**UNITEDSTATES 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, 2006** |
| ** **                                       |       | ** **                                                                                     |
| **or**                                           |
| ** **                                       | ** ** | ** **                                                                                     |
| **o**                                            |       | **Transition report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934.** |

 

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**LAKE AREA CORN PROCESSORS, LLC**

(Exact name ofsmall business issuer as specified in its charter)

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

 

**46269 SDHighway 34**

**P.O. Box100**

**Wentworth,South Dakota 57075**

(Address of principal executive offices)

**(605) 483-2676**

**(Issuer’s telephone number)**

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

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

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

Indicate by check mark if the registrant is not required to file reportspursuant to Section 13 or Section15(d) of the Act.     o  Yes            x  No

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90days.      x  Yes             o  No

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is notcontained in this form, and no disclosure will be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.   x

Indicate by check mark whether the registrant is alarge accelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):
| Large Accelerated Filer   o |   | Accelerated Filer   o |   | Non-Accelerated Filer   x |
|--------------------------------------------|--------|--------------------------------------|--------|------------------------------------------|

 

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

o Yes     x  No

The aggregate market value of the registrant’smembership units held by non-affiliates of the registrant was $14,810,000computed by reference to the most recent public offering price on Form S-4.

As of the date of this filing, there are 29,620,000membership units of the registrant outstanding.

**DOCUMENTSINCORPORATED BY REFERENCE**

The registrant hasincorporated by reference into Part III of this Annual Report onForm 10-K portions of its definitive proxy statement to be filed with theSecurities and Exchange Commission within 120 days after the close of thefiscal year covered by this Annual Report.

 

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**INDEX**
| **PART I**                                                                                                     | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|------------|
| **ITEM 1. BUSINESS**                                                                                           | ** ** | ** ** |
| **ITEM 1A. RISK FACTORS**                                                                                      | ** ** | ** ** |
| **ITEM 2. PROPERTIES**                                                                                         | ** ** | ** ** |
| **ITEM 3. LEGAL  PROCEEDINGS**                                                                                 | ** ** | ** ** |
| **ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**                                               | ** ** | ** ** |
| **PART II**                                                                                                    | ** ** | ** ** |
| **ITEM 5.  MARKET FOR MEMBERSHIP UNITS AND RELATED MEMBER MATTERS AND ISSUER PURCHASES  OF EQUITY SECURITIES** | ** ** | ** ** |
| **ITEM 6. SELECTED  FINANCIAL DATA**                                                                           | ** ** | ** ** |
| **ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATION**        | ** ** | ** ** |
| **ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**                                       | ** ** | ** ** |
| **ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**                                                       | ** ** | ** ** |
| **ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL  DISCLOSURES**            | ** ** | ** ** |
| **ITEM 9A.  CONTROLS AND PROCEDURES**                                                                          | ** ** | ** ** |
| **ITEM 9B. OTHER INFORMATION**                                                                                 | ** ** | ** ** |
| **PART  III**                                                                                                  | ** ** | ** ** |
| **ITEM 10.  MANAGERS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE**                       | ** ** | ** ** |
| **ITEM 11.  EXECUTIVE COMPENSATION**                                                                           | ** ** | ** ** |
| **ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED  STOCKHOLDER MATTERS**  | ** ** | ** ** |
| **ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE**                         | ** ** | ** ** |
| **ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES**                                                           | ** ** | ** ** |
| **PART IV**                                                                                                    | ** ** | ** ** |
| **ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES**                                                          | ** ** | ** ** |
| **SIGNATURES**                                                                                                 | ** ** | ** ** |

 

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**CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKINGSTATEMENTS**

Thisannual report contains historical information, as well as forward-lookingstatements that involve known and unknown risks and relate to future events,our future financial performance, or our expected future operations andactions.  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 termsor other similar expressions.  Theseforward-looking statements are only our predictions based upon currentinformation and involve numerous assumptions, risks and uncertainties.  Our actual results or actions may differmaterially from these forward-looking statements for many reasons, includingthe reasons described in this report. While it is impossible to identify all such factors, factors that could causeactual results to differ materially from those estimated by us include:

·                  Overcapacitywithin the ethanol industry causing supply to exceed demand;

·                  Actual ethanoland distillers grains production varying from expectations;

·                  Availability andcosts of products and raw materials, particularly corn and natural gas;

·                  Changes in theprice and market for ethanol and distillers grains;

·                  Our ability tomarket and our reliance on third parties to market our products;

·                  Changes in orelimination of governmental laws, tariffs, trade or other controls orenforcement practices such as:

·                  national, state or local energypolicy;

·                  federal ethanol tax incentives;

·                  legislation establishing a renewablefuel standard or other legislation mandating the use of ethanol or otheroxygenate additives;

·                  state and federal regulationrestricting or banning the use of MTBE; or

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

·                  Changes in theweather or general economic conditions impacting the availability and price of cornand natural gas;

·                  Total U.S.consumption of gasoline;

·                  Fluctuations inpetroleum prices;

·                  Changes in plantproduction capacity or technical difficulties in operating the plant;

·                  Costs ofconstruction and equipment;

·                  Changes in ourbusiness strategy, capital improvements or development plans;

·                  Results of ourhedging strategies;

·                  Changes ininterest rates or the availability of credit;

·                  Our ability togenerate free cash flow to invest in our business and service our debt;

·                  Our liabilityresulting from litigation;

·                  Our ability toretain key employees and maintain labor relations;

·                  Changes andadvances in ethanol production technology;

·                  Competition fromalternative fuels and alternative fuel additives; and

·                  Other factorsdescribed elsewhere in this report.

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The cautionary statements referred to in this sectionalso should be considered in connection with any subsequent written or oralforward-looking statements that may be issued by us or persons acting on ourbehalf.  We undertake no duty to updatethese forward-looking statements, even though our situation may change in thefuture. Furthermore, we cannot guarantee future results, events, levels ofactivity, performance, or achievements. We caution you not to put undue reliance on any forward-lookingstatements, which speak only as of the date of this report.  You shouldread this report and the documents that we reference in this report and havefiled as exhibits completely and with the understanding that our actual futureresults may be materially different from what we currently expect.  Wequalify all of our forward-looking statements by these cautionary statements.

**PART I.**

**ITEM 1.****                                                     BUSINESS.**

**Overview**

Lake Area CornProcessors, LLC (the “Company”) is a South Dakota limited liability company thatcurrently owns and manages its wholly-owned subsidiary Dakota Ethanol,LLC.  Prior to June 2006, the Broinfamily owned a minority interest of approximately 12% of Dakota Ethanol, LLC.  On June 30, 2006, we entered into anassignment agreement with the Broin family to purchase its minority interest inDakota Ethanol, LLC.  Following executionof the assignment agreement, we own 100% of Dakota Ethanol, LLC and operate itas a wholly-owned subsidiary.  DakotaEthanol, LLC owns and operates an ethanol plant located near Wentworth, SouthDakota that has a nameplate production capacity of 40 million gallons ofethanol per year.  Lake Area CornProcessors, LLC is referred to in this report as “LACP,” the “company,” “we,”or “us.”  Dakota Ethanol, LLC is referredto in this report as “Dakota Ethanol” or the “ethanol plant.”

SinceSeptember 4, 2001, Dakota Ethanol has been engaged in the production of ethanoland distillers grains.  Fuel gradeethanol is Dakota Ethanol’s primary product accounting for the majority of itsrevenue.  Dakota Ethanol also sells distillers grains, a principalco-product of the ethanol production process.   In 2006, DakotaEthanol processed approximately 17 million bushels of corn into approximately48 million gallons of ethanol.  Dakota Ethanol also processedapproximately 107,000 tons of distillers grains in 2006.  In 2007, weanticipate that Dakota Ethanol’s ethanol and distillers grains production willbe substantially the same as in fiscal year 2006.  There is, however, no assurance that DakotaEthanol will be able to operate at these production levels.

OnApril 26, 2006, we announced to our members that we were engaging inpreliminary discussions concerning a potential change in corporate structure,merger, public offering or business combination with one or morecompanies.  These discussions continueand no plans have been finalized.  Noagreement, arrangement or understanding concerning the potential transactionhas been made.

**GeneralDevelopment of Business**

LACPwas formed as a South Dakota cooperative on May 25, 1999.  On August 20, 2002, our members approved aplan to reorganize into a South Dakota limited liability company.  The reorganization became effective on August31, 2002, and the assets and liabilities of the cooperative were transferred tothe newly formed limited liability company. Following the reorganization, our legal name was changed to Lake AreaCorn Processors, LLC.

Ourownership of Dakota Ethanol represents substantially all of our assets and ouronly source of revenue.  Since we operate Dakota Ethanol asa wholly-owned subsidiary, we receive all revenues generated by Dakota Ethanolpursuant to its operating agreement.  Wedistribute the revenues received from Dakota Ethanol to our unit holders inproportion to the number of units held by each member.

Dakota Ethanol underwent a significant change in itsmode of operations on June 6, 2005, when it elected not to renew its managementagreement and other marketing agreements with Broin Management, LLC and othervarious Broin-related entities.  BetweenJune 6, 2005 and December 31, 2005, Dakota Ethanol and the Broin-relatedentities negotiated termination of the contracts and Dakota Ethanol enteredinto agreements with new risk management and marketing service providers.  In addition, on December 16, 2005, DakotaEthanol entered into an 

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employment agreement with Scott Mundt to serve in theposition of Transition Coordinator. Mr. Mundt’s employment began on October 17, 2005, the effectivedate of his employment agreement. Effective January 1, 2006, Mr. Mundt’s position changed to GeneralManager.  Mr. Mundt’s duties includeday-to-day management of the operations of Dakota Ethanol.

**AvailableInformation**

The public mayread and copy materials we file with the Securities and Exchange Commission atthe SEC’s Public Reference Room at 100 F Street NE, Washington, D.C.,20549.  Information on the operation ofthe Public Reference Room may be obtained by calling the SEC at1-800-SEC-0330.  In addition, the SECmaintains 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 isalso available at our website at*http://www.dakotaethanol.com/lacp.html*, which includes links toreports we have filed with the Securities and Exchange Commission.  The contents of our website are notincorporated by reference in this Annual Report on Form 10-K.

**Financial Information**

Please refer to “**Item 7 – Management’s Discussion and Analysis of Financial Conditionand 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 Products and Their Markets**

The principal products produced at the Dakota Ethanolplant are fuel grade ethanol and distillers grains.

***Ethanol***

  Ethanol is ethyl alcohol, a fuel componentmade primarily from corn and various other grains.  According to the Renewable FuelsAssociation, approximately 85 percent of the ethanol produced in theUnited States today is produced from corn, and approximately 90 percent ofethanol is produced from a corn and other input mix. Corn produces largequantities of carbohydrates, which convert into glucose more easily than mostother kinds of biomass. As of February 12, 2007, the Renewable FuelsAssociation estimates domestic ethanol production capacity at approximately 5.5billion gallons.

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

Ethanolcan be used as: (i) an octane enhancer in fuels; (ii) an oxygenated fueladditive for the purpose of reducing ozone and carbon monoxide vehicleemissions; and (iii) a non-petroleum-based gasoline substitute.  Approximately 95% of all ethanol is used inits primary form for blending with unleaded gasoline and other fuelproducts.  Used as a fuel oxygenate,ethanol provides a means to control carbon monoxide emissions in largemetropolitan areas where oxygenated fuels are required during certain times ofthe year.  The principal purchasers ofethanol are generally wholesale gasoline marketers or blenders.  The principal markets for our ethanol arepetroleum terminals in the continental United States.

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DakotaEthanol began producing ethanol in September 2001.  For our fiscal year ended December 31, 2006,revenues from sales of ethanol were approximately 91% of our totalrevenues.  The following table shows thepercentage of our total revenues that were from sales of ethanol for each of thelast three fiscal years:
| Fiscal Year        | ** ** | **Percentage of Revenues  from Sales of Ethanol** | ** ** |
|-------------------------|------------|----------------------------------------------------------------------------|------------|
| Ended December 31, 2006 |       | 91                                                                         | %          |
| Ended December 31, 2005 |       | 86                                                                         | %          |
| Ended December 31, 2004 |       | 85                                                                         | %          |

 

***Distillers Grains***

Aprincipal co-product of the ethanol production process is distillers grains, ahigh protein, high-energy animal feed supplement primarily marketed to thedairy and beef industry.  Distillersgrains contain by-pass protein that is superior to other protein supplementssuch as cottonseed meal and soybean meal. By-pass proteins are more digestible to the animal, thus generatinggreater lactation in milk cows and greater weight gain in beef cattle.  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 seven daysand can be sold only to consumers within the immediate vicinity of an ethanolplant.  DMWS is DWS that has been driedto approximately 50% moisture.  DMWS havea slightly longer shelf life of approximately ten days and are often sold tonearby markets.  CDS containsapproximately 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 3%DWS, 4% DMWS, 3% CDS and 90% DDGS.

Forour fiscal year ended December 31, 2006, revenues from sales of distillers grainswere approximately 8% of our total revenues. The following table shows the percentage of our total revenues that werefrom sales of distillers grains for each of the last three fiscal years:
| Fiscal Year        | ** ** | **Percentage of Revenues  from Sales of Distillers Grains** | ** ** |
|-------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| Ended December 31, 2006 |       | 8                                                                                         | %          |
| Ended December 31, 2005 |       | 13                                                                                        | %          |
| Ended December 31, 2004 |       | 14                                                                                        | %          |

 

**Distribution of PrincipalProducts**

Theethanol plant is located near Wentworth, South Dakota in Lake County, ineastern South Dakota.  We selected theWentworth site because of its location to existing grain production,accessibility to road and rail transportation and its proximity to majorpopulation centers.  It is served by theBurlington Northern Santa Fe railroad system. It is in close proximity to multiple state highways and is nearInterstate Highways 29 and 90.

***Ethanol Distribution***

From the date Dakota Ethanol began operations throughthe fiscal year ended December 31, 2005, Dakota Ethanol marketed the ethanolproduced at the plant through an exclusive marketing agreement with EthanolProducts, LLC (“Ethanol Products”), a Broin affiliate.  On June 6, 2005, Dakota Ethanol elected notto renew its agreement with Ethanol Products and agreed that termination wouldbecome effective as of January 1, 2006.

On November 30, 2005, Dakota Ethanolentered into an Ethanol Fuel Marketing Agreement with Renewable ProductsMarketing Group (“RPMG”) of Belle Plaine, Minnesota, for the purposes ofmarketing and distributing our ethanol. Under this agreement, we had the option of using a pooled ornon-pooled marketing arrangement.  Wehave elected to use a pooled marketing arrangement, which means that theethanol we produce is pooled with other ethanol producers and marketed byRPMG.  We pay RPMG a pooling fee forethanol delivered to 

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the pool, and 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 thepool.  BeginningDecember 31, 2006, Dakota Ethanol became eligible to purchase an ownershipinterest in RMPG through certain forms of capital contributions.  We have not yet exercised our right to becomea member of RPMG.  The term of ourethanol marketing agreement with RMPG expires on March 31, 2007; theagreement renews automatically for additional one-year terms unless priorwritten notice of non-renewal is provided by either party.  We intend to renew the RPMG agreementpursuant to the automatic renewal provision.

***Distillers GrainsDistribution***

From the date Dakota Ethanol began operations throughthe fiscal year ended December 31, 2005, Dakota Ethanol marketed its distillersgrains through a contract with Broin Enterprises, Inc. d/b/a Dakota GoldMarketing, a Broin affiliate, to market all of the distillers grains producedat the plant.  Five types of distillers grains were produced by DakotaEthanol and marketed by Dakota Gold Marketing: DDGS, Dakota GoldTM, DWS, CDS andDMWS.  Dakota GoldTM is DDGS with an addedcertification from Dakota Gold Marketing that the DDGS meets certain processingand production standards.  On June 6,2005, Dakota Ethanol elected not to renew its agreement with Dakota GoldMarketing and agreed to a termination date of December 1, 2005.

On November 28,2005, Dakota Ethanol entered into a Distillers Grain Marketing Agreement withCommodity Specialists Company (CSC) of Minneapolis, Minnesota for the purposeof marketing the distillers dried grains we produce.  Under the terms of the agreement, CSC markets our distillers dried grains, and we receive apercentage of the selling price actually received by CSC in marketing ourdistillers grains to its customers. The term of the agreement began onDecember 1, 2005 and renews automatically for an additional term of oneyear unless prior written notice of non-renewal is provided by eitherparty.  In December 2006, this agreementwith CSC was renewed pursuant to the automatic renewal provision for anadditional one year term.

Beginning on December 1,2005, Dakota Ethanol began marketing DWS, CDS and DMWS to our local marketwithout the use of an external marketer. Shipments of 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.

**Seasonal Factors in Business**

In an effort to improve air quality in regions wherecarbon monoxide and ozone are a problem, the Federal Oxygen Program of the Clean Air Act requires the saleof oxygenated motor fuels during the winter months in certain majormetropolitan areas.  Gasoline thatis blended with ethanol has a higher oxygen content than gasoline that does notcontain ethanol.  As a result, we expect fairly light seasonality withrespect to our gross profit margins on our ethanol allowing us to, potentially,be able to sell our ethanol at a slight premium during the mandated oxygenateperiod.  Conversely, we expect our average sales price for fuel-gradeethanol to be a little lower during the summer, when fuel-grade ethanol is primarilyused as an octane enhancer or a fuel supply extender.

**Sources and Availabilityof Raw Materials**

***Corn Feedstock Supply***

The major raw material required for our ethanol plantto produce ethanol and distillers grain is corn.  To operate at aname-plate capacity of40 million gallons, the plant requires a supply of approximately 14 million bushels of cornannually.  The plant currently operatesin excess of its nameplate capacity, producing approximately 48 million gallonsof ethanol annually from approximately 17 million bushels of corn.  Thearea surrounding the plant near Wentworth in Lake County, South Dakota currently provides an amplesupply of corn to meet and exceed our raw material requirements for thename-plate production capacity of the plant and our current higher thanname-plate production capacity.  In 2004 and 2005, the United Statesproduced record corn crops of approximately 11.8 billion bushels andapproximately 11.11 billion bushels respectively.  The 2006 corn crop was smaller, producingapproximately 10.74 billion bushels, however this was still the third largestAmerican corn crop recorded.  The

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slightly smaller corn crop and increased demand fromboth the animal feed and ethanol industries has lead to increased corn pricesduring 2006.  We expect that theseincreased corn prices will continue into 2007.

Forthe fiscal year ended December 31, 2005, Dakota Ethanol operated under anagreement with Broin Management, LLC for price risk management related to thecorn requirements of the plant.  However,Dakota Ethanol terminated the agreement effective January 1, 2006.

On November 28, 2005, Dakota Ethanolentered into a Risk Management Contract with FCStone, LLC (“FCStone”) of WestDes Moines, Iowa.  Under the contract,FCStone provides all risk management services and programs relating to DakotaEthanol’s production and sale of ethanol and distillers grains.  In exchange for these services, DakotaEthanol pays FCStone a fee of $3,333.33 per month, which is based on a rate of$0.001 per gallon of ethanol produced from an annual production capacity of 40million gallons.  In addition, DakotaEthanol will pay any commission, fee, service charge or mark-up arising fromany option, futures or other risk management or cash commodity transaction executedor brokered through FCStone, not to exceed $12.50 per round turn forexchange-traded futures and options contracts and equal to $10.00 per roundturn for over-the-counter transactions. The initial term of the contract began on December 1, 2005 and wentuntil October 31, 2006.  Followingthe initial term, the contract renews automatically for additional one-yearterms unless prior written 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.

***Natural Gas***

Natural gas is also an important input toour manufacturing process.  Dakota Ethanol uses natural gas to dry itsdistillers grains products to moisture contents at which they can be stored forlong periods of time.  This allows thedistillers grains we produce to be transported greater distances which allowsthem to serve broader livestock markets, including poultry and swine markets inthe continental United States.  DakotaEthanol contracts with NorthWestern Energy for its natural gas.  Under our agreement, the price for ournatural gas is based on market rates. The agreement is in effect until 2011 and automatically renews forsuccessive one-year terms unless the agreement is terminated.  Since operations were commenced in 2001,there have been no interruptions in the supply of natural gas from NorthWesternEnergy, and all of Dakota Ethanol’s natural gas requirements have been met.

