**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

**FORM 10-K**

**ý****      ****Annual report pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934.**

**For thefiscal year ended September 30, 2006**

**OR**

o        **Transition report pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934.**

**COMMISSION FILE NUMBER 0001229899**

**LITTLE SIOUX CORN PROCESSORS, L.L.C.**(Exact name of registrant as specified in its charter)

| **Iowa**                                                        |   | **42-1510421**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |

 

**4808 F Avenue, Marcus, Iowa 51035**

(Address of principal executive offices)

 

**(712) 376-2800**

(Registrant’s Issuer’s telephone number,including area code)

 

Securities registered pursuant toSection 12(b) of the Exchange Act: **None**

 

Securities registered pursuant toSection 12(g) of the Exchange Act: **MembershipUnits**

Indicate by check mark if the registrant is awell-known seasoned issuer, asdefined in Rule 405 of the Securities Act. o  Yes    x  No

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) of the Act.  oYes    x  No

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. x  Yes    o  No

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§229.405 of this chapter) is not contained in this form, and no disclosurewill be contained, to the best of registrant’s knowledge, in definitive proxyor information statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K. x

 Indicate by check mark whether the registrant isa large accelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):

| Large Accelerated Filer  o |   | Accelerated  Filer  o |   | Non-Accelerated  Filer  x |
|--------------------------------------|--------|---------------------------------|--------|-------------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Act). o  Yes     x  No

The aggregate market value of the membership unitsheld by non-affiliate of the registrant at March 31, 2006, was$33,845,500.  There is no establishedpublic trading market for our membership units. The aggregate market value was computed by reference to the last salesprice of certain membership units sold through the registrant’s qualifiedonline matching service during the registrant’s most recently completed secondfiscal quarter.

As of the date of this filing, there are 10,941membership units of the registrant outstanding.

**DOCUMENTS INCORPORATED BY REFERENCE**

Pursuant to General Instruction G (3), we omit PartIII, Items 10, 11, 12, 13, and 14 and incorporate such items by reference to anamendment to this Annual Report on Form 10-K or to a definitive proxy statementto be filed with the Securities and Exchange Commission within 120 days afterthe close of the fiscal year covered by this Annual Report (September 30,2006).

 

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**INDEX**
|                                                                                                    | ** ** | **Page No.** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| **PART I.**                                                                                        | ** ** | **6**             | ** ** |
| ** **                                                                                         | ** ** | ** **        | ** ** |
| **ITEM 1.  BUSINESS**                                                                              | ** ** | **6**             | ** ** |
| **ITEM  1A. RISK FACTORS**                                                                         | ** ** | **65**            | ** ** |
| **ITEM 2.  DESCRIPTION OF PROPERTY**                                                               | ** ** | **101**           | ** ** |
| **ITEM  3. LEGAL PROCEEDINGS**                                                                     | ** ** | **104**           | ** ** |
| **ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS**                                   | ** ** | **105**           | ** ** |
| ** **                                                                                         | ** ** | ** **        | ** ** |
| **PART II**                                                                                        | ** ** | **105**           | ** ** |
| ** **                                                                                         | ** ** | ** **        | ** ** |
| **ITEM 5. MARKET FOR MEMBERSHIP UNITS AND RELATED MEMBER  MATTERS**                                | ** ** | **105**           | ** ** |
| **ITEM 6. SELECTED FINANCIAL DATA**                                                                | ** ** | **111**           | ** ** |
| **ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN  OF OPERATION**                        | ** ** | **114**           | ** ** |
| **ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES  ABOUT MARKET RISK.**                          | ** ** | **158**           | ** ** |
| **ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**                                            | ** ** | **167**           | ** ** |
| **ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS  ON ACCOUNTING AND FINANCIAL DISCLOSURES** | ** ** | **167**           | ** ** |
| **ITEM 9A. CONTROLS AND PROCEDURES.**                                                              | ** ** | **167**           | ** ** |
| **ITEM  9B. OTHER INFORMATION.**                                                                   | ** ** | **169**           | ** ** |
| ** **                                                                                         | ** ** | ** **        | ** ** |
| **PART III**                                                                                       | ** ** | **169**           | ** ** |
| ** **                                                                                         | ** ** | ** **        | ** ** |
| **PART IV.**                                                                                       | ** ** | **170**           | ** ** |
| ** **                                                                                         | ** ** | ** **        | ** ** |
| **ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES**                                               | ** ** | **170**           | ** ** |
| ** **                                                                                         | ** ** | ** **        | ** ** |
| **SIGNATURES**                                                                                     | ** ** | **183**           | ** ** |

 

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**CAUTIONARY STATEMENTS REGARDINGFORWARD-LOOKING STATEMENTS**

This annual report contains historical information, aswell as forward-looking statements. These forward-looking statements include any statements that involveknown and unknown risks and relate to future events and our expectationsregarding future performance or conditions. Words such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,”“estimate,” “future,” “intend,” “could,” “hope,” “predict,” “target,” “potential,”or “continue” or the negative of these terms or other similar expressions areintended to identify forward-looking statements, but are not the exclusivemeans of identifying such statements. These forward-looking statements, and others we make from time to time,are subject to a number of risks and uncertainties. Many factors could causeactual results to differ materially from those projected in forward-lookingstatements, including the risks described in Part IA of this Annualreport.  While it is impossible to identifyall such factors, factors that could cause actual results to differ materiallyfrom those estimated by us include, but are not limited to:

·                                          Projectedgrowth, overcapacity or contraction in the ethanol market in which we operate;

·                                          Fluctuationsin the price and market for ethanol and distillers grains;

·                                          Changesin plant production capacity, variations in actual ethanol and distillersgrains production from expectations or technical difficulties in operating theplant;

·                                          Availabilityand costs of products and raw materials, particularly corn and natural gas;

·                                          Changesin our business strategy, capital improvements or development plans forexpanding, maintaining or contracting our presence in the market in which weoperate;

·                                          Costsof construction and equipment;

·                                          Changesin interest rates and the availability of credit to support capitalimprovements, development, expansion and operations;

·                                          Ourability to market and our reliance on third parties to market our products;

·                                          Ourability to distinguish ourselves from our current and future competition;

·                                          Changesto infrastructure, including

-                                            expansionof rail capacity,

-                                            increasesin truck fleets capable of transporting ethanol within localized markets,

-                                            additionalstorage facilities for ethanol, expansion of refining and blending facilitiesto handle ethanol,

-                                            growthin service stations equipped to handle ethanol fuels, and

-                                            growthin the fleet of FFVs capable of using E85 fuel;

·                                          Changesin or elimination of governmental laws, tariffs, trade or other controls orenforcement practices such as:

-                                            national,state or local energy policy;

-                                            federalethanol tax incentives;

-                                            legislationmandating the use of ethanol or other oxygenate additives;

-                                            stateand federal regulation restricting or banning the use of MTBE; or

-                                            environmentallaws and regulations that apply to our plant operations and their enforcement;

·                                          Increasedcompetition in the ethanol and oil industries;

·                                          Fluctuationsin US oil consumption and petroleum prices;

·                                          Changesin general economic conditions or the occurrence of certain events causing aneconomic impact in the agriculture, oil or automobile industries;

·                                          Anticipatedtrends in our financial condition and results of operations

·                                          Theavailability and adequacy of our cash flow to meet our requirements, includingthe repayment of debt;

·                                          Ourliability resulting from litigation;

·                                          Ourability to retain key employees and maintain labor relations;

·                                          Changesand advances in ethanol production technology; and

·                                          Competitionfrom alternative fuels and alternative fuel additives.

 

The cautionary statements referred to in this sectionalso should be considered in connection with any subsequent written or oralforward-looking statements that may be issued by us or persons acting on ourbehalf.  We do not undertake any duty toupdate forward-looking statements after the date they are made or to conformthem to actual results or to changes in circumstances or expectations.Furthermore, we cannot guarantee future results, events, levels of activity,performance, or achievements.  We cautionyou not to put undue reliance on any forward-looking statements, which speakonly as of the date of this report.  You should read this report and thedocuments that we reference in this report and have filed as exhibits,completely and with the understanding that our actual future results may bematerially different from what we currently expect.  We qualify all of ourforward-looking statements by these cautionary statements.

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**PART I.**

**ITEM 1.**                    BUSINESS.

**Overview**

LittleSioux Corn Processors, LLC (“Little Sioux”) owns and manages a 60.15% interestin its subsidiary, LSCP, LLLP (“LSCP”). Little Sioux’s business primarily consists of owning and managing itsinterest in LSCP.   LSCP owns and operates anethanol manufacturing plant located near Marcus, Iowa in Cherokee County innorthwest Iowa (the “Plant”).  (LittleSioux and LSCP are referred to collectively in this report as “we,” “our,” or “us.”)

Fuel grade ethanol is our primary product, accountingfor the majority of our revenue.  We also sell distillers grains and cornoil, co-products of the ethanol manufacturing process.  In fiscal year 2006, the Plant processedapproximately 19.1 million bushels of corn into approximately 53.2 milliongallons of ethanol, 244,000 tons of distillers grains and 4.0 million pounds ofcorn oil.  In fiscal year 2007, we anticipate that the Plant will produceapproximately 55.0 million gallons of ethanol, 241,000 tons of distillersgrains, and 14.2 million pounds of corn oil from approximately 19.6 millionbushels of corn.  However, there is noguarantee that we will be able to operate at these levels.

**General Development of Business since October 1, 2005**

LittleSioux was formed as an Iowa limited liability company on September 28,2000.  On March 6, 2002, we purchased thesole generalpartnership interest in LSCP, LP, an Iowa limited partnership.  On June 26, 2003, LSCP, LP elected to becomean Iowa limited liability limited partnership and its legal name waschanged to LSCP, LLLP.  Our generalpartnership interest in LSCP represents 60.15% of the ownership interests ofLSCP and substantially all of our assets. The remaining minority interests owned by various limited partners.  As general partner of LSCP, we manageand control the affairs of LSCP and the Plant.

Constructionof the Plant was substantially completed and operations commenced in April2003.  In July 2005, an expansion of thePlant’s ethanol production capacity was completed, increasing the Plant’sannual name-plate production capacity from 40 million gallons per year to 52million gallons per year.

Two new developments are planned for the plant in2007.  In May 2006, construction wascommenced at the Plant in order to expand our existing grain handlingfacilities and remodel our grain silos.  Expansion of the grain handling facilities is expected to be completedin May 2007 with remodeling of the grain silos completed in September2007.  Both construction projects aredesigned and will be built by McCormick Construction Company, Inc.

In October 2006, additional construction was commendedto expand the Plant’s production capacity from a 52 million gallon per year toa 92 million gallon name-plate production capacity.   We expect that this expansion will nearlydouble our operating revenue and operating efficiencies and increase the Plant’s corn usage from approximately 18.3 million to approximately 35million bushels annually.  The expansionwill be designed and built by Fagen Inc., the company that designed and builtthe Plant.  Construction of the Plantexpansion is expected to be completed in late 2007 or early 2008.  However, there is no assurance or guaranteethat construction will stay on schedule or that we will be able to operate atexpanded production by our anticipated completion date.  Additional information regarding ourconstruction projects and Plant expansion may be found at “**Item 7 —Management’s Discussion and Analysis of Financial Condition and Results ofOperations — Plant Operations and Expansion**.”

In addition, we also continue to study the feasibilityof developing and constructing an ethanol plant just south of Akron, Iowa inPlymouth County, or participating in the Akron plant project in somecapacity.  Additional informationregarding development of a second ethanol plant may be found at “**Item 7 — Management’s Discussion and Analysis of Financial Conditionand Results of Operations — Plant Operations and Expansion**.”

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**Available Information**

The public may read and copy materials we file withthe Securities and Exchange Commission at the SEC’s Public ReferenceRoom at 100 F Street NE, Washington, D.C., 20549.  Information on theoperation of the Public Reference Room may be obtained by calling the SECat 1-800-SEC-0330.  In addition, the SEC maintains an Internet site thatcontains reports, proxy and information statements and other informationregarding issuers that file electronically with the SEC.  Reports we fileelectronically with the SEC may be obtained at *www.sec.gov*.

In addition, information about us is also available atour website at*www.littlesiouxcornprocessors.com*, and under the link “SECCompliance,” visitors to our site may access, free of charge, the reports wehave filed with the Securities and Exchange Commission.  These reports aremade available on our website as soon as reasonably practicable after weelectronically file such materials with, or furnish such materials to, theSecurities and Exchange Commission. The contents of our website are notincorporated by reference in this Annual Report on Form 10-K.

**Financial Information**

Please refer to “**Item 8 — Management’s Discussion and Analysis of Financial Conditionand Results of Operations”** for information about our revenues, profit and loss measurementsand total assets.  Ourconsolidated financial statements and supplementary data are included beginningat page F-1 of this Report.

**PrincipalProducts and Their Markets**

The principal products we produce at our plant arefuel grade ethanol, distillers grains and corn oil.

***Ethanol***

  Ethanol is ethyl alcohol, a fuelcomponent made primarily from corn and various other grains.   However, according to the Renewable FuelsAssociation, approximately 85 percent of ethanol in the United Statestoday is produced from corn, and approximately 90 percent of ethanol isproduced from a corn and other input mix. Corn produces large quantities ofcarbohydrates, which convert into glucose more easily than most other kinds ofbiomass. The Renewable Fuels Association estimates current domestic ethanolproduction at approximately 5.28 billion gallons as of December 2006.

Anethanol plant is essentially a fermentation plant.  Ground corn and water are mixed with enzymesand yeast to produce a substance called “beer,” which contains about 10%alcohol and 90% water.  The “beer” isboiled to separate the water, resulting in ethyl alcohol, which is thendehydrated to increase the alcohol content. This product is then mixed with a certified denaturant to make theproduct unfit for human consumption and commercially saleable.

Ethanol can be used as: (i) an octaneenhancer in fuels; (ii) an oxygenated fuel additive for the purpose of reducingozone and carbon monoxide vehicle emissions; and (iii) a non-petroleum-basedgasoline substitute.  Approximately 95%of all ethanol is used in its primary form for blending with unleaded gasolineand other fuel products.  Used as a fueloxygenate, ethanol provides a means to control carbon monoxide emissions inlarge metropolitan areas.  The principalpurchasers of ethanol are petroleum terminals in the continental United States.

Forour fiscal years ended September 30, 2006, 2005 and 2004, revenues from sales ofethanol were approximately 89%, 86% and 86% of total revenues respectively.

***DistillersGrains***

Aprincipal co-product of the ethanol production process is distillers grains, ahigh protein, high-energy animal feed supplement primarily marketed to the dairyand beef industry.  Distillers grainscontain by-pass protein that is superior to other protein supplements such ascottonseed meal and soybean meal. By-pass proteins are more digestible to the animal, thus generatinggreater lactation in milk cows and greater weight gain in beef cattle.  The dry

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mill ethanolprocessing used by the Plant results in two forms of distiller grains: DistillersModified Wet Grains (“DMWS”) and Distillers Dried Grains with Solubles (“DDGS”).DMWS is processed corn mash that has been dried to approximately 50%moisture.  DMWS have a shelf life ofapproximately ten days and are often sold to nearby markets.  DDGS is processed corn mash that has beendried to 10% to 12% moisture.  DDGS hasan almost indefinite shelf life and may be sold and shipped to any marketregardless of its vicinity to an ethanol plant. At our plant, the composition of the distillers grains we produce isapproximately 57% DMGS and 43% DDGS.

Forour fiscal years ended September 30, 2006, 2005 and 2004 revenues from sales ofdistillers grains were approximately 9%, 12% and 14% of total revenues,respectively.

***CornOil***

Cornoil can be produced as a co-product of ethanol production by installingequipment to separate the oil from the distillers grains during the productionprocess.  In October 2005, we completed installation of this equipment and webegan producing corn oil.  Prior toinstallation of the corn oil segregation unit, the corn oil had been sold as anenergy component of our distillers grains.

Cornoil in its raw form can be used as livestock feed, as a fuel under certainoperating conditions, refined into bio-diesel fuel, or refined for humanconsumption.  We intend to initiallymarket the unrefined corn oil to the animal feed and bio-diesel markets toassure that quality specifications can be maintained.  In the long term, the corn oil co-productcould be marketed for human consumption. Specific details regarding market penetration into human food areunknown at this time since corn oil extraction in a dry mill situation such asours has not yet been proven, nor has its suitability for human consumptionbeen determined.

Forour fiscal year ended September 30, 2006, revenues from sales of corn oil wereapproximately 0.5% of total revenues. There were no corn oil sales in fiscal2005.

**Marketing and Distribution ofPrincipal Products**

Our ethanol plant is located near Marcus,Iowa in Cherokee County, in the northwestern section of Iowa.  We selected the Marcus site because of itslocation to existing grain production, accessibility to road and railtransportation and its proximity to major population centers such asMinneapolis, Minnesota; Omaha, Nebraska; and Chicago, Illinois.  Our Plant is served by the Canadian NationalRailroad Company.

We sell and market the ethanol, distillers grains andcorn oil produced at the plant through normal and established markets,including local, regional and national markets. We have entered into a marketing agreement with a third party marketerfor our ethanol.  Whether or not ethanolproduced by our Plant is sold in local markets will depend on decisions made byour marketer.  Local ethanol markets maybe limited and must be evaluated on a case-by-case basis. We have also enteredinto a third party marketing agreement for our distillers grains; however, wemarket the bulk of our distillers grains locally.  Although local ethanol, distillers grains andcorn oil markets will be the easiest to service, they may be oversold,particularly in Iowa.  Oversold marketsdepress ethanol, distillers grains and corn oil prices.

          ***Ethanol***

We havea marketing agreement with Archer Daniels Midland Company (“ADM”) for thepurposes of marketing and distributing all of the ethanol we produce at thePlant. Pursuant to our ethanol marketing agreement with ADM, theprice ADM pays us for our ethanol is calculated by averaging the price ADMreceives for all the ethanol it sells originating from (i) our plant, (ii) ADM’splant in Marshall, Minnesota and (iii) ADM’s plant in Columbus, Nebraska.  Inexchange for ADM’s marketing, sales, storage and transportation services, wepay ADM a fixed price per gallon of ethanol sold.  The initial term of the 

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marketingagreement with ADM expires in April 2007 but the agreement is automaticallyrenewed for successive one-year periods at the end of the initial term unlessthe parties agree otherwise.

***Distillers Grains***

We havea marketing agreement with Commodity Specialist Company (“CSC”), a Delawarecorporation, for the purpose of marketing and selling all the distillers grainswe produce, except distillers grains we produce and sell directly to localfarmers.  For our distillers grainsmarketed and sold by CSC, we receive a percentage of the selling price actuallyreceived by CSC receives from its customers.   Through the marketing of CSC and our relationships withlocal farmers, we are not dependent upon one or a limited number of customersfor our distillers grains sales.

Infiscal 2006, we marketed and sold the bulk of our distillers grains locally,primarily to nearby livestock producers, with the remaining approximately 10%of the distillers grains produced at the plant marketed and sold by CSC allover the continental United States.  Asadditional ethanol plants begin production excess capacity could result in thelocal markets.  If excess capacity in thelocal distillers grains markets occurs, we may be forced to dry more of ourdistillers grains for marketing by CSC rather than directly selling in thelocal markets.  As a result, our naturalgas costs will likely increase due to increased drying and our profits maydecrease.

***Corn Oil***

We market and sell our corn oil directlyto regional wholesalers.  Presently, theend use of our corn oil is in the livestock industry. In the long term, ourcorn oil could be marketed for human consumption; however, market penetrationas human food is unknown at this time as corn oil extraction in dry milling isrelatively new and suitability for human consumption has not yet beendetermined.  Because of our ability tomarket our corn oil directly to regional wholesalers, we are not dependent uponone or a limited number of customers for our corn oil sales.

**Dependence on One ora Few Major Customers**

We are substantially dependent upon ADMfor the purchase, marketing and distribution of our ethanol. ADM purchases 100%of the ethanol produced at the Plant, all of which is marketed and distributedto its customers.  Therefore, we are highly dependent on ADM forthe successful marketing of our products. As a large ethanol producer, ADM is also a source of competition.   In the event that our relationship withADM is interrupted or terminated for any reason, we believe that another entityto market the ethanol could be located.  However, any interruption ortermination of this relationship could temporarily disrupt the sale of ethanoland adversely affect our business and operations.

**Seasonal Factors in Business**

In an effort to improve air quality in regions wherecarbon monoxide and ozone are a problem, the Federal Oxygen Program of the Clean Air Act requires the saleof oxygenated motor fuels during the winter months in certain majormetropolitan areas to reduce carbon monoxide pollution.  Gasoline that is blended with ethanolhas a higher oxygen content than gasoline that does not contain ethanol. As a result, we expect fairly light seasonality with respect to our grossprofit margins on our ethanol allowing us to, potentially, be able to sell ourethanol at a slight premium during the mandated oxygenate period. Conversely, we expect our average sales price for fuel grade ethanol during thesummer, when fuel grade ethanol is primarily used as an octane enhancer or afuel supply extender, to be a little lower.

**F****inancial Information about Geographic Areas**

Allof our operations are domiciled in the United States.  All of the products sold to our customers forfiscal years 2006, 2005 and 2004 were produced in the United States and all ofour long-lived assets are domiciled in the United States.

**Sources andAvailability of Raw Materials**

***CornFeedstock Supply***

The major raw material required for our ethanol plantto produce ethanol, distillers grain and corn oil is corn.  To operate ata name-plate capacity of 52 million gallons, the Plant requires a supply ofapproximately 18 to 19 million bushels of corn annually.  Followingcompletion of our second plant expansion, the Plant’s new name-

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plate capacity will require the supply ofapproximately 34 to 36 million bushels of corn annually.  We have obtained a grain dealers license and have established ourown grain sourcing staff to acquire the corn we need.  We have also identified a number of graindealers as potential sources of grain in northwestern Iowa for additional corndelivery.  The grain required foroperation of the Plant is readily available through our own grain sourcingstaff, which purchases the corn directly from local producers or from secondarymarkets.  During the fiscal yearending September 30, 2006, we purchased approximately $*5*,739,000in corn from some of the Company’s members who are local grain producers.

Currently, we do not anticipate difficulty securingsufficient grain to operate the Plant.  As of November 9, 2006, the United StatesDepartment of Agriculture’s National Agricultural Statistics Service projected the 2006 national cornproduction at approximately 10.7 billion bushels, which would be the thirdlargest corn crop on record, and Iowa production at 2.0 billion bushels.  However,we expect that the increased demand of corn resulting from additional ethanolplants will lead to greater competition for corn in our geographic area, whichwe expect will lead to higher corn prices.  The USDA recently stated in their report entitled “World AgriculturalSupply and Demand Estimates” (December 11, 2006), that U.S. corn prices couldincrease to as much as $3.30 per bushel or more.  While our surrounding area produces asignificant amount of corn, our profitability may be negatively impacted iflong-term corn prices remain high.

***NaturalGas***

Natural gas is also an important input toour manufacturing process.  We estimate that our current natural gas usageis approximately 110,000 million British thermal units (“MMBTU”) permonth.  Following completion of oursecond expansion, we anticipate that our natural gas usage will increase toapproximately 200,000 million British thermal units (“MMBTU”) per month. We use natural gas to dry our distillers grains products to moisture contentsat which they can be stored for long periods and transported greater distances,so that we can market them to broader livestock markets, including poultry andswine markets in the continental United States. We contract with various natural gas vendors to supply the natural gasnecessary to operate the plant. FC Stone assists us with sourcing natural gasthrough various vendors, which we believe to be more cost-efficient than usingan exclusive supplier.

**FederalEthanol Supports**

Various federal and state laws, regulations, andprograms have led to an increasing use of ethanol in fuel, including subsidies,tax credits, policies and other forms of financial incentives.  Some ofthese laws provide economic incentives to produce and blend ethanol and othersmandate the use of ethanol.

The most recent ethanolsupports are contained in the Energy Policy Act of 2005. Most notably, the Actcreates a 7.5 billion gallon renewable fuels standard (RFS). The RFS requiresrefiners, importers and blenders (“obligated parties”) to show that a requiredvolume of renewable fuel is used in the nation’s fuel supply.  The RFS began at 4 billion gallons in 2006and will increase to 7.5 billion gallons by 2012. The RFS for 2007 is 4.7billion gallons.  The RFS is a nationalflexible program that does not require that any renewable fuels be used in anyparticular area or state, allowing refiners to use renewable fuel blends inthose areas where it is most cost-effective. According to the RFA, the RFSprogram is expected to lead to about $6 billion in new investment in ethanolplants across the country. An increase in the number of new plants will bringan increase in the supply of ethanol. Thus, while this bill may cause ethanolprices to increase in the short term due to additional demand, future supplycould outweigh the demand for 

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ethanol in the future. This would have a negative impact on our earnings.

On December 30, 2005, the EPA published an interimDirect Final Rule in the Federal Register imposing a 2.78% default provision(equating to 4 billion gallons of renewable fuel) of the RFS.  The Direct Final Rule applies a collectivecompliance approach, meaning no refiner individually has to meet the standard,but that the industry as a whole will have to blend at least 2.78% renewablefuels into gasoline during 2006.  Anyshortfall in meeting this requirement would be added to the 4.7 billion gallonRFS requirement for 2007.  There are noother consequences for failure to collectively meet the 2006 standard.  Although there is not a requirement forindividual parties to demonstrate compliance in 2006, the EPA found thatincreases in ethanol production and projections for future demand indicate thatthe 2006 volume is likely to be met and that more than 4 billion gallons ofethanol and biodiesel will be blended in 2006. An EPA brief explaining this action can be viewed on the EPA websitelocated in the renewable fuels section.

                OnSeptember 7, 2006, the EPA published proposed final rules implementing the RFSprogram.  The RFS program will apply in2007 prospectively from the effective date of the final rule.  The RFS for 2007 is 3.71% or 4.7 billiongallons of renewable fuel.  The RFS mustbe met by refiners, blenders, and importers (obligated parties).  Compliance with the RFS program will be shownthrough the acquisition of unique Renewable Identification Numbers (RINs)assigned by the producer to every batch of renewable fuel produced.  The RIN shows that a certain volume ofrenewable fuel was produced.  Obligatedparties must acquire sufficient RINs to demonstrate compliance with theirperformance obligation.  In addition,RINs can be traded and a recordkeeping and electronic reporting system for allparties that have RINs ensures the integrity of the RIN pool.

                RINsare valid for compliance purposes for the calendar year in which they weregenerated, or the following calendar year. No more than 20% of the current year obligation could be satisfiedusing  RINs from the previous year.  An obligated party may carry a deficit overfrom one year into the next if it cannot generate or purchase sufficient RINsto meet its renewable volume obligation. However, deficits cannot be carried over from one year into the next.

                The RFS system will be enforced througha system of registration, record keeping and reporting requirements forobligated parties, renewable fuels producers (RIN generators), as well as anyparty that procures or trades RINs either as part of their renewable fuels purchasesor separately.  Any person who violatesany prohibition or requirement of the RFS program may be subject to civilpenalties for each day of each violation. For example, under the proposed rule, a failure to acquire sufficientRINs to meet a party’s renewable fuels obligation would constitute a separateday of violation for each day the violation occurred during the annualaveraging period.  The enforcementprovisions are necessary to ensure the RFS program goals are not compromised byillegal conduct in the creation and transfer of RINs.

Historically, ethanolsales have also been favorably affected by the Clean Air Act amendments of1990, particularly the Federal Oxygen Program which became effective November1, 1992. The Federal Oxygen Program requires the sale of oxygenated motor fuelsduring the winter months in certain major metropolitan areas to reduce carbonmonoxide pollution. Ethanol use has increased due to a second Clean Air Act program,the Reformulated Gasoline Program. This program became effective January 1,1995, and requires the sale of reformulated gasoline in nine major urban areasto reduce pollutants, including those that contribute to ground level ozone,better known as smog.

The two major oxygenatesadded to reformulated gasoline pursuant to these programs are Methyl TertiaryButyl Ether (“MTBE”) and ethanol, however MTBE has caused groundwatercontamination and has been banned from use by many states. The Energy Policy Actof 2005 did not impose a national ban of MTBE but it also did not includeliability protection for manufacturers of MTBE. We expect the failure toinclude liability protection for manufacturers of MTBE to result in refinersand blenders using ethanol as an oxygenate rather than MTBE to satisfy thereformulated gasoline oxygenate requirement. While this may create increaseddemand in the short-term, we do not expect this to have a long term impact onthe demand for ethanol as the Act repeals the Clean Air Act’s 2% oxygenaterequirement for reformulated gasoline immediately in California and 270 daysafter enactment elsewhere.

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However, the Act did not repeal the 2.7% oxygenaterequirement for carbon monoxide nonattainment areas which are required to useoxygenated fuels in the winter months. While we expect ethanol to be theoxygenate of choice in these areas, there is no assurance that ethanol will infact be used.

