UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark one)

Commission file number 333-115164

U.S. PREMIUM BEEF, LLC
(Exact name of registrant as specified in its charter)

12200 North Ambassador Drive, Kansas City, MO 64163
(Address of principal executive offices)

Registrant’s telephone number, including area code: (866) 877-2525

Securities registered pursuant to Section 12(b) of the Act:  None
Securities registered pursuant to Section 12(g) of the Act:  None

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K.  þ

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

Large Accelerated Filer o               Accelerated Filer o                                Non-Accelerated Filer þ

Large Accelerated Filer o

Accelerated Filer o

Non-Accelerated Filer þ

Small Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o Noþ

The registrant’s equity is not traded on any exchange or other public market; however, there have been private transactions.  As of October 27, 2007,25, 2008, there were 735,385 Class A units and 735,385 Class B units outstanding.   

DOCUMENTS INCORPORATED BY REFERENCE

None

2

MARKET AND INDUSTRY DATA AND FORECASTS

Market data and certain industry forecasts used throughout this report were obtained from internal surveys, market research, consultant surveys, publicly available information and industry publications and surveys. Industry surveys, publications, consultant surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. Similarly, internal surveys, industry forecasts and market research, which we believe to be reliable, based upon our management’s knowledge of the industry, have not been independently verified. Forecasts are particularly likely to be inaccurate, especially over long periods of time. In addition, we do not know what assumptions regarding general economic growth were used in preparing the forecasts we cite.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements,” which are subject to a number of risks and uncertainties, many of which are beyond our control. Forward-looking statements are typically identified by the words “believe,” “expect,” “anticipate,” “intend,” “estimate” and similar expressions. Actual results could differ materially from those contemplated by these forward-looking statements as a result of many factors, including the status of our proposed sale to JBS S.A. (JBS) in light of the United States (U.S.) Department of Justice (DoJ), the Ranchers Cattlemen Action Legal Fund, United Stockgrowers of America (R-CALF) and the Organization for Competitive Markets (OCM) civil antitrust suits to block it, economic conditions generally and in our principal markets, the availability and prices of live cattle and commodities, food safety, livestock disease, including the identification of cattle with BSE, competitive practices and consolidation in the cattle production and processing industries, actions of domestic or foreign governments, hedging risk, changes in interest rates and foreign currency exchange rates, consumer demand and preferences, the cost of compliance with environmental and health laws, loss of key customers or suppliers, loss of key employees, labor relations, and consolidation among our customers and the potential inability to receive the anticipated benefits from the acquisition of the processing facility in Brawley, CA.customers.

In light of these risks and uncertainties, there can be no assurance that the results and events contemplated by the forward-looking information contained in this report will in fact transpire. Readers are cautioned not to place undue reliance on these forward-looking statements. We do not undertake any obligation to update or revise any forward-looking statements. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors.  Please review Item 1A. Risk Factors in this report, for other important factors that could cause actual results to differ materially from those in any such forward-looking statements.

Unless the context indicates or otherwise requires, the terms “the Company”, “we”, “our” and “us” refer to U.S. Premium Beef, LLC (formerly known as U.S. Premium Beef, Ltd.) and its consolidated subsidiaries. As used in this report, the term “NBP” refers to National Beef Packing Company, LLC (formerly known as Farmland National Beef Packing Company, LP (FNB)), a Delaware limited liability company and “USPB” refers to U.S. Premium Beef, LLC (formerly known U.S. Premium Beef, Ltd.) prior to consolidation.  As used in this report, the termterms “fiscal year” or “fiscal year ended” referrefers to our fiscal year, which ends on the last Saturday in August.

PART I

ITEM 1.                  BUSINESS 

BUSINESS OF U.S. PREMIUM BEEF, LLC

Overview

U.S. Premium Beef (USPB) was organized in July 1996 as a Kansas cooperative by a steering committee of cattle producers. USPB’s goal is to provide market access and improve the marketing and processing of beef products requiring higher quality cattle for wholesale and retail customers and consumers while providing higher returns to cattle producers. USPB operates an integrated cattle processing and beef marketing enterprise where consumer and processor demands and requirements are implemented through changes in genetics, feeding, and management. U.S. Premium Beef’s unitholders benefit from its supplier alliance with National Beef Packing Co., LLC (NBP) through (i) premiums received in excess of cash market prices for higher quality cattle, (ii) allocations of profits and potential distributions, (iii) potential unit price appreciation, and (iv) information that permits unitholders to make informed production decisions. 

On June 12, 2003, U.S. Premium Beef entered into an agreement with Farmland Industries, Inc. (Farmland) to acquire all of the partnership interests in Farmland National Beef Packing Company (FNB) held by Farmland.  USPB formed NB Acquisition, LLC (NB Acquisition) to consummate the acquisition. To finance the acquisition, USPB, NBPCo Holdings, LLC (NBPCo Holdings) and certain members of FNB’s management team purchased equity in NB Acquisition for $46.0 million in cash.  FNB issued $160.0 million of Senior Notes (Senior Notes), amended its credit facility and transferred a portion of the proceeds of the offering of the Senior Notes and borrowings under its amended credit facility to NB Acquisition.  Subsequently, NB Acquisition merged into FNB, and FNB then converted into a limited liability company under Delaware law and became known as National Beef Packing Company, LLC.  These transactions (the Acquisition) closed on August 6, 2003. 

Effective August 29, 2004, the cooperative restructured into a limited liability company (the Conversion)under Delaware law (Conversion). The business of USPB, the cooperative, is being continued in the limited liability company (LLC) form of business organization.

On June 1, 2006, U.S. Premium Beef’s majority owned subsidiary, NBP, completed the acquisition of substantially all of the assets of Brawley Beef, LLC (Brawley Beef).  Brawley Beef was an alliance of cattle producers in Arizona and California who supplied its beef processing facility in Brawley, California.

On February 29, 2008, JBS S.A. (JBS), JBS, NBP, USPB and the other holders of membership interests in NBP, including NBPCO Holdings, LLC and parties controlled by three executive officers, John R. Miller, Timothy M. Klein and Scott H. Smith, entered into a Membership Interest Purchase Agreement (MIPA), as amended from time to time. Under the MIPA, JBS will acquire all of the outstanding membership interests in NBP (including the membership interests issuable pursuant to deferred equity incentive compensation agreements with NBP’s Chief Executive Officer and Chief Operating Officer) for a combination of approximately $488.4 million cash and $71.6 million in common stock of JBS.

On October 20, 2008, the United States (U.S.) Department of Justice (DoJ), joined by the state attorneys general from seventeen states, filed a civil antitrust suit in U.S. District Court for the Northern District of Illinois seeking a permanent injunction against the MIPA alleging that it would result in lower prices paid to cattle suppliers and higher beef prices for consumers.  A similar suit was filed on November 13 , 2008 in the same court by the Ranchers Cattlemen Action Legal Fund, United Stockgrowers of America (R-CALF) and the Organization for Competitive Markets (OCM).  These actions are being vigorously contested by USPB, NBP, and JBS.

U.S. Premium Beef, NBPCo Holdings and NBP management each hold Class A and Class B interests in NBP. In addition, members of NBP management will be issued a fixed number of additional Class A and Class C interests in NBP in lieu of cash payments owed under existing employment arrangements. USPB holds approximately 54.8% of the Class B interests, as well as Class A interests with an aggregate face amount of approximately $94.7 million, NBPCo Holdings owns approximately 19.5% of the Class B interests, as well as Class A interests with an aggregate face amount of approximately $31.5 million, and members of management of NBP management own approximately 25.7% of the Class B interests, as well as Class A interests with an aggregate face amount of approximately $1.5$10.6 million. After the earlier of the occurrence of specified major liquidity transaction, change of control or inOn August 6, 2008, certain members of management of NBP management will bewere issued a fixed number of additional Class A interests with an aggregate face amount of approximately $9.1 million and Class C interests with an aggregate face amount of approximately $0.9 million in lieu of cash payments owed under prior or existing employment arrangements pursuant to deferred compensation agreements entered into in connection with ownership changes that occurred on August 6, 2003.agreements. These amounts were previously expensed as compensation expense.

Products and Production

USPB provides an integrated cattle production, processing and marketing system for the benefit of its unitholders and associates. As the basis of that system, USPB’s unitholders have a guaranteed right plus an obligation (on a one head per Class A unit per year basis) to deliver cattle to USPB, pursuant to the Uniform Cattle Delivery and Marketing Agreement (see Cattle Delivery Arrangements). Cattle delivered to USPB are then delivered to NBP for processing and subsequent product distribution and marketing. Shortly after the cattle are processed, cattle suppliers receive, at no extra charge, individual animal carcass data previously considered proprietary by many processors. This carcass data assists producers in refining production methodologies, thereby improving the product quality and subsequently enhancing the return to the producer.

We believe the primary advantage of USPB’s ownership in NBP centers around USPB’s ability to provide NBP with a consistent supply of quality beef from a verified source, allowing NBP to target higher margin value-added markets. Consumers have historically demonstrated their willingness and desire to buy branded products that offer better value in other consumer product markets, with the Certified Angus Beef^® product line being an example in the beef industry.

Cattle Producers’ Uniform Cattle Delivery and Marketing Agreements

USPB facilitates the delivery of cattle from its unitholders and associates to NBP. Under the cooperative structure, each share of common stock held by a shareholder entitled and obligated that shareholder to deliver one head of cattle per year to the cooperative. Each shareholder was required to enter into a Uniform Delivery and Marketing Agreement with the cooperative whereby the shareholder was committed to supply a designated number of cattle on an annual basis to be delivered during the delivery periods set forth in the delivery agreement. In the LLC structure, each Class A unit held by a unitholder entitles and obligates that unitholder to deliver one head of cattle per year to USPB.  The initial delivery agreement was for a term of 10 years, with the term of the cooperative’s agreements continuing following the Conversion. Subsequent renewals of the delivery agreement are for a term of 5 years with an evergreen renewal provision. These arrangements are described in greater detail in Cattle Delivery Arrangements.

