SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





**FORM
10-KSB**





**ý**
    **ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT
      OF 1934.**


For the
fiscal year ended December 31, 2004.





 ̈
    **TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.**


For the
transition period from _________________to___________________





Commission
file number: 333-60580








**HUSKER
AG, LLC**


(Name of
Small Business Issuer in its Charter)





Nebraska
    
    
    
    47-0836953(State
      or other jurisdiction ofIncorporation
      or organization)
    
    
    
    (IRS
      EmployerIdentification
      No.)54048
      Highway 20
      Plainview,
      Nebraska 68769
      (402)
      582-4446


(Address
and telephone number of Issuer's principal executive offices)





Securities
registered under Section 12(b) of the Exchange Act: **None**








Securities
registered under Section 12(g) of the Exchange Act:





Membership
Units ($1,000 per unit)


(Title of
class)





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





Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B and no disclosure will be contained, to the best of issuer's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.  ̈





State
issuer's revenues for its most recent fiscal year: $47,785,060





The
aggregate market value of the membership units held by non-affiliates of the
Company was $15,774,595, based on the book value of the membership units as of
December 31, 2004. Membership units held by each executive officer and director
of the Company have been excluded in that such persons may be deemed to be
affiliates of the Company. This determination of affiliate status is not
necessarily a conclusive determination for other purposes. As of March 29, 2005,
15,318 shares of the Company’s membership units were outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE: Portions of the Proxy Statement of the registrant for
the Annual Meeting of Members currently scheduled to be held June 6, 2005, are
incorporated in Part III of this report.





Transitional
Small Business Disclosure Format (check one): Yes  ̈ No **ý**













**HUSKER
AG, LLC**


**INDEX
TO 10-KSB FOR THE FISCAL YEAR**


**ENDED
DECEMBER 31, 2004**




PART
      IITEM
      1.
    DESCRIPTION
      OF BUSINESS
    1ITEM
      2.
    DESCRIPTION
      OF PROPERTY
    6ITEM
      3.
    LEGAL
      PROCEEDINGS
    6ITEM
      4.
    SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
    7PART
      IIITEM
      5.
    MARKET
      FOR REGISTRANT’S COMMON EQUITY AND RELATED MEMBERSHIP
    MATTERS
    7ITEM
      6.
    MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
    9ITEM
      7.
    FINANCIAL
      STATEMENTS
    21ITEM
      8.
    CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
    42ITEM
      8A.
    CONTROLS
      AND PROCEDURES
    42ITEM
      8B.
    OTHER
      INFORMATION
    42PART
      IIIITEM
      9.
    DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; SECTION 16(A)
      BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
    42ITEM
      10.
    EXECUTIVE
      COMPENSATION
    42ITEM
      11.
    SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
    42ITEM
      12.
    CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS
    42ITEM
      13.
    EXHIBITS
    42ITEM
      14.
    PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
    42SIGNATURES
    43




i





**PART
I**





**ITEM
1.  DESCRIPTION OF BUSINESS**





**(a)**  **BUSINESS
DEVELOPMENT**





Husker
Ag, LLC, a Nebraska limited liability company f/k/a Husker Ag Processing, LLC
(“Husker Ag” or the “Company”), was organized on August 29, 2000 to construct
and operate an ethanol plant to be located near Plainview, Nebraska. The Company
completed construction its plant and began operating in early 2003. Husker Ag is
managed by a thirteen member Board of Directors.





**(b)**  **BUSINESS
OF ISSUER**





Husker
Ag’s ethanol plant converts, on an annual basis, roughly nine million bushels of
corn into approximately 25 million gallons of ethanol per year. The ethanol
plant also produces over 160,000 tons annually of animal feed known as
distillers grain, which may be sold as distillers dried grain with solubles,
distillers modified wet grain and distillers wet grain. These types of
distillers grain are the principal co-products of the ethanol production
process. The Company currently produces and sells only modified wet distillers
grain.





**Description
of Dry Mill Process**





The
Company's ethanol plant produces ethanol by processing corn. The corn is
delivered, weighed and then unloaded in a receiving building. It is then
transported to a scalper to remove rocks and debris before it is conveyed to
storage bins. Thereafter, the corn is transported to a hammermill or grinder
where it is ground into flour and conveyed into a tank for processing. Water,
heat and enzymes are added to break down the starch in the ground corn. The
resulting slurry is heat sterilized and pumped to a tank where additional
enzymes are added to further breakdown the starch. Next, the mash is pumped into
fermenters, where other enzymes and yeast are added, to begin a batch
fermentation process. A distillation process divides the alcohol from the corn
beer. The alcohol, which exits the distillation process, is then further dried
using a molecular sieve. The resulting 200 proof alcohol is then pumped to farm
shift tanks and blended with five percent gasoline denaturant as it is pumped
into storage tanks.





Stillage
from the distillation process is then pumped into one of several centrifuges and
water from the centrifuges is evaporated into a thick syrup. The solids that
exit the centrifuge are called wet cake and may be conveyed to a dryer for
drying. Syrup may be added to the wet cake as it enters the dryer, where
moisture will be removed. This process produces distillers dried grain with
solubles, which may be used as animal feed. The wet grain and syrup may be
combined and sold as animal feed without drying or with only partial drying.





**Principal
Products**





Ethanol





Ethanol
is ethyl alcohol, a fuel component made primarily from corn and various other
grains, and can be used as: (a) an octane enhancer in fuels; (b) an oxygenated
fuel additive that can reduce ozone and carbon monoxide vehicle emissions; and
(c) a non-petroleum-based gasoline extender. Ethanol has important applications
and is used primarily as a high quality octane enhancer and an oxygenate capable
of reducing air pollution and improving automobile performance. The overwhelming
majority of all ethanol is used in its primary form for blending with unleaded
gasoline and other fuel products. As a fuel additive, the demand for ethanol is
derived from the overall demand for gasoline, as well as the competition of
ethanol versus competing oxygenate products and technologies.





Distillers
Grain





A
principal co-product of the ethanol production process is distillers grain, a
high protein, high-energy animal feed supplement primarily marketed to the dairy
and beef industry. Dry mill ethanol processing may create three forms of
distillers grain: distillers wet grain, distillers modified wet grain, and
distillers dried grain. Distillers wet grain is processed corn mash that
contains approximately 70% moisture. It has a shelf life of approximately 3
summer days (5 winter days). Distillers modified wet grain is similar except
that it has been dried to approximately 50% moisture. It has a slightly longer
shelf life of approximately two to three weeks and is often sold to nearby
markets. Dried distillers grain is corn mash that has been dried to 10%
moisture. It has an almost indefinite shelf life and may be sold and shipped to
any market regardless of its vicinity to an ethanol plant. The Company is
currently producing almost entirely distillers modified wet grain which is sold
to nearby markets. The Company could switch to dried distillers grain if there
were a significant change in local demand or a material change in market
conditions for the Company's current modified wet grain product.





1


****


**Customers**





Management
does not consider the Company’s business to be dependent on a single customer or
a few customers, and the loss of any of our customers would not have a material
adverse effect on our results. However, as of December 31, 2004, the Company had
receivables from Eco-Energy, Inc. ("Eco-Energy") amounting to 50% of the total
trade receivables. Eco-Energy is a re-seller of ethanol and therefore its
customers are indirectly a part of the Company's customer base. While the
Company acknowledges the potential credit risk from this large customer, the
Company currently has sufficient demand for its products and Management would
expect to find other customers should Eco-Energy's purchases from the Company
decrease for any reason. See the section entitled "Ethanol Industry - Ethanol"
below for information regarding the Company's agreement with
Eco-Energy.





**Ethanol
Industry**





Fuel
ethanol is sold primarily to oil refiners and gasoline distributors for blending
with gasoline. By extending fuel supplies, enhancing fuel octane, and serving as
an oxygenate for meeting environmental standards, fuel ethanol provides a
strategic benefit to marketers of gasoline. Fuel grade ethanol prices
traditionally have varied directly with the wholesale price of gasoline.
Historically, fuel grade ethanol prices have also reflected a premium due to the
oxygenate and octane enhancing properties of this motor fuel additive. However,
given the large amount of ethanol production coming on line in the foreseeable
future, ethanol prices may be driven down regardless of whether the wholesale
price of gasoline continues to rise. See sections below entitled "Competition"
and "Risk Factors" for further discussion of this issue.





The fuel
ethanol industry has been growing in terms of gallons produced at a compound
annual growth rate of 13.2% since 1980. This growth has been the result of
strong underlying economic demand and public support for fuel ethanol, which has
been driven by a variety of factors. One of the most important factors is the
strategic benefit gasoline suppliers receive from using fuel ethanol as an
octane enhancer and as an extender of gasoline supplies. Another significant
factor has been the environmental benefits of fuel ethanol as an oxygenate,
which has made it attractive to gasoline suppliers for marketing purposes and
for meeting environmental standards.





The
ethanol industry is very dependent on several governmental economic
incentives.





Federal
Ethanol Supports





In order
to address two distinct pollution problems, the Clean Air Act Amendments of 1990
created two programs mandating changes in fuel composition: the Federal Oxygen
Program aimed at carbon monoxide; and the Reformulated Gasoline Program targeted
at smog-forming emissions. These programs created a market for ethanol as an
oxygenate.





The
Federal Oxygen Program became effective November 1, 1992, and had the largest
effect on ethanol sales. This program requires the sale of oxygenated motor
fuels during the fall and winter months in certain major metropolitan areas to
reduce carbon monoxide pollution. The Reformulated Gasoline Program became
effective January 1, 1995. This program requires the sale of reformulated
gasoline in certain major urban areas to reduce pollutants, including those that
contribute to ground level ozone (i.e., smog).





The use
of ethanol as an oxygenate to blend with fuel to comply with federal mandates
also has been aided by federal tax policy.





2





Husker Ag
has received and expects to continue to receive benefits from economic
incentives to produce ethanol. The primary federal incentive is the exemption of
10% ethanol blends from 5.2 cents per gallon federal gas tax during 2004. This
exemption was reduced to 5.1 cents per gallon in 2005. Because the exemption
generally applies to 10% blends, it amounts to an effective subsidy of 51 cents
per gallon of pure ethanol (5.1 cents / 10%).





On
October 22, 2004, President Bush signed H.R. 4520 into law which contained the
Volumetric Ethanol Excise Tax Credit (“VEETC”) and amended the federal excise
tax structure effective as of January 1, 2005. The VEETC replaced the exemption
described above with a new volumetric ethanol excise tax credit of 51 cents per
gallon of ethanol blended through December 31, 2010. Unlike the previous
exemption described above, the tax credit under the VEETC is from general
revenues and does not impact the highway trust fund, and thus the VEETC removes
a disincentive for states to use ethanol.





Husker Ag
has also received the benefits of the federal small producer’s credit which is a
10¢ per gallon of ethanol tax credit available for ethanol produced at plants
with 30 million gallons or less of annual capacity. Ethanol producers that
qualify can deduct from their federal income tax 10¢ per gallon on the first 15
million gallons produced annually. The small producer tax credit is scheduled to
sunset December 31, 2007. The pass-through nature of Husker Ag’s partnership
taxation structure applies to any small producer tax credit received. The
credit, if any, received by Husker Ag, will be passed through to its members;
however, the amount of any such credit received by a member must also be
included in the gross income of the member, which could result in the taxation
of the amount of the credit distributed to the member. Moreover, the alternative
minimum tax may impact an individual member's ability to take advantage of this
credit.





The
Company has also received ethanol producer credits from the United States
Department of Agriculture Commodity Credit Corporation’s Bioenergy Program. Cash
payments to eligible ethanol producers are based on the increase in gallons of
ethanol produced from the prior federal fiscal year (which is an October 1 to
September 30 fiscal year) and the market price of corn at the end of each
quarter, with a more favorable calculation structure used for producers who
generate less than 65 million gallons of ethanol annually. In 2004, the Company
received approximately $2.2 million under this program. However, because the
Company operated at nearly full capacity during 2004, the Company expects to
receive federal ethanol producer credits of less than $100,000 during
2005.





State
Ethanol Supports





Husker Ag
has also received and anticipates continuing to receive economic benefits to
produce ethanol at the state level. The State of Nebraska established a
production tax credit of 18¢ per gallon of ethanol produced during a 96
consecutive month period by newly constructed ethanol facilities in production
prior to June 30, 2004. The tax credit is only available to offset Nebraska
motor fuels excise taxes. The tax credit is transferable and therefore Husker Ag
transfers credits received to a Nebraska gasoline retailer who then reimburses
Husker Ag for the face value of the credit amount less a handling fee. Under
current Nebraska law, no producer can receive tax credits for more than
15,625,000 gallons of ethanol produced in one year and no producer can receive
tax credits for more than 125 million gallons of ethanol produced over a
consecutive 96 month period. The minimum production level to qualify for credits
is 100,000 gallons of ethanol annually. Assuming Husker Ag continues to produce
at least 15,625,000 gallons of ethanol in a year, this producer tax credit could
result in payments of up to $2,812,500 to Husker Ag annually; subject to the
statutory maximum limit. The production incentive is scheduled to expire June
30, 2012. See "Risk Factors" below.





**Marketing
and Distribution Methods**





Ethanol





Husker Ag
has retained Eco-Energy Systems ("Eco-Energy") to sell and market its ethanol
through normal and established markets which includes local, regional and
national markets. On November 27, 2002, the Company entered into a Risk
Management and Ethanol Marketing Contract (the "Contract") with FCStone, LLC
("FCStone") and Eco-Energy pursuant to which FCStone provides Husker Ag with a
full service price risk management program and Eco-Energy purchases Husker Ag’s
entire output of ethanol in good faith at fair market rates for the term of the
Contract. In September 2004, this Contract was automatically extended for one
year on the same terms and conditions. In September 2005, it will again
automatically renew for one year unless Husker Ag provides notice of termination
prior to May 4, 2005.





3





Eco
Energy Systems markets and sells most of its ethanol throughout the United
States, primarily by rail. The target market area for the ethanol produced at
the plant includes local, regional and national markets. The local and regional
markets include the State of Nebraska, as well as markets in South Dakota,
Kansas, Missouri, Colorado, Minnesota, Illinois, Iowa, California, New Mexico
and Oregon.





The plant
was designed with rail facilities and connections to the Northeast Nebraska
Railway railroad system, which facilitates transporting the ethanol Husker Ag
produces to its national target markets. The Company ships its ethanol by rail
and by truck and determines which shipment method to utilize based on a review
and analysis of the current market conditions and any applicable environmental
regulatory limitations. The national target rail markets for the facility
include the Pacific Northwest, the Southern and Southwest markets, and
California.





Distillers
Grain





The dry
milling process that produces ethanol also produces distillers grain, which are
primarily used as a high protein animal feed. The price of distillers grain
generally varies with grain prices, so that increases in grain costs are
partially offset by increases in distillers grain prices. Husker Ag is currently
producing almost entirely distillers modified wet grain which is marketed and
sold primarily to feedlots, cattle feeders and dairies within a 120-mile radius
of the ethanol plant.