***Electricity***

Electricity is necessary for lighting and poweringmuch of the machinery and equipment used in the production process.  Dakota Ethanol contracts with Sioux ValleyEnergy, Inc. to provide all of the electric power and energy requirementsfor the ethanol plant.   Theagreement is in effect until 2011 and automatically renews for five-year terms,unless at least 18 months notice is given by either party to terminate theagreement prior to the expiration of the current term.  Dakota Ethanol hashad no interruption or shortages in the supply of electricity to the plantsince operations were commenced in 2001.

***Water***

Water is a necessary part of the ethanol productionprocess.  It is used in the fermentationprocess and to produce steam for the cooking, evaporation, and distillationprocesses.  Dakota Ethanol contracts withBig Sioux Community Water System, Inc. to supply and meet its waterrequirements for the ethanol and distillers grains production process.  Dakota Ethanol’s agreement with Big Sioux isfor automatically renewing five-year terms. Since Dakota Ethanol’s operations were commenced in September 2001,Dakota Ethanol has had no interruption in the supply of water as all itsrequirements have been met.  Thisagreement was renewed for a term of six months starting on January 1, 2007 at arate of $0.55 per thousand gallons of usage. The Big Sioux Community Water System will not guarantee any of theparameters of the original agreement due to the Ethanol Plant’s water usagelevels.  The agreement also allows DakotaEthanol to use water from the Skunk River Aquifer to meet the plant’s waterneeds.  In all other respects, the termsof the original contract are the same.

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**FederalEthanol Supports**

Theethanol industry is heavily dependent on several economic incentives to produceethanol, including federal ethanol supports. The most recent ethanol supports are contained in the Energy Policy Actof 2005.  Most notably, the Act creates a7.5 billion gallon Renewable Fuels Standard (“RFS”).  The RFS requires refiners to use4 billion gallons of renewable fuels in 2006, increasing to7.5 billion gallons by 2012. According to the Renewable Fuels Association, the 4 billion gallonrequirement for 2006 was met sometime between October and November of2006.  The production capacity of theethanol industry is expected to be significantly greater than the RFS into theforeseeable future, thereby muting the ethanol demand increasing effects of theRFS.  On September 7, 2006, the EPAissued a proposed final rule that would fully implement the RFS.  The proposed rule requires oil refiners touse 4 billion gallons of renewable fuels in 2006.  This quota increases incrementally until 2012when oil refiners will be required to use 7.5 billion gallons of renewablefuels per year.  The proposed rule alsocreates a credit trading system where oil refiners that blend more renewablefuels than they are required can sell credits to refiners who blend lessrenewable fuel than they are required under the RFS.  This allows the industry as a whole to meetthe RFS in the most cost effective manner possible.

Historically,ethanol sales have also been favorably affected by the Clean Air Act amendmentsof 1990, particularly the Federal Oxygen Program which became effectiveNovember 1, 1992.  The Federal OxygenProgram requires the sale of oxygenated motor fuels during the winter months incertain major metropolitan 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.  While this may create increased demand forethanol in the short-term, we do not expect this to have a long term impact onthe demand for ethanol as the Energy Policy Act repeals the Clean Air Act’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 expands 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 were eligible for the small producer tax credit andreceived the $1,500,000 maximum credit under the program which caps the creditat the first 15 million gallons of production. The credit is effective for taxable years ending after the date ofenactment.

In addition, the Energy Policy Act of2005 creates a new tax credit that permits taxpayers to claim a 30% credit (upto $30,000) for the cost of installing clean-fuel vehicle refueling equipment,such as an E85 fuel pump, to be used in a trade or business of the taxpayer orinstalled at the principal residence of the taxpayer. Under the provision,clean fuels are any fuel where at least 85% of the volume consists of ethanol,natural gas, compressed natural gas, liquefied natural gas, liquefied petroleumgas, and hydrogen and any mixture of diesel fuel and biodiesel containing atleast 20% biodiesel.  The provision iseffective for equipment placed in service after December 31, 2005 andbefore January 1, 2010. While it is unclear how this credit will affectthe demand for ethanol in the short term, we expect it will help raise consumerawareness of alternative sources of fuel and could positively impact futuredemand 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, whichcontained the Volumetric Ethanol Excise Tax Credit (“VEETC”) and amended thefederal 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 

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collected on all gasoline and allocated to the highwaytrust fund.  This is expected to addapproximately $1.4 billion to the highway trust fund revenue annually.  In place of the exemption, the bill creates anew volumetric ethanol excise tax credit of 5.1 cents per gallon of ethanolblended at 10%.  Refiners and gasolineblenders apply for this credit on the same tax form as before only it is acredit from general revenue, not the highway trust fund.  Based on volume, the VEETC is expected toallow much greater refinery flexibility in blending ethanol since it makes thetax credit available on all ethanol blended with all gasoline, diesel and ethyltertiary butyl ether (“ETBE”), including ethanol in E-85 and the E-20 inMinnesota.  The VEETC is scheduled toexpire on December 31, 2010.

Theethanol industry and our business depend upon continuation of the federalethanol supports discussed above.  Theseincentives have supported a market for ethanol that might disappear without theincentives.  Alternatively, theincentives may be continued at lower levels than at which they currentlyexist.  The elimination or reduction ofsuch federal ethanol supports would make it more costly for us to sell ourethanol and would likely reduce our net income.

**OurCompetition**

We will be in directcompetition with numerous other ethanol producers, many of whom have greaterresources than we do. We also expect that additional ethanol producers willenter the market if the demand for ethanol continues to increase.  Ethanol is a commodity product, like corn,which means our ethanol plantcompetes with other ethanol producers on the basis of price, and to a lesserextent delivery service.  We believe wecompete favorably with other ethanol producers due to our proximity to amplegrain supplies and multiple modes of transportation.

As of February 12, 2007, the RenewableFuels Association estimates that there are 113 ethanol production facilities inthe United States. Thereare also numerous other producer and privately owned ethanol plants planned andunder construction throughout the Midwest and elsewhere in the UnitedStates.  The largestethanol producers include Abengoa Bioenergy Corp., Archer Daniels Midland,Aventine Renewable Energy, Inc., Cargill, Inc., Hawkeye Renewables, LLC., NewEnergy Corp., Tate & Lyle, US Bioenergy Corp. and VeraSun EnergyCorporation, all of which are capable of producing more ethanol than weproduce.  Archer Daniels Midland iscurrently the largest ethanol producer in the U.S. and controls a significantportion of the ethanol market.

Accordingto the Renewable Fuels Association, excluding our plant, South Dakota currentlyhas 12 ethanol plants with a state production capacity of approximately 640million gallons per year.  In addition,expansions of existing plants and at least 4 new plants currently underconstruction are expected to add an additional approximately 700 milliongallons of annual capacity.  All of theethanol plants in South Dakota are located in the eastern portion of the state.

The following table identifies mostof the ethanol producers in the United States along with their productioncapacities:

**U.S. FUEL ETHANOL PRODUCTIONCAPACITY**million gallons per year (mmgy)
| **Company**              | ** ** | **Location**   | ** ** | **Feedstock** | ** ** | **Current  Capacity  (mgy)** | ** ** | **Under Construction/  Expansions  (mgy)** | ** ** |
|--------------------------|------------|----------------|------------|---------------|------------|------------------------------|------------|--------------------------------------------|------------|
| Abengoa  Bioenergy Corp. |       | York, NE       |       | Corn/milo     |       | 55                           |       |                                       |       |
|                     |       | Colwich, KS    |       |          |       | 25                           |       |                                       |       |
|                     |       | Portales, NM   |       |          |       | 30                           |       |                                       |       |
|                     |       | Ravenna, NE    |       |          |       |                         |       | 88                                         |       |
| Aberdeen Energy*         |       | Mina, SD       |       | Corn          |       |                         |       | 100                                        |       |
| Absolute Energy,  LLC*   |       | St. Ansgar, IA |       | Corn          |       |                         |       | 100                                        |       |

 

10

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| ACE  Ethanol, LLC                                                |   | Stanley, WI         |   | Corn        |   | 41     |   |   |   |
|------------------------------------------------------------------|--------|---------------------|--------|-------------|--------|--------|--------|--------|--------|
| Adkins  Energy, LLC*                                             |   | Lena, IL            |   | Corn        |   | 40     |   |   |   |
| Advanced  Bioenergy                                              |   | Fairmont, NE        |   | Corn        |   |   |   | 100    |   |
| AGP*                                                             |   | Hastings, NE        |   | Corn        |   | 52     |   |   |   |
| Agra  Resources Coop. d.b.a. EXOL*                               |   | Albert Lea, MN      |   | Corn        |   | 40     |   | 8      |   |
| Agri-Energy,  LLC*                                               |   | Luverne, MN         |   | Corn        |   | 21     |   |   |   |
| Alchem  Ltd. LLLP                                                |   | Grafton, ND         |   | Corn        |   | 10.5   |   |   |   |
| Al-Corn  Clean Fuel*                                             |   | Claremont, MN       |   | Corn        |   | 35     |   | 15     |   |
| Amaizing  Energy, LLC*                                           |   | Denison, IA         |   | Corn        |   | 40     |   |   |   |
| Archer  Daniels Midland                                          |   | Decatur, IL         |   | Corn        |   | 1,070  |   | 275    |   |
|                                                             |   | Cedar Rapids, IA    |   | Corn        |   |   |   |   |   |
|                                                             |   | Clinton, IA         |   | Corn        |   |   |   |   |   |
|                                                             |   | Columbus, NE        |   | Corn        |   |   |   |   |   |
|                                                             |   | Marshall, MN        |   | Corn        |   |   |   |   |   |
|                                                             |   | Peoria, IL          |   | Corn        |   |   |   |   |   |
|                                                             |   | Wallhalla, ND       |   | Corn/barley |   |   |   |   |   |
| Arkalon Energy, LLC                                              |   | Liberal, KS         |   | Corn        |   |   |   | 110    |   |
| ASAlliances Biofuels, LLC                                        |   | Albion, NE          |   | Corn        |   |   |   | 100    |   |
|                                                             |   | Linden, IN          |   | Corn        |   |   |   | 100    |   |
|                                                             |   | Bloomingburg, OH    |   | Corn        |   |   |   | 100    |   |
| Aventine Renewable Energy, LLC                                   |   | Pekin, IL           |   | Corn        |   | 207    |   |   |   |
|                                                             |   | Aurora, NE          |   | Corn        |   |   |   |   |   |
| Badger State Ethanol, LLC*                                       |   | Monroe, WI          |   | Corn        |   | 48     |   |   |   |
| Big River Resources, LLC*                                        |   | West Burlington, IA |   | Corn        |   | 52     |   | 50^    |   |
| Big River Resources  Grinnell, LLC (joint venture with US Bio) ^ |   | Grinnell, IA        |   | Corn        |   |   |   |   |   |
| Blue Flint Ethanol                                               |   | Underwood, ND       |   | Corn        |   | 50     |   |   |   |
| Bonanza Energy, LLC                                              |   | Garden City, KS     |   | Corn/milo   |   |   |   | 55     |   |
| Broin Enterprises, Inc.*                                         |   | Scotland, SD        |   | Corn        |   | 11     |   |   |   |
| Bushmills Ethanol, Inc.*                                         |   | Atwater, MN         |   | Corn        |   | 40     |   |   |   |
| Cardinal Ethanol                                                 |   | Harrisville, IN     |   | Corn        |   |   |   | 100    |   |
| Cargill, Inc.                                                    |   | Blair, NE           |   | Corn        |   | 85     |   |   |   |
|                                                             |   | Eddyville, IA       |   | Corn        |   | 35     |   |   |   |
| Cascade Grain                                                    |   | Clatskanie, OR      |   | Corn        |   |   |   | 108    |   |
| CassCo Amaizing Energy, LLC                                      |   | Atlantic, IA        |   | Corn        |   |   |   | 110    |   |
| Castle Rock Renewable  Fuels, LLC                                |   | Necedah, WI         |   | Corn        |   |   |   | 50     |   |
| Center Ethanol Company                                           |   | Sauget, IL          |   | Corn        |   |   |   | 54     |   |
| Central Indiana Ethanol, LLC                                     |   | Marion, IN          |   | Corn        |   |   |   | 40     |   |
| Central Illinois Energy,  LLC                                    |   | Canton, IL          |   | Corn        |   |   |   | 37     |   |
| Central MN Ethanol Coop*                                         |   | Little Falls, MN    |   | Corn        |   | 21.5   |   |   |   |
| Central Wisconsin Alcohol                                        |   | Plover, WI          |   | Seed corn   |   | 4      |   |   |   |
| Chief Ethanol                                                    |   | Hastings, NE        |   | Corn        |   | 62     |   |   |   |
| Chippewa Valley Ethanol Co.*                                     |   | Benson, MN          |   | Corn        |   | 45     |   |   |   |
| Commonwealth Agri-Energy, LLC*                                   |   | Hopkinsville, KY    |   | Corn        |   | 33     |   |   |   |
| Corn, LP*                                                        |   | Goldfield, IA       |   | Corn        |   | 50     |   |   |   |

 

11

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

 

12

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

 

13

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| Pinal Energy,  LLC                           |   | Maricopa, AZ           |   | Corn              |   |   |   | 55     |   |
|----------------------------------------------|--------|------------------------|--------|-------------------|--------|--------|--------|--------|--------|
| Pine Lake Corn  Processors, LLC*             |   | Steamboat Rock, IA     |   | Corn              |   | 20     |   |   |   |
| Pinnacle  Ethanol, LLC                       |   | Corning, IA            |   | Corn              |   |   |   | 60     |   |
| Plainview  BioEnergy, LLC                    |   | Plainview, TX          |   | Corn              |   |   |   | 100    |   |
| Platinum  Ethanol, LLC*                      |   | Arthur, IA             |   | Corn              |   |   |   | 110    |   |
| Plymouth  Ethanol, LLC*                      |   | Merrill, IA            |   | Corn              |   |   |   | 50     |   |
| Prairie Ethanol,  LLC                        |   | Loomis, SD             |   | Corn              |   | 60     |   |   |   |
| Prairie Horizon  Agri-Energy, LLC            |   | Phillipsburg, KS       |   | Corn              |   | 40     |   |   |   |
| Premier Ethanol                              |   | Portland, IN           |   | Corn              |   |   |   | 60     |   |
| Pro-Corn, LLC*                               |   | Preston, MN            |   | Corn              |   | 42     |   |   |   |
| Quad-County Corn  Processors*                |   | Galva, IA              |   | Corn              |   | 27     |   |   |   |
| Red Trail  Energy, LLC                       |   | Richardton, ND         |   | Corn              |   | 50     |   |   |   |
| Redfield Energy,  LLC *                      |   | Redfield, SD           |   | Corn              |   |   |   | 50     |   |
| Reeve  Agri-Energy                           |   | Garden City, KS        |   | Corn/milo         |   | 12     |   |   |   |
| Renew Energy                                 |   | Jefferson Junction, WI |   | Corn              |   |   |   | 130    |   |
| Siouxland Energy  & Livestock Coop*      |   | Sioux Center, IA       |   | Corn              |   | 25     |   | 40     |   |
| Siouxland  Ethanol, LLC                      |   | Jackson, NE            |   | Corn              |   |   |   | 50     |   |
| Sioux River  Ethanol, LLC*                   |   | Hudson, SD             |   | Corn              |   | 50     |   |   |   |
| Southwest Iowa  Renewable Energy, LLC * |   | Council Bluffs, IA     |   | Corn              |   |   |   | 110    |   |
| Sterling  Ethanol, LLC                       |   | Sterling, CO           |   | Corn              |   | 42     |   |   |   |
| Summit Ethanol                               |   | Leipsic, OH            |   | Corn              |   |   |   | 60     |   |
| Tall Corn  Ethanol, LLC*                     |   | Coon Rapids, IA        |   | Corn              |   | 49     |   |   |   |
| Tama Ethanol,  LLC                           |   | Tama, IA               |   | Corn              |   |   |   | 100    |   |
| Tate & Lyle                              |   | Loudon, TN             |   | Corn              |   | 67     |   | 38     |   |
|                                         |   | Ft. Dodge, IA          |   | Corn              |   |   |   | 105    |   |
| The Andersons  Albion Ethanol LLC            |   | Albion, MI             |   | Corn              |   | 55     |   |   |   |
| The Andersons  Clymers Ethanol, LLC          |   | Clymers, IN            |   | Corn              |   |   |   | 110    |   |
| The Andersons Marathon  Ethanol, LLC         |   | Greenville, OH         |   | Corn              |   |   |   | 110    |   |
| Trenton Agri  Products, LLC                  |   | Trenton, NE            |   | Corn              |   | 40     |   |   |   |
| United Ethanol                               |   | Milton, WI             |   | Corn              |   |   |   | 52     |   |
| United WI Grain  Producers, LLC*             |   | Friesland, WI          |   | Corn              |   | 49     |   |   |   |
| US BioEnergy  Corp.                          |   | Albert City, IA        |   | Corn              |   | 250    |   | 400^   |   |
|                                         |   | Woodbury, MI           |   | Corn              |   |   |   |   |   |
|                                         |   | Hankinson, ND          |   | Corn              |   |   |   |   |   |
|                                         |   | Central City , NE      |   | Corn              |   |   |   |   |   |
|                                         |   | Ord, NE                |   | Corn              |   |   |   |   |   |
|                                         |   | Dyersville, IA         |   | Corn              |   |   |   |   |   |
|                                         |   | Janesville, MN         |   | Corn              |   |   |   |   |   |
| U.S. Energy  Partners, LLC (White Energy)    |   | Russell, KS            |   | Milo/wheat starch |   | 48     |   |   |   |
| Utica Energy,  LLC                           |   | Oshkosh, WI            |   | Corn              |   | 48     |   |   |   |
| VeraSun Energy  Corporation                  |   | Aurora, SD             |   | Corn              |   | 230    |   | 330    |   |
|                                         |   | Ft. Dodge, IA          |   | Corn              |   |   |   |   |   |
|                                         |   | Charles City, IA       |   | Corn              |   |   |   |   |   |

 

14

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|                                                           |   | Welcome, MN    |   | Corn          |   |         |   |        |       |
|----------------------------------------------------------------|--------|----------------|--------|---------------|--------|--------------|--------|-------------|------------|
|                                                           |   | Hartely, IA    |   | Corn          |   |         |   |        |       |
| Voyager Ethanol,  LLC*                                         |   | Emmetsburg, IA |   | Corn          |   | 52           |   |        |       |
| Western New York  Energy, LLC                                  |   | Shelby, NY     |   | Corn          |   |         |   | 50          |       |
| Western Plains  Energy, LLC*                                   |   | Campus, KS     |   | Corn          |   | 45           |   |        |       |
| Western  Wisconsin Renewable Energy, LLC*                      |   | Boyceville, WI |   | Corn          |   | 40           |   |        |       |
| White Energy                                                   |   | Hereford, TX   |   | Corn/Milo     |   |         |   | 100         |       |
| Wind Gap Farms                                                 |   | Baconton, GA   |   | Brewery waste |   | 0.4          |   |        |       |
| Renova Energy                                                  |   | Torrington, WY |   | Corn          |   | 5            |   |        |       |
| Xethanol  BioFuels, LLC                                        |   | Blairstown, IA |   | Corn          |   | 5            |   | 35          |       |
| Yuma Ethanol                                                   |   | Yuma, CO       |   | Corn          |   |         |   | 40          |       |
| **Total  Current Capacity at**

**114  ethanol biorefineries** |   |           |   |          |   | **5,633.4**  |   |        |       |
| **Total  Under Construction (80)/Expansions (7)**              |   |           |   |          |   | ** **   |   | **6,394.9** | ** ** |
| **Total  Capacity**                                            |   |           |   |          |   | **12,028.3** |   |        |       |

 

----

*locally-owned Updated: March13, 2007

***Competition withEthanol Imported from Other Countries***

Ethanol production is also expandinginternationally.  Brazil has historicallybeen a significant producer of ethanol for both its domestic and exportmarkets.  According to the RenewableFuels Association, in 2006, Brazil exported more than 400 million gallons ofethanol to the United States.  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.  Large ethanol producers,such as Cargill, have expressed interest in building dehydration plants inparticipating Caribbean Basin countries, such as El Salvador, which wouldconvert ethanol 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.

Recently, President Bush has entered intodiscussions with South American countries regarding increasing ethanolproduction in South America.  While therewas no discussion regarding reducing or eliminating tariffs that protectethanol produced in the United States from foreign competition, recent highethanol prices in the United States have encouraged ethanol importation fromSouth and Central American countries despite the 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 adversely affect the prices we receive for our ethanol.

