UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

or

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)

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

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. Yesþ  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. Yesxþ Noo

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'sregistrant’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.xþ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, (as definedor a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). YesAct.

Large Accelerated Filer o       NoAccelerated Filer  xo       Non-Accelerated Filer  þ

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

The Registrant'sRegistrant’s equity is not traded on any exchange or other public market; however, there have been private transactions. The aggregate value of the interest held by non-affiliates approximates $47.3$75.3 million, based on the weighted average of the last sales approved. As of November 21, 2005,October 28, 2006, there were 691,845735,505 Class A units and 691,845735,505 Class B units outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        None

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     The close proximity of NBP'sNBP’s facilities to large supplies of cattle encourages its suppliers to tailor their production decisions to efficiently meet the demands of NBP'sNBP’s customers, reduces NBP'sNBP’s reliance on any one cattle supplier and lowers transportation costs. In FYE 2005,2006, excluding NBP'sNBP’s supply arrangement with USPB, NBP'sNBP’s largest supplier accounted for 5.7%5.6% of total purchases and NBP'sNBP’s top 25 suppliers accounted for 39.7%39.3% 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 States military and through other channels. In FYE 2005,2006, approximately 55%65% of NBP'sNBP’s total net sales were to retailers and 30%20% to food service providers. Across these channels, NBP serves over 800900 customers, which represent most major retailers and food service providers in the U.S. In FYE 2005,2006, no one customer represented more than 3.7%3.0% of total net sales, other than Wal-Mart and its affiliate Sam'sSam’s Club, which together represented 7.0%7.9% of NBP'sNBP’s total net sales. NBP'sNBP’s top 10 customers represented 29.2%29.8% of total net sales in FYE 2005.2006.

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Experienced Management.NBP is led by an experienced management team with, on average, over 2021 years of experience in the beef processing industry. John R. Miller, Chief Executive Officer, has over 25 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 1415 years in developing NBP into a profitable and premium supplier of beef products.

Description of Business Segments

NBP reports in two business segments:  Core Beef and Other. NBP measures segment profit as operating income.

Core Beef

Products, Sales and Marketing

The majority of NBP's revenues are generated from the sale of fresh meat either as a boxed beef product or a case-ready product. These products accounted for approximately 89% of its revenues in FYE 2005. In addition, NBP sells beef by-products to a variety of meat, feed processing, fertilizer and pet food industries. NBP also sells cattle hides to tanners, who primarily supply the clothing and automotive industries for both domestic and international use. NBP emphasizes the sale of higher-margin, branded beef products, and markets these products under several brand names, including National Black Angus Beef™, Black Canyon® Angus Beef, Certified Premium Beef™ and Naturewell® Natural Beef.  Also part of our value-added product line is Certified Angus Beef®, a registered trademark (used with permission) of Certified Angus Beef, LLC, a wholly-owned subsidiary of the American Angus Beef Association; and Certified Hereford Beef®, a registered trademark (used with permission) of Certified Hereford Beef, LLC.

NBP's focus continues to be adding further processing, specialized cutting, packaging and other value-added components to its products that generate higher profitability. In 2001, NBP opened two state-of-the-art case-ready facilities, which enabled it to expand margins by adding value to the beef it processes. NBP's case-ready operations further process its boxed beef products, as well as third-party pork products, by trimming and cutting these products into individual portions, and in some instances injecting with a solution to tenderize and moisturize the products. These portions are then packaged, oxygenated and sealed in a plastic case to increase the shelf-life of these products by up to five times versus traditional packaging methods.

During FYE 2005, NBP sold its beef products to more than 800 customers located in 25 countries. NBP markets its beef products through several channels, including:

• national and regional retailers, including supermarket chains, independent grocers, club stores and wholesale distributors such as Sam's Club, Royal Ahold, Associated Wholesale Grocers and Sherwood Foods;

• national retailers such as Wal-Mart, who purchase a substantial portion of NBP's case-ready and branded products;

• the food service industry, including food service distributors, hotel chains and other institutional customers such as U.S. Foodservice, Sysco, and MBM Corporation;

• further processors, including Oscar-Mayer and ConAgra; and

• international markets, including China, Mexico, South Korea, Hong Kong and Thailand. Subsequent to the December 23, 2003 discovery of a single case of BSE in Washington state, export beef products are currently limited to boxed beef products from cattle younger than 30 months to Mexico and other limited, smaller foreign markets.  Many international importers, such as Japan and South Korea (who were two of NBP's largest export markets for beef products in FYE 2003), closed their borders to U.S. edible beef products after this report of BSE. Neither Japan nor South Korea has reopened the borders yet to U.S. edible beef products, which has continued to negatively impact NBP's export sales in FYE 2005.

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As of August 27, 2005, NBP's domestic sales team consisted of 26 employees. The sales office for domestic sales is located in NBP's headquarters building in Kansas City, Missouri. The sales team in this office is responsible for selling and coordinating the movement of approximately 39 million pounds of boxed beef products per week to NBP customers nationwide. This centralized sales concept allows NBP to respond quickly to customer requests for pricing and load information. NBP has also integrated the satellite tracking capabilities of refrigerated carriers into its website allowing customers to track shipments in process. While providing significant customer advantages, NBP's centralized sales concept also enables its sales force to share key market intelligence in a manner that allows them to react to changing market conditions in an efficient manner.

The sales office for international sales is located in Chicago, Illinois. This office coordinates all aspects of sales, pricing and shipping to all destinations outside of the United States. NBP also has two satellite offices in Japan and South Korea that assist in the coordination of sales in those regions, historically two of its largest international markets.

NBP's marketing efforts include engaging in business-to-business programming and communications to create preferences for products among its customers. In addition, NBP supports its value-added, branded beef business through in-store merchandising and feature advertising support.

Raw Materials and Procurement

NBP's primary raw material for its processing plants is live cattle. During FYE 2005, NBP obtained approximately 19% of its cattle requirements from U.S. Premium Beef and its owners and associates through the pricing grid process. During FYE 2004 and FYE 2003, NBP obtained approximately 18% and 22% of its cattle requirements from USPB. NBP's arrangement with USPB provides it with a consistent supply of high-quality cattle. For information regarding this agreement, see Item 13. Certain Relationships and Related Transactions and Note 9. Related Party Transactions to USPB's consolidated financial statements in Item 8, both of which are included in this report.  NBP also purchases cattle on a cash bid basis from its primary and secondary markets.  NBP also sponsors other, non-affiliated supplier alliances that provide it with high-quality cattle. NBP believes that it is a first choice processor for suppliers seeking to attain premium pricing for their high-quality cattle and that cattle suppliers view NBP more favorably than its competitors due to its vertically integrated business model, which emphasizes building relationships and cooperating with suppliers and paying a premium for high-quality cattle. During FYE 2005, approximately 1,100 suppliers provided NBP with cattle.

All of NBP's cattle suppliers are required to document the quality of their feedlot operations. Each cattle supplier must verify that its use of antibiotics or other agricultural chemicals follows the manufacturer's intended purpose. They must also confirm that they use only Food and Drug Administration (FDA) approved pharmaceutical compounds and comply with dosage and administrative standards. Furthermore, each cattle supplier must confirm that they do not use feed containing animal based protein products, which have been associated with outbreaks of BSE.  Many of NBP's producers participate in state beef quality assurance training programs and have established certification and verification practices.  These programs emphasize meeting and exceeding the FDA, USDA, Food Safety Inspection Service (FSIS) and U.S. Environmental Protection Agency (EPA) standards for food safety and further protect the nation's beef supply utilizing hazard analysis and critical control point principles.  Using guidelines established by National Cattleman's Beef Association (NCBA), beef safety and quality assurance programs are administered and audited annually by various state beef associations.  State associations certifying NBP's suppliers include, among others, Texas Cattle Feeders Association, Kansas Livestock Association and Nebraska Cattlemen's Association.

Processing Facilities and Operations

NBP operates a total of four beef processing facilities in the United States. NBP's Liberal, Kansas and Dodge City, Kansas facilities are geographically positioned near its suppliers to efficiently source raw materials by reducing transportation costs. Two of NBP's facilities are case-ready facilities that supply beef and pork products to its customers. NBP's case-ready facilities are located in close proximity to key customer markets resulting in decreased delivery times. NBP's case-ready facilities are also located in areas with a highly skilled and cost-effective labor force.   See Item 2. Properties in this report for further information about these facilities.

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Cattle delivered to NBP's facilities are generally processed into beef products within 36 hours after arrival. Approximately 65% of the cattle processed in any week are committed to sale before the cattle are delivered to NBP's facilities. NBP processed in excess of three million fed cattle at its facilities in FYE 2005. NBP's facilities utilize modern, highly automated equipment to process and package beef products. NBP strives to maintain and enhance its facilities and has invested more than $260 million since 1995 to expand capacity and increase efficiency at its facilities. The design of NBP's facilities emphasizes worker safety to ensure compliance with all regulations and to reduce worker injury and turnover.  Additionally, NBP has placed a substantial amount of ammonia piping on the roof versus in the production areas, not in response to regulatory requirements, but in the interest of worker safety.  These and other changes designed the workplace to better fit NBP's employees.  All expansions are reviewed by internal personnel, including NBP's Corporate Environmental Director, Vice President of Safety, Vice President of Technical Services, Vice President of Engineering and Corporate Project Engineer, for regulatory compliance prior to construction.  NBP's facilities are also designed to reduce waste products and emissions and dispose of waste in accordance with applicable environmental standards.

NBP distributes beef products domestically directly from its processing facilities and case-ready facilities. NBP utilizes its subsidiary National Carriers and third party carriers to deliver products to its customers.

Other

Products, Sales and Marketing

NBP also sells beef products through its portion control business, Kansas City Steak Company, in which NBP has an approximate 75% interest. Kansas City Steak Company provides trimmed and cut individual portions both directly to consumers on a branded basis through television outlets (such as the QVC Channel) and direct mail catalogs; and directly to restaurants (such as Outback Steakhouse) and the food service industry on an unbranded basis.  On March 28, 2003, FNB acquired National Carriers, a refrigerated and livestock contract carrier service with terminals in Liberal, Kansas; Dallas, Texas; and Denison, Iowa.  National Carriers currently operates approximately 1,200 refrigerated and livestock units.  NBP contracts a significant portion of its freight services from National Carriers.  For further information regarding this relationship, see Note 8. Related Party Transactions to NBP's consolidated financial statements in Item 8. 

Raw Materials and Procurement

NBP's primary raw material for its portion control processing facility is boxed beef.  Approximately 30% of its boxed beef purchases are made through contractual agreements predetermined by the customer for whom the product is produced.  These contractual agreements are typically one year in duration and stipulate from whom the boxed beef can be purchased. The balance of NBP's raw material is purchased at its discretion on the open market from primary and secondary suppliers with similar quality and yield grade specifications as required under NBP's contracts.   NBP periodically conducts comprehensive cutting tests of potential suppliers' boxed beef to determine composition and quality.

Processing Facilities and Operations

NBP has a portion control facility in Kansas City, Kansas, which processes trimmed and cut individual portions for sale through Kansas City Steak Company.  See Item 2. Properties in this report for further information about this facility. National Carriers has offices located in Liberal, Kansas and Dodge City, Kansas, both of which are within close proximity to NBP's beef processing facilities in those locations, enabling NBP to efficiently transport product by reducing transportation costs.   National Carriers also has an office in Denison, Iowa, and administrative offices located in Kansas City, Missouri.

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Food Safety

NBP remains committed in the area of food safety by continuing to develop activated Lactoferrin through aLF Ventures, LLC, a joint venture NBP founded with DMV USA LP, a subsidiary of Campina Melkunie BV, the Netherlands' largest dairy cooperative. aLF is an activated form of Lactoferrin, a naturally occurring milk protein that has been shown to prevent harmful bacteria from attaching and growing on the surface of beef. In tests conducted at California Polytechnic State University, it was shown that aLF was effective in providing a high level of protection on fresh beef products from more than thirty different strains of harmful bacteria, including E. coli 0157:H7, Salmonella, Campylobacter, radiation-resistant strains and other pathogens.  aLF Ventures, LLC has an exclusive worldwide license to use aLF for food safety purposes on meat, dairy, produce and animal feed products.  aLF Ventures, LLC may not be able to commercially develop aLF into a product capable of achieving future revenues.  NBP has an approximately 24% interest in aLF Ventures, LLC.

NBP's     NBP’s food safety efforts incorporate a comprehensive network of leading technology that minimizes the risks involved in beef processing. NBP'sNBP’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'sNBP’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,“Test, Track and Treat"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 Black Angus Beef™, National Beef®, BioLogic®, Food Safety System, Black Canyon® Angus Beef, Naturewell™Certified Premium Beef™, Naturewell® Natural Beef, NatureSource™ Natural Angus Beef, Vintage™ Natural 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 NBP sells 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'sNBP’s products compete with a large number of other protein sources, including pork and poultry, but NBP'sNBP’s principal competition comes from other beef processors, including Tyson Foods, Inc., Cargill Inc., Swift & Company and Smithfield Foods, Inc. 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'sNBP’s competitors have greater financial and other resources and enjoy wider recognition for their consumer branded products.

Employees

As of August 27, 2005,26, 2006, NBP had approximately 6,7008,300 employees. Approximately 2,700 of NBP'sNBP’s employees at the Liberal, Kansas facility are represented by the United Food and Commercial Workers International Union under a collective bargaining agreement that expiresscheduled to expire on December 16, 2007. 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. NBP considers its relations with its employees and the United Food and Commercial Workers International Union and Teamsters International Union to be good.

