UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





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


For the
fiscal year ended September 30, 2008





OR





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


For the
transition period from __________ to ______________





Commission
File Number: 000-51764


____________________




LINCOLNWAY
ENERGY, LLC


(Exact
name of registrant as specified in its charter)


____________________





Iowa
              
              20-1118105(State
      or other jurisdiction of
              
              (IRS
      Employerincorporation
      or organization)
              
              Identification
      No.)





59511
      W. Lincoln Highway, Nevada, Iowa
              
              50201(Address
      of principal executive offices)
              
              (Zip
      Code)




Registrant's
telephone number, including area code: (515) 232-1010
 
 Securities
registered pursuant to Section 12(b) of the Act:  None
  Securities
registered pursuant to Section 12(g) of the Act:  Limited Liability Company
Units




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yeso  No x








Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o  No x





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





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. x





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





Large accelerated filer
                  o
                  
                  Accelerated filer
                  oNon-accelerated filer
                  x
                  
                  Smaller reporting company
                  o





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




The
aggregate market value of the units held by non-affiliates of the registrant was
$53,875,038 as of March 31, 2008. The units are not listed on an exchange or
otherwise publicly traded.  The value of the units for this purpose
has been based upon the $1,354 book value per-unit as of March 31,
2008.  In determining this value, the registrant has assumed that all
of its directors and its president and its chief financial officer are
affiliates, but this assumption shall not apply to or be conclusive for any
other purpose.




The
number of units outstanding as of November 30, 2008 was 42,049.





DOCUMENTS
INCORPORATED BY REFERENCE:  Portions of the registrant's definitive
proxy statement to be filed with the Securities and Exchange Commission with
respect to the 2009 annual meeting of the members of the registrant are
incorporated by reference into Item 11 of Part III of this Form
10-K.







LINCOLNWAY
ENERGY, LLC


FORM
10-K


For
the Fiscal Year Ended September 30, 2008





INDEX





Part
      I.Item
      1.
                    
                    Business.
                    1Item
      1A.
                    
                    Risk
      Factors.
                    12Item
      1B.
                    
                    Unresolved
      Staff Comments.
                    32Item
      2.
                    
                    Properties.
                    32Item
      3.
                    
                    Legal
      Proceedings.
                    33Item
      4.
                    
                    Submission
      of Matters to a Vote of Security Holders.
                    34Part
      II.Item
      5.
                    
                    Market
      for Registrant's Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.
                    35Item
      6.
                    
                    Selected
      Financial Data.
                    39Item
      7.
                    
                    Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations.
                    40Item
      7A.
                    
                    Quantitative
      and Qualitative Disclosures About Market Risk.
                    57Item
      8.
                    
                    Financial
      Statements and Supplementary Data.
                    60Item
      9.
                    
                    Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure.
                    77Item
      9A(T).
                    
                    Controls
      and Procedures.
                    77Item
      9B.
                    
                    Other
      Information.
                    79Part
      III.Item
      10.
                    
                    Directors,
      Executive Officers and Corporate Governance.
                    79Item
      11.
                    
                    Executive
      Compensation.
                    85Item
      12.
                    
                    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.
                    85Item
      13.
                    
                    Certain
      Relationships and Related Transactions, and Director
      Independence.
                    87Item
      14.
                    
                    Principal
      Accountant  Fees and Services.
                    88Part
      IV.Item
      15.
                    
                    Exhibits
      and Financial Statement Schedules.
                    89SIGNATURESAmendment
      to Ethanol Fuel Marketing AgreementCode
      of EthicsCertification
      of President and CEOCertification
      of Chief Financial OfficerSection
      1350 Certification of President and CEOSection
      1350 Certification of Chief Financial Officer





CAUTIONARY STATEMENT ON
FORWARD LOOKING STATEMENTS


AND INDUSTRY AND MARKET
DATA





Various
discussions and statements in this annual report are or contain forward looking
statements that express Lincolnway Energy's current beliefs, forecasts,
projections and predictions about future events.  All statements other
than statements of historical fact are forward looking statements, and include
statements with respect to financial results and condition; anticipated trends
in business, revenues, net income, net profits or net losses; projections
concerning operations, capital needs and cash flow; investment, business,
growth, expansion, acquisition and divestiture opportunities and strategies;
management's plans or intentions for the future; competitive position or
circumstances; and other forecasts, projections and statements of
expectation.  Words such as "expects," "anticipates," "estimates,"
"plans," "may," "will," "contemplates," "forecasts," "strategy," "future,"
"potential," "predicts," "projects," "prospects," "possible," "continue,"
"hopes," "intends," "believes," "seeks," "should," "could," "thinks,"
"objectives" and other similar expressions or variations of those words or those
types of words help identify forward looking statements.





Forward
looking statements involve and are subject to various material risks,
uncertainties and assumptions.  Forward looking statements are
necessarily subjective and are made based on numerous and varied estimates,
projections, views, beliefs, strategies and assumptions made or existing at the
time of such statements and are not guarantees of future results or
performance.  Forecasts and projections are also in all events likely
to be inaccurate, at least to some degree, and especially over long periods of
time, and in particular in a relatively new and rapidly developing industry such
as the ethanol industry.  Forecasts and projections are also currently
difficult to make with any degree of reliability or certainty given the severe
credit, market and other economic circumstances in existence at the time of the
preparation of this annual report.  Lincolnway Energy disclaims any
obligation to update or revise any forward looking statements based on the
occurrence of future events, the receipt of new information, or
otherwise.  Lincolnway Energy
cannot guarantee Lincolnway Energy's future results, performance or business
conditions, and strong or undue reliance must not be placed on any forward
looking statements.





Actual
future performance, outcomes and results may differ materially from those
suggested by or expressed in forward looking statements as a result of numerous
and varied factors, risks and uncertainties, some that are known and some that
are not, and many of which are beyond the control of Lincolnway Energy and
Lincolnway Energy's management.  It is not possible to predict or
identify all of those factors, risks and uncertainties, but they include
inaccurate assumptions or predictions by management, the accuracy and
completeness of the publicly available information upon which part of Lincolnway
Energy's business strategy is based and all of the various factors, risks and
uncertainties discussed in this annual report, and in particular in Items 1, 1A,
7 and 7A of this annual report.


(i)


Lincolnway
Energy may have obtained industry, market, competitive position and other data
used in this annual report or in Lincolnway Energy's general business plan from
Lincolnway Energy's own research or internal surveys, studies conducted by other
persons and/or trade or industry associations or general publications and other
publicly available information.  Lincolnway Energy attempts to utilize
third party sources of information which Lincolnway Energy believes to be
materially complete, accurate, balanced and reliable, but there is no assurance
of the accuracy, completeness or reliability of any third party
information.  For example, a trade or industry association for the
ethanol industry may present information in a manner that is more favorable to
the ethanol industry than would be presented by an independent
source.  Industry publications and surveys and other publicly
available information also generally state that they have obtained information
from sources believed to be reliable, but do not guarantee the accuracy and
completeness of any information.


(ii)





PART
I





Item
1.               Business.




General
Overview





Lincolnway
Energy, LLC is an Iowa limited liability company that operates a dry mill, coal
fired ethanol plant located in Story County, Iowa, near Nevada,
Iowa.  Lincolnway Energy has been processing corn into fuel grade
ethanol and distiller's grains at the ethanol plant since May 22,
2006.  The first full month of production at full capacity was July of
2006.





The
ethanol plant has a nameplate production capacity of 50,000,000 gallons of
ethanol per year, which, at that capacity, would also generate approximately
136,000 tons of distiller's grains per year.





Lincolnway
Energy began extracting corn oil from the syrup which is generated in the
production of ethanol in April, 2008.  Lincolnway Energy entered into
an agreement with FEC Solutions, L.L.C. on October 13, 2008 under which FEC
Solutions, L.L.C. purchases all of Lincolnway Energy's corn oil for resale by
FEC Solutions, L.L.C.  Lincolnway Energy estimates that it will
produce approximately 3000 tons of corn oil per year at the plant.





Lincolnway
Energy currently does not, and has no plans to, capture or market the carbon
dioxide which is produced as part of the ethanol production
process.





Financial
Information





Financial
statements for Lincolnway Energy are included in Item 8 of this annual
report.  The financial statements include information regarding
Lincolnway Energy's revenues, profits or losses and total
assets.  Item 6 of this annual report includes summary selected
financial data.





Lincolnway
Energy did not derive any revenue during the fiscal year ended September 30,
2008 from any customers located in any foreign country, and Lincolnway Energy
did not have any assets located in a foreign country during that fiscal
year.





Principal
Products and Their Markets





Lincolnway
Energy's principal products are fuel grade ethanol and distiller's
grains.


1


Ethanol





Lincolnway
Energy produces ethanol from corn.  The ethanol produced by Lincolnway
Energy is fuel grade ethanol, which can be used as a blend component/fuel
additive in gasoline.  Ethanol increases the octane rating of gasoline
and reduces vehicle emissions, primarily carbon monoxide.  The use of
ethanol is currently heavily supported by various governmental incentives and
programs.  The loss of one or more of those incentives or programs
could be highly detrimental to the ethanol industry.





All of
Lincolnway Energy's ethanol production is sold to Renewable Products Marketing
Group.  Lincolnway Energy's ethanol is pooled with the ethanol of
other ethanol producers whose ethanol is marketed by Renewable Products
Marketing Group.  Lincolnway Energy pays Renewable Products Marketing
Group a pooling fee of $.01 per gallon of ethanol, and Renewable Products
Marketing Group pays Lincolnway Energy a netback price per gallon that is based
upon the difference between the pooled average delivered ethanol selling price
and the pooled average distribution expense.  The averages are
calculated based upon each pool participant's selling price and expense averaged
in direct proportion to the volume of ethanol supplied by each pool
participant.  Lincolnway Energy's agreement with Renewable Products
Marketing Group had an initial term through June 2007, but Lincolnway Energy and
Renewable Products Marketing Group are continuing to operate under the
agreement.  Lincolnway Energy is dependent upon its agreement with
Renewable Products Marketing Group for the marketing and sale of Lincolnway
Energy's ethanol, and Lincolnway Energy's loss of the agreement could have
material adverse effects on Lincolnway Energy.





The
primary purchasers of ethanol are refiners, blenders or wholesale marketers of
gasoline.  Lincolnway Energy anticipates that its ethanol production
will be sold in coastal markets given the availability of rail service at
Lincolnway Energy's ethanol plant and local markets that will be shipped by
truck, but Renewable Products Marketing Group controls the marketing of all of
Lincolnway Energy's ethanol output.





Lincolnway
Energy anticipates that its primary means of shipping and distributing ethanol
will be by rail, but Lincolnway Energy is also able to ship and distribute
ethanol by truck.





The
nameplate production capacity of Lincolnway Energy's ethanol plant is 50,000,000
gallons of ethanol per year, or approximately 4,167,000 gallons per
month.  The ethanol plant exceeded the nameplate production capacity
for the fiscal year ended September 30, 2008, however, by approximately 8%, with
54,082,255 gallons of ethanol produced during that period, and with an average
monthly production of 4,506,855 gallons.





Lincolnway
Energy anticipates that the ethanol plant will produce ethanol at a similar rate
during the fiscal year ending September 30, 2009, and that Lincolnway Energy
will process approximately 19,800,000 bushels of corn into approximately
55,000,000 gallons of ethanol during the fiscal year ending September 30,
2009.





2


Lincolnway
Energy's revenues from the sale of ethanol during the fiscal years ended
September 30, 2006, September 30, 2007 and September 30, 2008 accounted for
approximately 90%, 87% and 83%, respectively, of Lincolnway Energy's total
revenues during those periods.  Lincolnway Energy estimates that its
revenues from the sale of ethanol for the fiscal year ending September 30, 2009
will account for approximately 83% of Lincolnway Energy's total revenues for
that fiscal year.





Distiller's
Grains





Lincolnway
Energy's other primary product is distiller's grains, which is a byproduct of
the ethanol production process.  Distiller's grains are, in general,
the solids which are left after the processing and fermentation of corn into
ethanol.  Distiller's grains are a high protein feed supplement that
are marketed primarily in the dairy and beef industries.  Distiller's
grains can also be used in poultry, swine and other livestock feed.





A dry
mill ethanol process such as that utilized by Lincolnway Energy can produce wet
distiller's grains and dried distiller's grains.  Wet distiller's
grain contains approximately 70% moisture, and has a shelf life of only
approximately three days.  Wet distiller's grains can therefore only
be sold to users located within relatively close proximity to the ethanol
plant.  Dried distiller's grain is wet distiller's grain that has been
dried to 10% to 12% moisture.  Dried distiller's grain has an extended
shelf life and may be sold and shipped to any market.





Lincolnway
Energy's output of distiller's grains was sold to Commodity Specialists Company
until October 1, 2007.  Lincolnway Energy paid Commodity Specialists
Company a fee of 2% of the FOB plant price of the dried distiller's grains and
4% of the FOB plant price for wet distiller's grains that were sold by Commodity
Specialists Company.





Lincolnway
Energy's output of distiller's grains is now sold to Hawkeye Gold, LLC under a
Distiller's Grains Marketing Agreement that became effective on October 1,
2007.  Lincolnway Energy pays Hawkeye Gold, LLC a marketing fee for
dried distiller's grains equal to the greater of 2% of the FOB plant price for
the dried distiller's grains or a per-ton fee of $1.30 for the dried distiller's
grains.  The marketing fee for wet distiller's grains is the greater
of 3% of the FOB plant price for the wet distiller's grains or a per-ton fee of
$1.00 for the wet distiller's grains.  The Distiller's Grains
Marketing Agreement can be terminated by Lincolnway Energy or Hawkeye Gold, LLC
on 90 days written notice.  Lincolnway Energy is dependent upon its
agreement with Hawkeye Gold, LLC for the marketing and sale of Lincolnway
Energy's distiller's grains, and Lincolnway Energy's loss of the agreement could
have material adverse effects on Lincolnway Energy.





The
primary purchasers of distiller's grains are individuals or companies involved
in dairy, beef or other livestock production.  Lincolnway Energy
anticipates that approximately 7% of its distiller's grains will be locally
marketed to nearby livestock producers, but Hawkeye Gold, LLC controls the
marketing of all of Lincolnway Energy's distiller's grains.





Lincolnway
Energy anticipates that its means of shipping and distributing distiller's grain
will be by rail or by truck.  Local livestock producers are also able
to pick up distiller's grains directly from the ethanol plant.


3





Lincolnway
Energy produced 163,928 tons of distiller's grains during the fiscal year ended
September 30, 2008, or approximately 13,661 tons of distiller's grains per
month.  The composition of the distiller's grains was approximately
20% wet distiller's grains and 80% dried distiller's grains.





Lincolnway
Energy anticipates processing approximately 130,000 tons of distiller's grains
during the fiscal year ending September 30, 2009.





Lincolnway
Energy's revenues from the sale of distiller's grains during the fiscal years
ended September 30, 2006, September 30, 2007 and September 30, 2008 accounted
for approximately 10%, 13% and 17%, respectively, of Lincolnway Energy’s total
revenues during those periods.  Lincolnway Energy estimates that its
revenues from the sale of distiller's grains for the fiscal year ending
September 30, 2009 will account for approximately 16% of Lincolnway Energy's
total revenues for that fiscal year.





Although
distiller's grains is a primary product of Lincolnway Energy, Lincolnway Energy
does not believe that distiller's grains should be viewed as a significant or
material source of revenue for Lincolnway Energy over the long term because of
the potential for the overproduction and supply of distiller's grains, the
volatility of feed prices and the availability of alternative feed
sources.





Other
Byproducts





There are
other potential byproducts from the production of ethanol at a dry mill plant,
primarily corn oil and carbon dioxide.





Corn
Oil





Lincolnway
Energy purchased a corn oil extraction system from FEC Solutions, L.L.C., which
was put into operation in April, 2008.  The system extracts corn oil
from the syrup which is generated in the production of
ethanol.  Lincolnway Energy entered into an agreement with FEC
Solutions, L.L.C. on October 13, 2008 under which FEC Solutions, L.L.C.
purchases all of Lincolnway Energy's output of corn oil for resale by FEC
Solutions, L.L.C.  Lincolnway Energy pays FEC Solutions, L.L.C. a
marketing and technical assistance fee of 5% of the FOB sales price of the corn
oil.  The agreement has an initial term of 36 months commencing from
October 13, 2008, and will renew for successive 36 month terms unless Lincolnway
Energy or FEC Solutions, L.L.C. elect to terminate the agreement at the end of
the then current 36 month term.





Lincolnway
Energy anticipates that FEC Solutions, L.L.C. will sell most of the corn oil in
the biodiesel industry, but FEC Solutions, L.L.C. controls the marketing of all
of Lincolnway Energy's output of corn oil.





Lincolnway
Energy estimates that it will produce approximately 3000 tons of corn oil per
year at the plant.  Lincolnway Energy does not, however, anticipate
that corn oil will be a principal or material product of Lincolnway Energy
because Lincolnway Energy estimates that corn oil sales will generate
approximately from $2,360,000 to $1,180,000 per fiscal year, which would be
approximately only 1% to .5% of Lincolnway Energy's total revenues for the
fiscal year ended September 30, 2008.


4





Carbon
Dioxide





Lincolnway
Energy currently does not attempt to capture or market the carbon dioxide which
is produced as part of the ethanol production process, and Lincolnway Energy
currently has no plans to do so.  Lincolnway Energy estimates that it
will produce approximately 150,000 tons of carbon dioxide per year, assuming
full production.





Sources
and Availability of Raw Materials





Corn and
coal are the primary raw materials that are utilized by Lincolnway Energy in the
production of ethanol.  Corn is used to produce the ethanol, and coal
is Lincolnway Energy's primary energy source for its ethanol plant.





Corn





Lincolnway
Energy estimates that it will utilize approximately 19,800,000 bushels of corn
per year at its ethanol plant, or approximately 1,650,000 bushels per month,
assuming production at a capacity of 55,000,000 gallons of ethanol per
year.





Lincolnway
Energy's ethanol plant is located in Story County, Iowa, near Nevada,
Iowa.  Although Lincolnway Energy anticipates purchasing corn from
various sources and areas, Lincolnway Energy believes that Story County will
produce a sufficient supply of corn, assuming normal growing conditions, to
generate the necessary annual requirements of corn for the ethanol
plant.  There is not, however, any assurance that Lincolnway Energy
will be able to purchase sufficient corn supplies from Story County or regarding
the supply or availability of corn given the numerous factors which affect the
supply and price for corn.





Lincolnway
Energy has an agreement with Heart of Iowa Cooperative pursuant to which
Lincolnway Energy can obtain up to 50% of its corn needs from Heart of Iowa
Cooperative's facility located adjacent to Lincolnway Energy's ethanol plant,
with the remaining 50% to be obtained from other Heart of Iowa Cooperative
facilities or other licensed grain dealers. The 50% limitation for Heart of Iowa
Cooperative's Nevada, Iowa location was imposed by the Iowa Department of
Natural Resources, as part of the air permitting process.  Heart of
Iowa Cooperative is a licensed grain dealer and has locations throughout Story
County, Iowa.  Heart of Iowa Cooperative is also a member of
Lincolnway Energy.





Lincolnway
Energy's agreement with Heart of Iowa Cooperative will terminate by its terms on
May 22, 2026.  The agreement may also be terminated, however, at any
time upon six months notice and the payment of a termination fee by the
terminating party.  The termination fee starts at $2,000,000, and is
reduced by $50,000 for each completed year of the agreement.  The term
of the agreement commenced on May 22, 2006.





Lincolnway
Energy purchased approximately 19,500,000 bushels of corn for $97,996,000 from
Heart of Iowa Cooperative during the fiscal year ended September 30,
2008.


5





Corn is
delivered to Lincolnway Energy's ethanol plant by rail and by
truck.  Lincolnway Energy has corn storage capabilities for
approximately 10 days of continuous ethanol production.





Coal
and Lime





Lincolnway
Energy's ethanol plant is a coal fired plant.  Lincolnway Energy's
ethanol plant will utilize approximately 300 tons of coal and 7 tons of lime per
day, assuming production at a capacity of 55,000,000 gallons of ethanol per
year.





Lincolnway
Energy purchased approximately 98,000 tons of coal for $5.7 million and 2,500
tons of lime for $67,689 during the fiscal year ended September 30,
2008.





Lincolnway
Energy currently obtains all of its coal pursuant to an agreement between
Lincolnway Energy and Williams Bulk Transfer.  The agreement allows
Lincolnway Energy to purchase up to 220,000 tons of coal per year at a per ton
price equal to the sum of the coal price and the transportation price, as those
terms are defined in the agreement.  The coal price and the
transportation price are subject to adjustment in various circumstances and
based on various factors.  For example, the transportation price is
subject to quarterly adjustment, upward or downward (but never below the initial
transportation price stated in the agreement), by 100% of the quarterly
percentage change in the All Inclusive Index--Less Fuel, and to a monthly
adjustment, upward but not downward, through the addition of a fuel surcharge
determined by the amount by which the average Retail On-Highway Diesel Fuel
Price of the U.S. exceeds a specified amount per gallon.  The
transportation price will also be increased on the scheduled adjustment dates
set out in the agreement.  The coal price adjustments are based upon,
in general, any increased costs as a result of any changes in laws, changes in
inflation as determined by designated indices, and the quality of the
coal.  Lincolnway Energy is required to pay a penalty of $16.00 per
ton multiplied by the difference of the minimum requirement and actual quantity
purchased, if Lincolnway Energy fails to purchase a minimum of 80,000 tons of
coal in any calendar year.  The $16.00 per ton penalty amount is
subject to adjustment as provided in the agreement.  Lincolnway
Energy's agreement with Williams Bulk Transfer will expire by its terms on
January 1, 2013.





Lincolnway
Energy is dependent upon its agreement with Williams Bulk Transfer for the
supply of all of Lincolnway Energy's coal needs.  Lincolnway Energy's
loss of its contract with Williams Bulk Transfer, or Lincolnway Energy's
inability to negotiate a new contract with Williams Bulk Transfer or another
supplier on favorable terms before the expiration or termination of the
agreement, would have material adverse effects on Lincolnway
Energy.





All of
the coal utilized by Lincolnway Energy is delivered by
truck.  Lincolnway Energy has coal storage for approximately 6 days of
continuous ethanol production.





Other
Raw Materials





Lincolnway
Energy's ethanol plant also requires a significant amount of electricity and
significant supplies of water.


6





Lincolnway
Energy's electricity needs are currently met by Alliant
Energy.  Lincolnway Energy pays the general service rates for its
electricity.





Lincolnway
Energy utilizes approximately two gallons of water to produce a gallon of
ethanol, which results in the use of approximately 325,000 gallons of water per
day.  Lincolnway Energy discharges 275,000 gallons of water per day
that has been treated by a reverse osmosis system. Lincolnway Energy's water
needs are currently met by the City of Nevada.





Rail
Access





Rail
access is critical to the operation of Lincolnway Energy's ethanol plant because
rail is used for the shipment and distribution of ethanol and distiller's
grains.  Lincolnway Energy utilizes rail track owned by Lincolnway
Energy, as well as tracks owned by the Union Pacific and Heart of Iowa
Cooperative.  Lincolnway Energy has agreements with the Union Pacific
and Heart of Iowa Cooperative regarding the use of their tracks.





Lincolnway
Energy is acquiring approximately 25 acres of real estate which is to the west
of Lincolnway Energy's existing real estate and which is adjacent to the Union
Pacific railroad tracks near Nevada, Iowa.  The real estate is being
acquired primarily for potential future use in the construction of additional
railroad spur tracks.  Lincolnway Energy has a Memorandum of
Understanding with the Union Pacific Railroad Company and is also currently
working with a consultant to determine the cost and feasibility of constructing
additional railroad spur tracks.  Lincolnway Energy has not, however,
made any determination as to whether, and if so, when, Lincolnway Energy will
pursue the construction of any additional railroad spur tracks.  The
current general economic and ethanol industry circumstances may make
construction of any additional railroad spur tracks difficult.  The
closing of the land purchase is scheduled for late December 2008.





Expansion
Plans





Lincolnway
Energy currently has no definite plans to expand its ethanol plant or to
construct or acquire any additional ethanol plants.  Lincolnway Energy
will, however, consider those matters as part of its ongoing operations and
analysis of its business and the ethanol industry in
general.  Lincolnway Energy believes there will be consolidations
within the ethanol industry through the sale and purchase of ethanol plants
during 2009 and 2010.





Lincolnway
Energy will also continue to consider and evaluate any other opportunities that
may arise with respect to its ethanol plant or the ethanol industry, including
with respect to possible ethanol marketing arrangements or
ventures.





Research
and Development Activities





Lincolnway
Energy is not currently engaged in any significant research or development
activities.


7





Competition





The
ethanol industry and markets remain highly competitive even though new
construction and expansion of ethanol plants slowed during 2007 and 2008, and in
particular 2008, due to unfavorable credit and market
conditions.  According to the Renewable Fuels Association, ethanol
production in the U.S. has increased by more than 300% since 2000, and the U.S.
ethanol industry produced a record of approximately 7.8 billion gallons of
ethanol from 139 plants located in 21 states in 2007, which exceeded the 2006
U.S. ethanol production by 2 billion gallons.  The U.S. became the
world's largest producer of ethanol in 2006, surpassing Brazil.  World
production also reached an all time high in 2007, according to the Renewable
Fuels Association. The countries producing ethanol include Brazil, Canada,
China, India, Thailand, Columbia, Australia, Turkey, Pakistan, Argentina and
various countries in the European Union and Central America.  Many of
those countries have also enacted ethanol blending requirements.





As of
January 2008, the Renewable Fuels Association was estimating that 4 billion
gallons of ethanol production capacity would come on line during 2008 from 68
plants that were then under construction or expanding.





The
current general economic and ethanol industry circumstances have, however,
become difficult and adverse, with various ethanol plants having been closed and
some openings or construction or expansions of plants having been cancelled or
postponed.  The projections for the growth of the ethanol industry
that were made in 2007 and 2008 may, therefore, no longer be
accurate.





Given
that the Energy Independence and Security Act of 2007 increased the renewable
fuels standard to 36 billion gallons of annual renewable fuel use by 2022 (up
from the prior mandate of 7.5 billion gallons of annual use by 2012), it is
probable that there will, however, continue to be growth in the ethanol
industry, both domestically and internationally, over the longer
term.





Lincolnway
Energy's competitors in the U.S. include not only regional farmer-owned
entities, but also the major oil companies and other large companies such as
Archer Daniels Midland, Cargill, Inc., VeraSun Energy Corporation, Aventine
Renewable Energy, Inc., Hawkeye Renewables, Poet and  Abengoa
Bioenergy Corp.





The
competition in the ethanol industry has increased during 2007 and 2008, with
declining ethanol prices, excess supplies of ethanol and, until recently, rising
corn costs.





The
ethanol industry will also continue to face increasing competition from
international suppliers of ethanol.  International suppliers produce
ethanol primarily from sugar cane and have cost structures that may be
substantially lower than Lincolnway Energy's and other U.S. based ethanol
producers.  Although there is currently a $.54 per gallon tariff on
foreign produced ethanol, ethanol imports equivalent to up to 7% of total U.S.
production in any given year from various countries were exempted from the
tariff under the Caribbean Basin Initiative to spur economic development in
Central America and the Caribbean.  Foreign suppliers of ethanol may
significantly increase their imports into the U.S.  Also, Canada may
import ethanol duty free, and Mexico may import ethanol under a duty rate of
$.10 per gallon.  Some of the larger competitors in the ethanol
industry may construct or establish ethanol plants in Central America or the
Caribbean.


8





Smaller
competitors also pose a threat.  Farmer-owned cooperatives and
independent companies consisting of groups of individual farmers and investors
have been able to compete successfully in the ethanol industry; although
Lincolnway Energy believes that smaller ethanol plants will have increasing
difficulty in competing with larger plants if the current market conditions
continue.  These smaller competitors operate smaller facilities which
do not affect the local price of corn grown in the proximity to the facility as
much as larger facilities do, and some of the smaller competitors are
farmer-owned and the farmer-owners either commit, or are incented by their
ownership in the facility, to sell corn to the facility.





The
continuing increase in domestic or foreign competition could cause Lincolnway
Energy to have to reduce its prices and take other steps to compete effectively,
which could adversely affect Lincolnway Energy's results of operations and
financial position.





Many
competitors will have greater production capacity, greater experience, more
access to information and/or greater capital or other financial resources, any
of which will make it difficult for Lincolnway Energy to compete with those
competitors.  For example, greater ethanol production may allow a
competitor to market its ethanol or distiller's grains at lower prices than
Lincolnway Energy.  Lincolnway Energy anticipates that there will be
acquisitions and consolidations in the ethanol industry in 2009 and 2010, and
that those acquisitions and consolidations will lead to additional competitors
with greater advantages over Lincolnway Energy.  A competitor may also
offer other products or services that are not offered by Lincolnway Energy,
which may give the competitor an additional advantage over Lincolnway
Energy.