Company Background

USPB was originally organized as a tax exempt cooperative within the meaning of Section 521(b)(l) of the Internal Revenue Code. The cooperative began operations on December 1, 1997, when the cooperative acquired its initial interest in Farmland National Beef, now known as National Beef Packing Company, LLC. In connection with the cooperative’s purchase of its interest in Farmland National Beef, the cooperative owned the right and was subject to the obligation to deliver cattle annually to NBP relative to: (i) USPB’s ownership in NBP and (ii) the number of cattle processed annually by NBP.  That arrangement continues following the Conversion.  Under that arrangement, USPB has delivered nearly 6.2more than 6.9 million head of cattle to NBP for processing since it commenced deliveries.  

On August 6, 2003, USPB became the majority owner in NBP.

On August 18, 2004, the shareholders of U.S. Premium Beef, Ltd. approved the conversion of the cooperative into a Delaware LLC.  Under the new ownership structure, each share of common stock of the cooperative was converted to one unit of Class A interest and one unit of Class B interest.  Immediately following the Conversion, there were 691,845 units of Class A interests and 691,845 units of Class B interests.  For a period to be determined by the board of directors, each Class A unit will be linked to its corresponding Class B unit and each pair of linked units must, if transferred, be transferred together.  Patronage Refunds for Reinvestment in the cooperative were carried over at their face amount into the LLC as Patronage Notices.

On June 1, 2006, U.S. Premium Beef’s majority owned subsidiary, NBP, completed the acquisition of substantially all of the assets of Brawley Beef.  As a result of the acquisition, USPB issued 44,160 new Class A units and 44,160 new Class B units to Brawley Beef in exchange for 44,160 limited partnership units in National Beef California (NBC), a subsidiary of NBP.  USPB then exchanged the limited partnership units with NBP for a higher ownership percentage in NBP.  After the acquisition, Brawley Beef, LLC changed its name to Desert Beef, LLC.

Holders of USPB Class A units are entitled to a pro rata share of 33% of the profits and losses; to receive distributions of USPB’s net cash flow when declared by the board of directors; to participate in the distribution of USPB’s assets if it dissolves or liquidates after payment of the Patronage Notices, and to vote on matters submitted to a vote of USPB’s unitholders.  Holders of USPB Class A units are committed under Uniform Cattle Delivery and Marketing Agreements to deliver one head of cattle to USPB annually for each unit held. 

Holders of USPB Class B units are entitled to a pro rata share of 67% of the profits and losses; to receive distributions of USPB’s net cash flow when declared by the board of directors; to participate in the distribution of USPB’s assets if it dissolves or liquidates after the payment of the Patronage Notices, and to vote on matters submitted to a vote of USPB’s unitholders.  Holders of USPB Class B units have no cattle delivery commitment.

Patronage Notices do not constitute units or membership interests in USPB, and holders will not be unitholders or associates of USPB by virtue of holding Patronage Notices.  As was the case in the cooperative, Patronage Notices will be paid by USPB at such time and in such amounts as may be determined by the board of directors in its sole and absolute discretion.  Upon liquidation, holders of Patronage Notices will be paid before holders of Class A and Class B units.  Patronage Notices carry no other or additional rights.

Employees

USPB has nine employees. USPB’s governance and strategic oversight responsibilities with NBP and the complexity of USPB’s obligations under its various contracts with NBP require USPB to retain the services of key senior management personnel with the experience, skill and expertise necessary to manage an enterprise competitive with other sophisticated participants in the beef and meat industries. Each employee is compensated through the payment of a base salary with management being eligible for incentive and discretionary bonuses. In addition, each employee is eligible to participate in benefits programs maintained by USPB. These programs include group medical insurance, accidental death and dismemberment insurance and similar programs.

USPB’s employees are not unionized and USPB believes that its relationship with its employees is good.

Governmental Regulation and Environmental Matters

The Company is subject to federal and state regulations relating to grading of animals, quality control, labeling, sanitary control and waste disposal. However, as many of the Company’s operational activities are conducted through its majority-owned subsidiary, NBP, and as USPB does not directly operate any processing facilities itself, the significant efforts with respect to governmental and environmental regulation are conducted by NBP. See Business of National Beef Packing Company, LLC - Government Regulation and Environmental Matters.

Sales, Marketing, and Customers

USPB’s sole customer is its majority-owned subsidiary, NBP. The ultimate customers of and the market for the products resulting from the processing of cattle supplied by USPB’s unitholders and associates are described in Business of National Beef Packing Company, LLC – General.  

Beef Industry, Markets, and Competition

As indicated above, USPB’s business activities are focused on facilitating the delivery of cattle produced by its unitholders and associates to USPB’s majority-owned subsidiary, NBP. Information regarding the beef industry, the market for beef and beef products and competition within the beef industry are described in Business of National Beef Packing Company, LLC - Industry Overview.

Intellectual Property

USPB owns little intellectual property because USPB’s sales are transacted through NBP. However, USPB maintains a trademark on a U.S. Premium Beef logo that it uses periodically on certain, selected products.

Research and Development

USPB does not conduct any research and development activities independent of the activities of NBP.

CATTLE DELIVERY ARRANGEMENTS

Cattle Producers’ Uniform Cattle Delivery and Marketing Agreements and Payments to Unitholders and Associates for Cattle

USPB facilitates the delivery of cattle from its unitholders and associates to NBP. Under the cooperative structure, each share of common stock held by a shareholder entitled and obligated that shareholder to deliver one head of cattle per year to the cooperative. Each shareholder was required to enter into a Uniform Delivery and Marketing Agreement with the cooperative whereby the shareholder was committed to supply a designated number of cattle on an annual basis to be delivered during the delivery periods set forth in the delivery agreement.  In the LLC structure, following the conversion from a cooperative, each Class A unit held by a unitholder entitles and obligates that unitholder to deliver one head of cattle per year to USPB.  The initial delivery agreement was for a term of 10 years, with the term of the cooperative’s agreements continuing following the Conversion. Subsequent renewalsAt the termination of the initial delivery agreement, unitholders are required to enter into a Uniform Cattle Delivery and Marketing Agreement.  The new agreement is for a term of 5 years with an evergreen renewal provision.

Cattle delivered to USPB by its unitholders and associates are delivered by USPB to NBP for processing (with the effect that NBP is USPB’s sole customer). The resulting beef and beef products are marketed by NBP. Each unitholder or associate is paid for the cattle delivered to USPB based on a market-based purchase price that is subject to the agreements between USPB and NBP.

Pursuant to the Uniform Cattle Delivery and Marketing Agreement, payment for cattle is based on the individual carcass quality of cattle delivered to the Company. In addition to the payments described in this section, the cooperative paid patronage dividends from its taxable income, in accordance with its bylaws. Such patronage dividends were based on the cooperative’s taxable income and were distributed to the cooperative’s shareholders and associate members in proportion to the number of cattle delivered to the cooperative by its shareholders and associate members. As a result, the patronage dividends received by the cooperative’s shareholders and associate members reflected the benefits and profits, if any, obtained from value-added marketing of the beef and beef products created from the cattle delivered to the cooperative for processing. As a limited liability company, allocations of profits and losses and potential distributions are not tied to cattle delivery, but rather to the number of Class A and Class B units held and the respective rights of the Class A and Class Bthose units.

BUSINESS OF NATIONAL BEEF PACKING COMPANY, LLC

General

NBP is the fourth largest beef processing company in the United States, accounting for 14.3%13.7% of the United States fed cattle processed in its fiscal year 2007.2008. NBP processes, packages and delivers fresh beef for sale to customers in the United States and international markets. NBP’s products include boxed beef and beef by-products, such as hides and offal. In addition, NBP sells value-added beef products including branded boxed beef, case-ready beef, chilled and frozen export beef and portion control beef. NBP markets products to retailers, distributors, food service providers and the United States military. NBP has the ability to process approximately 14,000 head per day in its beef processing facilities and generated approximately $5.6$5.8 billion in total net sales during fiscal year 2007.2008.  NBP’s relationship with U.S. Premium Beef facilitates a vertically integrated business model and provides NBP with a portion of the high-quality cattle used in its boxed beef and value-added products.

Steven D. Hunt, one of NBP’s three managers and the Chief Executive Officer of U.S. Premium Beef, has over 2627 years of experience in the beef industry. Mr. Hunt has been an integral member of NBP’s team and has helped to provide a supply of high-quality cattle.

 On June 12, 2003, U.S. Premium Beef entered into an agreement with Farmland Industries, Inc. (Farmland) to acquire all of the partnership interests in FNB held by Farmland.  U.S. Premium Beef formed NB Acquisition, LLC (NB Acquisition) to consummate the acquisition. To finance the acquisition, U.S. Premium Beef, NBPCo Holdings, LLC (NBPCo Holdings) and certain members of NBP management team purchased equity in NB Acquisition for $46.0 million in cash.  FNB issued $160.0 million of Senior Notes (Senior Notes), amended its credit facility and transferred a portion of the proceeds of the offering of the Senior Notes and borrowings under its amended credit facility to NB Acquisition.  

Subsequently, NB Acquisition merged into FNB, and FNB then converted into a limited liability company under Delaware law and became known as National Beef Packing Company, LLC.  These transactions closed on August 6, 2003.  NBP continues to hold all of the same assets it held before the consummation of the transactions, including equity in its subsidiaries.

Industry Overview

Beef products represent the largest segment of the U.S. meat industry based on retail sales and the U.S. is the largest producer of beef in the world, producing approximately 25.826.0 billion pounds of beef in the calendar year 2006.2007.  Beef production, from the birth of the animal to the delivery of meat products to the end distributor, is comprised of two primary segments: production and processing. The production segment raises cattle for slaughter and the processing segment slaughters cattle and packages beef for delivery to customers.  A typical 1,200 pound animal yields about 580 pounds of saleable meat, in addition to by-products.  Cattle supply in the beef industry typically follows a ten to twelve year cycle, consisting of about six to seven years of expansion followed by one to two years of consolidation and three to four years of contraction. This cycle is unique to cattle as other animals can either generate multiple offspring or have shorter incubation periods.

Beef carcasses are fabricated into boxed beef cuts for sale to retailers and food service operators who further process the cuts for sale to consumers. NBP estimates that approximately 80% of beef sold in the U.S. is sold as boxed beef.  Recently,In more recent years, meat processors have begun slicing and repackaging cuts, thereby reducing the amount of handling by the end retailer. These case-ready products may be placed directly into the retail display case for selection by the consumer. Case-ready products allow retail stores to shift butcher shop square footage to revenue-generating activities, reduce labor costs and workplace injuries associated with slicing beef, and potentially reduce food safety liability.

