UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-KSB

 

þ		Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the fiscal year ended September 30, 2008

o		Transition report under Section 13 or 15(d) of the Exchange Act.

For the transition period from                      to                     

IOWA RENEWABLE ENERGY, LLC

(Name of small business issuer in its charter)

Iowa		20-3386000
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)
1701 East 7th Street, Washington, Iowa		52353
(Address of principal executive offices)		(Zip Code)

(319) 653-2890
(Issuer’s telephone number)

Securities registered under Section 12(b) of the Exchange Act:

Securities registered under Section 12(g) of the Exchange Act:

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

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. þ

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

State issuer’s revenues for its most recent fiscal year. $67,135,224

As of December 22, 2008, the aggregate market value of the membership units held by non-affiliates (computed by reference to the most recent offering price of such membership units) was $23,581,000.

As of December 22, 2008, there were 26,331 membership units outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant has incorporated by reference into Part III of this Annual Report on Form 10-KSB its definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this Annual Report.

Transitional Small Business Disclosure Format (Check one): o Yes þ No

 

 

Table of Contents

PART I			3
ITEM 1. DESCRIPTION OF BUSINESS			3
ITEM 1A. RISK FACTORS			25
ITEM 2. DESCRIPTION OF PROPERTY			36
ITEM 3. LEGAL PROCEEDINGS			36
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			36
PART II			37
ITEM 5. MARKET FOR COMMON EQUITY, RELATED MEMBER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES			37
ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION			38
ITEM 7. FINANCIAL STATEMENTS			48
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE			60
ITEM 8A(T). CONTROLS AND PROCEDURES			60
ITEM 8B. OTHER INFORMATION			61
PART III			61
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CONTROL GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT			61
ITEM 10. EXECUTIVE COMPENSATION			61
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED MEMBER MATTERS			61
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE			61
ITEM 13. EXHIBITS			62
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES			62
SIGNATURES			63
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

AVAILABLE INFORMATION

Our website address is http://www.iowarenewableenergy.com. Our annual report on Form 10-KSB, quarterly reports on Form 10-QSB, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), are available, free of charge, on our website under the link “SEC Filings,” as soon as reasonably practicable after we electronically file such materials with, or furnish such materials to, the Securities and Exchange Commission. The contents of our website are not incorporated by reference in this annual report on Form 10-KSB. We anticipated that our 2009 Annual Meeting of Members will be held on Saturday, May 9, 2009.

PART I

ITEM 1. Description of Business.

Business Development

Iowa Renewable Energy, LLC is a an Iowa limited liability company, formed on April 14, 2005 for the purpose of developing, constructing, owning and operating a biodiesel manufacturing plant for the sale of biodiesel near Washington, Iowa.

We operate a biodiesel manufacturing plant with production capacity of 30 million gallons of biodiesel per year. Our plant is located near Washington, Iowa, in southeast Iowa. Our business is the production of biodiesel and crude glycerin for sale. On September 30, 2008, when our fiscal year ended, we had generated $67,135,224 in revenues primarily from the sale of biodiesel and glycerin and federal incentives since the beginning of our fiscal year on October 1, 2007.

We obtained our certificate of substantial completion for our plant on July 12, 2007 from Renewable Energy Group, Inc. (REG), our design-builder. After obtaining independent testing of our biodiesel to certify that our biodiesel meets the American Society for Testing and Materials (ASTM) standards, we began shipping our first lot of 7,200 gallons of biodiesel on July 12, 2007. We started operating our animal fat pretreatment system in mid-December 2007. We obtained BQ-9000 certification through the National Biodiesel Accreditation Commission in January 2008, which we believe increases the marketability of our product. The plant was operating at full capacity until the end of September 2007, with only minor temporary shutdowns for maintenance and a weather-related power outage. Since the beginning of October 2007, we have only been operating to produce biodiesel to satisfy existing contracts for the sale of our biodiesel and have not been producing biodiesel for speculation. This has allowed us to avoid excess inventory, but also resulted in several plant shutdowns. During the fourth quarter of fiscal year 2008, we operated our plant at approximately 66% of our plant’s capacity.

Most of our shutdowns have been due to:

	•		The inability to obtain adequate amounts of feedstock in a timely manner;
	•		The inability to obtain adequate amounts of feedstock at profitable prices;
	•		Lack of demand for biodiesel;
	•		Lack of biodiesel contracts at profitable prices; and
	•		Inadequate funds to obtain feedstock due to having to pay for feedstock while waiting for payments from our biodiesel sales.

From October 1, 2007 through September 30, 2008 we produced approximately 15,909,748 gallons of biodiesel, which is only approximately 55% of our plant’s capacity. We anticipate operating the plant at similar levels during our fiscal year 2009; however, our ability to operate depends upon many factors outside of our control, such as demand for biodiesel, price for biodiesel and cost of feedstock. If demand for biodiesel remains at its current low levels, or drops further during our fiscal year 2009, we will likely operate our plant even less during our fiscal year 2009. We do not anticipate speculatively producing biodiesel in the next 12 months. Therefore, if demand does not increase such that REG can obtain contracts for at least the same number of gallons as produced during fiscal year 2008, then we may operate at a lower production rate than during fiscal year 2008. In addition, we have been experiencing liquidity difficulties since beginning operations and if these conditions do not improve, or get worse, during our fiscal year 2009, then we will likely be unable to purchase sufficient feedstock to operate our plant at the levels we operated during fiscal year 2008.

Since our start-up of operations we have been dealing with short term liquidity issues. We entered into an amendment to our management and operational services agreement with REG to accelerate payment of our receivables. The amendment was in effect for four weeks in order to temporarily provide us with the cash flow necessary to continue our business. In addition, we have shared some of our biodiesel contracts with other biodiesel plants in the REG network, partially because our liquidity restraints would not allow us to fund the production of enough biodiesel to fill all contracts.

These agreements did not solve our liquidity problems and we expect to continue to seek additional opportunities to improve our liquidity. If these changes do not result in sufficient increased production and sales to sufficiently improve our liquidity, we may consider the following options:

	•		Entering into strategic opportunities with other biodiesel plants;
	•		Continued scaled back biodiesel production;
	•		Continued temporary shutdowns of the biodiesel plant;
	•		Producing biodiesel on a toll basis, where we would produce biodiesel using raw materials provided by someone else;
	•		Selling additional membership units;
	•		Selling our preprocessed animal fats to biodiesel plants that do not have the technology to process animal fats; or
	•		Amending our term loan with the bank to allow interest only payments.

On February 1, 2008, our $34,715,000 loan with Marshall Bankfirst Group (Bankfirst) converted from a construction loan to a term loan, which requires monthly principal and interest payments of approximately $373,000. As of the date of this report, we have timely paid all of our monthly payments under the loan. We are currently not in compliance with the current liabilities covenant under our loan, because our term loan is listed as a current liability. Our term loan is listed as a current liability because we have a going concern in the notes to our financial statements and generally accepted accounting principals (GAAP) require long term debt to be listed as a current liability when a company has a going concern disclosure. We are in compliance with the other loan covenants which are currently in effect. Our bank; however, will not yet begin testing our compliance on many of our covenants until February 2009, which means our current compliance requirements under our loan documents are minimal. If our financial condition does not improve substantially, which may not occur due to our historical performance and the anticipated seasonal decrease in demand for biodiesel, we will be in violation of several of our covenants. In addition, our loan contains an event of default for any material adverse change in our financial condition, and the term “material adverse change” is defined in such a way that leaves this determination to the subjective opinion of our lender.

As discussed in the accompanying financial statements, we have generated accumulated losses of $7,563,432 and undertaken significant borrowings to finance the construction of our biodiesel plant. These liquidity issues raise doubts about our ability to continue as a going concern (See Note 8 to the financial statements). In the event our lender declares a default under the loan agreement and elects to accelerate our payments under the loan documents or take possession of our assets securing the loans, we may be forced to shutdown the plant and our members could lose some or all of their investment. These losses and risk of default have raised doubts as to our ability to continue as a going concern.

General Demand

The biodiesel industry is still relatively new and unknown especially when compared to the ethanol industry. In 2007, the Renewable Fuels Association reported that a record 6.5 billion gallons of ethanol were produced in the United States. However, the biodiesel industry produced only approximately 450 million gallons of biodiesel in 2007, constituting only a small part of the 60 billion gallon per year U.S. diesel fuel market and a fraction of the amount of 2007 ethanol production. Total 2007 biodiesel production is also significantly less than current national biodiesel production capacity. The National Biodiesel Board estimates that as of September 29, 2008 (the latest date for which information is available), national biodiesel production capacity totaled approximately 2.61 billion gallons per year. Some plants are currently closed and some do not currently operate at full capacity due to this excess production capacity and other economic factors. The National Biodiesel Board estimates that production capacity could increase by another 849.9 million gallons if the plants currently under construction or engaged in expansion begin production.

Several factors could lead to an increase in biodiesel demand. Biodiesel has received attention from consumers and policymakers in recent years for several reasons. Biodiesel is made from renewable sources and provides environmental benefits over petroleum-based diesel, including reduced emissions of carbon dioxide, carbon monoxide, particulate matter and sulfur. In addition, a 2007 study by the U.S. Department of Energy (DOE) and the U.S. Department of Agriculture (USDA) found that biodiesel has a positive energy balance: for every 3.5 units of energy produced, only 1.0 unit of energy is consumed in the production process. Biodiesel mixes easily with diesel fuel at rates between 2% and 100%, and it improves the lubricity of petroleum-based diesel fuel at levels as low as 3%. The increased lubricity reduces friction of petroleum-based diesel fuel and may result in longer equipment life and protection of fuel injectors. Further, the Environmental Protection Agency (EPA) Ultra Low Sulfur Diesel Mandate seeks to reduce sulfur emissions through regulations that take effect over the next several years. Because low-sulfur diesel and ultra-low-sulfur diesel have lubricity problems, biodiesel may be an attractive alternative to satisfying the requirements of the mandate. However, EPA regulations are subject to change. If the mandate was cancelled or suspended, or if waiver of the mandate requirements were allowed, future biodiesel demand may be less than expected. In addition, studies have shown that nitrogen oxide emissions increase by 10% when pure biodiesel is used. Nitrogen oxide is the chief contributor to ozone or smog. New engine technology is available and is being implemented to eliminate this problem. However, these emissions may decrease the appeal of our product to environmental groups and agencies who have been historic supporters of the biodiesel industry.

We also anticipate that the Renewable Fuel Standard (RFS), recently expanded by the Energy Independence and Security Act of 2007, as described below under “Government Regulation and Federal Supports,” may increase demand for biodiesel. However, there can be no assurance that the RFS will increase demand for biodiesel, as it is estimated that current biodiesel production capacity already exceeds the 2012 RFS biodiesel mandate. We also anticipate that the expanded RFS requirements will be satisfied primarily by corn-based ethanol and other types of ethanol, including cellulose-based ethanol, and could have little effect, if any, on the biodiesel industry in the short-term. In addition, in November 2008, the EPA announced that the RFS program in 2009 will continue to be applicable to producers and importers of gasoline only. This means that the 500 million gallons of biomass-based diesel required by the RFS does not have to be blended into U.S. fuel supplies in 2009. This is due to the fact that the regulatory structure of the original RFS program does not provide a mechanism for implementing the Energy Independence and Security Act of 2007 requirement for the use of 500 million gallons of biomass-based diesel.

During fiscal year 2008 we operated at approximately 55% of our nameplate capacity, due to only operating the plant when we had biodiesel contracts to fill. During November 2008, we operated at approximately 41% of our nameplate capacity, which demonstrates the beginning of seasonal slow down for our operations. Historically, the demand for biodiesel follows a seasonal trend and demand decreases in colder months. Moreover, we believe the seasonal downtrend will have a greater effect on us this winter, because we are now producing more biodiesel from animal fats. Biodiesel produced from animal fats gel at a higher temperature than biodiesel produced from soybean oil, which means the temperature at which the flow of the fuel stops is higher for biodiesel produced from animal fats. Thus animal fat biodiesel cannot be marketed as widely during the winter. We also believe that the recent global economic downturn and the disruption of the financial and credit markets in recent months has depressed demand for biodiesel and fuel in general. We anticipate that in our fiscal year 2009 we will operate the plant at similar levels of operation as those for our fiscal year 2008; however, our ability to operate depends upon many factors outside of our control, such as demand for biodiesel, price for biodiesel and cost of feedstock. If demand for biodiesel remains at its current low levels, or drops further during our fiscal year 2009, we will likely operate our plant even less during our fiscal year 2009. In addition, we have been experiencing liquidity difficulties since beginning operations and if these conditions do not improve, or get worse, during our fiscal year 2009 then we will likely operate our plant at lower levels than during our fiscal year 2008. If we continue to operate at less than full capacity or cannot obtain sufficient cash to purchase feedstock to increase operations during the warmer months, this would have a negative impact on our revenues.

Principal Products and Markets

The principal products produced at our plant are biodiesel and crude glycerin. Iowa Renewable Energy’s biodiesel facility is able to pretreat crude vegetable oils and animal fats. Our plant, however, does not have a soybean crushing facility. The plant is capable of having an annual capacity to process approximately 160,000,000 pounds of soybean oil and 70,000,000 pounds of animal fats and grease into approximately 30 million gallons of biodiesel and 3 million gallons of crude glycerin per year. Our equipment does, however, allow a variance from this ratio to compensate for changes in feedstock cost and availability. During the fiscal year ended September 30, 2008 we processed approximately 38,000,000 pounds of soybean oil and 77,000,000 pounds of animal fats and grease into 15,909,748 gallons of biodiesel and 1,500,000 gallons of crude glycerin. We anticipate that we will continue to operate the plant at a similar ratio in the upcoming fiscal year, so long as feedstock costs remain at similar levels. If feedstock costs fluctuate, we will adjust what feedstocks we use accordingly so as to produce our biodiesel in the most cost-effective manner.

Primary Product — Biodiesel

Biodiesel is a clean-burning alternative fuel produced from domestic, renewable resources primarily used in compression ignition (diesel) engines. Biodiesel can also be used as home heating oil. Biodiesel is comprised of mono-alkyl esters of long chain fatty acids derived from vegetable oils or animal fats. A chemical process called transesterification removes the free fatty acids from the base oil and creates the desired esters. Transesterification is the reaction of vegetable oil or animal fat with an alcohol, such as methanol or ethanol, in the presence of a catalyst. The process yields four products: mono-alkyl ester (biodiesel), glycerin, feed quality fat, and methanol. The methanol can be used again in the process. Biodiesel can then be used in neat (pure) form, or blended with petroleum diesel.

Biodiesel that is in neat (pure) form is typically designated in the marketplace as B100. The 100 indicates that the fuel is 100% biodiesel. Biodiesel is frequently blended with petroleum based diesel. When biodiesel is blended, it is typically identified in the marketplace according to the percentage of biodiesel in the blend. For instance, B20 indicates that 20% of the fuel is biodiesel and 80% is petroleum-based diesel.

Biodiesel’s physical and chemical properties, as they relate to operations of diesel engines, are similar to petroleum-based diesel fuel. As a result, biodiesel, in its pure form or blended with petroleum diesel, may be used in most standard diesel engines without making any engine modifications. Biodiesel demonstrates greater lubricating properties, referred to as lubricity, than petroleum-based diesel. This could lead to less engine wear in the long-run as biodiesel creates less friction in engine components than petroleum-based diesel. Biodiesel also demonstrates greater solvent properties. With higher percentage blends of biodiesel, this could lead to break downs in certain rubber engine components such as seals. The solvent properties of biodiesel also can cause accumulated deposits from petroleum-based diesel in fuel systems to break down. This could lead to clogged fuel filters in the short-term. Fuel filters should initially be checked more frequently when using biodiesel blends. These problems are less prevalent in blends that utilize lower concentrations of biodiesel compared to petroleum-based diesel.

Glycerin

Glycerin is the primary co-product of biodiesel production. Glycerin is produced at a rate of approximately 10% of the quantity of biodiesel produced. Glycerin possesses a unique combination of physical and chemical properties that make it suitable for use in a wide variety of products. It is highly stable under typical storage conditions, compatible with a wide variety of other chemicals and comparatively non-toxic. Glycerin has many applications, including as an ingredient or processing aid in cosmetics, toiletries, personal care, drugs, and food products. Our glycerin, however, cannot be used in pharmaceutical products without further processing, and we do not have the capabilities to refine our glycerin into pharmaceutical quality. Also, glycerin produced from the production of animal fat-based biodiesel cannot be used in pharmaceutical products.

Biodiesel Markets

Biodiesel is primarily used as fuel for compression ignition (diesel) engines. It is produced using renewable resources and provides environmental advantages over petroleum-based diesel fuel, such as reduced vehicle emissions. Our ability to market our biodiesel is heavily dependent upon the price of petroleum-based diesel fuel as compared to the price of biodiesel, in addition to the availability of economic incentives to produce and use biodiesel.

Biodiesel is frequently used as fuel in transport trucks, ships, trains, in farming activities and in many government vehicles. Government legislation that seeks to encourage the use of renewable fuels could lead to an expansion of the market for biodiesel in the future. Recently, biodiesel has been identified as a potentially good substitute for diesel fuel in underground mining operations because it burns cleaner and leads to less air pollution, a feature that is very important in confined places such as mines. Further, biodiesel may be safer to handle in a mine setting where fire can be disastrous. Additional markets may become available as a result of growing environmental concerns by American consumers as well as an increased awareness of energy security and the United States’ ability to supply its own fuel needs. However, biodiesel still only accounts for a very small percentage of the diesel fuel market as a whole. The biodiesel industry will need to continue to grow demand in order to sustain the price of biodiesel into the future.

Wholesale Market/Biodiesel Marketers

The wholesale market involves selling biodiesel directly to fuel blenders or through biodiesel marketers. Fuel blenders purchase neat (B100) biodiesel from biodiesel production plants, mix it with petroleum diesel fuel according to specifications, and deliver a final product to retailers. There are few wholesale biodiesel marketers in the United States. Three examples are World Energy of Chelsea, Massachusetts, Eco-Energy, Inc. of Franklin, Tennessee, and REG of Ames, Iowa. These companies use their existing marketing relationships to market the biodiesel of individual plants to end users for a fee. We have entered into an agreement with REG to market the biodiesel we produce at our facility. See “Distribution of Principal Products” and “Dependence on One or More Major Customers” below.

Retail Market

The retail market consists of biodiesel distribution primarily through fueling stations to transport trucks and jobbers, which are individuals that buy products from manufacturers and sell them to retailers, for the purpose of supplying farmers, maritime customers and home heating oil users. Retail level distributors include oil companies, independent station owners, marinas and railroad operators. The biodiesel retail market is still in its very early stages as compared to other types of fuel. The present marketing and transportation network must expand significantly in order for our company to effectively market our biodiesel to retail users. Areas requiring expansion include, but are not limited to:

	•		additional rail capacity;
	•		additional storage facilities for biodiesel;
	•		increases in truck fleets capable of transporting biodiesel within localized markets;
	•		expansion in refining and blending facilities to handle biodiesel; and
	•		growth in service stations equipped to handle biodiesel fuels.

With increased governmental support of renewable fuels and greater consumer awareness of renewable fuels, we anticipate that the availability of biodiesel may increase in the future. However, substantial investments required for these infrastructure changes and expansions may not be made or they may not occur on a timely basis. Any delay or failure in making the changes to or expansion of infrastructure could hurt the demand or prices for our products, impede our delivery of products, impose additional costs on us or otherwise have a material adverse effect on our results of operations or financial position. Our business is dependent on the continuing availability of infrastructure and any infrastructure disruptions could have a material adverse effect on our business.

International Markets

Through our marketer, REG, we expect that a portion of our biodiesel may be sold abroad to international markets, particularly Europe. However, we are unable to track precisely where our biodiesel is delivered or how much of it is exported to Europe or other international markets. In some instances, we believe that international biodiesel sales may return greater profits than domestic biodiesel sales. However, the European Union recently announced plans to investigate alleged unfair trade practices engaged in by the U.S. biodiesel industry. See “RISK FACTORS.” This investigation could result in the imposition of tariffs and duties on U.S. produced biodiesel that is exported to Europe. This could drastically reduce our ability to sell biodiesel in the European market at a profit and may thereafter adversely affect our revenues.