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Government Regulation and Environmental Matters

NBP's     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 its 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, require the description and removal of SRMs that are considered to be inedible, and restrict the use of captive bolt stunners that deliberately inject compressed air into the cranium of an animal. NBP continueshas 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.

Wastewater, stormwater, and air discharges from NBP'sNBP’s operations are subject to extensive regulation by the EPA and other state and local authorities. NBP'sNBP’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 permitting consists of a Conditions for Authority to Construct and Permit to Operate, issued November 13, 2002, which is automatically renewed annually unless revoked for cause. 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 has a Compliance Calendar System in place at its Hummels Wharf, Pennsylvania and Moultrie, Georgia facilities.facilities and are developing a Compliance Calendar System for the recently acquired Brawley, California facility. Through the implementation of the ECMS system, NBP has identified violations of the Kansas Air Quality Law and implementing regulations at its Dodge City, Kansas and Liberal, Kansas facilities. NBP has reported these violations to the Kansas Department of Health and Environment (KDHE) and Region VII of the EPA. These violations have been resolved through settlement agreements with KDHE without material costs to the company.  NBP'sNBP. NBP’s Dodge City, Kansas,Kansas; Liberal, Kansas,Kansas; Hummels Wharf, PennsylvaniaPennsylvania; Moultrie, Georgia; and Moultrie, GeorgiaBrawley, California facilities are also subject to risk management planning pursuant to the federal Clean Air Act.

All of NBP'sNBP’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. Agreements are in effect for NBP'sNBP’s Dodge City, Kansas and Moultrie, Georgia facilities that will continue unless amended or revoked pursuant to their terms. NBP is in the process of obtaining an agreement with the City of Brawley for the National Beef California plant. NBP is also in the process of upgrading the treatment facilities at the Brawley plant to provide treatment that consistently meets the requirements of the Brawley City Ordinance. 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. NBP does not expect material costs in the continuation of these agreements and permit. Stormwater discharges from NBP'sthe Hummels Wharf, Pennsylvania and Moultrie, Georgia facilities and for the National Beef California Brawley plant are regulated pursuant to general permits issued by the states of Pennsylvania and Georgia, respectively.  Therespective states. Coverage under the Pennsylvania general permit was renewed on February 1, 2004 and expires on June 30, 2006.  NBP'sJanuary 31, 2009. NBP’s coverage under the Georgia general permit expired on May 31, 2003. The California general permit expired in 2002. The permit has been administratively extended pending issuance of a new permit. According to the California State Water Resources Control Board, the new permit may be issued in December 2006. NBP anticipates coverage for its Moultrie, Georgia facility under a new general permit, which was issued by the Georgia Environmental Protection Division, but has been stayed pending resolution of two appeals of the permit. NBP'sNBP’s coverage is anticipated to begin when the permit becomes final after resolution of the appeals. Thereafter, NBP expects these permits to be reissued by the respective states, and it does not expect material costs in securing coverage under such permits. NBP'sNBP’s Dodge City, Kansas facility has filed a notice of intent to be subject to the Kansas General Permit for Stormwater Discharges when promulgated. ItsNBP’s Liberal, Kansas facility discharges stormwater to the publicly owned treatment works and thus has not been required to file a notice of intent. NBP'sNBP’s Dodge City, Kansas,Kansas; Liberal, KansasKansas; and Hummels Wharf, Pennsylvania facilities are supplied by water from NBP ownits wells. NBP holds public water supply permits for its Dodge City, Kansas and Liberal, Kansas facilities that do not have expiration dates.

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NBP is also 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 it generated have been disposed. NBP'sOur Dodge City, KansasKansas; Liberal, Kansas; Hummels Wharf, Pennsylvania; Moultrie, Georgia; and Liberal, KansasBrawley, 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 theNBP’s Dodge City, Kansas and Liberal, Kansas facilities is disposed of or composted. A special waste permit is maintained by NBP'sNBP’s Dodge City, Kansas facility for the disposal of certain animal parts for which no market currently exists. The solid waste generated at itsNBP’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 National Beef California Brawley plant is composted except that general plant trash is landfilled and usable waste is taken to renderers. NBP is not aware that itis has any actual or potential liability under the Comprehensive Environmental Response, Compensation and Liability Act (Superfund). NBP'sNBP’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's     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 27, 2005,26, 2006, NBP has secured a bond of $25.7$30.0 million to satisfy these requirements. The bond is supported by a $12.5$15.0 million letter of credit.

From time to time NBP receives notices from regulatory authorities and others asserting that NBPit 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 itNBP has provided BICE with all requested information. No fines or penalties have been suggested or discussed.

We believe     NBP believes that weit currently areis in substantial compliance with all governmental laws and regulations and maintainmaintains all material permits (other than the stormwater permit for our Moultrie, Georgia facility discussed previously) and licenses relating to ourits operations. We areNBP 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'sUSPB’s business involves the operation of an integrated cattle processing and beef marketing enterprise in which USPB'sUSPB’s owners and associates supply cattle that are processed at the facilities owned and operated by USPB'sUSPB’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'sUSPB’s owners and associates and other cattle purchased by NBP from other sources. The financial results of NBP'sNBP’s operations therefore are the single largest influence on USPB'sUSPB’s financial performance. Consequently, those factors and risks that impact the performance of NBP'sNBP’s business have a direct and immediate influence on USPB'sUSPB’s performance. However, there are also some risks that are unique to USPB. ThisRisk 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 itself. USPB.

USPB's     USPB’s business operations and the implementation of our business strategiesstrategy are subject to significant risks inherent toin our businesses,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

Outbreaks of disease affecting livestock can adversely affect NBP'sNBP’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'sNBP’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 NBP'sits results of operations. Furthermore, an outbreak of disease could lead to widespread destruction of cattle, which could have a negative impact on NBP.

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If NBP'sNBP’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 NBP'sits 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'sNBP’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'sNBP’s competitors become contaminated, the beef industry may be subject to adverse publicity, which could negatively affect NBP'sits business.

If the products of NBP'sNBP’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'sNBP’s beef products, which may negatively affect its business, financial condition, results of operations and cash flows.

NBP'sNBP’s substantial debt could adversely affect its business.

NBP has a significant amount of debt. As of August 27, 200526, 2006, NBP had $308.8$378.7 million of long-term debt, none$2.4 million of which was classified as a current liability. As of August 27, 2005, NBP's26, 2006, NBP’s fifth amended and restated credit facility consistedconsists of a $120.0$170.0 million term loan, all of which $120.0 million was outstanding, and a $140.0$160.0 million revolving line of credit loan, which had outstanding borrowings of $15.0$18.9 million, outstanding letters of credit of $44.0$53.0 million and available borrowings of $74.1$88.1 million, based on the most restrictive financial covenant calculations. In addition to outstanding borrowings on the fifth amended and restated credit facility, NBP had outstanding borrowings under industrial revenue bonds of $13.8$20.7 million, senior notesSenior Notes of $160.0 million, and operating lease commitments of $35.0$40.2 million and capital leases and other obligations of $9.1 million as of August 27, 2005.26, 2006. See Item 7.Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations.

NBP'sNBP’s substantial debt could:

• make it difficult for NBP to satisfy its obligations, including making interest payments on the exchange notes and on otherits debt obligations;

  
  

• limit NBP'sNBP’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'sNBP’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 than NBP;debt; and

  
  

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

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

Despite NBP'sNBP’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 notesNBP’s Senior Notes permit it to incur additional debt in the future and its fifth amended and restated credit facility permits additional borrowings under certain circumstances. As of August 27, 2005,26, 2006, NBP had approximately $74.1$88.1 million of availability under the most restrictive financial covenant calculations in its fifth amended and restated credit facility. NBP may borrow funds to fund its capital expenditures and working capital needs. NBP also may incur additional debt to finance future acquisitions.

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

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

• incur additional indebtedness or issue guarantees;

  
  

• create liens on NBP'sNBP’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'sNBP’s restricted subsidiaries to pay dividends or make other distributions to NBP;

  
  

• issue or distribute capital stock of itsNBP’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'sNBP’s assets.

In addition, NBP'sNBP’s fifth amended and restated credit facility requires NBPit to meet specified financial ratios and tests. These ratios and tests could have an adverse effect on NBP'sNBP’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'sNBP’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 the senior notesNBP’s Senior Notes or NBP'sNBP’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'sNBP’s fifth amended and restated credit facility and any resulting acceleration under NBP'sthe amended and restated credit facility may result in a default under the indenture governing the senior notes.NBP’s Senior Notes. If an event of default under NBP'sNBP’s fifth 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 the senior notes. NBP'sNBP’s Senior Notes. NBP’s assets or cash flow may not be sufficient to repay in full its outstanding debt, including the senior notes.Senior Notes.

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

To service its debt, NBP will require a significant amount of cash. If itsNBP’s cash flow and capital resources are insufficient to fund its debt service obligations, NBP may be forced to reduce or delay capital expenditures, sell material assets or operations, obtain additional capital or restructure debt. NBP'sNBP’s ability to generate cash, make scheduled payments or to refinance its obligations depends on itsNBP’s successful financial and operating performance. NBP'sNBP’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 NBP'sits 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'sNBP’s margins may be negatively impacted by fluctuating raw material costs and selling prices and other factors that are outside of itsNBP’s control.

NBP's     NBP’s margins are dependent on the price at which its beef products can be sold and the price it pays for its 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 other proteincompeting or complimentary products, such as pork and poultry. For example, beginning in March 2002, a month-long Russian trade embargo on chicken imported from the United States had the effect of increasing chicken supplies in the United States, which put downward pressure on demand and prices for red meat products. 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.  Smaller export markets have reopened their borders to U.S. beef; however, with the June 2005 announcement by the USDA of a second confirmed case of BSE in the U.S. there is further uncertainty as to whether or when additional markets may reopen, and whether or when existing open markets may close.

The supply and market price of the livestock that constitute NBP'sNBP’s principal raw material and represent the substantial majority of its cost of goods sold are dependent upon a variety of factors over which itNBP 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 ourNBP’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 its beef products are subject to market forces.

Other than NBP’s existing arrangements with APC, Inc. and the United States military, NBP generally doesdo 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'sNBP’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 itsNBP’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 itsNBP’s business, financial condition or results of operations.

20

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

Sales to Wal-Mart Stores, Inc., or Wal-Mart, which does not cover NBP'sNBP’s sales to Wal-Mart'sWal-Mart’s affiliate Sam'sSam’s Club, represented approximately 5% of NBP'sNBP’s total net sales in FYE 2005. NBP's2006. NBP’s agreement with Wal-Mart expired on January 31, 2004 and NBPit 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 NBP's sales.its sales, financial position, results of operations and cash flows.

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

NBP's     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 itsNBP’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 stormwater 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. FailureNBP’s failure to comply with applicable laws and regulations could subject NBPit to administrative penalties and injunctive relief, civil remedies, including fines, injunctions, recalls of NBP'sNBP’s products or seizures of itsNBP’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'sNBP’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     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'sNBP’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 theseNBP’s facilities, including adjacent properties. The discovery of previously unknown contamination of property underlying or in the vicinity of NBP'sNBP’s present or former properties or manufacturing facilities and/or waste disposal sites could require itNBP to incur material unforeseen expenses. Occurrences of any of these events may have a material adverse effect on NBP'sNBP’s business, financial condition, results of operations and cash flows.

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

In FYE 2005,2006, exports, primarily to China, Mexico, Canada, South Korea, Hong Kong and ThailandTaiwan, accounted for approximately 7%6.7% of NBP'sNBP’s total net sales. NBP'sNBP’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.

21An example of a risk related to our international operations is BSE, as discussed above in Item 1, Business – Industry Overview.

For example, on December 23, 2003, it was announced by the USDA that a single Holstein dairy cow was discovered in the state of Washington to have tested positive for BSE.  The origin of the animal was subsequently traced to a farm in Canada.  Shortly after the announcement, several countries representing a substantial share of NBP's export business closed their borders to the importation of edible beef products from the United States.  Responding to the loss of export markets, live cattle prices in the United States declined by approximately 18% within 3 days.  During the second quarter of FYE 2004, NBP recorded charges to earnings totaling approximately $18.8 million due to the market impacts of the closure of international borders as a result of the BSE discovery in late December.  While exports of some beef products commenced once again to Mexico in April 2004, NBP cannot anticipate the duration of other continuing beef import bans or whether additional countries may impose similar restrictions.  In June 2005, the USDA announced a second confirmed case of BSE in the U.S., furthering uncertainty as to whether or when additional markets may reopen, and whether or when existing markets may close.  Thus far, the effect of resumed export of beef products to limited, smaller export markets has been marginal on the U.S. beef industry. Thus far, the effect of resumed export of beef products to Mexico has been marginal on the United States beef industry.

Other risks associated with NBP'sNBP’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'scountry’s or region'sregion’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'sNBP’s financial condition and results of operations.

  18

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

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

NBP's     NBP’s revenues, margins and cash flows will not increase as planned if it fails to implement the key elements of its strategy, and itsNBP’s ability to successfully implement this strategy is dependent at least in part on factors beyond NBP'sits 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'sNBP’s business.

The food industry in general is subject to changing consumer trends, demands and preferences. NBP'sNBP’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'sNBP’s products, and could have a material adverse effect on NBP'sNBP’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.

22

The beef processing industry is highly competitive and NBP'sNBP’s customers may not continue to purchase itsNBP’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'sNBP’s products compete with a number of other protein sources, including pork and poultry.

