsper year in biodiesel capacity.  Manyother groups or companies are reviewing the opportunity for plant constructionthrough feasibility studies or fundraising efforts.  Expansion in the industry has been acceleratingfor the past five years and has been stimulated by legislation and subsidies.  Because there are very few barriers toentering the biodiesel industry and because the biodiesel process itself isfairly simple, this expansion is expected to continue.  Such dynamic expansion is accompanied bysubstantial and accelerating capital flows into the industry.  In northern Illinois and adjacent areas ofWisconsin and Iowa (within a 150 mile radius of our site) there are threeoperating biodiesel plants with an annual capacity of 63 million gallons peryear.  Including our plant, there arecurrently at least seven potential new biodiesel projects in our area.

This rapid expansion leads to many uncertainties inthe industry regarding feedstock supplies, the biodiesel and glycerin marketsand the future profitability of companies like ours.

Feasibility studies for new or expanding plantsidentify the source of feedstocks and the potential price basis changes thatmay occur with the development of the project. The criteria for evaluating those studies are not always consistent fromproject to project, and there could be projects that build close to us that arewilling to accept more

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risk in the marketplaceand operate with a cost structure quite different from ours.  The development of such a project within ourfeedstock origination area could negatively impact our ability to sourcefeedstock locally at an acceptable price. Development in other areas of the state and in neighboring states couldimpact our ability to ship feedstocks in from other areas at acceptable pricesand freight rates.

Rapid expansion of the industry is taking place,mostly in the major soybean growing areas of the Midwest, and is providingbiodiesel production in that geographic area that may exceed demand.  Because of competition, access to high-volumelong-haul transportation via rail may become essential to all plants.  Yet, that transportation may not always beavailable when needed due to cost and overcrowding of the transportationinfrastructure.  Professional marketerstend to have facilities in specific locations instead of scattered throughoutthe market potential.  Other plants maybe closer or have cheaper transportation to the markets available to themarketer we choose.  Increased suppliescould adversely affect biodiesel prices in regional markets, could maketransportation facilities even more critical to individual plant locations andcould have an increasing and more frequent impact in the national marketplace.

***Glycerin Market***

Because of the significant expansion in the biodieselindustry; the oversupply of glycerin has caused glycerin prices to declinesignificantly in recent months to below historical levels.  Glycerin sales are expected to represent lessthan 1.0% of our gross income.  Somemarket reports report that the price for glycerin has declined to a level whereits value is essentially zero, resulting in glycerin being used as livestockfeed or as an energy source in boilers. This decline could adversely impact our potential earnings and profits.

***Air Pollutant Emissions***

Theproduction of biodiesel will result in air emissions produced by the combustionprocess used to generate steam.  Ourplant will generate steam using a natural gas fired boiler.  Natural gas combustion produces emissions ofvarious air contaminants that are regulated by the EPA and IEPA.  These pollutants include carbon monoxide,nitrogen oxides, particulate matter, sulfur dioxide, volatile organiccompounds, lead, sulfuric acid mist, mercury, and trace amounts of metals andorganic and inorganic compounds.  Theregulated pollutants will be controlled through the combined use of finelytuned combustion processes and control technologies that meet federal and staterequirements.

Thedistillation processes used as part of our biodiesel production will producevarious types of volatile organic compounds that will be reduced throughpollution control equipment to meet limits established by the EPA and IEPA.

Weare required to obtain a construction air permit from the IEPA before beginningconstruction of our plant and must also obtain an operating air permit onceconstruction and emission testing is completed. All permitting will be done with the plant categorized as a minor sourceof air emissions in accordance with federal and state definitions.

Constructionand operation of our plant will be allowed only if we can demonstrate that itcan be in continuous compliance with all applicable regulatoryrequirements.  Once in operation, it willbe subject to recordkeeping and reporting requirements as well as periodicon-site inspections.  If it violates anyprovision of its permit, our plant will be subject to enforcement actions,which can include substantial fines and possible closure.

***Carbon Dioxide Emissions***

Carbon dioxide is also emitted in the combustion ofnatural gas to produce steam.  Becausebiodiesel itself contains carbon, it will also produce carbon dioxide when itis consumed in vehicles or in other uses. Carbon dioxide is not presently considered a criteria pollutant by theEPA and there is no established health impact from the release of theseemissions.  Consequently, there is nocurrent federal or state requirement to control carbon dioxide emissions.

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The scientific community contends that carbon dioxideand other heat-trapping emissions are responsible for global climate change.  Designation of carbon dioxide as a criteriapollutant would enable the EPA to regulate U.S. emissions of carbon dioxide toconform to a domestic standard or to an international treaty restricting thoseemissions, such as the Kyoto Protocol. The Kyoto Protocol would require that the United States reduce itsgreenhouse gas emissions by 7% to 93% of 1990 levels by 2010.  However, the EPA has determined that it doesnot have authority to regulate carbon dioxide and has not proposed to do so,and the U.S. Senate rejected the Kyoto Protocol.  Twelve states and several environmentalactivists sued the EPA over its decision but the U.S. Court of Appeals ruled infavor of the EPA in July 2005.  On June 26,2006, the United States Supreme Court agreed to hear the case on appeal and thecase was argued before the court on November 29, 2006.  A decision in the case is unlikely before2007 and it is impossible to predict the result in the case or the regulatoryconsequence of any decision rendered by the court.

In July 2004, eight states and the city of NewYork sued five of the largest carbon dioxide emitters.  The lawsuit sought to require the companiesto reduce the amount of carbon dioxide pollution and did not seek monetarydamages.  In September 2005, a federaljudge dismissed the lawsuit, stating that the president and Congress, not thejudiciary, should consider such a broad environmental policy.  The case was argued on appeal before theUnited States Court of Appeals in June 2006.

It is possible that future requirements could emergethat would require control or mitigation of some or all of the carbon dioxideemissions from our plant or impact the use of biodiesel as a fuel.  Such regulations would likely have wide-rangingnational applicability impacting fuel combustion sources of all types,including power generation facilities and motor vehicles.

***Liquidity and Capital Resources***

Funding for our project planning and developmentactivities has been provided by a seed capital financing, totaling $3,500,000, andpartial receipts from grants from the United States Department of Agriculture (“USDA”)and the Illinois Soybean Board which have been awarded in the aggregate amountof $102,500.  We have applied foradditional USDA and Illinois state grants. We have not received any notification on these applications.

As of December 31, 2006, we had cash and cashequivalents of $538,648 and total assets of $3,538,991.  As of December 31, 2006, we had accountspayable of $153,670.  Since ourorganization on April 28, 2005 through December 31, 2006, we generated norevenues from operations.  Other incomeduring that period, consisting primarily of grant and interest income, amountedto $123,401.  Operating expenses duringthat period, attributable primarily to start-up business expenses, were$406,013.  We had an accumulated loss of$282,612 at December 31, 2006.  Totalmembers’/Unit holders’ equity as of December 31, 2006, was $3,385,321.

Based on our business plan and current constructioncost estimates, we believe the total project will cost approximately$62,000,000.  We plan to finance theproject with the proceeds of our equity offering and debt financing, combinedwith the proceeds of a prior seed equity financing completed by us and grantsreceived by us.  We are seeking to raisea minimum of $20,000,000 and a maximum of $35,000,000 of equity in our equityoffering.  The amount of debt financingthat we will require depends on the results of the offering.  We anticipate that we will need approximately$35,000,000 in debt financing if we raise the minimum amount offered in theequity offering and approximately $20,000,000 if we raise the maximum amountoffered.  Completion of our proposedbiodiesel plant depends on our ability to complete the offering successfullyand raise the amount of debt financing that we require.

We intend to seek our senior debt financing from amajor bank, which may act as a lead lender with participating loans from otherbanks.  We expect that the senior debtwill be in the form of a construction loan that will convert to a permanentloan when we begin operations.  We alsoexpect that the loan will be secured by all of our real property andsubstantially all of our other assets, including inventories andreceivables.  In addition to repaying theprincipal, we expect to pay interest on the loan at market rates for loans tostart-up biodiesel projects, plus annual fees for maintenance and oversight ofthe loan by the lead lender.  If we areunable to obtain senior debt in an amount necessary to fully capitalize theproject, we may need to seek subordinated debt financing which could require usto issue warrants for the purchase of additional Units.  The issuance of warrants could reduce thevalue of

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the Units purchased inthe equity offering.  We intend tocapitalize all of our interest during the construction period until we commencestart-up operations, and do not anticipate that we will be required to make anypayments on our debt until we construct our plant and begin producingbiodiesel.  If the project suffersdelays, we may not be able to timely repay the loan.  If interest rates increase, we will havehigher interest payments, which could adversely affect our business.

We have received a termsheet proposal from 1st Farm Credit Services, an Illinois basedagricultural finance institution (“FCS”), for debt financing in a maximumamount of $25,000,000.   The FCS proposalprovides for construction and term loan facilities and is subject to a varietyof terms and conditions which may or may not be acceptable to us.  There is no assurance that the FCS proposalwill result in receipt by us of and acceptable commitment or the debt financingthat we will require, or that we will not seek a commitment or commitments withdifferent terms or from other banks, financial institutions or lenders.

The FCS terms and conditions, as presently stated,include the following: (a) we will have a minimum of $35,000,000 in equity; (b)the term loan will be repayable in equal installments of principal and interestover a 10 year term; (c) interest rates will be partially fixed at a rate to bedetermined and partially variable based on LIBOR; and (d) covenants willinclude working capital, equity, net worth, debt service coverage,distributions, capital expenditures, borrowings, and other operating,management and reporting requirements and limitations.  The proposal also provides that FCS willprovide an operating line of credit for us in a maximum amount of $5,000,000.  The financing and all terms and conditionsare subject to the negotiation, execution and delivery of a master loanagreement and related documentation between FCS and us and funding will becontingent on satisfaction of closing conditions typical for such financings.For its proposal, we are obligated to pay FCS a $200,000 underwriting andparticipation fee, $50,000 of which we paid upon our acceptance of the termsheet and $150,000 of which will be due upon closing of the financing.

We have contacted and have had limited discussionswith other prospective lenders, but have no agreement with any other lender forthe senior debt financing that we need. We presently have no sources for subordinated debt financing.  There is no assurance that we will be able toobtain the debt financing in the amount that we will require or that the termsof any available financing will be acceptable to us.  Our ability to construct our plant andimplement our business plan will depend on the successful completion of ourequity offering and receipt of adequate debt financing.  Any failure to acquire needed financing wouldlikely require us to cease operations and liquidate.

Any federal, state or local grants or loans, taxcredits or tax increment financing which may be available to us in the futurecould offset a portion of our equity or debt requirements.  If we locate our plant in the Mill RaceIndustrial Park in Stephenson County, Illinois, where we have an option toacquire a site for our plant, we may qualify for tax credits and taxexemptions, but there is no assurance that such credits and exemptions will beavailable to us.  We have not assumedthat any enterprise zone benefits will be available for purposes of ourfinancial plan.

If we find that we do not have sufficient cash on handfor operations or if we decide to complete the purchase of our site and begincertain site work prior to the availability of the proceeds of our equityoffering and our debt financing, it may be necessary for us to secure interimbridge financing from one or more of our members, contractors or unaffiliatedlenders.  Any bridge financing obtainedwould not represent an additional source of capital for the project because itsterms would require repayment from the proceeds of the equity offering when itis completed.  We presently have no plansor commitments with respect to any additional or bridge financing.