On
January 25, 2004, the Husker Ag Board of Directors adopted a Policy on Marketing
which, among other things, provides that commencing April 1, 2004, no employee
of Husker Ag, no member of the Board of Directors, and no person performing
marketing functions for the Company, shall haul or have any ownership interest
in trucks or entities which haul the Company's products. During 2004, Husker Ag
hired a full-time employee to undertake primary responsibility for the sale and
marketing of distillers grain.





**Competition**





Husker Ag
is in direct competition with numerous other ethanol producers, many of whom
have greater resources than the Company does. The Company expects that
additional ethanol producers will enter the market if the demand for ethanol
continues to increase. Husker Ag’s ethanol plant will compete with other ethanol
producers on the basis of price and, to a lesser extent, delivery service.





During
the last twenty years, ethanol production capacity in the United States has
grown from almost nothing to more than 3.6 billion gallons at the end of 2004.
Based upon information provided by the Renewable Fuels Association, 81 ethanol
plants located in 20 states produced a record 3.41 billion gallons of ethanol in
2004, which is more than double that produced in 2000. Twelve new ethanol plants
were completed in 2004. These new facilities, combined with expansions at
existing plants, increased the industry's annual production capacity by 500
million gallons. At the end of 2004, 16 plants and two major expansions were
under construction which would increase production capacity by approximately 750
million gallons per year. This increase in capacity is expected to continue in
the near future. Husker Ag cannot determine the effect of this type of an
increase upon the demand or price of ethanol, although such plants may compete
with the Company in the sale of ethanol and related products.





The
ethanol industry has grown to over 80 production facilities in the United
States. Industry authorities estimate that these facilities, along with
approximately 16 facilities and two major expansions currently under
construction, are capable of producing in excess of 4.3 billion gallons of
ethanol per year. The largest ethanol producers include Archer Daniels Midland,
Cargill, New Energy Corp., MGP Ingredients, Inc., VeraSun Energy Corporation and
Aventine Renewable Energy, Inc., all of which are capable of producing much more
ethanol than the Company expects to produce. In addition, there are several
regional entities recently formed, or in the process of formation, of a similar
size and with similar resources to those of Husker Ag.





4





In
addition to the plants under construction, plans to construct additional new
plants or to expand existing plants have been announced which would further
increase the ethanol production capacity of the Company's competitors. Husker Ag
is unable to determine the number and production capacity of plants that
ultimately may be constructed, the timing of such construction or the effect of
resulting production upon the demand for or price of the Company's ethanol.
However, it is possible that the plant-building boom will create a market glut
for ethanol thereby driving ethanol prices, along with the Company's revenues,
down due to the increasing supply.





**Raw
Materials and Other Inputs**





The
principal costs associated with the operation of the plant are employment costs,
utilities, purchase of corn inventory, purchase of enzymes, chemicals and other
materials necessary to operate the plant, interest on indebtedness and general
and administrative expenses. Increases in the price of corn and/or other inputs
such as natural gas may have a material impact on the profitability of the
Company.





Corn
Supply and Corn Prices





The
Husker Ag ethanol plant needs between approximately 8.5 and 9 million bushels of
corn per year or approximately 25,000 bushels per day as the feedstock for its
dry milling process. The grain supply for the ethanol plant is obtained
primarily from local markets. During the five year period between 1996 to 2000,
corn production averaged 94 million bushels annually in the five county area
surrounding the plant. Since 2000, the corn production has increased somewhat in
this five county area. Management believes that the average annual corn
production is this area should generally remain consistent in the near
future.





The price
and availability of corn are subject to significant fluctuations depending upon
a number of factors which affect commodity prices in general, including crop
conditions, weather, governmental programs and foreign purchases. Because the
market price of ethanol is not related to grain prices, ethanol producers are
generally not able to compensate for increases in the cost of grain feedstock
through adjustments in prices charged for their ethanol. Therefore, the
Company's profitability will be negatively impacted during periods of high grain
prices.





The
Company enters into option and futures contracts, which are designated as hedges
of specific volumes of corn expected to be used in the manufacturing process
once the plant is completed. The Company uses derivative financial instruments
to manage the exposure to price risk related to corn purchases. The Company
currently does not meet the requirements for cash flow hedging under FASB 133.
The Company has entered into a risk management agreement with FCStone, LLC
("FCStone"), a commodities risk management firm, under which FCStone provides
the Company with advice, assistance and price risk management program for corn
products necessary for the operation of the plant. As of December 31, 2004, the
Company had purchased approximately 2,250,000 bushels of corn inventory through
the purchase and sale of call and put options through FCStone. As of December
31, 2004, the Company had open long and short positions in option contracts. The
Company has recorded these positions at their fair value.





The
Company has also retained Husker Trading, Inc. to originate and acquire corn for
plant usage rather than hiring an on-site commodities manager. As part of its
responsibilities, Husker Trading, Inc. will ensure the consistent scheduling of
grain deliveries and to establish and fill forward contracts through grain
elevators and will coordinate grain deliveries between the railroad,
participating elevators and producers, as well as negotiate price protection
with hedging specialists.





In
February 2004, the Husker Ag Board of Directors adopted a Risk Management
Policy, which establishes a Risk Management Committee to serve as the liaison
between management and Board regarding forward pricing and risk management
issues. The Risk Management Committee is currently comprised of General Manager
Allen Sievertsen, and Board members Fredrick Knievel, Stanley Gyberg, Mike
Kinney and David Stearns. The Risk Management Policy also establishes position
limits and forward pricing guidelines with respect to risk exposure for corn,
distillers grain, denaturant and natural gas, as well as approval procedures for
management and the Risk Management Committee, approved commodity transaction
instruments, and reporting and accounting function verification requirements.





5


****


**Government
Regulation and Environmental Matters**





The
operations of Husker Ag are subject to various federal, state and local laws and
regulations with respect to environmental matters, including air and water
quality and underground fuel storage tanks. Husker Ag believes it is currently
in substantial compliance with environmental laws and regulations. Protection of
the environment requires Husker Ag to incur expenditures for equipment,
processes and permitting. If Husker Ag were found to have violated federal,
state or local environmental regulations, the Company could incur liability for
cleanup costs, damage claims from third parties and civil or criminal penalties
that could materially adversely affect its business.





The
Company filed an application with the Nebraska Department of Environmental
Quality (the “NDEQ”) for its National Pollutant Discharge Elimination System
(NPEDS) waste water permit on August 2, 2002, and received its waste water
permit from the NDEQ and such permit was effective February 26, 2003. As of
December 31, 2004, the NDEQ had not yet issued Husker Ag its Air Quality
Operating Permit. Therefore, the Company has been subject to its Construction
Permit which was issued in January 2002. That permit limits production at the
plant to 25,000,000 gallons of denatured alcohol.





Because
Husker Ag elected to purchase a thermal oxidizer rather than use a boiler, the
NDEQ determined that the Husker Ag Air Quality Operating Permit needed
modification to include the impact of the thermal oxidizer on the plant’s
dispersion modeling. The modified Air Quality Construction Permit also seeks to
increase the amount of ethanol production permitted. The Company has completed
stack testing as required under the NDEQ regulations and submitted the results
of such testing on October 24, 2003. The submission also included a request to
increase the ethanol production permitted under the permit to approximately
27,000,000 gallons of denatured alcohol per year. The Air Quality Operating
Permit was submitted to the NDEQ on March 3, 2004. Once the modified Air Quality
Construction Permit is issued, the Company believes the NDEQ will issue Husker
Ag its Air Quality Operating Permit. The Company currently anticipates that the
Air Quality Operating Permit will be issued by the NDEQ, but will require the
Company to surface the plant roadways. This paving is expected to commence
during the 2nd quarter of 2005.





For the
twelve months ending December 31, 2004, Husker Ag produced more than 25,000,000
gallons of denatured alcohol, which is more than its Construction Permit limit.
The Company informed the NDEQ of this and continues to work with the NDEQ on a
new permit. Husker Ag has been advised by the NDEQ that it may be receiving a
written warning due to exceeding the current construction air permit limitations
on production and grain receiving amounts during 2004. As of March 29, 2005, the
NDEQ was unable to provide an estimate, if any, of possible exposure costs.
During 2005, Husker Ag has been operating its plant at a rate of 25,000,000
gallons, or less, of denatured alcohol per year. In the meantime, the Company
has submitted a revised request asking for a limit of more than 32,000,000
gallons per year. The Company currently expects to have a resolution to its
permit application during the 2nd quarter of 2005.





**Employees**





As of
March 29, 2005, Husker Ag had a total of 33 employees managing and operating the
ethanol plant facility. Husker Ag is not subject to any collective bargaining
agreements and has not experienced any work stoppages. Husker Ag management
considers its relationship with its employees to be good.





**ITEM
2. DESCRIPTION OF PROPERTY**





The
Company’s corporate offices are located at the plant site in the administrative
building at 54048 Highway 20, Plainview, Nebraska 68769, phone number (402)
582-4446. The administrative building consists of approximately 5,700 square
feet. The Husker Ag ethanol plant is on 47 acres of real property located 31⁄2
miles east of Plainview, Nebraska between the railroad and US Highway 20 located
in Pierce County, Nebraska. The ethanol plant and plant site are subject to real
estate mortgage liens granted to the Company's primarily lender, Union Bank
& Trust Company, as described below under Management's Discussion and
Analysis of Financial Condition and Results of Operations. Husker Ag's
management believes the properties and facilities of Husker Ag are adequate to
support Husker Ag’s ethanol business operations.




**ITEM
3. LEGAL PROCEEDINGS**
 
 Husker Ag
has not been informed of any legal matters that would have a material adverse
effect on its financial condition, results of operation or cash flow.


6


****


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





No
matters were submitted to a vote of members during the quarterly period ended
December 31, 2004.





**PART
II**





**ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED MEMBERSHIP
MATTERS**





**(a)
Market Information**





There is
no established trading market for Husker Ag’s membership units. To maintain its
partnership tax status, members of Husker Ag may not trade the membership units
on an established securities market or readily trade the membership units on a
secondary market (or the substantial equivalent thereof). All transfers are
subject to a determination that the transfer will not cause Husker Ag to be
deemed a publicly traded partnership.





Husker Ag
restricted the ability of members to transfer membership units in its Operating
Agreement. To help ensure that a secondary market does not develop, Husker Ag’s
Operating Agreement prohibits transfers without the approval of its Board of
Directors. The Board of Directors will not approve transfers unless they fall
within “safe harbors” contained in the publicly-traded partnership rules under
the Tax Code (defined below), which include: (a) transfers by gift, (b) transfer
upon death of a member, (c) transfers between family members, and (d) transfers
that comply with the “qualifying matching service” requirements. Any transfers
of membership units in violation of the publicly traded partnership rules or
without the prior consent of the Board will be invalid.





Under the
Internal Revenue Code and the related rules and regulations (the “Tax Code”), a
matching service is qualified only if it meets a number of specified
requirements, including a requirement that the service only displays quotes that
do not commit any person to buy or sell an interest at the quoted price
(non-firm price quotes) or quotes that express an interest in acquiring an
interest without an accompanying price (nonbinding indications of interest) and
does not display quotes at which any person is committed to buy or sell an
interest at the quoted price (firm quotes). The Tax Code also imposes
restrictions on the timing of entering into binding agreements for the sale of
membership units and the closing of the sale of such units, and further requires
that the sum of the percentage interests transferred during the entity's tax
year (excluding private transfers) cannot exceed 10% of the total interests in
partnership capital or profits. The Husker Ag Trading System described below has
incorporated these Tax Code requirements into its rules and procedures required
to be followed by those using the system.





in
February 2003, Husker Ag retained the services of Variable Investment Advisors,
Inc. ("VIA"), a broker-dealer registered with the SEC and the National
Association of Securities Dealers, Inc. (“NASD”), pursuant to a Trading Services
Agreement, to administer and operate an electronically accessible alternative
trading system which conforms to state and federal securities laws and also
complies with the qualified matching service rules set forth in the Internal
Revenue Code.





In
September, 2003, Husker Ag was informed by VIA that the Nebraska Department of
Banking and Finance, Bureau of Securities (the "Nebraska Department") had
contacted VIA regarding the Internet based alternative trading system it
operated for the Company. Although VIA was registered as a restricted
broker-dealer with the Securities and Exchange Commission (“SEC”) and the
National Association of Securities Dealers, Inc. (“NASD”), the Nebraska
Department stated that it believed VIA should be registered as a full-service
broker-dealer rather than a restricted broker-dealer. As of the end of June
2004, VIA had still not received approval from the Nebraska Department, and on
June 29, 2004, the Husker Ag Board of Directors authorized the termination of
the Trading Service Agreement entered into February 17, 2003, with VIA. This
decision was made in light of the extended time during which the VIA trading
system had not been operable due to regulatory issues regarding VIA
broker-dealer registration raised by the Nebraska Department.





7





The
Company had been reviewing other alternatives to the VIA trading system which
comply with applicable laws and IRS regulations, and on October 15, 2004,
received approval from the Nebraska Department to operate its own trading system
(the "Trading System") limited to trading in membership units of Husker Ag. As a
result of this approval, the Company commenced operation of its Trading System
on December 1, 2004. The Trading System will operate on a trimester basis
commencing December 1, April 1 and September 1 of each year. In accordance with
Section 10.9(b) of the Husker Ag Operating Agreement, the Husker Ag Board has
established the trimester period as an "interim transfer period" with respect to
transfers effected through the Trading System.





The
Trading System is intended to match a list of interested buyers with a list of
interested sellers, along with their non-firm price quotes. The Trading System
will not automatically effect matches between potential sellers and buyers and
it is the sole responsibility of sellers and buyers to contact each other to
make a determination as to whether an agreement to transfer Husker Ag membership
units may be reached. There are detailed timelines that must be followed under
the Trading System Rules and Procedures with respect to offers and sales of
membership units. All transactions must comply with the Husker Ag Trading
Systems Rules and Procedures, the Husker Ag Operating Agreement, and are subject
to approval by the Husker Ag Board of Directors.





The
Husker Ag Trading System has been designed to comply with federal tax laws and
IRS regulations establishing a "qualified matching service," as well as state
and federal securities laws. As a result, transfers of Husker Ag membership
units are strictly regulated, and the Nebraska Department's approval is based on
representations made to the Nebraska Department concerning the operation of the
Trading System, including the Husker Ag Trading System Rules and Procedures. The
Husker Ag Trading System Rules and Procedures are filed as an exhibit to this
Form 10-KSB, and are also available on the Husker Ag website, www.huskerag.com.
The history of all completed transactions under the Trading System is also
available on this website.





The
Husker Ag Board of Directors has adopted a policy that the Trading System is
intended to be the exclusive method of trading membership units for value in
transactions which would otherwise be applied against the Trading System's 10%
maximum annual limitation, except in extraordinary circumstances as determined
by the Board in its sole discretion. Transfers such as bona fide gifts and
transfers upon death which are not included in the 10% annual maximum limitation
are not included in the policy.