NBP's     NBP’s principal competition arises from other beef processors, including Tyson Foods, Inc., Cargill Incorporated, Swift & Company and Smithfield Foods, Inc. The principal competitive factors in the beef processing industry are price, quality, food safety, product distribution, technological innovations and brand loyalty. NBP'sNBP’s ability to be an effective competitor will depend on its ability to compete on the basis of these characteristics. Some of NBP'sNBP’s competitors have greater financial and other resources and enjoy wider recognition for their consumer branded products. NBP cannot assure youprovide certainty that it will be able to compete effectively with these companies and itsNBP’s 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'sNBP’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'sNBP’s products is usually the summer barbecue season. As a result of these seasonal fluctuations, NBP'sNBP’s operating results may vary substantially between fiscal quarters.

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

NBP's     NBP’s success will depend, in part, on the efforts of itsNBP’s executive officers and other key employees. In addition, the market for qualified personnel is competitive and NBP'sNBP’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 NBP does not maintain key-person insurance for some of its other officers, employees or members of itsNBP’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 NBP'sits key employees or the failure to attract and retain employees could have a material adverse effect on itsNBP’s business, results of operations and financial condition.

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

NBP has approximately 6,7008,300 employees worldwide. Approximately 2,700 employees at itsNBP’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. 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. A labor-related work stoppage by these unionized employees could limit NBP'sNBP’s ability to process and ship its products or increase its costs, which could adversely affect itsNBP’s results of operations and financial condition. In addition, it is possible that any labor union efforts to organize employees at NBP'sNBP’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'sNBP’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'sNBP’s retail and foodservice customers may put pressures on its operating margins.

In recent years, the trend among NBP'sNBP’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 NBP'sthe 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 itNBP loses its existing large customers, NBP'sits profitability could decrease.

23

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 itsNBP’s business and an increase in itsNBP’s costs.

NBP continually explores opportunities to acquire related businesses, some of which could be material to it. NBP'sNBP’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 the acquired companies such as Brawley Beef and Vintage Foods, L.P. and successfully implement appropriate operational, financial and management systems and controls to achieve the benefits expected to result from these acquisitions. NBP'sNBP’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'sNBP’s existing business. The diversion of management'smanagement’s attention and any delays or difficulties encountered in connection with the integration of these businesses could negatively impact NBP'sNBP’s business and results of operations. Further, the benefits that NBP anticipates from these acquisitions such as Brawley Beef and Vintage Foods, L.P. may not develop.

Risk Factors Associated with USPB

U.S. Premium Beef sellsdelivers all of the cattle provided by its owners and associates to National Beef Packing Company, LLC and does not have arrangements for alternative markets for its owners and associates cattle.

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

The other members of National Beef Packing Company, LLC 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 U.S. Premium Beef and its members.

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.

24

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 that could have adverse consequences for the LLC, 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'scooperative’s shareholders at the point of restructuring must recognize additional taxable income or gain 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 restructuring 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 LLC 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 means 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 become taxable as a corporation if it elects corporate tax status or if it is treated as a publicly traded partnership because of the manner in which units are transferred. The LLC's taxable income each year will depend in part on the depreciation, amortization and other cost recovery of the tax basis of its assets. The LLC's initial aggregate basis will bewas based on the fair market value of assets deemed to be received by the members 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.

25

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

The Company 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 Company 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 Company 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 Company to produce reliable financial reports and are important to helping prevent financial fraud. If the Company 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.

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

USPB's     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'sUSPB’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'sUSPB’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 itsour business, results of operations and financial condition.

ITEM 2.     PROPERTIES

USPB's     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 HDP -the Kansas City LLC,Aviation Department, with offices at c/o Kessinger/Hunter & Co., 2600 Grand Blvd., Suite 700,601 Brasilia Avenue, Kansas City, Missouri 64108.     64153.

NBP owns its Dodge City, Kansas,Kansas; Liberal, KansasKansas; Brawley, California; and Hummels Wharf, Pennsylvania facilities. It 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 leases its offices in Chicago, Illinois,Illinois; Salt Lake City, Utah,Utah; Denison, Iowa,Iowa; Dallas, Texas,Texas; Perkins, Oklahoma; Tokyo, Japan and Seoul, South Korea. NBP'sNBP’s fifth 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:

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ITEM 3.     LEGAL PROCEEDINGS

For information regarding legal proceedings, see Note 12.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'SREGISTRANT’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 November 21, 2005,October 28, 2006, there were 436435 record holders of Class A and Class B interests.  There have been nounits. The sales of the linked combination of Class Aprices by quarter and Class B units since the end of the fiscal year.  During the first quarter of the fiscal year ended August 27, 2005, thewere as follows:

The affiliated sales price for the linked combination of one Class A unit and one Class B unit ranged from $55.00 to $172.00, while sales prices during the second quarter of the fiscal year ranged from $55.00 to $175.00.  During the third quarter of the fiscal year, sales prices for the linked combination of one Class A unit and one Class B unit ranged from $152.50 to $170.00.  During the fourth quarter of the fiscal year, sales prices for the linked combination of one Class A unit and one Class B unit ranged from $60.00 to $170.00.  However some of therepresent sales that occurred during the fiscal year were not sales at arms length and, therefore, the sales price ranges disclosed above are not necessarily indicative of the market value of the units during the periods in question.

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

USPB made a cash distribution on December 22, 2004 of approximately $1.2 million to help offset the potential tax liability to unitholders due to the conversion from a cooperative to a limited liability company. The payment of cash dividends are made only from assets legally available for that purpose and depend on the Company'sCompany’s financial condition, results of operations, and other factors then deemed relevant by USPB'sUSPB’s board of directors. Cash distributions are paid to the interest holders of Class A and Class B units at the discretion of the board of directors and to the extent permitted by USPB'sUSPB’s senior lenders. See Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters.

Patronage dividends of $2,118,532 and $20,923,789approximately $2.1 million were allocated to the cooperative'scooperative’s patrons for FYE 2004 and FYE 2003 earnings, respectively.2004. Approximately forty-five percent of the FYE 2004 patronage dividend was paid in cash and the remaining approximate fifty-five percent was retained as patronage refunds for reinvestment.  Forty percent of the FYE 2003 patronage dividend was paid in cash and the remaining sixty percent was retained as patronage refunds for reinvestment. Patronage refunds for reinvestment, known as patronage notices in the LLC, will be paid by the LLC at such time and in such amounts as may be determined by the board of directors in its sole and absolute discretion. In addition, in the event of liquidation of the LLC, any patronage notice amounts that had not been paid previously would be entitled to be paid after the debts and liabilities of the LLC had been paid, but prior to any distributions based on ownership of units in the LLC.

27     Effective May 30, 2006, USPB’s majority owned subsidiary, NBP, completed the acquisition of substantially all of the assets of Brawley Beef pursuant to the Contribution Agreement with Brawley Beef and National Beef California, LP (NBC) (the Agreement). NBC is a newly formed limited partnership with National Carriers, Inc., a wholly-owned subsidiary of NBP, acting as its general partner. Brawley Beef was an alliance of cattle producers in Arizona and California who supplied the beef processing facility in Brawley, California. The facility commenced operations in December 2001.

     Pursuant to the terms of the Agreement, Brawley Beef contributed substantially all of its assets to NBC in exchange for limited partnership units of NBC, and NBC assumed certain of Brawley Beef’s debt and current liabilities. Brawley Beef then exchanged all of its NBC units with USPB for 44,160 new USPB Class A units and 44,160 new USPB Class B units. Under a separate unit exchange agreement between USPB and NBP, USPB exchanged these units of NBC with NBP for 5,899,297 Class A units and 664,475 Class B-1 units of NBP. As a result, USPB’s ownership interest in the NBP’s Class B voting units increased to approximately 54.8%.

The USPB did not sell any equity securities during FYE 2005Class A and Class B units that were not registered underissued in connection with the acquisition of Brawley were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.

ITEM 6.     SELECTED FINANCIAL DATA

The following table sets forth selected data presented under the captions "Statement of Operations Data"consolidated financial and "Selected Balance Sheet Data"other data for, and as of the end of, each of the years in the five-year period ended August 27, 2005 are derived from the consolidated financial statements of the Company and its subsidiaries, which financial statements have been audited by KPMG LLP, independent registered public accountants. The consolidated financial statements as of August 27, 2005 and August 28, 2004 and for each of the years in the three-year period ended August 27, 2005, and the report thereon, are included elsewhere in this document.26, 2006. The selected data should be read in conjunction with the consolidated financial statements for the year ended August 27, 2005,26, 2006, the related notes and the independent auditors'auditors’ report.

As described in Item 1,Business – General, 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 members and associate members based on the level of business conducted with the cooperative as opposed to common stockholder'sstockholder’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 FYE 2005,September 2004, make distributions to its unitholders based on their proportionate share of the underlying equity in the 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 Class A units and Class B linked units may be issued, redeemed, and transferred separately.

As described in Note 1 to the consolidated financial statements under Item 8. Financial Statements and Supplementary Data, 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, a new basis of accounting was established for NBP on the date of acquisition.  Prior to August 7, 2003, USPB accounted for its interest in FNB under the equity method of accounting.  For these reasons the financial position and operating results after the Acquisition are not comparable with those before the Acquisition.

The following table should be read in conjunction with Item 7.Management'sManagement’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.

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(1)  Our fiscal year ends on the last Saturday in August.  Fiscal year ended 2002 consisted of 53 weeks.  All others consisted of 52 weeks.

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ITEM 7.  MANAGEMENT'S7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this report. In addition to historical information, the following discussion and other parts of this report contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to the factors discussed under Item 1. Business - - Risk Factors, Disclosure Regarding Forward-Looking Statements, Item 1A.Risk Factors, and elsewhere in this report.

Overview

USPB was formed as a closed marketing cooperative on July 1, 1996. Its mission is to increase the quality of beef and long-term profitability of cattle producers by creating a fully integrated producer-owned beef processing system that is a global supplier of high quality, value-added beef products responsive to consumer desires.

On December 1, 1997, the cooperative became operational by acquiring 25.4966% of FNB, a partnership owned by the cooperative and Farmland Industries, Inc. (Farmland). The cooperative acquired an additional 3.29% partnership interest in February 1998, bringing its ownership to 28.7866% of FNB. Farmland then owned the remaining 71.2134%.

On May 31, 2002, Farmland and four of its subsidiaries filed voluntary petitions to reorganize under Chapter 11 of the United States Bankruptcy Code. FNB was not a party of these filings. Provisions of FNB'sFNB’s operating agreement and its financing agreement restricted partners'partners’ access to FNB'sFNB’s assets. In the fourth quarter of fiscal year 2003, as a result of the acquisition of Farmland'sFarmland’s interest by the cooperative and others, as more fully described below, the cooperative acquired a controlling interest in the former FNB, now NBP, and the assets, liabilities and operating results of NBP are consolidated with those of USPB effective August 7, 2003. Prior to the acquisition date, the cooperative accounted for its 28.7866% non-controlling interest in FNB under the equity method of accounting.

In connection with the cooperative'scooperative’s purchase of its interest in FNB, the cooperative obtainedowns the right and becameis subject to the obligation to deliver cattle annually to NBP relative to: (i) USPB'sUSPB’s ownership in NBP and (ii) the number of cattle processed annually by NBP. That arrangement continues following the conversion of the cooperative into the LLC. The price received for cattle is based upon a price grid determined by USPB and NBP, which reflects current market conditions. The cattle purchase agreement is effective as long as the USPB is an owner in NBP. Cattle delivered by USPB are processed in NBP's twoNBP’s three processing plants.

USPB acquires all its cattle requirements from its owners and associates. Under Uniform Delivery and Marketing Agreements, owners are obligated to deliver a designated number of cattle to USPB during specified delivery periods, as defined. The agreements are for a term of ten years and provide for minimum quality standards, delivery variances, and termination provisions, as defined. Cattle acquired pursuant to the agreements are concurrently sold to NBP pursuant to the cattle purchase agreement. Sales transactions are based upon prevailing cash market prices, and purchases are on terms no less favorable to NBP than would be obtained from an unaffiliated party.

On June 12, 2003, the cooperative entered into an agreement with Farmland to acquire all of the partnership interests in FNB held by Farmland, which approximated 71.2%. As a result of this acquisition, the cooperative gained voting control of FNB and converted it to a limited liability company, National Beef Packing Company, LLC, under Delaware law. These transactions (the Acquisition) closed on August 6, 2003. NBP assumed both the Uniform Delivery and Marketing Agreements and the cattle purchase agreement. NBP continues to hold all of the same assets its predecessor held before the consummation of the transactions, including equity in subsidiaries, except that Farmland retained a 49% interest in a NBP subsidiary National Beef aLF, LLC, which holds a 47.5% interest in aLF Ventures, LLC. After the Acquisition, NBP holds a 24.2% interest in aLF Ventures, LLC through its 51% interest retained in National Beef aLF, LLC. From July 2006 to July 2008, Farmland has a put right of this interest in National Beef aLF, LLC to NBP at its then fair market value. If the interest in NBP aLF, LLC is not repurchased, NBP is required to put the entire interest up for sale. Due to uncertainties in aLF Ventures, LLC's ability to generate future revenues, no amounts were allocated to the put option in the consolidated financial statements.