***OperatingExpenses***

From the commencement of our operations on April 28,2005 through December 31, 2006, we have incurred an accumulated loss of$282,612.  This loss was funded by a portionof the proceeds of our seed equity financing. The expenses resulting in the loss included $181,841 in professionalfees and $224,172 in general organizational and administrative expenses.  These were offset in part by grant revenuetotaling $102,500 and interest income of $20,901, which is recognized as otherincome.

When our biodiesel plant nears completion, we expectour operating expenses to increase, including expenditures for supplies,utilities and salaries for administration and production personnel.  We also expect to incur significant expensesrelating to financing and interest.  Wehave allocated funds in our capital structure for these

65

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expenses, but cannotassure that the funds allocated will be sufficient to cover theseexpenses.  We may need additional fundingto cover these costs if sufficient funds are not available or if costs arehigher than expected.

***Fiscal Year-End Financial Results***

The following tables summarize information from ourfinancial statements.  Because we are inthe development stage, we have no revenues from operations.  You should read these tables in conjunctionwith our financial statements and the notes thereto contained in this report.
| ** **                                 | ** ** | **From Inception  (April 28, 2005)  to  December 31, 2005** | ** ** | **Fiscal Year  ended  December 31, 2006** | ** ** | **From Inception  (April 28, 2005)  to  December 31, 2006** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **(audited)**                                                                        | ** ** | **(audited)**                                            | ** ** | **(audited)**                                                                        | ** ** |
| **Statement  of Operations Data:**         |       |                                                                                 |       |                                                     |       |                                                                                 |       |
|                                       |       |                                                                                 |       |                                                     |       |                                                                                 |       |
| Revenues                                   |       | $                                                                                    | 0          |                                                     | $          | 0                                                                                    |       | $ | 0 |   |
| Other Income                               |       | 2,500                                                                                |       | 120,901                                                  |       | 123,401                                                                              |       |
| Expenses                                   |       | (4,645                                                                               | )          | (401,368                                                 | )          | (406,013                                                                             | )          |
| Loss Accumulated during  Development Stage |       | $                                                                                    | (2,145     | )                                                        | $          | (280,467                                                                             | )          | $ | (282,612 | ) |

 

|                                                                | ** ** | **December 31, 2006** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                     | ** ** | **(audited)**                   | ** ** |
| **Balance  Sheet Data:**                                       |       |                            |       |
|                                                           |       |                            |       |
| Assets:                                                        |       |                            |       |
| Current Assets                                                 |       | $                               | 553,126    |   |
| Property and Equipment, net                                    |       | 2,323,129                       |       |
| Other Assets                                                   |       | 662,736                         |       |
| Total Assets                                                   |       | $                               | 3,538,991  |   |
|                                                           |       |                            |       |
| Liabilities and  Members’/Unit Holders’ Equity:      |       |                            |       |
| Current Liabilities                                            |       | $                               | 153,670    |   |
| Total Members’/Unit Holders’ Equity                  |       | 3,385,321                       |       |
| Total Liabilities and  Members’/Unit Holders’ Equity |       | $                               | 3,538,991  |   |

 

Our revenues from operations in the future will bederived principally from sales of biodiesel.

***Off-BalanceSheet Arrangements***

We do not have any off-balance sheet arrangements.

**Critical AccountingEstimates**

In accordance with United States generally acceptedaccounting principles, we use estimates and assumptions in preparing ourfinancial statements.  These estimatesand assumptions may have an impact on the amounts of revenues, expenses, assetsand liabilities reported in our financial statements.  We believe that the estimates and assumptionswe have used with respect to the financial statements included in this reportare reasonable.

Expenses incurred in connection with our currentoffering of Class A Units will be deferred until the sale of the Units iscompleted.  Upon issuance of the Units,these costs will be netted against the proceeds received.  If the offering is not completed, these costswill be expensed.

The Company accounts forequity-based compensation in accordance with SFASNo. 123R. Under the provisions of SFAS No. 123R,equity-based compensation cost isestimated at the grant date based on the award’s

66

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fair value as calculated by the Black-Scholes-Merton (“BSM”)option-pricing model and is recognized as expense ratably over the requisite serviceperiod. The BSM model requires various highlyjudgmental assumptions including volatility,forfeiture rates, and expected option life. If any of the assumptions used inthe BSM model change significantly,equity-based compensation expense may differmaterially in the future from that recorded in the current period.

## **Item7.   FINANCIAL STATEMENTS.**

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Board of Managers

Blackhawk Biofuels, LLC

Freeport, Illinois

Wehave audited the accompanying balance sheet of Blackhawk Biofuels, LLC (adevelopment stage company), as of December 31, 2006, and the related statementsof operations, changes in members’ equity, and cash flows for the year endedDecember 31, 2006, the period ended December 31, 2005 and the period frominception (April 28, 2005) to December 31, 2006.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States).  Those standards require that we plan andperform the audits to obtain reasonable assurance about whether the financialstatements are free of material misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of Blackhawk Biofuels, LLC, (adevelopment stage company) as of December 31, 2006, and the results of itsoperations and its cash flows for the year ended December 31, 2006, the periodended December 31, 2005 and for the period from inception (April 28, 2005) toDecember 31, 2006, in conformity with U.S. generally accepted accountingprinciples.
|        | /s/ Boulay, Heutmaker, Zibell &  Co. P.L.L.P. |   |
|--------|---------------------------------------------------|--------|
|   |                                              |
|   | Certified Public  Accountants                     |

 

Minneapolis,Minnesota

April 2, 2007

 

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**BLACKHAWKBIOFUELS, LLC**

(A DevelopmentStage Company)

Balance Sheet
| ** **                                                                                                              | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                              | ** ** | **2006**              | ** ** |
| **ASSETS**                                                                                                              |       |                  |       |
| **Current Assets**                                                                                                      |       |                  |       |
| Cash                                                                                                                    |       | $                     | 538,648    |   |
| Prepaid expenses                                                                                                        |       | 14,478                |       |
| Total current  assets                                                                                                   |       | 553,126               |       |
|                                                                                                                    |       |                  |       |
| **Property and Equipment**                                                                                              |       |                  |       |
| Computers and  office equipment                                                                                         |       | 2,892                 |       |
| Construction in  progress                                                                                               |       | 2,320,336             |       |
| Total property  and equipment                                                                                           |       | 2,323,228             |       |
| Less accumulated  depreciation                                                                                          |       | 99                    |       |
| Net property and  equipment                                                                                             |       | 2,323,129             |       |
|                                                                                                                    |       |                  |       |
| **Other Assets**                                                                                                        | ** ** | ** **            | ** ** |
| Deferred  offering costs                                                                                                |       | 432,435               |       |
| Debt issuance  costs                                                                                                    |       | 50,000                |       |
| Deposit                                                                                                                 |       | 180,301               |       |
| Total other  assets                                                                                                     |       | 662,736               |       |
|                                                                                                                    |       |                  |       |
| **Total Assets**                                                                                                        |       | $                     | 3,538,991  |   |
| ** **                                                                                                              |       |                  |       |
|                                                                                                                    |       |                  |       |
| **LIABILITIES  AND EQUITY**                                                                                             |       |                  |       |
| ** **                                                                                                              |       |                  |       |
| **Current Liabilities**                                                                                                 | ** ** | ** **            | ** ** |
| Accounts payable                                                                                                        |       | $                     | 153,670    |   |
|                                                                                                                    |       |                  |       |
| **Commitments and Contingencies**                                                                                       | ** ** | ** **            | ** ** |
|                                                                                                                    |       |                  |       |
| **Members’ Equity**                                                                                                | ** ** | ** **            | ** ** |
| Member contributions,  net of costs related to capital contributions, 3,500,000 units outstanding at  December 31, 2006 |       | 3,482,433             |       |
| Additional paid  in capital                                                                                             |       | 185,500               |       |
| Deficit  accumulated during development stage                                                                           |       | (282,612              | )          |
| Total members’  equity                                                                                             |       | 3,385,321             |       |
|                                                                                                                    |       |                  |       |
| **Total  Liabilities and Members’ Equity**                                                                         |       | $                     | 3,538,991  |   |

 

Notes to FinancialStatements are an integral part of this Statement.

68

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**BLACKHAWKBIOFUELS, LLC**

(A Development StageCompany)

 

Statements of Operations

 
| ** **                                      | ** ** | **Year Ended**   | ** ** | **Period Ended** | ** ** | **From Inception**                | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|----------------------------------------|------------|
| ** **                                      | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **(April 28, 2005) to** | ** ** |
| ** **                                      | ** ** | **2006**              | ** ** | **2005**              | ** ** | **December 31, 2006**        | ** ** |
|                                            |       |                  |       |                  |       |                                   |       |
| **Revenues**                                    |       | $                     | —     |                  | $          | —                                 |       | $ | — |   |
|                                            |       |                  |       |                  |       |                                   |       |
| **Operating  Expenses**                         | ** ** | ** **            | ** ** | ** **            |       |                                   |       |
| Professional fees                               |       | 177,841               |       | 4,000                 |       | 181,841                                |       |
| General and administrative                      |       | 223,527               |       | 645                   |       | 224,172                                |       |
| Total                                           |       | 401,368               |       | 4,645                 |       | 406,013                                |       |
| ** **                                      | ** ** | ** **            | ** ** | ** **            |       |                                   |       |
| **Operating  Loss**                             |       | (401,368              | )          | (4,645                | )          | (406,013                               | )          |
|                                            |       |                  |       |                  |       |                                   |       |
| **Other  Income**                               | ** ** | ** **            | ** ** | ** **            |       |                                   |       |
| Grant revenue                                   |       | 100,000               |       | 2,500                 |       | 102,500                                |       |
| Interest income                                 |       | 20,901                |       | —                |       | 20,901                                 |       |
| Total                                           |       | 120,901               |       | 2,500                 |       | 123,401                                |       |
|                                            |       |                  |       |                  |       |                                   |       |
| **Net  Loss**                                   |       | $                     | (280,467   | )                     | $          | (2,145                                 | )          | $ | (282,612 | ) |
| ** **                                      | ** ** | ** **            | ** ** | ** **            |       |                                   |       |
| **Weighted  Average Units Outstanding**         |       | 2,589,699             |       | —                |       | 1,541,990                              |       |
| ** **                                      | ** ** | ** **            | ** ** | ** **            |       |                                   |       |
| **Net Loss Per Unit, basic and  fully diluted** |       | $                     | (0.11      | )                     | $          | —                                 |       | $ | (0.18 | ) |

 

Notes to FinancialStatements are an integral part of this Statement.