Government/Public Sector

The government has increased its use of biodiesel since the implementation of the Energy Policy Act (EPACT) of 1992, amended in 1998, which authorized federal, state and public agencies to use biodiesel to meet the alternative fuel vehicle requirements of EPACT. Although it is possible that individual plants could sell directly to various government entities, it is unlikely our plant could successfully market our biodiesel through such channels. Government entities have very long sales cycles based on the intricacies of their decision making and budgetary processes.

Glycerin Markets and Demand

In 2006, excess production of glycerin caused the price of crude glycerin to decline dramatically, to the point that some producers were having to pay to have the glycerin disposed. Since then glycerin prices have been experiencing an increase. As of early December 2008, according to the Jacobsen Biodiesel Bulletin, average crude glycerin prices were approximately 4 to 8 cents per pound. REG currently markets the glycerin produced at our plant pursuant to our Management and Operational Services Agreement (MOSA). If oversupply of glycerin and low glycerin prices occur it may limit our ability to generate revenues through the sale of our primary co-product. This may negatively affect the profitability of our business.

Relatively higher refined glycerin prices, averaging approximately 30 to 40 cents per pound according to the Jacobsen Biodiesel Bulletin in December, have prompted some of our competitors, such as Cargill Inc. (Cargill) and Archer Daniels Midland Co. (ADM) to expand their glycerin refining capacities. These biodiesel producers may therefore have a competitive advantage over plants like ours that do not have glycerin refining capabilities.

Additional uses for glycerin are being researched. Research has been underway to develop technology that converts glycerin, a byproduct of biodiesel production, into ethanol. Ethanol made from glycerin may be cheaper to produce than ethanol made from corn, as glycerin does not require the extensive pre-processing steps required for corn. Research has also been underway to develop methods of converting glycerin into propylene glycol, which is a compound used in a variety of industrial products, including paints, polyester resins, lubricants, antifreeze and cosmetics. Accordingly, development of these technologies could increase the demand for glycerin. However, such technologies are still currently under development and there is no assurance that such technologies will become readily available or that they would increase demand for glycerin. Moreover, there is no assurance that our glycerin would work to be processed into ethanol, and taking advantage of such technology may require additional equipment or equipment modification. If we did not have the resources to purchase additional equipment or make equipment modifications, such technology developments could result in our glycerin being at a competitive disadvantage.

Distribution of Principal Products

We entered into an agreement with REG for the purpose of management and operational services. These services include REG marketing all of our biodiesel and glycerin. We pay REG a fee of 5.7 cents per gallon of biodiesel produced for all the services under this agreement. REG estimates a break down of this fee to be two cents (2¢) per gallon for biodiesel marketing services. Additionally, REG estimates one fifth cent (1/5¢) per gallon of this fee to be for the sales and marketing of glycerin. The sales and marketing services of REG include certain transportation services such as: arranging for transportation, logistics, and scheduling of biodiesel shipments; where advantageous, arranging for leased tankers for rail shipments; analyzing and auditing bulk transportation providers; overseeing reconciliation of shipments, invoicing and payments on a weekly basis; and providing invoicing and accounts receivable management for biodiesel shipments. Under the terms of the agreement, REG takes title to the product when loaded for delivery FOB the plant.

Our products can be delivered by truck or rail. Our property is located approximately thirty-five miles from Interstate 80 and thirty miles from the Mississippi River. We have established rail service directly to the plant so that we are able to ship biodiesel to our customers by rail. Rail service is provided by the Iowa, Chicago and Eastern Railroad and REG coordinates all of our transportation services.

Pursuant to our MOSA, for the fiscal year ended September 30, 2008, we recognized an expense of approximately $923,687 under this agreement.

Sources and Availability of Raw Materials

Feedstock Cost and Supply

The cost of feedstock is the largest single component of the cost of biodiesel production, accounting for 70% to 90% of the overall cost of producing biodiesel. As a result, increased prices for feedstock greatly impact the biodiesel industry. Our plant is capable of pretreating crude vegetable oil, including soybean oil and corn oil, and animal fats and utilizing the same to produce biodiesel. Animal fat has been less expensive to acquire than soybean oil and, accordingly, we attempt to use as much animal fat feedstock as possible so long as producing our biodiesel from animal fat would return greater profit margins. Animal fat biodiesel demand, however, does typically decline in the colder fall and winter months and, accordingly, our use of animal fats have been declining during such months. In fiscal year 2008, we also began utilizing corn oil as a lower-cost feedstock alternative to soybean oil. We anticipate that we will continue to use corn oil as a feedstock source for so long as its use returns greater profit margins as compared to soybean oil. The USDA December 2008 Oil Crops Outlook report provides that the average November 2008 price for corn oil was $31.06 per pound, which was only slightly lower than the November 2008 price for soybean oil of $31.55 per pound.

In the event we cannot obtain adequate supplies of feedstock at affordable prices, our ability to operate profitably may be materially impaired. We may be forced to shut down the plant temporarily or even permanently. Due to the increased prices for our inputs, decreased demand for biodiesel and our liquidity issues, we have experienced temporary shutdowns and are currently operating well below our capacity. For the fourth quarter of the year ended September 30, 2008, our plant operated at approximately 67% of its capacity, averaging 55% capacity production during the twelve months ended September 30, 2008. Continued plant shutdowns and increased feedstock costs may reduce our revenues and the value of your investment.

Soybean Oil

The twenty-year average price for soybean oil is approximately 21 cents per pound. However, soybean oil prices have been extremely volatile, reaching record highs in the summer of 2008 and sharply declining thereafter. The USDA December 2008 Oil Crops Outlook report provides that the average November 2008 soybean oil price was approximately 31.55 cents per pound, which is below the summer’s peak prices of 62.54 in July 2008, and the lowest level in more than a year. The drop in soybean oil prices was likely caused by the changing global economic conditions triggered by the recent failure of various major U.S. financial institutions, the passage of the federal government’s $700 billion bailout plan, the tightening of credit markets and the economic downturn experienced by the U.S. and other countries. According to the USDA’s National Weekly Ag Energy Round-Up report, crude soybean oil prices in Iowa for the week of December 19, 2008 were even lower, ranging from 27 to 29 cents per pound. The USDA forecasted that these soybean oil prices will remain in this range during the 2008/2009 marketing season, with a predicted price range of 31 to 35 cents per pound. The charts below shows U.S. soybean oil prices over the past ten years and for each month from the beginning of the 2007/2008 marketing year to November 2008:

U.S. Soybean Oil Prices for the Past 10 Years

Marketing Year		Price (cents)
1998/99			19.90
1999/00			15.60
2000/01			14.15
2001/02			16.46
2002/03			22.04
2003/04			29.97
2004/05			23.01
2005/06			23.41
2006/07			31.02
2007/08			52.03
2008/2009			31.0-35.0	(1)

U.S. Soybean Oil Prices for 2007-2008 Marketing Year

Month		Price (cents)
October 2007			38.10
November 2007			42.68
December 2007			45.16
January 2008			49.77
February 2008			56.68
March 2008			57.27
April 2008			56.58
May 2008			58.27
June 2008			62.43
July 2008			60.54
August 2008			50.78
September 2008			46.09
October 2008			35.50
November 2008(1)			31.55

Data provided by USDA, Oil Crops Outlook Report, December 12, 2008

Because it takes more than seven pounds of soybean oil to make a gallon of biodiesel, continued increases in soybean oil costs significantly reduce the potential profit margin on each gallon of biodiesel produced from soybean oil and sold. Any increase in the cost of soybean oil will negatively impact our ability to generate revenues and profits. Due to high soybean oil costs throughout most of the 2008 fiscal year, we have been using alternative forms of feedstock as substitutes for soybean oil to the greatest extent possible. These substitutes include animal fat and corn oil. However, prices for these alternative feedstocks have tended to increase along with the cost of soybean oil. Accordingly, we will continue to explore additional low-cost feedstocks and utilize soybean oil to the extent it remains a profitable and marketable option.

Increased competition with other biodiesel plants for soybean oil may result in increased prices for soybean oil. Accordingly, the number of acres of soybeans planted and harvested can impact the price of and competition for soybean oil. In its December 2008 Oil Crops Outlook report, the USDA reported that 74.4 million soybean acres were harvested in the 2008-2009 crop year. The USDA projects that soybean oil usage for biodiesel for 2008/2009 will be 18.1 billion pounds. The portion of that used to make biodiesel is not expected to increase as much due to the competition from other vegetable oils and animal fats being used as alternative sources of feedstock.

Animal Fats and Other Alternative Feedstocks

Our plant is also capable of utilizing animal fats to produce biodiesel and, like soybean oil, animal fat costs have also increased over the past several years. Animal fat costs peaked in the summer of 2008, and have since fallen as domestic and global economic conditions have worsened. Although prices for animal fats have declined from their recent peak, animal fat costs are nonetheless higher than their historical average. The USDA December 2008 Oil Crops Outlook report provides that the average November 2008 prices for lard and edible tallow were 26.40 and 18.13 cents per pound, respectively. The USDA predicted lard and edible tallow prices could increase slightly for 2008/2009, ranging from 27.5 to 31.5 cents per pound for lard and 20 to 24 cents per pound for edible tallow.

The charts below shows U.S. lard and edible tallow prices over the past ten years and for each month from the beginning of the 2007/2008 marketing year to November 2008:

Lard & Edible Tallow Prices for Past Ten Years

Marketing Year		Lard (cents)				Edible (cents)				Tallow
1998/99			14.66				15.14
1999/00			13.64				13.21
2000/01			14.61				13.43
2001/02			13.55				13.87
2002/03			18.13				17.80
2003/04			26.13				22.37
2004/05			21.80				18.48
2005/06			21.74				18.16
2006/07			28.43				27.32
2007/08			40.85				41.68
2008/2009			27.5-31.5	(1)			20.0-24.0	(1)

Lard & Edible Tallow Prices for 2007-2008 Marketing Year

Month		Lard (cents)				Edible (cents)				Tallow
October 2007			35.09				33.98
November 2007			33.78				36.88
December 2007			32.66				35.28
January 2008			33.01				38.53
February 2008			38.33				44.33
March 2008			46.00				48.39
April 2008			43.04				44.25
May 2008			42.27				41.88
June 2008			44.93				46.61
July 2008			52.82				48.61
August 2008			46.50				41.94
September 2008			41.73				39.53
October 2008			37.07				26.97
November 2008			26.40	(1)			18.13	(1)

Data provided by USDA, Oil Crops Outlook Report, December12, 2008

We have also been using corn oil that we obtain from ethanol plants as an alternative feedstock from time to time. We expect that, like animal fats, corn oil may be a less costly feedstock alternative to soybean oil, which reached record high prices during the past year. The National Weekly Ag Energy Round-Up for the week of December 19, 2008 indicates that crude corn oil costs in the Midwest ranged from 24 cents to 26 cents per pound. Corn oil-based biodiesel has cold flow properties similar to those of soybean oil-based biodiesel and accordingly, we may be able to continue to use corn oil as feedstock in the fall and winter months when demand for animal fat-based biodiesel could decrease. Corn oil, however, tends to cause a waxy substance to build-up during the production process. Due to this build-up, we expect that we will not be able to produce any biodiesel blends containing greater than 20% corn oil. The unique characteristic of corn oil could cause it to be a less desirable feedstock then other feedstocks. The amount of corn oil that we will be able to acquire will likely depend upon the rate in which ethanol plants begin installing corn oil extraction equipment at their plants and the extent to which they market their corn oil.

In the event we cannot obtain adequate supplies of feedstock at affordable costs for sustained periods of time, then we may be forced to shut down the plant temporarily or permanently. Shut downs and increased feedstock costs may reduce our revenues from operations which could decrease or eliminate the value of our units.

Feedstock Cold Flow Properties

Because biodiesel has different cold flow properties depending on the type of feedstock used in its manufacture, cold flow also becomes a primary factor in determining the type of feedstock to use. “Cold flow” refers to a fuel’s ability to flow easily at colder temperatures and is an important consideration in producing and blending biodiesel for use in colder climates and in colder seasons. The pour point for a fuel is the temperature at which the flow of the fuel stops. Therefore, a lower pour point temperature means the fuel is usable in colder temperatures. The following table represents the pour points for different types of fuels:

Type of Fuel		Pour Point
Soy-based Biodiesel (B100)		30ºF
Tallow-based Biodiesel (B100)		61ºF
No. 2 Petro Diesel (B0)		-30ºF
B2 Soy Blend with No. 2 Diesel		-25ºF

To provide biodiesel with an acceptable pour point in cold weather, we will need to blend our biodiesel with petroleum-based diesel. Generally, biodiesel that is used in blends of 2% to 20% will provide an acceptable pour point for the Iowa market. We expect that REG, our marketer, will sell our biodiesel throughout the nation and abroad. Cold flow additives can also be used seasonally to provide a higher level of cold weather protection, similar to the current practice with conventional diesel fuel. Demand for our biodiesel may diminish in colder climates and during the colder months as a result of cold flow concerns. We are currently producing biodiesel from soybean oil, corn oil, and animal fats. Approximately 68% of our biodiesel production for fiscal year 2008 was animal fat biodiesel blends, which is a significant increase from the 3% in fiscal year 2007, which means we will likely be more effected by seasonal downtrends and lack of demand for biodiesel produced from animal fat during the winter months.

Hedging

Due to fluctuations in the price and supply of feedstock, we utilize forward contracting and hedging strategies to manage our commodity risk exposure and optimize finished product pricing and supply. Hedging means protecting the price at which we buy feedstock and the price at which we will sell our products in the future. It is a way to attempt to reduce the risk caused by price fluctuations. The effectiveness of such hedging activities is dependent upon, among other things, the cost of feedstock and our ability to sell sufficient amounts of biodiesel. Although we attempt to link hedging activities to sales plans and pricing activities, such hedging activities can themselves result in costs because price movements in feedstock contracts are highly volatile and are influenced by many factors that are beyond our control. We may incur such costs and they may be significant. The market for soybean oil trades 18 months into the future. The animal grease market has no futures trade. However, there is a quoting system through the USDA that provides for price discovery for animal grease. There is not enough volume of biodiesel produced to currently justify a futures market. As such, there is no spot biodiesel price, making current price discovery limited. See “MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS – Commodity Price Risk Protection.”

Pretreatment Costs

Crude soybean oil and all animal fats need to be pretreated before being processed into biodiesel. Pretreatment takes crude soybean oil, corn oil and any animal fat or grease, removes the impurities and prepares the feedstock to go through the biodiesel production process. Some types of feedstock need more treatment than others. For example, virgin soybean oil can be easier and cheaper to pretreat than turkey fat, and turkey fat can be easier and cheaper to pretreat than beef tallow. The cost of the process is driven by the structure of the feedstock and the impurities in the feedstock.

For soybean oil, the pretreatment process results in refined and bleached (RB) oil. The price differential between RB oil and crude soy oil is ordinarily 5 cents per pound. Our processing plant has pretreatment capabilities allowing us to utilize crude vegetable oil and many types of fat or grease as feedstock in our facility. This added flexibility allows us to choose the feedstock that will produce biodiesel in the most cost-effective manner possible. Transitioning between feedstocks or to new feedstocks, however, does require our employees to spend time adjusting our equipment and determining the specific process to most profitably use a different feedstock takes time and resources.

Feedstock Procurement

We entered into the MOSA with REG to provide management and marketing services for our facility. Under the MOSA, REG is responsible for arranging the purchase and procurement of the feedstock and chemical inputs necessary to produce biodiesel at our plant. Under the MOSA, REG will:

	•		Provide analysis and audit of feedstock suppliers;
	•		Purchase feedstock at competitive prices meeting specifications and in quantities adequate to satisfy the production schedule of our plant;
	•		Negotiate for discounts on feedstock, where obtainable;
	•		Arrange for transportation, logistics, and scheduling of feedstock deliveries;
	•		Provide analysis and audit of bulk transportation providers;
	•		Perform due diligence requirements for investigation of suppliers of the chemical inputs;
	•		Provide analysis and audit of chemical suppliers and bulk transportation suppliers;
	•		Purchase chemical inputs at competitive prices meeting specifications for use in our plant;
	•		Negotiate for discounts on the purchase of chemical inputs, where obtainable;
	•		Procure adequate chemical inputs to meet our production schedules; and
	•		Arrange for transportation, logistics, and scheduling services for chemical input deliveries by suppliers.

The inability of REG to obtain adequate feedstock for our facility at economical prices, or at all, could have significant negative impacts on our ability to produce biodiesel and on our revenues.

Utilities

Our biodiesel plant requires a significant and uninterrupted supply of electricity, natural gas and water to operate. We do not have any long term agreements for our utilities but receive them on a monthly invoice basis.

Electricity. We require a significant supply of electricity to operate our plant. Alliant Energy supplies us with our electricity needs, on a monthly basis at variable rates.

Water and Sewer. We require a significant supply of water to operate our plant. The City of Washington supplies us with water, on a monthly basis at variable rates. We have entered into an agreement to have our wastewater handled by the Cities of Cedar Rapids, Muscatine and Des Moines until the City of Washington has the capacity to handle our wastewater.

Natural Gas. We require a significant supply of natural gas. Alliant Energy supplies us with natural gas on a monthly basis at variable rates.

Rail. Our rail access is complete and we are currently shipping our biodiesel by both rail and truck. The Iowa, Chicago & Eastern Railroad supplies our plant with rail service and REG makes all of our transportation arrangements.

New Products and Services

We have not introduced any new products or services during the fiscal year ended September 30, 2008.

Government Regulation and Federal Biodiesel Supports

Federal Biodiesel Supports

We expect demand for biodiesel in the United States to grow due to the demand for cleaner air, an emphasis on energy security, current significant increases in the price of diesel fuel, and the Renewable Fuels Standard and other government support of renewable fuels. The Energy Policy Act of 2005 and Jobs Bill, established the groundwork for biodiesel market development. The Energy Independence and Security Act of 2007 may further encourage the production and use of biodiesel in the United States.

Renewable Fuels Standard

The Energy Policy Act of 2005 created the Renewable Fuel Standard (RFS) which required refiners to use 7.5 billion gallons of renewable fuels by 2012. The Energy Independence and Security Act of 2007 (EISA) expanded the existing RFS to require the use of 9 billion gallons of renewable fuel in 2008, increasing to 36 billion gallons of renewable fuel by 2022. The EISA requires that 600 million gallons of renewable fuel used in 2009 must come from advanced biofuels other than corn-based ethanol, such as ethanol derived from cellulose, sugar or crop residue and biomass-based diesel (which includes biodiesel and renewable diesel), increasing to 21 billion gallons in 2022. The EISA further includes a requirement that 500 million gallons of biodiesel and biomass-based diesel fuel be blended into the national diesel pool in 2009, gradually increasing to one billion gallons by 2012. However, in November 2008, the EPA announced that the RFS program in 2009 will continue to be applicable to producers and importers of gasoline only. This means that the 500 million gallons of biomass-based diesel required by the RFS, as amended by the EISA, does not have to be blended into U.S. fuel supplies in 2009. This is due to the fact that the regulatory structure of the original RFS program does not provide a mechanism for implementing the EISA requirement for the use of 500 million gallons of biomass-based diesel. The EPA intends to propose options and develop mechanisms for implementing the EISA biomass-diesel requirements.

We anticipate that the RFS may increase demand for biodiesel in the long-term, as it sets a minimum usage requirement for biodiesel and other types of biomass-based diesel. However, there can be no assurances that demand for biodiesel will be increased by the RFS. As of September 29, 2008, the National Biodiesel Board estimated that national biodiesel production capacity was approximately 2.61 billion gallons per year, which already exceeds the 2012 biodiesel and biomass-based diesel use mandate contained in the EISA. Accordingly, there is no assurance that additional production of biodiesel and biomass-based diesel will not continually outstrip any additional demand for biodiesel that might be created by this new law. Furthermore, any additional delays in the EPA’s implementation of the EISA biomass-based diesel requirements could hinder the stimulation of additional biodiesel demand. If the RFS does not significantly increase demand compared to increases in supply, the RFS will not likely lead to an increase in biodiesel demand. We also anticipate that the expanded RFS will be primarily satisfied by ethanol, including both corn-based and other types of ethanol. The amount of corn-based ethanol that may be used to satisfy the RFS requirements is capped at 15 million gallons starting in 2015 and, accordingly, other types of ethanol, including cellulose-based ethanol, will likely be used to satisfy any requirements over and above the 15 million gallon corn-based ethanol cap.

