**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

Washington, D.C. 20549

 

**FORM 10-KSB**

** **

**x**                              ANNUALREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended **December 31, 2006**

 

**o**                                 TRANSITION REPORTUNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                          to                          

 

Commission file number **333-130815**

 

**Ethanol Grain Processors, LLC**

(Name of small businessissuer in its charter)

| **Tennessee**                                                   |   | **20-1834045**                     |
|-----------------------------------------------------------------|--------|------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (IRS Employer  Identification No.) |
|                                                            |   |                               |
| **1918  McDonald Road  Rives, Tennessee**                       |   | **38253**                          |
| (Address of  principal executive offices)                       |   | (Zip Code)                         |
| ** **                                                      |   | ** **                         |
|                                                            |   |                               |
| **(731)  536-1286**                                             |
| (Issuer’s  telephone number)                               |
|                                                            |   |                               |

 

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

Securities registered under Section 12(g) of theExchange Act:  **None**

Check whether the issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  o Yes       x  No

Check if there is no disclosure of delinquent filersin response to Item 405 of Regulation S-B contained in this form, and nodisclosure will be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in Part IIIof this Form 10-KSB or any amendment to this Form 10-KSB.  x

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

State issuer’s revenues for its most recent fiscalyear:  **None**

**As of March 23, 2007, the aggregate market value of the capital unitsheld by non-affiliates (computed by reference to the most recent offering priceof such units) was $30,360,232.**

**As of March 23, 2007, there were39,944,116 capital units outstanding**.

Transitional Small Business Disclosure Format (Checkone):  o Yes       x No

 

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**PART I**

**Item 1.    Description of Business**

**Overview**

We are a developmentstage company that intends to build and operate a gas-fired 100 million gallonper year ethanol production facility near Obion, Tennessee. We have purchased a230-acre site located on the Canadian National Railroad’s rail line. We havehired Fagan, Inc. to design and build our ethanol plant utilizing the processdesign technology of ICM, Inc. Having recently closed on our debt and equityfinancing and completed our preliminary site work, we expect to spend the nextapproximately 18 months constructing the ethanol plant. Following completion ofthe ethanol plant, we expect to reach guaranteed performance criteria andspecifications within 30 days.

We will not beginoperations or generate revenue until we complete construction of the plant,which we anticipate will be mid-2008. Once we begin operations, we expect togenerate revenue by selling ethanol and distillers grains. We also intend tosell the raw carbon dioxide gas our plant will produce “over-the-fence” to aprocessor that constructs a processing plant next to our planned ethanolfacility. We intend to produce ethanol from corn by using proven fermentationand distillation processes.

We intend to compete withother ethanol producers by capitalizing on the location of the ethanol plant,available transportation infrastructure, proximity of available feedstocksupply and a local growing ethanol demand by utilizing the best practices andpartners experienced with making producer owned dry mill facilities successful.

**The Ethanol Plant**

*The Dry Mill Process*

Our proposed ethanolplant will produce ethanol, distillers grains and carbon dioxide by processingcorn. We plan to receive corn by rail and semi-trailer truck. The corn will beweighed and stored in receiving facilities. It will then be transported to ascalper to remove rocks and debris before it is conveyed to processing bins.Thereafter, the corn will be transported to a hammer-mill or grinder where itis ground into a mash and conveyed into a tank for processing. We will addwater, heat and enzymes to break the ground corn into a fine liquid. Thisliquid will be heat sterilized and pumped to a tank where other enzymes areadded to convert the starches into glucose sugars. Next, the liquid is pumpedinto fermenters, where yeast is added, to begin the fermentation process, whichgenerally takes about 40 to 50 hours. Thereafter, the resulting “beer” ispumped to distillation columns, which divides the alcohol from the corn mash.The alcohol is concentrated to 190 proof in the distillation columns and isthen partially dehydrated in a molecular sieve. The resulting 200 proof alcoholis then blended with a five percent denaturant (such as gasoline) as it ispumped into storage tanks.

Meanwhile, corn mash fromthe distillation process is pumped into a centrifuge that separates the coarsegrain from the solubles. The solubles are then dried into a thick syrup. Thecoarse grain that exits the centrifuge is then conveyed to dryers. Syrup isadded to the coarse grain as it enters the dryer, where moisture is removed.This process produces distillers grains with various moisture levels, which canbe used as animal feed. The fermentation process will also produce carbondioxide, which we intend to capture and pipe “over the fence” to a third partyprocessor who may build a processing facility next to our ethanol plant.

*Plant Structure*

We anticipate that theethanol plant will use a dry milling process to produce fuel-grade ethanol asits main product and distillers grains as a co-product. The ethanol plant willhave a design capacity to produce 100 million gallons of ethanol per year. Inaddition, we expect the plant to produce approximately 320,000 tons of drieddistillers grains with solubles and 270,000 tons of carbon dioxide gasannually. We expect that when completed, the ethanol plant will have, amongothers, the following facilities:

*Grain Receiving, Storage andMilling Equipment*.  The ethanol plant will contain receiving facilities that will have theability to receive corn by rail and truck. Upon delivery, the corn will beweighed and a weight ticket issued. A leg will lift the corn to a scalper toremove rocks and debris before conveying the product to storage bins. A dustcollection system will be installed in the grain receiving system to limitparticulate emissions. The corn will be removed from storage and processedthrough a hammer-mill or grinder. The result of this process is ground corn.

*Conversion and LiquefactionSystem, Fermentation System and Evaporation System*.   Ground corn will be mixed in slurry tanks,routed through a pressure vessel and steam flashed in a flash vessel, whichproduces cooked mash. The cooked mash will then continue through liquefactiontanks and into fermenters. Simultaneously, yeast will be added to the cookedmash as it enters the fermenters. After batch fermentation is complete, theliquid produced by the fermentation process is pumped to wells and then to thedistillation column to separate the alcohol from the mash.

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*Distillation and Molecular Sieve*.   The alcohol is dehydrated in thedistillation column, the side stripper and the molecular sieve system. Thealcohol is then blended with 5% gasoline as it is pumped into storage tanks.The storage tanks will contain meters, filters, pumps and loading equipment fortransfer to rail cars or trucks.

*Liquid/Solid Separation System*.   The ethanol plant will also producedistillers grains. The resulting corn mash from the distillation column will betransported to centrifuges and then to dryers, where moisture is removed. Theethanol plant will utilize a dryer system with a thermal oxidizer and heatrecovery steam generation. After it is dried, the distillers grains will beconveyed to the filter receiver and then to a storage building.

*Product Storage Area*.   We expect to have storage tanks on site tostore the ethanol we produce. The plant will also contain a storage building tohold distillers grains until it is shipped to market.

*General Plant Infrastructure andUtilities*.   The plantwill also consist of administration facilities, chillers, cooling towers andother processing equipment, some of which require fresh water to operate.Boiler water is conditioned in regenerative softeners and/or other treatmentequipment and pumped through a deaerator and into a deaerator tank. Appropriateboiler chemicals are added and the pre-heated water is pumped into the boiler.Steam energy will be provided by a heat recovery steam generator. Processcooling will be provided by circulating cooling water through heat exchangers,a chiller and a cooling tower. We expect the plant to also contain a compressedair system consisting of an air compressor, receiver tank, pre-filter and airdryer. We expect that the plant design will also incorporate the use of aclean-in-place system for cooking, fermentation, distillation, evaporation,centrifuges and other systems.

The block flowdiagram below illustrates how the ethanol plant will process corn into ethanol:

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Source: Renewable Fuels Association

**Principal Products and Related Markets**

Once completed, we expectthe ethanol plant will convert, on an annual basis, approximately 35 millionbushels of corn into approximately 100 million gallons of ethanol, 320,000 tonsof dried distillers grain, and 270,000 tons of carbon dioxide gas.

*Ethanol*

Ethanol is ethyl alcohol,a fuel component made primarily from corn and various other grains, and can beused as:

·             Anoctane enhancer in fuels;

·             Anoxygenated fuel additive that can reduce ozone and carbon monoxide vehicleemissions; and

·             Anon-petroleum based gasoline substitute.

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Most ethanol is used inits primary form for blending with unleaded gasoline and other fuel products.The principal purchasers of ethanol are generally wholesale gasoline distributorsor blenders.

*Distillers Grains*

A principal by-product ofthe ethanol production process is distillers grains, a high protein,high-energy animal feed. Dry mill ethanol processing creates three primaryforms of distillers grains: distillers wet grains, distillers modified wetgrains and distillers dried grains with solubles. Distillers wet grains isprocessed corn mash that contains a substantial amount of moisture. It has ashelf life of up to approximately 14 days and can be sold only to farms withinthe immediate vicinity of the ethanol plant. Distillers modified grains issimilar to distillers wet grains except that it has been partially dried andcontains less moisture. Distillers modified grains has the same shelf life, butcontains less water to transport and is more easily adaptable to some feedingsystems, and can be potentially sold to regional markets. Distillers driedgrains with solubles is corn mash that has been dried to approximately 10%moisture. It has an almost indefinite shelf life and may be sold and shipped toany market regardless of its vicinity to the ethanol plant.

*Carbon Dioxide*

Another by-product of theethanol production process is raw carbon dioxide. Raw carbon dioxide can beprocessed and used in various food and non-food related applications, such asbeverage and dry ice production, pharmaceutical manufacturing, shrink-fittingand cryogenic blasting. Carbon dioxide is principally used as expendablerefrigerants and is commonly used in food processing facilities such as slaughterhouseoperations, frozen food storage, and as supplemental cooling for refrigeratedproducts.

**The Ethanol Market**

Ethanol is produced fromstarch or sugar-based feed products such as corn, potatoes, wheat, and sorghum,as well as from agricultural waste products including sugar, rice straw, cheesewhey, beverage wastes and forestry and paper wastes. Historically, corn hasbeen the primary source because of its relatively low cost, wide availabilityand ability to produce large quantities of carbohydrates that convert intoglucose more easily than other products.

Ethanol has been utilizedas a fuel additive since the late 1970’s when its value as a product extenderfor gasoline was discovered during the OPEC oil embargo crisis. In the 1980’s,ethanol began to see widespread use as an octane enhancer, replacing otherenvironmentally harmful components in gasoline such as lead and benzene.Ethanol’s use as an oxygenate continued to increase with the passage of theClean Air Act Amendments of 1990, which required the addition of oxygenates togasoline in the nation’s most polluted areas. Ethanol contains approximately35% oxygen and when combined with gasoline, it acts as an oxygenate thatincreases the percentage of oxygen in gasoline. As a result, the gasoline burnscleaner and releases less carbon monoxide and other exhaust emissions into theatmosphere. Although not all scientists agree about the existence or extent ofenvironmental benefits associated with its use, the use of ethanol is commonlyviewed as a way to improve the quality of automobile emissions.

The most common oxygenatecompeting with ethanol is methyl tertiary butyl ether or “MTBE,” which ischeaper than ethanol. Since the introduction and widespread use of MTBE as anoxygenate, it has been discovered in ground water, lakes and streams. Unlikeethanol, which is biodegradable, MTBE is petroleum-based. While MTBE has notbeen classified as a carcinogen, it has been shown to cause cancer in animalsand its continued use has raised serious environmental concerns. As a result,by the end of 2005, according to the U.S. Department of Energy, 25 states,including California, Illinois and New York, had barred, or passed lawsbanning, any more than trace levels of MTBE in their gasoline supplies, and legislationto ban MTBE was pending in four others.

Due in part to federaland state policies promoting cleaner air, the environmental concerns associatedwith MTBE, and federal and state tax and production incentives, the ethanolindustry has grown substantially in recent years. The Renewable FuelsAssociation estimates that in 2004, approximately 1.95 billion gallons ofethanol were utilized as an oxygenate in the Federal Reformulated GasolineProgram, 290 million gallons in the federal winter Oxygenated Gasoline Program,280 million gallons in Minnesota to satisfy the state’s oxygenated fuelsprogram, and 1.05 billion gallons in conventional gasoline markets as an octaneenhancer and gasoline extender.

According to theRenewable Fuels Association, no fewer than 15 new ethanol refineries werecompleted and brought online in 2006. The addition of these refineries,including the completion of expansion projects, added approximately 1.1 billiongallons of new production capacity. For the year, according to the RenewableFuels Association, 110 ethanol refineries located in 19 states produced arecord approximately 4.9 billion gallons, an increase of more than 25% from2005 and 300% since 2000. As of March 2007, according to the Renewable FuelsAssociation, 114 U.S. ethanol plants have the capacity to produce approximately5.6 billion gallons of ethanol annually, with another 87 plants underconstruction or expansion expected to add approximately 6.4 billion moregallons of annual productive capacity. A majority of the ethanol

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productioncapacity is located in the Midwest, in the corn-producing states of Illinois,Iowa, Minnesota, Nebraska and South Dakota.

The U.S. FederalHighway Administration estimates that approximately 2.75 billion gallonsof ethanol were used in the year 2003. The following table presents theestimated usage by state for those states consuming over 100 million gallons inthat year.

| State      | ** ** | ** ** | ** ** | **Total Ethanol Consumption  in 2003 (gallons)  (in thousands)** | ** ** |
|------------|------------|------------|------------|-------------------------------------------------------------------------------------------|------------|
| California |       | 588,743    |       |
| Illinois   |       | 385,054    |       |
| Indiana    |       | 131,143    |       |
| Iowa       |       | 104,391    |       |
| Michigan   |       | 151,418    |       |
| Minnesota  |       | 275,210    |       |
| Ohio       |       | 183,722    |       |
| Wisconsin  |       | 107,877    |       |

 

Since that time,ethanol consumption has continued to increase significantly in many markets.For example, due in part to the phase out of the use of MTBE in California,estimated ethanol demand in California in 2005 is approximately 900 milliongallons, according to a November 2005 California Energy Commission staffreport.

*National Renewable Fuel Standard*

The Energy Policy Act of2005 also introduced a national renewable fuel standard program which sets anational minimum usage requirement that phases in over seven years, beginningwith approximately 4.0 billion gallons in 2006 and increases to 7.5 billiongallons by 2012. The Environmental Protection Agency is directed to issue rulesensuring that the applicable volume of renewable fuels (ethanol, biodiesel, orany other liquid fuel produced from biomass or biogas) is sold or introducedinto commerce in the U.S. annually. The legislation required that the renewablefuel standard be implemented no later than one year after the date ofenactment. However, the Environmental Protection Agency was unable to completeits rulemaking for the program within that period, and instead allowed theprogram to operate under the statutory default standards for 2006. In September2006, proposed regulations were issued for a comprehensive, long-term programbeginning in 2007.We expect that ethanol will account for the largest share ofrenewable fuel produced and used under the renewable fuel standard for theforeseeable future, although the biodiesel industry is also growing.

The renewable fuelstandard program should ensure the continued growth of the ethanol market inthe near future. While we cannot assure you that this program’s mandates willcontinue in force in the future, the following chart illustrates the potentialU.S. ethanol demand based on the program’s schedule through the year 2012.

**U.S. Fuel Ethanol Demand**

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Source: U.S. EnvironmentalProtection Agency, December 2005

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*OxygenatedFuel Requirements*

Most ethanol is used inits primary form for blending with unleaded gasoline and other fuel products.Recently, the demand for ethanol has increased in part because of two majorprograms established by the Clean Air Act Amendments of 1990. The firstprogram, the Oxygenated Gasoline Program, is a recurring wintertime programdesigned to reduce carbon monoxide levels during the winter months. The CleanAir Act Amendments originally required the use of oxygenated fuels, at a minimumrate of 2.7% oxygen by weight (unless otherwise specified), during the wintermonths in approximately 43 metropolitan areas that were not in compliance withcarbon monoxide standards. According to the EPA, as of November 2005, a totalof 12 metropolitan areas were implementing the program.

The second programcreated by the Clean Air Act Amendments was the Reformulated Gasoline Program.This program, which began on January 1, 1995, was intended to reduce groundlevel ozone or smog. The program initially required the year-round use ofoxygenated fuel in nine metropolitan areas with severe ozone pollution. Otherless severely troubled areas had been phased into the program over time.According to the EPA, as of September 2005, various regions of 14 states andthe District of Columbia were required to comply with the program, and all or aportion of five additional states had also voluntarily opted into the program.However, states such as California, Georgia and New York sought waivers fromthe program. Under the recently enacted Energy Policy Act of 2005, theoxygenate standards for reformulated gasoline under the Clean Air Act waseliminated immediately for California and was eliminated nationwide 270 daysafter August 8, 2005, the date of enactment of the Energy Policy Act.

**Government Incentives**

In addition to therecently-enacted federal renewable fuel standard, the federal government andvarious state governments have created incentive programs to encourage ethanolproduction and to enable ethanol-blended fuel to better compete in domesticfuel markets with gasoline blended with MTBE. The federal incentive programsinclude excise tax credits to gasoline distributors, direct payments toeligible producers for increased ethanol production and federal income taxcredits which eligible producers may earn. State incentive programs includeproduction payments and income tax credits. However, these programs are notwithout controversy, due in part to their cost, and we cannot assure you thatthey will continue to be available in the future.

*Federal Excise Tax Exemption*

Although the regulatoryprogram is complicated and there are other federal tax incentives for ethanolproduction, the most important incentive for the ethanol industry and itscustomers is the partial exemption from the federal motor fuels excise tax, orthe “excise tax exemption.”  The excisetax exemption is provided to gasoline distributors as an incentive to blendtheir gasoline with ethanol. For each gallon of gasoline blended with 10% ofethanol, the distributors receive a 5.1¢ per gallon reduction from the federalexcise tax, which equates to a 51¢ reduction for each gallon of ethanol thatthey use. This exemption was recently extended through December 21, 2010 underthe Volumetric Ethanol Excise Tax Credit signed into law by President Bush inOctober 2004.

*Federal Small Producer Credit*

The federal Small EthanolProducer Credit provides an eligible ethanol producer a 10¢ per gallon taxcredit for the first 15 million gallons of ethanol produced annually. Under theprogram, ethanol producers that qualify or their owners (for pass-through taxentities) can reduce their federal income tax liability by the amount of theannual credit, subject to limitations. However, benefit of the credit isreduced somewhat because the amount of the credit must be added to regulartaxable income (but not to alternative minimum taxable income). Until recently,an eligible small ethanol producer was defined as a producer whose annualproduction capacity was 30 million gallons or less, which effectively precludedmost newer plants from qualifying. The Energy Tax Incentives Act of 2005increased the annual production capacity limitation from 30 million to 60million gallons. Because our anticipated capacity is 100 million gallonsannually, we do not expect to qualify as a small ethanol producer.

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**Ethanol Pricing**

The followingchart and table from our feasibility study illustrate historical ethanolpricing in Tennessee markets.

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|           | ** ** | **Ethanol Average Prices** | ** ** |
|-----------|------------|--------------------------------------|------------|
| **City**  | ** ** | ** **                           | ** ** | **5 Year  1999-2003** | ** ** | **5 Year  2000-2004** | ** ** | **3 Year  2002-2004** | ** ** | **1 Year  2004** | ** ** | **Recent 52  Weeks  12/08/05** | ** ** |
| Memphis   |       | $                                    | 1.27       |   | $ | 1.42 |   | $ | 1.41 |   | $ | 1.74 |   | $ | 1.79 |   |
| Nashville |       | $                                    | 1.27       |   | $ | 1.42 |   | $ | 1.41 |   | $ | 1.74 |   | $ | 1.80 |   |
|           |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The price of ethanoltends to be volatile. Historically, ethanol prices have tended to correlatewith wholesale gasoline prices, due largely to the primary use of ethanol as anadditive to gasoline. Over the last couple of years, however, as ethanolproduction has expanded rapidly, ethanol prices have been particularly volatileand ethanol and gasoline prices have at times diverged significantly. At thesame time, there is little historical correlation between ethanol and cornprices. The volatility of ethanol prices and lack of correlation with corn pricesrepresents a significant operational risk inherent in ethanol production fromcorn.

**Distillers Grains Industry**

Distillers grains is aco-product that is produced when corn is processed into ethanol. We intend tosell the distillers grains as animal feed for beef and dairy cattle, poultry,hogs and aquaculture (catfish). We believe that distillers grains is a goodsource of protein, vitamins, iron, fiber and other key nutrients that areimportant to promoting animal growth and health. The protein content ofdistillers grains averages 27-30% and the fat content averages 8-9%. Distillersgrains is highly digestible and can be mixed with other products to enhance thenutritional properties of the feed product. Distillers grains has a “by-pass”protein, which means it by-passes the rumen of cattle and is broken down in thesmall intestines for more efficient and faster utilization.

*Market Overview*

The amount of distillersgrains produced annually in North America is expected to increase significantlyas the number of ethanol plants increase. However, we believe that the demandfor distillers grains may increase as the feed industry becomes more familiarwith its benefits. The market for distillers grains is generally confined tolocations where freight costs allow it to be competitively priced against otherfeed ingredients. Distillers grains competes with three other feedformulations: corn gluten feed, dry brewers grain and mill feeds. The primaryvalue of these products as animal feed is their protein content. Dry brewersgrain and distillers grains have about the same protein content, and corngluten feed and mill feeds have slightly lower protein contents. Distillersgrains contains nutrients that have important growth promoting properties fordairy and beef cattle, poultry and swine. For dairy cattle, the highdigestibility and net energy content of distillers grains, as well as its highfat content, yields greater milk production as compared to other feedingredients. For beef cattle, feedlot studies have found that the improvedrumen health, energy effect of the fiber, and palatability promotes faster andmore efficient growth. Beef from cattle fed with distillers grains experienceless marbling and is leaner, while maintaining its tenderness.

For poultry and swine,feeding trials have found that distillers grains are a useful and economicsource of protein, fat and beneficial unidentified growth and health factors.Although poultry and swine account for a small portion of the

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distillers grainsmarket, we believe that with the advancement of research into the feedingrations of poultry and swine, these markets may grow.

*Types ofDistillers Grains*

If all of the distillersgrain we produced were in the form of distillers dried grains (DDG), weestimate that the ethanol plant would produce approximately 320,000 tons ofdistillers dried grain annually. When solubles (fine soluble fiber, fatglycerol, etc.) are added to the feed, it is called distillers dried grainswith solubles (DDGS). These products are commonly dried to 10-12% moisture,which gives them a long shelf life. When solubles are added, the product hashigher bulk density and stickiness and improved animal nutritional qualities,which helps to maintain a cleaner effluent stream. However, the solublestypically makes the drying process more difficult. We intend to utilize proventechnology and low temperatures while drying the grain to produce a premiumdistillers dried grains with solubles product that may sell at a slight pricingpremium.

Distillers wet grains(DWG) is distillers grains with higher moisture content than the dried grains,which allows for substantial savings from reduced drying costs. Further,distillers wet grains are often favored by dairy and beef feedlots andoperations because cattle seem to prefer the moist texture. In cattle feedlots,they are usually fed in the bunker with mineral supplements, roughage, corn orother conventional feed grains. However, the wet grains typically has a shelflife of about two weeks. This provides for a much smaller market and makes thetiming of its sale critical. Further, because of its moisture content, the wetgrains are heavier and more difficult to handle. The customer must be closeenough to justify the additional handling and shipping costs. As a result,distillers wet grains are principally sold only to local feedlots and livestockoperations.

*Distillers Grains Pricing*

Various factors affectthe price of distillers grain, including, among others, the price of corn,soybean meal and other alternative feed products, the performance or value ofdistillers grains in a particular feed market, and the supply and demand withinthe market. The following chart, based upon U.S. Department of Agricultureinformation as of March 2006, illustrates historical distillers grains pricesfor market years 1995 through 2004. As illustrated in the chart below, likeother commodities, the price of distillers grains can fluctuate significantly.

**WholesaleDistillers Dried Grain Prices(Lawrenceburg, Indiana)**

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**Sales and Marketing**

We have hired nationalmarketing firms to sell our ethanol and distillers grain. However, because ofthe number of local feedlots and livestock operations, we plan to sell aportion of our distillers grains locally, either as distillers dried grains ordistillers wet grains. We also intend to sell our raw carbon dioxide to a thirdparty processor who may build a processing facility next to our ethanol plant.

*Ethanol*

In February 2007, weentered into a marketing agreement with an unrelated party for the sale of allof the ethanol the we expect to produce. We agree to pay the buyer a certain percentage based on a pricing matrixunder the pooling method of the sales price for certain marketing, storage, andtransportation costs. The overall cost for these marketing services is expectedto be approximately 1% of the sales price of the ethanol. The agreementcommences on the date of the agreement and continues for three years from thefirst day of the delivery of ethanol. The agreement will automatically renew for one year terms thereafterunless terminated by either party with at least one year written notice.

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The market segments forour ethanol depends in part on the buyers and marketers we work with and theirsize and geographic reach. These customers vary in terms of where theydistribute the ethanol and the transportation methods and costs associated withdelivering the ethanol to their facilities. We believe that our ethanol will besold into regional markets in the South and Southeast, such as Birmingham, AL,Atlanta, GA, Baton Rouge, LA, St. Louis, MO, Memphis and Nashville, TN, andHouston, TX, and into national markets. Unless rail is an option, ethanol soldin local and regional markets are typically shipped primarily by truck. Ethanolsold into national markets will be shipped via rail.

To meet the challenge ofmarketing ethanol to diverse market segments, we have planned for an extensiverail siding at the production facility. The use of rail will allow us toquickly move large quantities of ethanol to the markets that provide thegreatest return. However, we also expect to have the ability to load and moveethanol by barge down the Mississippi River to the ports of Mobile, AL, NewOrleans, LA and west to Houston, TX from an existing loading facility atHickman, KY or from a new loading facility under construction at Cates Landingin Tiptonville, TN scheduled for completion in Summer 2008. We believe thiswill provide us additional cost savings. We anticipate that deliveries to themajority of the local markets within 300 miles of Obion, Tennessee will be bytruck, and deliveries to more distant markets will be via rail through theCanadian National Railroad Company, which can switch cars to most of the othermajor railroads, allowing us to easily ship ethanol and distillers grainthroughout the United States.

*Distillers Grains*

In February 2007, weentered into a marketing agreement with a third party to purchase all of thedistillers grains we expect to produce. The buyer agrees to pay us 98% of theFOB plant price for all dried distillers (subject to a minimum of $1.50 perton), 96% of the FOB plant price for all wet distillers (subject to a minimumof $1.50 per ton), and $2.00 per ton for all solubles. The agreement commenceson the first day of production and continues for one year. The agreement willcontinue thereafter until terminated by either party with at least 120 days’written notice.

The market for distillersgrains generally consists of local markets for distillers dried grains anddistillers wet grains and national markets for distillers dried grains. Inaddition, the market can be segmented by geographic region and livestockindustry. The bulk of the current demand is for dried distillers grain withsolubles (DDGS) delivered to geographic regions without significant local cornor ethanol production. The dairy markets in California and the Southwestrepresent some of the largest users. Our market strategy includes shipping asubstantial amount of our distillers grains as distillers dried grains to thesemarkets by rail. The location of the ethanol plant on a railroad and close to ariver port at Hickman, KY and the one under construction in Tiptonville, TNshould enable us to efficiently move distillers dried grains to dairy marketsin the South and Southwest. We believe that the location of our ethanol plantprovides us transportation advantages over ethanol plants in the Midwest whenshipping to these regions. This will allow us to capitalize on opportunities tominimize our freight costs.

We will also seek todevelop the local markets for distillers grains by encouraging local livestockoperations to consider their use. We believe that a potential market exists iflocal livestock operators become more familiar with the benefits and uses ofdistillers grains. Our marketing plan includes the development of promotionalmaterial to educate users on these benefits. This is of special interest to usas well as the State of Tennessee. Over the past twenty years, Tennessee hasgone from an exporter of dairy products to a substantial importer. Thedevelopment of local markets would help to further reduce our shipping cost andminimize drying costs since we may be able to deliver the distillers grains inthe form of distillers wet grains.

We expect that most ofthe distillers grains that we sell will be in the form of distillers driedgrains. If all of our distillers grains are marketed in the form of distillersdried grains, we expect that our ethanol plant will produce approximately320,000 tons of distillers grains annually.

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We will also seek tomarket our products to regional markets. We believe that based on historiclivestock figures and feeding rates, there is potential demand for distillersgrains within the Delta and West Agricultural Statistics District of Tennessee.The following tables show the corn supply-demand and distillers grainsconsumption potential for the periods referenced for the Delta AgriculturalStatistics District of Tennessee, according to our feasibility study.

**CORN SUPPLY-DEMAND & DDGCONSUMPTION POTENTIALTennessee, D10 DELTA**
| ** **                       | ** ** | **Crop Year (Sep-Aug)** | ** ** |
|----------------------------------|------------|-----------------------------------|------------|
| **Item**                         | ** ** | **95-96**                         | ** ** | **96-97** | ** ** | **97-98** | ** ** | **98-99** | ** ** | **99-00** | ** ** | **00-01** | ** ** | **01-02** | ** ** | **02-03** | ** ** | **03-04** | ** ** |
| ** **                       | ** ** | **milbu**                         | ** ** | **milbu** | ** ** | **milbu** | ** ** | **milbu** | ** ** | **milbu** | ** ** | **milbu** | ** ** | **milbu** | ** ** | **milbu** | ** ** | **milbu** | ** ** |
| Carryin                          |       | —                            |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Production                       |       | 14                                |       | 17 |   | 15 |   | 14 |   | 13 |   | 17 |   | 22 |   | 18 |   | 19 |   |
| Supply                           |       | 14                                |       | 17 |   | 15 |   | 14 |   | 13 |   | 17 |   | 22 |   | 18 |   | 19 |   |
| Carryout                         |       | —                            |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Disappearance                    |       | 14                                |       | 17 |   | 15 |   | 14 |   | 13 |   | 17 |   | 22 |   | 18 |   | 19 |   |
| of which                         |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residual Use                     |       | —                            |       | 2 |   | 1 |   | 1 |   | 1 |   | 1 |   | 2 |   | 2 |   | 2 |   |
| Feed Use                         |       | 3                                 |       | 3 |   | 3 |   | 3 |   | 3 |   | 3 |   | 3 |   | 3 |   | 3 |   |
| of which,                        |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dairy                            |       | 0.1                               |       | 0.1 |   | 0.1 |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Beef cattle                      |       | 0.7                               |       | 0.5 |   | 0.5 |   | 0.5 |   | 0.5 |   | 0.5 |   | 0.5 |   | 0.5 |   | 0.5 |   |
| Hogs                             |       | 1.0                               |       | 1.1 |   | 1.1 |   | 1.1 |   | 1.0 |   | 0.8 |   | 0.8 |   | 0.8 |   | 0.8 |   |
| Poultry                          |       | 1.1                               |       | 1.1 |   | 1.3 |   | 1.2 |   | 1.2 |   | 1.2 |   | 1.2 |   | 1.3 |   | 1.3 |   |
| Other                            |       | —                            |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Exports (+) or  Imports (-)      |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net of  Feed & Residual |       | 11                                |       | 12 |   | 10 |   | 10 |   | 9 |   | 13 |   | 18 |   | 13 |   | 15 |   |
|                             |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| DDG Consumption  Potential       |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                             |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| ** **                       | ** ** | **000mt**                         | ** ** | **000mt** | ** ** | **000mt** | ** ** | **000mt** | ** ** | **000mt** | ** ** | **000mt** | ** ** | **000mt** | ** ** | **000mt** | ** ** | **000mt** | ** ** |
| Dairy                            |       | 1                                 |       | 1 |   | 1 |   | 1 |   | 1 |   | 1 |   | — |   | — |   | — |   |
| Beef cattle                      |       | 10                                |       | 8 |   | 8 |   | 7 |   | 7 |   | 7 |   | 7 |   | 8 |   | 8 |   |
| Hogs                             |       | 15                                |       | 15 |   | 16 |   | 15 |   | 14 |   | 11 |   | 11 |   | 11 |   | 11 |   |
| Poultry                          |       | 15                                |       | 16 |   | 18 |   | 17 |   | 17 |   | 17 |   | 18 |   | 18 |   | 18 |   |
| Other                            |       | —                            |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Total                            |       | 41                                |       | 40 |   | 43 |   | 40 |   | 39 |   | 36 |   | 36 |   | 38 |   | 38 |   |

 

9

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Thefollowing tables show the corn supply-demand and distillers grains consumptionpotential for the periods referenced for the West Agricultural StatisticsDistrict of Tennessee, according to our feasibility study.