**(b)
Holders**





As of
March 29, 2005, there were approximately 550 unit holders of the Company’s
membership units determined by an examination of the Company’s transfer
book.





**(c)
Distributions**





Effective
September 17, 2003, the Husker Ag Board of Directors adopted the following
policy with respect to the announcement of any future distributions to be made
by Husker Ag to its members, in order to provide members, and any persons
considering the purchase of Husker Ag membership units, adequate prior notice of
such distributions:





The
Company will make a public announcement of any distribution to members which has
been approved by the Husker Ag Board of Directors within the 60 day period prior
to the commencement of the calendar trimester in which the record date for the
distribution would occur. The calendar trimester commencement dates are December
1, April 1, and September 1, and the announcement by Husker Ag would include
both the future record date for the distribution and the amount per membership
unit of such distribution.





The
Company has declared and paid the following distributions since its inception
through December 31, 2004:





**Record**
      **Date**
    
    **Approximate**
      **Date
      Paid**
    
    **Amount**
      **Per
      Unit**January
      5, 2004
    
    
    February
      2, 2004
    
    $
    150.00May
      7, 2004
    
    
    June
      1, 2004
    
    $
    200.00September
      10, 2004
    
    
    September
      15, 2004
    
    $
    150.00November
      30, 2004
    
    
    January
      7, 2005
    
    $
    100.00







8





The
Company’s former lender, Stearns Bank, N.A., ("Stearns Bank") approved each of
these distributions as required under the Company’s then existing loan
agreements with Stearns Bank.





Any
distributions are payable at the discretion of the Husker Ag Board of Directors,
subject to the provisions of the Nebraska Limited Liability Company Act, and the
Husker Ag Operating Agreement. The Board of Directors has no obligation to
distribute profits, if any, to members, and there can be no assurance as to the
ability of Husker Ag to declare or pay distributions in the future. In addition,
the terms of the permanent debt financing agreements entered into by Husker Ag
with Union Bank and Trust Company ("Union Bank") place certain restrictions on
the Company's ability to makes distributions.





First,
the Company must be in compliance with all of its loan convenants with Union
Bank prior to making any distributions in the future. In addition, any
distributions in excess of 35% of the Company's net income require prior
approval from Union Bank.





**Securities
Authorized for Issuance under Equity Compensation Plans**





Husker Ag
currently has no equity compensation plan.





**Recent
Sales of Unregistered Securities; Use of Proceeds from Unregistered
Securities**





Husker Ag
had no unregistered sales of securities during the past three fiscal
years.





**Purchases
of Equity Securities by Husker Ag**





None.





**ITEM
6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS**





**Forward-Looking
Statements**





*Husker
Ag and its representatives may from time to time make written or oral
forward-looking statements, including statements made in this report, that
represent Husker Ag's expectations or beliefs concerning future events,
including statements regarding future sales, future profits and other results of
operations, the continuation of historical trends, the sufficiency of cash
balances and cash generated from operating and financing activities for Husker
Ag’s future liquidity and capital resource needs, and the effects of any
regulatory changes. Such statements are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Husker Ag
cautions you that any forward-looking statements made by Husker Ag in this
report, in other reports filed by Husker Ag with the Securities and Exchange
Commission or in other announcements by Husker Ag are qualified by certain risks
and other important factors that could cause actual results to differ materially
from those in the forward-looking statements. Such risks and factors include,
but are not limited to, the risk factors set forth in the section below entitled
“RISK FACTORS”.*





The
Company commenced operations of its ethanol plant in March 2003, and became
fully operational by the end of March 2003. However, it did not begin operating
at name plate capacity until the 2 nd quarter
of 2003. Accordingly, the Company's income, production and sales data for 2003
represents less than a full year of operations, and any comparisons between
fiscal year 2003 and fiscal year 2004 should be reviewed with this important
distinction in mind.





**Liquidity
And Capital Resources**





As of
December 31, 2004, the Company had current assets of $14,464,715, including cash
and cash equivalents of $11,693,097 and the Company had total assets of
$42,307,406. As of December 31, 2004, the Company had current liabilities
totaling $6,921,764. As of December 31, 2004, the Company's ratio of current
assets to current liabilities was 2.09 to one, compared to 2.14 as of December
31, 2003.





9





As of
December 31, 2004, the Company had total member’s equity of $21,419,666, or
$1,398.33 per unit, compared to total member's equity of $18,544,419, or
$1,210.63 per unit, as of December 31, 2003.





Cash
Flow from Operating Activities . The
operating activities of Husker Ag for the year ended December 31, 2004,
generated $15,165,047 of net cash flow, which included energy production credits
from state and federal programs, as discussed below. The net cash from operating
activities primarily includes net income from operations before depreciation and
amortization of $12,038,776.





Cash
Flow from Investing Activities . The
Company used $651,001 of cash for investing activities for the year ended
December 31, 2004, all of which was used to purchase property and
equipment.





Cash
Flow from Financing Activities . Cash
used for financing activities for the year ended December 31, 2004, totaled
$11,827,550, consisting primarily of distributions paid to members ($7,659,000)
and payments on the construction loan and other long-term debt including debt
origination costs ($4,168,550).





Prior to
February 23, 2005, the senior and primary lender for Husker Ag was Stearns Bank,
N.A.., St. Cloud, Minnesota ("Stearns Bank"). The Company financed the
construction of its ethanol plant through Stearns Bank. From October 3, 2002
through December 31, 2003, the Company borrowed a total of $19,827,860 from
Stearns Bank under its construction loan. On January 20, 2004, the Company
converted its construction loan into three permanent loans. In June 2004, the
Company paid off the smallest of the three loans (original principal amount of
$1,505,900).




On
February 22, 2005, the Company signed a Commercial Loan Agreement with Union
Bank and Trust Company, Lincoln, Nebraska ("Union Bank") and Midwest Bank
National Association, Plainview, Nebraska ("Midwest Bank"), whereby Union Bank
and Midwest Bank agreed to loan Husker Ag the funds necessary to refinance the
Company's outstanding obligations with Stearns Bank and to provide the Company
with a revolving line of credit. On February 23, 2005, Husker Ag used the
proceeds from its new loan with Union Bank, along with approximately $5,793,226
of its cash reserves, to pay off its obligation to Stearns Bank in full. The
total payoff was approximately $15,793,226 which included a prepayment penalty
of $309,616.




Union
Bank and Midwest Bank made the following loans to Husker Ag on February 23,
2005, pursuant to the Commercial Loan Agreement and the resultant promissory
notes (collectively the "New Loans"):




1.  Union
Bank - single advance term loan in the amount of $10,000,000. This term note is
amortized over a seven year period with a final maturity on February 22, 2012.
This note is payable in equal monthly installments of $119,050 plus interest.
The interest rate on this note is fixed at 6.20% for the first five years.
Thereafter, the interest rate will be the 2-year Treasury Constant Maturity Rate
plus 3.00%, adjusted every two years.




2.  Midwest
Bank - multiple advance revolving line of credit loan with maximum borrowings of
$5,000,000. Interest is due monthly on this revolving line of credit and
principal is due annually. This note will accrue interest at the Wall Street
Journal Prime Rate plus 0.75% adjusted monthly (the WSJ Prime Rate was 5.50% at
March 1, 2005, with a resultant interest rate of 6.25% through March 31, 2005).
Husker Ag intends to utilize this line of credit when needed for operating
purposes. As of March 29, 2005, the Company had not borrowed any money from
Midwest Bank pursuant to this line of credit.




The New
Loans are secured by a first mortgage on the Company's real estate and plant, as
well as a first security interest on all accounts receivable, inventory,
equipment, fixtures, and on all personal property and general intangibles. The
Commercial Loan Agreement also required Husker Ag to pay loan fees and related
expenses of not more than $45,000. The term loan with Union Bank is subject to a
3% prepayment penalty if it is refinanced with another lender. Otherwise, the
Company may pay off either or both of the New Loans without penalty.




10





The
Commercial Loan Agreement requires lender approval prior to making distributions
to Husker Ag members in excess of 35% of the Company's net income determined on
both a year-to-date and annual basis. Distributions may be made up to this 35%
limitation without lender approval so long as Husker Ag complies with certain
conditions including compliance with all financial loan convenants determined
after giving effect to such distribution. In addition, Husker Ag must obtain
prior approval from both Union Bank and Midwest Bank for any capital
improvements in excess of $1,050,000. The Commercial Loan Agreement also imposes
a number of other covenants, stating that Husker Ag must maintain: (i) a minimum
tangible net worth of $20,500,000; (ii) working capital of not less than
$2,500,000; and (iii) a debt coverage ratio of 1.2:1 measured at the end of each
year (ratio is defined as net income plus depreciation plus interest on term
debt divided by principal plus interest on term debt).




Taking
into account the Company's refinancing with Union Bank on February 22, 2005, the
future annual maturities of all long-term debt of Husker Ag by fiscal year are
as follows (as of February 28, 2005):


2005:
    $1,222,755
      (includes scheduled payments from 3/22/05 through
  12/31/05)2006:
    1,459,6792007:
    1,460,9862008:
    1,462,3482009:
    1,463,7672010
      and thereafter:
    $3,223,362
 Management
believes that its cash reserves and cash from operations are adequate to meet
its operational expenses and short and long-term debt repayment obligations.





**Results
of Operations for the years ended December 31, 2004 and
2003**





Husker Ag
completed construction of its ethanol plant and commenced the production process
for the ethanol plant and began grinding corn on March 4, 2003. The Company
began operating at full capacity during the second quarter of 2003. Accordingly,
the Company's income, production and sales data for the year ended December 31,
2003 does not represent a full year of operations; and any comparisons between
fiscal year 2003 and fiscal year 2004, should be reviewed with this important
distinction in mind.





The
following table shows sales and revenues, cost of sales, gain or loss on
options, operating expenses and other items as a percentage of total sales and
revenues as derived from the Company’s Statements of Operations for the years
ended December 31, 2004 and 2003. This table should be read in conjunction with
the Company's financial statements and accompanying notes under Item 7 of this
Form 10-KSB:




2004
    
    2003Sales
      and revenues
    
    $
    47,785,060
    
    
    100.0
    %
    $
    34,337,034
    
    
    100.0
    %Cost
      of sales
    
    
    34,190,792
    
    
    71.5
    %
    
    24,715,318
    
    
    72.0
    %Gain
      (loss) on options
    
    
    (1,612,429
    )
    
    (3.4
    %)
    
    159,238
    
    
    .5
    %Gross
      profit
    
    
    11,981,839
    
    
    25.1
    %
    
    9,780,954
    
    
    28.5
    %Selling,
      general andadministrative
      expenses
    
    
    1,571,628
    
    
    3.3
    %
    
    1,098,188
    
    
    3.2
    %Operating
      income
    
    
    10,410,211
    
    
    21.8
    %
    
    8,682,766
    
    
    25.3
    %Interest
      expense
    
    
    (1,010,846
    )
    
    2.1
    %
    
    (724,001
    )
    
    2.1
    %Interest
      and other income
    
    
    368,982
    
    
    .7
    %
    
    37,378
    
    
    0.1
    %Net
      income
    
    $
    9,768,347
    
    
    20.4
    %
    $
    7,996,143
    
    
    23.3
    %







11





Net
Sales





The
Company’s net sales include ethanol sales, distillers grain sales and energy
production credits. For the years ended December 31, 2004 and 2003, ethanol
sales comprised 74.2% and 64.5%, respectively, of total net sales. Distillers
grain sales comprised 15.3% and 14.0% of the Company’s total net sales for its
2004 and 2003 fiscal years, respectively; while federal and state energy
production credits make up the remaining 10.5% and 21.5% of the Company’s total
net sales for 2004 and 2003, respectively. If energy production credits are
excluded, ethanol sales represents 82.9% and 82.2%, and distillers grain sales
represent 17.1% and 17.8%, of the total revenue of the Company from the sales of
its products for the years ending December 31, 2004 and 2003.





Energy
Production Credits





Net sales
include $5,013,391 and $7,368,737 of energy production credits for the years
ended December 31, 2004 and 2003, respectively. These amounts consist of ethanol
producer credits from the State of Nebraska totaling $2,812,500 for both 2004
and 2003, and $2,200,891 and $4,556,237 of ethanol producer credits from the
federal government for 2004 and 2003, respectively. The Company's net income for
2004 without the state and federal production credits included in net sales
would have been $4,754,956 (compared to actual net income of $9,768,347). The
Company does not expect to receive such a large amount of production credits in
the future.





While the
producer credits from the State of Nebraska should remain consistent for 2005
(subject to appropriate financing by the Nebraska Legislature; see "Risk
Factors" below), the Company expects to receive only minimal federal program
payments in 2005. The Company therefore anticipates that its sales of ethanol
and distillers grain will constitute a much larger percentage of the Company's
total net sales during 2005.





*Energy
Credits - Federal Program* . The
ethanol producer credits from the federal government include incentive revenue
from the United States Department of Agriculture’s Commodity Credit Corporation
under its Bioenergy Program. Cash payments to eligible ethanol producers are
based on the increase in gallons of ethanol produced from the prior federal
fiscal year (which is an October 1 to September 30 fiscal year) and the market
price of corn at the end of each quarter, with a more favorable calculation
structure used for producers who generate less than 65 million gallons of
ethanol annually.





Because
Husker Ag's ethanol plant was not operating at full capacity until the second
quarter of 2003, the Company reported approximately $2,200,891 of federal
production credits in its net income for 2004 due to the significant increase in
production over last year's results. However, since the plant was operating at
nearly full capacity for all of 2004, there will be only a minimal increase in
production, if any, and therefore a minimal amount of credit available for 2005.
Further, funding for this program has been recently cut. Accordingly, the
Company currently estimates that it will earn only an additional $80,000 in
federal ethanol producer credits during 2005. Thereafter, the Company does not
anticipate receiving any payment from this program in the foreseeable
future.





*Energy
Credits - Nebraska Program* . In
addition to Bioenergy Program cash incentives, LB 536, a State of Nebraska
legislative bill which came into law on May 31, 2001, established a production
tax credit of 18¢ per gallon of ethanol produced during a 96 consecutive month
period by newly constructed ethanol facilities in production prior to June 30,
2004. The tax credit is only available to offset Nebraska motor fuels excise
taxes. The tax credit is transferable and therefore Husker Ag transfers credits
received to a Nebraska gasoline retailer who then reimburses Husker Ag for the
face value of the credit amount less a handling fee. On March 24, 2003, Husker
Ag entered into an agreement with Rite Way Oil & Gas Co., Inc. ("Rite Way")
pursuant to which Husker Ag may transfer up to $500,000 in ethanol production
credits to Rite Way per month. Rite Way then pays Husker Ag the credit amount
less a handling fee. No producer can receive tax credits for more than
15,625,000 gallons of ethanol produced in one year and no producer will receive
tax credits for more than 125 million gallons of ethanol produced over the
consecutive 96 month period. The minimum production level for a plant to qualify
for credits is 100,000 gallons of ethanol annually. The production incentive is
scheduled to expire June 30, 2012. Assuming the Company continues to produce at
least 15,625,000 gallons of ethanol annually, this producer tax credit could
result in payments of up to $2,812,500 to the Company annually, subject to the
statutory maximum limit. Any changes to existing state law, regulations or
programs could have an adverse effect on the Company's business. See "Risk
Factors" below.