On April 10, 2007, the EPA published final rules implementing the RFS program. The RFS program final rules were effective as of September 1, 2007. Pursuant to the final rules, the EPA will calculate and publish the annual RFS in the Federal Register by November 30th for the following year. The RFS must be attained by refiners, blenders, and importers (collectively the “obligated parties”). Compliance with the RFS program will be shown through the acquisition of unique Renewable Identification Numbers (RINs). RINs are assigned by the producer to every batch of renewable fuel produced to show that a certain volume of renewable fuel was produced. Each obligated party is required to meet their own Renewable Volume Obligation. Obligated parties must produce or acquire sufficient RINs to demonstrate achievement of their Renewable Volume Obligation.

Each RIN may only be counted once toward an obligated party’s Renewable Volume Obligation and must be used either in the calendar year in which the RINs were generated, or in the following calendar year. At least 80% of the Renewable Volume Obligation for a given calendar year must come from RINs generated in that year. An obligated party may purchase RINs from third parties if it fails to produce the adequate RINs in the calendar year to meet its Renewable Volume Obligation. If the obligated party fails to satisfy is Renewable Volume Obligation in a calendar year, the obligated party may carry the deficit forward for one year. Such deficit will be added to the party’s obligation for the subsequent year.

The RFS system will be enforced through a system of registration, recordkeeping and reporting requirements for obligated parties, renewable producers (RIN generators), as well as any party that procures or trades RINs, either as part of their renewable purchases or separately. Any person who violates any prohibition or requirement of the RFS program may be subject to civil penalties for each day of each violation. For example, under the final rule, a failure to acquire sufficient RINs to meet a party’s renewable fuels obligation would constitute a separate day of violation for each day the violation occurred during the annual averaging period. The enforcement provisions are necessary to ensure the RFS program goals are not compromised by illegal conduct in the creation and transfer of RINs.

The EPA has assigned “equivalence values” to each type of renewable energy fuel in order to determine compliance with the RFS. The equivalence values used ethanol as the base-line measurement (such that one gallon of ethanol is equivalent to one credit towards RFS compliance) and assigned biodiesel an equivalence value of 1.5 (so that for each gallon of biodiesel used, the obligated party will receive one and one-half gallons credit towards its RFS compliance).

Production of biofuels, including both biodiesel and ethanol, may continue to increase at a faster pace than the RFS. Should the supply of biofuels increase more rapidly than demand for biofuels, including biodiesel, it may lead to decreases in the selling price of biodiesel.

Biodiesel Tax Credit

The American Jobs Creation Act of 2004 originally created the biodiesel blenders’ excise tax credit known as the Volumetric Ethanol Excise Tax Credit (“VEETC”). VEETC provides a tax credit of $1.00 per gallon for biodiesel. VEETC may be claimed in both taxable and nontaxable markets, including exempt fleet fuel programs and off-road diesel markets. The desired effect of VEETC is to streamline the use of biodiesel and encourage petroleum blenders to blend biodiesel as far upstream as possible, which will allow more biodiesel to be used in the marketplace. VEETC also streamlines the tax refund system for below-the-rack blenders to allow a tax refund of the biodiesel tax credit on each gallon of biodiesel blended with diesel (dyed or undyed) to be paid within 20 days of blending. Below-the-rack blenders are those blenders that market fuel that is for ground transportation engines and is not in the bulk transfer system. VEETC was set to expire on December 31, 2008, but was recently extended until December 31, 2009 as part of the Emergency Economic Stabilization Act of 2008 (“EESA”). The VEETC, as extended by the EESA, contains a few significant changes. The law closes the so-called “splash and dash” loophole, which refers to the instances where biodiesel produced in foreign countries was transported to the United States, blended with a small percentage of diesel to claim the tax incentive, and then shipped to a third country for sale and use. Pursuant to EESA, biodiesel produced outside the United States will no longer qualify for the biodiesel tax incentive. The law also reduces the credit for biodiesel co-processed with petroleum feedstock from $1.00 to 50 cents. Although VEETC was recently extended for an additional year, it is now set to expire on December 31, 2009 and there can be no assurance that it will be renewed again in the future. The loss of the biodiesel tax incentive provided by the VEETC would decrease our revenues and have an adverse impact on our ability to generate a profit, and therefore could reduce the value of your units.

In May 2008, Congress passed the Food and Energy Conservation Act of 2008 (the “Farm Bill”). The Farm Bill reauthorizes the CCC Bioenergy Program which was created to promote sustained increases in bioenergy production and related industrial agricultural commodities, as well as to help improve the environment through the production and use of cleaner burning fuels. Under the program, the USDA makes payments through the Commodity Credit Corporation to eligible producers to encourage increased purchases of eligible commodities for the purpose of expanding production of bioenergy and supporting new production capacity. The Farm Bill authorized $300 million in mandatory funding for the program over the 5 year duration of the Farm Bill and authorizes an additional $25 million in funding each year from fiscal year 2009 through fiscal year 2012, subject to Congress’ annual appropriations process. Most importantly, ethanol produced from corn will not qualify under the program, which means more of the benefits of this program will go to us and other biodiesel producers.

State Legislation

Several states, including Iowa, are currently researching and considering legislation to increase the amount of biodiesel used and produced in their states. Minnesota was the first state to mandate biodiesel use. The Minnesota legislation, which became effective in September 2005, requires that all diesel fuel sold in the state contain a minimum of 2% biodiesel. The 2% soy biodiesel blend has nearly the same cold flow properties as No. 2 petroleum diesel, which allows it to be used in Minnesota’s colder climate much the same as petroleum diesel throughout the year. Similarly, in July 2008 Massachusetts signed a law that requires all home heating oil and diesel fuel in the state to consist of 2% biodiesel by 2010 and 5% biodiesel by 2013. However, the Massachusetts Department of Energy Resources will be entitled to delay those requirements if it determines that fuels are not available to meet these requirements.

In May 2006, Iowa passed legislation that creates a renewable fuels standard that requires 10% of the fuel used in Iowa to be from renewable sources by 2009 and increasing the renewable fuel standard to 25% by 2019. While this does not require biodiesel use, it may significantly increase renewable fuels use in Iowa, which may include increased biodiesel use in Iowa. The Iowa legislation includes tax credits to help retailers meet this requirement. The Iowa legislation also provided for an incentive of three cents per gallon of biodiesel sold for retailers who sell at least 50% biodiesel blends. This is also expected to increase biodiesel sales and production.

Other states have enacted legislation to encourage (but not require) biodiesel production and use. Several states provide tax incentives and grants for biodiesel-related studies and biodiesel production, blending, and use. In addition, several governors have issued executive orders directing state agencies to use biodiesel blends to fuel their fleets.

Future Legislation

Environmental regulations that may affect our company change frequently.  It is possible that the government could adopt more stringent federal or state environmental rules or regulations, which could increase our operating costs and expenses.  The government could also adopt federal or state environmental rules or regulations that may have an adverse effect on the use of biodiesel. Furthermore, the Occupational Safety and Health Administration (OSHA) will govern our plant operations.  OSHA regulations may change such that the costs of the operation of the plant may increase.  Any of these regulatory factors may result in higher costs or other adverse effects on our operations, cash flows and financial performance. These adverse effects could decrease or eliminate the value of our units.

Competition with Other Biodiesel Producers

We operate in a very competitive environment. Biodiesel is a relatively uniform commodity where competition in the marketplace is predominantly based on price, consistent fuel quality, and to a lesser extent delivery service. We compete with large, multi-product companies and other biodiesel plants with varying capacities. Some of these companies can produce biodiesel in a more efficient manner than we are able. We face competition for capital, labor, management, feedstock and other resources. Some of our competitors have greater resources than we currently have or will have in the future. Some of our competitors have soy-crushing facilities and are therefore not reliant upon third parties for their soybean oil supply.

In 2007, approximately 450 million gallons of biodiesel were produced in the United States. As of September 29, 2008 (the latest date for which data is available), the National Biodiesel Board reported that there were 176 operating biodiesel plants in the United States with a total annual production capacity of 2.61 billion gallons. One of these plants was undergoing expansion to increase its annual production capacity. Another 39 plants were reported to be in the planning stages or under construction as of September 2008. The additional combined capacity of these plants under construction or expansion is estimated at 849.9 million gallons per year. Accordingly, biodiesel supply may already far exceed demand for biodiesel. Currently, there are 13 existing biodiesel plants in Iowa, including our plant, and at least 2 other companies have proposed new plants in Iowa; however, several of these plants may not be operating, may not be operating at full capacity, or may never begin operations. We expect that additional biodiesel producers may enter the market if the demand for biodiesel increases. As additional biodiesel plants are constructed and brought on line, we expect the supply of biodiesel to increase. The absence of increased demand may cause prices for biodiesel to decrease. We may not be able to compete successfully or such competition may reduce our ability to generate the profits necessary to operate our plant.

While REG markets our biodiesel to end users both domestically and internationally, biodiesel plants in Iowa are direct competitors for local end users and resources other than customers. We compete with the plants in Iowa for capital, labor and management. These resources tend to be utilized from a local market, and additional strains placed on these resources by increased competition in Iowa could result in our company being forced to expend additional funds on recruiting labor and management to relocate from other areas. In addition, while we may receive feedstock from areas beyond the state of Iowa, the most cost-efficient feedstock will likely come from local suppliers, as this will reduce transportation costs. We directly compete with Iowa biodiesel plants for business from a limited number of local feedstock suppliers. Local end users will also be the most cost-efficient customers for REG, due to reduced transportation expenses. Therefore, we compete directly with Iowa biodiesel producers, including REG, for these local customers.

Our management and operational services agreement with REG does not prevent REG from providing marketing and sales services for our competitors. If REG provides marketing and sales services for the biodiesel of our competitors, the result will be increased competition among those biodiesel producers. Biodiesel producers that work with REG, including our company, rely on REG to market their biodiesel and if REG cannot market all of the biodiesel it has committed to sell, then all of the biodiesel producers that work with REG are at risk that this loss will be allocated to them.

We must compete with other biodiesel producers in the industry not just in the sale of our biodiesel, but also in the acquisition of soybean oil, animal fats and other feedstocks and raw materials. A majority of biodiesel plants, including many of the largest biodiesel producers, utilize soybean oil. This may change over time as high soybean oil prices are encouraging biodiesel producers to find ways to utilize alternative and less costly types of feedstock. For example, research is currently underway to develop technology to produce biodiesel from alternative feedstocks such as algae. Furthermore, producers may increasingly design their plants with the capability to use multiple feedstocks. Nonetheless, we expect that increased biodiesel production will continue to increase the demand and cost of not only soybean oil, but also animal fats and other inputs. We expect this will make it more expensive for us to produce our biodiesel and will reduce our profit margins from biodiesel. This is because there is little or no correlation between the cost of feedstock and the market price of biodiesel and, therefore, we cannot pass along increased feedstock costs to our biodiesel customers. In order to stay competitive in the diesel industry, biodiesel must be competitively priced with petroleum-based diesel. Therefore, biodiesel prices fluctuate more in relation to petroleum-based diesel market prices than with feedstock market prices. As a result, increased feedstock costs and reduced biodiesel prices result in decreased profit margins. If we continue to experience high feedstock costs or reduced biodiesel prices for a sustained period of time, such pricing and costs may reduce our ability to generate revenues and our profit margins may significantly decrease or be eliminated.

Many current plants are capable of using only vegetable oil for feedstock. Our plant is able to use both vegetable oils and animal fats to produce biodiesel, allowing us to use whichever types of feedstock provides the greatest return at any given time. This is beneficial because the cost of feedstock is the highest cost associated with biodiesel production. Our ability to utilize animal fats is also significant because animal fat-based biodiesel has some favorable advantages over soybean oil-based biodiesel, such as better lubricity and lower nitrogen oxide (NOx) emissions. However, some purchasers of animal fat-based biodiesel may believe that it is not suitable for use during the winter months in colder climates due to its tendency to gel at higher temperatures. This could limit our ability to sell animal fat-based biodiesel during winter months.

We compete with large, multi-product companies and other biodiesel plants with varying capacities. Some of our competitors have greater resources than we currently have or will have in the future. Large plants with which we compete include the 85 million gallon per year Archer Daniels Midland Co (ADM) canola-based plant in Velva, North Dakota; the 90 million gallon per year Green Earth Fuels multi-feedstock plant in Galena Park, Texas; the 100 million gallon per year multi-feedstock Imperium Grays Harbor plant in Grays Harbor, Washington; the 80 million gallon per year soy-based biodiesel plant owned by Louis Dreyfus Agricultural Industries in Claypool, Indiana; and the 105 million gallon per year multi-feedstock GreenHunter Biofuels plant in Houston, Texas which recently became operational in July 2008.

Although most biodiesel plants are not equipped to process raw materials (such as soybeans) into feedstock (such as soybean oil), there are several of our competitors that have soy-crushing facilities and are therefore not reliant upon third parties for their feedstock supply like we are. As a result, we face a competitive challenge from biodiesel plants owned and operated by the companies that supply our inputs, such as Cargill, Inc. (“Cargill”), Ag Processing, Inc. (“AGP”) and ADM. Cargill, AGP and ADM have significant crush capabilities throughout North America and are large suppliers of soybean oil that own and operate their own biodiesel plants in the Midwest. Cargill owns a 37.5 million gallon plant in Iowa Falls, Iowa. AGP owns a 30 million gallon per year plant in Sergeant Bluff, Iowa, both of which process soy oil into biodiesel. ADM has constructed an 85 million gallon plant in Velva, North Dakota which processes canola oil into biodiesel. Also, increasing feedstock costs have spurred, and will likely continue to spur, additional development of crush facilities throughout the country. Such vertical integration provides these plants with greater control over their feedstock supplies, thereby providing them with a competitive advantage over plants like ours that do not have soy-crushing capabilities, especially as prices and competition for soybean oil and other feedstocks have increased.

The following map produced by the National Biodiesel Board indicates the locations of current active plants in the U.S as of September 29, 2008. Active plants are those companies that are actively producing biodiesel.

Commercial Biodiesel Production Plants (September 29, 2008)

Source: National Biodiesel Board, http://www.biodiesel.org/buyingbiodiesel/producers_marketers/ProducersMap-Existing.pdf

The following table provides a list of the active biodiesel plants in the United States as of September 29, 2008, as reported by the National Biodiesel Board. Some newly constructed plants, are not listed.

						Annual
						Production
State		Company		City		Capacity				Primary Feedstock
AL
		Allied Renewable Energy, LLC		Birmingham			15,000,000			Soy
		Athens Biodiesel, LLC		Athens
		Eagle Biodiesel, Inc.		Bridgeport			30,000,000
		Green River Biodiesel, Inc.		Moundville						Soy
		Perihelion Global, Inc.		Opp			10,000,000			Multi Feedstock
AR
		Arkansas Soy Energy Group		DeWitt			10,000,000			Soy
*		Future Fuel Chemical Company		Batesville			24,000,000			Multi Feedstock
		Pinnacle Biofuels, Inc.		Crossett			10,000,000			Multi Feedstock
AZ
		Amereco Arizona, LLC		Arlington			15,000,000			Multi Feedstock
CA
		Blue Sky Bio-Fuels, Inc.		Oakland						Multi Feedstock
		Community Fuels		Stockton			10,000,000			Multi Feedstock
		Energy Alternative Solutions, Inc.		Gonzales			1,000,000			Multi Feedstock
*		Imperial Western Products		Coachella			8,000,000			Multi Feedstock
		Renewable Energy Products, LLC		Santa Fe Springs			10,000,000			Multi Feedstock
		Wright Biofuels, Inc.		San Jacinto			5,500,000			Multi Feedstock
		Yokayo Biofuels, Inc.		Ukiah			350,000			Recycled Cooking Oil

						Annual
						Production
State		Company		City		Capacity				Primary Feedstock
CT
		BioDiesel One Ltd		Southington			4,000,000			Recycled Cooking Oil
		Bio-Pur Inc.		Bethlehem			1,000,000			Multi Feedstock
FL
		Agri-Source Fuels, Inc.		Dade City			30,000,000			Multi Feedstock
*		World Energy Alternatives, LLC		Lakeland			18,000,000			Soy, Animal Fats, Yellow Grease
GA
		Alterra Bioenergy of Middle Georgia, LLC		Gordon			15,000,000			Multi Feedstock
		BullDog BioDiesel		Ellenwood			18,000,000			Multi Feedstock
		ECO Solutions, LLC		Chatsworth			25,000,000			Multi Feedstock
		Georgia Biofuels Corp.		Loganville			1,000,000			Multi Feedstock
		Middle Georgia Biofuels		East Dublin			1,500,000			Poultry Fat, Tallow
*		Peach State Labs		Rome						Soy
		Seminole Biodiesel		Bainbridge			10,000,000			Multi Feedstock
		Sunshine BioFuels, LLC		Camilla			6,000,000			Soy
		US Biofuels Inc.		Rome			10,000,000			Multi Feedstock
HI
		Pacific Biodiesel		Kahului			500,000			Multi Feedstock
		Pacific Biodiesel		Honolulu			1,000,000			Multi Feedstock
IA
*		AGP		Sergeant Bluff			30,000,000			Soy
*		Cargill		Iowa Falls			37,500,000			Soy
*		Central Iowa Energy, LLC		Newton			30,000,000			Multi Feedstock
		East Fork Biodiesel, LLC		Algona			60,000,000			Refined Vegetable Oils
*		Freedom Fuels, LLC		Mason City			30,000,000			Soy
*		Iowa Renewable Energy, LLC		Washington			30,000,000			Multi Feedstock
*		REG Ralston, LLC		Ralston			12,000,000			Multi Feedstock
		Riksch BioFuels, LLC		Crawfordsville			10,000,000			Multi Feedstock
		Sioux Biochemical, Inc.		Sioux Center			2,000,000			Corn, Soy
		Soy Solutions		Milford			2,000,000			Soy
		Tri-City Energy		Keokuk			5,000,000			Soy
*		Western Dubuque Biodiesel		Farley			30,000,000			Vegetable Oils
*		Western Iowa Energy		Wall Lake			30,000,000			Multi Feedstock
ID
		Blue Sky Biodiesel, LLC		New Plymouth			10,000,000			Soy
		Pleasant Valley Biofuels, LLC		American Falls
IL
		Diamond Biofuels		Maxon			500,000			Animal Fats, Recycled Cooking Oil
		Heartland Biodiesel, Inc.		Marion			3,000,000			Soy
		Incobrasa Industries, Ltd.		Gilman			31,000,000			Soy
		Midwest Biodiesel Products, Inc.		South Roxanna			30,000,000			Multi Feedstock
*		Stephan Company		Millsdale			22,000,000			Multi Feedstock
IN
		e-biofuels, LLC		Middletown			25,000,000			Multi Feedstock
		Evergreen Renewables		Hammond			5,000,000			Soy
		Indiana Flex Fuels		LaPorte			5,000,000			Multi Feedstock
		Integrity Biofuels		Morristown			10,000,000			Soy
		Louis Dreyfus Agricultural Industries, LLC		Claypool			80,000,000			Soy
KS
		Healy Biodiesel, Inc.		Sedgwick			1,000,000			Recycled Cooking Oil
		Krystal Clean Biofuels		Kansas City						Multi Feedstock
KY
*		Griffin Industries		Butler			1,750,000			Multi Feedstock
		Ownesboro Grain		Ownesboro			50,000,000			Soy
		Union County Biodiesel Company, LLC		Stugis			5,000,000			Soy
LA
		Vanguard Synfuels, LLC		Pollock			12,000,000			Multi Feedstock