The domestic beef industry is characterized by prices that change daily based on seasonal consumption patterns and overall supply and demand for beef and other proteins in the United States and abroad. In general, domestic and worldwide consumer demand for beef products determines beef processors’ long-term demand for cattle, which is filled by feedlot operators. In order to operate profitably, beef processors seek to acquire cattle at the lowest possible costs and to minimize processing costs by maximizing plant operating rates. Cattle prices vary seasonally and are affected by inventory levels, the production cycle, weather, feed prices and other factors.

During fiscal year 2007,2008, approximately 27.327.9 million fed cattle were processed in the United States.  In recent periods, demand for beef products in the United States has been relatively stable, with population growth the primary factor in determining increased aggregate demand. 

BSE and Related

Beef Export BansMarkets

On December 23, 2003, it was announced by the United States Department of Agriculture (USDA) that a single Holstein dairy cow was discovered in the state of Washington to have tested positiveExport markets for BSE.  The origin of the animal was subsequently traced to a farm in Canada.  Shortly after the announcement, several countries, including Japan, representing a substantial share of NBP’s export business, closed their borders to the importation of edibleU.S. beef products from the United States.  Certain by-products have been classified as Specified Risk Materials (SRMs), and have been banned from use in feedstocks and the human food chain. Some of these products previously enjoyed a market in foreign countries.  The closure of most foreign markets to U.S. beef followingremain significantly constrained since the discovery of this cow in Washington state, and lack of alternative U.S. markets for many products which previously were exported, negatively impacted the revenue per head realized by the U.S. processing industry.

The reopening of U.S. export markets was further hampered by discovery in 2005 of a second case of BSEBovine Spongiform Encephalopathy (BSE) in the U.S.State of Washington in December 2003, as well as additional precautions required by some other importing countries.isolated cases.  In December 2005, Japan opened their border to U.S. beef but subsequently closed a short time later as a result of a U.S. packer erroneously shipping a product not approved for export to Japan.  On July 26, 2006, Japan agreed to reopen its market to U.S. beef from cattle aged 20 months and younger after an inspection of U.S. beef processing plants.  Shipments of U.S.younger.  NBP’s Brawley facility was suspended from shipping beef to Japan commenced in August 2006.  InApril 2008 following the discovery of a short loin which included a portion of a spinal column, a specified risk material, prohibited by Japan.  NBP’s Brawley Beef facility was subsequently cleared to resume shipments to Japan on September 2006,19, 2008.  South Korea announced a provisional opening of theirits border to U.S. beef but restrictions imposed with the reopening have created uncertainty regarding amounts of beef that may qualify.from animals 30 months and younger in September 2006; however, its border was subsequently closed on October 5, 2007.  South Korea has closedreopened its borders toborder and started inspecting U.S. beef from time-to-time ason June 27, 2008.  These constraints and uncertainties have had a result of alleged findings of products shipped to South Korea by U.S. export businesses that are not allowed by South Korea.negative impact on beef margins.

These challenges resulted in tremendous volatility in U.S. livestock market prices since fiscal year 2004.  Where pre-BSE export sales were approximately 17% of total net sales in fiscal year 2003, NBP’s total export sales were approximately 10%12%, 7%, 7%10%, and 10%7% of total net sales in fiscal years 2004, 2005,2008, 2007, and 2006, and 2007, respectively.  With the age restrictions placed on cattle that qualify for export to Japan, it is anticipated that between 5% and 20% of U.S. fed cattle will be able to meet the criteria.

NBP cannot presently assess the full economic impact of the consequences of BSE on the U.S. beef processingpacking industry or on its operations.  The Company’s revenues and net income may be materially adversely affected in the event existing exportExisting or new import restrictions continue indefinitely, additional countries announce similar restrictions, andor additional regulatory restrictions are put into effect or disruptions in domestic consumer demand for beef declines substantially.may continue to have a material adverse affect on the Company’s revenues and net income.

Business Strategy

Increase Supplier Alliances.     NBP intends to continue to increase the number of high-quality cattle that it purchases from supplier alliances to increase revenue and improve profitability. The cattle NBP purchases through supplier alliances, such as its relationship with U.S. Premium Beef, are purchased on either a value-based formula, which sets the price for carcasses according to both quality and yield, or a secondary-market basis, whereby NBP purchases cattle from suppliers outside of its primary supply territory. The percent of cattle NBP purchases pursuant to each of these methods fluctuates from period to period; the number of cattle NBP purchased on either a value-based formula or a secondary market basis was approximately 58%59.1% of its total cattle purchased in fiscal year 2007.2008. 

Based on NBP’s experience and on actual results, NBP believes that these purchasing methods allow it to increase the percentage of high-quality cattle that it processes relative to its total cattle processed.  NBP has focused on building relationships with and educating its suppliers on the mutual benefits of these purchasing methods and believes that it will be able to increase its high-quality cattle purchases utilizing these methods in the future.

Continue to Improve Operating Efficiencies.     NBP plans to continue to focus on increasing its profit margins by improving operating efficiencies and increasing processing yields.  Since fiscal year 2001, NBP has invested approximately $253$311.9 million and successfully expanded its processing facilities, creating an efficient and high volume business.

Pursue Strategic Acquisitions.     NBP’s management team has a history of successfully executing and integrating acquisitions in core or complementary businesses. NBP intends to continue to evaluate and selectively pursue acquisitions, particularly of underperforming processing facilities, which it believes are strategically important based on their potential to: (i) meet NBP’s customers’ needs, (ii) diversify NBP’s product offerings and customer base, (iii) broaden NBP’s geographic production and distribution platform, and (iv) increase cash flow.  It may pursue any such acquisitions subject to the covenants contained in its debt agreements.  As an example, USPB’s majority owned subsidiary, NBP, acquired substantially all of the assets of Brawley Beef effective May 30, 2006, which resulted in NBP’s ownership of its beef processing facility in Brawley, California, and entered into a long-term supply agreement for approximately 275,000 head of cattle per year to this facility.  Additionally, NBP acquired Vintage Foods, L.P., including the Vintage™ Natural Beef brand, during fiscal year 2006.  The Vintage brand is marketed as natural beef that is antibiotic- and hormone-free, from cattle that are 20 months of age and younger. 

Competitive Strengths

Vertically Integrated Business Model.    USPB owns the right and is subject to the obligation, if requested, to deliver cattle annually to NBP relative to: (i) USPB’s ownership in NBP and (ii) the number of cattle processed annually by NBP.  USPB’s ownership of and contractual supply relationship with NBP enhances NBP’s ability to deliver a consistent, high-quality, value-added product to its customers.  USPB is a limited liability company and its unitholders and associates consist of cattle ranchers and feedlot owners and operators. During fiscal year 2007,2008, USPB and its unitholders and associates provided NBP with approximately 17%19% of its total cattle requirements through the pricing grid process as more fully described in Item 13. Certain Relationships and Related Transactions, and Director Independence. NBP believes this supply relationship with USPB provides NBP with significant competitive advantages; including: (i) consistently supplying high-quality cattle, and (ii) an ability to consistently provide NBP’s customers with higher margin, value-added products.

Modern and Efficient Facilities.    NBP has invested more than $252$311.9 million since fiscal year 2001 to modernize its facilities, expand capacity and increase the rate at which cattle are processed. These facility upgrades and expansions have enabled NBP to significantly increase the number of cattle NBPit processes. NBP management believes that its beef processing facilities in Liberal, Kansas and Dodge City, Kansas are among the largest, most modern and efficient processing facilities in the United States. With the acquisition of the Brawley, California plant in June 2006, these three facilities combined are capable of processing about 14,000 cattle per day.  NBP believes that the efficiency improvements at these facilities have allowed NBP to achieve higher capacity utilization rates, lower operating costs and higher operating margins than those of major competitors. Furthermore, these efficiencies have helped NBP increase its market share of the United StatesU.S. supply of fed cattle processed from approximately 7.5% inby more than 6% since fiscal year 1997 to approximately 14.3% in fiscal year 2007.1997.  NBP’s two case-ready facilities in Hummels Wharf, Pennsylvania and Moultrie, Georgia, which began operating in 2001, are outfitted with state-of-the-art processing and packaging equipment that allows NBP to serve customers, such as Wal-Mart, in this growing niche market. In addition, its facilities are strategically located to enable NBP to source cattle and beef products efficiently and to effectively serve customers.

Significant Value-Added Product Portfolio.    NBP’s value-added product portfolio consists of branded boxed beef, case-ready beef, chilled and frozen export beef and portion control beef. NBP’s total value-added sales were approximately $1,424$1,619.0 million in fiscal year 2007,2008, comprising approximately 25.5%27.7% of its total net sales. NBP’s value-added products contribute significantly more, in terms of gross margin, than its traditional boxed beef products and are an important component of NBP’s profitability.  Prior to the discovery of a single dairy cow in Washington state infected with BSE on December 23, 2003, NBP’s chilled and frozen export beef products, which primarily consist of premium cuts, had been its primary export to the international beef market, particularly to Japan.

Focus on Food Safety.    NBP has continually focused on food safety. Its processing facilities utilize NBP’s proprietary BioLogic® Food Safety System to facilitate the production of clean, fresh, safe and high-quality beef products. Each of its processing facilities is divided into five zones that separate different stages of the production process and minimize the risk of contamination. NBP continually tests its products and facilities to track and trend the process effectiveness.

Supplier, Customer and Channel Diversification.    Two of NBP’s beef processing facilities are located in southwest Kansas, and its primary market area for the purchase of cattle for those facilities includes Kansas, Texas and Oklahoma.  According to information from the USDA,United States Department of Agriculture (USDA), cattle on feed in the Kansas, Texas and Oklahoma area represented approximately 50%41.7% of the fed cattle marketed in the U.S. during 2007.fiscal year 2008.  NBP’s third beef processing facility is located in Brawley, California.  OurNBP’s source of cattle for this facility is an alliance of cattle producers in Arizona and California with whom we have long-term cattle supply agreements.

The close proximity of NBP’s facilities to large supplies of cattle gives NBP’s buyers the ability to visit feedlots on a regular basis, which enables NBP to develop strong working relationships with its suppliers.  Additionally, the close proximity of NBP’s facilities to large supplies of cattle encourages its suppliers to tailor their production decisions to efficiently meet the demands of NBP’s customers, reduces NBP’s reliance on any one cattle supplier and lowers transportation costs.  During fiscal year 2007,2008, excluding NBP’s supply arrangement with USPB, NBP’s largest supplier accounted for 6.1%6.5% of total purchases and NBP’s top 25 suppliers accounted for 42.0%41.7% of its total purchases.