12





These two
programs may not have sufficient funds to cover the allocations to eligible
producers in future years. Husker Ag is currently unable to predict whether
there may be a funding shortfall and what the effect such a shortfall would have
on the Company's allocation.





Option
and Futures Contracts





The
Company's net income for the year ended December 31, 2004, included net realized
and unrealized losses on option and futures contracts in the amount of
$1,612,429, largely due to losses during the last half of 2004. Market
conditions during the last half of 2004 were extremely unfavorable for the
Company's option and futures contracts offsetting the gain reported for the six
months ended June 30, 2004. These losses were realized in a decreasing corn
price market, and are recognized ahead of decreased corn production costs.
Unless corn prices begin to rise again, the Company may expect to realize
additional losses on option and futures contracts. For the year ended December
31, 2003, the Company reported a gain on option and futures contracts in the
amount of $159,238.





In an
attempt to minimize the effects of the volatility of corn costs on operating
profits, Husker Ag has taken hedging positions in corn futures and option
markets. Hedging means protecting the price at which the Company buys corn and
the price at which it will sell its products in the future. It is a way to
attempt to reduce the risk caused by price fluctuation. The effectiveness of
hedging activities is dependent upon, among other things, the cost of corn and
Husker Ag’s ability to sell sufficient amounts of ethanol and distillers grain
to utilize all of the corn subject to the option and futures contracts. Hedging
activities can result in costs to the Company because price movements in grain
contracts are highly volatile and are influenced by many factors which are
beyond the Company’s control. See the subsection entitled “Corn Supply and Corn
Prices” above.





Cost
of Sales





Husker
Ag’s cost of sales includes production expenses. For the years ended December
31, 2004 and 2003, the Company's cost of sales, as a percentage of total net
sales, was 71.5% and 72.0%, respectively. After excluding energy production
credits from the Company's total net sales for both 2004 and 2003, the Company's
cost of sales as a percentage of such adjusted net sales decreased by 12.8% from
2003 to 2004. Depending upon the corn market, the Company expects to continue to
experience efficiencies in the operation of its plant during 2005. However, the
Company's cost of sales is largely dependent upon the corn market.





Selling,
General and Administrative Expenses





For the
years ended December 31, 2004 and 2003, the Company's selling, general and
administrative expenses, as a percentage of total net sales, were 3.3% and 3.2%,
respectively. After excluding energy production credits from the Company's total
net sales, the Company's selling, general and administrative expenses as a
percentage of such modified net sales decreased from 4.1% in 2003 to 3.7% in
2004. For 2005, Husker Ag anticipates that selling, general and administrative
expenses will remain in a range consistent with prior years as a percentage of
the Company's net sales excluding energy production credits.





Interest
and Other Income





Interest
and other income for the year ended December 31, 2004, consisted of $128,462 of
interest income and $240,520 of other income. For the year ended December 31,
2003, the Company had interest income of $21,024 and other income of $16,354.
Interest income was much higher in 2004 due to large amounts of cash equivalents
held by the Company during the year, especially near the end of the year. Much
of this cash reserve was used in February 2005 to pay down a portion of the
Company's long-term debt (see the section entitled "Liquidity and Capital
Resources" above). Other income for 2004 consisted primarily of a grant from the
USDA in the amount of $226,850 (see Note 1 to the Company's financial statements
provided in Item No. 7 below).





Interest
Expense





Interest
expense for the year ended December 31, 2004, was $1,010,846 compared to
$724,001 for the prior year ended December 31, 2003. This increase is due to
general increases in the interest rates on the Company's long term debt during
2003 and 2004 as well as the Company's pre-production capitalized interest.
These increases were offset somewhat by the declining balance of the Company's
long-term debt.





13





Before
the Company began producing ethanol in March 2003, all of the interest accrued
on its outstanding long-term debt was capitalized. Therefore, nearly three
months of the interest accrued during 2003 was not included in interest expense.
The increases in the Company's interest rates stem from a gradual increase
during the past two calendar years in the Wall Street Journal Prime Rate to
which the Company's long-term debt has been tied. In addition, in late 2003, the
Company's then primary lender, Stearns Bank, increased the adder to the Prime
Rate from 0.50% to 1.25%. Due to the Company's refinancing of, and reduction in,
its long-term debt in February 2005 (as discussed above), the Company
anticipates that its interest expense will be much less in 2005.





Net
Income





Net
income for Husker Ag for the year ended December 31, 2004 was $9,768,347, consisting
of income from operations of $10,410,211, $240,520 of other income and $128,462
of interest income offset by $1,010,846 of interest expense. Net income from
operations for 2004 included a $1,612,429 loss on option and futures
contracts , which
includes both the actual net loss on option and futures contracts closed during
2004 and the change during the year in the market value on option and futures
contracts outstanding as of December 31, 2004 and 2003. As noted above, the
Company's net income for 2004 without the state and federal production credits
included would have been $4,754,956. As explained further above, Husker Ag's net
income in 2005 is expected to be less than 2004 because the Company expects to
receive less than $100,000 of federal producer credits in 2005 compared to
$2,200,891 in 2004 (and $4,556,237 in 2003).





The net
income for the year ended December 31, 2003 was $7,996,143, consisting of income
from operations of $8,682,766, $16,354 of other income and $21,024 of interest
income offset by $724,001 of interest expense. Net income from operations for
2003 included a $159,238 gain on option and futures contracts.





Despite
the fact that federal and state production credits were approximately $2.4
million less in 2004 than the prior year, the Company's net income for 2004
increased by approximately $1.8 million over 2003. This was primarily due to the
fact that the Company operated at or near full capacity for all of 2004 compared
to less than nine months of optimal operations in 2003. Moreover, conditions for
the ethanol plant were very good in 2004; including relatively high ethanol
prices coupled with moderate corn prices. Of course the Company does not have
control over what ethanol and corn prices will do in the future, and cannot
provide assurance that such optimal conditions will continue in
2005.





**Trends
that may Impact the Company’s Future Operating Results**





Demand
and Prices for Ethanol Products





Demand
and the corresponding prices for ethanol products can vary significantly over
time and decreases in price levels could adversely affect Husker Ag’s
profitability and viability. The price for ethanol has some relation to the
price for gasoline. The price of ethanol tends to increase as the price of
gasoline increases, and the price of ethanol tends to decrease as the price of
gasoline decreases. Any lowering of gasoline prices may also lead to lower
prices for ethanol and adversely affect the Company’s operating
results.





During
2004, high oil prices and new MTBE bans resulted in strong ethanol demand and
record high ethanol prices. However, because the ethanol industry is so
dependent upon government supports, and more importantly, because the production
capacity for ethanol is increasing so rapidly, there can be no assurance that
the demand for ethanol will keep up with its supply in the near future -
regardless of what happens to the price of gasoline.





*Government
supports*





As
discussed above, current federal law is favorable to ethanol because it mandates
certain oxygenate blending. MTBE (methyl tertiary butyl ether) remains ethanol’s
major competitor as the oxygenate most used for gasoline. MTBE continues to come
under scrutiny because of ground water contamination and perceived health
effects on humans. Currently 20 states have enacted legislation that bans or
restricts the use of MTBE, including California, New York and Connecticut which
each instituted a ban on MTBE effective January 1, 2004. Several other states
are considering MTBE bans.





If
federal law is not changed in this regard and if MTBE usage continues to be
reduced, the ethanol industry should see stronger demand. On the other hand, the
elimination of the oxygen requirement in gasoline without adopting a similar
incentive for ethanol blending, could have a significantly negative impact on
both ethanol demand and pricing.





14





*Production
of ethanol*





As noted
above, with the new ethanol plants and plant expansions currently under
construction along with new construction expected in the near future, the
nationwide production capacity for ethanol is expected to increase dramatically
in the next couple of years. Experts in the ethanol industry have differing
views as to whether this increased production will create a surplus in the
ethanol market. At a minimum, this increased capacity creates some uncertainty
for the ethanol industry. Although the Company believes that there will be an
increase in the demand for ethanol as a result of the phase out of MTBE, Husker
Ag cannot provide any assurance or guarantee that there will be any material or
significant increases in the demand for ethanol. If the production of ethanol
exceeds either the demand for ethanol or the petroleum industry’s ability to
blend ethanol with gasoline, then the price of ethanol would be expected to
fall, and such fall in ethanol prices could be significant. In that case, the
Company’s revenues would decrease accordingly.





The
increased production of ethanol could have other adverse effects as well. For
example, the increased production will also lead to increased supplies of
co-products from the production of ethanol, such as distillers grain/solubles.
Those increased supplies could lead to lower prices for those co-products. Also,
the increased production of ethanol could result in increased demand for corn
which could in turn lead to higher prices for corn, resulting in higher costs of
production and lower profits.





Inputs





*Corn*





The
Company uses corn as its primary feedstock. Rising corn prices produce lower
profit margins for the production of ethanol and therefore, represent
unfavorable market conditions. Similarly, decreases in the price of corn may
increase revenues to the Company and therefore, would increase the profitability
of the Company. The corn market is dependent upon a variety of factors unrelated
to the ethanol market. The price of corn is generally dependent upon the
regional and international grain supplies, which can be very volatile. Corn
supplies and the resultant prices are affected by weather, governmental policy,
disease and other conditions.





Grain
markets were somewhat unstable during much of 2004. During 2004, corn prices
started the year at recent highs. However, after the records U.S. crop was
harvested later in the year, corn prices moderated significantly and ended the
year at relatively low levels. Management believes that corn prices may remain
moderate through the first half of 2005. However, after that corn prices will be
largely dependent on the corn crop grown during the summer of 2005. A
significant reduction in the quantity of corn harvested could result in
increased corn costs which would increase the Company’s cost to produce ethanol.
See section entitled "Risk Factors" below.





*Utilities*





Changes
in the cost of utilities may also have a material impact on the profitability of
the Company. Ethanol production requires a constant and consistent supply of
energy. If there is any interruption in Husker Ag’s supply of energy for
whatever reason, such as supply, delivery or mechanical problems, the Company
may be required to halt production. Increases in the price of natural gas would
harm Husker Ag’s business by increasing its energy costs. During 2004, the price
of natural gas was above its historical average, increasing the cost to the
Company to produce ethanol. While natural gas prices have historically
fluctuated significantly, Husker Ag expects that natural gas prices will remain
high throughout the remainder of 2005, especially in the winter months.





The
Company also needs to purchase significant amounts of electricity to operate the
plant. The prices which Husker Ag is required to pay for electrical power will
have a direct impact on its costs of producing ethanol and its financial
results.





*Other*





In
addition to general market fluctuations and economic conditions, Husker Ag could
experience significant cost increases associated with the on-going operation of
the plant caused by a variety of factors, many of which are beyond the Company’s
control. Labor costs can increase over time, particularly if there is any
shortage of labor, or shortage of persons with the skills necessary to operate
the ethanol plant. Changes in price, operation and availability of truck and
rail transportation may affect the Company’s profitability with respect to the
transportation of ethanol and other products to its customers. In addition, the
operation of the ethanol plant is subject to ongoing compliance with all
applicable governmental regulations, such as those regulations governing
pollution control, ethanol production, grain purchasing and other matters. If
any of these regulations were to change, it could cost Husker Ag significantly
more to comply with them. Further, other regulations may arise in future years
regarding the operation of the ethanol plant, including the possibility of
required additional permits and licenses. Husker Ag might have difficulty
obtaining any such additional permits or licenses, and they could involve
significant unanticipated costs. Husker Ag will be subject to all of those
regulations whether or not the operation of the ethanol plant is profitable.





15


****


**Books
and Records**





Husker Ag
currently relies on its internal staff for the maintenance of its books and
records. Husker Ag has employed an internal accountant, who is primarily
responsible for the maintenance of its accounting books and records. Such person
is assisted by full time office administrative personnel, all of whom are
responsible for compliance with the rules and regulations promulgated under the
Securities and Exchange Act of 1934 concerning the maintenance of accurate books
and records.





**Off-Balance
Sheet Arrangements**





At
December 31, 2004, the Company did not have any off-balance sheet
arrangements.





**Critical
Accounting Policies**





The
Securities and Exchange Commission ("SEC" or the "Commission") recently issued
disclosure guidance for "critical accounting policies". The SEC defines
"critical accounting policies" as those that require application of management's
most difficult, subjective or complex judgments, often as a result of the need
to make estimates about the effect of matters that are inherently uncertain and
may change in subsequent periods.





Accounts
Receivable





Accounts
receivable are stated at the amount billed to customers. If necessary, the
Company will provide an allowance for doubtful accounts, which is based upon a
review of outstanding receivables, historical collection information and
existing economic conditions.





Inventories





Inventories
are stated at the lower of cost or market. Cost of raw materials,
work-in-progress and finished goods are determined using last cost and average
cost under the first-in, first-out (FIFO) method.








Revenue
Recognition





Revenue
from the sale of the Company’s products is recognized when title passes based on
delivery or shipping terms. The Company records revenue from federal and state
incentive programs related to the production of ethanol when the Company has
produced the ethanol and completed all the requirements of the applicable
incentive program.





Derivative
Instruments





The
Company enters into option and futures contracts, which are designated as hedges
of specific volumes of corn expected to be used in the manufacturing process.
The Company uses derivative financial instruments to manage the exposure to
price risk related to corn purchases. The Company does not typically enter into
derivative instruments for any reason other than cash flow hedging purposes. The
option and futures contracts are recorded on the Company's balance sheet at fair
value. On the date that the contract is entered into, the Company designates the
option or contract as a hedge of variable cash flows of certain forecasted
purchases of corn used in the manufacturing process (a “cash flow hedge”). The
Company formally documents relationships between the option and futures
contracts, which serve as the hedging instruments, and the hedged items, as well
as its risk management objective and strategy for undertaking various hedge
transactions. When it is determined that an option or futures contract is not
highly effective as a hedge or has ceased to be a highly effective hedge, the
Company discontinues hedge accounting prospectively. Changes in the fair value
of option and futures contracts that are highly effective and that are
designated and qualify as cash flow hedges are recorded in other comprehensive
loss. Gains and losses that are realized will be recognized in the statement of
income when the related corn purchased is recognized in cost of
sales.





16





Currently,
option and futures contracts on corn purchased by the Company do not meet the
requirements for cash flow hedging treatment. As a result, changes in the market
value of option and futures contracts are recorded on the income statement in
gain/loss on option and futures contracts.





**RISK
FACTORS**





Husker
Ag’s business is not diversified and this could reduce the value of the
membership units .