An
ethanol plant utilizing corn to produce ethanol may also experience competition
in the form of other plants which produce ethanol from other
products.  For example, ethanol can be produced from corn stover, corn
fiber, wheat straw, barley straw, switchgrass, miscanthus, trees, woodwastes,
vegetative wastes and other wastes.  Range Fuels broke ground on the
first commercial scale cellulosic ethanol plant during 2007 in Soperton,
Georgia.  The plant will utilize leftover wood residue from timber
harvesting to make ethanol.  Abengoa Bioenergy, Alico, Inc., Blue Fire
Ethanol, Inc., Poet Bioenergy, Iogen and Range Fuels are each working with the
U.S. Department of Energy, including through grants, to commercialize cellulosic
ethanol technology.  The Energy Independence and Security Act of 2007
requires that 21 billion gallons of the new 36 billion gallon renewable fuels
standard must come from advanced biofuels, with that 16 billion gallons of that
amount required to come from cellulosic ethanol by 2022.  Research
will therefore continue regarding cellulosic ethanol, and it is likely that
processes will be developed in the near future which will make the production of
ethanol from these types of sources economical.  It is also possible
that one or more of these other sources may have greater advantages than corn,
which would adversely affect an ethanol plant that produces ethanol solely from
corn.  For example, a plant using one of those sources may be able to
produce ethanol on a more economical basis or on a more efficient or greater
scale.  The increased production of ethanol from other sources could
also adversely affect the price for ethanol generally.  Lincolnway
Energy's ethanol plant is designed to produce ethanol only from
corn.


9





Some
competitors operate their ethanol plant and produce ethanol using different
sources of energy than coal, or using various other sources of
energy.  The other sources of energy include natural gas and various
forms of waste type products, such as woodwaste, tires, construction waste and
manure.  Those competitors may have lower production and input costs
and/or higher operating efficiencies than Lincolnway Energy, which would allow
them to produce and market their ethanol at lower prices than Lincolnway
Energy.





Competition
from newly developed fuel additives would also reduce the use of ethanol and
Lincolnway Energy's profitability.  Although it is difficult to
predict if any new fuel additives will be developed, it likely will occur at
some point, and it could be in the near future.





Research
is also continually being conducted for alternatives to petroleum based fuel
products and for additional renewable fuel products.  For example,
research is ongoing regarding the use of hydrogen, electric or solar powered
vehicles and fuel cells.  A breakthrough or discovery in any research
could conceivably occur at any time, and could have the effect of greatly
reducing the use of ethanol or of even making the use of ethanol obsolete at
some point.  There will be increased incentives to develop
alternatives to petroleum based fuel products given the higher gasoline prices
that have occurred in 2008 and the continuing security and other concerns with
the Middle East and certain other major oil producing nations.





Ethanol
is a commodity and is priced on a very competitive basis.  Lincolnway
Energy believes that its ability to compete successfully in the ethanol industry
will depend upon its ability to price its ethanol competitively, which in turn
will depend on many factors, many of which are beyond the control of Lincolnway
Energy and its management.  As indicated above, one of those factors
is that Lincolnway Energy is subject to material and substantial competition,
including from competitors who will be able to produce or market significantly
higher volumes of ethanol and at lower prices.





Lincolnway
Energy believes that the principal competitive factors with respect to
distiller's grains are price, proximity to purchasers and product
quality.





Government
Oversight and Regulation





Lincolnway
Energy's business is subject to substantial governmental oversight and
regulation, including relating to the discharge of materials into the air, water
and ground; the generation, storage, handling, use, transportation and disposal
of hazardous materials; and the health and safety of Lincolnway Energy's
employees.





Lincolnway
Energy needs to maintain various permits to be able to maintain and continue its
operations.  The permits include water and air permits from the Iowa
Department of Natural Resources.





10


Lincolnway
Energy has obtained these permits, but on December 4, 2007, the Iowa
Environmental Protection Commission referred alleged environmental law
violations by Lincolnway Energy to the Iowa Attorney General's office for
enforcement action.  The referred allegations concern wastewater
releases relating to construction activities and exceedences of iron and total
suspended solid limits in Lincolnway Energy's NPDES wastewater discharge permit,
and air permitting, emissions limit exceedences, stack testing, monitoring and
reporting.  Lincolnway Energy will attempt to reach a negotiated
settlement of all allegations, and Lincolnway Energy has been in contact with
the Iowa Attorney General's office regarding the allegations.  No
timetable has, however, been set by the Iowa Attorney General's office for any
formal actions or steps regarding the allegations.  Lincolnway Energy
cannot predict the outcome, but it is likely that any settlement will include a
monetary penalty, although an amount cannot be predicted at this
time.  A settlement may also include repermitting regarding air
emissions and an injunction against future violations.





As part
of the process of attempting to negotiate a settlement of the allegations
regarding emissions limit exceedences and to otherwise comply with air emissions
requirements, Lincolnway Energy filed an application with the Iowa Department of
Natural Resources on August 28, 2008 for Lincolnway Energy to obtain a new air
permit under the 250 ton rules which were adopted in late
2007.  Lincolnway Energy believes that its current levels of emissions
would comply with the conditions of that air permit.  There is not,
however, any assurance that the air permit will be issued to Lincolnway
Energy.  Lincolnway Energy may also be subject to higher ongoing
compliance and operating costs under the new air
permit.    Also, even if Lincolnway Energy is issued the new
air permit, monetary penalties and other relief may still be imposed on
Lincolnway Energy for the emissions limit exceedences under its current air
permit which are the subject of the allegations.





Lincolnway
Energy installed equipment in July 2007 to attempt to address the exceedences of
iron and total suspended solid limits in Lincolnway Energy's NPDES wastewater
discharge permit that are part of the above referenced allegations of the Iowa
Environmental Protection Commission.  Lincolnway Energy's water test
results during 2008 have shown compliance with the requirements of its NPDES
permit regarding those matters, so Lincolnway Energy therefore believes the
equipment has addressed those allegations, at least going
forward.  Lincolnway Energy may, however, still face monetary
penalties and other relief could still be imposed on Lincolnway Energy based
upon any of the past violations which are part of the allegations.





Lincolnway
Energy is hopeful that it will be able to reach a settlement of all of the
allegations of the Iowa Environmental Protection Commission, but there is no
assurance that the allegations will be settled, and Lincolnway Energy cannot
predict at this time the outcome of any settlement or other proceedings that may
arise out of the allegations.  Lincolnway Energy was therefore unable
at the time of the preparation of this annual report to determine what effect
the proceedings of the Iowa Attorney General will have on Lincolnway
Energy.  The outcome (even if through settlement) could, however, have
material adverse effects on Lincolnway Energy's business and financial
condition.





The
principal risks associated with the substantial governmental oversight and
regulation of Lincolnway Energy and its business are discussed in Item 1A of
this annual report, at "Lincolnway Energy's Operations Are Subject To
Substantial and Extensive Governmental Laws and Regulations Which Restrict and
Increase the Cost of Lincolnway Energy's Business".


11





The
ethanol industry is also substantially supported by and dependent upon various
federal and state programs, including various subsidies, tax exemptions and
other forms of financial incentives.  Some of those programs and the
principal risks associated with the governmental support of the ethanol industry
are discussed in Item 1A of this annual report, under "Loss of Current
Governmental Support and Incentives for Ethanol Would Reduce the Use of Ethanol
and Materially and Adversely Affect Lincolnway Energy's Results of Operations
and Financial Position".





Employees





As of
December 15, 2008, Lincolnway Energy had 45 employees.





Item
1A.            Risk
Factors.





Any of
the following risks could significantly and adversely affect Lincolnway Energy's
prospects, business, results of operation and financial
condition.  The following risks are not the only risks Lincolnway
Energy is subject to or may face, and they are not intended to be set forth in
order of materiality or significance.





Risks
Relating to Lincolnway Energy and Its Business





The Economy And
The Ethanol Industry Are Currently Subject To Generally Unfavorable Market,
Credit, Profits And Other CircumstancesThe United States and
virtually all international economies are widely viewed as being in a recession
that may continue well into 2009, and perhaps longer.  The United
States and nearly all international economic circumstances include a critical
and severe lack of available loans and credit to nearly all types of industries,
significantly rising unemployment, falling profits or losses in many industries,
severe losses in the stock and other investment markets, individual and business
failures and bankruptcies, contemplated significant deficit spending and
"bailout" programs by governments, and falling business and consumer
confidence.





The
ethanol industry has been similarly affected.  For example, lenders
and the credit markets are generally unfavorable to the ethanol industry as of
late, and the lack of available credit has caused the proposed construction or
expansion of some ethanol plants to be cancelled or indefinitely
delayed.  The ethanol industry has also experienced decreasing
profits, and many ethanol plants have been experiencing losses, and may continue
to do so throughout 2009.  Some analysts are predicting that more
ethanol plants will be forced to seek bankruptcy protection in
2009.  VeraSun Energy Corp. and other ethanol companies have already
sought bankruptcy protection.  The prices of the publicly traded
ethanol companies have declined by anywhere from 85-95% of their highs, and some
are trading below $1.00.  The ethanol industry has also struggled with
extremely volatile corn prices, and record high corn prices during part of
2008.  The record high corn prices, coupled with declining ethanol
prices, has negatively impacted profits and, as noted, has caused some ethanol
companies to declare bankruptcy or to halt construction or expansion projects
and/or to delay the opening of recently completed ethanol plants.





Lincolnway
Energy is therefore operating in an uncertain and volatile economic and industry
environment.


12





Lincolnway Energy
Has A Limited Operating History.Lincolnway Energy was
organized in May, 2004, and its ethanol plant did not become operational until
May 22, 2006.  Lincolnway Energy therefore has a limited business,
operating and financial history.  Lincolnway Energy is in an expanding
and evolving industry where supply and demand and other industry and market
factors and occurrences can change materially in a short amount of
time.  The ethanol industry is also currently facing many difficult
market issues, as noted above.  Lincolnway Energy may therefore not
always be able to achieve its purposes or objectives.





Lincolnway
Energy's Managers And Officers Do Not Have Substantial Experience With An
Ethanol Plant Or In The Ethanol Industry.The board and the
officers of Lincolnway Energy do not have any significant or material experience
with an ethanol plant or the ethanol industry, other than through their
positions with Lincolnway Energy.  Lincolnway Energy has one ethanol
plant that did not commence operations until May 22, 2006.  The
managers and officers therefore do not have significant or material experience
in, or knowledge of, the operation of an ethanol plant or in or of the ethanol
industry, and in particular during difficult economic and market circumstances
such as those prevailing at the time of the preparation of this annual
report.





Lincolnway Energy
Is Heavily Dependent On A Management Team And Certain Suppliers And Service
Providers, But Could Lose Any Of Their Services At Any
Time.Lincolnway Energy is heavily dependent upon its core
management team of its president and chief executive officer, chief financial
officer, plant manager, commodities manager and controller, as well as on the
companies which provide coal and corn to Lincolnway Energy and the companies
which market Lincolnway Energy's ethanol and distiller's grains.  If
any of those management team members or companies terminate their services or
for any reason cease to provide services to Lincolnway Energy, Lincolnway
Energy's business and operations could be adversely affected in a sudden and
material way.  The services could be lost for reasons outside of
anyone's control, such as death or disability.  The marketing
companies may also be heavily dependent upon one or more key employees or other
relationships, and the loss of any of those employees or relationships by a
company could adversely affect the company's ability to continue to provide
timely and quality services to Lincolnway Energy.





Lincolnway
Energy's Ethanol Plant Has Only Been Operating Since May 22,
2006.Lincolnway Energy's ethanol plant has only been
operating since May 22, 2006. Lincolnway Energy may still discover defects or
deficiencies in the ethanol plant.  For example, Lincolnway Energy is
currently subject to regulatory proceedings with the Iowa Environmental
Protection Commission and the Iowa Attorney General regarding alleged water and
air emissions violations.  Any defects or deficiencies could cause
production and other delays as well as substantial costs and expenses, and in
particular if the defects or deficiencies are not covered by any
warranty.





Lincolnway Energy
Is Subject To Risk Because Its Ethanol Plant Utilizes
Coal.The primary energy source for Lincolnway Energy's
ethanol plant is coal.  The use of coal as a power source for an
ethanol plant is still relatively new and untested.   The use of
coal is also subject to numerous federal and state regulations, including
regarding permissible emissions levels.


13





As noted
in Item 3 of this annual report, Lincolnway Energy is currently subject to
proceedings with the Iowa Environmental Protection Commission and the Iowa
Attorney General concerning, among other things, air permitting, emission limit
exceedences, stack testing, monitoring and reporting.  Lincolnway
Energy will attempt to reach a negotiated settlement of all
allegations.  Lincolnway Energy cannot predict the outcome, but it is
likely that settlement will include a monetary penalty and repermitting
regarding air emissions and an injunction concerning future
violations.  Lincolnway Energy is hopeful that it will be able to
reach a settlement regarding the allegations, but there is no assurance that
they will be settled, and Lincolnway Energy cannot predict at this time the
result of any settlement or other proceedings that may arise out of the
allegations.  Lincolnway Energy is therefore not able to determine at
this time what effect the proceedings will have on Lincolnway Energy, but the
result (even if through settlement) could have material adverse effects on
Lincolnway Energy's business and financial condition.





Lincolnway
Energy's ability to comply with the emissions and other requirements arising
from its use of coal will depend to a degree on the type and quality of coal
that is provided to Lincolnway Energy by its coal supplier.  If the
coal does not meet the content and quality standards anticipated by Lincolnway
Energy, Lincolnway Energy may not be able to meet its emissions and other
regulatory and permit conditions and requirements.





As global
warming and climate change issues become more prevalent and accepted, there may
be increased governmental and public sentiment for more regulation of the use of
coal as a source of energy.  One result would likely be stricter
emissions requirements, which could lead to the need for capital expenditures in
order to meet those requirements and higher ongoing compliance and operating
costs.  Those expenditures and costs could be material, and adversely
affect Lincolnway Energy's results of operation and business.





The use,
storage and handling of coal also creates risks related to dust explosions and
fire.  Although Lincolnway Energy will take precautions to try to
avoid those types of incidents, there is no assurance that those precautions
will be successful in every circumstance.





The use
of coal also generates fly ash, and Lincolnway Energy may face economic,
logistic and environmental issues and difficulties in disposing of its fly
ash.





Lincolnway
Energy currently obtains all of its coal from one coal supplier.  If
the agreement is terminated or if that supplier fails to perform for any reason,
Lincolnway Energy might face an interruption in the supply of coal and have to
seek an alternate supply source.  Lincolnway Energy does not have any
agreement with any alternative suppliers at this time. As with natural gas and
other energy sources, coal supplies can be subject to interruption by weather,
strikes, transportation, and production problems that can cause supply
interruptions or shortages.  Lincolnway Energy has coal storage for
approximately 6 days of continuous ethanol production, and an interruption in
the supply of coal beyond that period could cause Lincolnway Energy to halt or
discontinue the production of ethanol, which would damage Lincolnway Energy’s
ability to generate revenues.


14





Lincolnway
Energy's Business Is Not Diversified Because It Is Limited To The Operation Of A
Single Ethanol Plant In The Midwest.Lincolnway Energy's
business is limited to the ownership and operation of a single ethanol plant,
although it is possible that Lincolnway Energy may attempt to own and operate
other ethanol plants at some point in the future.  The products of the
ethanol plant are limited to ethanol, distiller's grains and corn oil, and the
ethanol is limited to use as a fuel additive, as opposed to industrial and food
and beverage ethanol.  Lincolnway Energy is not, therefore, a
diversified business.





Lincolnway
Energy's plant is located in Story County, Iowa.  Lincolnway Energy
contemplates that if it ever owns or operates any additional ethanol plants, the
plants will also be located in the Midwest.  The geographic location
of Lincolnway Energy's business may therefore be limited to Iowa or, perhaps,
the Midwest.  Lincolnway Energy is therefore subject to any adverse
economic conditions or occurrences which may be particular to the
Midwest.  Lincolnway Energy's location in the Midwest may also lower
Lincolnway Energy's potential customer base given, among other things, the
logistics and cost to transport ethanol and distiller's grains to other regions,
and in particular if ethanol plants are developed in other areas of the country
where Lincolnway Energy's ethanol and distiller's grains are currently
shipped.





If Lincolnway
Energy Ever Expands, It Will Be Subject To The Risks Inherent In The Development
And Construction Process.If Lincolnway Energy ever determines
to expand its existing ethanol plant or to pursue the construction of an
additional ethanol plant, Lincolnway Energy will be subject to the numerous
material risks and uncertainties inherent in the development and construction
process.  For example, it may be difficult to identify a suitable
location for another ethanol plant because many favorable locations have already
been acquired by other ethanol plants or ethanol plant
developers.  Lincolnway Energy also believes that it could be
difficult to obtain the necessary financing, at least at this time, given the
generally unfavorable debt and equity financing market for the ethanol industry
at the time of the preparation of this annual report and the Iowa regulatory
proceedings to which Lincolnway Energy was subject at the time of the
preparation of this annual report.





Lincolnway Energy
May Make Other Investments Or Engage In Other
Business.Lincolnway Energy's board has the authority to cause
Lincolnway Energy to construct or acquire or to invest in other ethanol plants
or to make other investments or to engage in other businesses.  The
scope and nature of Lincolnway Energy's business could therefore change
significantly, which could expose Lincolnway Energy to numerous other risks and
uncertainties.  Lincolnway Energy's business may not always be limited
only to owning and operating its current ethanol plant.





Lincolnway Energy
Is Leveraged And Has Substantial Debt And Debt Service
Requirements.Lincolnway Energy financed the construction and
start-up of its ethanol plant with significant debt, and Lincolnway Energy will
have loans outstanding from time to time under its operating and working lines
of credit.


15


The use
of leverage creates risks.  For example, if Lincolnway Energy is
unable to generate profits and cash flow to service its substantial debt and its
ongoing operations and working capital needs, Lincolnway Energy may be forced to
reduce or delay capital expenditures or any expansion plans, sell assets or
operations, obtain additional loans or capital or attempt to restructure its
loans and other debt.  Lincolnway Energy also may not be able to
renew, extend or replace any existing loans or financing arrangements Lincolnway
Energy may have in place from time to time.  If any of those events
occur, Lincolnway Energy will need to attempt to obtain additional financing
through the sale of additional units or debt in Lincolnway Energy or through
additional loans from other lenders.  Lincolnway Energy believes,
however, that the debt and equity financing market is currently adverse to the
ethanol industry in general.  Any additional financing may lower
returns and adversely affect Lincolnway Energy's cash flow, business and
operations.  If Lincolnway Energy is unable to obtain financing when
needed, Lincolnway Energy may be forced to liquidate or otherwise sell some or
all of its assets or operations.





Lincolnway
Energy will also need to comply with the numerous restrictions and covenants
that are included as part of Lincolnway Energy's credit and loan
agreements.  The restrictions and covenants include prohibitions or
restrictions on incurring additional debt, granting additional security
interests or liens, acquiring additional assets, mergers, the issuance of
additional units, and making distributions to Lincolnway Energy's
members.  The credit and loan agreements also require Lincolnway
Energy to maintain various financial ratios and other similar financial
covenants.  Those restrictions and requirements may limit Lincolnway
Energy's flexibility in planning for, or reacting to, competition or changes in
the ethanol industry and Lincolnway Energy's ability to pursue other perceived
business opportunities.





Lincolnway
Energy's loans are secured by liens on all of Lincolnway Energy's assets, and if
Lincolnway Energy breaches any of its agreements with its lenders, the lenders
will be able to foreclose on Lincolnway Energy's assets.





Lincolnway
Energy's debt and leverage may place it at a competitive disadvantage with
competitors which have less debt or greater financial resources, and may also
increase Lincolnway Energy's vulnerability to adverse economic or industry
conditions or occurrences.





Any
increases in Lincolnway Energy's debt will increase the risks discussed
above.





Lincolnway
Energy's Financing Costs Will Rise If Interest Rates
Increase.Lincolnway Energy will be adversely affected by any
increase in interest rates or other lending costs because Lincolnway Energy has
substantial debt.  Although difficult to predict and outside of
Lincolnway Energy's control, it is likely that there will be increases in
interest rates, at least over the longer term.





Lincolnway
Energy's Potential Success Is Almost Exclusively Dependent On Ethanol Sales, And
The Price Of Ethanol And Gasoline Can Vary Greatly And Are Beyond Lincolnway
Energy's Control.Although Lincolnway Energy's ethanol plant
produces distiller's grains and corn oil, ethanol is the primary and material
source of revenue for Lincolnway Energy, having generated approximately 87% and
83% of Lincolnway Energy's total revenues for the fiscal years ended September
30, 2007 and 2008, respectively.


16





Ethanol
prices can vary significantly over both short and long term periods, and it is
difficult to accurately predict changes in ethanol prices or in ethanol
trends.  For example, the spot price of ethanol reached $2.49 at the
Chicago terminal during January 2007, but fell to $1.51 during September
2007.  As another example, the spot price of ethanol reached $2.96 at
the Chicago terminal during June, 2008, but fell to $1.57 during December,
2008.





The price
of gasoline also varies significantly over both short and long term
periods.  The price for ethanol has generally had some correlation to
the price of gasoline, so low gasoline prices or reductions in gasoline prices
will also generally reduce ethanol prices and profitability.  Gasoline
prices fell significantly during the fourth quarter of 2008 from the increasing
and record level prices that had existed from approximately late June 2006
through October 2008.  Also, the recent record prices for gasoline
were causing businesses and consumers to actively seek ways to lower or reduce
their gasoline consumption.  For example, there is increased attention
to requiring the auto industry to produce cars with higher fuel
efficiency.  Higher gasoline prices also increase the focus and
attention on the research and development of alternative energy options, such as
fuel cells.  The existence of higher gasoline prices can therefore
also adversely affect gasoline and ethanol prices and the profitability of
ethanol plants.





Lincolnway
Energy's inability to foresee or accurately predict changes in the supply or
prices of ethanol or gasoline will adversely affect Lincolnway Energy's
business.





If
ethanol prices decline to the point where it is unprofitable to produce ethanol
and remain at that level, Lincolnway Energy could be required to suspend
operations until the price increases to the level where it is once again
economical or profitable to produce and market the ethanol.  Any
suspension of operations would have a material adverse effect on Lincolnway
Energy's business, results of operations and financial
condition.  Some ethanol plants have delayed opening or have curtailed
production due to the unfavorable market conditions which were in existence at
the time of the preparation of this annual report.





Even if
ethanol prices are generally favorable, Lincolnway Energy still may not be able
to sell all of its ethanol, or at favorable prices.





The Increase In
Supplies Of Ethanol May Adversely Affect Ethanol And Ethanol Byproduct
Prices.There has been a significant increase in ethanol
production since 2000 and in particular over the past two to three
years.  Lincolnway Energy anticipates that there will continue to be
material increases in ethanol production, both in the United States and
internationally.





The
increasing ethanol production will at times lead or contribute to lower ethanol
prices and lower prices for distiller's grains due to the increased supplies of
those products in general.  The increasing ethanol production may also
lead to there being excess ethanol and/or distiller's grains production at some
point, which would also lower ethanol and distiller's grains
prices.





Excess
ethanol production capacity could also result from decreases in demand for
ethanol, which could result from a number of factors, such as regulatory
developments, reduced gasoline consumption in the United States or advancements
in alternatives to gasoline.


17





Purchases Of
Ethanol Blended Gasoline Will Decline If The Price Exceeds The Price For Regular
Unleaded Gasoline.The price of ethanol blended gas at the
pump has at times exceeded the price of regular unleaded
gasoline.  Consumers' purchases of gasoline are price driven, so it is
likely that the use of ethanol blended gasoline will be reduced during periods
where the price of ethanol blended gasoline exceeds the price of regular
unleaded gasoline.





Continued Growth
In The Ethanol Industry Depends On Changes To And Expansion Of Related
Infrastructure Which May Not Occur On A Timely Basis, If At
All.Substantial development and/or expansion of
infrastructure will be required by persons outside of Lincolnway Energy's
control for the ethanol industry to be able to continue to grow.  Some
areas requiring development or expansion include:


·
            Additional
      rail and rail car capacity;


·
            Additional
      storage facilities for ethanol;


·
            Increases
      in truck fleets capable of transporting ethanol within localized
      markets;


·
            Pipelines
      for the transportation of ethanol;


·
            Expansion
      of refining and blending facilities to handle
  ethanol;


·
            Growth
      in service stations equipped to handle ethanol fuels, and in particular
      E85 fuels; and


·
            Growth
      in the fleet of flexible fuel vehicles which are capable of using fuel
      with significantly higher ethanol content than
  10%.





The
substantial investments required for these infrastructure developments may not
be made or they may not be made on a timely basis, in particular given the
difficult economic and credit circumstances that were prevailing at the time of
the preparation of this annual report.  Any failure or delay in making
the developments to or expansion of the infrastructure could hurt the demand or
prices for ethanol, impede Lincolnway Energy's delivery of ethanol, impose
additional costs on Lincolnway Energy or otherwise have a material adverse
effect on Lincolnway Energy's results of operations and financial
condition.





Any Significant
Dependence On Any Particular Customer Or Supplier Could Have Adverse Effects On
Lincolnway Energy In The Event Of The Loss Of Any Such Customer Or
Supplier.If Lincolnway Energy is overly dependent on any
particular customer or group of customers for the sale of its ethanol or
distiller's grains or on any supplier or group of suppliers for Lincolnway
Energy's corn, coal or other inputs, the loss of any such customer or supplier
could have a material adverse effect on Lincolnway Energy and its
business.  Lincolnway Energy is currently heavily dependent upon a
single supplier for obtaining a significant portion of its corn needs and upon
another supplier for all of its coal needs.  Lincolnway Energy also
currently utilizes a single company to market all of Lincolnway Energy's ethanol
and another company to market all of its distiller's grains.  The loss
of any of those relationships could have material adverse effects on Lincolnway
Energy.


18


Lincolnway
Energy's Results Of Operations, Financial Position And Business Outlook Will
Likely Fluctuate Substantially Because Lincolnway Energy's Business Is Highly
Dependent On Commodity Prices, Which Are Subject To Significant Volatility And
Uncertainty, And On The Availability Of Raw Materials
Supplies.Lincolnway Energy's results of operations will be
substantially dependent on commodity prices, especially prices for corn, coal,
ethanol and unleaded gasoline.  The prices of these commodities are
volatile and beyond Lincolnway Energy's control.  For example, the
price of corn has been extremely volatile during 2008.  As a result of
the volatility of the prices for these commodities, Lincolnway Energy's results
will likely fluctuate substantially over time.  Lincolnway Energy will
experience periods during which the prices for ethanol and distiller's grains
decline and the costs of Lincolnway Energy's raw materials increase, which will
result in lower profits or operating losses and which will adversely affect
Lincolnway Energy's financial condition.  Lincolnway Energy may
attempt to offset a portion of the effects of such fluctuations by entering into
forward contracts to supply ethanol or to purchase corn, coal or other items or
by engaging in hedging and other futures related activities, but those
activities also involve substantial risks and may be ineffective to mitigate
price fluctuations.





The Supply And
Costs Of The Inputs Required By Lincolnway Energy Can Vary Greatly And Adversely
Affect Lincolnway Energy's Profits And Financial
Position.  Lincolnway Energy's ethanol plant produces ethanol
from corn.  Lincolnway Energy estimates that corn costs will, on the
average, make up approximately 69% of Lincolnway Energy's total annual operating
costs, but the percentage could be higher.  Accordingly, rising corn
prices will lower profit margins, and, at certain levels, corn prices would make
ethanol uneconomical to produce and to use in the fuel
markets.  Lincolnway Energy generally will be unable to pass along
increased corn costs to Lincolnway Energy's customers.  Corn prices
began to rise significantly in approximately July, 2006 (when the cash corn
price in Lincolnway Energy's local market area was approximately $2.09 per
bushel) and generally continued to rise until mid-year 2008 (when the cash corn
price in Lincolnway Energy's local market area reached approximately $7.15 per
bushel).  The cash corn price in Lincolnway Energy's local market area
was approximately $3.91 per bushel as of November 30, 2008.  The corn
price on the Chicago Board of Trade daily futures ranged from a low of $3.39 per
bushel to a high of $7.65 per bushel during Lincolnway Energy's fiscal year
ended September 30, 2008.





The price
of corn is influenced by many factors, including general economic, market and
regulatory factors, such as government policies and subsidies with respect to
agriculture and international trade, and global and local demand and
supply.  The expansion in the ethanol industry has also affected the
corn markets and the supply of corn, and has contributed to higher corn
prices.  Lincolnway Energy anticipates that the continuing expansion
of the ethanol industry will continue to significantly increase the demand for
corn, which may result in higher corn prices and, possibly, shortages of corn
from time to time.





The price
for corn in the market area encompassing Lincolnway Energy's ethanol plant could
be higher than the corn price payable in other markets, and in particular if
another ethanol plant is constructed in the same market area or another ethanol
plant attempts to purchase corn in Lincolnway Energy's market
area.  Lincolnway Energy will also compete for corn with the livestock
producers and elevators located within Lincolnway Energy's market
area.


19





The price
of corn is also influenced by the supply of corn, which is subject to many risks
which are beyond anyone's control, such as farmer planting decisions, imports,
weather and disease.





Lincolnway
Energy will have difficulty from time to time in obtaining corn on economical
terms, due to increasing prices or supply shortages.  Lincolnway
Energy may not always have short-term or long-term agreements or positions in
place for the purchase of all of its corn needs, and Lincolnway Energy will at
times need to buy all, or at least some, of Lincolnway Energy's corn needs on
the open market.  There may not be adequate supplies of corn available
on the open market or at prices which are favorable or acceptable to Lincolnway
Energy.