NBP also has a diversified sales mix across distribution channels and customers. This approach provides multiple avenues of potential growth and reduces its dependence on any one market or customer. NBP sells products to retailers, distributors, food service providers, further processors, the United StatesU. S. military and through other channels. During fiscal year 2007,2008, approximately 57%55% of NBP’s total net sales were to retailers and 25.7%25.1% to food service providers. Across these channels, NBP serves over 900 customers, which represent most major retailers and food service providers in the U.S.  In fiscal year 2007,2008, no one customer represented more than 4.0%3.8% of total net sales, other than Wal-Mart and its affiliate Sam’s Club, which together represented 6.8%7.8% of NBP’s total net sales. NBP’s top 10 customers represented 29.1%31.6% of total net sales in fiscal year 2007.2008.

Experienced Management.    NBP is led by an experienced management team with, on average, over 2223 years of experience in the beef processing industry. John R. Miller, Chief Executive Officer, has over 2627 years of experience in the beef processing industry. Mr. Miller has been recognized by Forbes magazine for his achievements and leadership within the U.S. beef processing industry. He has assembled a team of professionals, including NBP President, Timothy M. Klein, who have worked together over the past 1617 years in developing NBP into a profitable and premium supplier of beef products.

Food Safety

NBP’s food safety efforts incorporate a comprehensive network of leading technology that minimizes the risks involved in beef processing. NBP’s proprietary BioLogic® Food Safety System promotes the production of clean, fresh, safe, high-quality beef products. The BioLogic® Food Safety System is an integrated company philosophy that helps to establish new principles in food safety. The BioLogic® Food Safety System divides NBP’s production facilities into five zones based on the potential for microbial contamination during the processing procedures that take place in each zone. Within each of the five zones, BioLogic® employs its “Test, Track and Treat” approach, which provides on-going testing in each of the zones, effective tracking of the results of such tests and continuous treatments throughout the facilities. The Test, Track and Treat approach includes preventative measures such as equipment sterilization, hygiene, temperature control and ongoing testing to greatly reduce contamination risks.

Intellectual Property

NBP holds a number of trademarks and domain names that it believes are material to its business and which are registered with the United States Patent and Trademark Office, including National Beef®, BioLogic® Food Safety System, Black Canyon® Angus Beef, Black Canyon® Premium Reserve, Certified Premium Beef™Beef®, Naturewell® Natural Beef, NatureSource™NatureSource® Natural Angus Beef, Vintage™Vintage Natural Beef®, Imperial Valley™ Premium Beef, and Leading the Way in Quality Beef™.  NBP has also registered the National Beef^® trade name and trademark in most of the foreign countries to which it sells its products. Currently, NBP has a number of trademark registrations pending in the United States and in foreign countries. In addition to trademark protection, NBP attempts to protect its unregistered marks and other proprietary information under trade secret laws, employee and third-party non-disclosure agreements and other laws and methods of protection. All other trademarks or trade names referred to in this report are the property of their respective owners.

Competition

The beef processing industry is highly competitive. Competition exists both in the purchase of live cattle, as well as in the sale of beef products. NBP’s products compete with a large number of other protein sources, including pork and poultry, but NBP’s principal competition comes from other beef processors, including Tyson Foods, Inc., Cargill Incorporated, and JBS - Swift & Company and Smithfield Foods, Inc.Company. NBP management believes that the principal competitive factors in the beef processing industry are price, quality, food safety, customer service, product distribution, technological innovations and brand loyalty. Some of NBP’s competitors have greater financial and other resources and enjoy wider recognition for their consumer branded products.

Employees

As of August 25, 2007,30, 2008, NBP had approximately 8,800 employees.8,900 employees, of which approximately 42.7% are represented by collective bargaining agreements. Approximately 2,7002,800 of NBP’s employees at the Liberal, Kansas facility are represented by the United Food and Commercial Workers International Union under a collective bargaining agreement scheduled to expire on December 16, 2007.2012. Approximately 1,000 of NBP’s employees at its Brawley, California facility are jointly represented by the United Food and Commercial Workers International Union and the Teamsters International Union under a collective bargaining agreement scheduled to expire on May 31, 2008.December 8, 2013.  NBP considers its relations with its employees and the United Food and Commercial Workers International Union and Teamsters International Union to be good.

Government Regulation and Environmental Matters

NBP’s operations are subject to extensive regulation by the USDA, the Grain Inspection Packers and Stockyards Administration (GIPSA), the FDA, the EPA and other state, local and foreign authorities regarding the processing, packaging, storage, distribution, advertising and labeling of NBP’sits products, including food safety standards.  Recently, the food safety practices and procedures in the beef processing industry have been subject to more intense scrutiny and oversight by the USDA.  For example, on January 12, 2004, FSIS published an interim final rule on Specified Risk Materials (SRMs) and requirements for non-ambulatory disabled cattle due to the finding of BSE in routine testing.  NBP immediately implemented the appropriate programs/policies to ensure compliance with FSIS rules. The rule dealt with three Interim Regulations that prohibit the slaughter of non-ambulatory disabled cattle, requirerequires the description and removal of SRMs that are considered to be inedible, and restrictrestricts the use of captive bolt stunners that deliberately inject compressed air into the cranium of an animal.  NBP has historically and will continue to work closely with the USDA and any regulatory agencies to ensure that its operations comply with all applicable food safety laws and regulations.

Air emissions and wastewater and storm water discharges from NBP’s operations are subject to extensive regulation by the EPA and state and local authorities.  NBP’s Dodge City, Kansas and Liberal, Kansas facilities are subject to Title V permitting pursuant to the federal Clean Air Act and the Kansas Air Quality Act and implementing regulations.  These permits were renewed on January 11, 2005, and will expire on January 25, 2010.  NBP’s Brawley, California facility is subject to air permitting and holds a Conditions for Authority to Construct and Permit to Operate, issued December 12, 2006,August 22, 2008, which is automatically renewed annually with payment of a permit fee unless revoked for cause.  NBP’s Dodge City, Kansas, Liberal, Kansas, Hummels Wharf, Pennsylvania, Moultrie, Georgia, and Brawley, California facilities are also subject to risk management planning pursuant to the federal Clean Air Act.

NBP has an Environmental Compliance Management System (ECMS) in place for the Dodge City and Liberal plants that requires periodic and systematic self-auditing of compliance with all environmental requirements applicable to its operations.  NBP works closely with the Kansas Department of Health and Environment (KDHE) to assure environmental compliance.  Within this process, KDHE has made inquiries regarding the permitting of equipment that is the source of air emissions and which existed at the Liberal plant when NBP acquired the plant in 1993.  Specifically at issue is whether the equipment presentinstalled prior to NBP’s acquisition of the plant was such that the plant should have been classified as a major source forrequired prevention of significant deterioration permits under the federal and Kansas air laws.Clean Air Act new source review program.  NBP is unable to predict the outcome of these inquiries at this time.  NBP has a Compliance Calendar System in place at its Hummels Wharf, Pennsylvania and Moultrie, Georgia facilities and is developing a Compliance Calendar System for its Brawley, California facility.

All of NBP’s facilities are indirect dischargers of wastewater to publicly-owned treatment works and are subject to requirements under the federal Clean Water Act and corresponding state laws and agreements or permits with municipal or county authorities.  An agreement is in effect for NBP’s Dodge City, Kansas plant that will continue unless amended or revoked pursuant to its terms.  NBP has an agreement with the City of Liberal for wastewater and storm water treatment and areis working with the City regarding expansion of the City’s treatment facilities and the terms of the renewal of the City’s discharge permit.  NBP expects significant expenditures associated with the expansion of the City’s treatment facilities.  NBP has an agreement with the City of Moultrie and The Joint Development Authority of Brooks, Colquitt, Grady, Mitchell and Thomas Counties for treatment of wastewater from the Moultrie plant and it has a pretreatment permit from the City of Moultrie for treatment of wastewater from the Moultrie plant.  NBP is in the process of revising the terms under which wastewater from its wastewaterMoultrie plant is treated including discussions with the Joint Development Authority regarding its potential lease and in making changesoperation of an off-site wastewater treatment facility that will allow NBP to addressrespond to requests from the City of Moultrie that it treat phosphorus in its wastewater.  NBP does not expect to incur material costs in associationEstimated expenditures associated with the treatment improvements forof phosphorus in its Moultrie facility althoughwastewater whether through lease and operation of the Joint Development Authority facilities or other means by which it cannot be certain that this will be the case.might address phosphorus have been included in its capital expenditure budget.  NBP is in the process of upgrading thehas upgraded its treatment facilities at the Brawley plant to provide treatment that consistently meets the requirements of the Brawley City Ordinance and NBP is cooperating with the City as it responds to EPA Region 109 requirements for upgrades to the City’s publicly-owned treatment works needed in order for the City to comply with its direct discharge permit including requirements for ammonia and nutrient controls.  NBP does not expect to incur material costs in association with treatment of the Brawley plant wastewater although it cannot be certain that this will be the case.  NBP holds a permit for its Hummels Wharf, Pennsylvania facility from the Eastern Snyder County Regional Authority that automatically renews each year unless suspended or revoked pursuant to its terms.  The Eastern Snyder County Regional Authority has requested pursuant to NBP’s Hummels Wharf permit that it reduce biological oxygen demand loadings in its wastewater and that it reduce nutrients in its wastewater.  NBP may need to construct additional wastewater treatment facilities to respond to these requirements and if that is the case, expenditures associated with these requirements will be included in NBP’s capital expenditure budget. 

Storm water discharges from NBP’sits plants are regulated pursuant to general permits issued by the respective states.  In the states in which NBP has operations, it is in various stages of renewing its coverage under the respective general permits.

NBP’s Dodge City, Kansas, Liberal, Kansas and Hummels Wharf, Pennsylvania facilities are supplied by water from its wells.  NBP holds public water supply permits allowing it to supply potable water to its employees at theits Dodge City, Kansas and Liberal, Kansas facilities.  The public water supply permits do not have expiration dates.