						Annual
						Production
State		Company		City		Capacity				Primary Feedstock
MA
		MPB Bioenergy, LLC		Attleboro			500,000			Recycled Cooking Oil
MD
		Eagle Creek Fuel Services, LLC		Baltimore			1,000,000
		Greenlight Biofuels, LLC		Princess Anne			4,000,000			Multi Feedstock
		Maryland Biodiesel		Berlin			1,000,000			Soy
MI
		Ag Solutions, Inc.		Gladstone			5,000,000			Multi Feedstock
		Michigan Biodiesel, LLC		Bangor			10,000,000			Multi Feedstock
		NextDiesel		Adrian			20,000,000			Multi Feedstock, Corn Oil
		TPA Inc.		Warren			20,000,000			Multi Feedstock
MN
*		FUMPA BioFuels		Redwood Falls			3,000,000			Multi Feedstock
		Green Range Renewable Energy		Ironton			150,000			Recycled Cooking Oil
*		Minnesota Soybean Processors		Brewster			30,000,000			Soy
MO
		AGP		St. Joseph			29,900,000			Soy
		Global Fuels, LLC		Dexter			3,000,000			Multi Feedstock
		High Hill Biodiesel, Inc.		High Hill			5,000,000			Multi Feedstock
		Mid America Biofuels, LLC		Mexico			30,000,000			Soy
		Natural Biodiesel Plant, LLC		Hayti			5,000,000			Multi Feedstock
		Paseo Cargill Energy, LLC		Kansas City			37,500,000			Soy, Animal Fats
		Prairie Pride		Deerfield			30,000,000			Soy
MS
		CFC Transportation, Inc.		Columbus			1,500,000			Multi Feedstock
		Delta Biofuels, Inc.		Natchez			80,000,000			Multi Feedstock
		North Mississippi Biodiesel		New Albany			7,000,000			Soy
		Scott Petroleum Corporation		Greenville			20,000,000			Multi Feedstock
MT
		Earl Fisher Bio Fuels		Chester
NC
		Blue Ridge Biofuels		Asheville			1,000,000			Multi Feedstock
		Carolina Biodiesel, LLC		Durham
		Evans Environmental Energies, Inc.		Wilson			3,000,000
		Foothills Bio-Energies, LLC		Lenoir			5,000,000			Multi Feedstock
		Gortman Biofuel, LLC		Winston Salem			100,000
		Leland Organic Corporation		Leland			30,000,000			Multi Feedstock
		North Carolina BioFuels, LLC		Seaboard			1,000,000			Multi Feedstock
*		Piedmont Biofuels		Pittsboro			4,000,000			Multi Feedstock
		Triangle Biofuels Industries, Inc.		Wilson			3,000,000			Multi Feedstock
ND
		ADM		Velva			85,000,000			Canola
NE
		Horizon Biofuels, Inc.		Arlington			400,000			Animal Fat
		Northeast Nebraska Biodiesel, LLC		Scribner			5,000,000			Soy
		Wyobraska Biodiesel, LLC		Gering			10,000,000			Soy
NJ
		Fuel Bio One, LLC		Elizabeth			50,000,000			Multi Feedstock
		Innovation Fuels		Newark			40,000,000			Multi Feedstock
NM
		Rio Valley Biofuels, LLC		Anthony			750,000			Multi Feedstock
NV
		Bently Biofuels		Minden			1,000,000			Multi Feedstock
		Biodiesel of Las Vegas		Las Vegas			8,000,000			Multi Feedstock
NY
		Buffalo Biodiesel, Inc.		Tonawanda			1,500,000			Recycled Cooking Oil
		Northern Biodiesel, Inc.		Ontario						Soy

						Annual
						Production
State		Company		City		Capacity				Primary Feedstock
OH
		Agrifuels, LLC		Breman			1,000,000			Multi Feedstock
		American Ag Fuels, LLC		Definance			7,000,000			Multi Feedstock
		American Made Fuels, Inc.		Canton			5,000,000			Multi Feedstock
		Arlington Energy, LLC		Mansfield			4,000,000			Multi Feedstock
		Center Alternative Energy Company		Cleveland			5,000,000			Soy, Choice White Grease
		Jatrodiesel, Inc.		Miamisburg			5,000,000			Multi Feedstock
*		Peter Cremer		Cincinnati			30,000,000			Soy
		PK Biodiesel		Woodstock			5,000,000			Multi Feedstock
OK
		High Plains Bioenergy		Guymon			30,000,000			Multi Feedstock
		Tulsa Biofuels, LLC		Tulsa
OR
		Green Fuels of Oregon, Inc.		Klamath Falls			1,000,000			Canola
		SeQuential-Pacific Biodiesel, LLC		Salem			5,000,000			Multi Feedstock
PA
		Biodiesel of Pennsylvania, Inc.		White Deer			1,500,000			Soybean Oil
		Keystone BioFuels, Inc.		Shiremanstown						Multi Feedstock
		Lake Erie Biofuels		Erie			45,000,000			Soy
		Middletown Biofuels, LLC		Middletown			5,000,000			Soy
		Soy Energy, Inc.		New Oxford			1,500,000			Soy
		United Biofuels, Inc.		York			3,000,000			Multi Feedstock
		United Oil Company		Pittsburgh			5,000,000			Multi Feedstock
RI
		Mason Biodiesel, LLC		Westerly			2,500,000			Recycled Cooking Oil
		Newport Biodiesel, LLC		Newport			300,000			Recycled Cooking Oil
SC
		Carbon Neutral Solutions, LLC		Maldin
*		Carolina Biofuels, LLC		Greenville			50,000,000			Soy
		Ecogy Biofuels, LLC		Estill			30,000,000			Soy
		Southeast BioDiesel, LLC		N. Charleston			8,000,000			Multi Feedstock
SD
		Midwest BioDiesel Producers, LLC		Alexandria			7,000,000			Multi Feedstock
TN
		Blue Sky Biodiesel, Inc.		Kingstong			3,000,000			Multi Feedstock
		Memphis Biofuels, LLC		Memphis			50,000,000			Multi Feedstock
		Milagro Biofuels of Memphis		Memphis			5,000,000			Multi Feedstock
		Nu-Energie, LLC		Surgoinsville			5,000,000			Multi Feedstock
		NuOil		Counce			1,500,000			Multi Feedstock
		SunsOil, LLC		Athens			1,500,000			Multi Feedstock
TX
		Agribiofuels, LLC		Dayton			12,000,000			Multi Feedstock
		AgriMax Fuels, LLC		Channelview			3,000,000			Soy
*		Beacon Energy		Cleburne			12,000,000			Multi Feedstock
		Biodiesel of Texas, Inc.		Denton
		BioSelect Fuels (GBBLP)		Galveston			30,000,000			Multi Feedstock
		Brownfield Biodiesel, LLC		Ralls			2,000,000			Cottonseed, Soy, Canola
		Central Texas Biofuels		Giddings			600,000			Waste Vegetable Oil
		Direct Fuels		Euless			10,000,000			Multi Feedstock
		Double Diamond Biofuels, Inc.		Dimmitt			8,000,000			Multi Feedstock
		Fuel & Lube, LLC		Richmond			1,000,000			Recycled Cooking Oil
		GeoGreen Fuels		Gonzales			3,000,000			Multi Feedstock
		Green Earth Fuels of Houston, LLC		Galena Park			90,000,000			Multi Feedstock
		GreenHunter BioFuels, Ltd.		Houston			105,000,000			Multi Feedstock
		Greenlight Biofuels, Ltd.		Littlefield			5,000,000			Multi Feedstock
*		Huish Detergents		Pasadena			15,000,000			Palm
*		Johann Haltermann Ltd		Houston			12,000,000			Multi Feedstock
		Momentum Biofuels, Inc.		Pasadena			20,000,000			Multi Feedstock
		New Energy Fuels, Inc.		Waller			5,000,000			Multi Feedstock
		New Fuel Company		Dallas			250,000			Multi Feedstock
*		Organic Fuels, LLC		Galena Park			45,000,000			Multi Feedstock
		Pacific Biodiesel Texas		Hillsboro			2,500,000			Multi Feedstock

						Annual
						Production
State		Company		City		Capacity				Primary Feedstock
		Red River Biodiesel, Ltd.		New Boston			15,000,000			Multi Feedstock
		REG Houston, LLC		Seabrook			35,000,000			Refined Vegetable Oils
		SAFE Renewable Corp.		Conroe			30,000,000			Multi Feedstock
		Valco Bioenergy		Harlingen			3,000,000			Recycled Cooking Oil
VA
		Cheasapeake Custom Chemical		Ridgeway			5,500,000			Multi Feedstock
		RECO Biodiesel, LLC		Richmond			10,000,000			Multi Feedstock
		Red Birch Energy, Inc.		Bassett			2,500,000			Multi Feedstock
		Virginia Biodiesel Refinery		West Point			7,000,000			Multi Feedstock
WA
		Central Washington Biodiesel, LLC		Ellensburg						Multi Feedstock
		Gen-X Energy Group, Inc.		Burbank			15,000,000			Multi Feedstock
		Imperium Grays Harbor		Hoquiam			100,000,000			Multi Feedstock
*		Seattle Biodiesel		Seattle			5,000,000			Soy, Canola
WI
		Best Biodiesel, Inc.		Cashton			10,000,000
		Sanimax Energy Inc.		Deforest			20,000,000			Multi Feedstock
		Walsh Bio Diesel, LLC		Mauston			5,000,000			Multi Feedstock
WY
		AC & S, Inc.		Nitro			3,000,000			Soy

Competition from Other Fuel Sources

The biodiesel industry is in competition with the diesel fuel segment of the petroleum industry. Historically, biodiesel prices have correlated to the prices of petroleum-based diesel. Over the past several years, according to the Energy Information Administration, the price of diesel fuel steadily increased until reaching record high prices in July 2008 of approximately $4.70 per gallon for No. 2 ultra low sulfur diesel, and thereafter declined sharply to approximately $2.62 as of December 1, 2008. Although the price of diesel fuel has decreased over the past several months, diesel fuel prices per gallon remain at levels below or equal to the price of biodiesel. Following the trend of diesel prices, biodiesel prices steadily increased over the past year to their peak in the summer of 2008, after which time they decreased. As of December 19, 2008, the National Weekly Ag Energy Roundup reports that B100 biodiesel prices in Iowa ranged from $2.60 to $3.06 per gallon, which is down from a range of $3.85 to $4.00 approximately one year ago. If the diesel fuel industry is able to produce petroleum-based diesel fuel with acceptable environmental characteristics, we may find it difficult to compete with diesel fuel. In addition, other more cost-efficient domestic alternative fuels may be developed and displace biodiesel as an environmentally-friendly alternative. If diesel prices do not continue to increase or a new fuel is developed to compete with biodiesel, it may be difficult to market our biodiesel, which could result in the loss of some or all of our ability to operate profitably.

At least one large oil company has previously announced its intent to produce renewable diesel, another form of diesel with which we may be required to compete. Renewable diesel has characteristics similar to that of petroleum-based diesel fuel and can be co-processed at traditional petroleum refineries from vegetable oils or animal fats mixed with crude oil through a thermal de-polymerization process. However, as a result of an Internal Revenue Service interpretation of the application of certain biodiesel tax credits created under the Energy Policy Act of 2005, renewable diesel processed in traditional petroleum-refining equipment is currently eligible for the blenders’ tax credit, but only at a reduced rate of 50 cents per gallon. Opponents of the IRS interpretation argue that the blenders’ tax credit was intended for specific, limited production technologies, including the methyl ester biodiesel production process, and that the recent interpretation will allow a large subsidy of conventional petroleum refinery capacity at the expense of free-standing producers of biodiesel. In 2007, ConocoPhillips announced its plans to add technology to some of its refineries to produce approximately 175 million gallons of renewable diesel per year. Because renewable diesel is currently eligible for the blenders’ tax credit (although only at a reduced credit of 50 cents compared to the $1.00 credit available for biodiesel), other large oil companies may also decide to add production capacity for renewable diesel. These large petroleum refiners likely have greater financial resources than we do and may be able to devote greater production capacity to the production of renewable diesel than the typical biodiesel plant, which on average has an annual production capacity of 30 million gallons. Accordingly, if renewable diesel proves to be more cost-effective than biodiesel, our revenues and our ability to operate profitably may be adversely affected.

In addition, the EPA has issued regulations to reduce the amount of sulfur in diesel fuel in order to improve air quality. The removal of sulfur from diesel fuel also reduces its lubricity which must be corrected with fuel additives, such as biodiesel, which has inherent lubricating properties. We expect to compete with producers of other diesel additives made from raw materials other than soybean oil having similar lubricity values as biodiesel, such as petroleum-based lubricity additives. Some major oil companies produce these petroleum-based lubricity additives and strongly favor their use because they may be used in lower concentrations than biodiesel. In addition, much of the infrastructure in place is for petroleum-based additives. As a result, petroleum-based additives may be more cost-effective than biodiesel. Therefore, it may be difficult to market our biodiesel as a lubricity additive, which could result in the loss of some or all of your investment.

Glycerin Competition

Excess production of glycerin, a co-product of the biodiesel production process, may cause the price of glycerin to decline, thereby adversely affecting our source of revenue from glycerin. It is estimated that every one million gallons of biodiesel produced adds approximately another 100,000 gallons of crude glycerin into the market. Accordingly, as biodiesel production has increased, the glycerin market has become increasingly saturated. As a result, glycerin prices dropped dramatically in 2006, with crude glycerin prices hovering around 2 cents per pound or less. Some plants were forced to give away glycerin, and according to the Jacobsen Publishing Company’s Biodiesel Bulletin, others paid 3 cents to 4 cents per pound to dispose of crude glycerin. However, as of early December 2008, according to the Jacobsen Biodiesel Bulletin, average crude glycerin prices increased to approximately 4 to 8 cents per pound. REG markets the glycerin produced at our plant under our MOSA.

Excess glycerin production capacity may limit our ability to market our glycerin co-product, and we may even be forced to pay to dispose of our glycerin if prices decrease as they did in 2006. Low glycerin prices may also limit our ability to generate revenues through the sale of our co-product. This may negatively affect the profitability of our business. Additionally, some of our competitors, such as Cargill and ADM, have expanded their glycerin refining capacities due to relatively higher prices for refined glycerin when compared to the price of crude glycerin. In Iowa Falls, Iowa, Cargill has built a 30 million pound per year glycerin refinery near its 37.5 million gallon per year biodiesel production plant. These biodiesel producers may therefore have a competitive advantage over plants like ours that do not have glycerin refining capabilities.

Research and Development

We do not conduct any research and development activities associated with the development of new technologies for use in producing biodiesel and glycerin.

Dependence on One of a Few Major Customers

We have entered into a marketing contract with REG in which REG markets all biodiesel and glycerin produced at the facility. Therefore, we are highly dependent on REG for the successful remarketing of our products. REG provides market analysis of biodiesel supply and demand; market access to distribution channels developed by REG; analysis and audit of biodiesel customers, including creditworthiness; provides marketing specialists and sales representatives to attain and establish sales opportunities and relationships for the facility’s products; provides transportation and logistics for biodiesel shipments; and invoicing and accounts receivable management. Any loss of REG as our marketer for our products or any inability of REG to successfully market our products could have a significant negative impact on our revenues.

Furthermore, we are in direct competition with REG due to its ownership and management of other existing biodiesel plants and proposed biodiesel plants, and any failure by REG to comply with the terms of our MOSA could negatively impact our ability to generate revenues. The MOSA does not prohibit REG from providing services to our competitors, and its does not provide any procedures as to how REG will address any conflicts of interest that may arise during REG’s service to our plant and competitor plants. If REG places the interests of other biodiesel plants which it owns or manages ahead of our interests, our profitability may be negatively impacted.

Costs and Effects of Compliance with Environmental Laws

We are subject to extensive air, water and other environmental regulations and we have been required to obtain a number of environmental permits to construct and operate the plant. We have obtained all of the necessary permits to begin plant operations including air emissions permits, a NPDES Permit, storm water discharge permits, and boiler permits. We have obtained all of the permits required to construct the plant. As of September 30, 2008 we have not yet incurred any expenses in complying with environmental laws, including the cost of obtaining permits since our inception. Any costs related to environmental compliance and permitting have been paid by REG. Any retroactive change in environmental regulations, either at the federal or state level, could require us to obtain additional or new permits or spend considerable resources on complying with such regulations.

We are subject to oversight activities by the EPA. We have obtained an identification number from the EPA for any hazardous waste that may result from our production of biodiesel. There is always a risk that the EPA may enforce certain rules and regulations differently than Iowa’s environmental administrators. Iowa or EPA rules are subject to change, and any such changes could result in greater regulatory burdens on plant operations. We could also be subject to environmental or nuisance claims from adjacent property owners or residents in the area arising from possible foul smells or other air or water discharges from the plant. Such claims could have an adverse result in court if we are deemed to engage in a nuisance that substantially impairs the fair use and enjoyment of real estate.

Employees

Currently we have hired 26 full-time employees to operate our biodiesel facility. In addition to the employees we have already hired, REG has hired a General Manager, Alan Yoder, and Operations Manager, Glen Hansel, who direct the operations of the biodiesel facility. The General Manager and Operations Manager are employees of REG and are compensated by REG.

ITEM 1A. RISK FACTORS.

You should carefully read and consider the risks and uncertainties below and the other information contained in this report. The risks and uncertainties described below are not the only ones we may face. The following risks, together with additional risks and uncertainties not currently known to us or that we currently deem immaterial could impair our financial condition and results of operations.

Risks Related to Our Business

We are experiencing liquidity issues which could require us to cease operations. We are experiencing liquidity issues associated with the high cost of our raw materials, lack of demand for our product, and the ordinary delay between when we purchase raw materials and when we receive payments from REG for our finished products. This has resulted in a situation where we are short on cash. This has caused us to scale back production at our biodiesel plant, and may require us to cease operations altogether. These shutdowns could be temporary or permanent depending on the cash we have available to continue operations. We have already had several temporary shut downs at the plant and are not operating at full capacity. Should we not be able to continue to secure the cash we require in order to pay our obligations as they become due, we may have to cease operations, either on a permanent or temporary basis, which could decrease or eliminate the value of our units.

We have a history of losses and may not ever operate profitably. For the fiscal year ended September 30, 2008 we incurred a net loss of $3,784,924. There is no assurance that we will be successful in our efforts to operate the biodiesel plant. Even if we successfully meet all of our objectives, there is no assurance that we will be able to operate profitably. We are experiencing very high raw material costs and low biodiesel prices that in some case have been less than our production costs. Should we continue to endure the current high raw material costs without an increase in the price we receive for our biodiesel or glycerin, we may have to scale back or cease operations at the biodiesel plant, either on a temporary or permanent basis. This may affect our ability to generate revenues and could decrease or eliminate the value of our units.

Our business is not diversified. Our success depends largely upon our ability to profitably operate our biodiesel plant. We do not have any other lines of business or other sources of revenue if we are unable to operate our biodiesel plant and manufacture biodiesel and glycerin. We have no other line of business to fall back on if the biodiesel business declines or if our biodiesel plant cannot operate at full capacity for any extended period of time. Should we continue to experience difficulty operating our biodiesel plant, the value of our units may decrease or be eliminated.

We are in competition with REG, our design-builder and manager, which could place us at a competitive disadvantage and cause a conflict of interest for our manager. We have contracted with REG for management, feedstock procurement and marketing services for our plant. We are highly dependent upon REG to procure our inputs and market our products. Further, if our plant does not operate at the level anticipated by us in our business plan, we will rely on REG to adequately address such deficiency. REG operates its own biodiesel production facility in Ralston, Iowa and, acquired a 35 million gallon per year plant in Houston, Texas, which now operates under the name REG Houston, and anticipates increasing its biodiesel production through wholly-owned and third-party managed biodiesel plants in the future. This means that REG, our design-builder and manager, is in competition with us in many aspects of our business, including feedstock procurement and biodiesel production and marketing. We also have to compete with REG for employees. Because REG operates its own biodiesel production facilities and competes with us in many aspects of our business, REG may have a conflict of interest in managing our plant. Although we have entered into a management and operational services agreement with REG for management and marketing services, there is no assurance that REG’s performance of these services is not compromised by its own biodiesel production operations.