69

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**BLACKHAWKBIOFUELS, LLC**

(A Development StageCompany)

 

Statement of Changes inMembers’ Equity

 
| ** **                                                           | ** ** | ** **        | ** ** | **Additional**   | ** ** | **Deficit Accumulated** | ** ** |
|----------------------------------------------------------------------|------------|-------------------|------------|------------------|------------|------------------------------|------------|
| ** **                                                           | ** ** | **Member**        | ** ** | **Paid in** | ** ** | **During**                   | ** ** |
| ** **                                                           | ** ** | **Contributions** | ** ** | **Capital**      | ** ** | **Development Stage**   | ** ** |
|                                                                 |       |              |       |             |       |                         |       |
| **Balance  - Inception, April 28, 2005**                             |       | $                 | —     |             | $          | —                       |       | $ | — |   |
|                                                                 |       |              |       |             |       |                         |       |
| Net loss                                                             |       | —            |       | —           |       | (2,145                       | )          |
|                                                                 |       |              |       |             |       |                         |       |
| **Balance  - December 31, 2005**                                     |       | —            |       | —           |       | (2,145                       | )          |
|                                                                 |       |              |       |             |       |                         |       |
| Capital contributions - 1,770,000 units, $1.00 per  unit, March 2006 |       | 1,770,000         |       | —           |       | —                       |       |
| Less units subscribed receivable                                     |       | (630,000          | )          |             |       |                         |       |
|                                                                 |       |              |       |             |       |                         |       |
| Capital contributions - 1,730,000 units, $1.00 per  unit, April 2006 |       | 1,730,000         |       | —           |       | —                       |       |
|                                                                 |       |              |       |             |       |                         |       |
| Collection of units subscribed receivable - April  2006              |       | 630,000           |       | —           |       | —                       |       |
|                                                                 |       |              |       |             |       |                         |       |
| Cost of raising capital                                              |       | (17,567           | )          | —           |       | —                       |       |
|                                                                 |       |              |       |             |       |                         |       |
| Compensation recognized from warrant issuance                        |       | —            |       | 185,500          |       | —                       |       |
|                                                                 |       |              |       |             |       |                         |       |
| Net loss for the year ending December 31, 2006                       |       | —            |       | —           |       | (280,467                     | )          |
|                                                                 |       |              |       |             |       |                         |       |
| **Balance - December 31, 2006**                                      |       | $                 | 3,482,433  |             | $          | 185,500                      |       | $ | (282,612 | ) |

 

Notes to FinancialStatements are an integral part of this Statement.

70

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**BLACKHAWKBIOFUELS, LLC**

(A Development StageCompany)

 

Statements of Cash Flows

 
| ** **                                                      | ** ** | **Year Ended**   | ** ** | **Period Ended** | ** ** | **From Inception**                 | ** ** |
|-----------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------------------------|------------|
| ** **                                                      | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **(April 28, 2005)**          | ** ** |
| ** **                                                      | ** ** | **2006**              | ** ** | **2005**              | ** ** | **to December 31, 2006** | ** ** |
|                                                            |       |                  |       |                  |       |                                    |       |
| **Cash  Flows from Operating Activities**                       | ** ** | ** **            | ** ** | ** **            | ** ** |                                    |       |
| Net loss                                                        |       | $                     | (280,467   | )                     | $          | (2,145                                  | )          | $ | (282,612 | ) |
| Adjustments to reconcile net loss to net cash from  operations: |       |                  |       |                  |       |                                    |       |
| Compensation recognized from warrant issuance                   |       | 185,500               |       | —                |       | 185,500                                 |       |
| Depreciation                                                    |       | 99                    |       | —                |       | 99                                      |       |
| Grant income                                                    |       | 500                   |       | (500                  | )          | —                                  |       |
| Change in assets and liabilities                                |       |                  |       |                  |       |                                    |       |
| Prepaid expenses                                                |       | (14,478               | )          | —                |       | (14,478                                 | )          |
| Accounts payable                                                |       | 31,247                |       | —                |       | 31,247                                  |       |
| Net cash used in operating activities                           |       | (77,599               | )          | (2,645                | )          | (80,244                                 | )          |
|                                                            |       |                  |       |                  |       |                                    |       |
| **Cash  Flows from Investing Activities**                       |       |                  |       |                  |       |                                    |       |
| Capital expenditures                                            |       | (2,892                | )          | —                |       | (2,892                                  | )          |
| Deposit for Construction                                        |       | (2,500,000            | )          | —                |       | (2,500,000                              | )          |
| Net cash used in investing activities                           |       | (2,502,892            | )          | —                |       | (2,502,892                              | )          |
|                                                            |       |                  |       |                  |       |                                    |       |
| **Cash  Flows from Financing Activities**                       |       |                  |       |                  |       |                                    |       |
| Payments for debt issuance costs                                |       | (50,637               | )          | —                |       | (50,637                                 | )          |
| Member contributions received                                   |       | 3,500,000             |       | —                |       | 3,500,000                               |       |
| Payments received from (paid to) prospective members            |       | (65,000               | )          | 65,000                |       | —                                  |       |
| Payments for cost of raising capital                            |       | (17,567               | )          | —                |       | (17,567                                 | )          |
| Payments for deferred offering costs                            |       | (310,012              | )          | —                |       | (310,012                                | )          |
| Net cash provided by financing activities                       |       | 3,056,784             |       | 65,000                |       | 3,121,784                               |       |
| ** **                                                      |       |                  |       |                  |       |                                    |       |
| **Net  Increase in Cash**                                       |       | 476,293               |       | 62,355                |       | 538,648                                 |       |
| ** **                                                      |       |                  |       |                  |       |                                    |       |
| **Cash –  Beginning of Period**                            |       | 62,355                |       | —                |       | —                                  |       |
| ** **                                                      |       |                  |       |                  |       |                                    |       |
| **Cash –  End of Period**                                  |       | $                     | 538,648    |                  | $          | 62,355                                  |       | $ | 538,648 |   |
|                                                            | ** ** | ** **            | ** ** | ** **            |       |                                    |       |
| **Supplemental  Disclosure of Noncash Financing Activities**    |       |                  |       |                  |       |                                    |       |
| Deferred offering costs included in accounts payable            |       | $                     | 122,423    |                  | $          | —                                  |       | $ | 122,423 |   |
|                                                            |       |                  |       |                  |       |                                    |       |
| Construction  deposit capitalized as construction in process    |       | $                     | 2,320,336  |                  | $          | —                                  |       | $ | 2,320,336 |   |

 

Notes to FinancialStatements are an integral part of this Statement.

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**BLACKHAWKBIOFUELS, LLC**

(A Development StageCompany)

Notes to FinancialStatements

December 31, 2006 and 2005

**1.  SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

*Nature of Business*

The Company, which anticipates its plant location to be in StephensonCounty, Illinois, was organized to fund and construct a 30 million gallonbiodiesel production facility.  As ofDecember 31, 2006, the Company is in the development stage with its efforts beingprincipally devoted to organizational activities and preliminary constructionof the plant.  The Company anticipatescompletion of the plant in summer of 2008.

## *Accounting Estimates*

Management uses estimatesand assumptions in preparing these financial statements in accordance withgenerally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assetsand liabilities, the disclosure of contingent assets and liabilities, and thereported revenues and expenses.  Actualresults could differ from those estimates.

Significant estimatesinclude the deferral of expenditures for offering costs, which are dependentupon successful financing and project development, as discussed below, and thefair value of the warrants issued to members of the board of managers.  It is at least reasonably possible that theseestimates may change in the near term.

## *Cash*

The Company maintains itsaccounts at one financial institution. At times throughout the year, the Company’s cash balances may exceedamounts insured by the Federal Deposit Insurance Corporation.

*Property and Equipment*

Propertyand equipment is stated at the lower of cost or estimated fair value.  Depreciation is provided over an estimateduseful life by use of the straight line depreciation method. Maintenance andrepairs are expensed as incurred; major improvements and betterments arecapitalized. The Company capitalizes construction costs until the assets areplaced in service.

The Company hasincurred substantial consulting, permitting, purchases of constructionequipment, and other pre-construction services related to building its plantfacilities, which are capitalized as construction in process.

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**BLACKHAWKBIOFUELS, LLC**

(A Development StageCompany)

Notes to FinancialStatements

December 31, 2006 and 2005

*Deferred Offering Costs*

The Company defers the costs incurred to raise equityfinancing until that financing occurs. At such time that the issuance of new equity occurs, these costs will benetted against the proceeds received or if the financing does not occur, theywill be expensed.

*Grants*

The Company recognizes grant proceeds as other incomefor reimbursement of expenses incurred upon complying with the conditions ofthe grant.  For reimbursements ofincremental expenses (expenses the Company otherwise would not have incurredhad it not been for the grant), the grant proceeds are recognized as areduction of the related expense.  Forreimbursements of capital expenditures, the grants are recognized as areduction of the basis of the asset upon complying with the conditions of thegrant.

*Debt Issuance Costs*

Debtissuance costs will be amortized over the term of the related debt by use ofthe effective interest method.

*Income Taxes*

TheCompany is treated as a partnership for federal and state income tax purposesand generally does not incur income taxes. Instead, its earnings and losses are included in the income tax returnsof the members.  Therefore, no provisionor liability for federal or state income taxes has been included in thesefinancial statements.

*Stock-Based Compensation*

During 2006, the Company adopted SFAS No. 123(revised 2004) (“SFAS No. 123R”), *Share-BasedPayment*, which addresses the accounting for stock-based paymenttransactions in which an enterprise receives employee services in exchange for(a) equity instruments of the enterprise or (b) liabilities that arebased on the fair value of the enterprise’s equity instruments or that may besettled by the issuance of such equity instruments. In 2005, the SECissued SAB No. 107, which provides supplemental implementation guidancefor SFAS No. 123R. SFAS No. 123R eliminates the ability to accountfor stock-based compensation transactions using the intrinsic value methodunder Accounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*,and instead generally requires that such transactions be accounted for using afair-value-based method. The Company uses the Black-Scholes-Merton (“BSM”)option-pricing model to determine the fair-value of stock-based awards.

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**BLACKHAWKBIOFUELS, LLC**

(A Development StageCompany)

Notes to FinancialStatements

December 31, 2006 and 2005

*Organizational and Start Up Costs*

The Company expenses all organizational and start upcosts as incurred.

*Fair Value of Financial Instruments*

The carrying value of all financial instruments, which consists ofcash, approximates their fair value.  TheCompany estimates that the fair value of all financial instruments as ofDecember 31, 2006 does not differ materially from the aggregate carryingvalues of the financial instruments recorded in the accompanying balancesheet.  The estimated fair value amountshave been determined by the Company using appropriate valuation methodologies.

*Advertising*

The Company expenses the costs of advertising asincurred.

*Recently Issued Accounting Pronouncements*

Management has reviewed recently issued, but not yeteffective, accounting pronouncements and does not expect the implementation ofthese pronouncements to have a significant effect on the Company’s financial statements.

*Development Stage Entity*

The Company was formed on April 28, 2005 to have anindefinite life.  The Company wasinitially capitalized by contributions from members, as further described inNote 2.

*Earnings Per Share*

Earnings per share are calculated on a basic and fullydiluted basis using the weighted average units outstanding during the period. Warrants,representing 650,000 units, are not considered in the fully diluted calculationsince they are antidilutive.

**2.  MEMBERS’ EQUITY**

The Company wascapitalized by 108 members contributing a total of $3,500,000 for 3,500,000units.  These contributions were pursuantto a private placement memorandum in which the Company offered a maximum of3,500,000 units at a cost of $1.00 per unit for a maximum of $3,500,000.  Each investor was required to purchase aminimum of 25,000 units for a minimum investment of $25,000 and had the optionto purchase additional units in increments of 2,500 units thereafter.  This offering was closed and the units wereissued on April 12, 2006.

As specified in the Company’s limited liabilitycompany agreement, the Company is authorized to issue additional units asneeded.  The Company has one class ofunits, which include certain transfer restrictions as specified in the limitedliability company agreement and pursuant to applicable tax and securitieslaws.  Each unit represents a pro rataownership interest in the Company’s profits, losses and distributions.

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**BLACKHAWKBIOFUELS, LLC**

(A Development StageCompany)

Notes to FinancialStatements

December 31, 2006 and 2005

The Company had filed Form SB-2 Registration Statementwith the Securities and Exchange Commission (SEC), which was declared effectiveDecember 15, 2006.  The Offering is for aminimum of 10,000,000 units and a maximum of 17,500,000 units for sale at $2.00per unit.  The minimum purchaserequirement is 12,500 units for a minimum investment of $25,000. To become amember, a 10% deposit is required at the time of subscription with these fundsbeing deposited in an escrow account.  Inaddition, a signed full recourse promissory note for the remaining 90% is alsodue at subscription.  As of March 30,2007, the Company has raised approximately $19,000,000 under thisoffering.  These funds will not beincluded in the financial statements until the Company has raised the minimumrequirement and has fulfilled the requirements to break escrow.