***Competition fromAlternative 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 is strongly supported by major oil companies.  

Alternative fuels, gasoline oxygenatesand alternative ethanol production methods are continually under 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 of MTBEand ethanol.  New ethanol products ormethods of ethanol production developed by larger and better-financed competitorscould provide them competitive advantages and harm our business.

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***DistillersGrains Competition***

Our plant primarily competes with otherethanol producers in the production and sales of distillers grains.  According to the University of Minnesota’sDDGS—General Information website (last updated January 30, 2007) approximately3,200,000 to 3,500,000 tons of distillers grains are produced annually in NorthAmerica, approximately 98% of which are produced by ethanol plants. Theremaining 1 to 2% of DDGS is produced by the alcoholic beverage industry.  The amount of distillers grains produced isexpected to increase significantly as the number of ethanol plantsincrease.  This could negatively impactthe price at which we sell our distillers grains unless demand expands inrelation to the expanding supply.  Ourdistillers grains compete with other livestock feed products such as soybeanmeal, corn gluten feed, dry brewers grain and mill feeds.

**General Ethanol 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 byweight.  As a result, gasoline, whenblended with ethanol, burns cleaner, and releases less carbon monoxide andother exhaust emissions into the atmosphere.

According to theRenewable Fuels Association, demand for fuel ethanol in the United Statescontinued to increase in 2006.  Theimplementation of the Renewable Fuels Standard contained in the Energy PolicyAct of 2005 probably had little effect on increasing demand for ethanol becausethe ethanol industry easily surpassed the 4 billion gallon requirement for2006.  The ethanol industry producedapproximately 4.9 billion gallons of ethanol in 2006.  Projected production capacity for 2007 willexceed the RFS for 2007, requiring the ethanol industry to generate demand inexcess of the RFS for 2007.  If thesupply of ethanol increases at a more rapid rate than demand, the price atwhich we can sell our ethanol may decrease. However, the passage of the Volumetric Ethanol Excise Tax Credit (“VEETC”),is expected to provide the flexibility necessary to expand ethanol blendinginto higher blends of ethanol such as E85, E diesel and fuel cell markets.  This might spur additional demand for ethanolthat could help offset additional supply from increased ethanol productioncapacity that is set to come online in 2007.

Demand for ethanol may increase as a result ofincreased consumption of E85 fuel. E85 fuel is a blend of 85% ethanol and 15%gasoline. According to the Energy Information Administration, E85 consumptionis projected to increase from a national total of 11 million gallons in2003 to 47 million gallons in 2025. E85 is used as an aviation fuel and asa hydrogen source for fuel cells. According to the National Ethanol VehicleCoalition, there are currently about 4.5 million flexible fuel vehiclescapable of operating on E85 in the U.S. and approximately 1,200 retail stationssupplying E85. Automakers have indicated plans to produce an estimated2 million more flexible fuel vehicles per year.

The supply ofdomestically produced ethanol is at an all-time high. The Renewable FuelsAssociation reports that ethanol production in 2006 reached a record 4.9billion gallons, an increase of more than 25% since 2005.  The following table shows U.S. ethanolproduction capacity by state as of February 2007:

**EthanolProduction Capacity Ranked by State**(Largest to Smallest Production Capacity as of February 2007)

|          | ** ** |                  | ** ** | **Ethanol Production Capacity**     |
|----------|------------|------------------|------------|-----------------------------------------------|
| **Rank** | ** ** | **State**        | ** ** | **(Million Gallons Per Year)** |
| 1        |       | Iowa             |       | 3,236.5                                       |
| 2        |       | Nebraska         |       | 1,345.5                                       |
| 3        |       | Illinois         |       | 1,212.0                                       |
| 4        | ** ** | **South Dakota** |       | 910.0                                         |
| 5        |       | Minnesota        |       | 782.1                                         |
| 6        |       | Indiana          |       | 653.0                                         |
| 7        |       | Kansas           |       | 507.5                                         |

 

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| 8      |   | Wisconsin           |   | 502.0    |
|--------|--------|---------------------|--------|----------|
| 9      |   | Ohio                |   | 387.0    |
| 10     |   | Texas               |   | 370.0    |
| 11     |   | Michigan            |   | 262.0    |
| 12     |   | North Dakota        |   | 233.5    |
| 13     |   | Tennessee           |   | 205.0    |
| 14     |   | New York            |   | 164.0    |
| 15     |   | Missouri            |   | 155.0    |
| 16     |   | Oregon              |   | 143.0    |
| 17     |   | Colorado            |   | 125.0    |
| 18     |   | Georgia             |   | 100.4    |
| 19     |   | California          |   | 68.0     |
| 20     |   | Arizona             |   | 55.0     |
| 21     |   | Washington          |   | 55.0     |
| 22     |   | Idaho               |   | 50.0     |
| 23     |   | Kentucky            |   | 35.4     |
| 24     |   | New Mexico          |   | 30.0     |
| 25     |   | Wyoming             |   | 5.0      |
|   |   | United States Total |   | 11,828.3 |

 

Sources:  Renewable Fuels Association, Washington, DC. Nebraska Energy Office, Lincoln, NE.

In addition to domestic increases in thesupply of ethanol, as discussed above we face competition from internationalsources of ethanol, including ethanol produced in Caribbean Basin countriesthat may be eligible for tariff reductions or elimination pursuant to theCaribbean Basin Initiative.

**Research and Development**

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

**Dependence on One or aFew Major Customers**

Asdiscussed above, we have entered into marketing agreements for services relatedto marketing and distributing our principal products, ethanol and distillersgrains.  Pursuant to our agreements withRPMG and CSC, we rely on others for the sale and distribution of almost all ofour products, except for those distillers grains that we market locally.  Therefore, we expect to continue to be highlydependent on RPMG and CSC for the successful marketing of our products.  Any loss of RPMG or CSC as our marketingagent for our ethanol and distillers grains or any lack of performance underthe agreement or inability to secure competitive prices could have asignificant negative impact on our revenues.

**Costs and Effects ofCompliance with Environmental Laws**

Weare subject to extensive air, water and other environmental regulations, and wehave been required to obtain a number of environmental permits to construct andoperate the plant.  We have obtained allof the necessary permits to operate the plant including, air pollutionconstruction permits, a pollutant discharge elimination system general permit,storm water discharge permits, a water withdrawal permit, and an alcohol fuelproducer’s permit.  In addition, we havecompleted a spill prevention control and countermeasures plan.  Although we have been 

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successful in obtaining all of the permitscurrently required, any retroactive change in environmental regulations, eitherat the federal or state level, could require us to obtain additional permits orspend considerable resources on complying with such regulations.

In addition, we may be required to purchase andinstall equipment for controlling and improving emissions.  In fiscal year 2006, our costs of environmental compliance wereapproximately $81,000 compared to approximately $41,000 for the same period of2005.  In 2006 we applied for renewal ofour air permit which was not rejected by the State of South Dakota.

Weare subject to oversight activities by the EPA. There is always a risk that the EPA may enforce certain rules andregulations differently than South Dakota’s environmental administrators.  South Dakota or EPA rules are subject tochange, and any such changes could result in greater regulatory burdens onplant operations.  We could also besubject to environmental or nuisance claims from adjacent property owners orresidents in the area arising from possible foul smells or other air or waterdischarges from the plant.  Such claimsmay result in an adverse result in court if we are deemed to engage in anuisance that substantially impairs the fair use and enjoyment of real estate.

The government’s regulation of the environment changesconstantly.  It is possible that federalor state environmental 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 31,2006, we had a total of 39 full-time employees, including 33 full-timeemployees in ethanol production operations and 6 full-time employees in general management andadministration.  We do not expect to hirea significant number of employees in the next 12 months.

**ITEM 1A.               RISK FACTORS.**

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

**RisksRelating to Our Business**

***Our financial performance is significantly dependent on cornand natural gas prices.**** *Our results of operations andfinancial condition are significantly affected by the cost and supply of cornand natural gas.  Generally, we cannotpass 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 by weather, disease and other environmentalconditions.  The price of corn is alsoinfluenced by general 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 a period of high corn prices were to be sustained for some time, suchpricing may reduce our ability to generate revenues because of the higher costof operating and may make ethanol uneconomical to use in fuel markets.  If our region becomes saturated by ethanolplants, corn use for ethanol could consume a significant portion of the totalcorn production in our region, which would likely increase local cornprices.  We cannot offer any assurancethat we will be able to offset an increase in the price of corn by increasingthe price of our products.  If we cannotoffset increases in the 

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price of corn, ourfinancial performance may be materially and adversely affected should weexperience sustained higher corn prices.

Natural gas has recently been available only atprices greatly exceeding historical averages.  These prices have increasedour costs of production in the past.  Theprices for and availability of natural gas are subject to volatile marketconditions, 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.  Furthermore,increases in natural gas prices or changes in our natural gas costs relative tonatural gas costs paid by competitors may adversely affect our results ofoperations and financial condition.

Weseek to minimize the risks from fluctuations in the prices of corn and naturalgas through the use of hedging instruments. However, these hedging transactions also involve risks to our business.  See “**Risks Relating to OurBusiness -*****We engage in hedging transactions***.”

***Thespread between ethanol and corn prices can vary significantly. ***Corn costssignificantly impact our cost of goods sold.  Our gross margins areprincipally dependent upon the spread between ethanol and corn prices.  Recently, the spread between ethanol and cornprices has been at historically high levels, due in large part to high oilprices and low corn prices.  However,this spread fluctuated significantly in 2006 and may fluctuate significantly inthe future.  Any reduction in the spreadbetween ethanol and corn prices, whether as a result of an increase in cornprices or a reduction in ethanol prices, would adversely affect our results ofoperations and financial condition.

***Ourrevenues will be greatly affected by the price at which we can sell our ethanoland distillers grains.*** The prices of ethanol anddistillers grains can be volatile as a result of a number of factors. Thesefactors include overall supply and demand, the price of gasoline, level ofgovernment support, and the availability and price of competing products. Forinstance, the price of ethanol tends to increase as the price of gasolineincreases, and the price of ethanol tends to decrease as the price of gasolinedecreases. Any lowering of gasoline prices will likely also lead to lowerprices for ethanol, which may decrease our ethanol sales and reduce revenues.

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

***Our business is not diversified.***  Our success depends largely upon our abilityto profitably operate our ethanol plant. We do not have any other lines ofbusiness or other sources of revenue if we are unable to operate our ethanolplant and manufacture ethanol and distillers grains.  If economic or political factors adverselyaffect the market for ethanol, the company has no other line of business tofall back on. Our business would also be significantly harmed if our ethanolplant could not operate at full capacity for any extended period of time.

Advances inethanol production technology could require us to incur costs to update our plantor could otherwise hinder our ability to compete or operate profitably.  Advances and changes in the technology ofethanol production are expected to occur. Such advances and changes may make the ethanol production technologyinstalled in our plant less desirable or obsolete.  These advances could also allow ourcompetitors to produce ethanol at a lower cost than us.  If we are unable to adopt or incorporatetechnological advances, our ethanol production methods and processes could beless efficient than our competitors, which could cause our plant to becomeuncompetitive or completely obsolete.  Ifour competitors develop, obtain or license technology that is superior to oursor that makes our technology obsolete, we may be required to incur significantcosts to enhance or acquire new technology so that our ethanol productionremains competitive.  Alternatively, wemay be required to seek third-party licenses, which could also result insignificant expenditures.  We cannotguarantee or assure you that third-party licenses will be available or, onceobtained, will continue to be available on commercially reasonable terms, if atall.  These costs could negatively impactour financial performance by increasing our operating costs and reducing ournet income.

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***We sell all ofthe ethanol we produce to RPMG under our ethanol marketing agreement.* **RPMG is the sole buyer of all of ourethanol, and we rely heavily on its marketing efforts to successfully sell ourproduct.  Because RPMG sells ethanol fora number of other producers, we have limited control over its salesefforts.  Our financial performance isdependent upon the financial health of RPMG as a significant portion of ouraccounts receivable are attributable to RPMG. If RPMG breaches the ethanol marketing agreement or is not in thefinancial position to purchase and market all of the ethanol we produce, we maynot have any readily available means to sell our ethanol and our financialperformance will be adversely and materially affected.  If our agreement with RPMG terminates, we mayseek other arrangements to sell our ethanol, including selling our own product,but we give no assurance that our sales efforts would achieve resultscomparable to those achieved by RPMG.

***We sell asubstantial portion of the distillers grains we produce to CSC under ourdistillers grains marketing agreement.* **CSC is the sole buyer of all of ourdistillers grains that we do not sell locally, and we rely heavily on itsmarketing efforts to successfully sell our product.  We currently only market locally a smallpercentage of the distillers grains we produce. Because CSC 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 CSC,as a significant portion of our accounts receivable are attributable toCSC.  If CSC 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 CSCterminates, 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 CSC.

***We engage in hedging transactions that may becostly and ineffective.***  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.  The effectiveness of our hedging strategies is dependentupon the cost of corn and natural gas and our ability to sell sufficientproducts to use all of the corn and natural gas for which we have futures contracts. There is no assurance that our hedgingactivities will successfully reduce the risk caused by price fluctuation whichmay leave us vulnerable to high corn and natural prices. Alternatively, we maychoose not to engage in hedging transactions in the future.  As a result, our results of operations andfinancial conditions may also be adversely affected during periods in whichcorn and/or natural gas prices increase.

Hedging activities themselves can result in costsbecause price movements in corn and natural gas contracts are highly volatileand are influenced by many factors that are beyond our control.  There are several variables that could affectthe extent to which our derivative instruments are impacted by price fluctuationsin the cost of corn or natural gas.  However, it is likely that commoditycash prices will have the greatest impact on the derivatives instruments withdelivery dates nearest the current cash price. We may incur such costs and they may be significant.

***We are exploringa potential change in corporate structure, merger, public offering or businesscombination with one or more businesses which if we agreed to could beunsuccessful and could decrease the value of your units.* **We have been engaged in preliminarydiscussions regarding a potential change in corporate structure, merger, publicoffering or business combination with one or more businesses.  While we have not entered into any kind ofagreement or made any definitive plans regarding this issue we might in thefuture.  If we were to engage in thistype of transaction, it might be unsuccessful. This could lead to a reduction in the value of your units and couldadversely affect our profitability.

**RisksRelated to Ethanol Industry**

***Newplants or decreases in the demand for ethanol may result in excess productioncapacity.***  Thesupply of domestically produced ethanol is at an all-time high. The RenewableFuels Association reports that ethanol production in 2006 reached a record 4.9billion gallons, an increase of approximately 25% since 2005.  The ethanol industry has grown to over 113production facilities in the United States. Excluding our facility, South Dakota currently has at least 12current ethanol plants and at least 4 more in various stages ofdevelopment.  Excess capacity in theethanol industry would have an adverse impact on our results of operations,cash flows and general financial 

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condition.  Excess capacity may also result or intensify from increases inproduction capacity coupled with insufficient demand.  If the demand for ethanol does notgrow at the same pace as increases in supply, we would expect the price forethanol to decline.  If excess capacity in the ethanolindustry occurs, the market price of ethanol may decline to a level that isinadequate to generate sufficient cash flow to cover our costs.

***We operate in a competitive industry******and compete with larger, better financed entities.***  There issignificant competition among ethanol producers with numerous producer and privately owned ethanol plants planned and operatingthroughout the Midwest and elsewhere in the United States.  The number of ethanol plants beingdeveloped and constructed in the United States continues to increase at a rapidpace. The recent passage of the Energy Policy Act of 2005 included a renewablefuels mandate that we expect will further increase the number of domesticethanol production facilities.  Thelargest ethanol producers include Abengoa Bioenergy Corp., Archer DanielsMidland, ASAlliances Biofuels, LLC, Aventine Renewable Energy, Inc., Cargill,Inc., Hawkeye Renewables, LLC, New Energy Corp., Tate & Lyle, US BioenergyCorp., and VeraSun Energy Corporation, all of which are each capable ofproducing more ethanol than we expect to produce.  Archer Daniels Midland is currently the largestethanol producer in the U.S. and controls a significant portion of the ethanolmarket. If the demand for ethanol does not grow at the same pace as increasesin supply, we expect that lower prices for ethanol will result which mayadversely affect our ability to generate profits and harm our financialcondition.

***We compete with other gasoline additives. ***Our ethanol plant alsocompetes with producers of other gasoline additives made from raw materialsother than corn having similar octane and oxygenate values as ethanol, such asproducers of methyl tertiary butyl ether (MTBE). MTBE is a petrochemicalderived from methanol which generally costs less to produce than ethanol. Manymajor oil companies produce MTBE and strongly favor its use because it is petroleum-based.Alternative fuels, gasoline oxygenates and alternative ethanol productionmethods are also continually under development. The major oil companies havesignificantly greater resources than we have to market MTBE, to developalternative products, and to influence legislation and public perception ofMTBE and ethanol. These companies also have significant resources to beginproduction of ethanol should they choose to do so.

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

***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. Although currenttechnology is not sufficiently efficient to be competitive, a recent report bythe U.S. Department of Energy entitled “Outlook for Biomass Ethanol Productionand Demand” indicates that new conversion technologies may be developed in thefuture. If an efficient method of producing ethanol from cellulose-basedbiomass is developed, we may not be able to compete effectively. We do notbelieve it will be cost-effective to convert our ethanol plant into a plantwhich will use cellulose-based biomass to produce ethanol. If we are unable toproduce ethanol as cost-effectively as cellulose-based producers, our abilityto generate revenue and financial condition will be negatively impacted.

***Ethanol imported fromCaribbean basin countries may be a less**expensive alternative to our ethanol.***  Ethanol produced or processed in certaincountries in Central America and the Caribbean region is eligible for tariffreduction or elimination upon importation to the United States under a programknown as the Caribbean Basin 

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Initiative. Largeethanol producers, such as Cargill, have expressed interest in buildingdehydration plants in participating Caribbean Basin countries, such as ElSalvador, which would convert ethanol into fuel-grade ethanol for shipment tothe United States. Ethanol imported from Caribbean Basin countries may be aless expensive alternative to domestically produced ethanol. Competition fromethanol imported from Caribbean Basin countries may affect our ability to sellour ethanol profitably, adversely affect our results of operations andfinancial condition.

***Ethanol imported from Brazil may be a less expensive**alternative to our ethanol.***  Brazil is currently the world’s largestexporter of ethanol.  Until recently,Brazil was also the world’s largest producer of ethanol.  In Brazil, ethanol is produced primarily fromsugarcane, which is also used to produce food-grade sugar. In 2006, accordingto the Renewable Fuels Association, Brazil produced approximately 4.5 billiongallons of ethanol and exported a total of more than 400 million gallons ofethanol to the United States alone. Ethanol imported from Brazil may be a less expensive alternative todomestically produced ethanol, which is primarily made from corn. Tariffspresently protecting U.S. ethanol producers may be reduced or eliminated.Competition from ethanol imported from Brazil may affect our ability to sellour ethanol profitably and adversely affect our financial condition.

***Consumer beliefs may affect the demand for ethanol.***  We believe that certain consumers perceivethe use of ethanol to have a negative impact on gasoline prices at the pump.Some consumers also believe that ethanol adds to air pollution and harms carand truck engines. Still other consumers believe that the process of producingethanol actually uses more fossil fuel energy, such as oil and natural gas,than the energy in the ethanol that is produced. These consumer beliefs couldpotentially be widespread. If consumers choose not to buy ethanol, it willaffect the demand for the ethanol we produce which could lower the sellingprice of ethanol and negatively affect our profitability and financialcondition.

**RisksRelated to Regulation and Governmental Action**

***A change in government policies favorable to ethanol maycause demand for**ethanolto decline.***  Growth anddemand for ethanol may be driven primarily by federal and state governmentpolicies, such as state laws banning Methyl Tertiary Butyl Ether (MTBE) and thenational tax incentives and the renewable fuels standard. The continuation ofthese policies is uncertain, which means that demand for ethanol may decline ifthese policies change or are discontinued. A decline in the demand for ethanolis likely to cause lower ethanol prices which in turn will negatively affectour results of operations, financial condition and cash flows.