We have limited experience in the biodiesel industry, which increases the risk of our inability to operate the biodiesel plant. We are presently, and will likely continue to be, dependent upon our directors to manage our business. Most of our directors are experienced in business generally but have limited or no experience in operating a biodiesel plant or in governing and operating a public company. Most of our directors have no expertise in the biodiesel industry. In addition, certain directors on our board of directors are presently engaged in business and other activities that impose substantial demands on the time and attention of such directors. REG has hired Al Yoder to be General Manager and Glen Hansel to be Operations Manger of the plant and they have experience with production facilities. However, REG may not be successful in retaining such individuals because of the competitive market for such individuals. In addition, REG may have difficulty in attracting other competent personnel to relocate to Iowa in the event that such personnel are not retained. REG’s failure to attract and retain such individuals could limit or eliminate any profit that we might make and could result in our failure. If Iowa Renewable Energy fails, our members could lose all or substantially all of their equity interest.

We engage in hedging transactions which involve risks that can harm our business. We are exposed to market risk from changes in commodity prices. Exposure to commodity price risk results from our dependence on soybean oil in the biodiesel production process. In addition, we have engaged in hedging transactions for home heating oil, in an attempt to lock in profit margins on the sale of our biodiesel, because home heating oil has historically tracked with the price of biodiesel. The effectiveness of our hedging strategies is dependent upon the cost of soybean oil and home heating and our ability to sell sufficient amounts of our products. There is no assurance that our hedging activities will successfully reduce the risk caused by price fluctuation which may leave us vulnerable to volatile soybean oil and home heating oil prices. Alternatively, we may choose not to engage in hedging transactions. As a result, our results of operations and financial conditions may also be adversely affected during periods in which soybean oil prices increase.

Hedging activities themselves can result in increased costs because price movements in soybean oil contracts and home heating oil contracts are highly volatile and are influenced by many factors that are beyond our control. There are several variables that could affect the extent to which our derivative instruments are impacted by price fluctuations in the cost of soybean oil and home heating oil. However, it is likely that commodity cash prices will have the greatest impact on the derivative instruments with delivery dates nearest the current cash price. We may incur such costs and they may be significant. If we realize losses with respect to our derivative instruments, our net loss could increase.

Risks Related to Operation of the Biodiesel Plant

We depend on key suppliers, whose failure to perform could force us to abandon business, hinder our ability to operate profitably or decrease the value of our units. We are highly dependent upon REG or its affiliates for the operations of the plant. Should REG fail to perform in any manner significant to our operations, our project could fail and our members could lose some or all of the value of their investment. Further, we are depending on REG’s assessment of the cost and feasibility of operating our plant. If REG’s assessment of the cost and feasibility of operating our plant are incorrect, we may encounter unforeseen costs or difficulties in the operation of our plant which could affect our profitability or force us to abandon our business.

We are highly dependent upon REG to procure our inputs and market our products. REG has already had difficulty selling all of our biodiesel and acquiring prompt rail service for our goods and feedstock needs. If REG does not perform its obligations pursuant to our management and operations services agreements we may be unable to specifically enforce our agreement which could negatively affect the value of our units. Our reliance on REG may place us at a competitive disadvantage. REG and its affiliates are competitors for many aspects of our business including: feedstock procurement, biodiesel marketing, as well as management service providers and employees.

Changes in production technology could require us to commit resources to updating the biodiesel plant or could otherwise hinder our ability to compete in the biodiesel industry or to operate at a profit. We expect advances and changes in the technology of biodiesel production to occur. Such advances and changes may make our biodiesel production technology less desirable or obsolete. The plant is a single-purpose facility and has no use other than the production of biodiesel and associated products. Much of the cost of the plant is attributable to the cost of production technology which may be impractical or impossible to update. The value of our units could decline if changes in technology cause us to operate the plant at less than full capacity for an extended period of time or cause us to abandon our business. Further, more efficient technologies might be developed in the future that we cannot implement that would allow our competitors to produce biodiesel in a more cost effective manner than us.

Risks Related to Biodiesel Industry

The recent downturn in the U.S. economy has caused demand for biodiesel to decline, which may adversely affect our ability to generate revenues. The U.S. stock markets tumbled since September 2008 upon the collapse of multiple major financial institutions, the federal government’s takeover of two major mortgage companies, Freddie Mac and Fannie Mae, and the President’s enactment of a $700 billion bailout plan pursuant to which the federal government will directly invest in troubled financial institutions. Financial institutions across the country have lost billions of dollars due to the extension of credit for the purchase and refinance of over-valued real property. The U.S. economy is in the midst of a recession, with increasing unemployment rates and decreasing retail sales. Other large corporate giants, such as the big three auto makers, have also received government bailout money. These factors have caused significant economic stress and upheaval in the financial and credit markets in the United States, as well as abroad. Credit markets have tightened and lending requirements have become more stringent. Oil prices have dropped rapidly as demand for fuel has decreased. Although demand for biodiesel typically declines in colder winter months due to its cold flow properties, we believe that these economic factors have contributed to an even greater decrease in demand for biodiesel, which may persist throughout all or parts of fiscal year 2009. It is uncertain for how long and to what extent these economic troubles may negatively affect biodiesel demand in the future. If demand for biodiesel declines, we may be forced to temporarily or permanently cease operations and you may lose some or all of your investment.

Several biofuels companies throughout the country have recently filed for Chapter 1l bankruptcy due to industry and economic conditions, and we may also be forced to consider filing for bankruptcy protection in the event that economic conditions and our liquidity problems do not improve. In November 2008, Freedom Fuels, LLC, a biodiesel plant located near Mason City, Iowa, filed for Chapter 11 bankruptcy. Other biofuels companies, including one of the country’s largest ethanol producers, VeraSun Energy Corporation, have also filed for Chapter 11 bankruptcy. A Chapter 11 bankruptcy is an option in which a company attempts to reorganize with the intent that it will continue to operate.  A Chapter 11 bankruptcy differs from a Chapter 7 bankruptcy because under Chapter 7 the assets of a company are liquidated and it is not anticipated that the business will continue to operate.  Unfavorable worldwide economic conditions, the decreasing availability of credit, and volatile biofuel prices and input costs have likely contributed to the necessity of these bankruptcy filings. We are experiencing liquidity problems due to our lack of credit and low cash reserves, which are resulting primarily from the general decrease in demand for biodiesel that the industry is currently experiencing, our lack of biodiesel sale contracts, the unfavorable economic conditions that are currently prevailing in the U.S. and abroad and the other factors identified in this report. We anticipate operating at significantly below our nameplate production capacity for the first quarter of 2009 based on our historical performance and lack of seasonal demand. If our current liquidity problems persist and we are unable to generate sufficient revenues from the sale of our biodiesel, we may also have to consider bankruptcy as an option to cope with our financial difficulties. This could reduce or eliminate the value of our members’ investments in the Company.

The recent decline in oil and diesel prices may affect our ability to sell biodiesel at profitable prices. The price for biodiesel is correlated to the price for diesel, as biodiesel is used primarily as a diesel additive. The price of biodiesel tends to increase as the price of diesel increases, and the price of biodiesel tends to decrease as the price of diesel decreases. Diesel prices are typically influenced by oil prices. The recent global economic downturn has resulted in a rapid decline in oil and diesel prices. In November 2008, oil prices fell to their lowest level in more than three years, dropping below $50 a barrel, down from approximately $150 a barrel in July 2008. Additionally, average retail diesel prices have declined by approximately 40% since July 2008. Following the trend of oil and diesel prices, biodiesel prices have also fallen since July 2008. If oil and diesel prices remain low or decline even further, biodiesel prices will also likely remain low or decline further. This could make it difficult for us to produce and sell biodiesel at a profit and you could lose some or all of your investment as a result.

An investigation by the European Commission into whether the U.S. biodiesel industry has been engaging in unfair trade practices could lead to the imposition of duties or tariffs on biodiesel imported into Europe, which could cause a significant decrease in our revenues. International sales, particularly sales in Europe, have made up a portion of our fiscal year 2008 revenues. The European Union (EU) is currently conducting antisubsidy and antidumping investigations on U.S. biodiesel imports into Europe. Based on complaints from the European Biodiesel Board (EBB), the European Commission claims that U.S. biodiesel producers, after claiming maximum U.S. subsidies for B99 biodiesel, have been dumping biodiesel in the European market, where it may also be eligible for European subsidies. The European Commission states that these factors have adversely affected the European biodiesel industry, causing adverse effects on the prices and market share of European biodiesel producers. The EBB claims that subsidized B99 exports are a trade practice that breaches World Trade Organization rules. If the findings of the investigation indicate that taking action is justified, the European Commission would likely impose duties or tariffs on biodiesel imported into the EU. If duties or tariffs are imposed on our biodiesel exported to Europe, this could have the effect of significantly increasing the cost at which we must sell our biodiesel in European markets, making it difficult or impossible for us to compete with European biodiesel producers. Additionally, the European Commission may also impose a punitive injury margin on future biodiesel imports into Europe for a certain fixed amount of time. Accordingly, any future imposition of duties or tariffs on European biodiesel exports could significantly harm our revenues and financial performance.

If demand for biodiesel fails to grow at the same rate as planned supply, the excess production capacity will adversely impact our financial condition. In 2007, approximately 450 million gallons of biodiesel were produced in the United States, according to the National Biodiesel Board. Our biodiesel plant alone could produce almost 7% of the 2007 domestic production. The National Biodiesel Board estimates the current dedicated U.S. biodiesel production capacity of existing biodiesel plants as of September 29, 2008 (the latest date for which information is available) is approximately 2.61 billion gallons per year. Further, plants under construction and expansion as of September 29, 2008, if completed, are expected to result in another 849.9 million gallons of annual U.S. biodiesel production capacity, for total annual production capacity of approximately 3.46 billion gallons. Thus the current annual production capacity of existing plants far exceeds 2007 annual biodiesel consumption, and will likely far exceed 2008 biodiesel consumption. As production capacity increases, our competition with other biodiesel producers for the sale of our products increases, especially if there is not a corresponding increase in demand for biodiesel. Many biodiesel plants do not operate at full capacity due to the discrepancy between annual domestic biodiesel consumption and annual U.S. biodiesel production capacity. Several biodiesel plants have even been forced to completely shut down or declare bankruptcy, which may be due in part to an increase in national excess production capacity without a corresponding increase in biodiesel demand in combination with the worsening economic conditions. In a study prepared for the National Biodiesel Board, LECG, LLC predicts that the national demand for biodiesel fuel will increase to only 650 million gallons by 2015, far below current production capacity. LECG, LLC was formed by faculty from the University of California at Berkeley to provide independent testimony, authoritative studies and advisory services to inform business, regulatory and judicial decision makers and help resolve commercial disputes. Excess production capacity likely exists in the domestic biodiesel market. If biodiesel production capacity continues to expand at its current pace, and demand does not grow to meet the available supply, we may be forced to suspend production at our plant and the value of your units could be decreased or eliminated.

Excess capacity in the biodiesel industry may cause increased competition for inputs and decreased market prices for biodiesel. Biodiesel production at our plant will require significant amounts of soybean oil and other inputs. If overproduction of biodiesel occurs, we will face increased competition for inputs which means we may be either unable to acquire the inputs that we need or unable to acquire them at profitable prices. In addition, if excess capacity occurs, we may also be unable to market our products at profitable prices. If the demand for biodiesel does not grow at the same pace as increases in supply, we would expect the price for biodiesel to decline. Any decrease in the price at which we can sell our biodiesel will negatively impact our future revenues. Increased expenses and decreased sales prices for biodiesel will result in decreased revenues and increased losses.

Excess production of glycerin, a co-product of the biodiesel production process, may cause the price of glycerin to decline, thereby adversely affecting our ability to generate revenue from the sale of glycerin. The U.S. biodiesel industry is expected to produce an estimated 1.4 billion pounds of glycerin between 2006 and 2015, according to an economic study by John Urbanchuk, director of LECG, LLC. It is estimated that every million gallons of biodiesel produced adds approximately another one hundred thousand gallons of crude glycerin into the market. As biodiesel production has increased, the glycerin market has become increasingly saturated, resulting in significant declines in the price of glycerin. In 2006, glycerin prices dropped dramatically, with crude glycerin prices hovering around 2 cents per pound or less. According to the September 2006 issue of Biodiesel Magazine, some smaller plants were even forced to essentially give away glycerin and some even had to pay to dispose of the glycerin. Since then, however, there has recently been a steady, gradual increase in glycerin prices. However, if the price of glycerin declines, our revenues will be adversely affected and we could even be forced to pay to dispose of our glycerin as plants were required to do in the past. Any further excess glycerin production capacity may limit our ability to market our glycerin co-product and could negatively impact our future revenues.

The biodiesel manufacturing industry is a feedstock limited industry. As more plants are developed and go into production there may not be an adequate supply of feedstock to supply the demands of the industry, which could threaten the viability of our plant. The number of biodiesel manufacturing plants either in production or in the planning or construction phase continues to increase. As more plants are developed and go into production, and as more existing plants expand their production capacities, there may not be an adequate supply of feedstock to supply the demand of the biodiesel industry. Consequently, the cost of feedstock may rise to the point where it threatens the viability of our plant. This is because there is little or no correlation between the cost of feedstock and the market price of biodiesel and, therefore, we cannot pass along increased feedstock costs to our biodiesel customers. We cannot pass along increased feedstock costs to our biodiesel customers because in order to stay competitive in the diesel industry, biodiesel must be competitively priced with petroleum-based diesel. Therefore, biodiesel prices fluctuate more in relation to petroleum-based diesel market prices then with feedstock market prices. As a result, increased feedstock costs or decreased biodiesel prices may result in decreased revenues. If we experience a sustained period of high feedstock costs or reduced biodiesel prices, such pricing and costs may reduce our ability to generate revenues and our profit margins may significantly decrease or be eliminated. Furthermore, REG currently owns and operates biodiesel plants in Ralston, IA and Houston, TX and has also announced its desire to increase biodiesel production through wholly-owned and third-party managed biodiesel plants in Kansas and Louisiana (however, based on SEC filings, these plans have been suspended due to market conditions). This means that our plant manager and product marketer, REG and its affiliates, are competitors for a limited supply of feedstock.

The biodiesel industry is becoming increasingly competitive and we compete with some larger, better financed entities which could impact our ability to operate profitably. Commodity groups in the Midwest and the enactment of favorable federal and state legislation have encouraged the construction of biodiesel plants. Nationally, the biodiesel industry may become more competitive given the substantial construction and expansion that is occurring in the industry. As of September 29, 2008, the National Biodiesel Board estimated there were 176 active plants in the United States with an annual production capacity of 2.61 billion gallons annually. Another 39 plants were currently under construction and an additional 1 plant was expanding its existing operations. The additional combined capacity of these plants under construction and expansion is estimated at 849.9 million gallons per year and, if realized, would push national biodiesel production capacity to approximately 3.46 billion gallons per year.

We face a competitive challenge from larger biodiesel plants and from biodiesel plants owned and operated by the companies that supply our inputs. Cargill, Inc., a large supplier of soybean oil, owns a 37.5 million gallon plant in Iowa Falls, Iowa. Another large corporation and supplier of soybean oil, Archer Daniels Midland Co., has constructed an 85 million gallon plant in Velva, North Dakota to process canola oil into biodiesel. Additionally, Green Earth Fuels, LLC operates an 85 million gallon per year production facility in Houston, Texas and Imperium Renewables operates a 100 million gallon per year biodiesel plant in Grays Harbor, Washington, making these plants two of the largest biodiesel producers in the country. These plants will be capable of producing significantly greater quantities of biodiesel than the amount we expect to produce. Moreover, some of these plants may not face the same competition we do for inputs as the companies that own them are suppliers of the inputs. In light of such competition, lower prices for biodiesel may result which would adversely affect our ability to generate profits and adversely affect our financial obligations.

As the production of biodiesel fuel increases there may not be an adequate supply of railroad tank cars or trucks to distribute the biodiesel fuel produced by our plant. As more of the biodiesel production plants under construction and in the planning phase begin production, there exists an increasingly large supply of biodiesel fuel to be distributed and there may not be an adequate supply of rail tank cars or trucks to distribute the fuel which is produced. This problem has affected the agriculture industry for years and there are already reports of rail tank car shortages becoming a problem for the biodiesel industry.

Risks Related to Biodiesel Production

Declines in the demand for and prices of biodiesel and its primary co-product will have a significant negative impact on our financial performance. Our revenues will be greatly affected by the price at which we can sell our biodiesel and its primary co-product, glycerin. These prices can be volatile as a result of a number of factors over which we have no control. These factors include the overall supply and demand, the price of diesel fuel, level of government support, and the availability and price of competing products, and domestic and global economic conditions. The total production capacity of biodiesel continues to expand at this time. Demand may not rise to meet the increase in supply, and increased production of biodiesel may lead to lower prices. Any lowering of biodiesel prices may negatively impact our ability to generate profits.

We believe that the recent U.S. recession and global financial market turmoil may also depress biodiesel demand and prices. Biodiesel prices have significantly declined over recent months. We expect that we will operate below our name plate capacity throughout our fiscal year 2009. If we continue to operate at less than full capacity, this would have a negative impact on our revenues.

In addition, increased biodiesel production has lead to increased supplies of co-products from the production of biodiesel, such as glycerin. While prices have been increasing after a dramatic drop in 2006, prices are still lower than ten year historical prices. If the price of glycerin declines, our revenue from glycerin may substantially decrease. Increased expenses and decreased sales prices for our products will result in decreased revenues.

Because of volatile soybean oil prices, we are attempting to use alternative feedstocks, such as corn oil, to produce our biodiesel, which may have risks and disadvantages of which we are not yet fully aware. We are currently producing some of our biodiesel from corn oil that we obtain from ethanol plants or other sources. Corn oil, however, poses several unique challenges due to its moisture and solid content, as well as its elevated free-fatty-acid levels. Furthermore, unlike many other oil sources, corn oil from ethanol plants contains waxy compounds and sterols. This tends to cause a waxy substance to build-up in the process equipment during the production process. Unless a process for removing this waxy substance is developed, we expect that we will not be able to produce any biodiesel blends containing greater than 20% corn oil. The technology utilized by the ethanol plant which extracts the corn oil may also cause the suitability of the corn oil for the biodiesel production process to vary. These characteristics of corn oil could cause corn oil-based biodiesel to be less desirable than other types of biodiesel. Furthermore, special technologies may be necessary to pretreat corn oil for utilization in the biodiesel production process. Accordingly, our use of alternative feedstocks, such as corn oil, may require us to make modifications to our equipment, purchase new equipment or repair equipment that could unexpectedly be damaged by the use of different feedstocks. There may be disadvantages to the use of corn oil as a feedstock of which we are not yet aware. If as a result of the unique characteristics of corn oil, the demand or price we are able to receive for biodiesel produced from corn oil is less than what we can receive for biodiesel produced from other types of feedstock, our revenues could be negatively affected.

The decreasing availability and volatile cost of feedstock may hinder our ability to profitably produce biodiesel and may result in plant shut downs and decreased revenues. On December 12, 2008, the USDA reported the November average cost of soybean oil was approximately 31.55 per pound, which is below the summer’s peak prices and the lowest level in more than a year. Although prices have sharply dropped from the record high prices experienced in the summer of 2008, the November average is still higher than historical averages. The twenty-year average price for soybean oil is approximately 21 cents per pound. In the USDA December 2008 Oil Crops Outlook Report, it was forecasted soybean oil prices will likely remain close to current prices during the 2008/2009 marketing season, with a predicted price range of 31-35 cents per pound. Soybean oil prices have been extremely volatile over the recent years. The declining global economic conditions brought on by the collapse of major U.S. financial institutions in the fall of 2008 and the disruption of the financial and credit markets likely contributed to the sharp drop in prices from the summer of 2008 through fall of 2008. However, demand, supply, acres planted, weather, soybean crush rates and many other factors can contribute to price volatility. Prices for animal fats have also been volatile in recent months, as they tend to correlate to the prices of soybean oil. In a December 2008 Oil Crops Outlook Report, the USDA provided that the average November 2008 prices for lard and edible tallow were 26.40 cents and 18.13 cents per pound, respectively, which are down from their peak prices in the summer of 2008. These average prices, however, still exceed their historical averages. We expect that this volatility in feedstock costs will continue through the 2009 fiscal year. In the event we cannot obtain adequate supplies of feedstock at affordable costs for sustained periods of time, then we may be forced to shut down the plant, either temporarily or permanently. Shut downs or the persistence of recent high feedstock costs, or any further increase of feedstock costs, may reduce our revenues from operations which could decrease or eliminate the value of our units.