The use of ethanol as analternative fuel source has been aided by federal tax policy, which directlybenefits gasoline refiners and blenders, and increases demand for ethanol. OnOctober 22, 2004, President Bush signed H.R. 4520, which contained theVolumetric Ethanol Excise Tax Credit (“VEETC”) and amended the federal excisetax structure effective as of January 1, 2005. Prior to VEETC, ethanol-blendedfuel was taxed at a lower rate than regular gasoline (13.2 cents on a 10%blend). Under VEETC, the ethanol excise tax exemption has been eliminated,thereby allowing the full federal excise tax of 18.4 cents per gallon ofgasoline to be collected on all gasoline and allocated to the highway trustfund. We expect the highway trust fund to add approximately $1.4 billion to thehighway trust fund revenue annually. In place of the exemption, the billcreates a new volumetric ethanol excise tax credit of 5.1 cents per gallon ofethanol blended at 10%. Refiners and gasoline blenders apply for this credit onthe same tax form as before only it is a credit from general revenue, not thehighway trust fund. Based on volume, the VEETC is expected to allow muchgreater refinery flexibility in blending ethanol since it makes the tax creditavailable on all ethanol blended with all gasoline, diesel and ethyl tertiarybutyl ether (“ETBE”), including ethanol in E-85 and the E-20 in Minnesota. TheVEETC is scheduled to expire on December 31, 2010.

The Energy Policy Act of2005 expands who qualifies for the small ethanol producer tax credit.Historically, small ethanol producers were allowed a 10-cents-per-gallonproduction income tax credit on up to 15 million gallons of productionannually. The size of the plant eligible for the tax credit was limited to 30million gallons. Under the Energy Policy Act of 2005 the size limitation on theproduction capacity for small ethanol producers increases from 30 million to 60million gallons. The credit can be taken on the first 15 million gallons of production.The tax credit is capped at $1.5 million per year per producer. The smallethanol producer tax credit is set to expire December 31, 2010. However, upon completionof the expansion of the plant, we do not anticipate qualifying for this taxcredit as our anticipated annual production capacity of 92 million gallons willexceed the size limitation.

In addition, the Energy Policy Act of2005 creates a new tax credit that permits taxpayers to claim a 30% credit (upto $30,000) for the cost of installing clean-fuel vehicle refueling equipment,such as an E85 fuel pump, to be used in a trade or business of the taxpayer orinstalled at the principal residence of the taxpayer. Under the provision,clean fuels are any fuel of at least 85% of the volume of which consists ofethanol, natural gas, compressed natural gas, liquefied natural gas, liquefiedpetroleum gas, and hydrogen and any mixture of diesel fuel and biodieselcontaining at least 20% biodiesel. The provision is effective for equipmentplaced in service after December 31, 2005 and before December 31, 2010. Whileit is unclear how this credit will affect the demand for ethanol in the shortterm, we expect it will help raise consumer awareness of alternative sources offuel and could positively impact future demand for ethanol.

**OtherFactors Affecting Demand and Supply**

Inaddition to government supports that encourage production and the use ofethanol, demand for ethanol may increase as a result of increased consumptionof E85 fuel.  E85 fuel is a blend of 70%to 85% ethanol and gasoline.  Accordingto the Energy Information Administration, E85 consumption is projected toincrease from a national total of 11 million gallons in 2003 to 47 milliongallons in 2025. The demand for E85 is largely driven by flexible fuel vehiclepenetration of the US vehicle fleet, the retail price of E85 compared toregular gasoline and the availability of E85 at retail stations.  In the U.S., there are currently about 6million flexible fuel vehicles capable of operating on E85 and automakers haveindicated plans to produce an estimated 2 million more flexible fuel vehiclesper year.  In addition, Ford and GeneralMotors have recently begun national campaigns to promote ethanol and flexiblefuel vehicles.  Because flexible fuelvehicles can operate on both ethanol and gasoline, if the price of regulargasoline falls below E85, demand for E85 will decrease as well. In addition,gasoline stations offering E85 are relatively scarce. As of October 2006, justover 940 of the country’s 170,000 gas stations offered E85 as an alternative toordinary gasoline (National Ethanol Vehicle Coalition, October 6, 2006). TheEnergy Policy Act of 2005 established a tax credit of 30% for infrastructureand equipment to dispense E85.  This taxcredit became effective in 2006 and is expected to encourage more retailers tooffer E85 as an alternative to regular gasoline. The tax credit, unlessrenewed, will expire December 31, 2010.

OnOctober 5, 2006, Underwriters Laboratories (“UL”) suspended authorization formanufacturers to use UL Markings on components for fuel-dispensing devices thatspecifically reference compatibility with alcohol-

8

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blended fuels that contain greater than 15%ethanol.  Published studies on ethanolindicate that, in higher concentrations, it may have significantly enhancedcorrosive effects versus traditional gasoline. While there have been no documented reports of corrosion for UL Listedor Recognized components used with E85, Underwriters Laboratories is suspendingauthorization to use the UL Mark on components used in dispensing devices thatwill dispense any alcohol-blended fuels containing over 15% alcohol untilupdated certification requirements are established and the effected componentshave been found to comply with them.  Thelack of a UL seal for filling station pumps carrying E85 means that some ofthese stations may be violating fire codes, and that new stations intending toinstall E85 systems may need waivers from local or state fire marshals.  It is the decision of each authority havingjurisdiction as to whether existing E85 dispensing equipment is allowed toremain in service or is taken out of service until additional supportinginformation is received.  UnderwritersLaboratories has not set a deadline for creating standards that could lead tocertification, which could result in the closure of some existing E85 fuelingstations and delay in opening others.

**OurCompetition**

We will be in directcompetition with numerous other ethanol producers, many of whom have greaterresources than we do. We also expect that additional ethanol producers willcontinue to enter the market if the demand for ethanol continues toincrease.  Ethanol is a commodityproduct, like corn, which means ourethanol plant competes with other ethanol producers on the basis of price and,to a lesser extent, delivery service.  Webelieve we compete favorably with other ethanol producers due to our proximityto ample grain supplies and multiple modes of transportation.  In addition, we believe our plant’s locationoffers an advantage over other ethanol producers in that it has ready access byrail to growing ethanol markets, which reduces our cost of sales.

According to the Renewable Fuels Association,the ethanol industry has grown to approximately 109 production facilities inthe United States with current estimates current domestic ethanol production atapproximately 5.28 billion gallons as of December 2006.  As reported by the Iowa Renewable FuelsAssociation, excluding our Plant, Iowa currently has 24 ethanol plants with thecapacity to produce nearly 1.6 billion gallons annually.  In addition,there are 9 ethanol plants under construction or expansion in Iowa that willadd over 600 million gallons of annual capacity.  There are also numerous other producer and privately owned ethanolplants planned and operating throughout the Midwest and elsewhere in the UnitedStates.  The largest ethanolproducers include Abengoa Bioenergy Corp., ADM, ASAlliances Biofuels, LLC, AventineRenewable Energy, Inc., Cargill, Inc., The Andersons, US Bio Energy and VeraSunEnergy Corporation, all of which are each capable of producing more ethanolthan we expect to produce.  ADM, ourethanol marketer, is currently the largest ethanol producer in the U.S. andcontrols a significant portion of the ethanol market.

The following table identifies mostof the ethanol producers in the United States along with their productioncapacities.
| COMPANY                            | ** ** | **LOCATION**    | ** ** | **FEEDSTOCK** | ** ** | **Current  Capacity  (mgy)** | ** ** | **Under  Construction/  Expansions (mgy)** | ** ** |
|------------------------------------|------------|-----------------|------------|---------------|------------|------------------------------|------------|-------------------------------------------------|------------|
| Abengoa Bioenergy Corp.            |       | York,  NE       |       | Corn/milo     |       | 55                           |       |                                            |       |
|                                    |       | Colwich,  KS    |       |          |       | 25                           |       |                                            |       |
|                                    |       | Portales,  NM   |       |          |       | 30                           |       |                                            |       |
|                                    |       | Ravenna,  NE    |       |          |       |                         |       | 88                                              |       |
| Aberdeen Energy*                   |       | Mina,  SD       |       | Corn          |       |                         |       | 100                                             |       |
| Absolute Energy, LLC*              |       | St.  Ansgar, IA |       | Corn          |       |                         |       | 100                                             |       |
| ACE Ethanol, LLC                   |       | Stanley,  WI    |       | Corn          |       | 41                           |       |                                            |       |
| Adkins Energy, LLC*                |       | Lena,  IL       |       | Corn          |       | 40                           |       |                                            |       |
| Advanced  Bioenergy                |       | Fairmont,  NE   |       | Corn          |       |                         |       | 100                                             |       |
| AGP*                               |       | Hastings,  NE   |       | Corn          |       | 52                           |       |                                            |       |
| Agra Resources  Coop. d.b.a. EXOL* |       | Albert  Lea, MN |       | Corn          |       | 40                           |       | 8                                               |       |
| Agri-Energy, LLC*                  |       | Luverne,  MN    |       | Corn          |       | 21                           |       |                                            |       |

 

9

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| Alchem Ltd. LLLP                         |   | Grafton,  ND         |   | Corn        |   | 10.5   |   |   |   |
|------------------------------------------|--------|----------------------|--------|-------------|--------|--------|--------|--------|--------|
| Al-Corn Clean  Fuel*                     |   | Claremont,  MN       |   | Corn        |   | 35     |   | 15     |   |
| Amaizing Energy, LLC*                    |   | Denison,  IA         |   | Corn        |   | 40     |   |   |   |
| Archer Daniels  Midland                  |   | Decatur,  IL         |   | Corn        |   | 1,070  |   | 275    |   |
|                                     |   | Cedar  Rapids, IA    |   | Corn        |   |   |   |   |   |
|                                     |   | Clinton,  IA         |   | Corn        |   |   |   |   |   |
|                                     |   | Columbus,  NE        |   | Corn        |   |   |   |   |   |
|                                     |   | Marshall,  MN        |   | Corn        |   |   |   |   |   |
|                                     |   | Peoria,  IL          |   | Corn        |   |   |   |   |   |
|                                     |   | Wallhalla,  ND       |   | Corn/barley |   |   |   |   |   |
| Arkalon Energy, LLC                      |   | Liberal,  KS         |   | Corn        |   |   |   | 110    |   |
| ASAlliances  Biofuels, LLC               |   | Albion,  NE          |   | Corn        |   |   |   | 100    |   |
|                                     |   | Linden,  IN          |   | Corn        |   |   |   | 100    |   |
|                                     |   | Bloomingburg,  OH    |   | Corn        |   |   |   | 100    |   |
| Aventine Renewable Energy,  LLC          |   | Pekin,  IL           |   | Corn        |   | 100    |   | 57     |   |
|                                          |   | Aurora,  NE          |   | Corn        |   | 50     |   |   |   |
| Badger State  Ethanol, LLC*              |   | Monroe,  WI          |   | Corn        |   | 48     |   |   |   |
| Big River Resources, LLC*                |   | West  Burlington, IA |   | Corn        |   | 52     |   |   |   |
| Blue Flint  Ethanol                      |   | Underwood,  ND       |   | Corn        |   |   |   | 50     |   |
| Bonanza Energy, LLC                      |   | Garden  City, KS     |   | Corn/milo   |   |   |   | 55     |   |
| Broin  Enterprises, Inc.*                |   | Scotland,  SD        |   | Corn        |   | 11     |   |   |   |
| Bushmills Ethanol, Inc.*                 |   | Atwater,  MN         |   | Corn        |   | 40     |   |   |   |
| Cardinal Ethanol                         |   | Harrisville,  IN     |   | Corn        |   |   |   | 100    |   |
| Cargill, Inc.                            |   | Blair,  NE           |   | Corn        |   | 85     |   |   |   |
|                                          |   | Eddyville,  IA       |   | Corn        |   | 35     |   |   |   |
| Cascade Grain                            |   | Clatskanie,  OR      |   | Corn        |   |   |   | 108    |   |
| Center Ethanol Company                   |   | Sauget,  IL          |   | Corn        |   |   |   | 54     |   |
| Central Indiana  Ethanol, LLC            |   | Marion,  IN          |   | Corn        |   |   |   | 40     |   |
| Central MN Ethanol Coop*                 |   | Little  Falls, MN    |   | Corn        |   | 21.5   |   |   |   |
| Central  Wisconsin Alcohol               |   | Plover,  WI          |   | Seed  corn  |   | 4      |   |   |   |
| Chief Ethanol                            |   | Hastings,  NE        |   | Corn        |   | 62     |   |   |   |
| Chippewa Valley  Ethanol Co.*            |   | Benson,  MN          |   | Corn        |   | 45     |   |   |   |
| Commonwealth Agri-Energy,  LLC*          |   | Hopkinsville,  KY    |   | Corn        |   | 33     |   |   |   |
| Corn, LP*                                |   | Goldfield,  IA       |   | Corn        |   | 50     |   |   |   |
| Cornhusker Energy Lexington,  LLC        |   | Lexington,  NE       |   | Corn        |   | 40     |   |   |   |
| Corn Plus, LLP*                          |   | Winnebago,  MN       |   | Corn        |   | 44     |   |   |   |
| Dakota Ethanol, LLC*                     |   | Wentworth,  SD       |   | Corn        |   | 50     |   |   |   |
| DENCO, LLC                               |   | Morris,  MN          |   | Corn        |   | 21.5   |   |   |   |
| E3 Biofuels                              |   | Mead,  NE            |   | Corn        |   |   |   | 24     |   |
| East Kansas  Agri-Energy, LLC*           |   | Garnett,  KS         |   | Corn        |   | 35     |   |   |   |
| ESE Alcohol Inc.                         |   | Leoti,  KS           |   | Seed  corn  |   | 1.5    |   |   |   |
| Ethanol2000,  LLP*                       |   | Bingham  Lake, MN    |   | Corn        |   | 32     |   |   |   |
| Frontier Ethanol, LLC                    |   | Gowrie,  IA          |   | Corn        |   | 60     |   |   |   |
| Front Range  Energy, LLC                 |   | Windsor,  CO         |   | Corn        |   | 40     |   |   |   |
| Glacial Lakes Energy, LLC*               |   | Watertown,  SD       |   | Corn        |   | 50     |   | 50     |   |
| Global  Ethanol/Midwest Grain Processors |   | Lakota,  IA          |   | Corn        |   | 95     |   |   |   |

 

10

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|                                         |   | Riga,  MI          |   | Corn               |   |   |   | 57     |   |
|-----------------------------------------|--------|--------------------|--------|--------------------|--------|--------|--------|--------|--------|
| Golden Cheese Company of  California*   |   | Corona,  CA        |   | Cheese  whey       |   | 5      |   |   |   |
| Golden Grain  Energy, LLC*              |   | Mason  City, IA    |   | Corn               |   | 60     |   | 50     |   |
| Golden Triangle Energy, LLC*            |   | Craig,  MO         |   | Corn               |   | 20     |   |   |   |
| Grain Processing  Corp.                 |   | Muscatine,  IA     |   | Corn               |   | 20     |   |   |   |
| Granite Falls Energy, LLC*              |   | Granite  Falls, MN |   | Corn               |   | 52     |   |   |   |
| Great Plains  Ethanol, LLC*             |   | Chancellor,  SD    |   | Corn               |   | 50     |   |   |   |
| Green Plains Renewable  Energy          |   | Shenandoah,  IA    |   | Corn               |   |   |   | 50     |   |
|                                         |   | Superior,  IA      |   | Corn               |   |   |   | 50     |   |
| Hawkeye  Renewables, LLC                |   | Iowa  Falls, IA    |   | Corn               |   | 105    |   |   |   |
|                                    |   | Fairbank,  IA      |   | Corn               |   | 115    |   |   |   |
| Heartland Corn Products*                |   | Winthrop,  MN      |   | Corn               |   | 35     |   |   |   |
| Heartland Grain  Fuels, LP*             |   | Aberdeen,  SD      |   | Corn               |   | 9      |   |   |   |
|                                    |   | Huron,  SD         |   | Corn               |   | 12     |   | 18     |   |
| Heron Lake BioEnergy, LLC               |   | Heron  Lake, MN    |   | Corn               |   |   |   | 50     |   |
| Holt County  Ethanol                    |   | O’Neill,  NE  |   | Corn               |   |   |   | 100    |   |
| Horizon Ethanol, LLC                    |   | Jewell,  IA        |   | Corn               |   | 60     |   |   |   |
| Husker Ag, LLC*                         |   | Plainview,  NE     |   | Corn               |   | 26.5   |   |   |   |
| Illinois River Energy, LLC              |   | Rochelle,  IL      |   | Corn               |   |   |   | 50     |   |
| Indiana  Bio-Energy                     |   | Bluffton,  IN      |   | Corn               |   |   |   | 101    |   |
| Iowa Ethanol, LLC*                      |   | Hanlontown,  IA    |   | Corn               |   | 50     |   |   |   |
| Iroquois  Bio-Energy Company, LLC       |   | Rensselaer,  IN    |   | Corn               |   |   |   | 40     |   |
| James Valley Ethanol, LLC               |   | Groton,  SD        |   | Corn               |   | 50     |   |   |   |
| KAAPA Ethanol,  LLC*                    |   | Minden,  NE        |   | Corn               |   | 40     |   |   |   |
| Land O’ Lakes*                     |   | Melrose,  MN       |   | Cheese  whey       |   | 2.6    |   |   |   |
| Levelland/Hockley  County Ethanol, LLC  |   | Levelland,  TX     |   | Corn               |   |   |   | 40     |   |
| Lincolnland Agri-Energy,  LLC*          |   | Palestine,  IL     |   | Corn               |   | 48     |   |   |   |
| Lincolnway  Energy, LLC*                |   | Nevada,  IA        |   | Corn               |   | 50     |   |   |   |
| Liquid Resources of Ohio                |   | Medina,  OH        |   | Waste  Beverage    |   | 3      |   |   |   |
| Little Sioux  Corn Processors, LP*      |   | Marcus,  IA        |   | Corn               |   | 52     |   |   |   |
| Merrick & Company                   |   | Golden,  CO        |   | Waste  beer        |   | 3      |   |   |   |
| MGP Ingredients,  Inc.                  |   | Pekin,  IL         |   | Corn/wheat  starch |   | 78     |   |   |   |
|                                    |   | Atchison,  KS      |   |               |   |   |   |   |   |
| Michigan Ethanol, LLC                   |   | Caro,  MI          |   | Corn               |   | 50     |   |   |   |
| Mid America Agri  Products/Wheatland    |   | Madrid,  NE        |   | Corn               |   |   |   | 44     |   |
| Mid-Missouri Energy, Inc.*              |   | Malta  Bend, MO    |   | Corn               |   | 45     |   |   |   |
| Midwest  Renewable Energy, LLC          |   | Sutherland,  NE    |   | Corn               |   | 25     |   |   |   |
| Millennium Ethanol                      |   | Marion,  SD        |   | Corn               |   |   |   | 100    |   |
| Minnesota  Energy*                      |   | Buffalo  Lake, MN  |   | Corn               |   | 18     |   |   |   |
| Missouri Ethanol                        |   | Laddonia,  MO      |   | Corn               |   | 45     |   |   |   |
| Missouri Valley  Renewable Energy, LLC* |   | Meckling,  SD      |   | Corn               |   |   |   | 60     |   |
| NEDAK Ethanol                           |   | Atkinson,  NE      |   | Corn               |   |   |   | 44     |   |
| New Energy Corp.                        |   | South  Bend, IN    |   | Corn               |   | 102    |   |   |   |
| North Country Ethanol, LLC*             |   | Rosholt,  SD       |   | Corn               |   | 20     |   |   |   |
| Northeast  Biofuels                     |   | Volney,  NY        |   | Corn               |   |   |   | 114    |   |
| Northeast Missouri Grain,  LLC*         |   | Macon,  MO         |   | Corn               |   | 45     |   |   |   |

 

11

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| Northern Lights Ethanol,  LLC*          |   | Big  Stone City, SD     |   | Corn                   |   | 50     |   |   |   |
|-----------------------------------------|--------|-------------------------|--------|------------------------|--------|--------|--------|--------|--------|
| Northstar  Ethanol, LLC                 |   | Lake  Crystal, MN       |   | Corn                   |   | 52     |   |   |   |
| Northwest Renewable, LLC                |   | Longview,  WA           |   | Corn                   |   |   |   | 55     |   |
| Otter Creek  Ethanol, LLC*              |   | Ashton,  IA             |   | Corn                   |   | 55     |   |   |   |
| Otter Tail Ag Enterprises               |   | Fergus  Falls, MN       |   | Corn                   |   |   |   | 57.5   |   |
| Pacific Ethanol                         |   | Madera,  CA             |   | Corn                   |   | 35     |   |   |   |
|                                    |   | Boardman,  OR           |   | Corn                   |   |   |   | 35     |   |
| Panda Energy                            |   | Hereford,  TX           |   | Corn/milo              |   |   |   | 100    |   |
| Panhandle  Energies of Dumas, LP        |   | Dumas,  TX              |   | Corn/Grain  Sorghum    |   |   |   | 30     |   |
|                                    |   |                    |   |                   |   |   |   |   |   |
| Parallel Products                       |   | Louisville,  KY         |   | Beverage  waste        |   | 5.4    |   |   |   |
|                                         |   | R.  Cucamonga, CA       |   |                   |   |   |   |   |   |
| Patriot  Renewable Fuels, LLC           |   | Annawan,  IL            |   | Corn                   |   |   |   | 100    |   |
| Permeate Refining                       |   | Hopkinton,  IA          |   | Sugars  & starches |   | 1.5    |   |   |   |
| Phoenix Biofuels                        |   | Goshen,  CA             |   | Corn                   |   | 25     |   |   |   |
| Pinal Energy, LLC                       |   | Maricopa,  AZ           |   | Corn                   |   |   |   | 55     |   |
| Pine Lake Corn  Processors, LLC*        |   | Steamboat  Rock, IA     |   | Corn                   |   | 20     |   |   |   |
| Pinnacle Ethanol, LLC                   |   | Corning,  IA            |   | Corn                   |   |   |   | 60     |   |
| Prairie Ethanol,  LLC                   |   | Loomis,  SD             |   | Corn                   |   | 60     |   |   |   |
| Prairie Horizon Agri-Energy,  LLC       |   | Phillipsburg,  KS       |   | Corn                   |   | 40     |   |   |   |
| Premier Ethanol                         |   | Portland,  IN           |   | Corn                   |   |   |   | 60     |   |
| Pro-Corn, LLC*                          |   | Preston,  MN            |   | Corn                   |   | 42     |   |   |   |
| Quad-County Corn  Processors*           |   | Galva,  IA              |   | Corn                   |   | 27     |   |   |   |
| Red Trail Energy, LLC                   |   | Richardton,  ND         |   | Corn                   |   |   |   | 50     |   |
| Redfield Energy,  LLC *                 |   | Redfield,  SD           |   | Corn                   |   |   |   | 50     |   |
| Reeve Agri-Energy                       |   | Garden  City, KS        |   | Corn/milo              |   | 12     |   |   |   |
| Renew Energy                            |   | Jefferson  Junction, WI |   | Corn                   |   |   |   | 130    |   |
| Siouxland Energy &  Livestock Coop* |   | Sioux  Center, IA       |   | Corn                   |   | 25     |   | 40     |   |
| Siouxland  Ethanol, LLC                 |   | Jackson,  NE            |   | Corn                   |   |   |   | 50     |   |
| Sioux River Ethanol, LLC*               |   | Hudson,  SD             |   | Corn                   |   | 50     |   |   |   |
| Southwest Iowa  Renewable Energy, LLC * |   | Council  Bluffs, IA     |   | Corn                   |   |   |   | 110    |   |
| Sterling Ethanol, LLC                   |   | Sterling,  CO           |   | Corn                   |   | 42     |   |   |   |
| Summit Ethanol                          |   | Leipsic,  OH            |   | Corn                   |   |   |   | 60     |   |
| Tall Corn Ethanol, LLC*                 |   | Coon  Rapids, IA        |   | Corn                   |   | 49     |   |   |   |
| Tate & Lyle                         |   | Loudon,  TN             |   | Corn                   |   | 67     |   | 38     |   |
|                                    |   | Ft.  Dodge, IA          |   | Corn                   |   |   |   | 105    |   |
| The Andersons Albion Ethanol  LLC       |   | Albion,  MI             |   | Corn                   |   | 55     |   |   |   |
| The Andersons  Clymers Ethanol, LLC     |   | Clymers,  IN            |   | Corn                   |   |   |   | 110    |   |
| The Andersons Marathon  Ethanol, LLC    |   | Greenville,  OH         |   | Corn                   |   |   |   | 110    |   |
| Trenton Agri  Products, LLC             |   | Trenton,  NE            |   | Corn                   |   | 40     |   |   |   |
| United WI Grain Producers,  LLC*        |   | Friesland,  WI          |   | Corn                   |   | 49     |   |   |   |
| US Bio Albert  City                     |   | Albert  City, IA        |   | Corn                   |   |   |   | 100    |   |
| US Bio Woodbury                         |   | Woodbury,  MI           |   | Corn                   |   | 45     |   |   |   |
| US Bio Hankinson                        |   | Hankinson,  ND          |   | Corn                   |   |   |   | 100    |   |
| US Bio Ord                              |   | Ord,  NE                |   |                   |   |   |   | 50     |   |
| US Bio Platte  Valley                   |   | Central  City , NE      |   |                   |   | 100    |   |   |   |
| US Bio Dyersville                       |   | Dyersville,  IA         |   |                   |   |   |   | 100    |   |

 

12

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| U.S. Energy Partners, LLC  (White Energy)                |       | Russell,  KS      |   | Milo/wheat  starch                                           |   | 48           |   |        |   |
|----------------------------------------------------------|------------|-------------------|--------|--------------------------------------------------------------|--------|--------------|--------|-------------|--------|
| Utica Energy,  LLC                                       |       | Oshkosh,  WI      |   | Corn                                                         |   | 48           |   |        |   |
| VeraSun Energy Corporation                               |       | Aurora,  SD       |   | Corn                                                         |   | 230          |   | 330         |   |
|                                                          |       | Ft.  Dodge, IA    |   | Corn                                                         |   |         |   |        |   |
|                                                          |       | Charles  City, IA |   | Corn                                                         |   |         |   |        |   |
|                                                          |       | Welcome,  MN      |   | Corn                                                         |   |         |   |        |   |
|                                                          |       | Hartely,  IA      |   | Corn                                                         |   |         |   |        |   |
| Voyager Ethanol,  LLC*                                   |       | Emmetsburg,  IA   |   | Corn                                                         |   | 52           |   |        |   |
| Western Plains Energy, LLC*                              |       | Campus,  KS       |   | Corn                                                         |   | 45           |   |        |   |
| Western  Wisconsin Renewable Energy, LLC*                |       | Boyceville,  WI   |   | Corn                                                         |   | 40           |   |        |   |
| White Energy                                             |       | Hereford,  TX     |   | Corn/Milo                                                    |   |         |   | 100         |   |
| Wind Gap Farms                                           |       | Baconton,  GA     |   | Brewery  waste                                               |   | 0.4          |   | 0           |   |
| Renova Energy                                            |       | Torrington,  WY   |   | Corn                                                         |   | 5            |   |        |   |
| Xethanol  BioFuels, LLC                                  |       | Blairstown,  IA   |   | Corn                                                         |   | 5            |   | 35          |   |
| Yuma Ethanol                                             |       | Yuma,  CO         |   | Corn                                                         |   |         |   | 40          |   |
| **Total  Current Capacity at 109 ethanol biorefineries** | ** ** | ** **        |   |                                                         |   | **5,281.4**  |   |        |   |
| **Total  Under Construction (57)/Expansions (8)**        | ** ** | ** **        |   |                                                         |   |         |   | **4,857.5** |   |
| **Total Capacity**                                       | ** ** | ** **        |   |                                                         |   | **10,138.9** |   |        |   |
| *  locally-owned                                         | ** ** | ** **        |   | Renewable Fuels  Association  Last Updated December 13, 2006 |   |

 

***Competitionfrom Alternative Ethanol Production Methods***

Alternativeethanol production methods are continually under development. New ethanol productsor methods of ethanol production developed by larger and better-financedcompetitors could provide them competitive advantages and harm our business.