**CORN SUPPLY-DEMAND & DDGCONSUMPTION POTENTIALTennessee, D20 WEST TENNESSEE**
| ** **                       | ** ** | **Crop Year (Sep-Aug)** | ** ** |
|----------------------------------|------------|-----------------------------------|------------|
| **Item**                         | ** ** | ** **                        | ** ** | **95-96** | ** ** | **96-97** | ** ** | **97-98** | ** ** | **98-99** | ** ** | **99-00** | ** ** | **00-01** | ** ** | **01-02** | ** ** | **02-03** | ** ** | **03-04** | ** ** |
| ** **                       | ** ** | **milbu**                         | ** ** | **milbu** | ** ** | **milbu** | ** ** | **milbu** | ** ** | **milbu** | ** ** | **milbu** | ** ** | **milbu** | ** ** | **milbu** | ** ** | **milbu** | ** ** |
| Carryin                          |       | —                            |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Production                       |       | 27                                |       | 33 |   | 28 |   | 24 |   | 23 |   | 27 |   | 32 |   | 29 |   | 30 |   |
| Supply                           |       | 27                                |       | 33 |   | 28 |   | 24 |   | 23 |   | 27 |   | 32 |   | 29 |   | 30 |   |
| Carryout                         |       | —                            |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Disappearance                    |       | 27                                |       | 33 |   | 28 |   | 24 |   | 23 |   | 27 |   | 32 |   | 29 |   | 30 |   |
| of which                         |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residual Use                     |       | 1                                 |       | 4 |   | 3 |   | 2 |   | 2 |   | 2 |   | 3 |   | 3 |   | 3 |   |
| Feed Use                         |       | 9                                 |       | 10 |   | 10 |   | 10 |   | 9 |   | 8 |   | 8 |   | 8 |   | 8 |   |
| of which,                        |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dairy                            |       | 0.7                               |       | 0.7 |   | 0.6 |   | 0.6 |   | 0.5 |   | 0.5 |   | 0.5 |   | 0.5 |   | 0.5 |   |
| Beef cattle                      |       | 1.8                               |       | 1.6 |   | 1.6 |   | 1.5 |   | 1.5 |   | 1.5 |   | 1.5 |   | 1.6 |   | 1.6 |   |
| Hogs                             |       | 6.4                               |       | 7.2 |   | 7.8 |   | 7.4 |   | 6.7 |   | 5.4 |   | 5.3 |   | 5.5 |   | 5.5 |   |
| Poultry                          |       | 0.4                               |       | 0.4 |   | 0.5 |   | 0.5 |   | 0.5 |   | 0.5 |   | 0.5 |   | 0.5 |   | 0.5 |   |
| Other                            |       | —                            |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Exports (+) or Imports  (-)      |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net of Feed &  Residual |       | 18                                |       | 20 |   | 15 |   | 13 |   | 12 |   | 17 |   | 22 |   | 18 |   | 19 |   |
|                             |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| DDG Consumption  Potential       |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                             |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| ** **                       | ** ** | **000mt**                         | ** ** | **000mt** | ** ** | **000mt** | ** ** | **000mt** | ** ** | **000mt** | ** ** | **000mt** | ** ** | **000mt** | ** ** | **000mt** | ** ** | **000mt** | ** ** |
| Dairy                            |       | 10                                |       | 11 |   | 8 |   | 8 |   | 8 |   | 8 |   | 7 |   | 7 |   | 7 |   |
| Beef cattle                      |       | 26                                |       | 23 |   | 23 |   | 21 |   | 21 |   | 21 |   | 21 |   | 23 |   | 23 |   |
| Hogs                             |       | 90                                |       | 102 |   | 111 |   | 105 |   | 95 |   | 77 |   | 75 |   | 79 |   | 78 |   |
| Poultry                          |       | 6                                 |       | 6 |   | 7 |   | 7 |   | 7 |   | 7 |   | 7 |   | 7 |   | 7 |   |
| Other                            |       | —                            |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Total                            |       | 132                               |       | 142 |   | 149 |   | 141 |   | 130 |   | 112 |   | 110 |   | 115 |   | 115 |   |
|                                  |            |                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*CarbonDioxide*

We expect that when it isin full operation, the ethanol plant will produce approximately 270,000 tons ofcarbon dioxide gas annually. We intend to sell the raw carbon dioxide gas we producedirect (“over-the-fence”)  to the endprocessor who would build a processing facility near the ethanol plant. If weare unable to secure a third-party processor, then we will vent off all of thecarbon dioxide we produce into the air.

**Future Products**

We anticipate thatadvances in enzyme processes will increase the ethanol yield realized fromgrain feedstock. These processes are not refined for commercial application atthis time, but we anticipate adopting, if possible, technological advances asthey become available. Conversations with Monsanto of St. Louis, Missouri haveconfirmed that Monsanto is working with increased fermentable starch corngenetics. Past successes in extractable starch, genetically modified corn, hasshown marked improvements for wet mill plants such as Minnesota Corn Processors(MCP) and ADM. Research continues at Monsanto as well as application of theresearch in the Monsanto dry mill ethanol production simulation facility. Wewill continue to keep abreast of the advances in increased fermentable starchcorn as well as involve their members in the production of genetically modifiedcorn as advances are made.

The production of ethanolfrom biomass feedstock is also anticipated to become more economically feasiblein future years. We will look for options to benefit from those advances aswell. In the interim, the processes we plan to implement are considered to bethe most viable for the foreseeable future.

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**Inputs and Procurement Plan**

***Corn***

We anticipate that wewill need to procure approximately 35 million bushels of corn per year for ourethanol plant. Our members are not obligated to deliver corn to us.

*CornPurchasing*

In December 2006,we entered into a corn purchasing agreement with Obion Grain Co. for cornobtained in Obion County, Tennessee and the seven contiguous counties inTennessee and Kentucky. Following is a description of our corn procurementrelationship with Obion Grain Co., the seller, as provided for under the cornpurchasing agreement:

1.            We will commit to buy a specific number of bushels (the “Committed Bushels”) ofseller’s fall corn Harvest (defined below) f.o.b. our planned ethanol plant, upto a maximum of 3,500,000 bushels annually.  The actual number ofCommitted Bushels will be at seller’s option and will be set on or beforeAugust 15 of each Harvest year.

2.            The Committed Bushels will be sold and bought and priced in multiples of 5,000bushels at 12% above seller’s actual cost of corn at the time of pricing,delivered to the plant (*i.e.,* thecost of delivery shall be borne by seller and is included in the 12% grossmargin; and delivery costs to the plant are not considered part of the actualcost of corn).  We will have the right from time to time to inspect therecords of seller to determine and verify seller’s cost of corn.  TheCommitted Bushels will be priced no later than the end of Harvest.  It iscontemplated that pricing will be done during CBOT trading hours.  AllCommitted Bushels must be #2 yellow corn and be a “commercially acceptableproduct” in accordance with standards and specifications established by us fromseason to season.  Our established grading standards, premium anddiscounts schedules, and standardized delivery rules and regulations willapply.

3.            All Committed Bushels bought by us for deferred delivery will be stored byseller at the published tariff rates.  Stored corn will be delivered to usat the plant at our call.

4.            “Harvest”, for purposes of the corn purchasing agreement, shall be the periodwhen combines are actively bringing corn from the fields.  Our commitmentto purchase corn from seller under paragraphs 1 and 2 above shall only existduring Harvest.

5.            We shall have no obligation to purchase corn under the corn purchasingagreement until we first take delivery of corn for processing at the plant.

6.            Subject to all terms, provisions and conditions set forth in the cornpurchasing agreement, seller shall be the exclusive supplier to us of all cornobtained from farms, storage facilities or grain elevators, whether commercialor privately owned, in Obion County, Tennessee and/or the counties contiguousthereto (*i.e.*, Lake, Dyer, Gibsonand Weakley Counties in Tennessee; and Fulton, Hickman and Graves Counties inKentucky); provided, that only the Committed Bushels will be priced as setforth in paragraph 2 above.

7.            Notwithstanding any term, provision or condition to the contrary set forth inthe corn purchasing agreement, the parties further agree as follows:

(a)          It is the expectation of the parties that seller’s price of all corn(including, without limitation, the Committed Bushels) will be at or less thanthe price (in the ordinary course of business) of other commercially reasonablealternatives;

(b)          The National Grain and Feed Association trade rules shall apply to the sale andpurchase of all corn under the corn purchasing agreement;

(c)          The parties shall work together in good faith to develop efficient and effectivepolicies and procedures related to the purchasing and delivery of corn underthe corn purchasing agreement, and agree that such policies and proceduresshall be subject to annual review of both parties; and

(d)          The corn purchasing agreement shall expire upon either party or its respectivesuccessors or assigns ceasing operations permanently, or by mutual consent.

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8.            Enforcement of the corn purchasing agreement shall be governed by the Rules ofthe National Grain and Feed Association.

We expect to satisfy anyremaining corn needs on the open market at market prices. The price andavailability of corn is subject to significant fluctuation depending upon anumber of factors that affect commodity prices generally. These include, amongothers, crop conditions, crop production, weather, government programs andexport demands.

*CornSupply*

For our project, wedefine our feedstock area as the 13-county area surrounding Obion, Tennessee.The following information regarding corn production in this area is derivedfrom information contained in our feasibility study. Annual corn production inthese counties has ranged from 48 - 71 million bushels from 1994 to 2003. If weprocured all of our corn from this area, we would consume approximately 50 -75% of this production. Although we do not plan to procure all of our corn fromthis area, we believe that this area will be able to provide us a significantamount of the corn we need. However, annual yields in these counties have beensomewhat more volatile and less predictable than in the U.S. as a whole.Abundant yields (greater than 15% above trend) occurred in 13% of the last 40+years through 2003. Disastrous yields (greater than 15% below trend) occurredin 23% of the last 40+ years through 2003. The following table is a summary ofthe corn production of the 13-county area from 1994 to 2003.

Thefollowing table is a summary of the corn production of the 13-county area from 1994 to 2003.

|                | ** ** | **Year (Million bushels)** | ** ** |
|----------------|------------|--------------------------------------|------------|
| **County**     | ** ** | ** **                           | ** ** | **1994** | ** ** | **1995** | ** ** | **1996** | ** ** | **1997** | ** ** | **1998** | ** ** | **1999** | ** ** | **2000** | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** |
| Fulton, KY     |       | 3.0                                  |       | 2.5 |   | 3.6 |   | 3.0 |   | 2.9 |   | 3.0 |   | 4.8 |   | 4.8 |   | 2.8 |   | 3.5 |   |
| Graves, KY     |       | 6.6                                  |       | 5.7 |   | 6.0 |   | 5.8 |   | 5.7 |   | 5.1 |   | 7.3 |   | 8.0 |   | 6.4 |   | 7.8 |   |
| Hickman, KY    |       | 3.9                                  |       | 3.5 |   | 3.9 |   | 4.3 |   | 4.1 |   | 3.9 |   | 5.4 |   | 5.7 |   | 4.2 |   | 5.1 |   |
| Dunklin, MO    |       | 1.6                                  |       | 1.2 |   | 2.9 |   | 2.4 |   | 1.8 |   | 1.8 |   | 2.0 |   | 2.1 |   | 1.8 |   | 2.8 |   |
| New Madrid, MO |       | 8.6                                  |       | 6.8 |   | 12.4 |   | 9.9 |   | 8.2 |   | 8.0 |   | 11.4 |   | 11.3 |   | 12.0 |   | 12.8 |   |
| Pemiscot, MO   |       | 1.9                                  |       | 2.0 |   | 3.8 |   | 2.9 |   | 2.4 |   | 2.3 |   | 2.8 |   | 2.9 |   | 3.2 |   | 4.0 |   |
| Crockett, TN   |       | 0.4                                  |       | 0.4 |   | 0.9 |   | 0.7 |   | 0.6 |   | 0.4 |   | 0.5 |   | 0.4 |   | 0.5 |   | 0.9 |   |
| Dyer, TN       |       | 1.8                                  |       | 2.0 |   | 3.6 |   | 2.7 |   | 2.5 |   | 1.9 |   | 2.9 |   | 3.8 |   | 3.5 |   | 3.4 |   |
| Gibson, TN     |       | 6.1                                  |       | 6.0 |   | 6.9 |   | 6.1 |   | 5.5 |   | 5.0 |   | 6.3 |   | 7.2 |   | 6.0 |   | 7.7 |   |
| Lake, TN       |       | 1.1                                  |       | 1.2 |   | 2.0 |   | 1.3 |   | 1.2 |   | 1.1 |   | 2.3 |   | 2.7 |   | 1.4 |   | 1.8 |   |
| Lauderdale, TN |       | 0.8                                  |       | 0.9 |   | 1.7 |   | 1.8 |   | 1.5 |   | 1.2 |   | 2.3 |   | 2.9 |   | 2.0 |   | 2.2 |   |
| Obion, TN      |       | 8.7                                  |       | 9.4 |   | 9.2 |   | 7.8 |   | 7.0 |   | 8.1 |   | 8.4 |   | 10.3 |   | 7.9 |   | 9.1 |   |
| Weakley, TN    |       | 6.9                                  |       | 6.6 |   | 7.0 |   | 5.7 |   | 5.7 |   | 5.9 |   | 6.3 |   | 8.7 |   | 7.5 |   | 8.7 |   |
| Total          |       | 51.3                                 |       | 48.0 |   | 63.8 |   | 54.4 |   | 49.0 |   | 47.7 |   | 62.6 |   | 70.8 |   | 59.3 |   | 69.5 |   |
|                |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*CornPrices*

Corn prices are evaluatedusing data from delivered Memphis values, Illinois train values, local farmprices, and Midwest farm prices plus elevation and transportation.

12

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The followingtable presents historical corn price information for the 13-county areasurrounding Obion, Tennessee based on our feasibility study.

|                | ** ** | **Corn Average Price** | ** ** |
|----------------|------------|----------------------------------|------------|
| ** **     | ** ** | **10 Year**                 | ** ** | **5 Year** | ** ** | **3 Year** | ** ** |
| **County**     | ** ** | ** **                       | ** ** | **93-94 to 02-03** | ** ** | **98-99 to 02-03** | ** ** | **00-01 to 02-03** | ** ** |
| Fulton, KY     |       | $                                | 2.54       |   | $ | 2.21 |   | $ | 2.27 |   |
| Graves, KY     |       | $                                | 2.54       |   | $ | 2.20 |   | $ | 2.24 |   |
| Hickman, KY    |       | $                                | 2.49       |   | $ | 2.15 |   | $ | 2.19 |   |
| Dunklin, MO    |       | $                                | 2.47       |   | $ | 2.07 |   | $ | 2.10 |   |
| New Madrid, MO |       | $                                | 2.48       |   | $ | 2.08 |   | $ | 2.11 |   |
| Pemiscot, MO   |       | $                                | 2.47       |   | $ | 2.07 |   | $ | 2.10 |   |
| Crockett, TN   |       | $                                | 2.53       |   | $ | 2.27 |   | $ | 2.32 |   |
| Dyer, TN       |       | $                                | 2.58       |   | $ | 2.32 |   | $ | 2.37 |   |
| Gibson, TN     |       | $                                | 2.53       |   | $ | 2.27 |   | $ | 2.32 |   |
| Lake, TN       |       | $                                | 2.58       |   | $ | 2.32 |   | $ | 2.37 |   |
| Lauderdale, TN |       | $                                | 2.56       |   | $ | 2.30 |   | $ | 2.35 |   |
| Obion, TN      |       | $                                | 2.56       |   | $ | 2.30 |   | $ | 2.35 |   |
| Weakley, TN    |       | $                                | 2.55       |   | $ | 2.29 |   | $ | 2.34 |   |
|           |       |                             |       |   |   |   |   |
| Average        |       | $                                | 2.53       |   | $ | 2.22 |   | $ | 2.26 |   |
|                |            |                                  |            |  |  |  |  |  |  |  |  |  |

 

Corncosts could be slightly higher if we must procure corn from the north. Thefollowing table shows that corn prices may be higher if the corn is originatedfrom points north of the 13-county area based on our feasibility study.

|                                    | ** ** | **Average Prices**      | ** ** |
|------------------------------------|------------|------------------------------|------------|
| ** **                         | ** ** | **10 Year**             | ** ** | **5 Year** | ** ** | **3 Year** | ** ** |
| ** **                         | ** ** | **93-94 to 02-03** | ** ** | **98-99 to 02-03** | ** ** | **00-01 to 02-03** | ** ** |
| Memphis, TN                        |       | $                            | 2.58       |   | $ | 2.15 |   | $ | 2.21 |   |
| Illinois Trains                    |       | $                            | 2.56       |   | $ | 2.15 |   | $ | 2.22 |   |
| Fulton County,  KY                 |       | $                            | 2.54       |   | $ | 2.21 |   | $ | 2.27 |   |
|                               |       |                         |       |   |   |   |   |
| Average Farm  Price                |       |                         |       |   |   |   |   |
| Illinois State                     |       | $                            | 2.42       |   | $ | 2.05 |   | $ | 2.10 |   |
| Champaign  County, IL (Thomasboro) |       | $                            | 2.43       |   | $ | 2.26 |   | $ | 2.11 |   |
| Kankakee County,  IL (Indian Oaks) |       | $                            | 2.39       |   | $ | 2.02 |   | $ | 2.08 |   |
|                               |       |                         |       |   |   |   |   |
| Average Illinois                   | ** ** | **$**                        | **2.41**   | ** ** | **$** | **2.04** | ** ** | **$** | **2.10** | ** ** |
| Elevation (Est.)                   |       | $                            | 0.08       |   | $ | 0.08 |   | $ | 0.08 |   |
| Transportation  (Est.)             |       | $                            | 0.13       |   | $ | 0.13 |   | $ | 0.13 |   |
| Delivered Price                    | ** ** | **$**                        | **2.62**   | ** ** | **$** | **2.25** | ** ** | **$** | **2.31** | ** ** |

 

Further, the increaseddemand for corn from our ethanol plant in the above 13-county area may increasethe price of corn. Based on our feasibility study, we believe that our ethanolplant will raise basis by approximately $0.09 per bushel.

Using the historicalaverage from the surrounding area, Midwest corn costs and the estimated basisimpact from the ethanol plant, we estimate based on our feasibility study thatcorn costs for the plant would be approximately $2.62 per bushel. However, theprice of corn is volatile and is affected by numerous factors, such as weather,growing conditions, demand and government programs, and our corn costs could besignificantly higher (or lower) than what we estimate. Because there appears tobe little correlation between the price of ethanol and the price of corn, anysignificant increase in the price of corn would adversely affect ourprofitability and financial condition.

*Corn Sourcing*

We estimate that we willrequire approximately 35 million bushels of corn annually to produce 100million gallons of ethanol. Because of our location near the Mississippi River,we believe that we will be able to capitalize on a number of delivery options,thus ensuring long-term availability of the required feedstock at costs thatare competitive with other competing ethanol production facilities. Feedstockaccess will balance:

·             Truckdelivery from regional sources in northwest Tennessee and western Kentucky;

·             Bargedelivery from low basis locations in the Midwest (i.e. Illinois, Iowa, andMinnesota); and

13

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·             Raildelivery from the same low basis locations in the Midwest, when barge deliveryis not available.

In December 2006, weentered into a corn purchasing agreement with Obion Grain Co. for corn obtainedin Obion County, Tennessee and the seven contiguous counties in Tennessee andKentucky, including a commitment to buy up to 3.5 million bushelsannually. With rail and barge deliveries, we can also access a relatively largesupply of corn from lower basis locations without substantial increases totransportation costs. Accordingly, we plan to source a substantial amount ofour corn from the Midwest, which has a lower basis. We believe the key to ourcompetitive advantage in grain procurement will be the relatively low cost ofbarge transportation. Accordingly, we intend to use barge service as much aspossible, but will still be in a position to use rail access and localproduction as alternatives. We also plan to procure corn via truck deliveriesfrom local regions in Tennessee and Kentucky, which will be limited by the sizeof local corn production. This corn can be stored and utilized to supplementlower cost barge deliveries as needed when the river freezes. Obion Grain Co.retained ownership of approximately ten acres of land next to our site, and mayerect and operate a grain elevator on this land, which may allow moreflexibility in sourcing.

*Hedging and Risk Management*

In order to ensure aconstant supply of corn at a predictable price, we will assemble a riskmanagement team to assist with our procurement needs. To the extent possible,we intend to implement a hedging strategy for the various commodities that areinputs to and outputs from the ethanol plant. We intend to base our riskmanagement programs on gross processing margins, as opposed to focusingindividually on ethanol, dried distillers gains or corn. The team’s objectiveis to manage risk as opposed to trading and forecasting commodity prices.Hedging is a means of protecting the price that we will buy or sell a commodityin the future. In a hedging transaction for corn, we will purchase futurescontracts that lock in the amount and price of corn that we will purchase at afuture date. Whether our hedging activities are successful depends upon, amongother things, the cost of corn and our ability to sell sufficient amounts ofethanol and distillers grains to utilize all of the corn subject to the futurescontracts. Although we will attempt to link hedging activities to sales plansand pricing activities, hedging activities can result in significant costs,especially if we cannot use all of the corn subject to our futures contracts.We intend to hire a nationally recognized leader in commodities procurement andhedging for the purpose of accessing the required feedstocks and other facilityinputs and outputs.

We intend to acquire orbuild sufficient storage to allow for 21 days or more of storage. This willhelp support our ongoing hedging activities, as well as enable us to purchaselarge quantities of corn from local production at harvest. This plan isintended to support local agriculture, and help us control transportation costsby taking fewer and larger shipments of corn. We believe this is particularlyimportant during winter months when barge service is not available and we musttransport corn via rail, which is often more expensive than barge service.

***Utilities***

The production of ethanolis a very energy intensive process that requires significant and uninterruptedamounts of electricity and natural gas. We currently have no agreements for theelectricity or gas that we need to operate the ethanol plant. If there is anyinterruption in our supply of energy, such as supply, delivery or mechanicalproblems, we may have to halt production. Halting production for any extendedperiod of time will harm our business.

*Natural Gas*

We plan to satisfy ournatural gas requirements by arranging construction of a natural gas pipeline toour site. We have entered into a service agreement with Trunkline Gas Company,LLC (a division of Panhandle Energy) to construct the necessary infrastructureand deliver natural gas required by us for a ten-year period beginning May2008.

14

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We will also needto secure a natural gas provider to supply us with the natural gas required forour plant operations. As illustrated in the chart below from our feasibilitystudy, natural gas prices have increased significantly over the last few yearsand therefore have had a much greater impact on the cost of producing ethanol,with prices in Tennessee comparable to other major ethanol-producing states.Average price over the three years ended January 2004 in Tennessee was$5.91/mcf. The price of natural gas, like any commodity, could fluctuate andincrease significantly.

****

*Electricity*

Gibson Electric MembershipCorporation, the local electric cooperative, has indicated that they willsupply us with the electricity we need for the ethanol plant and to provide uswith certain necessary electrical infrastructures. However, we have not enteredinto any contract with Gibson Electric for these services. As illustrated inthe chart below from our feasibility study, electricity prices in Tennesseehave been comparable to other cornbelt states. Average prices in Tennessee overboth the three year and 10 year periods ended January 2004 was approximately$0.042 per kilowatt-hour. As of December 2005, the Department of Energy’sforecasts for U.S. electricity call for industrial prices to remain relativelyflat at between $0.051/Kwh and $0.060/Kwh over the next 10 years. However, theprice of electricity, like any commodity, could fluctuate and increasesignificantly.

15

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***Denaturant***

Wholesale gasolinewill be mixed into the ethanol and used as a denaturant in the ethanol process.Historical Tennessee dealer tankwagon and rack gasoline prices are shown in thefollowing chart from our feasibility study. Each tank of ethanol that weproduce will contain a 5% gasoline blend.

****

***OtherInputs***

Other inputs to theproduction process include chemicals, yeast, enzymes and water. In total theseinputs account for approximately 6% of total input costs. Of these, chemicalsand enzymes are the largest components. We have entered into a three-yearutility usage agreement for water and sewer services with the Town of Obion.Under this agreement, we will obtain water at a cost of $0.55 per 1,000 gallonsused, and pay another $0.55 per 1,000 gallons of sewer run-off produced.

**Transportation and Delivery**

We expect that theethanol plant will have facilities to receive corn by truck and rail and toload ethanol and distillers grains onto trucks and rail cars. We currently haveno agreement with any service provider to provide us with the transportationand delivery services that we will need. We intend to negotiate with rail andtruck service providers to provide us these services before we beginconstruction of the ethanol plant. We may look to third-party logisticsconsultants to assist us with our transportation needs. We have retainedAntioch International, Inc. to assist us with the design of our rail system.Our financing plan and our estimated project cost includes significant amountsfor railroad improvements to our site.

**Ethanol Competition**

We expect to be in directcompetition with producers of ethanol and other alternative fuel additives.Many of these producers have significantly greater resources than we do. Wealso expect the number of competitors to increase. The development of otherethanol plants, particularly those in close proximity to our ethanol plant,will increase the supply of ethanol and may result in lower local ethanolprices. Ethanol plants in close proximity will also compete with us for, amongother things, corn and personnel.

We will be in directcompetition with numerous other ethanol plants that produce the same productsthat we do. We plan to compete with other ethanol producers on the basis ofprice and delivery service. Our proposed ethanol plant is expected to produceapproximately 100 million gallons of ethanol annually. We believe that thisvolume will give us certain procurement and production efficiencies oversmaller competitors. We believe that we will be able, if necessary, to sellsome or all of our products at lower prices because of efficiencies arisingfrom the ethanol plant and our anticipated production volume, and ourtransportation advantages through barge service.

We expect to be in directcompetition with other ethanol producers in close proximity to our proposedethanol plant. These competitors will compete with us for, among other things,corn and personnel. Because of their close proximity, 

16

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these competitorsmay also be more likely to sell to the same markets that we intend to targetfor our ethanol and distillers grains.

As of March 2007,according to the Renewable Fuels Association, 114 U.S. ethanol plants have thecapacity to produce approximately 5.6 billion gallons of ethanol annually, withanother 87 plants under construction or expansion expected to add approximately6.4 billion more gallons of annual productive capacity. A majority of theethanol production capacity is located in the Midwest, in the corn-producingstates of Illinois, Iowa, Minnesota, Nebraska and South Dakota. The largestethanol producers include Abengoa Bioenergy Corp., Archer Daniels MidlandCompany, Aventine Renewable Energy, LLC., Cargill, Inc., Hawkeye Renewables,LLC, New Energy Corp., US BioEnergy Corp. and VeraSun Energy Corporation.

The following tableidentifies U.S. ethanol producers and their current and anticipated productioncapacities as of March 2007 according to the Renewable Fuels Association.Projects still in the development stage are not included in the table.