***Government incentives for ethanol production may beeliminated in the future.* **The ethanol industry and our business are assisted by variousfederal ethanol tax incentives, including those included in the Energy PolicyAct of 2005. The provision of the Energy Policy Act of 2005 likely to have thegreatest impact on the ethanol industry is the creation of a 7.5 billion gallonRenewable Fuels Standard (RFS). The RFS will begin at 4 billion gallons in2006, increasing to 7.5 billion gallons by 2012. The RFS helps support a marketfor ethanol that might disappear without this incentive. The elimination or reductionof tax 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 a 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 increases 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.

***Changes in environmental regulations or violations of theregulations could reduce our profitability.***  We are subject to extensive air, water andother environmental laws and regulations. In addition, some of these laws require our plant to operate under anumber of environmental permits. These laws, regulations and permits can oftenrequire expensive pollution control equipment or operation changes to limitactual or potential impacts to the environment. A violation of these laws and regulations or permit conditions canresult in substantial fines, damages, criminal sanctions, permit revocationsand/or plant shutdowns.  We do not assureyou that we have been, are or will 

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be at all times incomplete compliance with these laws, regulations or permits or that we have hador have all permits required to operate our business.  We do not assure you that we will not besubject to legal actions brought by environmental advocacy groups and otherparties for actual or alleged violations of environmental laws or ourpermits.  Additionally, any changes inenvironmental laws and regulations, both at the federal and state level, couldrequire us to spend considerable resources in order to comply with futureenvironmental regulations. The expense of compliance could be significantenough to reduce our profitability and negatively affect our financialcondition.

**ITEM 2.****                                                     PROPERTIES.**

Weown DakotaEthanol 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 million bushels ofcorn per year to produce approximately 48 million gallons of ethanol. The original construction of the plant was completed in 2001 and consists of the following buildings:

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

·                  A grain receiving and shippingbuilding;

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

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

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

All of Dakota Ethanol’s tangible andintangible property, real and personal, serves as the collateral for debtfinancing with First National Bank of Omaha described below under “**Item 7 – Management’s Discussion and Analysis ofFinancial Condition and Results of Operations – Indebtedness**.”

**ITEM 3.****                                                     LEGALPROCEEDINGS.**

From time to time in the ordinary course of business,Dakota Ethanol or we may be named as a defendant in legal proceedings relatedto various issues, including without limitation, workers’ compensation claims,tort claims, or contractual disputes.  Weare not currently involved in any material legal proceedings, directly orindirectly, and we are not aware of any claims pending or threatened against us or any of the managers that couldresult in the commencement of legal proceedings.

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

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

**PART II**

**ITEM 5.****                  MARKET FOR MEMBERSHIP UNITS ANDRELATED MEMBER MATTERS AND ISSUER PURCHASES OF MEMBERSHIP UNITS.**

**RecentSales of Unregistered Securities**

None.

**Market Information**

Thereis no public trading market for our units. Our units may only be transferred in accordance with our Capital UnitsTransfer System, which provides for transfers by gift to family members, upondeath, and through a qualified matching service, subject to approval by ourboard of managers.  Our qualifiedmatching service is 

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operated through Variable InvestmentAdvisors, Inc., a registered broker-dealer based in Sioux Falls, SouthDakota.  Variable Investment Advisor’sAlternative Trading System may be accessed at www.agstocktrade.com. Thematching service consists of an electronic bulletin board that providesinformation to prospective sellers and buyers of our units.  We do not receive any compensation relatingto the matching service.  We have no rolein effecting the transactions beyond approval, as required under our operatingagreement and the issuance of new certificates. So long as we remain a Section 12 registrant and a publicly reportingcompany, information about the company will be publicly available through theSEC’s filing system.  However, if at anytime we cease to be a Section 12 registrant or publicly reporting company, wewill continue to make information about the company publicly available on ourwebsite.

**Unit Holders**

As ofFebruary 1, 2007, the company had 29,620,000 membership units issued andoutstanding and a total of approximately 1,003 membership unit holders.  There is no other class of membership unitissued or outstanding.

**Distributions**

Underthe terms of our Amended and Restated Operating Agreement, we are required tomake distributions to our members and may not retain more than $200,000 of netcash from operations, unless (1) a 75% supermajority of our board decidesotherwise; (2) it would violate or cause a default under the terms of any debtfinancing or other credit facilities; or (3) it is otherwise prohibited bylaw.  Our ability to make distributionsto our members is dependent upon the distributions made to us by Dakota Ethanol.  All revenues generated from plant operationsare distributed by Dakota Ethanol to us in 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 revenue generated by Dakota Ethanol.  We distribute the revenues 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 FinancialCondition and Results of Operations**.”

Distributionsto our unit holders are also subject to certain loan covenants and restrictionsthat require us to make additional loan payments based on excess cashflow.  These loan covenants andrestrictions are described in greater detail under “**Item 7 – Management’s Discussion and Analysis ofFinancial Condition and Results of Operations****– Indebtedness.**”

***2006 Distributions***

In fiscal year 2006, Dakota Ethanol made total cash distributions toLACP of approximately $13,300,000 and approximately $800,000 to the minoritymembers.  As a result,our board of managers approved cash distributions to our members totaling $13,329,000.  The followingchart lists the cash distributions made to our 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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***2005 Distributions***

In fiscal year 2005, Dakota Ethanol made total cash distributions to LACPof approximately $11.8 million and approximately $1.6 million to the minoritymembers.  As a result,our board of managers approved cash distributions to our members totaling $11,551,800.  The followingchart lists the cash distributions made to our members in 2005:
| Date of Board Approval | ** ** | **Total Distribution**           | ** ** | **Distribution  Per Unit**                             | ** ** | **Distributed to Members of Record as of:** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|-------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| December 20,  2004                    |       | $    2,073,400.00 |       | $         0.07 |       | January  1, 2005                                                          |       |
|                                  |       |                                  |       |                                                        |       |                                                                      |       |
| February 18,  2005                    |       | $    2,962,000.00 |       | $         0.10 |       | January  1, 2005                                                          |       |
|                                  |       |                                  |       |                                                        |       |                                                                      |       |
| April 15,  2005                  |       | $    1,777,200.00 |       | $         0.06 |       | January  1, 2005                                                          |       |
|                                  |       |                                  |       |                                                        |       |                                                                      |       |
| August 26, 2005                       |       | $    1,777,200.00 |       | $         0.06 |       | May  1, 2005                                                              |       |
|                                  |       |                                  |       |                                                        |       |                                                                      |       |
| December 16,  2005                    |       | $    2,962,000.00 |       | $         0.10 |       | September  1, 2005                                                        |       |
|                                  |       |                                  |       |                                                        |       |                                                                      |       |
| **Totals**                            | ** ** | **$ 11,551,800.00**              | ** ** | **$       0.39**         |       |                                                                      |       |

 

***2004 Distributions***

In 2004, Dakota Ethanol made cash distributions to LACP ofapproximately $4,100,000 million and approximately $600,000 to the minoritymembers.  As a result,LACP distributed approximately $4,100,000 million, or $0.14 per capital unit,to our members in 2004.

**PerformanceGraph**

The following graph compares the cumulative totalreturn on the Company’s units with the cumulative total return of the NASDAQIndex and the SIC Code Index (SIC Code 2869—Industrial Organic Chemicals, NotElsewhere Classifed).  The unit priceperformance shown on the following graph is not intended to forecast and is notindicative of future unit price performance. The data for this performance graph was compiled for us by Ipreo, LLC.

****

25

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**ITEM 6.                  SELECTED FINANCIAL DATA.**

The following table sets forth selected consolidatedfinancial data of the Company, which is derived from the audited financialstatements for the periods indicated.
| **Statement of Operations Data:** | ** ** | **2006**                                                                                        | ** ** | **2005**                                                                                  | ** ** | **2004**                                                                                  | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| Revenues                                         |       | $  103,889,412                                                                        |       | $   80,020,970                                                             |       | $   84,432,486                                                             |       |
|                                             |       |                                                                                            |       |                                                                                      |       |                                                                                      |       |
| Cost of Revenues                                 |       | $    50,792,418                                                             |       | $   63,201,108                                                             |       | $   71,736,360                                                             |       |
|                                             |       |                                                                                            |       |                                                                                      |       |                                                                                      |       |
| Gross Profit                                     |       | $    53,096,994                                                             |       | $   16,819,862                                                             |       | $   12,696,126                                                             |       |
|                                             |       |                                                                                            |       |                                                                                      |       |                                                                                      |       |
| General and  Administrative Expense              |       | $    (3,938,845                                                             | )          | $    (3,610,590                                                       | )          | $    (3,058,024                                                       | )          |
|                                             |       |                                                                                            |       |                                                                                      |       |                                                                                      |       |
| Income From  Operations                          |       | $    49,158,149                                                             |       | $   13,209,272                                                             |       | $     9,638,102                                                  |       |
|                                             |       |                                                                                            |       |                                                                                      |       |                                                                                      |       |
| Interest Expense                                 |       | $    (1,008,300                                                             | )          | $    (1,089,364                                                       | )          | $    (1,300,647                                                       | )          |
|                                             |       |                                                                                            |       |                                                                                      |       |                                                                                      |       |
| Other Income                                     |       | $         121,719                                  |       | $        238,705                                  |       | $        223,548                                  |       |
|                                             |       |                                                                                            |       |                                                                                      |       |                                                                                      |       |
| Minority  Interest in Subsidiary Income          |       | $    (2,235,776                                                             | )          | $    (1,494,029                                                       | )          | $    (1,037,458                                                       | )          |
|                                             |       |                                                                                            |       |                                                                                      |       |                                                                                      |       |
| Net Income                                       |       | $    46,035,792                                                             |       | $   10,864,584                                                             |       | $     7,523,545                                                  |       |
|                                             |       |                                                                                            |       |                                                                                      |       |                                                                                      |       |
| Capital Units  Outstanding                       |       | 29,620,000                                                                                      |       | 29,620,000                                                                                |       | 29,620,000                                                                                |       |
| Net Income Per  Capital Unit                     |       | $               1.55 |       | $              0.37 |       | $              0.25 |       |
| Cash Distributions  per Capital Unit             |       | $               0.45 |       | $              0.32 |       | $              0.21 |       |
|                                             |       |                                                                                            |       |                                                                                      |       |                                                                                      |       |

 
| **Balance Sheet Data:**    | ** ** | **2006**                                                                                                             | ** ** | **2005**                                                                                        | ** ** | **2004**                                                                                  | ** ** |
|--------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| Working Capital                      |       | $   17,220,709                                                                                        |       | $      1,940,335                                                  |       | $       (145,791                                       | )          |
| Net Property,  Plant & Equipment |       | $   35,695,754                                                                                        |       | $    33,468,374                                                             |       | $   34,862,856                                                             |       |
| Total Assets                         |       | $   71,223,028                                                                                        |       | $    42,946,122                                                             |       | $   46,065,440                                                             |       |
| Long-Term  Obligations               |       | $     6,921,695                                                                             |       | $      8,601,196                                                  |       | $     9,882,779                                                  |       |
| Minority  Interest                   |       | $                   0 |       | $      3,234,649                                                  |       | $     3,055,597                                                  |       |
| Member’s Equity                 |       | $   56,720,382                                                                                        |       | $    24,013,590                                                             |       | $   22,627,406                                                             |       |
| Book Value Per Capital  Unit         |       | $              1.91                            |       | $               0.81 |       | $              0.76 |       |

 

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*See Item 7. Management’s Discussion and Analysis of Financial Condition andResults of Operations for further discussion of our financial results.

**ITEM 7.****                  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATION.**

Exceptfor the historical information, the following discussion containsforward-looking statements that are subject to risks and uncertainties. We caution you not to put undue reliance on any forward-looking statements,which speak only as of the date of this report.  Our actual results oractions may differ materially from these forward-looking statements for manyreasons, including the risks described in “**Item 1A - Risk Factors**”and elsewhere in this annual report.  Our discussion and analysis of ourfinancial condition and results of operations should be read in conjunctionwith the financial statements and related notes and with the understanding thatour actual future results may be materially different from what we currentlyexpect.

**Overview**

We currently ownDakota Ethanol, LLC as a wholly-owned subsidiary.  In June 2006, we entered into an assignmentagreement with members of the Broin family who owned a minority interest inDakota Ethanol of 

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approximately 12%.  We purchasedthe approximately 12% minority interest in Dakota Ethanol for approximately$19,400,000 which included the estimated net earnings of Dakota Ethanol throughthe date of the purchase.

Dakota Ethanolowns and operates an ethanol plant with a nameplate capacity of 40 milliongallons per year.  The plant currentlyoperates in excess of its nameplate capacity, producing approximately 48million gallons of ethanol per year.  Ourrevenues are derived from the sale and distribution of Dakota Ethanol’s ethanoland distillers grains throughout the continental United States.  Corn is supplied to us primarily from ourmembers who are local agricultural producers and from purchases of corn on theopen market. After processing the corn, the ethanol is sold to our ethanolmarketer, which subsequently markets and sells the ethanol to gasoline blendersand refineries located throughout the continental United States.  Beginning January 1, 2006, our ethanol hasbeen  marketed by RMPG pursuant to ourethanol marketing agreement.  Previouslyour ethanol was marketed by a subsidiary of the Broin Company called EthanolProducts, LLC.  We have elected to use a pooledmarketing arrangement with RPMG which means that the ethanol we produce ispooled with other ethanol producers and marketed by RPMG.  Wepay RPMG a pooling fee for ethanol delivered to the pool, and RPMG pays us anetback price per gallon that is based upon the difference between the pooledaverage delivered 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 thepool.  Except for the distillers grainswe sell directly to local farmers, our distillers grains are soldthrough a marketer that markets and sells our distillers grains to livestockfeeders.  From the commencement of ouroperations through December 1, 2005, Dakota Gold Marketing, a Broin affiliate,marketed our distillers grains. Subsequent to December 1, 2005, our distillers grains have been marketedby Commodity Specialist Company (CSC).  For our distillers grains,we receive a percentage of the selling price actually received by CSC inmarketing the distillers grains to its customers.

Our operating income or loss is significantly tiedto the price at which ethanol and distillers grains are sold.  Historically, the price of ethanol tends tofluctuate based on the price of unleaded gasoline and other petroleumproducts.  Surplus ethanol supplies alsotend to put downward price pressure on ethanol. In contrast, the price of distillers grains generally tends to fluctuatebased on the price of substitute livestock feed, such as corn and soybean meal.  Surplus grain supplies tend to put downwardprice pressure on distillers grains.

Our cost of revenues, which includes productionexpenses, is significantly affected by the cost of corn and natural gas.  In 2006, for instance, the cost ofcorn was approximately 54% of total cost of revenues, whereas the cost ofnatural gas was approximately 27% of total cost of revenues.  Comparatively, in 2005, the cost of corn wasapproximately 50% of total cost of revenues, whereas the cost of natural gaswas approximately 23% of total cost of revenues.  The cost of corn is affected primarily by supply and demand factors suchas crop production, carryout, exports, risk management and weather, much ofwhich we have no control over.  Naturalgas prices fluctuate with the energy complex in general.  Over the last few years, natural gas priceshave trended higher than average.  Weanticipate that natural gas prices will be stable if not slightly lower infiscal year 2007 as compared to fiscal year 2006.

We are subject toindustry-wide factors that affect our revenues and profits.  These factors include, but are not limitedto, the available supply and cost of corn from which our ethanol and distillersgrains are made; the cost of natural gas, which we use in the production ofethanol and distillers grains; dependence on one or a few major customers whomarket and distribute our products; the intensely competitive nature of ourindustry; possible legislation at the federal, state, and/or local level;changes in federal ethanol tax incentives; and the cost of complying with the extensiveenvironmental laws that regulate our industry.

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#### **Results ofOperations**

***Comparison of YearEnded******December 31, 2006 and2005*.**

The following table shows the results of ouroperations and the percentage of revenues, cost of goods sold, operatingexpenses and other items to total revenues in our consolidated statements ofoperations for the fiscal years ended 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 |   |
|                                         |            |            |             |          |            |  |  |  |  |  |  |

 

*Revenues*

Theincrease in revenues for fiscal year 2006 compared to fiscal year 2005 is dueprimarily to an increase in the price of ethanol and distillers grains, whichdespite decreased production resulted in higher revenues from sales of thoseproducts.  We had lower production volumeas a result of additional plant downtime for general maintenance.  Netgallons of denatured ethanol sold totaled approximately 47.7 million in fiscal 2006 compared toapproximately 47.6 million in fiscal2005.  The average per gallonprice we received for our ethanol sold for 2006 increased by approximately 30%compared to the twelve months ended December 31, 2005.  Sales of co-products increased slightly byapproximately 0.6% in 2006 compared to co-products sales in 2005 due to increasedmarket prices for corn and other alternative feedstocks.  In addition, the total incentive revenue fromstate programs increased by approximately 18%. We receive an incentive 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 income wasdue 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.

Theethanol industry experienced record high ethanol prices in 2006.  Replacement of MTBE with ethanol as a fueloxygenate along with higher gasoline costs drove demand for ethanol.  We expect ethanol prices to be less in fiscalyear 2007 with increased ethanol production and as increases in demand as aresult of MTBE replacement level off.  Webelieve ethanol prices will decrease as a result of significantly increasedproduction capacity and resulting increases in supply in the ethanol industry.  We believe this increased ethanol supplycould put downward pressure on the price of ethanol.

Ethanol production continues to grow as additionalplants become operational.  According tothe Renewable Fuels Association, there are over 113 ethanol plants in operationnationwide that have the capacity to annually produce approximately 5.5 billiongallons of ethanol.  Of these, there are at least 7 plants undergoingexpansions.  In addition, over 78 new ethanolplants are under construction.  Expansionsand plants under construction are expected to add an additional 6.2 billiongallons of annual capacity.  Theincreased supply of ethanol could create a situation where increases in supplysignificantly outpace increases in demand causing a

28

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weakening of ethanol prices.  This could negatively affect revenues fromthe sale of our ethanol.  We willespecially depend on RPMG our ethanol marketer to find buyers for our ethanolin a very competitive marketplace.

Wealso expect that use of ethanol as a fuel oxygenate may continue to increasedue to decreased use of methyl tertiary butyl ether (“MTBE”), the primarycompetitor of ethanol as a fuel oxygenate. Management expects fuel blenders to use ethanol instead of MTBE to meetthe winter oxygenation requirements for carbon monoxide non-attainment areas asprescribed by the Clear Air Act.  Weexpect this to have a positive impact on the demand for ethanol.

               Increased consumption of E85 fuel and increased consumer awareness ofethanol may increase ethanol demand.  TheUS Department of Energy Alternative Fuels Data Center has reported that theavailability and use of E85 is growing nationally, and the availability of E85and FFVs is expected to increase significantly in the next few years.  According to the National Ethanol VehicleCoalition, the benefits of E85 include less dependence upon oil imported fromother countries, in addition to environmental benefits because E85 containsroughly 80% less of the potential contaminants found in gasoline.  However, consumer resistance to the use ofethanol may affect the demand for ethanol which could affect our ability tomarket our product and reduce our revenues.

Theethanol industry’s ability to increase demand for ethanol in the coming yearsto offset increases in supply will be critical to our success.  If demand does not increase in proportion tosupply increases, the price of ethanol may decrease and we may not be able tooperate profitably.  Further, we may notbe able to sell all of the ethanol we produce. Similar concerns exist for our distillers grains.

Overall, the market value of distillers grainsincreased in 2006 compared to 2005.  This increased market value waslargely due to equivalent increases in the value of corn and soybeans, whichare alternative feed products to distillers grains.  However, our revenuesfrom distillers grains decreased in fiscal year 2006 compared to fiscal year2005 because of the form in which we sold our distillers grains.  We sold more modified (moderate wet)distillers grains and less dried DDGS in 2006 compared to 2005.  Themodified distillers grains resulted in a lower net value per ton than the driedproducts.  We produced more modified to increase our volume in the localmarket and to decrease or natural gas cost as the modified uses less naturalgas in the drying process.

Weexpect to continue to benefit from federal ethanol supports and federal taxincentives. Changes to these supports or incentives could significantly impactdemand for ethanol.  See ITEM 1.BUSINESS—Federal Ethanol Supports. Incentive revenue from state and federal programs increased 18% from the fiscal year ended December 31,2005 to the fiscal year ended December 31, 2006.  This increase was the result of increasedincentives from the State of South Dakota in fiscal year 2006 of approximately11% and the fact that we repaid approximately $46,000 in fiscal year 2005.  In fiscal year 2006, we did not receive anyfunding from the United States Department of Agriculture’s Commodity CreditBioenergy Program because we did not produce more ethanol this year as comparedto last year as required by the program. The program ended in September 2006 so we will not receive any furtherfunding from this program.