Most ethanol iscurrently produced from corn and other raw grains, such as milo or sorghum -especially in the Midwest. The current trend in ethanol production research isto develop an efficient method of producing ethanol from cellulose-basedbiomass, such as agricultural waste, forest residue, municipal solid waste, andenergy crops. This trend is driven by the fact that cellulose-based biomass isgenerally cheaper than corn, and producing ethanol from cellulose-based biomasswould create opportunities to produce ethanol in areas which are unable to growcorn. Additionally, the enzymes used to produce cellulose-based ethanol haverecently become less expensive.  Furthermore, the Department of Energy and the President have recentlyannounced support for the development of cellulose-based ethanol, including a$160 million Department of Energy program for pilot plants producingcellulose-based ethanol.  Several largecompanies, including Iogen Corporation, Abengoa, Royal Dutch Shell Group,Goldman Sachs Group, Dupont and Archer Daniels Midland, have all indicated thatthey are interested in research and development in this area.  In addition, Xethanol Corporation has statedplans to convert a six million gallon per year plant in Blairstown, Iowa toimplement cellulose-based ethanol technologies after 2007.  Broin Companies has also announced plans toexpand Voyager Ethanol in Emmetsburg, Iowa to include cellulose to ethanolcommercial production.

Although currenttechnology is not sufficiently efficient to be competitive on a large-scale, arecent report by the U.S. Department of Energy entitled “Outlook for BiomassEthanol Production and Demand” indicates that new conversion technologies maybe developed in the future. If an efficient method of collecting biomass forethanol production and producing ethanol from cellulose-based biomass isdeveloped, we may not be able to compete effectively. We do not believe it willbe cost-effective to convert the Plant into a plant which will usecellulose-based biomass to produce ethanol. As a result, it is possible we could be unable to produce ethanol ascost-effectively as cellulose-based producers.

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***Competition with Ethanol Imported from Other Countries***

Ethanol productionis also expanding internationally. Brazil has long been the world’s largest producer and exporter ofethanol; however, since 2005, US ethanol production slightly exceeded Brazilianproduction. Ethanol is produced more cheaply in Brazil than in the UnitedStates because of the use of sugarcane, a less expensive raw materialalternative to corn. However, in 1980,Congress imposed a tariff on foreign produced ethanol to make it more expensivethan domestic supplies derived from corn.  Thistariff was designed to protect the benefits of the federal tax subsidies forUnited States farmers.  InDecember 2006, legislation was passed in both the U.S. House ofRepresentatives and U.S. Senate to extend the $0.54 per gallon tariff beyondits current expiration in December 2007 through 208. We do not know theextent to which the volume of imports would increase or the effect on U.S.prices for ethanol if the tariff is not renewed.

Ethanol imports from 24 countries in Central Americaand the Caribbean Islands are exempted from this tariff under the CaribbeanBasin Initiative. Under the terms of the Caribbean Basin Initiative, exportsfrom member nations are capped at 7.0% of the total United States productionfrom the previous per year (with additional exemptions from ethanol producedfrom feedstock in the Caribbean region over the 7.0% limit). However, astotal production in the United States grows, the amount of ethanol producedfrom the Caribbean region and sold in the United States will also grow, whichcould impact our ability to sell ethanol.

***Competition fromAlternative Fuels***

OurPlant also competes with producers of other gasoline additives having similaroctane and oxygenate values as ethanol, such as producers of MTBE, apetrochemical derived from methanol that costs less to produce thanethanol.  Although currently the subjectof several state bans, many major oil companies can produce MTBE and because itis petroleum-based, its use is strongly supported by major oil companies.

Alternative fuels, gasoline oxygenates and alternative ethanolproduction methods are also continually under development by ethanol andoil companies with far greater resources. The major oil companies have significantlygreater resources than we have to develop alternative products and to influencelegislation and public perception of MTBE and ethanol. New ethanol products or methods of ethanol production developed bylarger and better-financed competitors could provide them competitiveadvantages and harm our business.

A number of automotive,industrial and power generation manufacturers are developing alternative cleanpower systems using fuel cells or clean burning gaseous fuels.  Like ethanol, the emerging fuel cell industryoffers a technological option to address increasing worldwide energy costs, thelong-term availability of petroleum reserves and environmental concerns.  Fuel cells have emerged as a potentialalternative to certain existing power sources because of their higherefficiency, reduced noise and lower emissions. Fuel cell industry participantsare currently targeting the transportation, stationary power and portable powermarkets in order to decrease fuel costs, lessen dependence on crude oil andreduce harmful emissions.  If the fuelcell and hydrogen industries continue to expand and gain broad acceptance andhydrogen becomes readily available to consumers for motor vehicle use, we maynot be able to compete effectively.  Thisadditional competition could reduce the demand for ethanol, which wouldnegatively impact our profitability.

***DistillersGrains Competition***

Ethanol plants in the Midwest produce themajority of distillers grains and primarily compete with other ethanolproducers in the production and sales of distillers grains.  According to the Renewable Fuels Associationapproximately 9 million metric tons of distillers grains were produced byethanol plants in 2005.  With theexception of our distillers grains that are marketed nationally by CSC, we tookadvantage of our proximity to local livestock producers by marketing the bulkof our distillers grains locally in 2006. However, the amount of distillers grains produced is expected toincrease significantly as the number of ethanol plants increase which willincrease competition in the distillers grains market in our area.  As a result, we may be forced to dry more of our distillers grains formarketing by CSC rather than directly selling in the local markets if excesscapacity in the local markets occurs. In addition, our distillers grains compete with other livestock feedproducts such as soybean meal, corn gluten feed, dry brewers grain and millfeeds.

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**Researchand Development**

We do not conduct any research anddevelopment activities associated with the development of new technologies foruse in producing ethanol, distillers grains or corn oil.

**Costs and Effects ofCompliance with Environmental Laws**

Weare subject to extensive air, water and other environmental regulations and wehave been required to obtain a number of environmental permits to construct andoperate the plant.  We have obtained allof the necessary permits to operate the Plant including, air pollutionconstruction permits, a pollutant discharge elimination system general permit,storm water discharge permits, a water withdrawal permit, and an alcohol fuelproducer’s permit.  In addition, we havecompleted a spill prevention control and countermeasures plan.  In addition, prior to the anticipatedstart date of construction for our Plant expansion, we were required to obtaina Title V emissions permit prior.  InSeptember 2006, we received our Title V permit and we commenced construction ofthe Plant expansion in October 2006.  Although we have been successful in obtaining all of the permitscurrently required, any retroactive change in environmental regulations, eitherat the federal or state level, could require us to obtain additional or newpermits or spend considerable resources on complying with such regulations.

We are subject to ongoing environmental regulationsand testing.  The plant passed emissions testing in December 2003 andwe received renewed operating permits in April 2004.  Finalpermitting was granted by the regulatory agency in November 2005.  We arerequired by federal regulations to conduct a Relative Accuracy Test Audit(RATA) once per 12-month period.  We passed the RATA testing inFebruary 2006.  In 2006, our costs of environmental compliance wereapproximately $78,000.

Weare subject to oversight activities by the EPA. There is always a risk that the EPA may enforce certain rules andregulations differently than Iowa’s environmental administrators.  Iowa or EPA rules are subject to change, andany such changes could result in greater regulatory burdens on plantoperations.  We could also be subject toenvironmental or nuisance claims from adjacent property owners or residents inthe area arising from possible foul smells or other air or water dischargesfrom the plant.  Such claims may resultin an adverse result in court if we are deemed to engage in a nuisance thatsubstantially impairs the fair use and enjoyment of real estate.

The government’s regulation of the environment changesconstantly.  It is possible that morestringent federal or state environmental rules or regulations could be adopted,which could increase our operating costs and expenses.  It also is possible that federal or stateenvironmental rules or regulations could be adopted that could have an adverseeffect on the use of ethanol.  Forexample, changes in the environmental regulations regarding the required oxygencontent of automobile emissions could have an adverse effect on the ethanol industry.  Furthermore, plant operations likely will begoverned by the Occupational Safety and Health Administration (“OSHA”).  OSHA regulations may change such that thecosts of the operation of the plant may increase.  Any of these regulatory factors may result inhigher costs or other materially adverse conditions affecting our operations,cash flows and financial performance.

**Employees**

As of September30, 2006, we had a total of 35 full-time employees.  We have 28 full-time employees in ethanolproduction operations and 7 full-time employees in general management andadministration.  As the expansion of thePlant progresses, we anticipate hiring approximately 10 additional employees.

**ITEM 1A.**           RISK FACTORS.

*Youshould carefully read and consider the risks and uncertainties below and theother information contained in this report. The risks and uncertainties described below are not the only ones we mayface.  The following risks, together withadditional risks and uncertainties not currently known to us or that wecurrently deem immaterial could impair our financial condition and results ofoperation.*

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**Risks Relating to Our Business**

***We have a limited operatinghistory and our business may not be as successful as we anticipate. ***We began our businessin 2000 and commenced production of ethanol at our plant in April 2003.  Accordingly, we have a limited operatinghistory from which you can evaluate our business and prospects.  Our operating results could fluctuate significantlyin the future as a result of a variety of factors, including those discussedthrough out these risk factors.  Many ofthese factors are outside our control. As a result of these factors, our operating results may not beindicative of future operating results and you should not rely on them asindications of our future performance. In addition, our prospects mustbe considered in light of the risks and uncertainties encountered by anearly-stage company and in rapidly evolving markets, such as the ethanolmarket, where supply and demand may change significantly in a short amount oftime.  Some of these risks relate to ourpotential inability to:

·                  effectively manage our business and operations;

·                  recruit and retain key personnel;

·                  successfully maintain our low-cost structure as we expand the scale ofour business;

·                  manage rapid growth in personnel and operations;

·                  develop new products that complement our existing business; and

·                  successfully address the other risksdescribed throughout this prospectus.

If we cannot successfully address these risks, ourbusiness, future results of operations and financial condition may bematerially adversely affected, and we may continue to incur operating losses inthe future.

***Our business isnot diversified.*** Our success depends largely upon our ability to profitably operate ourethanol plant.  We do not have any otherlines of business or other sources of revenue if we are unable to operate ourethanol plant and manufacture ethanol, distillers grains and corn oil.  If economic or political factors adverselyaffect the market for ethanol, we have no other line of business to fall backon if the ethanol business declines. Our business would also be significantlyharmed if its ethanol plant could not operate at full capacity for any extendedperiod of time.

***Our financial performance issignificantly dependent on corn and natural gas prices and generally we cannotpass on increases in input prices to our customers.**** *Ourresults of operations and financial condition are significantly affected by thecost and supply of corn and natural gas. Changes in the price and supply ofcorn and natural gas are subject to and determined by market forces over whichwe have no control

                Ethanol production requires substantialamounts of corn. Corn, as with most other crops, is affected by weather,disease and other environmental conditions. The price of corn is also influenced by general economic, market andgovernment factors.  These factorsinclude weather conditions, farmer planting decisions, domestic and foreigngovernment farm programs and policies, global demand and supply andquality.  Changes in the price of corncan significantly affect our business. Generally, higher corn prices willproduce lower profit margins and, therefore, represent unfavorable marketconditions.  This is especially true ifmarket conditions do not allow us to pass along increased corn costs to ourcustomers.  The price of corn hasfluctuated significantly in the past and may fluctuate significantly in thefuture.   If a period of high cornprices were to be sustained for some time, such pricing may reduce our abilityto generate revenues because of the higher cost of operating and may makeethanol uneconomical to use in fuel markets. We cannot offer any assurance that we will be able to offset anyincrease in the price of corn by increasing the price of our products.  If we cannot offset increases in the price ofcorn, our financial performance may be materially and adversely affected.

Natural gas has recently been available only atprices exceeding historical averages.  These prices are increasing ourcosts of production.  The pricesfor and availability of natural gas are subject to volatile marketconditions.  These market conditionsoften are affected by factors beyond our control such as higher prices as aresult of colder than average weather conditions, overall economic conditionsand foreign and domestic governmental regulations and relations.  Significant disruptions in the supply ofnatural gas could impair our ability to manufacture ethanol for our customers.  Furthermore, increases in natural gas pricesor changes in our natural gas costs relative to natural gas costs paid bycompetitors may adversely affect our results of operations and financialcondition.

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We seek tominimize the risks from fluctuations in the prices of corn and natural gasthrough the use of hedging instruments. However, these hedging transactions also involve risks to ourbusiness.  See “**RisksRelating to Our Business -*****We engage in hedging transaction which involverisks that can harm our business***.”

***Thespread between ethanol and corn prices can vary significantly and we do notexpect the spread to remain at recent high levels. ***Corn costssignificantly impact our cost of goods sold.  Our gross margins areprincipally dependent upon the spread between ethanol and corn prices.  Recently, the spread between ethanol and cornprices has been at historically high level, due in large part to high oilprices.  However, this spread has reducedas corn prices have increased dramatically since August 2006.  Any further reduction in the spread betweenethanol and corn prices, whether as a result of higher corn prices or lower ethanolprices, would adversely affect our results of operations and financialcondition.

***Ourrevenues will be greatly affected by the price at which we can sell our ethanoland distillers grains.*** These prices can be volatile as aresult of a number of factors. These factors include the overall supply anddemand, the price of gasoline, level of government support, and theavailability and price of competing products. For instance, the price ofethanol tends to increase as the price of gasoline increases, and the price ofethanol tends to decrease as the price of gasoline decreases. Any lowering ofgasoline prices will likely also lead to lower prices for ethanol, which maydecrease our ethanol sales and reduce revenues.

The price ofethanol has recently been much higher than its 10-year average. We do notexpect these prices to be sustainable as supply from new and existing ethanolplants increases to meet increased demand. Increased production of ethanol maylead to lower prices. The increased production of ethanol could have otheradverse effects. For example, the increased production could lead to increasedsupplies of co-products from the production of ethanol, such as distillersgrains. Those increased supplies could outpace demand, which would lead to lowerprices for those co-products. Also, the increased production of ethanol couldresult in increased demand for corn. This could result in higher prices forcorn and corn production creating lower profits.  There can be no assurance as to the price ofethanol or distillers grains in the future. Any downward changes in the priceof ethanol and/or distillers grains may result in less income which woulddecrease our revenues and profitability.

***We sell all of the ethanol weproduce to ADM in accordance with an ethanol marketing agreement.* **ADM, a significant competitor of ours, isthe sole buyer of all of our ethanol and we rely heavily on its marketingefforts to successfully sell our product. Because ADM sells ethanol for itself and a number of other producers, wehave limited control over its sales efforts. Our financial performance is dependent upon the financial health of ADM,as a significant portion of our accounts receivable are attributable to ADM.  If ADM breaches the ethanol marketingagreement or is not in the financial position to purchase all of the ethanol weproduce, we could experience a material loss and we may not have any readilyavailable means to sell our ethanol and our financial performance will beadversely and materially affected.  If ouragreement with ADM terminates, we may seek other arrangements to sell ourethanol, including selling our own product, but we give no assurance that oursales efforts would achieve results comparable to those achieved by ADM.

***Weengage in hedging transactions which involve risks that can harm our business.*** We are exposed to market risk from changes in commodityprices.  Exposure to commodity price risk results from our dependence oncorn and natural gas in the ethanol production process.  We seek to minimizethe risks from fluctuations in the prices of corn and natural gas through theuse of hedging instruments.  The effectiveness of our hedging strategiesis dependent upon, the cost of corn and natural gas and our ability to sellsufficient products to use all of the corn and natural gas for which we havefutures contracts.  There is no assurancethat our hedging activities will successfully reduce the risk caused by pricefluctuation which may leave us vulnerable to high corn and natural prices.Alternatively, we may choose not to engage in hedging transactions in thefuture.  As a result, our results ofoperations and financial conditions may also be adversely affected duringperiods in which corn and/or natural gas prices increase.

Hedging activities themselves can result in costsbecause price movements in corn and natural gas contracts are highly volatileand are influenced by many factors that are beyond our control.  There are several variables that could affectthe extent to which our derivative instruments are impacted by pricefluctuations in the cost of corn or 

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natural gas.  However, it is likely thatcommodity cash prices will have the greatest impact on the derivativesinstruments with delivery dates nearest the current cash price.  We may incur such costs and they may besignificant.

***Operational difficulties at ourPlant could negatively impact our sales volumes and could cause us to incursubstantial losses.**** *Our operations are subject to labor disruptions, unscheduled downtime andother operational hazards inherent in our 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 oflife, severe damage to or destruction of property and equipment orenvironmental damage, and may result in suspension of operations and theimposition of civil or criminal penalties. Our insurance may not be adequate to fully cover the potential operationalhazards described above or we may not be able to renew this insurance oncommercially reasonable terms or at all.

Moreover, our Plant may not operate as planned orexpected. Our Plant has a specified nameplate capacity which represents theproduction capacity specified in the applicable design-build agreement.  We recently entered into an agreement withFagen, Inc. to expand our name-plate capacity to 92 million gallons peryear.  We expect Fagen, Inc. to test thecapacity of the Plant following completion of the expansion.  But based on our prior experience, wegenerally expect our Plant to produce in excess of its nameplate capacity.  The operation of our Plant is and will be,however, subject to various uncertainties relating to our ability to implementthe necessary process improvements required to achieve these increasedproduction capacities. As a result, our Plant may not produce ethanol anddistillers grains at the levels we expect. In the event our Plant does not run at its nameplate or our increasedexpected capacity levels, our business, results of operations and financialcondition may be materially adversely affected.

***Disruptions to infrastructure, orin the supply of fuel, natural gas or water, could materially and adverselyaffect our business.*****Our business depends on thecontinuing availability of rail, road, port, storage and distributioninfrastructure. Any disruptions in this infrastructure network, whether causedby labor difficulties, earthquakes, storms, other natural disasters or humanerror or malfeasance or other reasons, could have a material adverse effect onour business.  We rely upon third-partiesto maintain the rail lines from our plants to the national rail network, andany failure on their part to maintain the lines could impede our delivery ofproducts, impose additional costs on us and could have a material adverseeffect on our business, results of operations and financial condition.

Our business also depends onthe continuing availability of raw materials, including fuel and natural gas.The production of ethanol, from the planting of corn to the distribution ofethanol to refiners, is highly energy-intensive.  Significant amounts of fuel and natural gasare required for the growing, fertilizing and harvesting of corn, as well asfor the fermentation, distillation and transportation of ethanol and the dryingof distillers grains.  A seriousdisruption in supplies of fuel or natural gas, or significant increases in theprices of fuel or natural gas, could significantly reduce the availability ofraw materials at our Plant, increase our production costs and could have amaterial adverse effect on our business, results of operations and financialcondition.

Our Plant also requires asignificant and uninterrupted supply of water of suitable quality tooperate.  If there is an interruption inthe supply of water for any reason, we may be required to halt production atour Plant. If production is halted at our Plant for an extended period of time,it could have a material adverse effect on our business, results of operationsand financial condition.

***Competition for qualifiedpersonnel in the ethanol industry is intense and we may not be able to hire andretain qualified personnel to operate our Plant.***  Oursuccess depends in part on our ability to attract and retain competentpersonnel, which can be challenging in a rural community. For the operation ofour Plant, we have hired qualified managers, engineers, operations and otherpersonnel.  Competition for both managersand plant employees in the ethanol industry is intense, and we may not be ableto maintain qualified personnel.  If weare unable to maintain productive and competent personnel or hire qualifiedreplacement personnel, our operations may be adversely affected, the amount ofethanol we produce may decrease and we may not be able to efficiently operateour Plant and execute our business strategy.

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***Technological advances couldsignificantly decrease the cost of producing ethanol or result in theproduction of higher-quality ethanol, and if we are unable to adopt orincorporate technological advances into our operations, our Plant could becomeuncompetitive or obsolete.*****Weexpect that technological advances in the processes and procedures forprocessing ethanol will continue to occur. It is possible that those advances could make the processes andprocedures that we utilize at our Plant less efficient or obsolete, or causethe ethanol we produce to be of a lesser quality.  Advances and changes in the technology ofethanol production are expected to occur. Such advances and changes may make the ethanol production technologyinstalled in our plant less desirable or obsolete.  These advances could also allow ourcompetitors to produce ethanol at a lower cost than us.  If we are unable to adopt or incorporatetechnological advances, our ethanol production methods and processes could beless efficient than our competitors, which could cause our Plant to becomeuncompetitive or completely obsolete.  Ifour competitors develop, obtain or license technology that is superior to oursor that makes our technology obsolete, we may be required to incur significantcosts to enhance or acquire new technology so that our ethanol productionremains competitive.  Alternatively, wemay be required to seek third-party licenses, which could also result insignificant expenditures.  We cannotguarantee or assure you that third-party licenses will be available or, onceobtained, will continue to be available on commercially reasonable terms, if atall.  These costs could negatively impactour financial performance by increasing our operating costs and reducing ournet income.

Ethanolproduction methods are also constantly advancing. Most ethanol is currentlyproduced from corn and other raw grains, such as milo or sorghum - especiallyin the Midwest.   However, the currenttrend in ethanol production research is to develop an efficient method ofproducing ethanol from cellulose-based biomass such as agricultural waste,forest residue and municipal solid waste. This trend is driven by the fact thatcellulose-based biomass is generally cheaper than corn and producing ethanolfrom cellulose-based biomass would create opportunities to produce ethanol inareas that are unable to grow corn. Another trend in ethanol productionresearch is to produce ethanol through a chemical process rather than afermentation process, thereby significantly increasing the ethanol yield perpound of feedstock. Although current technology does not allow these productionmethods to be competitive, new technologies may develop that would allow thesemethods to become viable means of ethanol production in the future. If we areunable to adopt or incorporate these advances into our operations, our cost ofproducing ethanol could be significantly higher than those of our competitors,which could make our Plant obsolete.

In addition, alternative fuels, additives andoxygenates are continually under development. Alternative fuel additives thatcan replace ethanol may be developed, which may decrease the demand forethanol.  It is also possible thattechnological advances in engine and exhaust system design and performancecould reduce the use of oxygenates, which would lower the demand for ethanoland our business, results of operations and financial condition may bematerially adversely affected.

**RisksRelated to Our Expansion Strategy**

***We give no assurances that wewill be able to implement our expansion strategy as planned or at all.**** *We are currently constructing an expansion of our current productioncapacity of 52 million gallons annually to 92 million gallons annually. The cost of the expansion is expected to be approximately $73,000,000, whichwill be financed using both a portion of our cash and additional debt to fullycapitalize the expansion.  The use of cash to finance these expenditurescould impact our ability to make future distributions to our members.  Weexecuted a debt financing commitment letter to finance this construction withour current lender, First National Bank of Omaha, however, we have not executeddefinitive loan documents for this financing. If we are unable to complete negotiation and execute definitive loandocument with First National Bank of Omaha for any reason, we may be forced toabandon our expansion plans.

There is no assurance that the expansion will reduceour operating costs or increase our operating income.  Our expansionprojections are based upon our historical operating costs and historical revenuesand there is no guarantee or assurance that our past financial performance canaccurately predict future results especially in connection withexpansion.  In addition, the expansion may cost more and may presentadditional challenges and risks that negatively impact our future financialperformance.

In addition to our Plantexpansion, we are studying the feasibility of developing and constructing a newethanol plant near Akron, Iowa in Plymouth County, or participating in the Akronplant project some capacity.   Suchparticipation may take the form of a partnership or joint venture or minorityinvestment.  Partnerships andjoint ventures typically involve 

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restrictions on actions that the partnership or jointventure may take without the approval of the partners. As a minority investor,we may not have any control over the actions of the business.  However, we have not yet determined how or if we will pursue the opportunitiespresented by the Akron plant and there is no assurance that if wedetermine to pursue the Akron plant that we will be successful.

Development of the Akron plant or participation insome capacity will involve numerous risks, any of which could harm ourbusiness, including but not limited to:

·                  difficulties inobtaining sufficient financing for the Akron plant;

·                  difficulties inobtaining the numerous regulatory approvals and permits required to constructand operate the Akron plant;

·                  difficulties inobtaining engineering and construction contracts for the design andconstruction of the Akron plant;

·                  difficulties inintegrating the operations, technologies, products, existing contracts,accounting processes and personnel of the Akron plant and realizing theanticipated synergies of the combined businesses;

·                  diversion offinancial and management resources from existing operations;

·                  the price we payor other resources that we devote may exceed the value we realize, or the valuewe could have realized if we had allocated the purchase price or otherresources to another opportunity; and

·                  potential lossof key employees, customers and strategic alliances from either our currentbusiness or the new business venture.

The failure to successfully evaluate and otherwiseadequately address the risks associated with development of the Akron Plantcould have a material adverse effect on our business, results of operations andfinancial condition.

***If the Plant expansion costsmore than we expect, the expansion may be unprofitable.**** *The totalcost of the expansion project is estimated to be $73,000,000, of which we willpay Fagen, Inc. $47,860,000 pursuant to our design-build agreement withFagen, Inc. for the design and construction of this expansion, subject toany mutually agreed-upon adjustments made in accordance with the general conditionsof the agreement and subject to a credit for any amounts previously paid toFagen Engineering, LLC for engineering performed pursuant to the Phase I andPhase II Engineering Services Agreement. There is no assurance that there will not be design changes or costoverruns associated with the expansion of the plant. In addition, shortages ofsteel could affect the final cost and final completion date of theproject.  Any significant increase in the estimated construction cost ofthe expansion may make the expansion too expensive to complete or unprofitableto operate because our revenue stream may not be able to adequately support theincreased cost and expense attributable to increased construction costs.

***Construction delays couldincrease our costs.***  Construction of the expansion began in October 2006 and isexpected to be completed in the latter part of 2007 or early 2008; however,construction projects often involve construction delays due to weatherconditions, or other events that delay the construction schedule. In addition,Fagen, Inc.’s involvement in the construction of a number of other plantswhile constructing our plant could cause delays in our construction schedule.Also, any changes in interest rates or the credit environment or any changes inpolitical administrations at the federal, state or local level that result inpolicy change towards ethanol, could also cause construction and operationdelays. If it takes longer to construct the expansion than we anticipate, itmay substantially increase our costs, which could have a material adverseeffect on our results of operations and financial condition.

***Defects in Plant expansionconstruction could impair our ability to produce ethanol and its co-products.*** There is no assurance thatdefects in materials and/or workmanship in the plant expansion will notoccur.  Under the terms of the design-build agreement withFagen, Inc., Fagen, Inc. warrants that the material and equipmentfurnished to build the plant will be new, of good quality, and free from materialdefects in material or workmanship at the time of delivery.  Though theexpansion design-build agreement requires Fagen, Inc. to correct alldefects in material or workmanship for a period of one year after substantialcompletion of the expansion, material defects in material or workmanship maystill occur.  Such defects couldsignificantly impair operations of the plant or cause us to interrupt 

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or discontinue the plant’s operation. Interrupting ordiscontinuing plant operations could materially affect our ability to generatesufficient cash flow to cover our costs and force us to terminate our business.

**Risks Related to Ethanol Industry**

***Overcapacitywithin the ethanol industry could cause an oversupply of ethanol and a declinein ethanol prices. ***Excesscapacity in the ethanol industry would have an adverse impact on our results ofoperations, cash flows and general financial condition.  Excesscapacity may also result or intensify from increases in production capacitycoupled with insufficient demand.  Ifthe demand for ethanol does not grow at the same pace as increases in supply,we would expect the price for ethanol to decline.  Ifexcess capacity in the ethanol industry occurs, the market price of ethanol maydecline to a level that is inadequate to generate sufficient cash flow to coverour costs.

***Weexpect to operate in a competitive industry******and compete with larger, better financed entities which could impact ourability to operate profitably.***  There is significant competition amongethanol producers with numerousproducer and privately owned ethanol plants planned and operating throughoutthe United States.  The numberof ethanol plants being developed and constructed in the United Statescontinues to increase at a rapid pace. The recent passage of the Energy PolicyAct of 2005 included a renewable fuels mandate that we expect will furtherincrease the number of domestic ethanol production facilities.  The largest ethanol producers include AbengoaBioenergy Corp., ADM, Aventine Renewable Energy, Inc., Cargill, Inc., TheAndersons, US Bio Energy and VeraSun Energy Corporation, all of which are eachcapable of producing more ethanol than we expect to produce.  In 2005, ADM announced its plan to addapproximately 500 million gallons per year of additional ethanolproduction capacity in the United States. ADM is currently the largest ethanol producer in the U.S. and controls asignificant portion of the ethanol market. ADM’s plan to produce an additional500 million gallons of ethanol per year will strengthen its position inthe ethanol industry and cause a significant increase in domestic ethanolsupply.  If the demand for ethanol doesnot grow at the same pace as increases in supply, we expect that lower prices forethanol will result which may adversely affect our ability to generate profitsand our financial condition.

Ourethanol plant also competes with producers of other gasoline additives madefrom raw materials other than corn having similar octane and oxygenate valuesas ethanol, such as producers of methyl tertiary butyl ether (MTBE). MTBE is apetrochemical derived from methanol which generally costs less to produce thanethanol. Many major oil companies produce MTBE and strongly favor its usebecause it is petroleum-based. Alternative fuels, gasoline oxygenates andalternative ethanol production methods are also continually under development.The major oil companies have significantly greater resources than we have tomarket MTBE, to develop alternative products, and to influence legislation andpublic perception of MTBE and ethanol. These companies also have significantresources to begin production of ethanol should they choose to do so.