Husker
Ag’s success depends largely upon its ability to timely complete and profitably
operate its ethanol business. Husker Ag does not have any other lines of
business or other sources of revenue if it is unable to manufacture ethanol and
distillers grain. If economic or political factors adversely affect the market
for ethanol, the value of its membership units could decline because the Company
has no other line of business to fall back on if the ethanol business declines.
Husker Ag’s business would also be significantly harmed if its ethanol plant
could not operate at full capacity for any extended period of time.





Husker
Ag is operating in an intensely competitive industry and competing with larger,
better financed entities which could impact its ability to operate
profitably .





There is
significant competition among ethanol producers. Husker Ag faces a competitive
challenge from larger ethanol plants, from plants that can produce a wider range
of products than it can, and from other plants similar to its ethanol plant.
Husker Ag’s ethanol plant is in direct competition with other ethanol producers,
many of which have greater resources than Husker Ag currently has. Large ethanol
producers such as Archer Daniels Midlands and Cargill, among others, are capable
of producing a significantly greater amount of ethanol than Husker Ag's current
production capacity. In addition, there are several Nebraska, Kansas, Minnesota,
Wisconsin, South Dakota and other Midwest regional ethanol producers which have
recently formed, are in the process of forming, or are under consideration,
which are or would be of a similar size and have similar resources to Husker Ag.





Husker
Ag's ethanol plant also competes with producers of other gasoline additives made
from raw materials other than corn having similar octane and oxygenate values as
ethanol, such as producers of methyl tertiary butyl ether (MTBE). MTBE is a
petrochemical derived from methanol which generally costs less to produce than
ethanol. Many major oil companies produce MTBE and strongly favor its use
because it is petroleum-based. Alternative fuels, gasoline oxygenates and
alternative ethanol production methods are also continually under development.
The major oil companies have significantly greater resources than Husker Ag has
to market MTBE, to develop alternative products, and to influence legislation
and public perception of MTBE and ethanol. These companies also have significant
resources to begin production of ethanol should they choose to do so.





The
rapid growth of production capacity in the ethanol industry creates some market
uncertainly for the ethanol industry .





At the
end of 2004, existing construction at new and expanding ethanol plants was
predicted to increase ethanol production capacity by approximately 750 million
gallons per year. This would increase the existing nationwide production
capacity by approximately 20%. This increase in capacity is expected to continue
in the near future. Husker Ag cannot determine what effect this increase in
production will have upon the demand or price of ethanol. At a minimum, this
increased capacity creates some uncertainty for the ethanol
industry.





17





Although
the Company believes that there will be an increase in the demand for ethanol in
the future as a result of the phase out of MTBE, Husker Ag cannot provide any
assurance or guarantee that there will be any material or significant increases
in the demand for ethanol. If the production of ethanol exceeds either the
demand for ethanol or the petroleum industry’s ability to blend ethanol with
gasoline, then the price of ethanol would be expected to fall, and such a fall
in ethanol prices could be significant. In that case, the Company’s revenues
would decrease accordingly.





The
increased production of ethanol could have other adverse effects as well. For
example, the increased production will also lead to increased supplies of
co-products from the production of ethanol, such as distillers grain. Those
increased supplies could lead to lower prices for those co-products. Also, the
increased production of ethanol could result in increased demand for corn which
could in turn lead to higher prices for corn, resulting in higher costs of
production and lower revenues.





Changes
in the supply and demand, and production and price with respect to corn could
make it more expensive to produce ethanol which could decrease Husker Ag’s
profits .





Ethanol
production will require substantial amounts of corn. Corn, as with most other
crops, is affected by weather, governmental policy, disease and other
conditions. A significant reduction in the quantity of corn harvested due to
adverse weather conditions such as drought, farmer planting decisions, domestic
and foreign government farm programs and policies, global demand and supply or
other factors could result in increased corn costs which would increase Husker
Ag’s cost to produce ethanol. The significance and relative impact of these
factors on the price of corn is difficult to predict. Significant variations in
actual growing conditions from normal growing conditions also may adversely
affect Husker Ag’s ability to procure corn for its plant. Any events that tend
to negatively impact the supply of corn will tend to increase prices and harm
Husker Ag’s business.





Rising
corn prices produce lower profit margins for the production of ethanol and
therefore, represent unfavorable market conditions. This is especially true when
market conditions do not allow Husker Ag to pass along increased corn costs to
its customers. The price of corn has fluctuated significantly in the past and
may fluctuate significantly in the future. Substantial increases in the price of
corn in 1996 caused some ethanol plants to temporarily cease production or lose
money. Husker Ag cannot assure you that it will be able to offset any increase
in the price of corn by increasing the price of its products. If Husker Ag
cannot offset increases in the price of corn, its financial performance may be
materially and adversely affected.





Husker Ag
purchases corn from local producers but Husker Ag does not currently have any
definitive agreements with any corn producers or grain elevators to provide corn
to its ethanol plant. The Company also attempts to reduce the risks related to
corn price volatility through the futures and option markets.





Federal
regulations concerning tax incentives could expire or change which could reduce
Husker Ag’s revenues .





Congress
currently provides certain federal tax incentives for oxygenated fuel producers
and marketers, including those who purchase ethanol to blend with gasoline in
order to meet federally mandated oxygenated fuel requirements. These tax
incentives include, generally, a excise tax credit for gasoline blended with at
least 10 percent, 7.7 percent, or 5.7 percent ethanol, and income tax credits
for blenders of ethanol mixtures and small ethanol producers. Gasoline marketers
pay a reduced tax on gasoline that they sell that contains ethanol.





The
ethanol industry and Husker Ag’s business depend on continuation of the federal
ethanol excise tax credit. This credit has supported a market for ethanol that
might disappear without the credit. The federal excise tax credit is scheduled
to expire December 31, 2010. These tax incentives to the ethanol industry may
not continue beyond their scheduled expiration date or, if they continue, the
incentives may not be at the same level. The revocation or amendment of any one
or more of those laws, regulations or programs could adversely affect the future
use of ethanol in a material way, and Husker Ag cannot guarantee that any of
those laws, regulations or programs will be continued. The elimination or
reduction of federal subsidy and tax incentives to the ethanol industry would
have a material adverse impact on Husker Ag’s business by making it more costly
or difficult for it to produce and sell ethanol. If the federal ethanol tax
incentives are eliminated or sharply curtailed, Husker Ag believes that a
decreased demand for ethanol will result.





18





Nebraska
state producer incentives may be unavailable or could be modified which could
reduce Husker Ag’s revenues .





In 2001,
LB 536 became law and established a production tax credit of 18¢ per gallon of
ethanol produced during a 96 consecutive month period by newly constructed
ethanol facilities in production prior to June 30, 2004. The tax credit is only
available to offset Nebraska motor fuels excise taxes. The tax credit is
transferable and therefore Husker Ag transfers credits received to a Nebraska
gasoline retailer who then reimburses Husker Ag for the face value of the credit
amount less a handling fee. No producer can receive tax credits for more than
15,625,000 gallons of ethanol produced in one year and no producer will receive
tax credits for more than 125 million gallons of ethanol produced over the
consecutive 96 month period. The minimum production level for a plant to qualify
for credits is 100,000 gallons of ethanol annually. Husker Ag has entered into a
written agreement with the Tax Commissioner on behalf of the State of Nebraska
pursuant to which Husker Ag agreed to produce ethanol at its designated facility
and the State of Nebraska agreed to furnish the producer tax credits in
accordance with the terms of the new law.





In 2003,
2004 and 2005, because of State of Nebraska budget shortfalls, various tax
credit provisions in effect in Nebraska, including LB 536, came under increased
scrutiny from the Nebraska Unicameral. As a result there can be no assurance
that the Nebraska legislature will not in subsequent legislative sessions enact
new legislation which would revise LB 536, or otherwise adversely impact ethanol
plants, such as Husker Ag's plant, which are to benefit from LB 536.





Husker Ag
believes there are a number of existing projects in Nebraska that could compete
with the Company for payments which may require legislature to increase funding
for the producer incentive program through either an increase in general fund
appropriation or other sources such as the grain check-off program. Despite the
Company’s written agreement with the State of Nebraska, the Nebraska legislature
could reduce or eliminate the producer tax credits at any time; however, a
reduction or elimination would constitute a breach of the contract by the State
of Nebraska. The State of Nebraska could also impose taxes on the ethanol plants
to provide additional funds for the ethanol production incentive fund. If the
State of Nebraska established such a tax, Husker Ag could be for example,
required to pay taxes on the distillers grain it produces, which could have a
material adverse impact on Husker Ag’s net income from the production
incentive.





On
February 6, 2004, the Nebraska Attorney General issued an opinion concerning
certain proposed legislation (LB 479, as amended by AM0852) before the Nebraska
Unicameral, in which the Attorney General concluded that because LB 479 alters
the definition of a "new ethanol production facility" eligible for ethanol tax
credits under the Nebraska Ethanol Development Act (the "Act"), and attempts to
retroactively change vested rights of producers that have entered into
agreements with the State of Nebraska, it "likely created an unconstitutional
impairment of contracts" between the State of Nebraska and producers that have
been executed under existing law. The opinion further states that "[T]he statute
authorizing execution of these agreements specifically binds the State to
provide such [ethanol tax] credits under the law in effect at the time of
execution of the agreements."





Husker Ag
has entered into an Ethanol Production Credit Agreement with the State of
Nebraska (the "EPC Agreement") for the provision of ethanol tax credits as
provided by the statutory provisions of the Act in effect on the date of the EPC
Agreement (September 5, 2001). Under the EPC Agreement, Husker Ag is to be paid
tax credits equal to 18¢ per gallon of ethanol, up to 15,625,000 gallons of
ethanol produced in one year (up to $2,812,500 annually), and subject to a
maximum payment of tax credits based on production of 125 million gallons over a
consecutive 96 month period. In the opinion of Husker Ag, the Attorney General
opinion provides support for Husker Ag's position that it is important that the
State of Nebraska continue to meet its obligations in accordance with the terms
of the EPC Agreement. The text of the entire Attorney General Opinion (Opinion
04005, dated February 6, 2004) is available on-line at the Nebraska Attorney
General website, www.ago.state.ne.us.





In the
2004 Nebraska Unicameral legislative session which ended April 15, 2004, the
Nebraska legislature passed a funding mechanism to fully fund four ethanol
plants in Nebraska that are currently qualified under LB 536. However, LB 536
now provides that any ethanol plants that were qualified by June 30, 2004, will
be accepted into the program. The Company believes that seven additional plants
may have been qualified by that date, and to the extent payments are made by the
State of Nebraska to these additional plants, the funding for available credits
could be reduced for the existing qualified plants, including Husker Ag, unless
the Nebraska legislature would provide additional funding for the
program.





19


****


**Update
for 2005 Legislative Session:** The 2005
Nebraska Unicameral legislative session is scheduled to end on or about June 3,
2005. The legislature is currently considering funding mechanisms to help ensure
that LB 536 remains funded. However, none of the applicable legislative bills
have come to a final vote by the legislature as of March 29, 2005. The
legislature is expected to continue to debate, and possibly vote on, one or more
ethanol related bills during the second quarter of 2005.





Husker
Ag is subject to extensive environmental regulation and operational safety
regulations that could result in higher than expected compliance costs and
liabilities .





The
Company may be subject to regulations on emissions from the United States
Environmental Protection Agency. Further, EPA and Nebraska's environmental
regulations are subject to change and often such changes are not favorable to
industry. Consequently, even if Husker Ag has the proper permits now, the
Company may be required to invest or spend considerable resources to comply with
future environmental regulations.





The
Company’s failure to comply or the need to respond to threatened actions
involving environmental laws and regulations may adversely affect its business,
operating results or financial condition. As an operational company, Husker Ag
has developed procedures for the proper handling, storage, and transportation of
finished products and materials used in the production process and for the
disposal of waste products. In addition, state or local requirements may also
restrict the Company’s production and distribution operations. Husker Ag could
incur significant costs to comply with applicable laws and regulations as
production and distribution activity increases. Protection of the environment
will require Husker Ag to incur expenditures for equipment or processes.





Husker Ag
could also be subject to environmental nuisance or related claims by employees,
property owners or residents near the ethanol plant arising from air or water
discharges. Ethanol production has been known to produce an odor to which
surrounding residents could object. If odors become a problem, Husker Ag may be
subject to fines and could be forced to take costly curative measures.
Environmental litigation or increased environmental compliance costs could
increase its operating costs.





Members
may be required to pay taxes on their share of Husker Ag’s income even if it
makes no distributions to members .





Husker Ag
expects to continue to be treated as a partnership for federal income tax
purposes unless there is a change of law or trading in the membership units is
sufficient to classify Husker Ag as a “publicly traded partnership.” This means
that Husker Ag will pay no income tax and all profits and losses will
“pass-through” to its members who will pay tax on their share of Husker Ag’s
profits. Husker Ag’s members may receive allocations of taxable income that
exceed any cash distributions made, if any. This may occur because of various
factors, including but not limited to, accounting methodology, lending covenants
that restrict Husker Ag’s ability to pay cash distributions, or its decision to
retain or use the cash generated by the business to fund its operating
activities and obligations. Accordingly, members may be required to pay income
tax on the allocated share of Husker Ag’s taxable income with personal funds,
even if the members receive little or no cash distributions from the Company.





20





**ITEM
7. FINANCIAL STATEMENTS**





**Husker
Ag, LLC**





Accountants’
Report and Financial Statements




December
31, 2004 and 2003














21





**Husker
Ag, LLC**


December
31, 2004 and 2003




**Contents**


**Report
      of Independent Registered Public Accounting Firm**
    23**Financial
      Statements**Balance
      Sheets
    24Statements
      of Operations
    25Statements
      of Members’ Equity
    26Statements
      of Cash Flows
    27Notes
      to Financial Statements
    29







22





**Report
of Independent Registered Public Accounting Firm**




Audit
Committee, Board of Directors and Members


Husker
Ag, LLC


Plainview,
Nebraska





We have
audited the accompanying balance sheets of Husker Ag, LLC as of December 31,
2004 and 2003, and the related statements of operations, members’ equity and
cash flows for each of the three years in the period ended December 31, 2004.
These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based
on our audits.





We
conduct our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Husker Ag, LLC as of December 31,
2004 and 2003, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2004, in conformity with
accounting principles generally accepted in the United States of
America.