If
Lincolnway Energy is unable to obtain corn or to obtain corn at favorable
prices, Lincolnway Energy could be required to suspend operations until corn
became available or at economical terms.  Any suspension of operations
would have a material adverse effect on Lincolnway Energy's business, results of
operations and financial condition.





Lincolnway
Energy's gross margin will depend significantly on the spread between ethanol
and corn prices, and in particular the spread (sometimes referred to as the
crush spread) between the price of a gallon of ethanol and the price for the
amount of corn required to produce a gallon of ethanol.  The price of
ethanol and corn fluctuates frequently and widely, however, so any favorable
spread between ethanol and corn prices which may exist from time to time
therefore cannot be relied upon as indicative of the future.  As an
example of the fluctuation in the crush spread, average Des Moines, Iowa ethanol
rack prices, as reported by Oil Price Information Service (OPIS), ranged from
approximately $2.49 to $1.51 in 2007 and from approximately $2.98 to $1.64
during January through November 2008, and with corn spot prices based on the
Chicago Board of Trade ranging from approximately $3.08 to $4.69 per bushel
during 2007 and from $7.65 to $3.36 per bushel during January through November
2008.  As another example, those same ranges during Lincolnway
Energy's fiscal year ended September 30, 2008 were, respectively, $2.98 to
$1.64, and $7.65 to $3.36.





The
supply and cost of other inputs needed by Lincolnway Energy can also vary
greatly, such as coal, electric and other energy costs.  Lincolnway
Energy's ethanol plant utilizes coal as its primary energy source, and
Lincolnway Energy estimates that coal costs will, on average, make up
approximately 4% of Lincolnway Energy's annual total operating
costs.  The prices for and availability of coal are subject to
numerous market conditions and factors which are beyond Lincolnway Energy's
control.  Significant disruptions in the supply of coal would impair
Lincolnway Energy's ability to produce ethanol, and increases in coal prices or
changes in Lincolnway Energy's coal costs relative to the costs paid by
Lincolnway Energy's competitors would adversely affect Lincolnway Energy's
competitiveness and results of operation and financial position.





Lincolnway
Energy is currently reliant upon its contract with a single coal supplier for
the supply of all of Lincolnway Energy's coal needs.  The contract
will terminate by its terms on January 1, 2013, and there is no assurance that
Lincolnway Energy will be able to enter into a similar agreement for the supply
of coal after that time.  Lincolnway Energy believes its current
contract for coal provides it with some protection regarding extreme changes in
the price of coal, but there is no assurance that Lincolnway Energy will be able
to enter into another contract that provides those same protections to
Lincolnway Energy.


20





There may
also be seasonal fluctuations experienced by Lincolnway Energy in the price of
corn and coal and the price of ethanol.  For example, the spot price
of corn has historically tended to rise during the spring planting season in May
and June and to decrease during the fall harvest in October and
November.  The price of gasoline has tended to rise during the summer
and winter months.  Lincolnway Energy does not, however, know if the
historical seasonal fluctuations will continue or will affect Lincolnway
Energy's results over time.





Transportation
costs can also be a factor in the price for ethanol because ethanol is currently
shipped by truck or by rail, and not by pipeline, and because ethanol generally
needs to be shipped long distances to a terminal where the ethanol can be
blended with gasoline.  The recent high fuel prices resulted in
greatly increased transportation costs.





Lincolnway
Energy's inability to foresee or accurately predict changes in the supply or
prices of corn, coal and other inputs, or the inability to pass on any increased
costs to Lincolnway Energy's customers, will adversely affect Lincolnway
Energy's business, results of operation and financial position.





Lincolnway
Energy's inability to obtain, or any delays in obtaining, corn, coal or other
inputs in times of shortages or high demand will also adversely affect
Lincolnway Energy's business, results of operation and financial
position.





Market Prices And
Futures Prices For Ethanol And For Corn, Coal And Other Inputs Are Very
Difficult To Predict Because They Are Speculative And
Volatile.  The agricultural economy and the economy in general,
and market prices and futures prices for oil, ethanol, distiller's grains, corn
oil, corn, coal and other inputs needed for Lincolnway Energy's ethanol
operation, are all highly volatile and are influenced by many varying
factors.  It is not possible to identify all possibly relevant
factors, but some of the factors include the following and rumors or speculation
about the following:





·
            Changing
      supply and demand relationships and trade deficit
  issues;


·
            Weather
      and other environmental conditions;


·
            Acts
      of God, including drought and
storms;


·
            Agricultural,
      fiscal, monetary, economic, trade and exchange control programs and
      policies of governments;


·
            International,
      national, regional and local political and economic events and
      policies;


·
            Changes
      in fuel and energy costs or in interest rates or rates of
      inflation;


·
            Controversies
      or disputes about the use of biotechnology in crops, or errors or adverse
      reactions caused by the use of biotechnology in crops, such as the past
      issues with Starlink corn;


·
            Infestations
      or diseases in crops;


·
            Acts
      of terrorism or war, both nationally and internationally, including in
      Afghanistan, Pakistan, India and the Middle
  East;


21





·
            Illegal
      or improper activities or scandals by participants in the markets, such as
      those that have recently occurred in the accounting industry, the stock
      and mutual fund industry and the insurance industry;
  and


·
            The
      general emotions and psychology of businesses, consumers and of the market
      place in general, which at times can be totally unrelated to actual
      economic or market conditions or other more tangible
    factors.





The
internet, e-mail, television and other forms of communication allow rumors and
speculation to be quickly and widely circulated, which can have immediate and
substantial effects on the markets, even if the rumor or speculation is later
found to be incorrect or unjustified.





It is
very likely that there will be further acts of terrorism in the United States
and abroad, including the possibility of acts aimed at disrupting the economy or
the markets or various industries or sectors within the markets.  For
example, there has been speculation about possible acts of terrorism aimed at
the energy, agricultural and food industries.  Any speculation or
rumors about, or actual acts of, terrorism could cause immediate and substantial
reactions in a wide range of the markets and industries and in the economy in
general.  The continued uncertainty in Afghanistan, Pakistan and the
Middle East also continues to create uncertainties and could cause adverse
reactions in the oil and energy markets and in the markets and economy in
general.





None of
the above factors or occurrences can be controlled by Lincolnway Energy, and it
will be impossible to always accurately predict or identify which factors are
relevant or are likely to occur.





Also,
even if Lincolnway Energy were somehow able to have fully current and correct
information as to all factors, prices would still not always react as predicted
or as would seem likely given the information.  For example, there
have been many occasions where the movements of the futures markets have seemed
totally unrelated to actual supply and demand and other more tangible
factors.  The latter fact may be caused, in part, because of the
substantial speculative trading that occurs in the futures markets.





The Use Of
Hedging Strategies Or The Futures Markets By Lincolnway Energy Could Be
Unsuccessful And Result In Losses.Lincolnway Energy will
likely attempt to minimize the effects of the volatility of corn, coal, ethanol,
distiller's grains and other prices by taking hedging positions through forward
pricing contracts or on the futures markets.  The intent of those
positions will be to attempt to protect the supply of, and the price at which
Lincolnway Energy can buy, corn, coal or other inputs and the price at which
Lincolnway Energy can sell its ethanol.  Any attempt by Lincolnway
Energy to use hedging strategies may be unsuccessful, and in fact could result
in substantial losses because price movements in futures contracts and options
are highly volatile and speculative, and are influenced by many factors which
are beyond the control of anyone.  Some of those factors include those
noted above in "Market Prices And Futures Prices For Ethanol And For Corn, Coal
And Other Inputs Are Very Difficult To Predict Because They Are Speculative And
Volatile."  Lincolnway Energy will likely vary the amount of forward
pricing, hedging and other risk mitigation strategies Lincolnway Energy may
undertake, and Lincolnway Energy may at times choose not to engage in any such
transactions.  As a result, Lincolnway Energy's results of operations
and financial position may be adversely affected by increases in the price of
corn or coal or decreases in the price of ethanol or unleaded
gasoline.  Lincolnway Energy does not typically enter into derivative
instruments other than for hedging purposes.  Although Lincolnway
Energy believes its derivative positions are economic hedges, none have been
designated as a hedge for accounting purposes.


22





Futures
markets will also sometimes be illiquid, and Lincolnway Energy may not be able
to execute a buy or sell order at the desired price, or to close out an open
position in a timely manner.  The inability to timely close out an
open position may result in substantial losses to Lincolnway
Energy.  Lincolnway Energy's potential losses and liabilities for any
futures or options positions are not limited to margin amounts or to the amount
held in or the value of Lincolnway Energy's trading account, and in the event of
a deficiency in Lincolnway Energy's trading account due to a margin call made to
the trading account, a loss exceeding the value of the trading account, or
otherwise, Lincolnway Energy will be responsible for the full amount of the
deficiency.  Given the volatility of futures trading, margin calls can
occur frequently and the amount of a margin call can be
significant.





There Are Many
Factors Important To The Success Of An Ethanol Plant And The Operation Of An
Ethanol Plant Which Are Beyond The Control Of Lincolnway
Energy.Lincolnway Energy's ability to successfully operate
its ethanol plant and to market the ethanol, distiller's grains and corn oil
produced at the plant are subject to numerous factors and risks which are beyond
the control of Lincolnway Energy.  Those factors include the
following:





·
            The
      ability to retain qualified employees and other personnel, and on
      favorable terms;


·
            Labor
      disputes or other employee issues;


·
            Increases
      in the price of corn, coal, electricity, labor, gas or fuel, and in truck
      and rail transportation costs;


·
            Railcar
      and truck shortages or strikes within those
  industries;


·
            The
      price of oil and gas;


·
            The
      demand for and consumption of petroleum products generally and ethanol
      specifically;


·
            Environmental
      and other regulations which impact both the demand for ethanol and the
      operation and cost of operation of the ethanol
  plant;


·
            Governmental
      regulations and incentives; and


·
            General
      market fluctuations and economic
conditions.





The
operation of an ethanol plant is subject to ongoing compliance with all
applicable governmental regulations, such as those governing pollution controls,
ethanol production, grain purchasing and other matters.  Other
regulations will likely arise in the future regarding the operation of ethanol
plants, including the possibility of required additional permits and licenses
and increased environmental, emissions or wastewater requirements or other
regulatory compliance.  There could be difficulty in obtaining any
such additional permits or licenses or in meeting any additional environmental,
emissions, wastewater or other compliance requirements.


23





Lincolnway
Energy's Operations Are Subject To Substantial And Extensive Governmental Laws
And Regulations Which Restrict And Increase The Costs Of Lincolnway Energy's
Business.Lincolnway Energy's ethanol operations are subject
to substantial and extensive governmental laws and regulations, including those
relating to the discharge of materials into the air, water or ground, and the
generation, storage, handling, use, transportation and disposal of hazardous
materials.  Some of those laws and regulations require Lincolnway
Energy to maintain various permits and other approvals in order to continue
ongoing operations.  Lincolnway Energy will need to meet the various
requirements and conditions necessary to the issuance and maintenance of those
permits and approvals.  The requirements and conditions may include
that the ethanol plant facilities and operations meet various specifications
regarding air quality, discharge, water and waste treatment, and various other
operational matters.  Lincolnway Energy's compliance with all
necessary permits, approvals and laws and regulations will increase Lincolnway
Energy's costs and expenses.  Lincolnway Energy's failure to comply
with those requirements or to maintain those permits and approvals may result in
fines or penalties, the loss of the right to continue operations or claims by
third parties.





For
example, as discussed in Item 3 of this annual report, Lincolnway Energy was
subject to regulatory proceedings by the Iowa Department of Natural Resources
and the Iowa Attorney General at the time of the preparation of this annual
report concerning various alleged environmental law violations relating to
wastewater releases, exceedences of iron and total suspended solid limits in
Lincolnway Energy's NPDES wastewater discharge permit, air permitting, emissions
exceedences, stack testing, monitoring and reporting.  Lincolnway
Energy hopes to reach a settlement on all of the alleged violations, but there
is no assurance that the allegations will be settled, and Lincolnway Energy
cannot predict at this time the outcome of any settlement or other proceedings
that may arise out of the allegations.  The outcome could, however,
have material adverse effects on Lincolnway Energy's business, operations and
financial condition.  Lincolnway Energy believes it is likely that the
outcome will include a monetary penalty and repermitting regarding air
emissions.





Lincolnway
Energy also anticipates that there will be changes in the approval requirements
and other laws and regulations over time, and that those changes will increase
the regulatory oversight and costs and expenses of Lincolnway
Energy.  For example, the regulation of the environment, including the
use of water, wastewater, storm water and air emissions, is a constantly
changing area of the law, and it is likely that more stringent federal or state
environmental laws, rules or regulations, or interpretation or enforcement of
existing laws, rules or regulations, could be adopted which would require
Lincolnway Energy to make substantial capital expenditures and/or increase
Lincolnway Energy's operating costs and expenses.  New laws, rules and
regulations may be advanced based upon claims related to global warming and
climate change.  It is also possible that federal or state
environmental laws, rules or regulations could be adopted which have an adverse
effect on the use of ethanol, such as changes in the regulations regarding the
required oxygen content of automobile fumes.  The new laws, rules or
regulations could also arise or become necessary because of currently unknown
conditions or problems arising from the production or use of ethanol, similar to
what have occurred with methyl tertiary-butyl ether (MTBE) because of the
adverse environmental and health issues now known to be caused by
MTBE.  There has also been increased attention by the Environmental
Protection Agency and other regulators to the wastewater and air emissions
released as a result of the process of producing ethanol, and it is possible
that additional environmental or other regulatory requirements or conditions may
be applied to the wastewater and air emissions released as part of the process
of producing ethanol.


24





Lincolnway Energy
May Become Subject To Various Environmental And Health And Safety And Property
Damage Type Claims And Liabilities.The nature of Lincolnway
Energy's operations will expose it to the risk of environmental and health and
safety claims and property damage claims.  For example, if any of
Lincolnway Energy's operations are found to have polluted the air or surface
water or ground water, such as through an ethanol spill, Lincolnway Energy could
become liable for substantial investigation, clean-up and remediation costs,
both for its own property and for the property of others which may have been
affected by the pollution or spill.  Those types of claims could also
be made against Lincolnway Energy based upon the acts or omissions of other
persons, including persons transporting or handling ethanol or who are
responsible for any locations where Lincolnway Energy disposes of any hazardous
substances.  Environmental and property damages claims and issues can
also arise due to spills, losses or other occurrences arising from events
outside of Lincolnway Energy's control and which are possible in Lincolnway
Energy's business, such as fire, explosions or blowouts.  A serious
environmental violation or repeated environmental violation could result in
Lincolnway Energy being unable to construct or operate any additional ethanol
plants and the loss of defenses to nuisance suits.  Lincolnway Energy
may also be unable to obtain financing or necessary permits if Lincolnway Energy
is subject to any pending administrative or legal action regarding environmental
matters.  Any of those types of events could have a material adverse
effect on Lincolnway Energy's financial condition and future
prospects.





There Is Growing
Negative Press And Public Sentiment Against The Ethanol Industry Which Could
Lead To Reduced Governmental And Public Support For The Use Of
Ethanol.There has been growing negative press and public
sentiment against the ethanol industry based upon claims that the use of corn to
produce ethanol has driven up grain prices, which hurts livestock farmers and
also consumers due to increased food prices.  The claims also include
environmental type allegations, including that burning ethanol in gasoline
causes air pollution and that increased corn acreage and ethanol production
could strain water supplies and worsen pollution in rivers and
streams.  The criticism has come from, among others, environmental
groups, the National Academy of Sciences, the American Lung Association and
through the United Nations.  The growing criticism of the ethanol
industry could lead to reduced governmental supports for the industry and
reduced public support and use of ethanol.  The current criticisms are
based primarily on the production of ethanol from corn, and could accelerate the
development of other economical sources for the production of
ethanol.  Lincolnway Energy's plant can only produce ethanol from
corn.





Loss Of Current
Governmental Support And Incentives For Ethanol Would Reduce The Use Of Ethanol
And Materially And Adversely Affect Lincolnway Energy's Results Of Operations
And Financial Position.There are various federal and state
laws and regulations and programs which have lead to the increasing use of
ethanol, including various subsidies, tax exemptions and other forms of
financial incentives.  Some of the laws provide economic incentives to
produce or use ethanol and some of the laws mandate the use of
ethanol.  No guarantee can be given that any of those laws,
regulations or programs will be continued, and the revocation or amendment of
any one or more of those laws, regulations or programs could adversely affect
the future use and price of ethanol in a material way.  Governmental
support of the ethanol industry may decrease due to governmental budget
issues.  The current governmental support of the ethanol industry may
also decrease as the ethanol industry matures and advances, or in the event of
any adverse environmental or other occurrences in the ethanol
industry.


25





As noted
above, the biofuels industry has received substantial negative press as of late
regarding the possible negative effects and side effects of ethanol
production.  Any negative public sentiment could lead to decreases in
governmental support of the ethanol industry.





The
ethanol industry would be particularly negatively affected by any reductions in
or loss of the renewable fuels standard mandates and any further reductions in
the excise tax credit that is available to blenders and sellers of
ethanol.  The credit has already been reduced from $.54 per gallon to
$.51 per gallon, and will be further reduced to $.45 per gallon beginning
January 1, 2009.





Lincolnway Energy
Currently Has No Expansion Plans And Any Expansion Plans That May Be Developed
May Not Be Able To Be Implemented By Lincolnway
Energy.Although Lincolnway Energy may determine to expand its
ethanol plant, or to construct or acquire additional ethanol plants in the
future, Lincolnway Energy currently does not have any definite plans for any
expansion of its existing ethanol plant or for the construction or acquisition
of an additional ethanol plant.  Lincolnway Energy therefore may not
ever be a company which has multiple ethanol plants or that will produce
significant volumes of ethanol.





Any
expansion plans that may be developed by Lincolnway Energy may not be able to be
implemented for numerous reasons.  For example, Lincolnway Energy will
need to be able to identify, and to acquire on acceptable terms, suitable real
estate in an area which already has, or can feasibly and economically develop,
the gas, electric, water and other physical infrastructure necessary to support
the plant and which also has both sufficient supplies of gas, electricity,
water, corn and other inputs and adequate rail and other transportation
access.  Given the increasing number of ethanol plants, it is becoming
increasingly more difficult to identify suitable locations for an ethanol
plant.  As other examples, Lincolnway Energy might not be able to
obtain the necessary debt or equity financing or the various lender and
governmental approvals and permits that would be necessary in order to construct
and operate new or expanded facilities.  Lincolnway Energy believes
that the current equity and lending market is adverse to the ethanol
industry.  The construction costs could also increase to levels that
would make the expansion of Lincolnway Energy's existing plant or the
construction of a new facility too expensive or unprofitable to
operate.  There currently are a limited number of contractors with
significant experience in building ethanol plants in the United States, so it
may be difficult to retain a contractor on a timely basis or on acceptable
financial or commercial terms.


26


Any
expansion would also likely reduce Lincolnway Energy's earnings and profits for
some period of time because of the significant costs and expenses that will be
incurred in order to expand or to construct or acquire and start up an
additional ethanol plant and operations and the working capital requirements and
operating losses that will be incurred during the construction and start up
period for the expanded or new ethanol plant.  The costs and expenses
of any expansion plan would likely result in net losses to Lincolnway Energy
during the expansion period.





The
pursuit and implementation of any expansion plans through the acquisition of
other ethanol plants would involve numerous risks, including possible dilution
to existing members if the acquisition is financed by the issuance of
units.  Other risks include difficulties in supporting and
transitioning customers and suppliers of the target company, and the general
integration of the new plant and related business into Lincolnway Energy's
existing business and operations.





Interruptions In
The Supply Of Water, Electricity, Coal Or Other Energy Sources Or Other
Interruptions In Production Would Have An Adverse Effect On Lincolnway Energy's
Ethanol Plant.Interruptions in the supply of water,
electricity, coal or other energy sources at Lincolnway Energy's ethanol plant
would have a material adverse impact on operations, and could require Lincolnway
Energy to halt production at the ethanol plant.





Interruptions
in or the loss of the supply of water, electricity, coal or other energy sources
could occur, for example, because of software or other computer problems at the
ethanol plant or at the plants of the suppliers of the water, electricity, coal
or other energy.  Lincolnway Energy's and any suppliers' use of its
software and other computer systems will be subject to attack by computer
hackers, and to failure or interruption through equipment failures, viruses,
acts of God and other events beyond the control of Lincolnway Energy or a
supplier.





Lincolnway
Energy's operations are also subject to significant interruption if its ethanol
plant experiences a major accident or is damaged by severe weather or other
natural disasters.  Lincolnway Energy's operations are also subject to
labor disruptions and unscheduled down time, and other operational hazards
inherent in the ethanol industry, such as equipment failures, fires, explosions,
abnormal pressures, blowouts, pipeline ruptures, transportation accidents and
natural disasters.  Some of these operational hazards may cause
personal injury or loss of life, severe damage to or destruction of property and
equipment or environmental damage, and may result in suspension of operations
and the imposition of civil or criminal penalties against Lincolnway
Energy.





Lincolnway
Energy's business is dependent upon the continuing availability of railroads,
railcars, truck fleets and other infrastructure necessary for the production,
transportation and use of ethanol.  Any disruptions or interruptions
in that infrastructure could have a material adverse effect on Lincolnway
Energy.





Lincolnway
Energy may not have insurance covering any of these types of matters or
occurrences.  Any insurance Lincolnway Energy may have in place may
not be adequate to fully cover the potential losses and hazards, and Lincolnway
Energy may not be able to renew the insurance on commercially reasonable terms
or at all.


27





Competition From
Other Ethanol Producers Or Energy Sources Will Adversely Affect Lincolnway
Energy And Could Reduce Lincolnway Energy's Profitability.The
ethanol industry is competitive and is rapidly becoming increasingly more
competitive, in particular given the substantial new construction and expansion
that has already occurred and that Lincolnway Energy believes may at some point
again occur in the industry.  The competitors include not only
regional farmer-owned entities, but also the major oil companies and other large
companies.





The
ethanol industry may also face increasing competition from international
suppliers of ethanol.  International suppliers produce ethanol from
corn but also other sources, such as sugar cane.  Some international
suppliers may have cost structures that are substantially lower than Lincolnway
Energy's and other U.S. based ethanol producers.





Smaller
competitors also pose a threat.  Farmer-owned cooperatives and
independent companies consisting of groups of individual farmers and investors
have been able to compete successfully in the ethanol industry.  These
smaller competitors operate smaller facilities which do not affect the local
price of corn grown in the proximity to the facility as much as larger
facilities do, and some of the smaller competitors are farmer-owned and the
farmer-owners either commit, or are incented by their ownership in the facility,
to sell corn to the facility.





Any
increase in domestic or foreign competition could cause Lincolnway Energy to
have to reduce its prices and take other steps to compete effectively, which
could adversely affect Lincolnway Energy's results of operations and financial
position.





Many
competitors will have greater production capacity, greater experience, more
access to information and/or greater capital or other financial resources, any
of which will make it difficult for Lincolnway Energy to compete with the
competitor.  For example, greater ethanol production may allow a
competitor to market its ethanol or distiller's grains at lower prices than
Lincolnway Energy.  There may be acquisitions and consolidations in
the ethanol industry, and those acquisitions and consolidations will likely lead
to competitors with greater advantages over Lincolnway Energy.  Some
analysts are predicting that there will be acquisitions or consolidations in the
ethanol industry in 2009.  A competitor may also offer other products
or services that are not offered by Lincolnway Energy, which may give the
competitor an additional advantage over Lincolnway Energy.





An
ethanol plant utilizing corn to produce ethanol may also experience competition
in the form of other plants which produce ethanol from other
products.   For example, ethanol can be produced from corn
stover, rice straw, wheat, cheese whey, potatoes, wheat, oats, barley straw,
milo, sorghum, sugar bogasse, rice hulls, various wastes (such as wood and
vegetation) and cellulose based biomass.  Research is being conducted
by various entities regarding the use of these cellulostic and biomass type
products, and it is likely that processes will be developed at some point in the
near future which will make the production of ethanol from these types of
sources economical.  It is also possible that one or more of these
other sources may from time to time have greater advantages than corn, which
would adversely affect an ethanol plant that produces ethanol solely from
corn.  For example, a plant using one of those sources may be able to
produce ethanol on a more economical basis or on a more efficient or greater
scale.  The increased production of ethanol from any of those sources
could also adversely affect the price for ethanol
generally.  Lincolnway Energy's ethanol plant is designed to produce
ethanol only from corn.


28





Some
competitors operate their ethanol plant and produce ethanol using different
sources of energy than coal, or using various other sources of
energy.  The other sources of energy include natural gas and various
forms of waste type products such as wood, tires, construction waste and
manure.  Those competitors may have lower production and input costs
and/or higher operating efficiencies than Lincolnway Energy, which would allow
them to produce and market their ethanol at lower prices than Lincolnway
Energy.





Competition
from newly developed fuel additives would also reduce the use of ethanol and
Lincolnway Energy's profitability.  Although it is difficult to
predict if any new fuel additives will be developed, it will likely occur at
some point, and it could be in the near future.





Research
is also continually being conducted for alternatives to petroleum based fuel
products and for additional renewable fuel products.  For example,
research is ongoing regarding the use of hydrogen, electric or solar powered
vehicles and fuel cells.  A breakthrough or discovery in any research
could conceivably occur at any time, and could have the effect of greatly
reducing the use of ethanol or of even making the use of ethanol
obsolete.  There will be increased incentives to develop alternatives
to petroleum based fuel products given the recent high gasoline
prices.





Loss Of Rights To
Technology Or The Occurrence Of Technological Advances Could Make Lincolnway
Energy's Ethanol Plant Obsolete.Lincolnway Energy obtained
its right to use the various software, patents and other technologies necessary
to its ethanol plant under license agreements with third parties.  The
termination of those license agreements or other loss of the right to use any
necessary technology would have material adverse effects on the ethanol plant
and on Lincolnway Energy.





Technological
advances in the processes and procedures for producing ethanol are continually
occurring, and further ongoing advances should be expected.  It is
possible that those advances could make the processes and procedures that are
utilized at Lincolnway Energy's ethanol plant obsolete or inefficient or cause
the ethanol and/or other by-products produced at the ethanol plant to not be as
high of quality as plants which utilize any new or advanced
technology.  Any modifications or changes to Lincolnway Energy's
ethanol plant to utilize any new technology could be technologically or cost
prohibitive, and will in all events at least initially reduce Lincolnway
Energy's profitability.





There Are
Potential Conflicts Of Interest In The Structure And Operation Of Lincolnway
Energy.Although Lincolnway Energy does not believe any
conflict of interest exists which in practice will be detrimental to Lincolnway
Energy, potential conflicts of interest do exist in the structure and operation
of Lincolnway Energy and its business.    For example, the
directors and officers of Lincolnway Energy are not required to devote their
full time or attention to Lincolnway Energy, and they are all involved in other
full time businesses and may provide services to others.  Some of the
directors or officers might be owners or otherwise interested in other ethanol
plants.  The directors and the officers will experience conflicts of
interest in allocating their time and services between Lincolnway Energy and
their other businesses and interests.


29





The
various companies that provide marketing and other services to Lincolnway Energy
are also not required to devote their full time or attention to those services,
and they will very likely be involved in other ethanol plants and ethanol
related businesses and possibly other businesses or ventures, including having
ownership or other interests in other ethanol plants.  The companies
will therefore experience conflicts of interest in allocating their time and
services between Lincolnway Energy and their various other ethanol plants or
business ventures.  The companies providing ethanol and distiller's
grains marketing services to Lincolnway Energy will be providing those same
services to other ethanol plants, and may experience conflicts of interest in
allocating favorable sales and sales when the supply of ethanol or distiller's
grains exceeds the demand.





Risks
Relating To Lincolnway Energy's Units.





Lincolnway
Energy's Units Are Not A Liquid Investment.  No market exists
for Lincolnway Energy's units.  A market will not develop for the
units because the units are not freely transferable and can only be sold,
assigned or otherwise transferred in compliance with the federal and applicable
state securities laws and the terms and conditions of the amended and restated
operating agreement and unit assignment policy of Lincolnway Energy, which
require the prior approval of the board for all sales and assignments of any
units.  The restrictions set out in the securities laws, the amended
and restated operating agreement and the unit assignment policy may at times
preclude the transfer of a unit.  The units are therefore not a liquid
investment.





There Is No
Guarantee Of Any Distributions From Lincolnway
Energy.Lincolnway Energy is not required to make any
distributions to its members.  Lincolnway Energy will also be
prohibited, or at least severely limited or restricted, from making any
distributions under the terms of Lincolnway Energy's credit and loan
agreements.  Lincolnway Energy's financial situation may also not
allow it to make any distributions to its members in any event.  The
payment of distributions will also always be at the discretion of the board of
Lincolnway Energy and will depend on, among other things, the board's analysis
of Lincolnway Energy's earnings, financial condition, capital requirements,
level of indebtedness, statutory and contractual restrictions regarding the
payment of distributions and any other considerations that the board deems
relevant.





The Staggered
Terms Of Lincolnway Energy's Board May Delay Or Prevent Lincolnway Energy's
Acquisition By A Third Party.Lincolnway Energy's amended and
restated operating agreement provides for three classes of directors, based upon
the term of office, with each director holding a three year
term.  Some view that type of provision as making more difficult, or
as deterring, a merger, tender offer or acquisition involving Lincolnway Energy
that might result in the members receiving a premium for their
units.





