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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

# **FORM 10-Q**

 

**x****       Quarterlyreport pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934 for the quarterly period ended June 30, 2008**

 

**OR**

 

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

 

**COMMISSIONFILE NUMBER 001-32922**

 

**AVENTINE RENEWABLE ENERGY HOLDINGS, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                             | ** ** | **05-0569368**                    |
|------------------------------------------|------------|-----------------------------------|
| (State of Incorporation)                 |       | (IRS Employer Identification No.) |
|                                     |       |                              |
| **120 North Parkway**                    | ** ** | ** **                        |
| **Pekin, Illinois**                      | ** ** | **61554**                         |
| (Address of Principal Executive Offices) |       | (Zip Code)                        |

 

**(309) 347-9200**

(Registrant’s Telephone Number, including Area Code)

 

Indicate by checkmarkwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

YES  x  NO  o

 

Indicate by checkmarkwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer”,“accelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange Act.  (Check one):

 
| Large  accelerated filer o | Accelerated filer x | Non-accelerated filer o  (Do not check if a smaller  reporting company) |   Smaller  reporting company o |
|----------------------------|--------------------------|-------------------------------------------------------------------------|------------------------------------------|

 

Indicate by checkmarkwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  YES o  NO x

 

Indicatethe number of shares outstanding of each class of Common Stock, as of thelatest practicable date

 

| **Class**                      | ** ** | **Outstanding  as of August 5, 2008** |
|--------------------------------|------------|--------------------------------------------|
| Common Stock, $0.001 Par Value |       | 41,970,988 Shares                          |

 

 

 

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# **FORM 10-Q**

 

**QUARTERLY REPORT**

 

**TABLE OF CONTENTS**

 
| ** ** | ** **                                                                                                                          | ** ** | **Page No.** |
|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|
|       |                                                                                                                                |       |              |
| ** ** | **PART I**                                                                                                                     | ** ** | ** **        |
| ** ** | ** **                                                                                                                          | ** ** | ** **        |
| Item 1.    | Financial  Statements                                                                                                               |       |              |
|       | Condensed  Consolidated Statements of Operations (Unaudited) -  Three-month and six-month periods ended June 30, 2008 and 2007 |       | 1                 |
|       | Condensed  Consolidated Balance Sheets – June 30, 2008  (Unaudited) and December 31, 2007                            |       | 2                 |
|       | Condensed  Consolidated Statements of Cash Flows (Unaudited) -  Six-month period ended June 30, 2008 and 2007                  |       | 3                 |
|       | Notes  to Unaudited Condensed Consolidated Financial Statements                                                                     |       | 4                 |
|       |                                                                                                                                |       |              |
| Item 2.    | Management’s  Discussion and Analysis of Financial  Condition and Results of Operations                                        |       | 22                |
|       |                                                                                                                                |       |              |
| Item 3.    | Quantitative  and Qualitative Disclosures About Market Risk                                                                         |       | 37                |
|       |                                                                                                                                |       |              |
| Item 4.    | Controls and  Procedures                                                                                                            |       | 39                |
|       |                                                                                                                                |       |              |
| ** ** | **PART II**                                                                                                                    | ** ** | ** **        |
| ** ** | ** **                                                                                                                          | ** ** | ** **        |
| Item 1.    | Legal  Proceedings                                                                                                                  |       | 40                |
|       |                                                                                                                                |       |              |
| Item 1A.   | Risk  Factors                                                                                                                       |       | 40                |
|       |                                                                                                                                |       |              |
| Item 2.    | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                        |       | 41                |
|       |                                                                                                                                |       |              |
| Item 3.    | Defaults Upon  Senior Securities                                                                                                    |       | 41                |
|       |                                                                                                                                |       |              |
| Item 4.    | Submission  of Matters to a Vote of Security Holders                                                                                |       | 41                |
|       |                                                                                                                                |       |              |
| Item 5.    | Other  Information                                                                                                                  |       | 42                |
|       |                                                                                                                                |       |              |
| Item 6.    | Exhibits                                                                                                                            |       | 42                |

 

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**PART I.                 FINANCIAL INFORMATION**

 

**Item 1.                    FinancialStatements**

 

**AventineRenewable Energy Holdings, Inc. and Subsidiaries**

**Condensed Consolidated Statements of Operations**

(Unaudited)

 
| ** **                                                              | ** ** | **Three months ended June 30,** | ** **  | **Six months ended June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------------------------|-------------|---------------------------------------------------|------------|
| **(In thousands except per share amounts)**    | ** ** | **2008**                                            | ** **  | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                              | ** ** | ** **                                          | ** **  | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                               | ** ** | **$**                                               | **601,591** |                                              | $          | 394,914 | ** ** | **$** | **1,111,539** |   | $ | 831,576 |   |
| Cost of goods  sold                                                     | ** ** | **568,731**                                         |        | 367,485                                           | ** ** | **1,054,596** |   | 775,732 |   |
| Gross profit                                                            | ** ** | **32,860**                                          |        | 27,429                                            | ** ** | **56,943** |   | 55,844 |   |
| Selling, general  and administrative expenses                           | ** ** | **10,139**                                          |        | 8,779                                             | ** ** | **19,008** |   | 18,377 |   |
| Loss related to  auction rate securities                                | ** ** | **8,476**                                           |        | —                                            | ** ** | **31,601** |   | — |   |
| Other (income)                                                          | ** ** | **(1,617**                                          | **)**       | (514                                              | )          | **(2,394** | **)** | (678 | ) |
| Operating income                                                        | ** ** | **15,862**                                          |        | 19,164                                            | ** ** | **8,728** |   | 38,145 |   |
| Other income  (expense):                                                |       |                                                |        |                                              |       |   |   |   |   |
| Interest income                                                         | ** ** | **506**                                             |        | 4,167                                             | ** ** | **2,745** |   | 5,535 |   |
| Interest expense                                                        | ** ** | **(1,125**                                          | **)**       | (7,021                                            | )          | **(3,516** | **)** | (7,357 | ) |
| Other  non-operating income (loss)                                      | ** ** | **(14,121**                                         | **)**       | 2,139                                             | ** ** | **(12,253** | **)** | 6,008 |   |
| Minority  interest                                                      | ** ** | **314**                                             |        | (725                                              | )          | **505** |   | (1,243 | ) |
| Income (loss)  before income taxes                                      | ** ** | **1,436**                                           |        | 17,724                                            | ** ** | **(3,791** | **)** | 41,088 |   |
| Income tax  expense                                                     | ** ** | **3,354**                                           |        | 5,117                                             | ** ** | **8,922** |   | 13,541 |   |
| Net income  (loss)                                                      | ** ** | **$**                                               | **(1,918**  | **)**                                             | $          | 12,607 | ** ** | **$** | **(12,713** | **)** | $ | 27,547 |   |
|                                                                    |       |                                                |        |                                              |       |   |   |   |   |
| *Per  share data:*                                                      |       |                                                |        |                                              |       |   |   |   |   |
| Income (loss)  per common share – basic:                           | ** ** | **$**                                               | **(0.05**   | **)**                                             | $          | 0.30 | ** ** | **$** | **(0.30** | **)** | $ | 0.66 |   |
| Basic weighted  average number of common shares                         | ** ** | **41,971**                                          |        | 41,912                                            | ** ** | **41,905** |   | 41,861 |   |
|                                                                    |       |                                                |        |                                              |       |   |   |   |   |
| Income (loss)  per common share – diluted:                         | ** ** | **$**                                               | **(0.05**   | **)**                                             | $          | 0.30 | ** ** | **$** | **(0.30** | **)** | $ | 0.65 |   |
| Diluted weighted  average number of common and common equivalent shares | ** ** | **41,999**                                          |        | 42,649                                            | ** ** | **41,932** |   | 42,554 |   |

 

*Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.*

 

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**AventineRenewable Energy Holdings, Inc. and Subsidiaries**

**Condensed Consolidated Balance Sheets**

 
| **(In thousands except share amounts)**                                                                                                                                                                                                                                           | ** ** | **June 30,  2008** | ** **  | **December 31,  2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|-------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                            | ** ** | **(Unaudited)**         | ** **  | ** **                  | ** ** |
| ** **                                                                                                                                                                                                                                                                                            |       |                    |        |                        |       |
| **Assets**                                                                                                                                                                                                                                                                                            |       |                    |        |                        |       |
| Current assets                                                                                                                                                                                                                                                                                        |       |                    |        |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                                                                                                            | ** ** | **$**                   | **114,354** |                        | $          | 17,171 |   |
| Short-term  investments                                                                                                                                                                                                                                                                               | ** ** | **—**              |        | 211,500                     |       |
| Accounts  receivable                                                                                                                                                                                                                                                                                  | ** ** | **84,158**              |        | 73,058                      |       |
| Inventories                                                                                                                                                                                                                                                                                           | ** ** | **100,951**             |        | 81,488                      |       |
| Income tax  receivable                                                                                                                                                                                                                                                                                | ** ** | **2,509**               |        | 11,962                      |       |
| Prepaid expenses  and other current assets                                                                                                                                                                                                                                                            | ** ** | **9,674**               |        | 12,816                      |       |
| Total current  assets                                                                                                                                                                                                                                                                                 | ** ** | **311,646**             |        | 407,995                     |       |
| Property, plant  and equipment, net                                                                                                                                                                                                                                                                   | ** ** | **104,893**             |        | 111,867                     |       |
| Construction in  process                                                                                                                                                                                                                                                                              | ** ** | **353,553**             |        | 226,410                     |       |
| Net deferred tax  assets                                                                                                                                                                                                                                                                              | ** ** | **—**              |        | 1,196                       |       |
| Other assets                                                                                                                                                                                                                                                                                          | ** ** | **15,156**              |        | 14,717                      |       |
| Total assets                                                                                                                                                                                                                                                                                          | ** ** | **$**                   | **785,248** |                        | $          | 762,185 |   |
|                                                                                                                                                                                                                                                                                                  | ** ** | ** **              |        |                        |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                                                                                                                        |       |                    |        |                        |       |
| Current  liabilities                                                                                                                                                                                                                                                                                  |       |                    |        |                        |       |
| Accounts payable                                                                                                                                                                                                                                                                                      | ** ** | **$**                   | **118,623** |                        | $          | 91,871 |   |
| Accrued interest                                                                                                                                                                                                                                                                                      | ** ** | **7,500**               |        | 7,500                       |       |
| Accrued  liabilities                                                                                                                                                                                                                                                                                  | ** ** | **3,578**               |        | 3,625                       |       |
| Other current  liabilities                                                                                                                                                                                                                                                                            | ** ** | **4,602**               |        | 1,622                       |       |
| Total current  liabilities                                                                                                                                                                                                                                                                            | ** ** | **134,303**             |        | 104,618                     |       |
| Senior unsecured  10% notes due April 2017                                                                                                                                                                                                                                                       | ** ** | **300,000**             |        | 300,000                     |       |
| Minority  interest                                                                                                                                                                                                                                                                                    | ** ** | **9,327**               |        | 9,832                       |       |
| Net deferred tax  liabilities                                                                                                                                                                                                                                                                         | ** ** | **1,371**               |        | —                      |       |
| Other long-term  liabilities                                                                                                                                                                                                                                                                          | ** ** | **3,780**               |        | 3,864                       |       |
| Total  liabilities                                                                                                                                                                                                                                                                                    | ** ** | **448,781**             |        | 418,314                     |       |
| Stockholders’  equity                                                                                                                                                                                                                                                                            |       |                    |        |                        |       |
| Common stock,  par value $0.001 per share; 185,000,000 shares authorized; 41,970,988 and  41,734,223 shares issued and outstanding as of June 30, 2008 and  December 31, 2007, respectively, net of 21,548,640 shares held in  treasury as of June 30, 2008 and December 31, 2007 | ** ** | **42**                  |        | 42                          |       |
| Preferred stock,  50,000,000 shares authorized, no shares issued or outstanding                                                                                                                                                                                                                       | ** ** | **—**              |        | —                      |       |
| Additional  paid-in capital                                                                                                                                                                                                                                                                           | ** ** | **284,518**             |        | 279,218                     |       |
| Retained  earnings                                                                                                                                                                                                                                                                                    | ** ** | **52,222**              |        | 64,935                      |       |
| Accumulated  other comprehensive loss                                                                                                                                                                                                                                                                 | ** ** | **(315**                | **)**       | (324                        | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                                                                      | ** ** | **336,467**             |        | 343,871                     |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                                                                      | ** ** | **$**                   | **785,248** |                        | $          | 762,185 |   |

 

*The accompanying notes are an integral part ofthese condensed consolidated financial statements.*

 

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**AventineRenewable Energy Holdings, Inc. and Subsidiaries**

**Condensed Consolidated Statements of Cash Flows**

(Unaudited)

 
| ** **                                                                                | ** ** | **Six Months Ended June 30,** | ** **  |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------------------|-------------|
| **(In thousands)**                                                                   | ** ** | **2008**                                          | ** **  | **2007** | ** ** |
|                                                                                      |       |                                              |        |   |   |
| **Operating  Activities**                                                                 |       |                                              |        |   |   |
| Net income  (loss)                                                                        | ** ** | **$**                                             | **(12,713** | **)** | $ | 27,547 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |                                              | ** **  |   |   |
| Loss related to  auction rate securities                                                  | ** ** | **31,601**                                        | ** **  | — |   |
| Depreciation and  amortization                                                            | ** ** | **7,124**                                         | ** **  | 6,205 |   |
| Minority  interest                                                                        | ** ** | **(505**                                          | **)**       | 1,243 |   |
| Stock-based  compensation expense                                                         | ** ** | **3,881**                                         | ** **  | 3,345 |   |
| Deferred income  tax                                                                      | ** ** | **2,567**                                         | ** **  | 1,373 |   |
| Other                                                                                     | ** ** | **(352**                                          | **)**       | 265 |   |
| Changes in  operating assets and liabilities:                                             |       |                                              | ** **  |   |   |
| Accounts  receivable, net                                                                 | ** ** | **(11,100**                                       | **)**       | 30,832 |   |
| Inventories                                                                               | ** ** | **(19,463**                                       | **)**       | (7,872 | ) |
| Accounts payable  and other liabilities                                                   | ** ** | **29,685**                                        | ** **  | (26,787 | ) |
| Other changes in  operating assets and liabilities                                        | ** ** | **11,561**                                        | ** **  | 8,851 |   |
| Net cash  provided by operating activities                                                | ** ** | **42,286**                                        | ** **  | 45,002 |   |
|                                                                                      | ** ** | ** **                                        | ** **  |   |   |
| **Investing  Activities**                                                                 |       |                                              | ** **  |   |   |
| Additions to  property, plant and equipment, net                                          | ** ** | **(129,555**                                      | **)**       | (78,354 | ) |
| Investment in  short-term securities                                                      | ** ** | **—**                                        |        | (242,848 | ) |
| Sale of  short-term securities                                                            | ** ** | **179,899**                                       |        | — |   |
| Indemnification  proceeds                                                                 | ** ** | **3,039**                                         |        | — |   |
| Proceeds from  the sale of property, plant and equipment                                  | ** ** | **14**                                            |        | — |   |
| Net cash  provided by (used for) investing activities                                     | ** ** | **53,397**                                        |        | (321,202 | ) |
|                                                                                      | ** ** | ** **                                        |        |   |   |
| **Financing  Activities**                                                                 |       |                                              |        |   |   |
| Proceeds from  issuance of senior unsecured notes                                         | ** ** | **—**                                        |        | 300,000 |   |
| Payment of debt  issuance costs                                                           | ** ** | **—**                                        |        | (8,221 | ) |
| Proceeds from  stock option exercises                                                     | ** ** | **—**                                        |        | 200 |   |
| Proceeds from  the issuance of common stock                                               | ** ** | **1,500**                                         |        | — |   |
| Distributions to  minority shareholders                                                   | ** ** | **—**                                        |        | (1,511 | ) |
| Net cash  provided by financing activities                                                | ** ** | **1,500**                                         |        | 290,468 |   |
| Net increase in  cash and cash equivalents                                                | ** ** | **97,183**                                        |        | 14,268 |   |
| Cash and cash  equivalents at beginning of period                                         | ** ** | **17,171**                                        |        | 29,791 |   |
| Cash and cash  equivalents at end of period                                               | ** ** | **$**                                             | **114,354** |   | $ | 44,059 |   |

 

*The accompanying notes are anintegral part of these condensed consolidated financial statements.*

 

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**Aventine Renewable Energy Holdings, Inc. and Subsidiaries**

**Notes to UnauditedCondensed Consolidated Financial Statements**

 

**(1)****                              ****Basis of Reporting for InterimFinancial Statements**

 

Theaccompanying unaudited condensed consolidated financial statements include theaccounts of Aventine Renewable Energy Holdings, Inc. and its subsidiaries,which are collectively referred to as “Aventine”,  the “Company”, “we”, “our” or “us”, unlessthe context otherwise requires.  Allsignificant intercompany transactions have been eliminated in consolidation.

 

We have prepared theunaudited condensed consolidated financial statements included herein pursuantto the rules and regulations of the Securities and ExchangeCommission.  Certain information andfootnote disclosures normally included in statements prepared in accordancewith generally accepted accounting principles have been omitted pursuant tosuch rules and regulations, although we believe that the disclosures areadequate to make the information presented not misleading.  These financial statements should be read inconjunction with the financial statements and notes thereto included in ourAnnual Report on Form 10-K for the year ended December 31, 2007.

 

Theaccompanying unaudited condensed consolidated financial statements presentedherewith reflect all adjustments (consisting of only normal and recurringadjustments) which, in the opinion of management, are necessary for a fairpresentation of the results of operations for the three and six month periodsended June 30, 2008 and 2007.  Theresults of operations for interim periods are not necessarily indicative ofresults to be expected for an entire year.

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer materially from those estimates.

 

As of June 30, 2008,the Company’s Summary of Critical Accounting Policies for the year ended December 31,2007, which are detailed in the Company’s Annual Report on Form 10-K, havenot changed.

 

The Company adopted FinancialAccounting Standards Board (“FASB”) Statement of Financial Accounting StandardsNo. 157 (“SFAS 157”), *Fair Value Measurements,*andFASB Statement of Financial Accounting Standards No. 159 (“SFAS 159”), *The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115*, effective on January 1,2008.  See Note 9 for additionalinformation regarding the adoption of SFAS 157 and SFAS 159 by the Company.

 

**(2)****                              ****Recent Accounting Pronouncements**

 

In March 2008,the FASB issued Statement of Financial Accounting Standards No. 161 (“SFAS161”), *Disclosures about Derivative Instruments andHedging Activities – An Amendment of FASB Statement No. 133*.  SFAS 161 requires entities to provide greater transparency in derivativedisclosures by requiring qualitative disclosure about objectives and strategiesfor using derivatives and quantitative disclosures about fair value amounts ofand gains and losses on derivative instruments. SFAS 161 is effective forfinancial statements issued for fiscal years and interim periods beginningafter 

 

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November 15, 2008.  The Company iscurrently evaluating SFAS 161, but does not expect it will have a materialimpact on the Company’s financial position or results of operations.