**3.  INCOMETAXES**

The differences between financial statement basis andtax basis of assets are as follows:
|                                                                              | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                   | ** ** | **2006**              | ** ** |
| Financial  statement basis of total assets                                   |       | $                     | 3,538,991  |   |
|                                                                         |       |                  |       |
| Start up and organizational costs expensed for  financial reporting purposes |       | 406,013               |       |
|                                                                         |       |                  |       |
| Income tax basis of  total assets                                            |       | $                     | 3,945,004  |   |

 

There were no differences between the financialstatement basis and tax basis of the Company’s liabilities.

**4. FINANCING**

InNovember 2006, the Company obtained a term sheet proposal from a financialinstitution to obtain long term financing for the construction of a 30 milliongallon biodiesel production facility. Under the terms of the proposal, thefinancial institution will provide a maximum construction loan of $25,000,000,subject to minimum total member equity contributions of $35,000,000. Theconstruction loan is available from the day of the formal loan closing untilthe earlier of 60 days post construction or the maturity date.  The construction period is defined by theterm sheet as sixteen months from the date of loan closing.  During the construction period, interestpayments are due quarterly at the 30-day LIBOR plus 350 basis points.  Upon the completion of construction and withappropriate certification of the plant operation, the total outstandingconstruction loan balance will be converted into a term loan providing amaximum of $25,000,000.  The term loanwill mature ten years from the conversion date of those facilities, with equalpayments of principal and interest due quarterly. At conversion of the loan upto 50% of the term loan is eligible for the variable base rate at 30-day LIBORplus 325 basis points, the remaining 50% of the term loan will be required tobe priced on fixed rates determined by adding 325 basis points to the Lender’sfunding costs.

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**BLACKHAWKBIOFUELS, LLC**

(A Development StageCompany)

Notes to FinancialStatements

December 31, 2006 and 2005

Inaddition, the term sheet proposal provides a maximum operating line of creditof $5,000,000, commencing upon completion of construction and with appropriatecertification of the plant operation. Interest payments will be due quarterlyuntil maturity of the note, which will be 364 days from the loan closing dateof those facilities.

**5. EQUITY-BASED COMPENSATION**

TheCompany has an equity-based compensation plan (the Plan) which provides for theissuance of warrants to members of the board of managers, for the purpose ofproviding services to facilitate the construction and planned future operationsof the plant.  Under the Plan, the rightto purchase the warrants will be exercisable at any time from and after thedate on which the plant commences operations and will continue for a period ofone year following such date, after which all such rights shall terminate.

The followingtable presents the weighted average assumptions used to estimate the fairvalues of the warrants granted to members of the board of managers in theperiods presented, using the BSM option-pricing formula: The risk-free interestrate for periods within the contractual life of the option is based on the U.S.Treasury yield curve in effect at the time of grant.  The expected life and expected volatility isbased on the average reported lives and volatilities of a representative sampleof five comparable companies in our industry sector.

 
| ** **                                                                  | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** | **Period from  Inception  (August 31,  2005) to  December 31,  2006** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| Risk-free  interest rate                                                    |       | 4.90                        | %          | —                      |       | 4.90                                                                                      | %          |
| Expected  volatility                                                        |       | 25.43                       | %          | —                      |       | 25.43                                                                                     | %          |
| Expected life  (in years)                                                   |       | 3.00                        |       | —                      |       | 3.00                                                                                      |       |
| Dividend yield                                                              |       | —                      |       | —                      |       | —                                                                                    |       |
| Weighted-average  estimated fair value of options granted during the period |       | $                           | 1.14       |                        | —     |                                                                                      | $          | 1.14 |   |
|                                                                             |            |                             |            |                             |            |                                                                                           |            |  |  |

 

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**BLACKHAWKBIOFUELS, LLC**

(A Development StageCompany)

Notes to FinancialStatements

December 31, 2006 and 2005

The followingtable summarizes the activity for outstanding warrants for members of the boardof managers:
| ** **                                           | ** ** | **Warrants Outstanding** | ** ** |
|------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                           | ** ** | **Number of  warrants**  | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-Average  Remaining  Contractual  Term  (in years)** | ** ** | **Aggregate  Intrinsic Value  (1)** | ** ** |
| Balance at  December 31, 2005                        |       | —                        |       | $ | — |   |   |   |   |   |
| Granted                                              |       | 650,000                       |       | $ | 1.00 |   |   |   |   |   |
| Exercised                                            |       | —                        |       | $ | — |   |   |   |   |   |
| Canceled/forfeited/expired                           |       | —                        |       | $ | — |   |   |   |   |   |
| Balance at  December 31, 2006                        |       | 650,000                       |       | $ | 1.00 |   | 2.5 |   | $ | 650,000 |   |
| Vested and exercisable as of December 31, 2006       |       |                          |       | $ | — |   |   |   | $ | — |   |
| Vested and  expected to vest as of December 31, 2006 |       | 650,000                       |       | $ | 1.00 |   | 2.5 |   | $ | 650,000 |   |

 

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(1)          The aggregate intrinsicvalue is calculated as approximately the difference between the weightedaverage exercise price of the underlying awards and the Company’s estimatedcurrent fair market value at December 31, 2006.

The Company recognized stock-based compensationexpense of approximately $185,500 during the year ending December 31, 2006 andfor the period from inception (April 28, 2005) to December 31, 2006 as a resultof the adoption of SFAS No. 123R. As of December 31, 2006, approximately$556,500 of total unrecognized compensation cost related to stock options isexpected to be recognized over a period of 2-3 years.  To the extent the forfeiture rate is differentthan we have anticipated, stock-based compensation related to these awards willbe different from our expectations.

**6.  GRANTS**

InOctober 2005, the Company was awarded a grant contract with the IllinoisSoybean Association for a maximum of $2,500. As of December 31, 2006, the Company has complied with the grantrequirements and has recognized $2,500 of grant income.

InFebruary 2006, the Company was awarded a $100,000 Value-Added Producer Grantfrom the United States Department of Agriculture.  The Company was required to match the grant fundingwith an amount equal to $100,000.

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**BLACKHAWKBIOFUELS, LLC**

(A Development StageCompany)

Notes to FinancialStatements

December 31, 2006 and 2005

Thematching funds was spent at a rate equal to or in advance of grant funds, withthe expenditure of matching funds not to occur until the date the grant began,which was February 2006.  The fundingperiod for the grant concluded on December 31, 2006.  The grant funds and matching funds was onlyused for the purposes and activities related to project development expenses,which included a business plan, financial forecasts and legal services. As ofDecember 31, 2006, the Company has complied with all requirements of the grantand received the full $100,000 which is recorded in grant income.

**7. COMMITMENTS AND CONTINGENCIES**

*Plant Construction*

Thetotal cost of the project, including the construction of the biodiesel plantand start-up expenses, is expected to approximate $62,000,000.  In April 2006, the Company entered into apreconstruction services agreement with an unrelated general contractor toprovide preliminary design, engineering, permitting and purchasing services forthe development and construction of the plant for approximately$2,500,000.  If the Company proceeds withthe construction of the biodiesel facility, the $2,500,000 shall be applied tothe final design-build agreement contract price, which is estimated to beapproximately $50,000,000.  If theCompany terminates the agreement, any remaining amounts above expenses incurredthrough the termination date, less a 15% restocking fee, will be refunded or ifcosts exceed $2,500,000, the contractor will bear the additional costs and theCompany will have no further obligation to the contractor.

TheCompany may terminate this agreement at any time by giving written notice.During the year ended, December 31, 2006, the Company paid the fee ofapproximately $2,500,000 and had incurred approximately $2,320,000 ofexpenditures under this contract, which are capitalized as construction inprocess at December 31, 2006.  Theremaining deposit amount of approximately $180,000 is recorded in other assetsas a deposit.

*Land Contracts*

InJune 2006, the Company entered into a contract with the Freeport Area EconomicDevelopment Foundation to have the option to purchase 23.14 acres of land inStephenson County, Illinois for $15,000 per surveyed acre until December 31,2006.  The contract was later amended tochange the expiration date to March 31, 2007. The Company will pay an amount of $825 on the first of each monthcommencing August 1, 2006, and each month thereafter in consideration for theoption to purchase the land.  Thesepayments will not be applied to the purchase price in the event this option isexercised.  Furthermore, a memorandum ofunderstanding was entered into to provide for certain conditions and actions ofboth parties upon the execution of the land option agreement.  As of December 31, 2006, the Company hasincurred approximately $4,125 under this option agreement.

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**BLACKHAWKBIOFUELS, LLC**

(A Development StageCompany)

Notes to FinancialStatements

December 31, 2006 and 2005

*Consulting Contracts*

InMay 2006, the Company entered into an agreement with an unrelated party forconsultation and contract negotiations. The contract required a payment of $10,000 at the time the contract wasexecuted.  A payment of $10,000 was madein December 2006, upon effectiveness of the proposed securities offering.  A payment of $10,000 was due upon thefinancial package receiving approval and is included in accounts payable as ofDecember 31, 2006, and a payment of $5,000 will be made upon commencement ofthe equity drive.  When constructioncommences, additional compensation will be made in the form of units in theamount of $25,000.  The consultant willalso receive 1% of any grant funds received by the Company, excluding anypossible funds received from the USDA VAPG and Energy grant programs.  Either party may terminate this contract uponfourteen days written advance notice.

InAugust 2006, the Company entered into a management and operational servicesagreement with a party related to the anticipated general contractor to providefor the overall management of the Company, including providing on-site generaland operations managers, acquiring feed stocks and the basic chemicalsnecessary for operation, performing administrative, sales and marketingfunctions, and other as needed services. The contract requires a monthly fee equal to $.0625 per gallon ofbiodiesel produced and an annual net income bonus of 6% of net income, asdetermined by the agreement.  The term ofthe agreement is five years after the end of the first month in which biodieselis produced for sale.  The agreement shallcontinue after the initial term unless and until one party gives written noticeof termination to the other of a proposed termination date at least 24 monthsin advance of a proposed termination date.

Theinitial term or any subsequent term may also be modified upon the mutualwritten consent of the parties.  Earlytermination may occur if certain conditions in the contract are not met.  In the case of early termination thebreaching party will be required to indemnify the other party for losses,claims and damages resulting from the termination.

InAugust 2006, the Company entered into an escrow agreement with a bank.  Under the terms of the escrow agreement, theescrow agent will receive compensation for its services equal to 15 basispoints (0.15%) of the yield on the escrowed funds.  The escrow agent shall also be reimbursed forreasonable out-of-pocket expenses.

InSeptember 2006, the Company entered into a Memorandum of Understanding with theFreeport Area Economic Development Foundation (FAEDF), an Illinoisnot-for-profit corporation, which sets forth the conditions and actions whichshall be taken by the parties for the construction of respective infrastructureitems and operation of the biodiesel facility. The parties intend to enter into an economic development agreement thatwill more fully set forth the terms, conditions and obligations of theagreement.