Taxation
And Other Risks.





Members Will Owe
Taxes On Lincolnway Energy's Profits But May Never Receive Any Distributions
From Lincolnway Energy.Lincolnway Energy is not required to
make any distributions, and it is possible that no distributions will be made by
Lincolnway Energy, even if Lincolnway Energy has profits.


30





Any
Lincolnway Energy profits will be taxable to its members in accordance with the
members' respective percentage ownership of the units, whether or not the
profits have been distributed.  Even if distributions are made, the
distributions may not equal the taxes payable by a member on the member's share
of Lincolnway Energy's profits.





Lincolnway
Energy could also sustain losses offsetting the profits of a prior tax period,
so a member might never receive a distribution or be able to sell the member's
units for an amount equal to the taxes which have already been paid by the
member.





The Internal
Revenue Service Could Challenge Allocations And Audit Lincolnway Energy's Tax
Returns.The amended and restated operating agreement of
Lincolnway Energy provides for the allocation of profits, losses and credits
among the members.  The Internal Revenue Service might challenge those
allocations and reallocate various items in a manner which reduces deductions or
increases income to the members, both of which would result in additional tax
liability for members.





The
Internal Revenue Service might also audit Lincolnway Energy's returns, and
adjustments might be required as a result of an audit.  If an audit
results in an adjustment, members could be required to file amended returns and
to pay back taxes, plus interest and possibly penalties.  The members'
tax returns might also be audited.





The Tax Laws May
Change To The Detriment Of Lincolnway Energy And Its
Members.It is possible that the current federal and/or state
tax treatment given to an investment in the units or to Lincolnway Energy may be
changed by subsequent legislative, administrative or judicial
action.  Any such changes could significantly alter the tax
consequences and decrease the after tax rate of return on investment in the
units.





For
example, although Lincolnway Energy anticipates being treated as a partnership
for tax purposes, if for some reason Lincolnway Energy was classified or treated
as a corporation, or Lincolnway Energy's board determined that it would be
beneficial for Lincolnway Energy and its members for Lincolnway Energy to become
taxed as a corporation, Lincolnway Energy would pay corporate income tax and no
profits or losses would flow through to the members.  The payment of
taxes by Lincolnway Energy would lower the cash available for distribution to
the members, and any distributions would be taxed to the members as
dividends.





Software Problems
And Computer Viruses May Have A Materially Adverse Effect Upon Lincolnway
Energy.Lincolnway Energy will utilize various software
applications in connection with its ethanol operation.  There is no
assurance that the operation of any software or other computer systems will be
uninterrupted or error free or will otherwise be successful.  There is
also no assurance or guarantee that the software will continue to be available
to Lincolnway Energy or that the software will be able to be maintained and
updated as necessary from time to time.


31


Lincolnway
Energy 's use of its software and other computer systems will be subject to
attack by computer hackers and to failure or interruption through viruses or
acts of God or other occurrences beyond the control of Lincolnway Energy, such
as computer failure, communications line failure, power failure, mechanical
failure, equipment malfunction or failure, and lightning.





The
refiners, suppliers and other persons who Lincolnway Energy has business
relationships with are also subject to the same software and computer system
risks, and may affect their ability to do business with Lincolnway
Energy.





Any
problems with any software or other computer systems might have material adverse
effects on Lincolnway Energy.





Item
1B.            Unresolved
Staff Comments.





This Item
is not applicable to Lincolnway Energy because Lincolnway Energy is not an
accelerated filer, a large accelerated filer or a well-known seasoned issuer, as
those terms are defined in the rules of the Securities and Exchange
Commission.





Item
2.               Properties.





Lincolnway
Energy's office and its ethanol plant are located on approximately 160 acres in
Story County, Iowa, near Nevada. Iowa.  Lincolnway Energy owns the
real estate and its office and ethanol plant, but all of those properties are
subject to a first mortgage and security interest held by Lincolnway Energy's
primary lender, CoBank, and to other mortgages and security interests held by
the Iowa Department of Economic Development, the Iowa Department of
Transportation, and Fagen, Inc.





Lincolnway
Energy's office building has approximately 1,400 square
feet.  Lincolnway Energy utilizes the office building for office space
for Lincolnway Energy's management and other staff.  Lincolnway Energy
was utilizing approximately 90% of the available office space as of the date of
this annual report, with the remaining 10% being available to accommodate any
expansion of Lincolnway Energy's staff.  The office building also
includes grain receiving facilities.





Lincolnway
Energy's ethanol plant and related facilities include the following material
buildings and related fixtures and equipment:





·
            process
      building containing lab, offices and control
  room;


·
            maintenance
      building containing offices, storage and a welding
  shop;


·
            administration
      building containing furniture and fixtures, office equipment, computers,
      telephone system, board room and grain receiving;
  and


·
            rail
      tracks and rail spur, paved access roads, dryers, evaporators, fermenters,
      grain bins and storage facilities for ethanol and distiller's
      grains.





Lincolnway
Energy's ethanol plant has a nameplate capacity of 50,000,000 gallons of ethanol
per year, and at that capacity will generate approximately 136,000 tons of
distiller's grains per year.  The ethanol plant became operational in
May 2006, and the first full month of production at full capacity was July of
2006.  Lincolnway Energy has attempted to operate the plant at full
capacity since that time, subject to normal shutdown and other maintenance
related days and matters.


32





Lincolnway
Energy also owns approximately 93 acres of real estate which is adjacent to the
160 acre parcel noted above.  Lincolnway Energy purchased this real
estate primarily for possible use in the construction of additional railroad
spur tracks, but the real estate could also be used as part of any future
expansion of Lincolnway Energy's business.  Lincolnway Energy does
not, however, have any definite plans for the use of the real estate in
Lincolnway Energy's ethanol operations, and the real estate will likely be
custom farmed during 2009.





Lincolnway
Energy also leases 90 rail cars which are used for transporting distiller's
grains.  The lease has a 5 year term which is scheduled to expire on
March 25, 2011.





Lincolnway
Energy also leases various miscellaneous office equipment and equipment utilized
in the operation of the ethanol plant.





Item
3.               Legal
Proceedings.





Except as
noted in the following paragraphs, as of the date of this annual report,
Lincolnway Energy was not aware of any material pending legal proceeding to
which Lincolnway Energy was a party or of which any of Lincolnway Energy's
property was the subject, other than ordinary routine litigation, if any, that
was incidental to Lincolnway Energy's business. Except as noted in the following
paragraphs, as of the date of this annual report, Lincolnway Energy was not
aware that any governmental authority was contemplating any material proceeding
against Lincolnway Energy or any of Lincolnway Energy's property.





On
December 4, 2007, the Iowa Environmental Protection Commission referred alleged
environmental law violations by Lincolnway Energy to the Iowa Attorney General's
office for enforcement action.  The referred allegations concern
wastewater releases relating to construction activities and exceedences of iron
and total suspended solid limits in Lincolnway Energy's NPDES wastewater
discharge permit and also air permitting, emissions limit exceedences, stack
testing, monitoring and reporting.





Lincolnway
Energy will attempt to reach a negotiated settlement of all of the allegations,
and Lincolnway Energy has been in contact with the Iowa Attorney General's
office regarding the allegations.  No timetable has, however, been set
by the Iowa Attorney General's office for any formal actions or steps regarding
the allegations.  Lincolnway Energy cannot predict the outcome, but it
is likely that any settlement will include a monetary penalty, although an
amount cannot be predicted at this time.  A settlement may also
include repermitting regarding air emissions and an injunction against future
violations.





As part
of the process of attempting to negotiate a settlement of the allegations
regarding emissions limit exceedences and to otherwise comply with air emissions
requirements, Lincolnway Energy filed an application with the Iowa Department of
Natural Resources on August 28, 2008 for Lincolnway Energy to obtain a new air
permit under the 250 ton rules which were adopted in late
2007.  Lincolnway Energy believes that its current levels of emissions
would comply with the conditions of that air permit.  There is not,
however, any assurance that the air permit will be issued to Lincolnway
Energy.  Lincolnway Energy may also be subject to higher ongoing
compliance and operating costs under the new air permit.  Also, even
if Lincolnway Energy is issued the new air permit, monetary penalties and other
relief may still be imposed on Lincolnway Energy for the emissions limit
exceedences under its current air permit which are the subject of the
allegations.


33





Lincolnway
Energy installed equipment in July 2007 to attempt to address the exceedences of
iron and total suspended solid limits in Lincolnway Energy's NPDES wastewater
discharge permit that are part of the above referenced allegations of the Iowa
Environmental Protection Commission.  Lincolnway Energy's water test
results during 2008 have shown compliance with the requirements of its NPDES
permit regarding those matters.  Lincolnway Energy therefore believes
that the equipment has addressed those allegations, at least going
forward.  Lincolnway Energy may, however, still face monetary
penalties and other relief could still be imposed on Lincolnway Energy based
upon any of the past violations which are part of the allegations.





Lincolnway
Energy is hopeful that it will be able to reach a settlement of all of the
allegations of the Iowa Environmental Protection Commission, but there is no
assurance that the allegations will be settled, and Lincolnway Energy cannot
predict at this time the outcome of any settlement or other proceedings that may
arise out of the allegations.  Lincolnway Energy was therefore unable
at the time of the preparation of this annual report to determine what effect
the proceedings of the Iowa Attorney General will have on Lincolnway
Energy.  The outcome (even if through settlement) could, however, have
material adverse effects on Lincolnway Energy's business and financial
condition.





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





No matter
was submitted to a vote of the members of Lincolnway Energy, through the
solicitation of proxies or otherwise, during the period of July 1, 2008 through
September 30, 2008.


34





PART
II





Item
      5.
            Market
      for Registrant's Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.





Lincolnway Energy is authorized to
issue an unlimited number of units, but member approval is required in order to
issue more than 45,608 units.  Lincolnway Energy had 42,049
outstanding units as of November 30, 2008, which were held of record by 978
different members.  The determination of the number of members is
based upon the number of record holders of the units as reflected in Lincolnway
Energy's internal unit records.





Lincolnway
Energy did not issue any units during the fiscal year ended September 30,
2008.





Lincolnway
Energy's units are not listed on any exchange, and there is no public trading
market for Lincolnway Energy's units.  An investment in Lincolnway
Energy's units is not a liquid investment because the amended and restated
operating agreement of Lincolnway Energy establishes various conditions on the
issuance of additional units and various restrictions on the sale, assignment or
other transfer of units.





The
amended and restated operating agreement of Lincolnway Energy provides that the
board of Lincolnway Energy may not issue any units for a consideration or value
of less than $500 per unit, issue more than an aggregate of 45,608 units, or
issue any units to any director or officer of Lincolnway Energy in their
capacity as such, without the vote of the members holding at least a majority of
the outstanding units represented at a meeting at which a quorum of the members
is present.  The members holding at least 25% of the outstanding units
constitute a quorum at any meeting of the members.





The
amended and restated operating agreement of Lincolnway Energy also provides that
no member shall, directly or indirectly, own, hold or control more than 49% of
the outstanding units at any time, unless the member exceeds that percentage by
reason of Lincolnway Energy purchasing units.  The amended and
restated operating agreement provides that for this purpose a member will be
deemed to indirectly own, hold and control all units which are owned by the
member's spouse or any of the member's parents or minor children and by any
entity of which any one or more of the member or any of those relatives owns at
least 10% of the outstanding voting equity of the entity.





The
amended and restated operating agreement of Lincolnway Energy also establishes
restrictions on the sale, assignment or other transfer of units.





The
amended and restated operating agreement provides that a member may not sell,
transfer, assign or otherwise dispose of or convey any units, whether
voluntarily or involuntarily, or grant a security interest in any units, except
with the prior approval of the board of Lincolnway Energy and in compliance and
accordance with the policies and procedures as may be adopted from time to time
by the board.  The board is authorized to adopt and implement those
policies and procedures for any reasonable purpose, as determined by the
board.  A reasonable purpose includes prohibiting, restricting,
limiting, delaying or placing conditions on any assignment which, alone or
together with any other past or contemplated assignments, would or might
reasonably be determined to:


35





·
            Violate
      or cause Lincolnway Energy to violate or to otherwise be in noncompliance
      with any law, rule, regulation or order, including any securities law,
      rule, regulation or order;





·
            Cause
      Lincolnway Energy to be taxed as a corporation for tax purposes, including
      by reason of Section 7704 of the Internal Revenue Code of
      1986;





·
            Result
      in the termination of Lincolnway Energy or Lincolnway Energy's tax year
      for tax purposes, including under Section 708 of the Internal Revenue Code
      of 1986, or cause the application to Lincolnway Energy of Sections
      168(g)(1)(B) or 168(h) of the Internal Revenue Code of 1986 or similar or
      analogous rules;





·
            Violate
      any term or condition of the amended and restated operating agreement,
      including the 49% ownership limitation noted
  above;





·
            Violate
      or cause Lincolnway Energy to violate or to otherwise be in noncompliance
      with any law, rule, regulation or order applicable to Lincolnway Energy's
      selection or use of its then current fiscal year, including Section 444 of
      the Internal Revenue Code of 1986;





·
            Require
      Lincolnway Energy to become licensed, registered or regulated as an
      investment company, a broker-dealer or any other form of regulated entity
      under any law, rule, regulation or order;
or





·
            Create
      or result in any fractional units.





The
policies and procedures adopted by the board regarding the assignment of units
are referred to as the unit assignment policy.  Lincolnway Energy's
current unit assignment policy mirrors the terms of the amended and restated
operating agreement and provides that all assignments require the prior approval
of the board, and that the board may prohibit, restrict, limit, delay or place
conditions on any assignment which might have any of the effects described in
the preceding subparagraphs.  Several of those potential effects could
be applicable to Lincolnway Energy at any given time.





One
example that will be applicable to Lincolnway Energy on an ongoing basis arises
from the fact that Lincolnway Energy is taxable as a partnership for income tax
purposes.  There are various statutes and regulations that Lincolnway
Energy must comply with in order to maintain that tax
classification.  One applicable statute and related regulation is
Section 7704 of the Internal Revenue Code of 1986 and Section 1.7704-1 of the
Treasury Regulations.  Section 7704 provides, in general, that a
partnership which becomes a publicly traded partnership under Section 7704 will
be taxed as a corporation.  Section 7704 provides that a publicly
traded partnership is a partnership whose interests either are traded on an
established securities market or are readily tradable on a secondary market or
the substantial equivalent.  Section 1.7704-1 sets forth some rules
for making a determination of whether a partnership is readily tradable on a
secondary market or the substantial equivalent for that purpose, and establishes
some specified processes and procedures as "safe harbors" under the publicly
traded partnership rules.  The safe harbors include a limited matching
service and a limited repurchase option.


36





The
general rule under the publicly traded partnership rules is that no more than 2%
of a partnership's outstanding units may be transferred during any taxable year,
unless the partnership has established one of the safe harbors that are
available under the publicly traded partnership rules.  As noted
above, the safe harbors include a limited matching service and a limited
repurchase option.  If one or both of those processes have been
established, a partnership may permit the transfer of up to an aggregate of 10%
of the partnership's outstanding units during any taxable year, so long as no
more than 2% of the transfers occur outside of the matching service or the
repurchase option and all of the other transfers are made in accordance with the
terms of the matching service or the repurchase option.





Lincolnway
Energy has established a qualified matching service on Lincolnway Energy's
website, and the amended and restated operating agreement of Lincolnway Energy
includes a repurchase provision which complies with the safe harbor for a
repurchase option under the publicly traded partnership rules.  There
are numerous conditions and requirements in both the qualified matching service
and the repurchase option, so neither provides any significant liquidity for
Lincolnway Energy's units.  Also, Lincolnway Energy has no obligation
to purchase any units under the repurchase provisions in the amended and
restated operating agreement.





Lincolnway
Energy has not made any repurchases of its units pursuant to the repurchase
provisions set forth in the amended and restated operating
agreement.





There
have been some sales of units pursuant to Lincolnway Energy's qualified matching
service.  The purchase price and other terms of any transactions
pursuant to Lincolnway Energy's qualified matching service are negotiated and
established solely by the seller and the buyer.  Lincolnway Energy
does not endorse or recommend any sale of units and is not responsible for the
fairness of the purchase price paid in any transactions made pursuant to the
qualified matching service, or for the payment or other terms of any
transaction.  Lincolnway Energy therefore does not represent or
guarantee in any way that any of the prices paid pursuant to the qualified
matching service are fair or accurately reflect the value of Lincolnway Energy's
units, and Lincolnway Energy does not endorse or recommend any sales of units at
any of the prices listed by a member in the qualified matching service or on the
same or similar terms.





The
publicly traded partnership rules exclude some types of transfers from the 2%
and 10% limitations.  As an example, a gift of units by a member to
certain family members of the member is not counted towards the 2% and 10%
limitations.





Another
example of a transfer limitation that currently will be applicable to Lincolnway
Energy on an ongoing basis arises from the fact that Lincolnway Energy has
elected to utilize a September 30 fiscal year end.  Given that fact,
no more than 5% of Lincolnway Energy's units can be owned by pass-through type
entities, such as Subchapter S corporations, limited liability companies or
partnerships.  At the time of the preparation of this annual report,
Lincolnway Energy was at the 5% maximum amount, so no transfers of any units to
a pass-through type entity were permitted.


37





The
amended and restated operating agreement and the unit assignment policy both
contemplate that a member desiring to assign any units must present Lincolnway
Energy with a unit assignment application and any other information requested by
the board.  The board is not required to act on a unit assignment
application until the next regularly scheduled meeting of the board which
follows the date on which Lincolnway Energy receives the completed and executed
unit assignment application.





An
assignment of a unit which is approved by the board will be effective for all
purposes, including for purposes of allocations and distributions, only as of
the date determined by the board, but the date must be within 32 days of the
date of the approval of the assignment by the board.  Lincolnway
Energy believes that approach is necessary in order to provide a uniform
effective date for assignments of units.





The unit
assignment policy also provides that Lincolnway Energy may require the assigning
member or the assignee to provide a legal opinion to Lincolnway Energy regarding
the assignment, and that Lincolnway Energy may require that Lincolnway Energy be
paid or reimbursed for all of its fees, costs and expenses incurred in
connection with any assignment, including legal and accounting
fees.





As of the
date of this annual report, Lincolnway Energy did not have any equity
compensation plans (including any individual compensation arrangements) in place
for any directors, officers, employees or other persons.





As of the
date of this annual report, Lincolnway Energy had no plans to, and had not
agreed to, register any of its units under any federal or state securities
laws.





There
were no outstanding warrants, options or other rights to purchase any units of
Lincolnway Energy as of the date of this annual report, and there were no
outstanding securities which were convertible or exchangeable into or for any
units of Lincolnway Energy.  Lincolnway Energy's units are not
convertible into any other securities.





The
payment of distributions to members by Lincolnway Energy is within the
discretion of the board of Lincolnway Energy, and there is no assurance of any
distributions from Lincolnway Energy.  The payment of distributions is
also subject to Lincolnway Energy's compliance with the various covenants and
requirements of Lincolnway Energy's credit and loan agreements, and it is
possible that those covenants and requirements will at times prevent Lincolnway
Energy from paying a distribution to its members.





Lincolnway
Energy has declared four distributions since Lincolnway Energy was organized in
May 2004.  The first distribution was declared in November 2006 and
was in the amount of $150 per unit, resulting in an aggregate distribution of
$6,428,850.  The second distribution was declared in May 2007, and was
in the amount of $200 per unit, resulting in an aggregate distribution of
$8,409,800.  The third distribution was declared in November 2007, and
was in the amount of $125 per unit, resulting in an aggregate distribution of
$5,256,125.  The fourth distribution was declared in May 2008, and was
in the amount of $75 per unit, resulting in an aggregate distribution of
$3,153,675.


38





Lincolnway
Energy does not contemplate being able to establish a definite or regular
distribution policy or history because the determination of whether a
distribution can or should be made by Lincolnway Energy will need to be made by
the board of Lincolnway Energy based upon the then existing facts and
circumstances of Lincolnway Energy, which could change materially from time to
time.  For example, although a distribution was declared in November
of both 2006 and 2007, the board of Lincolnway Energy determined that no
distribution should be made by Lincolnway Energy during November 2008 given the
general economic outlook and the prevailing conditions in the ethanol
industry.  Although no firm decision has been made, it is possible
that no, or perhaps reduced, distributions will be declared and paid by
Lincolnway Energy during the fiscal year ending September 30, 2009.





None of
Lincolnway Energy's units were purchased by or on behalf of Lincolnway Energy or
any affiliated purchaser (as defined in Rule 10b-18(a)(3) of the Securities
Exchange Act of 1934) of Lincolnway Energy during the period of July 1, 2008 to
September 30, 2008.  As of the date of this annual report, Lincolnway
Energy did not have any publicly announced plans or programs with respect to
purchases of its units.





Item
6.               Selected
Financial Data.





The
      following information is summary selected financial data for Lincolnway
      Energy for the fiscal years ended September 30, 2008, 2007, 2006 and 2005
      and Period from May 19, 2004 (date of inception) to September 30, 2004,
      with respect to the statements of operations data, and as of September 30,
      2008, 2007, 2006 and 2005 with respect to the balance sheet
      data.  The data is qualified by, and must be read in conjunction
      with, Item 1A of this annual report, "Risk Factors", Item 7 of this annual
      report, "Management’s Discussion and Analysis of Financial Condition and
      Results of Operations", and with the financial statements and
      supplementary data included in Item 8 of this annual
    report.





Statements of Operations Data:
                              
                              2008
                              
                              
                              2007
                              
                              
                              2006
                              
                              
                              2005
                              
                              
                              2004Revenues
                              
                              $
                              147,040,911
                              
                              
                              $
                              118,783,540
                              
                              
                              $
                              44,883,457
                              
                              
                              $
                              -
                              
                              
                              $
                              -Cost
      of goods sold
                              
                              
                              138,309,541
                              
                              
                              
                              94,233,456
                              
                              
                              
                              25,886,144
                              
                              
                              
                              -
                              
                              
                              $
                              -Gross
      Profit
                              
                              
                              8,731,370
                              
                              
                              
                              24,550,084
                              
                              
                              
                              18,997,313
                              
                              
                              
                              -
                              
                              
                              
                              -General
      and administrative expense
                              
                              
                              2,647,368
                              
                              
                              
                              2,903,436
                              
                              
                              
                              2,082,597
                              
                              
                              
                              427,478
                              
                              
                              
                              247,506Operating
      income (loss)
                              
                              
                              6,084,002
                              
                              
                              
                              21,646,648
                              
                              
                              
                              16,914,716
                              
                              
                              
                              (427,478
                              )
                              
                              
                              (247,506
                              )Interest
      expense
                              
                              
                              (1,430,469
                              )
                              
                              
                              (2,228,179
                              )
                              
                              
                              (1,281,287
                              )
                              
                              
                              -
                              
                              
                              
                              -Other
      income-interest and grant
                              
                              
                              181,895
                              
                              
                              
                              536,897
                              
                              
                              
                              274,292
                              
                              
                              
                              625,679
                              
                              
                              
                              3,728Net
      income (loss)
                              
                              $
                              4,835,428
                              
                              
                              $
                              19,955,366
                              
                              
                              $
                              15,907,721
                              
                              
                              $
                              198,201
                              
                              
                              $
                              (243,778
                              )Weighted
      average units outstanding
                              
                              
                              42,049
                              
                              
                              
                              42,519
                              
                              
                              
                              42,293
                              
                              
                              
                              32,816
                              
                              
                              
                              1,636Net
      income (loss) per unit - basic diluted
                              
                              $
                              115.00
                              
                              
                              $
                              469.33
                              
                              
                              $
                              376.13
                              
                              
                              $
                              6.04
                              
                              
                              $
                              (149.01
                              )Cash
      distributions per unit
                              
                              $
                              200.00
                              
                              
                              $
                              350.00
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -




39





Balance Sheet Data:
                      
                      2008
                      
                      
                      2007
                      
                      
                      2006
                      
                      
                      2005Working
      Capital
                      
                      $
                      10,216,873
                      
                      
                      $
                      11,845,308
                      
                      
                      $
                      6,548,336
                      
                      
                      $
                      4,212,119Net
      Property Plant & Equipment
                      
                      
                      65,010,487
                      
                      
                      
                      71,617,762
                      
                      
                      
                      78,170,697
                      
                      
                      
                      35,125,192Total
      Assets
                      
                      
                      90,516,722
                      
                      
                      
                      88,820,957
                      
                      
                      
                      93,027,237
                      
                      
                      
                      43,084,240Long-Term
      Obligations
                      
                      
                      19,998,369
                      
                      
                      
                      24,743,372
                      
                      
                      
                      29,548,706
                      
                      
                      
                      1,100,000Members'
      Equity
                      
                      
                      56,394,593
                      
                      
                      
                      59,968,965
                      
                      
                      
                      55,662,249
                      
                      
                      
                      38,640,778Book
      Value per Member Unit
                      
                      
                      1,341
                      
                      
                      
                      1,426
                      
                      
                      
                      1,299
                      
                      
                      
                      919





Lincolnway
Energy, LLC was organized on May 19, 2004, and its ethanol plant became
operational during May 2006. There was no comparative balance sheet data for
2004.





As
discussed in Item 3 of this annual report, Lincolnway Energy is currently
subject to enforcement proceedings by the Iowa Attorney General and the Iowa
Environmental Protection Commission regarding certain alleged environmental law
violations.  Lincolnway Energy cannot predict at this time the outcome
of those proceedings, but they could have material adverse effects on Lincolnway
Energy’s business and financial condition.  As discussed in Items 1A
and 7 of this annual report, the general economic and ethanol industry
circumstances prevailing at the time of this annual report were difficult and
will likely adversely affect Lincolnway Energy's results of operations during
the fiscal year ending September 30, 2009.





Item
      7.
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations.





Except
      for the historical information, the following discussion contains
      forward-looking statements that are subject to risks and uncertainties,
      and which speak only as of the date of this annual report.  No
      one should place strong or undue reliance on any forward looking
      statements.  Lincolnway Energy's actual results or actions may
      differ materially from these forward-looking statements for many reasons,
      including the risks described in Item 1A and elsewhere in this annual
      report.  This Item should be read in conjunction with the
      financial statements and related notes and with the understanding that
      Lincolnway Energy's actual future results may be materially different from
      what is currently expected or projected by Lincolnway
    Energy.





Overview





Lincolnway
Energy is an Iowa limited liability company that was formed on May 19, 2004 for
the purpose of constructing and operating a dry mill, coal fired ethanol plant.
Lincolnway Energy has been engaged in the production of ethanol and distillers
grains since May 22, 2006, and the plant became fully operational on June 22,
2006.  The ethanol plant produced 54,082,255 gallons of ethanol during
the fiscal year ended September 30, 2008, with an average of 4,506,855 gallons
of ethanol per month.  The nameplate capacity of the plant is
50,000,000 gallons of ethanol per year.  Lincolnway Energy had a
planned shut down during the months of November 2007 and June 2008 to complete
some maintenance work.


40





Lincolnway
Energy's revenues are derived from the sale of Lincolnway Energy's ethanol to
Renewable Products Marketing Group (RPMG), the sale of its distiller’s grains to
Hawkeye Gold, LLC, and the sale of its corn oil to FEC Solutions, LLC
(FECS).





Lincolnway
Energy's ethanol is sold pursuant to an ethanol marketing agreement between
Lincolnway Energy and RPMG.  Lincolnway Energy's ethanol is pooled
with the ethanol of other ethanol producers whose ethanol is marketed by
RPMG.  Lincolnway Energy pays RPMG a marketing fee of $.01 per gallon,
and RPMG pays Lincolnway Energy a netback price per gallon that is based upon
the difference between the pooled average delivered ethanol selling price and
the pooled average distribution expense.  These averages are
calculated based upon each pool participant's selling price and expense averaged
in direct proportion to the volume of ethanol supplied by each participant to
the pool.  Lincolnway Energy's agreement with RPMG had an initial term
through June 2007, but Lincolnway Energy and RPMG are continuing to operate
under the existing agreement.Lincolnway Energy
is dependent upon its agreement with RPMG for the marketing and sale of
Lincolnway Energy's ethanol, and Lincolnway Energy's loss of the agreement could
have material adverse effects on Lincolnway Energy.





Lincolnway
Energy believes that the ethanol market structure has changed during the past
year, and that the pool marketing arrangement used by RPMG may no longer be an
effective arrangement under the current market structure and
circumstances.  Lincolnway Energy has spent the past six months
investigating other marketing arrangements currently used in the ethanol
industry.  The goal of Lincolnway Energy is to assess various ethanol
marketing arrangements over a reasonable amount of time and then determine which
arrangement is best suited to Lincolnway Energy.





Lincolnway
Energy's output of distiller's grains is sold to Hawkeye Gold, LLC under a
Distiller's Grains Marketing Agreement that became effective on October 1,
2007.  Lincolnway Energy pays Hawkeye Gold, LLC a marketing fee for
dried distiller's grains equal to the greater of 2% of the FOB plant price for
the dried distiller's grains in question or a per-ton fee of $1.30 for the dried
distiller's grains.  The marketing fee for wet distiller's grains is
the greater of 3% of the FOB plant price for the wet distiller's grains in
question or a per-ton fee of $1.00 for the wet distiller's
grains.  The Distiller's Grains Marketing Agreement can be terminated
by either Lincolnway Energy or Hawkeye Gold, LLC on 90 days written
notice.  Lincolnway Energy is dependent upon its agreement with
Hawkeye Gold, LLC for the marketing and sale of Lincolnway Energy's distiller's
grains, and Lincolnway Energy's loss of the agreement could have material
adverse effects on Lincolnway Energy.