NBP also is subject to laws that provide for strict, and in certain circumstances joint and several, liability for remediation of hazardous substances at contaminated sites that could include current or former facilities or other sites where wastes itNBP generated have been disposed.  NBP’s Dodge City, Kansas, Liberal, Kansas, Hummels Wharf, Pennsylvania, Moultrie, Georgia and Brawley, California facilities are small quantity or conditionally exempt generators of hazardous waste and are subject to recordkeeping, but not permit requirements.  Solid waste generated at itsNBP’s Dodge City, Kansas and Liberal, Kansas facilities is disposed of or composted.  A special waste permit is maintained by NBP’s Dodge City, Kansas facility for the disposal of certain animal parts for which no market currently exists.  The solid waste generated at NBP’s Hummels Wharf, Pennsylvania and Moultrie, Georgia facilities is disposed of in a municipal landfill if it is general plant trash and is taken to renderers if it is usable waste.  Solid waste from the Brawley, California plant is composted except that general plant trash is landfilled and usable waste is taken to renderers.  NBP is not aware that it has any actual or potential liability under the Comprehensive Environmental Response, Compensation and Liability Act (Superfund).  NBP’s plants are subject to community right to know reporting requirements under the Superfund Amendments and Reauthorization Act of 1986, which requires yearly filings as to the substances used on the plant premises.  NBP also reports accidental releases of hazardous substances pursuant to the Superfund law and amendments and state law counterparts.

In fiscal year 2007,2008, NBP incurred expenses of approximately $4.4$4.5 million primarily related to the maintenance and improvement of wastewater treatment facilities and air pollution control.  NBP also incurred $2.1approximately $3.4 million in capital expenditures related to its wastewater treatment facilities and air pollution control in fiscal year 20072008 and anticipate capital expenditures of approximately $3.1$11.4 million in fiscal year 20082009 for environmental projects related to the wastewater treatment facilities and air pollution control.

NBP’s domestic operations are subject to the Packers and Stockyards Act of 1921 (PSA). This statute generally prohibits meat packers in the livestock industry from engaging in certain anti-competitive practices. In addition, this statute requires NBP to make payment for its livestock purchases before the close of the next business day following the purchase and transfer of possession of the livestock it purchases, unless otherwise agreed to by its livestock suppliers. Any delay or attempt to delay payment will be deemed an unfair practice in violation of the statute. Under the PSA, NBP must hold its cash livestock purchases in trust for its livestock suppliers until they have received full payment of the cash purchase price. As of August 25, 2007, NBP has secured a bond of $30.0$35.4 million to satisfy these requirements.  The bond is supported by a $15.5$10.6 million letter of credit.

From time to time NBP receives notices from regulatory authorities and others asserting that it is not in compliance with some laws and regulations. In some instances, litigation ensues.  NBP is currently in receipt of one such notice, from the Bureau of Immigration and Customs Enforcement (BICE) that it does not believe will result in material liability, if any.  In May 2003, NBP received a request for information from BICE regarding the immigration status of its employees, and NBP has provided BICE with all requested information.  No fines or penalties have been suggested or discussed. 

NBP believes that it currently is in substantial compliance with all governmental laws and regulations and maintains all material permits and licenses relating to its operations.  Other than as discussed above, NBP is not aware of any violations of environmental or other laws and regulations that are likely to result in material penalties or pending changes in such laws or regulations that are likely to result in material cost increases.

ITEM 1A.               RISK FACTORS

As described throughout this document, USPB’s business involves the operation of an integrated cattle processing and beef marketing enterprise in which USPB’s ownersunitholders and associates supply cattle that are processed at the facilities owned and operated by USPB’s majority-owned subsidiary, National Beef Packing Co, LLC.  NBP markets and distributes the beef and beef products produced from both cattle supplied by USPB’s ownersunitholders and associates and other cattle purchased by NBP from other sources.  The financial results of NBP’s operations therefore are the single largest influence on USPB’s financial performance.  Consequently, those factors and risks that impact the performance of NBP’s business have a direct and immediate influence on USPB’s performance.  However, there are also some risks that are unique to USPB.  This Risk Factors section is divided into two parts, with one subsection focusing on the risk factors that influence the performance of NBP and another subsection discussing certain risk factors that are directly applicable to USPB.  

USPB’s business operations and the implementation of our business strategy are subject to significant risks inherent in our business, including, without limitation, the risks and uncertainties described below.  The occurrence of any one or more of the risks or uncertainties described below could have a material adverse effect on our financial condition, results of operations, and cash flows.  While we believe we have identified and discussed below the key risk factors affecting our business, there may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may adversely affect our business, operations, industry, financial position, and financial performance in the future.

Risk Factors Associated With Operations of NBP

Risks Related to the Proposed Transaction

JBS and NBP may be unable to obtain the regulatory approvals required to complete the proposed transaction or, in order to do so, JBS and NBP may be required to comply with material restrictions or conditions, which they may be unable or unwilling to do.

The proposed transaction is subject to the requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act), and the rules and regulations promulgated thereunder, which provide that some acquisition transactions may not be completed until required information has been furnished to the Federal Trade Commission (FTC) and the Antitrust Division of the DoJ, and until the waiting period has been terminated or has expired.  JBS and NBP filed the required HSR Act notifications with the Antitrust Division, the FTC and applicable foreign jurisdictions as soon as practicable following approval of the proposed transaction by the members of U.S. Premium Beef and the shareholders of JBS.  The DoJ, joined by the state attorneys general from seventeen states, filed a civil antitrust suit on October 20, 2008 in the U.S. District Court for the Northern District of Illinois seeking a permanent injunction against the proposed acquisition of NBP by JBS.  A similar suit was filed on November 13, 2008 in the same court by R-CALF and OCM.  While NBP intends to vigorously contest these attempts to block the acquisition, there can be no assurance that NBP will be successful.

The purchase agreement limits NBP’s ability to pursue alternatives to the proposed transaction.

The purchase agreement contains terms and conditions that make it more difficult for NBP to sell its business to a party other than JBS.  These “no shop” provisions impose restrictions on NBP and the Sellers that, subject to certain exceptions, limit the ability of NBP and the Sellers to discuss, facilitate or commit to competing third party proposals to acquire all or a significant part of NBP. 

The businesses of NBP may be adversely affected if the proposed transaction is not completed.

Completion of the proposed transaction is subject to several closing conditions.  NBP’s future operations may be harmed to the extent that potential customers and suppliers are uncertain about its future direction.  NBP and the Sellers will also be required to pay significant costs incurred in connection with the proposed transaction, including legal and accounting fees, whether or not the proposed transaction is completed.  Moreover, under specified circumstances, NBP could be required to pay JBS a termination fee of up to $25 million plus reimbursement of certain JBS expenses in connection with the termination of the MIPA.  Under other circumstances, JBS could be required to pay the Sellers in connection with the termination of the MIPA a termination fee of up to $25 million plus reimbursement of certain expenses incurred by NBP and the Sellers.

Although it is expected that the proposed transaction will result in benefits to JBS, which will include NBP, JBS may not realize those benefits because of integration and other challenges.

The failure of JBS to meet the challenges involved in integrating the operations of JBS and NBP successfully or otherwise to realize any of the anticipated benefits of the proposed transaction could seriously harm the results of operations of JBS and NBP.  Realizing the benefits of the proposed transaction will depend in part on the integration of operations and personnel. The integration of companies is a complex and time-consuming process that, without proper planning and implementation, could significantly disrupt the businesses of JBS and NBP.  The challenges involved in integration include the following:

• difficulties in integrating operations, existing contracts, accounting processes and employees and realizing the anticipated synergies of the combined businesses;

• diversion of financial and management resources from existing operations;

• the price JBS pays or other resources that it devotes may exceed the value it realizes, or the value it could have realized if it had allocated the purchase price or other resources to another opportunity;

• potential loss of key employees, customers and strategic alliances from either JBS’s current business or the business of NBP;

• assumption of unanticipated problems or latent liabilities; and

• minimizing the diversion of management attention from ongoing business concerns.

JBS may not successfully integrate the operations of JBS and NBP in a timely manner, or at all, and as a result JBS and NBP may not realize the anticipated benefits or synergies of the proposed transaction to the extent, or in the timeframe, anticipated. The anticipated benefits and synergies are based on projections and assumptions, not actual experience, and assume a successful integration. In addition to the integration risks discussed above, the ability of JBS and NBP to realize these benefits and synergies could be adversely impacted by practical constraints on its ability to combine operations. 

JBS will continue to be controlled by its current controlling shareholders, whose interests may differ from those of NBP.

As of the date of this report, JBS’s controlling shareholders hold a majority of the voting share capital.  After the closing of the proposed transaction, JBS’s current controlling shareholders are anticipated to hold or control shares representing a majority of JBS’s voting share capital.  As long as JBS’s current controlling shareholders continue to hold or control a significant block of voting rights, they will control JBS and NBP, and this will enable them, without the consent of the other JBS shareholders, to:

• elect and remove from office the majority of JBS’s board of directors;

• control JBS’s management and policies; and

• determine the outcome of most corporate transactions or other matters submitted to JBS’s shareholders for approval, including mergers, acquisitions, and the sale of all or substantially all of JBS’s assets or the delisting of JBS common shares from the Novo Mercado.

JBS’s current controlling shareholders may also have their own interests, which may not be the same as those of NBP.

Risks Related to NBP’s Operations

Outbreaks of disease affecting livestock can adversely affect NBP’s business.

An outbreak of disease affecting livestock, such as BSE or foot-and-mouth disease, could result in restrictions on sales of products to NBP’s customers or purchases of livestock from its suppliers. Also, outbreaks of these diseases or concerns of such disease, whether or not resulting in regulatory action, can lead to cancellation of orders by NBP’s customers and create adverse publicity that may have a material adverse effect on consumer demand and, as a result, on its results of operations. Furthermore, an outbreak of disease could lead to widespread destruction of cattle, which could have a negative impact on NBP.

If NBP’s products become contaminated, it may be subject to product liability claims and product recalls that would adversely affect its business.

NBP may be subject to significant liability if the consumption of any of its products causes injury, illness or death and it may in the future recall products in the event of contamination or damage.  Contamination of NBP’s products also may create adverse publicity that could negatively affect its business.  NBP may encounter the same risks of contamination or negative publicity if a third party tampers with its products.  The occurrence of any of these risks may increase NBP’s costs and decrease demand for its products.  Organisms producing food borne illnesses are generally found in the environment and there is a risk that as a result of food processing they could be present in NBP’s products.  For example, E. coli 0157:H7 is one of many food borne bacteria commonly associated with beef products. Once contaminated products have been shipped for distribution and consumption, illness or death may result if the pathogens are present, increase due to handling or temperatures, and are not otherwise eliminated at the further processing, food service or consumer level.

