**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K**

 

| **x**      | **Annual  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934.**

**For  the fiscal year ended December 31, 2007** |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | **or**

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

 

**LAKEAREA CORN PROCESSORS, LLC**

(Exact name of registrant as specified in its charter)

 

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| **South Dakota**                                                    | ** ** | **000-50254**                | ** ** | **46-0460790**                            |
|---------------------------------------------------------------------|------------|------------------------------|------------|-------------------------------------------|
| **(State or other jurisdiction of  incorporation or organization)** | ** ** | **(Commission File Number)** | ** ** | **(I.R.S. Employer Identification  No.)** |

 

**46269 SD Highway 34**

**P.O. Box 100**

**Wentworth, South Dakota 57075**

(Address of principal executive offices)

 

**(605)483-2676**

**(Issuer’s telephone number)**

 

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

 

Securities registered pursuant to Section 12(g) of theExchange Act:  **MembershipUnits**

 

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

 

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (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  £ 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 herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K. T

 

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

 
| Large Accelerated Filer  ̈                                         |   | Accelerated Filer  ̈    |
|-----------------------------------------------------------------------------|--------|----------------------------------|
|                                                                        |   |                             |
| Non-Accelerated Filer x  (Do not check if a smaller reporting company) |   | Smaller Reporting Company o |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

o Yes  x No

 

The aggregate marketvalue of the registrant’s membership units held by non-affiliates of the registrantwas $14,090,742.50 computed by reference to the most recent public offeringprice on Form S-4.

 

As of March 15,2008, there are 29,620,000 membership units of the registrant outstanding.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

The registrant has incorporatedby reference into Part III of this Annual Report on Form 10-Kportions of its definitive proxy statement to be filed with the Securities andExchange Commission within 120 days after the close of the fiscal year coveredby this Annual Report.

 

 

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**INDEX**

 
| ** **                                                                                                   | ** ** | **Page**   |
|--------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **                                                                                                   | ** ** | ** ** |
| **PART I**                                                                                              | ** ** | **4**      |
| ** **                                                                                                   | ** ** | ** ** |
| **ITEM 1. BUSINESS**                                                                                         | ** ** | **4**      |
| ** **                                                                                                   | ** ** | ** ** |
| **U.S. FUEL ETHANOL PRODUCTION  CAPACITY**                                                                   | ** ** | **11**     |
| ** **                                                                                                   | ** ** | ** ** |
| **ITEM 1A. RISK FACTORS**                                                                                    | ** ** | **15**     |
| **ITEM 2. PROPERTIES**                                                                                       | ** ** | **20**     |
| **ITEM 3. LEGAL PROCEEDINGS**                                                                                | ** ** | **21**     |
| **ITEM 4. SUBMISSION OF  MATTERS TO A VOTE OF SECURITY HOLDERS**                                             | ** ** | **21**     |
| ** **                                                                                                   | ** ** | ** ** |
| **PART II**                                                                                             | ** ** | **21**     |
| ** **                                                                                                   | ** ** | ** ** |
| **ITEM 5. MARKET FOR  REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**                      | ** ** | **21**     |
| **ITEM 6. SELECTED  FINANCIAL DATA**                                                                         | ** ** | **24**     |
| **ITEM 7. MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION**       | ** ** | **25**     |
| **ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**                                    | ** ** | **37**     |
| **ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**                                                     | ** ** | **39**     |
| **ITEM 9. CHANGES IN AND DISAGREEMENTS WITH  ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**            | ** ** | **57**     |
| **ITEM 9A(T).  CONTROLS AND PROCEDURES.**                                                                    | ** ** | **57**     |
| **ITEM 9B. OTHER  INFORMATION.**                                                                             | ** ** | **57**     |
| ** **                                                                                                   | ** ** | ** ** |
| **PART III**                                                                                            | ** ** | **58**     |
| ** **                                                                                                   | ** ** | ** ** |
| **ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**                                         | ** ** | **58**     |
| **ITEM 11. EXECUTIVE  COMPENSATION**                                                                         | ** ** | **58**     |
| **ITEM 12. SECURITY OWNERSHIP OF CERTAIN  BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS** | ** ** | **58**     |
| **ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE**                      | ** ** | **58**     |
| **ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES**                                                         | ** ** | **58**     |
| ** **                                                                                                   | ** ** | ** ** |
| **PART IV.**                                                                                            | ** ** | **58**     |
| ** **                                                                                                   | ** ** | ** ** |
| **ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**                                                     | ** ** | **58**     |
| ** **                                                                                                   | ** ** | ** ** |
| **SIGNATURES**                                                                                               | ** ** | **61**     |

 

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**CAUTIONARY STATEMENTS REGARDINGFORWARD-LOOKING STATEMENTS**

 

This annual reportcontains historical information, as well as forward-looking statements thatinvolve known and unknown risks and relate to future events, our futurefinancial performance, or our expected future operations and actions.  In some cases, you can identifyforward-looking statements by terminology 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 similarexpressions.  These forward-lookingstatements are only our predictions based upon current information and involvenumerous assumptions, risks and uncertainties. Our actual results or actions may differ materially from theseforward-looking statements for many reasons, including the reasons described inthis report.  While it is impossible to identify all suchfactors, factors that could cause actual results to differ materially fromthose estimated by us include:

 
| · |   | Overcapacity within the  ethanol industry causing supply to exceed demand;                                            |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                  |
| · |   | Actual ethanol and  distillers grains production varying from expectations;                                           |
|   |   |                                                                                                                  |
| · |   | Availability and costs  of products and raw materials, particularly corn and natural gas;                             |
|   |   |                                                                                                                  |
| · |   | Changes in the price  and market for ethanol and distillers grains;                                                   |
|   |   |                                                                                                                  |
| · |   | Our ability to market  and our reliance on third parties to market our products;                                      |
|   |   |                                                                                                                  |
| · |   | Changes in or  elimination of governmental laws, tariffs, trade or other controls or enforcement  practices such as:  |
|   |   | ·                                                                                                                | national, state or  local energy policy; |
|   |   | ·                                                                                                                | federal ethanol tax  incentives; |
|   |   | ·                                                                                                                | legislation  establishing a renewable fuel standard or other legislation mandating the use  of ethanol or other oxygenate additives; |
|   |   | ·                                                                                                                | state and federal  regulation restricting or banning the use of MTBE; or |
|   |   | ·                                                                                                                | environmental laws and  regulations that apply to our plant operations and their enforcement; |
|   |   |                                                                                                                  |
| · |   | Changes in the weather  or general economic conditions impacting the availability and price of corn  and natural gas; |
|   |   |                                                                                                                  |
| · |   | Changes in total U.S.  consumption of gasoline;                                                                       |
|   |   |                                                                                                                  |
| · |   | Fluctuations in  petroleum prices;                                                                                    |
|   |   |                                                                                                                  |
| · |   | Changes in plant  production capacity or technical difficulties in operating the plant;                               |
|   |   |                                                                                                                  |
| · |   | Costs of construction  and equipment;                                                                                 |
|   |   |                                                                                                                  |
| · |   | Changes in our business  strategy, capital improvements or development plans;                                         |
|   |   |                                                                                                                  |
| · |   | Results of our hedging  strategies;                                                                                   |
|   |   |                                                                                                                  |
| · |   | Changes in interest  rates or the availability of credit;                                                             |
|   |   |                                                                                                                  |
| · |   | Our ability to generate  free cash flow to invest in our business and service our debt;                               |
|   |   |                                                                                                                  |
| · |   | Our liability resulting  from litigation;                                                                             |
|   |   |                                                                                                                  |
| · |   | Our ability to retain  key employees and maintain labor relations;                                                    |
|   |   |                                                                                                                  |
| · |   | Changes and advances in  ethanol production technology;                                                               |
|   |   |                                                                                                                  |
| · |   | Competition from  alternative fuels and alternative fuel additives; and                                               |
|   |   |                                                                                                                  |
| · |   | Other factors described  elsewhere in this report.                                                                    |

 

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The cautionarystatements referred to in this section also should be considered in connectionwith any subsequent written or oral forward-looking statements that may beissued by us or persons acting on our behalf. We undertake no duty to update these forward-looking statements, eventhough our situation may change in the future. Furthermore, we cannot guaranteefuture results, events, levels of activity, performance, or achievements.  We caution you not to put undue reliance onany forward-looking statements, which speak only as of the date of thisreport.  You should read this report and the documents that we referencein this report and have filed as exhibits completely and with the understandingthat our actual future results may be materially different from what wecurrently expect.  We qualify all of our forward-looking statements bythese cautionary statements.

 

**PART I**

 

**ITEM1.  BUSINESS.**

 

**Overview**

 

Lake Area Corn Processors, LLC is a South Dakota limited liabilitycompany that currently owns and manages its wholly-owned subsidiary DakotaEthanol, LLC.  Prior to June 2006,the Broin family owned a minority interest of approximately 12% of DakotaEthanol, LLC.  On June 30, 2006, weentered into an assignment agreement with the Broin family to purchase itsminority interest in Dakota Ethanol, LLC. Following execution of the assignment agreement, we own 100% of DakotaEthanol, LLC and operate it as a wholly-owned subsidiary.  Dakota Ethanol, LLC owns and operates anethanol plant located near Wentworth, South Dakota that has a nameplateproduction capacity of 40 million gallons of ethanol per year.  Lake Area Corn Processors, LLC is referred toin this report as “LACP,” the “company,” “we,” or “us.”  Dakota Ethanol, LLC is referred to in thisreport as “Dakota Ethanol” or the “ethanol plant.”

 

Since September 4,2001, Dakota Ethanol has been engaged in the production of ethanol anddistillers grains.  Fuel grade ethanol isDakota Ethanol’s primary product accounting for the majority of itsrevenue.  Dakota Ethanol also sells distillers grains, a principalco-product of the ethanol production process.   During our 2007fiscal year, Dakota Ethanol processed approximately 17.5 million bushels ofcorn into approximately 48.9 million gallons of ethanol.  Dakota Ethanolalso produced approximately 150,000 tons of distillers grains in 2007.  In2008, we anticipate that Dakota Ethanol’s ethanol and distillers grainsproduction levels will be substantially the same as in fiscal year 2007.  There is, however, no assurance that DakotaEthanol will be able to operate at these production levels.

 

**General Development of Business**

 

LACP was formed as aSouth Dakota cooperative on May 25, 1999. On August 20, 2002, our members approved a plan to reorganize intoa South Dakota limited liability company. The reorganization became effective on August 31, 2002, and theassets and liabilities of the cooperative were transferred to the newly formedlimited liability company.  Following thereorganization, our legal name was changed to Lake Area Corn Processors, LLC.

 

Ourownership of Dakota Ethanol represents substantially all of our assets and ouronly source of revenue.  Sincewe operate Dakota Ethanol as a wholly-owned subsidiary, we receive all revenuesgenerated by Dakota Ethanol.  Wedistribute the revenues received from Dakota Ethanol to our unit holders in proportionto the number of units held by each member.

 

Dakota Ethanolunderwent a significant change in its mode of operations on June 6, 2005,when it elected not to renew its management agreement and other marketingagreements with Broin Management, LLC and other various Broin-relatedentities.  Between June 6, 2005 and December 31,2005, Dakota Ethanol and the Broin-related entities negotiated termination ofthe contracts and Dakota Ethanol entered into agreements with new riskmanagement and marketing service providers. In addition, on October 16, 2005, Dakota Ethanol entered into anemployment agreement with Scott Mundt to serve in the position of TransitionCoordinator.  Mr. Mundt’s employmentbegan on October 17, 2005, the effective date of his employmentagreement.  Effective January 1,2006, Mr. Mundt’s position changed to General Manager.  Subsequently, on August 1, 2007, Mr. Mundtwas 

 

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appointed Chief ExecutiveOfficer of Lake Area Corn Processors, LLC. Mr. Mundt’s duties include day-to-day management of the operationsof Dakota Ethanol.

 

In the first fiscal quarter of 2007, Dakota Ethanol commencedconstruction of an 860,000 bushel grain storage bin.  The total cost of this project was estimatedto be approximately $2,000,000. Construction commenced on the grain storage bin in June 2007.  The grain storage bin is complete.  We spent approximately $2,032,000 toconstruct the grain storage bin.

 

**Financial Information**

 

Please refer to “**Item 7 — Management’sDiscussion and Analysis of Financial Condition and Results of Operations”** for information about our revenues, profit and loss measurementsand total assets and “**Item 8 - FinancialStatements and Supplementary Data**” for our consolidated financialstatements.

 

**Principal Productsand Their Markets**

 

The principalproducts produced at the ethanol plant are fuel grade ethanol and distillersgrains.

 

***Ethanol***

 

 Ethanol is ethyl alcohol, a fuel component made primarily from corn andvarious other grains.  According tothe Renewable Fuels Association, approximately 85 percent of the ethanolproduced in the United States today is produced from corn, and approximately90 percent of ethanol is produced from a corn and other input mix. Cornproduces large quantities of carbohydrates, which convert into glucose moreeasily than most other kinds of biomass. As of March 4, 2008, theRenewable Fuels Association estimates United States ethanol production capacityat more than 8 billion gallons.

 

An ethanol plant is essentially afermentation plant.  Ground corn andwater are mixed with enzymes and yeast to produce a substance called “beer,”which contains about 10% alcohol and 90% water. The “beer” is boiled to separate the water, resulting in ethyl alcohol,which is then dehydrated to increase the alcohol content.  This product is then mixed with a certifieddenaturant such as gasoline to make the product unfit for human consumption andcommercially saleable.

 

Ethanol can be used as: (i) an octaneenhancer in fuels; (ii) an oxygenated fuel additive for the purpose ofreducing ozone and carbon monoxide vehicle emissions; and (iii) anon-petroleum-based gasoline substitute. Approximately 95% of all ethanol is used in its primary form forblending with unleaded gasoline and other fuel products.  Used as a fuel oxygenate, ethanol provides ameans to control carbon monoxide emissions in large metropolitan areas whereoxygenated fuels are required during certain times of the year.  The principal purchasers of ethanol are generallywholesale gasoline marketers or blenders. The principal markets for our ethanol are petroleum terminals in thecontinental United States.

 

Dakota Ethanol began producing ethanol in September 2001.  For our fiscal year ended December 31,2007, revenues from sales of ethanol were approximately 89% of our totalrevenues.  The following table shows thepercentage of our total revenues that were from sales of ethanol for each ofthe last three fiscal years:

 
| **Fiscal Year**              | ** ** | **Percentage of Revenues  from Sales of Ethanol** | ** ** |
|------------------------------|------------|---------------------------------------------------|------------|
| Ended December 31, 2007 |       | 89                                                | %          |
| Ended December 31, 2006 |       | 91                                                | %          |
| Ended December 31, 2005 |       | 86                                                | %          |

 

***Distillers Grains***

 

A principal co-product of the ethanolproduction process is distillers grains, a high protein, high-energy animalfeed supplement primarily marketed to the dairy and beef industry.  Distillers grains contain by-pass proteinthat is superior to other protein supplements such as cottonseed meal andsoybean meal.  By-pass proteins are more 

 

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digestible to the animal, thus generatinggreater lactation in milk cows and greater weight gain in beef cattle.  Dry mill ethanol processing creates fourforms of distiller grains: Distillers Wet Grains (“DWS”), Distillers ModifiedWet Grains (“DMWS”), Condensed Distillers Solubles (“CDS”) and Distillers DriedGrains with Solubles (“DDGS”).  DWS isprocessed corn mash that contains approximately 70% moisture.  DWS has a shelf life of approximately sevendays and can be sold only to consumers within the immediate vicinity of anethanol plant.  DMWS is DWS that has beendried to approximately 50% moisture. DMWS has a slightly longer shelf life of approximately ten days and isoften sold to nearby markets.  CDScontains approximately 75% moisture and is marketed locally.  It has a shelf life of approximately thirtydays.  DDGS is DWS that has been dried to10% to 12% moisture.  DDGS has an almostindefinite shelf life and may be sold and shipped to any market regardless ofits vicinity to an ethanol plant.  At ourplant, the composition of the distillers grains we produce is approximately 1%DWS, 46% DMWS, 3% CDS and 50% DDGS.

 

For our fiscal year ended December 31,2007, revenues from sales of distillers grains were approximately 11% of ourtotal revenues.  The following tableshows the percentage of our total revenues that were from sales of distillersgrains for each of the last three fiscal years:

 
| **Fiscal Year**              | ** ** | **Percentage of Revenues****from Sales of Distillers Grains** | ** ** |
|------------------------------|------------|---------------------------------------------------------------|------------|
| Ended December 31, 2007 |       | 11                                                            | %          |
| Ended December 31, 2006 |       | 8                                                             | %          |
| Ended December 31, 2005 |       | 13                                                            | %          |

 

**Distributionof Principal Products**

 

The ethanol plant is located nearWentworth, South Dakota in Lake County, in eastern South Dakota.  We selected the Wentworth site because of itsproximity to existing grain production, accessibility to road and railtransportation and its proximity to major population centers.  It is served by the Burlington Northern SantaFe railroad system.  It is in closeproximity to multiple state highways and is near Interstate Highways 29 and 90.

 

***Ethanol Distribution***

 

From the dateDakota Ethanol began operations through the fiscal year ended December 31,2005, Dakota Ethanol marketed the ethanol produced at the plant through anexclusive marketing agreement with Ethanol Products, LLC (“Ethanol Products”),a Broin affiliate.  On June 6, 2005,Dakota Ethanol elected not to renew its agreement with Ethanol Products andagreed that termination would become effective as of January 1, 2006.

 

OnNovember 30, 2005, Dakota Ethanol entered into an Ethanol Fuel MarketingAgreement with Renewable Products Marketing Group (“RPMG”) of Shakopee,Minnesota, for the purposes of marketing and distributing our ethanol. On April 1,2007, Dakota Ethanol became an owner of RPMG by making a capital contributionto RPMG and executing certain other agreements. Dakota Ethanol’s capital contribution was $605,000, of which $105,000was paid upon execution and balance will be paid over time with a portion ofour ethanol sales revenue.  DakotaEthanol became a party to RPMG’s operating agreement, executed a contributionagreement that governs the funding of Dakota Ethanol’s capital contribution toRPMG, and entered into a new member ethanol fuel marketing agreement formembers of RPMG.  Becoming an owner ofRPMG allows Dakota Ethanol to share any profits made by RPMG and reduces thefees Dakota Ethanol pays RPMG to market its ethanol.  Pursuant to Dakota Ethanol’s member ethanolfuel marketing agreement, we use a pooled marketing arrangement, which meansthat the ethanol we produce is pooled with other ethanol producers and marketedby RPMG.  RPMG pays us a netback priceper gallon that is based upon the difference between the pooled averagedelivered ethanol selling price and the pooled average distributionexpense.  These averages are calculatedbased upon each pool participant’s selling price and expense averaged in directproportion to the volume of ethanol supplied by each participant to the pool.

 

***DistillersGrains Distribution***

 

From the date webegan operations through the fiscal year ended December 31, 2005, wemarketed our distillers grains through a contract with Broin Enterprises, Inc.d/b/a Dakota Gold Marketing, a Broin affiliate. On 

 

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June 6, 2005, weelected not to renew our agreement with Dakota Gold Marketing and agreed to atermination date of December 1, 2005.

 

On November 28, 2005, we enteredinto a Distillers Grain Marketing Agreement with Commodity Specialists Company(CSC) of Minneapolis, Minnesota for the purpose of marketing the distillersgrains we produce.  CSC was purchased byCHS, Inc. (CHS) during the summer of 2007. On August 8, 2007, CSC assigned our distillers grains marketingagreement to CHS effective October 1, 2007.  Therefore, our distillers grains are nowmarketed and sold by CHS.  The terms ofour marketing agreement with CHS are the same as the terms of our agreementwith CSC.  Under the distillers grainsmarketing agreement, we receive a percentage of the selling price actuallyreceived by CHS in marketing the distillers grains to its customers.  The term of the agreement began on December 1,2005 and renews automatically annually for additional one year terms unlessprior written notice of non-renewal is provided by either party.  In December 2007, this agreement withCHS was renewed pursuant to the automatic renewal provision for an additionalone year term.

 

Beginning on December 1, 2005, webegan marketing some of our distillers grains to our local market without theuse of an external marketer.  Shipmentsof these products are made to local markets by truck.  This has allowed us to sell less distillersgrains in the form of DDGS which has decreased our natural gas usage andincreased our revenues from the sale of distillers grains.

 

**SeasonalFactors in Business**

 

In an effort toimprove air quality in regions where carbon monoxide and ozone are a problem, theFederal Clean Air Act requires the sale of oxygenated motor fuels during thewinter months in certain major metropolitan areas.  Gasoline that is blended with ethanol has a higheroxygen content than gasoline that does not contain ethanol.  As a result,we expect fairly light seasonality with respect to our revenue from ethanolsales allowing us to, potentially, be able to sell our ethanol at a slightpremium during the mandated oxygenate period.  Conversely, we expect ouraverage sales price for ethanol to be slightly lower during the summer, whenfuel-grade ethanol is primarily used as an octane enhancer or a fuel supplyextender.

 

**Sources and Availability of Raw Materials**

 

***Corn Feedstock Supply***

 

The major rawmaterial required for our ethanol plant to produce ethanol and distillersgrains is corn.  To operate at a nameplate capacity of 40 million gallons, the plant requires asupply of approximately 14 million bushels of corn annually.  The plant currently operates in excess of itsnameplate capacity, producing approximately 48.9 million gallons of ethanolannually from approximately 17.5 million bushels of corn.  The areasurrounding the plant near Wentworth in Lake County, South Dakota currently provides anample supply of corn to meet and exceed our raw material requirements for thenameplate production capacity of the plant and our current higher than nameplateproduction capacity.  In 2004, 2005 and 2006, the United States producedrecord corn crops of approximately 11.8 billion bushels, 11.11 billion bushelsand 10.74 billion bushels respectively. Further, the 2007 corn crop produced a record 13.1 billion bushels ofcorn.  These four years represent thefour largest United States corn crops in history.  However, despite the record high cornproduction in 2007, corn prices continue to rise as a result of increasedglobal demand.  We expect that theseincreased corn prices will continue into our 2008 fiscal year.

 

For the fiscal year ended December 31,2005, we operated under an agreement with Broin Management, LLC for price riskmanagement related to the corn requirements of the plant.  However, we terminated the agreementeffective January 1, 2006.

 

OnNovember 28, 2005, we entered into a Risk Management Contract withFCStone, LLC (“FCStone”) of West Des Moines, Iowa.  Under the contract, FCStone provides all riskmanagement services and programs relating to our production and sale of ethanoland distillers grains.  In exchange forthese services, we pay FCStone a fee of $3,333.33 per month, which is based ona rate of $0.001 per gallon of ethanol produced from an annual productioncapacity of 40 million gallons.  Inaddition, we will pay any commission, fee, service charge or mark-up arisingfrom any option, futures or other risk management or cash commodity transactionexecuted or brokered through

 

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FCStone,not to exceed $12.50 per round turn for exchange-traded futures and optionscontracts and equal to $10.00 per round turn for over-the-countertransactions.  The initial term of thecontract began on December 1, 2005 and went until October 31,2006.  Following the initial term, thecontract renews automatically for additional one-year terms unless priorwritten notice of non-renewal is provided by either party.  This agreement was renewed for an additionalone-year term pursuant to the automatic renewal provision of the contract on October 31,2007.

 

Corn is supplied to us primarily from ourmembers who are local agricultural producers and from purchases of corn on theopen market.  Certain of our members havecorn delivery contracts that require them to supply us with corn as a conditionof being a member of the company.  On August 1,2007, our board of directors approved a resolution making it voluntary forthese members to deliver corn to us under their respective corn deliveryagreements.  We anticipate that many ofour members will continue to supply us with corn on a voluntary basis.

 

**                *Natural Gas***

 

Naturalgas is an important input to our manufacturing process.  We use naturalgas to dry our distillers grains products to moisture contents at which theycan be stored for long periods of time. This allows the distillers grains we produce to be transported greaterdistances which allows them to serve broader livestock markets, includingpoultry and swine markets in the continental United States.  We contract with NorthWestern Energy for ournatural gas.  Under our agreement, theprice for our natural gas is based on market rates.  The agreement is in effect until 2011 andautomatically renews for successive one-year terms unless the agreement isterminated.  Since operations commencedin 2001, there have been no interruptions in the supply of natural gas fromNorthWestern Energy, and all of our natural gas requirements have been met.

 

***Electricity***

 

Electricityis necessary for lighting and powering much of the machinery and equipment usedin the production process.  We contractwith Sioux Valley Energy, Inc. to provide all of the electric power andenergy requirements for the ethanol plant.   The agreement is in effect until 2011 andautomatically renews for five-year terms, unless at least 18 months notice isgiven by either party to terminate the agreement prior to the expiration of thecurrent term.  We have had no interruption or shortages in the supply ofelectricity to the plant since operations commenced in 2001.

 

***Water***

 

Wateris a necessary part of the ethanol production process.  It is used in the fermentation process and toproduce steam for the cooking, evaporation, and distillation processes.  We contract with Big Sioux Community WaterSystem, Inc. to supply and meet our water requirements for the ethanol anddistillers grains production process. Our agreement with Big Sioux is for automatically renewing five-yearterms.  Since our operations commenced inSeptember 2001, we have had no interruption in the supply of water and allour requirements have been met.  Thisagreement was renewed for a term of one year starting on July 1, 2007 at arate of $0.55 per thousand gallons of usage. The Big Sioux Community Water System will not guarantee any of the parametersof the original agreement due to our water usage levels.  The agreement also allows us to use waterfrom the Skunk River Aquifer to meet the plant’s water needs.  In all other respects, the terms of theoriginal contract are the same.