**U.S. Fuel Ethanol Production Capacitymillion gallons per year (mgy)**
| **Company**                                                    | ** ** | ** **          | ** ** | **Location** | ** ** | **Feedstock** | ** ** | **Current  Capacity  (mgy)** | ** ** | **Under  Construction/  Expansion  (mgy)** |
|----------------------------------------------------------------|------------|---------------------|------------|--------------|------------|---------------|------------|------------------------------|------------|--------------------------------------------|
| Abengoa  Bioenergy Corp.                                       |       | York, NE            |       | Corn/milo    |       | 55            |       |                         |
|                                                           |       | Colwich, KS         |       |         |       | 25            |       |                         |
|                                                           |       | Portales, NM        |       |         |       | 30            |       |                         |
|                                                           |       | Ravenna, NE         |       |         |       |          |       | 88                           |
| Aberdeen Energy*                                               |       | Mina, SD            |       | Corn         |       |          |       | 100                          |
| Absolute Energy,  LLC*                                         |       | St. Ansgar, IA      |       | Corn         |       |          |       | 100                          |
| ACE Ethanol, LLC                                               |       | Stanley, WI         |       | Corn         |       | 41            |       |                         |
| Adkins Energy,  LLC*                                           |       | Lena, IL            |       | Corn         |       | 40            |       |                         |
| Advanced  Bioenergy                                            |       | Fairmont, NE        |       | Corn         |       |          |       | 100                          |
| AGP*                                                           |       | Hastings, NE        |       | Corn         |       | 52            |       |                         |
| Agra Resources  Coop. d.b.a. EXOL*                             |       | Albert Lea, MN      |       | Corn         |       | 40            |       | 8                            |
| Agri-Energy,  LLC*                                             |       | Luverne, MN         |       | Corn         |       | 21            |       |                         |
| Alchem Ltd. LLLP                                               |       | Grafton, ND         |       | Corn         |       | 10.5          |       |                         |
| Al-Corn Clean  Fuel*                                           |       | Claremont, MN       |       | Corn         |       | 35            |       | 15                           |
| Amaizing Energy,  LLC*                                         |       | Denison, IA         |       | Corn         |       | 40            |       |                         |
| Archer Daniels  Midland                                        |       | Decatur, IL         |       | Corn         |       | 1,070         |       | 275                          |
|                                                           |       | Cedar Rapids, IA    |       | Corn         |       |          |       |                         |
|                                                           |       | Clinton, IA         |       | Corn         |       |          |       |                         |
|                                                           |       | Columbus, NE        |       | Corn         |       |          |       |                         |
|                                                           |       | Marshall, MN        |       | Corn         |       |          |       |                         |
|                                                           |       | Peoria, IL          |       | Corn         |       |          |       |                         |
|                                                           |       | Wallhalla, ND       |       | Corn/barley  |       |          |       |                         |
| Arkalon Energy,  LLC                                           |       | Liberal, KS         |       | Corn         |       |          |       | 110                          |
| ASAlliances  Biofuels, LLC                                     |       | Albion, NE          |       | Corn         |       |          |       | 100                          |
|                                                           |       | Linden, IN          |       | Corn         |       |          |       | 100                          |
|                                                           |       | Bloomingburg, OH    |       | Corn         |       |          |       | 100                          |
| Aventine  Renewable Energy, LLC                                |       | Pekin, IL           |       | Corn         |       | 207           |       |                         |
|                                                           |       | Aurora, NE          |       | Corn         |       |          |       |                         |
| Badger State  Ethanol, LLC*                                    |       | Monroe, WI          |       | Corn         |       | 48            |       |                         |
| Big River  Resources, LLC*                                     |       | West Burlington, IA |       | Corn         |       | 52            |       |                         |
| Big River  Resources Grinnell, LLC (joint venture with US Bio) |       | Grinnell, IA        |       | Corn         |       |          |       | 50                           |
| Blue Flint  Ethanol                                            |       | Underwood, ND       |       | Corn         |       | 50            |       |                         |
| Bonanza Energy,  LLC                                           |       | Garden City, KS     |       | Corn/milo    |       |          |       | 55                           |
| Broin  Enterprises, Inc.*                                      |       | Scotland, SD        |       | Corn         |       | 11            |       |                         |
| Bushmills  Ethanol, Inc.*                                      |       | Atwater, MN         |       | Corn         |       | 40            |       |                         |
| Cardinal Ethanol                                               |       | Harrisville, IN     |       | Corn         |       |          |       | 100                          |
| Cargill, Inc.                                                  |       | Blair, NE           |       | Corn         |       | 85            |       |                         |

 

17

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|                                     |   | Eddyville, IA     |   | Corn        |   | 35     |   |   |
|------------------------------------------|--------|-------------------|--------|-------------|--------|--------|--------|--------|
| Cascade Grain                            |   | Clatskanie, OR    |   | Corn        |   |   |   | 108    |
| CassCo Amaizing  Energy, LLC             |   | Atlantic, IA      |   | Corn        |   |   |   | 110    |
| Castle Rock  Renewable Fuels, LLC        |   | Necedah, WI       |   | Corn        |   |   |   | 50     |
| Center Ethanol  Company                  |   | Sauget, IL        |   | Corn        |   |   |   | 54     |
| Central Indiana  Ethanol, LLC            |   | Marion, IN        |   | Corn        |   |   |   | 40     |
| Central Illinois  Ethanol, LLC           |   | Canton, IL        |   | Corn        |   |   |   | 37     |
| Central MN  Ethanol Coop*                |   | Little Falls, MN  |   | Corn        |   | 21.5   |   |   |
| Central  Wisconsin Alcohol               |   | Plover, WI        |   | Seed corn   |   | 4      |   |   |
| Chief Ethanol                            |   | Hastings, NE      |   | Corn        |   | 62     |   |   |
| Chippewa Valley  Ethanol Co.*            |   | Benson, MN        |   | Corn        |   | 45     |   |   |
| Commonwealth  Agri-Energy, LLC*          |   | Hopkinsville, KY  |   | Corn        |   | 33     |   |   |
| Corn, LP*                                |   | Goldfield, IA     |   | Corn        |   | 50     |   |   |
| Cornhusker  Energy Lexington, LLC        |   | Lexington, NE     |   | Corn        |   | 40     |   |   |
| Corn Plus, LLP*                          |   | Winnebago, MN     |   | Corn        |   | 44     |   |   |
| Coshoctan  Ethanol, OH                   |   | Coshoctan, OH     |   | Corn        |   |   |   | 60     |
| Dakota Ethanol,  LLC*                    |   | Wentworth, SD     |   | Corn        |   | 50     |   |   |
| DENCO, LLC                               |   | Morris, MN        |   | Corn        |   | 21.5   |   |   |
| Dexter Ethanol,  LLC                     |   | Dexter, IA        |   | Corn        |   |   |   | 100    |
| E Energy Adams,  LLC                     |   | Adams, NE         |   | Corn        |   |   |   | 50     |
| E3 Biofuels                              |   | Mead, NE          |   | Corn        |   |   |   | 24     |
| E Caruso  (Goodland Energy Center)       |   | Goodland, KS      |   | Corn        |   |   |   | 20     |
| East Kansas  Agri-Energy, LLC*           |   | Garnett, KS       |   | Corn        |   | 35     |   |   |
| Elkhorn Valley  Ethanol, LLC             |   | Norfolk, NE       |   | Corn        |   |   |   | 40     |
| ESE Alcohol Inc.                         |   | Leoti, KS         |   | Seed corn   |   | 1.5    |   |   |
| Ethanol2000,  LLP*                       |   | Bingham Lake, MN  |   | Corn        |   | 32     |   |   |
| Ethanol Grain  Processors, LLC           |   | Obion, TN         |   | Corn        |   |   |   | 100    |
| First United  Ethanol, LLC (FUEL)        |   | Mitchell Co., GA  |   | Corn        |   |   |   | 100    |
| Frontier  Ethanol, LLC                   |   | Gowrie, IA        |   | Corn        |   | 60     |   |   |
| Front Range  Energy, LLC                 |   | Windsor, CO       |   | Corn        |   | 40     |   |   |
| Gateway Ethanol                          |   | Pratt, KS         |   | Corn        |   |   |   | 55     |
| Glacial Lakes  Energy, LLC*              |   | Watertown, SD     |   | Corn        |   | 50     |   | 50     |
| Global  Ethanol/Midwest Grain Processors |   | Lakota, IA        |   | Corn        |   | 95     |   |   |
|                                     |   | Riga, MI          |   | Corn        |   |   |   | 57     |
| Golden Cheese  Company of California*    |   | Corona, CA        |   | Cheese whey |   | 5      |   |   |
| Golden Grain  Energy, LLC*               |   | Mason City, IA    |   | Corn        |   | 60     |   | 50     |
| Golden Triangle Energy,  LLC*            |   | Craig, MO         |   | Corn        |   | 20     |   |   |
| Grand River  Distribution                |   | Cambria, WI       |   | Corn        |   |   |   | 40     |
| Grain Processing  Corp.                  |   | Muscatine, IA     |   | Corn        |   | 20     |   |   |
| Granite Falls  Energy, LLC*              |   | Granite Falls, MN |   | Corn        |   | 52     |   |   |
| Great Plains  Ethanol, LLC*              |   | Chancellor, SD    |   | Corn        |   | 50     |   |   |
| Greater Ohio  Ethanol, LLC               |   | Lima, OH          |   | Corn        |   |   |   | 54     |
| Green Plains  Renewable Energy           |   | Shenandoah, IA    |   | Corn        |   |   |   | 50     |
|                                     |   | Superior, IA      |   | Corn        |   |   |   | 50     |
| Hawkeye  Renewables, LLC                 |   | Iowa Falls, IA    |   | Corn        |   | 105    |   |   |
|                                     |   | Fairbank, IA      |   | Corn        |   | 115    |   |   |
|                                     |   | Menlo, IA         |   | Corn        |   |   |   | 100    |
| Heartland Corn  Products*                |   | Winthrop, MN      |   | Corn        |   | 35     |   |   |
| Heartland Grain  Fuels, LP*              |   | Aberdeen, SD      |   | Corn        |   | 9      |   |   |
|                                     |   | Huron, SD         |   | Corn        |   | 12     |   | 18     |
| Heron Lake  BioEnergy, LLC               |   | Heron Lake, MN    |   | Corn        |   |   |   | 50     |
| Holt County  Ethanol                     |   | O’Neill, NE  |   | Corn        |   |   |   | 100    |
| Horizon Ethanol,  LLC                    |   | Jewell, IA        |   | Corn        |   | 60     |   |   |
| Husker Ag, LLC*                          |   | Plainview, NE     |   | Corn        |   | 26.5   |   |   |
| Illinois River  Energy, LLC              |   | Rochelle, IL      |   | Corn        |   | 50     |   |   |
| Indiana  Bio-Energy                      |   | Bluffton, IN      |   | Corn        |   |   |   | 101    |
| Iowa Ethanol,  LLC*                      |   | Hanlontown, IA    |   | Corn        |   | 50     |   |   |
| Iroquois  Bio-Energy Company, LLC        |   | Rensselaer, IN    |   | Corn        |   | 40     |   |   |

 

18

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| James Valley  Ethanol, LLC              |   | Groton, SD             |   | Corn                  |   | 50     |   |   |
|-----------------------------------------|--------|------------------------|--------|-----------------------|--------|--------|--------|--------|
| KAAPA Ethanol,  LLC*                    |   | Minden, NE             |   | Corn                  |   | 40     |   |   |
| Kansas Ethanol,  LLC                    |   | Lyons, KS              |   | Corn                  |   |   |   | 55     |
| Land O’ Lakes*                     |   | Melrose, MN            |   | Cheese whey           |   | 2.6    |   |   |
| Levelland/Hockley  County Ethanol, LLC  |   | Levelland, TX          |   | Corn                  |   |   |   | 40     |
| Lincolnland  Agri-Energy, LLC*          |   | Palestine, IL          |   | Corn                  |   | 48     |   |   |
| Lincolnway  Energy, LLC*                |   | Nevada, IA             |   | Corn                  |   | 50     |   |   |
| Liquid Resources  of Ohio               |   | Medina, OH             |   | Waste beverage        |   | 3      |   |   |
| Little Sioux  Corn Processors, LP*      |   | Marcus, IA             |   | Corn                  |   | 52     |   |   |
| Marquis Energy,  LLC                    |   | Hennepin, IL           |   | Corn                  |   |   |   | 100    |
| Marysville  Ethanol, LLC                |   | Marysville, MI         |   | Corn                  |   |   |   | 50     |
| Merrick &  Company                  |   | Golden, CO             |   | Waste beer            |   | 3      |   |   |
| MGP Ingredients,  Inc.                  |   | Pekin, IL              |   | Corn/wheat starch     |   | 78     |   |   |
|                                    |   | Atchison, KS           |   |                  |   |   |   |   |
| Michigan  Ethanol, LLC                  |   | Caro, MI               |   | Corn                  |   | 50     |   |   |
| Mid America Agri  Products/Wheatland    |   | Madrid, NE             |   | Corn                  |   |   |   | 44     |
| Mid-Missouri  Energy, Inc.*             |   | Malta Bend, MO         |   | Corn                  |   | 45     |   |   |
| Midwest  Renewable Energy, LLC          |   | Sutherland, NE         |   | Corn                  |   | 25     |   |   |
| Millennium  Ethanol                     |   | Marion, SD             |   | Corn                  |   |   |   | 100    |
| Minnesota  Energy*                      |   | Buffalo Lake, MN       |   | Corn                  |   | 18     |   |   |
| Missouri Ethanol                        |   | Laddonia, MO           |   | Corn                  |   | 45     |   |   |
| Missouri Valley  Renewable Energy, LLC* |   | Meckling, SD           |   | Corn                  |   |   |   | 60     |
| NEDAK Ethanol                           |   | Atkinson, NE           |   | Corn                  |   |   |   | 44     |
| New Energy Corp.                        |   | South Bend, IN         |   | Corn                  |   | 102    |   |   |
| North Country  Ethanol, LLC*            |   | Rosholt, SD            |   | Corn                  |   | 20     |   |   |
| Northeast  Biofuels                     |   | Volney, NY             |   | Corn                  |   |   |   | 114    |
| Northeast  Missouri Grain, LLC*         |   | Macon, MO              |   | Corn                  |   | 45     |   |   |
| Northern Lights  Ethanol, LLC*          |   | Big Stone City, SD     |   | Corn                  |   | 50     |   |   |
| Northstar  Ethanol, LLC                 |   | Lake Crystal, MN       |   | Corn                  |   | 52     |   |   |
| Northwest  Renewable, LLC               |   | Longview, WA           |   | Corn                  |   |   |   | 55     |
| Otter Creek  Ethanol, LLC*              |   | Ashton, IA             |   | Corn                  |   | 55     |   |   |
| Otter Tail Ag  Enterprises              |   | Fergus Falls, MN       |   | Corn                  |   |   |   | 57.5   |
| Pacific Ethanol                         |   | Madera, CA             |   | Corn                  |   | 35     |   |   |
|                                    |   | Boardman, OR           |   | Corn                  |   |   |   | 35     |
|                                    |   | Burley, ID             |   | Corn                  |   |   |   | 50     |
| Panda Energy                            |   | Hereford, TX           |   | Corn/milo             |   |   |   | 100    |
| Panhandle  Energies of Dumas, LP        |   | Dumas, TX              |   | Corn/Grain/Sorghum    |   |   |   | 30     |
| Parallel  Products                      |   | Louisville, KY         |   | Beverage waste        |   | 5.4    |   |   |
|                                    |   | R. Cucamonga, CA       |   |                  |   |   |   |   |
| Patriot  Renewable Fuels, LLC           |   | Annawan, IL            |   | Corn                  |   |   |   | 100    |
| Penford Products                        |   | Cedar Rapids, IA       |   | Corn                  |   |   |   | 45     |
| Permeate  Refining                      |   | Hopkinton, IA          |   | Sugars & starches |   | 1.5    |   |   |
| Phoenix Biofuels                        |   | Goshen, CA             |   | Corn                  |   | 25     |   |   |
| Pinal Energy,  LLC                      |   | Maricopa, AZ           |   | Corn                  |   |   |   | 55     |
| Pine Lake Corn  Processors, LLC*        |   | Steamboat Rock, IA     |   | Corn                  |   | 20     |   |   |
| Pinnacle  Ethanol, LLC                  |   | Corning, IA            |   | Corn                  |   |   |   | 60     |
| Plainview  BioEnergy, LLC               |   | Plainview, TX          |   | Corn                  |   |   |   | 100    |
| Platinum  Ethanol, LLC*                 |   | Arthur, IA             |   | Corn                  |   |   |   | 110    |
| Plymouth  Ethanol, LLC*                 |   | Merrill, IA            |   | Corn                  |   |   |   | 50     |
| Prairie Ethanol,  LLC                   |   | Loomis, SD             |   | Corn                  |   | 60     |   |   |
| Prairie Horizon  Agri-Energy, LLC       |   | Phillipsburg, KS       |   | Corn                  |   | 40     |   |   |
| Premier Ethanol                         |   | Portland, IN           |   | Corn                  |   |   |   | 60     |
| Pro-Corn, LLC*                          |   | Preston, MN            |   | Corn                  |   | 42     |   |   |
| Quad-County Corn  Processors*           |   | Galva, IA              |   | Corn                  |   | 27     |   |   |
| Red Trail  Energy, LLC                  |   | Richardton, ND         |   | Corn                  |   | 50     |   |   |
| Redfield Energy,  LLC*                  |   | Redfield, SD           |   | Corn                  |   |   |   | 50     |
| Reeve  Agri-Energy                      |   | Garden City, KS        |   | Corn/milo             |   | 12     |   |   |
| Renew Energy                            |   | Jefferson Junction, WI |   | Corn                  |   |   |   | 130    |

 

19

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| Renova Energy                              |       | Torrington, WY     |   | Corn              |   | 5            |   |        |
|--------------------------------------------|------------|--------------------|--------|-------------------|--------|--------------|--------|-------------|
| Siouxland Energy  & Livestock Coop*    |       | Sioux Center, IA   |   | Corn              |   | 25           |   | 40          |
| Siouxland  Ethanol, LLC                    |       | Jackson, NE        |   | Corn              |   |         |   | 50          |
| Sioux River  Ethanol, LLC*                 |       | Hudson, SD         |   | Corn              |   | 50           |   |        |
| Southwest Iowa  Renewable Energy, LLC*     |       | Council Bluffs, IA |   | Corn              |   |         |   | 110         |
| Sterling  Ethanol, LLC                     |       | Sterling, CO       |   | Corn              |   | 42           |   |        |
| Summit Ethanol                             |       | Leipsic, OH        |   | Corn              |   |         |   | 60          |
| Tall Corn  Ethanol, LLC*                   |       | Coon Rapids, IA    |   | Corn              |   | 49           |   |        |
| Tama Ethanol,  LLC                         |       | Tama, IA           |   | Corn              |   |         |   | 100         |
| Tate & Lyle                            |       | Loudon, TN         |   | Corn              |   | 67           |   | 38          |
|                                       |       | Ft. Dodge, IA      |   | Corn              |   |         |   | 105         |
| The Andersons  Albion Ethanol LLC          |       | Albion, MI         |   | Corn              |   | 55           |   |        |
| The Andersons  Clymers Ethanol, LLC        |       | Clymers, IN        |   | Corn              |   |         |   | 110         |
| The Andersons  Marathon Ethanol, LLC       |       | Greenville, OH     |   | Corn              |   |         |   | 110         |
| Trenton Agri  Products, LLC                |       | Trenton, NE        |   | Corn              |   | 40           |   |        |
| United Ethanol                             |       | Milton, WI         |   | Corn              |   |         |   | 52          |
| United WI Grain  Producers, LLC*           |       | Friesland, WI      |   | Corn              |   | 49           |   |        |
| US BioEnergy  Corp.                        |       | Albert City, IA    |   | Corn              |   | 250          |   | 400         |
|                                       |       | Woodbury, MI       |   | Corn              |   |         |   |        |
|                                       |       | Hankinson, ND      |   | Corn              |   |         |   |        |
|                                       |       | Central City, NE   |   | Corn              |   |         |   |        |
|                                       |       | Ord, NE            |   | Corn              |   |         |   |        |
|                                       |       | Dyersville, IA     |   | Corn              |   |         |   |        |
|                                       |       | Janesville, MN     |   | Corn              |   |         |   |        |
| U. S. Energy  Partners, LLC (White Energy) |       | Russell, KS        |   | Milo/wheat starch |   | 48           |   |        |
| Utica Energy,  LLC                         |       | Oshkosh, WI        |   | Corn              |   | 48           |   |        |
| VeraSun Energy  Corporation                |       | Aurora, SD         |   | Corn              |   | 230          |   | 330         |
|                                       |       | Ft. Dodge, IA      |   | Corn              |   |         |   |        |
|                                       |       | Charles City, IA   |   | Corn              |   |         |   |        |
|                                       |       | Welcome, MN        |   | Corn              |   |         |   |        |
|                                       |       | Hartely, IA        |   | Corn              |   |         |   |        |
| Voyager Ethanol,  LLC*                     |       | Emmetsburg, IA     |   | Corn              |   | 52           |   |        |
| Western New York  Energy, LLC              |       | Shelby, NY         |   | Corn              |   |         |   | 50          |
| Western Plains  Energy, LLC*               |       | Campus, KS         |   | Corn              |   | 45           |   |        |
| Western  Wisconsin Renewable Energy, LLC*  |       | Boyceville, WI     |   | Corn              |   | 40           |   |        |
| White Energy                               |       | Hereford, TX       |   | Corn/milo         |   |         |   | 100         |
| Wind Gap Farms                             |       | Baconton, GA       |   | Brewery waste     |   | 0.4          |   |        |
| Xethanol  BioFuels, LLC                    |       | Blairstown, IA     |   | Corn              |   | 5            |   | 35          |
| Yuma Ethanol                               |       | Yuma, CO           |   | Corn              |   |         |   | 40          |
| **Total  Current Capacity**                | ** ** | ** **         |   |              |   | **5,633.4**  |   |        |
| **Total  Under Construction/Expansion**    | ** ** | ** **         |   |              |   | ** **   |   | **6,394.9** |
| **Total  Capacity**                        | ** ** | ** **         |   |              |   | **12,028.3** |   |        |

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*                    locally-owned

We expect to be in directcompetition with other ethanol producers in close proximity to our proposedethanol plant. These competitors will compete with us for, among other things,corn and personnel. Because of their close proximity, these competitors mayalso be more likely to sell to the same markets that we intend to target forour ethanol and distillers grains.

We may also compete withethanol that is produced or processed in certain countries in Central Americaand the Caribbean region, Brazil and other countries. Ethanol produced in theCaribbean basin and Central America may be imported into the United States atlow tariff rates or free of tariffs under the Caribbean Basin Initiative andthe Dominican Republic—Central America—United States Free Trade Agreement.According to the Renewable Fuels Association, Brazil produced approximately 4.5billion gallons of ethanol in 2006. Although tariffs presently impede largeimports of Brazilian ethanol into the United States, low production costs,other market factors or tariff reductions could make ethanol imports fromvarious countries a major competitive factor in the U.S.

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*AlternativeFuel Additives*

Alternative fuels,gasoline oxygenates and ethanol production methods are continually underdevelopment by various ethanol and oil companies that have far greaterresources than we do. New products or methods of ethanol production developedby larger and better-financed competitors could provide them competitiveadvantages over us and harm our business.

The development of ethersintended for use as oxygenates is also continuing. Methyl tertiary butyl ether,or “MTBE,” is a petrochemical produced by combining isobutylene (a product ofthe refining industry) with methanol. We expect to compete with producers ofMTBE, which costs less to produce than ethanol. MTBE is an oxygenate commonlyused in fuels for compliance with the federal Clean Air Act. Many major oilcompanies produce MTBE. These companies have significant resources to marketMTBE and to influence legislation and public perception of MTBE. Thesecompanies also have sufficient resources to begin production of ethanol shouldthey choose to do so.

**WARNINGREGARDING FORWARD-LOOKING STATEMENTS**

This report containsforward-looking statements involving future events, future business and otherconditions, our future performance and our expected future operations andactions. In some cases you can identify forward-looking statements by the useof words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,”“predict,” “hope,” “should,” “could,” “may,” “future,” “continue,” “potential”or the negatives of these terms or other similar expressions. These statementsare based on management’s beliefs and expectations and on information currentlyavailable to management. Some of the sections of this report that containforward-looking statements include Item 1 (Description of Business) and Item 6(Management’s Discussion and Analysis or Plan of Operation) Forward-lookingstatements are contained in other sections as well.

Forward-lookingstatements are only our predictions and involve numerous assumptions, risks anduncertainties. Important factors that could significantly affect our currentplans, anticipated actions and future financial condition and results include,among others, those matters discussed under the heading “Risk Factors” andelsewhere in this report. Our actual results or actions may differ materiallyfrom those set forth in the forward-looking statements for many reasons,including events that are beyond our control or assumptions not proving to beaccurate or reasonable. We caution you not to put undue reliance on anyforward-looking statements, which speak only as of the date of this report. Wecannot guarantee our future results, levels of activity, performance orachievements. We are not obligated to update the forward-looking statementscontained in this report for any reason.

**RISKFACTORS**

**RisksRelated to the Units**

***The units have no public market, no public market isexpected to develop, and consequently, it may be difficult for you to sell yourunits.***

Although we expectmatching services to be available to help match members who want to sell withpersons who want to buy, there is no public trading market for the units and wedo not expect one to develop in the foreseeable future. To maintain ourpartnership tax status, we do not intend to list the units on any stockexchange or automatic quotation system such as the Nasdaq Stock Market.Consequently, you may have to hold your units for an indefinite period of timebecause it may be difficult for you to sell your units.

***There are significant restrictions on transferring theunits, which may make your units unattractive to prospective purchasers and mayprevent you from selling them when you desire.***

Investing in our unitsshould be considered a long-term investment. Your ability to transfer yourunits is restricted by our Operating Agreement. You may not transfer your unitsunless the transfer is a “permitted transfer.” Permitted transfers aretransfers approved by the Board of Governors and that satisfy certainconditions and restrictions set forth in Section 10 of our Operating Agreement.In particular, transfers that would cause us to be deemed a “publicly tradedpartnership” and thus lose our partnership tax status are generally prohibited.In addition, a transferee of units generally may not become a member unless thetransferee is approved by the Board of Governors and satisfies certainconditions and restrictions set forth in Section 10. See “Description ofCapital Units and Operating Agreement—Restrictions on Transfer” and “FederalIncome Tax Considerations” for more information. These restrictions may makeyour units unattractive to prospective transferees, and may prevent you fromselling your units when you desire.

***VBV LLC controls us, with the remainder of our membershaving little or no control over our affairs.***

VBV LLC beneficially ownsapproximately 62.0% of our capital units and is able to appoint a majority ofour governors. Other members have no right to participate in management otherthan to elect (beginning with the 2009 annual meeting of the members) orappoint the remaining governors and to vote on certain limited specified matters.Even on those specified

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matters, other membershave no control because VBV would hold a majority of the members’ voting power.This majority ownership would make it very difficult to effect changes to ourmanagement or affairs, which makes a change in control and some transactionsdifficult to accomplish and may make your units unattractive to prospectivepurchasers.

VBV and a limited numberof other members acting individually or together hold appointment rights to asubstantial majority of our board of governors, may control the election of theremaining board seats, and will control substantially all matters requiringmember approval. Their interests may not always coincide with our interests asa company or with the interests of other unit holders. Accordingly, they couldcause us to enter into transactions or agreements that you would not approve ormake decisions with which you may not agree.

***Under our Operating Agreement, you may be required to sellor liquidate your investment earlier than you desire or for payment differentin amount or kind than you desire, or to hold a substantially changedinvestment.***

Under our OperatingAgreement, mergers, consolidation, dissolution or sale of all or substantiallyall of our assets can be effected with the approval of a majority of ourgovernors and the holders of a majority of our units. If the governors andmembers approve of such a matter, you will be bound to it because under ourOperating Agreement you have waived any right to dissent or seek payment of thefair value of your units.

In addition, if theholder(s) of a majority of our units then outstanding propose to sell orotherwise transfer more than 50% of the outstanding units to an unaffiliatedthird party, the majority holder(s) will grant the minority unit holders theright to participate in such transaction and shall require the proposedtransferee(s) to purchase their units on a pari passu basis, on substantiallyequivalent terms and for the same per unit consideration. Individual minorityinvestors will not be entitled to participation rights unless a majority of theminority holders elect to do so, in which case all minority holders will berequired to participate on a pro rata basis. Similarly, the majority holder(s)generally may, at its option, require the minority unit holders to sell theirunits to the proposed transferee(s), again on a pari passu basis, onsubstantially equivalent terms and for the same per unit consideration.Minority holders may also be required to sell or liquidate their investments inthe event of various other types of proposed majority interest transfers. Ifthe terms applicable to the minority holders in those other types of transactionsare not substantially equivalent as determined by a majority of the Governorsappointed or elected to the Board by the minority holders, a majority of theminority holders shall have the right to approve of those different terms onbehalf of all minority holders. In addition, if determined by the Board, allmembers are required to cooperate with the conversion of the company to acorporation or other entity, including tendering their units in exchange forequity interests in a successor corporation or other entity.

VBV holds a majority ofour units and is able to appoint a majority of our governors. As a result, VBVwould have complete control over mergers, consolidation, dissolution or sale ofall or substantially all of our assets. VBV would also generally be able torequire you to dispose of your units in connection with proposed sales of amajority interest or various other types of proposed majority interesttransfers, and to require you to cooperate with a conversion to a corporationor other entity. As a result, you may be required to sell or liquidate yourinvestment earlier than you desire or for payment different in amount or kindthan you desire, or to hold a substantially changed investment.

***Investors in our first seed round financing may have theright to rescind their purchases.***

The memorandum used inthe first seed round offering did not describe events relating to Alvin D.Escue’s involvement in certain legal proceedings that investors may haveconsidered material to an evaluation of the ability or integrity of Mr. Escuein his then capacity as a governor, promoter and our President and ChiefExecutive Officer that investors may have considered material to theirinvestment decision. In particular, the memorandum did not disclose the fact thatMr. Escue had been involved in various legal proceedings over the preceding tenyear period. Further, the memorandum did not describe the business experienceof Mr. Escue.

The capital units issuedin our first seed round offering were sold to residents of the State ofTennessee who subscribed for units during the period from December 8, 2004through January 21, 2005. We became aware of the above matters in July 2005upon conducting further background investigations of our governors and officersin connection with establishing our accounting and control systems. Theomissions regarding Mr. Escue may have caused these sales to be made inviolation of Rule 10b-5 under the Securities Exchange Act of 1934, as amended,and under the corresponding provisions of Tennessee law contained in Section48-2-121(a) of the Tennessee Securities Act of 1980, as amended. As a result ofthese potential securities violations, we offered to rescind the unitspurchased by each of the seed round investors, pursuant to Section 48-2-122 ofthe Tennessee Securities Act and the November 14, 1986 Tennessee PolicyStatement on rescission offers. The rescission offers were made in writing inSeptember 2005, subject to acceptance by subscribers within 30 days from theoffer date. Five investors (out of 31) who had purchased a total of 167,651units accepted our offer within the 30-day period, and we repurchased theirunits for the original purchase price plus interest. Federal securities laws donot provide that a rescission offer will terminate a purchaser’s right torescind a sale of securities that was made in violation of federal securitieslaws. Because only $75,000 in unit sales were rescinded out of the $1,000,000total first seed round, we may continue to be liable for the remaining $925,000plus interest under federal securities laws.

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**RisksRelated to Our Debt Financing**

***Our debt financing agreements contain restrictive covenantsthat limit distributions and impose restrictions on the use of working capital,and these restrictions could have a material adverse effect upon our businessand reduce the value of your investment.***

We plan to use asignificant amount of debt financing to complete our project. We may also needto procure additional debt financing to operate the ethanol plant followingconstruction. We have agreements in place with CoBank, ACB and Farm CreditServices of Mid-America for $90,000,000 in term financing and a $5,000,000seasonal line of credit. These lenders require that we first spend the proceedswe have raised in our equity offerings before they release any loan proceeds tous.

The use of debt financingmay make it more difficult for us to operate because we must make principal andinterest payments on the indebtedness and abide by covenants contained in our debtfinancing agreements. Our debt may have important implications on ouroperations, including, among other things:

·             Limiting our abilityto obtain additional debt or equity financing;

·             Making us vulnerableto increases in prevailing interest rates;

·             Placing us at acompetitive disadvantage because we may be substantially more leveraged thansome of our competitors;

·             Subjecting all orsubstantially all of our assets to liens, which means that there may bevirtually no assets left for unit holders in the event of a liquidation;

·             Limiting our abilityto adjust to changing market conditions, which could make us more vulnerable toa downturn in the general economic conditions of our business; and

·             Limiting our abilityto make business and operational decisions regarding our business and oursubsidiaries, including, among other things, limiting our ability to paydistributions to our unit holders, make capital improvements, sell or purchaseassets or engage in transactions we deem to be appropriate and in our bestinterest.

The terms of our debtfinancing agreements contain financial, maintenance, organizational,operational and other restrictive covenants. If we are unable to comply withthese covenants and service our debt, we may lose control of our business andbe forced to reduce or delay planned capital expenditures, sell assets,restructure our indebtedness or submit to foreclosure proceedings, all of whichwould result in a material adverse effect upon our business and reduce thevalue of your investment.