If the products of NBP’s competitors become contaminated, the beef industry may be subject to adverse publicity, which could negatively affect its business.

If the products of NBP’s competitors, in the United States or elsewhere, become contaminated, the beef industry may face adverse publicity. Any such adverse publicity could result in consumers lowering their demand for NBP’s beef products, which may negatively affect its business, financial condition, results of operations and cash flows.

NBP’s substantial debt could adversely affect its business.

NBP has a significant amount of debt.  As of August 25, 2007,30, 2008, NBP had $438.8$377.8 million of long-term debt, $3.4$3.6 million of which was classified as a current liability.  As of August 25, 2007,30, 2008, NBP’s amended and restated credit facility consists of a $202.6 million term loan, all of which was outstanding, and a $200.0 million revolving line of credit loan, which had outstanding borrowings of $38.4$11.4 million, outstanding letters of credit of $52.4$45.2 million and available borrowings of $109.2$143.4 million, based on the most restrictive financial covenant calculations.  In addition to outstanding borrowings on its amended and restated credit facility, NBP had outstanding borrowings under industrial revenue bonds of $20.7 million, Senior Notessenior notes of $160.0$129.4 million and capital leases and other obligations of $17.1$13.7 million as of August 25, 2007.30, 2008.  See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

NBP’s substantial debt could:

• make it difficult for NBP to satisfy its obligations, including making interest payments on its debt obligations;

• limit NBP’s ability to obtain additional financing to operate its business;

• require NBP to dedicate a substantial portion of its cash flow to payments on its debt, reducing its ability to use its cash flow to fund working capital, capital expenditures and other general operational requirements;

• limit NBP’s flexibility to plan for and react to changes in its business and the beef processing industry;

• place NBP at a competitive disadvantage relative to some of its competitors that have less debt; and

• increase NBP’s vulnerability to general adverse economic and industry conditions, including changes in interest rates, changes in cattle prices or a downturn in NBP’s business or the economy.

The occurrence of any one of these events could have a material adverse effect on NBP’s business, financial condition and results of operations.

Despite NBP’s current levels of debt, it may still incur significantly more debt, which could intensify the risks described above.

NBP may incur significant additional debt in the future. The terms of the indenture governing NBP’s Senior Notes permit it to incur additional debt in the future and its sixth amended and restated credit facility permits additional borrowings under certain circumstances. As of August 25, 2007,30, 2008, NBP had approximately $109.2$143.4 million of availability under the most restrictive financial covenant calculations in its amended and restated credit facility. NBP may borrow to fund its capital expenditures and working capital needs. NBP also may incur additional debt to finance future acquisitions.

Restrictive covenants under NBP’s amended and restated credit facility and the indenture may limit NBP’s ability to operate its business.

NBP’s amended and restated credit facility and the indenture governing its Senior Notes, contain, among other things, restrictive covenants that will limit NBP’s and its subsidiaries’ ability to finance future operations or capital needs or to engage in other business activities. The indenture and NBP’s amended and restated credit facility restrict, among other things, NBP’s ability and the ability of its subsidiaries to:

• incur additional indebtedness or issue guarantees;

• create liens on NBP’s assets;

• make distributions on or redeem equity interests;

• make investments or acquisitions;

• make restricted payments;

• create or permit restrictions on the ability of NBP’s restricted subsidiaries to pay dividends or make other distributions to NBP;

• issue or distribute capital stock of NBP’s subsidiaries;

• enter into transactions with affiliates;

• enter into sale and leaseback transactions;

• engage in unrelated business activities;

• transfer or sell assets; and

• engage in mergers, consolidations or sell substantially all of NBP’s assets.

In addition, NBP’s amended and restated credit facility requires it to meet specified financial ratios and tests under certain circumstances. These ratios and tests could have an adverse effect on NBP’s business by limiting its ability to take advantage of financing, merger and acquisition or other corporate opportunities and to fund its operations. Events beyond NBP’s control, including changes in general business and economic conditions, may affect its ability to meet those financial ratios and tests. Any future debt could also contain financial and other covenants more restrictive than those imposed under the indenture governing NBP’s Senior Notes or NBP’s amended and restated credit facility.

NBP may not meet those ratios and tests and its lenders may not waive any failure to meet those ratios and tests. A breach of any of those covenants or failure to maintain such ratios would result in a default under NBP’s amended and restated credit facility and any resulting acceleration under the amended and restated credit facility may result in a default under the indenture governing NBP’s Senior Notes. If an event of default under NBP’s amended and restated credit facility occurs, the lenders could elect to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable which would result in an event of default under NBP’s Senior Notes. NBP’s assets or cash flow may not be sufficient to repay in full its outstanding debt, including the Senior Notes.

NBP may be unable to generate sufficient cash flow to service its debt, which could adversely affect its financial condition and results of operations.

To service its debt, NBP will require a significant amount of cash. If NBP’s cash flow and capital resources are insufficient to fund its debt service obligations, it may be forced to reduce or delay capital expenditures, sell material assets or operations, obtain additional capital or restructure debt.  NBP’s ability to generate cash, make scheduled payments or to refinance its obligations depends on its successful financial and operating performance. NBP’s financial and operating performance, cash flow and capital resources depend upon prevailing economic conditions and certain financial, business and other factors, many of which are beyond its control. These factors include among others:

• economic, industry and competitive conditions;

• operating difficulties, increased operating costs or pricing pressures NBP may experience; and

• delays in implementing any strategic projects.

NBP’s margins may be negatively impacted by fluctuating raw material costs and selling prices and other factors that are outside of NBP’s control.

NBP’s margins are dependent on the price at which its beef products can be sold and the price it pays for raw materials, among other factors. These prices can vary significantly over a relatively short period of time as a result of a number of factors, including the relative supply and demand for live cattle and beef products, as well as the market for competing or complimentary products, such as pork and poultry. In addition, closure of international markets to U.S. beef product exports as a result of the December 23, 2003 BSE discovery negatively affected U.S. beef product margins, as certain by-products, classified as SRMs, have been banned from use in feedstocks and the human food chain.  Some of these products previously enjoyed a market in foreign countries.

The supply and market price of the livestock that constitute NBP’s principal raw material and represent the substantial majority of its cost of goods sold are dependent upon a variety of factors over which NBP has little or no control, including fluctuations in the size of herds maintained by producers, the relative cost of feed, weather and livestock diseases.  Additionally, the closure of the U.S. border to Canadian livestock from May 2003 until July 2005 constrained the supply of cattle in the U.S. which resulted in higher overall fed cattle prices in the U.S. compared to Canada, and the closure prompted Canada to increase its processing capabilities, which may also have an adverse impact on NBP’s future margins.

Severe price swings in raw materials, and the resulting impact on the prices NBP charges for its products, have at times had, and may in the future have, a material adverse effect on its financial condition, results of operations and cash flows. If NBP experiences increased costs, it may not be able to pass them along to its customers.

NBP generally does not have long-term contracts with its customers, and, as a result, the prices at which it sells beef products are subject to market forces.

Other than NBP’s existing arrangements with APC, Inc. and the United States military, NBP generally does not have long-term sales arrangements with its customers and, as a result, the prices at which it sells products to them are determined in large part by market forces. NBP’s customers, including those with which it has long-term contracts, place orders for products on an as-needed basis and, as a result, their order levels have varied from period to period in the past and may vary significantly in the future. The loss of one or more of NBP’s key customers, a significant decline in the number of orders from one or more of its key customers or a significant decrease in beef product prices for a sustained period of time could have a material adverse effect on NBP’s business, financial condition or results of operations.

Wal-Mart’s failure to continue purchasing from NBP could have a material adverse effect on NBP’s sales.

Sales to Wal-Mart Stores, Inc., or Wal-Mart, which does not cover NBP’s sales to Wal-Mart’s affiliate, Sam’s Club, represented approximately 4.1%4.9% of NBP’s total net sales in fiscal year 2007.2008.  NBP’s agreement with Wal-Mart expired on January 31, 2004, and it has not entered into a new agreement.  If Wal-Mart does not continue to purchase from NBP, it could have a material adverse effect on its sales, financial position, results of operations and cash flows.

NBP is subject to extensive governmental regulation and NBP’s noncompliance with or changes in applicable requirements could adversely affect its business, financial condition, results of operations and cash flows.

NBP’s operations are subject to extensive regulation and oversight by the USDA, the GIPSA, the FDA, and other state, local and foreign authorities regarding the processing, packaging, storage, distribution, advertising and labeling of NBP’s products, including food safety standards. Recently, the food safety practices and procedures in the meat processing industry have been subject to more intense scrutiny and oversight by the USDA. NBP is also subject to a variety of environmental laws and regulations, including those relating to wastewater and storm water discharges, air emissions, waste handling and disposal, and remediation of soil and groundwater contamination that are administered by the EPA, state, local and other authorities. In addition, NBP is subject to a variety of immigration laws and regulations, including those relating to the hiring and retention of employees.  NBP’s failure to comply with applicable laws and regulations could subject it to administrative penalties and injunctive relief, civil remedies, including fines, injunctions, interruption of NBP’s operations, recalls of NBP’s products or seizures of NBP’s properties, as well as potential criminal sanctions or personal injury or other damage claims. These remedies, changes in the applicable laws and regulations or discovery of currently unknown conditions could increase NBP’s costs and limit its business operations.

Compliance with environmental regulations may result in significant costs and failure to comply with environmental regulations may result in civil as well as criminal penalties, liability for damages and negative publicity.

NBP’s operations are subject to extensive and increasingly stringent regulations pertaining to the discharge of materials into the environment and the handling and disposition of wastes. Failure to comply with these regulations can have serious consequences for NBP, including criminal as well as civil and administrative penalties and negative publicity. NBP has incurred and will continue to incur significant capital and operating expenditures to avoid violations of these laws and regulations. Additional environmental requirements imposed in the future could require currently unanticipated investigations, assessments or expenditures, and may require NBP to incur significant additional costs. Because the nature of these potential future charges is unknown, NBP management is not able to estimate the magnitude of any future costs and NBP has not accrued any reserve for any potential future costs.