/s/ **BKD** **,
LLP**





Lincoln,
Nebraska


January
26, 2005






















23




**Husker
Ag, LLC**


**Balance
Sheets**


December
31, 2004 and 2003


**Assets**
    
    **2004**
    
    **2003****Current
      Assets**Cash
    
    $
    2,406,010
    
    $
    9,006,601Restricted
      cash
    
    
    393,060
    
    
    --Reverse
      repurchase agreement
    
    
    8,894,027
    
    
    --Total
      cash and cash equivalents
    
    
    11,693,097
    
    
    9,006,601Accounts
      receivableTrade
    
    
    398,651
    
    
    1,080,035Incentives
    
    
    74,651
    
    
    1,040,684Inventories
    
    
    1,671,610
    
    
    892,208Margin
      account
    
    
    249,755
    
    
    435,202Option
      and futures contracts
    
    
    77,813
    
    
    306,700Prepaid
      expenses
    
    
    299,138
    
    
    218,666Total
      current assets
    
    
    14,464,715
    
    
    12,980,096**Property
      and Equipment,**at
      costLand
    
    
    84,318
    
    
    84,318Plant
      buildings and equipment
    
    
    30,488,254
    
    
    29,993,299Other
      equipment
    
    
    418,779
    
    
    362,733Office
      building
    
    
    215,673
    
    
    215,673Vehicles
    
    
    22,200
    
    
    22,20031,229,224
    
    
    30,678,223Less
      accumulated depreciation
    
    
    3,963,275
    
    
    1,788,30227,265,949
    
    
    28,889,921**Other
      Assets**Debt
      origination costs, net of accumulated amortization; December 31, 2004 -
      $128,838 and 2003 - $33,382
    
    
    576,742
    
    
    411,704$
    42,307,406
    
    $
    42,281,721


**Liabilities
and Members’ Equity**


**Current
      Liabilities**Accounts
      payable
    
    $
    1,910,726
    
    $
    1,160,990Construction
      loan payable
    
    
    --
    
    
    152,643Current
      maturities of long-term debt
    
    
    2,141,171
    
    
    2,180,757Option
      and futures contracts
    
    
    259,025
    
    
    94,737Accrued
      expenses
    
    
    540,565
    
    
    168,672Deferred
      revenue
    
    
    538,477
    
    
    -Distributions
      payable
    
    
    1,531,800
    
    
    2,297,700Total
      current liabilities
    
    
    6,921,764
    
    
    6,055,499**Long-term
      Debt**
    
    
    13,965,976
    
    
    17,681,803**Members’
      Equity**-
      15,318 units
    
    
    21,419,666
    
    
    18,544,419$
    42,307,406
    
    $
    42,281,721










*See
Notes to Financial Statements*
 24


**Husker
Ag, LLC**


**Statements
of Operations**


Years
Ended December 31, 2004, 2003 and 2002


**2004**
    
    **2003**
    
    **2002****Net
      Sales**Ethanol
      sales
    
    $
    35,446,018
    
    $
    22,160,427
    
    $
    --Distillers
      grain sales
    
    
    7,325,651
    
    
    4,807,870
    
    
    --Energy
      production credits
    
    
    5,013,391
    
    
    7,368,737
    
    
    --47,785,060
    
    
    34,337,034
    
    
    --**Cost
      of Sales**
    
    
    29,033,578
    
    
    19,482,627
    
    
    --**Cost
      of Sales Related Parties**
    
    
    5,157,214
    
    
    5,232,691
    
    
    --**Gain
      (Loss) on Option and Futures Contracts**
    
    
    (1,612,429
    )
    
    159,238
    
    
    (972,175
    )**Gross
      Profit (Loss)**
    
    
    11,981,839
    
    
    9,780,954
    
    
    (972,175
    )**Selling,
      General and Administr****ative
      Expenses**
    
    
    1,571,628
    
    
    1,098,188
    
    
    695,176**Income
      (Loss) from Operations**
    
    
    10,410,211
    
    
    8,682,766
    
    
    (1,667,351
    )**Other
      Income (Expense)**Other
      income
    
    
    240,520
    
    
    16,354
    
    
    5,623Interest
      expense
    
    
    (1,010,846
    )
    
    (724,001
    )
    
    --Interest
      income
    
    
    128,462
    
    
    21,024
    
    
    118,350(641,864
    )
    
    (686,623
    )
    
    123,973**Net
      Income (Loss)**
    
    $
    9,768,347
    
    $
    7,996,143
    
    $
    (1,543,378
    )**Basic
      and Diluted Earnings (Loss) Per Membership Unit**
    
    $
    637.70
    
    $
    522.01
    
    $
    (100.76
    )**Weighted
      Average Units Outstanding**
    
    
    15,318
    
    
    15,318
    
    
    15,318







*See
Notes to Financial Statements*
 25


**Husker
Ag, LLC**


**Statements
of Members' EquityYears**


Ended
December 31, 2004, 2003 and 2002


**Accumulated****Membership
      Units**
    
    **Earnings**
    
    **Members’****Number**
    
    **Amount**
    
    **(Deficit)**
    
    **Equity****Balance,
      January 1, 2002**
    
    
    15,318
    
    $
    14,531,162
    
    $
    (140,539
    )
    $
    14,390,623Net
      loss
    
    
    --
    
    
    --
    
    
    (1,543,378
    )
    
    (1,543,378
    )**Balance,
      December 31, 2002**
    
    
    15,318
    
    
    14,531,162
    
    
    (1,683,917
    )
    
    12,827,245Distributions
      paid for state taxes of out-of-state members
    
    
    --
    
    
    --
    
    
    (1,269
    )
    
    (1,269
    )Distributions
      declared, $150 per membership unit
    
    
    --
    
    
    --
    
    
    (2,297,700
    )
    
    (2,297,700
    )Net
      income
    
    
    --
    
    
    --
    
    
    7,996,143
    
    
    7,996,143**Balance,
      December 31, 2003**
    
    
    15,318
    
    
    14,531,162
    
    
    4,013,257
    
    
    18,544,419Distributions
      declared, $450 per membership unit
    
    
    --
    
    
    --
    
    
    (6,893,100
    )
    
    (6,893,100
    )Net
      income
    
    
    --
    
    
    --
    
    
    9,768,347
    
    
    9,768,347**Balance,
      December 31, 2004**
    
    
    15,318
    
    $
    14,531,162
    
    $
    6,888,504
    
    $
    21,419,666













*See
Notes to Financial Statements*
 26


**Husker
Ag, LLC**


**Statements
of Cash Flows**


Years
Ended December 31, 2004, 2003 and 2002


**2004**
    
    **2003**
    
    **2002****Operating
      Activities**Net
      income (loss)
    
    $
    9,768,347
    
    $
    7,996,143
    
    $
    (1,543,378
    )Items
      not requiring (providing) cashDepreciation
      and amortization expense
    
    
    2,270,429
    
    
    1,818,561
    
    
    6,820Unrealized
      loss (gain) on option and futures contracts
    
    
    393,175
    
    
    (896,988
    )
    
    972,175Changes
      inAccounts
      receivable
    
    
    1,647,417
    
    
    (2,120,719
    )
    
    --Inventories
    
    
    (779,402
    )
    
    (892,208
    )
    
    --Margin
      account
    
    
    185,447
    
    
    (113,252
    )
    
    (321,950
    )Option
      contracts
    
    
    --
    
    
    --
    
    
    (287,150
    )Prepaid
      expenses
    
    
    (80,472
    )
    
    (196,821
    )
    
    (21,845
    )Other
      assets
    
    
    --
    
    
    --
    
    
    (4,920
    )Interest
      receivable
    
    
    --
    
    
    --
    
    
    194Accounts
      payable and accrued expenses
    
    
    1,221,629
    
    
    1,092,173
    
    
    120,741Deferred
      revenue
    
    
    538,477
    
    
    --
    
    
    --Net
      cash provided by (used in) operating activities
    
    
    15,165,047
    
    
    6,686,889
    
    
    (1,079,313
    )**Investing
      Activities**Purchases
      of property and equipment
    
    
    (651,001
    )
    
    (7,115,167
    )
    
    (22,489,954
    )Net
      cash used in investing activities
    
    
    (651,001
    )
    
    (7,115,167
    )
    
    (22,489,954
    )**Financing
      Activities**Offering
      costs paid
    
    
    --
    
    
    --
    
    
    (39,694
    )Advances
      on construction loan
    
    
    --
    
    
    9,635,745
    
    
    10,192,115Payments
      on construction loan
    
    
    (152,643
    )
    
    (494,717
    )
    
    --Payments
      on long-term debt
    
    
    (3,755,413
    )
    
    (11,200
    )
    
    --Receipt
      (payment) of debt origination costs
    
    
    (260,494
    )
    
    --
    
    
    240,000Distributions
      paid
    
    
    (7,659,000
    )
    
    (1,269
    )
    
    --Net
      cash provided by (used in) financing activities
    
    
    (11,827,550
    )
    
    9,128,559
    
    
    10,392,421**Increase
      (Decrease) in Cash and Cash Equivalents**
    
    
    2,686,496
    
    
    8,700,281
    
    
    (13,176,846
    )**Cash
      and Cash Equivalents, Beginning of Year**
    
    
    9,006,601
    
    
    306,320
    
    
    13,483,166**Cash
      and Cash Equivalents, End of Year**
    
    $
    11,693,097
    
    $
    9,006,601
    
    $
    306,320










*See
Notes to Financial Statements*
 27


**Husker
Ag, LLC**


**Statements
of Cash Flows - Continued**


Years
Ended December 31, 2004, 2003 and 2002


**2004**
    
    **2003**
    
    **2002****Supplemental
      Cash Flows Information**Decrease
      in accounts payable incurred for offering costs
    
    $
    --
    
    $
    --
    
    $
    39,694Net
      increase (decrease) in accounts payable incurred for site development and
      construction in progress
    
    $
    (100,000
    )
    $
    (1,428,120
    )
    $
    1,477,117Long-term
      debt incurred for plant buildings and equipment
    
    $
    --
    
    $
    693,260
    
    $
    --Interest
      paid (net of amount capitalized)
    
    $
    982,142
    
    $
    724,001
    
    $
    --Distributions
      payable
    
    $
    1,531,800
    
    $
    2,297,700
    
    $
    --Construction
      loan payable refinanced to long-term debt
    
    $
    --
    
    $
    19,180,500
    
    $
    --









*See
Notes to Financial Statements*
 28




**Husker
Ag, LLC**


**Notes
to Financial Statements**


**December
31, 2004, 2003 and 2002**


**Note
1: Nature of Operations
and Summary of Significant Accounting Policies**


******


***Nature
of Operations***




Husker
Ag, LLC (the Company), a Nebraska Limited Liability Company, was formed August
29, 2000 and is located in Plainview, Nebraska. Prior to formation of the LLC,
the Company operated as a partnership. The Company was organized to obtain
equity investors and debt financing to construct, own and operate an ethanol
plant with an annual production capacity of approximately 24 million gallons.
Construction began in 2001 and operations commenced in March 2003. The Company’s
products include fuel grade ethanol sold in limited markets throughout the
United States and distillers grain sold in surrounding counties in Nebraska. The
Company extends unsecured credit to its customers, with credit extended to one
customer of approximately 50% and 61% of trade accounts receivable as of
December 31, 2004 and 2003 respectively. Substantially all ethanol sales are
made to one broker.




***Use
of Estimates***




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




***Cash
Equivalents***




The
Company considers all liquid investments with original maturities of three
months or less to be cash equivalents. At December 31, 2004, cash equivalents
consisted primarily of a retail repurchase agreement and mutual fund. At
December 31, 2003 cash equivalents consisted primarily of money market
accounts.




The
Company maintains its cash accounts primarily at two financial institutions. At
times throughout the periods and at December 31, 2004 and 2003, the Company’s
cash balances at individual institutions exceeded federally insured limits. The
Company believes it is not exposed to any significant credit risk on cash. The
Company is required by a bank to maintain certain cash reserves to secure letter
of credit obligations.




The
Company maintains cash in a retail repurchase agreement at a financial
institution and the financial institution pledges securities as collateral to
secure the balance held under the agreement.









29


**Husker
Ag, LLC**
 **Notes
to Financial Statements**
 **December
31, 2004, 2003 and 2002**


**Note
1:** **Nature
of Operations and Summary of Significant Accounting Policies -
Continued**




***Accounts
Receivable***




Accounts
receivable are stated at the amount billed to customers. As of December 31, 2004
and 2003, the Company believes all receivables are fully collectible. If
necessary, the Company will provide an allowance for doubtful accounts, which is
based upon a review of outstanding receivables, historical collection
information and existing economic conditions. Accounts receivable are ordinarily
due in 3 business days for ethanol and 15 days after the issuance of the invoice
for distillers grain. Accounts that are unpaid after 30 days bear interest at
18%. Accounts past due more than 120 days are considered delinquent. Interest
ceases to accrue on delinquent accounts and does not resume until the account is
no longer classified as delinquent. Delinquent receivables are written off based
on individual credit evaluation and specific circumstances of the
customer.




***Inventories***




Inventories
are stated at the lower of cost or market. Cost on raw materials is determined
using last cost and average cost under the first-in, first-out (FIFO) method.
Cost on finished goods is determined using average cost under the FIFO method.
Inventories were comprised of the following at December 31:




**2004**
    
    **2003**Raw
      materials, enzymes and additives
    
    $
    412,634
    
    $
    400,338Work-in-progress
    
    
    167,307
    
    
    167,370Finished
      goods
    
    
    1,091,669
    
    
    324,500$
    1,671,610
    
    $
    892,208




***Debt
Origination Costs***




During
2001, the Company paid $685,086 related to loan origination costs, other fees
and a United States Department of Agriculture (USDA) guarantee application fee
related to the construction loan agreement described in Note 6. The USDA fee, in
the amount of $240,000, was refunded to the Company in 2002. On January 20, 2004
the Company refinanced its construction loan requiring the payment of loan
origination costs and other fees, including a UDSA guarantee fee, totaling
$260,494. Such costs have been deferred and are amortized over approximately
seven years (the life of the loan) using the straight-line method. Debt
origination costs, net of accumulated amortization, amounted to $576,742 and
$411,704 at December 31, 2004 and 2003, respectively. Amortization expense for
the years ended December 31, 2004 and 2003 were $95,456 and $33,382,
respectively.




30





**Husker
Ag, LLC**
 **Notes
to Financial Statements**
 **December
31, 2004, 2003 and 2002**
 ****


**Note
1:** **Nature
of Operations and Summary of Significant Accounting Policies -
Continued**




***Income
Taxes***




The
Company’s members have elected to have the Company’s income taxed as a
partnership under provisions of the Internal Revenue Code and a similar section
of the Nebraska income tax law. Therefore, taxable income or loss is reported to
the individual members for inclusion in their respective tax returns and no
provision for federal and state income taxes is included in these
statements.




Differences
between the financial statement bases of assets and liabilities amount to
approximately $11,378,736 and $8,033,000 of net deferred income at December 31,
2004 and 2003, respectively. These relate to capitalization and future
amortization of start up costs for tax purposes, the difference between the
recorded amounts of financial statement and tax depreciation, and unrealized
gains or losses on hedging contracts.




***Revenue
Recognition***




Revenue
from the sale of the Company’s products is recognized when title passes based on
delivery or shipping terms. The Company records revenue from federal and state
incentive programs related to the production of ethanol when the Company has
produced the ethanol and completed all the requirements of the applicable
incentive program.