***Competition from the advancement of alternative fuels maylessen the demand for**ethanol.***  Alternative fuels, gasoline oxygenates andethanol production methods are continually under development. A number ofautomotive, industrial and power generation manufacturers are developingalternative clean power systems using fuel cells or clean burning gaseousfuels. Like ethanol, the emerging fuel cell industry offers a technologicaloption to address increasing worldwide energy costs, the long-term availabilityof petroleum reserves and environmental concerns. Fuel cells have emerged as apotential alternative to certain existing power sources because of their higherefficiency, reduced noise and lower emissions. Fuel cell industry participantsare currently targeting the transportation, stationary power and portable powermarkets in order to decrease fuel costs, lessen dependence on crude oil andreduce harmful emissions. If the fuel cell and hydrogen industries continue toexpand and gain broad acceptance, and hydrogen becomes readily available toconsumers for motor vehicle use, we may not be able to compete effectively.This additional competition could reduce the demand for ethanol, resulting inlower ethanol prices that might adversely affect our results of operations andfinancial condition.

*****Certain countries can export ethanol to the UnitedStates duty-free, which may undermine the ethanol production industry in theUnited States*.**** Imported ethanol is generally subject to a $0.54 per gallon tariff and a2.5% ad valorem tax that was designed to offset the $0.51 per gallon ethanolsubsidy available under the federal excise tax incentive program for refineriesthat blend ethanol in their fuel. There is a special exemption from the tarifffor ethanol imported from 24 countries in Central America and the Caribbeanislands which is limited to a total of 7.0% of United States production peryear. In December 2006, legislation was passed by the U.S. House ofRepresentatives and U.S. Senate to extend the $0.54 per gallon tariff beyondits current expiration in December 

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2007 through 2008. We do not know the extent to which thevolume of imports would increase if the tariff is not renewed.

Inaddition the North America Free Trade Agreement countries, Canada and Mexico,are exempt from duty.  Imports from theexempted countries have increased in recent years and are expected to increasefurther as a result of new plants under development. In particular, the ethanolindustry has expressed concern with respect to a new plant under development byCargill, Inc., the fifth largest ethanol producer in the United States, in ElSalvador that would take the water out of Brazilian ethanol and then ship thedehydrated ethanol from El Salvador to the United States duty-free. Brazil iscurrently the world’s second largest producer and largest exporter of ethanol.In Brazil, ethanol is produced primarily from sugarcane, which is also used toproduce food-grade sugar.  Sinceproduction costs for ethanol in Brazil are estimated to be significantly lessthan what they are in the United States, the import of the Brazilian ethanolduty-free through El Salvador or another country exempted from the tariff maynegatively impact the demand for domestic ethanol and the price at which wesell our ethanol.

***Consumer resistance to the use of ethanol based on thebelief that ethanol is**expensive,adds to air pollution, harms engines and takes more energy to**produce that it contributes may affect the demand forethanol.***  Certainindividuals believe that use of ethanol will have a negative impact on gasolineprices at the pump. Many also believe that ethanol adds to air pollution andharms car and truck engines. Still other consumers believe that the process ofproducing ethanol actually uses more fossil energy, such as oil and naturalgas, than the amount of ethanol that is produced. These consumer beliefs couldpotentially be wide-spread. If consumers choose not to buy ethanol, it wouldaffect the demand for the ethanol we produce which could lower demand for ourproduct and negatively affect our profitability and financial condition.

***The expansion of domestic ethanolproduction in combination with state bans on MTBE and/or state renewable fuelsstandards may place strains on related infrastructure such that our ethanolcannot be marketed and shipped to blending terminals that would otherwiseprovide us the best cost advantages.* **If the volume of ethanol shipmentscontinues to increase and blenders switch from MTBE to ethanol, there may beweaknesses in infrastructure such that our ethanol cannot reach its targetmarkets. Substantial development of infrastructure by persons and entitiesoutside our control will be required for our operations, and the ethanolindustry generally, to grow.  Areas requiring expansion include, butare not limited to:

·                  additionalrail capacity to meet the expanding volume of ethanol shipments;

·                  additionalstorage facilities for ethanol;

·                  increasesin truck fleets capable of transporting ethanol within localized markets;

·                  expansionof and/or improvements to refining and blending facilities to handle ethanolinstead of MTBE;

·                  growth in thefleet of flexible fuel vehicles capable of using E85 fuel.

The expansionof the above infrastructure may not occur on a timely basis, if at all, ouroperations could be adversely affected by infrastructure disruptions.  In addition, lack of or delay ininfrastructure expansion may result in an oversupply of ethanol on themarket, which could depress ethanol prices and negatively impact our financialperformance.

**RisksRelated to Regulation and Governmental Action**

***A change in government policies favorableto ethanol may cause demand for ethanol to decline.***Growth and demand for ethanol may be drivenprimarily by federal and state government policies, such as state laws banningMTBE and the national renewable fuels standard. The continuation of these policiesis uncertain, which means that demand for ethanol may decline if these policieschange or are discontinued. A decline in the demand for ethanol is likely tocause lower ethanol prices which in turn will negatively affect our results ofoperations, financial condition and cash flows.

***Loss of or ineligibility for favorable taxbenefits for ethanol production could hinder our ability to operate at a profitand reduce the value of your investment in us.***The ethanol industry and our business areassisted by various federal ethanol tax incentives, including those included inthe Energy Policy Act of 2005. The provision of the Energy Policy Act of 2005likely to have the greatest impact on the ethanol industry is the creation 

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of a 7.5 billion gallon Renewable Fuels Standard(RFS). The RFS will begin at 4 billion gallons in 2006, 4.7 billiongallons in 2007, increasing to 7.5 billion gallons by 2012. The RFS helpssupport a market for ethanol that might disappear without this incentive. Theelimination or reduction of tax incentives to the ethanol industry could reducethe market for ethanol, which could reduce prices and our revenues by making itmore costly or difficult for us to produce and sell ethanol. If the federal taxincentives are eliminated or sharply curtailed, we believe that a decreaseddemand for ethanol will result, which could depress ethanol prices andnegatively impact our financial performance.

Another important provision involves an expansion inthe definition of who qualifies as a small ethanol producer. Historically,small ethanol producers were allowed a 10-cents per gallon production incometax credit on up to 15 million gallons of production annually. The size ofthe plant eligible for the tax credit was limited to 30 million gallons.Under the Energy Policy Act of 2005 the size limitation on the productioncapacity for small ethanol producers increases from 30 million to60 million gallons. However, upon completion of the plant expansion, we donot anticipate qualifying for this tax credit as our anticipated annualproduction of 92 million gallons will exceed the size limitation.

***Changes in environmental regulations or violations of theregulations could be**expensiveand reduce our profitability.*** We are subject to extensive air, water and other environmental laws andregulations.  In addition some of theselaws require our plant to operate under a number of environmental permits.These laws, regulations and permits can often require expensive pollutioncontrol equipment or operation changes to limit actual or potential impacts tothe environment.  A violation of theselaws and regulations or permit conditions can result in substantial fines,damages, criminal sanctions, permit revocations and/or plant shutdowns.  We do not assure you that we have been, areor will be at all times in complete compliance with these laws, regulations orpermits or that we have had or have all permits required to operate ourbusiness.  We do not assure you that wewill not be subject to legal actions brought by environmental advocacy groupsand other parties for actual or alleged violations of environmental laws or ourpermits.  Additionally, any changes inenvironmental laws and regulations, both at the federal and state level, couldrequire us to invest or spend considerable resources in order to comply withfuture environmental regulations. The expense of compliance could besignificant enough to reduce our profitability and negatively affect ourfinancial condition.

**ITEM 2.**                    PROPERTIES.

Weown the generalpartnership interest in LSCP, which owns the Plant.  The Plant is located on an approximately80-acre rural site that is located approximately two miles east of the City ofMarcus, Iowa and approximately one mile north of Iowa State Highway 3.  The plant’s address is 4808 F Avenue, Marcus,Iowa 51035.  The plant grindsapproximately 18 million to 19 million bushels of corn per year to produceapproximately 52 milliongallons of ethanol.  The originalconstruction of the plant wascompleted in 2003 and consistsof the following buildings:

·                  A processing building, whichcontains processing equipment, laboratories, control room and offices;

·                  A grain receiving and shippingbuilding, which contains a control room and 1st and 2nd level mezzanine;

·                  A mechanical building, whichcontains maintenance offices, storage and a welding shop; and

·                  An administrative building, alongwith furniture and fixtures, office equipment and computer and telephonesystems.

The plant includes a fermenter walkway,gas dryer, evaporator and storage facilities for ethanol and distillergrains.  The site also containsimprovements such as rail tracks and a rail spur, landscaping, drainage systemsand paved access roads.

InJuly 2005, we completed an expansion to the plant which enabled us to increaseour ethanol production from 40 million to 52 million gallons per year.  This plant expansion included an additionalfermenter, slurry tank, additional water treatment equipment, liquefactiontank, molecular sieves and additions to the process building, which willaccommodate the additional fermenter and shop area.  We also installed additional drier controlsand maintenance system software in fiscal year 2005.

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In addition in October 2005, we completed the installation of a corn oilsegregation unit which separatescorn oil from the distillers grains during the ethanol production process.  In May 2006, we commenced expansion of ourgrain handling facilities and remodeling of our existing grain silos.  On August 1, 2006, we purchasedapproximately eight acres of land west of the Marcus plant along the north sideof the railroad tracks to accommodate the Plant expansion.  In October 2006, we commencedconstruction of a second expansion of the Plant’s production capacitywhich will enable us to increase our ethanol production to 92 million gallonsper year by adding 40 million gallons annually.

Allof our tangible and intangible property, real and personal, serves as thecollateral for the debt financing with First National Bank of Omaha, which isdescribed below under “**Item 7 — Management’sDiscussion and Analysis of Financial Condition and Results of Operations —Indebtedness**.”

**ITEM 3.**                    LEGAL PROCEEDINGS.

From time to time in the ordinary course of business,we or LSCP may be named as a defendant in legal proceedings related to variousissues, including without limitation, workers’ compensation claims, tortclaims, or contractual disputes.  We arenot currently involved in any material legal proceedings, directly orindirectly, and we are not aware of any claims pending or threatened against us or any of the directors thatcould result in the commencement of legal proceedings.

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

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

**PART II**

**ITEM 5.**                    MARKET FORMEMBERSHIP UNITS AND RELATED MEMBER MATTERS AND ISSUER PURCHASES OF MEMBERSHIPUNITS.

**Market Information**

There is no established trading market forour membership units.

However, we have established a UnitTrading Bulletin Board, a private online matching service, in order tofacilitate trading among our members. The Unit Trading Bulletin Board has beendesigned to comply with federal tax laws and IRS regulations establishing a“qualified matching service,” as well as state and federal securities laws. OurUnit Trading Bulletin Board consists of an electronic bulletin board thatprovides a list of interested buyers with a list of interested sellers, alongwith their non-firm price quotes. The Unit Trading Bulletin Board does notautomatically affect matches between potential sellers and buyers and it is thesole responsibility of sellers and buyers to contact each other to make adetermination as to whether an agreement to transfer units may be reached. Wedo not become involved in any purchase or sale negotiations arising from ourUnit Trading Bulletin Board and have no role in effecting the transactionsbeyond approval, as required under our operating agreement, and the issuance ofnew certificates. We do not give advice regarding the merits or shortcomings ofany particular transaction. We do not receive, transfer or hold funds orsecurities as an incident of operating the Unit Trading Bulletin Board. We donot receive any compensation for creating or maintaining the Unit TradingBulletin Board. In advertising our qualified matching service, we do not characterizeLittle Sioux as being a broker or dealer or an exchange. We do not use the UnitTrading Bulletin Board to offer to buy or sell securities other than incompliance with the securities laws, including any applicable registrationrequirements.

There are detailed timelines that must befollowed under the Unit Trading Bulletin Board Rules and Procedures withrespect to offers and sales of membership units. All transactions must complywith the Unit Trading Bulletin Board Rules, our operating agreement, and aresubject to approval by our board of directors. The Unit Trading Bulletin BoardRules are available on our website, *www.littlesiouxcornprocessors.com*.

The following table contains historicalinformation by quarter for the past two years regarding the trading of units:

| Quarter                    | ** ** | **Low Price** | ** ** | **High Price** | ** ** | **Average Price** | ** ** | **# of  Units Traded** | ** ** |
|----------------------------|------------|--------------------|------------|---------------------|------------|------------------------|------------|----------------------------------|------------|
| July 1 – Sept 30 2006 |       | $                  | 6,500      |                | $          | 6,500                  |       | $                                | 6,500      |   | 8 |   |
| Apr 1 – June 30 2006  |       | $                  | 3,600      |                | $          | 6,355                  |       | $                                | 5,253      |   | 25 |   |
| Jan 1 – March 31 2006 |       | $                  | 3,250      |                | $          | 3,250                  |       | $                                | 3,250      |   | 10 |   |
| Oct 1 – Dec 31 2005   |       | $                  | 2,250      |                | $          | 2,250                  |       | $                                | 2,250      |   | 10 |   |
| July 1 – Sept 30 2005 |       | $                  | 2,500      |                | $          | 2,500                  |       | $                                | 2,500      |   | 25 |   |
| Apr 1 – June 30 2005  |       | $                  | 2,300      |                | $          | 2,500                  |       | $                                | 2,476      |   | 68 |   |
| Jan 1 – March 31 2005 |       | $                  | —     |                | $          | —                 |       | $                                | —     |   | — |   |
| Oct 1 – Dec 31 2004   |       | $                  | 1,375      |                | $          | 1,375                  |       | $                                | 1,375      |   | 5 |   |

 

As a limited liability company, LittleSioux is required to restrict the transfers of its membership units in order topreserve its partnership tax status. Our membership units may not be traded onany established securities market or readily trade on a secondary market (orthe substantial equivalent thereof). All transfers are subject to adetermination that the transfer will not cause Little Sioux to be deemed apublicly traded partnership.

**Unit Holders**

As of the date of filing of this report,the Company had 10,941 Class A membership units issued and outstanding and atotal of 689 Class A membership unit holders. There is no other class of membership unit issued or outstanding.

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**Distributions**

Distributions are payable at the discretionof our board of directors, subject to the provisions of the Iowa LimitedLiability Company Act and our operating agreement. Distributions to our unitholders are also subject to certain loan covenants and restrictions thatrequire us to make additional loan payments based on excess cash flow.  These loan covenants and restrictions aredescribed in greater detail under “**Item 7 — Management’sDiscussion and Analysis of Financial Condition and Results of Operations****— Indebtedness.**” LSCP may distribute a portion of the netprofits generated from plantoperations to it owners.  As an owner ofLSCP, we receive distributions in proportion to our equity ownership inLSCP.  We may distribute a portion ofour net profits receivedfrom LSCP to our unit holders in proportion to the number of units held by eachunit holder.  A unit holder’sdistribution is determined by dividing the number of units owned by such unitholder by the total number of units outstanding.  Our unit holdersare entitled to receive distributions of cash or property if and when adistribution is declared by our board of directors.  OurClass A directors have complete discretion over the timing and amount ofdistributions to our unit holders, however, our operating agreement requiresthe Class A directors to endeavor to make cash distributions at such times andin such amounts as will permit our unit holders to satisfy their income taxliability in a timely fashion.  However,there can be no assurance as to the ability of Little Sioux to declare or paydistributions in the future or that past distributions (described below) willbe indicative of future distributions.

***2006 Distributions***

On January 17, 2006 our Board of Directors, acting asgeneral partner of LSCP, approved a total cash distribution of $15,361,000 fromLSCP to all limited partners of record as of January 17, 2006.  At January 17, 2006, we owned 60.1539% of thelimited partnership units of LSCP. Accordingly, Little Sioux received a cash distribution of $9,240,240.The distribution was made in February 2006. On January 18, 2006, our Board of Directors approved a cash distributionof $842.34 per membership unit or a total of approximately $9,216,042 to LittleSioux’s unit holders of record as of January 17, 2006.

***2005 Distributions***

On January 18, 2005 our Board of Directors, acting asgeneral partner of the Partnership, approved a total cash distribution of$4,000,000 from the Partnership to all limited partners of record as of January18, 2005.  At January 18, 2005, we owned60.1539% of the limited partnership units of the Partnership.  Accordingly the Company received a cash distributionof $2,406,156. The distribution was made in February 2005.  On January 18, 2005, our Board of Directorsapproved a cash distribution of $219.92 per membership unit or a total of approximately$2,406,144 to the Company’s unit holders of record as of January 18, 2005.

OnMarch 15, 2005 our Board of Directors, acting as general partner of thePartnership, approved a total cash distribution of $3,000,000 from thePartnership to all limited partners of record as of March 15, 2005.  As a holder of 60.1539% of the limitedpartnership units of the Partnership, we received a cash distribution of$1,804,617.  On the same day, we approveda cash distribution of $159.96 per membership unit or a total of approximately $1,750,122to the Company’s unit holders of record as of March 15, 2005.

OnSeptember 20, 2005 our Board of Directors, acting as general partner of thePartnership, approved a cash distribution of $1,581,000 from the Partnership toall limited partners of record as of September 20, 2005.  As a holder of 60.1539% of the limitedpartnership units of the Partnership, we received a cash distribution of$951,033.  On September 20, 2005, ourBoard of Directors approved a cash distribution of $78.24 per membership unitor a total of approximately $856,023 to the Company’s unit holders of record asof September 20, 2005.

**ITEM 6.**                    SELECTEDFINANCIAL DATA.

The following table sets forth selected consolidatedfinancial data of Little Sioux Corn Processors, LLC and our subsidiary, LSCP,LLLP for the periods indicated. The audited financial statements included inItem 8 of this report have been audited by our independent auditors, Boulay, Heutmaker, Zibell &Co., P.L.L.P.
| **Statement of Operations Data:** | ** ** | ** ** | ** **  | **2006** | ** ** | **2005**   | ** ** | **2004** | ** ** | **2003**(1) | ** ** |
|--------------------------------------------------|------------|------------|-------------|----------|------------|------------|------------|----------|------------|-------------|------------|
| Revenues                                         |       | $          | 113,785,666 |     | $          | 95,881,420 |       | $        | 85,540,934 |        | $          | 31,814,299 |   |
|                                             |       |       |        |     |       |       |       |     |       |
| Cost of Goods  Sold                              |       | $          | 73,678,035  |     | $          | 65,257,086 |       | $        | 74,649,569 |        | $          | 27,462,227 |   |

 

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| Gross Margin                                  |   | $      | 40,107,631 |   | $      | 30,624,334 |   | $      | 10,891,365 |   | $ | 4,352,072 |   |
|-----------------------------------------------|--------|--------|------------|--------|--------|------------|--------|--------|------------|--------|---|-----------|--------|
|                                          |   |   |       |   |   |       |   |   |       |
| Selling, General  and Administrative Expenses |   | $      | 3,001,254  |   | $      | 2,634,802  |   | $      | 2,733,993  |   | $ | 2,660,909 |   |
|                                          |   |   |       |   |   |       |   |   |       |
| Operating Income                              |   | $      | 37,106,377 |   | $      | 27,989,532 |   | $      | 8,157,372  |   | $ | 1,691,163 |   |
|                                          |   |   |       |   |   |       |   |   |       |
| Other Income  (Expense)                       |   | $      | (118,637   | )      | $      | (4,469,066 | )      | $      | 5,360,140  |   | $ | 5,300,716 |   |
|                                          |   |   |       |   |   |       |   |   |       |
| Net Income Before  Minority Interest          |   | $      | 36,987,740 |   | $      | 23,520,466 |   | $      | 13,517,512 |   | $ | 6,991,879 |   |
|                                          |   |   |       |   |   |       |   |   |       |
| Minority  Interest in Subsidiary Income       |   | $      | 14,775,906 |   | $      | 9,421,765  |   | $      | 5,663,681  |   | $ | 2,920,676 |   |
|                                          |   |   |       |   |   |       |   |   |       |
| Net Income                                    |   | $      | 22,211,834 |   | $      | 14,098,701 |   | $      | 7,853,831  |   | $ | 4,071,203 |   |
|                                          |   |   |       |   |   |       |   |   |       |
| Average Units  Outstanding                    |   | 10,941 |       | 10,941 |   | 10,941     |   | 10,941 |       |
| Net Income Per  Unit                          |   | $      | 2,030.15   |   | $      | 1,288.61   |   | $      | 717.83     |   | $ | 372.11    |   |
| Distributions Per Unit                        |   | $      | 842.34     |   | $      | 458.12     |   | $      | 103.86     |   | $ | -         |   |

 
| **Balance Sheet Data:** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004**   | ** ** | **2003**(1) | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|------------|------------|-------------|------------|
| Cash &  Equivalents           |       | $        | 10,133,691 |     | $          | 14,135,954 |       | $           | 3,907,380  |   | $ | 536,483 |   |
| Current Assets                    |       | $        | 39,374,286 |     | $          | 26,748,278 |       | $           | 11,946,926 |   | $ | 8,048,340 |   |
| Property &  Equipment         |       | $        | 51,747,859 |     | $          | 50,128,437 |       | $           | 47,536,127 |   | $ | 48,797,341 |   |
| Total Assets                      |       | $        | 91,556,615 |     | $          | 77,162,356 |       | $           | 59,828,204 |   | $ | 57,308,872 |   |
| Current  Liabilities              |       | $        | 6,023,396  |     | $          | 10,692,316 |       | $           | 4,966,448  |   | $ | 4,951,852 |   |
| Long Term Debt                    |       | $        | 13,504,582 |     | $          | 16,092,315 |       | $           | 19,572,989 |   | $ | 28,157,443 |   |
| Minority  Interest                |       | $        | 28,864,721 |     | $          | 20,209,574 |       | $           | 14,207,003 |   | $ | 10,052,753 |   |
| Members’ Equity              |       | $        | 43,163,916 |     | $          | 30,168,151 |       | $           | 21,081,764 |   | $ | 14,146,824 |   |
| Book Value Per Unit               |       | $        | 3,945.15   |     | $          | 2,757.35   |       | $           | 1,926.86   |   | $ | 1,293.01 |   |

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(1)                                  Fiscalyear 2003 represents only a partial year of operations, as the ethanol plant commencedproduction in April 2003.

**ITEM 7.**                    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

Except for thehistorical information, the following discussion contains forward-lookingstatements that are subject to risks and uncertainties.  We caution younot to put undue reliance on any forward-looking statements, which speak onlyas of the date of this report.  Our actual results or actions may differmaterially from these forward-looking statements for many reasons, includingthe risks described in “**Item 1A - Risk Factors**”and elsewhere in this annual report.  Our discussion and analysis of ourfinancial condition and results of operations should be read in conjunctionwith the financial statements and related notes and with the understanding thatour actual future results may be materially different from what we currentlyexpect.

**Overview**

As general partner, wemanage the business and day-to-day operations of the Partnership’s 52 milliongallon per year ethanol plant in northwest Iowa.  In July 2005, wecompleted the expansion of our plant from an ethanol production capacity of 40million gallons per year to 52 million gallons per year.  In October 2006, we commencedconstruction of a second expansion of the Plant’s production capacitywhich will enable us to increase our ethanol production to 92 million gallonsper year by adding 40 million gallons annually.  We expect the 

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increased capacity will increase our operating incomeas a result of increasing revenue and operating efficiencies.  However, wecan not provide any guarantee that this second expansion will reduce ouroperating costs or increase our operating income.

Our revenues are derived from the sale anddistribution of our ethanol and distillers grains throughout the continentalUnited States.  Corn is supplied to usprimarily from local agricultural producers and from purchases of corn on theopen market. After processing the corn, ethanol is sold to ADM, whichsubsequently markets and sells the ethanol to gasoline blenders and refinerieslocated throughout the continental United States.  The price that wereceive from the sale of ethanol to ADM is based upon the price that ADMreceives from the sale to its customers, minus a marketing fee. Except distillers grains we selldirectly to local farmers, our distillers grains are sold throughCommodity Specialist Company which markets and sells the product to livestockfeeders.  For our distillers grains, we receive apercentage of the selling price actually received by CSC in marketing thedistillers grains to its customers.  Wemarket and sell our corn oil to regional wholesalers.  Presently, the enduse of our corn oil is in the livestock industry.  In the long term, ourcorn oil could be marketed for human consumption; however, the feasibility ofmarket penetration as human food is unknown at this time as corn oil extractionin dry milling is relatively new and suitability for human consumption has notyet been determined.

We are subject to industry-wide factors that affectour operating income and cost of production.  Our operating results arelargely driven by the prices at which we sell ethanol, distillers grain andcorn oil and the costs related to their production.  Historically, the priceof ethanol tends to fluctuate in the same direction as the price of unleadedgasoline and other petroleum products.  Surplus ethanol supplies also tendto put downward price pressure on ethanol.  In addition, the price ofethanol is generally influenced by factors such as general economic conditions,the weather, and government policies and programs.  The price ofdistillers grains is generally influenced by supply and demand, the price ofsubstitute livestock feed, such as corn and soybean meal, and other animal feedproteins.  Surplus grain supplies also tend to put downward price pressureon distillers grains.  In addition, our revenues are also impacted by suchfactors as our dependence on one or a few major customers who market anddistribute our products; the intensely competitive nature of our industry;possible legislation at the federal, state, and/or local level; changes infederal ethanol tax incentives.

Our two largest costs of production are corn andnatural gas.  The cost of corn is affected primarily by supply and demandfactors such as crop production, carryout, exports, government policies andprograms, risk management and weather, much of which we have no control. Natural gas prices fluctuate with the energy complex in general.  Over thelast few years, natural gas prices have trended higher than average and itappears prices will continue to trend higher due to the high price ofalternative fuels such as fuel oil.  Our costs of production are affectedby the cost of complying with the extensive environmental laws that regulateour industry.

**Results ofOperations**

***Comparison of Fiscal Years  Ended**September 30, 2006 and 2005*.**

The following table shows the results of ouroperations and the percentage of revenues, cost of goods sold, operating expensesand other items to total revenues in our consolidated statements of operationsfor the fiscal years ended September 30, 2006 and 2005:
| ** **                          | ** ** | **2006**   | ** **  | **2005** | ** ** |
|-------------------------------------|------------|------------|-------------|----------|------------|
| **Income Statement Data** | ** ** | **Amount** | ** **  | **%**    | ** ** | **Amount** | ** ** | **%** | ** ** |
| Revenues                            |       | $          | 113,785,666 |     | 100.0      |   | $ | 95,881,420 |   | 100.0 |   |
|                                |       |       |        |     |       |   |   |   |   |
| Cost of Goods  Sold                 |       | $          | 73,678,035  |     | 64.8       |   | $ | 65,257,086 |   | 68.1 |   |
|                                |       |       |        |     |       |   |   |   |   |
| Gross Margin                        |       | $          | 40,107,631  |     | 35.2       |   | $ | 30,624,334 |   | 31.9 |   |
|                                |       |       |        |     |       |   |   |   |   |
| Operating  Expenses                 |       | $          | 3,001,254   |     | 2.6        |   | $ | 2,634,802 |   | 2.7 |   |
|                                |       |       |        |     |       |   |   |   |   |
| Operating Income                    |       | $          | 37,106,377  |     | 32.6       |   | $ | 27,989,532 |   | 29.2 |   |

 

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| Other Income  (Expense)                 |   | $      | (118,637   | )      | (0.1   | )      | $      | (4,469,066 | )      | (4.7 | )      |
|-----------------------------------------|--------|--------|------------|--------|--------|--------|--------|------------|--------|------|--------|
|                                    |   |   |       |   |   |   |   |       |   |
| Net Income  Before Minority Interest    |   | $      | 36,987,740 |   | 32.5   |   | $      | 23,520,466 |   | 24.5 |   |
|                                    |   |   |       |   |   |   |   |       |   |
| Minority  Interest in Subsidiary Income |   | $      | 14,775,906 |   | 13.0   |   | $      | 9,421,765  |   | 9.8  |   |
|                                    |   |   |       |   |   |   |   |       |   |
| Net Income                              |   | $      | 22,211,834 |   | 19.5   |   | $      | 14,098,701 |   | 14.7 |   |

 

*Revenues*

The increase inrevenues from fiscal year 2006 compared to fiscal year 2005 is due primarily toan increase in the price we received for our ethanol.  Net gallons of denaturedethanol sold in fiscal 2006 increased approximately 8% over fiscal 2005. The average per gallon price we received for our ethanol sold for 2006increased approximately 14% compared to the twelve months endedSeptember 30, 2005.  Sales of co-products decreased byapproximately 4% in 2006 compared to co-products sales in 2005 due to a reductionin the average selling price for these co-products.