 

**(3)****                              ****Inventories**

 

Inventoriesare as follows:

 
| **(In thousands)** | ** **   | **June 30,  2008** | ** **   | **December 31,  2007** | ** **   |
|-------------------------|--------------|-------------------------|--------------|-----------------------------|--------------|
| *** ***            | *** *** | *** ***            | *** *** | *** ***                | *** *** |
| Finished  products      | ** **   | **$**                   | **91,782**   |                        | $            | 73,530 |   |
| Work-in-process         | ** **   | **3,872**               |         | 2,035                       |         |
| Raw materials           | ** **   | **2,928**               |         | 2,757                       |         |
| Supplies                | ** **   | **2,369**               |         | 3,166                       |         |
| Totals                  | ** **   | **$**                   | **100,951**  |                        | $            | 81,488 |   |

 

**(4)****                              ****Prepaid Expenses and OtherCurrent Assets**

 

Prepaidexpenses and other current assets are as follows:

 
| **(In thousands)**                    | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| * *                                   | * *   | * *                | * *   | * *                    | * *   |
| Prepaid motor  fuel taxes                  | ** ** | **$**                   | **2,099**  |                        | $          | 5,061 |   |
| Margin deposits  on derivative instruments | ** ** | **3,373**               |       | 4,013                       |       |
| Prepaid  insurance                         | ** ** | **1,440**               |       | 1,107                       |       |
| Prepaid ethanol                            | ** ** | **—**              |       | 1,050                       |       |
| Deferred income  taxes current             | ** ** | **854**                 |       | 854                         |       |
| Prepaid  relocation                        | ** ** | **527**                 |       | —                      |       |
| Other prepaid  expenses                    | ** ** | **1,381**               |       | 731                         |       |
| Totals                                     | ** ** | **$**                   | **9,674**  |                        | $          | 12,816 |   |

 

**(5)****                              ****Other Assets**

 

Otherassets are as follows:

 
| **(In thousands)**            | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| * *                           | * *   | * *                | * *   | * *                    | * *   |
| Deferred debt  issuance costs      | ** ** | **$**                   | **7,135**  |                        | $          | 7,533 |   |
| Investment in  marketing alliances | ** ** | **6,000**               |       | 6,000                       |       |
| Funded status of  pension plan     | ** ** | **2,021**               |       | 1,184                       |       |
| Totals                             | ** ** | **$**                   | **15,156** |                        | $          | 14,717 |   |

 

Deferreddebt issuance costs are subject to amortization.  Original deferred debt issuance costs totaling$7.2 million relating to our 10% senior unsecured notes are being amortizedutilizing a method which approximates the effective interest method over thelife of the notes of 10 years, resulting in amortization expense of $0.7million in 2008 and each year thereafter. Original deferred debt issuance costs totaling $0.9 million relating toour secured revolving credit facility are being amortized utilizing a methodwhich approximates the effective interest method over the five year life of thefacility, resulting in amortization expense of $0.2 million in 2008 and eachyear thereafter.

 

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**(6)****           Debt**

 

Thefollowing table summarizes the Company’s long-term debt:

 

| **(In thousands)**                         | ** ** | **June 30,  2008** | ** **  | **December 31,  2007** | ** ** |
|-------------------------------------------------|------------|-------------------------|-------------|-----------------------------|------------|
|                                            | ** ** | ** **              | ** **  |                        |       |   |   |
| Senior  unsecured 10% notes due April 2017 | ** ** | **$**                   | **300,000** |                        | $          | 300,000 |   |
| Secured  revolving credit facility              | ** ** | **—**              |        | —                      |       |
| ** **                                      |       | **300,000**             |        | 300,000                     |       |
| Less  short-term borrowings                     | ** ** | **—**              |        | —                      |       |
| Total  long-term debt                           | ** ** | **$**                   | **300,000** |                        | $          | 300,000 |   |

 

*Senior Revolving Credit Facility*

 

Our liquidity facility consists of a five year secured revolving creditfacility with JPMorgan Chase Bank, N.A., as administrative agent and a lender,of up to $200 million, subject to collateral availability, which, under certaincircumstances, can be increased up to $300 million.  Our secured revolving credit facilityincludes a $25 million sub-limit for letters of credit.  The credit facility expires in March 2012,and is secured by substantially all of the Company’s assets, with the exceptionof the assets of Nebraska Energy, LLC.

 

Collateral availability is determined via a borrowing base, whichincludes a percentage of eligible receivables and inventory, and no more than$50 million of property, plant and equipment. The amount of property, plant and equipment which can be included in theborrowing base reduces at a rate of $1.8 million each quarter beginning withthe quarter ending December 31, 2007. At June 30, 2008, the amount of property, plant and equipment whichwas eligible for inclusion in the calculation of the borrowing base was $44.6million.

 

Borrowings generally bear interest, at our option, at the followingrates (i) the Eurodollar rate plus a margin between 1.25% to 1.75%,depending on the average availability, or (ii) the greater of the primerate or the federal funds rate plus 0.50%, plus a margin between 0.00% to0.50%, depending on the average availability.  Accrued interest is payable monthly onoutstanding principal amounts, provided that accrued interest on Eurodollarloans is payable at the end of each interest period, but in no event lessfrequently than quarterly.  In addition,fees and expenses are payable based on unused borrowing availability (0.25% to0.375% per annum, depending on the average availability), outstanding lettersof credit (1.375% to 1.875% fee, depending on the average availability) andadministrative and legal costs.

 

Availability under our secured revolving credit facility is subject tocustomary conditions, including the accuracy of representations and warranties,the absence of any material adverse change and compliance with certaincovenants, which, among other things, may limit our ability to incur additionalindebtedness and liens; enter into transactions with affiliates; makeacquisitions; pay dividends; redeem or repurchase capital stock or seniornotes; make investments or loans; consolidate, merge or effect asset sales; or changethe nature of our business.  In addition,if availability under the facility falls below $50 million, we must maintain afixed charge coverage ratio of EBITDA (as defined under the agreement) lessnon-financed capital expenditures and taxes to fixed charges (scheduledinvestments of principal, interest expense, and dividend and certain otherpayments) of 1.1 to 1.

 

The secured revolving credit facility contains customary events ofdefault for credit facilities of this size and type, and includes, withoutlimitation, payment defaults; defaults in performance of covenants or otheragreements contained in the transaction documents; inaccuracies inrepresentations and warranties; certain defaults, termination events or similarevents; certain defaults with respect to any 

 

6

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otherCompany indebtedness in excess of $5.0 million; certain bankruptcy orinsolvency events; the rendering of certain judgments in excess of$5.0 million; certain ERISA events; certain change in control events andthe defectiveness of any liens under the secured revolving creditfacility.  Obligations under the securedrevolving credit facility may be accelerated upon the occurrence of an event ofdefault.

 

We had no borrowings outstanding under our secured revolving creditfacility at June 30, 2008, and $21.9 million of standby letters of creditoutstanding, thereby leaving approximately $131.3 million in borrowingavailability under our secured revolving credit facility as of that date.

 

*Senior Notes*

 

In March 2007, we issued $300 million aggregate principal amountof senior unsecured 10% fixed-rate notes due April 2017 (“Notes”).  Our Notes were issued pursuant to anindenture, dated as of March 27, 2007, between us and Wells Fargo Bank,N.A., as trustee.  The Notes are generalunsecured obligations of the Company and certain of its guarantor subsidiaries,initially limited to $300 million aggregate principal amount.  We may, subject to the covenants andapplicable law, issue additional notes under the indenture.  Any additional notes would be treated as asingle class with the previously issued Notes for all purposes under theindenture.

 

The Notes have interest payments due semi-annually on April 1 and October 1of each year, and are redeemable after the dates and at prices (expressed inpercentages of principal amount on the redemption date), as set forth below:

 

| **Year**                           | ** ** | **Percentage** | ** ** |
|------------------------------------|------------|----------------|------------|
| April 1,  2012                |       | 105.000        | %          |
| April 1,  2013                |       | 103.330        | %          |
| April 1,  2014                |       | 101.667        | %          |
| April 1,  2015 and thereafter |       | 100.000        | %          |

 

In addition, at any time prior to April 1, 2010, we may redeem upto 35% of the principal amount of the Notes from time to time originally issuedwith the net cash proceeds of one or more sales of qualifying capital stock ofthe Company at a redemption price of 100% of the principal amount, togetherwith accrued and unpaid interest to the redemption date, provided that at least65% of the aggregate principal amount of the Notes originally issued remainsoutstanding immediately after such redemption and notice of any such redemptionis mailed within 60 days of each such sale of capital stock.  The terms of the Notes also containrestrictive covenants that limit our ability to, among other things, incur additionaldebt, sell or transfer assets, make certain investments or guarantees, enterinto transactions with shareholders and affiliates, and pay future dividends.

 

On August 10, 2007, we exchanged all of the outstanding Notes foran issue of registered unsecured senior notes, with terms identical to theNotes.

 

7

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**(7)****          ****Other Current Liabilities**

 

Other current liabilities are as follows:

 

| **(In thousands)**           | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| * *                          | * *   | * *                | * *   | * *                    | * *   |
| Income  taxes payable             | ** ** | **$**                   | **1,460**  |                        | $          | — |   |
| Deferred  revenue                 | ** ** | **1,421**               |       | —                      |       |
| Accrued  property taxes           | ** ** | **591**                 |       | 578                         |       |
| Unearned  commissions             | ** ** | **424**                 |       | 424                         |       |
| Accrued  sales tax                | ** ** | **243**                 |       | 184                         |       |
| Deferred  income taxes            | ** ** | **400**                 |       | 379                         |       |
| Other  accrued operating expenses | ** ** | **63**                  |       | 57                          |       |
| Totals                            | ** ** | **$**                   | **4,602**  |                        | $          | 1,622 |   |

 

**(8)****          ****Other Long-Term Liabilities**

 

Other long-term liabilities are as follows:

 

| **(In thousands)** | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------|------------|-------------------------|------------|-----------------------------|------------|
| * *                | * *   | * *                | * *   | * *                    | * *   |
| Accrued  postretirement | ** ** | **$**                   | **2,438**  |                        | 2,310      |   |
| Unearned  commissions   | ** ** | **1,342**               |       | 1,554                       |       |
| Totals                  | ** ** | **$**                   | **3,780**  |                        | $          | 3,864 |   |
|                         |            |                         |            |                             |            |  |  |

 

**(9)****          ****Fair Value Measurements**

 

*SFAS 157*

 

The Companyadopted SFAS 157 effective January 1, 2008 for financial assets andliabilities measured at fair value on a recurring basis.  SFAS 157 applies to all financial assets andfinancial liabilities that are being measured and reported on a fair valuebasis.  There was no impact for adoptionof SFAS 157 to the consolidated financial statements.  SFAS 157 establishes a framework formeasuring fair value and expands disclosure about fair value measurements.  The statement requires that fair valuemeasurements be classified and disclosed in one of the following threecategories:

 

·      Level 1:Unadjusted quoted prices in active markets that are accessible at themeasurement date for identical, unrestricted assets or liabilities;

·      Level 2: Quotedprices in markets that are not active, or inputs which are observable, eitherdirectly or indirectly, for substantially the full term of the asset orliability;

·      Level 3: Pricesor valuation techniques that require inputs that are both significant to the fairvalue measurement and unobservable (i.e., supported by little or no marketactivity).

 

The following table summarizes thevaluation of our financial instruments which are carried at fair value by theabove SFAS 157 pricing levels as of June 30, 2008:

 

8

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| ** **                                                          | ** ** | ** **                                   | ** ** | **Fair Value Measurements at the Reporting Date Using**        | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| ** **                                                          | ** ** | **Fair Value  at  June 30,  2008** | ** ** | **Quoted Prices in  Active Markets  Using Identical  Assets  (Level 1)** | ** ** | **Significant Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** |
|                                                                |       |                                         |       |                                                                                              |       |   |   |   |   |
| Cash  and cash equivalents                                          |       | $                                            | 114,354    |                                                                                              | $          | 114,354 |   | — |   | — |   |
| Commodity  futures contracts recorded in prepaid expenses and other |       | $                                            | (17,619    | )                                                                                                 | $          | (17,619 | ) | — |   | — |   |

 

The following table represents a reconciliation of the change in assetsmeasured at fair value on a recurring basis using significant unobservableinputs (Level 3) during the six months ended June 30, 2008.

 
| ** **                                               | ** ** | **Fair Value Measurements  Using  Significant Unobservable  Inputs  (Level 3)** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| Balance  at December 31, 2007                       |       | $                                                                                                   | —     |   |
| Net  transfers to Level 3 category from Level 1 category |       | 127,200                                                                                             |       |
| Sales  of Level 3 category assets                        |       | 97,099                                                                                              |       |
| Total  realized losses recognized in net income          |       | (30,101                                                                                             | )          |
| Balance  at June 30, 2008                           |       | $                                                                                                   | —     |   |

 

During thethree month period ended June 30, 2008, the Company generated cash of$97.1 million from the sale of all of its remaining position of auction ratesecurities (Level 3 assets).  As aresult, the Company recorded in the three month period ended June 30, 2008an additional loss of $8.5 million, bringing the total losses related to Level3 assets in 2008 to $30.1 million.  Inaddition, the Company also sold auction rate securities prior to these assetsbeing classified as Level 3 assets incurring a loss of $1.5 million.  The total losses incurred by the Company in2008 related to auction rate securities were $31.6 million.  This loss is included in “loss related toauction rate securities” in the unaudited Condensed Consolidated Statement ofOperations.  The Company holds no auctionrate securities as of June 30, 2008.

 

The fair valueof our derivative contracts are primarily measured based on closing marketprices for commodities as quoted on the Chicago Board of Option Trading (“CBOT”)or the New York Mercantile Exchange (“NYMEX”).

 

The Companyrecorded net losses of $14.1 million and $12.3 million, respectively, for thethree and six month periods ended June 30, 2008 and net gains of $2.1million and $6.0 million, respectively, for the three and six month periodsended June 30, 2007 under “other non-operating income” in the unauditedCondensed Consolidated Statements of Operations for the changes in the fairvalue of its derivative financial instrument positions.

 

*SFAS 159*

 

The Companyadopted SFAS 159 effective January 1, 2008.  We have not elected the fair value option forany of our financial assets or liabilities.

 

9

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The carryingvalue of other financial instruments, including cash, accounts receivable andaccounts payable and accrued liabilities approximate fair value due to theirshort maturities or variable-rate nature of the respective balances.  The following table presents the otherfinancial instruments that are not carried at fair value but which require fairvalue disclosure as of June 30, 2008 and December 31, 2007.  The fair value of these instruments is basedupon the closing market price at period end:

 

| ** **        | ** ** | **As of June 30, 2008** | ** ** | **As of December 31, 2007** | ** ** |
|-------------------|------------|---------------------------------------------|------------|-------------------------------------------------|------------|
| ** **        | ** ** | **Carrying Value**                     | ** ** | **Fair Value**                             | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** |
| Cost  investments |       | 6,000                                       |       | n/a                                             |       | 6,000 |   | n/a |   |
| Long-term  debt   |       | 300,000                                     |       | 190,500                                         |       | 300,000 |   | 274,500 |   |

 

The Company’sinvestments accounted for under the cost method consist of minority positionsin equity securities of other ethanol operating companies.  These equity investments are recorded atcost, and it is not practical to estimate a fair value for these non-publiclytraded companies.  The Company monitorsits investments for impairment by considering current factors, including theeconomic environment, market conditions, operational performance and otherspecific factors relating to the business underlying the investment, andrecords reductions in carrying values when necessary.  Any impairment loss is reported under “Otherincome (expense)” in the consolidated statement of operations.

 

The fair valueof our senior secured floating rate notes are based upon quoted closing marketprices at the end of the period.

 

**(10)****        ****Stock-Based Compensation Plans**

 

The Company values its share-based payment awards using a form of theBlack-Scholes option-pricing model (the “option pricing model”).  The determination of fair value ofshare-based payment awards on the date of grant using the option pricing modelis affected by our stock price as well as the input of other subjectiveassumptions.  The option-pricing modelrequires a number of assumptions, of which the most significant are expectedstock price volatility, the expected pre-vesting forfeiture rate and theexpected option term (the amount of time from the grant date until the optionsare exercised or expire).  Expectedvolatility is normally calculated based upon actual historical stock pricemovements over the expected option term. Since we have a very short-term history of stock price volatility as apublic company, we calculate volatility by considering, among other things, theexpected volatilities of public companies engaged in similar industries.  Pre-vesting forfeitures are estimated using a3% forfeiture rate.  The expected optionterm is calculated using the “simplified” method permitted by SAB 107.  Our options have characteristicssignificantly different from those of traded options, and changes in theassumptions can materially affect the fair value estimates.