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**BLACKHAWKBIOFUELS, LLC**

(A Development StageCompany)

Notes to FinancialStatements

December 31, 2006 and 2005

**8. SUBSEQUENT EVENTS**

InFebruary 2007, the Company extended an existing agreement (see Note 7) with anunrelated party for the purpose of consultation, contract negotiations andmonitoring of construction phases of the plant. The contract required a payment of $5,000 at the time the contractrenewal was executed, a payment of $5,000 upon breaking escrow and also apayment of $15,000 is due on August 15 2007. When construction commences, additional compensation will be made in theform of units in the amount of $25,000. The consultant will also receive 1% of any grant funds received by theCompany, excluding any possible funds received from the USDA VAPG and Energygrant programs.  Either party mayterminate this contract upon fourteen days written advance notice.

DuringMarch 2007, the Company extended the original land option agreement for theintended plant site with an unrelated third party through June 30, 2007.  The Company may exercise this option at anytime before the maturity date.

DuringMarch 2007, the Company entered into a construction project labor agreementwith individual building trade unions to promote efficiency of constructionoperations and provide for peaceful settlement of labor disputes, as well as toset standard working conditions for the efficient prosecution for constructionwork of the plant.

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## **Item8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE.**

None.

### **Item8A. CONTROLS AND PROCEDURES.**

Our management, including Ronald Mapes, our Chair(principal executive officer) and Ronald Fluegel, our Treasurer (principalfinancial officer), have reviewed and evaluated the effectiveness of ourdisclosure controls and procedures (as defined in Rule 13a-15(e) under theSecurities Exchange Act of 1934, as amended) as of December 31, 2006.  Based upon this review and evaluation, theseofficers have concluded that our disclosure controls and procedures areeffective to ensure that information required to be disclosed in the reportsthat we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods required by the forms and rulesof the Securities and Exchange Commission; and to ensure that the informationrequired to be disclosed by an issuer in the reports that it files or submitsunder the Exchange Act is accumulated and communicated to our managementincluding our principal executive and principal financial officers, or personsperforming similar functions, as appropriate to allow timely decisionsregarding required disclosure.

Our management, including ourprincipal executive officer and principal financial officer, have reviewed andevaluated any changes in our internal control over financial reporting thatoccurred as of December 31, 2006 and there has been no change that hasmaterially affected or is reasonably likely to materially affect our internalcontrol over financial reporting.

### **Item8B. OTHER INFORMATION.**

None.

# **PART III**

## **Item9. DIRECTORS; EXECUTIVE OFFICERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION****16(A) OF THE EXCHANGEACT**

**Identification ofDirectors, Executive Officers and Significant Employees**

Our board of managers has the principal power andresponsibility to govern our business and affairs.  Our chief executive officer and otherofficers, who are elected or appointed by the board of managers, manage ouroperations.  Subject to limited powers toapprove amendments to our Amended and Restated Limited Liability CompanyAgreement proposed by our board of managers or to cause us to dissolve, ourmembers have virtually no role in our management.

We have a board of managers consisting of not lessthan nine managers to be elected by the members.  The number of managers is subject todetermination from time to time by the board of managers.  There is no maximum number of managersspecified by our Amended and Restated Limited Liability Company Agreement.  Managers are elected by the respectiveclasses of Units which are outstanding at any time.  There is no cumulative voting formanagers.  Currently, our board of managershas 13 managers who represent the Class A Units, the only class of Unitsoutstanding.

Our present managers were all elected as managers inMarch 2006 and their terms will expire in January 2008.  Thereafter, we expect that managers will beelected for three-year staggered terms. We may agree to give members

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or lenders who supplysignificant amounts of equity or debt capital to us the right to designatemanagers to serve on our board of managers.

Our managers have other business commitments that willcontinue to require most of their time and attention.  Our agreements with REG are intended toassist us in constructing our plant and with respect to all aspects of ouroperations.  Consequently, after ourequity offering is completed and the plant is constructed and operating, weexpect that the responsibilities of our managers for our operations will bereduced and their role will be limited to overall direction and policies.  We expect that those responsibilities willrequire one or two days per month and that our managers will have adequate timefor that purpose.

**Board of Managers**

The names, addresses, ages, positions with our companyand terms of our managers are as follows:
| **Name and  Address**                                        | ** ** | **Age**    | ** ** | **Position**                                                       | ** ** | **Term Expires** |
|--------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------------------|------------|------------------|
| ** **                                                   | ** ** | ** ** | ** ** | ** **                                                         | ** ** | ** **       |
| Ronald Mapes  9184 E. Binkley Rd.  Stockton, IL 61085        |       | 66         |       | Manager, Chair                                                     |       | January 2008     |
|                                                         |       |       |       |                                                               |       |             |
| Jon Rosenstiel  73 Route 73 South  Pearl City, IL 61062      |       | 43         |       | Manager, Vice Chair                                                |       | January 2008     |
|                                                         |       |       |       |                                                               |       |             |
| Ronald Fluegel  2398 N. Crossroads Road  Lena, IL 61048      |       | 47         |       | Manager, Treasurer                                                 |       | January 2008     |
|                                                         |       |       |       |                                                               |       |             |
| Quentin Davis  13779 W. White Oak Road  Forreston, IL 61030  |       | 53         |       | Manager, Secretary                                                 |       | January 2008     |
|                                                         |       |       |       |                                                               |       |             |
| Gary Bocker  10662 Illinois Route 64 W.  Polo, IL 61064      |       | 62         |       | Manager                                                            |       | January 2008     |
|                                                         |       |       |       |                                                               |       |             |
| Criss Davis  17092 Blackhawk Road  Shullsburg, WI 53586      |       | 47         |       | Manager and Vice President, Government and  Organizational Affairs |       | January 2008     |
|                                                         |       |       |       |                                                               |       |             |
| Dennis Hamilton  10664 E. Rush Town Road  Stockton, IL 61085 |       | 64         |       | Manager and Vice President, Strategic Development                  |       | January 2008     |
|                                                         |       |       |       |                                                               |       |             |
| Karl Lawfer  4874 S. Willow Road  Kent, IL 61044             |       | 41         |       | Manager and Vice President Industry Relations                      |       | January 2008     |
|                                                         |       |       |       |                                                               |       |             |
| David Shockey  6408 E. Shockey Road  Ridott, IL 61067        |       | 49         |       | Manager                                                            |       | January 2008     |
|                                                         |       |       |       |                                                               |       |             |
| Brad Smith  2946 Otter Creek Road  Milledgeville, IL 61051   |       | 34         |       | Manager and Vice President, Operations                             |       | January 2008     |

 

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| **Name and  Address**                                   | ** ** | **Age**    | ** ** | **Position**                                              | ** ** | **Term Expires** |
|---------------------------------------------------------|------------|------------|------------|-----------------------------------------------------------|------------|------------------|
| ** **                                              | ** ** | ** ** | ** ** | ** **                                                | ** ** | ** **       |
| Terry Sweitzer  423 N. Broad  Lanark, IL 61046          |       | 32         |       | Manager and Vice President, Risk Management               |       | January 2008     |
|                                                    |       |       |       |                                                      |       |             |
| Dennis Wilke  11745 Freeport Road  Durand, IL 61024     |       | 54         |       | Manager and Vice President, Transportation and  Logistics |       | January 2008     |
|                                                    |       |       |       |                                                      |       |             |
| Marvin Wurster  139 W. Maple Avenue  Stockton, IL 61085 |       | 62         |       | Manager and Vice President, Market Development            |       | January 2008     |

 

***Ronald Mapes***– Ron farms in a family grain and beef cattle operation near Stockton,Illinois.  Ron is also a partner inNorthwest Grain Inc. and attended the University of Wisconsin.  Ron serves on the Jo Daviess County Board(chair of the Economic Development Committee), is a trustee for StocktonTownship, and serves on the Mt. Carroll Mutual Insurance Company board.  A member of the Jo Daviess County Farm Bureauand Illinois Beef Association, Ron previously served on the Illinois SoybeanPromotion Board, United Soybean Board, and U.S. Meat Federation Board andExecutive Committee.  He is also pastpresident of the Jo Daviess County Fair.

***Jon Rosenstiel***– Jon operates a diversified grain and beef cattle operation near Pearl City,Illinois.  A graduate of Illinois StateUniversity with a BS in Ag Business, Jon also works full-time for StephensonService Company as Senior Sales Lead and Ridott location manager, overseeingkey agronomy accounts and managing the company’s seed division.  A member of the Stephenson County Farm BureauBoard of Directors (chairing the Education Task Force and serving on theGovernment & Local Affairs Task Force), Jon is a board member of theConservation & Ag Partners (CAP) Foundation.  He previously served as a board member andchairman of the Stephenson County SWCD and is an active member and treasurer ofthe Pearl City Lions Club.

***Ronald Fluegel***– Ron operates a grain and livestock farm near Lena, Illinois.  A graduate of Highland Community College, Ronhas participated in numerous leadership development programs including theNorthwestern University Kellogg Masters Marketing Program, the Illinois AgLeadership Program, and the Young Dairy Leaders Institute.  Ron currently serves on the board of theAdkins Energy Cooperative and remains active in the local and state HolsteinAssociations, where he once served as county president and state committeemember.  He is a past chairman of theStephenson County Extension Council, a former board member and officer of the StephensonCounty Farm Bureau, and a past member and president of the Le-Win Jaycees.  Ron is active in the Lena United MethodistChurch, Lena Lions Club, and is a licensed IHSA basketball official.  He also maintains a Mycogen seed dealershipand represents Bio Vet Animal Products.

***Quentin Davis***– A graduate of the University of Colorado with a BS in Civil/EnvironmentalEngineering, Quentin is retired after 29 years as a registered ProfessionalEngineer in Illinois, first as a project engineer followed by ownership andmanagement of a local firm.  He currentlyis serving in a part-time capacity as Projects Administrator for the non-profitFreeport Downtown Development Foundation after previously serving on itsboard.  He is also a member of the boardof the Freeport Area Economic Development Foundation.   Quentin is involved at Park HillsEvangelical Free Church, having served on the trustee board and buildingcommittee.  A United Way volunteer and agraduate of the Highland Community College Leadership Institute, Quentin servedas co-chair for the Forestville Valley School District Citizens AdvisoryBuilding Committee.

***Gary Bocker***– Gary started Bocker Grain Inc. in 1971 and currently operates the grainbusiness, a 7-unit trucking operation, a custom farming enterprise, anexcavating firm, and a 4,000 acre family farming operation near Polo,Illinois.  Gary started farming at age 18and built all of the grain storage systems in his business.  He served for many years on the board oftrustees of Forreston Grove Church and on the business council of CrossroadsCommunity Church in Freeport, where he is assisting in efforts to develop asatellite church in Polo.  Gary has also

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been very active with theRockford Rescue Mission and the Lions Club where he served as District Governorin 1999 & 2000 and currently is a Lions’ Foundation trustee.

***Criss Davis***– Criss resides near Shullsburg, Wisconsin where he maintains farmingoperations in Wisconsin and Illinois, including general partnerships in Swigart& Davis Farms and Monticello Pork LLC. Criss attended the University of Wisconsin-Platteville and WestfieldState College in Massachusetts.  A pastdirector of the Wisconsin Corn Growers Association and the National CornGrowers Association, Criss also served as past chairman of the United SoybeanBoard where he was a founding director of the Qualisoy Board.  He is also a member of the Wisconsin FarmBureau Federation.

***Dennis Hamilton***– Recently retired after nearly 20 years as CEO of Freeport Memorial Hospital,Dennis is currently serving as President Emeritus of Freeport Health Network(FHN).  Prior to his career in Freeport,Dennis served in administrative capacities at two Chicago-area hospitals.  An Air Force veteran, Dennis lives nearStockton, Illinois where he owns a tree farm. Dennis earned a BA in Economics from Loras College, Dubuque IA and hismaster’s degree in Health Care Administration from Trinity University, SanAntonio TX.  In addition to hisdistinguished career in medical administration, Dennis has served in leadershippositions as a board member of State Bank and US Bank in Freeport, FreeportArea Chamber of Commerce, Freeport Area Economic Development Foundation and theDistrict 145 Referendum Committee.  Hehas also been involved with the mayor’s Coalition for a Safe Community,Illinois Compensation Trust, Illinois Hospital Assn., American Hospital Assn.,American College of Health Care Executives and Rotary International.