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On August 18, 2004, the shareholders of U.S. Premium Beef, Ltd. approved the merger of the cooperative into a wholly-owned subsidiary, U.S. Premium Beef, Inc., a Delaware corporation. The merger was effective on August 29, 2004. The Delaware corporation then, in a statutory conversion authorized under Delaware law, converted into a Delaware limited liability company. Following the effective date of the merger and the statutory conversion, the business of the cooperative was continued in the limited liability company form of business organization. The Company was subsequently renamed U.S. Premium Beef, LLC.

     Effective May 30, 2006, USPB’s majority owned subsidiary, NBP, completed the acquisition of substantially all of the assets of Brawley Beef, LLC (Brawley Beef), consisting of a state-of-the-art beef processing facility in Brawley, California pursuant to the Contribution Agreement with Brawley Beef and National Beef California, LP (NBC) (the Agreement). NBC is a limited partnership formed with National Carriers, Inc., a wholly-owned subsidiary of the Company, acting as its general partner. Brawley Beef was an alliance of cattle producers in Arizona and California who supplied the beef processing facility. The facility commenced operations in December 2001.

     In calendar year 2005, NBP was the fourth largest beef processing company in the United States. In FYE 2005,2006, NBP accounted for approximately 12.3%12.5% of the fed cattle processed in the United States. NBP processes, packages and delivers fresh beef for sale to customers in the United States and international markets. NBP'sNBP’s products include boxed beef and beef by-products, such as hides and offal. In addition, they sell value-added beef products including branded boxed beef, case-ready beef and pork, chilled and frozen export beef and portion control beef. NBP markets its products to retailers, distributors, food service providers and the United States military. The relationship between the USPB and NBP facilitates a vertically integrated business model and provides NBP with a significant portion of the high-quality cattle used in its boxed beef and value-added products.

The 2003 results discussed below include the historical results of FNB as an equity investment using the equity method of accounting for the periods prior to the Acquisition from September 1, 2002 through August 6, 2003. For the periods subsequent to the Acquisition, the operating results of NBP have been consolidated and intercompany transactions eliminated. This new basis of accounting was established on the date of the closing of the Acquisition (see description of the Acquisition in Note 1 of our consolidated financial statements), and, therefore, the financial position and operating results after the Acquisition are not comparable with those before the Acquisition. As a result, we have provided an overview of the operations of NBP (formerly FNB) below to provide a better understanding of the impact that our ownership in NBP (approximately 53.2% for the 24 days ended August 30, 2003 and thereafter, and approximately 28.8% for the period prior to August 7, 2003) had on our operations.

As a result of the Acquisition and resulting consolidation of NBP, there were significant increases in the year of the Acquisition to the Company's consolidated assets, liabilities and expenses in comparison to prior periods. The Company's assets increased by 405%, with debt increasing by 3,800% and liabilities other than debt increasing by 726%. The Company's revenues for the 2003 fiscal year increased by approximately 469% in comparison to the prior year.

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The following table presents the historical consolidated statements of operations data expressed in millions of dollars for NBP (formerly FNB) for the periods indicated:

     NBP’s net income for the FYE 2006 was $39.4 million compared to $20.8 million for the FYE 2005, an increase of $18.6 million or 89.4%. This is attributed to increased operating income due primarily to increased margins and a decrease in other expense, net. Sales were higher, principally due to an increase in the number of cattle processed as a result of the acquisition of Brawley Beef, LLC, at higher average weights. Cost of sales were higher, principally due to the higher number of cattle processed as a result of the acquisition of Brawley Beef, LLC, at higher average weights, and a slight increase in average live cattle prices. Operating income increased $15.4 million or 28.5% over the prior year. As a percent of sales, operating income was 1.5% and 1.2% for FYE 2006 and FYE 2005, respectively.

The combined consolidated statement of operations data for the 364 days ended August 30, 2003 includes the results of Farmland National Beef Packing Company, L.P. for the 340 days ended August 6, 2003 and the results of National Beef Packing Company, LLC for the 24 days ended August 30, 2003. The results have been combined for the 364 day period to facilitate comparison. The results of operations for the 24 days ended August 20, 2003 are within a period for which demand for beef products was at a seasonally high level.

TheNBP’s net income for the FYE 2005 was $20.8 million compared to $44.0 million for the FYE 2004, a decrease of $23.2 million or 52.7%. This is attributed to decreased margins as noted below, decreased other, net due primarily to the write-off of debt issuance costs in FYE 2005 and an increase in interest expense primarily due to higher interest rates in FYE 2005. Sales were higher, principally due to the higher number of cattle slaughtered and processed at higher average weights. Cost of sales were higher, principally due to the higher number of cattle slaughtered and processed at higher average weights, partially offset by a decrease in average live cattle prices. Operating income decreased $14.9 million or 21.6% over the prior year. As a percent of sales, operating income was 1.2% and 1.7% for FYE 2005 and FYE 2004, respectively.

The net income for the FYE 2004 was $44.0 million compared to $89.0 million for the FYE 2003, a decrease of $45.0 million or 50.6%.  This is attributed to decreased margins and an $18.6 million increase in interest expense due to the increased borrowings as a result of the Acquisition.  While sales and cost of sales were higher, principally due to the higher live cattle prices and corresponding higher selling prices of beef products, operating income decreased $29.9 million or 30.2% over the prior year.  As a percent of sales, operating income was 1.7% and 2.7% for FYE 2004 and FYE 2003, respectively.  In May 2003 a cow in Canada was diagnosed with BSE, so the U.S. closed its border to the importation of live cattle from Canada.  The single case of BSE discovered in Washington state in December 2003 caused many international importers to close their borders to U.S. beef products.  As a result of these actions and their corresponding effects on the aggregate supply of cattle and aggregate demand for beef products, the U.S. beef industry experienced a noticeable compression of industry margins during the latter part of FYE 2004 and throughout FYE 2005.

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Financial Statement Accounts

Net Sales. Pursuant to the cattle purchase agreement between USPB and NBP, all of the USPB sales are eliminated, leaving only sales of NBP. Prior to the Acquisition, pursuant to the cattle purchase agreement between the cooperative and FNB, all of the cooperative's sales were to FNB. NBP'sNBP’s net sales are generated from sales of boxed beef, case-ready beef and pork, chilled and frozen export beef, portion control beef and beef by-products. They are affected by the volume of animals processed and the value that is extracted from each animal. The value that is extracted from cattle processed, the cut-out value, is affected by beef prices and product mix, as premium products and further processed products generate higher prices and operating margins. NBP'sNBP’s total value-added sales were approximately $970.9$1,246.9 million in FYE 2005,2006, comprising approximately 22.4%26.9% of total net sales. NBP'sNBP’s value-added products contribute significantly more, in terms of gross margin, than its traditional boxed beef products and are an important component of profitability. Wholesale beef prices fluctuate seasonally because of higher demand during the summer months. Wholesale beef prices also fluctuate because of changes in supply and demand for competing proteins and other foods, as well as changes in cattle supply, which have typically followed ana 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. We believe we are currently in the expansion phase of this cycle. In addition, beef and by-product sales are affected by the general economic environment and other factors.

Cost of Sales.    USPB's cost of sales, both prior to and subsequent to the Acquisition are accounted for in the same manner as net sales. NBP'sNBP’s cost of sales is comprised of the cost of livestock and plant costs such as labor, packaging, utilities, and other facility expenses. Livestock is the highest cost component, representing 83.1%82.6% of cost of sales in FYE 2005.2006. Total livestock costs are a function of the volume of animals processed and the price paid for each animal. Cattle prices vary over time and are affected by production cycles, weather, feed prices and other factors that affect the supply of and demand for livestock. Historically, changes in cut-out values, a representation normally expressed on a per hundred weight basis, of the sales value of a beef carcass, for beef products and corresponding livestock costs have been positively correlated. As a result, profitability is primarily affected by the difference between cut-out value and livestock cost, the volume of livestock processed and its processing yields, the amount of saleable product, typically expressed as a percentage of a total carcass weight. Labor and freight represented 4.2%4.5% and 2.7%3.2%, respectively, of cost of sales in FYE 2005.2006.

Selling, General and Administrative Expenses.Selling expenses consist primarily of salaries, trade promotions, advertising, commissions and other marketing costs. General and administrative costs consist primarily of general management, insurance and professional expenses.

Outlook

The recent opening     Drought conditions in the early part of calendar 2006 contributed to poor pastures in many important grazing areas of the Canadian border to livecountry and subsequently caused larger than normal numbers of cattle imports tobeing placed on feed. The larger numbers of cattle on feed increased the U.S.supply of market ready cattle in the late spring and summer months of calendar 2006. This larger than normal increase in market ready cattle increased the continued uncertaintylikelihood of additional border openingsa decline in key markets creates a difficult environment for beefcattle supply being realized in the fall and winter months of 2006. A decrease in available market ready cattle could negatively impact industry participants.  In general, domestic cattle supplies are anticipated to improve over the next two to three years, but with questions remaining regarding international market access, margins can be expected to continue to be negatively impacted.margins.

Recent Developments and Market Trends

The closure of U.S. borders toSee the importation of Canadian feederdiscussions above in Item 1, Business – Industry Overview – BSE and fattened (readyRelated Export Bans for slaughter) animals, which occurred in May 2003 following the discoverya more complete discussion of bovine spongiform encephalopathy (BSE) in Alberta that same month, tightened.

     Effective May 30, 2006, USPB’s majority owned subsidiary, NBP, completed the U.S. cattle supply.  The closureacquisition of substantially all of the U.S. border to Canadian livestock resulted in higher overall feeder and fed cattle prices in the U.S., negatively impacting raw material prices.  Although the U.S. border opened to Canadian produced boxed beef in September 2003, the entire U.S. beef industry continued  at a price disadvantage for both raw materials and boxed beef prices while  the ban on importationassets of Canadian livestock was maintained.  The ban on the importation of Canadian cattle was in place from May 2003 to July 2005.

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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 positive 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 bordersBrawley Beef pursuant to the importationContribution Agreement with Brawley Beef and National Beef California, LP (NBC). NBC is a newly formed limited partnership with National Carriers, Inc., a wholly-owned subsidiary of edibleNBP, acting as its general partner. Brawley Beef was an alliance of cattle producers in Arizona and California who supplied the beef products from the United States.  Certain by-products have been classified as Specified Risk Materials (SRMs), and have been banned from useprocessing facility in feedstocks and the human food chain. Some of these products previously enjoyed a marketBrawley, California. The facility commenced operations in foreign countries. The closure of most foreign markets to U.S. beef following 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 enjoyed by the U.S. packing industry. December 2001.

All of these challenges resulted in tremendous volatility in U.S. livestock market prices during FYE 2003, FYE 2004 and FYE 2005. In FYE 2003, 2004 and 2005, NBP's total export sales were approximately 17%, 10% and 7% of total net sales.

During the second quarter of FYE 2004, NBP recorded charges to sales and cost of sales totaling approximately $18.8 million due to the market impacts of the closure of international borders as a result of the BSE discovery in late December 2003.     

On December 29, 2004, the USDA announced it had established conditions under which it would allow imports into the U.S. of live cattle under 30 months of age and certain other commodities from regions with effective BSE prevention and detection measures.  Prior to being able to import to the U.S., each country must undergo a thorough risk assessment to be recognized as a "minimal-risk region."  Canada was the first country recognized as a minimal-risk region and, as such, would have been eligible to export to the U.S. live cattle under 30 months of age (subject to certain restrictions), as well as certain other animals and products.  The risk assessment conducted by the USDA, as part of the rulemaking process to determine Canada's status as a minimal-risk region, included consideration of the possibility that Canada could experience additional cases of BSE.  The final rule was published in the January 4, 2005 Federal Register and was to become effective March 7, 2005, but was delayed by litigation.

On March 2, 2005, the U.S. District Court in Billings, Montana granted a preliminary injunction to delay the implementation of USDA's minimal-risk regions rule, temporarily blocking the opening of the Canadian border to the importation of live cattle under 30 months of age into the U.S.  On March 17, 2005, the U.S. Department of Justice, on behalf of the USDA, filed a request with the U.S. Court of Appeals for the Ninth Circuit requesting that the court overturn the decision issued by the U.S. District Court in Montana, which would re-establish trade with Canada for beef products and live cattle under 30 months of age.  The National Meat Association along with the Canadian Cattlemen's Association and the Alberta Beef Producers, who were all denied leave to intervene in the trial court, also appealed seeking to overturn the preliminary injunction.  In July 2005, the U.S. Court of Appeals for the Ninth Circuit overturned the March 2005 preliminary injunction issued by the U.S. District Court in Billings, Montana, which had continued the closure of the Canadian border to imports of live cattle.  The U.S. Court of Appeals ruling resulted in the immediate reopening of the Canadian border to live cattle imports.  A petition for rehearing of the Ninth Circuit's ruling to the entire panel of Ninth Circuit judges was rejected by the Ninth Circuit on October 13, 2005. Although the Court of Appeals action does not completely dispose of the action in the lower court, the lower court may or may not enter final rulings that will permit continued trade in live animals and beef products between the two countries.