**Risks Related to Construction and Development of the EthanolPlant**

***The cost of the project may increasesignificantly and this may require us to obtain additional capital, which maybe difficult and expensive to obtain, or may not be available at all.***

We have estimated ourtotal project cost at approximately $158,977,000 based in part on ourdesign-build agreement with Fagen, Inc., and there is no assurance that thefinal cost of the project will not be higher. Certain events and conditions,including among others, delays, change orders we may submit and site conditionsthat may differ from what we expect could lead to significant increases in ourproject costs. Delays and changes are not uncommon in construction projectssuch as the one we intend to engage in. We may modify or change the location ofthe ethanol plant if we do not move forward with the proposed site, if we findanother site that better suits our needs or if we cannot obtain the necessarypermits and approvals or utilities and other services at our proposed site, orcannot obtain them at a reasonable cost. Changing the location of the ethanolplant from the proposed site would require a waiver of our covenants with ObionGrain and may increase the cost of the project and delay construction andstart-up operation of the ethanol plant.

We have based our capitalneeds on the estimated $158,977,000 in total project costs. Increases in thecost of the ethanol plant will require us to procure additional equity and/ordebt financing, which may be difficult and expensive to obtain, or may not beavailable at all. The terms of any additional financing may hinder our abilityto generate revenue and service our debt.

***Delays may hinder our ability to timely commence operationsand service our debt.***

Delays could occurbecause of, among other things, acts of God, defects in material orworkmanship, labor or material shortages, permitting or zoning delays, ourassumptions not materializing, our changing the location of the ethanol plantfrom the proposed site, or the need to obtain additional capital. We havedeveloped what we believe to be a reasonable timetable for completing theproject. Our schedule depends upon the accuracy of the assumptions underlyingour plan of operations. Our assumptions are based in part upon plans that arenot yet final or executed. The definitive versions of such plans may notmaterialize or if they do materialize, may not prove to be reasonable. Thiscould delay completion of the 

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ethanol plant. Delayswill hinder our ability to timely commence operations, generate revenue andservice our debt. If this occurs, we may have to seek permission from thelender to delay repayment of our debt, and this could be expensive.

***We will depend on key service providers for our ethanolplant project, whose failure to perform on a timely basis or at all could forceus to abandon our business or hinder our ability to operate profitably.***

We are highly dependentupon Fagen, Inc. and ICM, Inc. to design and build the plant. Under ourdesign-build agreement, Fagen will serve as our general contractor and willengage ICM to provide design and engineering services. We are also highlydependent upon Fagen’s and ICM’s experience and ability to train our personnelin operating the plant. If Fagen were to terminate its relationship with us,there is no assurance that we would be able to obtain a replacement generalcontractor. Any such event may force us to abandon our business.

Fagen and ICM are alsoinvolved with a number of other ethanol projects. Their involvement with otherprojects may take time away from their working on our project and delay thecompletion and start-up operation of our ethanol plant, which would harm ourbusiness and our ability to generate revenue and service our debt.

***We may encounter defects in material, workmanship or design,which may hinder our ability to efficiently operate the ethanol plant.***

Defects in material,workmanship or design are not uncommon in construction projects such as ours.If the ethanol plant is built and does not operate to the level anticipated byus in our business plan, we will rely on Fagen, Inc. and ICM, Inc. toadequately address such deficiency. There is no assurance that Fagen and/or ICMwill be able to correct such deficiency in an acceptable manner or otherwisewill have the financial resources to correct or pay for such deficiency. Theperformance guarantees from Fagen are unsecured and we may not be able torecover any losses we sustain arising from such deficiencies. Failure to do socould cause us to halt or discontinue our production of ethanol, which coulddamage our ability to generate revenues.

**Risks Related to Our Operations and Market**

***Because we are recently formed and havevirtually no operating history or experience operating an ethanol plant, we mayhave difficulties successfully completing and operating the ethanol plant.***

We are a start-upbusiness venture with no operating history and limited resources. Since ourinception to December 31, 2006,****wehave an accumulated deficit of approximately $1,999,000. We expect to continueincurring significant losses until we construct and commence operation of ourproposed ethanol plant. We are dependent on our officers and governors tomanage our business and development. Our officers and governors have noexperience managing and operating an ethanol business. Our lack of an operatinghistory and inexperience may make it difficult for us to successfully completeand operate the ethanol plant. If we do not successfully complete and operatethe ethanol plant, the value of your units will decline. We cannot assure youthat we will be able to successfully operate the ethanol plant. We have notbeen profitable since our inception and we may never achieve profitability. Wecan give you no assurance that we will ever generate revenue or that anyrevenue we do generate will be sufficient for us to continue our operations.

***If ethanol production continues to increase withoutoffsetting increases in demand, the price of ethanol and distillers grains maydecrease.***

Ethanol production hasgrown significantly and rapidly in recent years. We expect that the number ofethanol producers and the amount of ethanol and its co-product, distillersgrains, produced will likely continue to increase. We cannot assure you thatthe demand for ethanol and distillers grains will similarly continue toincrease. The demand for ethanol is dependent upon numerous factors such asgovernmental regulations, governmental incentives, whether the phase out orrestrictions on the use of MTBE continues and the development of othertechnologies or products that may compete with ethanol. Ethanol is generallyused as a gasoline additive, and the use of blends containing as much as 85%ethanol is a very limited submarket that may or may not grow larger in thefuture. Demand for distillers grains depends upon various factors such as thestrength of the local and national beef and dairy cattle industry, and theavailability of other feed products at more economical prices. An increase inthe supply of ethanol and distillers grains, without offsetting increases indemand, could lead to lower ethanol and distillers grains prices. Decreases inthe price of ethanol and distillers grains will result in us generating lowerrevenue and lower profit margins, if any.

***Corn prices will fluctuate and could increase significantlyin the future, which will increase our operating costs and adversely affect ouroperating results because we may not be able to pass any of the increased costson to our customers.***

We will requiresignificant amounts of corn to produce ethanol. The price of corn, as with mostother crops, is affected by weather, disease, changes in government incentives,demand and other factors. A significant reduction in the supply of corn becauseof weather or disease, or increases in the demand of corn because of increasedethanol production or other factors, could result in higher corn prices. Thereis little correlation between the price of corn and the price of ethanol. Thus,increases in corn prices will generally produce lower profit margins becausethe price we can obtain for ethanol may not 

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increase. Substantialincreases in the price of corn in 1996 caused some ethanol plants totemporarily cease production or operate at a loss. The price of corn has fluctuatedsignificantly in the past and may fluctuate significantly in the future. Ifcorn prices increase, our production costs will increase and our profit marginswill decrease because we may not be able to pass any of the increased costs onto our customers.

Based on our feasibilitystudy, the historical average price of corn is significantly higher in the areain which we intend to build the ethanol plant than in cornbelt states where thebulk of ethanol production is located. We also expect to rail in a substantialamount of the corn we will need. These factors may make our projectparticularly sensitive to the general ethanol production risk of a lack ofcorrelation between input costs and output prices.

***Hedging transactions could significantly increase ouroperating costs if we incorrectly estimate our corn requirements and are notable to utilize all of the corn subject to our futures contracts.***

We may attempt tominimize the effects of fluctuations in the price of corn on our operations bytaking hedging positions in the corn futures markets. Hedging is a means ofprotecting the price at which we will buy corn in the future. In a hedgingtransaction, we will purchase futures contracts that lock in the amount andprice of corn that we will purchase at a future date. Whether our hedgingactivities are successful depends upon, among other things, the cost of cornand our ability to sell sufficient amounts of ethanol and distillers grains toutilize all of the corn subject to the futures contracts. Although we willattempt to link hedging activities to sales plans and pricing activities,hedging activities can result in significant costs, especially if we cannot useall of the corn subject to our futures contracts.

***We will face intense competition from competing ethanol andother fuel additive producers, and we may not have sufficient resources tocompete with these entities.***

Competition in theethanol industry is intense. We will face formidable competition in everyaspect of our business, and particularly from other companies that are seekingto develop large-scale ethanol plants. We will face competitive challenges fromlarger facilities and organizations that produce a wider range and largerquantity of products than we can, and from other plants similar to our proposedethanol plant. Our ethanol plant will be in direct competition with otherethanol producers, many of which have more experience and greater resourcesthan we do. Some of these producers are, among other things, capable ofproducing a significantly greater amount of ethanol and will compete with usfor corn and product markets. Nationally, the ethanol industry may become morecompetitive given the substantial amount of construction and expansion that isoccurring in the industry. We may also compete with ethanol that is produced orprocessed in certain countries in Central America and the Caribbean region,Brazil and other countries. Although tariffs presently impede large imports ofBrazilian ethanol into the United States, low production costs, other marketfactors or tariff reductions could make ethanol imports from various countriesa major competitive factor in the U.S.

In addition, we must alsocompete against producers of other gasoline additives having similar octane andoxygenate values as ethanol, such as producers of methyl tertiary butyl etheror MTBE. Many major oil companies produce MTBE and strongly support its usebecause it is petroleum-based. These major oil companies have substantialresources to market MTBE, to develop alternative products, and to influencelegislation and the public’s perception about the relative benefits of MTBE andethanol. These companies also have sufficient resources to build plants andbegin producing ethanol should they choose to do so. We may not have sufficientresources to compete against the ethanol and other fuel additive producers inthe industry.

***Technological advances could significantlydecrease the cost of producing ethanol or result in the production of higherquality ethanol, and if we are unable to adopt or incorporate technologicaladvances into our operations, our proposed ethanol plant could becomeuncompetitive or obsolete.***

We expect thattechnological advances in the processes and procedures for producing ethanolwill continue to occur. It is possible that those advances could decrease thecost of producing ethanol or result in the production of higher qualityethanol. If we are unable to adopt or incorporate technological advances, ourethanol production methods and processes could be less efficient than ourcompetitors, which could cause our ethanol plant to become uncompetitive.

For example, the currenttrend in ethanol production research is to develop an efficient method ofproducing ethanol from cellulose-based biomass such as agricultural waste,forest residue, and municipal solid waste. This trend is driven by the factthat cellulose-based biomass is generally cheaper than corn and producingethanol from cellulose-based biomass would create opportunities to produceethanol in areas that are unable to grow corn. Another trend in ethanolproduction research is to produce ethanol through a chemical process ratherthan a fermentation process, thereby significantly increasing the ethanol yieldper pound of feedstock. Although current technology does not allow theseproduction methods to be competitive, new technologies may develop that wouldallow these methods to become viable means of producing ethanol in the future.

In addition, alternativefuels, additives and oxygenates are continually under development. Alternativefuel additives that can replace ethanol may be developed, which may decreasethe demand for ethanol. It is also possible that technological 

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advances in engine andexhaust system design and performance could reduce the use of oxygenates, whichwould lower the demand for ethanol.

***If we lose the services of marketers, it may be difficult tosell the ethanol and distillers grains that we produce.***

We do not intend to hirea sales staff to market our ethanol and distillers grains. We have entered intoagreements with third party distributors to market and sell our ethanol anddistillers grains. If any of the entities that we have contracted with breachesor terminates our distribution contracts or is unable to provide any of theservices contracted for, we will not have any readily available means to sellour ethanol and distillers grains. Our dependence on these distributors meansthat our financial performance depends upon the financial health of thedistributors we contract with. We cannot assure you that we will be able tofind a suitable replacement if a distributor fails to perform.

Further, these thirdparty distributors have relationships and agreements with other ethanolproducers. It is possible that a distributor’s ability or willingness to marketand sell our products could be impaired by agreements that the distributor mayhave with other entities not related to us. Consequently, we may not obtain thebest possible prices for our products.

***Any interruption in our natural gas or electricity supplymay force us to halt operations and significant increases in the price ofnatural gas or electricity may increase our cost of operation.***

We will require asignificant amount of natural gas and electricity to operate our ethanol plant.The price of natural gas and electricity, like other commodities, fluctuatesignificantly. Any significant increase in the price of gas or electricity willresult in increased operating costs. These increased operating costs willlikely lead to lower profit margins because the price of ethanol has littlecorrelation with production costs. Further, natural gas will be the onlythermal heating source for our ethanol plant and electricity will be our onlysource of power, and if there were any interruptions in supply, we would haveto halt operations. An interruption in supply or problems with delivery couldhave a material adverse effect on our business.

***Our operating costs could be higher than weexpect, and this could reduce any distributions we may make.***

In addition to generalmarket fluctuations and economic conditions, we could experience significantoperating cost increases from numerous factors, many of which are beyond ourcontrol. These increases could arise from, among other things:

·             Highernatural gas or thermal energy and electricity prices;

·             Higherlabor costs, particularly if there is any labor shortage; and

·             Highertransportation costs because of greater demands on truck, rail and bargetransportation services.

In addition, operatingthe ethanol plant subjects us to ongoing compliance with applicablegovernmental regulations, such as those governing pollution control,occupational safety, and other matters. We may have difficulty complying withthese regulations and our compliance costs could increase significantly. Anyincreases in operating costs will result in lower profit margins because we maybe unable to pass any of these costs on to our customers.

***The price of distillers grains is affectedby the price of competing commodity products, such as soybeans and corn, anddecreases in the price of these commodities could decrease the price ofdistillers grains, which will decrease the amount of revenue we may generate.***

Distillers grain competeswith other protein based animal feed products. The price of distillers grainmay decrease when the price of competing feed products decrease. The prices ofcompeting animal feed products are based in part on the prices of thecommodities from which they are derived. Downward pressure on commodity prices,such as soybeans and corn, will generally cause the price of competing animalfeed products to decline, resulting in downward pressure on the price ofdistillers grain. Because the price of distillers grain is not tied toproduction costs, decreases in the price of distillers grains will result in usgenerating less revenue and lower profit margins.

***If we do not secure a third party processor to process theraw carbon dioxide we produce, we will not be able to sell any carbon dioxideand will have to emit it into the air, which could subject us to futureenvironmental claims.***

We intend to contractwith a third party processor to build a processing facility next to ourproposed ethanol plant and purchase the raw carbon dioxide we produce. Wecannot assure you that we will be able to secure a processor on acceptableterms, or at all. If we do not contract with a processor to build a processingfacility next to our ethanol plant, we will not be able to sell any of thecarbon dioxide we produce and will have to emit it into the air. This willresult in the loss of a source of revenue and could subject us to futureenvironmental claims.

***Because we will be primarily dependent upon one product, ourbusiness will not be diversified, and we may not be able to adapt to changingmarket conditions or endure any decline in the ethanol industry.***

Our success depends onour ability to timely construct the ethanol plant and efficiently produceethanol. We do not have any other lines of business or other sources of revenueto rely upon if we are unable to produce and sell ethanol and 

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distillers grains, or ifthe market for those products decline. Our ethanol plant will not have theability to produce any other products. Our lack of diversification means thatwe may not be able to adapt to changing market conditions or to weather anysignificant decline in the ethanol industry.

***Competition for qualified personnel in the ethanol industryis intense and we may not be able to hire and retain qualified governors,engineers, and operators to efficiently operate the ethanol plant.***

When construction of theproposed ethanol plant nears completion, we will need a significant number ofemployees to operate the ethanol plant. Our success depends in part on ourability to attract and retain competent personnel to a rural community. We musthire qualified managers, engineers, and accounting, human resources, operationsand other personnel. Competition for employees in the ethanol industry isintense. We cannot assure you that we will be able to attract and maintainqualified personnel. If we are unable to hire and maintain productive andcompetent personnel, the amount of ethanol we produce may decrease and we maynot be able to efficiently operate the ethanol plant.

***Our proposed site is located near the New Madrid fault,which makes us vulnerable to a potential large earthquake.***

The site on which weintend to build the ethanol plant is located near the New Madrid fault.Historically, this area has been the site of some of the most severeearthquakes in North America. In 1811 and 1812, three earthquakes withmagnitude estimates of approximately 7.8, 8.0 and 8.1 occurred during athree-month period. The largest earthquakes since that time were in 1843 and1895 with magnitude estimates of 6.0 and 6.2, respectively. Scientists predictthat there is a significant chance of an earthquake of at least magnitude 6.0and as much as 8.0 occurring sometime during the next 50 years. While we expectthe ethanol plant to be built with significant structural reinforcements inlight of these risks, we cannot assure you that a severe earthquake would notcause material damage to the facility. This could substantially reduce thevalue of the facility and cause us to halt or discontinue our production of ethanol,which could damage our ability to generate revenues.

**RisksRelated to Our Structure and Relationships with Affiliates**

***We may issue additional units in the future, and this coulddilute your ownership interest in us, which could reduce your share of anydistribution that we may make and reduce your voting power.***

Under our OperatingAgreement, we are authorized to issue up to 250,000,000 capital units. As ofMarch 23, 2007, we have 39,944,116 units outstanding and we have grantedoptions to purchase up to a total of 55,884 additional units, for a total of40,000,000 units on a fully-diluted basis. Consequently, we could offer andsell a significant amount of additional units without seeking the approval ofour members. The sale of additional units or rights to purchase additionalunits could lower the value of your units by diluting your ownership interestin us, reducing your voting power and reducing the amount of any distributionthat we may make to you.

***Under our Operating Agreement, it may be difficult for youto enforce claims against an officer or governor, which means that you may notbe able to recover any losses you may suffer through your ownership of theunits arising from acts of our officers and governors that harm our business.***

Our officers andgovernors must discharge their duties with reasonable care, in good faith andin our best interest. Despite this obligation, our Operating Agreement limitsan officer’s and governor’s liability to us and our members. Officers andgovernors are generally not liable to us or our members for monetary damagesfor breaches of fiduciary duty, unless it involves (a) a breach of duty ofloyalty to us or our members, (b) acts or omissions that are not in goodfaith or involve intentional misconduct or a knowing violation of law or, withrespect to officers, for acts of gross negligence, (c) knowing violationsof the securities laws of Tennessee or for illegal distributions, or (d) atransaction from which is derived an improper personal benefit. Theselimitations could limit your rights to enforce claims against our officers orgovernors.

***There are conflicts of interest in our business, because wehave relationships with and may enter into additional transactions with ourofficers, governors, and affiliates, which could impair an interested officer’sor governor’s ability to act in our best interest.***

Conflicts of interestexist and may arise in the future because of the relationships between andamong our officers, governors, affiliates and us, their interests in otherethanol projects or competing businesses, and the fact that we have enteredinto and may from time to time in the future enter into transactions with ourofficers, governors and affiliates. Although we will examine these conflictsfrom time to time, we have not established any formal procedures to address orresolve any conflicts of interest. Conflicts of interest could have adverseconsequences for our business or you because our governors and officers mayplace their personal interests (including the interests of the other businesseswith which they are affiliated) ahead of our interests. For more information oncertain of our existing and prospective relationships and conflicts, please seeItem 12 (Certain Relationships and Related Transactions, and DirectorIndependence).

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**Governmentand Regulatory Risks**

***The use and demand for ethanol is dependenton various environmental regulations and governmental programs that couldchange and cause the demand for ethanol to decline.***

There are various federaland state laws, regulations and programs that have led to increased use ofethanol in fuel. These laws, regulations and programs are constantly changing.Federal and state legislators and environmental regulators could adopt ormodify laws, regulations or programs that could adversely affect the use ofethanol. Certain states oppose the use of ethanol because they must shipethanol in from other corn producing states, which could significantly increasegasoline prices in the state. Material changes in environmental regulationsregarding the use of MTBE or the required oxygen content of automobileemissions or the enforcement of such regulations could decrease the need to useethanol. For example, the Energy Policy Act of 2005 eliminated the reformulatedoxygenate standards under the Clean Air Act. Future changes in the law mayfurther postpone or waive requirements to use ethanol.

Other laws, regulationsand programs provide economic incentives to ethanol producers and users. Thepassage of pending federal or state energy legislation or any other revocationor amendment of any one or more of these laws, regulations or programs couldhave a significant adverse effect on the ethanol industry and our business. Wecannot assure you that any of these laws, regulations or programs will continuein the future. Some of these laws, regulations and programs will expire undertheir terms unless extended, such as the federal partial excise tax exemptionfor gasoline blenders who use ethanol in their gasoline, which is scheduled toexpire in December 2010. Government support of the ethanol industry couldchange and Congress and state legislatures could remove economic incentivesthat enable ethanol to compete with other fuel additives. The elimination orreduction of government subsidies and tax incentives could cause the cost ofethanol-blended fuel to increase. The increased price could cause consumers toavoid ethanol-blended fuel and cause the demand for ethanol to decline.

***Compliance with new and existingenvironmental laws and rules could significantly increase our construction andstart-up costs, and force us to delay or halt construction or operation.***

To construct the ethanolplant, we will need to obtain and comply with various permitting requirements.As a condition to granting necessary permits, regulators could make demandsthat increase our costs of construction and operations, in which case we couldbe forced to obtain additional debt or equity capital. Environmental issues,such as contamination and compliance with applicable environmental standardscould arise at any time during the construction and operation of the ethanolplant. If this occurs, it would require us to spend significant resources toremedy the issues and may delay or prevent construction or operation of theethanol plant. This would significantly increase the cost of the project. Wecannot assure you that we will be able to obtain and comply with all necessarypermits to construct and operate the ethanol plant. Failure to obtain andcomply with all applicable permits and licenses could halt our construction andoperation and could subject us to future environmental claims.

***Our business is subject to extensive and potentially costlyenvironmental regulations that could change and significantly increase ouroperating costs.***

The ethanol plant will besubject to environmental regulation by the state in which the plant is locatedand by the United States Environmental Protection Agency (“EPA”). For example,our ethanol plant will be subject to environmental regulations of the TennesseeDepartment of Environment and Conservation and the EPA. These regulations couldresult in significant compliance costs and may change in the future. Forexample, although carbon dioxide emissions are not currently regulated, someauthorities support restrictions on carbon dioxide emissions that, if adopted,could have a significant impact on our operating costs because we may have toemit a significant amount of carbon dioxide into the air. Also, the stateenvironmental agencies or the EPA may seek to implement additional regulationsor implement stricter interpretations of existing regulations. Recently, theEPA cautioned ethanol producers that it is prepared to sue companies whoseplants do not comply with applicable laws and regulations. In a recent test ofcertain ethanol plants, the EPA expressed concerns over the discovery ofcertain “volatile organic compounds,” some of which may be carcinogenic.Changes in environmental regulations or stricter interpretation of existingregulations may require additional capital expenditures or increase ouroperating costs. In addition, because our proposed ethanol plant will be a 100million gallon per year ethanol plant, it may be more difficult and costly forus to comply with applicable environmental regulations than smaller ethanolplants.

In addition, the ethanolplant could be subject to environmental nuisance or related claims byemployees, property owners or residents near the ethanol plant arising from airor water discharges. These individuals and entities may object to the airemissions from our ethanol plant. Ethanol production has been known to producean unpleasant odor to which surrounding residents and property owners couldobject. Environmental and public nuisance claims, or tort claims based on emissions,or increased environmental compliance costs could significantly increase ouroperating costs.

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**Risks Related to Tax Issues in a Limited Liability Company**

***If we are not taxed as a partnership, wewill pay taxes on all of our net income and you will be taxed on any earningswe distribute, and this will reduce the amount of cash available fordistributions to holders of our units.***

We expect to be treatedas a partnership for federal income tax purposes. This means that we will notpay any federal income tax, and our members will pay tax on their share of ournet income. We cannot assure you, however, that we will be able to maintain ourpartnership tax treatment. If we fail to qualify for partnership taxation forwhatever reason, then we may be taxed as a corporation. As a corporation, wewould be taxed on our taxable income at rates of up to 35% for federal incometax purposes. Further, you would generally be required to treat distributionsthat we make to you as corporate dividends. These distributions would not bedeductible by us, thus resulting in double taxation of our earnings andprofits. This would also reduce the amount of cash we may have available fordistributions.

***Your tax liability from your allocated share of our taxableincome may exceed any cash distributions you receive, which means that you mayhave to satisfy this tax liability with your personal funds.***

Because we are treated asa partnership for federal income tax purposes, all of our profits and losses “pass-through”to our unit holders. You must pay tax on your allocated share of our taxableincome every year. You may receive allocations of taxable income that exceedany cash distributions we make to you. This may occur because of variousfactors, including but not limited to, accounting methodology, the specific taxrates you face, and payment obligations and other debt covenants that restrictour ability to pay cash distributions. If this occurs, you may have to payincome tax on your allocated share of our taxable income with your own personalfunds.

***Any audit of our tax returns resulting inadjustments could cause the IRS to audit your tax returns, which could resultin additional tax liability to you.***

The IRS may audit our taxreturns and may disagree with the tax positions that we take on our returns.The rules regarding partnership allocations are complex. The IRS couldsuccessfully challenge the allocations set forth in our Operating Agreement andreallocate items of income, gains, losses, deductions or credits in a manner thatadversely affects our unit holders. If challenged by the IRS, the courts maynot sustain the position we take on our tax returns. An audit of our taxreturns could lead to separate audits of your personal tax returns, especiallyif adjustments are required. This could result in adjustments on your personaltax return and in additional tax liabilities, penalties and interest to you.

**Item 2.    Description of Property.**

In December 2006, wepurchased a 230-acre green field site near Obion, Tennessee on which to locateour proposed ethanol plant.

**Item 3.    Legal Proceedings.**

None.

**Item 4.    Submission of Matters to a Vote of Security Holders.**

A special meeting of themembers was held on November 16, 2006, for the purpose of voting on a proposedAmended and Restated Operating Agreement and proposed Articles of Amendment toour Articles of Organization, each as described in the proxy solicitingmaterials distributed to the members. The proposed Amended and RestatedOperating Agreement and proposed Articles of Amendment were previously approvedby our Board of Governors as necessary or advisable in connection with theinitial public offering of our capital units.

The number of units heldby members represented at the meeting, in person or by proxy, was 4,261,692. Asto the proposed Amended and Restated Operating Agreement, members holding4,172,278 units voted in favor, no members voted against and members holding89,414 units abstained. As to the proposed Articles of Amendment, membersholding all 4,261,692 units voted in favor.

**PART II**

**Item 5.    Market for Common Equity and Related Stockholder Matters.**

**Market Information**

There is no establishedpublic trading market for our capital units. As of March 15, 2007, there areapproximately 150 holders of record of our capital units.

**Distributions**

We will not declare anydistributions until we begin generating revenue. We do not expect to generateany revenue until we begin operating our proposed ethanol plant. After we begingenerating revenue, we intend to distribute our net cash 

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flow to our unit holders ratably in proportion totheir units held, subject to Tennessee law, our Operating Agreement andapplicable loan covenants and restrictions. By net cash flow, we mean our grosscash proceeds received less any portion, as determined by our governors intheir sole discretion, used to pay or establish reserves for our expenses, debtpayments, capital improvements, replacements and contingencies. If ourfinancial performance and loan covenants permit, our Board will try to makecash distributions at times and in amounts that will permit our members to makeincome tax payments. If our financial performance and loan covenants permit, weintend to make distributions in excess of the amount necessary for unit holdersto make income tax payments. Cash distributions are not assured, however, andwe may never be in a position to make distributions. Whether we will be able togenerate sufficient cash flow from our business to make distributions dependsupon numerous factors, including:

·       Successful and timely completion of ourproposed ethanol plant;

·       Required principal and interest payments onoutstanding debt and compliance with applicable loan covenants;

·       Our ability to operate our plant efficientlyand generate profits;

·       Our ability to control operating costs;

·       Adjustments and the amount of cash set asidefor reserves, capital expenditures and unforeseen expenses;

·       State and federal regulations and subsidies,and support for ethanol generally, which can impact our financial performance andthe cash available for distributions; and

·       General demand for ethanol and distillersgrains.

Under Tennessee law, wecannot make distributions to members if, after the distribution, we would notbe able to pay our debts as they become due or our liabilities, excludingliabilities to our members on account of their capital contributions, wouldexceed our assets.

If any capital units aretransferred during a fiscal year, all profits, losses, and other itemsattributable to the transferred capital units will be divided and allocatedbetween the transferor and the transferee by taking into account theirinterests during the year. We will make any distributions on or before thetransfer date to the transferor, and we will make all distributions after thetransfer date to the transferee. If we do not receive proper documentation of atransfer, we will make distributions, if any, to the owner of the units asshown in our books and records.

**Securities Authorized for Issuance under EquityCompensation Plans**

We previouslygranted options to our then governors, James Baxter Sanders, James K.Patterson, Flavius Allen Barker, Michael D. Miller, James L. Byford, Ph.D.,William H. Latimer, III, Phillip E. Pinion and Tom W. Wade, Jr., andone executive officer, Gary L. West, to purchase up to 55,884 units each (for atotal of 502,956 units) at an exercise price of approximately $0.45 per unit.The options were subject to forfeiture if the holder did not continuously serveas a governor or officer up through closing on our project financing. Theoptions vested on closing on project financing in January 2007 and by theirterms were to remain exercisable for a period of five years thereafter. All ofthese options were exercised in full in January 2007, other than the option topurchase up to 55,884 units granted to Mr. West.

Thefollowing table presents information as of December 31, 2006 with respect tocompensation plans (including individual compensation arrangements) under whichour capital units were authorized for issuance.

|                                                                   | ** ** | **Number of units  to be issued  upon exercise of  outstanding  options** | ** ** | **Weighted-  average  exercise price of  outstanding  options** | ** ** | **Number of  securities remaining  available for future  issuance under  equity compensation  plans** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Equity  compensation plans not approved by securities holders** |       | 502,956                                                                                                 |       | $                                                                         | 0.45       |                                                                                                                                | —     |   |
| **Total**                                                         |       | 502,956                                                                                                 |       | $                                                                         | 0.45       |                                                                                                                                | —     |   |

 

Further, inconsideration of their individual $125,000 personal guarantees of our$1,000,000 unsecured line of credit, we granted options to our then governors,Messrs. Sanders, Patterson, Barker, Miller, Byford, Latimer, Pinion andWade, to 

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purchase up to 279,419 units each (for a total of2,235,352 units), at an exercise price of approximately $0.45 per unit. Theseoptions vested immediately and by their terms were to remain exercisable for aperiod of five years after closing on project financing. These options were notsubject to forfeiture. All of these options were exercised in full in January2007. These options are not included in the above table.

**Use of Proceeds**

The Securities and ExchangeCommission declared our Registration Statement on Form SB-2 (Registration No.333-130815), as amended, for the initial public offering of our capital unitseffective on June 15, 2006. We commenced the offering promptly thereafter. Weregistered a total of 31,175,000 capital units with an aggregate gross offeringprice of $62,350,000, or $2.00 per unit. We received and accepted subscriptionsfor a total of 31,155,000 units ($62,310,000) in the offering before closingthe subscription period on January 19, 2007. Our officers and managers offeredand sold the units without the assistance of an underwriter. Upon our breakingof escrow and receipt in full of the $62,310,000 of offering proceeds onJanuary 23, 2007, we completed the sale of the 31,155,000 units and theoffering was terminated.