Incentive revenue from the State of South Dakotaincreased approximately $74,000, or approximately 11% in fiscal year 2006.  Due to budget constraints, we did notreceive the annual maximum benefit for fiscal year 2006 and we do not expectthat will receive the maximum benefit in fiscal year 2007 for the same reason.

*Cost of Revenues*

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

We recognize the gains or losses that result fromthe changes in the value of our derivative instruments in cost of goods sold asthe changes occur.  As corn and natural gas prices fluctuate, the value ofour derivative instruments are impacted, which affects our financialperformance.  We partially offset these losses with the cash 

29

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price we paid for corn.  We anticipate continued volatility in ourcost of goods sold due to the timing of the changes in value of the derivativeinstruments relative to the cost and use of the commodity being hedged.

Corncosts significantly impact our cost of goods sold.  While 2004 and 2005saw record setting corn yields in the United States, 2006 had a lower cornyield.  The 2004 corn crop yielded 11.8billion bushels of corn, 2005 yielded 11.11 billion bushels of corn and 2006yielded 10.74 billion bushels.  The lowercorn yield along with increased corn demand from both ethanol plants and worldfoodstuff markets pushed up the price of corn in fiscal year 2006.  We expect that corn prices will continue tostay at a high level as demand for corn continues to grow.  The price of corn could be significantlyaffected depending on the 2007 corn yield. Whether farmers follow the increased price of corn and plant more cornin 2007 could significantly affect the selling price of corn towards the end offiscal year 2007.

In fiscal year 2006 we experienced an average 4%decrease in the price we pay for natural gas. This, along with our decreased natural gas usage due to decreasedproduction of dried distillers grains lead to a decrease in our natural gascosts of approximately 7% for fiscal year 2006 as compared to fiscal year2005.  The price of natural gas hasdecreased from historic high prices that occurred at the end of fiscal year2005 due primarily to Hurricane Katrina. We expect that natural gas prices should be stable through fiscal year2007 if not slightly lower than fiscal year 2006.

*General and Administrative Expense*

Ouroperating expenses as a percentage of revenue were approximately 3.9% and 4.5% for fiscal year 2006 and 2005 respectively.  This decrease is due primarily to the factthat we no longer pay a management fee to Broin Management.

*Income from Operations*

Ourincome from operations for fiscal year 2006 totaled approximately $49,158,000 compared to approximately $13,209,000 for fiscal year 2005.  Thisincrease in income from operations is due primarily to an increase in revenuesdue to high ethanol prices and a decrease in cost of revenues due to lower cornand natural gas costs along with decreased corn and natural gas consumption.

*Other Income and Expense*

Ourtotal other income and expense for the twelve months ended December 31, 2006was 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 Dakota Ethanol’s primarylender.

*MinorityInterest in Subsidiary Income*

Minority interest insubsidiary income increased to approximately $2,236,000 for the year endedDecember 31, 2006, from $1,494,029 for the year ended December 31,2005.  This increase is despite the fact that we purchased the minorityinterest in June 2006 and the minority interest only existed for six months offiscal year 2006.  The increase inminority interest in subsidiary income was primarily due to the increasedprofitability of Dakota Ethanol, which increased by approximately $35.2 millionfrom the fiscal year ended December 31, 2005.

*NetIncome*

Net income increased toapproximately $46 million for the fiscal year ended December 31, 2006 from$10.8 million for the year ended December 31, 2005.  This increase isprimarily a result of the favorable spread between the selling price of ethanoland the price of our raw materials and our purchase of the minority interest inDakota Ethanol.

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***Comparison of Year Ended******December 31, 2005 and 2004*.**

The following table shows the results of ouroperations and the percentage of revenues, cost of goods sold, operatingexpenses and other items to total revenues in our consolidated statements ofoperations for the fiscal years ended December 31, 2005 and 2004:
| ** **                              | ** ** | **2005**   | ** ** | **2004** | ** ** |
|-----------------------------------------|------------|------------|------------|----------|------------|
| **Income Statement Data:**    | ** ** | **Amount** | ** ** | **%**    | ** ** | **Amount** | ** ** | **%** | ** ** |
| Revenues                                |       | $          | 80,020,970 |     | 100.0      |   | $ | 84,432,486 |   | 100.0 |   |
|                                    |       |       |       |     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of Revenues                        |       | 63,201,108 |       | 79.0     |       | 71,736,360 |   | 85.0 |   |
|                                    |       |       |       |     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross Profit                            |       | 16,819,862 |       | 21.0     |       | 12,696,126 |   | 15.0 |   |
|                                    |       |       |       |     | ** ** | ** ** | ** ** | ** ** | ** ** |
| General and  Administrative Expense     |       | (3,610,590 | )          | (4.5     | )          | (3,058,024 | ) | (3.6 | ) |
|                                    |       |       |       |     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income From  Operations                 |       | 13,209,272 |       | 16.5     |       | 9,638,102 |   | 11.4 |   |
|                                    |       |       |       |     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest Expense                        |       | (1,089,364 | )          | (1.4     | )          | (1,300,647 | ) | (1.5 | ) |
|                                    |       |       |       |     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Other Income                            |       | 238,705    |       | 0.3      |       | 223,548 |   | 0.3 |   |
|                                    |       |       |       |     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Minority  Interest in Subsidiary Income |       | (1,494,029 | )          | (1.9     | )          | (1,037,458 | ) | (1.2 | ) |
|                                    |       |       |       |     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Income                              |       | 10,864,584 |       | 13.6     |       | 7,523,545 |   | 8.9 |   |
|                                         |            |            |            |          |            |  |  |  |  |  |  |

 

*Revenues*

Thedecrease in revenues from fiscal year 2005 compared to fiscal year 2004 was dueprimarily to a decrease in the price of ethanol and distillers grains, whichresulted in lower revenues from sales of those products.  In addition, revenue decreased due to lowerproduction volume as a result of additional plant downtime for general maintenance.  Netgallons of denatured ethanol sold totaled 47.8 million in fiscal 2005 compared to 49.3 million in fiscal 2004.  The average per gallon price wereceived for our ethanol sold for 2005 decreased by approximately 1% comparedto the twelve months ended December 31, 2004. Sales of co-products decreased by approximately 15% in 2005 compared toco-products sales in 2004 due to decreased market prices for corn and otheralternative feedstocks.  In addition, thetotal incentive revenue from state and federal programs decreased byapproximately 13%.

Althoughethanol prices were strong for part of the first fiscal quarter of 2005, excesssupply of ethanol due to increased production caused ethanol prices to declineduring the first three quarters of the year. Although ethanol prices increased in the third quarter, Dakota Ethanolwas not able to take advantage of these higher prices during the third orfourth quarters because a large portion of its ethanol production had beenpre-sold below market rates.  Increased demand, firm crude oil and gasmarkets, public acceptance, and positive political signals all contributed to astrengthening of ethanol prices in 2005.

Revenuesfrom distillers grains decreased throughout the fiscal year, due to decreasingdistillers grain prices.  Lowerdistillers grain prices were attributed in part to increased distillers grainsproduction by new ethanol plants and in part to an abundant supply of grainsand feed proteins as a result of the record grain harvests in 2004 and 2005.

Incentive revenue from the State of South Dakota forthe fiscal year ended December 31, 2005 increased $35,000, or 5% compared tothe same period of 2004.

31

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*Cost of Revenues*

Ourcost of revenues as a percentage of revenues were 79% and 85% for thetwelve months ended December 31, 2005 and 2004 respectively.  The decrease in our cost of revenues fromperiod to period is primarily due to our reduced corn costs.  Our average per bushel price we paid for ourcorn decreased approximately 16% for the twelve months ended December 31, 2005compared to the twelve months ended December 31, 2004.

Our natural gas costs for fiscal year endingDecember 31, 2005 were substantially higher than in the 2004 fiscal year. These prices increased our costs of production.  In late August2005, Hurricane Katrina caused dramatic damage to areas of Louisiana, which isthe location of one of the largest natural gas hubs in the United States. Asthe damage from the hurricane became apparent, natural gas prices substantiallyincreased. Hurricane Rita also impacted the Gulf Coast and caused shutdowns atseveral Texas refineries, which further increased natural gas prices.

*General and Administrative Expense*

Ouroperating expenses as a percentage of revenue were approximately 4.5% and 3.6% for fiscal year 2005 and 2004 respectively.  This increase was due primary to an increasedmanagement incentive fee owed to Broin Management, which was based directly onDakota Ethanol’s net income.  Inaddition, payment to Broin Management relating to the termination of thecontracts with Broin Management also increased our administrative expense.

*Income from Operations*

Ourincome from operations for fiscal year 2005 totaled approximately $13,209,000 compared to approximately $9,638,000 for fiscal year 2004.  Thiswas a result of the decrease in cost of revenues for the fiscal year endedDecember 31, 2005.

*Other Income and Expense*

Ourtotal other income and expense for the twelve months ended December 31, 2005was substantially the same as the other income and expense for the twelvemonths ended December 31, 2004.  Ourinterest expense for the fiscal year ended 2005 decreased due to a reduction inthe principal balance on the loans outstanding with Dakota Ethanol’s primarylender.

*MinorityInterest in Subsidiary Income*

Minority interest insubsidiary income increased to approximately $1,494,000 for the year endedDecember 31, 2005, from approximately $1,037,000 for the year endedDecember 31, 2004.  The increase in minority interest in subsidiaryincome was primarily due to the increased profitability of Dakota Ethanol,which increased by approximately $3.3 million from the year endedDecember 31, 2004.

*NetIncome*

Net income increased toapproximately $10.8 million for the year ended December 31, 2005 from $7.5million for the year ended December 31, 2004.  A decrease in corncosts was the primary factor in the increase in our net income.

**Plant Operations**

We plan to continue to operate the ethanol plant forthe next 12 months.  Managementanticipates that the plant will continue to operate at or above name-platecapacity of 40 million gallons per year for the next twelve months.  Weexpect to have sufficient cash from cash flow generated by continuingoperations and cash reserves to cover the costs of operations over the next 12months, which consist primarily of corn supply, natural gas supply, staffing,office, audit, legal, compliance, working capital costs and debt serviceobligations.

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However, a variety of market factors can affect bothoperating costs and revenues.  These factors include:

·                  Changesin the availability and price of corn;

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

·                  Increasedcompetition in the ethanol and oil industries;

·                  Changesin interest rates or the availability of credit;

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

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

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

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

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

**Applicationof Critical Accounting Policies**

Management usesestimates and assumptions in preparing our consolidated financial statements inaccordance with generally accepted accounting principles.  These estimates and assumptions affect thereported amounts of assets and liabilities, the disclosure of contingent assetsand liabilities, and the reported revenues and expenses.  Of the significant accounting policiesdescribed in the notes to our consolidated financial statements, we believethat the following is the most critical:

***Derivative Instruments***

DakotaEthanol enters into short-term cash grain, option and futures contracts as ameans of securing corn for the ethanol plant and managing exposure to changesin commodity prices. All of Dakota Ethanol's derivatives are designated asnon-hedge derivatives, and accordingly are recorded at fair value with changesin fair value recognized in net income. Although the contracts are consideredeconomic hedges of specified risks, they are not designated as and accountedfor 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 cash andfutures contracts and options.

Unrealized gains and lossesrelated to derivative contracts related to corn and natural gas purchases areincluded as a component of cost of revenues and derivative contracts related toethanol sales are included as a component of revenues in the accompanyingfinancial statements.  The fair values ofderivative contracts are presented on the accompanying balance sheet asderivative financial instruments.

**Liquidityand Capital Resources**

The following table shows cash flows for the last two years:

|                                         | ** ** | **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 increase in net cash flow provided fromoperating activities between 2006 and 2005 was primarily due to a favorablespread between the price of corn and the price of ethanol.  Our capital needs are being adequatelymet through cash from our operating activities and our current creditfacilities.

*Cash Flow From InvestingActivities. *We experienced an increase in the net cashused for investing activities due primarily to our acquisition of the Broinfamily minority interest in Dakota Ethanol. We used cash provided byoperating activities for capital expenditures which totaled approximately $367,000for fiscal 2006 

33

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compared to approximately $1,155,00 for fiscal 2005.  This increaseprimarily reflects expenditures for the purchase of property andequipment.  In 2005, we installedpollution equipment including a scrubber and vapor flare for the purpose ofcontrolling air emissions from the plant. An additional $300,000 in cash was used in 2005 to modify the distillersgrains drying system.  Additionally, infiscal year 2006, we spent $350,000 on hammermill installation.

*Cash Flow From FinancingActivities.*We used cash for financing activitiesfor distributions and debt service of approximately $16,095,000 in fiscal 2006 compared to approximately $15,119,000in fiscal 2005.  The primaryreason for the increase in cash used was due to distributions made to ourmembers.  During fiscal year 2006 we alsoexecuted a $19,100,000 note for the purchase of the minority interest in DakotaEthanol and we retired the note in September 2006.  We used a significant portion of our netincome to retire this note by September 2006.

Managementanticipates sufficient cash flow from operating activities and revolving debtto cover debt service obligations, operations and planned capital expendituresfor the next 12 months.

The following table shows a comparison of cash flows for the fiscal yearsended December 31, 2005 and December 31, 2004:

|                                         | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------|------------|
| ** **                              | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| Net cash from  operating activities     |       | $                                          | 14,300,244 |   | $ | 11,388,383 |   |
| Net cash used  for investing activities |       | (684,811                                   | )          | (687,766 | ) |
| Net cash used for  financing activities |       | (15,118,655                                | )          | (8,589,929 | ) |
|                                         |            |                                            |            |  |  |  |  |

 

*Cash Flow From Operations. *The increase in net cash flow provided fromoperating activities between 2005 and 2004 was primarily due to a favorablespread between the price of corn and the price of ethanol.  Our capital needs are being adequatelymet through cash from our operating activities and our current creditfacilities.

*Cash Flow From InvestingActivities. *We used cash provided by operating activities for capital expenditureswhich totaled $1,154,799 forfiscal 2005 compared to $890,456 for fiscal 2004.  This increase primarilyreflects expenditures for the purchase of property and equipment.  In 2005, we installed pollution equipment includinga scrubber and vapor flare for the purpose of controlling air emissions fromthe plant.  An additional $300,000 incash was used in 2005 to modify the distillers grains drying system.

*Cash Flow From FinancingActivities.*We used cash for financing activitiesfor distributions and debt service of $15,118,655 in fiscal 2005 compared to $8,589,929 in fiscal 2004.  The primary reason for the increase in cash usedwas due to distributions made to our members and the minority members of DakotaEthanol.  In fiscal year 2005,distributions of approximately $11.5 million and $1.6 million were made to our members andthe minority members of Dakota Ethanol, respectively, compared to $4.1 millionand $600,000, respectively, during fiscal 2004.

**Indebtedness**

First National Bank ofOmaha is Dakota Ethanol’s primary lender. Dakota Ethanol has three notes or loans outstanding with First NationalBank pursuant to a Construction Loan Agreement and Construction Note datedSeptember 25, 2000 and amendments dated July 29, 2002, November 1, 2002, andApril 23, 2004.  In addition, in June2006, we issued a promissory note to our principal lender in the amount of$19,100,000.  We used the proceeds fromthis note to purchase the Broin family minority interest in Dakota Ethanol.  We retired this note in September 2006.

### ***Short-Term Debt Sources***

OnApril 21, 2006, Dakota Ethanol renewed a revolving promissory note from FirstNational Bank of Omaha in the amount of $3,000,000.  The note expires on April 20, 2007 and theamount available is subject to certain financial ratios.  Interest on any outstanding principal balanceaccrues at the bank’s base rate (8.25% as of December 31, 2006). There is acommitment fee of 0.375% on the unused portion of the $3,000,000availability.  The note is collateralizedby the ethanol plant, its accounts receivable and inventories.  On December 31, 2006, 

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Dakota Ethanol did not havean outstanding balance on the note, and the entire amount of $3,000,000 wasavailable to be drawn on the revolving promissory note.  The note is secured by Dakota Ethanol’s realproperty, personal property, and an assignment of all rents and leases in favorof First National.

#### ***Long-Term Debt Sources***

DakotaEthanol originally had a $26,600,000 note payable to First National Bank ofOmaha for the construction and permanent financing of the plant, referred to asTerm Note 1.  On July 29, 2002, DakotaEthanol amended the construction loan agreement to create two term notes fromits original Term Note 1, creating Term Notes 2 and 3.  Term Note 3 was converted into Term Notes 4and 5 on November 1, 2002.  Pursuant tothese agreements, Dakota Ethanol is subject to certain restrictive covenantsestablishing minimum reporting requirements, ratios, working capital and networth requirements.  The notes aresecured by the ethanol plant. The notes are subject to prepayment penaltiesbased on the cost incurred by the Bank to break its fixed interest ratecommitment.  The other terms andconditions of Term Note 1 remain in effect. Except as set forth below, the original terms and conditions of TermNote 1 apply to Term Notes 4 and 5.

Thebalance of Term Note 2 requires quarterly installments of $581,690 whichcommenced on October 1, 2002.  Thebalance is due September 1, 2011. Interest on outstanding principal balances accrues at a rate of 9%annually.  The principal balance on thenote as of December 31, 2006 was $8,229,093.

Thebalance of Term Note 4 was due and payable in quarterly installments of$329,777 commencing January 1, 2003, through September 1, 2011.  As of December 31, 2006, there was noprincipal balance outstanding on Term Note 4 as the note was fully repaidduring the second quarter of fiscal year 2006.

Thebalance of Term Note 5 is due and payable in quarterly installments of interestonly commencing January 1, 2003, through September 1, 2011.  Interest on outstanding principal balanceswill accrue at 50 basis points above the lender’s rate.  This rate is subject to various adjustmentsbased on various levels of indebtedness to net worth, as defined by theagreement.  Dakota Ethanol may elect toborrow any principal amount repaid on Term Note 5 up to $5,000,000 subject tothe terms of the agreement.  ShouldDakota Ethanol elect to utilize this feature, the lender will assess an unusedcommitment fee of 3/8 percent on the unused portion of the $5,000,000.  In addition, the bank draws our checkingaccount balance to a minimum balance on a daily basis. The excess cash paysdown or the shortfall is drawn upon Term Note 5 as needed. On December 31,2006, 2005 and 2004, Dakota Ethanol had $0 outstanding and $5,000,000 availableto be drawn on Term Note 5.

Finally, Dakota Ethanol has a long-term debtobligation on a portion of a $1.323 million tax increment revenue bond seriesissued by Lake County, South Dakota on December 2, 2003.  The maximumamount of estimated future payments on the taxable bond debt service is$1,826,602.  The carrying amount of theguarantee liability on Dakota Ethanol’s balance sheet is $385,812, whichrepresents the estimated shortfall between the taxable bond amount and theamount of taxes estimated to be collected on Dakota Ethanol’s property.  The bond was issued in connection with therefunding of a tax increment financing bond issued by Lake County in 2001, ofwhich Dakota Ethanol was the recipient of the proceeds.

In 2003, Lake County became aware that the taxescollected 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 interestrate 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 

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point in time if the property on which the plant islocated appreciates in value to the extent that Lake County is able to collecta sufficient amount in taxes to cover the principal and interest payments onthe taxable bonds. Principal payments of $57,682, $53,533, and $49,682 weremade on the bonds for year ended December 31, 2006, December 31, 2005 andDecember 31, 2004, respectively. The principal balance outstanding was$1,162,126 as of December 31, 2006.

In addition to our long-term debt obligations, wehave certain other contractual cash obligations and commitments.  Thefollowing tables provide information regarding our consolidated contractualobligations and commitments as of December 31, 2006:
| ** **                                 | ** ** | **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                |       | $                                        | 10,051,041 |   | $ | 2,326,760 |   | $ | 4,653,520 |   | $ | 3,070,761 |   | $ | 0 |   |
| Capital Lease  Obligations                 |       | 0                                        |       | 0 |   | 0 |   | 0 |   | 0 |   |
| Operating Lease  Obligations               |       | 0                                        |       | 0 |   | 0 |   | 0 |   | 0 |   |
| Purchase  Obligations                      |       | 39,136,970                               |       | 31,218,782 |   | 6,616,038 |   | 1,302,150 |   | 0 |   |
| Other Long-Term  Liabilities               |       | 385,812                                  |       | 62,536 |   | 122,997 |   | 104,867 |   | 95,412 |   |
| Total Contractual Cash  Obligations        |       | $                                        | 49,573,823 |   | $ | 33,608,078 |   | $ | 11,392,555 |   | $ | 4,477,778 |   | $ | 95,412 |   |

 

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

**Off-BalanceSheet Arrangements.**

We do not have any off-balance sheet arrangements.