Announcements of inconclusive, preliminary test results for BSE can be expected from time to time as a result of the sensitivity of the new screening regime.  Since the USDA enhanced surveillance program for BSE began in 2004, approximately 510,000 cattle have been tested for BSE using a rapid test.  Three of these animals tested inconclusive and were subsequently subjected to immunohistchemistry, or IHC, testing.  The IHC is an internationally recognized confirmatory test for BSE.  All three inconclusive samples tested negative using IHC.  The three samples were then tested by a second internationally recognized confirmatory test, referred to as the Western Blot test.  Of the three samples, two were negative but the third came back reactive.  Because of the conflicting results, the samples from the animal that tested reactive were sent to Weybridge, England for further testing and the results of that testing were confirmed on June 24, 2005 as positive for BSE.  In a USDA statement issued June 29, 2005, the cow was identified as born and raised in a herd in Texas and was approximately 12 years old.  In the USDA statement, USDA Chief Veterinarian John Clifford stated that the USDA believes, "it was most likely infected by consuming feed prior to the implementation of the ruminant-to-ruminant feed ban in 1997," and he emphasized "that this animal did not enter the human food chain."  Although the Secretary of the USDA has stated that there is no risk to animal or human health related to this case, the impact on the market created by this or other future tests is not possible to predict. Prior to this second confirmed case of BSE in the U.S., many countries had reopened their borders to allow the import of U.S. beef; however, this second confirmed case of BSE has led to uncertainty as to whether or when additional markets may reopen, and whether or when existing open markets may close.

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On October 31, 2005, a Japanese food safety panel responsible for recommendations concerning the importation of beef concluded that the risk of BSE in cattle 20 months of age and younger from the United States was very low.  The recommendation sets in motion a series of actions, including a month-long period for public comments, which could lead to the resumption of U.S. beef imports potentially before the end of the calendar year.  There can be no assurance that this action will result in the resumption of trade, or if so, when this will occur.

The Company cannot presently assess the full economic impact of the consequences of BSE on the U.S. beef packing industry or on its operations.  NBP's revenues and net income may be materially adversely affected in the event existing import restrictions continue indefinitely, additional countries announce similar restrictions, additional regulatory restrictions are put into effect or domestic consumer demand for beef declines substantially.

Critical Accounting Policies and Estimates

The following discussion and analysis of financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates and revises its estimates based on historical experience and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from those estimates. Changes in our estimates could materially affect our results of operations and financial condition for any particular period. Our fiscal year ends on the last Saturday in August. We believe that our most critical accounting policies are:are as follows:

Accounting for Investment in NBP.  Prior to the Acquisition, FNB was accounted for as an equity investment under the equity method of accounting. USPB's share of FNB's income was recognized as equity in earnings of FNB in a single line item in our consolidated statements of operations and recorded in the consolidated balance sheet in a single line item - Investment in FNB. Distributions received from FNB reduced the investment balance. Upon acquiring a controlling interest in the Acquisition, inIn accordance with accounting principles generally accepted in the United States of America, NBP'sNBP’s financial position and results of operations are consolidated into our financial statements and all transactions between the two companies are eliminated in the consolidation. A minority interest is presented which represents the earnings of NBP attributable to those holding a minority interest in NBP.

Allowance for Returns and Doubtful Accounts. The allowance for returns and doubtful accounts reflects reserves for customer receivables to reduce receivables to amounts expected to be collected. Management uses significant judgment in estimating uncollectible amounts. In estimating uncollectible amounts, management considers factors such as current overall economic conditions, industry-specific economic conditions, historical customer performance, and anticipated customer performance. Specific accounts are also reviewed for collectibility. While management believes these processes effectively address our exposure to doubtful accounts, changes in the economy, industry or specific customer conditions may require adjustment to the recorded allowance for doubtful accounts. Management uses significant judgment in estimating amounts expected to be returned. Management considers factors such as historical performance and customer conditions in estimating return amounts.

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Inventory Valuation. Inventories of NBP'sNBP’s beef processing operations, except supplies inventories, are determined using the first-in, first-out cost method or market. The cost of all other inventories is determined using the first-in, first-out method, specific or average cost methods. Management periodically reviews inventory balances and purchase commitments to estimate if inventories will be sold at amounts (net of estimated selling costs) less than their carrying amounts. If actual results differ from management estimates with respect to the selling of inventories at amounts less than their carrying amounts, NBP would adjust its inventory balances accordingly.

Goodwill. We recognize excess cost over the fair value of the net tangible and identifiable intangible assets acquired in a reporting unit, and record this excess as goodwill. We calculate the fair value of the applicable reporting unit using estimates of future cash flows. In accordance with Statement of Financial Accounting Standards (SFAS) 142,Goodwill and Other Intangible Assets,we assess the goodwill balance for impairment annually. This test involves comparing the fair value of each reporting unit to the unit’s book value to determine if any impairment exists. In connection with the Transaction,acquisition of Vintage Foods, L.P. during the fourth quarter of fiscal year 2006, we recognized excess cost over the fair value of the net tangible and identifiable intangible assets acquired, and recorded this excess as goodwill. On an annual basis, we assess the goodwill balance for impairment.  In accordance with Statement of Financial Accounting Standards (SFAS) 142, Goodwill and Other Intangible Assets, this test involves comparing the fair value of each reporting unit to the unit's book value to determine if any impairment exists.  We calculate the fair value of each reporting unit using estimates of future cash flows.  Goodwill was tested for impairment, and, as of August 27, 2005,26, 2006, management determined there was no impairment.

Workers'Workers’ Compensation Accrual. NBP incurs certain expenses associated with workers'workers’ compensation. To measure the expense associated with these costs, management must make a variety of estimates including employee accidents incurred but not yet reported. The estimates used by management are based on our historical experience as well as current facts and circumstances. NBP uses third-party specialists to assist management in appropriately measuring the expense and obligations associated with these costs.

Results of Operations

The following table shows consolidated statements of operations data for the periods indicated:

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The results of operations of NBP for the FYE August 26, 2006, the FYE August 27, 2005 and the FYE August 28, 2004 and the 24 days ended August 30, 2003 are consolidated in the respective periods and transactions between the USPB and NBP have been eliminated. Accordingly, these operating results

FYE August 26, 2006 compared to August 27, 2005

Net Sales.Net sales were $4,636.0 million for FYE 2006, an increase of $297.1 million, or 6.8%, compared to $4,338.9 million for FYE 2005. The increase resulted primarily from an increase of approximately 5.3% in the number of cattle processed, with 3.6% of that increase due to the acquisition of Brawley Beef, LLC, at average weights about 1.5% higher than the prior year, which translates to an increase in pounds of beef products sold in the period. Sales prices generally improved due to an improved product sales mix and a more favorable market environment for FYE 2006 compared to FYE 2005, including the resumption of shipments to Asian markets late in the fourth quarter of FYE 2006.

Cost of Sales.Cost of sales was $4,503.8 million for FYE 2006, an increase of $273.9 million, or 6.5%, from $4,229.9 million for FYE 2005. The majority of the increase came as a result of an increase of approximately 5.3% in the number of cattle processed, with 3.6% of that increase due to the acquisition of Brawley Beef, LLC, at average weights about 1.5% higher than the prior year, and slight increase in average live cattle prices of approximately 0.2%. The first half of FYE 2006 was negatively impacted by the tightened supply of market-ready cattle; increased supply of market-ready cattle in the second half of FYE 2006 helped lower live cattle costs during that period. Cost of sales, as a percentage of net sales, was 97.1% and 97.5% for FYE 2006 and FYE 2005, respectively.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $37.6 million for FYE 2006 compared to $34.0 million for FYE 2005, an increase of $3.6 million or 10.6%. The increase resulted primarily from an approximate $2.1 million increase in payroll and related expenses, an increase of approximately $1.8 million in marketing and travel expense associated with supporting two new marketing programs, increased travel associated in part from the Brawley Beef, LLC acquisition, and increased fuel costs; partially offset by a reduction of $0.6 million in bad debt reserve. Selling, general and administrative expenses, as a percentage of net sales, were 0.8% and 0.8% for FYE 2006 and FYE 2004 are not consistent2005, respectively.

Results of Operations

      The following table shows consolidated statements of operations data for the periods indicated:

Depreciation and Amortization Expense. Depreciation and amortization expenses were $28.7 million for FYE 2006 compared to $24.4 million for FYE 2005, an increase of $4.3 million, or 17.6%. This increase was due to additional assets being placed into service primarily at our two Kansas beef processing plants during FYE 2006, as well as additional assets acquired through the purchase of Brawley Beef, LLC in the fourth quarter of FYE 2006.

Operating Income. Operating income was $65.9 million for FYE 2006 compared to $50.6 million for FYE 2005, an increase of $15.3 million, or 30.2%. Operating income, as a percentage of net sales, was 1.4% for FYE 2006 and 1.2% for FYE 2005. The first half of FYE 2006 was negatively impacted by the tightened supply of market-ready cattle; increased supply of market-ready cattle in the second half of FYE 2006 helped lower live cattle costs during that period, which helped improve gross margin for FYE 2006. Gross margin improvements were primarily due to a more favorable market environment for FYE 2006 compared to FYE 2005, including the resumption of shipments to Asian markets late in the fourth quarter of FYE 2006.

Minority Owners’ Interest in NBP. Minority interest in NBP in FYE 2006 was $16.6 million compared to $8.5 million in FYE 2005, an increase of $8.1 million, or 95.3%. The increase is due to higher net income earned by NBP. The minority interest in NBP represents the minority owners’ equity in NBP’s earnings.

Interest Expense. Interest expense was $32.4 million for FYE 2006 compared to $29.0 million for FYE 2005, an increase of $3.4 million, or 11.7%. The increase was due primarily to higher average interest rates in FYE 2006 compared to FYE 2005, as evidenced by an increase of approximately 160 basis points in the published LIBOR index interest rates as of August 26, 2006 compared to August 27, 2005, which is the basis for interest rates on most of our variable rate borrowings. Additionally, the weighted average of variable rate debt increased primarily from the acquisition of Brawley Beef, LLC.

     Other, Net. Other non-operating income, net was $1.5 million in FYE 2006 compared to other non-operating expense, net of $5.3 million in FYE 2005, a variance of $6.8 million. FYE 2006 includes an approximate $1.4 million reduction in postretirement benefit obligation necessitated by a significant reduction of participants and premiums because of changes in Medicare, and an approximate $0.6 million in income for a settlement of a lawsuit related to corrugated packaging materials, partially offset by income tax expense of $1.5 million recorded on income for FYE 2006 for National Carriers, Inc., which is organized as a C Corporation. FYE 2006 includes $0.6 million in expense for the write-off of unamortized loan costs associated with amending and restating our fifth amended and restated credit facility. FYE 2003 operating results.2005 includes $3.2 million in expense for the write-off of unamortized loan costs associated with amending and restating our fourth amended and restated credit facility and income tax expense of $1.9 million recorded on the income for FYE 2005 for National Carriers, Inc.

FYE August 27, 2005 compared to August 28, 2004

Net Sales. Net sales were $4,338.9 million for FYE 2005, an increase of $245.4 million, or 6.0%, compared to $4,093.5 million for FYE 2004. The increase resulted primarily from an increase of approximately 4.4% in the number of cattle processed, at average weights about 2.9% higher than the prior year, which translates to an increase in pounds of beef products sold in the period. Overall volume was higher due in part to long-term expansion at the Dodge City beef processing facility, partially offset by market instability caused by the uncertainties created by BSE discoveries in the U.S.

Cost of Sales. Cost of sales were $4,229.9 million for FYE 2005, an increase of $256.2 million, or 6.4%, from $3,973.7 million for FYE 2004. The majority of the increase came as a result of an increase of approximately 4.4% in the number of cattle processed, at average weights about 2.9% higher than the prior year, partially offset by an approximate 1.7% decrease in average live cattle prices. Cost of sales, as a percentage of net sales, was 97.5% and 97.1% for FYE 2005 and FYE 2004, respectively.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $34.0 million for FYE 2005 compared to $34.8 million for FYE 2004, a decrease of $0.8 million or 2.3%. The decrease was the result of a $2.2 million recovery of a bad debt in FYE 2005 that had been written off in FYE 2003 due to the bankruptcy of one of NBP'sNBP’s customers, and a decrease of approximately $0.5 million in professional services partially offset by a $1.3 million increase in payroll and related expenses and an expense for state franchise taxes of approximately $0.3 million. Selling, general and administrative expenses, as a percentage of net sales, were 0.8% and 0.9% for FYE 2005 and FYE 2004, respectively.

Depreciation and Amortization Expense. Depreciation and amortization expenses were $24.4 million for FYE 2005 compared to $21.2 million for FYE 2004, an increase of $3.2 million, or 15.1%. This increase was due to additional assets being placed into service primarily at our beef processing plants during FYE 2005 and FYE 2004.

Operating Income. Operating income was $50.6 million for FYE 2005 compared to $63.8 million for FYE 2004, a decrease of $13.2 million, or 20.7%. Operating income, as a percentage of net sales, was 1.2% for FYE 2005 and 1.6% for FYE 2004. A small number of cases of BSE in Canada and the U.S. since May 2003 has caused many international importers to close their borders to U.S. beef products. As a result of these actions and their corresponding effects on the aggregate supply of cattle and aggregate demand for beef products, the U.S. beef industry has experienced a noticeable compression of industry margins during the latter part of FYE 2004 and all of FYE 2005.

Minority Owners'Owners’ Interest in NBP. Minority interest in NBP in FYE 2005 was $8.5 million compared to $19.4 million in FYE 2004, a decrease of $10.9 million, or 56.2%. The decrease is primarily due to lower net income earned by NBP. The minority interest in NBP represents the minority owners'owners’ equity in NBP'sNBP’s earnings.

Interest Expense. Interest expense was $29.0 million for FYE 2005 compared to $26.6 million for FYE 2004, an increase of $2.4 million, or 9.0%. The increase was due primarily to the higher average interest rates in FYE 2005 compared to FYE 2004 as evidenced by an increase of approximately 200 basis points in the published LIBOR index interest rates as of August 27, 200526, 2006 compared to August 28, 2004,27, 2005, which is the basis for interest rates on most of our variable rate borrowings.