If we are forced to temporarily cease operating our biodiesel plant for any reason, we might not be able to meet our current liabilities or our losses may be increased. If we are forced to temporarily cease operations at our biodiesel plant, either due to our inability to sell the biodiesel we are producing, feedstock costs, our lack of working capital and available credit, defects in our equipment at the plant, violations of environmental law, or any other reason, our ability to produce revenue would be aversely affected. We do not have any source of revenues other than production of biodiesel and glycerin at our biodiesel plant. If our plant were to cease production, we would not generate any revenue and we might not be able to pay our debts as they become due, including payments required under our loan agreements with our lender. If the plant ceases to operate for enough time, we might not be able to re-start operations at the plant and our members could lose some or all of their investment.

We are at a disadvantage in marketing our glycerin because our plant will not produce pharmaceutical grade glycerin, thereby decreasing the market for the glycerin we produce. A major use of glycerin is in the production of drugs. The glycerin our plant produces, however, is not pharmaceutical grade glycerin. This limits our ability to market the glycerin produced by our biodiesel plant. The glycerin we produce has to be purified in order for it to be used in pharmaceutical applications. However, any glycerin produced from the production of animal fat-based biodiesel cannot be used in such pharmaceutical applications. Since the market in which we can sell our glycerin is limited, we might not be able to sell all of the glycerin we produce or we may not be able to sell our glycerin at a favorable price. If we cannot sell all of the glycerin we produce or cannot sell it at a favorable price, our ability to operate our biodiesel plant profitably might be adversely affected which could decrease the value of our units.

Competition from other sources of fuel may decrease the demand for our biodiesel. Although the price of diesel fuel has increased over the last several years and reached record high prices earlier in 2008, diesel fuel prices per gallon remain at levels below or equal to the price of biodiesel. In addition, other more cost-efficient domestic alternative fuels may be developed and displace biodiesel as an environmentally-friendly alternative. If diesel prices do not continue to increase or a new fuel is developed to compete with biodiesel, it may be difficult to market our biodiesel, which could result in decreased revenues.

Asian soybean rust and other plant diseases may decrease our ability to obtain a sufficient feedstock supply. Our feedstock supply is highly dependent upon the availability and cost of soybeans. Asian soybean rust is a plant fungus that attacks certain plants including soybean plants. Asian soybean rust is abundant in certain areas of South America, and is present in the United States. Left untreated, it can reduce soybean harvests by as much as 80%. Although it can be killed with chemicals, the treatment increases production costs for farmers by approximately 20%. Increases in production costs and reduced soybean supplies could cause the cost of soybeans to rise and increase the cost of soybean oil as a feedstock to our plant. Such increase in cost would increase the cost of producing our biodiesel and increase our loss from operations.

Concerns about fuel quality may impact our ability to successfully market our biodiesel. Industry standards impose quality specifications for biodiesel fuel. Actual or perceived problems with quality control in the industry may lead to a lack of consumer confidence in the product and hinder our ability to successfully market our biodiesel. An inability to successfully market our biodiesel will lead to decreased revenues and may adversely impact our ability to operate at all.

Cold weather may cause biodiesel to gel, which could have an adverse impact on our ability to successfully market our biodiesel. The pour point for a fuel is the temperature at which the flow of the fuel stops. A lower pour point means the fuel is usable in colder weather. The pour point of 100% soy-based biodiesel is approximately 27ºF to 30ºF. The pour point for tallow-based biodiesel is approximately 61ºF. The pour point for No. 2 petroleum diesel fuel, the non-biodiesel fuel currently used in machines, is approximately -30ºF. When diesel is mixed with soy-based biodiesel to make a 2% biodiesel blend, the pour point is -25ºF. Therefore, we believe we will need to blend soy-based biodiesel and animal fat-based biodiesel with petroleum diesel in order to provide a biodiesel product that will have an acceptable pour point in cold weather. Generally, biodiesel that is used in blends of 2% to 20% is expected to provide an acceptable pour point for colder markets comparable to the No. 2 petroleum diesel pour point. In colder temperatures, lower blends are recommended to avoid fuel system plugging. This may cause the demand for our biodiesel in northern markets to diminish during the colder months.

The tendency of biodiesel to gel in colder weather may also result in long-term storage problems. At low temperatures, fuel may need to be stored in a heated building or heated storage tanks. This may result in a decrease in demand for our product in colder climates due to increased storage costs.

Our reliance upon third parties for feedstock supply may hinder our ability to profitably produce our biodiesel. In addition to being dependent upon the availability and cost of feedstock supply, we are dependent on relationships with third parties, including feedstock suppliers. We have entered into a MOSA with REG. REG anticipates acquiring our feedstock from third parties. Assuming that REG can establish feedstock relationships, suppliers may terminate those relationships, sell to other buyers, or enter into the biodiesel manufacturing business in competition with us. Suppliers may not perform their obligations as agreed, and we may be unable to specifically enforce our agreements. This could negatively affect our ability to generate revenue and may reduce or eliminate the value of our units.

Automobile manufacturers and other industry groups have expressed reservations regarding the use of biodiesel, which could negatively impact our ability to market our biodiesel. Because it is a relatively new product, the research on biodiesel use in automobiles and its effect on the environment is ongoing. Some industry groups, including the World Wide Fuel Charter, have recommended that blends of no more than 5% biodiesel be used for automobile fuel due to concerns about fuel quality, engine performance problems and possible detrimental effects of biodiesel on rubber components and other parts of the engine. Although some manufacturers have encouraged use of biodiesel fuel in their vehicles, cautionary pronouncements by others may impact our ability to market our product.

In addition, studies have shown that nitrogen oxide emissions increase by 10% when pure biodiesel is used. Nitrogen oxide is the chief contributor to ozone or smog. New engine technology is available and is being implemented to eliminate this problem. However, these emissions may decrease the appeal of our product to environmental groups and agencies who have been historic supporters of the biodiesel industry, which may result in our inability to market our biodiesel.

Competition from other diesel fuel lubricity additives for ultra low sulfur diesel may be a less expensive alternative to our biodiesel, which would cause us to lose market share and adversely affect our ability to generate revenues. The Environmental Protection Agency (EPA) has issued regulations to reduce the amount of sulfur in diesel fuel in order to improve air quality. These regulations affect all diesel fuel available for retail sale since October 2006. The removal of sulfur from diesel fuel also reduces its lubricity which must be corrected with fuel additives, such as biodiesel which has inherent lubricating properties. Our biodiesel plant is expected to compete with producers of other diesel additives made from other raw materials having similar lubricity values as biodiesel, such as petroleum-based lubricity additives. Many major oil companies produce these petroleum-based lubricity additives and strongly favor their use because they may be used in lower concentrations than biodiesel. In addition, much of the infrastructure is in place is for petroleum-based additives. As a result, petroleum-based additives may be more cost-effective than biodiesel. Therefore, it may be difficult to market our biodiesel as a lubricity additive, which could adversely affect our ability to generate revenues.

Our management and operational services agreement with REG does not address feedstock allocation between REG and its other customers which could lead to insufficient feedstock to operate our plant and negatively affect our financial condition. We have entered into a management and operational services agreement with REG, whereby REG acquires the feedstock that we require to operate our biodiesel plant. Our agreement does not address the way in which REG allocates feedstock between us and the other customers for which REG acquires soybean oil. If a shortage of feedstock was to occur, there is no provision in our management and operational services agreement that requires REG to supply us with the feedstock we require as opposed to REG’s other customers, including REG’s own biodiesel facilities. REG has already encountered difficulties in obtaining enough feedstock for us to operate the plant at full capacity. If a shortage of feedstock occurs, REG may not supply us with all of the feedstock we require to operate the plant which could decrease our revenues and could decrease or eliminate the value of our units.

Risks Related to Our Financing Plan

We are experiencing liquidity issues which could require us to cease operations. We are experiencing liquidity issues associated the high cost of our raw materials, decreased demand for biodiesel, and the delay between when we purchase those raw materials and when we receive payments from REG for sales of our finished products. We have exhausted the funds available under our debt facilities and do not have further commitments for funds from any lender. We also do not currently have significant cash reserves. Accordingly, we are currently lacking sufficient working capital to fund continual operations at this time and, accordingly, we are only producing biodiesel when an order for our product has been placed and when we have sufficient cash on hand to acquire the necessary feedstock. Our lack of funds could cause us to scale back production at our biodiesel plant or cease operations altogether. These shutdowns could be temporary or permanent depending on the cash we have available to continue operations. We are already not operating at full capacity. Should we not be able to secure the cash we require to operate the plant and pay our obligations as they become due, we may have to cease operations, either on a permanent or temporary basis, which could decrease or eliminate the value of our units.

The recent downturn in the U.S. economy may affect our ability to obtain additional financing. In recent months the global equity markets have been disrupted and have experienced significant volatility. The U.S. stock markets have tumbled since September 2008 upon the collapse of multiple major financial institutions, the federal government’s takeover of two major mortgage companies, Freddie Mac and Fannie Mae, and the President’s enactment of a $700 billion bailout plan pursuant to which the federal government will directly invest in troubled financial institutions. Financial institutions across the country have lost billions of dollars due to the extension of credit for the purchase and refinance of over-valued real property. The collapse of these financial institutions and the continued volatility in the credit market may significantly decrease the availability of credit needed to fund our operations. The volatility of the equity markets may also inhibit our ability to secure the equity needed to fund our operations. The U.S. economy is also in the midst of a recession, with increasing unemployment rates and decreasing retail sales. A recession is expected to decrease availability of equity investment monies for our company as well. If we are unable to obtain the equity or debt financing needed to fund our operations in the future, we may be forced to temporarily or permanently cease operations and you may lose some or all of your investment.

The loan agreement under which we obtained financing for the construction of our biodiesel plant contains restrictive covenants. We have undertaken significant borrowings to finance the construction of the biodiesel plant. Our loan agreements with our lender contain restrictive covenants which, among other things, require us to maintain minimum levels of working capital, as well as debt coverage and fixed charge coverage financial ratios. In addition, the covenants may restrict our ability to make distributions on the units without the prior consent of our lender. Failure to comply with these covenants may constitute an event of default under our loan agreements. We are currently not in compliance with the current liabilities covenant because our term loan is listed as a current liability. Our term loan is listed as a current liability because we have a going concern in the notes to our financial statements and generally accepted accounting principals (GAAP) require long term debt to be listed as a current liability when a company has a going concern disclosure. We are not required to come into compliance with many of these covenants until February 2009; however, given our current situation we will likely not be in compliance with the covenants when they come into effect. No assurances can be given that we will be in compliance with any of the loan covenants contained in our loan agreements during our 2009 fiscal year. Further, no assurance can be given that our lender will be willing to waive any such non-compliance with one or more of these loan covenants during our 2009 fiscal year. A declaration of default under the loan agreements could have a material adverse impact on our financial condition and results of operations and could result in the acceleration of payments due under the agreement, imposition of higher interest rates or default, or the loss of the assets securing the loan in the event the lender elected to foreclose its lien or security interest in such assets.

We may be unable to raise additional capital in the event our funds from operations and our credit facilities are insufficient to fund our operations for the next twelve months. In the event that the board of directors deems it necessary to obtain additional capital in order to fund plant operations or to otherwise comply with the covenants contained in our financing agreements with our lender during the next 12 months, the board of directors may decide to attempt to issue additional membership units in our company through one or more private placements. In such event, however, there is no guarantee that such an offering of our membership units would be successful in raising the desired capital. Due to current market conditions in the biodiesel industry, such as the increasing costs of soybean oil, animal fats, and methanol, and lack of demand for our biodiesel, we may not be able to attract sufficient numbers of investors to provide us with the necessary amount of additional capital. In such event, we may be forced to shut down the plant, either temporarily or permanently, or we may be unable to comply with the loan covenants contained in our financing agreements, which could constitute a default under our loan agreements entitling our lender to accelerate payments under our loan agreements or foreclose its lien or security interest in the assets securing the loans.

Our auditor has raised doubts about our ability to continue as a going concern and if we are unable to continue our business, our units may have little or no value. As discussed in the accompanying financial statements, we have generated accumulated losses of $7,563,432, have experienced significant increases in our input costs and undertaken significant borrowings to finance the construction of our biodiesel plant. These liquidity issues raise doubts about our ability to continue as a going concern. See Note 8 to the financial statements. The financing agreements with our lender contain a covenant that allows the lender to consider us in default of the loan at any point that our lender considers our financial performance to be poor. We are currently not in compliance with the current liabilities covenant because our term loan is listed as a current liability. Our term loan is listed as a current liability because we have a going concern in the notes to our financial statements and GAAP requires long term debt to be listed as a current liability when a company has a going concern disclosure. Several of our covenants will not come into effect until February 2009 and will require us to maintain minimum levels of working capital as well as debt coverage and fixed charge coverage financial ratios. We may fail to comply with one or more of our loan covenants, including the working capital covenant, periodically throughout our 2009 fiscal year. Failure to comply with these loan covenants constitutes an event of default under the our loan agreements which, at the election of the lender, could result in the acceleration of the unpaid principal loan balance and accrued interest under the loan agreements or the loss of the assets securing the loan in the event the lender elected to foreclose its lien or security interest in such assets. We have been in communication with our lender as to the possibility of increasing the line of credit, waiving certain covenants, or what other steps we need to take to resolve this situation, but there can be no assurance that our lender will increase our line of credit or waive any failure to comply with any one or more of the loan covenants, including the current covenant in which we are out of compliance. In the event our lender declared a default under the loan agreements and elected to accelerate our payments under the loan documents or take possession of our assets securing the loans, we may be forced to shut down the plant and our members could lose some or all of their investment. These factors have raised doubts as to our ability to continue as a going concern.

Risks Related to Regulation and Governmental Action

Loss of or ineligibility for favorable tax benefits for biodiesel production could hinder our ability to operate at a profit and reduce the value of our units. The biodiesel industry and our business are assisted by various federal biodiesel incentives. One such incentive is the Volumetric Ethanol Excise Tax Credit (“VEETC”), which provides a tax credit of $1.00 per gallon of biodiesel. The VEETC is set to expire on December 31, 2009 and there can be no guarantees that it will be extended beyond this date. These tax incentives for the biodiesel industry may not continue, or, if they continue, the incentives may not be at the same level. The elimination or reduction of tax incentives to the biodiesel industry could reduce the market for biodiesel, which could reduce our revenues by making it more costly or difficult to produce and sell biodiesel. If the federal tax incentives are eliminated or sharply curtailed, we believe that a decreased demand for biodiesel will result, which could depress biodiesel markets and negatively impact our financial performance.

A change in environmental regulations or violations thereof could result in the devaluation of our units. We are subject to extensive air, water and other environmental regulations. We have obtained all of the permits required to construct the plant and have obtained all the permits currently required to operate the plant. In addition, biodiesel producers are required to satisfy the fuel quality standards of the Environmental Protection Agency. This is part of the BQ 9000 standard which typically takes six months to complete once the plant has met its scheduled name plate production standards. Environmental laws and regulations, both at the federal and state level, are subject to change and changes can be made retroactively. Consequently, even if we have the proper permits at the proper time, we may be required to spend considerable resources to comply with future environmental regulations or new or modified interpretations of those regulations, which may increase our losses and could reduce or eliminate the value of our units.

The EPA’s delay in implementing the RFS requirement that 500 million gallons of biomass-based diesel be blended into the national diesel pool in 2009 may hinder stimulation of demand for biodiesel that may have otherwise been created by the 2007 amendments to the RFS program. The Energy Independence and Security Act of 2007 (EISA) amended the Renewable Fuel Standard (RFS) program originally created by the Energy Policy Act of 2005 by increasing the amount of biofuels that are required to be blended into the national diesel pool annually through 2022. The EISA created a biodiesel mandate requiring that 500 million gallons of biomass-based diesel fuel be used in on-road fuel in 2009, increasing to 1 billion gallons in 2022. However, in November 2008, the EPA announced that the RFS 2009 program will continue to be applicable to producers and importers of gasoline only. This means that the 500 million gallons of biomass-based diesel required by the EISA does not have to be blended into U.S. fuel supplies in 2009. The EPA indicated that this is due to the fact that the regulatory structure of the original RFS program does not provide a mechanism for implementing the EISA biomass-based diesel mandate. The EPA intends to propose options and develop mechanisms for implementing the EISA biomass-based diesel requirements. Accordingly, the EPA’s delay in implementing the RFS biomass-based diesel mandate may hinder any growth in biodiesel demand that may have otherwise been created if the 2009 mandate was implemented as originally anticipated. Any future delays in the implementation of the RFS biomass-based diesel mandate could cause stagnant biodiesel demand, which could adversely affect our ability to generate profits.

Risks Related to Conflicts of Interest

We may have conflicts of interest with REG, which may cause difficulty in enforcing claims against REG. We expect that one or more employees or associates of REG will continue to advise our directors. We anticipate REG to continue to be involved in substantially all material aspects of our operations. We have entered into an agreement with REG under which REG acquires feedstock and the basic chemicals necessary for our operation, and to perform the sales and marketing functions for our plant. It is possible that REG may purchase our units. There is no assurance that our arrangements with REG are as favorable to us as they could have been if obtained from unrelated third parties. In addition, because of the extensive roles that REG has in the operation of the plant, it may be difficult or impossible for us to enforce claims that we may have against REG. Such conflicts of interest may increase our losses and reduce the value of our units and could result in reduced distributions to investors.

REG and its affiliates may also have conflicts of interest because employees or agents of REG are involved as owners, creditors and in other capacities with other biodiesel plants in the United States. We cannot require REG to devote its full time or attention to our activities. As a result, REG may have conflicts of interest in allocating personnel, materials and other resources to our biodiesel plant.

Our directors may have relationships with individuals, companies or organizations with which we do business which may result in conflicts of interest. There may be business relationships between our directors and other individuals, companies or organizations with which we do business that may pose potential conflicts of interest with us. These relationships may result in conflicts of interest with respect to transactions between us and the other individuals, companies or organizations if our directors and officers put their interests in other companies or their own personal relationships ahead of what is best for our company.

Risks Related to Tax Issues in a Limited Liability Company

We expect to be taxed as a partnership, however, if we are taxed as a corporation we could be subject to corporate level taxes which could decrease our net income, if any, and decrease the amount of cash available to distribute to our members. We expect that our company will continue to be taxed as a partnership. This means that our company does not pay any company level taxes. Instead, the members are allocated any income or losses generated by our company based on the member’s ownership interest, and could pay taxes on the member’s share of our income, if any. If we are not taxed as a partnership, our company could be liable for corporate level taxes which would decrease our net income, if any, which may decrease the cash we have to distribute to our members.

Members may be allocated a share of our taxable income that exceeds any cash distributions received, therefore members may have to pay this tax liability using their personal funds. We expect to continue to be taxed as a partnership. This means members are allocated a percentage of our taxable income or loss based on their ownership interest in our company. Members may have tax liability based on their allocation of this income, if any. We may make distributions that are less than the amount of tax members owe based on their allocated percentage of our taxable income, or we may not make any distributions. If this is the case, members would have to satisfy this tax liability using their personal funds.

If we are audited by the IRS resulting in adjustments to our tax returns, this could cause the IRS to audit members’ tax returns, which could lead to additional tax liability for our members. The IRS could audit our tax returns and could disagree with tax decisions we have made on our returns. This could lead to the IRS requiring us to reallocate items of income, gain, losses, deductions, or credits that could change the amount of our income or losses that were allocated to members. This could require adjustments to members’ tax returns and could lead to audits of members’ tax returns by the IRS. If adjustments are required to members’ tax returns, this could lead to additional tax liabilities for members as well as penalties and interest being charged to members.