Due to a number of factors, including the higher priceof petroleum gasoline and seasonal demand, ethanol prices remained high duringfiscal 2006.  We believe the favorable prices are primarily due to highdemand for ethanol, created by a number of factors, including the declining useof MTBE as an oxygenate, the high price of gasoline, which encouragesvoluntary blending, and the growing recognition of ethanol as an alternativeenergy source.  However, ethanol prices began to trend lower duringSeptember 2006 and the fourth calendar quarter of 2006 due to a number offactors, including the lower price of petroleum gasoline and a drop in seasonaldemand.  We believe this trend will continue into 2007 until peak drivingseason begins in the summer.  While ethanol prices were lower late in thefourth quarter of 2006 than at end of our fiscal year quarter, they are stillhigher than the historical average. However, we cannot guarantee that the price of ethanol will not significantlydecrease due to factors beyond our control.

With respect todistillers grains, we believe that prices will remain at or near theircurrently low and stable levels due to the increasing number of ethanolproduction facilities commencing operations.  We expect revenues from thesale of distiller grains should remain relatively consistent with 2006.

*Costof Goods Sold*

Our cost of goodssold as a percentage of revenues were 64.8% and 68.1% for the twelve monthsended September 30, 2006 and 2005, respectively.  The decrease in ourcost of goods sold as a percentage of revenues from period to period isprimarily due to the increase in revenue during a stable corn market.  Revenues increased approximately 18.7% forthe twelve months ended September 30, 2006 compared to the twelve months endedSeptember 30, 2005, however our corn costs increased only approximately 6.3%for this same time period.  This benefit was partially offset by ourincreased natural gas costs.  For thetwelve months ended September 30, 2006, our natural gas costs increasedapproximately 88.4% compared to the twelve months ended September 30,2006.  However, the impact of theincreased natural gas costs is less than the impact of adverse changes toethanol prices and corn costs.

Corn costssignificantly impact our cost of goods sold.  As of November 9, 2006, United States Department of Agriculture’s NationalAgricultural Statistics Service projected the2006 national corn production at approximately 10.7 billion bushels, whichwould be the third largest corn crop on record, and Iowa production at 2.0billion bushels.  However, despite thelarge 2006 corn crop, corn prices have increased sharply since August 2006.  Additionally, due to increased exposure ofethanol, corn is now being viewed as an “energy commodity” as opposed tostrictly a “grain commodity,” contributing to the upward pressure on cornprices.  A recent USDA report entitled “World Agricultural Supply and DemandEstimates” (December 11, 2006), states that U.S. corn prices could increase inyear 2007 to as much as $3.30 per bushel or more. We expect corn pricesto remain at historically high price levels well into 2007, which could significantly impact our cost ofgoods sold.

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Natural gas has recently been available only at pricesexceeding historical averages. Historically, natural gas prices in the$5/mmbtu range were considered high.   These prices are increasingour costs of production.  Though natural gas prices have decreasedsomewhat during the fourth calendar quarter of 2006, we expect natural gasprices to remain high or elevated given the unpredictable marketsituation.  This could increase our gas costs substantially, which willincrease our cost of goods sold and may cause our net income to decrease.

The increase in our cost of goods sold was impacted bychanges in the fair value of our derivative instruments.  Our cost ofgoods sold includes a gain of $1,311,000 for fiscal year 2006 related to ourderivative instruments, compared to a loss of $2,697,000 for fiscal year2005.  We recognize the gains or losses that result from the changes inthe value of our derivative instruments in cost of goods sold as the changesoccur.  As corn and natural gas prices fluctuate, the value of our derivativeinstruments are impacted, which affects our financialperformance.  We anticipate continued volatility in our cost of goodssold due to the timing of the changes in value of the derivative instrumentsrelative to the cost and use of the commodity being hedged.

*Operating Expenses*

Our operatingexpenses, as a percentage of revenue, remained consistent at approximately 2.6%and 2.7% for fiscal year 2006 and 2005 respectively.  Our operating expense amounts have remainedfairly level from period to period. Although we can give no assurances, the plant expansion may increase ouroperating efficiency which would maintain or lower our operating expenses as apercentage of our revenues.

*OperatingIncome*

Our income fromoperations for fiscal year 2006 totaled $37,106,377 compared to $27,989,532 forfiscal year 2005.  This was a result of the increase in sales revenue forfiscal year 2006 combined with the decrease in cost of goods sold as apercentage of revenues for the same period. We expect the additional expansionof our Plant’s production capacity by an additional 40 million gallons annuallywill increase our annual operating income as a result of an increase in revenueand operating efficiency.  There is no assurance, however, that theexpansion will reduce our operating costs or increase our operatingincome.  Our expansion projections are based upon our historical operatingcosts and historical revenues and there is no guarantee or assurance that ourpast financial performance can accurately predict future results especially inconnection with expansion.  In addition, the expansion may presentadditional challenges and risks that negatively impact our future financialperformance.

*OtherIncome and Expense*

Our other incomeand expense for the twelve months ended September 30, 2006 was an expenseof $118,637 compared to an expense of $4,469,066 for the twelve months endedSeptember 30, 2005.  This reduction in expenses was a resulted from asettlement of a dispute with ADM that was recorded in fiscal 2005.

Our CCC Bioenergypayments were $92,857 for the twelve months ended September 30, 2005 comparedto $172,850 for the twelve months ended September 30, 2005.  Income from the United States Department ofAgriculture’s Commodity Credit Corporation Bioenergy Program during 2006 wassignificantly less than the amount we were eligible for based on our increasesin production.  This reduction was attributed to increased participationby ethanol producers, decreased funding, and a termination of the program onJune 30, 2006.

At September 30,2005, and during the first fiscal quarter of 2006, we were involved in adispute with ADM regarding the actual price ADM is required to pay for all theethanol it purchased from LSCP under the ethanol marketing agreement.  The dispute arose over ADM’s claimed failureto include its gains and losses from gasoline index hedges in calculating theprice ADM is to pay to LSCP, which resulted in an overpayment for all theethanol purchased by ADM from LSCP since the inception of the ethanol marketingagreement through September 30, 2005. After engaging independentaccountants to review ADM’s claimed overpayment, on February 17, 2006, weentered into a settlement agreement with ADM in resolution of this dispute.Under the terms of the settlement agreement, both parties agreed to release anddischarge each other from any and all claims relating to the inclusion of gainsand losses from gasoline index hedges in calculating the price ADM is to payLSCP under the ethanol marketing agreement through September 30,2005.  In addition, as consideration forthe release of claims by ADM, we agreed to pay a single cash payment of approximately$3.9 million to ADM upon execution of the settlement agreement.

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***Comparison of Fiscal Years  Ended**September 30, 2005 and 2004*.**

The following table shows the results of ouroperations and the percentage of revenues, cost of goods sold, operatingexpenses and other items to total revenues in our consolidated statements ofoperations for the fiscal years ended September 30, 2005 and 2004:
| ** **                              | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-----------------------------------------|------------|------------|------------|------------|------------|
| **Income Statement Data**     | ** ** | ** ** | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Revenues                                |       | $          | 95,881,420 |       | 100.0      |   | $ | 85,540,934 |   | 100.0 |   |
|                                    |       |       |       |       |       |   |   |   |   |
| Cost of Goods  Sold                     |       | $          | 65,257,086 |       | 68.1       |   | $ | 74,649,569 |   | 87.3 |   |
|                                    |       |       |       |       |       |   |   |   |   |
| Gross Profit                            |       | $          | 30,624,334 |       | 31.9       |   | $ | 10,891,365 |   | 12.7 |   |
|                                    |       |       |       |       |       |   |   |   |   |
| Operating  Expenses                     |       | $          | 2,634,802  |       | 2.7        |   | $ | 2,733,993 |   | 3.2 |   |
|                                    |       |       |       |       |       |   |   |   |   |
| Operating Income                        |       | $          | 27,989,532 |       | 29.2       |   | $ | 8,157,372 |   | 9.5 |   |
|                                    |       |       |       |       |       |   |   |   |   |
| Other Income  (Expense)                 |       | $          | (4,469,066 | )          | (4.7       | ) | $ | 5,360,140 |   | 6.3 |   |
|                                    |       |       |       |       |       |   |   |   |   |
| Net Income  Before Minority Interest    |       | $          | 23,520,466 |       | 24.5       |   | $ | 13,517,512 |   | 15.8 |   |
|                                    |       |       |       |       |       |   |   |   |   |
| Minority  Interest in Subsidiary Income |       | $          | 9,421,765  |       | 9.8        |   | $ | 5,663,681 |   | 6.6 |   |
|                                    |       |       |       |       |       |   |   |   |   |
| Net Income                              |       | $          | 14,098,701 |       | 14.7       |   | $ | 7,853,831 |   | 9.2 |   |
|                                         |            |            |            |            |            |  |  |  |  |  |  |  |  |

 

*Revenues*

The increase inrevenues from fiscal year 2005 compared to fiscal year 2004 is due primarily toan increase in the price we received for our ethanol in 2005.  The average per gallon price we received forour ethanol sold for 2005 increased approximately 12% compared to the twelvemonths ended September 30, 2004.  We soldapproximately the same quantity of ethanol in 2005 as compared 2004.  Sales of co-products increased byapproximately 7% in 2005 compared to co-products sales in 2004 due to a morefavorable sales mix of wet and dry distillers grains sold.

*Costof Goods Sold*

Our cost of goodssold as a percentage of revenues were 68.1% and 83.3% for the twelve monthsended September 30, 2005 and 2004 respectively. The decrease in our cost of goods sold from period to period wasprimarily due to our reduced corn costs. Our average per bushel price we paid for our corn decreasedapproximately 34% for the twelve months ended September 30, 2005 compared tothe twelve months ended September 30, 2004. Our cost of goods sold also includes a loss of $2,697,000 for fiscal year2005 related to our derivative instruments, down from a loss of $3,851000 forfiscal year 2004.

*Operating Expenses*

Our operatingexpenses as a percentage of revenue were approximately 2.7% and 3.2% for fiscalyear 2005 and 2004 respectively.  This reductionwas primarily due to our increased revenues. Our operating expense amounts have remained fairly level from period toperiod.  Although we can give noassurances, the plant expansion may increase our operating efficiency whichwould maintain or lower our operating expenses as a percentage of our revenues.

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*Operating Income*

Our income fromoperations for fiscal year 2005 totaled $27,989,532 compared to $8,157,372 forfiscal year 2004.  This was a result of the increase in salesrevenue for fiscal year 2005 combined with the decrease in cost of goods soldfor the same period.  

*OtherIncome and Expense*

Our other incomeand expense for the twelve months ended September 30, 2005 was an expense of$4,469,066 compared to income of $5,360,140 for the twelve months endedSeptember 30, 2004.  This resulted fromlower CCC Bio-Energy payments and a settlement of the above-described disputewith ADM.  We recorded the $3.9 millionsettlement as a loss as of September 30, 2005 in other income (expense).

**Plant Operations and Expansion**

We plan to continue to operate the ethanol plant forthe next 12 months. During fiscal year 2006, we commenced a plant expansionwhich when completed, will increase the ethanol production capacity of ourplant by 40 million gallons to 92 million gallons annually.

On May 1, 2006,McCormick Construction Company, Inc. (“McC Inc.”) commenced constructionof an expansion of the grain handling facilities and modification of existinggrain silos.  In exchange for theseservices, we have agreed to pay McC Inc., a lump sum of $5,673,025.  Weanticipate that the expansion of the grain handling facilities will besubstantially complete by May 1, 2007 and the remodeling of the existing grainsilos will be substantially complete by September 1, 2007.

On July 17, 2006, we engaged McC Inc. to expand ourdried distillers grains storage building. In exchange for these additional services, we have agreed to pay McCInc., a lump sum of $936,000.  Weanticipate that the expansion of the dried distillers grains storage buildingwill be substantially complete by September 1, 2007.

On July 10, 2006, we entered into an agreement with Fagen Engineering,LLC, an affiliate of Fagen, Inc., to perform the electrical design services forour expansion of the grain handling facilities, modification of our existinggrain silos and expansion of our distillers grains storage building.  In exchange for its services, we have agreedto pay Fagen Engineering, LLC $265,079 plus certain reimbursable expenses.

On August 1, 2006, we purchased approximately eight acres of land westof the Marcus plant along the north side of the railroad tracks to accommodatethe Plant expansion.  The purchase price of the land was approximately$58,000.

On September 26, 2006, we entered into a design-buildagreement with Fagen, Inc., for the construction of the expansion.  Fagen, Inc. will design and build theplant expansion using ICM, Inc., technology. As part of the design-buildagreement, we also entered into a limited License Agreement with ICM, Inc. touse the technology and information in the design and construction of the plantexpansion.  Under the terms of thedesign-build agreement, we will pay Fagen, Inc. $47,860,000 for the design andconstruction of the Plant’s expansion, subject to any mutually agreed-uponadjustments made in accordance with the general conditions of the agreement andsubject to a credit for any amounts previously paid to Fagen Engineering, LLCfor engineering performed pursuant to the Phase I and Phase II Engineering ServicesAgreement.  Fagen, Inc. commencedconstruction of the second expansion in October 2006 and we currently expectthe expansion will be completed sometime in late 2007 or early 2008.  However, there is no assurance or guaranteethat construction will stay on schedule or that we will be able to operate atexpanded production by our anticipated completion date

We estimate that the total cost of the expansionproject will be $73,000,000, of which we will pay $47,860,000 to Fagen, Inc.for the design and construction of the expansion, subject to any mutuallyagreed-upon adjustments made in accordance with the general conditions of theagreement and subject to a credit for any amounts previously paid to FagenEngineering, LLC for engineering performed pursuant to the Phase I and Phase IIEngineering Services Agreement. The total expansion project cost is apreliminary estimate and we expect it will change as we continue to gatherinformation relating to the expansion.

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We expect to finance the 40 million per year expansionusing both a portion of our cash and additional debt to finance the requiredcapital expenditure.  We do not expect toseek additional equity from our members to fund this expansion.  On April 10, 2006, we entered into a EleventhAmendment to Construction Loan Agreement with First National Bank of Omaha toobtain interim financing to finance the expansion of the grain handlingfacilities and modification of existing grain silos.  We are in the processof negotiating the terms for debt financing for our second Plant expansion with our current lender, First National Bankof Omaha.  While the loanagreements have not been executed, we have signed a commitment letter thatprovides for a expansion construction loan of $73,000,000 and increases ourexisting operating line credit/letters of credit facility from $3,500,000 to$5,000,000.  If we are unable to complete negotiation and execute definitive loandocument with First National Bank of Omaha for any reason, we may be forced toabandon our expansion plans.  For additional information regardingour expansion debt financing commitment, see “**Item 7 —Management’s Discussion and Analysis of Financial Condition and Results ofOperations — Indebtedness, *Expansion Debt Financing***.”

Management anticipates that the Plant will continue tooperate at or above name-plate capacity of 52 MGY for the next twelvemonths.  This current expansion will be completed while the currentfacility remains in production.  However,the Plant may be shut down from time to time over the next 12 months toincorporate expansion improvements.

We expect to have sufficient cash from cash flowgenerated by continuing operations, anticipated additional debt financingsecured to fund plant expansion, current lines of credit through our revolvingpromissory note, and cash reserves to cover the costs of expansion as well asour usual operating costs over the next 12 months, which consist primarily ofcorn supply, natural gas supply, staffing, office, audit, legal, compliance,working capital costs and debt service obligations.

After completion of the second expansion, our totaloperating costs are expected to increase because of the increase in ourproduction capacity.  We expect to offset the increase in operating costsby increased ethanol revenues, however, a variety of market factors can affectboth operating costs and revenues.  These factors include:

·                  Changesin the availability and price of corn;

·                  Changesin the environmental regulations that apply to our plant operations;

·                  Increasedcompetition in the ethanol and oil industries;

·                  Changesin interest rates or the availability of credit;

·                  Changesin our business strategy, capital improvements or development plans;

·                  Changesin plant production capacity or technical difficulties in operating the plant;

·                  Changesin general economic conditions or the occurrence of certain events causing aneconomic impact in the agriculture, oil or automobile industries;

·                  Changesin the availability and price of natural gas and the market for distillersgrains; and

·                  Changes infederal and/or state laws (including the elimination of any federal and/orstate ethanol tax incentives).

***Developmentof Akron Ethanol Plant***

In addition to expansion of the Plant, we are studying the feasibility ofdeveloping and constructing a new 110 million gallon per year ethanol plant near Akron, Iowa inPlymouth County, or participating in some capacity.  However, we have not yet determined how or if we will continue to pursue theopportunities presented by the Akron plant and there is no assurancethat if we determine to pursue the Akron plant that we will be successful.  For additional risks associated with development of the Akronplant, see “**Risks Relating to OurExpansion Strategy - *We give no assurancesthat we will be able to implement our expansion strategy as planned or at all***.”

In connection with our study of the opportunities inAkron, we have obtained two options for the real estate which we expect willmake up the primary Akron plant site.  OnJune 19, 2006, we entered into a real estate option agreement with the MaryFrances Wohlenberg Trust, an unrelated party, granting us an option to purchase

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approximately 156 acres of land (the “Wohlenberg Site”). The price of the option was $15,000.  Under the terms of the optionagreement, we have the option to purchase the land for $15,000 per surveyedacre. This option expires on December 19, 2006, however we may extend theoption to June 19, 2007 for an additional payment of $10,000. In the event weexercise this option, the option agreement allows us to apply the amounts paidfor the option and extensions of the option towards the total purchase pricefor the land. If the option is not exercised after the specified date, theoption agreement becomes null and void.  This option must be exercisedtogether with our option on the adjacent Lias site (described below).

On June 19, 2006, we entered into a real estate optionagreement with Robert E. and Margaret Lias, unrelated parties, granting us anoption to purchase approximately 140 acres of land adjacent to the Wohenbergsite (the “Lias Site”).  The price of the option was $15,000.  Underthe terms of the option agreement, we have the option to purchase the land for$15,000 per surveyed acre. This option expires on December 19, 2006, however wemay extend the option to June 19, 2007 for an additional payment of $10,000. Inthe event we exercise this option, the option agreement allows us to apply theamounts paid for the option and extensions of the option towards the totalpurchase price for the land. If the option is not exercised after the specifieddate, the option agreement becomes null and void.  This option must beexercised together with our option on the adjacent property (described above).

**Critical Accounting Estimates**

Management uses estimates and assumptions in preparingour consolidated financial statements in accordance with generally acceptedaccounting principles.  These estimatesand assumptions affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities, and the reported revenues andexpenses.  Of the significant accountingpolicies described in the notes to our consolidated financial statements, webelieve that the following are the most critical:

***Derivative Instruments***

We account for derivative instruments and hedgingactivities in accordance with SFAS No. 133, *Accounting for DerivativeInstruments and Hedging Activities*, as amended. SFAS No. 133requires a company to evaluate its contracts to determine whether the contractsare derivatives.  Certain contracts thatliterally meet the definition of a derivative may be exempted from SFAS No. 133as normal purchases or normal sales. Normal purchases and normal sales are contracts that provide for thepurchases or sale of something other than a financial instrument or derivativeinstrument that will be delivered in quantities expected to be used or soldover a reasonable period in the normal course of business.  Contracts that meet the requirements ofnormal are documented as normal and exempted from accounting and reportingrequirements of SFAS No. 133.  

In order to reduce the risk caused by marketfluctuations of corn, natural gas, and interest rates, we enter into option,futures and swap contracts.  Thesecontracts are used to fix the purchase price of our anticipated requirements ofcorn and natural gas in production activities and limit the effect of increasesin interest rates.  The fair value ofthese contracts is based on quoted prices in active exchange-traded orover-the-counter markets.  The fair valueof the derivatives is continually subject to change due to the changing marketconditions.  We do not typically enterinto derivative instruments other than for hedging purposes.  On the date the derivative instrument isentered into, we will designate the derivative as a hedge.  Changes in the fair value of a derivativeinstrument that is designated as, and meets all of the required criteria, for acash flow or fair value hedge is recorded in accumulated other comprehensiveincome and reclassified into earnings as the hedged items affect earnings.  Changes in the fair value of a derivativeinstrument that is not designated as, and accounted for, as a cash flow or fairvalue hedge is recorded in current period earnings.  Although certain derivative instruments maynot be designated as, and accounted for, as a cash flow or fair value hedge,they are effective economic hedges of specified risks.  

***Revenue Recognition***

Revenue from the sale of our products is recognized atthe time title of the goods and all risks of ownership transfer to thecustomers.  This generally occurs uponshipment to the customer or when the customer picks up the goods.  We record revenue from federal and stateincentive programs related to the production of ethanol when we have sold theethanol and completed all the requirements of the applicable incentive program.

***Inventory***

Inventory consists of raw materials, work in process,and finished goods.  Corn is the primaryraw material and, along with other raw materials, is stated at the lower ofaverage cost or market.  Finished foodsconsist of ethanol produced and DDGS, MWDGS, and corn oil, and are stated atthe lower of first-in, first-out, (FIFO method) cost or market.

***Property and Equipment***

Property and equipment are stated at the lower of costor estimated fair value.  Depreciation iscomputed by the straight –-line method over the following estimated usefullives:

| Asset Description                | ** ** | **Years**   | ** ** |
|----------------------------------|------------|-------------|------------|
| Land improvements                |       | 5 – 40 |       |
| Buildings and improvements       |       | 7 – 40 |       |
| Machinery and equipment          |       | 3 – 20 |       |
| Office equipment and furnishings |       | 3 – 10 |       |

Maintenance and repairs are expensed as incurred;major improvements and betterments are capitalized.  The present value of capital leaseobligations are classified as long-term debt and the related assets are includedin equipment.  Amortization of equipmentunder capital lease is included in depreciation expense.

We review our property and equipment impairmentwhenever events indicate that the carrying amount of the asset may not berecoverable.  An impairment loss isrecorded when the sum of the future cash flows is less than the carrying amountof the asset.  An impairment loss ismeasured as the amount by which the carrying amount of the asset exceeds itsfair value.

**Liquidityand Capital Resources**

***Comparisonof Fiscal Years ended September 30, 2006 and 2005***

|                                         | ** ** | **Year ended September 30,** | ** ** |
|-----------------------------------------|------------|---------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| Net cash from  operating activities     |       | $                                           | 32,957,631 |   | $ | 34,093,417 |   |
| Net cash used  for investing activities |       | (18,423,815                                 | )          | (7,409,870 | ) |
| Net cash used for  financing activities |       | (18,536,079                                 | )          | (16,454,973 | ) |
|                                         |            |                                             |            |  |  |  |  |

 

*CashFlow From Operations. *The net cash flow providedfrom operating activities was consistent between 2006 and 2005.  The increase resulting from improved netincome was offset by changes in derivative instruments, accounts payables andaccrued expenses.  Our capital needs are being adequately met through cashfrom our operating activities and our current credit facilities.

*CashFlow From Investing Activities. *We used cashprovided by operating activities for capital expenditures which totaled$6,439,043 for fiscal 2006 compared to $374,450 for fiscal 2005.   In addition, we used cash provided byoperating activities for the purchase of short term investments which totaled$18,726,834 at September 30, 2006 compared to $6,987,420 at September 30, 2005.

Management estimates that approximately $1,000,000 incapital expenditures will be made in the next twelve months for generalimprovements to the Plant, all of which are expected to be financed from aportion of cash flows from operations and additional debt financing.

In October 2006, we commenced construction of a 40million gallon per year expansion to our Plant.  The cost of the expansionis expected to be approximately $73,000,000, which will be financed using botha portion of our cash and additional debt to finance the required capitalexpenditure.  Our expansion projections are based upon our historicaloperating costs and historical revenues and there is no guarantee or assurancethat our past financial performance can accurately predict future resultsespecially in connection with expansion.  In addition, the expansion maycost more and may present additional challenges and risks that negativelyimpact our future financial performance.  We anticipate construction willbe completed in late 2007 or early 2008.

*Cash Flow From Financing Activities.*Weused cash to pay down our debt by $3,199,251 in fiscal 2006 compared to$8,023,465 in fiscal 2005.  Additionally, the total amount of cash wedistributed to partners and members totaled $15,336,828 in 2006 compared to$8,431,508 in 2005

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***Comparison of Fiscal Years ended September 30, 2005 and 2004***

The following table shows cash flows for 2005 and2004:
| ** **                              | ** ** | **Year ended September 30,** | ** ** |
|-----------------------------------------|------------|---------------------------------------------|------------|
| ** **                              | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| Net cash from  operating activities     |       | $                                           | 34,093,417 |   | $ | 17,479,109 |   |
| Net cash used  for investing activities |       | (7,409,870                                  | )          | (2,230,069 | ) |
| Net cash used for  financing activities |       | (16,454,973                                 | )          | (11,878,143 | ) |
|                                         |            |                                             |            |  |  |  |  |

 

*CashFlow From Operations. *The increase in net cash flowprovided from operating activities between 2005 and 2004 was primarily due to afavorable spread between the price of corn and the price of ethanol.

*CashFlow From Investing Activities. *We used cashprovided by operating activities as well as cash provided by a constructionnote totaling $5,400,000 for capital expenditures which totaled $5,774,450 infiscal 2005 compared to $2,230,069 for fiscal 2004.

*Cash Flow From Financing Activities.*Weused cash to pay down our debt by $8,023,465 in fiscal 2005 compared to$9,078,381 in fiscal 2005.  Additionally, the total amount of cash wedistributed to partners and members totaled $8,431,508 in 2005 compared to$2,049,762 in 2004.

**Indebtedness**

### *Short-TermDebt Sources*

We have a revolving promissory note of up to$3,500,000 with First National Bank of Omaha through March 2007.  Theinterest payable on the revolving promissory note is due monthly at the onemonth LIBOR plus 2.80%.  The revolving promissory note is our operatingline of credit.  We pay a commitment fee of 0.125% on the unused portionof the line.  We did not have an outstanding balance at September 30,2006 or 2005.  The maximum available credit under this note is based onreceivable and inventory balances.  As the balances in these accountsfluctuate, the amount of available credit on this note may be reduced orincreased subject to the maximum of $3,500,000.  The operating line ofcredit is subject to protective covenants requiring us to maintain variousfinancial ratios.  The operating line of credit is secured by all businessassets.

On April 10, 2006, we entered into an EleventhAmendment to Construction Loan Agreement with First National Bank of Omaha.Under this amendment, First National Bank of Omaha agreed to loan us up to$5,673,025 of interim financing pursuant to a Bridge Note to finance theexpansion of our grain handling facilities and modification of existing grainsilos.  Our bridge loan is subject to all terms and conditions of ourexisting Construction Loan Agreement with First National Bank of Omaha,including the specific provisions regarding events of default and the grantingof liens to secure our performance. In the event of default, First NationalBank of Omaha may accelerate the due date of the bridge loan and declare allobligations immediately due and payable. During the term of the bridge loan, weagreed to pay interest only on a quarterly basis on the outstanding principalamount at a rate equal to the one-month LIBOR rate plus 280 basis points.

On October 1, 2006, the Bridge Note terminated.  Noamounts have been drawn on this note as of September 30, 2006.  On October 27, 2006, we executed a commitmentletter with First National Bank of Omaha for debt financing for our expansion.  Under the terms of the commitment letter, thebridge note will be paid from proceeds of the construction note.  For additional information regarding ourexpansion debt financing commitment, see below “***ExpansionDebt Financing***.”

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***Long-Term Debt Sources***

We have long-term debt financing consisting of threeterm notes held by First National Bank of Omaha and referred to as Term Notes#2, #3, and #4. At September 30, 2006, the principal balance on Term Note #2was $11,308,363. Term Note #2 is payable in quarterly installments. Interest onTerm Note #2 is at the three month LIBOR plus 2.80%, which totaled 8.20% as ofSeptember 30, 2006. Term Note #2 is payable in full on June 1, 2008. Inorder to achieve a fixed interest rate on Term Note #2, we entered into aninterest rate swap which helps protect our exposure to increases in interestrates and the swap effectively fixes the interest rate on Term Note #2 at 5.79%until June 1, 2008.

At September 30, 2006, the principal balance on TermNote #3 was $5,090,129. Term Note #3 is payable in quarterly installments.Interest on Term Note #3 is at the three month LIBOR plus 2.80%, which totaled8.20% as of June 30, 2006. Term Note #3 is payable in full on June 1,2008.  As part of the financing agreement, we have agreed to pay anannual servicing fee of $50,000 for five years. However, under our commitment letter with First National Bank of Omahafor our expansion debt financing, this annual servicing fee will be reduced to $30,000beginning in the first quarter of 2007 and will be payable through 2012.

At September 30, 2006, there was no principal balanceon Term Note #4. Term Note #4 is payable in quarterly installments. Interest onTerm Note #4 is at the one month LIBOR plus 2.80%. Term Note #4 is payable infull on June 1, 2008. Term Note #4 allows borrowings up to the originalprincipal of $5,000,000 to the extent of principal payments made until maturityand requires a commitment fee of 0.375% on any unused portion.