***Karl Lawfer***– Karl operates a grain and livestock farming enterprise near Kent,Illinois.  A graduate of the Universityof Illinois with a BS in Animal Science, Karl has been involved in numerouscivic activities and organizations including his local school board andtownship boards.  He currently serves asDistrict 1 Director on the Illinois Soybean Association Board of Directors, andhe was previously honored as an Illinois Outstanding Young Farmer, Jo DaviessCounty Outstanding Conservation Farmer, and Midwest Dairymen’s Milk QualityAward recipient.  He is also a graduateof the prestigious Illinois Ag Leadership Foundation leadership developmentprogram.

***David Shockey***– David is a partner and attorney with the firm of Shockey & Cox LLC basedin Freeport, Illinois, where his practice deals principally with real estate,estate planning, and business planning. He has practiced in Freeport since 1983 and was associated withSchmelzle & Kroeger Law Offices until 2002 when Shockey & Cox wasformed.  Dave earned his B.S. inAgriculture and J.D. of Law from the University of Illinois inChampaign/Urbana.  He currently serves onthe Highland Community College Board of Trustees, is a member of the board ofthe Freeport Area Economic Development Foundation and is involved in numerouscivic organizations including Rotary, Freeport Art Museum, Jane Addamsland ParkFoundation, Dakota Opportunities in Education Foundation and First BaptistChurch.

***Brad Smith***– Brad resides near Milledgeville, Illinois. He is a partner in Smith Farming Corporation with his parents, wherethey raise corn and soybeans, finish feeder cattle and operate a Dekalb &Asgrow seed dealership.  A 1994 graduateof the University of Illinois with a BS in Agriculture, Brad is also a 2004graduate of the Illinois Ag Leadership Program. He currently serves as president of Blackhawk Farm Business FarmManagement (FBFM) Association and also serves on the Carroll County Farm Bureauboard of directors.  Brad and his wifeSara were recognized as winners of the Illinois Farm Bureau Young LeaderAchievement Award in 2004.

***Terry Sweitzer***– Terry graduated from Highland Community College in Freeport, Illinois (memberof the Phi Theta Kappa honors society) and the University ofWisconsin-Platteville with a BS in Agribusiness.  At UW/P, Terry belonged to the Farm Housefraternity and Alpha Zeta (Ag Council representative), and served as membershipofficer for the North American Marketing Association.  Terry began working with First Capitol Groupin 1996 as a hedge consultant, providing hedge consulting and educationalservices to producers and commercial clients. Terry resides in Lanark, Illinois where he serves as board chairman ofthe Cherry Grove Church of the Brethren where he is actively involved in anumber of committees.

***Dennis Wilke***– Dennis lives near Durand, Illinois, where he operates a cash grain farmingoperation and trucking business.  Agraduate of Durand HS, Dennis is supervisor for Harrison Township after servingas trustee for two years, and he also serves as a director of Durand StateBank.  He was a board member for DurandSchool

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District #322 from1985-93 and 1997-2001, serving as president from 1991-93.  Dennis also served on the Winnebago CountyFarm Bureau board of directors from 1980-86 where he was president from1983-86.  Dennis is a 1981 graduate ofthe Illinois Farm Bureau Agricultural Leaders of Tomorrow (ALOT) leadershipdevelopment program.

***Marvin Wurster***– Owner and operator of M&W Feed Service Ltd. and M&W Grain Ltd., Marvalso operates a seed dealership at his enterprise in Elizabeth, Illinois.  He resides in Stockton, Illinois.  Marv received his BS from the University ofWisconsin-Platteville and his MS and PhD from South Dakota State University inBrookings.  He served as a nutritionistwith Ralston Purina in St. Louis from 1969 until 1975, when he started M&WFeed Service.  He later expanded hisservices by opening M&W Grain in 1994. A member of the Council for Agriculture Science & Technology, Marvis a former president of the Stockton School Board.

**Committees of the Boardof Managers**

We presently have an executive committee and an auditcommittee of our board of managers.

Our executive committee exercises delegatedresponsibilities of the board of managers between regular meetings of the boardof managers and as otherwise directed by the board.  Ronald Mapes (Chair), Jon Rosenstiel, RonaldFluegel and Quentin Davis are serving as the initial members of our executivecommittee.

The audit committee selects our independent auditors,reviews the scope of audit and other services by the independent auditors,reviews our accounting principles and auditing practices and procedures to beused for our financial statements and reviews the results of those audits.  Marvin Wurster (Chair), Brad Smith and DennisWilke serve as the initial members of the audit committee.

Our board of managers has determined that we do nothave an audit committee financial expert serving on our audit committee.   We were organized and the development of ourcompany has been led by our current managers who did not include an individualwho would qualify as audit committee financial expert.  Our board of managers did not deem itappropriate to make any change in our board of managers during our developmentand financing phase.  Our next electionof managers will take place in January 2008. Our board of managers will determine prior to that election whether itis appropriate to add an audit committee financial expert to our board ofmanagers and audit committee at that time or whether to defer suchconsideration until after our plant is constructed, we have commencedcommercial operations and our development phase is completed.

We may establish additional committees in thefuture.  Additional committees mayinclude a compensation committee, a nominating committee and other committeesin the discretion of the board of managers.

**Chief Executiveand Chief Financial Officers**

We do not currently have a chief executive officer butexpect to have an experienced person to serve in that capacity prior to thecompletion of construction and commencement of operations of our plant.  Our chief executive officer would beresponsible for the administration of our company and oversight of plantmanagement.  We also may hire a chieffinancial officer to oversee our financial affairs, monitor the operation ofour plant from a financial standpoint and be responsible for financial reportsto our members and governmental authorities. We anticipate that the chief executive officer and chief financialofficer will be employees of our company and will report directly to our boardof managers.

**PlantManagement**

The members of our board of managers and executiveofficers do not have the background and expertise to manage the day to dayactivities of our plant as it commences operations.  We will require general management experiencein all areas of biodiesel production. The biodiesel industry is currently growing at a rapid pace and thedemand for management personnel with experience in operations and financialmanagement are in short supply. Therefore, we have signed an agreement with REG to provide general managementfor our plant and operations.

85

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REG has the resourcesnecessary to locate qualified personnel, assure that qualified personnel arealways in place and to provide for temporary replacements if needed.

We expect that the general manager supplied by REGwill begin employment 6 to 9 months before we complete construction of theplant.  We will also require experiencedoperations personnel for our plant.  Thiswill include a plant manager who will be primarily responsible for theday-to-day operations of our plant.  Thegeneral manager will begin employment before we complete construction of theplant.  The balance of our employees willalso be hired and trained before we commence operations of the plant.  REG will provide training for operationspersonnel and on-site, start-up assistance as we commence operations.

**Code of Ethics**

Our board of managers has adopted a code of ethicsthat applies to persons including our principal executive officer, ourprincipal financial officer, our principal accounting officer or controller,and persons performing similar functions. A copy of our code of ethics is filed with this report.

## **Item10. EXECUTIVE COMPENSATION**

**Executive Compensation**

Our executive officers who are also members of ourboard of managers serve on a part-time basis as required by theirresponsibilities to us.  We presentlyhave no other executive officers.  Nocash compensation has been paid by us to the persons serving as our executiveofficers, in their capacity as executive officers or as managers.  Warrants for the purchase of Class A Unitshave been  issued to our executiveofficers in their capacity as managers during the year ended December 31,2006.  See “Compensation of Managers”below for complete information regarding the issuance and terms of suchwarrants.

The followingtable set forth all compensation paid or payable by us during the last threeyears to our Chair who  presently servesas our chief executive officer.

**SummaryCompensation Table**
|                                                  | ** ** | ** ** | ** ** | ** **                   | ** ** | ** ** | ** ** | **Long Term Compensation**    | ** ** |
|--------------------------------------------------|------------|------------|------------|------------------------------|------------|------------|------------|-----------------------------------------|------------|
| ** **                                       | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | **Awards** | ** ** | **Payouts**                             | ** ** |
| **Name & Principal Position** | ** ** | **Year**   | ** ** | **Salary**                   | ** ** | **Bonus**  | ** ** | **Units Underlying Warrants** | ** ** | **LTIP Payouts** | ** ** |
| Ronald Mapes, Chair                              |       | 2006       |       | $                            | 0          |       | $          | 0                                       |       | $ | 50,000 |   |   | $ | 0 |   |
| (chief executive officer)                        |       | 2005       |       | $                            | 0          |       | $          | 0                                       |       | $ | 0 |   |   | $ | 0 |   |
|                                                  |       | 2004       |       | $                            | 0          |       | $          | 0                                       |       | $ | 0 |   |   | $ | 0 |   |

 

**Compensation of Managers**

Other than for per diem and expense reimbursement, wedo not pay our managers any cash compensation for acting in their capacity asmanagers, although we may do so in the future. Managers may be reimbursed for reasonable expenses incurred in carryingout their duties as managers, including mileage reimbursement for travel tomeetings.

On June 30, 2006, each member of our board of managerswas granted warrants for the purchase of 50,000 of our Class A Units, amountingto an aggregate of 650,000 Units.  Thewarrants are exercisable at an exercise price of $1.00 per Unit.  The warrants will become exercisable upon thecommencement of operations of our plant at its 30 mmgy capacity and will remainexercisable for a period of one year.  Wemay in the future issue Class A Units or Units of another class, or options oradditional warrants to purchase such Units, to managers as compensation.  We have not adopted any plan or policy forsuch compensation.  We may compensate ourmanagers for services provided in a capacity other than as a manager, providedthat the disinterested managers on our Board shall establish this compensation.

86

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**OutstandingEquity Awards at December 31, 2006**
| ** **   | ** ** | **Warrants**                                                                 | ** ** |
|--------------|------------|------------------------------------------------------------------------------|------------|
| ** **   | ** ** | **Number of Units Underlying Unexercised Warrants** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Name**     | ** ** | **Exercisable**                                                              | ** ** | **Unexercisable** | ** ** | **Percent of  Total** | ** ** | **Exercise Price  Per Unit** | ** ** | **Warrant  Expiration Date** | ** ** |
| Ronald Mapes |       | 0                                                                            |       | 50,000 |   | 7.7% |   | $ 1.00 |   | (1) |   |

 

----

(1)           The warrants will become exercisableupon the commencement of operations of our plant at its 30 mmgy capacity andwill remain exercisable for a period of one year.