 

**Federal Ethanol Supports**

 

The ethanol industry is dependent onseveral economic incentives to produce ethanol, including federal ethanolsupports.  One significant federalethanol support is the Renewable Fuels Standard (the “RFS”).  The RFS is a national program that does notrequire that any renewable fuels be used in any particular area or state,allowing refiners to use renewable fuel blends in those areas where it is mostcost-effective.  The RFS requires that ineach year, a certain amount of renewable fuels be utilized in the UnitedStates.  The RFS was increased by theEnergy Independence and Security Act of 2007 which became law in December 2007.  Currently, the RFS requires the use of 9billion gallons of renewable fuels in 2008, increasing to 36 billion gallons in2022.  However, the RFS requires that asignificant portion of these 36 billion gallons come from “advanced” renewablefuels.  Grain based ethanol, such as theethanol we produce, that may be used to meet the RFS is capped at 15 billiongallons per year starting in 2015. Therefore, demand for corn based ethanol may not expand significantlypast the 15 billion gallons per year cap.

 

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The advanced renewable fuels that can beused to satisfy the remaining gallons of the RFS include cellulosicethanol.  Cellulosic ethanol is ethanolthat is produced from cellulose, which is the main component of plant cellwalls and is the most common organic compound on earth.  Cellulose is found in wood chips, corn stalks,rice straw, amongst other common plants. Current technology makes it difficult or impossible to produce ethanolcost-effectively from cellulose. However, the RFS and state and federal grant programs are encouragingthe development of commercial cellulosic ethanol production.  Several grants were recently made for pilotprojects that are attempting to produce cellulosic ethanol on a commercialscale.

 

In April 2007, the EPA adopted afinal rule that fully implemented the RFS requirement.  The rule created a credit tradingprogram that is designed to allow the fuel refining industry as a whole to meetthe RFS requirement in the most cost effective manner possible.  The credit trading program allows refinerswho blend more renewable fuels than they are required to sell credits torefiners who blend less renewable fuels than they are required.  This credit trading program was designed todecrease any potential burden the RFS might place on small fuel refiners.

 

The increase in the RFS is likely toincrease both the supply and demand for ethanol.  The production capacity of the ethanolindustry as of March 4, 2008 is estimated by the RFA to be more than 8billion gallons.  Ethanol production inthe United States during 2007 was estimated by the RFA to be 6.5 billiongallons.  Monthly ethanol demandincreased by nearly 150 million gallons between January 2007 and December 2007,the last demand figures available from the RFA. The expanded RFS will likelyfurther increase demand for ethanol. However, as demand for ethanol increases, we expect the ethanol industryto increase ethanol supply to meet this increased demand.  Increases in supply may more than offsetincreases in demand associated with the RFS.

 

Historically, ethanol sales have also beenfavorably affected by the Clean Air Act amendments of 1990, particularly theFederal Oxygen Program which became effective November 1, 1992.  The Federal Oxygen Program requires the saleof oxygenated motor fuels during the winter months in certain majormetropolitan areas to reduce carbon monoxide pollution.  Ethanol use has increased due to a secondClean 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 majoroxygenates added to reformulated gasoline pursuant to these programs are MTBEand ethanol, however MTBE has caused groundwater contamination and has beenbanned from use by many states.  AlthoughtheEnergy Policy Act of 2005 did not impose a national ban of MTBE, its failure toinclude liability protection for manufacturers of MTBE is expected to result inrefiners and blenders using ethanol as an oxygenate rather than MTBE to satisfythe reformulated gasoline oxygenate requirement.  We believe all of the increase in ethanoldemand as a result of the phase out of MTBE has already occurred.  The Energy Policy Act repeals the Clean AirAct’s 2% oxygenate requirement for reformulated gasoline.  However, the Act did not repeal the 2.7%oxygenate requirement for carbon monoxide non-attainment areas which arerequired to use oxygenated fuels in the winter months.  While we expect ethanol to be the oxygenateof choice in these areas, there is no assurance that ethanol will in fact beused.

 

                 The Energy Policy Act of 2005 expanded who qualifiesfor 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 eligiblefor the tax credit was limited to 30 million gallons.  Under the Energy Policy Act of 2005, the sizelimitation on the production capacity for small ethanol producers increasedfrom 30 million to 60 million gallons. As a result, we are eligible for the small producer tax credit andreceived the $1,500,000 maximum credit under the program during our 2007 fiscalyear.  The credit is effective fortaxable years ending after the date of enactment.  The credit is directlypassed through to our members and is not recorded in our financial statements.

 

Inaddition, the Energy Policy Act of 2005 creates a new tax credit that permitstaxpayers to claim a 30% credit (up to $30,000) for the cost of installingclean-fuel vehicle refueling equipment, such as an E85 fuel pump, to be used ina trade or business of the taxpayer or installed at the principal residence ofthe taxpayer. Under the provision, clean fuels are any fuel where at least 85%of the volume consists of ethanol, natural gas, compressed natural gas,liquefied natural gas, liquefied petroleum gas, and hydrogen and any mixture ofdiesel fuel and biodiesel containing at least 20% biodiesel.  The provision is effective for equipmentplaced in service after December 31, 2005 and before January 1, 2010.While it is unclear how this credit will affect the demand for ethanol in theshort

 

9

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term,we expect it will help raise consumer awareness of alternative sources of fueland could positively impact future demand for ethanol.

 

       The use of ethanol as an alternative fuelsource has been aided by federal tax policy. On October 22, 2004, President Bush signed H.R. 4520,which contained the Volumetric Ethanol Excise Tax Credit (“VEETC”) and amendedthe federal excise tax structure effective as of January 1, 2005.  Prior to VEETC, ethanol-blended fuel wastaxed at a lower rate than regular gasoline (13.2 cents on a 10% blend).  Under VEETC, the ethanol excise tax exemptionhas been eliminated, thereby allowing the full federal excise tax of 18.4 centsper gallon of gasoline to be collected on all gasoline and allocated to thehighway trust fund.  In place of theexemption, the bill created a new volumetric ethanol excise tax credit of 5.1cents per gallon of ethanol blended at 10%. Refiners and gasoline blenders apply for this credit on the same taxform as before only it is a credit from general revenue, not the highway trustfund.  Based on volume, the VEETC isexpected to allow much greater refinery flexibility in blending ethanol sinceit makes the tax credit available on all ethanol blended with all gasoline,diesel and ethyl tertiary butyl ether (“ETBE”), including ethanol in E85 andE20 in Minnesota.  The VEETC is scheduledto expire on December 31, 2010.

 

The ethanol industry and our businessdepend upon continuation of the federal ethanol supports discussed above.  These incentives have supported a market forethanol that might disappear without the incentives.  Alternatively, the incentives may becontinued at lower levels than at which they currently exist.  The elimination or reduction of such federalethanol supports would make it more costly for us to sell our ethanol and wouldlikely reduce our net income.

 

**OurCompetition**

 

                We are indirect competition with numerous other ethanol producers, many of whom havegreater resources than we do.  During our2007 fiscal year, there was relatively slower growth in the number of newethanol producers entering the market due to high corn prices and relativelylower ethanol prices as compared to the preceding two years.  However, should demand for, or price of, ethanolincrease, for example, as a result of the increase in renewable fuels standardthat was recently adopted, we expect existing ethanol producers and new ethanolproducers to increase production capacity within the ethanol industry.  This increase in supply may more than offsetthe increase in demand.  Ethanol is acommodity product, like corn, which means our ethanol plant competes with otherethanol producers on the basis of price and, to a lesser extent, deliveryservice.  We believe we compete favorablywith other ethanol producers due to our proximity to ample grain supplies andmultiple modes of transportation.  Inaddition, we believe our plant’s location offers an advantage over otherethanol producers in that it has ready access by rail to growing ethanolmarkets, which may reduce our cost of sales.

 

Accordingto the Renewable Fuels Association, as of March 4, 2008, the ethanolindustry has grown to 143 production facilities in the United States. There are57 new plants currently under construction along with 7 plant expansions.  The Renewable Fuels Association currentlyestimates that the United States ethanol industry has capacity to produce morethan 8 billion gallons of ethanol per year. The new ethanol plants under construction along with the plantexpansions under construction could push United States production of fuelethanol in the near future to more than 13.4 billion gallons per year.  The largest ethanol producers include AbengoaBioenergy Corp., Archer Daniels Midland, Aventine Renewable Energy, Inc.,Hawkeye Renewable, POET (Formerly Broin), US BioEnergy Corp., and VeraSunEnergy Corporation, each of which are capable of producing more ethanol than weproduce.  Further, many consider theethanol industry ripe for consolidation. Currently, there are a few large producers of ethanol and many smallerproducers of ethanol.  It is likely thatin the future, some consolidation of the ethanol industry will occur which willresult in a smaller number of producers which control a large percentage of theethanol production market.  This mayallow these larger producers to influence the ethanol industry in ways that arenot beneficial to us.  These largerethanol producers may realize economies of scale in the production of ethanoland distillers grains that we cannot take advantage of, specifically withrespect to larger sales of ethanol and increased bargaining power for rawmaterials.  On November 29, 2007,VeraSun Energy Corporation and US BioEnergy Corporation announced a merger thatwould increase the annual production capacity of VeraSun to 1.6 billion gallonsof ethanol by the end of 2008.  This issignificantly more than we currently produce or expect to produce in thefuture.

 

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Inthe past we considered various types of corporate mergers and acquisitions,including discussions we had with Countryside Renewable Energy.  However, none of these plans or negotiationsresulted in any merger.  Since Countrysideabandoned its plans with respect to consolidating several ethanol producers intoone company, we do not anticipate entering into any such transaction in thenear future.

 

Thefollowing table identifies the majority of the largest ethanol producers in theUnited States along with their production capacities.

 

**U.S. FUEL ETHANOL PRODUCTION CAPACITY**

**BY TOP PRODUCERS**

**Producers of Approximately 200million gallons per year (mmgy) or more**

 
| ** **                             | ** ** | ** **         | ** ** | **Current**  | ** ** | **Under Construction/** | ** ** |
|----------------------------------------|------------|--------------------|------------|--------------|------------|-------------------------|------------|
| ** **                             | ** ** | ** **         | ** ** | **Capacity** | ** ** | **Expansions**          | ** ** |
| **Company**                            | ** ** | **Location**       | ** ** | **(mmgy)**   | ** ** | **(mmgy)**              | ** ** |
| Abengoa Bioenergy Corp                 |       | York, NE           |       | 55           |       |                    |       |
|                                   |       | Colwich, KS        |       | 25           |       |                    |       |
|                                   |       | Portales, NM       |       | 30           |       |                    |       |
|                                   |       | Revenna, NE        |       | 88           |       |                    |       |
|                                   |       |               |       |         |       |                    |       |
| Aventine Renewable  Energy, Inc.* |       | Pekin,  IL         |       | 207          |       | 226                     |       |
|                                   |       | Aurora,  NE        |       |         |       |                    |       |
|                                   |       | Mt.  Vernon, IN    |       |         |       |                    |       |
|                                   |       |               |       |         |       |                    |       |
| Archer Daniels Midland*                |       | Decatur,  IL       |       | 1,070        |       | 550                     |       |
|                                   |       | Cedar  Rapids, IA  |       |         |       |                    |       |
|                                   |       | Clinton,  IA       |       |         |       |                    |       |
|                                   |       | Columbus,  NE      |       |         |       |                    |       |
|                                   |       | Marshall,  MN      |       |         |       |                    |       |
|                                   |       | Peoria,  IL        |       |         |       |                    |       |
|                                   |       | Wallhalla, ND      |       |         |       |                    |       |
|                                   |       |               |       |         |       |                    |       |
| POET*                                  |       | Sioux Falls, SD    |       | 1,208        |       | 327                     |       |
|                                   |       | Alexandria, IN     |       |         |       |                    |       |
|                                   |       | Ashton, IA         |       |         |       |                    |       |
|                                   |       | Big Stone, SD      |       |         |       |                    |       |
|                                   |       | Bingham  Lake, MN  |       |         |       |                    |       |
|                                   |       | Caro,  MI          |       |         |       |                    |       |
|                                   |       | Chancellor,  SD    |       |         |       |                    |       |
|                                   |       | Coon  Rapids, IA   |       |         |       |                    |       |
|                                   |       | Corning,  IA       |       |         |       |                    |       |
|                                   |       | Emmetsburg,  IA    |       |         |       |                    |       |
|                                   |       | Fostoria,  OH      |       |         |       |                    |       |
|                                   |       | Glenville,  MN     |       |         |       |                    |       |
|                                   |       | Gowrie,  IA        |       |         |       |                    |       |
|                                   |       | Groton,  SD        |       |         |       |                    |       |
|                                   |       | Hanlontown,  IA    |       |         |       |                    |       |
|                                   |       | Hudson, SD         |       |         |       |                    |       |
|                                   |       | Jewell, IA         |       |         |       |                    |       |
|                                   |       | Laddonia, MO       |       |         |       |                    |       |
|                                   |       | Lake Crystal, MN   |       |         |       |                    |       |
|                                   |       | Leipsic, OH        |       |         |       |                    |       |
|                                   |       | Macon, MO          |       |         |       |                    |       |
|                                   |       | Marion,  OH        |       |         |       |                    |       |
|                                   |       | Mitchell,  SD      |       |         |       |                    |       |
|                                   |       | N.  Manchester, IN |       |         |       |                    |       |
|                                   |       | Portland.  IN      |       |         |       |                    |       |
|                                   |       | Preston,  MN       |       |         |       |                    |       |
|                                   |       | Scotland,  SD      |       |         |       |                    |       |

 

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| Hawkeye Renewables, LLC      |   | Iowa Falls, IA   |   | 105    |   |   |   |
|------------------------------|--------|------------------|--------|--------|--------|--------|--------|
|                         |   | Fairbank,  IA    |   | 115    |   |   |   |
|                         |   | Menlo,  IA       |   |   |   | 100    |   |
|                         |   | Shell Rock, IA   |   |   |   | 110    |   |
|                         |   |             |   |   |   |   |   |
| US BioEnergy Corp*           |   | Albert City, IA  |   | 310    |   | 440    |   |
|                         |   | Woodbury, MI     |   |   |   |   |   |
|                         |   | Hankinson, ND    |   |   |   |   |   |
|                         |   | Central City, NE |   |   |   |   |   |
|                         |   | Ord, NE          |   |   |   |   |   |
|                         |   | Dyersville, IA   |   |   |   |   |   |
|                         |   | Janesville, MN   |   |   |   |   |   |
|                         |   | Marion, SD       |   |   |   |   |   |
|                         |   |             |   |   |   |   |   |
| VeraSun Energy  Corporation* |   | Aurora, SD       |   | 560    |   | 330    |   |
|                         |   | Ft. Dodge, IA    |   |   |   |   |   |
|                         |   | Albion, NE       |   |   |   |   |   |
|                         |   | Charles City, IA |   |   |   |   |   |
|                         |   | Linden, IN       |   |   |   |   |   |
|                         |   | Welcome, MN      |   |   |   |   |   |
|                         |   | Hartely, IA      |   |   |   |   |   |
|                         |   | Bloomingburg, OH |   |   |   |   |   |

 

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*Individualstate production capacity not reported

 

Updated:March 4, 2008

 

***Competitionwith Ethanol Imported from Other Countries***

 

Ethanolproduction is also expanding internationally. Brazil has historically been a significant producer of ethanol for bothits domestic and export markets. According to the Renewable Fuels Association, in 2007, Brazil exportednearly 190 million gallons of ethanol to the United States through November 2007(the last available data).  Further,ethanol produced or processed in certain countries in Central American and theCaribbean region is eligible for tariff reduction or elimination uponimportation to the United States under a program known as the Caribbean BasinInitiative.  Some ethanol producers,including Cargill, have started taking advantage of this situation by buildingdehydration plants in participating Caribbean Basin countries, which convertethanol into fuel-grade ethanol for shipment to the United States.  Ethanol imported from Caribbean Basincountries may be a less expensive alternative to domestically produced ethanoland may affect our ability to sell our ethanol profitably.

 

In2007, President Bush entered into discussions with South American countriesregarding increasing ethanol production in South America.  There was no discussion regarding reductionor elimination of tariffs that protect the United State’s ethanol industry andno action has been taken to reduce or eliminate those tariffs.  Any reduction of tariffs could result inincreased importation of ethanol from South and Central American countrieswhich could create additional competition in the United States ethanol marketand could adversely affect the prices we receive for our ethanol.

 

***Competitionfrom Alternative Fuels***

 

Our ethanol plant also competes withproducers of other gasoline additives having similar octane and oxygenatevalues as ethanol, such as producers of MTBE, a petrochemical derived frommethanol that costs less to produce than ethanol.  Although currently the subject of severalstate bans, many major oil companies can produce MTBE, and because it ispetroleum-based, its use may receive strong support from major oil companies.

 

Alternative fuels,gasoline oxygenates and alternative ethanol production methods are continuallyunder development byethanol and oil companies with far greater resources than we possess. The majoroil companies have significantly greater resources than we have to developalternative products and to influence legislation and public perception ofethanol.  New ethanol products or methodsof ethanol production developed by larger and better-financed competitors couldprovide them competitive advantages and harm our business.

 

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Further, recent legislation, including the EnergyIndependence and Security Act of 2007, clearly encourages the development ofadvanced renewable fuels such as cellulosic ethanol that can be produced fromfeedstock other than raw grains.  This alternativemay be preferable to corn based ethanol and may enjoy more governmental andconsumer support.  This may decrease thedemand for and price of the ethanol we produce.

 

***Distillers Grains Competition***

 

Ourplant primarily competes with other ethanol producers in the production andsales of distillers grains.  According tothe University of Minnesota’s DDGS—General Information website (last updated November 29,2007) approximately 3,200,000 to 3,500,000 tons of distillers grains areproduced annually in North America, approximately 98% of which are produced byethanol plants. The remaining 1 to 2% of DDGS is produced by the alcoholicbeverage industry.  The amount ofdistillers grains produced is expected to continue to increase as the number ofoperating ethanol plants increases.  Thiscould negatively impact the price at which we sell our distillers grains unlessdemand expands in relation to the expanding supply.  Our distillers grains compete with otherlivestock feed products such as soybean meal, corn gluten feed, dry brewersgrain and mill feeds.  However, due tocurrent high corn and soybean prices, the price of distillers grains hasrisen.  However, increases in distillersgrains supply may dampen any increases in distillers grains prices that we haveexperienced as a result of corn and soybean price increases.

 

**GeneralEthanol Demand and Supply**

 

Ethanol has important applications, primarily as a high-qualityoctane enhancer and an oxygenate capable of reducing air pollution andimproving automobile performance.  Ethanol contains 35% oxygen by weight.  As a result, gasoline, when blended withethanol, burns cleaner, and releases less carbon monoxide and other exhaustemissions into the atmosphere.

 

According to theRenewable Fuels Association, demand for fuel ethanol in the United Statescontinued to increase in 2007.  Domesticethanol demand was more than 6.8 billion gallons in 2007 according to RenewableFuels Association statistics.  Further,domestic ethanol production is estimated by the RFA to be nearly 6.5 billiongallons.  If the supply of ethanolincreases at a more rapid rate than demand, the price at which we can sell ourethanol may decrease.  The ethanolindustry must continue to grow demand for ethanol in order to support currentethanol prices and allow the ethanol industry to remain profitable.

 

Demandfor ethanol may remain strong as a result of increased consumption of E85 fuel.E85 fuel is a blend of 85% ethanol and 15% gasoline.  The National Ethanol Vehicle Coalitionreports as of February 14, 2008, that there are approximately 1,500 retailgasoline stations supplying E85.  Whilethe number of retail E85 suppliers increases significantly each year, thisremains a relatively small percentage of the total number of U.S. retail gasolinestations, which is approximately 170,000. According to the RFA, as of February 2008, there are more than 6million flex fuel vehicles on the road in the United States.  As public awareness of ethanol and E85increases along with E85’s increased availability, management anticipates somegrowth in demand for ethanol as a result of E85 consumption.

 

The following table showsU.S. ethanol production capacity by state as of January 2008.  This table includes both operating ethanolproduction facilities and those that are currently under construction.

 

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**U.S.ETHANOL PRODUCTION CAPACITY BY STATE**

 

    *In Millions of Gallons*

 

 

| ** **                                                | ** ** | **Online** | ** ** | **Under Construction/  Expansion** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------|------------|------------|------------|------------------------------------|------------|-----------|------------|
| Iowa                                                      |       | 2059       |       | 1435                               |       | 3,494     |       |
| Nebraska                                                  |       | 1143.5     |       | 691                                |       | 1,834.5   |       |
| Illinois                                                  |       | 887        |       | 254                                |       | 1,141     |       |
| Minnesota                                                 |       | 619.6      |       | 457.5                              |       | 1,077.1   |       |
| South Dakota                                              |       | 683        |       | 283                                |       | 966       |       |
| Indiana                                                   |       | 470        |       | 450                                |       | 920       |       |
| Ohio                                                      |       | 68         |       | 470                                |       | 538       |       |
| Kansas                                                    |       | 432.5      |       | 75                                 |       | 507.5     |       |
| Wisconsin                                                 |       | 408        |       | 90                                 |       | 498       |       |
| Texas                                                     |       | 100        |       | 255                                |       | 355       |       |
| North Dakota                                              |       | 123        |       | 220                                |       | 343       |       |
| Michigan                                                  |       | 215        |       | 50                                 |       | 265       |       |
| California                                                |       | 73         |       | 155                                |       | 228       |       |
| Tennessee                                                 |       | 67         |       | 138                                |       | 205       |       |
| Missouri                                                  |       | 201        |       | 0                                  |       | 201       |       |
| New York                                                  |       | 50         |       | 114                                |       | 164       |       |
| Oregon                                                    |       | 40         |       | 108                                |       | 148       |       |
| Colorado                                                  |       | 125        |       | 0                                  |       | 125       |       |
| Georgia                                                   |       | 0.4        |       | 120                                |       | 120.4     |       |
| Arizona                                                   |       | 55         |       | 0                                  |       | 55        |       |
| Washington                                                |       | 0          |       | 55                                 |       | 55        |       |
| Kentucky                                                  |       | 35.4       |       | 0                                  |       | 35.4      |       |
| New Mexico                                                |       | 30         |       | 0                                  |       | 30        |       |
| Wyoming                                                   |       | 5          |       | 0                                  |       | 5         |       |
| Louisiana                                                 |       | 0          |       | 1.5                                |       | 1.5       |       |
| Total                                                     |       | 7,888.4    |       | 5,536                              |       | 13,424.4  |       |
| *Source: Renewable Fuels Association,  January 2008* |       |

 

Inaddition to domestic increases in the supply of ethanol, as discussed above weface competition from international sources of ethanol, including ethanolproduced in Caribbean Basin countries that may be eligible for tariffreductions or elimination pursuant to the Caribbean Basin Initiative.

 

**Research andDevelopment**

 

Wedo not conduct any research and development activities associated with thedevelopment of new technologies for use in producing ethanol and distillersgrains.

 

**Dependence on One or a Few Major Customers**

 

**               **As discussed above, we have entered into marketing agreements forservices related to marketing and distributing our principal products, ethanoland distillers grains.  Pursuant to ouragreements with RPMG and CHS, we rely on others for the sale and distributionof almost all of our products, except for those distillers grains that wemarket locally.  Therefore, we expect tocontinue to be highly dependent on RPMG and CHS for the successful marketing ofour products.  Any loss of RPMG or CHS asour marketing agent for our ethanol and distillers grains or any lack ofperformance under these agreements or inability to secure competitive pricescould have a significant negative impact on our revenues.

 

**Costs and Effects of Compliance withEnvironmental Laws**

 

We are subject to extensive air, water andother environmental regulations, and we have been required to obtain a numberof environmental permits to construct and operate the plant.  We have obtained all of the necessary permitsto operate the plant.  Although we havebeen successful in obtaining all of the permits currently required, anyretroactive change in environmental regulations, either at the federal or statelevel, could require us to obtain additional permits or spend considerableresources on complying with such regulations.

 

                In addition, we may be requiredto purchase and install equipment for controlling and improving emissions.  In fiscal year 2007, ourcosts of environmental compliance were approximately $252,000 compared toapproximately $81,000 for the same period of 2006.  In 2006 we applied for renewal of our airpermit which was approved effective August 16, 2007.  This air permit expires on August 16,2012.

 

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We are subject to oversight activities bythe EPA.  There is always a risk that theEPA may enforce certain rules and regulations differently than SouthDakota’s environmental administrators. South Dakota or EPA rules are subject to change, and any suchchanges could result in greater regulatory burdens on plant operations.  We could also be subject to environmental ornuisance claims from adjacent property owners or residents in the area arisingfrom possible foul smells or other air or water discharges from the plant.  Such claims may result in an adverse resultin court if we are deemed to engage in a nuisance that substantially impairsthe fair use and enjoyment of real estate.