 

Pre-tax stock-based compensation expense for the three month periodsended June 30, 2008 and 2007 was approximately $2.0 million and $1.8million, respectively.  For the threemonth period ended June 30, 2008, $1.9 million was charged to SG&Aexpense and $0.1 million was charged to cost of goods sold.  For the three month period ended June 30,2007, $1.7 million was charged to selling, general and administrative expenseand $0.1 million was charged to cost of goods sold.  Stock-based compensation expense reducedearnings per share by $0.03 per basic and fully diluted share for the threemonth periods ended June 30, 2008 and 2007, respectively.  Pre-tax stock-based compensation expense forthe six month periods ended June 30, 2008 and 2007 was approximately $3.9million and $3.4 million, respectively. For the six month period ended June 30, 2008, $3.7 million wascharged to SG&A expense and $0.2 million was charged to cost of goodssold.  For the six month period ended June 30,2007, $3.3 million was charged to selling, general and administrative expenseand $0.1 million was charged to cost of goods sold.  Stock-based compensation expense reducedearnings per share by $0.06 per basic and fully diluted share for the six monthperiod ended June 30, 2008 and by $0.05 per basic and 

 

10

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fullydiluted share for the six month period ended June 30, 2007.  The Company recognized a tax benefit on itscondensed consolidated statement of income from stock-based compensationexpense in the amount of $0.7 million and $0.5 million for the three monthperiods ended June 30, 2008 and 2007, respectively.  For the six month period ended June 30,2008 and 2007, the Company recognized a tax benefit on its condensedconsolidated statement of income from stock-based compensation expense in theamount of $1.5 million and $1.0 million, respectively.  The Company recorded pre-tax stock-basedcompensation expense for the three and six month periods ended June 30,2008 and 2007 as follows:

 

| ** **                         | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in millions)**             | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|                               |       |                                            |       |                                          |       |   |   |   |   |
| Stock-based  compensation expense: |       |                                            |       |                                          |       |   |   |   |   |
| Non-qualified  stock options       | ** ** | **$**                                           | **1.7**    |                                          | $          | 1.5 | ** ** | **$** | **3.3** |   | $ | 3.0 |   |
| Restricted  stock                  | ** ** | **0.1**                                         |       | 0.1                                           | ** ** | **0.2** |   | 0.2 |   |
| Restricted  stock units            | ** ** | **—**                                      |       | 0.1                                           | ** ** | **0.1** |   | 0.1 |   |
| Long-term  incentive stock plan    | ** ** | **0.2**                                         |       | 0.1                                           | ** ** | **0.3** |   | 0.1 |   |
|                                    |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |

 

As of June 30, 2008 and 2007, the Company had not yet recognizedcompensation expense on the following non-vested awards:

 
| ** **                      | ** ** | **2008**                           | ** ** | **2007**                                                               | ** ** |
|---------------------------------|------------|------------------------------------|------------|------------------------------------------------------------------------|------------|
| **(in millions)**          | ** ** | **Non-  recognized  Compensation** | ** ** | **Weighted Average  Remaining  Recognition  Period (years)** | ** ** | **Non-  recognized  Compensation** | ** ** | **Weighted Average  Remaining  Recognition  Period (years)** | ** ** |
|                            |       |                               |       |                                                                   |       |   |   |   |   |
| Non-qualified  options          | ** ** | **$**                              | **16.6**   | ** **                                                             | **2.8**    |   | $ | 19.1 |   | 2.6 |   |
| Restricted  stock               | ** ** | **0.9**                            | ** ** | **3.6**                                                                |       | 1.2 |   | 4.4 |   |
| Restricted  stock units         | ** ** | **0.1**                            | ** ** | **0.7**                                                                |       | 0.1 |   | 1.4 |   |
| Long-term  incentive stock plan | ** ** | **1.6**                            | ** ** | **1.8**                                                                |       | 1.6 |   | 2.5 |   |
| Total                           | ** ** | **$**                              | **19.2**   | ** **                                                             | **2.8**    |   | $ | 22.0 |   | 2.7 |   |

 

The Company did not grant any stock options during the quarter ended June 30,2008.  The Company did grant stock optionsduring the quarter ended June 30, 2007. The determination of the fair value of the stock option awards, usingthe option pricing model, incorporated the assumptions in the following tablefor stock options granted during the quarter ended June 30, 2007.  The risk-free rate is based on the U.S.Treasury yield curve in effect at the time of grant over the expectedterm.  Expected volatility is calculatedby considering, among other things, the expected volatilities of publiccompanies engaged in similar industries. The expected option term is calculated using the “simplified” methodpermitted by SAB 107.  Assumptions foroptions granted in the quarter ended June 30, 2007 are as follows:

 
| ** **                       | ** ** | **2007** | ** ** |
|----------------------------------|------------|----------|------------|
| Expected  stock price volatility |       | 58.0     | %          |
| Expected  life (in years)        |       | 6.5      |       |
| Risk-free  interest rate         |       | 4.9      | %          |
| Expected  dividend yield         |       | 0.0      | %          |
| Weighted  average fair value     |       | $        | 10.57      |   |
|                                  |            |          |            |  |

 

11

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Thefollowing table summarizes stock options outstanding and changes during the sixmonth period ended June 30, 2008:

 

| ** **                                       | ** ** | **Shares**              | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Life** | ** ** | **Aggregate  Intrinsic Value ** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|-------------------------------------------|------------|
|                                             |       | **(in thousands)** |       |                                   |       | **(years)**                            |       | **(in thousands)**                   |       |
|                                             |       | ** **              |       |                                   |       |                                   |       |                                      |       |
| Options  outstanding – January 1, 2008 |       | 3,516                   |       | $                                      | 8.10       |                                   | 7.4        |                                      | $          | — |   |
| Granted                                          |       | 568                     |       | 6.85                                   |       | 9.9                                    |       | —                                    |       |
| Exercised                                        |       | —                  |       | —                                 |       | —                                 |       | —                                    |       |
| Cancelled  or expired                            |       | 38                      |       | 14.42                                  |       | 9.5                                    |       | —                                    |       |
| Options  outstanding – June 30, 2008   |       | 4,046                   |       | $                                      | 7.87       |                                   | 7.2        |                                      | $          | — |   |
| Options  exercisable – June 30, 2008   |       | 1,889                   |       | $                                      | 4.84       |                                   | 6.1        |                                      | $          | — |   |

 

The range of exercise prices of the exercisable options and outstandingoptions at June 30, 2008 are as follows:

 

| **Weighted Average Exercise Price** | ** ** | **Number of  Exercisable  Options** | ** ** | **Number of  Outstanding  Options** | ** ** | **Weighted  Average  Remaining  Life** | ** ** |
|----------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|----------------------------------------|------------|
| ** **                                         | ** ** | **(in thousands)**                  | ** ** | **(in thousands)**                  | ** ** | **(years)**                            | ** ** |
| $0.23                                              |       | 992                                      |       | 1,006                                    |       | 5.0                                    |       |
| $2.36  - $4.80                                     |       | 584                                      |       | 1,410                                    |       | 7.2                                    |       |
| $7.05                                              |       | —                                   |       | 510                                      |       | 9.7                                    |       |
| $15.26  - $17.29                                   |       | 53                                       |       | 450                                      |       | 8.8                                    |       |
| $22.15  - $22.50                                   |       | 244                                      |       | 630                                      |       | 7.8                                    |       |
| $43.00                                             |       | 16                                       |       | 40                                       |       | 8.0                                    |       |
| Totals                                             |       | 1,889                                    |       | 4,046                                    |       | 7.2                                    |       |

 

Restricted stock award activity for the six months ended June 30,2008 is summarized below:

 

| ** **                                                    | ** ** | **Shares**              | ** ** | **Weighted  Average Grant  Date Fair  Value per  Award** | ** ** |
|---------------------------------------------------------------|------------|-------------------------|------------|-------------------------------------------------------------------------|------------|
|                                                          |       | **(in thousands)** |       |                                                                    |       |
|                                                          |       | ** **              |       |                                                                    |       |
| Unvested  restricted stock awards – January 1, 2008 |       | 75.9                    |       | $                                                                       | 16.29      |   |
| Granted                                                       |       | —                  |       | —                                                                  |       |
| Vested                                                        |       | 16.8                    |       | 17.41                                                                   |       |
| Cancelled  or expired                                         |       | —                  |       | —                                                                  |       |
| Unvested  restricted stock awards – June 30, 2008   |       | 59.1                    |       | $                                                                       | 15.97      |   |

 

Restrictedstock unit award activity for the six months ended June 30, 2008 issummarized below:

 

12

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| ** **                                                         | ** ** | **Shares**              | ** ** | **Weighted  Average Grant  Date Fair  Value per  Award** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------|------------|-------------------------------------------------------------------------|------------|
|                                                               |       | **(in thousands)** |       |                                                                    |       |
|                                                               |       |                    |       |                                                                    |       |
| Unvested  Restricted stock unit awards – January 1, 2008 |       | 18.0                    |       | $                                                                       | 15.85      |   |
| Granted                                                            |       | 9.3                     |       | 13.09                                                                   |       |
| Vested                                                             |       | 7.8                     |       | 16.58                                                                   |       |
| Cancelled  or expired                                              |       | —                  |       | —                                                                  |       |
| Unvested  restricted stock unit awards – June 30, 2008   |       | 19.5                    |       | $                                                                       | 14.22      |   |

 

**(11)****        ****Interest Expense**

 

The following table summarizes interest expense:

** **
| ** **                                    | ** **   | **Three months ended  June 30,** |         | **Six months ended  June 30,** | ** ** |
|-----------------------------------------------|--------------|-------------------------------------------------|--------------|-----------------------------------------------|------------|
| **(in thousands)**                       | ** **   | **2008**                                        | ** **   | **2007**                                      |       | **2008** | ** ** | **2007** | ** ** |
| *** ***                                  | *** *** | *** ***                                    | *** *** | *** ***                                  | * *   | *** *** | *** *** | *** *** | *** *** |
| Interest  expense                             | ** **   | **$**                                           | **7,500**    | ** **                                    | $          | 7,500 |   | **$** | **15,008** | ** ** | $ | 7,836 |   |
| Amortization  of deferred debt issuance costs | ** **   | **259**                                         | ** **   | 229                                           |       | **501** | ** ** | 229 |   |
| Capitalized  interest                         | ** **   | **(6,634**                                      | **)**        | (708                                          | )          | **(11,993** | **)** | (708 | ) |
| Interest  expense, net                        | ** **   | **$**                                           | **1,125**    | ** **                                    | $          | 7,021 |   | **$** | **3,516** | ** ** | $ | 7,357 |   |

 

**(12)****        ****Pension Expense**

 

*Defined Contribution Plans*

 

We have 401(k) plans covering substantially all of ouremployees.  We recorded expense withrespect to these plans for the three month periods ended June 30, 2008 and2007 of $0.3 million, and expense of $0.6 million and $0.7 million for the sixmonth periods ended June 30, 2008 and 2007, respectively.  Contributions made under our definedcontribution plans include a match, at the Company’s discretion, of employeesalaries contributed to the plans.

 

### *Qualified Retirement Plan*

###  

TheCompany provides a non-contributory qualified defined benefit pension plan forits unionized employees at our Pekin, IL production facilities.  The following table summarizes the componentsof net periodic pension cost for the qualified pension plan:

 
| ** **                           | ** **   | **Three months ended  June 30,** |         | **Six months ended  June 30,** | ** ** |
|--------------------------------------|--------------|-------------------------------------------------|--------------|-----------------------------------------------|------------|
| **(In thousands)**              | ** **   | **2008**                                        | ** **   | **2007**                                      |       | **2008** | ** ** | **2007** | ** ** |
| *** ***                         | *** *** | *** ***                                    | *** *** | *** ***                                  | * *   | *** *** | *** *** | *** *** | *** *** |
| Service  cost                        | ** **   | **$**                                           | **67**       | ** **                                    | $          | 88 |   | **$** | **154** | ** ** | $ | 176 |   |
| Interest  cost                       | ** **   | **124**                                         | ** **   | 124                                           |       | **248** | ** ** | 248 |   |
| Expected  return on plan assets      | ** **   | **(179**                                        | **)**        | (180                                          | )          | **(359** | **)** | (360 | ) |
| Amortization  of prior service costs | ** **   | **11**                                          | ** **   | 11                                            |       | **22** | ** ** | 22 |   |
| Amortization  of net actuarial loss  | ** **   | **(7**                                          | **)**        | 6                                             |       | **—** | ** ** | 12 |   |
| Net  periodic pension cost           | ** **   | **$**                                           | **16**       | ** **                                    | $          | 49 |   | **$** | **65** | ** ** | $ | 98 |   |

 

13

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### *Postretirement Benefit Obligation*

###  

We sponsor a healthcare plan that provides postretirement medicalbenefits to certain “grandfathered” unionized employees.  The plan is contributory, with contributionsrequired at the same rate as active employees. Benefit eligibility under the plan terminates at age 65.

 

The following table summarizes the components of the net periodic costsfor postretirement benefits:

 
| ** **                        | ** **   | **Three months ended  June 30,** | ** **   | **Six months ended  June 30,** | ** **   |
|-----------------------------------|--------------|-------------------------------------------------|--------------|-----------------------------------------------|--------------|
| **(In thousands)**           | ** **   | **2008**                                        | ** **   | **2007**                                      | ** **   | **2008** | ** ** | **2007** | ** ** |
| *** ***                      | *** *** | *** ***                                    | *** *** | *** ***                                  | *** *** | *** *** | *** *** | *** *** | *** *** |
| Service  cost                     | ** **   | **$**                                           | **38**       |                                          | $            | 38 | ** ** | **$** | **76** |   | $ | 76 |   |
| Interest  cost                    | ** **   | **34**                                          |         | 34                                            | ** **   | **68** |   | 68 |   |
| Net  periodic postretirement cost | ** **   | **$**                                           | **72**       |                                          | $            | 72 | ** ** | **$** | **144** |   | $ | 144 |   |

 

**(13)****        ****IncomeTaxes**

 

As of June 30, 2008, the Company has no uncertain tax positionsoutstanding.  We include the interestexpense or income, as well as potential penalties on unrecognized tax benefits,as components of income tax expense in the Condensed Consolidated Statement ofOperations.  As of June 30, 2008,because we had no uncertain tax positions outstanding, we also had no liabilityfor accrued interest on unrecognized tax benefits.

 

Our federal income tax return for 2006 and 2007 is open for examinationunder the federal statute of limitations. We file in numerous state and foreign jurisdictions with varyingstatutes of limitations open from 2003 to 2006.

 

We have accrued a deferred income tax benefit of $12.3 million relatedto the $31.6 million realized loss on the sale of securities for the six monthperiod ended June 30, 2008.  Becausewe do not expect to have sufficient capital gains to offset the $31.6 millioncapital loss, we have also recorded a valuation allowance for the full amountof the income tax benefit accrued.

 

**(14)****        ****Earnings (Loss) Per Share**

 

Basic earnings (loss) per share are computedby dividing net income by the weighted average number of common sharesoutstanding during each period.  Dilutedearnings (loss) per share are calculated using the treasury stock method inaccordance with SFAS 128, and includes the effect of all dilutive securities,including non-qualified stock options and restricted stock units awards (“RSU’s”).

 

14

----

 

Thefollowing table sets forth the computation of basic and diluted earnings (loss)per share:

 
| ** **                                                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(In thousands, except per share data)** | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                               |       |                                            | ** ** |                                          |       |   | ** ** |   |   |
| Net  income                                                        | ** ** | **$**                                           | **(1,918** | **)**                                         | $          | 12,607 | ** ** | **$** | **(12,713** | **)** | $ | 27,547 |   |
|                                                               |       |                                            | ** ** |                                          |       |   | ** ** |   |   |
| Weighted  average shares and share equivalents outstanding:        |       |                                            | ** ** |                                          |       |   | ** ** |   |   |
| Basic  shares                                                      | ** ** | **41,971**                                      | ** ** | 41,912                                        | ** ** | **41,905** | ** ** | 41,861 |   |
| Dilutive  non-qualified stock options and RSU’s               | ** ** | **28**                                          | ** ** | 737                                           | ** ** | **27** | ** ** | 693 |   |
| Diluted  weighted average shares and share equivalents             | ** ** | **41,999**                                      | ** ** | 42,649                                        | ** ** | **41,932** | ** ** | 42,554 |   |
|                                                               |       |                                            | ** ** |                                          |       |   | ** ** |   |   |
| Income  per common share - basic:                                  | ** ** | **$**                                           | **(0.05**  | **)**                                         | $          | 0.30 | ** ** | **$** | **(0.30** | **)** | $ | 0.66 |   |
| Income  per common share - diluted:                                | ** ** | **$**                                           | **(0.05**  | **)**                                         | $          | 0.30 | ** ** | **$** | **(0.30** | **)** | $ | 0.65 |   |

 

## ***We had additional potentially dilutivesecurities outstanding representing options on 4.1 million common shares at June 30,2008 that were not included in the computation of potentially dilutivesecurities because the options exercise prices were greater than the averagemarket price of the common shares or because the options were anti-dilutive,and were excluded from the calculation of diluted earnings per share inaccordance with SFAS 128.***

## *** ***

**(15)****        ****Industry Segment**

 

The Company operates in one reportable business segment, themanufacture and marketing of fuel-grade biofuels.

 

**(16)****        ****Litigation**

 

We are from time to time involved in various legal proceedings,including legal proceedings relating to the extensive environmental laws andregulations that apply to our facilities and operations.  We are not involved in any legal proceedingsthat we believe could have a material adverse effect upon our business,operating results or financial condition.

 

**(17)****        ****Unaudited Condensed Consolidating Financial Information**

 

The following tables present unaudited condensed consolidatingfinancial information for: (a) Aventine Renewable Energy Holdings, Inc.(the “Parent”) on a stand-alone basis; (b) on a combined basis, theguarantors of the 10% senior unsecured Notes (“Subsidiary Guarantors”), whichinclude Aventine Renewable Energy, LLC; Aventine Renewable Energy, Inc.;Aventine Power, LLC; Aventine Renewable Energy – Aurora West, LLC; and AventineRenewable Energy – Mt. Vernon, LLC; and (c) the Non-Guarantor Subsidiary,Nebraska Energy, LLC.  Each SubsidiaryGuarantor is wholly-owned by Aventine Renewable Energy Holdings, Inc.  The guarantees of each of the SubsidiaryGuarantors are full, unconditional, joint and several.  Accordingly, separate financial statements ofthe wholly-owned Subsidiary Guarantors are not presented because the SubsidiaryGuarantors are jointly, severally and unconditionally liable under theguarantees, and the Company believes that separate financial statements andother disclosures regarding the Subsidiary Guarantors are not material toinvestors.  Furthermore, there are nosignificant legal restrictions on the Parent’s ability to obtain funds from itssubsidiaries by dividend or loan.