***Property
and Equipment***




Property
and equipment are depreciated over the estimated useful life of each asset which
ranges from 3 to 30 years. Leasehold improvements are amortized over the shorter
of the lease term or the estimated useful lives of the improvements. Annual
depreciation is primarily computed using the straight-line method.




The
Company capitalized interest costs as a component of construction in progress,
based on the weighted-average rates paid for short-term borrowing. Total
interest incurred each year was:




2004
    
    2003
    
    2002Interest
      costs capitalized
    
    $
    --
    
    $
    117,551
    
    $
    49,924Interest
      costs charged to expense
    
    
    1,010,846
    
    
    724,001
    
    
    --Total
      interest incurred
    
    $
    1,010,846
    
    $
    841,552
    
    $
    49,924










31





**Husker
Ag, LLC**
 **Notes
to Financial Statements**
 **December
31, 2004, 2003 and 2002**
 
 **** **Note
1:** **Nature
of Operations and Summary of Significant Accounting Policies -
Continued**




***Grant
Income***




In
September 2004, the Company received a $226,850 Value-Added Agricultural Product
Market Development grant from the United States Department of Agriculture to
assist the Company in paying for employee salaries and corn purchases. The
Company recognized this amount as income upon meeting the conditions of the
grant. The amount is included in other income in 2004 in the accompanying
financial statements.




***Earnings
Per Membership Unit***




For
purposes of calculating basic earnings per membership unit, units subscribed and
issued by the Company are considered outstanding on the effective date of issue.
For purposes of calculating diluted earnings per membership unit, units
subscribed for but not issued by the Company are also included in the
computation of outstanding membership units.




**Note
2: Commencement of
Operations**




At
December 31, 2002, the Company was primarily involved in organizational
activities and construction of the plant. Accordingly, at December 31, 2002, the
Company was considered to be in the development stage and the financial
statements presented were those of a development stage enterprise. The total
deficit accumulated during the development stage amounted to $1,683,917. The
ethanol plant commenced operations during the quarter ended March 31,
2003.














32


****
 **Husker
Ag, LLC**
 **Notes
to Financial Statements**
 **December
31, 2004, 2003 and 2002**


**Note
3: Members’
Equity**




In
November 2004, the Company’s Board of Directors declared a cash distribution of
$100 per membership unit to all members of record as of November 30, 2004
payable in January, 2005. A distribution payable in the amount of $1,531,800 was
recorded by the Company as of December 31, 2004 by a charge to members’
equity.




In
December 2003, the Company’s Board of Directors declared a cash distribution of
$150 per membership unit to all members of record as of January 5, 2004, payable
in February 2004. A distributions payable in the amount of $2,297,700 was
recorded by the Company as of December 31, 2003 by a charge to members’
equity.




There are
significant transfer restrictions on transferability of membership units. The
Company’s Operating Agreement, as well as relevant portions of the Nebraska
Limited Liability Company Act and regulations of the Internal Revenue Service
(IRS) significantly restrict the transfer of the membership units. Unit holders
cannot assign or transfer a membership unit without approval from the Company’s
Board of Directors and the transfer or assignment must comply with applicable
Nebraska laws and IRS regulations.




The Board
of Directors will not approve transfers if the Board determines the transfer
would cause the Company to be treated as a “publicly traded partnership.” Any
transfers of membership units in violation of the publicly traded partnership
rules or without the prior consent of the Board of Directors will be null and
void.




**Note
4: Commitments and
Related Parties**




On
August 29, 2002, the Company entered into a natural gas distribution
agreement under which the distributor has agreed to transport a minimum of 35
million therms of natural gas at a fixed price over a five-year initial term.
The agreement is renewable at the end of the initial term for an additional
five-year period.




On March
7, 2004, the Company renewed an ethanol marketing agreement with Eco-Energy,
Inc. to market ethanol for an agreed-upon fee, which includes the cost of the
rail shipment. Eco-Energy, Inc. also collects the sales amount from the ultimate
customers and remits the net sales price to the Company within three business
days after the sale. The marketing agreement expires September 7,
2005.




At
December 31, 2004, the Company had entered into agreements to purchase 1,823,263
bushels of corn at an average price of $2.25 per bushel to be delivered between
January 2005 and January 2006. Thirty contracts totaling 389,557 bushels are
with related parties.




At
December 31, 2004, the Company had contracts for the sale of approximately
8,216,000 gallons of ethanol with prices ranging from $1.41 to $1.67 per gallon
to be delivered in 2005.




**Note
5: Design-Build
Agreement**




The
Company entered into a definitive design-build contract with a general
contractor totaling approximately $27,660,000 for the design and construction of
the ethanol plant that included provisions for an incentive bonus to, or
liquidated damages from, the general contractor based on the scheduled project
completion date. Based on the completion date, as defined in the contract, an
incentive bonus totaling $356,000 was due the general contractor. On June 5,
2003, the Company entered into a negotiable promissory note with the contractor
for payment of the incentive bonus. The Company paid the note in full in June
2004.




33


****
 **Husker
Ag, LLC**
 **Notes
to Financial Statements**
 **December
31, 2004, 2003 and 2002**




**Note
6:** **Long-term
Debt**





On
December 19, 2001, the Company entered into a written financing agreement
with Stearns Bank, N.A. for up to $20,000,000 of debt financing. The financing
agreement provided for, among other things, establishing an 18-month
construction loan that matured June 19, 2003. The construction loan was extended
to January 31, 2004. Interest accrued at a floating rate of Wall Street Journal
Prime plus 1.25% (5.25% at December 31, 2003) and there was $19,333,143 in
outstanding borrowings under this agreement at December 31, 2003. The loan was
converted into three term notes on January 20, 2004. The outstanding borrowings
at December 31, 2003 are classified between current and long-term liabilities on
the accompanying balance sheet based on the terms of the refinancing described
below. One of the term notes was paid in full on June 30, 2004.




On
January 20, 2004 the Company converted its construction loan into permanent
financing. As part of the conversion, the Company made a principal payment in
the amount of $152,643 and entered into three term loans, two of which remain
outstanding at December 31, 2004. Subject to any payment changes resulting from
changes in the interest rate charged, these term notes are due on demand. If no
demand is made, the notes are payable as described below. Stearns Bank has
waived the demand provision on the two term notes through December 2005. One
term loan is subject to a prepayment penalty and all loans are subject to
certain restrictive covenants which among other things require prior lender
approval of distributions and the maintenance of minimum levels of tangible net
worth, debt to tangible net worth, current ratio and working
capital.







34




**Husker
Ag, LLC**
 **Notes
to Financial Statements**
 **December
31, 2004, 2003 and 2002**


**Note
6:** **Long-term
Debt - Continued**




Long-term
debt consists of the following as of December 31, 2004 and 2003:




2004
    
    2003Note
      payable to Stearns Bank due in monthly installments of principal and
      interest of $125,633. The note bears interest at a variable rate of Wall
      Street Journal Prime plus 1.25% (6.0% at December 31, 2004), adjusted
      quarterly. The note matures April 2011 and is collateralized by
      substantially all assets of the Company, a first deed of trust on real
      property and a 70% USDA guarantee.
    
    $
    7,905,914
    
    $
    8,837,300Note
      payable to Stearns Bank due in monthly installments of principal and
      interest of $125,633. The note bears interest at a variable rate of Wall
      Street Journal Prime plus 1.25% (6.0% at December 31, 2004), adjusted
      quarterly. The note matures April 2011 and is collateralized by
      substantially all assets of the Company and a first deed of trust on real
      property.
    
    
    7,905,914
    
    
    8,837,300Note
      payable to Stearns Bank due in monthly installments of principal and
      interest of $34,901 beginning February 2004. The note accrued interest at
      a variable rate of Wall Street Journal Prime plus 1.25%, adjusted
      quarterly, and was collateralized by substantially all assets of the
      Company. The note was paid in full in June 2004.
    
    
    --
    
    
    1,505,900Note
      payable to Fagen Inc. (ethanol plant general contractor) due no later than
      September 2006. The note accrued interest at a rate commensurate with the
      rate charged on the aforementioned term loans with unpaid interest added
      to the principal annually. The note was without collateral and was paid in
      full in June 2004.
    
    
    --
    
    
    356,000










35





****Husker
Ag, LLC**
**Notes
to Financial Statements**
**December
31, 2004, 2003 and 2002****


**Note
6:** **Long-term
Debt - Continued**




2004
    
    2003Note
      payable to Northeast Nebraska Public Power District due in monthly
      installments of $3,438 through June 2013. The note bears interest at a
      fixed rate of 4.127%. The note is collateralized by a letter of credit in
      the amount of $326,060 expiring January 30, 2005. The letter of credit
      requires the Company to maintain cash at the bank in an amount equal to
      the letter of credit. The Company is in the process of obtaining a new
      letter of credit.
    
    
    295,319
    
    
    326,060Total
      long-term debt
    
    
    16,107,147
    
    
    19,862,560Less
      current maturities
    
    
    2,141,171
    
    
    2,180,757$
    13,965,976
    
    $
    17,681,803




The
Company has a line of credit, with maximum borrowings of $1,000,000, expiring
March 31, 2005. At December 31, 2004 and 2003, there were no borrowings
against the line. The line is collateralized by a security agreement dated
January 20, 2004. Interest will accrue at a variable interest rate of Wall
Street Journal Prime plus 0.50%, but not less than 6.45% and is payable
monthly.




The
Company also has a letter of credit with Stearns Bank in the amount of $67,000,
expiring January 9, 2005, to be used to serve the Company’s natural gas
obligations. The letter of credit requires the Company to maintain cash at the
bank in an amount equal to the letter of credit. The company did not renew this
letter of credit.




Future
annual maturities of long-term debt as of December 31, 2004 are as
follows:




**Year
      Ending December 31,**
    
    **Amount**2005
    
    $
    2,141,1712006
    
    
    2,274,5112007
    
    
    2,416,1692008
    
    
    2,565,1502009
    
    
    2,726,446Thereafter
    
    
    3,983,700$
    16,107,147

















36




**Husker
Ag, LLC**
 **Notes
to Financial Statements**
 **December
31, 2004, 2003 and 2002**


**Note
7:** **Retirement
Plan**





On
January 12, 2004, the Company implemented a retirement plan covering
substantially all employees. The Company matches employee contributions up to a
maximum of 3% of employee compensation. Company contributions to the plan were
$37,322 for the year ended December 31, 2004.




**Note
8:** **Derivative
Instruments**





The
Company enters into option and futures contracts, which are designated as hedges
of specific volumes of corn expected to be used in the manufacturing process.
The Company uses derivative financial instruments to manage the exposure to
price risk related to corn purchases. The Company does not typically enter into
derivative instruments for any reason other than cash flow hedging purposes. The
option and futures contracts presented on the December 31, 2004 and 2003 balance
sheets are recorded at fair value. On the date that the contract is entered
into, the Company designates the option or contract as a hedge of variable cash
flows of certain forecasted purchases of corn used in the manufacturing process
(a “cash flow hedge”). In order for these open contracts to qualify for cash
flow hedging treatment under Statement of Financial Accounting Standard No. 133
“Accounting for Derivative Instruments and Hedging Activities”, the Company must
formally document relationships between the option and futures contracts, which
serve as the hedging instruments, and the hedged items, as well as its risk
management objective and strategy for undertaking various hedge transactions.
When it is determined that an option or futures contract is not highly effective
as a hedge or has ceased to be a highly effective hedge, the Company must
discontinue hedge accounting prospectively. Changes in the fair value of option
and futures contracts that are highly effective and that are designated and
qualify as cash flow hedges are recorded in other comprehensive loss. Gains and
losses that are realized will be recognized in the statement of operations when
the related corn purchased is recognized in cost of sales.




Currently,
option and futures contracts on corn purchased by the Company do not meet the
requirements for cash flow hedging treatment. As a result, changes in market
value of option and futures contracts are recorded on the statement of
operations in gain/loss on option and futures contracts.














37




**Husker
Ag, LLC**
 **Notes
to Financial Statements**
 **December
31, 2004, 2003 and 2002**


**Note
9:** **Related
Party Transactions**





The
Company has transactions in the normal course of business with various members.
Significant related party transactions affecting the financial statements as of
and for the years ended December 31 are approximately as follows:




Balance
      Sheets
    
    2004
    
    2003Accounts
      receivable
    
    $
    34,000
    
    $
    142,000Accounts
      payable
    
    
    345,000
    
    
    161,000Statements
      of IncomeDistillers
      grain sales
    
    $
    1,028,000
    
    $
    1,307,000Corn
      purchases
    
    
    5,157,000
    
    
    5,233,000Commissions
      and salary on distillers grain sales
    
    
    54,000
    
    
    61,000


There
were no related party transactions affecting the financial statements for the
year ended December 31, 2002.




**Note
10:** **Disclosure
Regarding Fair Value of Financial Instruments**





The fair
value of a financial instrument is the current amount that would be exchanged
between willing parties, other than in a forced liquidation. Fair value is best
determined based upon quoted market prices. However, in many instances, there
are no quoted market prices for the Company’s various financial instruments. In
cases where quoted market prices are not available, fair values are based on
estimates using discounted expected cash flows or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. Accordingly, the fair
value estimates may not be realized in an immediate settlement of the
instrument. Statement of Financial Accounting Standards No. 107 excludes certain
financial instruments and all non-financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts may not necessarily
represent the underlying fair value of the Company. The Company’s financial
instruments are comprised of cash and cash equivalents, commodity margin
accounts, accounts receivable, accounts payable, option and futures contracts
and long-term debt. The fair values of such financial instruments approximate
the amounts recorded in the Company’s financial statements due primarily to
their short-term nature or variable interest rate terms.














38


**Husker
Ag, LLC**
 **Notes
to Financial Statements**
 **December
31, 2004, 2003 and 2002**


****


****


**Note
11:** **Energy
Production Incentive Credits and Significant Estimates**





The
Company is currently participating in a state energy production credit program.
Under this program, the Company earns a credit of $0.18 per gallon of ethanol
produced, not to exceed 15,625,000 gallons annually and no more than 125,000,000
gallons over a consecutive 96-month period. The program expires June 30, 2012.
Credits earned annually under this program for the years ended December 31, 2004
and 2003 were $2,812,500.




The
Company is also participating in a federal production credit program. Credits
earned under this program are based on the increased utilization of corn in the
production of ethanol. As of and for the years ended December 31, 2004 and 2003,
accounts receivable related to this program were approximately $75,000 and
$1,041,000 and credits earned were approximately $2,201,000 and $4,556,000,
respectively. Since the Company began operations in March 2003 and credits
earned under this program are based on the increased utilization of corn, the
majority of the revenue generated under this program was realized within the
first 12 months of operations.




**Note
12:** **Energy
Production Incentive Credits and Significant
Estimates**





The
Company is currently participating in a state energy production credit program.
Under this program, the Company earns a credit of $0.18 per gallon of ethanol
produced, not to exceed 15,625,000 gallons annually and no more than 125,000,000
gallons over a consecutive 96-month period. The program expires June 30, 2012.
Credits earned annually under this program for the years ended December 31, 2004
and 2003 were $2,812,500.