 

The government’s regulation of the environment changes constantly.  It is possible that federal or stateenvironmental rules or regulations could be adopted that could have anadverse effect on the use of ethanol. For example, changes in the environmental regulations regarding therequired oxygen content of automobile emissions could have an adverse effect onthe ethanol industry.  Furthermore, plantoperations are governed 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 effecting our operations,cash flows and financial performance.

 

**Employees**

 

As of December 31, 2007, wehad a total of 39 full-time employees, including 33 full-timeemployees in ethanol production operations and6 full-time employees in general management and administration.  We do not expect to hire a significant number ofemployees in the next 12 months.

 

**Financial Information about Geographic Areas**

 

All of our operations are domiciled in the United States.  All of the products sold to our customers forfiscal years 2007, 2006 and 2005 were produced in the United States and all ofour long-lived assets are domiciled in the United States.  We have engaged third-party professionalmarketers who decide where our products are marketed and we have no controlover the marketing decisions made by our third-party professional marketers.

 

**AvailableInformation**

 

The public may read and copy materials we file with the Securitiesand Exchange Commission at the SEC’s Public Reference Room at 100 F StreetNE, Washington, D.C., 20549.  Informationon the operation of the Public Reference Room may be obtained by callingthe SEC at 1-800-SEC-0330.  In addition,the SEC maintains an Internet site that contains reports, proxy and informationstatements and other information regarding issuers that file electronicallywith the SEC.  Reports we fileelectronically with the SEC may be obtained at http://www.sec.gov.  In addition, information about us is also available at our websiteat*http://www.dakotaethanol.com/lacp.html*,which includes links to reports we have filed with the Securities and ExchangeCommission.  The contents of our websiteare not incorporated by reference in this Annual Report on Form 10-K.

 

**ITEM 1A.               RISKFACTORS.**

 

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

 

**RisksRelating to Our Business**

 

***Increases in the price of corn would reduce our profitability.*** Our results of operations and financialcondition are significantly affected by the price and supply of corn. Changesin the price and supply of corn are subject to and determined by market forcesover which we have no control.  The priceat which we purchase corn has risen substantially in the last year and weexpect the price may continue to increase. Despite the third largest corn crop on record of approximately 10.74billion bushels in 2006, the price we paid for corn increased 

 

15

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approximately 89% in our2007 fiscal year as compared to the same period of 2006.  While the USDA estimates the 2007 corn cropproduced a record 13.1 billion bushels of corn, the selling price of corncontinues to rise.

 

Increases in demand forcorn from both the world foodstuff markets and from increased production ofethanol have increased the price of corn. We expect demand for corn from the ethanol industry to continue toexpand.  The Renewable Fuels Associationestimates as of March 4, 2008, there were 143 ethanol plants in operationnationwide with the capacity to produce more than 8 billion gallons of ethanolannually.  An additional 57 new plantsand 7 expansions are currently under construction, which will add an additionalestimated 5.3 billion gallons of annual production capacity.  Approximately 90% of the ethanol produced inthe United States uses corn as its feedstock. This increased supply of ethanol will continue to increase demand forcorn.

 

If the demand for corncontinues to increase so will the price we pay for corn.  Since our revenues depend on the spreadbetween the selling price of our ethanol and the price we pay for corn,increases in corn prices affect our ability to generate a profit.  This could negatively affect our futureprofitability.

 

***Our financial performance is significantly dependent on cornand natural gas prices.**** *Ourresults of operations and financial condition are significantly affected by thecost and supply of corn and natural gas. Generally, we cannot pass on increases in input prices to our customers.  Changes in the price and supply of corn andnatural gas are subject to and determined by market forces over which we haveno control.

 

                Corn, as with most other crops, is affected byweather, disease and other environmental conditions.  The price of corn is also influenced bygeneral economic, market and government factors.  These factors include weather conditions,farmer planting decisions, domestic and foreign government farm programs andpolicies, global demand supply and quality. Changes in the price of corn can significantly affect our business.Generally, higher corn prices will produce lower profit margins and, therefore,represent unfavorable market conditions. If we endure high corn prices for a sustained period of time withoutcorresponding increases in the selling price of ethanol and distillers grains,such pricing may reduce our ability to operate our ethanol plantprofitably.  If our region becomessaturated by ethanol plants, corn use for ethanol could consume a significantportion of the total corn production in our region, which would likely increaselocal corn prices.  We may not be able tooffset an increase in the price of corn by increasing the price of ourproducts.

 

The prices for andavailability of natural gas are subject to volatile market conditions,including supply shortages and infrastructure incapacities.  Significant disruptions in the supply ofnatural gas could impair our ability to manufacture ethanol and distillersgrains for our customers.  During the endof 2005 and early 2006, natural gas supply disruptions as a result ofhurricanes in the Gulf Coast lead to historic high natural gas prices.  At any time, similar supply disruptions mayincrease the price we pay for natural gas. Furthermore, increases in natural gas prices or changes in our naturalgas costs relative to natural gas costs paid by competitors may adverselyaffect our results of operations and financial condition.

 

                Increasesin the price we pay for corn and natural gas, without corresponding increasesin the price we receive for our ethanol and distillers grains, may make ourethanol plant operate unprofitably which could reduce or eliminate the value ofour units.

 

***The spreadbetween ethanol and corn prices can vary significantly. ***Corn costs significantly impact our cost of goodssold.  The spread between the price of ethanol and the price we pay perbushel of corn has fluctuated significantly in the past and may fluctuatesignificantly in the future.  The spreadbetween the price of ethanol and price of corn may continue to be volatile andmay lead to volatility in our net income. Any reduction in the spread between ethanol and corn prices, whether asa result of an increase in corn prices or a reduction in ethanol prices, wouldadversely affect our results of operations and financial condition.

 

***Our revenueswill be greatly affected by the price at which we can sell our ethanol anddistillers grains.*** The prices of ethanol and distillers grains can be volatile as aresult of a number of factors. These factors include overall supply and demand,the price of gasoline, the price of corn, government mandates for ethanol usesuch as the Renewable Fuels Standard, levels of government support, and theavailability and price of competing products.

 

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The selling price of ethanol peaked in 2006 and wassignificantly lower during the summer of 2007. We anticipate the price of ethanol to be volatile as new ethanol plantscome on-line increasing ethanol supply. The interaction of the new ethanol supply and demand will likely createswings in the price of ethanol into the foreseeable future.  Should ethanol demand expand at a slower pacethan increases in ethanol supply, we anticipate the selling price of ethanol todecrease.  Further, we anticipate thatincreases in ethanol supply will also lead to increases in distillers grainssupply.  If the increased supply ofdistillers grains is not also met with corresponding increases in distillersgrains demand, it may reduce the selling price of distillers grains.  As the ethanol industry continues to grow, weanticipate volatility in the price of both ethanol and distillers grains whichmakes future price projections unreliable. Any downward changes in the price of ethanol and/or distillers grainsmay result in less revenue and may impact our ability to operate profitably.

 

***Our business is not diversified.***  Our successdepends largely upon our ability to profitably operate our ethanol plant. We donot have any other lines of business or other sources of revenue if we areunable to operate our ethanol plant and manufacture ethanol and distillersgrains.  If economic or political factorsadversely affect the market for ethanol, the company has no other line ofbusiness to fall back on. Our business would also be significantly harmed ifour ethanol plant could not operate at full capacity for any extended period oftime.

 

***Advances inethanol production technology could require us to incur costs to update ourplant or could otherwise hinder our ability to compete or operate profitably.*** Advances and changes in the technology of ethanol production areexpected to occur.  Such advances andchanges may make the ethanol production technology installed in our plant lessdesirable or obsolete.  These advancescould also allow our competitors to produce ethanol at a lower cost thanus.  If we are unable to adopt orincorporate technological advances, our ethanol production methods andprocesses could be less efficient than our competitors, which could cause ourplant to become uncompetitive or completely obsolete.  If our competitors develop, obtain or licensetechnology that is superior to ours or that makes our technology obsolete, wemay be required to incur significant costs to enhance or acquire new technologyso that our ethanol production remains competitive.  Alternatively, we may be required to seekthird-party licenses, which could also result in significant expenditures.  We cannot guarantee or assure you thatthird-party licenses will be available or, once obtained, will continue to beavailable on commercially reasonable terms, if at all.  These costs could negatively impact ourfinancial performance by increasing our operating costs and reducing our netincome.

 

***Wesell all of the ethanol we produce to RPMG under our ethanol marketingagreement.***** **RPMG is the sole buyer of all of our ethanol, and werely heavily on its marketing efforts to successfully sell our product.  Because RPMG sells ethanol for a number ofother producers, we have limited control over its sales efforts.  Our financial performance is dependent uponthe financial health of RPMG as a significant portion of our accountsreceivable are attributable to RPMG.  IfRPMG breaches the ethanol marketing agreement or is not in the financial positionto purchase and market all of the ethanol we produce, we may not have anyreadily available means to sell our ethanol and our financial performance willbe adversely and materially affected.  Ifour agreement with RPMG 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 RPMG.

 

***Wesell a substantial portion of the distillers grains we produce to CHS under ourdistillers grains marketing agreement.***** **CHS is thesole buyer of all of our distillers grains that we do not sell locally, and werely heavily on its marketing efforts to successfully sell our product.  We currently only market locally a smallpercentage of the distillers grains we produce. Because CHS sells distillers grains for a number of other producers, wehave limited control over its sales efforts. Our financial performance is dependent upon the financial health of CHS,as a significant portion of our accounts receivable are attributable toCHS.  If CHS breaches the distillersgrains marketing agreement or is not in the financial position to purchase andmarket all of the distillers grains we produce which are not marketed locallyby us, we may not have any readily available means to sell our distillersgrains, and our financial performance will be adversely and materiallyaffected.  If our agreement with CHSterminates, we may seek other arrangements to sell our distillers grains,including selling our own product, but we give no assurance that our salesefforts would achieve results comparable to those achieved by CHS.

 

***We engage in hedging transactions that may becostly and ineffective.***  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 tominimize the risks from fluctuations in the prices of corn 

 

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and natural gas throughthe use of hedging instruments.  The effectiveness of our hedgingstrategies is dependent upon the cost of corn and natural gas and our abilityto sell sufficient products to use all of the corn and natural gas for which wehave futures contracts.  There is noassurance that our hedging activities will successfully reduce the risk causedby price fluctuation which may leave us vulnerable to high corn and naturalprices. Alternatively, we may choose not to engage in hedging transactions inthe future.  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 activitiesthemselves can result in costs because price movements in corn and natural gascontracts are highly volatile and are influenced by many factors that arebeyond our control.  There are severalvariables that could affect the extent to which our derivative instruments areimpacted by price fluctuations in the cost of corn or natural gas. However, it is likely that commodity cash prices will have the greatest impacton the derivatives instruments with delivery dates nearest the current cashprice.  We may incur such costs and theymay be significant.

 

**RisksRelated to Ethanol Industry**

 

***New plants underconstruction or decreases in the demand for ethanol may result in excessproduction capacity in our industry. ***The supply of domestically producedethanol is at an all-time high.  As of March 4,2008, there were 143 ethanol plants in operation nationwide with the capacityto produce more than 8 billion gallons of ethanol annually.  An additional 57 new plants and 7 expansionsare currently under construction, which will add an additional estimated 5.3billion gallons of annual production capacity.  Excess capacity in the ethanol industry would have an adverse impact onour results of operations, cash flows and general financial condition.  If the demand for ethanol does not grow atthe same pace as increases in supply, we would expect the selling price ofethanol to continue to decline.  Themarket price of ethanol may decline to a level that is inadequate to generatesufficient cash flow to cover our costs. This could negatively affect our future profitability.

 

***We operate in a competitiveindustry******and compete with larger,better financed entities.***  There is significant competition amongethanol producers with numerousproducer and privately owned ethanol plants planned and operating throughoutthe Midwest and elsewhere in the United States. The number of ethanol plants being developed and constructedin the United States continues to increase at a rapid pace. The recent passageof the Energy Independence and Security Act of 2007 increased the renewablefuels use mandate that we expect will further increase the number of domesticethanol production facilities.  Thelargest ethanol producers include Abengoa Bioenergy Corp., Archer DanielsMidland, Aventine Renewable Energy, Inc., Hawkeye Renewable, POET(Formerly Broin), US BioEnergy Corp., and VeraSun Energy Corporation, all ofwhich are each capable of producing more ethanol than we produce or expect toproduce in the future.  These largeethanol producers may realize economies of scale that we cannot take advantageof and may influence the ethanol industry in ways that are not beneficial tous.  If the demand for ethanol does notgrow 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 harm our financial condition.

 

***We compete with other gasoline additives. ***Our ethanol plant also competes with producers ofother gasoline additives made from raw materials other than corn having similaroctane and oxygenate values as ethanol, such as producers of methyl tertiarybutyl ether (MTBE). MTBE is a petrochemical derived from methanol whichgenerally costs less to produce than ethanol. Many major oil companies produceMTBE and strongly favor its use because it is petroleum-based. Alternativefuels, gasoline oxygenates and alternative ethanol production methods are alsocontinually under development. The major oil companies have significantlygreater resources than we have to market MTBE, to develop alternative products,and to influence legislation and public perception of MTBE and ethanol. Thesecompanies also have significant resources to begin production of ethanol shouldthey choose to do so.

 

***Competition from the advancement of alternative fuels maylessen the demand for******ethanol.*** Alternative fuels, gasoline oxygenates and ethanol production methodsare continually under development. A number of automotive, industrial and powergeneration manufacturers are developing alternative clean power systems usingfuel cells or clean burning gaseous fuels. Like ethanol, the emerging fuel cellindustry offers a technological option to address increasing worldwide energycosts, the long-term availability of petroleum reserves and environmentalconcerns. Fuel cells have emerged as a potential alternative to certainexisting power sources because of their higher efficiency, reduced noise andlower emissions. Fuel cell industry participants are currently targeting thetransportation, stationary power and portable power markets in order to decreasefuel costs, lessen dependence on 

 

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crude oil and reduce 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. This additional competition could reducethe demand for ethanol, resulting in lower ethanol prices that might adverselyaffect our results of operations and financial condition.

 

***Corn-based ethanol may compete with cellulose-based ethanolin the future****.*  Especially in the Midwest, most ethanol iscurrently produced from corn and other raw grains, such as milo or sorghum. Thecurrent trend in ethanol production research is to develop an efficient methodof producing ethanol from cellulose-based biomass, such as agricultural waste,forest residue, municipal solid waste, and energy crops. This trend is drivenby the fact that cellulose-based biomass is generally cheaper than corn, andproducing ethanol from cellulose-based biomass would create opportunities toproduce ethanol in areas which are unable to grow corn.  The Energy Independence and Security Act of2007 offers a very strong incentive to develop commercial scale cellulosicethanol.  The RFS requires that 16billion gallons per year of cellulosic ethanol be consumed in the United Statesby 2022.  We expect this will encourageinnovation that may lead to commercially viable cellulosic ethanol plants.  If an efficient method of producing ethanolfrom cellulose-based biomass is developed, we may not be able to competeeffectively. We do not believe it will be cost-effective to convert our ethanolplant into a plant which will use cellulose-based biomass to produce ethanol.If we are unable to produce ethanol as cost-effectively as cellulose-basedproducers, our ability to generate revenue and our financial condition will benegatively impacted.

 

***E******thanol imported from Caribbean basincountries may be a less******expensivealternative to our ethanol.***  Ethanolproduced or processed in certain countries in Central America and the Caribbeanregion is eligible for tariff reduction or elimination upon importation to theUnited States under a program known as the Caribbean Basin Initiative. Largeethanol producers, such as Cargill, have built dehydration plants inparticipating Caribbean Basin countries, such as El Salvador, which convertethanol into fuel-grade ethanol for shipment to the United States. Ethanolimported from Caribbean Basin countries may be a less expensive alternative todomestically produced ethanol. Competition from ethanol imported from CaribbeanBasin countries may affect our ability to sell our ethanol profitably,adversely affect our results of operations and financial condition.

 

***Ethanol imported from Brazil may be a less expensive******alternative to our ethanol.*** Brazil is currently the world’s largest exporter of ethanol.  Until recently, Brazil was also the world’slargest producer of ethanol.  In Brazil,ethanol is produced primarily from sugarcane, which is also used to producefood-grade sugar. In 2007, according to the Renewable Fuels Association, Brazilproduced approximately 5 billion gallons of ethanol and exported a total ofnearly 190 million gallons of ethanol to the United States through November 2007(the last available data).  Ethanolimported from Brazil may be a less expensive alternative to domesticallyproduced ethanol, which is primarily made from corn. Tariffs presentlyprotecting U.S. ethanol producers may be reduced or eliminated. Competitionfrom ethanol imported from Brazil may affect our ability to sell our ethanolprofitably and adversely affect our financial condition.

 

***Consumer beliefs may affect the demand for ethanol.*** We believe that certain consumers perceive the use of ethanol to have anegative impact on gasoline prices at the pump. Some consumers also believethat ethanol adds to air pollution and harms car and truck engines. Still otherconsumers believe that the process of producing ethanol actually uses morefossil fuel energy, such as oil and natural gas, than the energy in the ethanolthat is produced. These consumer beliefs could potentially be widespread. Ifconsumers choose not to buy ethanol, it will affect the demand for the ethanolwe produce which could lower the selling price of ethanol and negatively affectour profitability and financial condition.

 

**Risks Related to Regulation and GovernmentalAction**

 

***A change in government policies favorable to ethanol maycause demand for******ethanol todecline.***  Growth and demand for ethanol may be drivenprimarily by federal and state government policies, such as state laws banningMethyl Tertiary Butyl Ether (MTBE), national tax incentives and the renewablefuels standard. The continuation of these policies is uncertain, which meansthat demand for ethanol may decline if these policies change or arediscontinued. A decline in the demand for ethanol is likely to cause lowerethanol prices which in turn will negatively affect our results of operations,financial condition and cash flows.

 

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***Governmentincentives for ethanol production may be eliminated in the future.***** **The ethanol industry and our business are assisted byvarious federal ethanol tax incentives, including those included in the EnergyPolicy Act of 2005 and the Energy Independence and Security Act of 2007. Theprovisions of the Energy Policy Act of 2005 and the Energy Independence andSecurity Act of 2007 likely to have the greatest impact on the ethanol industryis the creation of the Renewable Fuels Standard (RFS). The RFS began in 2006and was expanded in the Energy Independence and Security Act of 2007.  The RFS requires that 9 billion gallons ofrenewable fuels be used in 2008, expanding to 36 billion gallons by 2022.  However, only approximately 15 billiongallons of the RFS can be met by corn based ethanol.  The remaining gallons of the RFS may be metby other renewable fuels such as cellulosic ethanol and biodiesel.  The RFS helps support a market for ethanolthat might disappear without this incentive. The elimination or reduction oftax incentives to the ethanol industry could also reduce the market forethanol, which could reduce prices and our revenues by making it more costly ordifficult for us to produce and sell ethanol. If the federal tax incentives areeliminated or sharply curtailed, we believe that decreased demand for ethanolwill result, which could negatively affect our profitability and financialcondition.

 

Another importantprovision involves increasing the production capacity limit of plants that areeligible for the small ethanol producer tax credit. Small ethanol producers areallowed a 10-cents-per-gallon production income tax credit on up to 15 milliongallons of production annually. The size of the plant eligible for the taxcredit was historically limited to 30 million gallons. Under the Energy PolicyAct of 2005, the size limitation on the production capacity for small ethanolproducers increased from 30 million to 60 million gallons. This tax credit mayfoster additional growth in ethanol plants of a larger size and increasecompetition in this particular plant size category.  Without these government supports for ethanol,demand for ethanol may decrease which would likely decrease the selling priceof ethanol and negatively affect our financial condition.  Without these governmental supports,production of ethanol may become unprofitable which could decrease or eliminatethe value of our units.

 

***Changes in environmental regulations or violations of theregulations could reduce our profitability.***  We are subjectto extensive air, water and other environmental laws and regulations.  In addition, some of these laws require ourplant to operate under a number of environmental permits. These laws,regulations and permits can often require expensive pollution control equipmentor operation changes to limit actual or potential impacts to theenvironment.  A violation of these lawsand regulations or permit conditions can result in substantial fines, damages,criminal sanctions, permit revocations and/or plant shutdowns.  In the future, permit requirements may changeor we may exceed certain limits in our permits that may lead to regulatoryactions by the State of South Dakota or the EPA.  Further, we may be required to secureadditional permits in the future which may be costly and may affect our abilityto operate the ethanol plant.  We may alsobe subject to litigation by environmental advocacy groups and other partiesbased on actual or alleged violations of environmental laws.  Additionally, any changes in environmentallaws and regulations, both at the federal and state level, could require us tospend considerable resources in order to comply with future environmentalregulations. The expense of compliance with environmental laws as well aslitigation concerning environmental laws could be significant and reduce ourprofitability and negatively affect our financial condition.

 

***Carbon dioxide may be regulated in the future by the EPA as an airpollutant requiring us to obtain additional permits and install additionalenvironmental mitigation equipment, which could adversely affect our financialperformance.***  The Supreme Court recently decided a case inwhich it ruled that carbon dioxide is an air pollutant under the Clean Air Actfor the purposes of motor vehicle emissions. The lawsuit sought to require the EPA to regulate carbon dioxide invehicle emissions.  Similar lawsuits havebeen filed seeking to require the EPA to regulate carbon dioxide emissions fromstationary sources such as our ethanol plant under the Clean Air Act. Our plantproduces a significant amount of carbon dioxide that we currently vent into theatmosphere.  While there are currently noregulations applicable to us concerning carbon dioxide, if the EPA or the Stateof South Dakota regulate carbon dioxide emissions by plants such as ours, wemay have to apply for additional permits or we may be required to installcarbon dioxide mitigation equipment or take other as yet unknown steps tocomply with these potential regulations. Compliance with any future regulation of carbon dioxide, if it occurs,could be costly and may prevent us from operating the ethanol plant profitablywhich could decrease or eliminate the value of our units.

 

**ITEM 2.  PROPERTIES.**

 

We ownDakota Ethanol as a wholly-owned subsidiary. The ethanol plant is located on Dakota Ethanol’s 77-acre rural site nearWentworth, South Dakota. The plant grinds approximately 17.5 million bushels ofcorn per 

 

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year to produce approximately 48.9million gallons of ethanol.  All of our operations occur at our plant inWentworth, South Dakota.  The original construction ofthe plant was completed in 2001 and consists of the followingbuildings:

 

·                  A processingbuilding, which contains processing equipment, laboratories, control room andoffices;

·                  A grain receivingand shipping building;

·                  A mechanicalbuilding, which contains maintenance offices, storage and a welding shop; and

·                  An administrativebuilding, along with furniture and fixtures, office equipment and computer andtelephone systems.

 

The plant includes a fermenter walkway, gas dryer, evaporator andstorage facilities for ethanol and distillers grains.  The site also contains improvements such asrail tracks and a rail spur, landscaping, drainage systems and access roads.

 

Allof Dakota Ethanol’s tangible and intangible property, real and personal, servesas the collateral for debt financing with First National Bank of Omahadescribed below under “**Item 7 — Management’sDiscussion and Analysis of Financial Condition and Results of Operations —Indebtedness**.”

 

**ITEM 3.  LEGAL PROCEEDINGS.**

 

From time to timein the ordinary course of business, Dakota Ethanol or Lake Area Corn Processorsmay be named as a defendant in legal proceedings related to various issues,including without limitation, workers’ compensation claims, tort claims, orcontractual disputes.  We are notcurrently involved in any material legal proceedings, directly or indirectly,and we are not aware of any claims pending orthreatened against us or any of the managers that could result in thecommencement of legal proceedings.

 

**ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.**

 

We did not submitany matter to a vote of our unit holders through the solicitation of proxies orotherwise during the fourth quarter of 2007.

 

**PART II**

 

**ITEM 5.****                                                    ****MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.**

 

**RecentSales of Unregistered Securities**

 

None.

 

**Market Information**

 

There is no public trading market for ourunits.  Our units may only be transferredin accordance with our Capital Units Transfer System, which provides fortransfers by gift to family members, upon death, and through a qualifiedmatching service, subject to approval by our board of managers.  Our qualified matching service is operatedthrough Variable Investment Advisors, Inc., a registered broker-dealerbased in Sioux Falls, South Dakota. Variable Investment Advisor’s Alternative Trading System may be accessedat www.agstocktrade.com. The matching service consists of an electronicbulletin board that provides information to prospective sellers and buyers ofour units.  We do not receive anycompensation relating to the matching service. We have no role in effecting the transactions beyond approval, asrequired under our operating agreement and the issuance of newcertificates.  So long as we remain a Section 12registrant and a publicly reporting company, information about the company willbe publicly available through the SEC’s filing system.  However, if at any time we cease to be a Section 12registrant or publicly reporting company, we will continue to make informationabout the company publicly available on our website.

 

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**Unit Holders**

 

As of March 15, 2008, the company had29,620,000 membership units issued and outstanding and a total of approximately1,015 unit holders.  There is no otherclass of membership unit issued or outstanding.

 

**Bid and Asked Prices**

 

The following table contains informationconcerning completed unit transactions that occurred during the last two fiscalyears.  Our bulletin board trading systemdoes not track bid and asked prices and therefore we only have informationconcerning completed unit transactions.