 

15

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Table of Contents

 

**Aventine Renewable Energy Holdings, Inc. andSubsidiaries**

**CondensedConsolidating Statements of Operations**

**For the Three Months EndedJune 30, 2008**

(Unaudited)

 
| **(In thousands)**                          | ** ** | **Parent** | ** ** | **Subsidiary  Guarantors** | ** ** | **Non-  Guarantor  Subsidiary** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------|------------|------------|------------|----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| Net sales                                        | ** ** | **$**      | **—** | ** **                 | **$**      | **631,083**                     | ** ** | **$**            | **24,003** | ** **       | **$**      | **(53,495** | **)** | **$** | **601,591** | ** ** |
| Cost of goods sold                               | ** ** | **—** | ** ** | **598,229**                | ** ** | **23,776**                      | ** ** | **(53,274**      | **)**      | **568,731**      | ** ** |
| Gross profit                                     | ** ** | **—** | ** ** | **32,854**                 | ** ** | **227**                         | ** ** | **(221**         | **)**      | **32,860**       | ** ** |
| Selling, general and administrative expenses     | ** ** | **66**     | ** ** | **9,650**                  | ** ** | **644**                         | ** ** | **(221**         | **)**      | **10,139**       | ** ** |
| Loss on the sale of securities                   | ** ** | **—** | ** ** | **8,476**                  | ** ** | **—**                      | ** ** | **—**       | ** ** | **8,476**        | ** ** |
| Other income                                     | ** ** | **—** | ** ** | **(1,650**                 | **)**      | **33**                          | ** ** | **—**       | ** ** | **(1,617**       | **)**      |
| Operating income (loss)                          | ** ** | **(66**    | **)**      | **16,378**                 | ** ** | **(450**                        | **)**      | **—**       | ** ** | **15,862**       | ** ** |
| Other income (expense):                          | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                      | ** ** | ** **       | ** ** | ** **       | ** ** |
| Interest income                                  | ** ** | **—** | ** ** | **503**                    | ** ** | **3**                           | ** ** | **—**       | ** ** | **506**          | ** ** |
| Interest expense                                 | ** ** | **(1,048** | **)**      | **(77**                    | **)**      | **—**                      | ** ** | **—**       | ** ** | **(1,125**       | **)**      |
| Equity in undistributed earnings of subsidiaries | ** ** | **2,550**  | ** ** | **(133**                   | **)**      | **—**                      | ** ** | **(2,417**       | **)**      | **—**       | ** ** |
| Other non-operating income (expense)             | ** ** | **—** | ** ** | **(14,121**                | **)**      | **—**                      | ** ** | **—**       | ** ** | **(14,121**      | **)**      |
| Minority interest                                | ** ** | **—** | ** ** | **—**                 | ** ** | **—**                      | ** ** | **314**          | ** ** | **314**          | ** ** |
| Income (loss) before income taxes                | ** ** | **1,436**  | ** ** | **2,550**                  | ** ** | **(447**                        | **)**      | **(2,103**       | **)**      | **1,436**        | ** ** |
| Income tax expense                               | ** ** | **3,354**  | ** ** | **1,015**                  | ** ** | **—**                      | ** ** | **(1,015**       | **)**      | **3,354**        | ** ** |
| Net income (loss)                                | ** ** | **$**      | **(1,918** | **)**                      | **$**      | **1,535**                       | ** ** | **$**            | **(447**   | **)**            | **$**      | **(1,088** | **)** | **$** | **(1,918** | **)** |

 

**Aventine Renewable EnergyHoldings, Inc. and Subsidiaries**

**Condensed ConsolidatingStatements of Operations**

**For the Three Months EndedJune 30, 2007**

(Unaudited)

 
| **(In thousands)**                          | ** ** | **Parent** | ** ** | **Subsidiary  Guarantors** | ** ** | **Non-  Guarantor  Subsidiary** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------|------------|------------|------------|----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| Net sales                                        |       | $          | —     |                       | $          | 392,579                         |       | $                | 26,646     |             | $          | (24,311 | ) | $ | 394,914 |   |
| Cost of goods sold                               |       | —     |       | 369,835                    |       | 21,711                          |       | (24,061          | )          | 367,485          |       |
| Gross profit                                     |       | —     |       | 22,744                     |       | 4,935                           |       | (250             | )          | 27,429           |       |
| Selling, general and administrative expenses     |       | 73         |       | 8,248                      |       | 708                             |       | (250             | )          | 8,779            |       |
| Other income                                     |       | —     |       | (510                       | )          | (4                              | )          | —           |       | (514             | )          |
| Operating income (loss)                          |       | (73        | )          | 15,006                     |       | 4,231                           |       | —           |       | 19,164           |       |
| Other income (expense):                          |       |       |       |                       |       |                            |       |             |       |             |       |
| Interest income                                  |       | —     |       | 4,135                      |       | 32                              |       | —           |       | 4,167            |       |
| Interest expense                                 |       | (6,972     | )          | (49                        | )          | —                          |       | —           |       | (7,021           | )          |
| Equity in undistributed earnings of subsidiaries |       | 24,769     |       | 3,415                      |       | —                          |       | (28,184          | )          | —           |       |
| Other non-operating income                       |       | —     |       | 2,478                      |       | (339                            | )          | —           |       | 2,139            |       |
| Minority interest                                |       | —     |       | —                     |       | —                          |       | (725             | )          | (725             | )          |
| Income before income taxes                       |       | 17,724     |       | 24,985                     |       | 3,924                           |       | (28,909          | )          | 17,724           |       |
| Income tax expense                               |       | 5,117      |       | 6,346                      |       | —                          |       | (6,346           | )          | 5,117            |       |
| Net income                                       |       | $          | 12,607     |                       | $          | 18,639                          |       | $                | 3,924      |             | $          | (22,563 | ) | $ | 12,607 |   |

 

16

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**Aventine Renewable EnergyHoldings, Inc. and Subsidiaries**

**Condensed ConsolidatingStatements of Operations**

**For the Six Months Ended June 30,2008**

(Unaudited)

 
| **(In thousands)**                          | ** ** | **Parent** | ** **  | **Subsidiary  Guarantors** | ** ** | **Non-  Guarantor  Subsidiary** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------|------------|------------|-------------|----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| Net sales                                        | ** ** | **$**      | **—**  | ** **                 | **$**      | **1,149,989**                   | ** ** | **$**            | **49,314** | ** **       | **$**      | **(87,764** | **)** | **$** | **1,111,539** | ** ** |
| Cost of goods sold                               | ** ** | **—** | ** **  | **1,092,845**              | ** ** | **49,056**                      | ** ** | **(87,305**      | **)**      | **1,054,596**    | ** ** |
| Gross profit                                     | ** ** | **—** | ** **  | **57,144**                 | ** ** | **258**                         | ** ** | **(459**         | **)**      | **56,943**       | ** ** |
| Selling, general and administrative expenses     | ** ** | **99**     | ** **  | **18,025**                 | ** ** | **1,343**                       | ** ** | **(459**         | **)**      | **19,008**       | ** ** |
| Loss on the sale of securities                   | ** ** | **—** | ** **  | **31,601**                 | ** ** | **—**                      | ** ** | **—**       | ** ** | **31,601**       | ** ** |
| Other income                                     | ** ** | **—** | ** **  | **(2,426**                 | **)**      | **32**                          | ** ** | **—**       | ** ** | **(2,394**       | **)**      |
| Operating income (loss)                          | ** ** | **(99**    | **)**       | **9,944**                  | ** ** | **(1,117**                      | **)**      | **—**       | ** ** | **8,728**        | ** ** |
| Other income (expense):                          | ** ** | ** ** | ** **  | ** **                 | ** ** | ** **                      | ** ** | ** **       | ** ** | ** **       | ** ** |
| Interest income                                  | ** ** | **—** | ** **  | **2,730**                  | ** ** | **15**                          | ** ** | **—**       | ** ** | **2,745**        | ** ** |
| Interest expense                                 | ** ** | **(3,371** | **)**       | **(145**                   | **)**      | **—**                      | ** ** | **—**       | ** ** | **(3,516**       | **)**      |
| Equity in undistributed earnings of subsidiaries | ** ** | **(321**   | **)**       | **(597**                   | **)**      | **—**                      | ** ** | **918**          | ** ** | **—**       | ** ** |
| Other non-operating income (expense)             | ** ** | **—** | ** **  | **(12,253**                | **)**      | **—**                      | ** ** | **—**       | ** ** | **(12,253**      | **)**      |
| Minority interest                                | ** ** | **—** | ** **  | **—**                 | ** ** | **—**                      | ** ** | **505**          | ** ** | **505**          | ** ** |
| Income (loss) before income taxes                | ** ** | **(3,791** | **)**       | **(321**                   | **)**      | **(1,102**                      | **)**      | **1,423**        | ** ** | **(3,791**       | **)**      |
| Income tax expense (benefit)                     | ** ** | **8,922**  | ** **  | **(104**                   | **)**      | **—**                      | ** ** | **104**          | ** ** | **8,922**        | ** ** |
| Net income (loss)                                | ** ** | **$**      | **(12,713** | **)**                      | **$**      | **(217**                        | **)**      | **$**            | **(1,102** | **)**            | **$**      | **1,319** | ** ** | **$** | **(12,713** | **)** |

 

**Aventine Renewable EnergyHoldings, Inc. and Subsidiaries**

**Condensed ConsolidatingStatements of Operations**

**For the Six Months Ended June 30,2007**

(Unaudited)

 
| **(In thousands)**                          | ** ** | **Parent** | ** ** | **Subsidiary  Guarantors** | ** ** | **Non-  Guarantor  Subsidiary** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------|------------|------------|------------|----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| Net sales                                        |       | $          | —     |                       | $          | 831,955                         |       | $                | 48,569     |             | $          | (48,948 | ) | $ | 831,576 |   |
| Cost of goods sold                               |       | —     |       | 783,771                    |       | 40,409                          |       | (48,448          | )          | 775,732          |       |
| Gross profit                                     |       | —     |       | 48,184                     |       | 8,160                           |       | (500             | )          | 55,844           |       |
| Selling, general and administrative expenses     |       | 236        |       | 17,167                     |       | 1,474                           |       | (500             | )          | 18,377           |       |
| Other income                                     |       | —     |       | (674                       | )          | (4                              | )          | —           |       | (678             | )          |
| Operating loss                                   |       | (236       | )          | 31,691                     |       | 6,690                           |       | —           |       | 38,145           |       |
| Other income (expense):                          |       |       |       |                       |       |                            |       |             |       |             |       |
| Interest income                                  |       | —     |       | 5,477                      |       | 58                              |       | —           |       | 5,535            |       |
| Interest expense                                 |       | (7,308     | )          | (49                        | )          | —                          |       | —           |       | (7,357           | )          |
| Equity in undistributed earnings of subsidiaries |       | 48,632     |       | 5,646                      |       | —                          |       | (54,278          | )          | —           |       |
| Other non-operating income (expense)             |       | —     |       | 5,867                      |       | 141                             |       | —           |       | 6,008            |       |
| Minority interest                                |       | —     |       | —                     |       | —                          |       | (1,243           | )          | (1,243           | )          |
| Income (loss) before income taxes                |       | 41,088     |       | 48,632                     |       | 6,889                           |       | (55,521          | )          | 41,088           |       |
| Income tax expense                               |       | 13,541     |       | 15,805                     |       | —                          |       | (15,805          | )          | 13,541           |       |
| Net income (loss)                                |       | $          | 27,547     |                       | $          | 32,827                          |       | $                | 6,889      |             | $          | (39,716 | ) | $ | 27,547 |   |

 

17

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**Aventine Renewable EnergyHoldings, Inc. and Subsidiaries**

**CondensedConsolidating Balance Sheets**

**June 30, 2008**

(Unaudited)

 
| **(In thousands)**                         | ** ** | **Parent**  | ** **  | **Subsidiary  Guarantors** | ** ** | **Non-  Guarantor  Subsidiary** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------|------------|-------------|-------------|----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                      |       |        |        |                       |       |                            |       |             |       |             |       |
| **Assets**                                      |       |        |        |                       |       |                            |       |             |       |             |       |
| Current assets                                  |       |        |        |                       |       |                            |       |             |       |             |       |
| Cash and cash equivalents                       | ** ** | **$**       | **—**  | ** **                 | **$**      | **112,993**                     | ** ** | **$**            | **1,361**  | ** **       | **$**      | **—** | ** ** | **$** | **114,354** | ** ** |
| Accounts receivable, net                        | ** ** | **—**  | ** **  | **83,082**                 | ** ** | **1,076**                       | ** ** | **—**       | ** ** | **84,158**       | ** ** |
| Inventories                                     | ** ** | **—**  | ** **  | **97,913**                 | ** ** | **3,038**                       | ** ** | ** **       | ** ** | **100,951**      | ** ** |
| Intercompany receivable                         | ** ** | **311,553** | ** **  | **—**                 | ** ** | **85**                          | ** ** | **(311,638**     | **)**      | **—**       | ** ** |
| Income tax receivable                           | ** ** | **—**  | ** **  | **2,509**                  | ** ** | **—**                      | ** ** | **—**       | ** ** | **2,509**        | ** ** |
| Prepaid expenses and other assets               | ** ** | **6**       | ** **  | **9,400**                  | ** ** | **268**                         | ** ** | **—**       | ** ** | **9,674**        | ** ** |
| Total current assets                            | ** ** | **311,559** | ** **  | **305,897**                | ** ** | **5,828**                       | ** ** | **(311,638**     | **)**      | **311,646**      | ** ** |
|                                            | ** ** | ** **  | ** **  | ** **                 | ** ** | ** **                      | ** ** | ** **       | ** ** | ** **       | ** ** |
| Property, plant and equipment, net              | ** ** | **—**  | ** **  | **87,524**                 | ** ** | **17,369**                      | ** ** | **—**       | ** ** | **104,893**      | ** ** |
| Construction in process                         | ** ** | **—**  | ** **  | **352,787**                | ** ** | **766**                         | ** ** | **—**       | ** ** | **353,553**      | ** ** |
| Investment in subsidiaries                      | ** ** | **326,044** | ** **  | **43,750**                 | ** ** | **—**                      | ** ** | **(369,794**     | **)**      | **—**       | ** ** |
| Long-term investments                           | ** ** | **—**  | ** **  | **—**                 | ** ** | **—**                      | ** ** | **—**       | ** ** | **—**       | ** ** |
| Other assets                                    | ** ** | **6,364**   | ** **  | **8,792**                  | ** ** | **—**                      | ** ** | **—**       | ** ** | **15,156**       | ** ** |
| Total assets                                    | ** ** | **$**       | **643,967** | ** **                 | **$**      | **798,750**                     | ** ** | **$**            | **23,963** | ** **       | **$**      | **(681,432** | **)** | **$** | **785,248** | ** ** |
| ** **                                      |       |        |        |                       |       |                            |       |             |       |             |       |
| **Liabilities and Stockholders’ Equity**   |       |        |        |                       |       |                            |       |             |       |             |       |
| Current liabilities                             |       |        |        |                       |       |                            |       |             |       |             |       |
| Accounts payable                                | ** ** | **$**       | **—**  | ** **                 | **$**      | **113,987**                     | ** ** | **$**            | **4,636**  | ** **       | **$**      | **—** | ** ** | **$** | **118,623** | ** ** |
| Accrued interest                                | ** ** | **7,500**   | ** **  | **—**                 | ** ** | **—**                      | ** ** | **—**       | ** ** | **7,500**        | ** ** |
| Accrued liabilities                             | ** ** | **—**  | ** **  | **3,289**                  | ** ** | **289**                         | ** ** | **—**       | ** ** | **3,578**        | ** ** |
| Other current liabilities                       | ** ** | **—**  | ** **  | **4,305**                  | ** ** | **297**                         | ** ** | **—**       | ** ** | **4,602**        | ** ** |
| Intercompany payable                            | ** ** | **—**  | ** **  | **311,638**                | ** ** | **—**                      | ** ** | **(311,638**     | **)**      | **—**       | ** ** |
| Total current liabilities                       | ** ** | **7,500**   | ** **  | **433,219**                | ** ** | **5,222**                       | ** ** | **(311,638**     | **)**      | **134,303**      | ** ** |
|                                            | ** ** | ** **  | ** **  | ** **                 | ** ** | ** **                      | ** ** | ** **       | ** ** | ** **       | ** ** |
| Long-term debt                                  | ** ** | **300,000** | ** **  | **—**                 | ** ** | **—**                      | ** ** | **—**       | ** ** | **300,000**      | ** ** |
| Minority interest                               | ** ** | **—**  | ** **  | **—**                 | ** ** | **—**                      | ** ** | **9,327**        | ** ** | **9,327**        | ** ** |
| Net deferred tax liabilities                    | ** ** | **—**  | ** **  | **1,371**                  | ** ** | **—**                      | ** ** | **—**       | ** ** | **1,371**        | ** ** |
| Other long-term liabilities                     | ** ** | **—**  | ** **  | **3,780**                  | ** ** | **—**                      | ** ** | **—**       | ** ** | **3,780**        | ** ** |
| Total liabilities                               | ** ** | **307,500** | ** **  | **438,370**                | ** ** | **5,222**                       | ** ** | **(302,311**     | **)**      | **448,781**      | ** ** |
| Stockholders’ equity                       | ** ** | **336,467** | ** **  | **360,380**                | ** ** | **18,741**                      | ** ** | **(379,121**     | **)**      | **336,467**      | ** ** |
| Total liabilities and stockholders’ equity | ** ** | **$**       | **643,967** | ** **                 | **$**      | **798,750**                     | ** ** | **$**            | **23,963** | ** **       | **$**      | **(681,432** | **)** | **$** | **785,248** | ** ** |

 

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**Aventine Renewable EnergyHoldings, Inc. and SubsidiariesCondensed Consolidating Balance SheetDecember 31, 2007**

 
| **(In thousands)**                         | ** ** | **Parent** | ** ** | **Subsidiary  Guarantors** | ** ** | **Non-  Guarantor  Subsidiary** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------|------------|------------|------------|----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                      | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                      | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Assets**                                      |       |       |       |                       |       |                            |       |             |       |             |       |
| Current assets                                  |       |       |       |                       |       |                            |       |             |       |             |       |
| Cash and cash equivalents                       |       | $          | —     |                       | $          | 13,640                          |       | $                | 3,531      |             | $          | — |   | $ | 17,171 |   |
| Short-term investments                          |       | —     |       | 211,500                    |       | —                          |       | —           |       | 211,500          |       |
| Accounts receivable, net                        |       | —     |       | 72,695                     |       | 363                             |       | —           |       | 73,058           |       |
| Inventories                                     |       | —     |       | 80,909                     |       | 1,705                           |       | (1,126           | )          | 81,488           |       |
| Income tax receivable                           |       | —     |       | 11,962                     |       | —                          |       | —           |       | 11,962           |       |
| Intercompany receivable                         |       | 318,272    |       | —                     |       | 1,361                           |       | (319,633         | )          | —           |       |
| Prepaid expenses and other assets               |       | 6          |       | 12,642                     |       | 168                             |       | —           |       | 12,816           |       |
| Total current assets                            |       | 318,278    |       | 403,348                    |       | 7,128                           |       | (320,759         | )          | 407,995          |       |
|                                            |       |       |       |                       |       |                            |       |             |       |             |       |
| Property, plant and equipment, net              |       | —     |       | 93,001                     |       | 18,866                          |       | —           |       | 111,867          |       |
| Construction in process                         |       |       |       | 225,122                    |       | 1,288                           |       | —           |       | 226,410          |       |
| Investment in subsidiaries                      |       | 326,365    |       | 44,347                     |       | —                          |       | (370,712         | )          | —           |       |
| Net deferred tax assets                         |       | —     |       | 1,196                      |       | —                          |       | —-          |       | 1,196            |       |
| Other assets                                    |       | 6,728      |       | 7,989                      |       | —                          |       | —           |       | 14,717           |       |
| Total assets                                    |       | $          | 651,371    |                       | $          | 775,003                         |       | $                | 27,282     |             | $          | (691,471 | ) | $ | 762,185 |   |
|                                            |       |       |       |                       |       |                            |       |             |       |             |       |
| **Liabilities and Stockholders’ Equity**   |       |       |       |                       |       |                            |       |             |       |             |       |
| Current liabilities                             |       |       |       |                       |       |                            |       |             |       |             |       |
| Accounts payable                                |       | $          | —     |                       | $          | 88,675                          |       | $                | 4,322      |             | $          | (1,126 | ) | $ | 91,871 |   |
| Accrued interest                                |       | 7,500      |       | —                     |       | —                          |       | —           |       | 7,500            |       |
| Accrued liabilities                             |       | —     |       | 3,361                      |       | 264                             |       | —           |       | 3,625            |       |
| Other current liabilities                       |       | —     |       | 1,317                      |       | 305                             |       | —           |       | 1,622            |       |
| Intercompany payable                            |       | —     |       | 319,633                    |       | —                          |       | (319,633         | )          | —           |       |
| Total current liabilities                       |       | 7,500      |       | 412,986                    |       | 4,891                           |       | (320,759         | )          | 104,618          |       |
|                                            |       |       |       |                       |       |                            |       |             |       |             |       |
| Long-term debt                                  |       | 300,000    |       | —                     |       | —                          |       | —           |       | 300,000          |       |
| Minority interest                               |       | —     |       | —                     |       | —                          |       | 9,832            |       | 9,832            |       |
| Other long-term liabilities                     |       | —     |       | 3,864                      |       | —                          |       | —           |       | 3,864            |       |
| Total liabilities                               |       | 307,500    |       | 416,850                    |       | 4,891                           |       | (310,927         | )          | 418,314          |       |
| Stockholders’ equity                       |       | 343,871    |       | 358,153                    |       | 22,391                          |       | (380,544         | )          | 343,871          |       |
| Total liabilities and stockholders’ equity |       | $          | 651,371    |                       | $          | 775,003                         |       | $                | 27,282     |             | $          | (691,471 | ) | $ | 762,185 |   |