At September 30, 2006, the aggregate indebtednessrepresented by Term Notes #2, #3 and #4 was $16,398,492.

We have a capital lease obligation in the amount of$116,428 on which we initially pay monthly installments totaling $6,658, withan implicit interest rate of 3.67%. This obligation is secured by the leasedequipment and runs through March 1, 2008.

We have a note in the amount of $97,222 payable to theIowa Energy Center on which we pay monthly installments of $3,472 withoutinterest. This note is secured by real estate, but is subordinated to the termnotes. It matures on January 29, 2009.

We have a note with Farmers State Bank of Marcus, Iowain the amount of $108,136 on which we pay monthly installments of $5,921,including interest at 6%. This note is secured by real estate, but issubordinated to the term notes. It matures on January 29, 2009.

Wehave a note totaling $178,500 payable to the Iowa Department of EconomicDevelopment on which we pay monthly installments of $1,167 without interest.This note is secured by all equipment and matures on July 1, 2009.

***Expansion Debt Financing***

We are in the process of negotiating theterms for debt financing for our second Plant expansion with our current lender, First National Bank of Omaha.  While the loan agreements have not been executed,we have signed a commitment letter that provides for a construction loan of$73,000,000 and increases our existing operating line of credit and letters ofcredit facility from $3,500,000 to $5,000,000. As provided in the commitmentletter, during the construction period interest on the construction loan willbe payable on a quarterly basis on the outstanding principal amount at a rateequal to the one-month LIBOR rate plus 310 basis points.  Following completion of the constructionperiod, the construction note will be converted to a 5-year term note withquarterly payments of principal and interest on the outstanding principalamount at a rate equal to the three-month LIBOR rate plus 300 basis points.  The interest payable on the revolvingoperating line of credit and letters of credit facility will be due monthly atthe one month LIBOR plus 2.80% and will be subject to a commitment fee of1.75% per annum assessed against the letter of credit commitments.

35

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Under the commitment letter, the terms and conditionsof the expansion debt financing loans are similar to our existing creditfacility with First National Bank, including the specific provisions regardingdistributions to members, maintenance of deposit accounts, annual capitalexpenditures, certain financial loan covenants, pre-payment penalties, eventsof default and the granting of liens to secure our performance.  We will also be prohibited from makingdistributions to our members, however, LSCP will be allowed to distribute 40%of its net income to the limited partners after our lender has received auditedfinancial statements for the fiscal year.

***Contractual Obligations andCommercial Commitments***

In addition to ourlong-term debt obligations, we have certain other contractual cash obligationsand commitments.  The following tables provide information regarding ourconsolidated contractual obligations and commitments as of September 30,2006:
| ** **                                 | ** ** | **Payment Due By Period** | ** ** |
|--------------------------------------------|------------|------------------------------------------|------------|
| **Contractual Cash Obligations** | ** ** | ** **                               | ** ** | **Total** | ** ** | **Less than  One Year** | ** ** | **One to  Three  Years** | ** ** | **Four to  Five  Years** | ** ** | **After Five  Years** | ** ** |
|                                       |       |                                     |       |   |   |   |   |   |   |   |   |
| Long-Term Debt  Obligations                |       | $                                        | 16,898,778 |   | $ | 3,394,196 |   | $ | 13,504,582 |   | $ | 0 |   | $ | 0 |   |
| Operating Lease  Obligations               |       | 409,905                                  |       | 187,371 |   | 222,534 |   | 0 |   | 0 |   |
| Purchase  Obligations                      |       | 66,306,619                               |       | 65,775,127 |   | 531,492 |   | 0 |   | 0 |   |
| Other Long-Term  Liabilities               |       | 0                                        |       | 0 |   | 0 |   | 0 |   | 0 |   |
| Total Contractual Cash  Obligations        |       | $                                        | 83,615,302 |   | $ | 69,356,694 |   | $ | 14,258,608 |   | $ | 0 |   | $ | 0 |   |
|                                            |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Off-Balance Sheet Arrangements.**

We do not have any off-balance sheet arrangements.

**ITEM 7A.**           QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are exposed to the impact of market fluctuationsassociated with interest rates and commodity prices as discussed below. We have no exposure to foreign currency risk as all of its business isconducted in U.S. Dollars. We use derivative financial instruments as part ofan overall strategy to manage market risk. We use cash, futures and optioncontracts to hedge changes to the commodity prices of corn and natural gas. Wedo not enter into these derivative financial instruments for trading orspeculative purposes, nor do we designate these contracts as hedges foraccounting purposes pursuant to the requirements of SFAS 133, *Accounting for Derivative Instruments and Hedging Activities*.

**Interest Rate Risk**

We are exposed to market risk from changes in interestrates. Exposure to interest rate risk results primarily from holding arevolving promissory note and three term notes which bear variable interestrates.  Specifically, we have $16,398,492 outstanding in variable rate,long-term debt as of September 30, 2006.  The specifics of each note arediscussed in greater detail in “**Item 2 —Management’s Discussion and Analysis of Financial Condition and Results ofOperations — Indebtedness**.”

In order to achieve a fixed interest rate on Term Note#2, we entered into an interest rate swap which helps protect our exposure toincreases in interest rates and the swap effectively fixes the interest rate onTerm Note #2 at 5.79% until June 1, 2008. When the three-month LIBOR plus2.80% exceeds 5.79%, we receive payments for the difference between the marketrate and the swap rate. Conversely, when the three-month LIBOR plus 2.80% isbelow 5.79%, we make payments for the difference between the market rate andthe swap rate. While our exposure is now greatly reduced, there can be noassurance that the interest rate swap agreement will provide us with protectionin all scenarios. For example, if interest rates were to fall below 5.79%, wewould still be obligated pay interest at 5.79% under the interest rate swapagreement.

36

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In order to protect our interest rate exposure on TermNote #3, we entered into an interest rate cap agreement to reduce the risk ofincreases in interest rates. The interest rate cap agreement is based on anotional amount of $10,000,000 and caps increases in interest rates at 6.8% onthis amount. The interest rate cap agreement expired on June 1, 2006;however, obligations under Term Note #3 continue until June 1, 2008.Accordingly, we are vulnerable to rising interest rates.

Sincethe interest rate cap has expired, it had no value as of September 30,2006.  At September 30, 2005, the fairvalue of the interest rate cap was $69,756, which was recorded as an asset withderivative instruments.  The interest rate cap was not designated as acash flow hedge.  We charged interest expense with the loss on the interest rate cap of approximately $69,756 onthe interest rate cap for the fiscal year 2006. We offset interest expense with a gain of approximately $39,000 on the interest rate cap during fiscal2005.  The Company chargedinterest expense with the loss on the interest rate cap of approximately$50,000 for the fiscal year ending September 30, 2004.

**Commodity Price Risk**

We are also exposed to market risk from changes incommodity prices.  Exposure to commodity price risk results from ourdependence on corn and natural gas in the ethanol production process.  Weseek to minimize the risks from fluctuations in the prices of corn and naturalgas through the use of derivative instruments.  In practice, as marketsmove, we actively manage our risk and adjust hedging strategies asappropriate.  Although we believe our hedge positions accomplish an economichedge against our future purchases, they are not designated as such for hedgeaccounting purposes, which would match the gain or loss on our hedge positionsto the specific commodity purchase being hedged.  We are marking to marketour hedge positions, which means as the current market price of our hedgepositions changes, the gains and losses are immediately recognized in our costof goods sold.

The immediate recognition of hedging gains and lossescan cause net income to be volatile from quarter to quarter due to the timingof the change in value of the derivative instruments relative to the cost anduse of the commodity being hedged. At September 30, 2006 and September 30,2005, the fair value of our derivative instruments for corn and natural gas isan asset in the amount of $4,356,698 and $496,853, respectively. There areseveral variables that could affect the extent to which our derivativeinstruments are impacted by price fluctuations in the cost of corn or naturalgas. However, it is likely that commodity cash prices will have the greatestimpact on the derivatives instruments with delivery dates nearest the currentcash price.

To manage our corn price risk, our hedging strategy isdesigned to establish a price ceiling and floor for our corn purchases. We have taken a net long position on our exchange traded futures and optionscontracts, which allows us to offset increases or decreases in the market priceof corn.  The upper limit of loss on our futures contracts is thedifference between the contract price and the cash market price of corn at thetime of the execution of the contract.  The upper limit of loss on ourexchange traded and over-the-counter option contracts is limited to the amountof the premium we paid for the option.

We estimate that our expected corn usage isapproximately 19 million bushels per year for the production of 52 milliongallons of ethanol.  We have price protection in place for a portion ofour expected corn usage for fiscal year 2007 and fiscal year 2008 using forwardcontracts, CBOT futures and options and Over-the-Counter optioncontracts.  As we move forward, additional protection may benecessary.  As corn prices move in reaction to market trends and information,our income statement will be affected depending on the impact such marketmovements have on the value of our derivative instruments.  As we moveforward, additional price protection may be required to solidify our marginsinto fiscal year 2007.  Depending on market movements, crop prospects andweather, these price protection positions may cause immediate adverse effects,but are expected to produce long-term positive growth for us.

To manage our natural gas price risk, we entered intoa natural gas purchase agreement with our supplier to supply us with naturalgas.  This purchase agreement fixes the price at which we purchase naturalgas.  We estimate we have purchased a portion of our fall and winter 2006and 2007 natural gas requirements utilizing both cash, futures and optionscontracts.  We may also purchase additional natural gas requirements forthe 2007 calendar year as we attempt to further reduce our susceptibility toprice increases.

37

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At the time we purchased price protection for naturalgas, the market was experiencing a great deal of price uncertainty.  Dueto this uncertainty, we purchased amounts for most of the plant’s needs andimplemented derivative instruments to allow us to benefit in the event naturalgas prices declined.  Energy sector prices have increased and natural gas,as a portion of the total energy market, has responded with higher prices to becost competitive with its alternatives.  In the future, we may not beable to secure natural gas for prices less than current market price and we maynot recover high costs of production resulting from high natural gas prices,which may raise our costs of production.

A sensitivity analysishas been prepared to estimate our exposure to corn and natural gas price risk.The table presents the fair value of our derivative instruments as of September30, 2006 and 2005 and the potential loss in fair value resulting from ahypothetical 10% adverse change in such prices.  The fair value of thepositions is a summation of the fair values calculated by valuing each netposition at quoted market prices as of the applicable date. The results of thisanalysis, which may differ from actual results, are as follows:

| Year Ended     | ** ** | ** ** | ** ** | **Fair Value** | ** ** | **Effect of Hypothetical  Adverse  Change— Market Risk** | ** ** |
|---------------------|------------|------------|------------|---------------------|------------|-----------------------------------------------------------------------------------|------------|
| September 30,  2006 |       | $          | 4,356,698  |                | $          | 435,669                                                                           |       |
| September 30,  2005 |       | $          | 496,853    |                | $          | 49,685                                                                            |       |

 

**ITEM 8.**                    FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA.

Ourconsolidated financial statements and supplementary data are included beginningat page F-1 of this Report.

**ITEM 9.**                    CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.

Boulay,Heutmaker, Zibell & Co., P.L.L.P. has been our independent auditor sincethe Company’s inception and is the Company’s independent auditor at the presenttime.  The Company has had nodisagreements with its auditors.

**ITEM 9A.**           CONTROLS ANDPROCEDURES.

Ourmanagement, including our President and Chief Executive Officer (the principalexecutive officer), Stephen Roe, along with our Chief Financial Officer (theprincipal financial officer), Gary Grotjohn, have reviewed and evaluated theeffectiveness of our disclosure controls and procedures (as defined in Rule13a-15(e) under the Securities Exchange Act of 1934, as amended) as ofSeptember 30, 2006.  Based upon this review and evaluation, these officershave concluded that our disclosure controls and procedures are effective toensure that information required to be disclosed in the reports that we file orsubmit under the Exchange Act  isrecorded, processed, summarized and reported within the time periods requiredby the forms and rules of the Securities and Exchange Commission; and to ensurethat the information required to be disclosed by an issuer in the reports thatit files or submits under the Exchange Act is accumulated and communicated toour management including our principal executive and principal financialofficers, or persons performing similar functions, as appropriate to allowtimely decisions regarding required disclosure.

Ourmanagement, including our principal executive officer and principal financialofficer, have reviewed and evaluated any changes in our internal control overfinancial reporting that occurred as of September 30, 2006 and there has beenno change that has materially affected or is reasonably likely to materiallyaffect our internal control over financial reporting.

**ITEM 9B.**           OTHER INFORMATION.

None.

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**PART III.**

Pursuant to General Instruction G (3), we omit PartIII, Items 10, 11, 12, 13, and 14 and incorporate such items by reference to anamendment to this Annual Report on Form 10-K or to a definitive proxy statementto be filed with the Securities and Exchange Commission within 120 days afterthe close of the fiscal year covered by this Annual Report (September 30,2006).

**PART IV.**

**ITEM 15.**             EXHIBITS, FINANCIAL STATEMENTSCHEDULES.

The following exhibits and financial statements arefiled as part of, or are incorporated by reference into, this report:

**(1)****                                   FinancialStatements**

An index to the financial statements included in thisreport appears at page F-1. The financial statements appear beginning at pageF-2 of this Report.

**(2)****                                   Financial Statement Schedules**

All supplemental schedules are omitted as the requiredinformation is inapplicable or the information is presented in the consolidatedfinancial statements or related notes.

**(3)****                                   Exhibits**
| Exhibit No. | ** ** | **Exhibit**                                                                                                                                                     | ** ** | **Filed Herewith** | ** ** | **Incorporated by Reference**                                                                                        |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|----------------------------------------------------------------------------------------------------------------------|
| 3.1         |       | Articles of Organization of the registrant.                                                                                                                     |       |               |       | Exhibit 2.1 to the registrant’s registration  statement on Form 10-SB filed with the Commission on May 1, 2003  |
| 3.2         |       | Third Amended and  Restated Operating Agreement of the registrant                                                                                               |       | X                  |       |                                                                                                                 |
| 3.3         |       | Certificate of Limited  Partnership.                                                                                                                            |       |               |       | Exhibit 2.3 to the  registrant’s registration statement on Form 10-SB filed with the Commission  on May 1, 2003 |
| 3.4         |       | Limited Partnership  Agreement.                                                                                                                                 |       |               |       | Exhibit 2.4 to the  registrant’s registration statement on Form 10-SB filed with the Commission  on May 1, 2003 |
| 10.1        |       | Ethanol Marketing  Agreement between Little Sioux Corn Processors, L.P. and Minnesota Corn  Processors, L.L.C.*                                                 |       |               |       | Exhibit 6.1 to the  registrant’s registration statement on Form 10-SB filed with the Commission  on May 1, 2003 |
| 10.2        |       | Assignment of Ethanol  Marketing Agreement between Little Sioux Corn Processors, L.P. and Minnesota  Corn Processors, L.L.C. to Archer Daniels Midland Company. |       |               |       | Exhibit 6.2 to the  registrant’s registration statement on Form 10-SB filed with the Commission  on May 1, 2003 |
| 10.3        |       | Distillers Grain  Marketing Agreement between Little Sioux Corn Processors, L.P. and Commodity  Specialist Company*.                                            |       |               |       | Exhibit 6.3 to the  registrant’s registration statement on Form 10-SB filed with the Commission  on May 1, 2003 |
| 10.4        |       | Construction Loan  Agreement dated July 25, 2002 by and between LSCP, L.P. and First National  Bank of Omaha.                                                   |       |               |       | Exhibit 10.5 to the  registrant’s Form 10-KSB filed with the Commission on December 29, 2003                    |

 

39

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| 10.5  |   | First Amendment to Construction Loan Agreement dated  April 29, 2003 by and between LSCP, L.P. and First National Bank of Omaha.                                                                          |   |   |   | Exhibit 10.6 to the registrant’s Form 10-KSB filed  with the Commission on December 29, 2003  |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|----------------------------------------------------------------------------------------------------|
| 10.6  |   | Second Amendment to  Construction Loan Agreement dated June 1, 2003 by and between LCSP, L.P. and  First National Bank of Omaha.                                                                          |   |   |   | Exhibit 10.7 to the  registrant’s Form 10-KSB filed with the Commission on December 29, 2003  |
| 10.7  |   | Third Amendment to  Construction Loan Agreement dated June 23, 2003 by and between LCSP, L.P. and  First National Bank of Omaha.                                                                          |   |   |   | Exhibit 10.8 to the  registrant’s Form 10-KSB filed with the Commission on December 29, 2003  |
| 10.8  |   | Revolving Promissory  Note dated June 23, 2003 between LSCP, L.P. and First National Bank of Omaha.                                                                                                       |   |   |   | Exhibit 10.9 to the  registrant’s Form 10-KSB filed with the Commission on December 29, 2003  |
| 10.9  |   | Term Note #2 dated June  23, 2003 between LSCP, L.P. and First National Bank of Omaha.                                                                                                                    |   |   |   | Exhibit 10.10 to the  registrant’s Form 10-KSB filed with the Commission on December 29, 2003 |
| 10.10 |   | Term Note #3 dated June  23, 2003 between LSCP, L.P. and First National Bank of Omaha.                                                                                                                    |   |   |   | Exhibit 10.11 to the  registrant’s Form 10-KSB filed with the Commission on December 29, 2003 |
| 10.11 |   | Term Note #4 dated June  23, 2003 between LSCP, L.P. and First National Bank of Omaha.                                                                                                                    |   |   |   | Exhibit 10.12 to the  registrant’s Form 10-KSB filed with the Commission on December 29, 2003 |
| 10.12 |   | Agreement Between Owner  and Design/Builder on the Basis of a Stipulated Price.                                                                                                                           |   |   |   | Exhibit 10.1 to the  registrant’s Form 10-Q filed with the Commission on February 14, 2005    |
| 10.13 |   | Sixth Amendment to  Construction Loan Agreement (Term Note #5).                                                                                                                                           |   |   |   | Exhibit 10.2 to the  registrant’s Form 10-Q filed with the Commission on February 14, 2005    |
| 10.14 |   | LSCP, LLLP Deferred  Bonus Compensation Plan.                                                                                                                                                             |   |   |   | Exhibit 10.1 to the  registrant’s Form 10-Q filed with the Commission on August 15, 2005      |
| 10.15 |   | Settlement Agreement  and Release of Claims between LSCP, LLLP and Archer Daniels Midland Company  dated February 15, 2006.                                                                          |   |   |   | Exhibit 10.1 to the  registrant’s Form 10-Q filed with the Commission on May 15, 2006         |
| 10.16 |   | Standard Short  Form Agreement between Owner and Contractor for Grain Handling Expansion  and Existing Silo Modification dated January 25, 2006 with McCormick  Construction Company, Inc. |   |   |   | Exhibit 10.2 to the  registrant’s Form 10-Q filed with the Commission on May 15, 2006         |
| 10.17 |   | Eleventh Amendment to  Construction Loan Agreement dated March 30, 2006 with First National  Bank of Omaha.                                                                                          |   |   |   | Exhibit 10.3 to the  registrant’s Form 10-Q filed with the Commission on May 15, 2006         |
| 10.18 |   | Electrical Design  Services Agreement dated July 10, 2006 with Fagen Engineering, LLC.                                                                                                                    |   |   |   | Exhibit 10.1 to the  registrant’s Form 10-Q filed with the Commission on August 14, 2006      |
| 10.19 |   | Change Order Agreement  dated July 17, 2006 with McCormick Construction Company, Inc.                                                                                                                     |   |   |   | Exhibit 10.2 to the  registrant’s Form 10-Q filed with the Commission on August 14, 2006      |
| 10.20 |   | Lump Sum Design-Build  Expansion Agreement dated September 20, 2006 with Fagen, Inc.*                                                                                                                     |   | X      |   |                                                                                               |

 

40

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| 14.1 |   | Code of Ethics of Little Sioux Corn Processors,  L.L.C. adopted December 18, 2003. |   |   |   | Exhibit 14.1 to the registrant’s Form 10-KSB filed  with the Commission on December 29, 2003 |
|------|--------|------------------------------------------------------------------------------------|--------|--------|--------|---------------------------------------------------------------------------------------------------|
| 21.1 |   | Subsidiaries of the  Registrant                                                    |   | X      |   |                                                                                              |
| 24.1 |   | Power of Attorney                                                                  |   | X      |   |                                                                                              |
| 31.1 |   | Certificate Pursuant to  17 CFR 240.13a-14(a)                                      |   | X      |   |                                                                                              |
| 31.2 |   | Certificate Pursuant to  17 CFR 240.13a-14(a)                                      |   | X      |   |                                                                                              |
| 32.1 |   | Certificate Pursuant to  18 U.S.C. Section 1350                                    |   | X      |   |                                                                                              |
| 32.2 |   | Certificate Pursuant to  18 U.S.C. Section 1350                                    |   | X      |   |                                                                                              |

 

*Portions of theexhibit have been omitted and filed separately with the Securities and ExchangeCommission pursuant to a request for confidential treatment under Rule 406 ofthe Securities Act of 1933, as amended.

**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.
|        |              |   |   | LITTLE SIOUX CORN PROCESSORS, L.L.C.                                  |
|--------|-------------------|--------|--------|-----------------------------------------------------------------------|
|   |              |   |   |                                                                  |
| Date:  | December 29, 2006 |   |   | /s/ Stephen Roe                                                       |
|   |              |   |   | Stephen Roe                                                           |
|   |              |   |   | President and Chief Executive Officer  (Principal Executive Officer)  |
|   |              |   |   |                                                                  |
| Date:  | December 29, 2006 |   |   | /s/ Gary Grotjohn                                                     |
|   |              |   |   | Gary Grotjohn                                                         |
|   |              |   |   | Chief Financial Officer  (Principal Financial and Accounting Officer) |

 

Pursuant to therequirements of the Securities Exchange Act, this report has been signed belowby the following persons on behalf of the registrant and in the capacities andon the dates indicated.
| Date: December 29, 2006 |   | /s/ Vince  Davis**                       |
|-------------------------|--------|------------------------------------------|
|                    |   | Vince Davis, Director                    |
|                    |   |                                     |
| Date: December 29, 2006 |   | /s/ Daryl  Haack**                       |
|                    |   | Daryl Haack, Director                    |
|                    |   |                                     |
| Date: December 29, 2006 |   | /s/ Doug  Lansink**                      |
|                    |   | Doug Lansink, Director                   |
|                    |   |                                     |
| Date: December 29, 2006 |   | /s/ Ron Wetherell                        |
|                    |   | Ron Wetherell, Chairman and Director     |
|                    |   |                                     |
| Date: December 29, 2006 |   | /s/ Darrell  Downs**                     |
|                    |   | Darrell Downs, Director                  |
|                    |   |                                     |
| Date: December 29, 2006 |   | /s/ Myron Pingel                         |
|                    |   | Myron Pingel, Vice Chairman and Director |

 

41

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| Date: December 29, 2006 |   | /s/ Tim Ohlson**                   |
|-------------------------|--------|------------------------------------|
|                    |   | Tim Ohlson, Secretary and Director |
|                    |   |                               |
| Date: December 29, 2006 |   | /s/ Verdell  Johnson**             |
|                    |   | Verdell Johnson, Director          |
|                    |   |                               |
| Date: December 29, 2006 |   | /s/ Dale  Arends**                 |
|                    |   | Dale Arends, Director              |

 
| **By:  |   | /s/ Ron Wetherell                                                |   |
|--------|--------|------------------------------------------------------------------|--------|
|   |   | Ron Wetherell  Attorney-in-Fact  pursuant to a power of attorney |   |
|   |   |                                                             |   |
|   |   | /s/ Myron Pingel                                                 |   |
|   |   | Myron Pingel  Attorney-in-Fact  pursuant to a power of attorney  |   |

 

42

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**INDEX TO CONSOLIDATED FINANCIALSTATEMENTS**
|                                                                                                                                                    | ** ** | **Page No.** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| Report of Independent Registered Public Accounting  Firm                                                                                           |       | F-2               |       |
| Consolidated Financial  Statements                                                                                                                 |       |              |       |
| Consolidated Balance Sheet as of September 30,  2006 and 2005                                                                                 |       | F-3               |       |
| Consolidated Statements of Operation for the years  ended September 30, 2006, 2005 and 2004                                                   |       | F-5               |       |
| Consolidated Statements of Members’ Equity and  Accumulated Other Comprehensive Income for the years ended September 30,  2006, 2005 and 2004 |       | F-6               |       |
| Consolidated Statements of Cash Flows for the years  ended September 30, 2006, 2005 and 2004                                                       |       | F-7               |       |
| Notes to Consolidated Financial Statements                                                                                                         |       | F-9               |       |
| Report of Independent Registered Public Accounting  Firm on Supplementary Information                                                              |       | F-19              |       |
| Consolidating Balance Sheet                                                                                                                        |       | F-20              |       |
| Consolidating Statements of Operations                                                                                                             |       | F-22              |       |
| Consolidated Schedule of Grain Purchases                                                                                                           |       | F-23              |       |
| Consolidated Schedule of Corn Payables                                                                                                             |       | F-24              |       |

 

F-1

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Boardof DirectorsLittle Sioux Corn Processors, LLC and SubsidiaryMarcus, Iowa

We have audited the accompanying consolidated balance sheet of LittleSioux Corn Processors, LLC and Subsidiary as of September 30, 2006 and2005, and the related consolidated statements of operations, changes in members’equity and accumulated other comprehensive income, and cash flows for thefiscal years ended September 30, 2006, 2005 and 2004.  Theseconsolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the consolidated financial statements are free of materialmisstatement.  An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the consolidated financialstatements.  An audit also includes assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation.  We believe that our auditsprovide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of LittleSioux Corn Processors, LLC and Subsidiary as of September 30, 2006 and2005, and the results of their operations and their cash flows for the fiscalyears ended September 30, 2006, 2005 and 2004, in conformity with U.S.generally accepted accounting principles.
|        |   | /s/ Boulay, Heutmaker, Zibell & Co.  P.L.L.P. |
|--------|--------|--------------------------------------------------------|
|   |   | Certified Public Accountants                           |

 

Minneapolis,MinnesotaDecember 27, 2006

F-2

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**LITTLESIOUX CORN PROCESSORS, LLC AND SUBSIDIARYConsolidated Balance Sheet**
| ** **                                            | ** ** | **September 30** | ** ** | **September 30** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| **ASSETS**                                            |       |                  |       |                  |       |
| **Current Assets**                                    |       |                  |       |                  |       |
| Cash and  equivalents                                 |       | $                     | 10,133,691 |                  | $          | 14,135,954 |   |
| Short-term  investments                               |       | 18,726,834            |       | 6,987,420             |       |
| Accounts  receivable                                  |       | 2,655,454             |       | 2,703,324             |       |
| Inventory                                             |       | 1,666,395             |       | 1,346,217             |       |
| Derivative  instruments                               |       | 4,356,698             |       | 566,609               |       |
| Prepaid expenses                                      |       | 1,835,214             |       | 1,008,754             |       |
| Total current  assets                                 |       | 39,374,286            |       | 26,748,278            |       |
|                                                  |       |                  |       |                  |       |
|                                                  |       |                  |       |                  |       |
| **Property and Equipment**                            |       |                  |       |                  |       |
| Land and  improvements                                |       | 2,826,839             |       | 2,762,708             |       |
| Plant buildings  and equipment                        |       | 57,971,654            |       | 55,146,210            |       |
| Office buildings  and equipment                       |       | 213,928               |       | 335,392               |       |
|                                                  |       | 61,012,421            |       | 58,244,310            |       |
| Less accumulated  depreciation                        |       | 13,649,392            |       | 8,829,771             |       |
|                                                  |       | 47,363,029            |       | 49,414,539            |       |
| Construction in  progress                             |       | 4,384,830             |       | 713,898               |       |
| Net property and  equipment                           |       | 51,747,859            |       | 50,128,437            |       |
|                                                  |       |                  |       |                  |       |
|                                                  |       |                  |       |                  |       |
| **Other Assets**                                      |       |                  |       |                  |       |
| Long-term  investments                                |       | 103,742               |       | 48,000                |       |
| Land option and  other                                |       | 189,616               |       | -                     |       |
| Deferred loan  costs, net of accumulated amortization |       | 141,112               |       | 237,641               |       |
| Total other  assets                                   |       | 434,470               |       | 285,641               |       |
| **Total Assets**                                      |       | $                     | 91,556,615 |                  | $          | 77,162,356 |   |

 