From June 15, 2006 (theeffective date of the Registration Statement) to December 31, 2006, we incurredno expenses for our account in connection with the issuance and distribution ofthe units registered for underwriting discounts and commissions, finders’ fees,or expenses paid to or for underwriters. Other (and total) expenses incurredduring this period for our account in connection with the issuance anddistribution of the units were an estimated $45,000. None of these paymentswere direct or indirect payments to our governors, officers or theirassociates, persons owning 10% or more of any class of our equity securities orour affiliates.

**Item 6.    Management’s Discussion and Analysis or Plan of Operation.**

The following is adiscussion of our plans for the project to the start-up of the ethanol plant.This plan reflects our current thinking and is subject to change as the projectprogresses.

**Overview**

Ethanol GrainProcessors, LLC is a Tennessee limited liability company. We are a developmentstage company that intends to build and operate a gas-fired 100 million gallonper year ethanol production facility near Obion, Tennessee. We are currentlynot an operating business and we have no revenue. We have no substantialassets. To date, our efforts have been devoted principally to developing ourplanned ethanol project.

We will not beginoperations or generate revenue until we complete construction of our proposedethanol plant, which we anticipate will be mid-2008. Once we begin operations,we expect to generate revenue by selling ethanol and distillers grains. We alsointend to sell the raw carbon dioxide gas our plant will produce “over-the-fence”to a processor that constructs a processing plant next to our planned ethanolfacility. We intend to produce ethanol from corn by using proven fermentationand distillation processes. We have hired Fagen, Inc. to design and build ourethanol plant utilizing the process design technology of ICM, Inc.

The Securities and ExchangeCommission declared our Registration Statement on Form SB-2 (Registration No.333-130815), as amended, for the initial public offering of our capital unitseffective on June 15, 2006. We commenced the offering promptly thereafter. Weregistered a total of 31,175,000 capital units with an aggregate gross offeringprice of $62,350,000, or $2.00 per unit. We received and accepted subscriptionsfor a total of 31,155,000 units ($62,310,000) in the offering before closing thesubscription period on January 19, 2007. Our officers and managers offered andsold the units without the assistance of an underwriter. Upon our breaking ofescrow and receipt in full of the $62,310,000 of offering proceeds on January23, 2007, we completed the sale of the 31,155,000 units and the offering wasterminated.

**SiteSelection**

We believe thereis an opportunity for a large-scale gas-fired ethanol plant in northwesternTennessee. We believe northwestern Tennessee has access to an adequate supply oflocal and railed corn, and is served by rail and highway transportationnetworks, and is in close proximity to the Mississippi River barge and portsystem. We believe this transportation infrastructure will provide us access toa number of ethanol and distillers grains markets and terminal locations in theSouth and Southeast. We intend to capitalize on these transportation advantageswhen we sell our ethanol to the Birmingham, AL, Atlanta, GA, Baton Rouge, LA,St. Louis, MO, Memphis and Nashville, TN, and Houston, TX markets.

**SitePurchase**

We had enteredinto a site purchase option contract with Obion Grain Co., Inc. topurchase a 230-acre green field site near Obion, Tennessee on which to locateour proposed ethanol plant. The site is located on Canadian National Railroad’s

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mainline coming south out of Chicago, Illinois. Wecompleted a Phase I Environmental Site Assessment of the site, which revealedno evidence of on-site or off-site recognized environmental conditions.

In December 2006,we closed on the purchase of the 230-acre intended plant site as contemplatedby the site purchase option contract. The property was acquired by us  in exchange for the issuance of  575,000 capital units, valued at $1,150,000.

Under the optioncontract, we agreed that we will not proceed with the development orconstruction of an ethanol plant in western Tennessee or western Kentucky otherthan on the purchased site. This means that if we are going to build an ethanolplant in the area, it will need to be located on the purchased site.

Obion Grain Co.retained ownership of approximately ten acres of land next to the purchasedsite, and may erect and operate a grain elevator on this land. If so, we haveagreed to grant Obion Grain Co. permission to enter onto the purchased site anda limited right to use the rail loop track improvements that we intend toconstruct on the purchased site for purposes of grain elevator operations, so longas that use does not interfere with our ethanol facility operations. Theparties have agreed to review on an annual basis an equitable sharing ofmaintenance costs of the rail loop track based on Obion Grain Co.’s usage.

Under the purchaseoption contract, we had also agreed to certain corn procurement provisions.However, in December 2006, we also entered into a corn purchasing agreementwith Obion Grain Co. This agreement expressly superseded the provisionsregarding corn procurement under the site purchase option contract.

**SiteInfrastructure and Improvements**

We will need tomake improvements to our proposed site and other infrastructure in order toconstruct and operate the ethanol plant.

*RoadwayImprovements*

In order to obtainour building and operating permits, the State of Tennessee will likely requireus to make several roadway improvements for access to the ethanol plant. Theseupgrades could consist of installing acceleration lanes, deceleration lanes,and safety lighting. We are continuing discussions with Obion County, the Townof Obion and the Tennessee Department of Transportation regarding roadwayimprovements. We have hired Civil Engineering Solutions LLC to assist us withdrawings for proposed road improvements that would provide us access to andfrom the ethanol plant. We expect that these improvements will provide usaccess to Interstate 69 from the ethanol plant.

*Rail Access*

We will beresponsible for rail engineering, siding and tracking on our property off theCanadian National Railroad Company’s mainline rail system. We intend toconstruct sufficient tracking on our site to accommodate high volume loadingcapacity for ethanol and distillers grain, as well as unloading capacity forcorn.

**Planof Operations to Plant Start-Up**

We have hiredFagen, Inc. to design and build our ethanol plant utilizing the processdesign technology of ICM, Inc. We have hired RTP EnvironmentalAssociates, Inc. to assist us with environmental permitting matters, ThePatterson Group, LLC to provide us our organizational, administrative andfinancial consulting services, and U.S. Energy Services, Inc. to provideus with consulting and energy management services.

Having recentlyclosed on our debt and equity financing and completed our preliminary sitework, we expect to spend the next approximately 18 months constructing theethanol plant. Following completion of the ethanol plant, we expect to reachguaranteed performance criteria and specifications within 30 days.

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**Employees**

We may hire aconstruction manager to assist us during the construction phase of our operations.Our plan is to hire the members of our management team approximately 3-9 monthsprior to anticipated plant start-up, with the remainder of our employeesstarting 30-60 days before plant start-up. We intend to hire a plant managementteam that has demonstrated processing and/or manufacturing facility experiencein their respective areas of responsibility. On-site training and assistancebefore and during plant start-up is part of our design-build contract, as wellas continued assistance following when we achieve performance criteria for aperiod up to 6 months.

We currently havethree employees. Upon completion of the ethanol plant, we expect to have 36-41employees, of which 25-30 will be in ethanol production operations, and 11 ingeneral management and administration. We will not maintain an internal salesorganization, but will instead rely upon third-party buyers and marketers tobuy or market the ethanol and distillers grains that we produce. Accordingly,our principal operations will be the general management of our business and theoperation of the ethanol plant. We anticipate that we will need the followingpersonnel to handle these functions:

| Position                               | ** ** | ** ** | ** ** | **Number of   Employees** | ** ** |
|----------------------------------------|------------|------------|------------|-------------------------------------|------------|
| General Manager                        |       | 1          |       |
| Plant Manager                          |       | 1          |       |
| Operations  Manager                    |       | 1          |       |
| Commodities  Manager                   |       | 1          |       |
| Controller                             |       | 1          |       |
| Lab Manager                            |       | 1          |       |
| Lab Technician                         |       | 2          |       |
| Maintenance  Supervisor                |       | 1          |       |
| Maintenance  Personnel and Technicians |       | 4          |       |
| Shift  Supervisors                     |       | 4          |       |
| General Plant  Operations Personnel    |       | 15-20      |       |
| Office Staff                           |       | 4          |       |
| Total                                  |       | 36-41      |       |

 

**Our Financing Plan**

We estimate thatwe will need a total of approximately $158,977,000 to finance our ethanol plantproject, including construction of our proposed ethanol plant and funding forstart-up operations. Actual project costs may vary significantly from thisestimate due to a variety of factors, including those described under “RiskFactors” in Item 1 (Description of Business) and elsewhere in this report.Having closed on our debt and equity financing, we believe we have sufficientfunds to cover our estimated costs through start-up operations. We plan to useour equity capital, grant proceeds and debt financing to pay for siteimprovements and utility infrastructure costs, construct the ethanol plant andfinance organizational, financing and start-up costs, including ourpre-production costs and our initial inventories of corn, chemicals, yeast,denaturant, and ethanol and distillers grains.

As ofDecember 31, 2006, we had raised a total of approximately $2,077,000 inseed capital, which we have used to fund our organization and operations, andreceived a capital contribution of land valued at $1,150,000. In January 2007,we received an additional $66,050,000 in equity financing through thecompletion of our public offering and our prior escrow offering, as well asoption exercises and employee subscriptions. Also in January 2007, we arrangedfor financing through CoBank of up to $90,000,000 in senior secured debt,consisting of a $60,000,000 term loan and a $30,000,000 revolving term loan.

We estimate thatwe will receive approximately $900,000 in total grant proceeds. We have beenawarded a $150,000 matching grant from U.S. Department of Agriculture, RuralDevelopment, to assist us with the development and construction of the ethanolplant. We also believe that we will be eligible to receive a $750,000 TennesseeEconomic Development Agency grant for which we plan to apply. We may also beeligible for other federal or state grants. However, we have not been awardedany additional grants and we cannot assure you that we will receive anyadditional grant proceeds.

The followingtable shows our estimated sources of funds from our inception until the ethanolplant is built and we begin operations. These figures are estimates only andthe actual sources of funds may vary significantly from those described below.

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**EstimatedSources of Funds**

| Equity             |   | $          | 69,276,500  |   |
|--------------------|--------|------------|-------------|--------|
| Grants             |   | 900,000    |        |
| Equity and  grants |   | 70,176,500 |        |
| Debt financing     |   | 88,800,000 |        |
| Total              |   | $          | 158,976,500 |   |

 

The followingtable shows our estimated uses of funds from our inception until the ethanolplant is built and we begin operations. These figures are estimates only andthe actual uses of funds may vary significantly from those described below. Theinformation is based on the financing plans discussed above. Further, costs andexpenses associated with the ethanol plant could be much higher due to avariety of factors, including those described under “Risk Factors” in Item 1(Description of Business) and elsewhere in this report.

**Estimated Uses of Funds**

| Plant construction(1)                                         |   | $         | 111,305,000 |   |
|---------------------------------------------------------------|--------|-----------|-------------|--------|
| Additional grain  storage(1)                                  |   | 2,500,000 |        |
| Grain handling  upgrade(1)                                    |   | 540,000   |        |
| Land                                                          |   | 1,150,000 |        |
| Site development  costs(2)                                    |   | 6,230,000 |        |
| Rail  infrastructure                                          |   | 5,873,000 |        |
| Administrative  building                                      |   | 340,000   |        |
| Office equipment                                              |   | 60,000    |        |
| Computers,  software and network                              |   | 140,000   |        |
| Construction  insurance costs                                 |   | 125,000   |        |
| Construction  manager fee                                     |   | 100,000   |        |
| Construction  performance bond                                |   | 425,000   |        |
| Construction  cost escalation for CCI increases to March 2007 |   | 4,790,000 |        |
| Construction  contingency                                     |   | 2,762,500 |        |
| Fire protection  and water supply                             |   | 910,000   |        |
| Water treatment  system                                       |   | 2,000,000 |        |
| Capitalized  interest(3)                                      |   | 1,500,000 |        |
| Rolling stock                                                 |   | 400,000   |        |
| Financing  costs(4)                                           |   | 925,000   |        |
| Organization  costs                                           |   | 2,151,000 |        |
| Pre-production  period costs                                  |   | 750,000   |        |
| Start up costs:                                               |   |      |        |
| Working capital                                               |   | 7,950,000 |        |
| Inventory—corn                                           |   | 2,000,000 |        |
| Inventory—chemicals and ingredients                      |   | 500,000   |        |
| Inventory—work in process—ethanol                   |   | 2,500,000 |        |
| Inventory—work in process—distillers grains         |   | 550,000   |        |
| Inventory spare parts—process equipment                  |   | 500,000   |        |
| **Total**                                                     |   | $         | 158,976,500 |   |

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(1)             Grainstorage capacity and associated handling systems for approximately 1,000,000bushels is included in plant construction. We have increased our plannedcapacity to 2,000,000 bushels, resulting in estimated incremental grain storageand handling costs of approximately $2,500,000 and $540,000, respectively.

(2)             Includessite improvements (such as dirt work, soil stabilization and subsurfaceremediation, highway road safety upgrades and hard surface roads on our site)and site utilities. Excludes land acquisition.

(3)             Becausewe intend to capitalize all of our interest expenses and not make any paymentson our debt financing until we begin start-up operations, we estimate that bythe time we begin start-up operations, capitalized interest, net of interest incomeearned on offering proceeds, will total approximately $1,500,000.

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(4)             Weestimate that our financing costs for our debt financing will totalapproximately $925,000. Financing costs includes lender commitment fees, aswell as out-of-pocket expenses such as title insurance, legal fees, appraisalcosts and filing fees.

As shown in theabove table, we expect to spend the majority of our funds on site preparationand development, design, engineering and construction of the ethanol plant,infrastructure, equipment and construction-related insurance and performancebond. These costs include leveling and grading the site, general site work toprepare for construction of the ethanol plant, preparing and pouringfoundations, and material and labor to construct the plant and ancillaryfacilities. We will also be purchasing and installing ethanol productionequipment, such as pumps, grinders, processing equipment, storage tanks andconveyors. Under our design-build agreement with Fagen, Inc., we will beresponsible for site preparation and infrastructure costs, and ourdesign-builder will be responsible for the process design and engineering,construction, equipment purchases and installation. We will be required to makemonthly progress payments based on the work completed and invoiced to us by thedesign-builder.

**DevelopmentServices Providers**

*Fagen, Inc.*

We have enteredinto a design-build agreement with Fagen, Inc. in connection with thedesign, construction and operation of the proposed ethanol plant. Fagen is acivil, mechanical and electrical contractor specializing in heavy industrialconstruction and maintenance work.

Under thedesign-build agreement, Fagen will perform all services in connection with theengineering, design, procurement, construction start-up, testing and trainingfor the operation and maintenance of the plant, and provide all material,equipment, tools and labor necessary to complete the plant in accordance withthe terms of the design-build agreement. As full consideration for the servicesand costs incurred under the design-build agreement, we will pay Fagen acontract price of approximately  $114,345,000, which does not includewater pretreatment system and fire protection system to be provided by Fagenpursuant to a separate agreement currently being negotiated by us and Fagen.The contract price is also subject to increase based upon the percentageincrease in the construction cost index from September 2005, which equates toan additional approximately $4,790,000 based on the index value as of March2007. By an agreement between us and Fagen Engineering, LLC, we have engagedFagen Engineering for engineering services for a fee of $92,500, which is to beincluded in the contract price under the design-build agreement or paid by usif Fagen does not receive the written notice to proceed described below.

As part of thecontract price, the original design-build agreement contemplated our paying an$8,000,000 mobilization fee as soon as permitted by our organizational documentsand other agreements and, at the latest, at the earlier of financial closing orFagen’s acceptance of the notice to proceed. Under a recent amendment, themobilization fee increased to $24,000,000, which was paid less 10% retainage inMarch 2007. The mobilization fee represents a partial pre-payment of thecontract price. We are also obligated to make monthly payments for workperformed and not paid for during a previous period.

Under thedesign-build agreement, Fagen must achieve substantial completion of theproject no later than 545 days after the date a notice to proceed is given. Theagreement does not allow us to deliver the notice to proceed until we haveacquired title to the real estate on which the plant will be constructed,certain engineering and site work is completed, we have obtained certainpermits, sales tax exemptions and evidence of insurance, and we have achievedfinancial closing by the execution of final loan documents and relatedagreements to providing financing for the plant. A valid notice to proceedcannot be given until Fagen provides us with a written notification ofacceptance. Following receipt of the notice to proceed from us, Fagen mustnotify us of either acceptance or denial within 10 days. The original design-buildagreement provided that if the notice to proceed is not received by April 30,2007, the agreement may be terminated at Fagen’s sole option. However, under arecent amendment, this deadline is to be extended to December 31, 2007 if byApril 30, 2007 we have fulfilled the above requirements other than thecompletion of certain site work which we are diligently proceeding with and wehave paid the mobilization fee.

If substantialcompletion is achieved within the 545-day period, we will be obligated to payFagen an early completion bonus of $20,000 for each day that the date ofsubstantial completion occurred in advance of the end of the 545-dayperiod.  Final completion of the work must be achieved within 90 days ofthe earlier of the actual date of substantial completion or the date scheduledfor substantial completion. When final completion of the work has beenachieved, Fagen will deliver to us a request for final payment under thedesign-build agreement and we will be obligated to make a final payment within30 days after receipt of the request. Following final completion, Fagen willprovide us with one month of on-site operational support for us and ourpersonnel after successful completion of performance tests.  Fagen willalso provide off-site technical and operating procedure support by telephoneand other electronic means for a period of six months from the date ofsubstantial completion. Additionally, at a mutually agreed time prior tostart-up, Fagen will 

35

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provide up to two weeks of training at a facilitydesignated by ICM for all of our employees involved in the operation andmaintenance of the plant.

Under thedesign-build agreement, Fagen has guaranteed that the plant will meetperformance criteria determined by the parties in a performance test conductedand concluded not later than ninety days after the date of substantialcompletion. Fagen is responsible for paying any design and construction costsassociated with remediating any performance shortfall.  If the plant doesnot meet the final completion criteria by the required final completion date,Fagen is obligated to pay us liquidated damages of $20,000 for each day thatthe final completion date is delayed, up to a maximum of $1,000,000 in lieu ofliability for losses or other damages occasioned by the delay.

The design-buildagreement may be terminated by us upon ten days written notice, in which casewe will remain responsible to Fagen for payment for all work performed but notalready paid for, reasonable costs and expenses associated with thetermination, including demobilization costs, an amount equal to the settlementof terminated contracts with subcontractors and consultants, all retainagewithheld by Fagen, and an amount equal to fifteen percent of all work performedand reasonable costs associated therewith. If we terminate the project at ourelection, we may obtain a limited right to use the drawings, specifications,calculations, data, notes and other materials and documents furnished by Fagenon an as-is basis on the date of termination and agreements regarding our riskas to use of the drawings, specifications, calculations, data, notes and othermaterials and documents furnished by Fagen to us and warranties regardingequipment in exchange for a payment by us to Fagen. Fagen may terminate thedesign-build agreement for certain work stoppages, our failure to provide Fagenwith information, permits or approvals or to meet any of our other obligationsunder the design-build agreement if the failure results in certain types ofwork stoppages, or our failure to pay amounts properly due under thedesign-build agreement following an opportunity to cure such failure withinseven days.

In thedesign-build agreement, each of the parties made representations andwarranties, and covenants and agreements to the other as customary for anagreement of this type. The provisions of the design-build agreement furtherprovide that Fagen’s liability will not exceed the contract price and will bereduced by the total value stated in the application for payment. However, uponthe earlier of substantial completion or the time requests for payment havebeen made for 90% of the contract price, Fagen’s liability for the performanceor non-performance of the work or its other obligations is limited to thegreater of 10% of the contract price or the amount of insurance coverageavailable to respond to the claim or liability under any insurance policyprovided by Fagen under the design-build agreement. The design-build agreementalso contains provisions regarding the use of subcontractors, scheduled for andsupervision of work, retainage up to a specified maximum amount, paymentprocess, warranties and corrections of defective work, bonds and performancesecurity, performs testing criteria and materials, resolutions of disputesthrough mediation and arbitration, force majeure, indemnification and otherliability matters and the ownership of the drawings, specifications,calculations, data, notes and other materials and documents furnished by Fagento us under the design-build agreement.

*ICM, Inc.*

Under ourdesign-build agreement with Fagen, we expect that Fagen will engageICM, Inc. to provide environmental consulting and engineering services. Inconnection with the design-build agreement, we have also entered into a licenseagreement with ICM for the use of certain proprietary property and informationof ICM in the design and construction of the plant.

ICM is afull-service engineering, manufacturing and merchandising operation. ICM is theengineering and manufacturing company. ICM operates out of its manufacturingand office facility near Wichita, Kansas. Engineering operations consist ofconsulting, design by Professional Engineers, procurement and projectmanagement as well as manufacturing engineering for the company’s distillersgrains dryer and ICM/Phoenix Bio-Methanator wastewater treatment product lines.

*ThePatterson Group, LLC*

We have enteredinto an agreement with The Patterson Group, LLC and its principal,Mr. James K. Patterson, to provide us financial related and seniormanagement services. Under the agreement, Mr. Patterson will serve as ourChief Executive Officer and our Chief Financial Officer on a full-time basisand provide us the following services:

·       Provide active managementof the day-to-day activities of our development stage company;

·       Manage all accounting,payroll, purchasing, cash management, financial planning, budgeting, auditing,tax and financial reporting matters;

·       All data processing andmanagement reporting; and

·       Mr. Patterson willwork with and report to our treasurer.

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We expectMr. Patterson and The Patterson Group to continue acting as our ChiefExecutive Officer and our Chief Financial Officer until we hire permanentreplacements. In exchange for these services, we issued Mr. Patterson223,535 capital units, and agreed to pay additional compensation as follows:

·       A fee of $1,500 per week;

·       A deferred payment of$189,000 paid in January 2007 upon our closing on financing for the proposedplant; and

·       A one-time bonus of$189,000 paid in January 2007 upon our closing on financing for the proposedplant.

We also agreed toreimburse Mr. Patterson for reasonable out-of-pocket expenses related tothe performance of the services.

*HaroldCoffey Construction, Inc.*

In December 2006,we entered into a contract with Harold Coffey Construction, Inc. for theperformance of site preparation work required for our ethanol plant project.Under the contract, Coffey Construction, the contractor, will be performingboth our plant site excavation work (Phase I) and a significant portion of ourrail track excavation work (Phase II).

Prior to thecommencement of each phase, the contractor is to prepare and deliver a scheduleof the work included within the phase, to be updated periodically.  PhaseI is to be substantially completed within approximately 112 days from the datewe deliver a notice to proceed, with extensions to be granted for workmodifications, weather or other site conditions or unforeseeable causes. Once Phase I has been substantially completed and we authorize the removal of thesoils removed as part of Phase I and used as engineering weight and otherwisestockpiled for use in Phase II, and we give a notice to proceed on Phase II,Phase II is to be substantially completed within approximately 135 days (againsubject to extension).

All pricing is tobe done on an agreed per-unit basis for each of the contemplated elements ofthe work.  Based on the unit prices, we have estimated the total costs ofPhase I at approximately $4,476,000 and of Phase II at approximately$2,800,000. Work is to be billed on a monthly basis, subject to our retainageof 10% of the amount billed until the work is half-way completed and thenreduced to 5%.  Upon full and timely completion of each phase, we are topay the retainage for each phase with the final payment for the work includedin each phase.

The contract alsocontains provisions regarding supervision and subcontracting, inspections andtesting, corrections of defective work, change orders, insurance requirements,indemnification and dispute resolution.

We may terminatethe contractor’s services in the event of its bankruptcy or similarcircumstances, its failure to supply suitable workers, materials or equipment,its failure to make prompt payment to subcontractors or suppliers, itsdisregard for applicable laws or our authority, its falling materially behindthe project schedule without an acceptable plan to return to schedule, or itsother violation of the contract documents.  Then, upon completion of thework, in the event the unpaid balance of the contract price exceeds thecompletion costs incurred by owner, we must pay the excess to the contractor.Or, if the completion costs exceed the unpaid balance, the contractor would berequired to pay the difference to us.  Conversely, the contractor mayterminate the contract if we are in default.

*OtherConsulting Contracts*

We have enteredinto a consulting agreement with Antioch International, Inc. to provide usengineering services relating to our rail tracks. In exchange for theseservices, we will compensate Antioch International on a time and material andfixed fee basis, which we estimate will total approximately $89,000. Under theagreement, Antioch International will:

·       Assist us with preparingstudies and developing solutions for our rail track requirements;

·       Assist us with preliminarydesign of our rail tracks;

·       Assist us with regulatoryrequirements relating to the rail tracks;

·       Prepare designs, schematicsand other necessary documentation relating to our rail tracks; and

·       Assist us with preparingcost estimates.

We have enteredinto a contract with RTP Environmental Associates, Inc., a consulting firmthat provides environmental services to ethanol businesses. Under theagreement, RTP Environmental Associates will assist us with preliminary siteassessments, air and water related permitting requirements for the constructionand operation of the ethanol plant, certain construction related permits, andother environmental related matters on an as needed basis. We will pay RTPEnvironmental Associates on a time and material basis, which we estimate atapproximately $107,000.

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We have enteredinto a contract with U.S. Energy Services, Inc. to provide us withconsulting and energy management services. Under the agreement, U.S. EnergyServices will assist us with securing supplies of natural gas and electricity,including the construction of a gas pipeline and development of otherenergy-related infrastructure. We will pay U.S. Energy Services $3,900 permonth for these services, and also reimburse U.S. Energy Services for relatedout-of-pocket expenses.

We have enteredinto an agreement with Thomas D. Williamson, DBA TransportationConsultants Co. for the provision of rail transportation consulting work.We will pay an hourly rate for these services along with reimbursement of allreasonable out of pocket expenses. Either party may terminate the agreementupon 30 days written notice.

**Environmentaland Other Regulatory Matters**

Before we beginconstruction, we will be required to obtain various environmental, constructionand operating permits, as discussed below. We anticipate that our designbuilder will be responsible for the construction permits and registrations, andwe will be responsible for obtaining necessary air and water permits andoperating permits. If permitting delays occur, construction of the ethanolplant may be delayed. In addition, permitting and environmental and otherregulatory requirements may change in the future. Changes in permitting andregulatory requirements could make compliance more difficult and costly. If weare unable to obtain necessary permits or to comply with the requirements ofsuch permit or any other environmental regulations, our business may beadversely affected and we may not be able to construct or operate our proposedethanol plant. The following is a preliminary list of the required federal andstate permits we believe we will be required to obtain:

*FederalPermits*

Clean Air Act Requirements

·       Prevention of SignificantDeterioration (PSD) and Construction Permits

·       Applicable Federal NewSource Performance Standards (NSPS)

·       Applicable NationalEmission Standards for Hazardous Air Pollutants (NESHAPS)

·       Title V Operating Permit ofthe Clean Air Act Amendments of 1990

·       Risk Management Plan

·       OSHA 1910 Process SafetyManagement (PSM) Plan

Clean Water Act Requirements

·       National PollutantDischarge Elimination System (NPDES)

·       Oil Pollution Preventionand Spill Control Countermeasures

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

·       Tier II Forms—listing ofpotentially hazardous chemicals stored on-site

·       EPCRA Section 313 and304 and CERCLA Section 103. These reports track use and release ofregulated substances above threshold and/or designated quantities annually.

Alcohol and Tobacco Taxand Trade Bureau

·       Alcohol Fuel Permit

*StatePermits and Licenses*

·       Air Quality Permits

·       Storage Tank Permits

·       Water Quality Permits

·       State Liquor License

·       State Department of MotorFuels

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·       State Department ofTransportation (Highway Access Permit; Possible Easement Rights)

·       State Department of Health

·       State Department of PublicService (Boiler License)

·       StateDepartment of Natural Resources

·       Water Appropriation Permits

·       Other waters and wetlandconsiderations

The Tennessee AirPollution Control Board has issued us permits to construct air contaminantsources for the applicable components of the proposed plant. We elected to optout of the major source operating permit program requirements by agreeing tooperate below the major source applicability thresholds. The permits also willserve as temporary operating permits from initial start-up, provided the actualoperating permits are applied for within 30 days of initial start-up and anyapplicable emission standards are met.

**Income,Franchise and Excise Taxes**

We will be apass-through entity for federal income tax purposes and therefore will not besubject to federal income taxes. Tennessee, however, imposes an entity levelstate franchise/excise tax of 25 cents per $100 of net worth and 6.5% of netearnings. Depending on our net worth and net earnings, this tax could be in therange of $500,000 to $1,000,000 per year.

**Liquidity and Capital Resources**

As of December 31,2006, we had approximately $53,000 in cash and total assets of approximately$2,113,000. Because we had not yet completed the sale of units in our publicoffering, that total assets amount includes approximately $560,000 of deferredoffering costs related to the public offering, which costs will be nettedagainst the offering proceeds in subsequent financial statements. As ofDecember 31, 2006, we had raised a total of approximately $2,077,000 inseed capital, which we have used to fund our organization and operations, andreceived a capital contribution of land valued at $1,150,000. In January 2007,we received an additional $66,050,000 in equity financing through thecompletion of our public offering and our prior escrow offering, as well asoption exercises and employee subscriptions.

As of December 31,2006, we had total liabilities of approximately $676,000. Since our inceptionthrough December 31, 2006, we had an accumulated deficit of approximately$1,999,000. Total members’ equity as of December 31, 2006 was approximately$1,437,000. Since our inception, we have generated no revenue from operations.

InAugust 2005, we entered into a line of credit agreement with a bank. Wemay advance up to $1,000,000 under this line of credit until its expiration inAugust 2007. The line of credit is secured by the limited guarantees ofour eight governors in the amount of $125,000 each. As of December 31, 2006, wehad borrowings outstanding of approximately $500,000 under the line of credit.Currently, there are no borrowings outstanding under the line of credit. Inaddition, we have obtained an approximately $169,000 letter of credit underthis line of credit agreement in order to secure anticipated future obligationsto a third party service provider that we have hired to construct the naturalgas delivery infrastructure which will be needed for plant operations.

We have arrangedfor financing through CoBank of up to $90,000,000 in senior secured debt,consisting of a $60,000,000 term loan and a $30,000,000 revolving term loan. Anannually renewable seasonal line of credit of up to $5,000,000 will also bemade available. The debt is secured by substantially all of our assets. Theterm loan and revolving term loan are subject to a common credit agreement withvarious financial and non-financial covenants that limit distributions, requireminimum debt service coverage, net worth and working capital requirements. Thefinancing terms are as follows:

·             Weare required to make quarterly principal payments on the term loan of$2,250,000 from May 2009 through August 2015. Beginning with the fiscal year ending 2008 and ending with the fiscalyear 2012, we are also required to make special principal payments equal to 75%of our excess cash flow, not to exceed $4,000,000 per fiscal year and anaggregate total of $13,000,000.  Thespecial payments will be applied to the quarterly payments in reverse order ofmaturity.  The remaining unpaid balanceof the term loan is due November 2015.