 

| **Period**       | ** ** | **Low Price** | ** ** | **High Price** | ** ** | **Average Price** | ** ** | **# of  Units Listed** | ** ** |
|------------------|------------|---------------|------------|----------------|------------|-------------------|------------|------------------------|------------|
| 2006 1st Quarter |       | $             | 2.61       |           | $          | 2.96              |       | $                      | 2.83       |   | 172,000 |   |
| 2006 2nd Quarter |       | $             | —     |           | $          | —            |       | $                      | —     |   | — |   |
| 2006 3rd Quarter |       | $             | —     |           | $          | —            |       | $                      | —     |   | — |   |
| 2006 4th Quarter |       | $             | —     |           | $          | —            |       | $                      | —     |   | — |   |
| 2007 1st Quarter |       | $             | —     |           | $          | —            |       | $                      | —     |   | — |   |
| 2007 2nd Quarter |       | $             | 3.73       |           | $          | 4.11              |       | $                      | 3.99       |   | 164,050 |   |
| 2007 3rd Quarter |       | $             | 3.61       |           | $          | 3.98              |       | $                      | 3.87       |   | 8,500 |   |
| 2007 4th Quarter |       | $             | 2.77       |           | $          | 2.92              |       | $                      | 2.85       |   | 112,000 |   |

 

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“—” Indicates periodduring which unit trading was suspended by the Company.

 

**Distributions**

 

Under the terms of our Amended andRestated Operating Agreement, we are required to make distributions to ourmembers and may not retain more than $200,000 of net cash from operations,unless: (1) a 75% supermajority of our board decides otherwise; (2) itwould violate or cause a default under the terms of any debt financing or othercredit facilities; or (3) it is otherwise prohibited by law.  Our ability to make distributions to ourmembers is dependent upon the distributions made to us by Dakota Ethanol.  All net income generated from plantoperations is distributed by Dakota Ethanol to us since Dakota Ethanol is ourwholly-owned subsidiary.  Prior to theBroin family’s assignment of its minority interest in Dakota Ethanol, we wouldreceive approximately 88% of the net income generated by Dakota Ethanol.  We distribute the net income received fromDakota Ethanol to our unit holders in proportion to the number of units held byeach unit holder.  A unit holder’sdistribution percentage is determined by dividing the number of units owned bysuch unit holder by the total number of units outstanding.  Our expectations with respect to our abilityto make future distributions are discussed in greater detail in “**Item 7 — Management’s Discussion and Analysis of Financial Conditionand Results of Operations**.”

 

Distributions to our unit holders are alsosubject to certain loan covenants and restrictions that require us to makeadditional 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.**”

 

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***2007 Distributions***

 

Infiscal year 2007, Dakota Ethanol madetotal cash distributions to LACP of approximately $18,748,000.  As a result, our board of managersapproved cash distributions to our members totaling $17,772,000.  The followingchart lists the cash distributions made to our members in fiscal year 2007:

 
| **Date of  Board Approval** | ** ** | **Total Distribution** | ** **     | **Distribution  Per Unit** | ** ** | **Distributed to Members of Record as of:** | ** ** |
|-----------------------------|------------|------------------------|----------------|----------------------------|------------|---------------------------------------------|------------|
| February 7, 2007       |       | $                      | 5,924,000      |                       | $          | 0.20                                        |       | January 1,  2007 |   |
| April 25, 2007         |       | $                      | 2,962,000      |                       | $          | 0.10                                        |       | April 1,  2007 |   |
| May 30, 2007           |       | $                      | 2,962,000      |                       | $          | 0.10                                        |       | April 1,  2007 |   |
| August 1, 2007         |       | $                      | 2,962,000      |                       | $          | 0.10                                        |       | July 1,  2007 |   |
| November 20, 2007      |       | $                      | 2,962,000      |                       | $          | 0.10                                        |       | October 1,  2007 |   |
| **Totals**                  | ** ** | **$**                  | **17,772,000** | ** **                 | **$**      | **0.60**                                    | ** ** | ** ** | ** ** |

 

***2006 Distributions***

 

Infiscal year 2006, Dakota Ethanol madetotal cash distributions to LACP of approximately $13,300,000 and approximately$800,000 to the minority members. As a result, our board of managersapproved cash distributions to our members totaling $13,329,000. The following chart lists the cash distributions made toour members in 2006:

 
| **Date of  Board Approval** | ** ** | **Total Distribution** | ** **     | **Distribution  Per Unit** | ** ** | **Distributed to Members of Record as of:** | ** ** |
|-----------------------------|------------|------------------------|----------------|----------------------------|------------|---------------------------------------------|------------|
| February 15, 2006      |       | $                      | 2,962,000      |                       | $          | 0.10                                        |       | January 1,  2006 |   |
| April 11, 2006         |       | $                      | 2,962,000      |                       | $          | 0.10                                        |       | January 1,  2006 |   |
| August 25, 2006        |       | $                      | 2,962,000      |                       | $          | 0.10                                        |       | May 1,  2006 |   |
| November 17, 2006      |       | $                      | 4,443,000      |                       | $          | 0.15                                        |       | September 1,  2006 |   |
| **Totals**                  | ** ** | **$**                  | **13,329,000** | ** **                 | **$**      | **0.45**                                    | ** ** | ** ** | ** ** |

 

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**Performance Graph**

 

Thefollowing graph compares the cumulative total return on the Company’s unitswith the cumulative total return of the NASDAQ Index and the SIC Code Index(SIC Code 2869—Industrial Organic Chemicals, Not Elsewhere Classifed).  The unit price performance shown on thefollowing graph is not intended to forecast and is not indicative of futureunit price performance.  The data forthis performance graph was compiled for us by Ipreo, LLC.

 

 

**COMPARISON OF 5-YEAR CUMULATIVETOTAL RETURNAMONG LAKE AREA CORN PROCESSORS, LLC,**

**NASDAQ MARKET INDEX AND SIC CODEINDEX**

 

 

 

ASSUMES $100 INVESTED ON DEC. 31, 2002ASSUMES DIVIDEND REINVESTEDFISCAL YEAR ENDING DEC. 31, 2007

 

 

**ITEM 6.**                                                     **SELECTEDFINANCIAL DATA.**

 

The followingtable sets forth selected consolidated financial data of the Company, which isderived from the audited financial statements for the periods indicated.  The selected consolidated balance sheetfinancial data as of December 31, 2005, 2004 and 2003 and the selectedconsolidated income statement data and other financial data for the years endedDecember 31, 2004 and 2003 have been derived from our audited consolidatedfinancial statements that are not included in this Form 10-K. The selectedconsolidated balance sheet financial data as of December 31, 2007 and 2006and the selected consolidated income statement data and other financial datafor each of the years in the three year period ended December 31, 2007have been derived from the audited Consolidated Financial Statements includedelsewhere in this Form 10-K. You should read the following table inconjunction with (i) the consolidated financial statements andaccompanying notes included elsewhere in this Form 10-K; (ii) **“Item 7 Management’s Discussion and Analysis of Financial Condition andResults of Operations”**; and (iii) **“Item 1ARisk Factors”**found elsewhere in this Form 10-K.  Among other things, those financialstatements include more detailed information regarding the basis ofpresentation for the following consolidated financial data.

 

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| **Statement of Operations Data:**        | ** ** | **2007**   | ** **  | **2006**   | ** ** | **2005**    | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|------------------------------------------|------------|------------|-------------|------------|------------|-------------|------------|------------|------------|------------|------------|
| Revenues                                 |       | $          | 103,739,699 |       | $          | 103,889,412 |       | $          | 80,020,970 |       | $          | 84,432,486 |   | $ | 69,391,182 |   |
|                                     |       |       |        |       |       |        |       |       |       |       |       |
| Cost of Revenues                         |       | $          | 80,977,667  |       | $          | 50,792,418  |       | $          | 63,201,108 |       | $          | 71,736,360 |   | $ | 60,198,865 |   |
|                                     |       |       |        |       |       |        |       |       |       |       |       |
| Gross Profit                             |       | $          | 22,762,032  |       | $          | 53,096,994  |       | $          | 16,819,862 |       | $          | 12,696,126 |   | $ | 9,192,317 |   |
|                                     |       |       |        |       |       |        |       |       |       |       |       |
| General and Administrative Expense       |       | $          | (3,721,813  | )          | $          | (3,938,845  | )          | $          | (3,610,590 | )          | $          | (3,058,024 | ) | $ | (2,620,736 | ) |
|                                     |       |       |        |       |       |        |       |       |       |       |       |
| Income From Operations                   |       | $          | 19,040,219  |       | $          | 49,158,149  |       | $          | 13,209,272 |       | $          | 9,638,102 |   | $ | 6,571,581 |   |
|                                     |       |       |        |       |       |        |       |       |       |       |       |
| Interest Expense                         |       | $          | (695,043    | )          | $          | (1,008,300  | )          | $          | (1,089,364 | )          | $          | (1,300,647 | ) | $ | (1,461,763 | ) |
|                                     |       |       |        |       |       |        |       |       |       |       |       |
| Other Income (Expense)                   |       | $          | (339,971    | )          | $          | 121,719     |       | $          | 238,705    |       | $          | 223,548 |   | $ | 147,629 |   |
|                                     |       |       |        |       |       |        |       |       |       |       |       |
| Minority Interest in Subsidiary Income   |       | $          | —      |       | $          | (2,235,776  | )          | $          | (1,494,029 | )          | $          | (1,037,458 | ) | $ | (641,767 | ) |
|                                     |       |       |        |       |       |        |       |       |       |       |       |
| Net Income                               |       | $          | 18,005,205  |       | $          | 46,035,792  |       | $          | 10,864,584 |       | $          | 7,523,545 |   | $ | 4,615,680 |   |
|                                     |       |       |        |       |       |        |       |       |       |       |       |
| Capital Units Outstanding                |       | 29,620,000 |        | 29,620,000 |       | 29,620,000  |       | 29,620,000 |       | 29,620,000 |       |
| Net Income Per Capital Unit              |       | $          | 0.61        |       | $          | 1.55        |       | $          | 0.37       |       | $          | 0.25 |   | $ | 0.16 |   |
| Cash Distributions per Capital Unit      |       | $          | 0.60        |       | $          | 0.45        |       | $          | 0.32       |       | $          | 0.21 |   | $ | 0.12 |   |
|                                     |       |       |        |       |       |        |       |       |       |       |       |
| **Balance  Sheet Data:**                 | ** ** | **2007**   | ** **  | **2006**   | ** ** | **2005**    | ** ** | **2004**   | ** ** | **2003**   | ** ** |
| Working Capital                          |       | $          | 16,054,455  |       | $          | 17,220,709  |       | $          | 1,940,335  |       | $          | (145,791 | ) | $ | (115,841 | ) |
| Net Property, Plant & Equipment |       | $          | 35,345,093  |       | $          | 35,695,754  |       | $          | 33,468,374 |       | $          | 34,862,856 |   | $ | 35,998,055 |   |
| Total Assets                             |       | $          | 73,554,744  |       | $          | 72,381,310  |       | $          | 42,946,122 |       | $          | 46,065,440 |   | $ | 45,998,055 |   |
| Long-Term Obligations                    |       | $          | 5,077,137   |       | $          | 6,921,695   |       | $          | 8,601,196  |       | $          | 9,882,779 |   | $ | 12,682,279 |   |
| Minority Interest                        |       | $          | —      |       | $          | —      |       | $          | 3,234,649  |       | $          | 3,055,597 |   | $ | 2,863,277 |   |
| Member’s Equity                     |       | $          | 56,953,587  |       | $          | 56,720,382  |       | $          | 24,013,590 |       | $          | 22,627,406 |   | $ | 21,324,061 |   |
| Book Value Per Capital Unit              |       | $          | 1.92        |       | $          | 1.91        |       | $          | 0.81       |       | $          | 0.76 |   | $ | 0.72 |   |

 

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

 

Except for the historicalinformation, the following discussion contains forward-looking statements thatare subject to risks and uncertainties.  We caution you not to put unduereliance on any forward-looking statements, which speak only as of the date ofthis report.  Our actual results or actions may differ materiallyfrom these forward-looking statements for many reasons, including the risks described in “**Item 1A - Risk Factors**” and elsewhere inthis annual report.  Our discussion and analysis of our financial conditionand results of operations should be read in conjunction with the financialstatements and related notes and with the understanding that our actual futureresults may be materially different from what we currently expect.

 

25

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**Overview**

 

We currently own Dakota Ethanol, LLC as a wholly-owned subsidiary.  In June 2006, we entered into anassignment agreement with members of the Broin family who owned a minorityinterest in Dakota Ethanol of approximately 12%.  We purchased the approximately 12% minorityinterest in Dakota Ethanol for approximately $19,400,000 which included theestimated net earnings of Dakota Ethanol through the date of the purchase.

 

Dakota Ethanol owns and operates an ethanol plant with a nameplatecapacity of 40 million gallons per year. The plant currently operates in excess of its nameplate capacity,producing approximately 48.9 million gallons of ethanol per year.  Our revenues are derived from the sale anddistribution of our ethanol and distillers grains throughout the continentalUnited States.  Corn is supplied to usprimarily from our members who are local agricultural producers and frompurchases of corn on the open market. After processing the corn, the ethanol issold to our ethanol marketer, which subsequently markets and sells the ethanolto gasoline blenders and refineries located throughout the continental UnitedStates.  Beginning on January 1,2006, our ethanol has been  marketed byRMPG pursuant to our ethanol marketing agreement.  Previously our ethanol was marketed by asubsidiary of the Broin Company called Ethanol Products, LLC.

 

On May 30, 2007, we made a $605,000 capital contribution to RPMGand executed certain other agreements necessary to become an owner of RPMG.  Specifically, we became a party to RPMG’soperating agreement, executed a contribution agreement that governs the fundingof our capital contribution to RPMG, and entered into a new member ethanol fuelmarketing agreement for members of RPMG. Becoming an owner of RPMG allows us to share any profits made by RPMGand reduces the fees we pay RPMG to market our ethanol.  Pursuant to our member ethanol fuel marketingagreement, we use a pooled marketing arrangement, which means that the ethanolwe produce is pooled with other ethanol producers and marketed by RPMG.  RPMG pays us a netback price per gallon thatis based upon the difference between the pooled average delivered ethanolselling price and the pooled average distribution expense.  These averages are calculated based upon eachpool participant’s selling price and expense averaged in direct proportion tothe volume of ethanol supplied by each participant to the pool.  We elected to pay our capital contribution toRPMG over time with a portion of our ethanol sales revenue.

 

From the commencement of our operations through December 1, 2005,Dakota Gold Marketing, a Broin affiliate, marketed our distillers grains.  From December 1, 2005 until October 1,2007, our distillers grains were marketed by Commodity Specialist Company(CSC).  CSC was recently purchased by CHS, Inc.(CHS).  On August 8, 2007, CSCassigned our distillers grains marketing agreement to CHS effective October 1,2007.  Therefore, our distillers grainsare currently marketed and sold by CHS under the same terms as our agreementwith CSC.  Under the distillers grainsmarketing agreement, we receive a percentage of the selling price actuallyreceived by CHS in marketing the distillers grains to its customers.

 

Ouroperating income or loss is significantly tied to the price at which ourethanol and distillers grains are sold. Historically, the price of ethanol tends to fluctuate based on the priceof unleaded gasoline and other petroleum products.  This trend was broken recently and the priceof ethanol has more closely followed the price of corn.  However, management believes that the priceof ethanol may not continue to follow the price of corn in the future.  Surplus ethanol supplies also tend to putdownward price pressure on ethanol.  Incontrast, the price of distillers grains generally tends to fluctuate based onthe price of substitute livestock feed, such as corn and soybean meal.  Surplus grain supplies tend to put downwardprice pressure on distillers grains.

 

Ourcost of revenues, which includes production expenses, is significantly affectedby the cost of corn and natural gas.  In 2007, for instance, our corn costsrepresented approximately 66% of our total cost of revenues, whereas the costof natural gas represented approximately 15% of our total cost ofrevenues.  Comparatively, in 2006, thecost of corn was approximately 54% of our total cost of revenues, whereas thecost of natural gas was approximately 27% of our total cost of revenues. This change in the relative percentages of our cost of revenues attributed tocorn is due to the significant increase in corn costs that we experiencedduring our 2007 fiscal year.  The cost ofcorn is affected primarily by supply and demand factors such as cropproduction, carryout, exports, risk management and weather, much of which wehave no control over.  Natural gas pricesfluctuate with the energy complex in general. Over the last few years, natural gas prices have trended lower from apeak that we experienced at the end of our 2005 fiscal year and the beginningof our 2006 fiscal year.  We anticipatethat natural gas prices will be stable in fiscal year 2008 as compared tofiscal year 2007.

 

26

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We are subject to industry-widefactors that affect our revenues and profits. These factors include, but are not limited to, the available supply andcost of corn from which our ethanol and distillers grains are made; the cost ofnatural gas, which we use in the production of ethanol and distillers grains;dependence on one or a few major customers who market and distribute ourproducts; the intensely competitive nature of our industry; possiblelegislation at the federal, state, and/or local level; changes in federalethanol tax incentives; and the cost of complying with the extensiveenvironmental laws that regulate our industry.

 

#### **Results ofOperations**

#### ** **

***Comparison of Year Ended******December 31,2007 and 2006*****.**

 

The followingtable shows the results of our operations and the percentage of revenues, costof revenues, operating expenses and other items to total revenues in ourconsolidated statements of operations for the fiscal years ended December 31,2007 and 2006:

 
| ** **                              | ** ** | **2007**   | ** **  | **2006** | ** ** |
|-----------------------------------------|------------|------------|-------------|----------|------------|
| **Income  Statement Data:**             | ** ** | **Amount** | ** **  | **%**    | ** ** | **Amount** | ** ** | **%** | ** ** |
| Revenues                                |       | $          | 103,739,699 |     | 100.0      |   | $ | 103,889,412 |   | 100.0 |   |
|                                    |       |       |        |     |       |   |   |   |   |
| Cost of Revenues                        |       | 80,977,667 |        | 78.1     |       | 50,792,418 |   | 48.9 |   |
|                                    |       |       |        |     |       |   |   |   |   |
| Gross Profit                            |       | 22,762,032 |        | 21.9     |       | 53,096,994 |   | 51.1 |   |
|                                    |       |       |        |     |       |   |   |   |   |
| General and Administrative  Expense     |       | (3,721,813 | )           | (3.6     | )          | (3,938,845 | ) | (3.8 | ) |
|                                    |       |       |        |     |       |   |   |   |   |
| Income From Operations                  |       | 19,040,219 |        | 18.4     |       | 49,158,149 |   | 47.4 |   |
|                                    |       |       |        |     |       |   |   |   |   |
| Other Income (Expense)                  |       | (1,035,014 | )           | (1.0     | )          | (886,581 | ) | (0.9 | ) |
|                                    |       |       |        |     |       |   |   |   |   |
| Minority Interest in  Subsidiary Income |       | —     |        | —   |       | (2,235,776 | ) | (2.2 | ) |
|                                    |       |       |        |     |       |   |   |   |   |
| Net Income                              |       | 18,005,205 |        | 17.4     |       | 46,035,792 |   | 44.3 |   |
|                                         |            |            |             |          |            |  |  |  |  |  |  |

 

*Revenues*

 

During our fiscal yearended December 31, 2007, we experienced a slight decrease in our totalrevenue compared to our 2006 fiscal year. This decrease in our revenue was a result of the net effect of decreasedethanol revenue offset by a smaller increase in distillers grains revenueduring our 2007 fiscal year as compared to the same period of 2006.  Additionally, we experienced an approximately$26,000 decrease in incentive revenue in fiscal year 2007 as compared to fiscalyear 2006.

 

Our revenue from sales ofethanol decreased approximately 3% during our 2007 fiscal year as compared toour 2006 fiscal year.  The reason forthis decrease was primarily due to a lower average selling price for our ethanolduring our 2007 fiscal year as compared to the same period of 2006, which waspartially offset by an increase in the volume of ethanol we sold.  The average price we received for our ethanolduring our 2007 fiscal year was approximately 5% lower than the average pricewe received in fiscal year 2006. However, ethanol prices reached historic highs during our 2006 fiscalyear as a result of the interaction of a number of factors, includingsignificantly increased ethanol demand as a result of the Renewable FuelsStandard and the replacement of MTBE with ethanol as the oxygenate of choicefor reformulated gasoline.  Managementattributes this decrease in the average sales price of ethanol during our 2007fiscal year with the significant increase in ethanol supply that came into themarket during our 2007 fiscal year. Management believes that this significant increase in supply may haveexceeded demand for ethanol at certain points during our 2007 fiscal year,which negatively affected the price we received for our ethanol.  However, the most significant decreases inethanol prices occurred during the middle of our 2007 fiscal year, and ethanolprices rebounded towards the end of our 2007 fiscal year.

 

27

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Management expects thatethanol prices will remain volatile as new ethanol supply enters the market andinteracts with increases in ethanol demand. Management anticipates that ethanol prices may decrease during thesummer months of the 2008 fiscal year as a result of increases in ethanolsupply that management expects will become operational during that timeperiod.  We depend on RPMG to market theethanol we produce.  If RPMG is unable tomarket the ethanol we produce, or market the ethanol we produce at competitiveprices, we anticipate that this will negatively affect our revenue.

 

The ethanol industry’sability to increase demand for ethanol in the coming years to offset increasesin supply will be critical to our success. If demand does not increase in proportion to supply increases, the priceof ethanol may decrease and we may not be able to operate profitably.  Increased consumption ofE85 fuel and increased consumer awareness of ethanol may increase ethanoldemand.  The United States Department of Energy AlternativeFuels Data Center has reported that the availability and use of E85 is growingnationally, and the availability of E85 and Flex Fuel Vehicles is expected toincrease significantly in the next few years.  However, demand for ethanol as a result of increasedE85 use will only occur if E85 becomes more readily available for consumers topurchase it and if the number of Flex Fuel Vehicles increases.  The National Ethanol Vehicle Coalitionreports as of February 14, 2008, that there are currently approximately1,500 retail gasoline stations supplying E85. While the number of retail E85 suppliers increases significantly eachyear, this remains a relatively small percentage of the total number of U.S.retail gasoline stations, which is approximately 170,000.  As public awareness of ethanol and E85increases along with E85’s increased availability, management anticipates somegrowth in demand for ethanol as a result of E85 consumption.

 

Additionally, management believes that increasedgovernment mandates for renewable fuels use will positively impact demand forethanol.  As a result of the EnergyIndependence and Security Act of 2007, the national Renewable Fuels Standard(RFS) increased to 9 billion gallons of renewable fuels in 2008.  The RFS requires the use of 36 billiongallons of renewable fuels by 2022. However, the RFS requires that a significant portion of these 36 billiongallons come from “advanced” renewable fuels. Grain based ethanol, such as the ethanol we produce, that may be used tomeet the RFS is capped at 15 billion gallons per year starting in 2015.  Therefore, demand for corn based ethanol maynot expand significantly past 15 billion gallons due to the cap in theRFS.  The advanced renewable fuels thatcan be used to satisfy the remaining gallons of the RFS include cellulosicethanol.  Cellulosic ethanol is ethanolthat is produced from cellulose, which is the main component of plant cellwalls and is the most common organic compound on earth.  Cellulose is found in wood chips, cornstalks, rice straw, amongst other common plants.  Current technology makes it difficult orimpossible to produce ethanol cost-effectively from cellulose.  However, the RFS and state and federal grantprograms are encouraging the development of commercial-scale cellulosic ethanolproduction.  Several grants were recentlymade for pilot projects that are attempting to produce cellulosic ethanol on acommercial scale.

 

                During our 2007 fiscal year, we increased the numberof gallons of ethanol we produced by approximately 2.3% compared to the sameperiod of 2006.  Management attributesthis increase in ethanol production to a decrease in the amount of plantdown-time that we experienced during our 2007 fiscal year as compared to our2006 fiscal year.  This increase inethanol and distillers grains production increased our revenues in fiscal year2007.

 

                In our 2007 fiscal year, we increased our distillersgrains revenue by approximately 29% compared to the same period of 2006.  This increase in the revenue was a result ofa combination of an increase in the average price we received for ourdistillers grains and an increase in the total distillers grains production byus during our 2007 fiscal year as compared to the same period of 2006.  We experienced an increase of approximately 10%in the average price we received for our dried distillers grains during our2007 fiscal year as compared to the same period 2006.  Additionally, we experienced an increase ofapproximately 29% in the average price we received for our modified/wetdistillers grains during our 2007 fiscal year as compared to the same period of2006.  Management believes that theseincreases in the average prices we received for our distillers grains duringthe 2007 fiscal year was a result of the significant increases in corn andsoybean meal prices during 2007. Distillers grains can be used as a feed substitute for corn and soybeanmeal.  Management believes that theaverage selling price of distillers grains will continue to move in correlationto changes in the prices of corn and soybean meal.  Since distillers grains prices tend toincrease in response to increases in corn prices, management expects thatincreased sales revenue from distillers grains sales may somewhat offsetincreases in our cost of revenues as a result of increases in corn prices.

 

28

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However, as additionalethanol supply enters the market, management expects the supply of distillersgrains will also increase, which may negatively impact the price we receive forour distillers grains.

 

                We increased the total tons of distillers grains weproduced during our 2007 fiscal year by approximately 6% compared to the sameperiod of 2007.  This increase in thetotal distillers grains production was a result of increased ethanol production.  Since distillers grains are the primaryco-product of our ethanol production process, as ethanol production increases,distillers grains production will correspondingly increase.