Some of NBP’s facilities have been in operation for many years. During that time, NBP and previous owners of these facilities have generated and disposed of wastes that are or may be considered hazardous or may have polluted the soil or groundwater at NBP’s facilities, including adjacent properties. The discovery of previously unknown contamination of property underlying or in the vicinity of NBP’s present or former properties or manufacturing facilities and/or waste disposal sites could require NBP to incur material unforeseen expenses. Occurrences of any of these events may have a material adverse effect on NBP’s business, financial condition, results of operations and cash flows.

NBP’s international operations expose NBP to political and economic risks in foreign countries, as well as to risks related to currency fluctuations.

In fiscal year 2007,2008, exports, primarily to Mexico, China, Mexico, Japan, South Korea, Canada, Hong Kong, Egypt, and Taiwan, accounted for approximately 9.8%12% of NBP’s total net sales. NBP’s international activities expose it to risks not faced by companies that limit themselves to the domestic market. One significant risk is that the international operations may be affected by tariffs, other trade protection or food safety measures and import or export licensing requirements. 

An example of a risk related to ourNBP’s international operations is BSE, as discussed above in Item 1,1. Business. 

Other risks associated with NBP’s international activities include:

• changes in foreign currency exchange rates and hyperinflation or deflation in the foreign countries in which NBP operates;

• exchange controls;

• changes in a specific country’s or region’s political or economic conditions, particularly in emerging markets;

• potentially negative consequences from changes in regulatory requirements; and

• international conflict, including terrorist acts, which could significantly impact NBP’s financial condition and results of operations.

The occurrence of any of these events could increase NBP’s costs, lower demand for NBP’s products or limit NBP’s operations, which could have a material adverse effect on its business, financial condition, results of operations or prospects.

Failure to successfully implement NBP’s business strategy may impede its plans to increase revenues, margins and cash flow.

NBP’s revenues, margins and cash flows will not increase as planned if it fails to implement the key elements of its strategy, and NBP’s ability to successfully implement this strategy is dependent at least in part on factors beyond its control. For example, the willingness of consumers to purchase value-added products depends in part on economic conditions. In periods of economic uncertainty, consumers tend to purchase more private label or less-expensive products. Thus, if NBP encounters periods of economic uncertainty, the sales volume for its value-added products could suffer. Also, NBP may not be successful in identifying favorable international expansion opportunities.

Changes in consumer preferences could adversely affect NBP’s business.

The food industry in general is subject to changing consumer trends, demands and preferences. NBP’s products compete with other protein sources, such as pork and poultry, and other foods. Trends within the food industry change often and NBP’s failure to anticipate, identify or react to changes in these trends could lead to, among other things, reduced demand and price reductions for NBP’s products, and could have a material adverse effect on NBP’s business, financial condition, results of operations and cash flows. In addition, NBP does not have any other material lines of business or other sources of revenue to rely upon if it is unable to efficiently process and sell beef products or if the market for beef declines. This lack of diversification means that NBP may not be able to adapt to changing market conditions or withstand any significant decline in the beef industry.

The beef processing industry is highly competitive and NBP’s customers may not continue to purchase NBP’s products.

The beef processing industry is highly competitive. Competition exists both in the purchase of live cattle and in the sale of beef products. In addition, NBP’s products compete with a number of other protein sources, including pork and poultry.

NBP’s principal competition arises from other beef processors, including Tyson Foods, Inc., Cargill Meat Solutions, and JBS - Swift & Company and Smithfield Foods, Inc.Company. The principal competitive factors in the beef processing industry are price, quality, food safety, product distribution, technological innovations and brand loyalty. NBP’s ability to be an effective competitor will depend on its ability to compete on the basis of these characteristics. Some of NBP’s competitors have greater financial and other resources and enjoy wider recognition for their consumer branded products. NBP cannot provide certainty that it will be able to compete effectively with these companies and its ability to compete could be adversely affected by its significant debt levels.

The sales of NBP’s beef products are subject to seasonal variations and, as a result, NBP’s quarterly operating results may fluctuate.

The beef industry is characterized by prices that change based on seasonal consumption patterns. The highest period of demand for NBP’s products is usually the summer barbecue season. As a result of these seasonal fluctuations, NBP’s operating results may vary substantially between fiscal quarters.

NBP depends on the service of key individuals, the loss of which could materially harm NBP’s business.

NBP’s success will depend, in part, on the efforts of NBP’s executive officers and other key employees. In addition, the market for qualified personnel is competitive and NBP’s future success will depend on its ability to attract and retain these personnel. NBP does not have long-term employment agreements with some of its executive officers, and does not maintain key-person insurance for some of its other officers, employees or members of NBP’s board of managers. NBP may not be able to negotiate the terms of renewals of any existing long-term employment agreements on terms favorable to NBP or at all. The loss of the services of any of its key employees or the failure to attract and retain employees could have a material adverse effect on NBP’s business, results of operations and financial condition.

NBP’s performance depends on favorable labor relations with its employees. Any deterioration of those relations or increase in labor costs could adversely affect NBP’s business.

NBP has approximately 8,8008,900 employees worldwide. Approximately 2,7002,800 employees at NBP’s Liberal, Kansas facility are represented by the United Food and Commercial Workers International Union under a collective bargaining agreement that expires on December 16, 2007.2012. Approximately 1,000 employees at NBP’s Brawley, California facility are jointly represented by the United Food and Commercial Workers International Union and Teamsters International Union under a collective bargaining agreement that expires on May 31, 2008.December 8, 2013.  A labor-related work stoppage by these unionized employees could limit NBP’s ability to process and ship its products or increase its costs, which could adversely affect NBP’s results of operations and financial condition. In addition, it is possible that any labor union efforts to organize employees at NBP’s non-unionized facilities might be successful and that any labor-related work stoppages at these non-unionized facilities in the future could adversely affect its results of operations and financial condition. In general, any significant increase in labor costs, deterioration of employee relations, slowdowns or work stoppages at any of NBP’s locations, whether due to union activities, employee turnover or otherwise, could have a material adverse effect on its business, financial condition, results of operations and cash flows.

The consolidation of NBP’s retail and foodservice customers may put pressure on its operating margins.

In recent years, the trend among NBP’s retail and foodservice customers, such as supermarkets, warehouse clubs and foodservice distributors, has been towards consolidation. These consolidations, along with the entry of mass merchants into the grocery industry, have resulted in customers with increasing negotiating strength who tend to exert pressure on NBP with respect to pricing terms, product quality and new products. As the customer base continues to consolidate, competition for the business of fewer customers is expected to intensify. If NBP does not negotiate favorable terms of sale with its customers and implement appropriate pricing to respond to these trends, or if NBP loses its existing large customers, its profitability could decrease.

NBP may not be able to successfully integrate existing and future acquisitions, which could result in it not achieving the expected benefits of the acquisition, the disruption of NBP’s business and an increase in NBP’s costs.

NBP continually explores opportunities to acquire related businesses, some of which could be material to it. NBP’s ability to continue to grow may depend upon identifying and successfully acquiring attractive companies, effectively integrating these companies, achieving cost efficiencies and managing these businesses as part of NBP.  For example, effective May 30, 2006, NBP, along with its majority owner, U.S. Premium Beef, acquired substantially all the assets of Brawley Beef, LLC (Brawley Beef).  Brawley Beef operated a beef processing facility in Brawley, California, producing upscale custom cuts for sale to retail customers.  Additionally, NBP acquired Vintage Foods, L.P., including the Vintage™ Natural Beef brand, during fiscal year 2006.  The Vintage brand is marketed as natural beef that is antibiotic- and hormone-free, from cattle that are 20 months of age and younger. 

NBP may not be able to effectively integrate acquired companies and successfully implement appropriate operational, financial and management systems and controls to achieve the benefits expected to result from these acquisitions. NBP’s efforts to integrate these businesses could be affected by a number of factors beyond its control, such as regulatory developments, general economic conditions and increased competition. In addition, the process of integrating these businesses could cause the interruption of, or loss of momentum in, the activities of NBP’s existing business. The diversion of management’s attention and any delays or difficulties encountered in connection with the integration of these businesses could negatively impact NBP’s business and results of operations. Further, the benefits that NBP anticipates from acquisitions may not develop.

Risk Factors Associated with USPB

USPB delivers allfacilitates the delivery of the cattle provided by its unitholders and associates to National Beef Packing Company, LLCNBP and does not have arrangements for alternative markets for its unitholders and associates cattle.

USPB’s sole customer for the cattle provided by USPB’sits unitholders and associates is National Beef Packing Company, LLC.NBP.  Given USPB’s ownership of a majority interest in NBP, USPB has not developed alternative customers for the cattle provided by USPB’s unitholders and associates.  If events were to occur which would prevent NBP from purchasing and processing the cattle supplied by USPB’s unitholders and associates, USPB would need to exercise provisions in its agreements with both NBP and USPB’s unitholders that would permit USPB to reduce the number of cattle acquired from unitholders and sold to NBP.  While such provisions would mitigate harm to USPB, it is likely that the value of the linked Class A and Class B linked units and the associated delivery rights held by USPB’s unitholders would be impaired.

The other members of National Beef Packing Company, LLCNBP do not deliver cattle to NBP for processing, creating the possibility that the interests of those other members of NBP could conflict with the interests of USPB and its unitholders. 

The other members of NBP do not deliver cattle to NBP for processing and marketing.  As a result, conflicts of interest may arise between USPB and NBP relating to cattle purchases.  If a dispute were to arise, the settlement of any such dispute may not be on terms as favorable to USPB as would be expected if all of the members of NBP were involved in the delivery of cattle to NBP for processing. 

The restructuring of the cooperative was a taxable event for both the cooperative and its shareholders.

The restructuring of the cooperative to become an LLC was a taxable event for both the cooperative and its shareholders. The tax consequences to the cooperative depended on the value of its assets and apportionment of the value among specific assets, both of which involved risks described in the following risk factors.

The shareholders recognized gain or loss depending on when and how their shares in the cooperative were acquired. The amount depended on the value of the cooperative's assets, net of liabilities, and customary discounts allowed, both of which involved valuation risks described in the following risk factors. The taxable gain or loss that was recognized depended on whether the value of the Class A and Class B linked units received in the restructuring for those shares was greater or less than the tax basis in the common stock of the cooperative. If the shares were purchased in the cooperative's initial stock offerings, they had a gain on this portion of the restructuring. Values were subject to closing date adjustments and the possibility of future challenges by the Internal Revenue Service.