## **Item11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDMEMBER MATTERS**

The following table sets forth certain informationregarding the beneficial ownership of our Units as of the date of this reportby each person or entity known by us to be the beneficial owner of more than 5%of our issued and outstanding Class A Units, each of our managers and executiveofficers, and all of our managers and executive officers as a group.
| Name and Address (if required)  of Beneficial Owner | ** ** | **Amount and Nature of  Beneficial Ownership  (1) (2) (3)** | ** ** | **Percentage of  Outstanding Units  (2)** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
|                                                                              |       |                                                                                      |       |                                                |       |
| Ronald Mapes                                                                      |       | 25,000                                                                                    |       | .71                                                 | %          |
| Jon Rosenstiel                                                                    |       | 25,000                                                                                    |       | .71                                                 | %          |
| Quentin Davis(5)                                                                  |       | 30,000                                                                                    |       | .86                                                 | %          |
| Ronald Fluegel                                                                    |       | 50,000                                                                                    |       | 1.43                                                | %          |
| Karl Lawfer                                                                       |       | 25,000                                                                                    |       | .71                                                 | %          |
| Terry Sweitzer                                                                    |       | 27,500                                                                                    |       | .79                                                 | %          |
| Brad Smith                                                                        |       | 30,000                                                                                    |       | .86                                                 | %          |
| Criss Davis(6)                                                                    |       | 50,000                                                                                    |       | 1.43                                                | %          |
| Gary Bocker(5)                                                                    |       | 100,000                                                                                   |       | 2.86                                                | %          |
| Marvin  Wurster(4)                                                                |       | 25,000                                                                                    |       | .71                                                 | %          |
| Dennis Wilke(4)                                                                   |       | 30,000                                                                                    |       | .86                                                 | %          |
| David Shockey                                                                     |       | 25,000                                                                                    |       | .71                                                 | %          |
| Dennis Hamilton                                                                   |       | 25,000                                                                                    |       | .71                                                 | %          |
| All managers and  executive officers as a group                                   |       | 467,500                                                                                   |       | 13.36                                               | %          |

 

----

(1)          Unless otherwise noted,each person or group identified possesses sole voting and investment power withrespect to the Units.

(2)          Units not outstandingbut deemed beneficially owned by virtue of the right of a person to acquirethem within 60 days are treated as outstanding only when determining the amountand percent owned by such person.

(3)          Does not include Unitsissuable upon the exercise of warrants issued to each manager for the purchaseof 50,000 Units at $1.00 per Unit because the Units will not be exercisableuntil the commencement of operations of our plant.

(4)          Includes Units owned injoint tenancy with spouse.

(5)          Includes Units owned bya trust over which he exercises sole voting and investment control.

(6)          IncludesUnits owned by a trust over which he exercises shared voting and investmentcontrol with his spouse.

87

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## **Item12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE**

Conflicts of interest exist and may arise in thefuture because of the relationships between and among our officers, managers,their affiliates and us, and the fact that we may from time to time enter intotransactions with our officers, managers and their affiliates.  Conflicts of interest could cause our officersand managers to put their own personal interests ahead of ours.  We cannot assure you that transactions weenter into with related parties will be on terms as favorable to us as thosethat could have been obtained in an arm’s-length transaction.  Disputes may arise concerning transactions weenter into with related parties, and it is possible that our officers andmanagers may receive more favorable treatment than an unaffiliated third partywould receive.

Although we intend to examine all conflicts that mayarise from time to time, we cannot assure you that conflicts of interest willnot harm our business or reduce the value of our Units.  We currently have not established any formalprocedures to evaluate or resolve any conflicts of interest.

Except as stated below, there have been no transactionsduring the past two years, and there are no proposed transactions, to which wewere or are to be a party, in which any manager, executive officer, nominee tobe a manager, holder of 5% or more of our outstanding Units or member of theimmediate family of any of the foregoing had or is to have a direct or indirectmaterial interest.

On June 30, 2006 our board of managers approvedexecution of an option agreement with the Freeport Area Economic DevelopmentFoundation, an Illinois not-for-profit corporation, giving us the option topurchase our proposed plant site in the Mill Race Industrial Park.  The option allows us to acquire that site ata purchase price of $347,100. The option was signed on June 20, 2006 andprovides for option payments of $825 per month commencing August 1, 2006.  Three of our managers, Quentin Davis, DennisHamilton and David Shockey, are also members of the board of directors of theFoundation.  As a consequence of thatrelationship, on October 27, 2006, our board of managers ratified the executionof the option agreement following disclosure by the three managers of theirrelationship with the Foundation and a finding by the remaining members of ourboard that the terms of the transaction were fair and reasonable to us.  The three conflicted managers abstained fromvoting on the ratification motion and the ratification was approved by aunanimous vote of the remaining members of our board of managers.  On November 27, 2006, our board of managersapproved an amendment to the option agreement extending the expiration date ofthe option from December 31, 2006 to March 31, 2007.  On March 15, 2007, the board approved afurther amendment to the option agreement extending the expiration date to June30, 2007.  In each case, the threeconflicted managers abstained from voting on the motions to approve theamendments and the amendments were approved by a unanimous vote of theremaining members of our board of managers voting on the motion.  Messrs Davis, Hamilton and Shockey have no personalfinancial interest in the Foundation or the transaction.  We anticipate that they will abstain on anyfuture action by our board of managers with respect to the option, includingany action to exercise the option or purchase the site.

The occupations of our managers and officers may giverise to transactions involving a conflict of interest.  Although it is unlikely that any of ourcurrent managers or officers, or their affiliates, would supply feedstock to ourbiodiesel plant or purchase biodiesel or glycerin from us, we may find itdesirable in the future to have representatives of our suppliers, customers orother key contractors serve on our board of managers.  In addition, members of our board of managersmay provide supplies or services to us on terms similar to those available fromdisinterested providers.

Our managers may be considered promoters with respectto our company.  Each manager haspurchased Units from us on the same terms as other members and has alsoreceived warrants for the purchase of 50,000 Units at an exercise price of$1.00 per Unit.  We do not consider anyconsultants or suppliers to us to be promoters.

We have not determined that any of our managers areindependent by reference to NASDAQ Rule 4200(a)(15) or would be independent byreference to NASDAQ audit committee standards.

## **Item13. EXHIBITS**

The following exhibits are filed as part of, or areincorporated by reference into, this report:

88

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| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                        |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                                   |
| 3.1         |       | Certificate of Formation.  (Incorporated by reference to Exhibit No. 3.1 to our Registration Statement  on Form SB-2, File No. 333-136353.)                                                                                                       |
|        |       |                                                                                                                                                                                                                                                   |
| 3.2         |       | Amended and Restated  Limited Liability Company Agreement. (Incorporated by reference to Exhibit  No. 3.2 to our Registration Statement on Form SB-2, File  No. 333-136353.)                                                                      |
|        |       |                                                                                                                                                                                                                                                   |
| 4.1         |       | Form of Subscription  Agreement. (Incorporated by reference to Appendix C to the Prospectus  contained in our Registration Statement on Form SB-2, File  No. 333-136353.)                                                                         |
|        |       |                                                                                                                                                                                                                                                   |
| 4.2         |       | Form of Promissory Note.  (Incorporated by reference to Appendix C to the Prospectus contained in our  Registration Statement on Form SB-2, File No. 333-136353.)                                                                                 |
|        |       |                                                                                                                                                                                                                                                   |
| 4.3         |       | Escrow Agreement between  the Registrant and State Bank dated December 4, 2006. (Incorporated by  reference to Exhibit No. 4.3 to our Registration Statement on Form SB-2, File  No. 333-136353.)                                                 |
|        |       |                                                                                                                                                                                                                                                   |
| 10.1        |       | Real Estate Option Agreement between the Registrant  and Freeport Area Economic Development Foundation dated June 20, 2006.  (Incorporated by reference to Exhibit No. 10.1 to our Registration Statement  on Form SB-2, File No. 333-136353.)    |
|        |       |                                                                                                                                                                                                                                                   |
| 10.2        |       | Agreement for Pre-Construction Services between the  Registrant and Renewable Energy Group, LLC dated April 26, 2006.  (Incorporated by reference to Exhibit No. 10.2 to our Registration Statement  on Form SB-2,  File No. 333-136353.)         |
|        |       |                                                                                                                                                                                                                                                   |
| 10.3        |       | Management and Operational Services Agreement  between the Registrant and West Central Cooperative dated August 4, 2006.  (Incorporated by reference to Exhibit No. 10.3 to our Registration Statement  on Form SB-2, File No. 333-136353.)       |
|        |       |                                                                                                                                                                                                                                                   |
| 10.4        |       | Agreement between the Registrant and Ebenezer Mgmt,  LLC dated February 2, 2006. (Incorporated by reference to Exhibit No. 10.4 to  our Registration Statement on Form SB-2, File No. 333-136353.)                                                |
|        |       |                                                                                                                                                                                                                                                   |
| 10.5        |       | Agreement between the Registrant and Ebenezer Mgmt,  LLC dated May 10, 2006. (Incorporated by reference to Exhibit No. 10.5 to our  Registration Statement on Form SB-2, File No. 333-136353.)                                                    |
|        |       |                                                                                                                                                                                                                                                   |
| 10.6        |       | Form of Warrant issued to members of the board of  managers and executive officers of the Registrant. (Incorporated by reference  to Exhibit No. 10.6 to our Registration Statement on Form SB-2, File  No. 333-136353.)                          |
|        |       |                                                                                                                                                                                                                                                   |
| 10.7        |       | Fee Agreement between the Registrant and Pacific  Southwest Realty Services dated August 18, 2006. (Incorporated by reference  to Exhibit No. 10.7 to our Registration Statement on Form SB-2, File  No. 333-136353.)                             |
|        |       |                                                                                                                                                                                                                                                   |
| 10.8        |       | Memorandum of Understanding between the Registrant  and Freeport Area Economic Development Foundation dated September 1, 2006.  (Incorporated by reference to Exhibit No. 10.8 to our Registration Statement  on Form SB-2, File No. 333-136353.) |
|        |       |                                                                                                                                                                                                                                                   |
| 10.9        |       | Consent to Assignment dated August 7, 2006 of  Agreement for Pre-Construction Services between the Registrant and Renewable  Energy Group, LLC dated April 26, 2006 to Renewable                                                                       |

 

89

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|        |   | Energy Group. Inc. (Incorporated by reference to  Exhibit No. 10.9 to our Registration Statement on Form SB-2, File  No. 333-136353.)                                                                                                                                                                                        |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                              |
| 10.10  |   | Consent to Assignment dated October 26, 2006 of  Management and Operational Services Agreement between the Registrant and West  Central Cooperative dated August 4, 2006 to Renewable Energy Group. Inc.  (Incorporated by reference to Exhibit No. 10.10 to our Registration Statement  on Form SB-2, File No. 333-136353.) |
|   |   |                                                                                                                                                                                                                                                                                                                              |
| 10.11  |   | Amendment to Real Estate Option Agreement between  the Registrant and Freeport Area Economic Development Foundation dated  November 27, 2006. (Incorporated by reference to Exhibit No. 10.11 to our  Registration Statement on Form SB-2, File No. 333-136353.)                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                              |
| 10.12  |   | Term Sheet Proposal of 1st Farm Credit Services to the Registrant  signed November 27, 2006. (Incorporated by reference to Exhibit No. 10.12 to  our Registration Statement on Form SB-2, File No. 333-136353.)                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                              |
| *10.13 |   | Agreement between the Registrant and Ebenezer Mgmt,  LLC dated February 15, 2007.                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                              |
| *10.14 |   | Construction Project Labor Agreement for Blackhawk  Biodiesel Plant in Freeport, Illinois between Weitz Industrial, LLC and the  Craft Local Unions Affiliated with the Northwestern Illinois Building and  Construction Trades Council dated March 16, 2007.                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                              |
| *10.15 |   | Second Amendment to Real Estate Option Agreement  between the Registrant and Freeport Area Economic Development Foundation dated  March 20, 2007.                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                              |
| *14.1  |   | Code of Ethics and Business Conduct.                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                              |
| *31.1  |   | Certificate pursuant to 17 CFR 240 15d-14(a).                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                              |
| *31.2  |   | Certificate pursuant to 17 CFR 240 15d-14(a).                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                              |
| *32.1  |   | Certificate pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                                                                                                   |

 

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*     Filed or amended herewith

## **Item14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**

The aggregate feesbilled by Boulay, Heutmaker, Zibell & Co. P.L.L.P., as our independentregistered public accountants for the year ended December 31, 2006 andyear ended December 31, 2005, are as follows: 
| Category      | ** ** | **Fiscal Year** | ** ** | **Fees** | ** ** |
|---------------|------------|----------------------|------------|----------|------------|
| Audit Fees(1) |       | 2006                 |       | $        | 60,513     |   |
|               |       | 2005                 |       | $        | 17,900     |   |

 

90

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----

(1)Audit fees include audit of our financial statements, reviews of ourquarterly financial statements, reviews of our registration statement filed onForm SB-2 and related amendments, other services related to SEC matters, anddiscussions with our management and audit committee.