 

                We increased the amount of distillers grains wemarketed as wet/modified distillers grains during our 2007 fiscal year ascompared to our 2006 fiscal year. Wet/modified distillers grains require less natural gas to produce thandried distillers grains, which decreases our cost of revenues.  We market a portion of the wet/modifieddistillers grains we produce locally. Management expects to continue to make decisions as to whether ourdistillers grains will be dried and marketed as dried distillers grains basedon market conditions that exist in the distillers grains markets.  These market conditions include supply anddemand factors as well as the price difference between dried distillers grainsand wet/modified distillers grains and the price of natural gas.

 

                During our 2007 fiscal year, we experienced adecrease in incentive income of approximately $26,000.  We annually receive an ethanol producer’sincentive from the State of South Dakota. In our 2007 fiscal year, we did not receive the annual maximumallocation under this program as a result of budget constraints on the SouthDakota program.  Management does notexpect that we will receive the maximum allocation in fiscal year 2008 for thesame reason.  We did not receive anyfederal incentive income during our 2007 fiscal year.

 

*Costof Revenues*

 

Ourcost of revenues as a percentage of revenues was approximately 78% andapproximately 49% for the fiscal years ended December 31, 2007 and 2006respectively.  Our total cost of revenuesincreased by approximately 59% during our 2007 fiscal year compared to the sameperiod of 2006.  This significantincrease in cost of revenues resulted from a significant increase in theaverage price per bushel we paid for corn during our 2007 fiscal year andincreased corn consumption by the ethanol plant as a result of the increased ethanoland distillers grains production.

 

Theaverage price we paid per bushel of corn increased by approximately 89% duringDakota Ethanol’s 2007 fiscal year as compared to the same period of 2006.  This significant increase in the averageprice we paid for corn has significantly increased our cost of revenues.  Despite the fact that the United States corncrop that was harvested in the fall of 2007 produced approximately 13.1 billionbushels of corn, the most corn ever produced in one year in the United States, the average price per bushel of corncontinues to rise.  Management believesthe current high corn prices are a result of expanded domestic demand,including increased corn demand as a result of ethanol production, increasedcorn exports as a result of a weak United States Dollar, and current highpetroleum prices which affect the average price we pay for corn.  Management anticipates that corn prices willremain high into the foreseeable future. However, management believes that the corn supply will continue toexpand due to the current high corn prices which may somewhat control futurecorn prices.  Management does notanticipate difficulty securing sufficient corn to operate the ethanol plant inthe foreseeable future.

 

Weuse derivative instruments to help protect the prices we pay for our rawmaterials, including corn and natural gas. We recognize the gains or losses that result from the changes in thevalue of our derivative instruments in cost of goods sold as the changesoccur.  As corn and natural gas prices fluctuate, the value of ourderivative instruments are impacted, which affects our financialperformance.  We partially offset these losses with the cash price we payfor corn.  Management anticipates 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.

 

Weuse significant amounts of natural gas to dry the distillers grains produced atthe ethanol plant.  Total cost ofrevenues attributed to natural gas decreased during our 2007 fiscal year byapproximately 13% compared to the same period of 2006.  This decrease in cost of revenues attributedto natural gas costs was a result of decreased natural gas consumption and adecreased average price we paid for natural gas during our 2007 fiscalyear.  Total natural gas consumption atthe ethanol plant decreased by approximately 3% during the 2007 fiscal year ascompared to same period of 2006.  Thereason for this decrease in natural gas consumption was the fact that we sold

 

29

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lessdried distillers grains in fiscal year 2007 and more wet/modified distillersgrains.  This decreased the amount ofdistillers grains drying that was required in fiscal year 2007 and thereforereduced our total natural gas consumption. Further, we experienced a decrease of approximately 10% in the averageprice we paid per MMBTU of natural gas in fiscal year 2007 as compared to thesame period of 2006.  Natural gas pricesincreased sharply at the end of 2005 and the beginning of 2006 as a result ofsupply interruptions from hurricane activity in the Gulf Coast.  These supply interruptions caused a spike innatural gas prices that subsequently decreased in 2007.  Management anticipates relatively stablenatural gas prices in fiscal year 2008 barring any supply interruptions likethose experienced during our 2006 fiscal year. Management anticipates that natural gas consumption at the ethanol plantwill stay at its current level unless we further reduce the amount ofdistillers grains we sell in the dried form.

 

*General and Administrative Expense*

 

Our general andadministrative expenses decreased slightly in our 2007 fiscal year compared tothe same period of 2006.  This decreasein general and administrative expenses resulted from the net effect ofincreased professional fees, including legal fees and Sarbanes-Oxley Section 404Compliance consulting fees and increased environmental compliance fees, and decreasedbonus expenses for fiscal year 2007 as compared to fiscal year 2006.  Our general and administrative expenses as apercentage of revenue were approximately 3.6% and 3.8% for fiscal years 2007 and 2006respectively.

 

*Incomefrom Operations*

 

Ourincome from operations for fiscal year 2007 totaled approximately $19,040,000 compared toapproximately $49,158,000 for fiscal year 2006.  This significant decreasein income from operations is due primarily to a significant increase in corncosts that significantly increased our cost of revenues.  In fiscal year 2006, the ethanol industryexperienced historic high ethanol prices along with relatively lower corncosts.  Since corn is the largest rawmaterial cost to produce ethanol, this created a situation where the profitmargin per gallon of ethanol was very high during our fiscal year 2006.  Comparatively, we experienced slightly lowerethanol prices in fiscal year 2007 compared to 2006, and significantly highercorn costs.  The net effect of thesechanges led to a lower profit margin per gallon of ethanol produced for our2007 fiscal year compared to fiscal year 2006.

 

*OtherIncome and Expense*

 

Ourtotal other expense for the twelve months ended December 31, 2007 wasapproximately 17% higher compared to our other expense for the 2006 fiscalyear.  This increase in other expense forour 2007 fiscal year was a result of increased loss on equity on investmentscompared to fiscal year 2006.  We offsetthis increased loss on equity in investments with a larger interest income anddecreased interest expense in fiscal year 2007 compared to fiscal year 2006.

 

*Minority Interest in SubsidiaryIncome*

 

For our 2007 fiscal year, there was no minorityinterest in Dakota Ethanol as the Broin family minority interest was repurchasedin June 2006.  Dakota Ethanol madedistributions to the Broin family of approximately $2,236,000 in fiscal year2006 pursuant to its minority interest in Dakota Ethanol.  This decreased the distributions that werepaid to Lake Area Corn Processors in fiscal year 2006.

 

*Net Income*

 

Net income decreased by approximately 61% in our 2007fiscal year, as compared to the same period of 2006.  This significant decrease in net income was adirect result of the significant increase in cost of revenues that weexperienced in fiscal year 2007 compared to fiscal year 2006, offset by thelack of a minority interest distribution to the Broin family.

 

30

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**Changes in Financial Conditionfor the Fiscal year ended December 31, 2007 Compared to the Fiscal YearEnded December 31, 2006.**

 

                Total assets were $73,554,774 onDecember 31, 2007, as compared to $72,381,310 on December 31,2006.  Current assets totaled $27,578,505on December 31, 2007, as compared to $25,959,942 on December 31,2006.  We had approximately $6,313,000less cash on hand on December 31, 2007 as compared to December 31,2006.  This significant decrease in cashon hand was a result of more cash being used for corn inventory as a result ofmore bushels of corn being stored on-site due to our new grain storage bin aswell as an increase in the price of corn at the end of our 2007 fiscalyear.  This significant decrease in cashon hand was offset by increases in ethanol receivables, raw material inventory,and approximately $4,677,000 that was due from our commodities broker on December 31,2007.  The significant increase in rawmaterial inventory was a result of our increased grain storage capacity as aresult of the new grain bin that was constructed during fiscal year 2007 alongwith a significant increase in corn price.

 

                Property plant and equipment andother assets were relatively unchanged between our fiscal year end on December 31,2007 compared to December 31, 2006.

 

                Current liabilities were higherat our 2007 fiscal year end compared to 2006. This increase was the result of increased accounts payable and the factthat we had approximately $2,333,000 outstanding on our revolving loan on December 31,2007.  The increase in our accountspayable was primarily a result of increased corn prices which increased thevalue of our accounts payable.  Long termliabilities continue to decrease as we make payments on our term loan and dueto decreases in our guarantee payable.

 

                Members’ equity remainedrelatively unchanged at our fiscal year end on December 31, 2007 ascompared to December 31, 2006.  Wecontinue to make distributions to our members approximately quarterly.

 

***Comparison of Year Ended******December 31,2006 and 2005*****.**

 

The followingtable shows the results of our operations and the percentage of revenues, costof revenues, operating expenses and other items to total revenues in ourconsolidated statements of operations for the fiscal years ended December 31,2006 and 2005:

 
| ** **                              | ** ** | **2006**   | ** **  | **2005** | ** ** |
|-----------------------------------------|------------|------------|-------------|----------|------------|
| **Income  Statement Data:**             | ** ** | **Amount** | ** **  | **%**    | ** ** | **Amount** | ** ** | **%** | ** ** |
| Revenues                                |       | $          | 103,889,412 |     | 100.0      |   | $ | 80,020,970 |   | 100.0 |   |
|                                    |       |       |        |     |       |   |   |   |   |
| Cost of Revenues                        |       | 50,792,418 |        | 48.9     |       | 63,201,108 |   | 79.0 |   |
|                                    |       |       |        |     |       |   |   |   |   |
| Gross Profit                            |       | 53,096,994 |        | 51.1     |       | 16,819,862 |   | 21.0 |   |
|                                    |       |       |        |     |       |   |   |   |   |
| General and Administrative  Expense     |       | (3,938,845 | )           | (3.8     | )          | (3,610,590 | ) | (4.5 | ) |
|                                    |       |       |        |     |       |   |   |   |   |
| Income From Operations                  |       | 49,158,149 |        | 47.4     |       | 13,209,272 |   | 16.5 |   |
|                                    |       |       |        |     |       |   |   |   |   |
| Interest Expense                        |       | (1,008,300 | )           | (1.0     | )          | (1,089,364 | ) | (1.4 | ) |
|                                    |       |       |        |     |       |   |   |   |   |
| Other Income                            |       | 121,719    |        | 0.1      |       | 238,705 |   | 0.3 |   |
|                                    |       |       |        |     |       |   |   |   |   |
| Minority Interest in  Subsidiary Income |       | (2,235,776 | )           | (2.2     | )          | (1,494,029 | ) | (1.9 | ) |
|                                    |       |       |        |     |       |   |   |   |   |
| Net Income                              |       | 46,035,792 |        | 44.3     |       | 10,864,584 |   | 13.6 |   |
|                                         |            |            |             |          |            |  |  |  |  |  |  |

 

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*Revenues*

 

The increase in revenuesfor fiscal year 2006 compared to fiscal year 2005 was due primarily to anincrease in the selling price of ethanol and distillers grains, which despitedecreased production of ethanol and distillers grains resulted in higherrevenues from sales of those products. Our production of ethanol and distillers grains decreased in fiscal year2006 as compared to fiscal year 2005 as a result of additional plant downtimefor general maintenance.  Net gallons ofdenatured ethanol sold totaled approximately 47.7 million in fiscal 2006compared to approximately 47.6 million in fiscal 2005.  The average per gallon price we received forour ethanol sold for 2006 increased by approximately 30% compared to the twelvemonths ended December 31, 2005. Sales of co-products increased slightly by approximately 0.6% in 2006compared to co-products sales in 2005 due to increased market prices forcorn.  In addition, the total incentiverevenue from state programs increased by approximately 18% in fiscal year 2006as compared to fiscal year 2005.  Wereceived incentive revenue from the State of South Dakota for production ofethanol.  We did not receive anyincentive revenue from the federal government in fiscal year 2006 or 2005.  Part of our increase in incentive incomewas due to the fact that in fiscal year 2005, we had an incentive repayment ofapproximately $46,000 that we did not have to pay in fiscal year 2006.  The ethanol industry experienced record highethanol prices in 2006.  Replacement ofMTBE with ethanol as a fuel oxygenate along with higher gasoline costs drovedemand for ethanol.

 

                Overall, the market value of distillers grainsincreased in 2006 compared to 2005.  Thisincreased market value was largely due to equivalent increases in the value ofcorn and soybeans, which are alternative feed products to distillersgrains.  However, our revenues fromdistillers grains decreased in fiscal year 2006 compared to fiscal year 2005because of the form in which we sold our distillers grains.  We sold more modified (moderate wet)distillers grains and less dried distillers grains in 2006 compared to2005.  The modified distillers grainsresulted in a lower net value per ton than the dried products.  We produced more modified to increase ourvolume of sales in the local market and to decrease our natural gas cost as themodified distillers grains uses less natural gas in the drying process.

 

                Incentive revenue from the State of South Dakotaincreased approximately $74,000, or approximately 11% in fiscal year 2006compared to fiscal year 2005.  Due tobudget constraints, we did not receive the annual maximum benefit from theState of South Dakota program for our 2006 fiscal year.

 

*Costof Revenues*

 

Ourcost of revenues as a percentage of revenues was approximately 49% andapproximately 79% for the twelve months ended December 31, 2006 and 2005respectively.  The decrease in our costof revenues from period to period was primarily due to reduced corn costs.  The average per bushel price we paid for ourcorn increased approximately 10% for the twelve months ended December 31,2006 compared to the twelve months ended December 31, 2005, however, ourtotal corn costs decreased in fiscal year 2006 due to additional hedging gainsof approximately $5.5 million.

 

Infiscal year 2006 we experienced an average 4% decrease in the price we paid fornatural gas.  This, along with ourdecreased natural gas usage due to decreased production of dried distillersgrains lead to a decrease in our natural gas costs of approximately 7% forfiscal year 2006 as compared to fiscal year 2005.  The price of natural gas decreased if fiscalyear 2006 from historic high prices that occurred at the end of fiscal year2005 due primarily to Hurricane Katrina.

 

*General and Administrative Expense*

 

Our operating expenses asa percentage of revenue were approximately 3.8% and 4.5% for fiscal year 2006and 2005 respectively.  This decrease wasdue primarily to the fact that we did not pay a management fee to BroinManagement during our 2006 fiscal year that was paid during the 2005 fiscalyear.

 

*Incomefrom Operations*

 

Ourincome from operations for fiscal year 2006 totaled approximately $49,158,000compared to approximately $13,209,000 for fiscal year 2005.  This increase in income from operations wasdue primarily to an

 

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increasein revenues due to high ethanol prices and a decrease in cost of revenues dueto lower corn and natural gas costs along with decreased corn and natural gasconsumption.

 

*OtherIncome and Expense*

 

Ourtotal other income and expense for the twelve months ended December 31,2006 was substantially the same as the other income and expense for the twelvemonths ended December 31, 2005.  Ourinterest expense for the fiscal year ended 2006 decreased due to a reduction inthe principal balance on the loans outstanding with our primary lender.

 

*Minority Interest in SubsidiaryIncome*

 

Minority interest in subsidiary income increased toapproximately $2,236,000 for the year ended December 31, 2006, from$1,494,029 for the year ended December 31, 2005.  This increase was despite the fact that wepurchased the Broin family minority interest in June 2006 and the minorityinterest only existed for six months of fiscal year 2006.  The increase in minority interest insubsidiary income was primarily due to the increased profitability of DakotaEthanol, which increased by approximately $35.2 million for the fiscal yearended December 31, 2006 as compared to the fiscal year ended December 31,2005.

 

*Net Income*

 

Net income increased to approximately $46 million forthe fiscal year ended December 31, 2006 from $10.8 million for the yearended December 31, 2005.  Thisincrease was primarily a result of the favorable spread between the sellingprice of ethanol and the price of our raw materials and our purchase of theBroin family minority interest in Dakota Ethanol.

 

**Changes in Financial Conditionfor the Fiscal Year Ended December 31, 2006 Compared to the Fiscal YearEnded December 31, 2005.**

 

                Assets totaled $72,381,310 on December 31,2006, as compared to $42,946,122 on December 31, 2005.  Current assets totaled $25,959,942 on December 31,2006, as compared to $9,037,022 on December 31, 2005.  This increase in current assets resulted froma significant increase in cash we had on hand at December 31, 2006 comparedto December 31, 2005 due to our continuing operations as well as nearly$9,000,000 in derivative financial instruments that were on our balance sheeton December 31, 2006.  Our totalassets also increased as a result of approximately $10,396,000 in goodwill thatwas included on our balance sheet as a result of the Broin repurchase thatoccurred in fiscal year 2006.

 

Current liabilities on December 31,2006 were relatively unchanged compared to December 31, 2005.   Long-term liabilities continued to decreaseduring our 2006 fiscal year as a result of our ongoing term loan payments.  Total members equity on December 31,2006 was approximately $56,720,000, a significant increase compared to December 31,2005.  This significant increase was aresult of a significant increase in retained earnings that occurred as a resultof our ongoing operations.

 

**PlantOperations**

 

We plan tocontinue to operate the ethanol plant for the next 12 months.  Management anticipates that the plant willcontinue to operate at or above name-plate capacity of 40 million gallons peryear for the next twelve months.  We expect to have sufficient cash fromcash flow generated by continuing operations and cash reserves to cover thecosts of operations over the next 12 months, which consist primarily of cornsupply, natural gas supply, staffing, office, audit, legal, compliance, workingcapital costs and debt service obligations.

 

However, a varietyof market factors can affect both operating costs and revenues.  Thesefactors include:

 

·                  Changes in the availability and price of corn;

·                  Changes in the environmental regulations that apply toour plant operations;

 

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·                  Increased competition in the ethanol and oilindustries;

·                  Changes in interest rates or the availability ofcredit;

·                  Changes in our business strategy, capital improvementsor development plans;

·                  Changes in plant production capacity or technicaldifficulties in operating the plant;

·                  Changes in general economic conditions or theoccurrence of certain events causing an economic impact in the agriculture, oilor automobile industries;

·                  Changes in the availability and price of natural gasand the market for distillers grains; and

·                  Changes in federal and/or state laws (including theelimination of any federal and/or state ethanol tax incentives).

 

**Application of Critical Accounting Policies**

 

                Management uses estimates and assumptions in preparing our consolidatedfinancial statements in accordance with generally accepted accountingprinciples.  These estimates andassumptions 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 is the most critical:

 

***Derivative Instruments***

 

*               *Dakota Ethanol enters into short-term cashgrain, option and futures contracts as a means of securing corn and natural gasfor the ethanol plant and managing exposure to changes in commodity and energyprices.  Dakota Ethanol enters intoshort-term forward, option and futures contracts for sales of ethanol to manageexposure to changes in energy prices. All of Dakota Ethanol’s derivatives are designated as non-hedgederivatives, and accordingly are recorded at fair value with changes in fairvalue recognized in net income. Although the contracts are considered economichedges of specified risks, they are not designated as and accounted for ashedging instruments.

 

As part of its trading activity, Dakota Ethanol usesfutures and option contracts offered through regulated commodity exchanges toreduce risk and is exposed to risk of loss in the market value of inventories.To reduce that risk, Dakota Ethanol generally takes positions using cash andfutures contracts and options.

 

Unrealizedgains and losses related to derivative contracts related to corn and naturalgas purchases are included as a component of cost of revenues and derivative contractsrelated to ethanol sales are included as a component of revenues in theaccompanying financial statements.  Thefair values of derivative contracts are presented on the accompanying balancesheet as derivative financial instruments.

 

**Liquidity and Capital Resources**

 

Thefollowing table shows cash flows for the last two years:

 
| ** **                              | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|
| ** **                              | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Net cash from operating  activities     |       | $                                | 12,957,731 |   | $ | 41,808,080 |   |
| Net cash used for  investing activities |       | (2,138,895                       | )          | (19,743,726 | ) |
| Net cash used for  financing activities |       | (17,131,489                      | )          | (16,094,861 | ) |
|                                         |            |                                  |            |  |  |  |  |

 

*Cash Flow From Operations**. *Thesignificant decrease in net cash from operating activities primarily resultedfrom the significant decrease in net income that resulted during Dakota Ethanol’s2007 fiscal year compared to the same period of 2006.  This decrease resulted from a significantincrease in cost of revenues as a result of a significant increase in theaverage price per bushel that we paid for corn.

 

*Cash Flow From Investing Activities**. *We experienced a significant decrease in net cash used for investingactivities in fiscal year 2007 compared to fiscal year 2006.  This decreased resulted from the fact that we

 

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repurchased the Broin minority interest in DakotaEthanol in June 2006 for approximately $19,376,000.  Further, Dakota Ethanol used $350,000 in cashto install a hammermill.  In fiscal year2007, we had an increase in net cash used in investing activities as a resultof a grain bin that was constructed during fiscal year 2007 of approximately$2.2 million and the investment in RPMG of $360,000.

 

*Cash Flow From Financing Activities**.*During our 2007 fiscalyear, we had an increase in net cash used for financing activities of$4,443,000 as a result of the fact that we paid approximately $0.15 more perunit in distributions during our 2007 fiscal year as compared to the sameperiod of 2006.  In fiscal year 2006, weissued a note in the amount of $19,100,000 to repurchase the minority interestin Dakota Ethanol held by the Broin family. This note was repaid during our fiscal year 2006.  Our net cash used in financing activities wasalso higher in fiscal year 2006 as a result of distributions that were made byDakota Ethanol to the minority owner and payments made on a guarantee issued byus.

 

Management anticipatessufficient cash flow from operating activities and revolving debt to cover debtservice obligations, operations and planned capital expenditures for the next12 months.

 

Thefollowing table shows a comparison of cash flows for the fiscal years ended December 31,2005 and December 31, 2006:

 
| ** **                              | ** ** | **Year  ended December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------------------|------------|
| ** **                              | ** ** | **2006**                          | ** ** | **2005** | ** ** |
| Net cash from operating  activities     |       | $                                 | 41,808,080 |   | $ | 14,300,244 |   |
| Net cash used for investing  activities |       | (19,743,726                       | )          | (684,811 | ) |
| Net cash used for  financing activities |       | (16,094,861                       | )          | (15,118,655 | ) |
|                                         |            |                                   |            |  |  |  |  |

 

*Cash Flow From Operations**. *The increasein net cash flow provided from operating activities between 2006 and 2005 wasprimarily due to a favorable spread between the price of corn and the price ofethanol.  This significantly increasedour net income in fiscal year 2006 compared to fiscal year 2005.

 

*Cash Flow For Investing Activities**. *We used cashprovided by operating activities for capital expenditures which totaledapproximately $367,000for fiscal 2006 compared to approximately $1,155,000 for fiscal2005.  This decrease primarily reflects higher expenditures for thepurchase of property and equipment that occurred in fiscal year 2005 as comparedto 2006.  In 2005, we installed pollutionequipment including a scrubber and vapor flare for the purpose of controllingair emissions from the plant.  Anadditional $300,000 in cash was used in 2005 to modify the distillers grainsdrying system.  In fiscal year 2006, ourprimary capital expenditure was for the installation of a hammermill.

 

*Cash Flow For Financing Activities**.*We used more cash for financing activities infiscal year 2006 as compared to the same period of 2005 primarily as a result ofincreased distributions that were paid in fiscal year 2006.  In fiscal year 2006, distributions of $13,329,000 and $816,419 were made to our membersand the minority members of Dakota Ethanol, respectively, compared to$11,551,800 and $1,154,799, respectively, during fiscal 2005.

 

**Indebtedness**

 

First National Bank ofOmaha is Dakota Ethanol’s primary lender. Dakota Ethanol has two notes or loans outstanding with First NationalBank pursuant to a Construction Loan Agreement and Construction Note dated September 25,2000 and amendments thereto.

 

***Short-Term DebtSources***

 

On May 20, 2007,Dakota Ethanol renewed a revolving promissory note from First National Bank ofOmaha in the amount of $3,000,000.  Thenote expires on May 19, 2008 and the amount available is subject tocertain financial ratios.  Interest onany outstanding principal balance accrues at fifty basis points above the bank’sbase rate (7.25% on December 31, 2007). There is a commitment fee of 3/8%on the unused portion of the $3,000,000 availability.  The note is collateralized by the ethanolplant, its accounts receivable and inventories. On

 

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December 31, 2007,Dakota Ethanol had an outstanding balance on the note of $2,333,000, and$667,000 was available to be drawn on the revolving promissory note.

 

***Long-Term DebtSources***

 

Dakota Ethanol has onelong-term note payable to First National Bank of Omaha that was used for thepermanent financing of the plant.  DakotaEthanol is subject to certain restrictive covenants establishing minimumreporting requirements, ratios, working capital and net worth requirementspursuant to the loan agreement.    As of December 31,2007, we were in compliance with all of our loan covenants.  The term note is secured by the ethanolplant.  The note is subject to prepaymentpenalties based on the cost incurred by the Bank to break its fixed interestrate commitment.

 

The balance of the termnote requires quarterly payments which commenced on October 1, 2002.  The balance is due September 1,2011.  Interest on the outstandingprincipal balances accrues at a fixed rate of 9% annually.  The principal balance due pursuant to thenote as of December 31, 2007 was $6,599,140.