**ITEM 7A.               QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK.**

We are exposed to the impact of market fluctuationsassociated with commodity prices as discussed below.  We have no exposureto foreign currency risk as all of our business is conducted in U.S. Dollars.We use derivative financial instruments as part of an overall strategy tomanage market risk. We use cash, futures and option contracts to hedge changesto the commodity prices of corn and natural gas. We do not enter into thesederivative financial instruments for trading or speculative purposes, nor do wedesignate these contracts as hedges for accounting purposes pursuant to therequirements of SFAS 133, *Accounting for DerivativeInstruments and Hedging Activities*.

**Commodity Price Risk**

We are also exposed to market risk from changes incommodity prices.  Exposure to commodity price risk results from ourdependence on corn and natural gas in the ethanol production process.  Weseek to minimize the risks from fluctuations in the prices of corn and naturalgas through the use of hedging instruments.  In practice, as markets move,we actively manage our risk and adjust hedging strategies as appropriate. Although we believe our hedge positions accomplish an economic hedge againstour future purchases, they are not designated as such for hedge accountingpurposes, which would match the gain or loss on our hedge positions to thespecific commodity purchase being hedged.  We are marking to market ourhedge positions, which means as the current market price of our hedge positionschanges, the gains and losses are immediately recognized in our cost of goodssold.

The immediate recognition of hedging gains and lossescan cause net income to be volatile from quarter to quarter due to the timingof the change in value of the derivative instruments relative to the cost anduse of the commodity being hedged.  We recorded a decrease to cost ofrevenues of approximately $11,448,000 related to derivative instruments for theyear ended December 31, 2006.  Werecorded a decrease of cost of revenues of approximately $817,000 and anincrease of cost of revenues of approximately $4,070,000 related to derivativeinstruments for the years ended December 31, 2005 and 2004, respectively.  There are several variables that could affectthe extent to which our derivative instruments are impacted by pricefluctuations in the cost of corn or natural 

36

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gas.  However, it is likely that commodity cashprices will have the greatest impact on the derivatives instruments withdelivery dates nearest the current cash price.

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

We estimate that our corn usage for fiscal year 2007will be approximately 17 million bushels for the production of 48 milliongallons of ethanol.  We have price protection for approximately 17% of ourexpected corn usage for fiscal year ended December 31, 2007 using CBOT futuresand options and over-the-counter option contracts.  As we move forward,additional price protection may be necessary.  As corn prices move inreaction to market trends and information, our income statement will beaffected depending on the impact such market movements have on the value of ourderivative instruments.  As we move forward, additional price protectionmay be required to solidify our margins into fiscal year 2008.  Dependingon market movements, crop prospects and weather, these price protectionpositions may cause immediate adverse effects to our financial results, but areexpected to produce long-term positive growth for us.

As of December 31, 2006, Dakota Ethanol is committedto purchasing 414,000 mmBtu’s of natural gas for 2007, valued at approximately$2.7 million.  The natural gas purchasesrepresent approximately 26% of the annual plant requirements.

A sensitivity analysis has been prepared to estimateour exposure to corn and natural gas price risk. The table presents the fairvalue of our derivative instruments as of December 31, 2006, December 31, 2005and December 31, 2004 and the potential loss in fair value resulting from ahypothetical 10% adverse change in such prices. The fair value of the positionsis a summation of the fair values calculated by valuing each net position atquoted market prices as of the applicable date. The results of this analysis,which may differ from actual results, are as follows:
| Year Ended    | ** ** | **Fair Value** | ** ** | **Effect of Hypothetical Adverse  Change— Market Risk** | ** ** |
|--------------------|------------|---------------------|------------|---------------------------------------------------------------------------------------|------------|
| December 31,  2006 |       | $                   | 8,957,869  |                                                                                  | $          | 895,786 |   |
| December 31,  2005 |       | $                   | 170,125    |                                                                                  | $          | 17,012 |   |
| December 31, 2004  |       | $                   | 749,832    |                                                                                  | $          | 74,983 |   |

 

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**ITEM 8.                   FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

## ***McGladrey & Pullen***

Certified PublicAccountants

## ***REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM***

The Audit Committee

**Lake AreaCorn Processors, LLC**

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

We conducted ouraudit in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditprovides a reasonable basis for our opinion.

In our opinion,the consolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Lake Area Corn Processors, LLC andsubsidiary as of December 31, 2006, and the results of their operations andtheir cash flows for the year then ended, in conformity with U.S. generallyaccepted accounting principles.
|                  | /s/ McGladrey  & Pullen, LLP |   |
|------------------|----------------------------------|--------|
|             |                             |
| Des Moines, Iowa |                             |
| March 29, 2007   |                             |

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## ***REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM***

The Audit Committee

**Lake AreaCorn Processors, LLC**

We have auditedthe accompanying consolidated balance sheets of Lake Area Corn Processors, LLC as of December 31, 2005, and therelated consolidated statements of operations, changes in members’ equity, andcash flows for each of the years ended December 31, 2005 and 2004.  These consolidated financial statements arethe responsibility of the company’s management. Our responsibility is to express an opinion on these consolidatedfinancial statements based upon our audits.

We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free ofmaterial misstatement.  An audit includesconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the company’sinternal control over financial reporting. Accordingly, we do not express such an opinion.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the consolidated financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe our auditsprovide a reasonable basis for our opinion.

In our opinion,the consolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Lake Area Corn Processors, LLC as of December 31, 2005, and theresults of its operations and its cash flows for the years ended December 31,2005 and 2004 in conformity with accounting principles generally accepted inthe United States of America.

Eide Bailly LLP

Sioux Falls, South Dakota

February 6, 2006

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**LAKE AREACORN PROCESSORS, LLC**

**ConsolidatedBalance Sheets**

**December 31, 2006 and 2005**
| ** **                        | ** ** | **2006**        | ** **     | **2005**   | ** ** |
|-----------------------------------|------------|-----------------|----------------|------------|------------|
|                              | ** ** | ** **      |           |       |       |
| **ASSETS**                        | ** ** | ** **      |           |       |       |
|                              | ** ** | ** **      |           |       |       |
| CURRENT ASSETS                    | ** ** | ** **      |           |       |       |
| Cash                              | ** ** | **$**           | **6,673,775**  |       | $          | 704,282 |   |
| Receivables                       | ** ** | ** **      |           |       |       |
| Ethanol                           | ** ** | **3,519,875**   |           | —     |       |
| Ethanol -  related party          | ** ** | **—**      |           | 4,928,479  |       |
| Distiller’s  grains          | ** ** | **376,710**     |           | 343,456    |       |
| Incentives                        | ** ** | **166,667**     |           | 166,667    |       |
| Other                             | ** ** | **42,738**      |           | 75,000     |       |
| Inventory                         | ** ** | ** **      |           |       |       |
| Raw materials                     | ** ** | **1,965,408**   |           | 449,887    |       |
| Finished goods                    | ** ** | **1,220,400**   |           | 651,580    |       |
| Parts inventory                   | ** ** | **971,756**     |           | 889,481    |       |
| Work in process                   | ** ** | **602,501**     |           | 304,610    |       |
| Derivative financial  instruments | ** ** | **8,957,869**   |           | 170,125    |       |
| Prepaid expenses                  | ** ** | **303,961**     |           | 353,455    |       |
|                              | ** ** | ** **      |           |       |       |
| Total current  assets             | ** ** | **24,801,660**  |           | 9,037,022  |       |
|                              | ** ** | ** **      |           |       |       |
| PROPERTY AND EQUIPMENT            | ** ** | ** **      |           |       |       |
| Land                              | ** ** | **126,097**     |           | 106,394    |       |
| Land  improvements                | ** ** | **2,665,358**   |           | 2,329,933  |       |
| Buildings                         | ** ** | **8,088,853**   |           | 7,439,179  |       |
| Equipment                         | ** ** | **36,571,921**  |           | 32,894,616 |       |
| Construction in  progress         | ** ** | **—**      |           | 19,967     |       |
|                              | ** ** | **47,452,229**  |           | 42,790,089 |       |
| Less accumulated  depreciation    | ** ** | **(11,756,475** | **)**          | (9,321,715 | )          |
|                              | ** ** | ** **      |           |       |       |
| Net property and  equipment       | ** ** | **35,695,754**  |           | 33,468,374 |       |
|                              | ** ** | ** **      |           |       |       |
| OTHER ASSETS                      | ** ** | ** **      |           |       |       |
| Goodwill                          | ** ** | **10,395,766**  |           | —     |       |
| Guarantee  premium                | ** ** | **274,615**     |           | 359,206    |       |
| Other                             | ** ** | **55,233**      |           | 81,520     |       |
|                              | ** ** | ** **      |           |       |       |
| Total other  assets               | ** ** | **10,725,614**  |           | 440,726    |       |
|                              | ** ** | ** **      |           |       |       |
|                              | ** ** | **$**           | **71,223,028** |       | $          | 42,946,122 |   |

 

**SEE NOTES TO FINANCIAL STATEMENTS**

40

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**LAKE AREACORN PROCESSORS, LLC**

**ConsolidatedBalance Sheets**

**December 31, 2006 and 2005**
| ** **                                                                       | ** ** | **2006**       | ** **     | **2005**   | ** ** |
|----------------------------------------------------------------------------------|------------|----------------|----------------|------------|------------|
|                                                                             | ** ** | ** **     |           |       |       |
| **LIABILITIES  AND MEMBERS’ EQUITY**                                        | ** ** | ** **     |           |       |       |
|                                                                             | ** ** | ** **     |           |       |       |
| CURRENT  LIABILITIES                                                             | ** ** | ** **     |           |       |       |
| Accounts payable                                                                 | ** ** | **$**          | **5,231,875**  |       | $          | 4,427,614 |   |
| Accounts payable - related party                                                 | ** ** | **—**     |           | 180,488    |       |
| Accrued liabilities                                                              | ** ** | **655,866**    |           | 525,434    |       |
| Current portion of guarantee payable                                             | ** ** | **62,536**     |           | 62,617     |       |
| Current portion of notes payable                                                 | ** ** | **1,630,674**  |           | 1,900,534  |       |
|                                                                             | ** ** | ** **     |           |       |       |
| Total current liabilities                                                        | ** ** | **7,580,951**  |           | 7,096,687  |       |
|                                                                             | ** ** | ** **     |           |       |       |
|                                                                             | ** ** | ** **     |           |       |       |
| LONG-TERM  LIABILITIES                                                           | ** ** | ** **     |           |       |       |
| Guarantee payable                                                                | ** ** | **323,276**    |           | 372,950    |       |
| Notes payable                                                                    | ** ** | **6,598,419**  |           | 8,228,246  |       |
|                                                                             | ** ** | ** **     |           |       |       |
| Total long-term liabilities                                                      | ** ** | **6,921,695**  |           | 8,601,196  |       |
|                                                                             | ** ** | ** **     |           |       |       |
| MINORITY  INTEREST                                                               | ** ** | **—**     |           | 3,234,649  |       |
|                                                                             | ** ** | ** **     |           |       |       |
| COMMITMENTS AND  CONTINGENCIES                                                   | ** ** | ** **     |           |       |       |
|                                                                             | ** ** | ** **     |           |       |       |
| MEMBERS’ EQUITY                                                             | ** ** | ** **     |           |       |       |
| Capital units, $0.50 stated value,  29,620,000 units issued and outstanding |       | **14,810,000** |           | 14,810,000 |       |
| Additional paid-in capital                                                       | ** ** | **96,400**     |           | 96,400     |       |
| Retained earnings                                                                | ** ** | **41,813,982** |           | 9,107,190  |       |
|                                                                             | ** ** | ** **     |           |       |       |
| Total members’ equity                                                       | ** ** | **56,720,382** |           | 24,013,590 |       |
|                                                                             | ** ** | ** **     |           |       |       |
|                                                                             | ** ** | **$**          | **71,223,028** |       | $          | 42,946,122 |   |

 

**SEE NOTES TO FINANCIAL STATEMENTS**

41

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**LAKE AREACORN PROCESSORS, LLC**

**ConsolidatedStatements of Operations**

**Years Ended December 31, 2006, 2005 and 2006**

** **
| ** **                                                                                                  | ** ** | **2006**        | ** **     | **2005**   | ** ** | **2004**   | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|-----------------|----------------|------------|------------|------------|------------|
| REVENUES                                                                                                    | ** ** | ** **      | ** **     | ** ** |       |       |       |
| Sales - related party                                                                                       | ** ** | **$**           | **—**     | ** ** | $          | 69,125,699 | ** ** | $ | 71,648,488 |   |
| Sales                                                                                                       | ** ** | **103,113,502** | ** **     | 10,239,951 | ** ** | 11,769,124 |       |
| Incentive income                                                                                            | ** ** | **775,910**     | ** **     | 655,320    | ** ** | 1,014,874  |       |
| Total revenues                                                                                              | ** ** | **103,889,412** | ** **     | 80,020,970 | ** ** | 84,432,486 |       |
|                                                                                                        | ** ** | ** **      | ** **     |       | ** ** |       |       |
| COST OF REVENUES                                                                                            | ** ** | **50,792,418**  | ** **     | 63,201,108 | ** ** | 71,736,360 |       |
|                                                                                                        | ** ** | ** **      | ** **     |       | ** ** |       |       |
| GROSS PROFIT                                                                                                | ** ** | **53,096,994**  | ** **     | 16,819,862 | ** ** | 12,696,126 |       |
|                                                                                                        | ** ** | ** **      | ** **     |       | ** ** |       |       |
| EXPENSES                                                                                                    | ** ** | ** **      | ** **     |       | ** ** |       |       |
| General and administrative                                                                                  | ** ** | **3,938,845**   | ** **     | 3,610,590  | ** ** | 3,058,024  |       |
|                                                                                                        | ** ** | ** **      | ** **     |       | ** ** |       |       |
| INCOME FROM  OPERATIONS                                                                                     | ** ** | **49,158,149**  | ** **     | 13,209,272 | ** ** | 9,638,102  |       |
|                                                                                                        | ** ** | ** **      | ** **     |       | ** ** |       |       |
| OTHER INCOME  (EXPENSE)                                                                                     | ** ** | ** **      | ** **     |       | ** ** |       |       |
| Interest and other income                                                                                   | ** ** | **121,719**     | ** **     | 238,705    | ** ** | 223,548    |       |
| Interest and other expense                                                                                  | ** ** | **(1,008,300**  | **)**          | (1,089,364 | )          | (1,300,647 | )          |
| Total other income (expense)                                                                                | ** ** | **(886,581**    | **)**          | (850,659   | )          | (1,077,099 | )          |
|                                                                                                        | ** ** | ** **      | ** **     |       | ** ** |       |       |
| NET INCOME  BEFORE MINORITY INTEREST                                                                        | ** ** | **48,271,568**  | ** **     | 12,358,613 | ** ** | 8,561,003  |       |
|                                                                                                        | ** ** | ** **      | ** **     |       | ** ** |       |       |
| MINORITY  INTEREST IN SUBSIDIARY                                                                            | ** ** | **(2,235,776**  | **)**          | (1,494,029 | )          | (1,037,458 | )          |
|                                                                                                        | ** ** | ** **      | ** **     |       | ** ** |       |       |
| NET INCOME                                                                                                  | ** ** | **$**           | **46,035,792** | ** ** | $          | 10,864,584 | ** ** | $ | 7,523,545 |   |
|                                                                                                        | ** ** | ** **      | ** **     |       | ** ** |       |       |
| BASIC AND  DILUTED EARNINGS PER UNIT                                                                        | ** ** | **$**           | **1.55**       | ** ** | $          | 0.37       | ** ** | $ | 0.25 |   |
|                                                                                                        | ** ** | ** **      | ** **     |       | ** ** |       |       |
| WEIGHTED AVERAGE  UNITS OUTSTANDING  FOR THE CALCULATION  OF BASIC AND  DILUTED EARNINGS PER UNIT | ** ** | **29,620,000**  | ** **     | 29,620,000 | ** ** | 29,620,000 |       |

 

**SEE NOTES TO FINANCIAL STATEMENTS**

42

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**LAKE AREACORN PROCESSORS, LLC**

**ConsolidatedStatements of Changes in Members’ Equity**

**Years Ended December 31, 2006, 2005 and 2006**
| ** **                                    | ** ** | ** **             | ** ** | ** **  | ** **     | **Additional** | ** ** | ** **   | ** ** | ** **  | ** **     |
|-----------------------------------------------|------------|------------------------|------------|-------------|----------------|----------------|------------|--------------|------------|-------------|----------------|
| ** **                                    | ** ** | **Capital Units** | ** ** | **Paid-In** | ** **     | **Retained**   | ** ** | ** **   | ** ** |
| ** **                                    | ** ** | **Units**              | ** ** | **Amount**  | ** **     | **Capital**    | ** ** | **Earnings** | ** ** | **Total**   | ** **     |
| BALANCE,  DECEMBER 31, 2003                   |       | 29,620,000             |       | 14,810,000  |           | 96,400         |       | 6,417,661    |       | 21,324,061  |           |
| Net income                                    |       | —                 |       | —      |           | —         |       | 7,523,545    |       | 7,523,545   |           |
| Distributions paid ($.14 per capital unit)    |       |                   |       |        |           |           |       | (4,146,800   | )          | (4,146,800  | )              |
| Distributions payable ($.07 per capital unit) |       | —                 |       | —      |           | —         |       | (2,073,400   | )          | (2,073,400  | )              |
|                                          |       |                   |       |        |           |           |       |         |       |        |           |
| 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** | ** ** |

 

**SEE NOTES TO FINANCIAL STATEMENTS**

(Remainder of Page Intentionally Left Blank)

43

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**LAKE AREACORN PROCESSORS, LLC**