Lincolnway
Energy purchased a corn oil system from FECS, which was put into operation in
April, 2008.  The system extracts corn oil from the syrup which is
generated in the production of ethanol.  Lincolnway Energy produced
corn oil on a trial basis from April, 2008 until approximately September, 2008,
and FECS purchased all of the corn oil produced by Lincolnway Energy during that
time period.  Lincolnway Energy entered into an agreement with FECS on
October 13, 2008 under which FECS purchases all of Lincolnway Energy's output of
corn oil for resale by FECS.  Lincolnway Energy pays FECS a marketing
and technical assistance fee of 5% of the FOB sales price of the corn
oil.  The agreement has an initial term of 36 months, commencing from
October 13, 2008, and can renew for successive 36 month terms unless Lincolnway
Energy or FECS elects to terminate the agreement at the end of the then current
36 month term.


41





Plan
of Operations for the Next 12 Months





Lincolnway
Energy plans to spend additional time focusing on plant or operational changes
that may increase plant efficiency.  There have been technological
changes that have occurred since the plant was built, and some of those changes
have now been utilized for a sufficient amount of time so as to develop a
history which makes it feasible for Lincolnway Energy to evaluate actual results
verses claims made by sales people.  Lincolnway Energy plans
to evaluate process changes that can take place through changes in
procedure and without spending any capital.  These types of changes
may involve things like lowering temperatures or adding ingredients at a
different stage of the process.  Lincolnway Energy also plans to
evaluate the ingredients used in the ethanol production process based not only
on price but also on performance.  This is an important step as many
suppliers are now developing products that are claimed to be superior in
performance to some of the existing products.  Lincolnway Energy will
also plan to evaluate equipment improvements that have short pay back times and
that can create efficiencies in multiple plant processes.





Lincolnway
Energy continues to cooperate with researchers at various universities, but
primarily Iowa State University, in hopes that someone will invent a process
that benefits the ethanol industry by reducing production costs or by adding
value to an existing product.  Lincolnway Energy also cooperates with
a number of independent companies that are striving to bring improvements to the
ethanol industry.





Overall,
Lincolnway Energy will strive to make any improvements it can feasibly and
economically make in light of the goal of also preserving capital during these
credit constrained times.





Lincolnway
Energy also plans to study the storage and transportation infrastructure needs
of Lincolnway Energy. This has become an important consideration because as the
ethanol industry has built more plants, shipping destinations have radically
changed.  Lincolnway Energy therefore needs to evaluate if any steps
or changes should be taken which could put Lincolnway Energy in a better
position to compete with other ethanol producers by having the infrastructure in
place which will help Lincolnway Energy obtain the best possible price available
in the market place.





Air
and Water Permit Compliance





As
discussed in Item 3 of this annual report, Lincolnway Energy is currently
subject to enforcement proceedings by the Iowa Attorney General and the Iowa
Environmental Protection Commission regarding certain alleged environmental law
violations.  Lincolnway Energy cannot predict at this time the outcome
of those proceedings, but they could have material adverse effects on Lincolnway
Energy’s business and financial condition.


42





Air
Permit Application





Lincolnway
Energy submitted an application for a 250 ton per year Air Quality Permit to the
Iowa Department of Natural Resources (IDNR) on August 28, 2008. The IDNR is
currently in the process of reviewing the application. The review process is
very thorough and often times can take up to one year.





Lincolnway
Energy is currently in the process of conducting the annual emissions testing
required by its Air Quality Permit. Lincolnway Energy believes that this testing
will again show that Lincolnway Energy is eligible for a 250 ton per year Air
Quality Permit, but there is no assurance that the new air permit will be issued
to Lincolnway Energy.





Comparison
of Fiscal Years Ended September 30, 2008 and 2007





Statements of Operations
    Data:
                                
                                2008
                                
                                
                                2007Amount
                                
                                
                                %
                                
                                
                                Amount
                                
                                
                                %Revenues
                                
                                $
                                147,040,911
                                
                                
                                
                                100.0
                                
                                
                                $
                                118,783,540
                                
                                
                                
                                100.0Cost
      of goods sold
                                
                                
                                138,309,541
                                
                                
                                
                                94.1
                                
                                
                                
                                94,233,456
                                
                                
                                
                                79.3Gross
      Profit
                                
                                
                                8,731,370
                                
                                
                                
                                5.9
                                
                                
                                
                                24,550,084
                                
                                
                                
                                20.7General
      and administrative expense
                                
                                
                                2,647,368
                                
                                
                                
                                1.8
                                
                                
                                
                                2,903,436
                                
                                
                                
                                2.4Operating
      income
                                
                                
                                6,084,002
                                
                                
                                
                                4.1
                                
                                
                                
                                21,646,648
                                
                                
                                
                                18.3Interest
      expense
                                
                                
                                (1,430,469
                                )
                                
                                
                                (0.9
                                )
                                
                                
                                (2,228,179
                                )
                                
                                
                                (1.9
                                )Other
      income-interest and grant
                                
                                
                                181,895
                                
                                
                                
                                0.1
                                
                                
                                
                                536,897
                                
                                
                                
                                0.4Net
      income
                                
                                $
                                4,835,428
                                
                                
                                
                                3.3
                                
                                
                                $
                                19,955,366
                                
                                
                                
                                16.8





Revenues
from operations for the fiscal year ended September 30, 2008 were approximately
$147.0 million, consisting of $122.3 million of ethanol sales (83%) and $25.5
million in distiller's grains sales (17%).  Revenues increased in
fiscal year 2008 by approximately 24%, when compared to the fiscal year 2007.
Lincolnway Energy sold approximately 54.3 million gallons of ethanol at an
average price of $2.25 per gallon, 131,000 tons of dried distillers grains at an
average price of $183.00 per ton and 33,000 tons of wet distillers grains at an
average price of $49.00 per ton during the fiscal year ended September 30,
2008.  Lincolnway Energy also sold approximately $1.4 million of syrup
and corn oil during the 2008 fiscal year.  The increase in revenues
for the fiscal year ended September 30, 2008 resulted from an 8% increase in
sales volume and a 10% increase in price for ethanol, and a 66% increase in the
sales price for distillers grains, all as compared to the previous fiscal year.
The increase in sales volume is due to Lincolnway Energy's increase in
production over the nameplate of 50 million gallons. In April 2007, Lincolnway
Energy started entering into derivative contracts to hedge its exposure to price
risk as it relates to ethanol sales. The revenues for the year ended September
30, 2008 include a combined unrealized and realized net loss on derivative
contracts of $2.2 million, compared to a $514,464 gain for the year ended
September 30, 2007.


43





The
average price Lincolnway Energy received for its dried distillers grains
increased to $183.00 per ton in fiscal year 2008 from $110.00 per ton in fiscal
year 2007.  The higher prices received for distiller's grains helped
offset the higher price which was paid by Lincolnway Energy for
corn.  Management believes the increase in the price for distiller's
grains is a result of the increase in the price of corn because increased corn
prices positively affects the price of distiller’s grains as animal feeding
operations substitute distiller’s grains as animal feed in place of
corn.  This increase in demand for distiller’s grains as a substitute
for corn is offset, however, by an increase in the supply of distillers grains
resulting from increased ethanol production in fiscal year 2008 as compared to
2007.  Management expects that distiller’s grains prices could
decrease slightly in the foreseeable future as the supply of distillers grains
increases as a result of increased ethanol production.





Lincolnway
Energy anticipates that its results of operations for the remainder of calendar
year 2008 and for 2009 will continue to be affected by high corn prices, a
surplus of ethanol, low ethanol prices, and volatility in the commodity
markets.





Lincolnway
Energy's cost of goods sold for the fiscal year ended September 30, 2008 totaled
approximately $138.3 million, which was an increase of 47% when compared to
fiscal year 2007.  The increase in cost of goods sold for the 2008
fiscal year is primarily due to a 7% increase in ethanol production and a 46%
increase in the average cost of corn per bushel for fiscal year
2008.   Cost of goods sold major components are: corn costs,
energy costs, ingredient costs, production labor, repairs and maintenance,
process depreciation, and ethanol and distillers grain freight expense and
marketing fees.  Cost of goods sold for fiscal year 2008 also includes
a combined unrealized and realized net gain of $3.4 million from derivative
instruments, and a $1.1 million unrealized loss on firm purchase commitments,
which is recognized in corn costs, compared to a $2.7 million combined
unrealized and realized net gain and no loss on firm purchase commitments for
fiscal year 2007.





Corn
costs for the fiscal year ended September 30, 2008 totaled approximately $98.0
million, compared to $59.7 for fiscal year 2007. Approximately 19.5 million
bushels of corn was ground during fiscal year 2008 at an average cost of $4.99
per bushel, compared to 17.5 million bushels at an average cost of $3.42 for
fiscal year 2007. The increase in bushels ground was due to the increase in
production during fiscal year 2008.  Corn costs, including the
combined unrealized and realized net gain from derivative instruments and a
unrealized loss on firm purchase commitments, represented 69% of cost of goods
sold for the fiscal year ended September 30, 2008, compared to 61% of costs of
goods sold for fiscal year 2007.





Lincolnway
Energy enters into future purchase contracts for corn and these contracts are
evaluated for potential losses.  As of September 30, 2008, Lincolnway
Energy had various corn fixed and basis contracts for approximately 3,564,000
bushels.  Due to rapidly falling corn prices, at September 30, 2008,
Lincolnway Energy recorded a loss  of approximately $.72 on 1,413,571
bushels of fixed price contracts and $.06 on 1,040,000 bushels of basis
contracts, totaling approximately a $1.1 million unrealized
loss.


44





Lincolnway
Energy anticipates continued volatility in Lincolnway Energy's corn costs due to
the timing of the change in value of the derivative instruments relative to the
cost and use of the corn being hedged.





Energy
costs for the fiscal year ended September 30, 2008 totaled approximately $8.2
million, or 6% of cost of goods sold, compared to $6.7 million, or 8% of cost of
goods sold, for the 2007 fiscal year.  Energy costs consist of coal
costs and electricity and propane costs.  For the fiscal year ended
September 30, 2008, Lincolnway Energy purchased approximately 98,000 tons of
coal at an approximate total cost of $5.8 million.  Electricity and
propane costs amounted to approximately $2.3 million. Electricity costs
decreased as a percentage of cost of goods sold for the fiscal year 2008 due to
the installation of two capacitors to the existing system.





Ingredient
costs for the fiscal year ended September 30, 2008 totaled approximately $6.8
million, or 5% of cost of goods sold, compared to $6.0 million, or 6% of cost of
goods sold, for the 2007 fiscal year.  Ingredients were a smaller
percentage of cost of goods sold for fiscal year 2008 due to corn costs
representing a larger percentage for the year.   Ingredient costs
consist of denaturant, enzymes and process chemicals.





Production
labor, repairs and maintenance and other plant costs totaled approximately $5.3
million, or 4% of cost of goods sold, for the fiscal year ended September 30,
2008, compared to $4.7 million, or 5% of cost of goods sold, for fiscal year
2007.





Depreciation
totaled approximately $7.4 million, or 5% of cost of goods sold, for the fiscal
year ended September 30, 2008, compared to $7.3 million, or 8% of cost of goods
sold, for fiscal year 2007.





Ethanol
and distiller’s grain freight expense and marketing fees totaled approximately
$14.2 million, or 10% of cost of goods sold, during the fiscal year ended
September 30, 2008, compared to $11.8 million, or 12% of cost of goods sold, for
fiscal year 2007.  An increase in sales for the 2008 fiscal year drove
these costs up for the 2008 fiscal year.





General
and administrative expenses totaled approximately $2.6 million during the fiscal
year ended September 30, 2008, compared to $2.9 million for fiscal year 2007.
The decrease of $.3 million is due to a reduction of professional fees and
business promotions.





Other
income and expense totaled approximately $1.2 million net expense during the
fiscal year ended September 30, 2008, compared to $1.7 million net expense for
fiscal year 2007. The decrease in net expense is due to a decrease in interest
expense for the fiscal year ended September 30, 2008. Long-term debt and
interest rates decreased for fiscal year 2008 compared to fiscal year
2007.


45




Financial
Summary and Analysis of Fourth Quarter 2007





The
fourth quarter of 2007 is the first full quarter where there is comparable data
available for 2006, so the following paragraphs compare those
periods.





Lincolnway
Energy's net income totaled approximately $1.7 million during the fourth quarter
of fiscal year 2007, which was a decrease from net income of approximately $13.4
million in the fourth quarter of fiscal year 2006. This decrease is due to a
combination of a decrease in ethanol price and an increase in corn costs from
the fourth quarter of fiscal year 2007 to the fourth quarter of fiscal year
2006.





Revenues
from operations for the fourth quarter of fiscal year 2007 totaled approximately
$29.0 million, down from approximately $34.0 million in the fourth quarter of
fiscal year 2006.  Net gallons of denatured ethanol sold totaled
approximately 12,700,000 in the fourth quarter of fiscal year 2007, compared to
13,400,000 gallons in the fourth quarter of fiscal year 2006. The approximate
700,000 gallon difference between those quarters is due to ethanol unit trains
being loaded, but not yet released to the common carrier at the end of the
fourth quarter of fiscal year 2007, which resulted in higher finished goods
inventory because revenue is not recognized until the unit trains are released
to the common carrier.  Lincolnway Energy experienced a 13% decrease
in ethanol prices in the fourth quarter of fiscal year 2007, when compared to
the fourth quarter of fiscal year 2006.





Lincolnway
Energy sold approximately 41,000 tons of distiller's grains in the fourth
quarter of fiscal year 2007, compared to 38,000 tons in the fourth quarter of
fiscal year 2006.  Lincolnway Energy experienced an 18% increase in
distiller’s grains price for the fourth quarter of 2007, when compared to the
fourth quarter of 2006.





Lincolnway
Energy's cost of goods sold for the fourth quarter of fiscal year 2007 totaled
approximately $26.5 million, which was an increase from approximately $19.2
million in the fourth quarter of fiscal year 2006. The increase is due to an
approximate 130% increase in corn costs and an approximate 38% reduction of
denaturant usage. Denaturant usage has decreased due to the escalating price
increase in unleaded gas compared to ethanol. Denaturant is an additive that
ethanol plants are required by regulation to add to the alcohol
produced.  Denaturant can be added up to 4.96% of volume of alcohol
produced, but no less than 1.96%.  When unleaded gas prices started to
exceed ethanol prices, Lincolnway Energy reduced the usage of denaturant from
the upper end of the range normally used by Lincolnway Energy (4.53%) to the
lower end normally used by Lincolnway Energy (2.2%), thereby reducing the volume
of denaturant used, which lowered cost of goods sold related to the cost of
denaturant.





General
and administrative expenses for the fourth quarter of fiscal year 2007 totaled
approximately $.620 million, compared to $.670 million in the fourth quarter of
fiscal year 2006. The net decrease of $.05 million is due to a reduction of
professional fees, marketing fees and administrative labor costs for the fourth
quarter of fiscal year 2007.




46




Other
income and expense for the fourth quarter of fiscal year 2007 totaled
approximately $.41 million net expense, compared to $.89 million net expense in
the fourth quarter of fiscal year 2006. The decrease in net expense is due to a
decrease in interest expense for the fourth quarter of fiscal year 2007.
Long-term debt and interest rates decreased for the fourth quarter of fiscal
year 2007, when compared to the fourth quarter of fiscal year 2006.





Risks,
Trends and Factors that May Affect Future Operating Results





Corn





Corn
prices for the fiscal year ended September 30, 2008, presented undoubtedly some
of the most volatile price fluctuations in the history of the corn
market.  Corn prices passed the former historical highs by more than
$2.00 per bushel, only to reverse mid-year and drop by over $3.00 per bushel by
fiscal year end September 30, 2008.  The factors driving corn prices
have grown more speculative and complex, making it even more difficult to
predict corn prices with any degree of reliability or certainty, whether over
the short or the long term.  In the past, the fundamental supply and
demand equation at least primarily drove corn prices, but that factor has been
diminishing, and in particular during this past year, as cash and futures prices
for corn were driven largely by the increased speculative trading in corn
futures contracts by hedge funds and other similar type
investors.  Open interest in corn futures reached never before seen
highs in 2008, and as of the time of the preparation of this annual report,
funds held positions in approximately 1.16 billion bushels of
corn.  This speculative trading and the macro-economic conditions
throughout the world have proven very able to rapidly and materially influence
the price of corn.  The speculative trading funds also commonly hold
extensive trading positions in stocks, bonds, international markets,
etc.  The fact that these traders have those other investments may be
causing corn and other commodity prices and trading to be affected more so than
in the past by factors affecting, or movements in, those other types of markets
and investments.  For example, when the U.S. and world economy moved
into recession, triggering extensive financial market losses and margin calls,
many funds which were invested in corn began to liquidate their positions, which
drove down corn prices.  Also, as noted in Item 1A above in Risk
Factors, the general emotions and psychology of the overall markets and economy
can play a role in both cash and futures prices for corn and for ethanol and
other commodities, so perceptions and actions in the stock and other investment
sectors can affect Lincolnway Energy's markets even if those perceptions and
actions are really unrelated to actual supply, demand and other more tangible
market factors and indicators for the ethanol industry.  This will
continue to be a risk for Lincolnway Energy, LLC going forward.





Lincolnway
Energy can be adversely affected by rapidly decreasing corn prices as well as by
increasing prices, depending on how much corn Lincolnway Energy has on hand or
the positions it holds in the futures market.  A measured approach to
corn hedging and a conservative amount of risk exposure continues to be
Lincolnway Energy's general approach to dealing with the volatility that will
continue to apply to the corn market.





As of
early December 2008, cash corn prices in central Iowa had dropped to
approximately $3.31 per bushel.  However, the supply and demand for
the 08/09 crop suggests that corn supplies will be as tight and likely tighter
than the prior year's crop.  For the 07/08 crop year, U.S. corn
supplies exceeded demand by 1.625 billion bushels.  The USDA estimates
that the excess supplies for the 08/09 crop will be 1.138 billion bushels;
although many private analysts suggest the excess will be closer to 1.4-1.5
billion bushels.  Either way, it suggests tighter supplies for the
current crop year.  The attrition within the ethanol producers’
community and the liquidity concerns of some large international corn buyers
also has many questioning the amount of corn that will get consumed in
2009.




47




Lincolnway
Energy attempts to offset or hedge some of the risk involved with the changing
corn price through the trading of futures and options on the Chicago Board of
Trade, as well as the purchase of physical delivery contracts from
suppliers.  Lincolnway Energy continues to monitor and attempt to
manage risks involved with corn production in order to attempt to ensure
adequate supply and protection against rapid price
increases.  Lincolnway Energy believes that option strategies
currently offer the greatest flexibility for Lincolnway Energy’s
purposes.





Ethanol





Ethanol
prices remained tied to corn for the most part during the 2008 fiscal
year.  Lincolnway Energy saw ethanol futures reach a high of $2.955
per gallon in June 2008.  The fiscal year low came early in the fiscal
year, during October 2007, at $1.53 per gallon.  The futures price as
of December 22, 2008, was $1.57 per gallon.





Changes
in government policy continue to be one of the biggest current threats to
ethanol prices.  The Renewable Fuels Standard mandates that for the
calendar year 2009, 11.1 billion gallons of renewable fuels must be included in
the U.S. motor fuel usage, of which 10.5 billion gallons can include corn-based
ethanol.  While changes to this law are unlikely, they are not
impossible, and any reduction in the mandate would have a material adverse
effect on the ethanol industry and Lincolnway Energy.





The
Volumetric Ethanol Excise Tax Credit (VEETC) is a law that has been under fire
in recent months.  This law, enacted in 2004, originally allowed a 54
cent per gallon tax credit to blenders and sellers of ethanol.  The
credit was reduced to 51 cents effective in January 2005, and is expected to be
further reduced to 45 cents on January 1, 2009.  Further reductions in
the VEETC tax credit present a potential risk for the ethanol industry and
Lincolnway Energy.





The U.S.
and international recession also creates a potential risk factor for ethanol
prices.  There has been a dramatic decrease in overall oil and
gasoline demand as the high prices this summer, along with tightening economic
conditions, have driven the consumer to use less energy.  Gasoline
prices have recently dropped to levels much lower than ethanol
prices.  The difference in price currently hovers near 51 cents/gallon
(gas discount to ethanol), which effectively takes away the VEETC tax credit to
ethanol blenders and limits the amount of discretionary blending that would
otherwise occur when ethanol could be bought cheaper.  Any reduction
in gasoline prices to levels at a greater than a 51 cent per gallon discount to
ethanol would create further disincentives for ethanol blending.




48




Crush
Margin





The gross
crush margin represents the biggest factor affecting the future results of
Lincolnway Energy.  This margin figure represents the gross profit or
loss of buying a bushel of corn and converting it into gallons of marketable
denatured ethanol.  All of the fundamental factors that influence the
corn or ethanol markets are ultimately expressed in the crush
margin.  The values of corn and ethanol have been strongly correlated
for the fiscal year ended September 30, 2008, which is the main contributing
factor in the stability of the gross crush margin. Lincolnway Energy expects
this trend to continue through the fiscal year ending September 30, 2009. Major
factors that could change the crush margin, thereby affecting future
profitability results of Lincolnway Energy, include weather affecting corn
production, changes in governmental policy, and international economic
changes.











Source:
Chicago Board of Trade





Critical
Accounting Estimates and Accounting Policies





Lincolnway
Energy's financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America and follow general
practices within the industries in which Lincolnway Energy
operates.  This preparation requires management to make estimates,
assumptions, and judgments that affect the amounts reported in the financial
statements and accompanying notes.  These estimates, assumptions and
judgments are based on information available as of the date of the financial
statements; accordingly, as this information changes, actual results could
differ from the estimates, assumptions, and judgments reflected in the financial
statements.  Certain policies inherently have a greater reliance on
the use of estimates, assumptions, and judgments and, as such, have a greater
possibility of producing results that could be materially different than
originally reported.  Management believes the following policies are
both important to the portrayal of Lincolnway Energy's financial condition and
results of operations and require subjective or complex judgments; therefore,
management considers the following to be critical accounting
policies.





49





Off-Balance
Sheet Arrangements





Lincolnway
Energy currently does not have any off-balance sheet arrangements.





Revenue
Recognition





Revenue
from the sale of Lincolnway Energy’s ethanol and distillers grains is recognized
at the time title and all risks of ownership transfer to the
customers.  This generally occurs upon the loading of the
product.  For ethanol, title passes from Lincolnway Energy at the time
the product crosses the loading flange in either a railcar or truck. For
distiller’s grains, title passes upon the loading of distiller's grains into
trucks.  For railcar shipments, this takes place when the railcar is
filled and the marketer receives written notice that they have been loaded and
are available for billing.  Shipping and handling costs incurred by
Lincolnway Energy for the sale of ethanol and distiller’s grain are included in
costs of goods sold.





Lincolnway
Energy’s ethanol production is sold to Renewable Products Marketing Group
(RPMG).  Lincolnway Energy’s ethanol is pooled with the ethanol of
other ethanol producers whose ethanol is marketed by RPMG.  Lincolnway
Energy pays RPMG a pooling fee of $.01 per gallon of ethanol, and RPMG pays
Lincolnway Energy a netback price per gallon that is based upon the difference
between the pooled average delivered ethanol selling price and the pooled
average distribution expense.  The averages are calculated based upon
each pool participant’s selling price and expense averaged in direct proportion
to the volume of ethanol supplied by each pool participant.





Lincolnway
Energy’s distiller’s grain production is sold to Hawkeye Gold,
LLC.  Lincolnway Energy pays Hawkeye Gold, LLC a marketing fee for
dried distiller’s grains equal to the greater of 2% of the FOB plant price for
the dried distiller’s grain or a per-ton fee of $1.30 for the dried distiller’s
grain.  The marketing fee for wet distiller’s grains is the greater of
3% of the FOB plant price for the wet distiller’s grains or a per-ton fee of
$1.00 for the wet distiller’s grains.





Lincolnway
Energy’s corn oil production is sold to FEC Solutions, LLC (FECS). For corn oil,
title passes upon the loading of the corn oil into the trucks. The purchase
price payable by FECS for each shipment of corn oil is the FOB sales price less
a marketing and technical assistance fee in an amount equal to 5% of the FOB
sales price.





Derivative
Instruments





Lincolnway
Energy enters into derivative contracts to hedge its exposure to price risk
related to forecasted corn needs, forward corn purchase contracts and ethanol
sales.   Lincolnway Energy does not typically enter into
derivative instruments other than for hedging purposes.  All the
derivative contracts are recognized on the September 30, 2008 and 2007 balance
sheets at their fair market value.  Although Lincolnway Energy
believes Lincolnway Energy's derivative positions are economic hedges, none has
been designated as a hedge for accounting purposes.  Accordingly, any
realized or unrealized gain or loss related to these derivative instruments is
recorded in the statement of operations as a component of cost of goods sold in
the case of corn contracts and as a component of revenue in the case of ethanol
sales.




50




During
the fiscal years ended September 30, 2008, 2007 and 2006, Lincolnway Energy
recorded a combined realized and unrealized net gain for corn derivative
financial instruments of $3,444,671, $2,702,925 and $515,300, respectively.
During the years ended September 30, 2008, 2007 and 2006, Lincolnway Energy
recorded a combined realized and unrealized gain (loss) for ethanol sales
derivative financial instruments of ($2,203,154), $514,464 and $0, respectively.
Unrealized gains and losses on forward contracts, in which delivery has not
occurred, are deemed "normal purchases and normal sales" under FASB Statement
No. 133, as amended, and therefore are not marked to market in Lincolnway
Energy's financial statements, unless the contracts are prices higher than
market, then the contracts are adjusted to market.  As of September
30, 2008, Lincolnway Energy had outstanding commitments for approximately
1,414,000 bushels of corn amounting to approximately $7.5 million under a
forward cash contract and approximately 2,150,000 bushels of corn under several
basis contracts in which the related commodity will be delivered through March
2009.





Firm
Purchase Commitments for Corn





To ensure
an adequate supply of corn to operate the plant, Lincolnway Energy enters into
contracts to purchase corn from local farmers and elevators. At September 30,
2008, Lincolnway Energy had various fixed and basis contracts for approximately
3,564,000 bushels.  Of the 3,564,000 bushels under contract,
approximately 1,414,000 had a fixed price at an average of $5.33 per bushel and
approximately 2,150,000 had basis contracts at an average basis of $.21 per
bushel as of September 30, 2008.  Due to the significant decrease in
corn prices experienced during the fourth quarter of fiscal year 2008,
Lincolnway Energy’s average price for corn under fixed price contracts as of
September 30, 2008 was approximately $.72 per bushel above the market price and
its average price for basis contracts was approximately $.06 above the market
price.  Given that these contracts are considered firm purchase
commitments of inventory and inventory is valued at the lower of cost or market,
Lincolnway Energy recorded an unrealized loss of approximately $1.1 million on
the decrease in value.





New
Accounting Pronouncements





In
September 2006, the FASB issued Statement No. 157, Fair Value Measurement (FAS
157).  While this statement does not require new fair value
measurements, it provides guidance on applying fair value and expands required
disclosures.  FAS 157 is effective for Lincolnway Energy beginning in
the first quarter of fiscal 2009.  This pronouncement should not have
a material impact on Lincolnway Energy’s financial statements.





In
February 2008, the FASB issued “Effective Date of FASB Statement No.157” FASB
Staff Position (FSP) No. 157-2 (FSP No. 157-2).  FSP No.157-2 delays
the effective date of SFAS No. 157 until fiscal years beginning after November
15, 2008, for fair value measurements of non-financial assets and non-financial
liabilities, except for items that are recognized or disclosed at fair value in
an entity’s financial statements on a recurring basis (at least
annually).




51




In
February 2007, the FASB issued Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (FAS 159).  The statement,
which is expected to expand fair value measurement, permits entities to choose
to measure many financial instruments and certain others items at fair
value.  FAS 159 is effective for Lincolnway Energy beginning in the
first quarter of 2009.  This pronouncement should not have a material
impact on Lincolnway Energy’s financial statements.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities.”  The new standard is intended to improve
financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows.  It is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early
application encouraged.  Lincolnway Energy does not expect the
adoption of SFAS No.161 to have a material impact on Lincolnway Energy’s
financial statements.





Liquidity
and Capital Resources





The
following table shows cash flows for the fiscal years ended September 30, 2008
and 2007:




Year ended September 30,2008
            
            
            2007Net
      cash provided by operating activities
            
            $
            14,190,197
            
            
            $
            30,319,132Net
      cash (used in) investing activities
            
            
            (1,100,344
            )
            
            
            (2,882,841
            )Net
      cash (used in) financing activities
            
            
            (12,235,713
            )
            
            
            (24,311,256
            )




For the
fiscal year ended September 30, 2008, cash provided by operating activities was
$14.2 million, compared to cash provided by operating activities of $30.3
million for the fiscal year ended September 30, 2007. The decrease is due to a
decrease in net income for fiscal year 2008.  This decrease in net
income is primarily the result of increased corn prices that increased
Lincolnway Energy's cost of goods sold.