·             Therevolving term loan is subject to reducing commitments beginning May 2016.Accordingly, we are required to make semi-annual principal payments of$4,500,000 from May 2016 through November 2018, and a final $3,000,000principal payment in May 2019. In addition, if the term loan discussed above isrepaid prior to its maturity date, we must begin repaying the revolving termloan six months after the term loan repayment.

39

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·             Anyunpaid principal balance on the line of credit is due October 2009.

·             Initially,all outstanding balances are to accrue interest at a variable rate equal toCoBank’s base variable rate plus 0.25%, convertible into fixed rate loans at arate of LIBOR plus 3.15%. These rates may be reduced by 0.25% following plantstart-up and completion of the making of the $13,000,000 in annual specialpayments.

·             Arrangement(origination) fees are computed based on 0.75% of all amounts borrowed. Otherfees are to include unused commitment fees on any unused portion of therevolving term loan and the line of credit commitments at annual rates of 0.5%and 0.4%, respectively, $30,000-$40,000 in annual administration fees, and a 2%penalty if we refinance any commitments prior to the third anniversary of plantstart-up.

 

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**Item 7. FinancialStatements**

REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of DirectorsEthanol Grain Processors, LLCObion, Tennessee

We have auditedthe accompanying balance sheet of Ethanol Grain Processors, LLC (a developmentstage company), as of December 31, 2006 and the related statements ofoperations, changes in members’ equity, and cash flows for the years endedDecember 31, 2006 and 2005 and for the period from inception (October 28, 2004)to December 31, 2006.  These financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

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

In our opinion,the financial statements referred to above present fairly, in all materialrespects, the financial position of Ethanol Grain Processors, LLC, (adevelopment stage company) as of December 31, 2006 and the results of itsoperations and its cash flows for the years ended December 31, 2006 and 2005and for the period from inception (October 28, 2004) to December 31, 2006,in conformity with U.S. generally accepted accounting principles.
|  | /s/Boulay, Heutmaker, Zibell & Co. P.L.L.P. |
|--|-------------------------------------------------|

 

Minneapolis, MinnesotaApril 2, 2007

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**Item 7.   Financial Statements.**

**ETHANOLGRAIN PROCESSORS, LLC**(A Development Stage Company)

Balance Sheet
| ** **                                                              | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                              | ** ** | **2006**              | ** ** |
| **ASSETS**                                                              |       |                  |       |
| **Current Assets**                                                      | ** ** | ** **            | ** ** |
| Cash                                                                    |       | $                     | 52,820     |   |
| Prepaid expenses                                                        |       | 30,921                |       |
| Total current  assets                                                   |       | 83,741                |       |
|                                                                    |       |                  |       |
| **Property and Equipment**                                              | ** ** | ** **            | ** ** |
| Land                                                                    |       | 1,154,400             |       |
| Administration  building                                                |       | 18,993                |       |
| Office equipment                                                        |       | 37,144                |       |
| Vehicles                                                                |       | 21,941                |       |
| Construction in  progress                                               |       | 147,979               |       |
|                                                                    |       | 1,380,457             |       |
| Less accumulated  depreciation                                          |       | (20,717               | )          |
| Net property and  equipment                                             |       | 1,359,740             |       |
|                                                                    |       |                  |       |
| **Other Assets**                                                        | ** ** | ** **            | ** ** |
| Deferred  offering costs                                                |       | 559,989               |       |
| Deferred  financing costs                                               |       | 109,698               |       |
| Total other  assets                                                     |       | 669,687               |       |
|                                                                    |       |                  |       |
| **Total  Assets**                                                       |       | $                     | 2,113,168  |   |
|                                                                    |       |                  |       |
| **LIABILITIES AND MEMBERS’ EQUITY**                                | ** ** | ** **            | ** ** |
| ** **                                                              | ** ** | ** **            | ** ** |
| **Current Liabilities**                                                 | ** ** | ** **            | ** ** |
| Line of credit                                                          |       | $                     | 500,000    |   |
| Accounts payable                                                        |       | 166,861               |       |
| Accrued expenses                                                        |       | 3,905                 |       |
| Current portion  of capital lease obligation                            |       | 3,423                 |       |
| Total current  liabilities                                              |       | 674,189               |       |
|                                                                    |       |                  |       |
| **Capital lease obligation, less  current portion**                     |       | 1,503                 |       |
|                                                                    |       |                  |       |
| **Commitments and Contingencies**                                       | ** ** | ** **            | ** ** |
|                                                                    |       |                  |       |
| **Members’ Equity**                                                | ** ** | ** **            | ** ** |
| Member  contributions, 4,836,692 units outstanding at December 31, 2006 |       | 3,226,500             |       |
| Options granted  in connection with guarantees                          |       | 210,000               |       |
| Deficit  accumulated during development stage                           |       | (1,999,024            | )          |
| Total members’  equity                                             |       | 1,437,476             |       |
|                                                                    |       |                  |       |
| **Total  Liabilities and Members’ Equity**                         |       | $                     | 2,113,168  |   |

 

Notes to FinancialStatements are an integral part of this Statement.

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**ETHANOL GRAIN PROCESSORS, LLC**(A Development Stage Company)

Statement of Operations
| ** **                              | ** ** | **Year Ended**   | ** ** | **Year Ended**   | ** ** | **From Inception**                 | ** ** |
|-----------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------------------------|------------|
| ** **                              | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **(October 28, 2004)**        | ** ** |
| ** **                              | ** ** | **2006**              | ** ** | **2005**              | ** ** | **to December 31, 2006** | ** ** |
|                                    |       |                  |       |                  |       |                                    |       |
| **Revenues**                            |       | $                     | —     |                  | $          | —                                  |       | $ | — |   |
|                                    |       |                  |       |                  |       |                                    |       |
| **Operating  Expenses**                 | ** ** | ** **            | ** ** | ** **            | ** ** | ** **                              | ** ** |
| Professional fees                       |       | 609,042               |       | 323,860               |       | 946,838                                 |       |
| Organizational                          |       | —                |       | 210,135               |       | 253,579                                 |       |
| General and administrative              |       | 232,748               |       | 364,229               |       | 738,488                                 |       |
| Total                                   |       | 841,790               |       | 898,224               |       | 1,938,905                               |       |
| ** **                              | ** ** | ** **            | ** ** | ** **            | ** ** | ** **                              | ** ** |
| **Operating  Loss**                     |       | (841,790              | )          | (898,224              | )          | (1,938,905                              | )          |
|                                    |       |                  |       |                  |       |                                    |       |
| **Other  Income (Expense)**             | ** ** | ** **            | ** ** | ** **            | ** ** | ** **                              | ** ** |
| Grant revenue                           |       | 150,000               |       | —                |       | 150,000                                 |       |
| Interest income                         |       | —                |       | 2,098                 |       | 2,098                                   |       |
| Other income                            |       | 9,152                 |       | 10                    |       | 9,162                                   |       |
| Interest expense                        |       | (127,235              | )          | (94,144               | )          | (221,379                                | )          |
| Total                                   |       | 31,917                |       | (92,036               | )          | (60,119                                 | )          |
|                                    |       |                  |       |                  |       |                                    |       |
| **Net  Loss**                           |       | $                     | (809,873   | )                     | $          | (990,260                                | )          | $ | (1,999,024 | ) |
| ** **                              | ** ** | ** **            | ** ** | ** **            | ** ** | ** **                              | ** ** |
| **Weighted  Average Units Outstanding** |       | 4,277,445             |       | 2,465,126             |       | 3,117,923                               |       |
| ** **                              | ** ** | ** **            | ** ** | ** **            | ** ** | ** **                              | ** ** |
| **Net  Loss Per Unit**                  |       | $                     | (0.19      | )                     | $          | (0.40                                   | )          | $ | (0.64 | ) |

 

Notes to FinancialStatements are an integral part of this Statement.

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**ETHANOL GRAIN PROCESSORS, LLC**(A Development Stage Company)Period from October 28, 2004 (Date of Inception) to December 31, 2006

Statement of Changes inMembers’ Equity
| **Balance  - October 28, 2004 (date of inception)**                             |       | $          | —     |   |
|---------------------------------------------------------------------------------|------------|------------|------------|--------|
|                                                                            |       |       |       |
| Capital contributions - 4,471 units, $.45 per unit,  October 2004               |       | 2,000      |       |
|                                                                            |       |       |       |
| Equity units issued for services, 223,535 units,  $.45 per unit, October 2004   |       | 100,000    |       |
|                                                                            |       |       |       |
| Units subscribed - 1,710,043 units, $.45 per unit                               |       | 765,000    |       |
| Less units subscribed receivable                                                |       | (276,667   | )          |
| Units subscribed                                                                |       | 488,333    |       |
|                                                                            |       |       |       |
| Net loss                                                                        |       | (198,891   | )          |
|                                                                            |       |       |       |
| **Balance  - December 31, 2004**                                                |       | $          | 391,442    |   |
|                                                                            |       |       |       |
| Collection of units subscribed receivable                                       |       | 276,667    |       |
|                                                                            |       |       |       |
| Capital contributions - 525,307 units, $.45 per  unit, January 2005             |       | 235,000    |       |
|                                                                            |       |       |       |
| Equity units issued for services, 223,535 units,  $.45 per unit, July 2005      |       | 100,000    |       |
|                                                                            |       |       |       |
| Value of 2,235,352 options issued for guarantee of  line of credit, August 2005 |       | 210,000    |       |
|                                                                            |       |       |       |
| Capital retired - 157,592 units, $.45 per unit,  August 2005                    |       | (70,500    | )          |
|                                                                            |       |       |       |
| Capital rescissions - 167,651 units, $.45 per unit,  September 2005             |       | (75,000    | )          |
|                                                                            |       |       |       |
| Capital contributions - 1,900,048 units, $.54 per  unit, December 2005          |       | 1,020,000  |       |
| Less units subscribed receivable                                                |       | (830,000   | )          |
| Units subscribed                                                                |       | 190,000    |       |
|                                                                            |       |       |       |
| Net loss                                                                        |       | (990,260   | )          |
| ** **                                                                      | ** ** | ** ** | ** ** |
| **Balance  - December 31, 2005**                                                |       | $          | 267,349    |   |
|                                                                            |       |       |       |
| Collection of units subscribed receivable                                       |       | 830,000    |       |
|                                                                            |       |       |       |
| Equity units issued for land, 575,000 units, $2.00  per unit, December 2006     |       | 1,150,000  |       |
|                                                                            |       |       |       |
| Net loss                                                                        |       | (809,873   | )          |
|                                                                            |       |       |       |
| **Balance  - December 31, 2006**                                                |       | $          | 1,437,476  |   |

 

Notes to FinancialStatements are an integral part of this Statement.

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**ETHANOL GRAIN PROCESSORS, LLC**(A Development Stage Company)

Statement of Cash Flows
| ** **                                                                            | ** ** | **Year Ended**   | ** ** | **Year Ended**   | ** ** | **From Inception**                 | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------------------------|------------|
| ** **                                                                            | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **(October 28, 2004)**        | ** ** |
| ** **                                                                            | ** ** | **2006**              | ** ** | **2005**              | ** ** | **to December 31, 2006** | ** ** |
|                                                                                  |       |                  |       |                  |       |                                    |       |
| **Cash  Flows from Operating Activities**                                             | ** ** | ** **            | ** ** | ** **            | ** ** | ** **                              | ** ** |
| Net loss                                                                              |       | $                     | (809,873   | )                     | $          | (990,260                                | )          | $ | (1,999,024 | ) |
| Adjustments to reconcile net loss to net cash from  operations:                       |       |                  |       |                  |       |                                    |       |
| Depreciation                                                                          |       | 12,716                |       | 8,001                 |       | 20,717                                  |       |
| Consulting fees exchanged for membership units                                        |       | —                |       | 100,000               |       | 200,000                                 |       |
| Deferred offering costs written off for failed  offering attempt                      |       | —                |       | 131,835               |       | 131,835                                 |       |
| Amortization of debt discount                                                         |       | 122,500               |       | 87,500                |       | 210,000                                 |       |
| Change in assets and liabilities:                                                     |
| Prepaid expenses                                                                      |       | (17,806               | )          | (12,015               | )          | (29,821                                 | )          |
| Accounts payable                                                                      |       | (43,927               | )          | 14,921                |       | 50,678                                  |       |
| Accrued expenses                                                                      |       | 3,905                 |       | —                |       | 3,905                                   |       |
| Advance payable to Ethanol Grain Processors  Cooperative                              |       | —                |       | (32,000               | )          | —                                  |       |
| Net cash used in operating activities                                                 |       | (732,485              | )          | (692,018              | )          | (1,411,710                              | )          |
|                                                                                  |       |                  |       |                  |       |                                    |       |
| **Cash  Flows from Investing Activities**                                             | ** ** | ** **            | ** ** | ** **            | ** ** | ** **                              | ** ** |
| Payment for land options                                                              |       | —                |       | —                |       | (1,100                                  | )          |
| Capital expenditures                                                                  |       | (5,220                | )          | (66,491               | )          | (71,711                                 | )          |
| Payments for construction in process                                                  |       | (132,580              | )          | —                |       | (132,580                                | )          |
| Net cash used in investing activities                                                 |       | (137,800              | )          | (66,491               | )          | (205,391                                | )          |
|                                                                                  |       |                  |       |                  |       |                                    |       |
| **Cash  Flows from Financing Activities**                                             | ** ** | ** **            | ** ** | ** **            | ** ** | ** **                              | ** ** |
| Proceeds on line of credit, net                                                       |       | 449,515               |       | 50,485                |       | 500,000                                 |       |
| Member contributions                                                                  |       | —                |       | 235,000               |       | 237,000                                 |       |
| Collection of units subscribed                                                        |       | 830,000               |       | 466,667               |       | 1,785,000                               |       |
| Payments for rescinded and retired units                                              |       | —                |       | (145,500              | )          | (145,500                                | )          |
| Payments for deferred offering costs                                                  |       | (357,896              | )          | (149,573              | )          | (600,738                                | )          |
| Payment for deferred financing costs                                                  |       | (100,000              | )          | —                |       | (100,000                                | )          |
| Principal payments on capital lease obligation                                        |       | (3,176                | )          | (2,665                | )          | (5,841                                  | )          |
| Net cash provided by financing activities                                             |       | 818,443               |       | 454,414               |       | 1,669,921                               |       |
| ** **                                                                            | ** ** | ** **            | ** ** | ** **            | ** ** | ** **                              | ** ** |
| **Net  Increase (Decrease) in Cash**                                                  |       | (51,842               | )          | (304,095              | )          | 52,820                                  |       |
| ** **                                                                            | ** ** | ** **            | ** ** | ** **            | ** ** | ** **                              | ** ** |
| **Cash —  Beginning of Period**                                                  |       | 104,662               |       | 408,757               |       | —                                  |       |
| ** **                                                                            | ** ** | ** **            | ** ** | ** **            | ** ** | ** **                              | ** ** |
| **Cash —  End of Period**                                                        |       | $                     | 52,820     |                  | $          | 104,662                                 |       | $ | 52,820 |   |
|                                                                                  |       |                  |       |                  |       |                                    |       |
| **Supplemental  Disclosure of Noncash Investing Activities and Financing Activities** | ** ** | ** **            | ** ** | ** **            | ** ** | ** **                              | ** ** |
| Capital lease obligation incurred for equipment                                       |       | $                     | —     |                  | $          | 10,767                                  |       | $ | 10,767 |   |
| Construction costs included in accounts payable                                       |       | $                     | 15,399     |                  | $          | —                                  |       | $ | 15,399 |   |
| Deferred offering costs included in accounts payable                                  |       | $                     | 91,086     |                  | $          | 75,738                                  |       | $ | 91,086 |   |
| Deferred financing costs included in accounts  payable                                |       | $                     | 9,698      |                  | $          | —                                  |       | $ | 9,698 |   |
| Equity units exchanged for consulting services                                        |       | $                     | —     |                  | $          | —                                  |       | $ | 200,000 |   |
| Equity units exchanged for land                                                       |       | $                     | 1,150,000  |                  | $          | —                                  |       | $ | 1,150,000 |   |
| Options issued for line of credit guarantee                                           |       | $                     | —     |                  | $          | 210,000                                 |       | $ | 210,000 |   |

 

Notes to FinancialStatements are an integral part of this Statement.

45

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**ETHANOL GRAIN PROCESSORS, LLC**(A Development Stage Company)

Notes to FinancialStatements

December 31, 2006 and2005

**1.  SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

*Nature of Business*

Ethanol Grain Processors,LLC (a development stage Tennessee limited liability company to be located nearObion, Tennessee) was organized to pool investors to build a 100 million gallonnatural gas powered ethanol plant.  Thetotal cost of the project, including the construction of the ethanol plant andstart-up expenses is expected to approximate $159,000,000.  As ofDecember 31, 2006, the Company is in the development stage with its effortsbeing principally devoted to organizational and equity raising activities.

*Fiscal Reporting Period*

The Company has adopted a fiscal year ending December 31 for reporting financialoperations.

## *Accounting Estimates*

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires managementto make estimates and assumptions that affect the reported amount of assets,liabilities, revenue, and expenses. Actual results and outcomes may differ from management’s estimates andassumptions.

## *Cash*

The Company maintains its accounts primarily at onefinancial institution.  At timesthroughout the year, the Company’s cash balances may exceed amounts insured by the Federal DepositInsurance Corporation.

*Property and Equipment*

Property and equipment is stated at the lower of costor estimated fair value.  Depreciationand amortization are provided over estimated useful lives by the use of the straight line method.  Maintenance and repairs are expensed asincurred; major improvements and betterments are capitalized.  Present value of capital lease obligationsare classified as long term debt and the related assets are included inproperty and equipment.  Amortization ofproperty and equipment under capital lease is included in depreciation expense.

The Company capitalizesconstruction costs and construction period interest until the assets are placedin service.  The Company had nocapitalized interest related to construction in progress for the yearended December 31, 2006.

46

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**ETHANOL GRAIN PROCESSORS, LLC**(A Development Stage Company)

Notes to FinancialStatements

December 31, 2006 and 2005

*Deferred Financing Costs*

Costs associated with the January 2007 issuance ofloans are recorded as deferred financing costs. Financing costs will be amortized over the life of the loan using theeffective interest method.  There were noamortization expenses related to the deferred financing costs in fiscal 2006 or2005.

*Deferred Offering Costs*

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

During the year ended December 31, 2005, the Companyhad expensed deferred offering costs of approximately $132,000 in adiscontinued attempt to prepare a Registration Statement with the TennesseeDepartment of Commerce and Insurance Division of Securities to raise $50million.

*Grants*

The Company recognizes grant income as other incomefor reimbursement of expenses incurred upon complying with the conditions ofthe grant.  For reimbursements of capitalexpenditures, the grants are recognized as a reduction of the basis of theasset upon complying with the conditions of the grant.

*Income Taxes*

Ethanol Grain Processors, LLC is treated as apartnership for federal and state income tax purposes, and generally does notincur income taxes.  Instead its earningsand losses are included in the income tax returns of its members.  Therefore, no provision or liability forfederal or state income taxes has been included in these financial statements.

*Fair Value ofFinancial Instruments*

The carrying value of cash and payables approximatestheir fair value.

It is not currently practicable to estimate fair valueof the Company’s line of credit.  Thisagreement contains certain unique terms, conditions, covenants, and restrictions, as discussed in Note2.  There are no readily determinablesimilar instruments on which to base an estimate of fair value.

47

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**ETHANOL GRAIN PROCESSORS, LLC**(A Development Stage Company)

Notes to FinancialStatements

December 31, 2006 and2005

*Stock-BasedCompensation*

On January 1, 2006, the Company adopted SFASNo. 123 (revised 2004) (“SFAS No. 123R”), *Share-Based Payment*, which addresses the accounting forstock-based payment transactions in which an enterprise receives employeeservices in exchange for (a) equity instruments of the enterprise or(b) liabilities that are based on the fair value of the enterprise’sequity instruments or that may be settled by the issuance of such equityinstruments.  In January 2005, theSEC issued SAB No. 107, which provides supplemental implementationguidance for SFAS No. 123R. SFAS No. 123R eliminates the ability toaccount for stock-based compensation transactions using the intrinsic value methodunder Accounting Principles Board (“APB”) Opinion No. 25, Accounting forStock Issued to Employees, and instead generally requires that suchtransactions be accounted for using a fair-value-based method. The Company usesthe Black-Scholes-Merton (“BSM”) option-pricing model to determine thefair-value of stock-based awards.

Prior to the adoption of SFAS No. 123R, the Companyhad accounted for stock-based compensation utilizing the intrinsic value methodin accordance with the provisions of Accounting Principles Board OpinionNo. 25 (APB 25), “Accounting for Stock Issued to Employees,” and therelated interpretations.  In accordancewith the modified prospective method, the Company’s financial statements forprior periods have not been restated to reflect the adoption of SFAS No.123R.  Under this transition method,there was no compensation expense recognized during the year ended December 31,2006 and 2005 which reflected (a) compensation expense for all share-basedawards granted prior to, but not yet vested, as of December 31, 2005, based onthe grant date fair value estimated in accordance with the original provisionsof SFAS 123, and (b) compensation expense for all share-based awards grantedsubsequent to December 31, 2005, based on the grant date fair value estimated inaccordance with the provisions of SFAS No. 123R.

The following table represents the effect on net lossif the Company had applied the fair value based method and recognitionprovisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accountingfor Stock-Based Compensation,” to stock-based employee compensation:

For the yearending December 31, 2005:

|                                                                                                  | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------|------------|
| Net loss, as  reported                                                                           |       | $        | (990,260   | ) |
| Less: stock-based compensation expense determined  under fair value based methods for all awards |       | (87,500  | )          |
| Plus: stock-based compensation expense determined  under fair value based methods for all awards |       | 87,500   |       |
| Pro forma net loss                                                                               |       | $        | (990,260   | ) |

 

48

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**ETHANOL GRAIN PROCESSORS, LLC**(A Development Stage Company)

Notes to FinancialStatements

December 31, 2006 and2005

*RecentlyIssued Accounting Pronouncements*

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

**2.  LINE OF CREDIT**

In August 2005, the Company entered into a line ofcredit agreement with a bank. The Company may draw up to $1,000,000 untilexpiration in August 2007.  Interest ispayable monthly at .65% below Wall Street Journal Prime Rate, 7.6% at December31, 2006. The agreement is secured by the limited guarantees of each of theeight board of governor members in the amount of $125,000.  As of December 31, 2006, there was $500,000 outstandingon the line of credit.

In July 2006, the Company issued a $169,000 letter ofcredit against the line of credit in favor of its natural gas transportation companydiscussed in Note 9.  This letter ofcredit will expire in July 2007.  

In exchange for guaranteeing the line of creditagreement, each governor was issued an option to purchase 279,419 membershipunits at $.45 per unit for a total of 2,235,352 units.  The options vest immediately and expire fiveyears from the date of financial closing. The fair value of these options in the amount of $210,000 was recordedas a debt discount at August 31, 2005 and was amortized to interest expenseover the term of the guarantee.  Theadditional interest expense related to this amortization was $122,500 and$87,500 for the years ending December 31, 2006 and 2005, respectively.  The debt discount was fully amortized atDecember 31, 2006.

**3.  MEMBERS’ EQUITY**

The Company was formed on October 28, 2004 to have aperpetual life.  The Company wasinitially capitalized by 4 members who contributed an aggregate of $2,000 for4,471 units.  In January 2005, theCompany issued an additional 2,235,350 units valued at $1,000,000 of which1,710,043 were subscribed in 2004.  Inaddition, in 2004 one of the founding members of the Company received 223,535units of membership valued at $100,000, in exchange for various contributionsto the Company in efforts to organize and develop the Company.

On March 15, 2006, the Board of Governors approved a2.23535:1 membership unit split for the issued and outstanding units.  Information pertaining to units and earningsper unit have been restated in the accompanying financial statements andrelated footnotes to reflect this split.

49

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**ETHANOL GRAIN PROCESSORS, LLC**(A Development Stage Company)

Notes to FinancialStatements

December 31, 2006 and2005

The Company prepared a Form SB-2 RegistrationStatement, declared effective June 15, 2006, with the Securities and ExchangeCommission (SEC) for a minimum of 25,000,000 membership units up to a maximumof 31,175,000 membership units for sale at $2 per unit with a minimum of 10,000units per investor.  In September 2006,the Company filed a post effective amendment, declared effective December 2006,to include a new investment agreement. The offering was closed on January 23, 2007 with the Company receivingsubscriptions for 31,175,000 units for approximately $62,350,000.

As specified in the Company’s operating agreement, theCompany is authorized to issue one class of membership units.  The Company may issue a maximum of250,000,000 membership units.  TheCompany has one class of membership units, which include certain transferrestrictions as specified in the operating agreement and pursuant to applicabletax and securities laws.  Additionalclasses of membership interests and units may be created and issued as theboard determines necessary.  Income andlosses are allocated to all members based upon their respective percentage ofunits held.

One of the founding members, the former ChiefExecutive Officer of the Company, received 223,535 units of membership valuedat $100,000 in 2004, in exchange for various contributions to the Company inefforts to organize and develop the Company. In August 2005, the former Chief Executive Officer resigned from hisposition and is no longer employed by the Company.  The former Chief Executive Officer sold67,061 units to another founding member and the Company purchased 157,592 unitswhich included the initial contribution of $500 at a cost of $70,500.  Based on matters concerning the former ChiefExecutive Officer, the Company made a rescission offer to its first seed roundinvestors to repurchase their membership interest for the original purchaseprice plus interest in September 2005. The rescission offer was open for a 30day period from the date of receipt of the offer of rescission letter datedSeptember 2, 2005.  The rescission periodclosed with the Company receiving acceptance of the rescission offer from fiveseed round investors holding 167,651 units with an original purchase pricetotaling $75,000.  During October 2005,the Company paid $80,600 including approximately $5,600 of accrued interest, torepurchase these units.

In December 2005, the Company received a promissorynote from a related party, a member, in exchange for 558,538 units at $.54 perunit for $300,000 of capital.  Thepromissory note states that the principal balance shall be due and payable inten, unequal installments, with the first five installments of $5,000 duemonthly beginning December 1, 2005 and ending on April 1, 2006, and thenfive installments of $55,000 due monthly beginning May 1, 2006 and ending onSeptember 1, 2006.  In addition, theentire remaining unpaid principal balance will be due and payable at maturityon September 1, 2006.  During 2006, thebalance was paid in full.

50

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**ETHANOL GRAIN PROCESSORS, LLC**(A Development Stage Company)

Notes to FinancialStatements

December 31, 2006 and2005

In December 2005, the Company received a promissorynote from a related party, the general contractor and a member, in exchange for1,341,210 units at $.54 per unit for $720,000 of capital.  The promissory note states that the principalbalance shall be due and payable in eleven installments.  The first installment of $120,000 was due andpayable on December 1, 2005, and thereafter ten equal installments of $60,000per month, commencing on December 15, 2005 and continuing on the 15th of eachmonth thereafter for a period of ten months, with the final payment of theentire remaining unpaid principal balance due and payable at maturity onSeptember 15, 2006.  During 2006, thebalance was paid in full.

In November 2005, the Company received an additionalpromissory note from the same general contractor and member discussed above inexchange for 1,250,000 units at $2.00 per unit for $2,500,000 of capital.  The promissory note states that a $50,000deposit be placed in an escrow account and the principal balance shall be dueand payable at financial closing. Subsequent to year end, the remaining principal balance was paid to theescrow account.

In October 2006, the Company entered into aninvestment agreement with an unrelated party to subscribe for, and purchase,20,002,500 units at $2.00 per unit for a minimum total investment of$40,005,000.  In accordance with thepublic offering, 10% of the anticipated subscription, $4,000,500, has beendeposited into a separate escrow account. The Company then filed a post effective amendment with the Securitiesand Exchange Commission and had its members approve certain amendments to itsoperating agreement.  In addition, priorsubscriptions in the public offering were confirmed based on the informationcontained in the amendment.  During the confirmation process, 4,697,500 units were rescinded for a total of$9,395,000.  In January 2007, the rescissionswere paid out along with approximately $11,100 of interest.  Per the agreement, the remaining units less20,000 units not subscribed to by new investors would be additional unitssubscribed by the unrelated party.  Afterthe rescissions, an additional 4,761,500 units for $9,523,000 was subscribed toby the unrelated party in January 2007. With certain exceptions, the agreement may be terminated by either partyif the above conditions are not met within ninety days.

**4.  INCOMETAXES**

The differences between financial statement basis andtax basis of assets are as follows:

|                                                                 | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                      | ** ** | **2006**              | ** ** |
| Financial  statement basis of total assets                      |       | $                     | 2,113,168  |   |
|                                                            |       |                  |       |
| Organizational costs expensed for financial  reporting purposes |       | 1,904,557             |       |
|                                                            |       |                  |       |
| Taxable income tax  basis of total assets                       |       | $                     | 4,017,725  |   |

 

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

51

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**ETHANOL GRAIN PROCESSORS, LLC**(A Development Stage Company)

Notes to FinancialStatements

December 31, 2006 and2005

**5.  STOCKBASED COMPENSATION**

The Company granted options to each of the governorsand certain members of management to purchase 55,884 units each at an exerciseprice of $.45 per unit for a total of 502,956 units. The options vest atfinancial closing and will remain exercisable for a period of five yearsthereafter. The options are subject to forfeiture if the governor does notcontinuously remain a governor up to financial closing.

The fair value of all options are estimated on thedate of grant using the Black-Scholes option-pricing model with the followingweighted-average assumptions used for grants in 2005; dividend yield andexpected volatility of 0%; risk-free interest rate of 3.65 to 4.06%; andexpected lives of approximately 6 years. There were no stock options granted during 2006.

The following table summarizes the activity foroutstanding employee and non-employee stock options:
| ** **                                                | ** ** | **Options Outstanding** | ** ** |
|-----------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                | ** ** | **Number of  Shares**   | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-Average  Remaining  Contractual  Term  (in years)** | ** ** | **Aggregate  Intrinsic  Value(1)** | ** ** |
| Balance at  December 31, 2005                             |       | 2,738,308                    |       | $ | 0.45 |   |   |   |   |   |
| Granted                                                   |       | —                       |       | — |   |   |   |   |   |
| Exercised                                                 |       | —                       |       | — |   |   |   |   |   |
| Canceled/forfeited/expired                                |       | —                       |       | — |   |   |   |   |   |
| Balance at  December 31, 2006                             |       | 2,738,308                    |       | $ | 0.45 |   | 4.63 |   | $ | 4,244,377 |   |
| Vested and exercisable as of December 31, 2006  |       | 2,738,308                    |       | $ | 0.45 |   | 4.63 |   | $ | 4,244,377 |   |
| Vested and expected  to vest as of December 31, 2006 |       | 2,738,308                    |       | $ | 0.45 |   | 4.63 |   | $ | 4,244,377 |   |

----

(1)             Theaggregate intrinsic value is calculated as approximately the difference betweenthe weighted average exercise price of the underlying awards and the Company’sestimated current fair market value at December 31, 2006, which was ouroffering price of $2.00 per unit.