 

Finally, Dakota Ethanolhas a long-term debt obligation on a portion of a $1.323 million tax incrementrevenue bond series issued by Lake County, South Dakota on December 2,2003.  The portion for which DakotaEthanol is obligated is estimated at $323,276. The bond was issued inconnection with the refunding of a tax increment financing bond issued by LakeCounty in 2001, of which Dakota Ethanol was the recipient of the proceeds.  In 2003, Lake County became aware that thetaxes collected from the property on which the plant was located would beinsufficient to cover the debt service of the 2001 bond issue. Based on thisdeficiency and change in interest rates during December of 2003, LakeCounty refunded the 2001 bond issue and replaced it with two separate bonds: atax-exempt bond in the amount of $824,599 and a taxable bond in the amount of$1,323,024. As a part of this refund, Dakota Ethanol entered into an agreementwith the holder of these bonds to guarantee the entire debt service on thetaxable bond issue. The taxes levied on Dakota Ethanol’s property are usedfirst towards paying the debt service of the tax-exempt bonds and any remainingtaxes are used for paying the debt service of the taxable bonds. Since theproperty taxes on the property are currently sufficient to cover a portion ofthe debt service on the taxable bond series, Dakota Ethanol’s obligation underthe guarantee is to cover the shortfall in debt service, representing thedifference between the original taxable bond amount ($1,323,024) and theestimated amount expected to be collected in property taxes from the realproperty on which Dakota Ethanol’s plant is located.   The interest rate on the bonds is 7.75%annually.  The taxable bonds requiresemi-annual payments of interest on December 1 and June 1, inaddition to a payment of principal on December 1 of each year. WhileDakota Ethanol’s obligation under the guarantee is expected to continue untilmaturity in 2018, such obligation may cease at some point in time if theproperty on which the plant is located appreciates in value to the extent thatLake County is able to collect a sufficient amount in taxes to cover theprincipal and interest payments on the taxable bonds. The principal balanceoutstanding was $1,099,974 as of December 31, 2007.

 

Inaddition to our long-term debt obligations, we have certain other contractualcash obligations and commitments.  The following tables provideinformation regarding our consolidated contractual obligations and commitmentsas of December 31, 2007:

 

| ** **                          | ** ** | **Payment Due By Period** | ** ** |
|-------------------------------------|------------|---------------------------|------------|
| **Contractual  Cash Obligations**   | ** ** | **Total**                 | ** ** | **Less than  One Year** | ** ** | **One to  Three  Years** | ** ** | **Three to  Five  Years** | ** ** | **After Five  Years** | ** ** |
|                                |       |                      |       |   |   |   |   |   |   |   |   |
| Long-Term Debt Obligations          |       | $                         | 7,726,541  |   | $ | 2,326,760 |   | $ | 4,653,520 |   | $ | 746,261 |   | $ | — |   |
| Capital Lease Obligations           |       | —                    |       | — |   | — |   | — |   | — |   |
| Operating Lease Obligations         |       | —                    |       | — |   | — |   | — |   | — |   |
| Purchase Obligations                |       | 45,726,113                |       | 35,838,995 |   | 9,981,518 |   | 205,600 |   | — |   |
| Other Long-Term  Liabilities        |       | 323,276                   |       | 62,319 |   | 113,163 |   | 104,527 |   | 43,267 |   |
| Total Contractual Cash  Obligations |       | $                         | 53,775,930 |   | $ | 38,228,074 |   | $ | 14,748,201 |   | $ | 1,056,388 |   | $ | 43,267 |   |

 

**               **The long-term debtobligations in the table above include both principal and interest paymentswith a fixed annual interest rate of nine percent.

 

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**Off-BalanceSheet Arrangements.**

 

We do not have anyoff-balance sheet arrangements.

 

**ITEM 7A.               QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK.**

 

Weare exposed to the impact of market fluctuations associated with commodityprices as discussed below.  We have no exposure to foreign currency riskas all of our business is conducted in U.S. Dollars. We use derivativefinancial instruments as part of an overall strategy to manage market risk. Weuse cash, futures and option contracts to hedge changes to the commodity pricesof corn and natural gas. We do not enter into these derivative financialinstruments for trading or speculative purposes, nor do we designate thesecontracts as hedges for accounting purposes pursuant to the requirements ofSFAS 133, *Accounting for Derivative Instruments and HedgingActivities*.

 

**Interest Rate Risk**

 

Weare exposed to market risk from changes in interest rates. Exposure to interestrate risk results primarily from holding a revolving letter of credit whichbears variable interest rates. Specifically, we have approximately $2,333,000 outstanding in variablerate, long-term debt as of December 31, 2007.  The specifics of this revolving note isdiscussed in greater detail in **“Item 7 — Management’sDiscussion and Analysis of Financial Condition and Results of Operations —Indebtedness.”**

 

**CommodityPrice Risk**

 

We are exposed tomarket risk from changes in commodity prices.  Exposure to commodity pricerisk results from our dependence on corn and natural gas in the ethanolproduction process.  We seek to minimize the risks from fluctuations inthe prices of corn and natural gas through the use of hedginginstruments.  In practice, as markets move, we actively manage our riskand adjust hedging strategies as appropriate.  Although we believe ourhedge positions accomplish an economic hedge against our future purchases, theyare not designated as such for hedge accounting purposes, which would match thegain or loss on our hedge positions to the specific commodity purchase beinghedged.  We are marking to market our hedge positions, which means as thecurrent market price of our hedge positions changes, the gains and losses areimmediately recognized in our cost of revenues.

 

The immediaterecognition of hedging gains and losses can cause net income to be volatilefrom quarter to quarter due to the timing of the change in value of thederivative instruments relative to the cost and use of the commodity beinghedged.  We recorded a decrease to cost of revenues of approximately$1,258,000 related to derivative instruments for the year ended December 31,2007.  We recorded a decrease to cost ofrevenue of approximately $11,448,000 and a decrease to cost of revenues ofapproximately $817,000 related to derivative instruments for the years ended December 31,2006 and 2005, 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 thegreatest impact on the derivatives instruments with delivery dates nearest thecurrent cash price.

 

To manage our cornprice risk, our hedging strategy is designed to establish a price ceiling andfloor for our corn purchases.  We have taken a net long position on ourexchange traded futures and options contracts, which allows us to offsetincreases or decreases in the market price of corn.  The upper limit ofloss on our futures contracts is the difference between the contract price andthe cash market price of corn at the time of the execution of the contract. Theupper limit of loss on our exchange traded and over-the-counter optioncontracts is limited to the amount of the premium we paid for the option.

 

We estimate thatour corn usage for fiscal year 2008 will be approximately 17.5 million bushelsfor the production of 48.9 million gallons of ethanol.  We have priceprotection for approximately 55% of our expected corn usage for fiscal yearended December 31, 2008 using CBOT futures and options andover-the-counter option contracts.  As we move forward, additional priceprotection may be necessary.  As corn prices move in reaction to markettrends and information, our income statement will be affected depending on theimpact such market movements have on the value of our derivativeinstruments.  As we move forward, additional price protection may

 

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be required to solidifyour margins into fiscal year 2009.  Depending on market movements, cropprospects and weather, these price protection positions may cause immediateadverse effects to our financial results, but are expected to produce long-termpositive growth for us.

 

As of December 31,2007, we are committed to purchasing 60,000 mmBtu’s of natural gas for 2008,valued at approximately $480,000.  Thenatural gas purchases represent approximately 4% of the annual plantrequirements.

 

A sensitivityanalysis has been prepared to estimate our exposure to corn and natural gasprice risk. The table presents the fair value of our derivative instruments asof December 31, 2007, December 31, 2006 and December 31, 2005and the potential loss in fair value resulting from a hypothetical 10% adversechange in such prices. The fair value of the positions is a summation of thefair values calculated by valuing each net position at quoted market prices asof the applicable date. The results of this analysis, which may differ fromactual results, are as follows:

 
| **Year Ended**         | ** ** | **Fair Value** | ** ** | **Effect of Hypothetical  Adverse  Change— Market Risk** | ** ** |
|------------------------|------------|----------------|------------|---------------------------------------------------------------|------------|
| December 31, 2007 |       | $              | 39,641,473 |                                                          | $          | 3,964,147 |   |
| December 31, 2006 |       | $              | 8,957,869  |                                                          | $          | 895,786 |   |
| December 31, 2005 |       | $              | 170,125    |                                                          | $          | 17,012 |   |

 

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**ITEM 8.                   FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

***REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM***

 

The Audit Committee

**LakeArea Corn Processors, LLC**

 

We have audited theconsolidated balance sheet of Lake Area Corn Processors, LLC and subsidiary asof December 31, 2007 and 2006 and the related consolidated statements ofoperations, changes in members’ equity and cash flows for the years thenended.  These financial statements arethe responsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in all materialrespects, the financial position of Lake Area Corn Processors, LLC andsubsidiary as of December 31, 2007 and 2006, and the results of theiroperations and their cash flows for the years then ended, in conformity withU.S. generally accepted accounting principles.

 

We were not engaged toexamine management’s assertion about the effectiveness of Lake Area CornProcessors, LLC and subsidiary’s internal control over financial reporting asof December 31, 2007 included in the Annual Report included in Form 10K,and accordingly, we do not express an opinion thereon.

 

McGladrey &Pullen, LLP

Des Moines, Iowa

March 28, 2008

 

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***REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM***

 

The Audit Committee

**LakeArea Corn Processors, LLC**

 

We have audited theaccompanying consolidated statements of operations, changes in members’ equity,and cash flows of Lake Area Corn Processors, LLC and subsidiary for the year ended December 31,2005.  These consolidated financial statementsare the responsibility of the company’s management.  Our responsibility is to express an opinionon these consolidated financial statements based upon our audit.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe consolidated financial statements are free of material misstatement.  An audit includes consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the company’s internal control over financialreporting.  Accordingly, we do notexpress such an opinion.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe our audit provides a reasonablebasis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the results of operations and the cash flows of Lake AreaCorn Processors, LLC and subsidiary for the year ended December 31, 2005 inconformity with accounting principles generally accepted in the United Statesof America.

 

Eide Bailly LLP

Sioux Falls, South Dakota

February 6, 2006

 

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**LAKEAREA CORN PROCESSORS, LLC**

CONSOLIDATED BALANCESHEETS

DECEMBER 31, 2007 AND2006

 
| ** **                       | ** ** | **2007**        | ** **     | **2006**    | ** ** |
|----------------------------------|------------|-----------------|----------------|-------------|------------|
|                             |       |            |           |        |       |
| **ASSETS**                       |       |            |           |        |       |
|                             |       |            |           |        |       |
| CURRENT ASSETS                   |       |            |           |        |       |
| Cash                             | ** ** | **$**           | **361,122**    |        | $          | 6,673,775 |   |
| Receivables                      |       |            |           |        |       |
| Ethanol                          | ** ** | **—**      |           | 3,519,875   |       |
| Ethanol - related party          | ** ** | **4,424,712**   |           | —      |       |
| Distiller’s grains          | ** ** | **559,849**     |           | 376,710     |       |
| Incentives                       | ** ** | **166,667**     |           | 166,667     |       |
| Other                            | ** ** | **5,267**       |           | 42,738      |       |
| Inventory                        |       |            |           |        |       |
| Raw materials                    | ** ** | **4,927,377**   |           | 1,965,408   |       |
| Finished goods                   | ** ** | **1,342,893**   |           | 1,220,400   |       |
| Parts inventory                  | ** ** | **1,112,896**   |           | 971,756     |       |
| Work in process                  | ** ** | **700,039**     |           | 602,501     |       |
| Due from broker                  | ** ** | **4,677,332**   |           | —      |       |
| Derivative financial instruments | ** ** | **9,000,243**   |           | 10,116,151  |       |
| Prepaid expenses                 | ** ** | **300,108**     |           | 303,961     |       |
|                             |       |            |           |        |       |
| Total current assets             | ** ** | **27,578,505**  |           | 25,959,942  |       |
|                             |       |            |           |        |       |
| PROPERTY AND EQUIPMENT           |       |            |           |        |       |
| Land                             | ** ** | **126,097**     |           | 126,097     |       |
| Land improvements                | ** ** | **2,665,358**   |           | 2,665,358   |       |
| Buildings                        | ** ** | **8,088,853**   |           | 8,088,853   |       |
| Equipment                        | ** ** | **38,820,526**  |           | 36,571,921  |       |
| ** **                       |       | **49,700,834**  |           | 47,452,229  |       |
| Less accumulated depreciation    | ** ** | **(14,355,741** | **)**          | (11,756,475 | )          |
|                             |       |            |           |        |       |
| Net property and equipment       | ** ** | **35,345,093**  |           | 35,695,754  |       |
|                             |       |            |           |        |       |
| OTHER ASSETS                     |       |            |           |        |       |
| Goodwill                         | ** ** | **10,395,766**  |           | 10,395,766  |       |
| Guarantee premium                | ** ** | **201,973**     |           | 274,615     |       |
| Other                            | ** ** | **33,437**      |           | 55,233      |       |
|                             |       |            |           |        |       |
| Total other assets               | ** ** | **10,631,176**  |           | 10,725,614  |       |
|                             |       |            |           |        |       |
| ** **                       |       | **$**           | **73,554,774** |        | $          | 72,381,310 |   |

 

SeeNotes to Consolidated Financial Statements

 

41

----

 

**LAKEAREA CORN PROCESSORS, LLC**

CONSOLIDATED BALANCESHEETS

DECEMBER 31, 2007 AND 2006

 
| ** **                                                                  | ** ** | **2007**       | ** **     | **2006**   | ** ** |
|-----------------------------------------------------------------------------|------------|----------------|----------------|------------|------------|
|                                                                        |       |           |           |       |       |
| **LIABILITIES  AND MEMBERS’ EQUITY**                                   |       |           |           |       |       |
|                                                                        |       |           |           |       |       |
| CURRENT LIABILITIES                                                         |       |           |           |       |       |
| Accounts payable                                                            | ** ** | **$**          | **6,503,826**  |       | $          | 5,231,875 |   |
| Accrued liabilities                                                         | ** ** | **841,945**    |           | 655,866    |       |
| Due to broker                                                               | ** ** | **—**     |           | 1,158,282  |       |
| Short-term notes payable                                                    | ** ** | **2,333,000**  |           | —     |       |
| Current portion of guarantee payable                                        | ** ** | **62,319**     |           | 62,536     |       |
| Current portion of notes payable                                            | ** ** | **1,782,960**  |           | 1,630,674  |       |
|                                                                        |       |           |           |       |       |
| Total current liabilities                                                   | ** ** | **11,524,050** |           | 8,739,233  |       |
|                                                                        |       |           |           |       |       |
| LONG-TERM LIABILITIES                                                       |       |           |           |       |       |
| Guarantee payable                                                           | ** ** | **260,957**    |           | 323,276    |       |
| Notes payable                                                               | ** ** | **4,816,180**  |           | 6,598,419  |       |
|                                                                        |       |           |           |       |       |
| Total long-term liabilities                                                 | ** ** | **5,077,137**  |           | 6,921,695  |       |
|                                                                        |       |           |           |       |       |
| COMMITMENTS AND  CONTINGENCIES                                              |       |           |           |       |       |
|                                                                        |       |           |           |       |       |
| MEMBERS’ EQUITY                                                        |       |           |           |       |       |
| Capital units, $0.50 stated value, 29,620,000 units issued and  outstanding |       | **14,810,000** |           | 14,810,000 |       |
| Additional paid-in capital                                                  | ** ** | **96,400**     |           | 96,400     |       |
| Retained earnings                                                           | ** ** | **42,047,187** |           | 41,813,982 |       |
|                                                                        |       |           |           |       |       |
| Total members’ equity                                                  | ** ** | **56,953,587** |           | 56,720,382 |       |
|                                                                        |       |           |           |       |       |
| ** **                                                                  |       | **$**          | **73,554,774** |       | $          | 72,381,310 |   |

 

SeeNotes to Consolidated Financial Statements

 

42

----

 

**LAKEAREA CORN PROCESSORS, LLC**

CONSOLIDATED STATEMENTSOF OPERATIONS

YEARS ENDED DECEMBER 31,2007, 2006 AND 2005

 
| ** **                                                                                     | ** ** | **2007**        | ** **     | **2006**    | ** ** | **2005**   | ** ** |
|------------------------------------------------------------------------------------------------|------------|-----------------|----------------|-------------|------------|------------|------------|
| REVENUES                                                                                       |       |            |           |        |       |       |       |
| Sales - related party                                                                          | ** ** | **$**           | **67,181,395** |        | $          | —     |       | $ | 69,125,699 |   |
| Sales                                                                                          | ** ** | **35,808,304**  |           | 103,113,502 |       | 10,239,951 |       |
| Incentive income                                                                               | ** ** | **750,000**     |           | 775,910     |       | 655,320    |       |
| Total revenues                                                                                 | ** ** | **103,739,699** |           | 103,889,412 |       | 80,020,970 |       |
|                                                                                           |       |            |           |        |       |       |       |
| COST OF REVENUES                                                                               | ** ** | **80,977,667**  |           | 50,792,418  |       | 63,201,108 |       |
|                                                                                           |       |            |           |        |       |       |       |
| GROSS PROFIT                                                                                   | ** ** | **22,762,032**  |           | 53,096,994  |       | 16,819,862 |       |
|                                                                                           |       |            |           |        |       |       |       |
| EXPENSES                                                                                       |       |            |           |        |       |       |       |
| General and administrative                                                                     | ** ** | **3,721,813**   |           | 3,938,845   |       | 3,610,590  |       |
|                                                                                           |       |            |           |        |       |       |       |
| INCOME FROM OPERATIONS                                                                         | ** ** | **19,040,219**  |           | 49,158,149  |       | 13,209,272 |       |
|                                                                                           |       |            |           |        |       |       |       |
| OTHER INCOME (EXPENSE)                                                                         |       |            |           |        |       |       |       |
| Interest and other income                                                                      | ** ** | **265,029**     |           | 121,719     |       | 238,705    |       |
| Equity in net income (loss) of investments                                                     | ** ** | **(605,000**    | **)**          | —      |       | —     |       |
| Interest and other expense                                                                     | ** ** | **(695,043**    | **)**          | (1,008,300  | )          | (1,089,364 | )          |
| Total other income (expense)                                                                   | ** ** | **(1,035,014**  | **)**          | (886,581    | )          | (850,659   | )          |
|                                                                                           |       |            |           |        |       |       |       |
| NET INCOME BEFORE MINORITY  INTEREST                                                           | ** ** | **18,005,205**  |           | 48,271,568  |       | 12,358,613 |       |
|                                                                                           |       |            |           |        |       |       |       |
| MINORITY INTEREST IN  SUBSIDIARY                                                               | ** ** | **—**      |           | (2,235,776  | )          | (1,494,029 | )          |
|                                                                                           |       |            |           |        |       |       |       |
| NET INCOME                                                                                     | ** ** | **$**           | **18,005,205** |        | $          | 46,035,792 |       | $ | 10,864,584 |   |
|                                                                                           |       |            |           |        |       |       |       |
| BASIC AND DILUTED EARNINGS  PER UNIT                                                           | ** ** | **$**           | **0.61**       |        | $          | 1.55       |       | $ | 0.37 |   |
|                                                                                           |       |            |           |        |       |       |       |
| WEIGHTED AVERAGE UNITS OUTSTANDING FOR THE CALCULATION OF BASIC AND DILUTED  EARNINGS PER UNIT |       | **29,620,000**  |           | 29,620,000  |       | 29,620,000 |       |

 

SeeNotes to Consolidated Financial Statements

 

43

----

 

**LAKEAREA CORN PROCESSORS, LLC**

CONSOLIDATED STATEMENTSOF CHANGES IN MEMBERS’ EQUITY

YEARS ENDED DECEMBER 31,2007, 2006 AND 2005

 
| ** **                                 | ** ** | ** **        | ** ** | ** **  | ** **     | **Additional** | ** ** | ** **   | ** ** | ** **  | ** **     |
|--------------------------------------------|------------|-------------------|------------|-------------|----------------|----------------|------------|--------------|------------|-------------|----------------|
| ** **                                 | ** ** | **Capital Units** | ** ** | **Paid-In** | ** **     | **Retained**   | ** ** | ** **   | ** ** |
| ** **                                 | ** ** | **Units**         | ** ** | **Amount**  | ** **     | **Capital**    | ** ** | **Earnings** | ** ** | **Total**   | ** **     |
| BALANCE, DECEMBER 31, 2004                 |       | 29,620,000        |       | $           | 14,810,000     |           | $          | 96,400       |       | $           | 7,721,006      |   | $ | 22,627,406 |   |
| Net income                                 |       | —            |       | —      |           | —         |       | 10,864,584   |       | 10,864,584  |           |
| Distributions paid ($.32 per capital unit) |       | —            |       | —      |           | —         |       | (9,478,400   | )          | (9,478,400  | )              |
|                                       |       |              |       |        |           |           |       |         |       |        |           |
| BALANCE, DECEMBER 31, 2005                 |       | 29,620,000        |       | 14,810,000  |           | 96,400         |       | 9,107,190    |       | 24,013,590  |           |
| Net income                                 |       | —            |       | —      |           | —         |       | 46,035,792   |       | 46,035,792  |           |
| Distributions paid ($.45 per capital unit) |       | —            |       | —      |           | —         |       | (13,329,000  | )          | (13,329,000 | )              |
|                                       |       |              |       |        |           |           |       |         |       |        |           |
| BALANCE, DECEMBER 31, 2006                 |       | 29,620,000        |       | 14,810,000  |           | 96,400         |       | 41,813,982   |       | 56,720,382  |           |
| Net income                                 |       | —            |       | —      |           | —         |       | 18,005,205   |       | 18,005,205  |           |
| Distributions paid ($.60 per capital unit) |       | —            |       | —      |           | —         |       | (17,772,000  | )          | (17,772,000 | )              |
|                                       |       |              |       |        |           |           |       |         |       |        |           |
| **BALANCE,  DECEMBER 31, 2007**            | ** ** | **29,620,000**    | ** ** | **$**       | **14,810,000** | ** **     | **$**      | **96,400**   | ** ** | **$**       | **42,047,187** | ** ** | **$** | **56,953,587** | ** ** |

 

SeeNotes to Consolidated Financial Statements

 

44

----

 

**LAKEAREA CORN PROCESSORS, LLC**

CONSOLIDATED STATEMENTSOF CASH FLOWS

YEARS ENDED DECEMBER 31,2007, 2006 AND 2005

 
| ** **                                                          | ** ** | **2007**        | ** **     | **2006**    | ** ** | **2005**    | ** ** |
|---------------------------------------------------------------------|------------|-----------------|----------------|-------------|------------|-------------|------------|
| OPERATING ACTIVITIES                                                |       |            |           |        |       |        |       |
| Net income                                                          | ** ** | **$**           | **18,005,205** |        | $          | 46,035,792  |       | $ | 10,864,584 |   |
| Changes to net income not affecting cash                            |       |            |           |        |       |        |       |
| Depreciation                                                        | ** ** | **2,630,660**   |           | 2,452,370   |       | 2,274,401   |       |
| Amortization                                                        | ** ** | **94,438**      |           | 110,878     |       | 137,266     |       |
| Minority interest in subsidiary                                     | ** ** | **—**      |           | 2,235,776   |       | 1,494,029   |       |
| Other                                                               | ** ** | **—**      |           | 14,204      |       | (199,263    | )          |
| Equity in net (income) loss of investments                          | ** ** | **605,000**     |           | —      |       | —      |       |
| (Increase) decrease in                                              |       |            |           |        |       |        |       |
| Receivables                                                         | ** ** | **(1,050,505**  | **)**          | 1,407,612   |       | (729,972    | )          |
| Inventory                                                           | ** ** | **(3,323,140**  | **)**          | (2,464,507  | )          | 228,320     |       |
| Prepaid expenses                                                    | ** ** | **3,853**       |           | 49,494      |       | (264,433    | )          |
| Derivative financial inst. and due from broker                      | ** ** | **(4,719,706**  | **)**          | (8,787,744  | )          | 579,707     |       |
| Increase (decrease) in                                              |       |            |           |        |       |        |       |
| Accounts payable                                                    | ** ** | **771,419**     |           | 623,773     |       | (232,340    | )          |
| Accrued liabilities                                                 | ** ** | **(59,493**     | **)**          | 130,432     |       | 147,945     |       |
|                                                                |       |            |           |        |       |        |       |
| NET CASH FROM OPERATING  ACTIVITIES                                 | ** ** | **12,957,731**  |           | 41,808,080  |       | 14,300,244  |       |
|                                                                |       |            |           |        |       |        |       |
| INVESTING ACTIVITIES                                                |       |            |           |        |       |        |       |
| Purchase of property and equipment                                  | ** ** | **(1,779,467**  | **)**          | (367,357    | )          | (1,154,799  | )          |
| Purchase of minority interest                                       | ** ** | **—**      |           | (19,376,369 | )          | 469,988     |       |
| Purchase of investment                                              | ** ** | **(359,428**    | **)**          | —      |       | —      |       |
|                                                                |       |            |           |        |       |        |       |
| NET CASH USED FOR  INVESTING ACTIVITIES                             | ** ** | **(2,138,895**  | **)**          | (19,743,726 | )          | (684,811    | )          |
|                                                                |       |            |           |        |       |        |       |
| FINANCING ACTIVITIES                                                |       |            |           |        |       |        |       |
| Outstanding checks in excess of bank balance                        | ** ** | **—**      |           | —      |       | —      |       |
| Notes payable issued                                                | ** ** | **2,333,000**   |           | 19,100,000  |       | —      |       |
| Principal payments on notes payable                                 | ** ** | **(1,629,953**  | **)**          | (20,999,687 | )          | (1,971,878  | )          |
| Payment on guarantee payable                                        | ** ** | **(62,536**     | **)**          | (49,755     | )          | —      |       |
| Distributions paid to minority members                              | ** ** | **—**      |           | (816,419    | )          | (1,594,977  | )          |
| Distributions paid to LACP members                                  | ** ** | **(17,772,000** | **)**          | (13,329,000 | )          | (11,551,800 | )          |
|                                                                |       |            |           |        |       |        |       |
| NET CASH USED FOR  FINANCING ACTIVITIES                             | ** ** | **(17,131,489** | **)**          | (16,094,861 | )          | (15,118,655 | )          |
|                                                                |       |            |           |        |       |        |       |
| NET INCREASE (DECREASE) IN  CASH                                    | ** ** | **(6,312,653**  | **)**          | 5,969,493   |       | (1,503,222  | )          |
|                                                                |       |            |           |        |       |        |       |
| CASH AT BEGINNING OF  PERIOD                                        | ** ** | **6,673,775**   |           | 704,282     |       | 2,207,504   |       |
|                                                                |       |            |           |        |       |        |       |
| CASH AT END OF PERIOD                                               | ** ** | **$**           | **361,122**    |        | $          | 6,673,775   |       | $ | 704,282 |   |
|                                                                |       |            |           |        |       |        |       |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                   |       |            |           |        |       |        |       |
|                                                                |       |            |           |        |       |        |       |
| Cash paid during the year for interest                              | ** ** | **$**           | **695,750**    |        | $          | 1,033,419   |       | $ | 839,838 |   |
|                                                                |       |            |           |        |       |        |       |
| SUPPLEMENTAL SCHEDULE OF NONCASH OPERATING AND FINANCING ACTIVITIES |       |            |           |        |       |        |       |
|                                                                |       |            |           |        |       |        |       |
| Capital expenditures in accounts payable                            | ** ** | **$**           | **500,532**    |        | $          | —      |       | $ | — |   |

 

SeeNotes to Consolidated Financial Statements

 

45

----

 

**LAKEAREA CORN PROCESSORS, LLC**

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

DECEMBER 31, 2007 AND2006

** **

**NOTE 1 - NATURE OF OPERATIONS**

** **

*Principal Business Activity*

 

Lake Area Corn Processors, LLC and subsidiary (the Company) is a SouthDakota limited liability company located in Wentworth, South Dakota. TheCompany was organized by investors to provide a portion of the corn supply fora 40 million-gallon (annual capacity) ethanol plant, owned by Dakota Ethanol,LLC (Dakota Ethanol). On September 4, 2001, the ethanol plant commencedits principal operations. The Company sells ethanol and related products tocustomers located in North America.