 

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**Aventine Renewable EnergyHoldings, Inc. and Subsidiaries**

**CondensedConsolidating Statement of Cash Flows**

**For the Six Months Ended June 30,2008**

(Unaudited)

 
| **(In thousands)**                              | ** ** | **Parent** | ** ** | **Subsidiary  Guarantors** | ** ** | **Non-  Guarantor  Subsidiary** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------|------------|------------|------------|----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| * *                                             | * *   | * *   | * *   | * *                   | * *   | * *                        | * *   | * *         | * *   | * *         | * *   |
| **Operating Activities**                             |       |       |       |                       |       |                            |       |             |       |             |       |
| Net cash provided by (used for) operating activities | ** ** | **$**      | **(1,500** | **)**                      | **$**      | **44,480**                      | ** ** | **$**            | **(694**   | **)**            | **$**      | **—** | ** ** | **$** | **42,286** | ** ** |
| ** **                                           | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                      | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Investing Activities**                             | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                      | ** ** | ** **       | ** ** | ** **       | ** ** |
| Additions to property, plant and equipment           | ** ** | **—** | ** ** | **(128,065**               | **)**      | **(1,490**                      | **)**      | **—**       | ** ** | **(129,555**     | **)**      |
| Sale of investment securities                        | ** ** | **—** | ** ** | **179,899**                | ** ** | **—**                      | ** ** | ** **       | ** ** | **179,899**      | ** ** |
| Indemnification proceeds                             | ** ** | **—** | ** ** | **3,039**                  | ** ** | **—**                      | ** ** | ** **       | ** ** | **3,039**        | ** ** |
| Proceeds from the sale of fixed asset                | ** ** | **—** | ** ** | **—**                 | ** ** | **14**                          | ** ** | ** **       | ** ** | **14**           | ** ** |
| Net cash provided by (used for) investing activities | ** ** | **—** | ** ** | **54,873**                 | ** ** | **(1,476**                      | **)**      | **—**       | ** ** | **53,397**       | ** ** |
|                                                 | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                      | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Financing Activities**                             | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                      | ** ** | ** **       | ** ** | ** **       | ** ** |
| Proceeds from issuance of common stock               | ** ** | **1,500**  | ** ** | **—**                 | ** ** | **—**                      | ** ** | **—**       | ** ** | **1,500**        | ** ** |
| Net cash provided by financing activities            | ** ** | **1,500**  | ** ** | **—**                 | ** ** | **—**                      | ** ** | **—**       | ** ** | **1,500**        | ** ** |
| ** **                                           | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                      | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net increase (decrease) in cash and cash equivalents | ** ** | **—** | ** ** | **99,353**                 | ** ** | **(2,170**                      | **)**      | **—**       | ** ** | **97,183**       | ** ** |
| Cash and cash equivalents at beginning of period     | ** ** | **—** | ** ** | **13,640**                 | ** ** | **3,531**                       | ** ** | **—**       | ** ** | **17,171**       | ** ** |
| Cash and cash equivalents at end of period           | ** ** | **$**      | **—** | ** **                 | **$**      | **112,993**                     | ** ** | **$**            | **1,361**  | ** **       | **$**      | **—** | ** ** | **$** | **114,354** | ** ** |

 

**Aventine Renewable EnergyHoldings, Inc. and Subsidiaries**

**Condensed ConsolidatingStatement of Cash Flows**

**For the Six Months Ended June 30,2007**

(Unaudited)

 
| **(In thousands)**                              | ** ** | **Parent** | ** ** | **Subsidiary  Guarantors** | ** ** | **Non-  Guarantor  Subsidiary** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------|------------|------------|------------|----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| * *                                             | * *   | * *   | * *   | * *                   | * *   | * *                        | * *   | * *         | * *   | * *         | * *   |
| **Operating Activities**                             |       |       |       |                       |       |                            |       |             |       |             |       |
| Net cash provided by (used for) operating activities |       | $          | (291,979   | )                          | $          | 328,319                         |       | $                | 8,662      |             | $          | — |   | $ | 45,002 |   |
|                                                 |       |       |       |                       |       |                            |       |             |       |             |       |
| **Investing Activities**                             |       |       |       |                       |       |                            |       |             |       |             |       |
| Additions to property, plant and equipment           |       | —     |       | (77,674                    | )          | (680                            | )          | —           |       | (78,354          | )          |
| Investment in short-term securities                  |       | —     |       | (242,848                   | )          | —                          |       | —           |       | (242,848         | )          |
| Net cash used for investing activities               |       | —     |       | (320,522                   | )          | (680                            | )          | —           |       | (321,202         | )          |
|                                                 |       |       |       |                       |       |                            |       |             |       |             |       |
| **Financing Activities**                             |       |       |       |                       |       |                            |       |             |       |             |       |
| Proceeds from issuance of senior unsecured notes     |       | 300,000    |       | —                     |       | —                          |       | —           |       | 300,000          |       |
| Payment of debt issuance costs                       |       | (8,221     | )          | —                     |       | —                          |       | —           |       | (8,221           | )          |
| Proceeds from stock option exercises                 |       | 200        |       | —                     |       | —                          |       | —           |       | 200              |       |
| Distribution to minority stockholders                |       | —     |       | 5,489                      |       | (7,000                          | )          | —           |       | (1,511           | )          |
| Net cash provided by (used for) financing activities |       | 291,979    |       | 5,489                      |       | (7,000                          | )          | —           |       | 290,468          |       |
|                                                 |       |       |       |                       |       |                            |       |             |       |             |       |
| Net increase in cash and cash equivalents            |       | —     |       | 13,286                     |       | 982                             |       | —           |       | 14,268           |       |
| Cash and cash equivalents at beginning of period     |       | —     |       | 26,413                     |       | 3,378                           |       | —           |       | 29,791           |       |
| Cash and cash equivalents at end of period           |       | $          | —     |                       | $          | 39,699                          |       | $                | 4,360      |             | $          | — |   | $ | 44,059 |   |

 

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**(18)****                          Subsequent Event**

 

On July 31, 2008, the Company entered into apurchase agreement with Nebraska Energy Cooperative, its minority partner inNebraska Energy, LLC, to purchase the 21.6% of Nebraska Energy, LLC it does notalready own.  The Company has agreed toissue 1 million shares of common stock to acquire the remaining interest.  It is expected that this transaction willclose as soon as possible after receiving the necessary approvals from theexisting unit holders of the Nebraska Energy Cooperative.

 

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Item2.    Management’s Discussion and Analysisof Financial Condition and Results of Operations

 

*This report contains forward-looking statements madepursuant to the safe harbor provisions of the Private Securities LitigationReform Act of 1995.  Forward-looking statementsinclude all statements that do not relate solely to current or historical fact,but address events or developments that we anticipate will occur in thefuture.  Forward-looking statementsinclude statements regarding our goals, beliefs, plans or current expectations,taking into account the information currently available to our management.  When we use words such as “anticipate,” “intend,”“expect,” “believe,” “plan,” “may,” “should” or “would” or other words thatconvey uncertainty of future events or outcome, we are making forward-lookingstatements.  Statements relating tofuture sales, earnings, operating performance, restructuring strategies, plantexpansions, capital expenditures and sources and uses of cash, for example, areforward-looking statements.*

 

*These forward-looking statements are subject to variousrisks and uncertainties which could cause actual results to differ materiallyfrom those stated or implied by such forward-looking statements.  We undertake no obligation to publicly releaseany revision of any forward-looking statements contained herein to reflectevents and circumstances occurring after the date hereof, or to reflect theoccurrence of unanticipated events. Information concerning risk factors is contained under Item “1A - RiskFactors” in our Annual Report on Form 10-K for the fiscal year ended December 31,2007.  You should carefully consider allof the risks and all other information contained in or incorporated byreference in this report and in our filings with the SEC.  These risks are not the only ones weface.   Additional risks anduncertainties not presently known to us, or which we currently considerimmaterial, also may adversely affect us. If any of these risks actually occur, our business, financial conditionand results of operations could be materially and adversely affected.*

 

**CompanyOverview**

 

Aventineis a leading producer and marketer of ethanol. Through our own production facilities, marketing alliances with otherethanol producers and our purchase/resale operations, we market and distributeethanol to many of the leading energy companies in the U.S.  We have a comprehensive national distributionnetwork utilizing trucks, a leased railcar and barge fleet and a terminalnetwork at critical points on the nation’s transportation grid where ourethanol is blended with our customers’ gasoline.  Aventine is also a marketer and distributorof biodiesel.  In addition to producingethanol, our facilities also produce several co-products including: corn glutenfeed and meal, corn germ, condensed corn distillers solubles, dried distillersgrain with solubles (“DDGS”), wet distillers grain with solubles (“WDGS”),carbon dioxide and brewers’ yeast.

 

**Resultsof Operations**

 

The following discussionsummarizes the significant factors affecting the consolidated operating resultsof the Company for the three and six month periods ended June 30, 2008 and2007.  This discussion should be read inconjunction with the unaudited condensed consolidated financial statements andnotes to the unaudited condensed consolidated financial statements contained inItem 1 above, and the consolidated financial statements and related notes forthe year ended December 31, 2007 included in the Company’s Annual Reporton Form 10-K.

 

Our revenues are principallyderived from the sale of ethanol and from the sale of co-products (corn glutenfeed and meal, corn germ, condensed corn distillers solubles, DDGS, WDGS,carbon dioxide, and brewers’ yeast) that we produce as by-products during theproduction of ethanol at our plants, which we refer to as co-productrevenues.  We sell ethanol obtained fromthe following sources:

 

·                  Ethanol which we manufacture at our plants;

·                  Ethanol which we purchase from our marketingalliance partners; and

·                  Ethanol that we purchase from other producersand marketers.

 

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We market and sell ethanolwithout regard to whether we produced it, are marketing it for our marketingalliance partners or purchased it for resale from other producers ormarketers.  In addition to ethanol, wealso purchase and market biodiesel.

 

*Executive Summary*

 

Weincurred a net loss of $1.9 million, or $0.05 per diluted share, in the secondquarter of 2008, as compared to net income of $12.6 million, or $0.30 perdiluted share, in the second quarter of 2007. The net loss in the second quarter of 2008 includes $8.5 million inlosses related to the sale of auction rate securities.  Excluding this loss, net income and dilutedearnings per share would have been $6.6 million and $0.16, respectively.  Net income in this quarter was also significantlyaffected by realized and unrealized losses on hedges, significantly higher corncosts, higher utility costs and higher legal and other professional fees,offset somewhat by higher ethanol pricing and higher volumes of ethanolsold.  Revenue in the second quarter of2008 was a record at $601.6 million, an increase of $206.7 million, or 52.3%,from second quarter 2007 revenue of $394.9 million.  Commodity spread, defined as gross ethanolselling price per gallon less net corn cost per gallon, was basically flat inthe second quarter of 2008 as compared to 2007, at $1.29 per gallon, ascompared to $1.28 per gallon in the second quarter of 2007.  The average sales price per gallon of ethanolincreased in Q2’08 to $2.50 per gallon from the $2.29 average received in Q2’07.  However, corn costs during the second quarterof 2008 averaged $5.38 per bushel, significantly higher than our second quarter2007 cost of $3.99 per bushel.

 

**Gallons of ethanol sold inthe second quarter of 2008 increased 38.8%, to 220.3 million gallons from 158.7million gallons in the second quarter of 2007. Higher purchase/resale gallons and higher volumes purchased frommarketing alliance partners were offset by declines in equity production.  Ethanol production in the quarter totaled45.6 million gallons, down from 50.7 million gallons in the second quarter of2007.**

 

Grossprofit was $32.9 million in the second quarter of 2008, an increase of $5.4million from the second quarter of 2007. While gross profit increased, the gross profit percentage decreased inthe second quarter of 2008 to 5.5%, from 6.9% in the second quarter of2007.  The decrease in the gross profitpercentage is mainly due to a shift in the mix of gallons available for sale,with less higher margin production gallons being replaced with an increase in thenumber of gallons of lower margin marketing alliance and purchase/resalevolumes.  The economic impact of sellinggallons held in inventory at the end of Q1’08 with a $1.95 per gallon value asprices increased during Q2’08 was a positive impact to cost of goods sold ofapproximately $13.7 million.  The averageinventory cost of $2.28 per gallon at the end of the second quarter of 2008versus $1.95 at the end of the first quarter of 2008 reflects the increase inethanol prices during the quarter using our weighted average FIFO approach tocalculating inventory.  Similarly, rising prices throughout Q2’07 had apositive economic impact on cost of goods sold of $2.1 million.

 

Our inventory isvalued based upon a weighted average price we pay for ethanol that we purchasefrom our marketing alliance partners and our purchase/resale transactions,along with our own cost to produce ethanol.  Changes, either upward ordownward, in our purchased cost of ethanol or our own production costs, willcause the inventory value to fluctuate from period to period, perhapssignificantly.  These changes in value flow through our statement ofoperations as the inventory is sold and can significantly increase or decreaseour profitability.

 

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Othernon-operating expense for the second quarter of 2008 includes $14.1 million ofrealized and unrealized net losses on derivative contracts, including theeffect of marking to market derivative contracts, versus net gains in thesecond quarter of 2007 of $2.1 million. Derivative gains and losses for Q2’08 are composed of net realized gainson CBOT corn positions of $4.4 million, net realized losses on short gasolinefuture positions of $3.9 million, net unrealized losses on CBOT corn positionsof $7.0 million and net unrealized losses on short gasoline positions of $7.6million.  All of our derivative positionsrequire cash settlement on a daily basis. Economically offsetting our short gasoline positions are forward ethanolsales contracts that are indexed to gasoline.  Such contracts are notmarked to market.  Also not marked to market are below market forwardcontracts to purchase corn that are either stand-alone, or are economically takenagainst short futures positions.

 

*For theThree Months Ended June 30, 2008 Compared to the Three Months Ended June 30,2007*

 

Totalgallons of ethanol sold in the second quarter of 2008 increased to 220.3million gallons, versus 158.7 million gallons sold in the second quarter of2007.  Gallons of ethanol were sourced asfollows:

 
| ** **                                                     | ** ** | **For the Three Months Ended June 30,** | ** ** | **Increase/** | ** ** | **% Increase/** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------|------------|---------------|------------|----------------------|------------|
| **(In thousands, except for percentages)** | ** ** | **2008**                                | ** ** | **2007**      | ** ** | **(Decrease)**       | ** ** | **(Decrease)** | ** ** |
| Equity  production                                             | ** ** | **45,590**                              |       | 50,679        |       | (5,089               | )          | (10.0 | )% |
| Marketing  alliance purchases                                  | ** ** | **120,225**                             |       | 75,105        |       | 45,120               |       | 60.1 | % |
| Purchase/resale                                                | ** ** | **49,144**                              |       | 22,085        |       | 27,059               |       | 122.5 | % |
| Decrease  (increase) in inventory                              | ** ** | **5,305**                               |       | 10,862        |       | (5,557               | )          | N.M. | * |
| Total                                                          | ** ** | **220,264**                             |       | 158,731       |       | 61,533               |       | 38.8 | % |

 

----

*  Not meaningful

 

Netsales in the second quarter of 2008 increased 52.3% from the second quarter of2007.  Net sales were $601.6 million inthe second quarter of 2008 versus $394.9 million in the second quarter of 2007.  Overall, the increase in net sales was theresult of the increase in the number of gallons of ethanol sold and an increasein the average sales price of ethanol sold. Ethanol prices averaged $2.50 per gallon in the second quarter of 2008versus $2.29 in the second quarter of 2007.

 

Co-productrevenues for the second quarter of 2008 totaled $37.0 million, an increase of$13.8 million or 59.5%, from the second quarter 2007 total of $23.2million.  Co-product revenues increasedduring the second quarter of 2008 as a result of higher co-product pricing, principallygerm, meal, yeast and DDGS caused by the significant increase in cornprices.  In the second quarter of 2008,we sold 272.8 thousand tons, versus 297.1 thousand tons in the second quarterof 2007.  Co-product revenues, as apercentage of corn costs, were 40.2% during the second quarter of 2008, versus31.1% in the second quarter of 2007. Co-product revenues, as a percentage of corn costs, increased in thesecond quarter of 2008 as compared to 2007 as the result of increases in ourco-product pricing rising at a faster rate in 2008 versus 2007 as compared tothe price we paid for corn.  For thesecond quarter of 2008, our average purchase price per bushel of corn was lowerthan the CBOT price in effect during the same period.

 

Costof goods sold for the quarter ended June 30, 2008 was $568.7 million,compared to $367.5 million for the quarter ended June 30, 2007, anincrease of $201.2 million or 54.7%.  Asa percentage of net sales, cost of good sold increased from 93.1% to94.5%.  Cost of goods sold consists ofthe cost to produce ethanol at our own facilities, the cost of purchasingethanol from our marketing alliance partners and the cost of purchasing ethanoland biodiesel from other producers and marketers, freight and logistics coststo ship ethanol, biodiesel and co-products, and the cost of motor fuel taxeswhich have been billed

 

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tocustomers.  The increase in cost of goodssold is principally the result of increased corn costs, increased conversioncosts, and higher prices paid for purchased biofuels.