52

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**ETHANOL GRAINPROCESSORS, LLC**(ADevelopment Stage Company)

**Notes to Financial Statements**

**December 31, 2006 and 2005**

**6.  GRANTS**

In November 2005, the Company received a United StatesDepartment of Agriculture Value-Added Producer Grant in the amount of$150,000.  The Company matched the grantfunding with an amount equal to $150,000 in compliance with all terms asoutlined in the grant agreement.  As ofDecember 31, 2006, the Company has recognized $150,000 as grant revenue.

**7. LONG-TERM DEBT**

In January 2007, the Company entered into a credit agreement with a financial institution to partiallyfinance the construction of the plant.  Underthe credit agreement, the lender has provided a construction term loan for$60,000,000, a revolving construction term loan of $30,000,000 and a revolvingline of credit of $5,000,000.  The loansare secured by substantially all assets. 

For all three loans, the Company is required to payinterest monthly on the unpaid balance in accordance with one or more of thefollowing interest rate options:  agentbase variable rate plus 0.25%, quoted fixed per annum rate or a fixed rate ofLIBOR plus 3.15%.  The quoted rate orLIBOR rates may only be fixed on increments of $500,000 or in multiples thereofnot to exceed a total of ten fixes at any one time.  The Company shall select the applicable rateoption at the time of each loan request. Once the Company has completed the $13,000,000 in free cash flowpayments, the interest rate parameters will be decreased from plus 0.25% to 0.0%for the agent base variable rate option and from plus 3.15% to plus 2.90% forthe LIBOR fixed rate option.

The construction term loan and revolving constructionterm loan described above are subject to a common credit agreement with variousfinancial and non-financial covenants that limit distributions, require minimumdebt service coverage, net worth and working capital requirements.  Specific terms for each loan are as follows:

*Constructionterm loan*

The Company isrequired to make 26 quarterly principal installments of $2,250,000 plus accruedinterest beginning on May 20, 2009 until August 20, 2015 with a finalinstallment in an amount equal to the remaining unpaid balance on November 20,2015.  In addition to the requiredpayments, the Company, beginning with the fiscal year ending 2008 and ending withthe fiscal year 2012, is required to make additional principal payments equalto 75% of the Company’s excess cash flow as defined in the loan agreement notto exceed $4,000,000 per fiscal year and an aggregate total of$13,000,000.  The payments will be appliedto the principal installments in the reverse order of maturity.  The Company is required to pay a financingfee of approximately $450,000 at the time of execution of the loanagreement.  Prior to December 31, 2006,the Company prepaid $100,000 towards the anticipated financing fees.

53

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**ETHANOL GRAINPROCESSORS, LLC**(ADevelopment Stage Company)

**Notes to Financial Statements**

**December 31, 2006 and 2005**

*Revolvingconstruction term loan*

The Company isrequired to make semi-annual principal payments beginning on May 1, 2016 untilMay 1, 2019 of a reducing commitment amount as follows.

 

| Payment Date | ** ** | **Commitment Amount** | ** ** |
|-------------------|------------|----------------------------|------------|
|              |       |                       |       |
| May 1, 2016       |       | $                          | 25,500,000 |   |
| November 1, 2016  |       | 21,000,000                 |       |
| May 1, 2017       |       | 16,500,000                 |       |
| November 1, 2017  |       | 12,000,000                 |       |
| May 1, 2018       |       | 7,500,000                  |       |
| November 1, 2018  |       | 3,000,000                  |       |
|                   |            |                            |            |  |

 

In addition, ifthe construction term loan discussed above is repaid prior to its maturitydate, the Company must begin repaying the revolving term loan six months afterthe repayment.  The Company is requiredto pay an arrangement fee of approximately $225,000 upon execution of the loanagreement which occurred in January 2007. In addition, the Company agrees to pay a monthly commitment fee at arate of 0.5% of the average daily unused portion of the commitment.

*Revolvingline of credit*

The Company isrequired to pay interest monthly until October 1, 2009 when any unpaidprincipal balance is due.  The revolvingline of credit is subject to a borrowing base. The Company is required to pay a financing fee of approximately $37,500,which was paid in January 2007.   Inaddition, the Company agrees to pay a monthly commitment fee at a rate of 0.4%of the average daily unused portion of the commitment.

54

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**ETHANOL GRAINPROCESSORS, LLC**(ADevelopment Stage Company)

**Notes to Financial Statements**

**December 31, 2006 and 2005**

**8.  LEASES**

The Company leases a mobile office under an operatinglease which expires in June 2007. The agreement requires monthly payments of$400. The Company paid $7,500 for setup expenses in accordance with the termsof the lease.  As of December 31, 2006and 2005, the Company has recorded rent expense of approximately $4,800 and$10,600, respectively.

The Company also leases a copier under a thirty-sixmonth capital lease that will expire in May of 2008.  The imputed cost of approximately $10,800 isincluded on the balance sheet with accumulated amortization of approximately$5,900 as of December 31, 2006. The agreement requires monthly payments ofapproximately $300, including imputed interest at 7.5%.

Minimum lease payments for future years are asfollows:

   Years Ending December 31,

| 2007                                     |   | $     | 3,676  |   |
|------------------------------------------|--------|-------|--------|--------|
| 2008                                     |   | 1,532 |   |
| Total minimum  lease payments            |   | 5,208 |   |
| Less interest                            |   | (282  | )      |
| Present value of  minimum lease payments |   | $     | 4,926  |   |

 

Capital lease obligation maturities are as follows:

   Years Ending December 31,

| 2007   |   | $     | 3,423  |   |
|--------|--------|-------|--------|--------|
| 2008   |   | 1,503 |   |
|   |   | $     | 4,926  |   |

 

**9. COMMITMENTS AND CONTINGENCIES**

*Land contract*

In December 2006, the Company exercised the option,with a company owned by several members, to purchase a total of approximately230 acres of land at a total cost of approximately $1,150,000.  The Company issued 575,000 membership unitsvalued at $2.00 as consideration for the transaction.  The remaining options on the alternative sitewere not exercised and were expensed in December 2005.

55

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**ETHANOL GRAINPROCESSORS, LLC**(ADevelopment Stage Company)

**Notes to Financial Statements**

**December 31, 2006 and 2005**

*Construction contract*

In August 2006, the Company signed a lump-sumdesign-build agreement with a general contractor, a member of the Company, forapproximately $114,300,000 subject to change based on the Construction CostIndex (CCI), published by Engineering News-Record Magazine, whereby changes inthe CCI will correspondingly change the contract price.  Due to the increase in the CCI, the estimatedcontract price increase is approximately $4,800,000 more than the pricestipulated in the design-build agreement. This and future estimated increases have been provided for in the totalproject cost of $159,000,000.  As part ofthe contract, the Company will pay an $8,000,000 mobilization fee, subject toretainage payable when permitted and, at the latest, at the earlier offinancial closing as the contractor’s acceptance of notice to proceed.  Monthly applications will be submitted forwork performed in the previous period. Final payment will be due when final completion has been achieved.  The design-build agreement includes aprovision whereby the general contractor receives an early completion bonus foreach day the construction is complete prior to 545 days after the date of thenotice to proceed.  In addition, theagreement includes a provision whereby the contractor will have to payliquidated damages per day to the Company for each day the construction iscompleted beyond the required final completion date not to exceed $1,000,000.  The contract may be terminated by the Companyupon a ten day written notice subject to payment for work completed,termination fees, and any applicable costs and retainage.  The Company intends to begin operations inmid-2008.  The Company must provide avalid notice to proceed no later than April 30, 2007, otherwise the contractormay terminate the agreement.  Subsequentto year end, the contract was amended to change the mobilization fee to$24,000,000, to cap the CCI adjustments at April 2007 and delaying the noticeto proceed to no later than December 31, 2007 before the contractor canterminate the agreement.

In May 2006, the Company entered into an agreementwith an affiliate of the general contractor to provide preliminary design,engineering, procurement and construction services for the development andconstruction of the plant for a fixed fee of $92,500 plus reimbursableexpenses.  Either party may terminatethis agreement upon 20 days’ written notice. The fees related to the agreement will be credited against the finaldesign-build agreement.  As of December31, 2006, the Company has incurred approximately $65,000 for these services.

In December 2006, the Company entered into anagreement with an unrelated party for Phase I (grading and drainage) and PhaseII (rail spur track) for the site work for approximately $7,300,000 includingchange orders.  The agreement states thatPhase I shall be substantially complete within 112 days from the notice toproceed and Phase II shall be substantially complete within 135 days from thenotice to proceed.  Monthly applicationswill be submitted for work performed in the previous period subject toretainage in the amount of 10% until the work is 50% complete and 5% thereafter  Final payment will be due when finalcompletion of each phase has been achieved. Work began in January 2007 and is expected to be completed in March2007.

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**ETHANOL GRAINPROCESSORS, LLC**(ADevelopment Stage Company)

**Notes to Financial Statements**

**December 31, 2006 and 2005**

*Consulting contracts*

In July 2004, the Company entered into an agreementwith an unrelated party for environmental consulting services.  The agreement was amended in April 2005 foradditional environmental permitting assistance. The agreement requires payment on a time and material basis whichmanagement estimates to be $107,000. The agreement may be terminated by eitherparty upon 30 days written notice.  As ofDecember 31, 2006, the Company has incurred approximately $68,000 for theseservices with approximately $5,200 included in accounts payable.

In March 2005, the Company entered into a consultingagreement with an unrelated party for finance assistance and contractnegotiation services. The agreement requires a commitment fee of $25,000 alongwith weekly payments of $1,500 until closing of the equity campaign and aone-time bonus of $125,000 upon closing of the debt financing.  Subsequent to year end, the Company closed onthe debt financing and paid the $125,000 bonus. In addition, the Company has agreed to reimburse all reasonable,ordinary and necessary expenses incurred in performance of its duties, up to amaximum of $2,500 per person per week. The Company may also engage the party to provide other services for afee of $375 per day.  The agreement canbe terminated by the party upon fourteen days prior written notice, but theCompany may only terminate the agreement for cause.  As of December 31, 2006, the Company hasincurred approximately $67,000 for these services.

In July 2005, the Company entered into a managementconsulting agreement with a related party to provide management services in thecapacity of the Chief Executive Officer and Chief Financial Officer.  During the term of this agreement, aconsulting fee of $1,500 per week is to be paid weekly upon presentation ofinvoices for services.  In addition, adeferred compensation amount of $189,000 and a bonus of $189,000 shall be dueand payable at financial closing of the project.  Subsequent to year end, the Company closed onthe debt financing and paid the $378,000 bonuses.  The agreement is for the period from theeffective date of the agreement until the Company hires a permanent Chief ExecutiveOfficer.  The Company may terminate theagreement at any time effective immediately, only if the related party is inbreach of contract.  The related partymay terminate the agreement with a 60-day written notice given to theCompany.  Effective July 2005, the Companyissued 223,535 membership units valued at $.45 per unit to the Chief ExecutiveOfficer.

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**ETHANOL GRAINPROCESSORS, LLC**(ADevelopment Stage Company)

**Notes to Financial Statements**

**December 31, 2006 and 2005**

*Utility contracts*

In October 2004, the Company entered into a utilityusage agreement with the City of Obion for purchasing water and sewer servicesfor the facility for a period of three years commencing October 1, 2004. Thewater agreement requires a minimum monthly charge of $5,000 for the first9,100,000 gallons of raw water usage with $.55 per 1,000 gallonsthereafter. The sewer agreement requires payment of $.55 per 1,000 gallons ofsewer run-off going through the sewer system. At the end of the agreement,rates are subject to a 10% increase.

In August 2006, the Company entered into a definitivecontract to deliver natural gas to the plant for the period from May 1, 2008 toMarch 31, 2018 at a discounted rate of $.20 per Dekatherm (Dt) subject to amaximum daily quantity of 9,400 Dt.  TheCompany has a $169,000 letter of credit against their current line of credit infavor of its natural gas provided as discussed in Note 2.

*Marketing agreements*

In February 2007, the Company entered into amarketing agreement with an unrelated party for the sale of all of the ethanolthe Company is expected to produce. The Company agrees to pay the buyer a certain percentage based on apricing matrix under the pooling method of the sales price for certainmarketing, storage, and transportation costs. The agreement commences on the date of the agreement and continues forthree years from the first day of the delivery of ethanol.  The agreement will automatically renew forone year terms thereafter unless terminated by either party with at least oneyear written notice.

In February 2007, the Company entered into a marketingagreement with an unrelated party to purchase all of the distillers grains theCompany is expected to produce.  Thebuyer agrees to pay the Company 98% of the FOB plant price for all drieddistillers, 96% of the FOB plant price for all wet distillers and $2.00 per ton for all solubles, subject to a minimum of $1.50 perton.  The agreement commences on thefirst day of production and continues for one year.  The agreement will continue thereafter untilterminated by either party with at least 120 days’ written notice.

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**ETHANOL GRAINPROCESSORS, LLC**(ADevelopment Stage Company)

**Notes to Financial Statements**

**December 31, 2006 and 2005**

*Corn purchasing agreement*

In December 2006, the Company entered into a cornpurchase agreement with a related party to be the exclusive provider of allcorn in Obion County, Tennessee and the seven (7) countiesin Tennessee and Kentucky contiguous thereto. The Company has committed to purchasing a maximum of 3,500,000 bushelsof corn annually in multiples of 5,000 bushels at 12% above the seller’s actualcost of corn including delivery to the plant. The agreement continues until either party ceases operations or bymutual consent.

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**Item 8.   Changes In andDisagreements With Accountants on Accounting and Financial Disclosure.**

None.

**Item 8A.   Controls andProcedures.**

**Evaluation of Disclosure Controls and Procedures**

Management, including ourChief Executive Officer and Chief Financial Officer, James K. Patterson, hasevaluated our disclosure controls and procedures as of the end of the periodcovered by this report. Based upon this review, Mr. Patterson has concludedthat our disclosure controls and procedures are effective.

**Internal Control Over Financial Reporting**

This annual report doesnot include a report of management’s assessment regarding internal control overfinancial reporting or an attestation report of the company’s registered publicaccounting firm due to a transition period established by rules of theSecurities and Exchange Commission for newly public companies.

**Changes in Internal Control Over FinancialReporting**

There have been nochanges in internal control over financial reporting that occurred during thefiscal quarter ended December 31, 2006 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

**Item 8B.   OtherInformation.**

None.

**PART III**

**Item 9.   Directors,Executive Officers, Promoters, Control Persons and Corporate Governance;Compliance WithSection 16**(a) of the ExchangeAct.

Our Board of Governorsmanages our business and affairs. The number of governors is set at 11. Asindicated in the table below, certain of these governors are subject toappointment by members owning a majority of our outstanding units or otherwiseowning blocks of 3,000,000 units or more. The remaining seats on the board thatare not subject to a right of appointment will be subject to election by theremaining members. However, in order to preserve continuity of governance andharmonious transition from the initial Board, the initial Board designated fromamong themselves the governors to serve in the elected seats following thebreaking of escrow. The terms of these designated governors to the electedseats are be staggered such that, beginning in 2009, our members will electone-third (or as nearly as possible) of the non-appointed members of the Boardof Governors annually.

The names, ages,addresses and certain biographical information regarding our current governorsand executive officers are set forth below.
| **Name**                | ** ** | **Age** | ** ** | **Position**                                                 | ** ** | **Term Expires/Appointed** | ** ** |
|-------------------------|------------|---------|------------|--------------------------------------------------------------|------------|---------------------------------|------------|
|                    |       |    |       |                                                         |       |                            |       |
| John Mullins            |       | 39      |       | Governor,  Chairman                                          |       | Appointed                       |       |
|                    |       |    |       |                                                         |       |                            |       |
| James K. Patterson      |       | 57      |       | Governor,  Chief Executive Officer,  Chief Financial Officer |       | Term  expires 2011              |       |
|                    |       |    |       |                                                         |       |                            |       |
| Mike Willis             |       | 38      |       | Governor,  Vice Chairman                                     |       | Appointed                       |       |
|                    |       |    |       |                                                         |       |                            |       |
| Dave Geary              |       | 39      |       | Governor,  Treasurer                                         |       | Appointed                       |       |
|                    |       |    |       |                                                         |       |                            |       |
| James L. Byford, Ph.D.  |       | 63      |       | Governor,  Secretary                                         |       | Term  expires 2010              |       |
|                    |       |    |       |                                                         |       |                            |       |
| Michael King            |       | 40      |       | Governor                                                     |       | Appointed                       |       |
|                    |       |    |       |                                                         |       |                            |       |
| William H. Latimer, III |       | 68      |       | Governor                                                     |       | Term  expires 2011              |       |
|                    |       |    |       |                                                         |       |                            |       |
| Michael D. Miller       |       | 58      |       | Governor                                                     |       | Appointed                       |       |
|                    |       |    |       |                                                         |       |                            |       |
| Michael Odai            |       | 36      |       | Governor                                                     |       | Appointed                       |       |
|                    |       |    |       |                                                         |       |                            |       |

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| Alain Treuer     |   | 36     |   | Governor                |   | Appointed          |   |
|------------------|--------|--------|--------|-------------------------|--------|--------------------|--------|
|             |   |   |   |                    |   |               |   |
| Tom W. Wade, Jr. |   | 73     |   | Governor                |   | Term  expires 2009 |   |
|             |   |   |   |                    |   |               |   |
| Gary L. West     |   | 50     |   | Chief Operating Officer |   | Non-governor       |   |

 

**Biographies**

*John Mullins.*Mr. John Mullins has servedon the Board of Governors since January 2007. Mr. Mullins has been employed asChief Executive of Bioverda Limited since 2005. Bioverda is a 100% wholly ownedsubsidiary of NTR plc, both companies being registered and incorporated inIreland. Bioverda was established to develop, own and operate sustainablebio-energy businesses focussing on the following sectors: methane (landfill gasand coal mine methane), biogas (large scale anaerobic digestion) and biofuels(biodiesel and bioethanol). NTR is a leading Irish private sector developer andoperator of public infrastructure with businesses including toll roadoperations, Greenstar (a fully integrated waste management company operating inIreland and the UK), Celtic Anglian Water (a water services company), IrishBroadband (telecommunications) and Airtricity (Europe’s largest independentwind farm developer). Prior to his current role with Bioverda, Mr. Mullinsworked as a Business Development Director at Greenstar.

*James K. Patterson.*Mr. James K.Patterson, through contract with The Patterson Group, LLC, has provided usorganizational, administrative and financial consulting services since February2005, and has served as our Chief Financial Officer since May 2005 and as ourChief Executive Officer since July 2005. Mr. Patterson is the founder of ThePatterson Group, a consulting firm that he formed to provide organizational,administrative and financial consulting services, and has served as itsPresident since October 2003. He has also served as President of The WoodsGroup, LLC since January 2000. The Woods Group is a merchant banking firmspecializing in mergers and acquisitions, corporate finance and strategicplanning. Mr. Patterson’s experience also includes over 25 years of experiencein senior management positions in both public and privately owned companies,including approximately 15 years of banking experience in which he has servedas Chief Executive Officer, a member of the Board of Directors and a member ofthe executive committee, the loan committee and the investment committee ofvarious banks in Tennessee. He also has extensive experience in the dataprotection services industry, having served for 11 years on the Board of theindustry’s national and international trade associations. During this time, healso served as one of four Regional Vice Presidents in the United States forthe Data Protection Services division of Iron Mountain, Inc., a largeinformation management company, and as a key member of Iron Mountain’s mergersand acquisitions team. Mr. Patterson is a graduate of Middle Tennessee StateUniversity, where he holds a Bachelor of Science degree in Finance andAdministration. He is also a graduate of the Tennessee Banker’s School atVanderbilt University and the Graduate School of Banking of the South atLouisiana State University.

*Mike Willis.*Mr. Mike Willis has served onthe Board of Governors since January 2007. Mr. Willis is a Principal of VirginFuels. Since 2005, Mike has worked at Virgin Management Limited in Londonworking with several of the Virgin portfolio companies internationally inmanaging their growth at the senior management and Board levels and assistingthose businesses in effecting corporate finance transactions.

*Dave Geary.*Mr. Dave Geary has served onthe Board of Governors since January 2007. Mr. Geary has been employed asFinance Director of Bioverda since 2005. Prior to that, he was the GroupTreasurer at NTR.

*James L. Byford, Ph.D.*Mr. James L. Byfordhas served on the Board of Governors since our inception. He is Dean of theCollege of Agriculture and Applied Sciences at the University of Tennessee,Martin, a position he has held since October 1987. Mr. Byford has earnednumerous awards and honors, including, most recently, the 2004 LifetimeConservation Achievement Award from the Tennessee Department of Environment andConservation and the 2004 Tennessee VIP Award from the Future Farmers ofAmerica (FFA). He also serves on numerous industry-related boards, includingthe Tennessee Council of Cooperatives, University of Tennessee Press EditorialBoard, the MeadWestvaco Forest Industries Advisory Board, and the WestTennessee River Basin Authority Board. Mr. Byford has authored severalpublications and research papers on wildlife, forestry and conservation. He isa graduate of the University of Tennessee, Martin, where he holds a Bachelor ofScience degree in General Agriculture. He also holds a Ph.D. from AuburnUniversity in Wildlife, Forestry and Fisheries.

*Michael King.*Mr. Michael King has servedon the Board of Governors since January 2007. Mr. King has been employed asChief Operations Officer of NTR since June 2000.

*William H. Latimer, III.*Mr. William H.Latimer, III has served on our Board of Governors since January 2005. He is theprincipal of Bill Latimer Investments, Inc., an investment company specializingin commodities trading, a position he has held for 20 years. He is a directorof Obion Grain and Dyersburg Elevator. He is also a Trustee of Blue Cross BlueShield of Tennessee, a position he has held for the past 25 years. Mr. Latimerhas also served as Chairman of Administrative Board of the First UnitedMethodist Church of Union City, Tennessee. He has also served as a member of

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the Union City SchoolBoard, to which he was elected to serve three four-year terms. Mr. Latimer is aformer First Lieutenant with the United States Army and a graduate of theUniversity of Tennessee, where he holds a Bachelor of Science degree inIndustrial Engineering.

*Michael D. Miller.*Mr. Michael D. Millerhas served on the Board of Governors since January 2005. He serves as theGeneral Manager and Secretary of Obion Grain and Dyersburg Elevator, positionshe has held for 30 years. Mr. Miller has served as Vice-President and Presidentof the Tennessee Grain and Feed Association, Vice-President and President ofthe Tennessee Crop Improvement Association and Vice-President and President ofthe Tennessee Foundation Seeds. Mr. Miller has served on the vestry of St.James Episcopal Church in Union City, Tennessee since 1990 and on the board ofSouthern Lease Management and Mississippi Valley Ag since June 2002. He is agraduate of the University of Tennessee, Martin, where he holds a Bachelor ofScience degree in Agriculture. He also holds a Master of Science degree inEducation from the University of Tennessee, Martin.

*MichaelOdai*. Mr. Michael Odai has served on the Board of Governorssince January 2007. Mr. Odai is General Counsel of Virgin Fuels.  He joined the Virgin Group in 2005 as GeneralCounsel of Virgin Money Australia.

*Alain Treuer.*Mr. Alain Treuer has servedon the Board of Governors since March 2007. Mr. Alain Truer is a Principal ofTellac Reuert Partners (TRP) S.A., an international investment company.

*Tom W. Wade, Jr.*Mr. Tom W. Wade, Jr. hasserved on the Board of Governors since January 2005. He has owned and operatedKenton Grain Company, Wade Gin Company, Dyer Grain Company and Como Grain andFeed Company for over 30 years. He has also been a principal owner of HumboldtGin and Warehouse Company and Yorkville Gin Company since 1999. Mr. Wade hasowned and operated a strawberry farming business in Kenton, Tennessee for thelast 45 years. Mr. Wade’s other experiences include serving as President of theTennessee Ginners Association, Charter President of the Tennessee Grain &Feed Association and President of the University of Tennessee National AlumniAssociation, the Pi Kappa Alpha Educational Foundation and the Obion CountyIndustrial Board. Mr. Wade has also served as Chairman of the Board of FirstState Bank and Chairman of the Executive Committee of Community FirstBancshares, the parent company of First State Bank. He also served as Chairmanof the Tennessee delegation to the National Cotton Council and was a member ofthe Tennessee Council on Agriculture and Forestry and the Tennessee Board forEconomic Growth. Mr. Wade has been the Vice-Chairman of the Gibson CountyRailroad Authority since March 1984. Mr. Wade is a graduate of the Universityof Tennessee, Knoxville.

*Gary L. West.*Mr. Gary L. West has servedas our Chief Operating Officer since May 2005, previously serving as our ChiefFinancial Officer since our inception. Mr. West has held various positions inagricultural and livestock industries for over 20 years. Prior to enrollingfull-time in a Master’s degree in Business program from January 2003 to May2004, Mr. West worked for InterGlobal Waste Management, Inc. as a corporatesales manager for Aquaculture Industry Pond Monitoring Systems from October2000 until November 2002, developing marketing plans and budgets and acting asliaison between product development and farmers. Mr. West is a graduate ofMississippi State University, where he holds a Bachelor of Science degree inAgricultural Engineering, Technology and Business. He also holds a Master’sdegree in Business from the University of Tennessee, Martin.

**Code of Ethics**

We have notadopted a code of ethics because we do not yet have significant operations.

**Item 10.   ExecutiveCompensation.**

Members of ourBoard of Governors receive a per diem of $150 per half day and $300 per fullday for attending meetings and carrying out duties on our behalf.Mr. Byford will not receive any per diems for serving on our Board ofGovernors while he is employed by the public education system in the State ofTennessee. In addition, Board members such as Mr. Patterson who arecompensated for providing day-to-day services do not receive per diem paymentsfor serving on the Board. Members of our Board are also reimbursed forreasonable expenses incurred in carrying out their duties as governors,including mileage reimbursement for travel to duly held meetings.

We compensateMr. Patterson for his services as our Chief Executive Officer and ChiefFinancial Officer as described under Item 6 (Management’s Discussion andAnalysis or Plan of Operation) under the heading “Development ServicesProviders—The Patterson Group, LLC.” We compensate Mr. West for hisservices to us at an annual salary of $60,000, payable in accordance with ourpayroll practices.

We also previouslygranted options to our then governors and Mr. West to purchase up to55,884 units each (for a total of 502,956 units) at an exercise price ofapproximately $0.45 per unit. The options were subject to forfeiture if theholder did not continuously serve as a governor or officer up through closingon our project financing. The options vested on closing on project financing inJanuary 2007 and by their terms were to remain exercisable for a period of fiveyears

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thereafter. All of theseoptions were exercised in full in January 2007, other than the option topurchase up to 55,884 units granted to Mr. West.

Further, inconsideration of their individual $125,000 personal guarantees of our$1,000,000 unsecured line of credit, we granted options to our then governors,Messrs. Sanders, Patterson, Barker, Miller, Byford, Latimer, Pinion andWade, to purchase up to 279,419 units each (for a total of 2,235,352 units), atan exercise price of approximately $0.45 per unit. These options vested immediatelyand by their terms were to remain exercisable for a period of five years afterclosing on project financing. These options were not subject to forfeiture. Allof these options were exercised in full in January 2007.

The followingtable shows, for the fiscal years ended December 31, 2006 and 2005, thecompensation of James K. Patterson, our Chief Executive Officer sinceJuly 2005, and Alvin D. Escue, our Chief Executive Officer from inceptionuntil July 2005. None of our other executive officers had totalcompensation in excess of $100,000 for either fiscal year.

**SummaryCompensation Table**
| **Name and Principal Position** | ** ** | ** ** | ** ** | **Fiscal Year** | ** ** | **Salary** | ** ** | **Stock Awards** | ** ** | **Option  Awards** | ** ** | **Total** | ** ** |
|------------------------------------------------|------------|------------|------------|----------------------|------------|------------|------------|-----------------------|------------|--------------------|------------|-----------|------------|
| James K.  Patterson                            |       | 2006       |       | $                    | 78,000     | (1)        | $          | —                |       | $                  | —     |      | $          | 78,000 |   |
| Chief Executive Officer (current)              |       | 2005       |       | 65,900               | (1)        | 100,000    | (2)        | —                |       | 165,900            |       |
|                                           |       |       |       |                 |       |       |       |                  |       |               |       |
| Alvin D. Escue                                 |       | 2005       |       | 25,000               |       | —     |       | —                |       | 25,000             |       |
| Chief Executive  Officer (former)              |       |       |       |                 |       |       |       |                  |       |               |       |
|                                                |            |            |            |                      |            |            |            |                       |            |                    |            |           |            |  |  |  |  |

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(1)             Mr. Pattersonwas not employed by us during either fiscal year, instead providing services tous under a management consulting agreement.

(2)             Represents223,535 units issued to Mr. Patterson, valued at $100,000**,**the dollar amount recognized for financial statementreporting purposes with respect to the fiscal year.

Thefollowing table contains information concerning outstanding equity awards heldby James K. Patterson as of  December 31,2006, the only individual named in the summary compensation table who held anyoutstanding equity awards as of  thatdate.

**Outstanding Equity Awards at FiscalYear-End**
| **Name**            | ** ** | **Number of Units  Underlying Unexercised  Options—Unexercisable** | ** ** | **Option  Exercise  Price  ($/Unit)** | ** ** | **Option  Expiration  Date** | ** **    |
|---------------------|------------|----------------------------------------------------------------------------------------|------------|---------------------------------------|------------|------------------------------|---------------|
| James K.  Patterson |       | 55,884                                                                                 | (1)(2)     | $                                     | 0.45       |                         | indeterminate | (1) |
|                     |            |                                                                                        |            |                                       |            |                              |               |  |

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(1)             As of December 31,2006, these options were unvested and subject to forfeiture if Mr. Pattersondid not continuously serve as a governor or officer up through closing on ourproject financing. The options vested on closing on project financing inJanuary 2007 and by their terms were to remain exercisable for a period of fiveyears thereafter. All of these options were exercised in full in January 2007.

(2)             Excludesan option for the  purchase up to 279,419units granted to Mr. Patterson in connection with his personal guaranteeof a portion of our unsecured line of credit.

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Thefollowing table presents information regarding the compensation of theindividuals other than James K. Patterson who served as governors during thefiscal year ended December 31, 2006.