We do not anticipate declaring distributions to members in the foreseeable future. We have incurred a net loss of $3,784,924 as of our fiscal year ended September 30, 2008. We do not anticipate that our board of directors will be declaring distributions to members in the foreseeable future. Accordingly, members will not likely receive distributions on their units and, in the event that members incur any tax liability as a result of their ownership of units in the company, members may be required to satisfy such liability with their personal funds.

ITEM 2. DESCRIPTION OF PROPERTY.

Our property consists primarily of the plant and the real estate upon which the plant sits in Washington, Iowa. The plant is fully operational. The plant is located on an approximately 28 acre site located near Washington, Iowa. The site is approximately thirty-five miles from Interstate 80 and thirty miles from the Mississippi River. We paid $420,000 for the site. The plant’s address is 1701 East 7th Street, Washington, Iowa. The site is adjacent to the main line of the Iowa Chicago & Eastern Railroad, which serves the plant. The plant consists of the following buildings:

	•		Administrative building
	•		Processing building
	•		Pretreatment building
	•		Storage tank farm

The site also contains improvements such as rail tracks and a rail spur, landscaping, drainage systems and paved access roads. Construction of the plant was substantially complete in June 2007.

All of our tangible and intangible property, real and personal, serves as the collateral for the debt financing with Marshall Bankfirst Corporation (Bankfirst). Money borrowed under the Iowa Department of Economic Development loan is also secured by substantially all of the company’s assets, but is subordinate to the agreements with Bankfirst.

ITEM 3. LEGAL PROCEEDINGS.

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

We did not submit any matter to a vote of our unit holders through the solicitation of proxies or otherwise during the fourth fiscal quarter of our fiscal year ended September 30, 2008.

PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED MEMBER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information

There is no public trading market for our units. We have created a private qualified online matching service in order to facilitate trading of our units. Our online matching service consists of an electronic bulletin board that provides information to prospective sellers and buyers of our units. We do not receive any compensation for creating or maintaining the matching service. We do not become involved in any purchase or sale negotiations arising from our qualified matching service. In advertising our qualified matching service, we do not characterize the Company as being a broker or dealer in an exchange. We do not give advice regarding the merits or shortcomings of any particular transaction. We do not receive, transfer or hold funds or securities as an incident of operating the online matching service. We do not use the bulletin board to offer to buy or sell securities other than in compliance with the securities laws, including any applicable registration requirements. We have no role in effecting the transactions beyond approval, as required under our amended and restated operating agreement, and the issuance of new certificates. So long as we remain a public reporting company, information about the Company will be publicly available through the SEC’s filing system. However, if at any time we cease to be a public reporting company, we will continue to make information about the Company publicly available on our website. No sales of our units have been completed under our qualified online matching service.

Unit Holders

As of September 30, 2008, we had approximately 629 unit holders of record.

Distributions

We have not declared or paid any distributions on our units. Our board of directors has complete discretion over the timing and amount of distributions to our unit holders. However, our amended and restated operating agreement requires the board of directors to endeavor to make cash distributions at such times and in such amounts as will permit our unit holders to satisfy their income tax liability in a timely fashion.

Equity Compensation Plans

We do not have any equity compensation plans under which equity securities of Iowa Renewable Energy are authorized for issuance.

Sale of Unregistered Securities

We did not make any sales of equity securities that were unregistered during the fiscal year ended September 30, 2008.

Repurchases of Equity Securities

Neither we, nor anyone acting on our behalf, has repurchased any of our outstanding units.

ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

Cautionary Statements Regarding Forward Looking Statements

Throughout this report, we make “forward-looking statements” that involve future events, our future performance, and our future operations and actions. In some cases, you can identify forward-looking statements by the use of words such as “may,” “should,” “plan,” “future,” “intend,” “could,” “estimate,” “predict,” “hope,” “potential,” “continue,” “believe,” “expect” or “anticipate” or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions and involve numerous assumptions, risks and uncertainties. Our actual results may differ from these forward-looking statements for many reasons, including the following factors:

Changes in interest rates or the availability of credit;

Our ability to raise additional equity capital proceeds or obtain additional debt financing;

Overcapacity within the biodiesel industry resulting in increased competition and costs for feedstock and/or decreased prices for our biodiesel and glycerin;

Decrease in the demand for biodiesel;

Actual biodiesel and glycerin production varying from expectations;

Economic consequences of the domestic and global economic downturn and recent financial crisis;

Availability and cost of products and raw materials, particularly soybean oil, animal fats, natural gas and methanol;

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

Changes in or elimination of governmental laws, tariffs, trade or other controls or enforcement practices such as:

	•		national, state or local energy policy;
	•		federal and state biodiesel tax incentives;
	•		legislation establishing a renewable fuel standard or other legislation mandating the use of biodiesel or other lubricity additives; or
	•		environmental laws and regulations that apply to our plant operations and their enforcement;

Total U.S. consumption of diesel fuel;

Fluctuations in petroleum and diesel prices;

Changes in plant production capacity or technical difficulties in operating the plant;

Changes in our business strategy, capital improvements or development plans;

Results of our hedging strategies;

Competition with other manufacturers in the biodiesel industry;

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

Our liability resulting from litigation;

Our ability to retain key employees and maintain labor relations;

Changes and advances in biodiesel production technology;

Competition from alternative fuels and alternative fuel additives;

Failure to comply with loan covenants contained in our financing agreements;

Our ability to continue to export our biodiesel;

The imposition of tariffs or other duties on biodiesel imported into Europe;

Our ability to generate profits; and

Other factors described elsewhere in this report.

We are not under any duty to update the forward-looking statements contained in this report. We cannot guarantee future results, levels of activity, performance or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits completely and with the understanding that our actual future results may be materially different from those we currently expect. We qualify all of our forward-looking statements by these cautionary statements.

Overview

Our plant is currently fully operational. We began producing biodiesel on July 10, 2007. After obtaining independent testing of our biodiesel to certify that our biodiesel meets the American Society for Testing and Materials (ASTM) standards, we began shipping our first lot of 7,200 gallons of biodiesel on July 12, 2007. The plant was operating at full capacity until the end of September 2007, with only minor temporary shut downs for maintenance and a weather-related power outage. Since the beginning of October 2007, we have only been operating to produce biodiesel to satisfy existing contracts for the sale of our biodiesel and have not been producing biodiesel for speculation. This has allowed us to avoid excess inventory, but also, resulted in several plant shutdowns. During the fourth quarter of fiscal year 2008, we operated our plant at approximately 66% of our plant’s capacity.

Most of our shutdowns have been due to:

•

The inability to obtain adequate amounts of feedstock in a timely manner;

•

The inability to obtain adequate amounts of feedstock at competitive costs;

•

Lack of demand for biodiesel;

•

Lack of biodiesel contracts at profitable margins; and

•

Inadequate funds to obtain feedstock due to having to pay for feedstock while waiting for payments from our biodiesel sales.

From October 1, 2007 through September 30, 2008 we produced approximately 15,909,748 gallons of biodiesel, which is only approximately 55% of our plant’s capacity. We anticipate operating the plant at similar levels during our fiscal year 2009; however, our ability to operate depends upon many factors outside of our control, such as the demand for biodiesel, price for biodiesel and cost of feedstock. If demand for biodiesel remains at its current low levels, or drops further during our fiscal year 2009 we will likely operate at even lower levels. We do not however, anticipate speculatively producing biodiesel in the next 12 months. Therefore, if demand does not increase such that REG can obtain contracts for the same amount of biodiesel that we produced during our fiscal year 2008, then we may operate at a lower production rate than during our fiscal year 2008. In addition, we have been experiencing liquidity difficulties since beginning our operations and if these conditions do not improve, or get worse, during our fiscal year 2009 then we will likely operate our plant at lower levels than we did during our fiscal year 2008.

On February 1, 2008, our $34,715,000 loan with Bankfirst converted from a construction loan to a term loan, which requires monthly principal and interest payments of approximately $373,000. As of the date of this report, we have timely paid all of our monthly payments under the loan. We are currently not in compliance with the current liabilities covenant because our term loan is listed as a current liability. Our term loan is listed as a current liability because we have a going concern in the notes to our financial statements and GAAP requires long term debt to be listed as a current liability when a company has a going concern disclosure. In addition, many of our covenants will not come into effect until February 2009. If our financial condition does not improve substantially, which may not occur due to our historical performance and the anticipated seasonal down turn in biodiesel demand, we will likely be in violation of several of our covenants. In addition, our loan contains an event of default for any material adverse change in our financial condition, and the term “material adverse change” is defined in such a way that leaves this determination to the subjective opinion of our lender.

Plan of Operations for the Next 12 Months

Plant Operations

We expect to spend the next 12 months engaging in the production of biodiesel and glycerin at our plant. Our plant is fully operational. All construction items are completed and we are actively producing biodiesel at our plant, although not at full capacity.

Results of Operations

Comparison of Fiscal Years Ended September 30, 2008 and September 30, 2007

The following table shows the results of our operations and the percentage of revenues, costs of goods sold, operating expenses and other items to total revenues in our statements of operations for the fiscal years ended September 30, 2008 and September 30, 2007. Since our plant did not become fully operational until July 2007, we are not able to provide comparable financial information for the complete fiscal years ended September 30, 2008 and September 30, 2007 and it is important that you keep this in mind.

		Fiscal Year Ended								Fiscal Year Ended
		September 30, 2008								September 30, 2007
Income Statement Data
Revenues		$	67,135,224				100.00	%		$	16,443,440				100.00	%
Cost of Goods Sold		$	67,000,778				99.80	%		$	18,231,147				110.87	%
Gross Profit (Loss)		$	134,446				0.20	%		$	(1,787,707	)			(10.87	%)
Operating Expenses		$	1,729,356				2.58	%		$	670,296				4.08	%
Interest Income		$	91,762				0.14	%		$	229,859				1.40	%
Interest (Expense)		$	(2,281,776	)			(3.40	)%		$	(716,470	)			(4.36	)%
Net (Loss)		$	(3,784,924	)			(5.64	)%		$	(2,944,614	)			17.91	%

Our operating results generally reflect the relationship between the price of biodiesel and the costs of feedstocks used to produce our biodiesel. Because biodiesel is used as an additive or alternative to diesel fuel, biodiesel prices are strongly correlated to petroleum-based diesel fuel prices. Historically, the price of biodiesel has fluctuated with the price of diesel fuel. In addition, the price of biodiesel is generally influenced by factors such as general economic conditions, the weather, and government policies and programs. Surplus biodiesel supplies also tend to put downward price pressure on biodiesel. Additionally, prices for diesel and the costs of feedstock, including soybean oil or animal fats, have been volatile and such fluctuations in the cost of feedstock may significantly affect our financial performance. Our results of operations will benefit when the margin between biodiesel prices and feedstock costs widens and will be harmed when this margin narrows. The biodiesel industry was experiencing very high feedstock costs, without corresponding increases in biodiesel prices, thereby causing profit margins to be small or nonexistent. More recently, the biodiesel industry has been experiencing dropping feedstock costs; however, biodiesel prices have dropped even more rapidly, resulting in continued small or nonexistent profit margins. We expect these price relationships to continue for the foreseeable future. In addition, our revenues are also impacted by such factors as our dependence on one or a few major customers who market and distribute our products; the intensely competitive nature of our industry; the extensive environmental laws that regulate our industry; possible legislation at the federal, state and/or local level; and changes in federal biodiesel tax incentives.

Revenues

		Fiscal Year Ended September 30, 2008								Fiscal Year Ended September 30, 2007
Revenue Source		Amount				% of Revenues				Amount				% of Revenues
Biodiesel Sales		$	57,539,313				95	%		$	14,583,103				99	%
Glycerin Sales		$	1,887,636				3	%		$	173,404				1	%
Fatty Acids and Soapstock Sales		$	901,617				2	%		$	14,280				0	%
Total Revenues from Sales		$	60,328,566				100	%		$	14,770,787				100	%

Revenues from operations for the fiscal year ended September 30, 2008 totaled $67,135,224 compared with $16,443,440 for the fiscal year ended September 30, 2007. Included within our total revenues for the fiscal year ended September 30, 2008 and 2007 are approximately $6,806,658 and $1,672,653 respectively, in incentives we received or which were receivable from certain federal government programs for the sale of our biodiesel. Revenues in fiscal year 2008 were approximately 4.1 times greater than revenues in fiscal year 2007. The increase in revenues was due primarily to increased production and sales volume of biodiesel, glycerin, fatty acids and soapstock and higher sales prices for our biodiesel and its co-products. The increase in production volume was due to the fact that our plant was operational during all of fiscal year 2008, as compared to only approximately four months in fiscal year 2007. Accordingly, our results of operations for fiscal 2008 reflect approximately eight additional months of operations than the results of operations for fiscal 2007 reflect.

Higher biodiesel prices in fiscal 2008 compared to fiscal 2007, combined with an increase in biodiesel sales volume, contributed to the higher total revenues in fiscal year 2008 as compared with fiscal year 2007. Average biodiesel sale prices during most of the year ended September 30, 2008 trended upward from the average biodiesel sale prices we experienced in the same period in 2007. The average biodiesel sale price we received for the year ended September 30, 2008 was approximately 27% higher than our average biodiesel sale price for the comparable period in 2007.

Because biodiesel is primarily used as an additive to petroleum-based diesel, biodiesel prices have generally correlated to diesel fuel prices. Diesel prices have climbed over the past several years reaching record highs of over $4.70 per gallon in July 2008, but have since trended downward, as oil prices have plummeted and the recent U.S. economic downturn and credit crisis have contributed to a decrease in demand for fuel in general. According to the Energy Information Administration, average retail prices for No. 2 Ultra Low Sulfur Diesel peaked at over $4.70 per gallon in July 2008, but rapidly dropped thereafter to approximately $2.62 per gallon as of early December 2008, which is the lowest price since approximately March 2007. Biodiesel prices have followed a similar trend, peaking in the summer of 2008 and declining thereafter. Nonetheless, diesel fuel prices per gallon remain at levels below or equal to the price of biodiesel. For example, the price for B100 biodiesel in Iowa was approximately $2.60 to $3.06 per gallon for the week of December 19, 2008, according to the USDA’s Weekly Ag Energy Round-Up report, which does not take into account the $1.00 tax credit available to biodiesel producers. However, according to the Energy Information Administration, Midwestern diesel fuel prices as of the week of December 15, 2008 averaged approximately $2.41 per gallon, which is slightly lower than the price per gallon for B100 biodiesel before the tax credit. The premium of biodiesel prices over diesel prices could cause a reduction in the demand for biodiesel. Through most of fiscal year 2008, biodiesel prices steadily increased and were well above historical highs and, therefore helped, to a certain extent, to offset high input costs, such as soybean oil. However, we expect that a drop in biodiesel prices without a corresponding decrease in the cost of feedstock and other inputs will cause the profit margin on each gallon of biodiesel produced to shrink, which could result in significant losses. Due to the volatility of the global economic conditions and commodities markets, it is uncertain whether biodiesel prices and input costs will continue to decrease or whether they will rebound to the higher prices experienced in earlier parts of 2008.

Based on historical trends, we anticipate that seasonal demand for biodiesel will decrease in the fall and winter months when blenders have typically decreased their biodiesel blend percentages due to cold flow concerns. Such decrease in demand could cause downward pressure on biodiesel sale prices. We anticipate the RFS will increase demand for biodiesel; however, at this time it is unclear what impact, if any, the RFS will have on biodiesel demand in 2009. Our financial condition may be negatively affected by decreases in the sales price of biodiesel. This is especially true during periods when feedstock costs for soybean oil and animal fats are relatively high, causing our profit margins to decrease even further.

We also believes that recent U.S. and global economic downturn and the financial crisis that led to a collapse of a variety of major U.S. financial institutions and the federal government’s passage of a $700 billion bailout plan may also place downward pressure on the demand for fuel, including biodiesel. These factors have caused significant upheaval in the financial markets and economy of the United States, as well as abroad. Credit markets have tightened and lending requirements have become more stringent. The U.S. economy is in the midst of a recession, with increasing unemployment rates and decreasing retail sales. Commodity markets have tumbled as a result of the recent economic turmoil, causing oil and other commodity prices to drop significantly. We expect that these conditions may lead to a decline in biodiesel demand and it is uncertain for how long and to what extent these financial troubles may negatively affect biodiesel demand in the future.

Excess production capacity in the biodiesel industry could make it difficult for us to market our products at profitable prices. The National Biodiesel Board estimates that current dedicated biodiesel production capacity of existing plants as of September 29, 2008 (the most recent date for which data is available) was about 2.61 billion gallons per year, which is up from approximately 1.85 billion gallons per year as of September 2007. The National Biodiesel Board also estimates that plants under construction and expansion as of September 29, 2008 could add another 849.9 million gallons to U.S. biodiesel production capacity, for a total annual production capacity of 3.46 billion gallons. Despite these significant increases in production capacity, the National Biodiesel Board estimates that only 450 million gallons of biodiesel were produced in 2007. Many biodiesel plants do not operate at full capacity due in part to the fact that total production capacity significantly exceeds demand. If the demand for biodiesel does not grow at the same pace as increases in supply, we expect the price for biodiesel to decline in the long-term.

Higher crude glycerin sales prices in fiscal 2008 compared to fiscal 2007, resulted in higher total revenues in fiscal year 2008. The sales price of glycerin has increased due to increased demand for crude glycerin, which has trended upwards due to expanding glycerin refining capacity and increasing uses for glycerin.

We expect our results of operations to benefit from federal and state biodiesel supports and tax incentives. Biodiesel has generally been more expensive to produce than petroleum-based diesel and, as a result, the biodiesel industry depends on such incentives to be competitive. Changes to these supports or incentives could significantly impact demand for biodiesel. The most significant of these are the Volumetric Ethanol Excise Tax Credit (“VEETC”) and the Renewable Fuels Standard (“RFS”), as recently amended by the Energy Independence and Security Act of 2007 (the “Energy Independence Act”). See “DESCRIPTION OF BUSINESS — Government Regulation and Federal Biodiesel Supports.”

We are highly dependent upon REG for the successful marketing of our products. We do not have our own sales force and we do not have any other agreements or relationships with feedstock suppliers. If REG breaches the agreement or does not have the ability, for financial or other reasons, to market all of the biodiesel and glycerin we produce, we will not have any readily available means to sell our biodiesel. Any loss of our relationship with REG could have a significant adverse impact on our revenues.

Cost of Goods Sold

The primary components of cost of goods sold from the production of biodiesel are raw materials (soybean oil, animal fats, corn oil, methanol and other chemicals), energy (natural gas and electricity), labor and depreciation on process equipment. Our business is sensitive to feedstock costs. The cost of feedstock is the largest single component of the cost of biodiesel production, typically accounting for 70-90% of the overall cost of producing biodiesel. Any fluctuation in the cost of feedstock will alter the return on investment that our members receive. Changes in the price or supply of feedstock are subject to and determined by market forces and other factors over which we have no control, such as crop production, carryout, exports, government policies and programs, and weather. Because biodiesel prices are strongly correlated to diesel fuel prices, the biodiesel industry is unlike many other industries where finished product prices are more strongly correlated to changes in production costs. This characteristic of the biodiesel industry makes it difficult for biodiesel producers to pass along increased feedstock costs and, therefore, increases in feedstock costs can significantly affect our ability to generate profits.

Cost of goods sold for our products for the year ended September 30, 2008 was $67,000,778, which is approximately 3.7 times greater than our cost of goods sold for the year ended September 30, 2007, which was equal to $18,231,147. The increase is primarily attributed to the fact that our plant was operational for the entire fiscal year 2008, whereas in fiscal year 2007 our plant was operational only for approximately four months of the year. As a percentage of revenues, our cost of goods sold decreased slightly from fiscal year 2007 to fiscal year 2008, which were 110.87% and 99.8%, respectively. This decrease was due primarily to the effect of spreading the costs over a larger revenue pool.