Other, Net. Other, net expenses were $5.3 million for FYE 2005 compared to $0.0 million for FYE 2004. Other, net expenses are lower in FYE 2005 compared to FYE 2004 due to $3.2 million in expense for the write-off of unamortized loan costs associated with amending and restating NBP's existing seniorNBP’s fourth amended and restated credit facility, and income tax expense of $1.9 million recorded on the income for FYE 2005 for National Carriers, Inc., which is organized as a C corporation. FYE 2004 includes a $1.1 million gain received through the demutualization of a company which held annuities for NBP employees, offset by income tax expense of $0.7 million recorded on the income for FYE 2004 for National Carriers, Inc. and tax accruals of $0.5 million in consideration of the potential recharacterization of income from patronage-source to nonpatronage-source,non-patronage-source, which could be asserted by the IRS.

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FYE August 27, 2004  compared to August 30, 2003

Net Sales. Net sales were $4,093.5 million for FYE 2004 compared to $871.8 million for  FYE 2003, an increase of $3,221.7 million or 369.5%. The increase was the direct result of consolidating NBP's sales of $4,093.5 million and eliminating the intercompany sales of $614.3 million from the cooperative to NBP. The decline in the cooperative's sales to NBP of $10.9 million, or 1.7%, was driven by a decrease of 15.0% in the number of cattle sold, offset by an increase in the average sales price of 16.2%.

Cost of Sales. Cost of sales were $3,973.7 million for FYE 2004 compared to $853.6 million for FYE 2003, an increase of $3,120.1 million or 365.5%. The increase was the direct result of consolidating NBP's cost of sales of $3,973.7 million and eliminating the intercompany cost of sales of $614.3 million.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $34.8 million for FYE 2004 compared to $5.7 million for FYE 2003, an increase of $29.1 million or 510.5%. The increase was the direct result of consolidating NBP's expenses of $29.6 million that were not consolidated in the 2003 period.

Depreciation and Amortization Expense. Depreciation and amortization expenses were $21.2 million for FYE 2004 compared to $2.1 million for FYE 2003, an increase of $19.1 million or 909.5%. This increase was the direct result of consolidating NBP's depreciation of $21.2 million which included increases that resulted from depreciation on new capital projects placed in service, from the depreciation of assets acquired in the acquisition of National Carriers, Inc.  Additionally, a small increase resulted from the amortization of intangible assets identified in the purchase accounting under the Acquisition.

Operating Income. Operating income was $63.8 million for FYE 2004 compared to $10.4 million for FYE 2003, a favorable increase of $53.4 million. Operating income, as a percentage of net sales, was 1.6% for FYE 2004 and 1.2% for FYE 2003. This is the direct result of consolidating NBP's results of operations in 2004 of $69.0 million which was 1.7% of our consolidated sales.

Equity in Earnings. In FYE 2004 the results of NBP were consolidated while earnings in FNB were $22.6 million for FYE 2003. The minority interest in NBP represents the minority owners' equity in NBP's earnings. 

Interest Expense. Interest expense was $26.6 million for FYE 2004 compared to $2.4 million for FYE 2003, an increase of $24.2 million. The increase was due primarily to the higher level of borrowings in FYE 2004 as a result of the Acquisition.

Other, Net. Other, net was income of $0.0 million for FYE 2004 compared to an expense of $1.7 million for FYE 2003. In 2004, NBP received $1.1 million through the demutualization of a company which held annuities for NBP employees, and the loss in NBP's equity investment of aLF Ventures, LLC of $0.8 million. These were offset by tax accruals of $0.5 million in consideration of the potential recharacterization of income from patronage-source to nonpatronage-source, which could be asserted by the IRS. FYE 2003 is primarily due to the consolidation of NBP's net expense of $1.7 million for the 24 day period from August 7 to August 30, 2003. This net expense consisted of $1.7 million of bridge loan commitment fees, $1.6 million in the write-off of unamortized debt issuance costs (both associated with the Acquisition), $0.9 million of expenses associated with an investment in an electronic commerce venture, as offset by receipt of a $2.3 million award in an antitrust vitamin litigation.

Liquidity and Capital Resources

     As of August 26, 2006 we had net working capital of $226.6 million, which included $4.9 million in distributions payable, and cash and cash equivalents of $58.4 million, including $4.0 million restricted to IRB approved expenditures. As of August 27, 2005, we had net working capital of $178.6 million, which included $1.9 million in distributions payable, and cash and cash equivalents of $54.4 million, including $3.9 million restricted to IRB approved expenditures. As of August 28, 2004, we had net working capital of $179.9 million, which included $3.1 million in partner and member distributions payable, and cash and cash equivalents of $43.6 million, including $8.4 million restricted to IRB approved expenditures.  Our primary sources of liquidity are cash flow from operations and available borrowings under ourNBP’s fifth amended and restated credit facility.

38

As of August 27, 2005,26, 2006, we had $315.0$383.9 million of long-term debt, of which $1.0$3.4 was classified as a current liability. As of August 27, 2005, NBP's26, 2006, NBP’s fifth amended and restated credit facility consisted of a $120.0$170.0 million term loan, all of which $120.0 million was outstanding, a term loan with CoBank of which $6.2$5.2 million was outstanding and a $140.0$160.0 million revolving line of credit loan, which had outstanding borrowings of $15.0$18.9 million, outstanding letters of credit of $44.0$53.0 million and available borrowings of $74.1$88.1 million, based on the most restrictive financial covenant calculations. Cash flow from operations and borrowings under NBP'sNBP’s fifth amended and restated credit facility have funded itsacquisitions, working capital requirements, capital expenditures and other general corporate purposes. We were in compliance with all financial covenants as of August 27, 2005.26, 2006.

In addition to outstanding borrowings under its fifth amended and restated credit facility, NBP had outstanding borrowings under industrial revenue bonds of $13.8$20.7 million, Senior Notes of $160.0 million and senior notescapital lease and other obligations of $160.0$9.1 million as of August 27, 2005.26, 2006.

Capital spending through FYE 20062007 is expected to approximate $40.0 million, with projects already initiated at August 27, 2005 accounting for $5.5 million of that amount.$50.0 million. These expenditures as well as proposed new capital projects expected to start during FYE 2006, are primarily for plant expansion, equipment renewals and improvements.

The Company believes that available borrowings under NBP'sNBP’s fifth amended and restated credit facility and cash provided by operating activities will be sufficient to support its working capital, capital expenditures and debt service requirements for the foreseeable future. NBP'sNBP’s ability to generate sufficient cash, however, is subject to certain general economic, financial, industry, legislative, regulatory and other factors beyond their control.

Operating Activities

     Net cash provided by operating activities was $44.6 in FYE 2006 and $60.0 million in FYE 2005. The $15.4 million decrease was due primarily to a net increase in working capital requirements in the current period resulting from increased beef inventory levels, partially offset by an increase in accounts receivable collections and by increased net income in FYE 2006.

Net cash provided by operating activities was $60.0 million in FYE 2005 and $39.7 million in FYE 2004. The $20.3 million increase was due primarily to an increase in working capital resulting partially from increased accounts receivable collections, offset by lower net income in FYE 2005.

Net cash provided by operating activities was $39.7 million in FYE 2004 and $20.4 million in FYE 2003. The $19.3 million increase was due primarily to the consolidation of NBP.

Investing Activities

     Net cash used in investing activities was $32.9 million in FYE 2006 compared to $16.7 million for FYE 2005, an increase of $16.2 million. The increase was due to an increase in capital spending in FYE 2006.

Net cash used in investing activities was $16.7 million in FYE 2005 compared to $31.2 million for FYE 2004, a decrease of $14.5 million. The decrease was due primarily to decreased capital spending in FYE 2005.

Net cash used in investing activities was $31.2 million in FYE 2004 compared to $227.9 million for FYE 2003, a decrease of $196.7 million. The decrease was due primarily to the 2003 funding of the Acquisition and funding of the acquisition of National Carriers. 

Financing Activities

     Net cash used in financing activities was $7.7 million in FYE 2006 compared to net cash used in financing activities of $32.5 million for FYE 2005. The $24.8 million change was due primarily to an increase in borrowings on the term note payable of $46.4 million and revolving credit lines of $31.0 million in FYE 2006 compared to FYE 2005, partially offset by the repayment of $52.9 million of Brawley Beef, LLC debt in FYE 2006.

Net cash used in financing activities was $32.5 million in FYE 2005 compared to $7.2 million for FYE 2004. The increase in FYE 2005 of $25.3 million was due primarily to a lower revolving credit line balance in FYE 2005, partially offset by a decrease in the member distributions paid in FYE 2005.

Net cash used in financing activities was $7.2 million in FYE 2004 compared to cash provided by financing of $233.7 million for FYE 2003. The decrease in FYE 2004 of $240.9 million was due primarily to the FYE 2003 issuance of Senior Notes and member contributions associated with the Acquisition.

39

CoBank Term Debt

USPB'sEffective June 1, 2006, and related to the purchase of the assets of Brawley Beef, more fully described inRecent Developments above, USPB amended the CoBank term debt agreement to facilitate USPB’s acquisition of additional membership units in NBP. USPB contributed partnership units in NBC, which were acquired from Brawley Beef, LLC, to NBP in exchange for an additional (i) 5,899,297 Class A units and (ii) 664,475 Class B-1 units in NBP. The amendment also modifies the term “Collateral” to not include the partnership units in NBP and exempts USPB from being required to grant CoBank a security interest in the NBC partnership units. The amendment also permits USPB to have up to a one-hundred percent (100%) interest in NBP and to acquire the NBC partnership units and additional units in NBP.

     Effective July 19, 2006, USPB amended the CoBank term debt agreement to cause distributions that are made in excess of the amount allowed (Excess Distribution) to be deducted from the amount which could otherwise be distributed to its members for the subsequent periods until the Excess Distribution has been fully deducted.

     USPB’s CoBank term debt of approximately $6.2$5.2 million is payable in quarterly installments with final payment due in July 2011, bearing interest at the 90 day LIBOR index plus 2.50%, adjusted quarterly (6.01%(8.01% at August 26, 2006, 6.01% at August 27, 2005, and 4.10% at August 28, 2004 and 3.36% at August 30, 2003)27, 2004).

The debt agreement with CoBank contains certain covenants which require, among other things:

• reporting requirements;

  
  

• a minimum working capital reserve;

  
  

• a minimum debt service coverage ratio (not required if working capital falls above the greater of one half the aggregate commitment or $4 million and NBP is in compliance with their loan covenants).

  
  

• a minimum net worth of $70.0 million

  
  

• restrictions on transactions with related parties; and,

  
  

• restrictions on dividend payments;

The Company was in compliance with all CoBank debt covenants as of August 27, 2005.26, 2006. The debt is secured by USPB'sUSPB’s interest in NBP.

USPB's     USPB’s rate margin, which is adjusted annually, is determined pursuant to a table based on the NBP leverage ratio, as of the end of each fiscal year of NBP. Based on the table, the rate margin was 2.50% at bothFYE August 26, 2006, August 27, 2005 and August 28, 2004 and 2.25% at August 30, 2003.  2004.

Amended and Restated Senior Credit FacilityFacilities

Effective December 30, 2004,June 1, 2006, and related to the purchase of the assets of Brawley Beef, more fully described in Item 1.Business – Business Strategy, NBP amended and restated its existing senior credit facility with a consortium of banks. The facility now consists of a $120.0$170.0 million term loan that matures in December 2014May 2016 and a $140.0$160.0 million revolving line of credit loan that matures in December 2009May 2011 that is subject to certain borrowing base limitations. TheThis fifth amendment and restatement is within the scope of the Emerging Issues Task Force (EITF) 96-19,Debtor'sDebtor’s Accounting for a Modification or Exchange of Debt Instruments as well as EITF 98-14,Debtor'sDebtor’s Accounting for Changes in Line-of-Credit or Revolving-Debt Arrangements. In accordance with that guidance, a portion of the unamortized loan costs of approximately $2.6$0.5 million from the previousfourth amended and restated credit facility as well as additional finance and legal charges associated with the new fifth amended and restated credit facility of approximately $0.6$0.1 million were recordedexpensed in Other, net in the Statement of Operations during the fiscal year 2005. ended August 26, 2006.

The borrowings under the revolving loan are available for NBP'sNBP working capital requirements, capital expenditures and other general corporate purposes. The fifth amended and restated credit facility is secured by a first priority lien on substantially all of NBP'sNBP’s assets. The principal amount outstanding under the term loan is due and payable in equal quarterlysemi-annual installments of $6.0 million on the last business day of each March, June September and December commencing June 30, 2011 in equal installments of approximately $2.8 million, with any and all remaining principal outstanding being due and payable on March 31, 2010 and ending on December 29, 2014.the maturity date. Prepayment is allowed at any time.