Cash
flows used in investing activities reflect the impact of property and equipment
acquired for the ethanol plant.  Net cash used in investing activities
decreased by $1.8 million for the fiscal year ended September 30, 2008, when
compared to the fiscal year ended September 30, 2007.  The decrease is
primarily due to a reduction of capital expenditures for the fiscal year
2008.





Cash
flows from financing activities include transactions and events whereby cash is
obtained or paid back to or from depositors, creditors or
investors.  Net cash provided by financing activities decreased by
$12.1 million for the fiscal year ended September 30, 2008, when compared to the
fiscal year ended September 30, 2007.  The decrease is due to a
decrease in distribution payments to the members for the year and a decrease in
payments on long term borrowing.  Lincolnway Energy made payments on
their term loan of $3,750,000 during fiscal year 2008, compared to payments of
$8,750,000 in fiscal year 2007.




52




If market
conditions do not improve, Lincolnway Energy can expect to see net losses for
the first quarter of fiscal year 2009 and possibly future
quarters.  Lincolnway Energy still has significant depreciation
expense; approximately $8.1 million budgeted for fiscal year 2009, which does
not affect cash balance, so Lincolnway Energy anticipates keeping cash balances
at a low but acceptable level that will meet bank covenants.  After
our prepayment of $1,250,000 in November 2008, Lincolnway Energy’s next term
loan payment is not due until September 2009, and Lincolnway Energy does not
plan on making any significant capital expenditures for fiscal year
2009.  If Lincolnway Energy does get in a negative cash position,
Lincolnway Energy will have access to its $10 million line of credit. As of
December 2008, Lincolnway Energy has been in compliance with all bank covenants
related to bank financing.





The
following table shows cash flows for the fiscal years ended September 30, 2007
and 2006:




Year ended September 30,2007
            
            
            2006Net
      cash provided by operating activities
            
            $
            30,319,132
            
            
            $
            11,401,526Net
      cash (used in) investing activities
            
            
            (2,882,841
            )
            
            
            (48,400,737
            )Net
      cash provided by (used in) financing activities
            
            
            (24,311,256
            )
            
            
            34,219,547




For the
fiscal year ended September 30, 2007, cash provided by operating activities was
$30.3 million, compared to cash provided by operating activities of $11.4
million for the fiscal year ended September 30, 2006. The increase is due to
there having been a full year of operations in fiscal year 2007, as compared to
only four months of operations in fiscal year 2006, which increased net income
and depreciation.





Cash
flows used in investing activities reflect the impact of property and equipment
acquired for the ethanol plant.  Net cash used in investing activities
decreased by $45.5 million for the fiscal year ended September 30, 2007, when
compared to the fiscal year ended September 30, 2006.  The decrease is
due to plant construction having been completed during fiscal year
2006.





Cash
flows from financing activities include transactions and events whereby cash is
obtained or paid back to or from depositors, creditors or
investors.  Net cash used in financing activities decreased by $58.5
million for the fiscal year ended September 30, 2007, when compared to the
fiscal year ended September 30, 2006.  The net decrease was primarily
due to decreased borrowings for the plant construction of $47.3 million, payment
of member distributions of $14.8 million and a change in membership units of
$1.6 million.  The decrease was offset by the reduction in debt
payments of $(5.2) million.





53




Loans
and Agreements





Lincolnway
Energy has a construction and term loan with Co-Bank.  The interest
rate under the term loan is a variable interest rate based on the prime rate
less .05%.  The loan requires 30 principal payments of $1,250,000 per
quarter.  The quarterly payments commenced in December 2006 and will
continue through March 2014, with the final installment due in May
2014.  In order to alleviate some of the interest rate risk, on July
25, 2008 Lincolnway Energy fixed $7,750,000 of the $19,000,000 loan outstanding
at an interest rate of 6.62%, through July 2011.  The loan requires
the maintenance of certain financial and nonfinancial covenants.  The
borrowings under the loan are collateralized by substantially all of Lincolnway
Energy's assets.  The loan also includes certain prepayment penalties,
but as of September 30, 2008, Lincolnway Energy had been allowed to make
prepayments of $20,000,000 without any penalty.  As of September 30,
2008, the balance remaining on Lincolnway Energy’s construction loan was
$19,000,000. On November 26, 2008, Lincolnway Energy made another prepayment on
the term loan of $1,250,000.  The next scheduled payment is due in
September, 2009.





Lincolnway
Energy also has a $10,000,000 construction/revolving term credit facility with
Co-Bank.  The interest rate under the credit facility agreement is a
variable interest rate based on the prime rate less .05%.  Borrowings
are subject to borrowing base restrictions as defined in the
agreement.  The credit facility requires the maintenance of certain
financial and nonfinancial covenants.  The borrowings under the
agreement are collateralized by substantially all of Lincolnway Energy's
assets.  The construction/revolving term credit facility has a
commitment fee on the average daily unused portion of the commitment at a rate
of 1⁄2 of 1% per annum, payable monthly.  The agreement also includes
certain prepayment penalties.  There was no balance remaining on the
facility as of September 30, 2008.





Lincolnway
Energy executed a mortgage in favor of Co-Bank creating a first lien on
substantially all of its assets, including the real estate and ethanol plant and
all personal property located on its property for the loan and credit agreements
discussed above.





Lincolnway
Energy also has subordinated debt financing which includes a subordinated note
of $1,250,000 payable to Fagen, Inc., with an interest rate of 4%, and a
$1,216,781 note payable to Fagen, Inc., with an interest rate of 5% per
annum.  Principal is due in full under both of those notes at maturity
on May 22, 2021 and November 17, 2014, respectively.





Lincolnway
Energy also entered into a $500,000 loan agreement with the Iowa Department of
Transportation in February 2005.  Under the agreement, the loan
proceeds were disbursed upon submission of paid invoices and interest at 2.11%
per annum began to accrue on January 1, 2007.  Payments began on July
1, 2007.  Lincolnway Energy also has a $300,000 loan agreement and a
$100,000 forgivable loan agreement with the Iowa Department of Economic
Development.  The $300,000 loan does not impose any interest, and the
$100,000 loan is forgivable upon the completion of Lincolnway Energy's ethanol
plant and the production of at least 50 million gallons of ethanol before the
project completion date of October 31, 2008.  The Iowa Department of
Economic Development will be conducting a site visit, January 2009, to review
project completion documentation.  At that time, it will be determined
if the loan will be forgiven.Management feels
confident that it will be forgiven.As of December 15, 2008,
Lincolnway Energy had made payments totaling $57,500 on the Iowa Department of
Economic Development $300,000 loan agreement and $68,476 on the Iowa Department
of Transportation agreement.





54




Lincolnway
Energy entered into an agreement with an unrelated entity on March 3, 2007 to
lease railcars.  The 5 year term of the agreement will end in March
2011.  The agreement required a $351,000 letter of credit facility as
partial security for Lincolnway Energy's obligations under the
agreement.  The letter of credit facility was initially funded through
a $4,000,000 revolving credit agreement with Co-Bank.  On April 11,
2008, the $4,000,000 revolving credit agreement was reduced to $351,000, the
amount of the above mentioned letter of credit.  The $351,000
revolving credit agreement was cancelled on July 3, 2007, because an amendment
was made to the railcar lease agreement on June 19, 2007 that allowed Lincolnway
Energy to purchase a certificate of deposit for $351,000 in lieu of the letter
of credit. The certificate of deposit will mature on January 20, 2010 and will
be automatically renewed.  Interest is paid to Lincolnway Energy on
the certificate of deposit on a quarterly basis.


55





Contractual
Obligations Table





In
addition to long-term debt obligations, Lincolnway Energy has certain other
contractual cash obligations and commitments.  The following tables provide
information regarding Lincolnway Energy's contractual obligations and
commitments as of September 30, 2008:




Payment Due By PeriodLess than
                          
                          
                          Two to
                          
                          
                          Four to
                          
                          
                          MorethanContractual Obligations
                          
                          Total
                          
                          
                          One Year
                          
                          
                          ThreeYears
                          
                          
                          FiveYears
                          
                          
                          FiveYearsLong-Term
      Debt Obligations
                          
                          $
                          22,240,805
                          
                          
                          $
                          2,574,363
                          
                          
                          $
                          10,156,731
                          
                          
                          $
                          6,755,877
                          
                          
                          $
                          2,753,834Interest
      Obligation of Long-Term Debt
                          
                          
                          3,846,772
                          
                          
                          
                          1,161,432
                          
                          
                          
                          1,651,490
                          
                          
                          
                          479,354
                          
                          
                          
                          554,496Operating
      Lease Obligations
                          
                          
                          1,772,615
                          
                          
                          
                          738,362
                          
                          
                          
                          1,034,253
                          
                          
                          
                          -
                          
                          
                          
                          -Purchase ObligationsCoal
      Supplier Commitment
                          
                          
                          21,644,800
                          
                          
                          
                          5,291,200
                          
                          
                          
                          10,822,400
                          
                          
                          
                          5,531,200
                          
                          
                          
                          -Corn
      Supplier Commitment
                          
                          
                          7,536,555
                          
                          
                          
                          7,536,555
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Denaturant
      Commitment
                          
                          
                          554,175
                          
                          
                          
                          554,175
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Total
                          
                          $
                          57,595,722
                          
                          
                          $
                          17,856,087
                          
                          
                          $
                          23,664,874
                          
                          
                          $
                          12,766,431
                          
                          
                          $
                          3,308,330





Employees





As of
December 15, 2008, Lincolnway had 45 employees in the following general
positions:




Position
            
            #
      EmployedPresident
      and Chief Executive Officer
            
            1Chief
      Financial Officer
            
            1Environmental/Health
      and Safety Manager
            
            1Merchandising/Logistics  Manager
            
            1Controller
            
            1Lab
      Supervisor
            
            1Production
      Manager
            
            1Maintenance
      Manager
            
            1Logistics
      Supervisor
            
            1Admin/Clerical
            
            6Shift
      Supervisors
            
            4Maint/Instrument
      Technicians
            
            8Lab
      Technicians
            
            1Plant
      Operators
            
            17Total
            
            45




The
      position of plant manager was vacant as of the time of the preparation of
      this annual report.  Lincolnway Energy hopes to fill that
      position by the end of March 2009.





56





Item
      7A.
            Quantitative
      and Qualitative Disclosures About Market
Risk.





In
      addition to risks inherent in Lincolnway Energy's operation, Lincolnway
      Energy is exposed to various market risks.  The primary market
      risks arise as a result of possible changes in interest rates and certain
      commodity prices.





Interest
      Rate Risk





Lincolnway
      Energy has various outstanding loan agreements and promissory notes which
      expose Lincolnway Energy to market risk related to changes in the interest
      rate imposed under those loan agreements and promissory
    notes.





Lincolnway
      Energy has loan agreements and/or promissory notes with the following
      entities, and with the principal balance and interest rates
      indicated:


Lender
            
            Principal Balance
              As of September 30,2008
            
            
            RateCo-Bank
            
            $
            7,750,000
            
            
            
            6.62
            %Co-Bank
            
            
            11,250,000
            
            
            
            4.95
            %IA
      Department Economic Development
            
            
            342,500
            
            
            
            0.00
            %IA
      Department of Transportation
            
            
            431,524
            
            
            
            2.11
            %Fagen,
      Inc
            
            
            1,216,781
            
            
            
            5.00
            %Fagen,
      Inc
            
            
            1,250,000
            
            
            
            4.00
            %$
            22,240,805




The
      interest rate under all of the loan agreements and promissory notes, other
      than with the $11,250,000 CoBank balance, all are fixed at the interest
      rates specified above.  The interest rate under all of the
      CoBank loan agreements are at prime, less .05%, and were at 4.95% per
      annum as of September 30, 2008.





A
      hypothetical increase of 1% in the interest rates under the CoBank loan
      agreements would result in additional interest expense of approximately
      $112,500 based upon the year ending September 30, 2008 balance of
      $11,250,000.





Commodity
      Price Risk





Lincolnway
      Energy is also exposed to market risk with respect to the price of
      ethanol, Lincolnway Energy's principal product, and the price and
      availability of corn, the principal commodity used by Lincolnway Energy to
      produce ethanol.  The other primary product of Lincolnway Energy
      is distiller’s grains, and Lincolnway Energy is also subject to market
      risk with respect to the price for distillers
  grains.




57




In
      general, rising ethanol and distillers grains prices result in higher
      profit margins, and therefore represent favorable market
      conditions.  Ethanol and distillers grains prices are, however,
      influenced by various factors beyond the control of Lincolnway Energy's
      management, including the supply and demand for gasoline, the availability
      of substitutes and the effect of laws and
  regulations.





In
      general, rising corn prices result in lower profit margins and,
      accordingly, represent unfavorable market
      conditions.  Lincolnway Energy will generally not be able to
      pass along increased corn costs to its ethanol customers.  The
      availability and price of corn is subject to wide fluctuations due to
      various unpredictable factors which are beyond the control of Lincolnway
      Energy's management, including weather conditions, farmer planting
      decisions, governmental policies with respect to agriculture and local,
      regional, national and international trade, demand and supply. For
      example, if corn costs were to increase $.10 cents per bushel from one
      year to the next, the impact on cost of goods sold would be approximately
      $1.98 million for the year.  Lincolnway Energy's average corn
      costs for the fiscal years ended September 30, 2008 and September 30, 2007
      was approximately $4.99 per bushel and $3.42 per bushel,
      respectively.





Over
      the five year period from September 30, 2002 through September 30, 2008,
      corn prices (based on the Chicago Board of Trade daily futures data)
      ranged from a low of $1.86 per bushel in November 2005 to a high of $7.65
      per bushel in June 2008, with prices averaging $3.18 per bushel over that
      five year period.  During the fiscal year ended September 30,
      2008, corn prices (based on the Chicago Board of Trade daily futures data)
      ranged from a low of $3.35 per bushel in October 2007, to a high of $7.65
      per bushel in June 2008.  On December 1, 2008, the Chicago Board
      of Trade price per bushel of March 2008 corn was $
  3.53.





Although
      Lincolnway Energy believes that its futures and option positions
      accomplish an economic hedge against Lincolnway Energy's future purchases
      of corn or future sales of ethanol, Lincolnway Energy has chosen not to
      use hedge accounting for those positions, which would match the gain or
      loss on the positions to the specific commodity purchase being
      hedged.  Lincolnway Energy is instead using fair value
      accounting for the positions, which generally means that as the current
      market price of the positions changes, the realized or unrealized gains
      and losses are immediately recognized in Lincolnway Energy's costs of
      goods sold in the statement of operations for corn positions or as a
      component of revenue in the statement of operations for ethanol
      positions.  The immediate recognition of gains and losses on
      those positions can cause net income to be volatile from quarter to
      quarter due to the timing of the change in value of the positions relative
      to the cost and use of the commodity being hedged.  For example,
      Lincolnway Energy's corn position gain (realized and unrealized) that was
      included in its earnings for the fiscal year ended September 30, 2007 was
      $2,702,925, as opposed to $3,444,671 for the fiscal year ended September
      30, 2008.





Another
      important raw material for the production of Lincolnway Energy's ethanol
      is coal.  Lincolnway Energy's cost per ton for coal under its
      current coal supply agreement is subject to various fixed and periodic
      adjustments based on factors which are outside of the control of
      Lincolnway Energy's management, including based upon changes in certain
      inflation type indices, increases in transportation costs and the quality
      of the coal.  Lincolnway Energy's coal costs will therefore
      vary, and the variations could be material.  Coal costs
      represented approximately 4% of Lincolnway Energy's total cost of goods
      sold for the fiscal year ended September 30,
  2008.




58




The
      extent to which Lincolnway Energy may enter into arrangements with respect
      to its ethanol or corn during the year may vary substantially from time to
      time based on a number of factors, including supply and demand factors
      affecting the needs of customers or suppliers to purchase ethanol or sell
      Lincolnway Energy raw materials on a fixed basis, Lincolnway Energy's
      views as to future market trends, seasonable factors and the cost of
      futures contracts.




59




Item
      8.
            Financial
      Statements and Supplementary Data.




Report
of Independent Registered Public Accounting Firm





To the
Board of Directors and Members


Lincolnway
Energy, LLC


Nevada,
Iowa





We have
audited the accompanying balance sheets of Lincolnway Energy, LLC as of
September 30, 2008 and 2007, and the related statements of operations, members’
equity and cash flows for each of the three years in the period ended September
30, 2008.  These financial statements are the responsibility of the
Company's management.  Our responsibility is to express an opinion on
these financial statements based on our audits.





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





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Lincolnway Energy, LLC as of
September 30, 2008 and 2007, and the results of its operations and its cash
flows for each of the three years in the period ended September  30,
2008, in conformity with U.S. generally accepted accounting
principles.




We were
not engaged to examine management's assessment of the effectiveness of
Lincolnway  Energy, LLC’s internal control over financial reporting as
of September 30, 2008, included in the accompanying Management’s Annual Report
on Internal Control Over Financial Reporting and, accordingly, we do not express
an opinion thereon.





/s/
McGladrey & Pullen, LLP





Des
Moines, Iowa





December
23, 2008




60




Lincolnway
Energy, LLC




Balance
Sheets


September
30, 2008 and 2007





2008
                        
                        
                        2007ASSETS
      (Note 4)CURRENT
      ASSETSCash
      and cash equivalents
                        
                        $
                        8,711,048
                        
                        
                        $
                        7,856,908Certificate
      of deposit
                        
                        
                        -
                        
                        
                        
                        428,050Due
      from broker
                        
                        
                        7,926,204
                        
                        
                        
                        845,169Trade
      and other accounts receivable (Note 8)
                        
                        
                        3,625,594
                        
                        
                        
                        2,475,593Inventories
      (Note 3)
                        
                        
                        3,994,022
                        
                        
                        
                        3,671,529Prepaid
      expenses and other
                        
                        
                        83,765
                        
                        
                        
                        162,215Derivative
      financial instruments (Note 9)
                        
                        
                        -
                        
                        
                        
                        514,464Total
      current assets
                        
                        
                        24,340,633
                        
                        
                        
                        15,953,928PROPERTY
      AND EQUIPMENTLand
      and land improvements
                        
                        
                        6,991,822
                        
                        
                        
                        6,966,137Buildings
      and improvements
                        
                        
                        1,604,305
                        
                        
                        
                        1,587,836Plant
      and process equipment
                        
                        
                        74,833,725
                        
                        
                        
                        73,319,932Construction
      in progress
                        
                        
                        11,652
                        
                        
                        
                        92,513Office
      furniture and equipment
                        
                        
                        346,441
                        
                        
                        
                        332,98683,787,945
                        
                        
                        
                        82,299,404Accumulated
      depreciation
                        
                        
                        (18,777,458
                        )
                        
                        
                        (10,681,642
                        )65,010,487
                        
                        
                        
                        71,617,762OTHER
      ASSETSRestricted
      cash (Note 4)
                        
                        
                        351,000
                        
                        
                        
                        351,000Financing
      costs, net of amortization of  $123,354 and
    $80,448
                        
                        
                        348,608
                        
                        
                        
                        391,514Deposit
                        
                        
                        463,994
                        
                        
                        
                        504,753Investments
                        
                        
                        2,000
                        
                        
                        
                        2,0001,165,602
                        
                        
                        
                        1,249,267$
                        90,516,722
                        
                        
                        $
                        88,820,957




See Notes
to Financial Statements.




61





2008
                      
                      
                      2007LIABILITIES
      AND MEMBERS’ EQUITYCURRENT
      LIABILITIESAccounts
      payable
                      
                      $
                      2,131,287
                      
                      
                      $
                      1,772,703Accounts
      payable, related party (Note 7)
                      
                      
                      1,109,612
                      
                      
                      
                      169,088Current
      maturities of long-term debt (Note 4)
                      
                      
                      2,574,363
                      
                      
                      
                      1,323,346Accrued
      expenses
                      
                      
                      577,993
                      
                      
                      
                      726,008Accrued
      loss on firm purchase commitments (Note 6)
                      
                      
                      1,065,000
                      
                      
                      
                      -Derivative
      financial instruments (Note 9)
                      
                      
                      6,665,505
                      
                      
                      
                      117,475Total
      current liabilities
                      
                      
                      14,123,760
                      
                      
                      
                      4,108,620NONCURRENT
      LIABILITIESLong-term
      debt, less current maturities (Note 4)
                      
                      
                      19,666,442
                      
                      
                      
                      24,743,372Other
                      
                      
                      331,927
                      
                      
                      
                      -Total
      noncurrent liabilities
                      
                      
                      19,998,369
                      
                      
                      
                      24,743,372COMMITMENTS
      AND CONTINGENCY (Notes 5, 8 and 11)MEMBERS’
      EQUITYMember
      contributions,  42,049 units issued and
    outstanding
                      
                      
                      38,990,105
                      
                      
                      
                      38,990,105Retained
      earnings
                      
                      
                      17,404,488
                      
                      
                      
                      20,978,86056,394,593
                      
                      
                      
                      59,968,965$
                      90,516,722
                      
                      
                      $
                      88,820,957




62




Lincolnway
Energy, LLC




Statements
of Operations


Years
Ended September 30, 2008, 2007 and 2006





2008
                                  
                                  
                                  2007
                                  
                                  
                                  2006Revenues
      (Note 8)
                                  
                                  $
                                  147,040,911
                                  
                                  
                                  $
                                  118,783,540
                                  
                                  
                                  $
                                  44,883,457Cost
      of goods sold (Note 7)
                                  
                                  
                                  138,309,541
                                  
                                  
                                  
                                  94,233,456
                                  
                                  
                                  
                                  25,886,144Gross
      profit
                                  
                                  
                                  8,731,370
                                  
                                  
                                  
                                  24,550,084
                                  
                                  
                                  
                                  18,997,313General
      and administrative expenses
                                  
                                  
                                  2,647,368
                                  
                                  
                                  
                                  2,903,436
                                  
                                  
                                  
                                  2,082,597Operating
      income
                                  
                                  
                                  6,084,002
                                  
                                  
                                  
                                  21,646,648
                                  
                                  
                                  
                                  16,914,716Other
      income (expense):Grants
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  151,859Interest
      income
                                  
                                  
                                  181,895
                                  
                                  
                                  
                                  445,703
                                  
                                  
                                  
                                  117,732Interest
      expense
                                  
                                  
                                  (1,430,469
                                  )
                                  
                                  
                                  (2,228,179
                                  )
                                  
                                  
                                  (1,281,287
                                  )Other
                                  
                                  
                                  -
                                  
                                  
                                  
                                  91,194
                                  
                                  
                                  
                                  4,701(1,248,574
                                  )
                                  
                                  
                                  (1,691,282
                                  )
                                  
                                  
                                  (1,006,995
                                  )Net
      income
                                  
                                  $
                                  4,835,428
                                  
                                  
                                  $
                                  19,955,366
                                  
                                  
                                  $
                                  15,907,721Weighted
      average units outstanding
                                  
                                  
                                  42,049
                                  
                                  
                                  
                                  42,519
                                  
                                  
                                  
                                  42,293Net
      income per unit - basic and diluted
                                  
                                  $
                                  115.00
                                  
                                  
                                  $
                                  469.33
                                  
                                  
                                  $
                                  376.13





See Notes
to Financial Statements.


63




Lincolnway
Energy, LLC




Statements
of Members' Equity


Years
Ended September 30, 2008, 2007 and 2006





RetainedMember
                      
                      
                      EarningsContributions
                      
                      
                      (Deficit)
                      
                      
                      TotalBalance,
      September 30, 2005
                      
                      $
                      38,686,355
                      
                      
                      $
                      (45,577
                      )
                      
                      $
                      38,640,778Issuance
      of 810 membership units  (Note 2)
                      
                      
                      810,000
                      
                      
                      
                      -
                      
                      
                      
                      810,000Compensation
      from issuance of membership units
                      
                      
                      303,750
                      
                      
                      
                      -
                      
                      
                      
                      303,750Net
      income
                      
                      
                      -
                      
                      
                      
                      15,907,721
                      
                      
                      
                      15,907,721Balance,
      September 30, 2006
                      
                      
                      39,800,105
                      
                      
                      
                      15,862,144
                      
                      
                      
                      55,662,249Repurchase
      of 810 membership units (Note 2)
                      
                      
                      (810,000
                      )
                      
                      
                      -
                      
                      
                      
                      (810,000
                      )Distributions  ($350
      per unit)
                      
                      
                      -
                      
                      
                      
                      (14,838,650
                      )
                      
                      
                      (14,838,650
                      )Net
      income
                      
                      
                      -
                      
                      
                      
                      19,955,366
                      
                      
                      
                      19,955,366Balance,
      September 30, 2007
                      
                      
                      38,990,105
                      
                      
                      
                      20,978,860
                      
                      
                      
                      59,968,965Distributions  ($200
      per unit)
                      
                      
                      -
                      
                      
                      
                      (8,409,800
                      )
                      
                      
                      (8,409,800
                      )Net
      income
                      
                      
                      -
                      
                      
                      
                      4,835,428
                      
                      
                      
                      4,835,428Balance,
      September 30, 2008
                      
                      $
                      38,990,105
                      
                      
                      $
                      17,404,488
                      
                      
                      $
                      56,394,593




See Notes
to Financial Statements.




64




Lincolnway
Energy, LLC




Statements
of Cash Flows


Years
Ended September 30, 2008, 2007 and 2006





2008
                          
                          
                          2007
                          
                          
                          2006CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
                          
                          $
                          4,835,428
                          
                          
                          $
                          19,955,366
                          
                          
                          
                          15,907,721Adjustments
      to reconcile net income  to net cash provided by operating
      activities:Depreciation
      and amortization
                          
                          
                          8,151,084
                          
                          
                          
                          8,053,101
                          
                          
                          
                          2,715,906Loss
      on disposal of property and equipment
                          
                          
                          27,491
                          
                          
                          
                          121,786
                          
                          
                          
                          -Compensation
      expense - issuance of membership units
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          303,750Unrealized
      loss on firm purchase commitments
                          
                          
                          1,065,000
                          
                          
                          
                          -
                          
                          
                          
                          -Changes
      in working capital components:(Increase)
      decrease in prepaid expenses and other
                          
                          
                          78,450
                          
                          
                          
                          (5,162
                          )
                          
                          
                          (113,009
                          )(Increase)
      decrease in trade and other accounts receivable
                          
                          
                          (1,150,001
                          )
                          
                          
                          1,996,645
                          
                          
                          
                          (4,472,238
                          )(Increase)
      in due from broker
                          
                          
                          (7,081,035
                          )
                          
                          
                          (143,721
                          )
                          
                          
                          (701,448
                          )(Increase)
      decrease in derivative financial instruments
                          
                          
                          7,062,494
                          
                          
                          
                          916,223
                          
                          
                          
                          (1,313,212
                          )(Increase)
      in inventories
                          
                          
                          (322,493
                          )
                          
                          
                          (682,735
                          )
                          
                          
                          (2,988,794
                          )(Increase)
      decrease in deposits
                          
                          
                          40,759
                          
                          
                          
                          (449,250
                          )
                          
                          
                          (55,503
                          )Increase
      in accounts payable
                          
                          
                          358,584
                          
                          
                          
                          718,849
                          
                          
                          
                          1,027,090Increase
      in accounts payable, related party
                          
                          
                          940,524
                          
                          
                          
                          6,049
                          
                          
                          
                          163,039Increase
      (decrease) in accrued expenses
                          
                          
                          (148,015
                          )
                          
                          
                          (168,019
                          )
                          
                          
                          928,224Increase
      in noncurrent other liabilities
                          
                          
                          331,927
                          
                          
                          
                          -
                          
                          
                          
                          -Net
      cash provided
by  operating  activities
                          
                          
                          14,190,197
                          
                          
                          
                          30,319,132
                          
                          
                          
                          11,401,526CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of property and equipment
                          
                          
                          (1,530,183
                          )
                          
                          
                          (2,103,791
                          )
                          
                          
                          (48,400,737
                          )Proceeds
      from redemption of certificate of deposit
                          
                          
                          428,050
                          
                          
                          
                          -
                          
                          
                          
                          -Purchase
      of certificates of deposit
                          
                          
                          -
                          
                          
                          
                          (779,050
                          )
                          
                          
                          -Proceeds
      from sale of equipment
                          
                          
                          1,789
                          
                          
                          
                          -
                          
                          
                          
                          -Net
      cash (used in) investing activities
                          
                          
                          (1,100,344
                          )
                          
                          
                          (2,882,841
                          )
                          
                          
                          (48,400,737
                          )CASH
      FLOWS FROM FINANCING ACTIVITIESIssuance
      of membership units
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          810,000Repurchase
      of membership units
                          
                          
                          -
                          
                          
                          
                          (810,000
                          )
                          
                          
                          -Member
      distributions
                          
                          
                          (8,409,800
                          )
                          
                          
                          (14,838,650
                          )
                          
                          
                          -Payments
      for financing costs
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (70,495
                          )Proceeds
      from long-term borrowings
                          
                          
                          -
                          
                          
                          
                          153,707
                          
                          
                          
                          47,521,690Payments
      on long-term borrowings
                          
                          
                          (3,825,913
                          )
                          
                          
                          (8,816,313
                          )
                          
                          
                          (14,041,648
                          )Net
      cash provided by  (used in) financing activities
                          
                          
                          (12,235,713
                          )
                          
                          
                          (24,311,256
                          )
                          
                          
                          34,219,547Net
      increase (decrease) in cash and cash equivalents
                          
                          
                          854,140
                          
                          
                          
                          3,125,035
                          
                          
                          
                          (2,779,664
                          )CASH
      AND CASH EQUIVALENTSBeginning
                          
                          
                          7,856,908
                          
                          
                          
                          4,731,873
                          
                          
                          
                          7,511,537Ending
                          
                          $
                          8,711,048
                          
                          
                          $
                          7,856,908
                          
                          
                          $
                          4,731,873




65


Lincolnway
Energy, LLC




Statements
of Cash Flows (Continued)


Years
Ended September 30, 2008, 2007 and 2006





2008
                  
                  
                  2007
                  
                  
                  2006SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION, cash paid for interest, net of amount
      capitalized
                  
                  $
                  1,534,197
                  
                  
                  $
                  2,430,012
                  
                  
                  $
                  1,271,011SUPPLEMENTAL
      DISCLOSURES OF NONCASH OPERATING, INVESTING AND FINANCING
      ACTIVITIESConstruction
      in progress included in accounts payable
                  
                  $
                  -
                  
                  
                  $
                  21,078
                  
                  
                  $
                  545,822Capital
      lease obligation incurred for equipment
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  32,501Reclassification
      of accrued interest to long-term debt
                  
                  
                  -
                  
                  
                  
                  116,781
                  
                  
                  
                  -





See Notes
to  Financial Statements.