See Notes to ConsolidatedFinancial Statements

F-3

----

**LITTLESIOUX CORN PROCESSORS, LLC AND SUBSIDIARYConsolidated Balance Sheet**
| ** **                                                     | ** ** | **September 30** | ** ** | **September 30** | ** ** |
|----------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                     | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| **LIABILITIES AND MEMBERS’ EQUITY**                       |       |                  |       |                  |       |
| **Current Liabilities**                                        |       |                  |       |                  |       |
| Current  maturities of long-term liabilities                   |       | $                     | 3,394,196  |                  | $          | 4,005,714 |   |
| Accounts payable                                               |       | 2,064,582             |       | 2,304,286             |       |
| Accrued expenses                                               |       | 564,618               |       | 4,382,316             |       |
| Total current  liabilities                                     |       | 6,023,396             |       | 10,692,316            |       |
|                                                           |       |                  |       |                  |       |
|                                                           |       |                  |       |                  |       |
| ** Long-Term Liabilities, net of current maturities**     |       | 13,504,582            |       | 16,092,315            |       |
| ** **                                                     |       |                  |       |                  |       |
| ** **                                                     |       |                  |       |                  |       |
| **Minority Interest**                                          |       | 28,864,721            |       | 20,209,574            |       |
| ** **                                                     |       |                  |       |                  |       |
| ** **                                                     |       |                  |       |                  |       |
| **Members’ Equity, 10,941 units  issued and outstanding** |       | 43,163,916            |       | 30,168,151            |       |
| ** **                                                     |       |                  |       |                  |       |
| **Total Liabilities and Members’  Equity**                |       | $                     | 91,556,615 |                  | $          | 77,162,356 |   |

 

See Notes to ConsolidatedFinancial Statements

F-4

----

**LITTLESIOUX CORN PROCESSORS, LLC AND SUBSIDIARYConsolidated Statements of Operations**
| ** **                                                | ** ** | **Year Ended**   | ** **  | **Year Ended**   | ** ** | **Year Ended**   | ** ** |
|-----------------------------------------------------------|------------|-----------------------|-------------|-----------------------|------------|-----------------------|------------|
| ** **                                                | ** ** | **September 30** | ** **  | **September 30** | ** ** | **September 30** | ** ** |
| ** **                                                | ** ** | **2006**              | ** **  | **2005**              | ** ** | **2004**              | ** ** |
| **Revenues**                                              |       | $                     | 113,785,666 |                  | $          | 95,881,420            |       | $ | 85,540,934 |   |
| **Cost of Goods Sold**                                    |       | 73,678,035            |        | 65,257,086            |       | 74,649,569            |       |
| **Gross Margin**                                          |       | 40,107,631            |        | 30,624,334            |       | 10,891,365            |       |
| **Selling, General, and  Adminstrative Expenses**         |       | 3,001,254             |        | 2,634,802             |       | 2,733,993             |       |
| **Operating Income**                                      |       | 37,106,377            |        | 27,989,532            |       | 8,157,372             |       |
| **Other Income (Expense)**                                | ** ** | ** **            | ** **  | ** **            | ** ** | ** **            | ** ** |
| Interest income                                           |       | 835,980               |        | 158,761               |       | 7,557                 |       |
| Interest expense                                          |       | (1,286,265            | )           | (1,126,101            | )          | (1,439,020            | )          |
| Other income                                              |       | 331,648               |        | (3,501,726            | )          | 6,791,603             |       |
| Total other income  (expense), net                        |       | (118,637              | )           | (4,469,066            | )          | 5,360,140             |       |
|                                                      |       |                  |        |                  |       |                  |       |
| **Net Income Before Minority  Interest**                  |       | 36,987,740            |        | 23,520,466            |       | 13,517,512            |       |
| **Minority Interest in Subsidiary  Income**               |       | 14,775,906            |        | 9,421,765             |       | 5,663,681             |       |
| **Net Income**                                            |       | $                     | 22,211,834  |                  | $          | 14,098,701            |       | $ | 7,853,831 |   |
| **Net Income Per Unit - Basic and  Diluted**              |       | $                     | 2,030.15    |                  | $          | 1,288.61              |       | $ | 717.83 |   |
| **Distributions Per Unit - Basic  and Diluted**           |       | $                     | 842.34      |                  | $          | 458.12                |       | $ | 103.86 |   |
| ** **                                                | ** ** | ** **            | ** **  | ** **            | ** ** | ** **            | ** ** |
| **Weighted Average Units Outstanding-Basic and  Diluted** |       | 10,941                |        | 10,941                |       | 10,941                |       |

 

See Notes to ConsolidatedFinancial Statements

F-5

----

**LITTLESIOUX CORN PROCESSORS, LLC AND SUBSIDIARYConsolidated Statement of Changes in Members’ Equity and Accumulated OtherComprehensive Income**
| ** **                                                           | ** ** | **Member  Contributions** | ** ** | **Retained  Earnings** | ** ** | **Comprehensive  Income (Loss)** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** |
|----------------------------------------------------------------------|------------|---------------------------|------------|------------------------|------------|---------------------------------------|------------|-----------------------------------------------------------|------------|
|                                                                 |       |                      |       |                   |       |                                  |       |                                                      |       |
| Balance - September 30,  2003                                        |       | $                         | 10,842,237 |                   | $          | 3,522,028                             |       |                                                      |       | $ | (217,441 | ) |
|                                                                 |       |                      |       |                   |       |                                  |       |                                                      |       |
| Net income                                                           |       |                      |       | 7,853,831              |       | 7,853,831                             |       |                                                      |       |
|                                                                 |       |                      |       |                   |       |                                  |       |                                                      |       |
| Distributions                                                        |       |                      |       | (1,136,332             | )          |                                  |       |                                                      |       |
|                                                                 |       |                      |       |                   |       |                                  |       |                                                      |       |
| Other  comprehensive loss:                                           |       |                      |       |                   |       |                                  |       |                                                      |       |
| Less:  reclassification adjustment for losses included in net income |       |                      |       |                   |       | 217,441                               |       | 217,441                                                   |       |
|                                                                 |       |                      |       |                   |       |                                  |       |                                                      |       |
| Comprehensive  income                                                |       |                      |       |                   |       | $                                     | 8,071,272  |                                                      |       |   |
|                                                                 |       |                      |       |                   |       |                                  |       |                                                      |       |
| Balance - September 30,  2004                                        |       | $                         | 10,842,237 |                   | $          | 10,239,527                            |       |                                                      |       | $ | — |   |
|                                                                 |       |                      |       |                   |       |                                  |       |                                                      |       |
| Net income                                                           |       |                      |       | 14,098,701             |       |                                  |       |                                                      |       |
|                                                                 |       |                      |       |                   |       |                                  |       |                                                      |       |
| Distributions                                                        |       |                      |       | (5,012,314             | )          |                                  |       |                                                      |       |
|                                                                 |       |                      |       |                   |       |                                  |       |                                                      |       |
| Balance - September 30,  2005                                        |       | $                         | 10,842,237 |                   | $          | 19,325,914                            |       |                                                      |       | $ | — |   |
|                                                                 |       |                      |       |                   |       |                                  |       |                                                      |       |
| Net income                                                           |       |                      |       | 22,211,834             |       |                                  |       |                                                      |       |
|                                                                 |       |                      |       |                   |       |                                  |       |                                                      |       |
| Distributions                                                        |       |                      |       | (9,216,069             | )          |                                  |       |                                                      |       |
|                                                                 |       |                      |       |                   |       |                                  |       |                                                      |       |
| Balance - September 30, 2006                                         |       | $                         | 10,842,237 |                   | $          | 32,321,679                            |       |                                                      |       | $ | — |   |
|                                                                      |            |                           |            |                        |            |                                       |            |                                                           |            |  |  |  |  |

 

See Notes to Consolidated Financial Statements

F-6

----

**LITTLESIOUX CORN PROCESSORS, LLC AND SUBSIDIARYConsolidated Statements of Cash Flows**
| ** **                                                                         | ** ** | **Year Ended**   | ** ** | **Year Ended**   | ** ** | **Year Ended**   | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                         | ** ** | **September 30** | ** ** | **September 30** | ** ** | **September 30** | ** ** |
| ** **                                                                         | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| **Operating Activities**                                                           |       |                  |       |                  |       |                  |       |
| Net income                                                                         |       | $                     | 22,211,834 |                  | $          | 14,098,701            |       | $ | 7,853,831 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                  |       |                  |       |                  |       |
| Depreciation and  amortization                                                     |       | 4,916,150             |       | 3,885,650             |       | 3,519,323             |       |
| Minority  interest in subsidiary’s income                                     |       | 14,775,906            |       | 9,421,765             |       | 5,663,681             |       |
| Provision for  losses on receivables                                               |       | (20,000               | )          | -                     |       | -                     |       |
| Loss on hedging  activity                                                          |       | -                     |       | -                     |       | 312,777               |       |
| Change in  operating assets and liabilities:                                       |       |                  |       |                  |       |                  |       |
| Restricted cash                                                                    |       | -                     |       | 2,730,481             |       | (2,717,579            | )          |
| Recievables                                                                        |       | 67,870                |       | 32,252                |       | 2,380,756             |       |
| Inventory                                                                          |       | (320,178              | )          | 738,387               |       | (664,360              | )          |
| Derivative  instruments                                                            |       | (3,790,089            | )          | (748,188              | )          | 638,192               |       |
| Prepaid expenses                                                                   |       | (826,460              | )          | (519,869              | )          | 75,544                |       |
| Accounts payable                                                                   |       | (239,704              | )          | 363,135               |       | 578,272               |       |
| Accrued expenses                                                                   |       | (3,817,698            | )          | 4,091,103             |       | (161,328              | )          |
| Net cash  provided by operating activities                                         |       | 32,957,631            |       | 34,093,417            |       | 17,479,109            |       |
|                                                                               |       |                  |       |                  |       |                  |       |
| **Investing Activities**                                                           |       |                  |       |                  |       |                  |       |
| Proceeds from  investments                                                         |       | 10,869,891            |       | -                     |       | -                     |       |
| Payments for  investments                                                          |       | (22,665,047           | )          | (7,035,420            | )          | -                     |       |
| Capital expenditures                                                               |       | (6,439,043            | )          | (374,450              | )          | (2,230,069            | )          |
| Land option and  other                                                             |       | (189,616              | )          | -                     |       | -                     |       |
| Net cash used in  investing activities                                             |       | (18,423,815           | )          | (7,409,870            | )          | (2,230,069            | )          |
|                                                                               |       |                  |       |                  |       |                  |       |
| **Financing Activities**                                                           |       |                  |       |                  |       |                  |       |
| Net changes in  short-term debt                                                    |       | -                     |       | (38,829               | )          | (736,336              | )          |
| Payments of  long-term debt                                                        |       | (3,199,251            | )          | (7,984,636            | )          | (8,342,045            | )          |
| Redemption of  minority interest                                                   |       | -                     |       | -                     |       | (750,000              | )          |
| Distribution  paid to minority interest                                            |       | (6,120,759            | )          | (3,419,194            | )          | (913,430              | )          |
| Distribution  paid to members                                                      |       | (9,216,069            | )          | (5,012,314            | )          | (1,136,332            | )          |
| Net cash used in  financing activities                                             |       | (18,536,079           | )          | (16,454,973           | )          | (11,878,143           | )          |
|                                                                               |       |                  |       |                  |       |                  |       |
| **Net increase in cash and  equivalents**                                          |       | (4,002,263            | )          | 10,228,574            |       | 3,370,897             |       |
| ** **                                                                         |       |                  |       |                  |       |                  |       |
| **Cash  and equivalents****— Beginning of Period**                            |       | 14,135,954            |       | 3,907,380             |       | 536,483               |       |
| ** **                                                                         |       |                  |       |                  |       |                  |       |
| **Cash and equivalents — End of Period**                                      |       | $                     | 10,133,691 |                  | $          | 14,135,954            |       | $ | 3,907,380 |   |

 

See Notes to Consolidated Financial Statements

F-7

----

**LITTLE SIOUX CORNPROCESSORS, LLC AND SUBSIDIARYConsolidated Statements of Cash Flow**
| ** **                                             | ** ** | **Year Ended**   | ** ** | **Year Ended**   | ** ** | **Year Ended**   | ** ** |
|--------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                             | ** ** | **September 30** | ** ** | **September 30** | ** ** | **September 30** | ** ** |
| ** **                                             | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| **Supplemental  Cash Flow Information**                |       |                  |       |                  |       |                  |       |
| Cash paid for interest                                 |       | $                     | 1,255,615  |                  | $          | 1,102,945             |       | $ | 1,527,937 |   |
| Construction in progress included in accounts  payable |       | $                     | -          |                  | $          | 596,000               |       |   |   |
| Equipment acquired through a construction note         |       | $                     | -          |                  | $          | 5,400,000             |       | $ | - |   |
| Reduction in property and equipment due to debt        |       |                  |       |                  |       |                  |       |
| Forgiveness                                            |       | $                     | -          |                  | $          | -                     |       | $ | 90,000 |   |

 

See Notes to ConsolidatedFinancial Statements

F-8

----

**LITTLE SIOUX CORNPROCESSORS, LLC AND SUBSIDIARYNotes to Consolidated Financial StatementsSeptember 30, 2006 and 2005**

**Note 1:  Nature of Operations**

The “Company” represents Little Sioux Corn Processors,LLC (the “LLC”) and its subsidiary LSCP, LLLP (“LSCP”).  The Companyoperates a 52 million gallon ethanol plant, located near Marcus,Iowa.   In July 2005, the Companycompleted its expansion, from a 40 million gallon plant to 52 million gallonplant.  The Company is currently in theprocess of expanding the plant from a 52 million gallon plant to a 92 milliongallon plant, as described in Note 15.  TheCompany sells its production of ethanol, distiller’s grains with solubles,modified wet distillers grains with solubles and corn oil in the ContinentalUnited States.

**Note 2:  Summary of SignificantAccounting Policies**

**Principles of Consolidation**

The consolidated financial statements include theaccounts of the LLC and its 60.15% owned subsidiary, LSCP.  All significant inter-company balances andtransactions are eliminated in consolidation.

**Minority Interest**

Amounts recorded as minority interest on the balancesheet relate to the net investment by limited partners in LSCP plus or minusany allocation of income or loss of LSCP.  After giving effect to certainspecial allocations, income and losses of LSCP will be allocated to thepartners based upon their respective percentage of partnership unitsheld.  The minority interest share of the comprehensive income for the fiscalyears ending September 30, 2006, 2005, and 2004, is $14,775,906,$9,421,765, and $5,663,681, respectively.

Minority interest has been classified on theaccompanying balance sheet to reflect it as a separate line item rather thanincluding it as part of equity.  This classification has no impact on netincome or earnings per unit.

**Use of Estimates**

The preparation of these consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

**Revenue Recognition**

Revenue from the sale of the Company’s products isrecognized at the time title of the goods and all risks of ownership transferto the customers.  This generally occursupon shipment to the customer or when the customer picks up the goods.

The Company records revenue from federal and stateincentive programs related to the production of ethanol when the Company hassold the ethanol and completed all the requirements of the applicable incentiveprogram.

The Company has an ethanol marketing agreement with ADM,a related party, whereby ADM purchases all of the Company’s ethanol. TheCompany agrees to pay ADM a fixed price per gallon for every gallon of ethanolproduced by the Company and sold by ADM. The initial term is until April 2007with renewal options thereafter in one-year increments.

**Cash and Equivalents**

The Company considers all highly liquid debtinstruments purchased with a maturity of three months or less to be cash andequivalents.

The Company maintains its accounts primarily at twofinancial institutions.  At times throughout the year, the Company’s cashand equivalents balances, which include money market funds and debt instrumentwith a maturity of less than three months, may exceed amounts insured by theFederal Deposit Insurance Corporation.  At September 30, 2006, andSeptember 30, 2005, such money market funds and debt instruments approximated$4,124,000 and 

F-9

----

** **

$11,779,000, respectively.  The Company does not believe it is exposed toany significant credit risk on cash and equivalents.

**Restricted Cash**

The Company is periodically required to maintain cashbalances at its broker related to derivative instrument positions.

**Investments**

The Company includes in investments certain debtinstruments with maturities greater than three months and marketablesecurities, both classified as “available for sale.”   The Company maintains marketable securities aspart of the deferred compensation plan and classifies these amounts aslong-term investments.  Accordingly, a corresponding liability has beenrecorded in accrued expenses. Investments are carried at their estimated fair market value based onquoted mark prices.  

**Accounts Receivable**

Credit terms are extended to customers in the normalcourse of business.  The Company performsongoing credit evaluations of its customers’ financial condition and, generally,requires no collateral.

Accounts receivable are recorded at their estimatednet realizable value.  Accounts areconsidered past due if payment is not made on a timely basis in accordance withthe Company’s credit terms.  Accountsconsidered uncollectible are written off. The Company’s estimate of the allowance for doubtful accounts is basedon historical experience, its evaluation of the current status of receivables,and unusual circumstances, if any.  AtSeptember 30, 2006, the Company was of the belief that such amounts would becollectable and thus an allowance was not considered necessary.  At September 30, 2005, the Company had anallowance for doubtful accounts of $20,000.

**Inventory**

Inventory consists of raw materials, work in process,and finished goods.  Corn is the primaryraw material and, along with other raw materials, is stated at the lower ofaverage cost or market.  Finished foodsconsist of ethanol produced and DDGS, MWDGS, and corn oil, and are stated at thelower of first-in, first-out, (FIFO method) cost or market.

**Property and Equipment**

Property and equipment are stated at the lower of costor estimated fair value.  Depreciation iscomputed by the straight-line method over the following estimated useful lives:

| Asset Description            | ** ** | ** **  | ** ** | **Years** | ** ** |
|-----------------------------------|------------|-------------|------------|-----------|------------|
| Land  improvements                |       | 5 — 40 |       |
| Buildings and  improvements       |       | 7 — 40 |       |
| Machinery and  equipment          |       | 3 — 20 |       |
| Office equipment and  furnishings |       | 3 — 10 |       |

 

Maintenance and repairs are expensed as incurred;major improvements and betterments are capitalized.  The present value of capital leaseobligations are classified as long-term debt and the related assets areincluded in equipment.  Amortization ofequipment under capital lease is included in depreciation expense.

The Company reviews its property and equipmentimpairment whenever events indicate that the carrying amount of the asset maynot be recoverable.  An impairment lossis recorded when the sum of the future cash flows is less than the carryingamount of the asset.  An impairment lossis measured as the amount by which the carrying amount of the asset exceeds itsfair value.

F-10

----

** **

**Deferred Loan Costs**

Costs associated with the issuance of the constructionloan discussed in Note 7 are recorded as deferred loan costs, net ofaccumulated amortization.  Loan costs areamortized to operations over the life of term note #2 using the effectiveinterest method.

**Derivative Instruments**

The Companyaccounts for derivative instruments and hedging activities in accordance withSFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, asamended. SFAS No. 133 requires a company to evaluate its contracts to determinewhether the contracts are derivatives. Certain contracts that literally meet the definition of a derivative maybe exempted from SFAS No. 133 as normal purchases or normal sales.  Normal purchases and normal sales are contractsthat provide for the purchases or sale of something other than a financialinstrument or derivative instrument that will be delivered in quantitiesexpected to be used or sold over a reasonable period in the normal course ofbusiness.  Contracts that meet therequirements of normal are documented as normal and exempted from accountingand reporting requirements of SFAS No. 133.

In order to reducethe risk caused by market fluctuations of corn, natural gas and interest rates,the Company enters into option, futures and swap contracts.  These contracts are used to fix the purchaseprice of the Company’s anticipated requirements of corn and natural gas inproduction activities and limit the effect of increases in interest rates.  The fair value of these contracts is based onquoted prices in active exchange-traded or over-the-counter markets.  The fair value of the derivatives iscontinually subject to change due to the changing market conditions.  The Company does not typically enter intoderivative instruments other than for hedging purposes. On the date thederivative instrument is entered into, the Company will designate thederivative as hedge. Changes in the fair value of a derivative instrument thatis designated as, and meets all of the required criteria, for a cash flow or fairvalue hedge is recorded in accumulated other comprehensive income andreclassified into earnings as the hedged items affect earnings. Changes thefair value of derivative instrument that is not designated as, and accountedfor, as a cash flow or fair value hedge is recorded in current period earnings.Although certain derivative instruments may not be designated as, and accountedfor, as a cash flow or fair value hedge, they are effective economic hedges ofspecified risks. 

**Benefit Plans**

The Company has a 401(k) plan covering substantially allemployees who meet specified age and service requirements.  Under thisplan, the Company makes a matching contribution of up to 4% of the participants’eligible wages.

The Company has a deferred compensation plan forcertain employees providing supplemental benefits.  The Board may annuallygrant a discretionary deferred bonus under the plan to each participant in anamount up to twenty percent of each participant’s base salary for the priorcalendar year.  Costs of the plan are recognized during the employee’sservice period for the Company so that the benefits are accrued when paymentsbegin.  Participants are fully vested six years after the grant dateprovided that the participant is employed full-time. Deferred compensationamounts are included in accrued expenses.

**Income Taxes**

The LLC and LSCP are treated as partnerships forfederal and state income tax purposes and generally do not incur incometaxes.  Instead, their earnings andlosses are included in the income tax returns of the members and partners.  Therefore, no provision or liability forfederal or state income taxes has been included in these financialstatements.  Differences betweenconsolidated financial statement basis of assets and tax basis of assets isrelated to capitalization and amortization of organization and start-up costsfor tax purposes, whereas these costs are expensed for financial statementpurposes.  In addition, the Company usesthe modified accelerated cost recovery system method (MACRS) for taxdepreciation instead of the straight-line method that is used for bookdepreciation, which also causes temporary differences.

**FairValue of Financial Instruments**

The carrying value of cash and equivalents approximatestheir fair value.

The Company believes the carrying amount of derivativeinstruments approximates fair value based on quote market prices.

F-11

----

** **

It is not currently practicable to estimate fair valueof the line of credit and notes payable to the lending institution.  Because these agreements contain certainunique terms, conditions, covenants, and restrictions, as discussed in Notes 8and 9, there are no readily determinable similar instruments on which to basean estimate of fair value.

**Environmental Liabilities**

The Company’s operations are subject to environmentallaws and regulations adopted by various governmental entities in thejurisdiction in which it operates.  These laws require the Company toinvestigate and remediate the effects of the release or disposal of materialsat its location.  Accordingly, the Company has adopted policies,practices, and procedures in the areas of pollution control, occupationalhealth, and the production, handling, storage and use of hazardous materials toprevent material environmental or other damage, and to limit the financialliability, which could result from such events.  Environmental liabilitiesare recorded when the liability is probable and the costs can reasonablyestimated.

**Reclassifications**

The presentation of certain items in the consolidatedbalance sheet for 2005 and consolidated statements of operations and cash flowsfor September 30, 2005 and 2004, has been changed to conform to theclassifications used at September 30, 2006. These reclassifications had no effect on members’ equity, net income, orcash flows previously reported.

**Note 3. Investments**

The cost and fair value of the Company’s investmentsare as follows at September 30:

|                                                         | ** ** | **2006**                | ** **     |
|---------------------------------------------------------|------------|-------------------------|----------------|
| ** **                                              | ** ** | **Amortized Cost** | ** **     | **Fair Value** | ** ** |
| Short-term  investments                                 | ** ** | ** **              | ** **     | ** ** | ** ** |
| Certificates of deposit                                 |       | $                       | 1,000,000      |   | $ | 1,000,000 |   |
| Marketable securities — government notes and bonds |       | 17,726,834              |           | 17,726,834 |   |
| Total                                                   |       | 18,726,834              |           | 18,726,834 |   |
|                                                    |       |                    |           |   |   |
| Other  investments                                      |       |                    |           |   |   |
| Marketable securities — government notes and bonds |       | 103,742                 |           | 103,742 |   |
|                                                    |       |                    |           |   |   |
| **Total  investments**                                  | ** ** | **$**                   | **18,830,576** | ** ** | **$** | **18,830,576** | ** ** |

 

|                                                         | ** ** | **2005**                | ** **    |
|---------------------------------------------------------|------------|-------------------------|---------------|
| ** **                                              | ** ** | **Amortized Cost** | ** **    | **Fair Value** | ** ** |
| Short-term  investments                                 | ** ** | ** **              | ** **    | ** ** | ** ** |
| Certificates of deposit                                 |       | $                       | 5,000,000     |   | $ | 5,000,000 |   |
| Marketable securities — government notes and bonds |       | 1,987,992               |          | 1,987,992 |   |
| Total                                                   |       | 6,987,992               |          | 6,987,992 |   |
|                                                    |       |                    |          |   |   |
| Other  investments                                      |       |                    |          |   |   |
| Marketable securities — government notes and bonds |       | 48,000                  |          | 48,000 |   |
|                                                    |       |                    |          |   |   |
| **Total  investments**                                  | ** ** | **$**                   | **7,035,992** | ** ** | **$** | **7,035,992** | ** ** |

 

There were no material realized or unrealized gains orlosses for fiscal 2006, 2005, or 2004. 

F-12

----

Shown below are the amortized cost and estimated fairvalue of securities with fixed maturities at September 30, 2006, by contractualmaturity dates.  Actual maturities maydiffer from contractual maturities because certain securities may retain earlycall or prepayment rights.

|                                           | ** ** | **Amortized Cost** | ** **     | **Fair Value** | ** ** |
|-------------------------------------------|------------|-------------------------|----------------|---------------------|------------|
| Due within one year                       |       | $                       | 18,739,657     |                | $          | 18,739,657 |   |
| Due after one year but  within five years |       | 90,919                  |           | 90,919              |       |
|                                      |       |                    |           |                |       |
| **Total investments**                     | ** ** | **$**                   | **18,830,576** | ** **          | **$**      | **18,830,576** | ** ** |

 

**Note 4:  Inventory**

Inventory is comprised ofthe following at:

|                 | ** ** | **September 30, 2006** | ** **    | **September 20, 2005** | ** ** |
|-----------------|------------|----------------------------------|---------------|----------------------------------|------------|
| Raw materials   |       | $                                | 1,001,783     |                             | $          | 579,568 |   |
| Work in process |       | 364,036                          |          | 437,872                          |       |
| Finished goods  |       | 300,576                          |          | 328,777                          |       |
| **Totals**      | ** ** | **$**                            | **1,666,395** | ** **                       | **$**      | **1,346,217** | ** ** |

 

**Note 5: Derivative Instruments**

At September 30, 2006 and September 30, 2005, theCompany had recorded an asset for derivative instruments related to corn andnatural gas option and futures positions of $4,356,698 and $496,853, respectively.  None of the positions open at September 30,2006 were designated as cash flow or fair value hedges.  The Company hasrecorded a gain of approximately $1,311,000 in cost of goods sold for thetwelve months ended September 30, 2006. The Company had recorded a loss of $2,697,000 and $ 3,851,000 in cost ofgoods sold for the twelve months ended September 30, 2005 and 2004,respectively.

At September 30, 2005, the Company had an interestrate cap as described in Note 9 with a fair value of $69,756, respectively,recorded as an asset with derivative instruments.  The interest rate capwas not designated as a cash flow or fair value hedge.  The Companycharged interest expense with a loss of $69,756 during fiscal 2006 as theinterest rate cap expired in June 2006. The Company offset interest expense with a gain $39,000 during fiscal2005.  The Company charged interestexpense with a loss of $50,000 for fiscal 2004.

**Note 6: Construction in Progress**

The Company continues to make payments for theexpansion to a 92 million gallon plant. During fiscal 2006, the Company has notincurred any interest nor has the Company capitalized any interest related toconstruction in progress.  The Company anticipates the expansion will costapproximately $73,000,000.

During fiscal 2005, the Company capitalized interestrelated to the expansion to a 52 million gallon plant of $26,526.

**Note 7:Deferred Loan Costs**

The Company had deferred loan costs of $487,060 withaccumulated amortization of $345,948 at September 30, 2006.  AtSeptember 30, 2005, the Company has deferred loan costs of $487,060 withaccumulated amortization of $249,419.  The amortization expense related tothe deferred loan costs for fiscal years 2006, 2005, and 2004 was approximately$97,000, $108,000 and $118,000, respectively.

**Note 8:  Revolving Promissory Note**

Under the terms of thefinancing agreement with the lending institution, the Company has a revolvingpromissory note of up to $3,500,000, subject to borrowing baselimitations.  In April 2006, the lendinginstitution renewed the revolving 

F-13

----

promissory note until March 2007.  The revolving promissory note incurs interestmonthly at the one month LIBOR plus 280 basis points.  The Company pays a commitment fee of .125% onthe unused portion of the revolving promissory note.  There were no balances outstanding on therevolving promissory note at September 30, 2006 or 2005.  The revolving promissory note as well as theterm notes described in Note 9 are subject to protective covenants under acommon financing agreement requiring the Company to maintain various financialratios, including debt service coverage and minimum net worth and workingcapital requirements and secured by all business assets.