**ConsolidatedStatements of Cash Flows**

**Years Ended December 31, 2006, 2005 and 2006**
| ** **                                         | ** ** | **2006**        | ** **     | **2005**    | ** ** | **2004**   | ** ** |
|----------------------------------------------------|------------|-----------------|----------------|-------------|------------|------------|------------|
| OPERATING  ACTIVITIES                              | ** ** | ** **      | ** **     |        | ** ** |       |       |
| Net income                                         | ** ** | **$**           | **46,035,792** | ** **  | $          | 10,864,584 | ** ** | $ | 7,523,545 |   |
| Changes to net income not affecting cash           | ** ** | ** **      | ** **     |        | ** ** |       |       |
| Depreciation                                       | ** ** | **2,452,370**   | ** **     | 2,274,401   | ** ** | 2,195,723  |       |
| Amortization                                       | ** ** | **110,878**     | ** **     | 137,266     | ** ** | 159,715    |       |
| Minority interest in subsidiary                    | ** ** | **2,235,776**   | ** **     | 1,494,029   | ** ** | 1,037,458  |       |
| Other                                              | ** ** | **14,204**      | ** **     | (199,263    | )          | (214,428   | )          |
| (Increase) decrease in                             | ** ** | ** **      | ** **     |        | ** ** |       |       |
| Receivables                                        | ** ** | **1,407,612**   | ** **     | (729,972    | )          | (123,044   | )          |
| Inventory                                          | ** ** | **(2,464,507**  | **)**          | 228,320     | ** ** | 905,491    |       |
| Prepaid expenses                                   | ** ** | **49,494**      | ** **     | (264,433    | )          | 8,255      |       |
| Derivative financial instruments                   | ** ** | **(8,787,744**  | **)**          | 579,707     | ** ** | (21,282    | )          |
| Increase (decrease) in                             | ** ** | ** **      | ** **     |        | ** ** |       |       |
| Accounts payable                                   | ** ** | **623,773**     | ** **     | (232,340    | )          | (33,123    | )          |
| Accrued liabilities                                | ** ** | **130,432**     | ** **     | 147,945     | ** ** | (49,927    | )          |
|                                               | ** ** | ** **      | ** **     |        | ** ** |       |       |
| NET CASH FROM  OPERATING ACTIVITIES                | ** ** | **41,808,080**  | ** **     | 14,300,244  | ** ** | 11,388,383 |       |
|                                               | ** ** | ** **      | ** **     |        | ** ** |       |       |
| INVESTING  ACTIVITIES                              | ** ** | ** **      | ** **     |        | ** ** |       |       |
| Purchase of minority interest                      | ** ** | **(19,376,369** | **)**          | 469,988     | ** ** | 202,690    |       |
| Purchase of property and equipment                 | ** ** | **(367,357**    | **)**          | (1,154,799  | )          | (890,456   | )          |
|                                               | ** ** | ** **      | ** **     |        | ** ** |       |       |
| NET CASH USED  FOR INVESTING ACTIVITIES            | ** ** | **(19,743,726** | **)**          | (684,811    | )          | (687,766   | )          |
|                                               | ** ** | ** **      | ** **     |        | ** ** |       |       |
| FINANCING  ACTIVITIES                              | ** ** | ** **      | ** **     |        | ** ** |       |       |
| Outstanding checks in excess of bank balance       | ** ** | **—**      | ** **     | —      | ** ** | (812,144   | )          |
| Notes payable issued                               | ** ** | **19,100,000**  | ** **     | —      | ** ** | —     |       |
| Principal payments on notes payable                | ** ** | **(20,999,687** | **)**          | (1,971,878  | )          | (3,065,845 | )          |
| Payment on guarantee payable                       | ** ** | **(49,755**     | **)**          | —      | ** ** | —     |       |
| Distributions paid to minority members             | ** ** | **(816,419**    | **)**          | (1,594,977  | )          | (565,140   | )          |
| Distributions paid to LACP members                 | ** ** | **(13,329,000** | **)**          | (11,551,800 | )          | (4,146,800 | )          |
|                                               | ** ** | ** **      | ** **     |        | ** ** |       |       |
| NET CASH USED  FOR FINANCING ACTIVITIES            | ** ** | **(16,094,861** | **)**          | (15,118,655 | )          | (8,589,929 | )          |
|                                               | ** ** | ** **      | ** **     |        | ** ** |       |       |
| NET INCREASE  (DECREASE) IN CASH                   | ** ** | **5,969,493**   | ** **     | (1,503,222  | )          | 2,110,688  |       |
|                                               | ** ** | ** **      | ** **     |        | ** ** |       |       |
| CASH AT  BEGINNING OF PERIOD                       | ** ** | **704,282**     | ** **     | 2,207,504   | ** ** | 96,816     |       |
|                                               | ** ** | ** **      | ** **     |        | ** ** |       |       |
| CASH AT END OF  PERIOD                             | ** ** | **$**           | **6,673,775**  | ** **  | $          | 704,282    | ** ** | $ | 2,207,504 |   |
|                                               | ** ** | ** **      | ** **     |        | ** ** |       |       |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION | ** ** | ** **      | ** **     |        | ** ** |       |       |
|                                               | ** ** | ** **      | ** **     |        | ** ** |       |       |
| Cash paid during  the year for interest            | ** ** | **$**           | **1,033,419**  | ** **  | $          | 839,838    | ** ** | $ | 1,300,647 |   |

 

**SEE NOTES TO FINANCIAL STATEMENTS**

44

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**NOTES TO FINANCIAL STATEMENTS**

**NOTE 1 -**             NATURE OF OPERATIONS

*PrincipalBusiness Activity*

Lake Area CornProcessors, LLC (the Company) is a South Dakota limited liability companylocated in Wentworth, South Dakota. The Company was organized by investors to providea portion of the corn supply for a 40 million-gallon (annual capacity) ethanolplant, owned by Dakota Ethanol, LLC (Dakota Ethanol). On September 4, 2001, theethanol plant commenced its principal operations. The Company sells ethanol andrelated products to customers located in North America.

**NOTE 2-**             SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

*Principlesof 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, 2006when it became wholly owned.  Allsignificant inter-company transactions and balances have been eliminated inconsolidation.

*RevenueRecognition*

Revenue from theproduction of ethanol and related products is recorded when title transfers tocustomers, net of allowances for estimated returns. Generally, ethanol andrelated products are shipped FOB shipping point, based on written contractterms between Dakota Ethanol and it customers. Collectibility of revenue is reasonably assured based on historicalevidence of collectibility between Dakota Ethanol and its customers.  Interest income is recognized as earned.

*Costof Revenues*

The primarycomponents of cost of revenues from the production of ethanol and relatedco-product are corn expense, energy expense (natural gas and electricity), rawmaterials 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 and 2004. Shipping costs for ethanol were approximately $946,000 and $1,180,000for the years ended December 31, 2005 and 2004, respectively.Beginning in 2006, shipping costs for ethanol are deducted from the sales priceby the marketer, and thus are not specifically identifiable and are included innet revenues.

Shippingcosts incurred in the sale of distiller’s grains are classified in netrevenues.  Shipping costs on distiller’s grains were approximately$2,380,000, $3,045,000, and $3,018,000 for the years ended December 31, 2006,2005 and 2004, respectively.

*Generaland Administrative Expenses*

The primarycomponents of general and administrative expenses are management fee expenses,wages and benefits, professional fee expenses (legal and audit), and insuranceexpenses.

45

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*InventoryValuation*

Ethanol andrelated products are stated at net realizable value. Raw materials,work-in-process, and parts inventory are valued using methods which approximatethe lower of cost or market on the first-in, first-out method.

*Cash andCash Equivalents*

Cash and cashequivalents consist of demand accounts and other accounts that providewithdrawal privileges. Checks drawn in excess of bank balance are recorded as aliability on the balance sheet and as a financing activity on the statement ofcash flows.

Trade receivablesare uncollateralized customer obligations due under normal trade termsrequiring payment within fifteen days from the invoice date. Unpaid tradereceivables with invoice dates over thirty days old bear interest at 1.5percent per month.  Trade receivables arestated at the amount billed to the customer. Payments of trade receivables are allocated to the specific invoicesidentified on the customer’s remittance advice or, if unspecified, are appliedto the earliest unpaid invoices.

The carryingamount of trade receivables is reduced by a valuation allowance that reflectsmanagement’s best estimate of the amounts that will not be collected.Management reviews all trade receivable balances that exceed sixty days fromthe invoice date and based on an assessment of current creditworthiness,estimates the portion, if any, of the balance that will not be collected.

*DerivativeFinancial Instruments and Hedging Activities*

Dakota Ethanol enters into short-term cash grain,option and futures contracts as a means of securing corn for the ethanol plantand managing exposure to changes in commodity prices. All of Dakota Ethanol’sderivatives are designated as non-hedge derivatives, and accordingly arerecorded at fair value with changes in fair value recognized in net income.Although the contracts are considered economic hedges of specified risks, theyare 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 cash andfutures contracts and options.

Unrealized gains and losses related to derivative contracts related tocorn and natural gas purchases are included as a component of cost of revenuesand derivative contracts related to ethanol sales are included as a componentof revenues in the accompanying financial statements.  The fair values of derivative contracts arepresented on the accompanying balance sheet as derivative financialinstruments.

Dakota Ethanol hasrecorded a decrease to cost of revenues of $11,447,854 and $817,433 related toderivative contracts for the years ended December 31, 2006 and 2005,respectively.  Dakota Ethanol hasrecorded an increase to cost of revenues of $4,069,718 related to derivativecontracts for the year ended December 31, 2004. Dakota Ethanol has recorded an increase to revenues of $99,966 relatedto derivative contracts for the year ended December 31, 2006.

*Guarantee Premium*

The guarantee premium isamortized over the term of the related guarantee using the interest method ofamortization.

*Minority Interest*

Amounts recorded asminority interest on the balance sheet relate to the investment by Broin familymembers (hereinafter referred to as the minority members) in Dakota Ethanol,plus any allocation of minority income or minus any allocation of minoritydistributions or losses of Dakota Ethanol. Earnings and losses of DakotaEthanol 

46

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are allocated to themembers in proportion to the member’s capital accounts.  The minority interest was acquired by LakeArea Corn Processors, LLC effective at the close of business on June 30, 2006.

*Use ofEstimates*

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. Actualresults could differ from those estimates.

*Concentrationsof Credit Risk*

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

*Propertyand Equipment*

Property andequipment is stated at cost. Significant additions and betterments arecapitalized, while expenditures for maintenance, repairs and minor renewals arecharged to operations when incurred. Construction in progress includes the costof assets under construction, including capitalized interest and related costs,which have not been placed in service as of the balance sheet date.Depreciation on assets placed in service is computed using the straight-linemethod over estimated useful lives as follows:

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

 

Equipment relates to twogeneral categories: mechanical equipment and administrative and maintenanceequipment.  Mechanical equipmentgenerally relates to equipment for handling inventories and the production ofethanol and related products, with useful lives of 15 to 20 years, includingboilers, cooling towers, grain bins, centrifuges, conveyors, fermentationtanks, pumps and drying equipment. Administrative and maintenance equipment is equipment with useful livesof 5 to 15 years, including vehicles, computer systems, security equipment,testing devices and shop equipment.

The Company reviews itsproperty and equipment for impairment whenever events indicate that thecarrying amount of the asset may not be recoverable. An impairment loss isrecorded when the sum of the future cash flows is less than the carrying amountof the asset. An impairment loss is measured as the amount by which thecarrying amount of the asset exceeds its fair value.

*Goodwill*

Goodwill represents theexcess of purchase price over the underlying net assets of businessacquired.  Under Statement of FinancialAccounting Standards No. 142, goodwill is not amortized but is subject toannual impairment tests.  The Company hasperformed the required impairment tests, which have resulted in no impairmentadjustments.

*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, 2006, 2005, and 2004.

47

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*IncomeTaxes*

The Company istaxed as a limited liability company under the Internal Revenue Code. Theincome of the Company flows through to the members to be taxed at the memberlevel rather than the corporate level. Accordingly, the Company has no taxliability.

The subsidiarycompany, Dakota Ethanol, is organized as a limited liability company understate law. Dakota Ethanol has elected to be taxed as a partnership, and incomeand expense pass through to the Company and the minority owner.

*Environmental Liabilities*

Dakota Ethanol’soperations are subject to environmental laws and regulations adopted by variousgovernmental authorities in the jurisdiction in which it operates. These lawsrequire Dakota Ethanol to investigate and remediate the effects of the releaseor disposal of materials at its locations. Accordingly, Dakota Ethanol hasadopted policies, practices and procedures in the areas of pollution control, occupationalhealth and the production, handling, storage and use of hazardous materials toprevent material environmental or other damage, and to limit the financialliability which could result from such events. Environmental liabilities arerecorded when Dakota Ethanol’s liability is probable and the costs can bereasonably estimated.

*OperatingSegment*

The Company uses the “managementapproach” for reporting information about segments in annual and interimfinancial statements.  The managementapproach is based on the way the chief operating decision-maker organizessegments within a company for making operating decisions and assessingperformance.  Reportable segments arebased on products and services, geography, legal structure, managementstructure and any other manner in which management disaggregates acompany.  Based on the “managementapproach” model, the Company has determined that its business is comprised of asingle operating segment.

*RecentlyIssued Accounting Pronouncements*

There are norecently issued accounting pronouncements that have a material impact on theCompany.

**NOTE 3 -**             SHORT-TERM NOTEPAYABLE

On April 21, 2006,Dakota Ethanol renewed a revolving promissory note from First National Bank ofOmaha in the amount of $3,000,000. The note expires on April 20, 2007 and theamount available is subject to certain financial ratios. Interest on theoutstanding principal balances will accrue at the bank’s base rate (8.25percent at December 31, 2006). There is a commitment fee of 3/8 percent on theunused portion of the $3,000,000 availability. The note is collateralized bythe ethanol plant, its accounts receivable and inventories. On December 31,2006 and 2005, Dakota Ethanol had $0 outstanding and $3,000,000 available to bedrawn on the revolving promissory note.

**NOTE 4 -**             LONG-TERM NOTESPAYABLE

Dakota Ethanoloriginally had a $26,600,000 note payable to First National Bank of Omaha,Nebraska (the Bank) for the construction and permanent financing of the plant(Term Note 1). On July 29, 2002, Dakota Ethanol amended the construction loanagreement to create two term notes from its original Term Note 1, creating TermNotes 2 and 3, and converted Term Note 3 into Term Notes 4 and 5 on November 1,2002.

As part of thenote payable agreement, Dakota Ethanol is subject to certain restrictivecovenants establishing minimum reporting requirements, ratios, working capitaland net worth requirements. Dakota Ethanol is in compliance with the covenantsas of December 31, 2006. The note is collateralized by the ethanol plant, whichhad a net book value of approximately $35,700,000 on December 31, 2006, itsaccounts receivable and inventories. The 

48

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note is subject toprepayment penalties based on the cost incurred by the Bank to break its fixedinterest rate commitment.

The balance ofTerm Note 2 is due and payable in quarterly installments of $581,690 commencingOctober 1, 2002, through September 1, 2011. Interest on outstanding principalbalances will accrue at a rate of 9 percent. The other terms and conditions ofTerm Note 1 remain in effect.

Except as setforth below, the original terms and conditions of Term Note 1 apply to TermNotes 4 and 5.

The balance ofTerm Note 4 is due and payable in quarterly installments of $329,777 commencingJanuary 1, 2003, through September 1, 2011. The note was repaid in full onApril 3, 2006.

The balance ofTerm Note 5 is due and payable in quarterly installments of interest onlycommencing January 1, 2003, through September 1, 2011. Interest on outstandingprincipal balances will accrue at 50 basis points above the lender’s rate (8.25percent at December 31, 2006). This rate is subject to various adjustmentsbased on various levels of indebtedness to net worth, as defined by theagreement. Dakota Ethanol may elect to borrow any principal amount repaid onTerm Note 5 up to $5,000,000 subject to the terms of the agreement. ShouldDakota Ethanol elect to utilize this feature, the lender will assess an unusedcommitment fee of 3/8 percent on the unused portion of the $5,000,000. Inaddition, the bank draws the checking account balance to a minimum balance on adaily basis. The excess cash pays down or the shortfall is drawn upon Term Note5 as needed. On December 31, 2006, and 2005, Dakota Ethanol had $0 outstandingand $5,000,000 available to be drawn on Term Note 5.

The balance of thenotes payable as of December 31, 2006 and 2005 is as follows:
|                                             | ** ** | **2006**       | ** **    | **2005**   | ** ** |
|---------------------------------------------|------------|----------------|---------------|------------|------------|
|                                        |       |           |          |       |       |
| Note payable to  First National Bank, Omaha |       |           |          |       |       |
| Term Note 2                                 |       | **$**          | **8,229,093** |       | $          | 9,718,308 |   |
| Term Note 4                                 |       | **—**     |          | 410,472    |       |
| Term Note 5                                 |       | **—**     |          | —     |       |
|                                        |       | **8,229,093**  |          | 10,128,780 |       |
|                                        |       | ** **     |          |       |       |
| Less current  portion                       |       | **(1,630,674** | )             | (1,900,534 | )          |
|                                        |       | ** **     |          |       |       |
|                                        |       | **$**          | **6,598,419** |       | $          | 8,228,246 |   |

 

Minimum principalpayments for the next five years are as follows:
| Years Ending December 31, | ** ** | **Amount** | ** ** |
|------------------------------------------|------------|------------|------------|
| 2007                                     |       | $          | 1,630,674  |   |
| 2008                                     |       | 1,783,029  |       |
| 2009                                     |       | 1,952,996  |       |
| 2010                                     |       | 2,137,398  |       |
| 2011                                     |       | 724,996    |       |
|                                          |            |            |            |  |

 

**NOTE 5 -**             TAX INCREMENTFINANCING

During the year endedDecember 31, 2001, Dakota Ethanol received a grant of approximately $1,911,587from the proceeds of tax increment financing bonds issued by Lake County, SouthDakota. Under South Dakota law, proceeds from tax increment financing are not aliability of the entity (Dakota Ethanol), but are an obligation of the taxingdistrict issuing the bonds. The grant was provided to fund infrastructureimprovements to real property owned by Dakota Ethanol and will be repaid byLake County from the incremental increase in property taxes related to the 

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improvement of DakotaEthanol’s real property. The proceeds of the financing were recorded as areduction of the cost basis of the applicable property and equipment.

**NOTE 6 -**             EMPLOYEE BENEFITPLANS

Dakota Ethanolmaintains a 401(k) plan for the employees who meet the eligibility requirementsset forth in the plan documents. Dakota Ethanol matches a percentage of theemployees’ contributed earnings. Employer contributions to the plan totaledapproximately $26,000, $16,000 and $19,000 for the years ended December 31,2006, 2005 and 2004, respectively.

**NOTE 7 -**             INCOME TAXES

The differencebetween the financial statement basis and tax basis of assets is as follows:
| ** **                           | ** ** | **2006**        | ** **     | **2005**    | ** ** |
|--------------------------------------|------------|-----------------|----------------|-------------|------------|
| Financial  statement basis of assets |       | **$**           | **71,223,028** |        | $          | 42,946,122 |   |
| Less tax over  book depreciation     |       | **(19,155,939** | )              | (12,382,942 | )          |
| Derivative  financial instruments    |       | **(8,346,774**  | )              | 1,184,188   |       |
| TIF guarantee                        |       | **(274,615**    | )              | (359,206    | )          |
| Other book and  tax differences      |       | **121,580**     |           | 160,916     |       |
|                                 |       | ** **      |           |        |       |
| Tax basis of  assets                 |       | **$**           | **43,567,280** |        | $          | 31,549,078 |   |

 
| ** **                                | ** ** | **2006**     | ** **     | **2005** | ** ** |
|-------------------------------------------|------------|--------------|----------------|----------|------------|
|                                      |       |         |           |     |       |
| Financial  statement basis of liabilities |       | **$**        | **14,502,646** |     | $          | 15,697,883 |   |
| TIF guarantee  payable                    |       | **(385,812** | )              | (435,567 | )          |
| Other book and  tax differences           |       | **(72,337**  | )              | (54,800  | )          |
| Tax basis of  liabilities                 |       | **$**        | **14,044,497** |     | $          | 15,207,516 |   |

 

**NOTE 8 -**                  FAIR VALUE OFFINANCIAL INSTRUMENTS

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

The carryingamount of long-term obligations at December 31, 2006 of $8,614,905 had anestimated fair value of approximately $8,772,000 based on estimated interestrates for comparable debt.  The carryingamount and fair value were $10,564,347 and $10,812,000, respectively atDecember 31, 2005.

The Companybelieves the carrying amount of the short-term note payable approximates fairvalue due to the short maturity of the instrument.

The Companybelieves the fair value of agreements for the purchase of utilitiesapproximates the carrying value based on the variable terms of the agreementsthat follow local market rates.

**NOTE 9 -       COMMITMENTS,CONTINGENCIES AND AGREEMENTS**

The Company has enteredinto contracts and agreements regarding the operation and management of theethanol plant.

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Dakota Ethanol hasentered into agreements for the purchase of electricity and natural gas. Thefollowing agreements commenced on or about September 4, 2001.

Natural Gas – The agreement providesDakota Ethanol with a fixed transportation rate for natural gas for a ten-yearterm, renewable for ten-year terms. In addition, the agreement provides apricing structure for natural gas for a two-year period based on market rates.The agreement does not require minimum purchases of natural gas during theirinitial term.

Electricity – The agreement providesDakota Ethanol with electric service for a term of ten years, renewable forfive-year periods. The agreement sets rates for energy usage based on marketrates and requires a minimum purchase of electricity each month during theinitial term of the agreement.

Expenses related to the agreement for the purchase ofelectricity and natural gas were $13,227,165 $15,484,077, and $12,168,447 forthe years ended December 31, 2006, 2005 and 2004, respectively.

Minimum annual payments during the term of the electricity agreement areas follows:
| Years Ending December 31, | ** ** | **Amount** | ** ** |
|------------------------------------------|------------|------------|------------|
|                                     |       |       |       |
| 2007                                     |       | 303,600    |       |
| 2008                                     |       | 308,400    |       |
| 2009                                     |       | 308,400    |       |
| 2010                                     |       | 308,400    |       |
| 2011                                     |       | 205,600    |       |

 

Ethanol Fuel MarketingAgreement – Dakota Ethanol has an agreement with RenewableProducts Marketing Group, a joint venture of ethanol producers, for the sale,marketing, billing and receipt of payment and other administrative services forall ethanol produced by the plant effective January 1, 2006. The agreementexpires on March 31, 2007, and is automatically renewed for successive one-yearterms unless terminated 90 days prior to expiration.