66


Note
      1.
                Nature
      of Business and Significant Accounting
  Policies
 Principal business
activity:  Lincolnway Energy, LLC (the Company), located in
Nevada, Iowa, was formed in May 2004 to pool investors to build a 50 million
gallon annual production dry mill corn-based ethanol plant.  The
Company began making sales on May 30, 2006 and became operational during the
quarter ended June 30, 2006.
 
 A summary
of significant accounting policies follows:
 
 Use of
estimates:  The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period.  Actual results
could differ from those estimates.
 
 Concentration of credit
risk:  The Company’s cash balances are maintained in bank
deposit accounts which at times may exceed federally insured
limits.  The Company has not experienced any losses in such
accounts.
 
 Cash and cash
equivalents:  For the purposes of reporting the statement of
cash flows, the Company includes as cash equivalents all cash accounts and
highly liquid debt instruments which are not subject to withdrawal restrictions
or penalties.  Certificates of deposit are considered investments as
all have been purchased with maturities in excess of ninety
days.  Although the Company maintains its cash accounts in one bank,
the Company believes it is not exposed to any significant credit risk on cash
and cash equivalents.  The Company has repurchase agreements with one
bank, which totaled approximately, $8,680,000 at September 30,
2008.  In accordance with the terms of the repurchase agreements, the
Company does not take possession of the related securities.  The
Company’s agreements also contain provisions to ensure that the market value of
the underlying assets remain sufficient to protect the Company in the event of
default by the banks by requiring that the underlying securities have a total
market value of at least 100% of the bank’s total obligations under the
agreements.
 
 Trade accounts
receivable:  Trade accounts receivable are recorded at original
invoice amounts less an estimate made for doubtful receivables based on a review
of all outstanding amounts on a monthly basis.  Management determines
the allowance for doubtful accounts by regularly evaluating individual customer
receivables and considering customers financial condition, credit history and
current economic conditions.  Receivables are written off when deemed
uncollectible.  Recoveries of receivables written off are recorded
when received.  A receivable is considered past due if any portion of
the receivable is outstanding more than 90 days.
 
 Inventories:  Inventories,
which consist primarily of corn, ethanol and distillers grain with soluble, are
stated at the lower of cost or market using the first-in, first-out
method.
 
 Financing
costs:  Financing costs associated with the construction and
revolving loans discussed in Note 4 are recorded at cost and include
expenditures directly related to securing debt financing.  The Company
amortized these costs using the effective interest method over the term of the
agreement.  The financing costs are included in interest expense on
the statement of operations.
  67
 
  Property and
equipment:  Property and equipment is stated at
cost.  Construction in progress is comprised of costs related to the
projects that are not completed.  Depreciation is computed using the
straight-line method over the following estimated useful lives:
  YearsLand
      improvements
                            
                            
                            
                            
                            
                            20Buildings
      and improvements
                            
                            
                            
                            
                            40Plant
      and process equipment
                            
                            
                            
                            
                            5 -
      20Office
      furniture and equipment
                            
                            
                            
                            
                            3 -
      7
 
 Maintenance
and repairs are expensed as incurred; major improvements and betterments are
capitalized.  The present value of capital lease obligations are
classified as long-term debt and the related assets are included in
equipment.  Amortization of equipment under capital lease is included
in depreciation expense.  Equipment under capital lease and
accumulated depreciation totaled $31,433 and $14,976, respectively, as of
September 30, 2008 and $32,501 and $8,976, respectively, as of September 30,
2007.
 
 Investments:  The
Company has investments in common stock.  These investments are
carried at cost.
 
 Derivative financial
instruments:  The Company enters into derivative contracts to
hedge the Company’s exposure to price risk related to forecasted corn needs
forward corn purchase contracts and ethanol sales.  The Company does
not typically enter into derivative instruments other than for hedging
purposes.  All the derivative contracts are recognized on the balance
sheet at their fair market value.  Although the Company believes its
derivative positions are economic hedges, none have been designated as a hedge
for accounting purposes.   Accordingly, any realized or
unrealized gain or loss related to corn derivatives is recorded in the statement
of operations as a component of cost of goods sold.  Any realized or
unrealized gain or loss related to ethanol derivative instruments is recorded in
the statement of operations as a component of revenue.  During the
years ended September 30, 2008, 2007 and 2006, the Company has recorded a
combined realized and unrealized gain for corn derivative financial instruments
of $3,444,671 and $2,702,925 and $515,300, respectively.  During the
years ended September 30, 2008, 2007 and 2006, the Company recorded a combined
realized and unrealized gain (loss) for ethanol sales derivative instruments of
($2,203,154), $514,464 and $0, respectively.
 
 Deposit:  The
Internal Revenue Service (under Section 7519) requires partnerships that elect a
fiscal year over a calendar year to make a deposit each year.  The
deposit is 25% of annual taxable net income, multiplied by the tax rate of 36%
for the reporting fiscal year.
 
 Revenue
Recognition:  Revenue from the sale of the Company’s ethanol
and distillers grains is recognized at the time title and all risks of ownership
transfer to the customers.  This generally occurs upon the loading of
the product.  For ethanol, title passes at the time the product
crosses the loading flange in either a railcar or truck. This change in title
transfer arrangements took place July 1, 2008 with the amendment of the ethanol
fuel marketing agreement.  Prior to July, risk of loss or title
transfer took place when the product was released to the common carrier and a
bill of lading was produced.  For distiller’s grain, title passes upon
the loading into trucks.  For railcar shipments, this takes place when
the railcar is filled and the marketer receives written notice that they have
been loaded and are available for billing.  Shipping and handling
costs incurred by the Company for the sale of ethanol and distiller’s grain are
included in costs of goods sold.
 
 Commissions
for the marketing and sale of ethanol and distiller grains are included in costs
of goods sold.
   68
  Revenue
by product is as follows:
  (In thousands)
                              
                              2008
                              
                              
                              2007
                              
                              
                              2006Ethanol
                              
                              $
                              122,253
                              
                              
                              $
                              102,457
                              
                              
                              $
                              40,441Distiller's
      Grain
                              
                              $
                              25,544
                              
                              
                              $
                              15,730
                              
                              
                              $
                              4,442Other
                              
                              $
                              1,447
                              
                              
                              $
                              82
                              
                              
                              $
                              -
 
 Income
taxes:  The Company is organized as a partnership for federal
and state income tax purposes and generally does not incur income
taxes.  Instead, the Company’s earnings and losses are included in the
income tax returns of the members.  Therefore, no provision or
liability for federal or state income taxes has been included in these financial
statements.
 
 Earnings per
unit:  Basic and diluted earnings per unit have been computed
on the basis of the weighted average number of units outstanding during each
period presented.
 
 Grants:  The
Company recognizes grant income upon complying with the conditions of the
grant.
 
 Fair Value of financial
instruments:  The carrying amounts of cash and cash
equivalents, derivative financial instruments, trade accounts receivable,
accounts payable and accrued expenses approximate fair value.  The
carrying amount of long-term debt approximates fair value because the interest
rates fluctuate with market rates or the fixed rates are based on current rates
offered to the Company for debt with similar terms and maturities.
 
 New accounting
pronouncements:  In September 2006, the FASB issued Statement
No. 157, Fair Value Measurement (FAS 157).  While this statement does
not require new fair value measurements, it provides guidance on applying fair
value and expands required disclosures.  FAS 157 is effective for us
beginning in the first quarter of fiscal 2009.  This pronouncement
should not have a material impact on our financial statements.
 
 In
February 2008, the FASB issued “Effective Date of FASB Statement No.157” FASB
Staff Position (FSP) No. 157-2 (FSP No. 157-2).  FSP No.157-2 delays
the effective date of SFAS No. 157 until fiscal years beginning after November
15, 2008, for fair value measurements of non-financial assets and non-financial
liabilities, except for items that are recognized or disclosed at fair value in
an entity’s financial statements on a recurring basis (at least
annually).
 
 In
February 2007, the FASB issued Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (FAS 159).  The statement,
which is expected to expand fair value measurement, permits entities to choose
to measure many financial instruments and certain others items at fair
value.  FAS 159 is effective for us beginning in the first quarter of
2009.  This pronouncement should not have a material impact on our
financial statements.
 
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities.”  The new standard is intended to improve
financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows.  It is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early
application encouraged.  We do not expect the adoption of SFAS No.161
to have a material impact on our financial statements.
 
 Reclassification: The
accompanying financial statements contain certain reclassifications to conform
to the presentation used in the current period.  The reclassification
had no impact on members’ equity, gross profit or net income.
  69
 Note
      2.
                  Members’
      Equity
 The
Company was formed on May 19, 2004.  It was initially capitalized by
the issuance of 1,924 membership units totaling $962,000 to the founding members
of the Company.  The Company has one class of membership
units.  A majority of the Board of Directors owns a membership
interest in the Company.  The Company is authorized to issue up to
45,608 membership units without member approval.
 
 On April
4, 2007, the Company repurchased 810 membership units from the Company’s
directors at a purchase price of $1,000 per unit pursuant to manager and member
vote that was held at a special member meeting on April 3, 2007.
 
 Income
and losses are allocated to all members based on their pro rata ownership
interest. All unit transfers are effective the last day of the
month.    Units may be issued or transferred only to persons
eligible to be members of the Company and only in compliance with the provisions
of the operating agreement.
  Note
      3.
                    Inventories
 Inventories
consist of the following as of September 30, 2008 and 2007:
  2008
                              
                              
                              2007Raw
      materials, including corn, coal, chemicals and supplies
                              
                              $
                              1,864,634
                              
                              
                              $
                              1,277,700Work
      in process
                              
                              
                              959,444
                              
                              
                              
                              1,151,023Ethanol
      and distillers grain
                              
                              
                              1,169,944
                              
                              
                              
                              1,242,806Total
                              
                              $
                              3,994,022
                              
                              
                              $
                              3,671,529
   70
  Note
      4.
              Long-Term
      Debt
  Long-term
debt consists of the following as of September 30, 2008 and 2007:
 
 2008
                        
                        
                        2007Construction
      term loan.  (A)
                        
                        $
                        19,000,000
                        
                        
                        $
                        22,750,000Construction/revolving
      term loan.  (C)
                        
                        
                        -
                        
                        
                        
                        -Note
      payable to contractor, interest-only quarterly payments at
    5%due
      through maturity date of November 2014, secured by realestate
      and subordinate to financial institution debt commitments. (B
      )
                        
                        
                        1,216,781
                        
                        
                        
                        1,216,781Note
      payable to contractor, unsecured, interest-only quarterlypayments
      at 4% due through maturity date of May 2021
                        
                        
                        1,250,000
                        
                        
                        
                        1,250,000Note
      payable to Iowa Department of Economic
      Development.  (D)
                        
                        
                        242,500
                        
                        
                        
                        272,500Note
      payable to Iowa Department of Economic
      Development.  (D)
                        
                        
                        100,000
                        
                        
                        
                        100,000Note
      payable to Iowa Department of
    Transportation.  (E)
                        
                        
                        431,524
                        
                        
                        
                        477,43722,240,805
                        
                        
                        
                        26,066,718Less
      current maturities
                        
                        
                        (2,574,363
                        )
                        
                        
                        (1,323,346
                        )$
                        19,666,442
                        
                        
                        $
                        24,743,372
 
 Maturities
of long-term debt as of September 30, 2008 are as follows:
 
 Years
      ending September 30:2009
                    
                    $
                    2,574,3632010
                    
                    
                    5,077,8572011
                    
                    
                    5,078,8742012
                    
                    
                    5,052,4092013
                    
                    
                    1,703,468Thereafter
                    
                    
                    2,753,834$
                    22,240,805
 
 (A)
              The
      Company has a construction and term loan with a financial
      institution.  Borrowings under the term loan include a variable
      interest rate based on prime less .05%.   The agreement
      requires 30 principal payments of $1,250,000 per quarter commencing in
      December 2006 through March 2014, with the final installment due May 2014.
      In order to alleviate some of the interest rate risk, the Company on July
      25, 2008, fixed a portion of the loan or $7,750,000 of the $19,000,000
      loan outstanding at an interest rate of 6.62%, through July 2011. The same
      payment amortization schedule will apply.  The agreement
      requires the maintenance of certain financial and nonfinancial
      covenants.  Borrowings under this agreement are collateralized
      by substantially all of the Company’s assets.   As of
      September 30, 2008 the Company has been allowed to make prepayments of
      $20,000,000 without any
penalty.
  71
 
 (B)
              The
      Company has a $1,100,000 subordinate note payable dated November 17, 2004
      to an unrelated third party.  Quarterly interest payments began
      on March 31, 2007.  The third party allowed the Company to
      include the accrued interest of $116,781 through December 2006 into the
      principal of the note. Principal is due in full at maturity on November
      17, 2014.
 
 (C)
              The
      Company has a $10,000,000 construction/revolving term credit facility with
      a financial institution which expires on September 1,
      2016.  Borrowings under the credit facility agreement include a
      variable interest rate based on prime less .05% for each advance under the
      agreement.  Borrowings are subject to borrowing base
      restrictions as defined in the agreement.  The credit facility
      and revolving credit agreement require the maintenance of certain
      financial and nonfinancial covenants.  Borrowings under this
      agreement are collateralized by substantially all of the Company’s
      assets.  There was no balance outstanding as of September 30,
      2008.
 
 On July
3, 2007 the $351,000 revolving credit agreement was cancelled.  This
agreement was for the benefit of a letter of credit that was required by an
unrelated third party to lease rail cars.  An amendment was made to
the lease agreement on June 19, 2007, that allowed the Company to purchase a
certificate of deposit for $351,000 in lieu of the letter of credit that is
pledged as collateral on the railcar lease. The Company has classified this
certificate of deposit as restricted cash in other assets.
 
 (D)
              The
      Company also has a $300,000 loan agreement and a $100,000 forgivable loan
      agreement with the Iowa Department of Economic Development
      (IDED).  The $300,000 loan is noninterest-bearing and due in
      monthly payments of $2,500 beginning December 2006 and a final payment of
      $152,500 due November 2012.  Borrowings under this agreement are
      collateralized by substantially all of the Company’s assets and
      subordinate to the above $39,000,000 financial institution debt and
      construction and revolving loan/credit agreements included in (A) and
      (C).  The $100,000 loan is forgivable upon the completion of the
      ethanol production facility and the production of at least 50 million
      gallons of ethanol before the project completion date of October 31,
      2008.
 
 (E)
              The
      Company entered into a $500,000 loan agreement with the Iowa Department of
      Transportation (IDOT) in February 2005.  The proceeds were
      disbursed upon submission of paid invoices.  Interest at 2.11%
      began accruing on January 1, 2007.  Principal payments will be
      due semiannually through July 2016.  The loan is secured by all
      rail track material constructed as part of the plan
      construction.  The debt is subordinate to the above $39,000,000
      financial institution debt and construction and revolving loan/credit
      agreements included in (A) and (C).
  Note
      5.
              Lease
      Commitments
  The
Company entered into a lease agreement with an unrelated third party to lease 90
rail cars for the purpose of transporting distiller’s grain.  The
five-year term of the lease commenced March 2006 and will end March
2011.  The lease calls for monthly payments of $58,500 plus applicable
taxes.  There is also an additional usage rental of 2.5 cents per mile
for each car that exceeds 30,000 miles.  The amended agreement that
was made to the lease agreement on June 19, 2007, allowed the Company to
purchase a certificate of deposit for $351,000 in lieu of the letter of credit
that was required as partial security for the Company’s obligation under the
lease.
  72
  The
Company leases office equipment and other equipment under operating leases that
will expire various dates through May 2011.  The leases call for
monthly payments ranging from $218 to $2,385 plus applicable taxes.
  Minimum
lease payments under these operating leases for future years are as
follows:
 
 Years
      ending Sept 30:2009
                    
                    $
                    738,3622010
                    
                    
                    736,4962011
                    
                    
                    297,757$
                    1,772,615
 
 Rent
expense under the above operating leases totaled $738,471, $702,414 and $380,320
for the years ended September 30, 2008, 2007 and 2006.
  Note
      6.
              Firm
      Purchase Commitments for Corn
  To ensure
adequate supply of corn to operate the plant, the Company enters into contracts
to purchase corn from local farmers and elevators. At September 30, 2008, the
Company had various fixed and basis contracts for approximately 3,564,000
bushels.  Of the 3,564,000 bushels under contract, approximately
1,414,000 had a fixed price at an average of $5.33 per bushel and approximately
2,150,000 had basis contracts at an average basis of $.21 per bushel as of
September 30, 2008.  Due to the significant decrease in corn prices
experienced during the fourth quarter of fiscal year 2008, the Company’s average
price for corn under fixed price contracts, as of September 30, 2008 was
approximately $.72 per bushel above the market price and average price for basis
contracts were approximately $.06 above the market price.  Because
these contracts are considered firm purchase commitments of inventory and
inventory is valued at the lower of cost or market, the Company recorded an
unrealized loss of $1,065,000 on firm purchase commitments for corn for the year
ended September 30, 2008.  No unrealized losses were recorded for the
years ended September 30, 2007 and 2006.
  Note
      7.
              Related-Party
      Transactions
  The
Company has an agreement with the Heart of Iowa Coop (HOIC), a member of the
Company, to provide 100% of the requirement of corn for use in the operation of
the ethanol plant.  The agreement became effective when the Company
began accepting corn for the use at the ethanol plant in May 2006 and will
continue for a period of 20 years.  The Company pays a handling fee of
$.0675 per bushel of corn which was reduced in July 2007 from $.075 when the
Company purchased their own locomotive to use.  If the Company chooses
to buy corn that is not elevated by HOIC, and is inside a 60-mile radius of
Nevada, Iowa, the Company will be required to pay HOIC $.04 per bushel of corn,
outside a 60-mile radius, $.03 per bushel of corn.  The agreement may
be terminated before the end of the term by providing six months’ notice of
termination and paying the other party $2,000,000, reduced by $50,000 for each
completed year of the agreement.  The amount is payable over four
years with interest at the prime rate on the date of termination.  The
Company purchased corn totaling $97,996,197, $59,189,376 and $14,878,595 for the
years ended September 30, 2008, 2007 and 2006, respectively.  As of
September 30, 2008, the Company has several corn cash contracts with HOIC
amounting to 1,413,571 bushels, for a commitment of $7,536,555 and several basis
contracts representing approximately 2,150,000 bushels of corn.  The
contracts mature on various dates through March 2009.  The Company
also has made some miscellaneous purchases from HOIC (storage fees, fuel, and
propane costs) amounting to $184,062, $375,213 and $245,662 for the years ended
September 30, 2008, 2007 and 2006, respectively. As of September 30, 2008 and
2007 the amount due to HOIC is $989,594 and $89,812,
respectively.
  73
 
 The
Company is also purchasing anhydrous ammonia and propane from Prairie Land
Cooperative, a member of the Company.  Total purchases for the years
ended September 30, 2008, 2007 and 2006 were $1,030,326, $552,677 and $129,601,
respectively. As of September 30, 2008 and 2007 the amount due to Prairie Land
Cooperative is $120,018 and $78,401, respectively.  As of September
30, 2008, there was no purchase commitment.
  Note
      8.
              Commitments
      and Major Customer
  The
Company has an agreement with an unrelated entity and major customer for
marketing, selling, and distributing all of the ethanol produced by the
Company.  Under such pooling arrangements, the Company will pay the
entity $.01 (one cent) per gallon for each gallon of ethanol
sold.  This agreement shall be effective until terminated by 45 days’
written notice.  The agreement had an initial 12-month term through
June 2007. The parties are currently negotiating a new agreement and are still
operating under the terms of the existing agreement.   For the
years ended September 30, 2008, 2007 and 2006, the Company has expensed
$543,399, $501,271 and $174,289, respectively, under this agreement. Revenues
with this customer were $122,253,299, $102,456,965 and $40,441,364 for the years
ended September 30, 2008, 2007 and 2006, respectively.  Trade accounts
receivable of $1,980,535 and $2,263,990 was due from the customer as of
September 30, 2008 and 2007, respectively.
 
 The
Company had an agreement with an unrelated entity for marketing, selling and
distributing all of the distiller’s grains with solubles which are by-products
of the ethanol plant.   For the years ended September 30, 2008,
2007 and 2006, the Company has expensed marketing fees of $ 1,381, $253,366 and
$62,775, respectively, under this agreement.  Revenues with this
customer were $172,899, $15,730,159 and $4,442,093 for the years ended September
30, 2008, 2007 and 2006, respectively. Trade accounts receivable of $0 and
$114,195 was due from the customer as of September 30, 2008 and 2007,
respectively.
 
 The
Company has entered into a new agreement with an unrelated entity for marketing,
selling and distributing the distiller’s grains as of October 1,
2007.   For the year ended September 30, 2008, the Company has
expensed marketing fees of $455,238 under this agreement.  Revenues
with this customer were $25,370,636 for the year ended September 30,
2008.  Trade accounts receivable of $1,353,705 was due from the
customer as of September 30, 2008.
 
 The
Company has an agreement with an unrelated party to provide the coal supply for
the ethanol plant.  The agreement includes the purchase of coal at a
cost per ton and a transportation cost per ton as defined in the
agreement.  The cost is subject to price adjustments on a monthly
basis.  If the Company fails to purchase the minimum number of tons of
coal for the calendar year 2008, the Company shall pay an amount per ton
multiplied by the difference of the minimum requirement and actual quantity
purchased.  That agreement expired as of January 1,
2008.   On October 1, 2007 the Company entered into an amended
agreement to the original cost supply agreement.  The term of the
agreement has been extended from the original expiration date to January 1,
2013.  The same minimum purchase commitment is required from the
Company as the previous agreement.  The calendar years 2008, 2009,
2010, 2011, and 2012 purchase commitments total $308,568, $5,291,200,
$5,371,200, $5,451,200, $5,531,200.   For the years ended
September 30, 2008, 2007 and 2006, the Company has purchased coal of $5,741,047,
$4,257,613 and $1,752,646, respectively.
 
 The
Company has entered into a variable contract with a supplier of
denaturant.  The variable contract is for a minimum purchase of
270,000 gallons at the national gasoline daily average plus
$.23/usg.  The term of the contract is from October 1, 2008 through
December 31, 2008.   The estimated future purchase commitment is
$554,175.  For the years ended September 30, 2008, 2007 and 2006, the
Company purchased $2,797,738, $3,162,301 and $1,720,321, respectively, of
denaturant.
  74
  Note
      9.
              Risk
      Management
  The
Company’s activities expose it to a variety of market risks, including the
effects of changes in commodity prices.  These financial exposures are
monitored and managed by the Company as an integral part of its overall risk
management program.  The Company’s risk management program focuses on
the unpredictability of commodity markets and seeks to reduce the potentially
adverse effects that the volatility of these markets may have on its operating
results.
 
 The
Company maintains a risk management strategy that uses derivative instruments to
minimize significant, unanticipated earnings fluctuations caused by market
fluctuations.  The Company’s specific goal is to protect the Company
from large moves in the commodity costs.
 
 To reduce
price risk caused by market fluctuations, the Company generally follows a policy
of using exchange-traded futures and options contracts to minimize its net
position of merchandisable agricultural commodity inventories and forward
purchases and sales contracts.  In April 2007, the Company started
entering into derivative contracts to hedge the exposure to price risk as it
relates to ethanol sales.  Exchange traded futures and options
contracts are designated as non-hedge derivatives and are valued at market price
with changes in market price recorded in operating income through cost of goods
sold for corn derivatives and through revenue for ethanol
derivatives.
 
 The
effects on operating income from derivative activities is as follows for
September 30,
 
 2008
                      
                      
                      2007
                      
                      
                      2006Increase
      (decrease) in revenue due to derivatives related to ethanol
      sales:Realized
                      
                      $
                      (2,174,662
                      )
                      
                      $
                      -
                      
                      
                      $
                      -Unrealized
                      
                      
                      (28,492
                      )
                      
                      
                      514,464
                      
                      
                      
                      -Total
      effect on revenue
                      
                      
                      (2,203,154
                      )
                      
                      
                      514,464
                      
                      
                      
                      -(Increase)
      decrease in cost of goods sold due to derivates related to corn
      costs:Realized
                      
                      
                      6,280,771
                      
                      
                      
                      4,131,488
                      
                      
                      
                      (795,787
                      )Unrealized
                      
                      
                      (2,836,100
                      )
                      
                      
                      (1,428,563
                      )
                      
                      
                      1,311,087Total
      effect on cost of goods sold
                      
                      
                      3,444,671
                      
                      
                      
                      2,702,925
                      
                      
                      
                      515,300Total
      increase  to operating income due to derivative
      activities
                      
                      $
                      1,241,517
                      
                      
                      $
                      3,217,389
                      
                      
                      $
                      515,300
 
 Unrealized
gains and losses on forward contracts, in which delivery has not occurred, are
deemed “normal purchases and normal sales” under FASB No 133, as amended, and
therefore are not marked to market in the Company’s financial statements unless
the  contracts are prices higher than market, then the contracts are
adjusted to market.
  75
  Note
      10.
              Retirement
      Plan
  The
Company adopted a 401(k) plan covering substantially all employees effective
February 1, 2006.  The Company provides matching contributions of 50%
for up to 6% of employee compensation.  Company contributions and plan
expenses for the years ended September 30, 2008 and 2007 totaled $66,795 and
$54,645, respectively.
  Note
      11.
              Contingency
  The
Company needs to maintain various permits to be able to maintain and continue
its operations.  The permits include water and air permits from the
Iowa Department of Natural Resources.  The Company has obtained these
permits, but on December 4, 2007, the Iowa Environmental Protection Commission
referred alleged environmental law violations by the Company to the Iowa
Attorney General's office for enforcement action.  The referred
allegations concern wastewater releases relating to construction activities and
exceedences of iron and total suspended solid limits in the Company’s NPDES
wastewater discharge permit, and concern air permitting, emission limit
exceedences, stack testing, monitoring and reporting.  Over the past
year the Company has had regular contact with the Iowa Attorney General’s
office, during each contact the Iowa Attorney General’s office has requested
more time and has not had time to consider the Company’s case due to their heavy
work load.
 
 The
Company has determined that the amount of any negotiated settlement cannot be
predicted at this time because (i) the proceedings are at the initial stage, in
that the Iowa Attorney General’s office has not yet communicated with the
Company about their assessment of the proceedings or possible penalties and
discovery has not yet begun,  (ii) additional tests are being
conducted and additional factual information is being developed which will be
relevant to any penalty determination, and (iii) the range of possible
settlements range from nominal amount to a larger amount which can not be
determined at this time.  The Company considers the guidance in FIN 14
when assessing whether an amount should be accrued for this contingency and
determined that there was no amount that is a better estimate than another and
that the minimum amount in the range was a nominal amount and so no amounts were
accrued.
  Note
      12.
              Subsequent
      Event
  On
November 6, 2008, the Company entered into an Offer to Buy Real Estate and
Acceptance to purchase a strip of land which is adjacent to the Company’s
existing real estate and the Union Pacific railroad.  The purchase of
the real estate will be effected by the Company acquiring another parcel of real
estate in Story County, Iowa, and then conveying that parcel in trade for the
real estate.  The purchase price will be $553,000 and the closing is
scheduled for late December 2008.
 
 The
Company is acquiring the real estate for potential future use in the
construction of railroad spur tracks, but the Company has not made final
determination as to whether the Company will pursue the construction of
additional railroad spur tracks.
 
 The
Company has entered into a Memorandum of Understanding with the Union Pacific
Railroad Company and is currently working with a consultant to determine the
cost and feasibility of constructing additional railroad spur tracks to the west
of the Company’s ethanol plant.
  76
 
 Item
      9.
              Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure.
 
 Lincolnway
      Energy has not had any change in its accountants or any disagreements with
      its accountants which are required to be disclosed under this
      Item.
 
 Item
      9A(T).
              Controls
      and Procedures.
 