The intended tax treatment of the restructuring is subject to the possibility of future challenges by the Internal Revenue Service could assert that could have adverse consequences for the Company,USPB should be treated as the successor to the cooperative's obligations, and to the unitholders.

The board of directors and senior management relied on an appraisal that is not binding on the Internal Revenue Service.

In evaluating the tax consequences of the restructuring, USPB has relied, in part, on the appraisal prepared by American Appraisal Associates. Their appraisal is not binding on the Internal Revenue Service. There is a risk that the Internal Revenue Service might determine that the Company or the cooperative’s shareholders at the point of restructuring must recognize additional taxable income or gaincorporation for federal income tax purposes.

The Internal Revenue Service could also challenge other aspects of the restructuring that could materially adversely affect the LLC and its unitholders.

In addition to challenging the overall valuation of the cooperative and the LLC units received in the restructuring, the Internal Revenue Service might also challenge:

• the cooperative's apportionment of values to specific assets and the treatment of the resulting gains or losses as capital gain or loss or ordinary income or loss;

• the treatment of the restructuringUnder applicable regulations, an unincorporated entity such as a constructive distribution of specific assets rather than as a distribution of interests in the LLC. There are anti-netting rules that may become operative if these challenges are mounted by the IRS. Specifically, the cooperative's capital losses cannot be offset against any income other than capital gains and, likewise, patronage losses cannot be offset against  nonpatronage income or gain; and

• the tax treatment of the cooperative's patronage notices that became obligations of the LLClimited liability company is uncertain and the IRS could challenge the intended treatment of the patronage notices in calculating the shareholders' gain or loss on the restructuring.

If the Internal Revenue Service challenges the transaction on any of these grounds, it could materially adversely affect the LLC and subject the unitholders and the LLC, as successor to the cooperative's obligations, to additional tax liability.

The Internal Revenue Service could also challenge post-restructuring tax reporting positions to be taken by the LLC that could materially adversely affect the LLC unitholders.

USPB believes that the LLC will be treated as a partnership for federal income tax purposes. This meanspurposes unless the entity is considered a “publicly traded partnership” or the entity affirmatively elects to be taxed as a corporation.  USPB has not elected to be taxed as a corporation, and USPB believes that the LLC will pay no federal or state income tax and unitholders will pay tax on their share of the LLC's net income. However, the LLC would becomeit should be treated as a partnership not taxable as a corporation if it elects corporatefor federal income tax status or if it is treatedpurposes.  USPB has not requested and will not request any ruling from the IRS, however, with respect to its classification as a publicly traded partnership becausefor federal income tax purposes.  If the IRS were to assert successfully that USPB were taxable as a corporation for federal income tax purposes in any taxable year, holders of the manner in whichlinked Class A units and Class B units are transferred. The LLC'swould not be required to report on their federal income tax returns their allocable share of USPB’s items of income, gain, deduction, and loss for that year and USPB would be subject to tax on its net income for that year at corporate tax rates.  In addition, any distributions would be taxable income each year will dependto holders of linked Class A units and Class B units as dividend income.  Taxation of USPB as a corporation could materially reduce the after−tax return on an investment in part onunits and could substantially reduce the depreciation, amortization and other cost recovery of the tax basis of its assets. The LLC's initial aggregate basis was based on the fair market value of assets deemed to be received by the unitholders in the restructuring. However, the method of apportioning basis to specific LLC assets is uncertain, and the IRS could challenge the apportionment of basis to specific assets so as to increase the allocation to longer lived assets or assets that cannot be depreciated or amortized. This generally would defer the timing of some of the LLC's depreciation, amortization or other cost recovery deductions. The patronage notices for which the LLC became obligated in the restructuring are expected to have a face value substantially in excess of their negative present value that was used in valuing the liquidating distribution deemed to be received by the shareholders. It is expected that capital loss deduction will be available to the LLC, and therefore to its unitholders, when cumulative payments made by the LLC to the holders of the patronage notices exceed their restructuring date negative present value. Because of the lack of controlling legal authority on this issue, the IRS could challenge the capital loss deduction. Also, limitations on the deductibility of capital losses could reduce or eliminate the benefit of the deduction.your units.

Failure to achieve and maintain effective internal controls could have a material adverse effect on USPB’s business, operating results and financial condition.

The CompanyUSPB is in the process of documenting and testing its internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the effectiveness of its internal controls over financial reporting and a report by its independent auditors addressing these assessments. This process is both costly and challenging.  During the course of testing, the CompanyUSPB may identify deficiencies which it may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, if the CompanyUSPB fails to achieve and maintain the adequacy of its internal controls, as such standards are modified, supplemented or amended from time to time, it may not be able to ensure that it can conclude on an ongoing basis that it has effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover, effective internal controls are necessary for the CompanyUSPB to produce reliable financial reports and are important to helping prevent financial fraud.  If the CompanyUSPB cannot provide reliable financial reports or prevent fraud, its business and operating results could be harmed, investors could lose confidence in its reported financial information, and its business, results of operation and financial condition could be adversely affected. 

The provisions of the 2007 Farm Bill could negatively impact USPB’s business and its unitholders.

The United States Senate and House of Representatives are finalizing the 2007 Farm Bill.  If enacted, several key pieces of potential legislation could negatively impact USPB’s business and its unitholders.   Proposed Senate amendments, if approved, would potentially restrict value-added marketing arrangements and could bring USPB and its unitholders under expansive new federal regulation.

USPB depends on the service of key senior management personnel, the loss of which could materially harm its business.

USPB’s success will depend, in part, on the efforts of its key senior management personnel. The market for qualified personnel is competitive and USPB’s future success will depend on its ability to attract and retain these personnel. USPB does not have long-term employment agreements with most of its senior management. USPB may not be able to negotiate either new contracts or renewals of any existing long-term employment agreements on terms favorable to USPB or at all. The loss of the services of any of USPB’s key senior management personnel or the failure to attract and retain highly skilled personnel in the future could have a material adverse effect on ourUSPB’s business, results of operations and financial condition.

ITEM 1B.               UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2.                  PROPERTIES

USPB’s corporate office is located at 12200 Ambassador Drive, Suite 501, Kansas City, Missouri, in proximity to the corporate offices of NBP.  The Company leases its office space from the Kansas City Aviation Department, with offices at 601 Brasilia Avenue, Kansas City, Missouri 64153.

NBP owns its Dodge City, Kansas;Kansas, Liberal, Kansas;Kansas, Brawley, California;California and Hummels Wharf, Pennsylvania facilities. ItNBP leases its headquarters facility in Kansas City, Missouri, its Kansas City Steak Company processing facility in Kansas City, Kansas and its case-ready facility in Moultrie, Georgia. NBP also leaseslease its offices in Chicago, Illinois;Illinois, Salt Lake City, Utah;Utah, Denison, Iowa;Iowa, Dallas, Texas; Perkins, Oklahoma;Texas, Springdale, Arkansas, Tokyo, Japan, Seoul, South Korea, and Beijing, China.  NBP’s amended and restated credit facility is secured by a first priority lien on substantially all of its assets.  The facility locations and approximate daily processing levels are shown in the table below:

ITEM 3.                  LEGAL PROCEEDINGS

For information regarding legal proceedings, see Note 13. Legal Proceedings to our consolidated financial statements included in Item 8 of this report.

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

No matters were submitted to a vote of the unitholders during the last quarter of the fiscal year covered by this report.

PART II

ITEM 5.                 MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

There is no established public trading market for any class of common equity of U.S. Premium Beef, LLC.  As of October 27, 2007,25, 2008, there were 441452 record holders of linked Class A and Class B units.  The sales prices by quarter and since the end of the fiscal year were as follows:

 The affiliated sales represent sales that were not at arms length and, therefore, the sales price ranges disclosed above are not necessarily indicative of the market value of the linked Class A and Class B units during the periods in question. 

On February 20, 2007 and February 26, 2007, USPB made cash distributions to each of its unitholders in the amount of $1.17 and $1.20, respectively, for theeach linked combination of each Class A unit and Class B unit held by its unitholders. 

On September 23, 2005, USPB made a cash distribution to each of its unitholders in the amount of $1.73 for the linked combination of each Class A unit and Class B unit held by its unitholders. 

The payment of cash distributions are made only from assets legally available for that purpose and depend on the Company’s financial condition, results of operations, and other factors then deemed relevant by USPB’s board of directors.  Cash distributions are paid to the holders of linked Class A and Class B units at the discretion of the board of directors and to the extent permitted by USPB’s senior lenders.  See Item 1312. Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters.

ITEM 6.                  SELECTED FINANCIAL DATA

The following table sets forth selected consolidated financial and other data for, and as of the end of, each of the years in the five-year period ended August 25, 2007.30, 2008.  The selected data should be read in conjunction with the consolidated financial statements for the fiscal year ended August 25, 2007,30, 2008, the related notes and the independent auditors’ report.

As described in Item 1, Business, USPB acquired a controlling interest in NBP on August 6, 2003 and since that date has consolidated the results of NBP in its consolidated financial statements.  As a result of the acquisition of a controlling interest in NBP, the financial position and operating results after the Acquisition are not comparable with those before the Acquisition.

Historical per share data has been omitted because, under the cooperative structure, earnings of the cooperative are distributed as patronage dividends to membersshareholders and associate members based on the level of business conducted with the cooperative as opposed to common stockholder’sshareholder’s proportionate share of underlying equity in the cooperative. Pro forma per unit data has been included below because as an LLC, the restructured entity will, beginning in September 2004, make distributions to its unitholders based on their proportionate share of the underlying equity in the linked Class A and Class B linked units, 33% and 67%, respectively, as opposed to the level of business conducted with the LLC. The pro forma per unit data gives effect to the exchange of one Class A unit and one Class B unit of the newly formed LLC for each share of common stock of the cooperative, effective August 29, 2004. Class A units and Class B units shall be issued, redeemed, and transferred together on a one for one basis until the board of directors determines the extent and conditions under which linked Class A units and Class B linked units may be issued, redeemed, and transferred separately.

The following table should be read in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data (including the accompanying notes) contained elsewhere in this report.