Distiller’s GrainMarketing Agreement – Dakota Ethanol has an agreement withCommodity Specialists Company for the marketing of all distiller’s dried grainsproduced by the plant effective on December 1, 2005. The agreement expires onDecember 1, 2007, and is automatically renewed for successive one-year termsunless terminated 120 days prior to expiration. In addition, Commodity Specialists Company has entered into rail carleases for the shipment of Dakota Ethanol’s products.  Dakota Ethanol has agreed to reimburseCommodity Specialists Company for the costs related to the leases.  Costs related to the leases for the yearended December 31, 2006 were $824,374. There were no costs related to the leases for the year ended December31, 2005.

Minimum annual paymentsduring the term of the rail car lease agreement are as follows:
| Years Ending December 31, | ** ** | **Amount** | ** ** |
|------------------------------------------|------------|------------|------------|
|                                     |       |       |       |
| 2007                                     |       | 859,800    |       |
| 2008                                     |       | 859,800    |       |
| 2009                                     |       | 859,800    |       |
| 2010                                     |       | 788,150    |       |

 

Risk Management Agreement— Dakota Ethanol has an agreement with FCStone, LLC for the risk management andgrain procurement program related to corn and energy requirements of the plant.The 

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agreement expires onNovember 1, 2007, and is renewable for successive one-year terms unlessterminated four months prior to expiration.

Dakota Ethanolreceives an incentive payment from the United States Department of Agriculture(USDA) for the use of corn to produce ethanol. In accordance with the terms ofthis arrangement, revenue is recorded based on incremental production ofethanol compared to the prior year. No incentive income or expense was recordedfor the year ended December 31, 2006, as ethanol production decreased comparedto the prior year.  Incentive expense of$46,328 was recorded for the year ended December 31, 2005, as ethanolproduction decreased compared to the prior year and a refund of incentivesreceived earlier in the program year was owed. Incentive revenue of $348,207 was recorded for the years ended December31, 2004.  Dakota Ethanol’s participationin the program ended June 30, 2006 as the incentive expired on September 30,2006.

Dakota Ethanol alsoreceives an incentive payment from the State of South Dakota to produceethanol. In accordance with the terms of this arrangement, revenue is recordedbased on ethanol sold.  Incentive revenueof $775,910, $701,648, and $666,667 was recorded for the years ended December31, 2006, 2005 and 2004, respectively. Dakota Ethanol did not receive the annual maximum for the 2006 programyear due to budget constraints on the State of South Dakota program and willnot likely receive the annual maximum under the 2007 program year.

As of December 31, 2006,Dakota Ethanol is committed to purchasing 9.3 million bushels of corn on aforward contract basis through December 31, 2007, valued at approximately $27.3million. The corn purchase contracts represent 55% of the annual plant cornusage.  Further, Dakota Ethanol is committedto purchasing 414,000 mmBtu’s of natural gas for 2007, valued at approximately$2.7 million.  The natural gas purchasesrepresent approximately 26% of the annual plant requirements.

The followingcommitments, contingencies and agreements are with related parties.

Each capital unitholder has entered into a corn delivery agreement with the Company. For eachunit owned, 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. Thedelivery agreements commence at the discretion of the Company to coincide withthe completion and operation of the plant. Members can opt out of delivery ifthey meet certain criteria and are approved by the Board of Managers. Based onthe number of units outstanding, 3,800,000 bushels of corn will be deliveredannually by the unit holders. This represents approximately 27 percent of thecorn required for the operation of the plant at its 40,000,000 gallon capacity.Purchases of corn from corn delivery agreements and cash contracts from theCompany’s stockholders totaled approximately $8,034,000, $7,090,000 and$10,620,000 for the years ended December 31, 2006, 2005 and 2004, respectively,of which $1,156,000, $621,000 and $442,000 was recorded as a liability atDecember 31, 2006, 2005 and 2004, respectively.

The Company andthe former minority members of Dakota Ethanol, or parties related to the formerminority members through common ownership, have entered into the followingagreements:

Ethanol MarketingContract – Dakota Ethanol had an agreement with EthanolProducts, LLC, a joint venture of ethanol producers, for the sale, marketing,billing and receipt of payment and other administrative services for allethanol produced by the plant. In the event Ethanol Products, LLC was unable tocollect from their customer, Dakota Ethanol was charged for the applicable baddebt.  Dakota Ethanol terminated theagreement effective January 1, 2006.

Distiller’s GrainsMarketing Contract – Dakota Ethanol had an agreement withDakota Gold Marketing (formerly known as Dakota Commodities) for the marketingof all distiller’s grains produced by the plant. The agreement provided for anagency relationship in that Dakota Gold Marketing did not take title to thedistiller’s grains, but acted as a broker on behalf of Dakota Ethanol.  Dakota Ethanol terminated the agreementeffective December 1, 2005.

Management Agreement– Dakota Ethanol had an agreement with Broin Management, LLC for the managementand operation of the ethanol plant. In exchange for the services, BroinManagement received 

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an annual fee plus anincentive bonus of 5 percent of net income. The annual fee was adjusted each yearfor changes in the consumer price index. The management agreement included thesalary and benefits of the plant general manager and plant technical managerand certain other services related to operation of the ethanol plant.  Dakota Ethanol terminated the agreementeffective January 1, 2006.

Corn Price RiskManagement Agreement – Dakota Ethanol had an agreement withBroin Management, LLC for the hedge and price risk management related to cornrequirements of the plant.  DakotaEthanol terminated the agreement effective January 1, 2006.

Information TechnologyManagement – Dakota Ethanol had an agreement with Broin andAssociates, Inc., for information technology and systems management. DakotaEthanol terminated the agreement effective October 1, 2005.

Dakota Ethanol had anagreement with Broin and Associates, Inc., for the purchase of certain softwareand data management services. The annual fee for the management service wasadjusted each year for changes in the consumer price index.  Dakota Ethanol terminated the agreementeffective January 1, 2006.

Construction Contract– Dakota Ethanol had an agreement with Broin and Associates, Inc., for thedesign and construction of process equipment and environmental controlequipment. The total value of the project is approximately $740,000. Theproject began in November of 2004 and was completed in 2005.

Revenues and expensesrelated to the above agreements with related parties are as follows:
|                                        | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------------|------------|
| ** **                             | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Ethanol sales                          |       | $                                           | —     |   | $ | 69,125,699 |   | $ | 71,648,488 |   |
| Management fees  expense               |       | —                                      |       | 1,071,338 |   | 903,884 |   |
| Marketing fees expense  - all products |       | —                                      |       | 1,229,662 |   | 691,076 |   |
|                                        |            |                                             |            |  |  |  |  |  |  |  |

 

Environmental– During the year ended December 31, 2002, management became aware that the ethanolplant may have exceeded certain emission levels allowed by their operatingpermit. The Company has disclosed the situation to the appropriate stateregulatory agency and has taken steps to reduce the emissions to acceptablelevels. Management has not accrued a liability for environmental remediationcosts since the costs, if any, cannot be estimated.

**NOTE 10 -**           RELATED PARTYTRANSACTIONS

Purchases ofsupplies and chemicals from related parties totaled approximately $54,000, and$145,000 for the years ended December 31, 2005 and 2004, respectively.  The Company has an agreement with Dakota GoldMarketing for the use of rail cars to transport distiller’s grains. Theagreement provides a flat rate per car, per shipment. Fees under the rail caragreement were approximately $214,000 and $218,000 for the years ended December31, 2005 and 2004, respectively.  DakotaEthanol terminated the agreements effective December 1, 2005.

The amount owed toBroin Management, LLC related to the management agreement as of December 31,2005 was $97,462.

Additionalagreements with related parties are included in Note 9.

**NOTE 11 -**           TIF BOND GUARANTEE

During December2003, Dakota Ethanol entered into an agreement to guarantee a bond issued byLake County, South Dakota. The bond issue was in conjunction with the refundingof the tax increment financing (TIF) bond 

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issued by LakeCounty in 2001, of which Dakota Ethanol was the recipient of the proceeds.During 2003, Lake County became aware that the taxes collected based on the incrementaltax would not be sufficient to cover the debt service of the 2001 bond issue.Based on the aforementioned deficiency and changes in interest rate duringDecember of 2003, Lake County refunded the 2001 bond issue replacing it withtwo separate bonds. A tax-exempt bond in the amount of $824,599 and a taxablebond in the amount of $1,323,024 were issued. As a part of the refunding,Dakota Ethanol entered into the agreement to guarantee the taxable bond issue.The taxes levied on Dakota Ethanol’s property will first go towards thesemiannual debt service of the tax-exempt bonds and any remaining taxes will beused for the debt service of the taxable bonds. Dakota Ethanol guarantees anyshortfall in debt service for the taxable bonds. The guarantee expires inDecember of 2018.

The maximum amountof estimated future payments on the taxable bond debt service is $1,826,602 asof December 31, 2006. The carrying amount of the guarantee liability on DakotaEthanol’s balance sheet is $385,812, which represents the estimated shortfallbetween the taxable bond amount and the amount of taxes estimated to becollected on Dakota Ethanol’s property.

Estimatedmaturities of the guarantee for the next five years are as follows:

| Years Ending December 31, | ** ** | **Amount** | ** ** |
|------------------------------------------|------------|------------|------------|
|                                     |       |       |       |
| 2007                                     |       | 62,536     |       |
| 2008                                     |       | 62,319     |       |
| 2009                                     |       | 60,678     |       |
| 2010                                     |       | 52,485     |       |
| 2011                                     |       | 52,382     |       |

 

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

Management has appliedthe guidance from Financial Accounting Standards Board Interpretation No. 45,(FIN 45) related to accounting for guarantee obligations. Management hasdetermined the probability weighted present value of the estimated cash flowsrelated to the guarantee obligation and recorded a liability and related assetof $385,812 as of December 31, 2006.

Estimated amortization ofthe guarantee premium for the next five years is as follows:

| 2007 |   | 72,641 |   |
|------|--------|--------|--------|
| 2008 |   | 60,710 |   |
| 2009 |   | 48,841 |   |
| 2010 |   | 37,390 |   |
| 2011 |   | 27,375 |   |

 

**NOTE 12 -**           MINORITY INTERESTPURCHASE

On June 30,2006, the Company executed an Assignment Agreement with members of the Broinfamily for the purchase of all of the outstanding minority interest (11.898%)in Dakota Ethanol. The Company purchased the minority interest under the rightof first refusal when the Broins negotiated to sell their interest to a thirdparty to allow the company to take advantage of prevailing marketconditions.  The purchase transaction closedon 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 throughJune 30, 2006. The total amount paid to the Broins was $19,351,776.

In order to fundour buyout of the minority interest, the Company entered into a credit facilityof $19,100,000 with our senior lender, First National Bank of Omaha. The creditfacility was a 120 day term note with a principal 

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balance of$19,100,000 accruing interest at a variable rate based on the Bank’s base rateas published from time to time as its national base rate. The entire balance ofthe note was repaid from operating funds prior to September 30, 2006.

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

The totalacquisition costs for the minority interest, including purchase price, legaland closing fees, was $19,376,369. Allocation of the purchase 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.

The followingselected pro forma information from the statements of operations is preparedassuming the Company had acquired the minority interest at the beginning of theyears presented:

|                                      | ** ** | **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 13 -**           SUBSEQUENT EVENTS

During February2007, the Company declared and paid a distribution to its members of$5,924,000, or $.20 per capital unit, with a distribution date of February 7,2007.

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**NOTE 14 -**           QUARTERLY FINANCIALREPORTING (UNAUDITED)

Summary quarterly resultsare as follows:
| ** **                                  | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|---------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                  | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| 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        |       |
|                                        |       |        |       |        |       |        |       |        |       |
| Year ended  December 31, 2004               |       |        |       |        |       |        |       |        |       |
| Total revenues                              |       | $           | 18,915,005 |        | $          | 21,591,665  |       | $           | 21,068,181 |   | $ | 22,857,635 |   |
| Gross profit (loss)                         |       | 5,047,916   |       | (969,415    | )          | 1,322,758   |       | 7,294,867   |       |
| Income (loss) from operations               |       | 4,138,269   |       | (1,528,232  | )          | 679,065     |       | 6,349,000   |       |
| Net income (loss)                           |       | 3,404,201   |       | (1,605,629  | )          | 368,859     |       | 5,356,114   |       |
| Basic and  diluted earnings (loss) per unit |       | 0.11        |       | (0.05       | )          | 0.01        |       | 0.18        |       |

 

The abovequarterly financial data is unaudited, but in the opinion of management, alladjustments necessary for the fair presentation of the selected data for theseinterim periods presented have been included.

**ITEM 9.****                  CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.**

Wedecided to change our independent registered public accountants, andaccordingly dismissed EideBailly, LLP (“Eide Bailly”) on January 8, 2007.  Eide Bailly’s reports on the Company’sfinancial statements from our inception, including the past two years, did notcontain any adverse opinion or disclaimer of opinion, nor were they qualifiedor modified as to uncertainty, audit scope, or accounting principles.

Thedecision to change independent registered public accountants was recommendedand approved our audit committee.

Therewere no disagreements with Eide Bailly on any matter of accounting principlesor practices, 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.

Wehave provided Eide Bailly with the contents of this disclosure and Eide Baileyissued a letter indicating their agreement with this disclosure which was filedwith the Commission on a Form 8-K on January 10, 2007.

OnJanuary 8, 2007, we engaged McGladrey & Pullen, LLP as our new independentregistered public accountant to audit our financial statements.  This engagement was approved by our auditcommittee.

**ITEM 9A.****                CONTROLSAND PROCEDURES.**

Ourmanagement, including our President and Chief Executive Officer (the principalexecutive officer), Douglas Van Duyn, along with our Chief Financial Officer(the principal financial officer), Brian Woldt, have 

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reviewed andevaluated the effectiveness of our disclosure controls and procedures (asdefined in Rule 13a-15(e) under the Securities Exchange Act of 1934, asamended) as of December 31, 2006.  Based upon this review and evaluation,these officers have concluded that our disclosure controls and procedures areeffective to ensure that information required to be disclosed in the reportsthat we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periodsrequired by the forms and rules of the Securities and Exchange Commission; andto ensure that the information required to be disclosed by an issuer in the reportsthat it files or submits under the Exchange Act is accumulated and communicatedto our management including our principal executive and principal financialofficers, or persons performing similar functions, as appropriate to allowtimely decisions regarding required disclosure.

Ourmanagement, including our principal executive officer and principal financialofficer, have reviewed and evaluated any changes in our internal control overfinancial reporting that occurred as of December 31, 2006 and there has been nochange that has materially affected or is reasonably likely to materiallyaffect our internal control over financial reporting.

**ITEM 9B.****               OTHERINFORMATION.**

None.

**PART III****.**

**ITEM****10.****                                           MANAGERS****AND****EXECUTIVE OFFICERS OFTHE****REGISTRANT AND CORPORATE GOVERNANCE**

The information required by this Item is incorporatedby reference to the definitive proxy statement for our 2007 Annual Meeting ofMembers to be filed with the Securities and Exchange Commission within 120 daysafter the end of our 2006 fiscal year. This proxy statement is referred to in this report as the 2007 ProxyStatement.

**ITEM 11.               EXECUTIVE COMPENSATION**

The information required by this Item is incorporatedby reference to the 2007 Proxy Statement.

**ITEM 12. ****             SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED MEMBERMATTERS**

The information required by this Item is incorporatedby reference to the 2007 Proxy Statement.

**ITEM 13. ****                                        CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE**

The information required by this Item is incorporatedby reference to the 2007 Proxy Statement.

**ITEM 14.               PRINCIPAL ACCOUNTING FEES ANDSERVICES**

The information required by this Item is incorporatedby reference to the 2007 Proxy Statement.

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**PART IV.**

**ITEM 15.****                 EXHIBITS****AND FINANCIAL STATEMENTSCHEDULES****.**

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

(a)   Thefollowing are filed as part of this report:

(1)            Financial Statements —Reference is made to the “Index to Financial Statements” of Lake Area CornProcessors, LLC located under Part II Item 8 of this report for a list of thefinancial statements and schedules for the fiscal year ended December 31, 2006,included herein.

(2)            All supplemental schedulesare omitted because of the absence of conditions under which they are requiredor because the information is shown in the Consolidated Financial Statements ornotes thereto.

(3)            The exhibits we have filedherewith or incorporated by reference herein are identified in theExhibit Index set forth below.

(b)          See Item 15(a)(3).

(c)   Notapplicable.

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.    |
|        |       |                                                                                                                                               |       |                 |       |                                                                                                                                               |
| 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.   |
|        |       |                                                                                                                                               |       |                 |       |                                                                                                                                               |
| 10.1        |       | Addendum to Water Purchase Agreement dated February  28, 2007 between Big Sioux Community Water Systems, Inc. and Dakota Ethanol,  LLC.            |       | X                    |       | Filed herewith                                                                                                                                     |
|        |       |                                                                                                                                               |       |                 |       |                                                                                                                                               |
| 10.2        |       | 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. |
|        |       |                                                                                                                                               |       |                 |       |                                                                                                                                               |
| 10.3        |       | 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. |

 

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| 10.4   |   | 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.      |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                    |   |   |   |                                                                                                                                                 |
| 10.5   |   | 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.   |
|   |   |                                                                                                                                    |   |   |   |                                                                                                                                                 |
| 10.6   |   | 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.   |
|   |   |                                                                                                                                    |   |   |   |                                                                                                                                                 |
| 10.7   |   | 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.   |
|   |   |                                                                                                                                    |   |   |   |                                                                                                                                                 |
| 10.8   |   | 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.     |
|   |   |                                                                                                                                    |   |   |   |                                                                                                                                                 |
| 10.9   |   | 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. |
|   |   |                                                                                                                                    |   |   |   |                                                                                                                                                 |
| 10.10  |   | 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. |
|   |   |                                                                                                                                    |   |   |   |                                                                                                                                                 |
| 10.11  |   | 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.          |
|   |   |                                                                                                                                    |   |   |   |                                                                                                                                                 |
| 10.12  |   | 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.      |
|   |   |                                                                                                                                    |   |   |   |                                                                                                                                                 |
| 10.13  |   | 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 therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
|                            |   | LAKE AREA CORN PROCESSORS, LLC                                         |
|----------------------------|--------|------------------------------------------------------------------------|
| Date:  March 30, 2007 |   | /s/ Douglas Van Duyn                                                   |
|                       |   | Douglas Van Duyn                                                       |
|                       |   | President and Chief Executive Officer   (Principal Executive Officer)  |
|                       |   |                                                                   |
| Date:  March 30, 2007 |   | /s/ Brian Woldt                                                        |
|                       |   | Brian Woldt                                                            |
|                       |   | Chief Financial Officer   (Principal Financial and Accounting Officer) |

 

Pursuant to therequirements of the Securities Exchange Act, this report has been signed belowby the following persons on behalf of the registrant and in the capacities andon the dates indicated.
| Date: March 30, 2007  |   | /s/ Douglas Van Duyn              |
|-----------------------|--------|-----------------------------------|
|                  |   | Douglas Van Duyn, CEO and Manager |
|                  |   |                              |   |   |
|                  |   |                              |   |   |
| Date: March 30,  2007 |   | /s/ Brian Woldt                   |
|                  |   | Brian Woldt, CFO and Manager      |
|                  |   |                              |
|                  |   |                              |
| Date: March 30,  2007 |   | /s/ Randy Hansen                  |
|                  |   | Randy Hansen, Manager             |
|                  |   |                              |
|                  |   |                              |
| Date: March 30,  2007 |   | /s/ Dale Schut                    |
|                  |   | Dale Schut, Manager               |
|                  |   |                              |   |   |
|                  |   |                              |   |   |
| Date: March 30,  2007 |   | /s/ Ronald Alverson               |
|                  |   | Ronald Alverson, Manager          |
|                  |   |                              |   |   |
|                  |   |                              |   |   |
| Date: March 30,  2007 |   | /s/ Dale Thompson                 |
|                  |   | Dale Thompson, Manager            |
|                  |   |                              |   |   |
|                  |   |                              |   |   |
| Date: March 30,  2007 |   | /s/ Todd Brown                    |
|                  |   | Todd Brown, Manager               |

 

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