 

Purchasedethanol in the second quarter of 2008 totaled $393.6 million, versus $207.9million in the second quarter of 2007. The increase in purchased ethanol results from both the increase in thenumber of gallons of ethanol purchased and from an increase in the cost pergallon of ethanol purchased.  In thesecond quarter of 2008, we purchased 169.4 million gallons of ethanol at anaverage cost of $2.32 per gallon as compared to 97.2 million gallons of ethanolat an average cost of $2.14 in the second quarter of 2007.

 

Productioncosts include corn costs, conversion costs (defined as the cost of convertingthe corn into ethanol, and includes production salaries, wages and stockcompensation costs, fringe benefits, utilities (including coal and naturalgas), maintenance, denaturant, insurance, materials and supplies and othermiscellaneous production costs) and depreciation.  Corn costs in the second quarter of 2008totaled $92.1 million or $5.38 per bushel, versus $74.7 million, or $3.99 perbushel in the second quarter of 2007. The increase in corn costs is due to higher corn prices as a result ofincreased demand for grains on a global basis, lower expected corn productionas a result of severe flooding in the Midwest portion of the U.S., along withexpected new ethanol production facilities being built.

 

Conversioncosts for the second quarter of 2008 increased to $33.1 million from $30.9million for the second quarter of 2007. The total dollars spent on conversion costs increased year over year asa result of higher natural gas costs, higher denaturant costs, and higheroutside service costs.  The conversioncost per gallon increased year over year to $0.73 per gallon in the secondquarter of 2008 versus $0.61 per gallon in the second quarter of 2007.  Conversion costs per gallon in the secondquarter of 2008 were also negatively affected by the lower number of gallonsproduced.

 

Depreciationin the second quarter of 2008 totaled $3.3 million, versus $3.0 million in thesecond quarter of 2007.  Motor fuel taxeswere $4.5 million in the second quarter of 2008 versus $4.3 million in thesecond quarter of 2007.  The cost ofmotor fuel taxes are recovered through billings to customers.

 

Freight/logisticscosts in the second quarter of 2008 increased to $44.3 million, orapproximately $0.20 per gallon, from $28.0 million, or $0.18 per gallon in thesecond quarter of 2007. Freight/logistics cost per gallon is calculated by taking totalfreight/logistics costs incurred (including costs to ship co-products) anddividing by the total ethanol gallons sold. The increase in freight costs was primarilydue to increasing fuel surcharges resulting from record high oil prices, whichcontinue to negatively impact general freight rates, and from general freight increases associated with moving product along longersupply lines to emerging new markets in the Southeast. These additionalexpenses have been made to support higher prices on the increased volumes.

 

The average inventory costof $2.28 per gallon at the end of the second quarter of 2008 versus $1.95 atthe end of the first quarter of 2008 reflects the increase in ethanol pricesduring the quarter using our weighted average FIFO approach to calculatinginventory.  The economic impact of selling gallons that were previouslyheld in inventory at the end of the first quarter of 2008 during a period ofrising prices was $13.7 million. Similarly, rising prices throughout Q2’07 had a positive economic impacton cost of goods sold of $2.1 million.

 

Selling,general and administrative (“SG&A”) expenses were $10.1 million in thesecond quarter of 2008, compared to $8.8 million in the second quarter of2007.  The year over year increaseprimarily reflects higher expenditures for legal and other professional fees,along with increased personnel costs.

 

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In the second quarter of2008, the Company incurred additional losses totaling $8.5 million on theliquidation of its portfolio of auction rate securities.  The Company holds no auction rate securitiesas of June 30, 2008.

 

Interestincome in the second quarter of 2008 was $0.5 million, versus $4.2 million inthe second quarter of 2007.  The decreasein interest income is due to a lower level of funds available to invest,combined with lower interest rates received on the auction rate securities wepreviously held, many which reset to zero for most of Q2’08.

 

Interestexpense in the second quarter of 2008 was $1.1 million, as compared to $7.0million in the second quarter of 2007. Interest expense in the second quarter of 2008 was lower than in thesame period in 2007 due to a greater amount of interest being capitalized onour expansion projects during the second quarter of 2008.  Interest expense in the second quarter of2008 includes $7.5 million in interest on $300 million aggregate principalamount of our 10.0% senior unsecured notes issued March 27, 2007 and $0.2million of amortization of deferred financing fees, reduced by capitalizedinterest of $6.6 million.

 

Othernon-operating expense for the second quarter of 2008 includes $14.1 million ofrealized and unrealized net losses on derivative contracts, including theeffect of marking to market derivative contracts, versus net gains in thesecond quarter of 2007 of $2.1 million. Derivative gains and losses for the second quarter of 2008 are comprisedof net realized gains on CBOT corn positions of $4.4 million, net realizedlosses on short gasoline future positions of $3.9 million, net unrealizedlosses on CBOT corn positions of $7.0 million and net unrealized losses onshort gasoline positions of $7.6 million. All of our derivative positions require cash settlement on a dailybasis.  Without such cash settlement onthe derivative contracts, cash flows from operations would have beensignificantly greater.  Economicallyoffsetting our short gasoline positions are forward ethanol sales contractsthat are indexed to gasoline.  Such contracts are not marked tomarket.  Also not marked to market are below market forward contracts topurchase corn that are either stand-alone, or are economically taken againstshort futures positions.

 

Theminority interest for the quarter ended June 30, 2008 was a reduction ofexpense of $0.3 million, compared to a charge to income of $0.7 million for thequarter ended June 30, 2007.  Thischange reflects the reduced operating performance of our Nebraska subsidiarycaused primarily by the year over year significant increase in corn costs, andthe lower average price received from selling wet distillers grains.

 

Incometax expense in the second quarter of 2008 totaled $3.4 million.  The Company does not expect to receive anincome tax benefit related to the losses incurred on the sale of auction ratesecurities as it does not expect to have sufficient capital gains to offset the$31.6 million capital loss.  As a result,the Company recorded a valuation allowance equal to the amount of the incometax benefit it recorded resulting from the loss on the sale of auction rate securities.  Excluding the effects of the loss on the saleof auction rate securities, the effective income tax rate in Q2’08 was 33.8% ofpre-tax income, versus an income tax rate of 28.9% in the second quarter of2007.  In 2007, our effective income taxrate was lower due to the amount of tax free interest received on ourinvestment portfolio.

 

*For theSix Months Ended June 30, 2008 Compared to the Six Months Ended June 30,2007*

 

Totalgallons of ethanol sold in the first six months of 2008 increased to 431.5million gallons, versus 351.9 million gallons sold in the first six months of2007.  Gallons of ethanol were sourced asfollows:

 
| ** **                                                     | ** ** | **For the Six Months Ended June 30,** | ** ** | **Increase/** | ** ** | **% Increase/** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------|------------|---------------|------------|----------------------|------------|
| **(In thousands, except for percentages)** | ** ** | **2008**                              | ** ** | **2007**      | ** ** | **(Decrease)**       | ** ** | **(Decrease)** | ** ** |
| Equity  production                                             | ** ** | **93,325**                            |       | 99,586        |       | (6,261               | )          | (6.3 | )% |
| Marketing  alliance purchases                                  | ** ** | **250,114**                           |       | 209,814       |       | 40,300               |       | 19.2 | % |
| Purchase/resale                                                | ** ** | **88,108**                            |       | 43,613        |       | 44.495               |       | 102.0 | % |
| Decrease  (increase) in inventory                              | ** ** | **(41**                               | **)**      | (1,094        | )          | 1,053                |       | N.M. | * |
| Total                                                          | ** ** | **431,506**                           |       | 351,919       |       | 79,587               |       | 22.6 | % |

 

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*  Not meaningful

 

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Netsales in the first six months of 2008 increased 33.7% from the same period in2007.  Net sales were $1,111.5 million inthe first half of 2008 versus $831.6 million in the first half of 2007.  Overall, the increase in net sales was theresult of the increase in the number of gallons of ethanol sold and an increasein the average sales price of ethanol sold. Ethanol prices averaged $2.36 per gallon in the first half of 2008versus $2.18 in the first half of 2007.

 

Co-productrevenues for the first six months of 2008 totaled $70.3 million, an increase of$24.0 million or 51.8%, from the first six months of 2007 total of $46.3million.  Co-product revenues increasedduring the first half of 2008 as a result of higher co-product pricing,principally germ, meal, yeast and DDGS caused by the significant increase incorn prices.  In the first six months of2008, we sold 545.2 thousand tons, versus 564.1 thousand tons in the first sixmonths of 2007.  Co-product revenues, asa percentage of corn costs, were 40.7% during the first six months of 2008,versus 33.2% in the first six months of 2007. Co-product revenues, as a percentage of corn costs, increased in thefirst half of 2008 as compared to 2007 as the result of increases in co-productpricing rising at a faster rate in 2008 versus 2007 as compared to corn.  For the first half of 2008, our average purchaseprice per bushel of corn was lower than the CBOT price in effect during thesame period.

 

Costof goods sold for the first six months of 2008 was $1,054.6 million, comparedto $775.7 million for the first six months of 2007, an increase of $278.9 millionor 36.0%.  As a percentage of net sales,cost of goods sold increased from 93.3% to 94.9%.  Cost of goods sold consists of the cost toproduce ethanol at our own facilities, the cost of purchasing ethanol from ourmarketing alliance partners and the cost of purchasing ethanol and biodieselfrom other producers and marketers, freight and logistics costs to shipethanol, biodiesel and co-products, and the cost of motor fuel taxes which havebeen billed to customers.  The increasein cost of goods sold is principally the result of increased corn costs,increased conversion costs, and higher prices paid for purchased biofuels.

 

Purchasedethanol in the first half of 2008 totaled $735.5 million, versus $508.7 millonin the first half of 2007.  The increase inpurchased ethanol results from both the increase in the number of gallons ofethanol purchased and from an increase in the cost per gallon of ethanolpurchased.  In the first half of 2008, wepurchased 338.2 million gallons of ethanol at an average cost of $2.17 pergallon as compared to 253.4 million gallons of ethanol at an average cost of$2.01 in the first half of 2007.

 

Productioncosts include corn costs, conversion costs (defined as the cost of convertingthe corn into ethanol, and includes production salaries, wages and stockcompensation costs, fringe benefits, utilities (including coal and naturalgas), maintenance, denaturant, insurance, materials and supplies and othermiscellaneous production costs) and depreciation.  Corn costs in the first six months of 2008totaled $172.9 million or $4.93 per bushel, versus $139.4 million, or $3.79 perbushel in the first six months of 2007. The increase in corn costs is due to higher corn prices as a result ofincreased demand for grains on a global basis, lower expected corn productionas a result of severe flooding in the Midwest portion of the U.S. along withexpected new ethanol production facilities being built.

 

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Conversioncosts for the first half of 2008 increased to $62.9 million from $57.9 millionfor the first half of 2007.  The totaldollars spent on conversion costs increased year over year as a result ofhigher natural gas costs, higher denaturant costs, and higher outside servicecosts.  The conversion cost per gallonincreased year over year to $0.67 per gallon in the first six months of 2008versus $0.58 per gallon in the first six months of 2007.  Conversion costs per gallon in the first halfof 2008 were also negatively affected by the lower number of gallons producedas a result of lowering the denaturant blending levels to 1.96% from 4.76%.

 

Depreciationin the first half of 2008 totaled $6.6 million, versus $6.0 million in thefirst half of 2007.  Depreciation expenseincreased in the first half of 2008 as a result of the Pekin dry mill rampingup production during the first quarter of 2007. Motor fuel taxes were $7.9 million in the first half of 2008 versus$10.5 million in the first half of 2007. The cost of motor fuel taxes are recovered through billings tocustomers.

 

Freight/logisticscosts in the first half of 2008 increased to $86.5 million, or approximately$0.20 per gallon, from $58.2 million, or $0.17 per gallon in the first half of2007.  Freight/logistics cost per gallonis calculated by taking total freight/logistics costs incurred (including coststo ship co-products) and dividing by the total ethanol gallons sold.  The increase in freight costs was primarily due to increasing fuel surcharges resultingfrom record high oil prices, which continue to negatively impact generalfreight rates, and from general freightincreases associated with moving product along longer supply lines to emergingnew markets in the Southeast. These additional expenses have been made tosupport higher prices on the increased volumes.

 

The average inventory costof $2.28 per gallon at the end of the first half of 2008 versus $1.80 at theend of 2007 reflects the increase in ethanol prices during the quarter usingour weighted average FIFO approach to calculating inventory.  The economicimpact of selling gallons that were previously held in inventory at the end of2007 during a period of rising prices was $17.5 million.  Similarly, rising prices throughout the firsthalf of 2007 had a positive economic impact on cost of goods sold of $2.1million.

 

Selling,general and administrative (“SG&A”) expenses were $19.0 million in thefirst six months of 2008, compared to $18.4 million in the first six months of2007.  The year over year increaseprimarily reflects higher expenditures for legal and other professional fees,along with increased personnel costs.

 

In the first six months of2008, the Company incurred losses totaling $31.6 million related to thevaluation and ultimate sale of its portfolio of auction rate securities.  The Company holds no auction rate securitiesas of June 30, 2008.

 

Interestincome in the first half of 2008 was $2.7 million, versus $5.5 million in thefirst half of 2007.  The decrease ininterest income is due to a lower level of funds available to invest, combinedwith lower interest rates received on the auction rate securities we previouslyheld, many which reset to zero for most of 2008.

 

Interestexpense in the first six months of 2008 was $3.5 million, as compared to $7.4million in the first six months of 2007. Interest expense in the first half of 2008 was lower than in the sameperiod in 2007 due to a greater amount of interest being capitalized on ourexpansion projects during 2008.  Interestexpense in the first half of 2008 includes $15.0 million in interest on $300million aggregate principal amount of our 10.0% senior unsecured notes issued March 27,2007 and $0.5 million of amortization of deferred financing fees, reduced bycapitalized interest of $12.0 million.

 

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Othernon-operating expense for the first half of 2008 includes $12.3 million ofrealized and unrealized net losses on derivative contracts, including theeffect of marking to market derivative contracts, versus net gains in the firsthalf of 2007 of $6.0 million.  Derivativegains and losses for the first half of 2008 are composed of net realized gainson CBOT corn positions of $7.6 million, net realized losses on short gasolinefuture positions of $4.5 million, net unrealized losses on CBOT corn positionsof $8.4 million and net unrealized losses on short gasoline positions of $7.0million.  All of our derivative positionsrequire cash settlement on a daily basis. Economically offsetting our short gasoline positions are forward ethanolsales contracts that are indexed to gasoline.  Such contracts are notmarked to market.  Also not marked to market are below market forwardcontracts to purchase corn that are either stand-alone, or are economicallytaken against short futures positions.

 

Theminority interest for the first half of 2008 was a reduction of expense of $0.5million, compared to a charge to income of $1.2 million for the first half of2007.  This change reflects the reducedoperating performance of our Nebraska subsidiary caused primarily by the yearover year significant increase in corn costs, and the lower average pricereceived from selling wet distillers grains.

 

Incometax expense in the first half of 2008 totaled $8.9 million.  The Company does not expect to receive anincome tax benefit related to the losses incurred on the sale of auction ratesecurities as it does not expect to have sufficient capital gains to offset the$31.6 million capital loss.  As a result,the Company recorded a valuation allowance equal to the amount of the incometax benefit it recorded resulting from the loss on the sale of auction ratesecurities.  Excluding the effects of theloss on the sale of auction rate securities, the effective income tax rate inthe first half of 2008 was 32.1% of pre-tax income, versus an income tax rateof 33.0% in the first half of 2007.

 

**Trendsand Factors that May Affect Future Operating Results**

 

*Ethanol Pricing*

 

Ethanol prices increased throughout the first halfof 2008.  The effect of higher ethanolprices benefited our gross profit during 2008 by offsetting increasing costs toproduce.  Both corn and gasoline priceshave risen in 2008.  The rise in price ofthese commodities favorably impacts ethanol price since corn is the principalfeedstock in ethanol production and ethanol replaces gasoline.  The rise in ethanol prices could also beattributable to a combination of a new renewable fuel mandate passed byCongress in December 2007 which requires 9 billion gallons of renewablebiofuel consumption in 2009 and favorable economics of blending ethanol due to thecurrent price of ethanol being substantially lower than the price ofgasoline.  During the first six months of2008, ethanol has been sold at a significant discount to wholesale gasoline.  This, combined with the $0.51 per gallon taxcredit available to blenders, provided significant arbitrage opportunities toblenders to increase the amount of ethanol they are blending.  However, we are unable to predict whetherethanol prices will remain strong, or whether new supply projected to comeonline will cause ethanol prices to fall.

 

Asof June 30, 2008, we had contracts for delivery of ethanol totaling 184.5million gallons through December 2008. These contracts are shared for the benefit of the marketing alliancepool as a whole, of which Aventine is a part, and are not solely applicable toAventine.  These commitments were for30.3 million gallons at an average fixed price of $2.32 per gallon, 35.8million gallons at an average spread to wholesale gasoline of a negative 36cents per gallon (based upon the NYMEX, Chicago and NY harbor indices), and118.4 million gallons at spot prices (using various Platt, OPIS and AXXISindices).

 

Forthe third quarter of 2008, we have contracts for delivery of ethanol totaling108.1 million gallons.  These commitmentsare for 16.3 million gallons at an average fixed price of $2.37, 22.8 million

 

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gallonsat an average spread to wholesale gasoline of a negative 34 cents (based uponthe NYMEX, Chicago and NY harbor indices), and 69.0 million gallons at spotprices (using various Platt, OPIS and AXXIS indices).

 

Atthe end of the second quarter of 2008, we also had short gasoline positionsoutstanding using swap agreements where we sold 8.1 million gallons of gasolineat an average fixed price of $2.15 per gallon for delivery through December 2008.  We did this to hedge some of our gasolineindexed contracts from potentially falling gasoline prices.  The fair value of these positions at June 30,2008 was a loss of approximately $10.3 million.

 

*Corn*

 

Corn prices have risen significantly since 2006 andreached record levels during the second quarter of 2008.  We believe that corn prices are likely toremain above historical levels for the foreseeable future.

 

We continuously purchase corn for physical deliveryfrom suppliers using forward purchase contracts in order to assure supply.  As we do this, we also typically short a likeamount of CBOT corn futures with similar dates to lock in the basisdifferential.  We also occasionally useCBOT futures contracts to lock in the price of corn by taking long positions inCBOT contracts in order to reduce our risk of price increases.  Exchange traded forward contracts forcommodities are marked to market each period. Our forward physical purchases of corn are not marked to market.

 

At June 30, 2008, we had fixed the price of18.9 million bushels of corn through December 2008 at an average of $5.83per bushel, representing approximately 50% percent of our corn requirements forthe remainder of 2008.