**Note 9: Long-Term Liabilities**

Long-term liabilitiesconsists of the following:
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | ** ** | **September 30, 2006** | ** ** | **September 30, 2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| Term note 2 has fixed principal payments due quarterly with interest  at the three month LIBOR plus 280 basis points, which totaled 8.20% and 6.67%  at September 30, 2006 and 2005, respectively, payable in full on June 1,  2008.  As part of the financing agreement, the Company accepted a fixed  rate option on term note 2 by entering into an interest rate swap which  effectively fixes the interest rate on this term note at 5.79% until this  term note is repaid on June 1, 2008. The Company did not designate the  interest rate swap as a cash flow or fair value hedge. The value of the  interest rate swap is not significant. | ** ** | **$11,308,363**        |       | $12,732,447            |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | ** **             |       |                   |       |
| Term note 3 bears interest at the three month LIBOR plus 280 basis  points, which totaled 8.20% and 6.67% at September 30, 2006 and 2005,  respectively.  Term note 3 is payable in full on June 1,  2008.  The Company is required to make quarterly payments of $506,588  applied first to accrued interest on term note 4.  The remaining amount  is applied to accrued interest on term note 3 and then to principal until  this note is paid in full or until maturity.  After term note 3 is  repaid, payments are applied first to accrued interest and then to principal  on term note 4 until paid in full or until maturity.    | ** ** | **5,090,129**          |       | 1,293,643              |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | ** **             |       |                   |       |
| Term note 4 bears interest at the one month LIBOR plus 280 basis  points.  Term note 4 is payable in full on June 1, 2008.  Term note #4 had no outstanding balance as  of June 30, 2006. Term note 4 allows subsequent borrowings up to the original  $5,000,000 to the extent of principal payments made until maturity and  requires a commitment fee of .25% on any used portion.                                                                                                                                                                                                                                                               | ** ** | **-**                  |       | -                      |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | ** **             |       |                   |       |
| Term note 5 was added to term note #3 on October 1, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | ** ** | **-**                  |       | 5,400,000              |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | ** **             | ** ** | ** **             | ** ** |
| Note payable to Iowa Energy Center, due in monthly payments of $3,472  without interest, maturing on January 29, 2009, secured by real estate,  subordinated to term notes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | ** ** | **97,222**             |       | 138,889                |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | ** **             |       |                   |       |
| Note payable to bank due in monthly payments of $5,921 including  interest at 6% maturing on January 29, 2009, secured by real estate,  subordinated to term notes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** | **108,136**            |       | 149,986                |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | ** **             | ** ** | ** **             | ** ** |
| Note payable to Iowa Department of Economic Development, due in sixty  monthly installments beginning August 1, 2004 of $1,167 without interest,  payable in full on July 1, 2009, secured by all equipment.                                                                                                                                                                                                                                                                                                                                                                                                                                                       | ** ** | **178,500**            |       | 192,500                |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | ** **             |       |                   |       |
| Capital lease obligation, due in monthly installments initially  totaling $6,658 commencing April 1, 2003 including implicit interest at 3.67%  through March 1, 2008, secured by leased equipment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** | **116,428**            |       | 190,564                |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | ** **             |       |                   |       |
| Totals                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | ** ** | **$16,898,778**        |       | $20,098,029            |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | ** **             |       |                   |       |
| Less amounts due within  one year                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | ** ** | **3,394,196**          |       | 4,005,714              |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | ** **             |       |                   |       |
| Totals                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | ** ** | **$13,504,582**        |       | $16,092,315            |       |

 

As part of the financing agreement, the premium abovethe LIBOR on the term notes and revolving promissory note has been reducedbased on a financial ratio from the original 380 basis points.  Thefinancing agreement requires an annual servicing fee of $50,000 for five years.  The Company entered into an interest rate capto reduce the risk of increases in interest rates. The interest rate cap wasbased on a $10,000,000 notional amount and capped interest rate increases at6.8%. The interest rate cap expired in June 2006.

F-14

----

The estimated maturities of long-term liabilities atSeptember 30, 2006 are as follows:

| 2007                         |   | $          | 3,394,196  |   |
|------------------------------|--------|------------|------------|--------|
| 2008                         |   | 13,323,662 |       |
| 2009                         |   | 180,920    |       |
| Total long-term  liabilities |   | $          | 16,898,778 |   |

 

**Note 10: Leases**

The Company leasesequipment under operating and capital leases through 2008.  The Company isgenerally responsible for maintenance, taxes, and utilities for leasedequipment.  Equipment under operating leases includes rail cars andvarious other equipment.  Rent expense for operating leases wasapproximately $187,000, $229,000, and $312,000 for fiscal years 2006, 2005,and 2004, respectively.  During fiscal 2006, the Company rented railcars on a month-to-month basis and recognized approximately $60,000 in otherincome.  During fiscal 2005, the Company recognized rail car rental incomeapproximately $89,000 in other income.  Therewas no rail car rental income during fiscal 2004.  During fiscal 2005, the Company also recordedincome of approximately $90,000 on the permanent transfer of 30 rail cars of a50 rail car lease to a third party.  Thistransfer indemnified the Company from any liability and, as a result, theCompany transferred all rights and privileges to the 30 rail cars.

Equipment under capitalleases is as follows:
| ** **                | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
|---------------------------|------------|------------------------|------------|------------------------|------------|
|                           | ** ** | **2006**               | ** ** | **2005**               | ** ** |
| Equipment                 |       | $                      | 451,437    |                   | $          | 451,437 |   |
| Accumulated  Amortization |       | 105,212                |       | 75,116                 |       |
|                      |       |                   |       |                   |       |
| Total                     |       | $                      | 346,225    |                   | $          | 376,321 |   |

 

At September 30,2006, the Company had the following minimum commitments, which at inception hadnon-cancelable terms of more than one year:

|                                                                                              | ** ** | **Operating  Lease** | ** ** | **Capital  Lease** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| 2007                                                                                         |       | $                    | 187,371    |               | $          | 79,893 |   |
| 2008                                                                                         |       | 168,054              |       | 39,946             |       |
| 2009                                                                                         |       | 54,480               |       | ——       |       |
| Total minimum  lease commitments                                                             |       | $                    | 409,905    |               | 119,839    |   |
| Less amount  representing interest                                                           |       |                 |       | 3,411              |       |
|                                                                                         |       |                 |       |               |       |
| Present value of minimum lease commitments, included in the preceding  long-term liabilities |       |                 |       | $                  | 116,428    |   |

 

**Note11:  Members’ Equity**

On January 17,2006, the Board of Directors declared a distribution of $15,361,000 from LSCPto the partners, which was paid in February 2006.  The LLC received approximately $9,240,000 ofthis distribution.  In February 2006, theLLC paid $842.34 per unit to the LLC unit holders.

On January 18, 2005, theBoard of Directors declared a distribution of $4,000,000 from LSCP to thepartners, which was paid in February 2005. The LLC received approximately $2,406,000 of this distribution.  In February 2005, the LLC paid $219.92 perunit to the LLC unit holders.

On March 15, 2005, theBoard of Directors declared a distribution of $3,000,000 from LSCP to thepartners, which was paid in April 2005.  The LLC received approximately$1,805,000 of this distribution.  In April 2005, the LLC paid $159.96 perunit to the LLC unit holders.

On September 20, 2005,the Board of Directors declared a distribution of $1,581,000 from LSCP to thepartners, which was paid in September 2005. The LLC received approximately $951,000 of this distribution.  In September 2005, the LLC paid $78.24 perunit to the LLC unit holders.

On January 20, 2004, theBoard of Directors declared a distribution of $1,050,000 from LSCP to thepartners, which was paid in February 2004. The LLC received approximately $615,000 of this distribution.  In February 2004, the LLC paid approximately$51.29 per unit to the LLC unit holders.

On August 17, 2004, theBoard of Directors declared a distribution of $1,200,000 from LSCP to thepartners, which was paid in September 2004. The LLC received approximately $722,000 of this distribution.  In September 2004, the LLC paid approximately$52.57 per unit to the LLC unit holders.

**Note 12:  Employee Benefit Plans**

The Company recorded contributions to the 401(k) planof approximately $53,000, $33,000 and $28,000 in fiscal 2006, 2005 and 2004,respectively.

F-15

----

Compensation expense related to the deferredcompensation plan was approximately $28,000 and $48,000 in fiscal 2006 and2005, respectively.  There were nodeferred compensation amounts in fiscal 2004.

**Note 13:  Related PartyTransactions**

The Company has balancesand transactions in the normal course of business with various relatedparties.  Significant related partyactivity affecting consolidated financial statements are as follows:

| Balance Sheet  | ** ** | ** ** | ** ** | **September 30, 2006** | ** ** | **September 30, 2005** | ** ** |
|---------------------|------------|------------|------------|----------------------------------|------------|----------------------------------|------------|
| Accounts receivable |       | $          | 2,236,000  |                             | $          | 2,272,000                        |       |
| Accounts payable    |       | 137,000    |       | 3,923,000                        |       |
|                     |            |            |            |                                  |            |                                  |            |  |  |

 

| Statements of Operations | ** ** | ** ** | ** **  | **Year Ended  September 30, 2006** | ** ** | **Year Ended  September 30, 2005** | ** ** | **Year Ended  September 30, 2004** | ** ** |
|------------------------------------|------------|------------|-------------|---------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| Revenues                           |       | $          | 101,069,000 |                                              | $          | 82,549,000                                        |       | $                                                 | 73,309,000 |   |
| Expenses                           |       | 14,121,000 |        | 11,672,000                                        |       | 15,840,000                                        |       |
|                                    |            |            |             |                                                   |            |                                                   |            |                                                   |            |  |  |  |

 

**Note 14:  Income Taxes**

The differences betweenconsolidated financial statement basis and tax basis of assets are as follows:

|                                                                                             | ** ** | **September 30  2006** | ** ** | **September 30  2005** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Consolidated financial  statement basis of assets                                           |       | $                           | 91,556,615 |                        | $          | 77,162,356 |   |
| Plus: organization and  start-up costs capitalized, net                                     |       | 238,211                     |       | 397,163                     |       |
| Plus: deferred  compensation amounts                                                        |       | 74,247                      |       | 48,000                      |       |
| Less: accumulated tax  depreciation and amortization greater than financial statement basis |       | (17,954,460)                |       | (18,585,418                 | )          |
|                                                                                        |       |                        |       |                        |       |
| Income tax basis of assets                                                                  |       | $                           | 73,914,613 |                        | $          | 58,974,101 |   |

 

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

**Note 15:**  **Commitmentsand Contingencies**

**Contractual Obligations**

The following tableprovides information regarding the contractual obligations of the Company as ofSeptember 30, 2006:

|                               | ** ** | **Total** | ** ** | **Less than One Year** | ** ** | **One to Three Years** | ** ** |
|-------------------------------|------------|-----------|------------|---------------------------------------|------------|---------------------------------------|------------|
| Long-Term Debt  Obligations   |       | $         | 16,898,778 |                                  | $          | 3,394,196                             |       | $ | 13,504,582 |   |
| Operating Lease  Obligations  |       | $         | 409,905    |                                  | $          | 187,371                               |       | $ | 222,534 |   |
| Purchase Obligations          |       | $         | 66,306,619 |                                  | $          | 65,775,127                            |       | $ | 531,492 |   |
| Total Contractual Obligations |       | $         | 83,615,302 |                                  | $          | 69,356,694                            |       | $ | 14,258,608 |   |

 

F-16

----

**Land Options**

In June 2006, the Company entered into a land optionagreement for $15,000 that will be credited against the purchases price of$2,333,000 should the Company decide to exercise the option.  The land is expected to be used for thepotential 100 MGPY ethanol plant that is anticipated to be located near Akron,Iowa.  The land option commences on thedate of the execution of the option agreement and continues for until December19, 2006.  The option was extended toJune 19, 2007 for an additional payment of $10,000.  If the option is not exercised after thespecified date, the land option agreement becomes null and void.  The land included in this option and the onedescribed below entered into in June 2006 are the primary building sites, andboth options must be exercised together.

In June 2006, the Company entered into a land optionagreement for $15,000 that will be credited against the purchase price of$2,100,000 should the Company decide to exercise the option.  The land is expected to be used for thepotential 100 MGPY ethanol plant that is anticipated to be located near Akron,Iowa.  The land option commences on thedate of the execution of the option agreement and continues for until December19, 2006.  The option was extended toJune 19, 2007 for an additional payment of $10,000.  If the option is not exercised after thespecified date, the land option agreement becomes null and void.  The land included in this option and the onedescribed above entered into in June 2006 are the primary building sites, andboth options must be exercised together.

The Company had two options on alternate sites thathave expired.

**Expansion Contract**

In September 2006, the Company entered into aDesign-Build Contract with Fagen, Inc., a related party, for the constructionof a 40 million gallon per year expansion to the Company’s current plant inMarcus, Iowa.  The contract value isapproximately $47,860,000.  Theconstruction period on the contract is expected to last approximately one yearfrom the notice to proceed.

**Legal Proceedings**

TheCompany was involved in a dispute with ADM involving the ethanol marketingagreement.  The Company settled the claim by agreeing to pay ADMapproximately $3,900,000, which the Company recorded as of September 30,2005 in other income and expense.  Thisamount was paid in February 2006.

**Note 16:  Quarterly Financial Data (Unaudited)**

Summary quarterly resultsare as follows:
| **Fiscal year  ended September 30, 2006** | ** ** | ** ** | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|------------------------------------------------|------------|------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| Revenues                                       |       | $          | 23,141,931 |               | $          | 27,498,079          |       | $                  | 31,146,507 |                | $          | 31,999,149 |   |
| Gross profit                                   |       | 7,770,477  |       | 7,562,173          |       | 11,401,189          |       | 13,373,792         |       |
| Operating income                               |       | 7,095,713  |       | 6,712,372          |       | 10,646,392          |       | 12,651,900         |       |
| Income before minority  interest               |       | 6,993,492  |       | 6,654,834          |       | 10,646,950          |       | 12,692,464         |       |
| Minority interest in  subsidiary income        |       | 2,787,012  |       | 2,659,079          |       | 4,250,481           |       | 5,079,334          |       |
| Net income                                     |       | 4,206,480  |       | 3,995,755          |       | 6,396,469           |       | 7,613,130          |       |
| Basic and diluted earnings per unit            |       | 384.47     |       | 365.21             |       | 584.63              |       | 695.84             |       |
|                                                |            |            |            |                    |            |                     |            |                    |            |                     |            |  |  |  |  |

 
| **Fiscal year ended September 30, 2005** | ** ** | ** ** | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| Revenues                                                          |       | $          | 22,975,735 |               | $          | 23,835,684          |       | $                  | 23,101,306 |                | $          | 25,968,695 |   |
| Gross profit                                                      |       | 5,907,410  |       | 8,135,675          |       | 7,887,907           |       | 8,693,342          |       |
| Operating income                                                  |       | 5,211,539  |       | 7,470,042          |       | 7,279,454           |       | 8,028,497          |       |
| Income before minority  interest                                  |       | 4,993,564  |       | 7,375,228          |       | 7,146,738           |       | 4,004,936          |       |
| Minority interest in  subsidiary income                           |       | 1,992,348  |       | 2,965,331          |       | 2,858,942           |       | 1,605,144          |       |
| Net income                                                        |       | 3,001,216  |       | 4,409,897          |       | 4,287,796           |       | 2,399,792          |       |
| Basic and diluted earnings per unit                               |       | 274.31     |       | 403.06             |       | 391.90              |       | 219.34             |       |
|                                                                   |            |            |            |                    |            |                     |            |                    |            |                     |            |  |  |  |  |

 

F-17

----

 
| **Fiscal year ended September 30, 2004** | ** ** | ** ** | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| Revenues                                                          |       | $          | 19,266,908 |               | $          | 20,203,296          |       | $                  | 21,497,087 |                | $          | 24,573,643 |   |
| Gross profit (loss)                                               |       | 3,013,255  |       | 8,040,239          |       | (2,591,303          | )          | 2,429,174          |       |
| Operating income (loss)                                           |       | 2,295,699  |       | 7,387,346          |       | (3,223,140          | )          | 1,697,467          |       |
| Income (loss) before  minority interest                           |       | 4,529,123  |       | 11,295,095         |       | (3,900,172          | )          | 1,593,466          |       |
| Minority interest in  subsidiary income (loss)                    |       | 1,880,548  |       | 4,715,589          |       | (1,592,236          | )          | 659,780            |       |
| Net income (loss)                                                 |       | 2,648,575  |       | 6,579,506          |       | (2,307,936          | )          | 933,686            |       |
| Basic and diluted  earnings (loss) per unit                       |       | 242.08     |       | 601.36             |       | (210.94             | )          | 85.33              |       |
|                                                                   |            |            |            |                    |            |                     |            |                    |            |                     |            |  |  |  |  |

 

The above quarterly financial data is unaudited, butin the opinion of management, all adjustments necessary for a fair presentationof the selected data for these periods presented have been included.

 

F-18

----

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ONSUPPLEMENTARY INFORMATION**

Boardof DirectorsLittle Sioux Corn Processors, LLC and SubsidiaryMarcus, Iowa

Our report on our audits of the consolidated financialstatements of Little Sioux Corn Processors, LLC and Subsidiary for the fiscalyears ended September 30, 2006, 2005 and 2004 appears onpage F-2.  Those audits were conducted for the purpose of forming anopinion on the consolidated financial statements taken as a whole.  Thesupplementary information on pages F-20 through F-24 is presented for thepurposes of additional analysis and is not a required part of the basicconsolidated financial statements.  Such information has not beensubjected to the auditing procedures applied in the audits of the consolidatedfinancial statements and, accordingly, we express no opinion on it.
|        |   | /s/ Boulay, Heutmaker, Zibell & Co.  P.L.L.P. |
|--------|--------|--------------------------------------------------------|
|   |   | Certified Public Accountants                           |

 

Minneapolis,MinnesotaDecember 27, 2006

F-19

----

**LITTLE SIOUX CORNPROCESSORS, LLC AND SUBSIDIARYConsolidating Balance Sheet**
| ** **                                            | ** ** | **September 30** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **2006**              | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **LSCP, LLLP**   | ** ** | **Little Sioux  Processors, LLC** | ** ** | **Elimination** | ** ** | **Consolidated** | ** ** | **2005**

**Consolidated** | ** ** |
|                                                  |       |                  |       |   |   |   |   |   |   |   |   |
| **Assets**                                            |       |                  |       |   |   |   |   |   |   |   |   |
|                                                  |       |                  |       |   |   |   |   |   |   |   |   |
| **Current Assets**                                    |       |                  |       |   |   |   |   |   |   |   |   |
| Cash and  equivalents                                 |       | $                     | 10,130,695 |   | $ | 2,996 |   | $ | — | ** ** | $ | 10,133,691 |   | $ | 14,135,954 |   |
| Short-term  investments                               |       | 18,726,834            |       | — |   | — | ** ** | 18,726,834 |   | 6,987,420 |   |
| Accounts  receivable                                  |       | 2,749,007             |       | — |   | (93,553 | **)** | 2,655,454 |   | 2,703,324 |   |
| Inventory                                             |       | 1,666,395             |       | — |   | — | ** ** | 1,666,395 |   | 1,346,217 |   |
| Derivative  instruments                               |       | 4,356,698             |       | — |   | — | ** ** | 4,356,698 |   | 566,609 |   |
| Prepaid expenses                                      |       | 1,835,214             |       | — |   | — | ** ** | 1,835,214 |   | 1,008,754 |   |
| Total current  assets                                 |       | 39,464,843            |       | 2,996 |   | (93,553 | ) | 39,374,286 |   | 26,748,278 |   |
|                                                  |       |                  |       |   |   |   |   |   |   |   |   |
| ** **                                            |       |                  |       |   |   |   |   |   |   |   |   |
| **Property and Equipment**                            |       |                  |       |   |   |   |   |   |   |   |   |
| Land and  improvements                                |       | 2,826,839             |       | — |   | — | ** ** | 2,826,839 |   | 2,762,708 |   |
| Plant buildings  and equipment                        |       | 57,971,654            |       | — |   | — | ** ** | 57,971,654 |   | 55,286,305 |   |
| Office buildings  and equipment                       |       | 213,928               |       | — |   | — | ** ** | 213,928 |   | 195,298 |   |
|                                                  |       | 61,012,421            |       | — |   | — | ** ** | 61,012,421 |   | 58,244,311 |   |
| Less accumulated  depreciation                        |       | (13,649,392           | )          | — |   | — | ** ** | (13,649,392 | **)** | (8,829,771 | ) |
|                                                  |       | 47,363,029            |       | — |   | — | ** ** | 47,363,029 |   | 49,414,540 |   |
| Construction in  progress                             |       | 4,384,830             |       | — |   | — | ** ** | 4,384,830 |   | 713,898 |   |
| Net property and  equipment                           |       | 51,747,859            |       | — |   | — | ** ** | 51,747,859 |   | 50,128,437 |   |
|                                                  |       |                  |       |   |   |   |   |   |   |   |   |
| **Other Assets**                                      |       |                  |       |   |   |   |   |   |   |   |   |
| Long-term  investments                                |       | 103,742               |       | — |   | — | ** ** | 103,742 |   | 48,000 |   |
| Investments in  LSCP, LLLP                            |       | —                |       | 43,254,473 |   | (43,254,473 | **)** | — |   | — |   |
| Land options and  other                               |       | 189,616               |       | — |   | — | ** ** | 189,616 |   | — |   |
| Deferred loan  costs, net of accumulated amortization |       | 141,112               |       | — |   | — | ** ** | 141,112 |   | 237,641 |   |
|                                                  |       | 434,469               |       | 43,254,473 |   | (43,254,473 | ) | 434,470 |   | 285,641 |   |
| ** **                                            |       |                  |       |   |   |   |   |   |   |   |   |
| **Total Assets**                                      |       | $                     | 91,647,172 |   | $ | 43,257,469 |   | (43,348,026 | ) | 91,556,615 |   | 77,162,356 |   |
|                                                       |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See Report of Independent Registered Public AccountingFirm on Supplemental Information.

F-20

----

 

**LITTLE SIOUX CORNPROCESSORS, LLC AND SUBSIDIARYConsolidating Balance Sheet**

 
| ** **                                            | ** ** | **September 30** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **2006**              | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **LSCP, LLLP**   | ** ** | **Little Sioux  Processors, LLC** | ** ** | **Elimination** | ** ** | **Consolidated** | ** ** | **2005  Consolidated** | ** ** |
|                                                  |       |                  |       |   |   |   |   |   |   |   |   |
| **Liabilities and Members Equity**                    |       |                  |       |   |   |   |   |   |   |   |   |
|                                                  |       |                  |       |   |   |   |   |   |   |   |   |
| **Current  Liabilities**                              |       |                  |       |   |   |   |   |   |   |   |   |
| Current maturities of long-term liabilities           |       | $                     | 3,394,196  |   | $ | — |   | $ | — | ** ** | 3,394,196 |   | $ | 4,005,714 |   |
| Accounts payable                                      |       | 2,064,582             |       | 93,553 |   | (93,553 | ) | 2,064,582 |   | 2,304,286 |   |
| Accrued expenses                                      |       | 564,618               |       | — |   | — | ** ** | 564,618 |   | 4,382,316 |   |
| Total current liabilities                             |       | 6,023,396             |       | 93,553 |   | (93,553 | ) | 6,023,396 |   | 10,692,316 |   |
|                                                  |       |                  |       |   |   |   |   |   |   |   |   |
| **Long-Term  Liabilities, net of current maturities** |       | 13,504,582            |       | — |   | — | ** ** | 13,504,582 |   | 16,092,315 |   |
|                                                  |       |                  |       |   |   |   | ** ** |   |   |   |   |
| **Minority  Interest**                                |       | —                |       | — |   | 28,864,721 | ** ** | 28,864,721 |   | 20,209,574 |   |
|                                                  |       |                  |       |   |   |   | ** ** |   |   |   |   |
| **Members’  Equity**                             |       | 72,119,194            |       | 43,163,916 |   | (72,119,194 | ) | 43,163,916 |   | 30,168,151 |   |
|                                                  |       |                  |       |   |   |   |   |   |   |   |   |
| **Total Liabilities and Members’  Equity**       |       | 91,647,172            |       | 43,257,469 |   | (43,348,026 | ) | 91,556,615 |   | 77,162,356 |   |
|                                                       |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

See Report of Independent Registered Public AccountingFirm on Supplemental Information

F-21

----

**LITTLE SIOUX CORNPROCESSORS, LLC AND SUBSIDIARYConsolidating Statements of Operations**
| ** **                               | ** ** | **September 30,** | ** **  |
|------------------------------------------|------------|------------------------|-------------|
| ** **                               | ** ** | **2006**               | ** **  | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **LSCP, LLLP**    | ** **  | **Little Sioux  Processors, LLC** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** | **2005  Consolidated** | ** ** | **2004  Consolidated** | ** ** |
| ** **                               | ** ** | ** **             | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues**                             |       | $                      | 113,785,666 |   | $ | — |   | $ | — |   | $ | 113,785,666 |   | $ | 95,881,420 |   | $ | 85,540,934 |   |
| ** **                               |       |                   |        |   |   |   |   |   |   |   |   |   |   |
| **Cost of Goods Sold**                   |       | 73,678,035             |        | — |   | — |   | 73,678,035 |   | 65,257,086 |   | 74,649,569 |   |
| ** **                               |       |                   |        |   |   |   |   |   |   |   |   |   |   |
| **Gross Profit**                         |       | 40,107,631             |        | — |   | — |   | 40,107,631 |   | 30,624,334 |   | 10,891,365 |   |
| ** **                               |       |                   |        |   |   |   |   |   |   |   |   |   |   |
| **Operating Expenses**                   |       | 2,906,985              |        | 94,269 |   | — |   | 3,001,254 |   | 2,634,802 |   | 2,733,993 |   |
| ** **                               |       |                   |        |   |   |   |   |   |   |   |   |   |   |
| **Operating Income**                     |       | 37,200,646             |        | (94,269 | ) | — |   | 37,106,377 |   | 27,989,532 |   | 8,157,372 |   |
| ** **                               |       |                   |        |   |   |   |   |   |   |   |   |   |   |
| **Other Income (Expense)**               |       |                   |        |   |   |   |   |   |   |   |   |   |   |
| Income from  subsidiary                  |       | —                 |        | 22,306,627 |   | (22,306,627 | ) | — |   |   |   |   |   |
| Interest income                          |       | 835,980                |        | — |   | — |   | 835,980 |   | 158,761 |   | 7,557 |   |
| Interest expense                         |       | (1,286,265             | )           | — |   | — |   | (1,286,265 | ) | (1,126,101 | ) | (1,439,020 | ) |
| Other income                             |       | 332,172                |        | (524 | ) | — |   | 331,648 |   | (3,501,726 | ) | 6,791,603 |   |
| Total other income  (expense), net       |       | (118,113               | )           | 22,306,103 |   | (22,306,627 | ) | (118,637 | ) | (4,469,066 | ) | 5,360,140 |   |
| ** **                               |       |                   |        |   |   |   |   |   |   |   |   |   |   |
| **Net Income Before Minority  Interest** |       | 37,082,533             |        | 22,211,834 |   | (22,306,627 | ) | 36,987,740 |   | 23,520,466 |   | 13,517,512 |   |
|                                     |       |                   |        |   |   |   |   |   |   |   |   |   |   |
| Minority Interest in  Subsidiary Income  |       | —                 |        | — |   | 14,775,906 |   | 14,775,906 |   | 9,421,765 |   | 5,663,681 |   |
|                                     |       |                   |        |   |   |   |   |   |   |   |   |   |   |
| **Net Income**                           |       | $                      | 37,082,533  |   | $ | 22,211,834 |   | $ | (37,082,533 | ) | $ | 22,211,834 |   | $ | 14,098,701 |   | $ | 7,853,831.00 |   |

 

See Report of Independent Registered Public AccountingFirm on Supplemental Information

F-22

----

**LITTLE SIOUX CORNPROCESSORS, LLC AND SUBSIDIARYConsolidated Schedule of Grain PurchasesLicense No. GD-5050**

|                               | ** ** | **September 30  2006** | ** ** | **September 30  2005** | ** ** |
|-------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Grain purchases (in  bushels) |       | 19,203,032                  |       | 17,450,845                  |       |

 

See Report of Independent Registered Public AccountingFirm on Supplementary Information.

F-23

----

**LITTLE SIOUX CORNPROCESSORS, LLC AND SUBSIDIARYConsolidated Schedule of Corn PayablesLicense No. GD-5050**

|                                   | ** ** | **September 30, 2006** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| ** **                        | ** ** | **Bushels**                      | ** ** | **Price** | ** ** |
| Deferred payment  contract - corn |       | 34,932                           |       |   |   |
|                              |       |                             |       |   |   |
| Corn payables                     |       | 90,746                           |       | $ | 2.09 |   |
|                                   |            |                                  |            |  |  |  |

 

See Report of Independent Registered Public AccountingFirm on Supplementary Information.

F-24

----