NBP's     The fifth amended and restated credit facility contains covenants that limit its ability to incur additional indebtedness, sell or dispose of assets, make capital expenditures, pay certain dividends and prepay or amend certain indebtedness among other matters. The fifth amended and restated credit facility also contains a provision for a conversion to more favorable interest rates and more restrictive financial covenants on the earlier of (a) June 1, 2006August 25, 2007 or (b) ourNBP’s election (the Conversion(Conversion Date). At NBP's election,Currently, the interest may be computed atrate for the term loan is (a) the Base Rate (as defined in the credit agreement) plus an applicable margin75 basis points or (b) the LIBOR Rate (as defined in the credit agreement) plus 275 basis points, or a LIBOR rate plus an applicable margin.combination of these rates at our election. As of August 27, 2005,26, 2006, the interest rate for the term loan was equal to LIBOR8.0625%. Currently, the interest rate for the revolving loan is (a) the Base Rate plus 27550 basis points (6.1%) andor (b) the weighted averageLIBOR Rate plus 250 basis points, or a combination of these rates at our election. As of August 26, 2006, the interest rate for the revolving loan was equal to LIBOR plus 250 basis points (6.0%)8.75%. After the Conversion Date, the interest rate for the term loan and revolving loan iswill be determined by reference to a matrix of rates keyed to our funded debt to EBITDA (as defined in the credit agreement) ratio.

40

The fifth amended and restated credit facility also imposes certain financial covenants. From DecemberMay 30, 20042006 until the earlier of February 28, 2007 or the Conversion Date, NBP isNBP’s required to (i) have as of the end of each fiscal quarter a minimum four-quarter rolling EBITDA of $50.0 million and (ii) maintain at all times a minimum Borrowing Base Availability (as defined in the credit agreement) of at least $25.0 million. After February 28, 2007 until the Conversion date, NBP’s required to (i) have as of the end of each fiscal quarter a minimum four-quarter rolling EBITDA of $60.0 million and (ii) maintain at all times a minimum Borrowing Base Availability of at least $25.0 million. After the Conversion Date, NBP will be subjectNBP’s required to covenants imposingmaintain at all times a specified maximum funded debt to EBITDA ratio, a maximum senior secured funded debt to EBITDA ratio, a minimum four-quarter rolling EBITDA and a minimum four-quarter rolling debt service coverage ratio. As definedIn addition, NBP’s annual net capital expenditures are limited to $50 million in the amended credit facility, EBITDA contains specified adjustments.  On August 27, 2005, NBP was in compliance with all financial covenants.fiscal year 2007 and each fiscal year thereafter.

Effective July 7, 2005, the     The fifth amended and restated credit facility was further amendedcontains customary affirmative covenants, including furnishing financial statements, maintenance of insurance, conduct of business, maintenance of properties, and compliance with laws. The facility also contains customary negative covenants, including covenants restricting NBP’s ability to allow NBP to purchase up to $30 million in cumulative purchase price (including any premium) of our 10‑1/2% Senior Notes due August 1, 2011 so long as NBP is not in default under the facility at the time of the purchasepay certain distributions, incur additional indebtedness, merge with another entity, sell or as a result of the purchase.

Effective October 14, 2005, NBP further amended its existing senior credit facility to reflect changes in the covenant limiting its net capital expenditures.  There were no changes to the remaining covenants in the credit facility.  NBP's net capital expenditures are now limited to $64 million in the combined period of FYE 2005dispose assets, and FYE 2006, $35 million in FYE 2007 and $40 million in FYE 2008 and fiscal years thereafter.  Prior to this amendment, FYE 2005 and FYE 2006 were separately limited to $32 million each year.make investments or acquire assets, among other restrictions.

Industrial Revenue Bonds

In conjunction with the fourth amendment and restatement of its creditour NBP’s facility, effective December 30, 2004, NBP entered into a transaction with the City of Dodge City, Kansas, in order to provide NBP property tax savings. Under the transaction, the City purchased ourNBP’s Dodge City facility (the "facility"“facility”) by issuing $102.3 million in bonds due in December 2014, and leased the facility to NBP for an identical term under a capital lease. The City'sCity’s bonds were purchased by NBP using proceeds of its term loan under the fourth amended and restated credit facility. Because the City has assigned the lease to the bond trustee for the benefit of NBP as the sole bondholder, NBP, in effect, controls enforcement of the lease against itself. As a result of the capital lease treatment, the facility will remain a component of property, plant and equipment in NBP'sNBP’s consolidated balance sheet. As a result of the legal right of offset, the capital lease obligation and the corresponding bond investments will be eliminated in consolidation. The transaction provides NBP with property tax exemptions for the leased facility, which, after netting payments to the City and local school district under payment in lieu of tax agreements, result in an annual property tax savings of approximately 25%. The facility remains subject to a prior mortgage and security interest in favor of the lenders under the senior credit facility. Additional revenue bonds may be issued to cover the costs of certain improvements to this facility. The total amount of revenue bonds authorized for issuance is $120.0 million.

The cities of Liberal and Dodge City, Kansas issued an aggregate of $13.8 million of industrial development revenue bonds on NBP'sNBP’s behalf to fund the purchase of equipment and construction of improvements at its facilities in those cities. These bonds were issued in 1999 and 2000 in four series of $1.0 million, $1.0 million, $6.0 million and $5.8 million and are due on demand or on February 1, 2029, March 1, 2027, March 1, 2015 and October 1, 2009. However, because each series of bonds is backed by a letter of credit under our existing amended and restated credit facility, these bonds have been presented as non-current obligations. Pursuant to a lease agreement, NBP leases the facilities, equipment and improvements from the respective cities and make lease payments in the amount of principal and interest due on the bonds. Each series of bonds is backed by a letter of credit under NBP's amended and restated credit facility.

The bonds issued in 1999 and 2000 are variable rate demand obligations that bear interest at a rate that is adjusted weekly, which rate will not exceed 10% per annum. The average per annum interest rate for each series of bonds was 2.3%3.4% in FYE 2005.2006. NBP has the option to redeem a series of bonds at any time for an amount equal to the principal plus accrued interest to the date of such redemption. The holders of the bonds have the option to tender the bonds upon seven days'days’ notice for an amount equal to par plus accrued interest. To the extent that the remarketing agent for the bonds is unable to resell any of the bonds that are tendered, the remarketing agent will use the letter of credit to fund such tender.

41     In connection with the Brawley Beef acquisition, NBP assumed the obligation under a Trust Indenture securing $6.8 million in California Pollution Control Financing Authority Tax-Exempt variable rate demand solid waste disposal revenue bonds dated as of October 1, 2001. The bonds bear a rate that is adjusted weekly, which rate will not exceed 12% per annum. The average per annum interest rate for this series of bonds for the period from the Brawley acquisition date until the end of FYE 2006 was 3.7%. These bonds have been presented as non-current. NBP has the option to redeem all or a portion of the bonds at any time for an amount equal to the principal plus accrued interest to the date of such redemption. The holders of the bonds have the option to tender the bonds upon seven days’ notice for an amount equal to par plus accrued interest. To the extent that the remarketing agent for the bonds is unable to resell any of the bonds that are tendered, the remarketing agent will use the letter of credit to fund such tender.

Utilities Commitment

Effective December 30, 2004, NBP finalized an agreement with the City of Dodge City, Kansas, whereby in consideration of certain improvements made to the city water and wastewater systems, NBPit has committed to make a series of service charge payments totaling $19.3 million over a 20 year period, of which $0.8 million wasand $1.2 million were paid in fiscal year 2005.years 2005 and 2006, respectively. Payments under the commitment will be $1.2 million in fiscal year 2006, $1.4 million in each of the fiscal yearyears 2007 $1.4 million in fiscal year 2008, $1.4 million in fiscal yearthrough 2009, and $1.7 million in fiscal year 2010 and $0.8 million in fiscal year 2011, with the balance of $11.4$10.6 million to be paid in subsequent years.

10 ½% Senior Notes

Concurrent with the Acquisition, NBP issued the     The 10 ½% Senior Notes that will mature on August 1, 2011. Interest on the Senior Notes is payable semi-annually in arrears on August 1 and February 1 of each year, which commenced on February 1, 2004. The Senior Notes are senior unsecured obligations, ranking equal in right of payment with all of ourits other senior unsecured obligations. With limited exceptions, the Senior Notes are not redeemable before August 1, 2007. During the 12 month period commencing August 1, 2007 and August 1, 2008, the Senior Notes may be redeemed at 105.250% and 102.625%, respectively, of the principal amount. Thereafter, the Senior Notes may be redeemed at 100% of face value. The Indenture governing the Senior Notes contains certain covenants that restrict NBP'sits ability to:

• incur additional indebtedness;

  
  

• make restricted payments;

  
  

• make distributions on or redeem ourits equity interests;

  
  

• sell ourits assets;

  
  

• create liens;

  
  

• merge or consolidate with another entity; and

  
  

• enter into transactions with affiliates.

Cash Payment Obligations

The following table describes our cash payment obligations as of August 27, 200526, 2006 (in thousands):

⁽¹⁾ NBP makes a verbal commitment to cattle producers to purchase cattle about one week in advance of delivery of the live animals to ourits plants, with the actual price paid for the cattle determined after the cattle are delivered and inspected at our facilities. This amount approximates ourits outstanding cattle commitments at August 27, 2005.26, 2006.

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Off-Balance Sheet Arrangements

As of August 27, 200526, 2006 we did not have any significant off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Inflation

We believe that our results of operations are not materially affected by moderate changes in the inflation rate. Inflation and changing prices did not have a material affect on our operations in FYE 2006, 2005 2004 and 2003.2004. Severe increases in inflation, however, could affect the global and U.S. economies and could have an adverse affect on our business, financial condition and results of operations.

Seasonality and Fluctuations in Operating Results

The Company'sCompany’s operating results are influenced by seasonal factors in the beef industry. These factors affect the price that we pay for livestock as well as the ultimate price at which NBP sells its products. The seasonal demand for beef products is highest in the summer and fall months as weather patterns permit more outdoor activities and there is an increased demand for higher value items that are grilled, such as steaks. Both live cattle prices and boxed beef prices tend to be at seasonal highs during the summer and fall. Because of higher consumption, more favorable growing conditions and the housing of animals in feedlots for the winter months, there are generally more cattle available in the summer and fall.

ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Disclosures

The principal market risks affecting our business are exposure to changes in prices for commodities, such as livestock and boxed beef.beef, and interest rate risk.

Commodities.    NBP usesWe use various raw materials, many of which are commodities. Raw materials are generally available from several different sources, and NBPwe presently believesbelieve that itwe can obtain them as needed. Commodities are subject to price fluctuations that may create price risk. When appropriate, NBPwe may hedge commodities in order to mitigate this price risk. While this may tend to limit NBP'sour ability to participate in gains from commodity price fluctuations, it also tends to reduce the risk of loss from changes in commodity prices. NBP reflectsWe reflect commodity contract gains and losses as adjustments to the basis of underlying commodities purchased; gains or losses are recognized in the statement of operations as a component of costs of goods sold.

NBP purchases     We purchase cattle for use in itsour processing businesses. When appropriate, NBP enterswe enter into forward purchase contracts at prices determined prior to the delivery of the cattle. The commodity price risk associated with these activities can be hedged by selling (or buying) the underlying commodity, or by using an appropriate commodity derivative instrument. The particular hedging instrument NBP useswe use depends on a number of factors, including availability of appropriate derivative instruments.

NBP sells     We sell commodity beef products in itsour business. Commodity beef products are subject to price fluctuations that may create price risk. When appropriate, NBP enterswe enter into forward sales contracts at prices determined prior to shipment. We may hedge the commodity price risk associated with these activities in order to mitigate this price risk. While this may tend to limit NBP'sour ability to participate in gains from commodity price fluctuations, it also tends to reduce the risk of loss from changes in commodity beef prices. NBP reflectsWe reflect commodity contract gains and losses as adjustments to the basis of underlying commodities sold; gains or losses are recognized in the statement of operations as a component of net sales.

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NBPWe may use futures contracts in order to reduce exposure associated with entering into firm commitments to purchase live cattle at prices determined prior to delivery of the cattle as well as firm commitments to sell certain beef products at sales prices determined prior to shipment. In accordance with SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, as amended, NBP accountswe account for futures contracts and their related firm purchase commitments at fair value. MostCertain firm commitments for live cattle purchases and all firm commitments for boxed beef sales are treated as "normal“normal purchases and sales"sales” and not marked to market. SFAS No. 133 imposes extensive recordkeeping requirements in order to treat a derivative instrument as a hedge for accounting purposes. Derivatives qualify for treatment as hedges when there is a high correlation between the change in fair value of the instrument and the related change in fair value of the underlying commitment. For derivatives that qualify as effective hedges, the change in fair value has no net effect on earnings until the hedged transaction affects earnings. For derivatives that are not designated as hedging instruments, or for the ineffective portion of a hedging instrument, the change in fair value does affect current period net earnings.

While NBP management believes each of these instruments help mitigate various market risks, they are not designated and accounted for as hedges under SFAS No. 133 as a result of the extensive recordkeeping requirements of this statement. Accordingly, the gains and losses associated with the change in fair value of the instrument and the offsetting gains and losses associated with changes in the market value of certain of the firm purchase commitments related to the futures contracts are recorded to income and expense in the period of change.

The following     While we previously presented the market value of commodity derivative instruments and firm commitments in a table, describeswe currently use sensitivity analysis to evaluate the numbereffect that changes in the market value of futures positionscommodities will have on these commodity derivative instruments. We feel that sensitivity analysis more appropriately reflects the potential market value exposure associated with the use of derivative instruments. As of August 26, 2006, and August 27, 2005, the potential change in the fair value of those positionsapplicable commodity prices, assuming a hypothetical 10% decrease in the underlying commodity price in each year, was $1.4 million and related firm commitments at August 27, 2005 and August 28, 2004.  A position in live cattle consists of 40,000 pounds.  Firm commitments for purchase are for live cattle and firm commitments for sales are for boxed beef (dollars in thousands).less than $0.1 million, respectively.