 

**NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

** **

*Principles of Consolidation*

 

The consolidatedfinancial statements of the Company include the accounts of its subsidiary,Dakota Ethanol. The Company owned 88% of Dakota Ethanol until June 30,2006 when it became wholly owned.  Allsignificant inter-company transactions and balances have been eliminated inconsolidation.

 

*Revenue Recognition*

 

Revenue from the production of ethanol and related products is recordedwhen title transfers to customers, net of allowances for estimated returns.Generally, ethanol and related products are shipped FOB shipping point, basedon written contract terms between Dakota Ethanol and its customers.  Collectibility of revenue is reasonablyassured based on historical evidence of collectibility between Dakota Ethanoland its customers.  Interest income isrecognized as earned.

 

*Cost ofRevenues*

 

The primary components ofcost of revenues from the production of ethanol and related co-product are cornexpense, energy expense (natural gas and electricity), raw materials expense(chemicals and denaturant), and direct labor costs.

 

Shippingcosts incurred in the sale of ethanol are recorded as a component of cost ofrevenues in 2005. Shipping costs forethanol were approximately $946,000 for the year ended December 31, 2005,respectively. Beginning in 2006, shipping costs for ethanol are deductedfrom the sales price by the marketer, and thus are not specificallyidentifiable and are included in net revenues.

 

Shippingcosts incurred in the sale of distiller’s grains are classified in netrevenues.  Shipping costs on distiller’s grains were approximately$1,918,000, $2,380,000, and $3,045,000, for the years ended December 31,2007, 2006 and 2005, respectively.

 

*Generaland Administrative Expenses*

 

The primary components ofgeneral and administrative expenses are management fee expenses, wages and benefits,professional fee expenses (legal and audit), and insurance expenses.

 

*InventoryValuation*

 

Ethanol and relatedproducts are stated at net realizable value. Raw materials, work-in-process,and parts inventory are valued using methods which approximate the lower ofcost or market on the first-in, first-out method.

 

46

----

 

**LAKEAREA CORN PROCESSORS, LLC**

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

DECEMBER 31, 2007 AND2006

 

*Cash and Cash Equivalents*

 

Cash and cash equivalentsconsist of demand accounts and other accounts that provide withdrawalprivileges. Checks drawn in excess of bank balance are recorded as a liabilityon the balance sheet and as a financing activity on the statement of cashflows.

 

Trade receivables areuncollateralized customer obligations due under normal trade terms requiringpayment within fifteen days from the invoice date. Unpaid trade receivableswith invoice dates over thirty days old bear interest at 1.5 percent per month.  Trade receivables are stated at the amountbilled to the customer.  Payments oftrade receivables are allocated to the specific invoices identified on thecustomer’s remittance advice or, if unspecified, are applied to the earliestunpaid invoices.

 

The carrying amount oftrade receivables is reduced by a valuation allowance that reflects management’sbest estimate of the amounts that will not be collected. Management reviews alltrade receivable balances that exceed sixty days from the invoice date andbased on an assessment of current creditworthiness, estimates the portion, ifany, of the balance that will not be collected.

 

*Investmentin commodities contracts, derivative instruments and hedging activities*

 

SFAS No. 133requires a company to evaluate its contracts to determine whether the contractsare derivatives.  Certain contracts that literally meet the definition ofa derivative may be exempted from SFAS No. 133 as normal purchases ornormal sales.  Normal purchases and normal sales are contracts that providefor the purchase or sale of something other than a financial instrument orderivative instrument that will be delivered in quantities expected to be usedor sold over a reasonable period in the normal course of business. Contracts that meet the requirements of normal purchases or sales aredocumented as normal and exempted from the accounting and reportingrequirements of SFAS No. 133. Dakota Ethanol does not use the normal purchase and sales exemptionunder SFAS No. 133 for forward purchases of corn.

 

DakotaEthanol enters into short-term forward, option and futures contracts as a meansof securing corn and natural gas for the ethanol plant and managing exposure tochanges in commodity and energy prices. Dakota Ethanol enters into short-termforward, option and futures contracts for sales of ethanol to manage exposureto changes in energy prices.  All ofDakota Ethanol’s derivatives are designated as non-hedge derivatives, andaccordingly are recorded at fair value with changes in fair value recognized innet income. Although the contracts are considered economic hedges of specifiedrisks, they are not designated as and accounted for as hedging instruments.

 

As part of its trading activity, Dakota Ethanol usesfutures and option contracts offered through regulated commodity exchanges toreduce risk and is exposed to risk of loss in the market value of inventories.To reduce that risk, Dakota Ethanol generally takes positions using forward andfutures contracts and options.

 

Realizedand unrealized gains and losses related to derivative contracts related to cornand natural gas purchases are included as a component of cost of revenues andderivative contracts related to ethanol sales are included as a component ofrevenues in the accompanying financial statements.  The fair values of derivative contracts arepresented on the accompanying balance sheet as derivative financialinstruments.

 

47

----

 

**LAKEAREA CORN PROCESSORS, LLC**

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

DECEMBER 31, 2007 AND2006

 

Net realized andunrealized gains (losses) are as follows:

 
| ** **                                                                                                   | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                   | ** ** | **2007**                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net realized and unrealized gains (losses) included in costs of goods  sold as related to purchase contracts |       | $                            | 1,258,158  |   | $ | 11,447,854 |   | $ | 817,433 |   |
|                                                                                                         |       |                         |       |   |   |   |   |
| Net realized and unrealized gains (losses) included in revenues as  related to sales contracts               |       | —                       |       | 99,966 |   | — |   |
|                                                                                                              |            |                              |            |  |  |  |  |  |  |  |

 

*Investments*

 

Dakota Ethanol has a lessthan 20% investment interest in the company’s ethanol marketer, RenewableProducts Marketing Group, LLC (RPMG).  These investments are beingaccounted for by the equity method of accounting under which the Company’sshare of net income is recognized as income in the Company’s income statementand added to the investment account due to it being a flow throughentity.  Distributions or dividends received from the investments aretreated as a reduction of the investment account.  The Company consistently follows the practiceof recognizing the net income based on the most recent reliable data. Therefore, the net income which is reported in the Company’s income statementfor RPMG is based on RPMG’s September 30, 2007 year-end results.

 

*Guarantee Premium*

 

The guarantee premium is amortized over the term of the related guaranteeusing the interest method of amortization.

 

*Minority Interest*

 

Amounts recorded as minority interest on the balance sheet relate tothe investment by Broin family members (hereinafter referred to as the minoritymembers) in Dakota Ethanol, plus any allocation of minority income or minus anyallocation of minority distributions or losses of Dakota Ethanol. Earnings andlosses of Dakota Ethanol are allocated to the members in proportion to themember’s capital accounts.  The minorityinterest was acquired by Lake Area Corn Processors, LLC effective at the closeof business on June 30, 2006.

 

*Use of Estimates*

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amount of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and revenues and expenses during the reporting period. Actual resultscould differ from those estimates.

 

*Concentrations of Credit Risk*

 

The Company’s cashbalances are maintained in bank depositories and periodically exceed federallyinsured limits.

 

48

----

 

**LAKEAREA CORN PROCESSORS, LLC**

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

DECEMBER 31, 2007 AND2006

 

*Property and Equipment*

 

Property and equipment isstated at cost. Significant additions and betterments are capitalized, whileexpenditures for maintenance, repairs and minor renewals are charged tooperations when incurred. Depreciation on assets placed in service is computedusing the straight-line method over estimated useful lives as follows:

 

| Land improvements |   | 40 years   |
|-------------------|--------|------------|
| Equipment         |   | 5-20 years |
| Buildings         |   | 40 years   |

 

Equipment relates to two general categories: mechanical equipment andadministrative and maintenance equipment. Mechanical equipment generally relates to equipment for handlinginventories and the production of ethanol and related products, with usefullives of 15 to 20 years, including boilers, cooling towers, grain bins,centrifuges, conveyors, fermentation tanks, pumps and drying equipment.  Administrative and maintenance equipment isequipment with useful lives of 5 to 15 years, including vehicles, computersystems, security equipment, testing devices and shop equipment.

 

The Company reviews its property and equipment for impairment wheneverevents indicate that the carrying amount of the asset may not be recoverable.An impairment loss is recorded when the sum of the future cash flows is lessthan the carrying amount of the asset. An impairment loss is measured as theamount by which the carrying amount of the asset exceeds its fair value.

 

*Goodwill*

 

Goodwill represents the excess of purchase price over the underlyingnet assets of business acquired.  UnderStatement of Financial Accounting Standards No. 142, goodwill is notamortized but is subject to annual impairment tests.  The Company has performed the requiredimpairment tests, which have resulted in no impairment adjustments.

 

*Earnings Per Unit*

 

For purposes ofcalculating basic earnings per unit, units issued are considered outstanding onthe effective date of issuance. Diluted earnings per unit are calculated byincluding dilutive potential equity units in the denominator.  There were no dilutive equity units for theyears ending December 31, 2007, 2006, and 2005.

 

*Income Taxes*

 

The Company is taxed as alimited liability company under the Internal Revenue Code. The income of theCompany flows through to the members to be taxed at the member level ratherthan the corporate level. Accordingly, the Company has no tax liability.

 

*Environmental Liabilities*

 

Dakota Ethanol’s operations are subject to environmental laws andregulations adopted by various governmental authorities in the jurisdiction inwhich it operates. These laws require Dakota Ethanol to investigate andremediate the effects of the release or disposal of materials at its locations.Accordingly, Dakota Ethanol has adopted policies, practices and procedures inthe areas of pollution control, occupational health and the production,handling, storage and use of hazardous materials to prevent materialenvironmental or other damage, and to limit the financial liability which couldresult from such events. Environmental liabilities are recorded when DakotaEthanol’s liability is probable and the costs can be reasonably estimated.

 

*OperatingSegment*

* *

The Company uses the “management approach” for reporting informationabout segments in annual and interim financial statements.  The management approach is based on the waythe chief operating decision-maker organizes segments within a 

 

49

----

 

**LAKEAREA CORN PROCESSORS, LLC**

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

DECEMBER 31, 2007 AND2006

 

company for making operating decisions and assessing performance.  Reportable segments are based on products andservices, geography, legal structure, management structure and any other mannerin which management disaggregates a company. Based on the “management approach” model, the Company has determinedthat its business is comprised of a single operating segment.

 

*Reclassification*

 

Certain items have beenreclassified within the 2006 and 2005 financial statements.  The changesdo not affect net income or members’ equity but were changed to agree with theclassifications used in the December 31, 2007 financial statements.

 

*Recently Issued AccountingPronouncements*

 

In September 2006,the FASB issued SFAS No. 157, *FairValue Measurements*. This Statement defines fair value, establishes aframework for measuring fair value, and expands disclosures about fair valuemeasurements. SFAS No. 157 also emphasizes that fair value is amarket-based measurement, not an entity-specific measurement, and sets out afair value hierarchy with the highest priority being quoted prices in activemarkets.  Under SFAS No. 157, fair value measurements are disclosedby level within that hierarchy.  Therequirements of SFAS No. 157 are first effective for our fiscal yearbeginning January 1, 2008.  However, in February 2008, the FASBdecided that an entity need not apply this standard to nonfinancial assets andliabilities that are recognized or disclosed at fair value in the financialstatements on a nonrecurring basis until the subsequent year. Accordingly, our adoption of this standard on January 1, 2008 is limitedto financial assets and liabilities and any nonfinancial assets and liabilitiesrecognized or disclosed at fair value on a recurring basis.

 

In February 2007,the FASB issued FASB Statement No. 159, *TheFair Value Option for Financial Assets and Financial Liabilities —Including an amendment of FASB Statement No. 115*, whichprovides all entities with an option to report selected financial assets andliabilities at fair value. The objective of the Statement is to improvefinancial reporting by providing entities with the opportunity to mitigatevolatility in earnings caused by measuring related assets and liabilitiesdifferently without having to apply the complex provisions of hedge accounting.Certain specified items are eligible for the irrevocable fair value measurementoption as established by Statement No. 159. Statement No. 159 iseffective as of the beginning of an entity’s first fiscal year beginning after November 15,2007.

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007), “Business Combinations”(“FAS 141R”), which replaces FASB Statement No. 141. FAS 141Restablishes principles and requirements for how an acquirer recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, any non controlling interest in the acquiree and thegoodwill acquired. The Statement also establishes disclosure requirements whichwill enable users to evaluate the nature and financial effects of the businesscombination. FAS 141R is effective as of the beginning of an entity’sfiscal year that begins after December 15, 2008, which will be the Company’syear beginning November 1, 2009.

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statement—amendments of ARB No. 51 (FAS 160).” FAS 160 statesthat accounting and reporting for minority interests will be recharacterized asnoncontrolling interests and classified as a component of equity.  TheStatement also establishes reporting requirements that provide sufficientdisclosures that clearly identify and distinguish between the interests of theparent and the interests of the noncontrolling owners. FAS 160 applies to allentities that prepare consolidated financial statements, except not-for-profitorganizations, but will affect only those entities that have an outstandingnoncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. This statement is effective as of the beginning of an entity’s first fiscalyear beginning after December 15, 2008, which corresponds to the Company’syear beginning November 1, 2009.

 

There are no recentlyissued accounting pronouncements that are expected to have a material impact onthe Company.

 

**NOTE 3 - SHORT-TERM NOTE PAYABLE**

** **

On May 20, 2007,Dakota Ethanol renewed a revolving promissory note from First National Bank ofOmaha in the amount of $3,000,000. The note expires on May 19, 2008 andthe amount available is subject to certain financial ratios. Interest on theoutstanding principal balances will accrue at the bank’s base rate (7.25percent at December 31, 2007). There is a commitment fee of 3/8 percent onthe unused portion of the $3,000,000 availability. The note is collateralizedby the ethanol plant, its accounts receivable and inventories. On December 31,2007, Dakota Ethanol had $2,333,000 outstanding and $667,000 

 

50

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**LAKEAREA CORN PROCESSORS, LLC**

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

DECEMBER 31, 2007 AND2006

 

available to be drawn onthe revolving promissory note.  On December 31,2006, Dakota Ethanol had $0 outstanding and $3,000,000 available to be drawn onthe revolving promissory note.

 

**NOTE 4 - LONG-TERM NOTES PAYABLE**

** **

Dakota Ethanol has twonotes payable to First National Bank of Omaha, Nebraska (the Bank) for theconstruction and permanent financing of the plant (Term Notes 2 and 5).

 

As part of the notepayable agreements, Dakota Ethanol is subject to certain restrictive covenantsestablishing minimum reporting requirements, ratios, working capital and networth requirements. Dakota Ethanol is in compliance with the covenants as of December 31,2007. The note is collateralized by the ethanol plant and equipment, which hada net book value of approximately $35,345,000 on December 31, 2007, itsaccounts receivable and inventories. The note is subject to prepaymentpenalties based on the cost incurred by the Bank to break its fixed interestrate commitment.

 

The balance of Term Note2 is due and payable in quarterly installments of $581,690 through September 1,2011. Interest on outstanding principal balances will accrue at a rate of 9percent.

 

The balance of Term Note5 is due and payable in quarterly installments of interest only through September 1,2011. Interest on outstanding principal balances will accrue at adjustablebasis points above the lender’s rate (7.25 percent at December 31, 2007).This rate is subject to various adjustments based on various levels ofindebtedness to net worth, as defined by the agreement. Dakota Ethanol mayelect to borrow any principal amount repaid on Term Note 5 up to $5,000,000subject to the terms of the agreement. Should Dakota Ethanol elect to utilizethis feature, the lender will assess an unused commitment fee of 3/8 percent onthe unused portion of the $5,000,000. In addition, the bank draws the checkingaccount balance to a minimum balance on a daily basis. The excess cash pays downor the shortfall is drawn upon Term Note 5 as needed. On December 31,2007, and 2006, Dakota Ethanol had $0 outstanding and $5,000,000 available tobe drawn on Term Note 5.

 

The balance of the notespayable as of December 31, 2007 and 2006 is as follows:

 

 
| ** **                                  | ** ** | **2007**       | ** **          | **2006**   | ** ** |
|---------------------------------------------|------------|----------------|---------------------|------------|------------|
|                                        |       |           |                |       |       |
| Note payable to First  National Bank, Omaha |       |           |                |       |       |
| Term Note 2                                 | ** ** | **$**          | **6,599,140**       |       | $          | 8,229,093 |   |
| Term Note 5                                 | ** ** | **—**     |                | —     |       |
| ** **                                  |       | **6,599,140**  |                | 8,229,093  |       |
|                                        |       |           |                |       |       |
| Less current portion                        | ** ** | **(1,782,960** | **)**               | (1,630,674 | )          |
|                                        |       |           |                |       |       |
| ** **                                  |       | **$**          | ** 4,816,180** |       | $          | 6,598,419 |   |

 

Minimum principalpayments for the next five years are as follows:

 

| **Years  Ending December 31,** | ** ** | **Amount** | ** ** |
|--------------------------------|------------|------------|------------|
| 2008                           |       | 1,782,960  |       |
| 2009                           |       | 1,952,921  |       |
| 2010                           |       | 2,137,316  |       |
| 2011                           |       | 725,943    |       |

 

 

51

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**LAKEAREA CORN PROCESSORS, LLC**

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

DECEMBER 31, 2007 AND2006

 

**NOTE 5 - EMPLOYEE BENEFIT PLANS**

** **

Dakota Ethanol maintainsa 401(k) plan for the employees who meet the eligibility requirements setforth in the plan documents. Dakota Ethanol matches a percentage of theemployees’ contributed earnings. Employer contributions to the plan totaledapproximately $45,000, $26,000 and $16,000 for the years ended December 31,2007, 2006 and 2005, respectively.

 

**NOTE 6 - FAIR VALUE OF FINANCIALINSTRUMENTS**

** **

The Company believes the carrying amount of cash, cash equivalents,accounts receivable, due from broker, derivative instruments, and accountspayable approximates fair value due to the short maturity of these instruments.

 

The carrying amount oflong-term obligations at December 31, 2007 of $6,922,416 had an estimatedfair value of approximately $7,068,108 based on estimated interest rates forcomparable debt.  The carrying amount andfair value were $8,614,905 and $8,772,454 respectively at December 31, 2006.

 

The Company believes thecarrying amount of the short-term note payable approximates fair value due tothe short maturity of the instrument.

 

**NOTE 7 - COMMITMENTS,CONTINGENCIES AND AGREEMENTS**

** **

The Company has entered into contracts and agreements regarding theoperation and management of the ethanol plant.

 

Dakota Ethanol has entered into agreements for the purchase ofelectricity and natural gas. The following agreements commenced on or about September 4,2001.

 

Natural Gas — The agreement provides Dakota Ethanolwith a fixed transportation rate for natural gas for a ten-year term, renewablefor ten-year terms. In addition, the agreement provides a pricing structure fornatural gas for a two-year period based on market rates. The agreement does notrequire minimum purchases of natural gas during their initial term.

 

Electricity — The agreement provides Dakota Ethanolwith electric service for a term of ten years, renewable for five-year periods.The agreement sets rates for energy usage based on market rates and requires aminimum purchase of electricity each month during the initial term of theagreement.

 

Expenses related to theagreement for the purchase of electricity and natural gas were $12,425,574,$13,227,165, and $15,484,077, for the years ended December 31, 2007, 2006and 2005, respectively.

 

Minimum annual paymentsduring the term of the electricity agreement are as follows:

 

| **Years  Ending December 31,** | ** ** | **Amount** | ** ** |
|--------------------------------|------------|------------|------------|
| 2008                           |       | $          | 308,400    |   |
| 2009                           |       | 308,400    |       |
| 2010                           |       | 308,400    |       |
| 2011                           |       | 205,600    |       |
|                                |            |            |            |  |

 

Ethanol Fuel MarketingAgreement —Dakota Ethanol has an agreement with RPMG (a related party, see note 2), ajoint venture of ethanol producers, for the sale, marketing, billing andreceipt of payment and other administrative services for all ethanol producedby the plant effective January 1, 2006. The agreement expires on March 31,2008, and is automatically renewed for successive one-year terms unlessterminated 90 days prior to expiration.

 

Distiller’s GrainMarketing Agreement— Dakota Ethanol has an agreement with CHS, Inc. for the marketing of alldistiller’s dried grains produced by the plant. The agreement expires on December 1, 2008, and is automatically 

 

52

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**LAKEAREA CORN PROCESSORS, LLC**

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS

DECEMBER 31, 2007 AND2006

 

renewed for successiveone-year terms unless terminated 120 days prior to expiration.  In addition, CHS, Inc. has entered intorail car leases for the shipment of Dakota Ethanol’s distiller’s driedgrains.  Dakota Ethanol has agreed toreimburse CHS, Inc. for the costs related to the leases.  Costs related to the leases for the yearsended December 31, 2007 and 2006 were $859,800 and $824,374.

 

Minimum annual paymentsduring the term of the rail car lease agreement are as follows:

 

| **Years  Ending December 31,** | ** ** | **Amount** | ** ** |
|--------------------------------|------------|------------|------------|
| 2008                           |       | $          | 859,800    |   |
| 2009                           |       | 859,800    |       |
| 2010                           |       | 788,150    |       |
|                                |            |            |            |  |

 

Risk Management Agreement — Dakota Ethanol has an agreement withFCStone, LLC for the risk management and grain procurement program related tocorn and energy requirements of the plant. The agreement expires on November 1,2008, and is renewable for successive one-year terms unless terminated fourmonths prior to expiration.

 

Dakota Ethanolparticipated in an incentive program with the United States Department ofAgriculture (USDA) for the use of corn to produce ethanol. In accordance withthe terms of this arrangement, revenue is recorded based on incrementalproduction of ethanol compared to the prior year. No incentive income orexpense was recorded for the year ended December 31, 2006, as ethanolproduction decreased compared to the prior year.  Incentive expense of $46,328 was recorded forthe year ended December 31, 2005, as ethanol production decreased comparedto the prior year and a refund of incentives received earlier in the programyear was owed.  Dakota Ethanol’sparticipation in the program ended June 30, 2006 as the incentive expiredon September 30, 2006.

 

Dakota Ethanol also receives an incentive payment from the State ofSouth Dakota to produce ethanol. In accordance with the terms of thisarrangement, revenue is recorded based on ethanol sold.  Incentive revenue of  $750,000, $775,910, and $701,648, was recordedfor the years ended December 31, 2007, 2006 and 2005, respectively.  Dakota Ethanol did not receive the annualmaximum for the 2006 program year due to budget constraints on the State ofSouth Dakota program and will not likely receive the annual maximum under the2007 program year.