 Evaluation
      of Disclosure Controls and
Procedures
 
 Lincolnway
      Energy’s  management,  with  the  participation 
      of  Lincolnway Energy's president and chief executive officer
      and chief financial  officer ,  have evaluated the 
      effectiveness of Lincolnway Energy’s disclosure  controls  and
      procedures  (as defined in Rule  13a-15(e)  under
      the Securities  Exchange  Act of 1934) as of the end of
      the  period  covered by this report.  As a result of such
      evaluation,  the president and chief executive officer and the chief
      financial  officer have  concluded  that such 
      disclosure  controls and procedures are effective to provide 
      reasonable  assurance that the  information required to be
      disclosed in the reports Lincolnway Energy  files or submits 
      under the Securities Exchange  Act of 1934 is (i) 
      recorded,  processed,  summarized  and reported within
      the time  periods specified  in the  Securities 
      and  Exchange Commission's   rules  and 
      forms,  and (ii)  accumulated  and  communicated 
      to management,  including Lincolnway Energy’s  principal
      executive and principal financial officers or persons performing such
      functions,  as appropriate,  to allow timely decisions
      regarding  disclosure. Lincolnway Energy believes that a control
      system, no matter how well designed and operated,  cannot provide
      absolute assurance that the  objectives of the control system
      are met, and no evaluation of controls can provide  absolute 
      assurance that all control issues and instances of fraud,  if any,
      within a company have been
detected.
 
 Management's
Annual Report on Internal Control Over Financial Reporting.
 
 The
management of Lincolnway Energy is responsible for establishing and maintaining
adequate internal control over financial reporting for Lincolnway
Energy.  Lincolnway Energy's internal control system was designed to,
in general, provide reasonable assurance to Lincolnway Energy's management and
board regarding the preparation and fair presentation of published financial
statements, but because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.  Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
 
 Lincolnway
Energy's management assessed the effectiveness of Lincolnway Energy's internal
control over financial reporting as of September 30, 2008.  The
framework used by management in making that assessment was the criteria set
forth in the document entitled “ Internal Control – Integrated Framework” issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on that assessment, Lincolnway Energy's management has determined that as of
September 30, 2008, Lincolnway Energy's internal control over financial
reporting was effective for the purposes for which it is
intended.
  77
  This
annual report does not include an attestation report of Lincolnway Energy's
registered public accounting firm regarding internal control over financial
reporting.  Management's report was not subject to attestation by
Lincolnway Energy's registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit Lincolnway Energy to
provide only management's report in this annual report.
  Changes
      in Internal Control over Financial
Reporting
 
 No
      change in Lincolnway Energy's system of internal control over
      financial  reporting occurred during the fourth quarter of the fiscal
      year ended September 30, 2008 that has materially affected,  or
      is  reasonably  likely to materially  affect, 
      Lincolnway Energy's internal  control over  financial
      reporting.
  78
 
 Item
      9B.
              Other
      Information.
 
 Lincolnway
      Energy did not have any information which was required to be disclosed in
      a report on Form 8-K during the fourth quarter of the fiscal year ended
      September 30, 2008, which was not reported on a Form
  8-K.
 
 PART
III
 
 Item
      10.
              Directors,
      Executive Officers and Corporate
Governance.
 
 The
      directors and executive officers of Lincolnway Energy as of the date of
      this annual report were as follows:
 
 Name
                                          
                                          Age
                                          
                                          Position(s)Jeff
      Taylor
                                          
                                          42
                                          
                                          Director
      and ChairmanBrian
      Conrad
                                          
                                          47
                                          
                                          Director
      and Vice ChairmanKurt
      Olson
                                          
                                          52
                                          
                                          Director
      and SecretaryTerrill
      Wycoff
                                          
                                          66
                                          
                                          Director
      and TreasurerTimothy
      Fevold
                                          
                                          48
                                          
                                          DirectorWilliam
      Couser
                                          
                                          54
                                          
                                          DirectorJames
      Hill
                                          
                                          63
                                          
                                          DirectorRick
      Vaughan
                                          
                                          49
                                          
                                          DirectorRichard
      Johnson
                                          
                                          73
                                          
                                          DirectorRichard
      Brehm
                                          
                                          55
                                          
                                          President
      and Chief
                                            Executive
      OfficerKim
      Supercynski
                                          
                                          46
                                          
                                          Chief
      Financial
Officer
  79
 
 Jeff
      Taylor
 
 Mr.
      Taylor has been a director of Lincolnway Energy since Lincolnway Energy
      was organized in May, 2004.  His current term as a director will
      end at the annual meeting of the members which will be held in
      2011.  Mr. Taylor served as the vice president/vice chairman of
      Lincolnway Energy from the time Lincolnway Energy was organized in May,
      2004 until April, 2008.  Mr. Taylor has served as the chairman
      of Lincolnway Energy since May, 2008.  Mr. Taylor has been
      self-employed as a farmer since 1988, and he owns and operates farms in
      Story County, Iowa.
 
 Brian
      Conrad
 
 Brian
      Conrad has been a director of Lincolnway Energy since Lincolnway Energy
      was organized in May, 2004.  His current term as a director will
      end at the annual meeting of the members which will be held in
      2011.  Mr. Conrad has served as the vice chairman of Lincolnway
      Energy since May, 2008.  Mr. Conrad has been employed with John
      Deere Credit since 1988, and has held various positions with John Deere
      Credit, including credit operations, and sales and
      marketing.  His current position with John Deere Credit is
      Business Development Manager for John Deere Wind Energy.  Mr.
      Conrad has an undergraduate degree in economics and business
      administration and a Masters in Business
  Administration.
 
 Kurt Olson
 
 Kurt
      Olson has been a director of Lincolnway Energy since July 27, 2007, and
      his current term as a director will end at the annual meeting of the
      members which is held in 2010.  Mr. Olson has served as the
      secretary of Lincolnway Energy since May, 2008.  Mr. Olson
      graduated in 1978 from Iowa State University in ag-economics and has been
      actively involved in business operations and management of real estate in
      central Iowa for the past 28 years.  Mr. Olson was employed with
      Litchfield Realty Company from 1987 to 2003.  He served as the
      president of Litchfield Realty and its subsidiaries, AgServ Company and
      FarmLand Real Estate and Management, LC. In 2003, Mr. Olson purchased
      FarmLand Real Estate and Management,
LC.
 
 Terrill
      Wycoff
 
 Mr.
      Wycoff has been a director of Lincolnway Energy since Lincolnway Energy
      was organized in May, 2004.  His current term as a director will
      end at the annual meeting of the members which will be held in
      2009.  Mr. Wycoff has also served as the treasurer of Lincolnway
      Energy since Lincolnway Energy was organized in May, 2004.  Mr.
      Wycoff has been employed by First National Bank, Ames, Iowa for
      approximately 47 years, and currently serves as the Executive Vice
      President of First National Bank.  He is also a member of the
      board of directors of First National Bank, in Ames,
  Iowa.
  80
 
 Timothy
      Fevold
 
 Mr.
      Fevold has been a director of Lincolnway Energy since Lincolnway Energy
      was organized in May, 2004.  His current term as a director will
      end at the annual meeting of the members which will be held in
      2011.  Mr. Fevold also served as the secretary of Lincolnway
      Energy from the time Lincolnway Energy was organized in May, 2004 until
      April, 2008.  Mr. Fevold has been employed by Hertz Farm
      Management, based in Nevada, Iowa, since 1982, and is an accredited farm
      manager.  He represents absentee landowners throughout Central
      Iowa.   Mr. Fevold has also been licensed as a real estate
      broker in Iowa since 1987.
 
 William
      Couser
 
 Mr.
      Couser has been a director of Lincolnway Energy since Lincolnway Energy
      was organized in May, 2004.  His current term as a director will
      end at the annual meeting of the members which will be held in
      2009.  Mr. Couser was the chairman of Lincolnway Energy from the
      time Lincolnway Energy was organized in May, 2004 until April,
      2008.  He also served as the interim president and chief
      executive officer of Lincolnway Energy from May, 2004 until July 13,
      2005.  Mr. Couser has served as a director of Iowa Renewable
      Fuels Association for the past four years and is currently serving as
      President.  Mr. Couser has been self-employed as a farmer since
      1977.  His farming operations include row crops and
      cattle.
 
 James
      Hill
 
 Mr.
      Hill has been a director of Lincolnway Energy since Lincolnway Energy was
      organized in May, 2004.  His current term as a director will end
      at the annual meeting of the members which will be held in
      2010.  Mr. Hill has been self-employed as a farmer since
      1972.  Following graduation from college, Mr. Hill worked in
      management with his farming business. While farming and feeding cattle,
      Mr. Hill became involved in the cattle industry organizations and
      ultimately serving as chairman of the Iowa Beef Industry Council and
      president of the Iowa Cattlemen’s Association.  He also served
      as president of the board of directors of the Ellsworth-Williams Coop
      during their merger with Prairie Land Coop.  He has also served
      as an advisory council member for Farm Credit Services of America since
      approximately 1994.
  81
 
 Rick
      Vaughan
 
 Rick
      Vaughan has been a director of Lincolnway Energy since Lincolnway Energy
      was organized in May, 2004. His current term as a director will end at the
      annual meeting of the members which will be held in 2009.  Mr.
      Vaughan has been the General Manager of Prairie Land Cooperative since
      February 1995.
  Richard
      Johnson
 
 Richard
      Johnson has been a director of Lincolnway Energy since July 27, 2007, and
      his current term as a director will end at the annual meeting of the
      members which will be held in 2010.  Mr. Johnson has been a
      self-employed certified public accountant since 2003.  He has
      served since 2006 as a director of a bank holding company, Ogden
      Bancshares, and as a director of one of its subsidiaries, Vision Bank of
      Iowa.  He also has served as a director of EMC National Life
      Insurance Company (EMCNL) since 2003 and has been a director and treasurer
      of Petroleum Marketers Management Insurance Company (PMMIC) since
      2000.  Mr. Johnson serves as a member of the audit committee of
      Ogden Bancshares and is chairman of the audit committees for EMCNL and
      PMMIC.  He also served as the elected auditor of the State of
      Iowa from 1979 to 2003.  Mr. Johnson completed a six year term
      on December 31, 2006 as a trustee of the Financial Accounting Foundation,
      the board that oversees and provides board member selection and funding of
      the national Accounting Standards Boards.  Mr. Johnson has
      served as a member of the Iowa Accountancy Examining Board since January
      2003 where he is currently vice chairman and a member of the disciplinary
      committee.  The Accountancy Board licenses and regulates
      certified public accountants and accounting practitioners in the State of
      Iowa.
 
 Richard
      Brehm
 
 Mr. Brehm
joined Lincolnway Energy on May 17, 2005 as the General Manager and was
appointed president and chief executive officer on July 13, 2005. Mr. Brehm has
served in various management positions in agriculture and ethanol production
since 1995. Mr. Brehm served as Director of Operations for International
Ingredient Corporation, St. Louis, Missouri from September 1995 to January 2002.
During that time he was responsible for the construction and operation of a fuel
ethanol plant at Cleburne, Texas as well as nine other manufacturing plants.
International Ingredient Corporation is a manufacturer of food and feed
specialty ingredients for feed, pet food, pharmaceutical and baking companies’
world wide.
 
 From June
2002 to December 2003, Mr. Brehm served as a broker- manager with Agri
Management Services in Monticello, Iowa. During that time Mr. Brehm obtained a
Series III commodity brokers license and worked to provide companies and
producers with grain marketing and procurement strategies.
  82
 
 In
January 2004, Mr. Brehm became Director of Plant Operations at United Bio
Energy, Wichita, Kansas where he served as interim general manager at Platte
Valley Fuel Ethanol, Central City, Nebraska between January 2004 and May 2004.
Mr. Brehm continued to work on numerous ethanol plant projects throughout the
Midwest until United Bio Energy appointed him general manager of Big River
Resources, West Burlington, Iowa from October 2004 to March 2005. During April
2005 and May 2005, United Bio Energy assigned Mr. Brehm to develop additional
ethanol plants in Kansas and Nebraska.
 
 Kim
      Supercynski
 
 Ms.
      Supercynski has served as the chief financial officer of Lincolnway Energy
      since October 2005.  She served as the corporate controller for
      Garst Seed Company, located in Slater, Iowa, from approximately February
      1996 to October 2005.  Her responsibilities in that capacity
      included overseeing the accounting department. Garst Seed Company is an
      affiliate of Syngenta, Inc., which is a large international company that
      sells, markets and produces agricultural seed. Ms. Supercynski is a
      certified public accountant and a certified treasury
      professional.
  83
 
 Number
      and Term of Directors and Officers
 
 The
      number of directors for Lincolnway Energy was fixed at 9 as of the date of
      this annual report.  Each of Lincolnway Energy's directors is
      elected to a three year term and until his or her successor is
      elected.  The terms of the directors are staggered, so that
      three of the directors' terms expire in one year, three expire the next
      year, and three expire the following
year.
 
 The
      officers of Lincolnway Energy are elected annually by the directors at its
      annual meeting, and hold office until the next annual meeting of the
      directors and until their respective successors are chosen.  Any
      officer may be removed by the directors at any time, with or without
      cause, subject to any employment agreement as may exist between Lincolnway
      Energy and any officer.  Lincolnway Energy did not have any
      written employment agreements with any officer as of the date of this
      annual report.
 
 Significant
      Employees
 
 Lincolnway
      Energy currently has two employees who Lincolnway Energy expects to make a
      significant contribution to its business, in addition to Lincolnway
      Energy's executive officers identified above.  Those employees
      are Kristine Strum and David Zimmerman.  Lincolnway Energy does
      not have a written employment agreement with either of those
      employees.
 
 Kristine Strum. Ms. Strum
has served as the controller for Lincolnway Energy since December 12,
2005.  She was employed as a controller by Iowa Newspapers, Inc., in
Ames, Iowa, from August, 1989 to December, 2005.  Iowa Newspapers,
Inc. is a newspaper publishing company.  Ms. Strum is
42.
 
 David
Zimmerman.Mr. Zimmerman has been Lincolnway Energy's
commodities manager since March 5, 2007.  He was employed as a
commodities analyst by RJ O'Brien and Associates in West Des Moines, Iowa from
March, 2004 to March, 2007.  RJ O'Brien and Associates is a futures
commission merchant.  He was employed as a commodities merchant with
Agri Grain Marketing/Cargill in West Des Moines, Iowa and Eddyville, Iowa from
August, 2002 to March, 2004.  Agri Grain Marketing/Cargill is a cash
grain brokerage business.  Mr. Zimmerman is 36.
 
 Lincolnway Energy believes that the
plant manager position is also a key position for Lincolnway
Energy.  Larson Dunn served as Lincolnway Energy's plant manager from
October 17, 2005 until October 17, 2008.  Lincolnway Energy hopes to
fill the plant manager position by the end of March, 2009.
 
 Mr.
      Dunn was employed by Archer Daniels Midland at Peoria, Illinois as a mill
      fermentation superintendent from January, 2003 until October,
      2005.  He was employed as a plant chemist at Williams Bioethanol
      in Pekin, Illinois from September, 1998 to January,
      2003.  Williams Bioethanol operates a 150,000,000 gallon ethanol
      plant located in Pekin,
Illinois.
  84
 
 Code
      of Ethics
 
 Lincolnway
      Energy has adopted a code of ethics that applies to Lincolnway Energy's
      directors, principal executive officer, principal financial officer,
      principal accounting officer or controller, or persons performing similar
      functions for Lincolnway Energy.
 
 No
      Changes to Director Nomination
Procedures
 
 There
      were no material changes during the fiscal year ended September 30, 2008
      to the procedures by which the members of Lincolnway Energy may recommend
      nominees for election as a director of Lincolnway
  Energy.
 
 Audit
      Committee Financial Expert
 
 Lincolnway
      Energy has an audit committee.  The members of the audit
      committee as of the date of this annual report were Richard Johnson, Tim
      Fevold, Brian Conrad and Rick
Vaughan.
 
 Lincolnway
      Energy's board has determined that Richard Johnson is an audit committee
      financial expert, as that term is defined in the applicable regulations of
      the Securities and Exchange Commission.  Lincolnway Energy's
      board has also determined that all committee members meet the standards of
      independence under the Governance Guidelines and applicable NASDAQ Stock
      Market listing standards, including that the committee members are free of
      any relationship that would interfere with his individual exercise of
      independent judgment.
 
 Item
      11.
              Executive
      Compensation.
 
 The
information required by this Item is incorporated by reference from the
"Compensation Of Executive Officers And Directors" section in Lincolnway
Energy's definitive proxy statement to be filed by Lincolnway Energy with
respect to the annual meeting of the members of Lincolnway Energy which will be
held in 2009, which definitive proxy statement shall be filed within 120 days
after the end of the fiscal year covered by this annual report.
 
 Item
      12.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.
 
 As
      of the date of this annual report, Lincolnway Energy was only authorized
      to issue units of membership interest, and Lincolnway Energy did not have
      any other classes or series of
units.
  85
 
 As
      of the date of this annual report, Lincolnway Energy did not have any
      compensation plans, including any individual compensation arrangements,
      under which units of Lincolnway Energy are authorized for
      issuance.
 
 The
      following table sets forth certain information regarding the beneficial
      ownership of units of Lincolnway Energy as of November 30, 2008 by the
      directors and executive officers of Lincolnway
      Energy.  Lincolnway Energy had 42,049 outstanding units on
      November 30, 2008.
 
 Name of Beneficial Owner
                
                Amount
      and Nature
                  Of Beneficial Ownership1
                
                Percent of ClassWilliam
      Couser, Director
                
                4132
                
                .98%Jeff
      Taylor, Director and Chairman
                
                4503,4
                
                1.07%Timothy
      Fevold, Director
                
                101
                
                .24%Terrill
      Wycoff, Director and Treasurer
                
                225
                
                .54%James
      Hill, Director
                
                250
                
                .59%Brian
      Conrad, Director and Vice Chairman
                
                5533
                
                1.32%Rick
      Vaughan, Director
                
                -0-
                
                0%Richard
      Johnson,
                  Director
                
                42
                
                .10%Kurt
      Olson, Director and Secretary
                
                200
                
                .48%Richard
      Brehm, President and Chief Executive Officer
                
                -0-
                
                0%Kim
      Supercynski, Chief Financial Officer
                
                255
                
                .06%All
      directors and executive officers as a group
                
                2,259
                
                5.4%
 1
              Unless
      otherwise indicated by a footnote, all of the units are directly owned by
      the listed individual or jointly owned with their spouse and are not
      pledged as security by the listed
individual.
  86
 
 2   One hundred of the units are pledged as security
      by the listed individual
 
 3
              All
      of the units are pledged as security by the listed
    individual.
 
 4
              Fifty
      of the units are held by a trust for which Jeff Taylor serves as one of
      the trustees.
 
 5
              All
      of the units are owned by the spouse of the listed
    individual.
 
 
 To
      Lincolnway Energy's knowledge, as of the date of this annual
      report:
 
 ·
              No
      person or group was the beneficial owner of more than 5% of Lincolnway
      Energy's outstanding units, and no person or group held more than 5% of
      Lincolnway Energy's outstanding units pursuant to any voting trust or
      similar agreement, and
 
 ·
              There
      are no arrangements, including any pledge of units by any person, the
      operation of which may at a subsequent date result in a change in control
      of Lincolnway Energy.
 
 Item
      13.
                Certain
      Relationships and Related Transactions, and Director
      Independence.
 
 There
were no transactions since the beginning of Lincolnway Energy's fiscal year
ended September 30, 2008, and there are no currently proposed transactions, in
which Lincolnway Energy was or is to be a participant where the amount involved
exceeds $120,000, and in which any of the following types of persons had, or
will have, a direct or indirect material interest:
 
 ·
              any
      director or executive officer of Lincolnway
  Energy;
 
 ·
              any
      person who is known by Lincolnway Energy to own of record or beneficially
      more than 5% of Lincolnway Energy's outstanding units;
  or
 
 ·
              any
      immediate family member of any of the foregoing
  persons.
 
 The
      directors of Lincolnway Energy are William Couser, Jeff Taylor, Timothy
      Fevold, Terrill Wycoff, James Hill, Brian Conrad, Rick Vaughan, Richard
      Johnson and Kurt Olson.  Each of the directors meets the
      standards of independence under the Governance Guidelines and applicable
      NASDAQ Stock Market listing standards, including that each director is
      free of any relationship that would interfere with his individual exercise
      of independent judgment.
  87
 
 Item
      14.
                  Principal
      Accountant  Fees and
Services.
 
 The
following table presents fees for professional services rendered by McGladrey
& Pullen, LLP for the audit of Lincolnway Energy's annual financial
statements for the fiscal years ended September 30, 2007 and 2008 and fees
billed for other services rendered by McGladrey & Pullen, LLP and its
affiliate RSM McGladrey, Inc. during those periods:
 
 Year
      Ended September 30,2007
                      
                      
                      2008Audit
      Fees
                      
                      $
                      85,950
                      
                      
                      $
                      91,650Tax
      Fees
                      
                      $
                      20,500
                      
                      
                      $
                      24,000All
      Other Fees
                      
                      $
                      21,987
                      
                      
                      $
                      2,140Total
                      
                      $
                      128,437
                      
                      
                      $
                      117,790
 
 Audit
Fees.  The audit fees were incurred for the audit by McGladrey
& Pullen, LLP of Lincolnway Energy's annual financial statements and review
of the financial statements included in Lincolnway Energy's quarterly reports on
Form 10-Q or services that are normally provided by McGladrey & Pullen, LLP
in connection with statutory and regulatory filings or engagements for the
fiscal years ended September 30, 2007 and 2008.
 
 Tax
Fees.  The tax fees were billed for services rendered by RSM
McGladrey, Inc. for tax compliance, tax advice and tax planning.  The
nature of the services comprising the tax fees was for year end tax preparation
of the partnership return and associated K-1’s.
 
 All Other
Fees.  The all other fees were billed to Lincolnway Energy for
products and services provided by RSM McGladrey, Inc which are not included
under audit fees or tax fees.  The nature of the products and services
comprising the all other fees for 2007 and 2008 was RINS audit, cost segregation
study, compensation consulting, and consulting relating to the compliance with
SOX 404 reporting requirements.
 
 Lincolnway
Energy's board has concluded that the provision of the non-audit services listed
above is compatible with maintaining the independence of McGladrey & Pullen,
LLP.
 
 Each
specific engagement of McGladrey & Pullen, LLP and its affiliate RSM
McGladrey, Inc is approved by the audit committee of the board of Lincolnway
Energy.
  88
 
 The
percentage of hours expended on McGladrey & Pullen, LLP’s engagement to
audit Lincolnway Energy's financial statements for the fiscal year ended
September 30, 2008 that were attributed to work performed by persons other than
McGladrey & Pullen, LLP’s  full time, permanent employees did not
exceed 50%.
 
 PART
IV
 
 Item
      15.
              Exhibits
      and Financial Statement Schedules.
 
 (a)
              Financial
      Statements and Schedules.
 
 The
financial statements are set forth under Item 8 of this annual
report.  Financial statement schedules have been omitted because they
are not required or are not applicable, or the information is otherwise included
in this annual report.
 
 (b)
              Exhibits.
 
 The
following exhibits are filed as part of this annual report.  Exhibits
previously filed are incorporated by reference, as noted.
 
 Incorporated by
ReferenceExhibit
                                          
                                          
                                          
                                          Filed
      Herewith;
                                          
                                          
                                          
                                          Period
                                          
                                          
                                          
                                          FilingNumber
                                          
                                          Exhibit Description
                                          
                                          Page Number
                                          
                                          Form
                                          
                                          Ending
                                          
                                          Exhibit
                                          
                                          Date3.1
                                          
                                          Articles
      of Restatement
                                          
                                          
                                          
                                          10-Q
                                          
                                          6/30/07
                                          
                                          3.1
                                          
                                          8/13/073.2
                                          
                                          Amended
      and Restated Operating Agreement and Unit Assignment
Policy
                                          
                                          
                                          
                                          10-Q
                                          
                                          6/30/07
                                          
                                          3.2
                                          
                                          8/13/07*10.1
                                          
                                          Design/Build
      Contract Between Lincolnway Energy, LLC and Fagen, Inc.
                                          
                                          
                                          
                                          10
                                          
                                          
                                          
                                          10.1
                                          
                                          1/27/0610.2
                                          
                                          Master
      Loan Agreement Between Lincolnway Energy, LLC and Farm Credit Services of
      America
                                          
                                          
                                          
                                          10
                                          
                                          
                                          
                                          10.2
                                          
                                          1/27/0610.3
                                          
                                          Construction
      and Term Loan Supplement Between Lincolnway Energy, LLC and FarmCredit
      Services of America
                                          
                                          
                                          
                                          10
                                          
                                          
                                          
                                          10.3
                                          
                                          1/27/0610.4
                                          
                                          Construction
      and Revolving Term Loan Supplement Between Lincolnway Energy, LLC and Farm
      Credit Services of America
                                          
                                          
                                          
                                          10
                                          
                                          
                                          
                                          10.4
                                          
                                          1/27/06
 
 89
 
 10.5
                                
                                Loan
      Agreement Between Lincolnway Energy,  LLC and Iowa Department of
      Transportation
                                
                                
                                
                                10
                                
                                
                                
                                10.5
                                
                                1/27/0610.6
                                
                                Ethanol
      Fuel Marketing Agreement Between Lincolnway Energy, LLC and Renewable
      Products  Marketing Group. See Exhibit 10.6.1 for an amendment
      to this agreement.
                                
                                
                                
                                10
                                
                                
                                
                                10.6
                                
                                1/27/0610.6.1
                                
                                Amendment
      to Ethanol Fuel Marketing Agreement Between Lincolnway Energy, LLC and
      RPMG, Inc.
                                
                                E-110.7
                                
                                Distiller's
      Grain Marketing Agreement Between Lincolnway Energy, LLC and Hawkeye Gold,
      LLC
                                
                                
                                
                                10-K
                                
                                9/30/07
                                
                                10.7
                                
                                12/21/07*10.9
                                
                                Coal
      Supply Agreement Between Lincolnway Energy, LLC and Williams Bulk
      Transfer, Inc.  See Exhibit 10.9.1 for an amendment to this
      agreement.
                                
                                
                                
                                10
                                
                                
                                
                                10.9
                                
                                1/27/06*10.9.1
                                
                                Amendment
      Number One
                                  to
      Coal Supply Agreement Between Lincolnway Energy, LLC and Williams Bulk
      Transfer, Inc.
                                
                                
                                
                                10-K
                                
                                9/30/07
                                
                                10.9.1
                                
                                12/21/0710.10
                                
                                Loan
      Agreement Between Lincolnway Energy, LLC and Iowa Department
      of
                                  Economic
      Development
                                
                                
                                
                                10
                                
                                
                                
                                10.10
                                
                                1/27/06
  90
 
 10.11
                                      
                                      Amended
      and Restated Grain Handling Agreement Between Lincolnway Energy, LLC and
      Heart of Iowa Cooperative
                                      
                                      
                                      
                                      10
                                      
                                      
                                      
                                      10.11
                                      
                                      1/27/0610.13
                                      
                                      Industry
      Track Contract Between Lincolnway Energy, LLC and Union Pacific
      Railroad
                                      
                                      
                                      
                                      10-Q
                                      
                                      6/30/06
                                      
                                      10.13
                                      
                                      8/14/0610-K
                                      
                                      9/30/06
                                      
                                      10.14
                                      
                                      12/21/0614
                                      
                                      Code
      of Ethics
                                      
                                      E-331.1
                                      
                                      Rule
      13a-14(a) Certification of President and Chief Executive
      Officer
                                      
                                      E-731.2
                                      
                                      Rule
      13a-14(a) Certificationof
      Chief Financial Officer
                                      
                                      E-932.1
                                      
                                      Section
      1350 Certification of President and Chief Executive
Officer
                                      
                                      E-1132.2
                                      
                                      Section
      1350 Certification of Chief Financial Officer
                                      
                                      E-12
 
 *
              Material
      has been omitted pursuant to a request for confidential treatment and such
      material has been filed separately with the Securities and Exchange
      Commission.
  91
 
 SIGNATURES
 
 Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 LINCOLNWAY
      ENERGY, LLCDate:  December
      24, 2008
                By:
                /s/ Richard BrehmRichard Brehm, President and ChiefExecutive OfficerDate:  December
      24, 2008
                By:
                /s/ Kim SupercynskiKim Supercynski, Chief FinancialOfficer
 
 Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated:
 
 Date:  December
      24, 2008
                              
                              /s/
      William CouserWilliam
      Couser, DirectorDate:  December
      24, 2008
                              
                              /s/
      Jeff TaylorJeff
      Taylor, DirectorDate:  December
      24, 2008
                              
                              /s/
      Timothy FevoldTimothy
      Fevold, DirectorDate:  December
      24, 2008
                              
                              /s/
      Terrill WycoffTerrill
      Wycoff, DirectorDate:  December
      24, 2008
                              
                              /s/
      Kurt OlsonKurt
      Olson, DirectorDate:  December
      24, 2008
                              
                              /s/
      James HillJames
      Hill, DirectorDate:  December
      24, 2008
                              
                              /s/
      Brian ConradBrian
      Conrad,
Director
  
 
 Date:  December 24, 2008
                              
                              /s/
      Richard JohnsonRichard
      Johnson, DirectorDate:  December
      24, 2008
                              
                              /s/
      Rick VaughanRick
      Vaughan, DirectorDate:  December
      24, 2008
                              
                              /s/
      Richard BrehmRichard
      Brehm, President andChief
      Executive OfficerDate:  December
      24, 2008
                              
                              /s/
      Kim SupercynskiKim
      Supercynski, Chief FinancialOfficer