 

*Marketing Alliance*

 

Our marketing alliance annualized volume at the endof the second quarter of 2008 was 538 million gallons. With our own equityproduction, our marketing alliance partner volumes, and purchase/resalevolumes, we distributed approximately 881 million gallons of ethanol on anannualized basis in the second quarter of 2008. Our expectation for 2008 is that another 316 million gallons of marketingalliance partner production will come online, bringing our total ethanolmarketing capacity to approximately 1.2 billion gallons annually by the end ofthis year.  Going forward, we may seechanges to our marketing alliance volumes as a result of economic pressureswhich may affect marketing alliance volumes available for distribution.

 

*Supply and Demand*

 

Accordingto the Renewable Fuels Association, the annual ethanol production capacity inthe U.S. of plants currently in operation and those under construction isalmost 13.4 billion gallons annually. This volume of ethanol production exceeds the mandate for renewablebiofuel consumption required in 2012. Ethanol produced in the United States competes with sugar-based ethanolproduced in Brazil.  This domesticproduction capacity, along with imports, may cause supply to exceeddemand.  If additional demand for ethanolis not created, either through additions to discretionary blending (throughincreased penetration rates in areas that blend ethanol today or through theestablishment of new markets where little or no ethanol is blended today), orthrough additional state level mandates, the excess supply may cause ethanolprices to decrease, perhaps substantially.

 

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*Expansion*

 

We have identifiedopportunities to increase our equity production capacity through thedevelopment of new production facilities. We are currently building 113 million gallon annualized capacity ethanolproduction facilities at both Mt. Vernon, Indiana and Aurora, Nebraska, wherewe expect to begin ramping up ethanol production in the first quarter of2009.  In addition, we are obligatedto add an additional 113 million gallons of capacity through a phase IIexpansion in Mt. Vernon, Indiana, and would be subject to material penalties ifwe do not.  We also intend to add anadditional 113 million gallons of capacity through a phase II expansion atAurora, Nebraska, along with potentially expanding our existing Pekin, Illinoiscampus.  The timing of these expansionswill be based upon, among other factors, market conditions and the availabilityof financing on attractive terms.  Weanticipate that the aggregate capital expenditures to build our phase Iexpansion at each of Mt. Vernon and Aurora, excluding capitalized interest,will be approximately $250 million per plant, which includes approximately $15million of additional infrastructure at each plant to facilitate theconstruction of the phase II expansions. We have not yet entered into agreements for any of our additionalexpansions.  The cost to build theseadditional expansions will depend on market conditions at the time constructionis commenced and may be higher or lower than the cost of the phase Iexpansions.** **Therecan be no assurance that we can raise additional funds to complete theseprojects.

 

Wemay be subject to material penalties if we do not timely complete phase I ofthe Aurora expansion or either phase of the Mt. Vernon expansion.  If phase I of the Aurora plant is notcompleted and fully operational by July 1, 2009 we will be responsible forliquidated damages of $138,889 per month (up to a maximum of $5 million) untilthe plant is fully operational.  If we donot pay these damages, the counterparty has the right to repurchase theproperty at cost (subject to adjustment for any expenses which we have paidwith respect to infrastructure construction). We recently amended our lease with the Indiana Port Commission toprovide additional flexibility as to the timing of the phase II expansion atMt. Vernon.  This lease, as amended,requires substantial completion of phase I (an initial 110 million gallons ofcapacity) by March 1, 2009 and substantial completion of phase II (anadditional 110 million gallons of capacity) by January 1, 2011, subject inthe case of the phase II to specified extension rights.  If we do not achieve these milestones, theState may, subject to specified cure rights, take over construction andcomplete the facility at our expense.  Inaddition, if we fail to achieve these milestones we will, subject to specifiedcure rights or our ability to negotiate an extension, be in default under ourlease and the State may also, at its election, (i) without terminating thelease re-let the premises to a third party and charge us for any necessaryrepairs and alterations, (ii) without terminating the lease, require us topay all amounts we are obligated to pay under the lease as they become payable,less any amount received from any re-letting of the premises or (iii) terminatethe lease.  If the State of Indianaterminates the lease it can require that we pay liquidated damages in theamount by which the lease payments we are obligated to make under the leaseexceed the fair and reasonable rental value of the premises, each discounted topresent value (but in no event being less than two years of basic rent andminimum guaranteed wharfage under the lease). In addition, upon any termination or expiration of the lease, the Statedoes not have to pay us for the value of the plant or any other improvementsthat we made to the premises and can require us to restore the leased premisesto their original condition at our cost and expense.  In addition, under the design build agreementsfor the initial 113 million gallon capacity expansion at each of Mt Vernon andAurora, we have the ability to delay construction by up to 180 days.  If we do so, we will be responsible forcertain increased costs and foregone profit of the contractor (potentiallyincluding an early completion bonus).  Ifwe were to delay construction beyond 180 days the contractor would be entitledto treat the delay as a termination by us for convenience and we would be responsiblefor certain costs and expenses of the contractor in connection with suchtermination.

 

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*Biodiesel*

 

Duringthe first half of 2008, we sold 2.1 million gallons of biodiesel.

 

**Liquidity and CapitalResources**

 

*Overview and Outlook*

 

Thefollowing table sets forth selected information concerning our financialcondition:

 
| **(In thousands)**   | ** **   | **June 30,  2008   (Unaudited)** | ** **   | **December 31,   2007** | ** **   |
|---------------------------|--------------|--------------------------------------------|--------------|-----------------------------------|--------------|
| *** ***              | *** *** | *** ***                               | *** *** | *** ***                      | *** *** |
| Cash and cash equivalents | ** **   | **$**                                      | **114,354**  |                              | $            | 17,171 |   |
| Short-term investments    | ** **   | **—**                                 |         | 211,500                           |         |
| Working capital           | ** **   | **177,343**                                |         | 303,377                           |         |
| Total debt                | ** **   | **300,000**                                |         | 300,000                           |         |
| Current ratio             | ** **   | **2.32**                                   |         | 3.90                              |         |
|                           |              |                                            |              |                                   |              |  |  |

 

During the second quarter, the Companygenerated cash of $97.1 million from the sale of its remaining position ofauction rate securities.  As a result,the Company recorded an additional loss of $8.5 million in the second quarter,bringing the total losses on auction rate securities to $31.6 million.  The Company holds no auction rate securitiesas of June 30, 2008.

 

The Company has made commitments for theconstruction of new ethanol facilities. The initial phase I expansions in Mt. Vernon, Indiana and Aurora,Nebraska began construction in 2007.  Itis expected that each phase I project will cost approximately $250million.  Through June 30, 2008,approximately $313 million has been spent on these two projects.  We expect to spend an additional $190 millionto complete these projects, excluding capitalized interest.  Total liquidity available to us at the end ofthe second quarter of 2008 was $245.7 million, comprised of $114.4 million incash and cash equivalents and $131.3 million available under our existingsecured revolving credit facility.

 

In addition to funding capital expenditures, ourprincipal use of liquidity is funding our working capital needs.  Our working capital needs are primarilydriven by inventory, accounts receivable and accounts payable levels.  Inventory, accounts receivable and accountspayable levels can vary materially as a result of changes in commodity prices,particularly corn and ethanol prices, as well as the number of gallons ininventory, the number of gallons of ethanol purchased in purchase resale transactionsor from marketing alliance partners and days’ sales outstanding of receivables.

 

TheCompany continues to evaluate options to increase the amount of liquidityavailable to it, including discussions with banks on a new or amended liquidityfacility or raising additional capital. However, we currently expect the existing liquidity available to us,including our current cash balances, amounts available under our existingsecured revolving credit facility and anticipated cash flow from operations, willbe sufficient to satisfy existing anticipated working capital needs, debtservice obligations, capital expenditures and other anticipated cashrequirements for 2008.

 

On October 26, 2006, Aventine’s Board of Directors approved acommon stock share buyback program of up to $50 million.  Under the repurchase program, the Company maybuy back shares from time to time on the open market.  The program has no minimum share repurchaseamounts, and there is 

 

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nofixed time period under which any share repurchases must take place.  This share repurchase program is not expectedto impact the Company’s expansion plans. From program inception through the end of the second quarter of 2008,the Company has repurchased a total of 369,615 shares of its common stock.  The amount remaining under the authorizationto repurchase stock is approximately $45.9 million.  The amounts the Company may repurchase underthis program in the future may be affected by cash required to complete currentfacility expansion, as well as cash provided by operations.

 

*Sources of Liquidity*

 

Ourprincipal sources of liquidity are cash, cash equivalents, cash provided byoperations, and cash available under our secured revolving credit facility.

 

*Cashand cash equivalents.*  Forthe first six months of 2008, cash and cash equivalents increased by $97.2million.  Cash and cash equivalents as ofJune 30, 2008 and December 31, 2007 were $114.4 million and $17.2million, respectively.  The increase incash and cash equivalents is principally the result of the liquidation of ourauction rate security portfolio, along with cash provided by operations, offsetby expenditures related to our plant expansions.

 

C*ash provided by operations.* Net cash provided by operating activities in the first six months of2008 was $42.3****million, as compared to cashprovided by operating activities of $45.0 million for the first six months of2007.  Cash provided by operations in2008 was affected by a regularly scheduled $15 million semi-annual interestpayment made in the second quarter of 2008 on our 10% senior unsecured bonds.  We issued these bonds in March 2007.  For 2007, no interest payment on these bondswas scheduled to be made until October 2007.

 

*Cash available under our liquidity facility*.  In March 2007, we established a new fiveyear secured revolving credit facility with JPMorgan Chase Bank, N.A., asadministrative agent and a lender, of up to $200 million, subject to collateralavailability, which, under certain circumstances, can be increased to $300million.  See “Item 2 – Management’sDiscussion and Analysis of Financial Condition and Results of Operation -Secured Revolving Credit Facility” below for more information about our securedrevolving credit facility.

 

Wehad no borrowings outstanding under our secured revolving credit facility at June 30,2008, and $21.9 million of standby letters of credit outstanding, therebyleaving approximately $131.3 million in borrowing availability under oursecured revolving credit facility as of that date.

 

*Uses of Liquidity*

 

Our principal uses of liquidity are capitalexpenditures, payments related to our outstanding debt and liquidity facility,working capital and the repurchase of shares of our common stock.

 

*Capitalexpenditures.*  During thefirst half of 2008, we spent approximately $117.6 million, exclusive ofcapitalized interest of $12.0 million, on capital projects.  Of this amount, $5.7 million was spent onmaintenance and environmental projects, while $111.9 million was spent oncapacity expansion projects.  The amountwe expect to spend to complete our two new ethanol production facilitiesthrough the first quarter of 2009 is approximately $190 million, exclusive ofcapitalized interest.  Expected capitalexpenditures on non-expansion related maintenance and environmental itemsshould be approximately $5 million for the remainder of 2008.

 

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*Paymentsrelated to our outstanding debt and liquidity facility.*  In the first half of 2008, we made aregularly scheduled $15 million semi-annual payment on our 10% senior unsecuredbonds.  Interest payments of $15 millionon our 10% senior unsecured notes are due on April 1 and October 1.

 

*Working capital.*  Our workingcapital declined from $303.4 million to $177.3 million from December 31,2007 to June 30, 2008 as we used current assets to fund our capitalexpenditures.

 

*Repurchaseof shares of common stock.*  In the first half of 2008, we did notrepurchase any shares of our common stock on the open market.  The share repurchase program allows therepurchase of up to $50 million of our outstanding common stock, although thereare no minimum share purchase requirements. There is approximately $45.9 million available to be repurchased underthis program.

 

**Secured Revolving CreditFacility**

 

Ourliquidity facility consists of a five year secured revolving credit facilitywith JPMorgan Chase Bank, N.A., as administrative agent and a lender, of up to$200 million, subject to collateral availability, which, under certaincircumstances, can be increased up to $300 million.  Our secured revolving credit facilityincludes a $25 million sub-limit for letters of credit.  The credit facility expires in March 2012,and is secured by substantially all of the Company’s assets, with the exceptionof the assets of Nebraska Energy, LLC.

 

Collateralavailability is determined via a borrowing base, which includes a percentage ofeligible receivables and inventory, and no more than $50 million of property,plant and equipment.  The amount ofproperty, plant and equipment which can be included in the borrowing basereduces at a rate of $1.8 million each quarter beginning with the quarter endedDecember 31, 2007.  At June 30,2008, the amount of property, plant and equipment which was eligible forinclusion in the calculation of the borrowing base was $44.6 million.

 

Borrowingsgenerally bear interest, at our option, at the following rates (i) theEurodollar rate plus a margin between 1.25% to 1.75%, depending on the averageavailability, or (ii) the greater of the prime rate or the federal fundsrate plus 0.50%, plus a margin between 0.00% to 0.50%, depending on the averageavailability.  Accrued interest ispayable monthly on outstanding principal amounts, provided that accrued intereston Eurodollar loans is payable at the end of each interest period, but in noevent less frequently than quarterly.  Inaddition, fees and expenses are payable based on unused borrowing availability(0.25% to 0.375% per annum, depending on the average availability), outstandingletters of credit (1.375% to 1.875% fee, depending on the average availability)and administrative and legal costs.

 

Availabilityunder our secured revolving credit facility is subject to customary conditions,including the accuracy of representations and warranties, the absence of anymaterial adverse change and compliance with certain covenants, which, amongother things, may limit our ability to incur additional indebtedness and liens;enter into transactions with affiliates; make acquisitions; pay dividends;redeem or repurchase capital stock or senior notes; make investments or loans;consolidate, merge or effect asset sales; or change the nature of ourbusiness.  In addition, if availabilityunder the facility falls below $50 million, we must maintain a fixed chargecoverage ratio of EBITDA (as defined under the agreement) less non-financedcapital expenditures and taxes to fixed charges (scheduled investments ofprincipal, interest expense, and dividend and certain other payments) of 1.1 to1.

 

Thesecured revolving credit facility contains customary events of default forcredit facilities of this size and type, and includes, without limitation,payment defaults; defaults in performance of covenants or other agreementscontained in the transaction documents; inaccuracies in representations andwarranties; certain defaults, termination events or similar events; certaindefaults with respect to any 

 

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other Company indebtednessin excess of $5.0 million; certain bankruptcy or insolvency events; therendering of certain judgments in excess of $5.0 million; certain ERISAevents; certain change in control events and the defectiveness of any liensunder the secured revolving credit facility. Obligations under the secured revolving credit facility may beaccelerated upon the occurrence of an event of default.

 

Wehad no borrowings outstanding under our secured revolving credit facility at June 30,2008, and $21.9 million of standby letters of credit outstanding, therebyleaving approximately $131.3 million in borrowing availability under oursecured revolving credit facility as of that date.

 

**Environmental Matters**

 

Weare subject to extensive federal, state and local environmental laws,regulations and permit conditions (and interpretations thereof), includingthose relating to the discharge of materials into the air, water and ground,the generation, storage, handling, use, transportation and disposal ofhazardous materials, and the health and safety of our employees.  These laws, regulations, and permits requireus to incur significant capital and other costs, including costs to obtain andmaintain expensive pollution control equipment. They may also require us to make operational changes to limit actual orpotential impacts to the environment.  Aviolation of these laws, regulations or permit conditions can result insubstantial fines, natural resource damages, criminal sanctions, permitrevocations and/or facility shutdowns. In addition, environmental laws and regulations (and interpretationsthereof) change over time, and any such changes, more vigorous enforcementpolicies or the discovery of currently unknown conditions may requiresubstantial additional environmental expenditures.

 

We are also subject topotential liability for the investigation and cleanup of environmentalcontamination at each of the properties that we own or operate and at off-sitelocations where we arranged for the disposal of hazardous wastes.  For instance, soil and groundwatercontamination has been identified in the past at our Illinois campus.  If any of these sites are subject toinvestigation and/or remediation requirements, we may be responsible under theComprehensive Environmental Response, Compensation and Liability Act or otherenvironmental laws for all or part of the costs of such investigation and/orremediation, and for damages to natural resources.  We may also be subject to related claims by privateparties alleging property damage or personal injury due to exposure tohazardous or other materials at or from such properties.  While costs to address contamination orrelated third-party claims could be significant, based upon currently availableinformation, we are not aware of any material contamination or such third partyclaims.  We have not accrued any amountsfor environmental matters as of June 30, 2008.  The ultimate costs of any liabilities thatmay be identified or the discovery of additional contaminants could adverselyimpact our results of operation or financial condition.

 

Inaddition, the hazards and risks associated with producing and transporting ourproducts (such as fires, natural disasters, explosions, abnormal pressures andspills) may result in spills or releases of hazardous substances, and mayresult in claims from governmental authorities or third parties relating toactual or alleged personal injury, property damage, or damages to naturalresources.  We maintain insurance coverageagainst some, but not all, potential losses caused by our operations. Ourcoverage includes, but is not limited to, physical damage to assets, employer’sliability, comprehensive general liability, automobile liability and workers’compensation.  We do not carryenvironmental insurance.  We believe thatour insurance is adequate for our industry, but losses could occur foruninsurable or uninsured risks or in amounts in excess of existing insurancecoverage.  The occurrence of events whichresult in significant personal injury or damage to our property, naturalresources or third parties that is not covered by insurance could have amaterial adverse impact on our results of operations and financial condition.

 

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Ourair emissions are subject to the federal Clean Air Act, the federal Clean AirAct Amendments of 1990 and similar state laws which generally require us toobtain and maintain air emission permits for our ongoing operations as well asfor any expansion of existing facilities or any new facilities.  Obtaining and maintaining those permitsrequires us to incur costs, and any future more stringent standards may resultin increased costs and may limit or interfere with our operatingflexibility.  In addition, the permitsultimately issued may impose conditions which are more costly to implement thanwe had anticipated.  These costs couldhave a material adverse effect on our financial condition and results ofoperations.  Because other ethanolmanufacturers in the U.S. are and will continue to be subject to similar lawsand restrictions, we do not currently believe that our costs to comply withcurrent or future environmental laws and regulations will adversely affect ourcompetitive position.  However, becauseethanol is produced and traded internationally, these costs could adverselyaffect us in our efforts to compete with foreign producers not subject to suchstringent requirements.

 

Federaland state environmental authorities have been investigating alleged excess VOCemissions and other air emissions from many U.S. ethanol plants, including ourIllinois and Nebraska facilities.  Thematter relating to our Illinois wet mill facility is still pending, and wecould be required to install additional air pollution control equipment or takeother measures to control air pollutant emissions at that facility.  If authorities require us to installcontrols, we would anticipate that costs would be higher than the approximately$3.4 million we incurred for this matter at our Nebraska facility due to thelarger size of the Illinois wet mill facility. In addition, if the authorities determine our emissions were in violationof applicable law, we would likely be required to pay fines that could bematerial.  In February 2008, wereceived an indemnification payment from the former owner of our Nebraskafacility relating to the cost of installing environmental controls at thatfacility in connection with an April 2005 consent decree with stateauthorities.