Our average soybean oil costs for the year ended September 30, 2008 were approximately 2% lower than soybean oil costs for the four months we processed biodiesel from soybean oil during the year ended September 30, 2007. Likewise, animal fat costs for the year ended September 30, 2008 were approximately 16% lower than animal fat costs for the three months we processed biodiesel from animal fat during the year ended September 30, 2007. Increases in these feedstock costs can significantly increase our cost of goods sold. In fiscal year 2008, we also began utilizing corn oil feedstock. We did not utilize corn oil feedstock in fiscal year 2007 and only used minimal amounts in fiscal year 2008.

In order to minimize cost of goods sold, we have been increasingly utilizing lower-cost feedstocks such as animal fats and corn oil in place of higher-cost feedstocks such as soybean oil during the year ended September 30, 2008 as compared with the same period in 2007. In fiscal year 2008, approximately 68% of the feedstock used in our biodiesel production was animal fats and 32% was soybean oil. In fiscal year 2007, by comparison, approximately 3% of feedstock used in biodiesel production was animal fats, and approximately 97% was soybean oil.

In addition, natural gas has recently been available only at prices exceeding historical averages. We expect continued volatility in the natural gas market. Global demand for natural gas is expected to continue to increase, which may further drive up prices. Any ongoing increases in the price of natural gas will increase our cost of goods sold.

Commodity prices have been extremely volatile over the recent year, increasing by historic proportions in the summer of 2008 before dropping rapidly over the past several months. Soybean costs fell to $9.20 per bushel in November 2008, down from a high of approximately $13.30 per bushel in July 2008, according to the USDA’s December 2008 Oil Crop Outlook Report. Soybean oil prices have followed a similar trend, which according to the USDA’s December 2008 Oil Crop Outlook Report, average soybean oil prices reached a peak of approximately 62.43 cents per pound in June 2008, but plunged to a price of 31.55 cents per pound in November 2008, which is dramatically lower than the summer’s peak and the lowest level in more than a year. The drastic decrease in soybean oil prices is likely due to the rapid changes in the global economy experienced over the last four months. The USDA National Weekly Ag Energy Round-Up Report indicates that as of December 19, 2008, soybean oil prices in Iowa have dropped even further to approximately 27.20 to 29.70 cents per pound, which is down from the price range of 43.89 to 45.39 cents per pound one year ago. The USDA forecasted that 2008/09 soybean oil prices would range from 31 to 35 cents per pound. Accordingly, based on recent trends, management expects that cost of goods sold on the basis of a per-gallon of soybean oil-based biodiesel sold may decrease below levels experienced in fiscal year 2008. However, management still expects that prices may remain volatile through fiscal year 2009. It is uncertain to what extent and for how long domestic and global economic conditions may exert downward pressure on the cost of soybean oil and other commodities. Because it takes more than seven pounds of soybean oil to make a gallon of biodiesel, price fluctuations can have a significant affect on our profit margin on each gallon of biodiesel produced and sold. Soybean crushing, soybean acres planted, and weather conditions could increase volatility in the soybean oil market. Animal fats prices have also increased significantly, although they still remain lower than soybean oil prices.

Like soybean oil prices, animal fat costs also rapidly increased for most of the 2008 fiscal year before dropping over the past several months. Although animal fat costs did not reach prices as high as soybean oil prices in the summer of 2008, animal fat costs nonetheless increased well above their historical average. The prices for animal fats tend to move in relation to the price of other feedstocks such as soybean oil. Accordingly, as soybean oil prices increase, animal fat costs will also likely increase and vice versa. According to the USDA’s December 2008 Oil Crop Outlook report, lard and edible tallow prices for November 2008 were estimated at 27.5-31.5 cents and 20 to 24 cents per pound, respectively, which are down from their peak of 52.82 cents and 38.61 cents per pound, respectively, in July 2008. Based on these recent trends, management anticipates that the cost of animal fat feedstock will decrease for fiscal year 2009 as compared to fiscal year 2008, However, management expects that prices may remain volatile throughout fiscal year 2009, as domestic and global economic conditions and commodities markets may affect input prices, including animal fats.

Based on recent trends of soybean oil and animal fat costs, we expect that cost of goods sold on a per-gallon basis may decrease below levels experienced in fiscal year 2008. However, management still expects that prices may remain volatile through fiscal year 2009. It is uncertain to what extent and for how long domestic and global economic conditions may exert downward pressure on the cost of soybean oil and animal fats. We will attempt to utilize feedstocks that provide us with the greatest margins on the sale of our biodiesel. Nonetheless, even if feedstock costs continue to drop, decreases in the price at which we may sell our biodiesel and glycerin in the future could still result in low profit margins, which could have an adverse affect on our net income.

We experienced a $1,636,163 net loss during the year ended September 30, 2008 related to our derivative contracts, which is an increase from the $524,827 net loss recognized during the fiscal year ended September 30, 2007. The increase in net loss related to hedging is likely due to having a full year of entering into derivative contracts during fiscal year 2008, and only entering into derivative contracts for approximately half of fiscal year 2007. We enter into option contracts to reduce the risk caused by market fluctuations of soybean oil, home heating oil and natural gas. The contracts are used to fix the purchase price of our anticipated requirements of soybean oil and natural gas in production activities and to manage exposure to changes in biodiesel prices. The fair value of the derivatives is continually subject to change due to the changing market conditions. As the value of soybean oil, home heating oil and natural gas fluctuate, the value of our derivative instruments are impacted, which affects our financial performance. We anticipate continued volatility in our cost of goods sold due to the timing and changes in value of derivative instruments relative to the cost of the commodity being hedged.

Operating Expenses.

Operating expenses for the year ended September 30, 2008 totaled $1,729,356, which is significantly higher than operating expenses of $670,296 for the same period in 2007. This increase is primarily due to the fact that our plant was operational for the entire 2008 fiscal year, whereas the plant was operational for only approximately four months in the 2007 fiscal year. Operating expenses as a percentage of revenues decreased slightly from fiscal year 2007 to fiscal year 2008, at 4.08% and 2.58% respectively. The decrease in operating expenses as a percentage of revenues is primarily due to efficiencies gained from operating the plant continuously. We expect that our operating expenses for fiscal 2009 will remain fairly consistent if average plant production levels remain consistent.

Other Income (Expenses).

Our other income and expenses for the fiscal year ended September 30, 2008 was interest expense of $2,281,776 and interest income of $91,762. The interest expense represents interest on our debt payments, which increased substantially from $716,470 for fiscal year 2007, because interest on our debt was capitalized prior to plant completion in June 2007.

Our interest income decreased from fiscal year 2007 to fiscal year 2008, which was 1.0% and 0.14% of our revenues respectively. This decrease in interest income was due primarily to lowered rates given from financial institutions and a decrease in our invested cash.

Changes in Financial Condition

The following table highlights the changes in our financial condition from September 30, 2007 to September 30, 2008:

		September 30,				September 30,
		2008				2007
Current Assets		$	11,178,526			$	12,352,679
Current Liabilities		$	35,640,464			$	35,527,516
Members’ Equity		$	15,601,990			$	19,386,914

Current Assets. Current assets totaled $11,178,526 at September 30, 2008 down from $12,352,679 at September 30, 2007. The decrease during this period is a result of a decrease in our accounts receivable balance due to customer payment patterns. However, the decreases in our accounts receivable was partially offset by an increase in our inventory level as of September 30, 2008.

Current Liabilities. Total current liabilities totaled approximately $35,640,464 at September 30, 2008, up slightly from $35,527,516 at September 30, 2007.

Members’ Equity. Members’ contributions at both September 30, 2008 and September 30, 2007 were equal to $23,165,422. Total members’ equity as of September 30, 2008 was $15,601,990, down from $19,386,914 as of September 30, 2007. The decrease in total members’ equity is due to accumulated deficit of $7,563,432 for the fiscal year 2008 up from $3,778,508 in fiscal year 2007.

Liquidity and Capital Resources

Cash Flow from Operating Activities. Net cash flow provided by operating activities for the year ended September 30, 2008 totaled $15,075 compared to $12,009,224 used for the year ended September 30, 2007. Income net of the non-cash items of depreciation, amortization and unrealized loss was relatively unchanged at $1,605,381 used in our fiscal year 2008 compared to $1,746,433 used in our fiscal year 2007. However, during our fiscal year 2007, we used significantly more working capital during the start-up of our operations.

Cash Flow from Investing Activities. Net cash flow used in investing activities for the year ended September 30, 2008 totaled $253,908, of which $1,044,817 was comprised of sales tax refund payments related to our purchase of equipment for our plant and $22,481 used for capital expenditures for minor improvements to our plant for efficiency and upgrade purposes. The tax refund payments were made pursuant to the IDED’s High Quality Job Creation Program under which we were eligible for certain tax incentives, including refunds of sales tax paid in connection with the construction of our biodiesel plant.

Cash Flow from Financing Activities. Net cash used in financing activities for the year ended September 30, 2008 totaled $297,215, which was the result of proceeds and payments on our long-term debt financing.

Short-Term and Long-Term Debt Sources

In October 2006, we closed on our $34,715,000 debt financing with Bankfirst. The financing with Bankfirst provided for a $29,715,000 term loan, with an interest rate during construction (the first 14 months following loan closing) of 0.75% over the Prime Rate as of the effective date reported in the Money Rates column of The Wall Street Journal. Our construction loan converted to a term loan in February 2008. Starting on February 1, 2008 and on the 1st day of each month thereafter, 59 monthly payments of principal and interest (which is prime plus 0.75%) is due and payable through and including January 1, 2013. Payments are calculated in an amount necessary to amortize the principal amount of this note plus interest thereon over a 10 year period. The remaining unpaid principal balance, together with all accrued but unpaid interest, is due and payable in full on January 1, 2013.

The term loan imposes various covenants upon us which may restrict our operating flexibility. We are subject to several ratios in the term loan which may limit how we allocate our sources of funds. The term loan imposes a negative covenant on distributions which may restrict our ability to distribute earnings to our members. The term loan also requires us to obtain Bankfirst’s permission prior to making any significant changes in our material contracts with third-party service providers.

In addition, we have a $5,000,000 revolving line of credit with Bankfirst. This loan provides for the same interest options as under the term loan. Advances under the reducing revolving credit note are available through the life of the commitment. The commitment reduces by $900,000 semi-annually beginning July 1, 2012 and continuing through January 1, 2016, with a final reduction at the expiration of the commitment on July 1, 2016 at which time any outstanding balance shall be due and payable in full. The note requires interest payments based on unpaid principal. The interest options are the same as those under the term loan.

We executed a mortgage in favor of Bankfirst creating a first lien on substantially all of our assets, including our real estate, plant, all personal property located on our property and all revenues and income arising from the land, plant or personal property for the loan and credit agreements discussed above. As of the date of this report, we have timely paid all of our monthly payments under the loan. We are currently not in compliance with the current liabilities covenant because our term loan is listed as a current liability. Our term loan is listed as a current liability because we have a going concern in the notes to our financial statements and GAAP requires long term debt to be listed as a current liability when a company has a going concern disclosure. Our bank will not begin testing under several of the covenants until February 2009. If our financial condition does not improve as anticipated, which may not occur given our historical performance and anticipated seasonal lack of demand for biodiesel, we will likely be in violation of several of our covenants. In addition, our loan contains an event of default for any material adverse change in our financial condition, and the term “material adverse change” is defined in such a way that leaves this determination to the subjective opinion of our lender.

Grants and Government Programs

We entered into a loan with the Iowa Department of Economic Development for $400,000. This loan is part of the Iowa Department of Economic Development’s Value Added Program and $100,000 of the loan is forgivable and the $300,000 principal amount does not bear interest. The balance at September 30, 2008 was $185,000.

In addition, on May 14, 2007 we entered into a Railroad Revolving Loan and Grant Program Agreement with the Iowa Department of Transportation (IDOT) for an amount of up to $168,000 (or 13.3% of the cost for the railroad project, whichever is less) and a loan amount of up to $132,000 (or 10.5% of the cost for the railroad project, whichever is less). Interest on the loan amount is at 3.67% per year for five years and we will make our first payment under this loan in December 2008. The balance at September 30, 2008 was $132,000.

Critical Accounting Estimates

Management uses estimates and assumptions in preparing our financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported revenues and expenses.

Revenue Recognition

Revenue from the production of biodiesel and its co-products is recorded when title transfers to customers. Biodiesel and its co-products are generally shipped FOB from the plant.

Derivative Instruments and Hedging Activities

Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, or SFAS No. 133, requires a company to evaluate its contracts to determine whether the contracts are derivatives. Certain derivative contracts may be exempt under SFAS No. 133 as normal purchases or normal sales, which are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. At this time, our forward contracts related to the purchase of soy oil and natural gas are considered normal purchases and, therefore, are exempted from the accounting and reporting requirements of SFAS No. 133.

Commodity Price Risk Protection

We seek to minimize the risks from fluctuations in the prices of raw material inputs, such as soybean oil, animal fats and natural gas, and finished products, such as biodiesel, through the use of derivative instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. Although we believe our hedge positions accomplish an economic hedge against our future purchases, they do not qualify for hedge accounting, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We are using fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the gains and losses are immediately recognized in our cost of goods sold. The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.

As of September 30, 2008, the fair value of our derivative instruments relating to certain commodities, including soybean oil and heating oil, is reflected as an asset on our balance sheet in the amount of $65,141. We recognized a net loss of $1,636,163 during the year ended September 30, 2008, which consisted of a realized loss of $2,211,551 and an unrealized gain of $575,388. The unrealized portion of any hedging loss is subject to change with market fluctuations and may be offset by future higher-priced biodiesel sales.

There are several variables that could affect the extent to which our derivative instruments are impacted by price fluctuations in the cost of soybean oil, natural gas or biodiesel. However, it is likely that commodity cash prices will have the greatest impact on the derivative instruments with delivery dates nearest the current cash price. As we move forward, additional protection may be necessary. As the prices of these hedged commodities move in reaction to market trends and information, our statement of operations will be affected depending on the impact such market movements have on the value of our derivative instruments. Depending on market movements, crop prospects and weather, these price protection positions may cause immediate adverse effects, but are expected to produce long-term positive growth for the Company.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

ITEM 7. FINANCIAL STATEMENTS.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Members
Iowa Renewable Energy, LLC

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

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

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

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 8 to the financial statements, the Company has suffered losses from operations and has experienced significant increases in the input costs of its products. This has created liquidity issues and the Company is or, will likely be, in violation of its bank debt covenants and there is no assurance that such violations will be waived which together raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 8. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We were not engaged to examine management’s assessment of the effectiveness of Iowa Renewable Energy, LLC’s internal control over financial reporting as of September 30, 2008 included in Item 8AT of the 10-KSB and, accordingly, do not express an opinion thereon.

/s/ McGladrey & Pullen LLP                    

Davenport, Iowa

December 22, 2008

Iowa Renewable Energy, LLC

Balance Sheets
September 30, 2008 and 2007

		2008				2007
Assets
Current Assets:
Cash and cash equivalents		$	189,474			$	725,522
Due from broker			82,182				1,337,860
Accounts receivable			4,469,451				5,614,315
Derivative financial instruments			65,141				—
Federal incentive receivable			747,741				822,228
Inventory			5,580,906				3,815,722
Prepaids and other assets			43,631				37,032
			11,178,526				12,352,679
Property and Equipment:
Land			420,000				420,000
Plant and processing equipment			40,673,235				41,464,111
Office building, furniture and fixtures			572,632				572,665
Equipment and vehicles			226,424				226,424
			41,892,291				42,683,200
Accumulated depreciation			(3,313,970	)			(663,962	)
			38,578,321				42,019,238
Other Assets:
Cash, restricted by loan agreement			1,044,817				—
Financing costs, net			440,790				542,513
			1,485,607				542,513
		$	51,242,454			$	54,914,430
Liabilities and Members’ Equity
Current Liabilities:
Current maturities of long-term debt		$	33,345,343			$	33,342,558
Accounts payable and accrued expenses			2,295,121				1,374,711
Derivative financial instruments			—				510,247
Construction payable, including retainage 2008 none; 2007 $300,000			—				300,000
Total current liabilities			35,640,464				35,527,516
Long-Term Debt			—				—
Commitments
Members’ Equity:
Member contributions, net of issuance costs, units outstanding 2008 26,331; 2007 26,331			23,165,422				23,165,422
Accumulated (deficit)			(7,563,432	)			(3,778,508	)
			15,601,990				19,386,914
		$	51,242,454			$	54,914,430

See Notes to Financial Statements.

Iowa Renewable Energy, LLC

Statements of Operations
Years Ended September 30, 2008 and 2007

		2008				2007
Revenues:
Sales		$	60,328,566			$	14,770,787
Federal incentives			6,806,658				1,672,653
			67,135,224				16,443,440
Cost of sales			67,000,778				18,231,147
Gross profit (loss)			134,446				(1,787,707	)
Operating expenses:
General and administrative			1,691,356				660,796
Depreciation			38,000				9,500
			1,729,356				670,296
(Loss) before other income (expense)			(1,594,910	)			(2,458,003	)
Other income (expense):
Interest income			91,762				229,859
Interest expense			(2,281,776	)			(716,470	)
Net (loss)		$	(3,784,924	)		$	(2,944,614	)
Weighted average units outstanding			26,331				26,241
Net (loss) per unit — basic and diluted		$	(143.74	)		$	(112.21	)

See Notes to Financial Statements.

Iowa Renewable Energy, LLC

Statements of Changes in Members’ Equity
Years Ended September 30, 2008 and 2007

						Member				Accumulated				Total Members’
		Member Units				Contributions				Deficit				Equity
Balance, September 30, 2006			25,231			$	22,615,422			$	(833,894	)		$	21,781,528
Exercise of unit options			1,100				550,000				—				550,000
Net (loss)			—				—				(2,944,614	)			(2,944,614	)
Balance, September 30, 2007			26,331				23,165,422				(3,778,508	)			19,386,914
Net (loss)			—				—				(3,784,924	)			(3,784,924	)
Balance, September 30, 2008			26,331			$	23,165,422			$	(7,563,432	)		$	15,601,990

See Notes to Financial Statements.

Iowa Renewable Energy, LLC

Statements of Cash Flows
Years Ended September 30, 2008 and 2007

		2008				2007
Cash Flows from Operating Activities:
Net (loss)		$	(3,784,924	)		$	(2,944,614	)
Adjustments to reconcile net (loss) to net cash provided by (used in) operating activities:
Depreciation			2,650,008				662,502
Amortization			101,723				25,432
Unrealized (gain) loss on derivative financial instruments			(575,388	)			510,247
Change in working capital components:
(Increase) decrease in due from broker			1,255,678				(1,337,860	)
(Increase) decrease in accounts receivable			1,219,351				(6,436,543	)
(Increase) in inventory			(1,765,184	)			(3,815,722	)
(Increase) in prepaids and other assets			(6,599	)			(37,032	)
Increase in accounts payable and accrued expenses			920,410				1,364,366
Net cash provided by (used in) operating activities			15,075				(12,009,224	)
Cash Flows from Investing Activities:
Purchase and construction of property and equipment			(22,481	)			(30,942,594	)
Sales tax and utility refund from construction of property and equipment			813,390				—
(Increase) decrease in cash restricted			(1,044,817	)			10,263,792
Net cash used in investing activities			(253,908	)			(20,678,802	)
Cash Flows from Financing Activities:
Issuance of membership units, an exercise of unit options			—				550,000
Payments for financing costs			—				(552,515	)
Proceeds from long-term borrowings			1,717,442				32,997,558
Payment on long-term borrowings			(2,014,657	)			(55,000	)
Net cash provided by (used in) financing activities			(297,215	)			32,940,043
Net increase (decrease) in cash and cash equivalents			(536,048	)			252,017
Cash and cash equivalents:
Beginning			725,522				473,505
Ending		$	189,474			$	725,522
Supplemental Disclosure of Cash Flow Information, cash payments for interest, net of amount capitalized		$	2,287,429			$	443,754
Supplemental Disclosure of Noncash Operating and Financing Activities:
Construction in progress included in accounts payable		$	—			$	300,000
Amortized financing costs included in construction in process			—				67,815