**Governor Compensation**

| Name                     | ** ** | ** ** | ** ** | **Fees Earned   or Paid in Cash** | ** ** | **Total** | ** ** |
|--------------------------|------------|------------|------------|------------------------------------------------------------|------------|-----------|------------|
| James Baxter  Sanders    |       | $          | 1,650      |                                                       | $          | 1,650     |       |
| Flavius Allen  Barker    |       | 1,650      |       | 1,650                                                      |       |
| Michael D.  Miller       |       | 1,650      |       | 1,650                                                      |       |
| James L. Byford,  Ph.D.  |       | —     |       | —                                                     |       |
| William H.  Latimer, III |       | 1,650      |       | 1,650                                                      |       |
| Phillip E.  Pinion       |       | 1,650      |       | 1,650                                                      |       |
| Tom W. Wade, Jr.         |       | 1,350      |       | 1,350                                                      |       |
|                          |            |            |            |                                                            |            |           |            |  |  |

 

**Item 11.   SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters.**

The following table presentsinformation concerning the beneficial ownership of our units as of March 23,2007 for each person known to us to beneficially own more than 5% of ouroutstanding units, each of our governors, each of our executive officers, andall governors and executive officers as a group.

We currently have 39,944,116units outstanding and we have granted options to purchase up to a total of55,884 additional units, for a total of 40,000,000 units on a fully-dilutedbasis. All unit and per unit amounts discussed or presented in this section andelsewhere in this report reflect a 2.23535-to-1.0 split of our capital unitsand options to acquire capital units outstanding as of March 15, 2006.

The beneficial ownershippercentages are based on 39,944,116 units issued and outstanding. Indetermining the number of units beneficially owned by an individual or entityand the percentage ownership of that individual or entity, units underlyingoptions beneficially owned by that individual or entity are also deemedoutstanding. These units are not, however, deemed outstanding for the purposeof computing the percentage ownership of any other individual or entity.

Unlessotherwise indicated and subject to community property laws where applicable,each unit holder named in the table below has sole voting and investment powerwith respect to the units shown opposite such unit holder’s name.

|                                                                         | ** ** | **Units Beneficially Owned** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------------|------------|
| **Name**                                                                | ** ** | ** **                             | ** ** | **Number** | ** ** | **Percent** | ** ** |
|                                                                    |       |                                   |       |   |   |
| *Governors  and Executive Officers*                                     | * *   | * *                               | * *   | * * | * * |
| John Mullins                                                            |       | —                                 |       | — | % |
| James K.  Patterson                                                     |       | 558,838                                |       | 1.4 |   |
| Mike Willis                                                             |       | —                                 |       | — |   |
| Dave Geary                                                              |       | —                                 |       | — |   |
| James L. Byford,  Ph.D.                                                 |       | 504,072                                |       | 1.3 |   |
| Michael King                                                            |       | —                                 |       | — |   |
| William H.  Latimer, III(1)(2)                                          |       | 3,457,373                              |       | 8.7 |   |
| Michael D.  Miller(1)(3)                                                |       | 2,156,494                              |       | 5.4 |   |
| Michael Odai                                                            |       | —                                 |       | — |   |
| Alain Treuer                                                            |       | —                                 |       | — |   |
| Tom W. Wade, Jr.                                                        |       | 1,058,838                              |       | 2.7 |   |
| Gary L. West(4)                                                         |       | 103,032                                |       | * |   |
| All executive  officers and governors as a group(9 persons)(1),(4) |       | 6,216,577                              |       | 15.5 |   |
|                                                                    |       |                                   |       |   |   |
| *Other  5% Beneficial Owners*                                           | * *   | * *                               | * *   | * * | * * |
| VBV LLC(5)                                                              |       | 24,764,000                             |       | 62.0 |   |
| Obion Grain Co.,  Inc.(6)                                               |       | 4,550,635                              |       | 11.4 |   |
| Fagen Energy,  Inc.(7)                                                  |       | 2,591,210                              |       | 6.5 |   |
| James Baxter  Sanders(1)(8)                                             |       | 2,180,908                              |       | 5.5 |   |
|                                                                    |       |                                   |       |   |   |
|                                                                         |            |                                        |            |  |  |  |  |

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*                    Lessthan 1%.

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(1)             Includes1,398,535 units held by Obion Grain Co., Inc. and 223,535 units heldby Dyersburg Elevator Company, Inc. Mr. Latimer, Mr. Miller andMr. Sanders hold 36.0%, 6.0% and 8.1%, respectively, of the outstandingshares of common stock of each of Obion Grain Co. and Dyersburg ElevatorCompany. Each of these individuals also serves as a director of each of theseentities, and Mr. Miller and Mr. Sanders both also serve as officersof each of these entities.

(2)             Mr.Latimer’s address is 201 West Main Street, Suite E, Union City, TN 38261.

(3)             Mr.Miller’s address is 516 North 7th Street, Obion, TN 38240.

(4)             Includesoptions granted to Mr. West to purchase up to 55,884 units at an exerciseprice of approximately $0.45 per unit.

(5)             VBVLLC’s address is 65 Bleecker Street, New York, NY 10012.

(6)             Includesall units beneficially owned by Mr. Latimer, Mr. Miller and Mr. Sanders,and 223,535 units held by Dyersburg Elevator Company, Inc., all ofwhich persons have elected to be affiliated with Obion Grain Co., Inc. forgovernor appointment purposes. Obion Grain Co., Inc.’s address is 6th atPalestine, Obion, TN 38240.

(7)             FagenEnergy, Inc.’s address is 501 W. Highway 212, P.O. Box 159, Granite Falls, MN56241.

(8)             Mr.Sanders’ address is 1034 Troy Hickman Road, Troy, TN 38260.

**Item 12.   CertainRelationships and Related Transactions, and Director Independence.**

We have engaged intransactions with related parties. Although we believe that these transactionswere in our best interests, we cannot assure you that these transactions wereentered into on terms as favorable to us as those that could have been obtainedin an arms-length transaction. We may also engage in transactions with relatedparties in the future. Conflicts of interests arise when we transact businesswith related parties. All unit and per unit amounts discussed or presented inthis section and elsewhere in this report reflect a 2.23535-to-1.0 split of ourcapital units and options to acquire capital units outstanding as ofMarch 15, 2006.

**Formation Transactions**

Our founders****Alvin D. Escue (our former Chief ExecutiveOfficer and General Manager), James L. Byford, Phillip E. Pinion(Messrs. Byford and Pinion are currently members of our Board ofGovernors), and Mr. Gary L. West (currently our Chief Operating Officer),each purchased 1,118 capital units for a purchase price of $500 upon theformation of our company. We also issued to Mr. Escue 223,535 capitalunits in consideration for non-cash capital contributions of development assetsthat we valued at $100,000, consisting of land option rights, studies, reports,letters of intent with vendors and suppliers and marketers, and our businessplan and related goodwill. In addition, we paid Mr. Escue approximately$44,000 for out-of-pocket expenses incurred on our behalf prior to ourorganization in connection with the development of our business plan. Of the224,653 units issued to Mr. Escue in these formation transactions, 67,061were later resold to Michael D. Miller for a purchase price of $30,000 and theremaining 157,592 were redeemed for a purchase price of $70,500. See “—EscueSeparation Agreement” below.

**Seed Offerings**

InJanuary 2005, the following persons participated in a private placement ofour units:

| Name                                   | ** ** | ** ** | ** ** | **Number of Units Purchased** | ** ** | **Consideration Paid** | ** ** |
|----------------------------------------|------------|------------|------------|----------------------------------------------|------------|-----------------------------|------------|
| James Baxter  Sanders                  |       | 223,535    |       | $                                            | 100,000    |                        |
| Michael D.  Miller                     |       | 67,060     |       | 30,000                                       |       |
| Tom W.  Wade, Jr.                 |       | 223,535    |       | 100,000                                      |       |
| James L. Byford,  Ph.D.                |       | 167,651    |       | 75,000                                       |       |
| Phillip E.  Pinion                     |       | 55,883     |       | 25,000                                       |       |
| Gary L. West                           |       | 33,530     |       | 15,000                                       |       |
| Obion Grain  Co., Inc.            |       | 223,535    |       | 100,000                                      |       |
| Dyersburg Elevator  Company, Inc. |       | 223,535    |       | 100,000                                      |       |
|                                        |            |            |            |                                              |            |                             |            |  |

 

InDecember 2005, the following persons participated in an additional privateplacement of our units:

| Name                             | ** ** | ** ** | ** ** | **Number of Units Purchased** | ** ** | **Consideration Paid** | ** ** |
|----------------------------------|------------|------------|------------|----------------------------------------------|------------|-----------------------------|------------|
| Fagen  Energy, Inc.         |       | 1,341,210  |       | $                                            | 720,000    |                        |
| Ethanol Capital  Management, LLC |       | 558,837    |       | 300,000                                      |       |
|                                  |            |            |            |                                              |            |                             |            |  |

 

65

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**Private Escrow Offering**

In December 2005,we entered into an agreement with Fagen Energy, Inc. under which FagenEnergy subscribed for an additional 1,250,000 units for a purchase price of$2,500,000. We closed on the prior escrow offering and issued the units inJanuary 2007.

**Option Grants**

We granted optionsto our then governors, James Baxter Sanders, James K. Patterson, Flavius AllenBarker, Michael D. Miller, James L. Byford, Ph.D., William H.Latimer, III, Phillip E. Pinion and Tom W. Wade, Jr., and oneexecutive officer, Gary L. West, to purchase up to 55,884 units each (for atotal of 502,956 units) at an exercise price of approximately $0.45 per unit.The options were subject to forfeiture if the holder did not continuously serveas a governor or officer up through closing on our project financing. Theoptions vested at closing on project financing in January 2007 and were toremain exercisable for a period of five years thereafter.

Further, inconsideration of their individual $125,000 personal guarantees of our $1million unsecured line of credit, we granted options to our then governors,Messrs. Sanders, Patterson, Barker, Miller, Byford, Latimer, Pinion andWade, to purchase up to 279,419 units each (for a total of 2,235,352 units), atan exercise price of approximately $0.45 per unit. The options vestedimmediately and were to remain exercisable for a period of five years afterclosing on our project financing. The options were not subject to forfeiture.

**Escue Separation Agreement**

In connection withthe termination of the employment of Alvin D. Escue, our former Chief ExecutiveOfficer, we entered into a separation agreement with Mr. Escue inAugust 2005, under which each party agreed to release all claims againstthe other party. In addition, Mr. Escue agreed to not compete with us inwest Tennessee until successful start-up of the our proposed ethanol plant. Inconsideration for his release and his agreement not to compete, we agreed toredeem Mr. Escue’s entire membership interest (represented by 157,592units) for a purchase price of $70,500. We closed on this redemptiontransaction in September 2005.

**Site Option Agreement with ObionGrain Co., Inc.**

We entered into asite purchase option contract with Obion Grain Co., Inc. to purchase a230-acre green field site on which to locate our proposed ethanol plant. Eachof Obion Grain Co. and its affiliate, Dyersburg Elevator Company, hold 223,535of our capital units. In addition, three of our governors, James BaxterSanders, Michael D. Miller and William H. Latimer, are significant shareholdersand directors of Obion Grain and Dyersburg Elevator Company, andMr. Sanders serves as President of each entity and Mr. Miller servesas General Manager and Secretary of each entity.

The purchase pricefor the property was $5,000 per acre, or $1,150,000 for all 230 acres. InDecember 2006, we purchased the property by issuing 575,000 units (valued at$2.00 per unit) to Obion Grain Co.

The site purchaseoption contract contains other material terms and conditions, including arequirement that we buy a substantial portion of our required corn from ObionGrain Co. and a covenant that we will not proceed with the development orconstruction of an ethanol plant in western Tennessee or western Kentucky otherthan on the option site. See “Management’s Plan of Operation—Site OptionAgreement.”

**Consulting Agreement with ThePatterson Group, LLC**

We have enteredinto an agreement with The Patterson Group, LLC and its principal,Mr. James K. Patterson, to provide us financial related administrativeservices and overall management services. Under the agreement,Mr. Patterson will serve as our Chief Executive Officer and ChiefFinancial Officer on a full-time basis and manage our day-to-day financialmatters. We have issued Mr. Patterson 223,535 units (valued at $100,000)as partial compensation for his duties and responsibilities. For moreinformation on the terms of this agreement, please “Development ServicesProviders—The Patterson Group, LLC” under Item 6 (Management’s Discussion andAnalysis or Plan of Operation).

**Design-Build Agreement with Fagen,Inc.**

We have enteredinto a design-build agreement with Fagen, Inc. We have also engaged FagenEngineering, LLC for related engineering services. For more information on theterms of these agreements, see “Development Services Providers—Fagen, Inc.”under Item 6 (Management’s Discussion and Analysis or Plan of Operation). Anaffiliate of Fagen,

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Fagen Energy, Inc.,holds 2,591,210 of our capital units. We have no other existing or contemplatedrelationships with Fagen, Fagen Engineering, Fagen Energy or their affiliates.

**Conflicts of Interest**

Conflicts ofinterest exist and may arise in the future because of the relationships betweenand among our officers, governors, affiliates and us, their interests in otherethanol projects or competing businesses, and the fact that we have enteredinto and may from time to time in the future enter into transactions with ourofficers, governors and affiliates. Conflicts of interest could cause our officersand governors to put their own personal interests ahead of ours. We cannotassure you that transactions we enter into with related parties will be onterms as favorable to us as those that could have been obtained in anarms-length transaction. Disputes may arise concerning transactions we enterinto with related parties, and it is possible that our officers, governors andtheir affiliates may receive a more favorable resolution than an unaffiliatedthird party would receive. However, the Board of Governors may not receive anyrebates or kickbacks by causing us to transact business with a particularsupplier, vendor or customer, nor may the Board cause us to enter intoreciprocal business arrangements to circumvent the conflicts of interest andinvestment restrictions guidelines of the North American SecuritiesAdministrators Association.

Our Board ofGovernors has adopted a resolution specifying that we may not make any loans orforbearances to company officers, governors or controlling persons, except forloans or forbearances (1) described inSection 0780-4-2-.06(4)(k) of the Rules of the TennesseeDepartment of Commerce and Insurance, Division of Securities and (2) thatare allowed under (and approved and made in accordance with) our Operating Agreementand applicable federal and state law.

Although we intendto examine all conflicts that may arise from time to time, we cannot assure youthat conflicts of interest will not harm our business or reduce the value ofyour units. We currently have not established any formal procedures to evaluateor resolve any conflicts of interest. Our Operating Agreement and Tennessee lawprovides certain specific approval mechanisms regarding transactions with ourgovernors and their affiliates. In addition, all future transactions with ouraffiliates are to be on terms no less favorable than could be obtained from anunaffiliated third party and must be approved by a majority of the governorsincluding the majority of the disinterested governors.

Conflicts ofinterest could arise, among others, in the situations described below:

·       We may engage intransactions with our officers, governors and affiliates for the purchase ofcorn and sale of distillers grains.

·       We may compete for cornagainst Obion Grain Co., Dyersburg Elevator Company and the Tom Wade Companies.One of our governors, Mr. Tom W. Wade, Jr., is a principalshareholder, officer and director of the Tom Wade Companies. Tom Wade Companiesoperates several elevator facilities in neighboring communities of Obion,Tennessee. Obion Grain Co. operates a local elevator in Obion, Tennessee andseveral additional elevator facilities in neighboring communities. DyersburgElevator Company operates an elevator facility in Dyersburg, Tennessee.

·       Our governors and executiveofficers hold units and options. Their decisions regarding the operation of ourbusiness will affect the amount of cash available for distribution tothemselves and our other members. They also receive compensation for theirservices, and will continue to make decisions regarding their own compensationin the future.

·       VBV holds a majority of ourcapital units and controls our board of governors. VBV and its affiliates alsohas and may become the majority or minority investors in various other ethanolplant projects. The interests of VBV and its affiliates as a result of theseother investments and relationships may not always coincide with our interestsas a company or with the interests of other unit holders.  These conflictsof interests could cause VBV to put its interests ahead of ours.

·       Our governors must devotesufficient time to our business and affairs, but are free to serve, in anycapacity the governor deems appropriate, any other person or entity, includinganother ethanol business. Our management contract with Mr. Patterson andThe Patterson Group, however, prohibits Mr. Patterson from competing withus in west Tennessee or western Kentucky during his contract term with us andfor a period of one year thereafter. Our governors and our officers mayexperience conflicts of interest in allocating their time and attention betweenus and other businesses. Our governors may also acquire financial or otherincentives in other businesses. None of our officers or governors are currentlyinvolved, or have plans to become involved, with another ethanol business.

**DirectorIndependence**

We have notdetermined that any of our governors are independent by reference to NASDAQRule 4200(a)(15) or would be independent by reference to NASDAQ audit committeestandards.

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**Item 13.        Exhibits.**
| Exhibit  Number | ** ** | **Exhibit Title**                                                                                                                                                                                                                                                                     |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                                                                                                                  |
| 3.1             |       | Articles of Organization (incorporated herein by  reference to Exhibit 3.1 to Post-Effective Amendment No. 4 to the Company’s  Registration Statement on Form SB-2 filed December 14, 2006 (SEC File No.  333-130815))                                                           |
|            |       |                                                                                                                                                                                                                                                                                  |
| 3.2             |       | Amended Operating Agreement (incorporated herein by  reference to Exhibit 3.2 to Post-Effective Amendment No. 4 to the Company’s  Registration Statement on Form SB-2 filed December 14, 2006 (SEC File No. 333-130815))                                                         |
|            |       |                                                                                                                                                                                                                                                                                  |
| 4.1             |       | Form of Unit Certificate (incorporated herein by  reference to Exhibit 4.1 to Post-Effective Amendment No. 4 to the Company’s  Registration Statement on Form SB-2 filed December 14, 2006 (SEC File No.  333-130815))                                                           |
|            |       |                                                                                                                                                                                                                                                                                  |
| 4.2             |       | Form of Subscription Agreement (incorporated herein  by reference to Exhibit 4.2 to Post-Effective Amendment No. 4 to the  Company’s Registration Statement on Form SB-2 filed December 14, 2006 (SEC  File No. 333-130815))                                                     |
|            |       |                                                                                                                                                                                                                                                                                  |
| 4.3             |       | Escrow Agreement (incorporated herein by reference  to Exhibit 4.3 to Pre-Effective Amendment No. 2 to the Company’s Registration  Statement on Form SB-2 filed May 5, 2006 (SEC File No. 333-130815))                                                                           |
|            |       |                                                                                                                                                                                                                                                                                  |
| 4.4             |       | Form of Confirmation Notice and Election Form  (incorporated herein by reference to Exhibit 4.4 to Post-Effective Amendment  No. 3 to the Company’s Registration Statement on Form SB-2 filed December 5,  2006 (SEC File No. 333-130815))                                       |
|            |       |                                                                                                                                                                                                                                                                                  |
| 10.1            |       | Agreement with the Patterson Group, LLC and Mr.  James K. Patterson (incorporated herein by reference to Exhibit 10.1 to the  Company’s Registration Statement on Form SB-2 filed December 30, 2005 (SEC  File No. 333-130815))                                                  |
|            |       |                                                                                                                                                                                                                                                                                  |
| 10.2            |       | Form of Option Grant (compensation options)  (incorporated herein by reference to Exhibit 10.2 to the Company’s  Registration Statement on Form SB-2 filed December 30, 2005 (SEC File No.  333-130815))                                                                         |
|            |       |                                                                                                                                                                                                                                                                                  |
| 10.3            |       | Form of Option Grant (guarantee options)  (incorporated herein by reference to Exhibit 10.3 to the Company’s  Registration Statement on Form SB-2 filed December 30, 2005 (SEC File No.  333-130815))                                                                            |
|            |       |                                                                                                                                                                                                                                                                                  |
| 10.4            |       | Subscription Agreement with Fagen Energy, Inc. (seed  capital) (incorporated herein by reference to Exhibit 10.4 to the Company’s  Registration Statement on Form SB-2 filed December 30, 2005 (SEC File No.  333-130815))                                                       |
|            |       |                                                                                                                                                                                                                                                                                  |
| 10.5            |       | Subscription Agreement with Ethanol Capital  Management, LLC (seed capital) (incorporated herein by reference to Exhibit  10.5 to the Company’s Registration Statement on Form SB-2 filed December 30,  2005 (SEC File No. 333-130815))                                          |
|            |       |                                                                                                                                                                                                                                                                                  |
| 10.6            |       | Subscription Agreement with Fagen Energy, Inc.  (prior escrow offering) (incorporated herein by reference to Exhibit 10.6 to  the Company’s Registration Statement on Form SB-2 filed December 30, 2005  (SEC File No. 333-130815))                                              |
|            |       |                                                                                                                                                                                                                                                                                  |
| 10.6.1          |       | Amendment to Subscription Agreement with Fagen  Energy, Inc. (prior escrow offering) (incorporated herein by reference to  Exhibit 10.6.1 to Pre-Effective Amendment No. 1 to the Company’s Registration  Statement on Form SB-2 filed March 27, 2006 (SEC File No. 333-130815)) |
|            |       |                                                                                                                                                                                                                                                                                  |
| 10.7            |       | Credit Agreement (incorporated herein by reference  to Exhibit 10.7 to the Company’s Registration Statement on Form SB-2 filed  December 30, 2005 (SEC File No. 333-130815))                                                                                                     |
|            |       |                                                                                                                                                                                                                                                                                  |
| 10.7.1          |       | Renewal of Credit Agreement (incorporated herein by  reference to Exhibit 10.7.1 to Post-Effective Amendment No. 1 to the  Company’s Registration Statement on Form SB-2 filed October 24, 2006 (SEC  File No. 333-130815))                                                      |

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|        |   |                                                                                                                                                                                                                                                                                   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.8   |   | Land Purchase Option with Obion Grain Co., Inc.  (incorporated herein by reference to Exhibit 10.8 to the Company’s  Registration Statement on Form SB-2 filed December 30, 2005 (SEC File No.  333-130815))                                                                      |
|   |   |                                                                                                                                                                                                                                                                                   |
| 10.9   |   | [Intentionally Omitted]                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                   |
| 10.10  |   | Agreement for Professional Services with Antioch  International, Inc. (incorporated herein by reference to Exhibit 10.10 to  Pre-Effective Amendment No. 1 to the Company’s Registration Statement on Form  SB-2 filed March 27, 2006 (SEC File No. 333-130815))                  |
|   |   |                                                                                                                                                                                                                                                                                   |
| 10.11  |   | Consulting Agreement with BioEnergy Capital  Consultants, LLC (incorporated herein by reference to Exhibit 10.11 to  Pre-Effective Amendment No. 1 to the Company’s Registration Statement on Form  SB-2 filed March 27, 2006 (SEC File No. 333-130815))                          |
|   |   |                                                                                                                                                                                                                                                                                   |
| 10.12  |   | Service Agreement with RTP Environmental Associates,  Inc. (incorporated herein by reference to Exhibit 10.12 to Pre-Effective  Amendment No. 1 to the Company’s Registration Statement on Form SB-2 filed  March 27, 2006 (SEC File No. 333-130815))                             |
|   |   |                                                                                                                                                                                                                                                                                   |
| 10.13  |   | Energy Management Agreement with U.S. Energy  Services, Inc. (incorporated herein by reference to Exhibit 10.13 to  Pre-Effective Amendment No. 1 to the Company’s Registration Statement on Form  SB-2 filed March 27, 2006 (SEC File No. 333-130815))                           |
|   |   |                                                                                                                                                                                                                                                                                   |
| 10.14  |   | Agency Authorization Agreement with U.S. Energy  Services, Inc. (incorporated herein by reference to Exhibit 10.14 to  Pre-Effective Amendment No. 1 to the Company’s Registration Statement on Form  SB-2 filed March 27, 2006 (SEC File No. 333-130815))                        |
|   |   |                                                                                                                                                                                                                                                                                   |
| 10.15  |   | [Intentionally Omitted]                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                   |
| 10.16  |   | [Intentionally Omitted]                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                   |
| 10.17  |   | Consulting Agreement with Thomas D. Williamson, DBA  Transportation Consultants Co. (incorporated herein by reference to Exhibit  10.17 to Pre-Effective Amendment No. 3 to the Company’s Registration  Statement on Form SB-2 filed June 5, 2006 (SEC File No. 333-130815))      |
|   |   |                                                                                                                                                                                                                                                                                   |
| 10.18  |   | Design-Build Agreement with Fagen, Inc.  (incorporated herein by reference to Exhibit 10.18 to Post-Effective  Amendment No. 1 to the Company’s Registration Statement on Form SB-2 filed  October 24, 2006 (SEC File No. 333-130815))                                            |
|   |   |                                                                                                                                                                                                                                                                                   |
| 10.19  |   | Engineering Services Agreement with Fagen  Engineering, LLC (incorporated herein by reference to Exhibit 10.19 to  Post-Effective Amendment No. 1 to the Company’s Registration Statement on  Form SB-2 filed October 24, 2006 (SEC File No. 333-130815))                         |
|   |   |                                                                                                                                                                                                                                                                                   |
| 10.20  |   | License Agreement with ICM, Inc. (incorporated  herein by reference to Exhibit 10.20 to Post-Effective Amendment No. 1 to the  Company’s Registration Statement on Form SB-2 filed October 24, 2006 (SEC  File No. 333-130815))                                                   |
|   |   |                                                                                                                                                                                                                                                                                   |
| 10.21  |   | Investment Terms Agreement with Virgin Group  Holdings Limited and Bioverda Limited (incorporated herein by reference to  Exhibit 10.21 to Post-Effective Amendment No. 1 to the Company’s Registration  Statement on Form SB-2 filed October 24, 2006 (SEC File No. 333-130815)) |
|   |   |                                                                                                                                                                                                                                                                                   |
| 10.22  |   | Service Agreement with Trunkline Gas Company, LLC  (incorporated herein by reference to Exhibit 10.7.1 to Post-Effective  Amendment No. 22 to the Company’s Registration Statement on Form SB-2 filed  October 24, 2006 (SEC File No. 333-130815))                                |
|   |   |                                                                                                                                                                                                                                                                                   |
| 10.23  |   | Commitment Letter with CoBank, ACB and Farm Credit  Services of Mid-America (incorporated herein by reference to Exhibit 10.23 to  Post-Effective Amendment No. 4 to the Company’s Registration Statement on  Form SB-2 filed December 14, 2006 (SEC File No. 333-130815))        |
|   |   |                                                                                                                                                                                                                                                                                   |
| 10.24  |   | Corn Purchasing Agreement with Obion Grain Co., Inc.  (incorporated herein by reference to Exhibit 10.24 to Post-Effective  Amendment No. 5 to the Company’s Registration Statement on Form SB-2 filed  December 29, 2006 (SEC File No. 333-130815))                              |
|   |   |                                                                                                                                                                                                                                                                                   |
| 10.25  |   | Site Preparation Work Contract with Harold Coffey  Construction, Inc. (incorporated herein by reference to Exhibit 10.25 to  Post-Effective Amendment No. 5 to the Company’s Registration Statement on  Form SB-2 filed December 29, 2006 (SEC File No. 333-130815))              |
|   |   |                                                                                                                                                                                                                                                                                   |

 

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| 31     |   | Certification pursuant to Rule 15d-14(a) under the  Exchange Act                           |
|--------|--------|--------------------------------------------------------------------------------------------|
|   |   |                                                                                       |
| 32     |   | Certification pursuant to Rule 15d-14(b) under the  Exchange Act and 18 U.S.C. § 1350 |
|   |   |                                                                                       |

 

**Item 14. Principal Accountant Fees and Services.**

*Audit Fees*. Theaudit fees billed for our fiscal years ended December 31, 2006 and 2005 were$101,600 and $69,500, respectively. These fees covered professional services rendered by our principalaccountant for the audit of our annual financial statements and review offinancial statements included in our Form 10-QSB and services that are normallyprovided by the accountant in connection with statutory and regulatory filingsor engagements for those fiscal years, including our Registration Statement onForm SB-2 (Registration No. 333-130815) and both pre-effective andpost-effective amendments thereto.

Prior to engagement ofthe principal accountant to perform audit services for us, the engagement wasapproved by our Board of Governors, which was acting as our audit committee atthe time.

*Audit-Related Fees, Tax Fees, andAll Other Fees*. There were no audit-related fees, tax fees,or other fees billed for these periods for products or services provided by ourprincipal accountant.

 

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**SIGNATURES**

In accordance withSection 13 or 15(d) of the Exchange Act, the registrant caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.
|          |     | ETHANOL GRAIN PROCESSORS,  LLC |
|----------|----------|--------------------------------|
|     |     |                           |   |   |
|     |     |                           |   |   |
|     |     | By:                            |   | /s/ James K. Patterson |
|     |     |                           |   | James K. Patterson |
|     |     |                           |   | Chief Executive Officer and Chief Financial Officer |
| * * | * * | * *                       |   | *(Principal Executive, Financial and Accounting  Officer)* |

 

Date: April 2,2007

In accordance with theExchange Act, this report has been signed below by the following persons onbehalf of the registrant and in the capacities and on the dates indicated.
| Name                        | ** ** | **Title**                                                   | ** ** | **Date**      |
|-----------------------------|------------|-------------------------------------------------------------|------------|---------------|
|                        |       |                                                        |       |          |
| /s/ John Mullins            |       | Governor, Chairman                                          |       | April 2, 2007 |
| John Mullins                |       |                                                        |       |          |
|                        |       |                                                        |       |          |
| /s/ James K. Patterson      |       | Governor, Chief Executive Officer, Chief Financial  Officer |       | April 2, 2007 |
| James K. Patterson          |       |                                                        |       |          |
|                        |       |                                                        |       |          |
|                        |       | Governor, Vice Chairman                                     |       |          |
| Mike Willis                 |       |                                                        |       |          |
|                        |       |                                                        |       |          |
| /s/ Dave Geary              |       | Governor, Treasurer                                         |       | April 2, 2007 |
| Dave Geary                  |       |                                                        |       |          |
|                        |       |                                                        |       |          |
| /s/ James L. Byford         |       | Governor, Secretary                                         |       | April 2, 2007 |
| James L. Byford, Ph.D.      |       |                                                        |       |          |
|                        |       |                                                        |       |          |
|                        |       | Governor                                                    |       |          |
| Michael King                |       |                                                        |       |          |
|                        |       |                                                        |       |          |
| /s/ William H. Latimer, III |       | Governor                                                    |       | April 2, 2007 |
| William H. Latimer, III     |       |                                                        |       |          |
|                        |       |                                                        |       |          |
| /s/ Michael D. Miller       |       | Governor                                                    |       | April 2, 2007 |
| Michael D. Miller           |       |                                                        |       |          |
|                        |       |                                                        |       |          |
|                        |       | Governor                                                    |       |          |
| Michael Odai                |       |                                                        |       |          |
|                        |       |                                                        |       |          |
|                        |       | Governor                                                    |       |          |
| Alain Treuer                |       |                                                        |       |          |
|                        |       |                                                        |       |          |
| /s/ Tom W. Wade, Jr.        |       | Governor                                                    |       | April 2, 2007 |
| Tom W. Wade, Jr.            |       |                                                        |       |          |

 

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