Prior to engagement of the principal independent registered publicaccountants to perform audit services for the Company, the principal accountantwas pre-approved by our audit committee pursuant to Company policy requiringsuch approval.

91

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**SIGNATURES**

In accordance withSection 13 or 15(d) of the Exchange Act, the registrant caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.
|                     |   | BLACKHAWK BIOFUELS, LLC                                              |
|---------------------|--------|----------------------------------------------------------------------|
|                |   |                                                                 |
| Date: April 2, 2007 |   | /s/ RONALD MAPES                                                     |   |
|                |   | Ronald Mapes                                                         |
|                |   | Chair and Manager                                                    |
|                |   | (Principal Executive Officer)                                        |
|                |   |                                                                 |
|                |   |                                                                 |
| Date: April 2, 2007 |   | /s/ RONALD FLUEGEL                                                   |   |
|                |   | Ronald Fluegel                                                       |
|                |   | Treasurer and Manager (Principal Financial and   Accounting Officer) |

 

**POWER OF ATTORNEY**

Each person whose signature appears below herebyconstitutes and appoints Ronald Mapes, Jon Rosenstiel and Quentin Davis, andeach of them, such person’s true and lawful attorney-in-fact and agent, withfull power of substitution and resubstitution, for such person and in suchperson’s name, place and stead, in any and all capacities, to sign this AnnualReport on Form 10-KSB of Blackhawk Biofuels, LLC and any and all amendmentsthereto, and to file the same, with all exhibits thereto and other documents inconnection therewith, with the Securities and Exchange Commission, grantingunto said attorneys-in-fact and agents, and each of them and their substituteor substitutes, full power and authority to do and perform each and every actand thing requisite and necessary to be done in connection therewith, as fullyto all intents and purposes as such person might or could do in person, herebyratifying and confirming all that said attorneys-in-fact and agents, and eachof them and their substitute or substitutes, may lawfully do or cause to bedone by virtue hereof.

In accordance with the Exchange Act, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.
| Date: April 2, 2007 | /s/ RONALD MAPES                                                     |   |
|---------------------|----------------------------------------------------------------------|--------|
|                | Ronald Mapes                                                         |
|                | Chair and Manager                                                    |
|                | (Principal Executive Officer)                                        |
|                |                                                                 |
|                |                                                                 |
| Date: April 2, 2007 | /s/ RONALD FLUEGEL                                                   |   |
|                | Ronald Fluegel                                                       |
|                | Treasurer and Manager (Principal Financial and   Accounting Officer) |
|                |                                                                 |
|                |                                                                 |
| Date: April 2, 2007 | /s/ JON ROSENSTIEL                                                   |   |
|                | Jon Rosenstiel                                                       |
|                | Manager                                                              |

 

92

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| Date: April 2, 2007 | /s/ QUENTIN DAVIS   |   |
|---------------------|---------------------|--------|
|                | Quentin Davis       |
|                | Manager             |
|                |                |
|                |                |
| Date: April 2, 2007 | /s/ GARY BOCKER     |   |
|                | Gary Bocker         |
|                | Manager             |
|                |                |
|                |                |
| Date: April 2, 2007 | /s/ CRISS DAVIS     |   |
|                | Criss Davis         |
|                | Manager             |
|                |                |
|                |                |
| Date: April 2, 2007 | /s/ DENNIS HAMILTON |   |
|                | Dennis Hamilton     |
|                | Manager             |
|                |                |
|                |                |
| Date: April 2, 2007 | /s/ KARL LAWFER     |   |
|                | Karl Lawfer         |
|                | Manager             |
|                |                |
|                |                |
| Date: April 2, 2007 | /s/ DAVID SHOCKEY   |   |
|                | David Shockey       |
|                | Manager             |
|                |                |
|                |                |
| Date: April 2, 2007 | /s/ BRAD SMITH      |   |
|                | Brad Smith          |
|                | Manager             |
|                |                |
|                |                |
| Date: April 2, 2007 | /s/ TERRY SWEITZER  |   |
|                | Terry Sweitzer      |
|                | Manager             |
|                |                |
|                |                |
| Date: April 2, 2007 | /s/ DENNIS WILKE    |   |
|                | Dennis Wilke        |
|                | Manager             |
|                |                |
|                |                |
| Date: April 2, 2007 | /s/ MARVIN WURSTER  |   |
|                | Marvin Wurster      |
|                | Manager             |

 

**Supplemental information to beFurnished with Reports Filed Pursuant to Section 15(d) of the Exchange Act byNon-Reporting Issuers**

The registrant has notsent an annual report or proxy material to its security holders, If such reportor proxy material is sent to security holders subsequent to the filing of thisreport, copies of such material will be furnished to the Commission.

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**EXHIBIT INDEX**

The following exhibits are filed as part of, or areincorporated by reference into, this report:
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                     |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                                |
| 3.1         |       | Certificate of Formation. (Incorporated  by reference to Exhibit No. 3.1 to our Registration Statement on Form SB-2,  File No. 333-136353.)                                                                                                    |
|        |       |                                                                                                                                                                                                                                                |
| 3.2         |       | Amended and Restated  Limited Liability Company Agreement. (Incorporated by reference to  Exhibit No. 3.2 to our Registration Statement on Form SB-2, File  No. 333-136353.)                                                                   |
|        |       |                                                                                                                                                                                                                                                |
| 4.1         |       | Form of Subscription  Agreement. (Incorporated by reference to Appendix C to the Prospectus  contained in our Registration Statement on Form SB-2, File  No. 333-136353.)                                                                      |
|        |       |                                                                                                                                                                                                                                                |
| 4.2         |       | Form of Promissory Note. (Incorporated  by reference to Appendix C to the Prospectus contained in our Registration  Statement on Form SB-2, File No. 333-136353.)                                                                              |
|        |       |                                                                                                                                                                                                                                                |
| 4.3         |       | Escrow Agreement between  the Registrant and State Bank dated December 4, 2006. (Incorporated by  reference to Exhibit No. 4.3 to our Registration Statement on Form SB-2, File  No. 333-136353.)                                              |
|        |       |                                                                                                                                                                                                                                                |
| 10.1        |       | Real Estate Option Agreement between the Registrant  and Freeport Area Economic Development Foundation dated June 20, 2006.  (Incorporated by reference to Exhibit No. 10.1 to our Registration Statement  on Form SB-2, File No. 333-136353.) |
|        |       |                                                                                                                                                                                                                                                |
| 10.2        |       | Agreement for Pre-Construction Services between the  Registrant and Renewable Energy Group, LLC dated April 26, 2006.  (Incorporated by reference to Exhibit No. 10.2 to our Registration Statement  on Form SB-2, File No. 333-136353.)       |
|        |       |                                                                                                                                                                                                                                                |
| 10.3        |       | Management and Operational Services Agreement  between the Registrant and West Central Cooperative dated August 4, 2006.  (Incorporated by reference to Exhibit No. 10.3 to our Registration Statement  on Form SB-2, File No. 333-136353.)    |
|        |       |                                                                                                                                                                                                                                                |
| 10.4        |       | Agreement between the Registrant and Ebenezer Mgmt,  LLC dated February 2, 2006. (Incorporated by reference to Exhibit No. 10.4 to  our Registration Statement on Form SB-2, File No. 333-136353.)                                             |
|        |       |                                                                                                                                                                                                                                                |
| 10.5        |       | Agreement between the Registrant and Ebenezer Mgmt,  LLC dated May 10, 2006. (Incorporated by reference to Exhibit No. 10.5 to our  Registration Statement on Form SB-2, File No. 333-136353.)                                                 |
|        |       |                                                                                                                                                                                                                                                |
| 10.6        |       | Form of Warrant issued to members of the board of  managers and executive officers of the Registrant. (Incorporated by reference  to Exhibit No. 10.6 to our Registration Statement on Form SB-2, File  No. 333-136353.)                       |
|        |       |                                                                                                                                                                                                                                                |
| 10.7        |       | Fee Agreement between the Registrant and Pacific  Southwest Realty Services dated August 18, 2006. (Incorporated by reference  to Exhibit No. 10.7 to our Registration Statement on Form SB-2, File  No. 333-136353.)                          |
|        |       |                                                                                                                                                                                                                                                |
| 10.8        |       | Memorandum of Understanding between the Registrant  and Freeport Area Economic                                                                                                                                                                      |

 

94

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|        |   | Development Foundation dated September 1, 2006.  (Incorporated by reference to Exhibit No. 10.8 to our Registration Statement  on Form SB-2, File No. 333-136353.)                                                                                                                                                           |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                              |
| 10.9   |   | Consent to Assignment dated August 7, 2006 of  Agreement for Pre-Construction Services between the Registrant and Renewable  Energy Group, LLC dated April 26, 2006 to Renewable Energy Group. Inc.  (Incorporated by reference to Exhibit No. 10.9 to our Registration Statement  on Form SB-2, File No. 333-136353.)       |
|   |   |                                                                                                                                                                                                                                                                                                                              |
| 10.10  |   | Consent to Assignment dated October 26, 2006 of  Management and Operational Services Agreement between the Registrant and West  Central Cooperative dated August 4, 2006 to Renewable Energy Group. Inc.  (Incorporated by reference to Exhibit No. 10.10 to our Registration Statement  on Form SB-2, File No. 333-136353.) |
|   |   |                                                                                                                                                                                                                                                                                                                              |
| 10.11  |   | Amendment to Real Estate Option Agreement between  the Registrant and Freeport Area Economic Development Foundation dated November  27, 2006. (Incorporated by reference to Exhibit No. 10.11 to our Registration  Statement on Form SB-2, File No. 333-136353.)                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                              |
| 10.12  |   | Term Sheet Proposal of 1st Farm Credit Services to the Registrant  signed November 27, 2006. (Incorporated by reference to Exhibit No. 10.12 to  our Registration Statement on Form SB-2, File No. 333-136353.)                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                              |
| *10.13 |   | Agreement between the Registrant and Ebenezer Mgmt,  LLC dated February 15, 2007.                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                              |
| *10.14 |   | Construction Project Labor Agreement for Blackhawk  Biodiesel Plant in Freeport, Illinois between Weitz Industrial, LLC and the  Craft Local Unions Affiliated with the Northwestern Illinois Building and  Construction Trades Council dated March 16, 2007.                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                              |
| *10.15 |   | Second Amendment to Real Estate Option Agreement between  the Registrant and Freeport Area Economic Development Foundation dated March  20, 2007.                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                              |
| *14.1  |   | Code of Ethics and Business Conduct.                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                              |
| *31.1  |   | Certificate pursuant to 17 CFR 240 15d-14(a).                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                              |
| *31.2  |   | Certificate pursuant to 17 CFR 240 15d-14(a).                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                              |
| *32.1  |   | Certificate pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                                                                                                   |

 

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*     Filed or amended herewith

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