 

We have made, and expect tocontinue making, significant capital expenditures on an ongoing basis to complywith increasingly stringent environmental laws, regulations and permits,including compliance with the U.S. Environmental Protection Agency’s (“EPA”)National Emissions Standard for Hazardous Air Pollutants, or NESHAP, forindustrial, commercial and institutional boilers and process heaters.  This NESHAP was issued but subsequentlyvacated.  The vacated version of the rule requiredus to implement maximum achievable control technology at our Illinois wet millfacility to reduce hazardous air pollutant emissions from our boilers.  We expect the EPA will revise the rule toimpose more stringent requirements than were contained in the vacatedversion.  In the absence of a final EPANESHAP for industrial, commercial and institutional boilers and processheaters, we are working with state authorities to determine what technologywill be required at our Illinois wet mill facility and when such technologymust be installed.  We currently cannotestimate the amount that will be needed to comply with any future federal orstate technology requirement regarding air emissions from our boilers.

 

We currently generaterevenue from the sale of carbon dioxide, which is a co-product of the ethanolproduction process at each of our Illinois and Nebraska facilities.  New laws or regulations relating to theproduction, disposal or emissions of carbon dioxide may require us to incursignificant additional costs and may also adversely affect our ability tocontinue generating revenue from carbon dioxide sales.  In particular, Illinois and five other MidwesternStates have recently entered into the Midwestern Greenhouse Gas ReductionAccord, a program which directs participating states to develop a multi-sectorcap-and-trade mechanism to help achieve reductions in greenhouse gases,including carbon dioxide.  It is possiblethis program could require carbon dioxide emissions reductions from our Pekin,Illinois plants, which could result in significant costs.  In addition, it is possible that other statesin which we conduct or plan to conduct business, including Nebraska andIndiana, could join this accord or that federal, state or local regulatorscould require other costly carbon dioxide emissions reductions or offsets.

 

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**Item 3.            Quantitativeand Qualitative Disclosures About Market Risk**

 

Weare exposed to various market risks, including changes in commodityprices.  Market risk is the potentialloss arising from adverse changes in market rates and prices.  In the ordinary course of business, we enterinto various types of transactions involving financial instruments to manageand reduce the impact of changes in commodity prices.  We do not enter into derivatives or otherfinancial instruments for trading or speculative purposes.

 

***Commodity Price Risks***

 

Weare subject to market risk with respect to the price and availability of corn,the principal raw material we use to produce ethanol and ethanolby-products.  In general, rising cornprices result in lower profit margins and, therefore, represent unfavorablemarket conditions.  This is especiallytrue when market conditions do not allow us to pass along increased corn coststo our customers.  The availability andprice of corn is subject to wide fluctuations due to unpredictable factors suchas weather conditions, farmer planting decisions, governmental policies withrespect to agriculture and international trade and global demand andsupply.  Our weighted average gross corncosts for the three months ended June 30, 2008 and 2007 was $5.38 and$3.99 per bushel, respectively.  For thesix months ended June 30, 2008 and 2007, our weighted average corn costswere $4.93 and $3.79, respectively.

 

Wehave firm-price purchase commitments with some of our corn suppliers underwhich we agree to buy corn at a price set in advance of the actual delivery ofthat corn to us.  At June 30, 2008,we had commitments to purchase approximately 24.3 million bushels of cornthrough December 2009 at an average price of $5.92 per bushel from thesecorn suppliers.  Under thesearrangements, we assume the risk of a price decrease in the market price ofcorn between the time this price is fixed and the time the corn is delivered.  In order to reduce our market exposure toprice decreases, at the time we enter into a firm-price purchase commitment, wealso often enter into commodity forward contracts to sell a certain amount ofcorn at the then-current price for delivery to the counterparty at a laterdate.  We account for these commodityforward transactions under Statement of Financial Accounting Standard No. 133,*Accounting for Derivative Instruments and HedgingActivities*, as amended by Statement of Financial Accounting StandardNo. 138, *Accounting for Certain DerivativeInstruments and Certain Hedging Activities*, and by Statement ofFinancial Accounting Standard No. 149, *Amendment of Statement 133on Derivative Instruments and Hedging Activities*, (hereinaftercollectively referred to as “SFAS 133”). These forward contracts are not designated as hedges and, therefore, aremarked to market each period, with corresponding gains and losses recorded inother non-operating income.  The fairvalue of these derivative assets is recognized in other current assets in theCondensed Consolidated Balance Sheet, net of any cash received from thebrokers.  Information on this type ofderivative transaction is as follows:

 
| **(In millions)**                                     | ** ** | **June 30,   2008** | ** ** |
|------------------------------------------------------------|------------|-------------------------------|------------|
|                                                       |       |                          |       |
| Realized and unrealized loss included in earnings in  2008 |       | $                             | 11.2       |   |
|                                                            |            |                               |            |  |

 
| **(In millions)**                                                                                        | ** ** | **June 30, 2008** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
|                                                                                                          |       |                        |       |
| Net bushels sold                                                                                              |       | 5.5                         |       |
| Aggregate notional value of derivatives outstanding                                                           |       | $                           | 32.3       |   |
| Period through which derivative positions currently  exist                                                    |       | December 2009          |       |
| Unrealized loss on the fair value of outstanding  derivative positions                                        |       | $                           | (9.6       | ) |
| The change in fair value due to the effect of a 10%  adverse change in commodity prices to current fair value |       | $                           | (4.2       | ) |

 

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Wehave also entered into commodity futures contracts in connection with thepurchase of corn to reduce our risk of future price increases.  We account for these transactions under SFAS133.  These futures contracts are notdesignated as hedges and, therefore, are marked to market each period, withcorresponding gains and losses recorded in other non-operating income.  The fair value of these derivative contractsare recognized in other current assets in the Condensed Consolidated BalanceSheet, net of any cash received from the brokers.  Information on this type of derivativetransaction is as follows:

 
| ** **                                                     | ** ** | **June 30,** | ** ** |
|----------------------------------------------------------------|------------|-------------------|------------|
| **(In millions)**                                         | ** ** | **2008**          | ** ** |
|                                                           |       |              |       |
| Realized and unrealized net gain included in  earnings in 2008 |       | $                 | 10.4       |   |
|                                                                |            |                   |            |  |

 
| ** **                                                                                                    | ** ** | **June 30,**  | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| **(In millions)**                                                                                        | ** ** | **2008**           | ** ** |
|                                                                                                          |       |               |       |
| Net bushels bought                                                                                            |       | 1.4                |       |
| Aggregate notional value of derivatives outstanding                                                           |       | $                  | 8.1        |   |
| Period through which derivative positions currently  exist                                                    |       | December 2008 |       |
| Unrealized gain on fair value of derivatives                                                                  |       | $                  | 2.3        |   |
| The change in fair value due to the effect of a 10%  adverse change in commodity prices to current fair value |       | $                  | (1.0       | ) |

 

Weare also subject to market risk with respect to ethanol pricing.  Our ethanol sales are priced using contractsthat can either be fixed; based upon the price of wholesale gasoline plus orminus a fixed amount; or based upon a market price at the time ofshipment.  These ethanol contracts arefor the benefit of our marketing alliance pool. We sometimes fix the price at which we sell ethanol using fixed pricephysical delivery contracts.  These fixedprice ethanol contracts are shared with our marketing alliance pool, and arenot applicable only to our equity gallons. At June 30, 2008, we had fixed contracts to sell approximately 30.3million gallons of ethanol at an average fixed price of $2.32 per gallonthrough December 2008.  These normalsale transactions are not marked to market.

 

Wealso sell forward ethanol using contracts where the price is determined at apoint in the future based upon an index plus or minus a fixed amount.  At June 30, 2008, we had sold forwardapproximately 35.8 million gallons of ethanol using wholesale gasoline as anindex plus a fixed spread that averaged a negative $0.36 per gallon.  Under these arrangements, we assume the riskof a price decrease in the market price of gasoline.  In order to reduce our market exposure toprice decreases, at the time we enter into a firm sales commitment, we may alsoenter into commodity forward contracts to sell a like amount of gasoline at thethen-current price for delivery to the counterparty at a later date.  These contracts are entered into only toprotect the value of our own equity gallons, and are not shared with ourmarketing alliance.  We account for thesetransactions under SFAS 133.  Theseforward contracts are not designated as hedges and, therefore, are marked tomarket each period, with corresponding gains and losses recorded in othernon-operating income.  The fair value ofthese derivative liabilities is recognized in other current liabilities in theCondensed Consolidated Balance Sheet, net of any cash paid to brokers.  Information on this type of derivativetransaction is as follows:

 

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| **(In millions)**                                                                                        | ** ** | **June 30,   2008** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                    | ** ** | ** **                    | ** ** |
| Realized and unrealized loss included in earnings                                                             |       | $                             | 11.5       |   |
| ** **                                                                                                    | ** ** | ** **                    | ** ** |
| Gallons sold                                                                                                  | ** ** | **8.1**                       | ** ** |
| Aggregate notional value of derivatives outstanding                                                           | ** ** | **$**                         | **17.3**   | ** ** |
| Period through which derivative positions currently  exist                                                    | ** ** | **December 2008**        | ** ** |
| Unrealized loss on the fair value of outstanding  derivative positions                                        | ** ** | **$**                         | **(10.3**  | **)** |
| The change in fair value due to the effect of a 10%  adverse change in commodity prices to current fair value | ** ** | **$**                         | **(2.8**   | **)** |

 

***MaterialLimitations***

 

Thedisclosures with respect to the above noted risks do not take into account theunderlying commitments or anticipated transactions.  If the underlying items were included in theanalysis, the gains or losses on the futures contracts may be offset.  Actual results will be determined by a numberof factors that are not generally under our control and could varysignificantly from those factors disclosed.

 

Weare exposed to credit losses in the event of nonperformance by counterpartieson the above instruments, as well as credit or performance risk with respect toour hedged commitments. Although nonperformance is possible, we do notanticipate nonperformance by any of these parties.

 

**Subsequent Event**

 

OnJuly 31, 2008, the Company entered into a purchase agreement with NebraskaEnergy Cooperative, its minority partner in Nebraska Energy, LLC, to purchasethe 21.6% of Nebraska Energy, LLC it does not already own.  The Company has agreed to issue 1 millionshares of common stock to acquire the remaining interest.  It is expected that this transaction willclose as soon as possible after receiving the necessary approvals from theexisting unit holders of the Nebraska Energy Cooperative.

 

**Item 4.            Controls andProcedures**

 

**Evaluation of DisclosureControls and Procedures**

 

Underthe supervision of and with the participation of management, including ourChief Executive Officer, Ronald H. Miller, and our Chief Financial Officer,Ajay Sabherwal, the Company carried out an evaluation of the effectiveness ofour disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”)) as of the end of the period covered by this report.  Based upon that evaluation, Messrs. Millerand Sabherwal have concluded that, as of the end of the period covered by thisreport, the Company’s disclosure controls and procedures have been designed andare effective to provide reasonable assurance that information required to bedisclosed in the reports filed or submitted under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in the rules andforms of the Securities and Exchange Commission.  These disclosure controls and procedures include,without limitation, controls and procedures designed to provide reasonableassurance that information required to be disclosed in such reports isaccumulated and communicated to our management, including Messrs. Millerand Sabherwal, as appropriate to allow timely decisions regarding the requireddisclosure.  The design of any system ofcontrols is based in part upon certain assumptions about the likelihood offuture events.  There can be no assurancethat any design will succeed in achieving its stated goal under all potentialfuture conditions, regardless of how remote.

 

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**Changes in InternalControl over Financial Reporting**

 

Basedupon evaluation by our management, which was conducted with the participationof Messrs. Miller and Sabherwal, there has been no change in our internalcontrol over financial reporting during the period covered by this report thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 
| **PART II.** | ** ** | **OTHER  INFORMATION** |
|-------------------|------------|------------------------|
|              |       |                   |
| **Item  1.**      | ** ** | **Legal  Proceedings** |

 

We are from time totime involved in various legal proceedings, including legal proceedingsrelating to the extensive environmental laws and regulations that apply to ourfacilities and operations.  We are notinvolved in any legal proceedings that we believe could have a material adverseeffect upon our business, operating results or financial condition.

 
| **Item  1A.** | ** ** | **Risk  Factors** |
|---------------|------------|-------------------|

 

TheCompany included in its Annual Report on Form 10-K as of December 31,2007 a description of certain risks and uncertainties that could affect theCompany’s business, future performance or financial condition (“Risk Factors”).  The Risk Factors as included in our Form 10-Kas of December 31, 2007 are updated by additional risk factors asdescribed below:

 

*Waivers or repeal of the renewablefuels standard (“RFS”)  minimum levels ofrenewable fuels included in gasoline could have a material adverse effect onAventine’s results of operations.*

 

Subsequent to thepassage of the Energy Independence and Security Act of 2007 in December 2007increasing the mandated required usage of renewable biofuels, efforts have beenunderway by various parties to repeal or reduce the RFS through newlegislation and/or requested waivers of the current legislation.  In April 2008,Texas Governor Rick Perry formally filed a request with the EPA to reduce the2008 mandated usage of renewable biofuels to 4.5 billion gallons,from the current 9 billion gallon mandate.  In addition, 24Republican Senators sent a letter to the EPA in support of Governor Perry’srequest.  The EPA requested comment letters and received over15,000 responses addressing Governor Perry’s waiver request. The EPA was initially required to rule on the waiver request by July 23,2008, but has extended the time period in order to fully examine and considerall of the issues brought forth by these comment letters.  There isalso a current public relations campaign underway by the RetailGrocers Association which purports to directly associate a rise in corn priceswith the increased mandates required under the new RFS.  The attempt is toblame ethanol for the rise in food prices in order to get the RFS requirementsreduced or repealed.  Concurrent with these attempts at eliminating orreducing the mandated use of ethanol, legislation has been introduced inCongress to repeal the RFS.  Any repeal or waiver from the RFS mayadversely affect demand for ethanol and could have a material adverse effect onAventine’s results of operations and financial condition.

 

*Our ability to complete our ethanol plantexpansion projects in a timely manner and at the expected cost is highlydependant upon third parties, including our engineering, procurement andconstruction (“EPC”) contractor and their sub-contractors.*

 

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We are highly dependant on third parties, includingour EPC contractor and their sub-contractors, for the timely completion of ournew ethanol production facilities at the expected costs.  Delays in the projects, whether the resultweather, regulatory issues or other issues related to the EPC contractor orsub-contractor, may affect our results of operations and financial condition.

 

*A reduction in the Volumetric Ethanol ExciseTax Credit (“VEETC”) may reduce the attractiveness of ethanol blended fuelsabove mandated amounts.  Any reduction inthe amount of discretionary blending as a result of a reduction in the VEETCmay have a material adverse effect on our results of operations and financialcondition.*

 

The amount of ethanol production capacity in the U.S.as of June 30, 2008 is approximately 9.7 billion gallons.  This amount exceeds the 2008 mandated usageof renewable biofuels of 9 billion gallons. Ethanol consumption above mandated amounts is primarily based upon theeconomic benefit derived by blenders, including benefits received from theVEETC.   The 2008 Farm Bill enacted intolaw reduces the VEETC from its current 51 cents per gallon to 45 cents pergallon beginning in the first year following ethanol production reaching 7.5billion gallons (which we believe will happen in 2008).  Any reduction in discretionary blending as aresult of the lower VEETC may affect the demand for ethanol above mandatedamounts, thereby having a negative effect on our operations, results of operationsand our financial condition.

 
| **Item  2.** | ** ** | **Unregistered  Sales of Equity Securities and Use of Proceeds** |
|--------------|------------|------------------------------------------------------------------|
|         |       |                                                             |
|         |       | **None**                                                         |
|         |       |                                                             |
| **Item 3.**  | ** ** | **Defaults Upon Senior Securities**                              |
|         |       |                                                             |
|         |       | **None**                                                         |
|         |       |                                                             |
| **Item 4.**  | ** ** | **Submission of Matters to a Vote of Security  Holders**         |

 

OnMay 2, 2007, the Company held its Annual Meeting of Stockholders.  The matters voted on at the meeting and theresults of those votes were as follows:

 

(1)  Election of Class IIIDirectors:

 
| ** **        | ** ** | **Vote for** | ** ** | **Votes against** | ** ** | **Votes withheld and  non-votes** | ** ** |
|-------------------|------------|-------------------|------------|------------------------|------------|---------------------------------------------|------------|
|              |       |              |       |                   |       |                                        |       |
| Leigh J. Abramson |       | 34,024,693        |       | 531,967                |       | 7,414,670                                   |       |
| Wayne D. Kuhn     |       | 34,027,645        |       | 529,443                |       | 7,414,242                                   |       |
| Ronald H. Miller  |       | 33,993,447        |       | 568,444                |       | 7,409,439                                   |       |

 

Other directors whose term ofoffice continued after the meeting were Messrs. Bobby L. Latham and FarokhS. Hakimi as Class I directors; and Messrs. Richard A. Derbes,Michael C. Hoffman and Arnold M. Nemirow as class II directors.

 

(2)  Ratification ofthe appointment of Ernst and Young LLP as the Company’s independent registeredpublic accounting firm for the fiscal year ending December 31, 2008:

 
| **Vote for** | ** ** | **Votes against** | ** ** | **Votes withheld   and non-votes** | ** ** |
|-------------------|------------|------------------------|------------|---------------------------------------------------|------------|
|              |       |                   |       |                                              |       |
| 34,337,646        |       | 269,328                |       | 7,364,356                                         |       |

 

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| **Item 5.** | ** ** | **Other  Information** |
|-------------|------------|------------------------|
|        |       |                   |
|        |       | **None**               |
|        |       |                   |
| **Item 6.** | ** ** | **Exhibits**           |

 
| (a)    | Exhibits |
|--------|----------|
|   |     |
|   | 10.1     | Fourth Amendment to Lease  Agreement and Reaffirmation of Guaranty, dated as of June 19, 2008 |
|   |     |   |
|   | 31.1     | Certification of the Chief  Executive Officer pursuant to Section 302 of the Sarbanes- Oxley Act of  2002. |
|   |     |   |
|   | 31.2     | Certification of the Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002. |
|   |     |   |
|   | 32.1     | Certification of the Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|   |     |   |
|   | 32.2     | Certification of the Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

# **SIGNATURE**

# ** **

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned theretoduly authorized.

 
|                        | AVENTINE  RENEWABLE ENERGY   HOLDINGS, INC. |
|-----------------------------|---------------------------------------------|
|                        |                                        |
|                        |                                        |   |
| Dated:  August 7, 2008 | By:                                         |   /s/ William J. Brennan |
|                        | Name:                                       |  William J. Brennan |
|                        | Title:                                      |  Chief Accounting and Compliance   Officer (duly authorized officer and   principal accounting officer) |
|                             |                                             |  |  |

 

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