Foreign Operations.Transactions denominated in a currency other than an entity'sentity’s functional currency may expose that entity to currency risk. Although NBP operateswe operate in international markets including Japan and South Korea, product sales are predominately made in United States dollars and therefore currency risks are limited.

Interest Rates.As a result of the Company'sour normal borrowing and leasing activities, our operating results are exposed to fluctuations in interest rates, which we manage primarily through our regular financing activities. We generally maintain limited investments in cash and cash equivalents.

We have short-term and long-term debt with variable interest rates. Our variable interest expense is sensitive to changes in the general level of interest rates. As of August 27, 2005,26, 2006, most of our debt is borrowed at LIBOR plus a weighted average margin.margin rate of 2.75%. As of August 27, 2005,26, 2006, the weighted average interest rate on our $155.0$209.5 million of variable interest debt was approximately 5.8%7.7%.

We had total interest expense of approximately $32.4 million in FYE 2006 and approximately $29.0 million in FYE 2005 and approximately $26.6 million in FYE 2004.2005. The estimated increase in interest expense from a hypothetical 200 basis point increase in applicable variable interest rates would have been approximately $3.4 million in FYE 2006 and approximately $3.3 million in FYE 2005 and approximately $3.4 million in FYE 2004.2005.

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements and notes thereto, and other information required by this Item 8 are included in this report beginning on page F-1.

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ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.     CONTROLS AND PROCEDURES

The Company maintains a system of controls and procedures designed to provide reasonable assurance as to the reliability of the Consolidated Financial Statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e) under supervision and with the participation of management, including our Chief Executive Officer and Chief Reporting and Compliance Officer. Based upon that evaluation, as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief Reporting and Compliance Officer concluded that our disclosure controls and procedures were effective in alerting them, in a timely manner, to material information required to be included in our periodic Securities and Exchange Commission filings. There have been no changes in our internal control over financial reporting during the thirteen weeks ended August 27, 200526, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events.

ITEM 9B.     OTHER INFORMATION

None.

PART III

ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Board of Directors

U.S. Premium Beef'sBeef’s business and affairs are governed by its board of directors. The board of directors currently consists of seven directors. The board of directors has full authority to act on behalf of USPB. The board of directors acts collectively through meetings, committees and senior management members it appoints. In addition, USPB employs a staff of executives to manage the day-to-day business of USPB. The members of the board of directors and the senior members of the executive team are identified below.

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Senior Management and Members of the Board of Directors

Terry D. Ryan. Mr. Ryan manages HRC Feedyards, Inc., nearis employed by Fairleigh Companies, Scott City, Kansas, and has been involved in the commercial cattle feeding industry since 1977. He is also a partner in the family farm operation in Rawlins County, Kansas. He is a member of the National Cattlemen'sCattlemen’s Beef Association and the Kansas Livestock Association (KLA). Mr. Ryan is a past member of the KLA boardBoard of directors.Directors. Mr. Ryan has served as a member of USPB's boardUSPB’s Board of directorsDirectors since 1996. He was elected to the Chairmanchairman of USPB's boardUSPB’s Board of directorsDirectors in 2004. Mr. Ryan attended Colby Community College with an emphasis onin Animal Science and Farm and Ranch Management.

Mark R. Gardiner. Mr. Gardiner is President of Gardiner Angus Ranch, Inc. (GAR), a family owned purebred and commercial Angus operation headquartered at Ashland, Kansas, with nine seedstock satellite cowherds across the United States and Australia. Gardiner Angus Ranch markets over 1,500 bulls and 600 females per year to both commercial and seedstock beef producers throughout the United States. Gardiner Angus Ranch also runs an embryo transfer program that makes more than 2,000 transfers per year, including more than 60% of GAR'sGAR’s 1,500-plus head of registered Angus calves born each year. A percentage of its calves are finished at commercial feedlots to provide carcass data on all Gardiner sires. In addition to a native range program, Gardiner Angus Ranch operates a significant dryland farming enterprise. Mr. Gardiner is a member of the National Cattlemen'sCattlemen’s Beef Association, Kansas Livestock Association, American Angus Association, Kansas Angus Association and the Beef Improvement Federation. Mr. Gardiner has served as a member of USPB's boardUSPB’s Board of directorsDirectors since 1996. He was elected Secretary/Treasurer of USPB's boardUSPB’s Board in 2003 and Vice Chairman of the boardBoard in 2004.  Mr. Gardiner holds a Bachelor'sBachelor’s degree from Kansas State University in Animal Sciences and Industry.

John D. Fairleigh. Mr..Mr. Fairleigh is President and CEO of Fairleigh Companies, a family-owned business in Scott City, Kansas, consisting of a 44,000 head commercial feedyard, Fairleigh Ranch, a 10,000 acre backgrounding and grazing operation, Fairleigh Farms and L&M Western Tire and Oil Company. He is a member of the National Cattlemen'sCattlemen’s Beef Association and Kansas Livestock Association. Mr. Fairleigh has served as a USPB boardBoard member since 1999 and was elected Secretary/TreasurerSecretary of the boardBoard in 2004. Mr. Fairleigh holds a Bachelor'sBachelor’s degree in Business from Kansas State University.

John Adams. Mr. Adams is a fourth generation partner in Adams Cattle Company and manages operations in Meade and Seward counties in Kansas and in Beaver County in Oklahoma. Mr. Adams's family has engaged in that business for more than 100 years. Most of the calves off that ranch are backgrounded at the family's northeast Kansas ranch, where they are grown to feeder weight. Mr. Adams also runs an extensive farming operation that includes irrigated and dryland crops and hay production, as well as a wheat grazing program. Mr. Adams is a member of the National Cattlemen's Beef Association, Kansas Livestock Association and the Oklahoma Cattlemen's Association. Mr. Adams has served as a member of USPB's board of directors since 1999. Mr. Adams attended the University of Kansas School of Business.

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Kelly K. Giles.  Mr. Giles is a third generation cow-calf, stocker/feeder and seed stock operator.  Mr. Giles is the General Manager of Giles Enterprises, LLC, a genetics, marketing and procurement company based in Ashland, Kansas, with a business office in Canyon, Texas.  He is also a General Partner in Giles Land Co., LP of Ashland, Kansas, which owns the Giles Ranch that has been in operation since 1947.  Mr. Giles is a member of the National Cattlemen's Beef Association, the Kansas Livestock Association, and the American Angus Association.  He holds a Bachelor's degree in Animal Science and Industry from Kansas State University and a Masters of Business Administration degree in Finance from Texas A&M University.  Mr. Giles has served as a member of USPB's Board of Directors since 1996.

Douglas A. Laue. Mr. Laue owns and operates Black Diamond Customer Feeders, Inc. in Herington, Kansas, and runs a grazing program in the Kansas Flint Hills. He is a member of the National Cattlemen's Beef Association and Kansas Livestock Association (KLA). Mr. Laue previously served as the Chairman of the KLA Feeders Council. Mr. Laue has been a member of USPB's board of directors since 1996 and served as Vice Chairman of USPB's board of directors from 1996 through 2002. Mr. Laue holds a Bachelor's degree in Animal Sciences and Industry from Kansas State University.

Jerry L. Bohn. Mr. Bohn has served as the General Manager of Pratt Feeders since 1989. Pratt Feeders has a one-time capacity of 115,000 head in four feedlots in Kansas and Oklahoma. In this capacity he oversees more than 100 employees. Mr. Bohn also owns and manages a 5,000 to 6,000 head cattle operation which includes grazing and finishing cattle. Mr. Bohn previously was employed as Director of Market Analysis for Cattle-Fax, an industry market analysis firm. Mr. Bohn has served as Presidentpresident of the Kansas Livestock Association. He has been a boardBoard member of the Kansas Beef Council, the National Cattlemen'sCattlemen’s Beef Association (NCBA) and Feeders Advantage, a private animal health product distribution company. Mr. Bohn has also served on the NCBA'sNCBA’s Executive Committee and as Chairmanchairman of NCBA'sNCBA’s Live Cattle Marketing Committee.Marketing.

Douglas A. Laue. Mr. Laue owns and operates Black Diamond Customer Feeders, Inc. near Herington, Kansas, and runs a grazing program in the Kansas Flint Hills. He has served asis a member of USPB's boardthe National Cattlemen’s Beef Association and Kansas Livestock Association (KLA). Mr. Laue previously served as the chairman of directorsthe KLA Feeders Council. Mr. Laue has been a member of USPB’s Board of Directors since 2004.1996 and served as vice chairman of USPB’s Board of Directors from 1996 through 2002. Mr. Bohn isLaue holds a graduate of Kansas State University with a Bachelor'sBachelor’s degree in Animal Sciences and Industry.Industry from Kansas State University.

Carol A. Keiser. Ms. Keiser is president of C-BAR Cattle Company, Inc. where she manages operations for the feeding of 5,000 to 6,000 head of cattle in Texas, Kansas, Nebraska, and Western Illinois. Prior to C-BAR Cattle Company she developed health and well-being procedures for Loveless Feedlot, taught vocational agriculture and served as an FFA advisor. She is a Certified Livestock Manager, Certified Livestock Dealer and is a member of the National Cattlemen’s Beef Association and the American Society of Animal Science and American Meat Science Association. Currently, Ms. Keiser serves on the National Agricultural Research, Extension, Education, and Economics Advisory Board, the Board of Trustees of the Farm Foundation, and the Illinois Global partnership Advisory. She served on the Steering Committee of the Future of Animal Agriculture in North America Project, the Board of Directors of the Council of Food and Agricultural Research, Illinois Beef Association Check-off Division, was past chair of UIAA University of Illinois Alumni Association and Board of UIUC Agriculture, Consumer and Environmental Sciences Alumni Board. Ms. Keiser is a graduate of the University of Illinois in Animal Science.

Rex W. McCloy. Mr. McCloy is manager and part-owner of McLeod Farms Inc., a family-owned business headquartered in Morse, TX. The operation includes a 6,500 head capacity feed yard, a 7,000 acre irrigated farm, a backgrounding operation and a 20,000 acre ranch in Harding Co., NM. Mr. McCloy is a member of the National Cattlemen’s Beef Association, the Texas Cattle Feeder's Association (TCFA) and the Texas Southwestern Cattle Raiser's Association. He is a past Board member and marketing committee chairman of TCFA. In addition he is a former member of U.S. Premium Beef’s nominating committee. Mr. McCloy holds a Bachelors degree in Agricultural Economics from Texas Tech University.

Steven D. Hunt. Mr. Hunt was named Chief Executive Officer in July 1996 and was instrumental in the development and establishment of U.S. Premium Beef. Prior to his employment with USPB, Mr. Hunt owned and operated SDH Cattle Company at Winfield, Kansas, until 1996. As Vice President of Corporate Lending with CoBank, ACB from January 1987 to October 1988, Mr. Hunt also has experience in many areas of commercial banking, including direct agricultural lending, commercial lending, finance, business analysis, training, marketing and personnel. Mr. Hunt has served on the Board of National Beef Packing Company, LLC, (NBP) since 1997 and was elected chairman of NBP’s Board in 2003. Mr. Hunt holds a Bachelor'sBachelor’s degree in Agricultural Economics from Kansas State University.

Stan LinvilleD. Linville.. Mr. Linville is USPB'sUSPB’s Chief Operating Officer and joined USPB in 1997. He oversees cattle scheduling and technical operations. Before joining USPB, he operated a family farming operation near Holcomb, Kansas. He also worked in the cattle division of Brookover Enterprises at Garden City, Kansas, and as a grain merchandiser for Bartlett Grain Co. in Kansas City. Mr. Linville holds a Bachelor'sBachelor’s degree in Agricultural Economics from Kansas State University.

Danielle ImelD. Imel.. Ms. Imel is USPB'sUSPB’s Treasurer and joined USPB in 1998. She oversees the Company'sCompany’s finance functions and is directly responsible for Company treasury activities. She was employed by the CPA firm of Kennedy, McKee and Co., LLC of Dodge City, Kansas, prior to joining USPB. Ms. Imel earned a Bachelor'sBachelor’s degree in Accounting and a second Bachelor'sBachelor’s degree in Agricultural Economics from Kansas State University.

Scott J. Miller. Mr. Miller is USPB'sUSPB’s Chief Reporting and Compliance Officer and joined USPB in 2005. He oversees financial reporting and will ensureensures compliance with internal policies and regulatory requirements. Before joining USPB, he worked as the Manager, Capital Markets for Sprint Corporation from 2001 to 2005 and, prior to that, in various finance and accounting positions with Farmland Industries. Mr. Miller earned a Bachelors degree in Accounting from Benedictine College and an MBA with an emphasis in Finance from the University of Missouri-Kansas City (UMKC).City. He has passed the Certified Public Accounting exam and the Certified Cash Managers exam.

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Board of Directors

Under USPB'sUSPB’s LLC operating agreement, the number of directors is set by the board of directors but may not be less than seven (7) directors. Directors must be unitholders of USPB and will be elected by holders of USPB Class A units. The operating agreement states that at least one director will represent Seedstock breeders and the balance of the directors will be evenly divided between directors who are unitholders who have Even Slot delivery agreements and unitholders who have Odd Slot delivery agreements. Current representation is as follows:

• Seedstock -– Mr. Gardiner

  
  

• Even Slot -– Messrs. Ryan, Fairleigh, and Laue

  
  

• Odd Slot -– Messrs. Adams, Bohn and Giles

  McCloy, and Ms. Keiser