The
Company is also participating in a federal production credit program. Credits
earned under this program are based on the increased utilization of corn in the
production of ethanol. As of and for the years ended December 31, 2004 and 2003,
accounts receivable related to this program were approximately $75,000 and
$1,041,000 and credits earned were approximately $2,201,000 and $4,556,000,
respectively. Since the Company began operations in March 2003 and credits
earned under this program are based on the increased utilization of corn, the
majority of the revenue generated under this program was realized within the
first 12 months of operations.




Credits
earned under the aforementioned state and federal energy production programs are
included in net sales in the accompanying statements of operations.




Total
credits available under the federal energy production credit program depend on
the amount of credits claimed by eligible participants. Credits claimed may
exceed the amount of credits available. As a result, federal energy production
incentive credits receivable are based on the amount of credits estimated to be
allocated to the Company and actual credits received may differ from amounts
recorded by a material amount.




**Note
13:** **Reverse
Repurchase Agreement**





In order
to perfect the security interest of the Company in securities that act as
collateral under the repurchase agreement, Midwest Bank, N.A. (the Bank) has
transferred such securities to a third party custodian. The custodian is the
Company’s agent for the purposes of possessing and perfecting the Company’s
security interest in said securities at December 31, 2004. To the extent that
the market value of the securities used as collateral falls below the
outstanding amount of repurchase obligations, the company may become an
unsecured creditor of the Bank. The market value of securities pledged as
collateral exceeds the carrying amount of the reverse repurchase agreement and
the agreement has a weighted average maturity of one day as of December 31,
2004.




39


****


****Husker
Ag, LLC**
**Notes
to Financial Statements**
**December
31, 2004, 2003 and 2002****


**Note
13: Contingencies**




Husker
Ag, LLC is subject to various federal, state and local environmental laws and
regulations that govern emissions of air pollutants; discharges or water
pollutants; and generation, handling, storage and disposal of hazardous
substances. The Company is also subject to potential liabilities arising under
state laws that require responsible parties to remediate releases of hazardous
or solid waste constituents into the environment associated with past or present
activities. Husker Ag LLC has been advised by the Nebraska Department of
Environmental Quality that it may be receiving a written warning due to
exceeding the current construction air permit limitations on production and
grain receiving amounts. As of December 31, 2004, the Nebraska DEQ was unable to
provide an estimate, if any, of possible exposure costs. Management does not
expect exposure costs, if any, to be material.




**Note
14: Recent Accounting
Pronouncements**




In
December 2004, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 123 (revised 2004), Share-Based Payment. The Statement generally
provides that the cost of Share-Based Payments be recognized over the service
period based on the fair value of the option or other instruments at the date of
grant. The grant date fair value should be estimated using an option-pricing
model adjusted for the unique characteristics of the options or other
instruments granted. The Company does not have any outstanding options at
December 31, 2004. With respect any future grants, the Company may elect to use
the Black-Scholes option pricing model or may elect to determine the grant date
fair value using an alternative method. This Statement will be effective for the
Company beginning July 1, 2005.




In
November 2004, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. This
Statement clarifies that items such as idle facility expense, excessive
spoilage, double freight, and re-handling costs should be classified as a
current-period charge. The Statement also requires the allocation of fixed
production overhead to inventory based on the normal capacity of the production
facilities. The statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005.




In
December 2004, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 153, Exchanges of Nonmonetary Assets, and amendment of APB Opinion
No. 29. Statement No. 29 generally provides that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged subject to
certain exceptions to the general rule. The Statement amends Opinion No. 29 to
eliminate the exception for exchanges involving similar productive assets with a
general exception for exchanges that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. This
Statement is effective for nonmonetary asset exchanges in periods beginning
after June 15, 2005.





40


****
**Husker
Ag, LLC**
**Notes
to Financial Statements**
**December
31, 2004, 2003 and 2002**








The
implementation of these pronouncements is not expected to have a significant
effect on the financial statements.




**Note
15: Subsequent Event**




On
January 20, 2005, the Board of Directors approved a resolution to refinance the
Company’s line of credit and two term notes totaling $15,811,828 with Union Bank
and Trust Company and Midwest Bank N.A. The resulting financing arrangement will
consist of one term note in the amount of $10,000,000 and a line of credit with
maximum borrowings of $5,000,000 secured by substantially all Company assets.
The term note will accrue interest at 6.2% with monthly principal and interest
payments to be determined upon final closing. The revolving line of credit will
accrue interest at Wall Street Journal Prime plus 0.75% adjusted monthly.
Interest is payable monthly on the line of credit, and principal is due
annually. The refinancing will result in the assessment of a pre-payment penalty
by Stearns Bank of approximately $310,000.












41


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





None.





**ITEM
8A. CONTROLS AND PROCEDURES**





(a) Evaluation
of Disclosure Controls and Procedures : The
Company's Principal Executive Officer and Principal Financial Officer have
evaluated the effectiveness of the Company's disclosure controls and procedures
(as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the
period covered by this annual report on Form 10-KSB (the "Evaluation Date").
Based on such evaluation, such officers have concluded that, as of the
Evaluation Date, the Company's disclosure controls and procedures are effective
in alerting them on a timely basis to material information relating to the
Company (including its consolidated subsidiaries) required to be included in the
Company's periodic filings under the Exchange Act.





(b) Changes
in Internal Controls : During
the Company’s fourth fiscal quarter ended December 31, 2004, there have not been
any significant changes in the Company's internal control over financial
reporting or in other factors that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.





**ITEM
8B. OTHER INFORMATION**





**(a)
Information Not Previously Reported On Form 8-K**





None.





**PART
III**





**ITEM
9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE**





The
information required by this Item is incorporated herein by reference to the
Company’s Proxy Statement.





**ITEM
10. EXECUTIVE COMPENSATION**





The
information required by this Item is incorporated herein by reference to the
Company’s Proxy Statement.





**ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT**





The
information required by this Item is incorporated herein by reference to the
Company’s Proxy Statement.





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





The
information required by this Item is incorporated herein by reference to the
Company’s Proxy Statement.





**ITEM
13. EXHIBITS**





The
response to this Item 13 is submitted as a separate section of this report (see
Exhibit Index on page 45).





**ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**





The
information required by this Item is incorporated herein by reference to the
Company’s Proxy Statement.







42





**SIGNATURES**





In
accordance with Section 13 of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, there-unto duly
authorized.





**HUSKER AG,
      LLC**Date: March 29,
2005
    By:
    /s/ Fredrick J.
    KnievelFredrick J. Knievel, Chairman of
      the Board,President and Director*(Principal Executive
      Officer)*
 Date: March 29, 2005
    By:
    /s/ Robert E. BrummelsRobert E. Brummels, Treasurer and
      Director*(Principal Financial Officer)*


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


Signature
    
    Capacity/s/
      Fredrick J. Knievel
    
    Chairman
      of the Board, President, DirectorFredrick
      J. KnievelDate:
      March 29, 2005/s/
      Mike Kinney
    
    Vice
      Chairman, Vice President, DirectorMike
      KinneyDate:
      March 29, 2005/s/
      Robert E. Brummels
    
    Treasurer
      and DirectorRobert
      E. BrummelsDate:
      March 29, 2005/s/
      Kristine WackerKristine
      Wacker
    
    Principal
      Accounting OfficerDate:
      March 29, 2005/s/
      Leonard Wostrel
    
    Secretary
      and DirectorLeonard
      WostrelDate:
      March 29, 2005/s/
      Ronald Fick
    
    DirectorRonald
      FickDate:
      March 29, 2005/s/
      James Hall
    
    DirectorJames
      HallDate:
      March 29, 2005
   43
  /s/
      O. Kelly Hodson
    
    DirectorO.
      Kelly HodsonDate:
      March 29, 2005/s/
      Gary Kuester
    
    DirectorGary
      KuesterDate:
      March 29, 2005/s/
      David Stearns
    
    DirectorDavid
      StearnsDate:
      March 29, 2005/s/
      J. Alex Thramer
    
    DirectorJ.
      Alex ThramerDate:
      March 29, 2005




44





**EXHIBIT
INDEX**





ExhibitNumber
    
    Description
    
    Method
      of Filing3.1
    
    Articles
      of Organization, as amended
    
    Incorporated
      by reference to the Company’s Form 10-QSB for the period ended June 30,
      2002 filed on August 14, 2002.3.2
    
    Second
      Amended and Restated Operating Agreement of the Company, dated as of
      August 13, 2004, and including Amendment Nos. 1 through 10
    
    Filed
      herewith.10.1
    
    Agreement
      with the Nebraska Department of Agriculture
    
    Incorporated
      by reference to the Company’s Registration Statement on Form SB-2 (SEC
      Registration No. 333-60580, as amended (the “1933 Act Registration
      Statement”) filed on May 10, 2001.10.2
    
    Contract
      Labor Agreement with Allen Sievertsen
    
    Incorporated
      by reference to the Company’s Registration Statement on Form SB-2 (SEC
      Registration No. 333-60580, as amended (the “1933 Act Registration
      Statement”) filed on May 10, 2001.10.3
    
    Design
      Build Contract with Fagen, Inc. and ICM, Inc. dated November 30,
      2001
    
    Incorporated
      by reference to the Company’s Form 10-KSB for the fiscal year ended
      December 31, 2001 filed on March 29, 2002.10.4
    
    Loan
      Commitment Agreement with Stearns Bank dated November 30,
    2001
    
    Incorporated
      by reference to the Company’s Form 10-KSB for the fiscal year ended
      December 31, 2001 filed on March 29, 2002.10.5
    
    Construction
      Loan Agreement with Stearns Bank dated December 19, 2001
    
    Incorporated
      by reference to the Company’s Form 10-KSB for the fiscal year ended
      December 31, 2001 filed on March 29, 2002.10.6
    
    Promissory
      Note dated December 19, 2001
    
    Incorporated
      by reference to the Company’s Form 10-KSB for the fiscal year ended
      December 31, 2001 filed on March 29, 2002.10.7
    
    Commercial
      Security Agreement dated December 19, 2001
    
    Incorporated
      by reference to the Company’s Form 10-KSB for the fiscal year ended
      December 31, 2001 filed on March 29, 2002.
 10.8
    
    Construction
      Deed of Trust dated December 19, 2001
    
    Incorporated
      by reference to the Company’s Form 10-KSB for the fiscal year ended
      December 31, 2001 filed on March 29, 2002.10.9
    
    Contract
      Change Order to the Design Build Contract dated August 7, 2002 between the
      Company and Fagen, Inc.
    
    Incorporated
      by reference to the Company’s Form 10-QSB for the period ended September
      30, 2002 filed on November 14, 2002.10.10
    
    Track
      Agreement dated August 29, 2002 between the Company and Nebraska
      Northeastern Railroad Company
    
    Incorporated
      by reference to the Company’s Form 10-QSB for the period ended September
      30, 2002 filed on November 14, 2002.10.11
    
    Trading
      Service Agreement dated February 17, 2003 between the Company and Variable
      Investment Advisors, Inc.
    
    Incorporated
      by reference to the Company's Form 10-KSB for the period ended December
      31, 2002, filed on March 31, 2003.10.12
    
    Promissory
      Note, dated January 20, 2004, to Stearns Bank, National Association (Loan
      No. 57748)
    
    Incorporated
      by reference to the Company's Form 10-KSB for the period ended December
      31, 2003, filed on March 30, 2004.
  45
   ExhibitNumber
    
    Description
    
    Method
      of Filing10.13
    
    Promissory
      Note, dated January 20, 2004, to Stearns Bank, National Association (Loan
      No. 57749)
    
    Incorporated
      by reference to the Company's Form 10-KSB for the period ended December
      31, 2003, filed on March 30, 2004.10.14
    
    Promissory
      Note, dated January 20, 2004 to Stearns Bank, National Association (Loan
      No. 57750)
    
    Incorporated
      by reference to the Company's Form 10-KSB for the period ended December
      31, 2003, filed on March 30, 2004.10.15
    
    Business
      Loan Agreement, dated January 20, 2004 with Stearns Bank, National
      Association
    
    Incorporated
      by reference to the Company's Form 10-KSB for the period ended December
      31, 2003, filed on March 30, 2004.10.16
    
    Commercial
      Loan Agreement with Union Bank and Midwest Bank, dated February 22,
      2005
    
    Incorporated
      by reference to the Company's Form 8-K filed on February 28,
      2005.10.17
    
    Promissory
      Note dated February 22, 2005 to Union Bank for a single advance term
      loan
    
    Incorporated
      by reference to the Company's Form 8-K filed on February 28,
      2005.10.18
    
    Promissory
      Note dated February 22, 2005 to Midwest Bank for a revolving line of
      credit
    
    Incorporated
      by reference to the Company's Form 8-K filed on February 28,
      2005.10.19
    
    Commercial
      Security Agreement with Union Bank and Midwest Bank, dated February 22,
      2005
    
    Incorporated
      by reference to the Company's Form 8-K filed on February 28,
      2005.10.20
    
    Real
      Estate Deed of Trust dated February 22, 2005 in favor of Union Bank and
      Midwest Bank
    
    Incorporated
      by reference to the Company's Form 8-K filed on February 28,
      2005.10.21
    
    Risk
      Management and Ethanol Marketing Contract dated November 27, 2002, by and
      among the Company, FC Stone, LLC, and Eco-Energy, Inc.*****
    
    Filed
      herewith.10.22
    
    Agreement
      dated March 24, 2003, between the Company and Rite Way Oil & Gas Co.,
      Inc.*****
    
    Filed
      herewith.10.23
    
    Ethanol
      Production Credit Agreement dated September 5, 2001, between the Company
      and the State of Nebraska
    
    Filed
      herewith.10.24
    
    Summary
      of Director Compensation Policy
    
    Filed
      herewith.10.25
    
    Summary
      of the Named Executive Officer Compensation
    
    Filed
      herewith.14.1
    
    Husker
      Ag, LLC Code of Ethics for Principal Executive and Senior Financial
      Officers adopted by the Board of Directors on March 26, 2004
    
    Incorporated
      by reference to the Company's Form 10-KSB for the period ended December
      31, 2003, filed on March 30, 2004.99.1
    
    Company's
      Trading System Rules and Procedures as amended by the Board of Directors
      on January 22, 2005
    
    Filed
      herewith.31.1
    
    Certification
      of Principal Executive Officer required by Rule 13a-15(e) and
      15d-15(e)
    
    Filed
      herewith.31.2
    
    Certification
      of Principal Financial Officer required by Rule 13a-15(e) and
      15d-15(e)
    
    Filed
      herewith.32.1
    
    Section
      1350 Certifications, adoptedpursuant to Section 906 of Sarbanes-Oxley Act of 2002
    
    Filed
      herewith.





***** -
Material has been omitted pursuant to a request for confidential treatment and
such materials have been filed separately with the Securities and Exchange
Commission.








46