 

As of December 31, 2007, Dakota Ethanol is committed to purchasing9.6 million bushels of corn on a forward contract basis through December 31,2008, valued at approximately $34.2 million. Dakota Ethanol has a derivativefinancial instrument asset of approximately $9.0 million related to the forwardcontracted purchases of corn.  The cornpurchase contracts represent 55% of the annual plant corn usage.  Further, Dakota Ethanol is committed topurchasing 60,000 mmBtu’s of natural gas for 2008, valued at approximately$480,000.  The natural gas purchasesrepresent approximately 4% of the annual plant requirements.

 

The following commitments, contingencies and agreements are withrelated parties.

 

Each capital unit holderhas entered into a corn delivery agreement with the Company. For each unitowned, one-fourth bushel of corn is required to be delivered annually. Theprice paid for the corn is the average corn price for the applicable four-monthperiod (trimester) based on several local grain elevators’ cash corn price.Members can opt out of delivery agreement and the average price if they chooseto do so. Based on the number of units outstanding, 2,400,000 bushels of cornwill be delivered annually by the unit holders. This represents approximately17 percent of the corn required for the operation of the plant at its40,000,000 gallon capacity. Purchases of corn from corn delivery agreements andcash contracts from the Company’s stockholders totaled approximately$10,660,000, $8,034,000, and $7,090,000 for the years ended December 31,2007, 2006, and 2005, respectively, of which $726,000, $1,156,000, and $621,000was recorded as a liability at December 31, 2007, 2006, and 2005,respectively.

 

Environmental — During the year ended December 31,2002, management became aware that the ethanol plant may have exceeded certainemission levels allowed by their operating permit. The Company has disclosedthe situation to the appropriate state regulatory agency and has taken steps toreduce the emissions to acceptable levels. Management has not accrued aliability for environmental remediation costs since the costs, if any, cannotbe estimated.

 

53

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**LAKEAREA CORN PROCESSORS, LLC**

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

DECEMBER 31, 2007 AND2006

 

**NOTE 8 - RELATED PARTYTRANSACTIONS**

** **

On April, 1 2007, DakotaEthanol purchased a 9% interest in RPMG, in which Dakota Ethanol has enteredinto an ethanol marketing agreement for the exclusive rights to market, selland distribute the entire ethanol inventory produced by Dakota Ethanol. Dakota Ethanol paid approximately $137,000 in marketing fees under theagreement for the nine months ended December 31, 2007, respectively.  The marketing fees are included in netrevenues.

 

Dakota Ethanol sells 100%of its ethanol product under this marketing agreement.  Net sales to RPMGunder the agreement were approximately $67,181,000 for the nine months ended December 31,2007.  At December 31, 2007 amounts due from RPMG included inreceivables were $4,424,712.

 

Additional agreementswith related parties are included in Note 7.

 

**NOTE 9 - TIF BOND GUARANTEE**

** **

During December 2003,Dakota Ethanol entered into an agreement to guarantee a bond issued by LakeCounty, South Dakota. The bond issue was in conjunction with the refunding ofthe tax increment financing (TIF) bond issued by Lake County in 2001, of whichDakota Ethanol was the recipient of the proceeds. During 2003, Lake Countybecame aware that the taxes collected based on the incremental tax would not besufficient to cover the debt service of the 2001 bond issue. Based on theaforementioned deficiency and changes in interest rate during December of2003, Lake County refunded the 2001 bond issue replacing it with two separatebonds. A tax-exempt bond in the amount of $824,599 and a taxable bond in theamount of $1,323,024 were issued. As a part of the refunding, Dakota Ethanolentered into the agreement to guarantee the taxable bond issue. The taxeslevied on Dakota Ethanol’s property will first go towards the semiannual debtservice of the tax-exempt bonds and any remaining taxes will be used for thedebt service of the taxable bonds. Dakota Ethanol guarantees any shortfall indebt service for the taxable bonds. The guarantee expires in December of2018.

 

The maximum amount ofestimated future payments on the taxable bond debt service is $1,674,385 as of December 31,2007. The carrying amount of the guarantee liability on Dakota Ethanol’sbalance sheet is $323,276, which represents the estimated shortfall between thetaxable bond amount and the amount of taxes estimated to be collected on DakotaEthanol’s property.

 

Estimated maturities ofthe guarantee for the next five years are as follows:

 

| **Years  Ending December 31,** | ** ** | **Amount** | ** ** |
|--------------------------------|------------|------------|------------|
| 2008                           |       | $          | 62,319     |   |
| 2009                           |       | 60,678     |       |
| 2010                           |       | 52,485     |       |
| 2011                           |       | 52,382     |       |
| 2012                           |       | 52,145     |       |
|                                |            |            |            |  |

 

Dakota Ethanol has norecourse from third parties or collateral held by third parties related to theguarantee.

 

Management has applied the guidance from Financial Accounting StandardsBoard Interpretation No. 45, (FIN 45) related to accounting forguarantee obligations. Management has determined the probability weightedpresent value of the estimated cash flows related to the guarantee obligationand recorded a liability and related asset of $201,973 as of December 31,2007.

 

54

----

 

**LAKEAREA CORN PROCESSORS, LLC**

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

DECEMBER 31, 2007 AND2006

 

Estimated amortization of the guarantee premium for the next five yearsis as follows:

 

| **Years  Ending December 31,** | ** ** | **Amount** | ** ** |
|--------------------------------|------------|------------|------------|
| 2008                           |       | $          | 60,710     |   |
| 2009                           |       | 48,841     |       |
| 2010                           |       | 37,390     |       |
| 2011                           |       | 27,375     |       |
| 2012                           |       | 17,381     |       |
|                                |            |            |            |  |

 

**NOTE 10 - MINORITY INTERESTPURCHASE**

** **

On June 30, 2006,the Company executed an Assignment Agreement with members of the Broin familyfor the purchase of all of the outstanding minority interest (11.898%) inDakota Ethanol. The Company purchased the minority interest under the right offirst refusal when the Broins negotiated to sell their interest to a thirdparty to allow the company to take advantage of prevailing marketconditions.  The purchase transactionclosed on June 30, 2006. Dakota Ethanol is now operated as a wholly-ownedsubsidiary. The Company paid to the Broins a purchase price of $17,116,000 plusan amount representing the Broins’ share of estimated net income through June 30,2006. The total amount paid to the Broins was $19,351,776.

 

In order to fund ourbuyout of the minority interest, the Company entered into a credit facility of$19,100,000 with our senior lender, First National Bank of Omaha. The creditfacility was a 120 day term note with a principal balance of $19,100,000accruing interest at a variable rate based on the Bank’s base rate as publishedfrom time to time as its national base rate. The entire balance of the note wasrepaid from operating funds prior to September 30, 2006.

 

Because Dakota Ethanolwas already 88% owned by the Company since inception, the results of itsoperations have already been reflected in the Company’s balance sheets andstatements of operations since the inception of Dakota Ethanol.

 

The total acquisitioncosts for the minority interest, including purchase price, legal and closingfees, was $19,376,369.  Allocation of thepurchase price is as follows:

 

| Property and equipment |   | $          | 4,326,597  |   |
|------------------------|--------|------------|------------|--------|
| Minority interest      |   | 4,654,006  |       |
| Goodwill               |   | 10,395,766 |       |
|                   |   | $          | 19,376,369 |   |
|                        |        |            |            |        |  |

 

There are no contingentprovisions or research and development assets purchased or written off in thepurchase of the minority interest. All of the goodwill is expected to beamortizable for income tax purposes.

 

55

----

 

**LAKEAREA CORN PROCESSORS, LLC**

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

DECEMBER 31, 2007 AND2006

 

The following selectedpro forma information from the statements of operations is prepared assuming theCompany had acquired the minority interest at the beginning of the yearspresented:

 

| ** **                           | ** ** | **2006**   | ** **  | **2005**   | ** ** |
|--------------------------------------|------------|------------|-------------|------------|------------|
| Total Revenues                       |       | $          | 103,889,412 |       | $          | 80,020,970 |   |
| Net Income                           |       | 47,325,743 |        | 10,821,052 |       |
| Basic and Diluted Earnings  Per Unit |       | $          | 1.60        |       | $          | 0.37 |   |

** **

** **

**NOTE 11 - QUARTERLY FINANCIALREPORTING (UNAUDITED)**

** **

Summary quarterly resultsare as follows:

 
| ** **                                 | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|--------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                 | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| Year ended December 31,  2007              |       |        |       |        |       |        |       |        |       |
| Total revenues                             |       | $           | 27,769,149 |        | $          | 27,647,758  |       | $           | 24,466,924 |   | $ | 23,855,868 |   |
| Gross profit (loss)                        |       | 3,371,737   |       | 7,872,608   |       | 5,419,955   |       | 6,097,732   |       |
| Income (loss) from operations              |       | 2,454,649   |       | 6,943,447   |       | 4,485,537   |       | 5,156,586   |       |
| Net income (loss)                          |       | 2,322,466   |       | 6,835,926   |       | 4,474,171   |       | 4,372,642   |       |
| Basic and diluted earnings (loss) per unit |       | 0.08        |       | 0.23        |       | 0.15        |       | 0.15        |       |
|                                       |       |        |       |        |       |        |       |        |       |
| Year ended December 31,  2006              |       |        |       |        |       |        |       |        |       |
| Total revenues                             |       | $           | 22,684,333 |        | $          | 29,579,774  |       | $           | 27,531,613 |   | $ | 24,093,692 |   |
| Gross profit (loss)                        |       | 6,620,601   |       | 14,006,367  |       | 13,713,311  |       | 18,756,715  |       |
| Income (loss) from operations              |       | 5,897,503   |       | 13,157,052  |       | 12,502,276  |       | 17,601,318  |       |
| Net income (loss)                          |       | 4,990,770   |       | 11,431,056  |       | 12,313,474  |       | 17,300,492  |       |
| Basic and diluted earnings (loss) per unit |       | 0.17        |       | 0.39        |       | 0.42        |       | 0.57        |       |
|                                       |       |        |       |        |       |        |       |        |       |
| Year ended December 31,  2005              |       |        |       |        |       |        |       |        |       |
| Total revenues                             |       | $           | 21,523,608 |        | $          | 17,218,242  |       | $           | 18,871,816 |   | $ | 22,407,304 |   |
| Gross profit (loss)                        |       | 6,211,744   |       | 2,334,117   |       | 2,795,219   |       | 5,478,782   |       |
| Income (loss) from operations              |       | 5,184,450   |       | 1,588,697   |       | 1,778,144   |       | 4,657,981   |       |
| Net income (loss)                          |       | 4,351,948   |       | 1,179,629   |       | 1,390,874   |       | 3,942,133   |       |
| Basic and diluted earnings (loss) per unit |       | 0.15        |       | 0.04        |       | 0.05        |       | 0.13        |       |

 

The above quarterlyfinancial data is unaudited, but in the opinion of management, all adjustmentsnecessary for the fair presentation of the selected data for these interimperiods presented have been included.

 

56

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**ITEM 9.****                                            ****CHANGES IN AND DISAGREEMENTSWITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.**

 

We decided to change ourindependent registered public accountants, and accordingly dismissed EideBailly, LLP (“EideBailly”) on January 8, 2007.  EideBailly’s reports on the Company’s financial statements from our inception,including the past two years, did not contain any adverse opinion or disclaimerof opinion, nor were they qualified or modified as to uncertainty, audit scope,or accounting principles.

 

The decision to changeindependent registered public accountants was recommended and approved by ouraudit committee.

 

There were nodisagreements with Eide Bailly on any matter of accounting principles orpractices, financial statement disclosure, or auditing scope or procedure,which if not resolved to Eide Bailly’s satisfaction would have caused it tomake reference to the subject matter of the disagreement in connection with itsreport.

 

We have provided EideBailly with the contents of this disclosure and Eide Bailey issued a letterindicating their agreement with this disclosure which was filed with theCommission on a Form 8-K on January 10, 2007.

 

On January 8, 2007,we engaged McGladrey & Pullen, LLP as our new independent registeredpublic accountant to audit our financial statements.  This engagement was approved by our auditcommittee.

 

**ITEM 9A(T).           CONTROLS AND PROCEDURES.**

 

**DisclosureControls and Procedures**

 

                 The Company maintainsdisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in the reports that the Company files or submits underthe Securities Exchange Act of 1934 (the “Exchange Act”) is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms, and that suchinformation is accumulated and communicated to the Company’s management,including its Chief Executive Officer and Chief Financial Officer, asappropriate, to allow for timely decisions regarding required disclosures.

 

                 Our management is responsiblefor establishing and maintaining adequate internal control over financialreporting, as such term is defined in Rule 13(a)-15(f) of the ExchangeAct.  Under the supervision and with theparticipation of our management, including our Chief Executive Officer andChief Financial Officer, we conducted an evaluation of the effectiveness of ourinternal control over financial reporting as set forth by the Committee ofSponsoring Organizations of the Treadway Commission (“COSO”) in InternalControl — Integrated Framework.  Based onthis assessment, management has concluded that our internal control overfinancial reporting was effective as of December 31, 2007.

 

                 This annual report does notinclude an attestation report of the Company’s registered public accountingfirm regarding internal control over financial reporting.  Management’s report was not subject toattestation by our registered public accounting firm pursuant to temporary rules ofthe Securities and Exchange Commission that permit us to provide onlymanagement’s report in this annual report.

 

**ITEM 9B.               OTHERINFORMATION.**

 

                None.

 

57

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**PART III.**

 

**ITEM****10.****                                             ****DIRECTORS, EXECUTIVE OFFICERS ANDCORPORATE GOVERNANCE.**

 

The informationrequired by this Item is incorporated by reference to the definitive proxystatement for our 2008 Annual Meeting of Members to be filed with theSecurities and Exchange Commission within 120 days after the end of our 2007fiscal year.  This proxy statement isreferred to in this report as the 2008 Proxy Statement.

 

**ITEM 11.****                                             ****EXECUTIVE COMPENSATION**

 

Theinformation required by this Item is incorporated by reference to the 2008Proxy Statement.

 

**ITEM 12.****                                             ****SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

Theinformation required by this Item is incorporated by reference to the 2008Proxy Statement.

 

**ITEM 13.****                                             ****CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE**

 

Theinformation required by this Item is incorporated by reference to the 2008Proxy Statement.

 

**ITEM 14.****                                             ****PRINCIPAL ACCOUNTANTFEES AND SERVICES**

 

Theinformation required by this Item is incorporated by reference to the 2008Proxy Statement.

 

**PART IV.**

 

**ITEM 15.****                                                 ****EXHIBITS****AND FINANCIAL STATEMENT SCHEDULES.**

 

        The following exhibits and financialstatements are filed as part of, or are incorporated by reference into, thisreport:

 

(1)           FinancialStatements — Reference is made to the “Index to Financial Statements” of LakeArea Corn Processors, LLC located under Part II Item 8 of this report fora list of the financial statements and schedules for the fiscal year ended December 31,2007, included herein.

 

(2)           Allsupplemental schedules are omitted because of the absence of conditions underwhich they are required or because the information is shown in the ConsolidatedFinancial Statements or notes thereto.

 

(3)           Theexhibits we have filed herewith or incorporated by reference herein areidentified in the Exhibit Index set forth below.

 

                 The following exhibits are filed as part of thisreport.  Exhibits previously filed areincorporated by reference, as noted.

** **
| **Exhibit No.** | ** ** | **Exhibit**                                 | ** ** | **Filed  Herewith** | ** ** | **Incorporated  by Reference**                                                                                                                            |
|----------------------|------------|---------------------------------------------|------------|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1                  |       | Plan of Reorganization.                     |       |                |       | Filed as Exhibit 2.1 on the  registrant’s Form S-4 filed with the Commission on August 2, 2001  and incorporated by reference herein. |
|                 |       |                                        |       |                |       |                                                                                                                                                      |
| 3.1                  |       | Articles of organization of the registrant. |       |                |       | Filed as Exhibit 3.1 on the  registrant’s Form S-4 filed with the Commission on August 2, 2001  and incorporated by reference herein. |

 

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| 3.2    |   | Amended and restated operating agreement of  the registrant.                                                                                            |   |   |   | Filed as Exhibit 3.6 on the  registrant’s Form 10-K filed with the Commission on March 31, 2005  and incorporated by reference herein.     |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                    |   |   |   |                                                                                                                                                           |
| 3.3    |   | First amendment to the amended and restated  operating agreement of the registrant.                                                                     |   |   |   | Filed as Exhibit 99.1 on the  registrant’s Form 8-K filed with the Commission on March 19, 2007  and incorporated by reference herein.     |
|   |   |                                                                                                                                                    |   |   |   |                                                                                                                                                           |
| 10.1   |   | Contribution Agreement between Renewable  Products Marketing Group, LLC and Dakota Ethanol, LLC dated April 1,  2007.                              |   |   |   | Filed as Exhibit 10.1 on the registrant’s  Form 10-Q filed with the Commission on August 14, 2007 and  incorporated by reference herein.   |
|   |   |                                                                                                                                                    |   |   |   |                                                                                                                                                           |
| 10.2   |   | Member Ethanol Fuel Marketing Agreement  between Renewable Products Marketing Group, LLC and Dakota Ethanol, LLC dated  April 1, 2007.             |   |   |   | Filed as Exhibit 10.2. on the  registrant’s Form 10-Q filed with the Commission on August 14, 2007  and incorporated by reference herein.  |
|   |   |                                                                                                                                                    |   |   |   |                                                                                                                                                           |
| 10.3   |   | Addendum to Water Purchase Agreement dated  February 28, 2007 between Big Sioux Community Water Systems, Inc.  and Dakota Ethanol, LLC.       |   |   |   | Filed as Exhibit 10.1 on the  registrant’s Form 10-K filed with the Commission on March 30, 2007.                                          |
|   |   |                                                                                                                                                    |   |   |   |                                                                                                                                                           |
| 10.4   |   | Eighth Amendment to the Construction Loan  Agreement dated June 30, 2006 between First National Bank of  Omaha and Dakota Ethanol, LLC.            |   |   |   | Filed as Exhibit 10.2 on the  registrant’s Form 10-Q filed with the Commission on August 14, 2006  and incorporated by reference herein.   |
|   |   |                                                                                                                                                    |   |   |   |                                                                                                                                                           |
| 10.5   |   | Assignment Agreement between Jeff Broin, Rob Broin, Todd Broin,  Lowell Broin, Judy Broin and Lake Area Corn Processors, LLC dated  June 30, 2006. |   |   |   | Filed as Exhibit 10.1 on the  registrant’s Form 10-Q filed with the Commission on August 14, 2006  and incorporated by reference herein.   |
|   |   |                                                                                                                                                    |   |   |   |                                                                                                                                                           |
| 10.6   |   | Sixth Amendment to the Construction Loan  Agreement dated March 23, 2006 between First National Bank of  Omaha and Dakota Ethanol, LLC.            |   |   |   | Filed as Exhibit 10.1 on the  registrant’s Form 10-Q filed with the Commission on May 15, 2006  and incorporated by reference herein.      |
|   |   |                                                                                                                                                    |   |   |   |                                                                                                                                                           |
| 10.7   |   | Risk Management Agreement dated November 28, 2005 between  FCStone, LLC and Dakota Ethanol, LLC.                                                   |   |   |   | Filed as Exhibit 10.1 on the  registrant’s Form 8-K filed with the Commission on December 2, 2005  and incorporated by reference herein.   |
|   |   |                                                                                                                                                    |   |   |   |                                                                                                                                                           |
| 10.8   |   | Distillers Grain Marketing Agreement dated November 28, 2005  between Commodity Specialists Company and Dakota Ethanol, LLC.                       |   |   |   | Filed as Exhibit 10.2 on the  registrant’s Form 8-K filed with the Commission on December 2, 2005  and incorporated by reference herein.   |
|   |   |                                                                                                                                                    |   |   |   |                                                                                                                                                           |
| 10.9   |   | Ethanol Fuel Marketing Agreement dated November 30, 2005 between  Renewable Products Marketing Group, LLC and Dakota Ethanol.                      |   |   |   | Filed as Exhibit 10.3 on the  registrant’s Form 8-K filed with the Commission on December 2, 2005  and incorporated by reference herein.   |
|   |   |                                                                                                                                                    |   |   |   |                                                                                                                                                           |
| 10.10  |   | Ethanol Marketing Contract Termination dated November 4, 2005  between Ethanol Products, LLC and Dakota Ethanol, LLC.                              |   |   |   | Filed as Exhibit 10.1 on registrant’s  Form 10-Q filed with the Commission on November 14, 2005 and  incorporated by reference herein.     |
|   |   |                                                                                                                                                    |   |   |   |                                                                                                                                                           |
| 10.11  |   | Redemption Agreement dated November 4, 2005 between Ethanol  Products, LLC and Dakota Ethanol, LLC.                                                |   |   |   | Filed as Exhibit 10.2 on the registrant’s Form 10-Q filed  with the Commission on November 14, 2005 and incorporated by reference  herein. |

 

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| 10.12  |   | DDGS Marketing Contract Termination dated November 4, 2005  between Broin Enterprises, Inc. and Dakota Ethanol, LLC.           |   |   |   | Filed as Exhibit 10.3 on the registrant’s Form 10-Q filed  with the Commission on November 14, 2005 and incorporated by reference  herein. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                     |   |   |   |                                                                                                                                                           |
| 10.13  |   | Fourth Amendment to Construction Loan Agreement dated April 22,  2005 between First National Bank of Omaha and Dakota Ethanol, LLC. |   |   |   | Filed as Exhibit 10. 1 on the registrant’s Form 10-Q filed  with the Commission on May 16, 2005 and incorporated by reference  herein.     |
|   |   |                                                                                                                                     |   |   |   |                                                                                                                                                           |
| 10.14  |   | Revolving Promissory Note dated April 21, 2005 between First  National Bank of Omaha and Dakota Ethanol, LLC.                       |   |   |   | Filed as Exhibit 10.2 on the registrant’s Form 10-Q filed  with the Commission on May 16, 2005 and incorporated by reference  herein.      |
|   |   |                                                                                                                                     |   |   |   |                                                                                                                                                           |
| 10.15  |   | Employment Agreement between Scott Mundt and Dakota Ethanol, LLC  dated October 17, 2005.                                           |   |   |   | Filed as Exhibit 10.9 on the  registrant’s Form 10-K filed with the Commission on March 30, 2006  and incorporated by reference herein.    |
|   |   |                                                                                                                                     |   |   |   |                                                                                                                                                           |
| 16.1   |   | Letter from Eide Bailly, LLP dated as of January 9, 2007  regarding change of independent principal accountant.                     |   |   |   | Filed as Exhibit 16.1 on the registrant’s  Form 8-K filed with the Commission on January 10, 2007 and  incorporated by reference herein.   |
|   |   |                                                                                                                                     |   |   |   |                                                                                                                                                           |
| 31.1   |   | Certificate Pursuant to 17 CFR  240.13a-14(a)                                                                                            |   | X      |   | Filed herewith                                                                                                                                                 |
|   |   |                                                                                                                                     |   |   |   |                                                                                                                                                           |
| 31.2   |   | Certificate Pursuant to 17 CFR  240.13a-14(a)                                                                                            |   | X      |   | Filed herewith                                                                                                                                                 |
|   |   |                                                                                                                                     |   |   |   |                                                                                                                                                           |
| 32.1   |   | Certificate Pursuant to 18 U.S.C.  Section 1350                                                                                     |   | X      |   | Filed herewith                                                                                                                                                 |
|   |   |                                                                                                                                     |   |   |   |                                                                                                                                                           |
| 32.2   |   | Certificate Pursuant to 18 U.S.C.  Section 1350                                                                                     |   | X      |   | Filed herewith                                                                                                                                                 |

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13or 15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|                            | LAKE  AREA CORN PROCESSORS, LLC                                         |
|---------------------------------|-------------------------------------------------------------------------|
|                            |                                                                    |
|                            |                                                                    |
| Date: March 28,  2008 | /s/  Scott Mundt                                                        |
|                            | Scott  Mundt                                                            |
|                            | President  and Chief Executive Officer

(Principal  Executive Officer)  |
|                            |                                                                    |
|                            |                                                                    |
| Date: March 28,  2008 | /s/  Robbi Buchholtz                                                    |
|                            | Robbi  Buchholtz                                                        |
|                            | Chief  Financial Officer

(Principal  Financial and Accounting Officer) |

** **

                Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.

 
| Date:  March 28, 2008 | /s/  Douglas Van Duyn      |
|----------------------------|----------------------------|
|                       | Douglas  Van Duyn, Manager |
|                       |                       |
|                       |                       |
| Date:  March 28, 2008 | /s/  Brian Woldt           |
|                       | Brian  Woldt, Manager      |
|                       |                       |
|                       |                       |
| Date:  March 28, 2008 | /s/  Randy Hansen          |
|                       | Randy  Hansen, Manager     |
|                       |                       |
|                       |                       |
| Date: March 28, 2008  | /s/ Rick Kasperson         |
|                       | Rick Kasperson, Manager    |
|                       |                       |
|                       |                       |
| Date:  March 28, 2008 | /s/  Ronald Alverson       |
|                       | Ronald  Alverson, Manager  |
|                       |                       |
|                       |                       |
| Date:  March 28, 2008 | /s/  Dale Thompson         |
|                       | Dale  Thompson, Manager    |
|                       |                       |
|                       |                       |
| Date:  March 28, 2008 | /s/  Todd Brown            |
|                       | Todd  Brown, Manager       |

 

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