** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-KSB**

 

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| x      | **Annual  report under Section 13 or 15(d) of the Securities Exchange Act of  1934.** |
|--------|-------------------------------------------------------------------------------------------------|
|   |                                                                                            |
|   | **For the fiscal year ended  October 31, 2007**                                            |
|   |                                                                                            |
| o      | **Transition  report under Section 13 or 15(d) of the Exchange Act.**                 |

 

**For the transition period from                           to                            **

 

Commission file number 333-137482

** **

**HIGHWATERETHANOL, LLC**

(Name of small business issuer in its charter)

 

| **Minnesota**                                                       | ** ** | **20**-4798531                            |
|---------------------------------------------------------------------|------------|-------------------------------------------|
| **(State or other jurisdiction of  incorporation or organization)** | ** ** | **(I.R.S. Employer Identification  No.)** |

 

| **205 S. Main Street, PO Box 96,  Lamberton, MN** | ** ** | **56152**  |
|---------------------------------------------------|------------|------------|
| (Address of principal executive offices)          |       | (Zip Code) |

 

**(507)752-6160**

(Issuer’s telephone number)

 

Securities registered under Section 12(b) of the ExchangeAct:

** **

**None**

 

Securities registered under Section 12(g) of the ExchangeAct:

 

**None**

** **

Checkwhether the issuer is not required to file reports pursuant to Section 13or 15(d) of the Exchange Act.  o

 

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

 

Check if there is nodisclosure of delinquent filers in response to Item 405 of Regulation S-B isnot contained in this form, and no disclosure will be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or anyamendment to this Form 10-KSB.  x

 

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

 

o  Yes                   x No

 

Stateissuer’s revenues for its most recent fiscal year.  **None**

 

Asof January 25, 2008, the aggregate market value of the membership unitsheld by non-affiliates (computed by reference to the most recent offering priceof such membership units) was $1,180,000.

 

Asof January 25, 2008, there were 386 membership units outstanding.

 

TransitionalSmall Business Disclosure Format (Check one):                      o  Yes                   x  No

 

 

 

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**Table ofContents**

 
| **PART I**                                                                                                                                          | 3      |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| ** **                                                                                                                                          |   |
| **ITEM 1. DESCRIPTION OF BUSINESS**                                                                                                                 | 3      |
| **ITEM 1A. RISK FACTORS**                                                                                                                           | 19     |
| **ITEM 2. DESCRIPTION  OF PROPERTY**                                                                                                                | 29     |
| **ITEM 3. LEGAL PROCEEDINGS**                                                                                                                       | 30     |
| **ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**                                                                                    | 30     |
| ** **                                                                                                                                          |   |
| **PART II**                                                                                                                                         | 30     |
| ** **                                                                                                                                          |   |
| **ITEM 5. MARKET  FOR COMMON EQUITY AND RELATED MEMBER MATTERS AND SMALL BUSINESS ISSUER  PURCHASES OF EQUITY SECURITIES**                          | 30     |
| **ITEM 6.  MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**                                                                         | 31     |
| **ITEM 7. FINANCIAL  STATEMENTS**                                                                                                                   | 42     |
| **ITEM 8. CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**                                                   | 53     |
| **ITEM 8A. CONTROLS  AND PROCEDURES**                                                                                                               | 53     |
| **ITEM 8B. OTHER  INFORMATION**                                                                                                                     | 53     |
| ** **                                                                                                                                          |   |
| **PART III**                                                                                                                                        | 53     |
| ** **                                                                                                                                          |   |
| **ITEM 9.  GOVERNORS; EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE  GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT** | 53     |
| **ITEM 10. EXECUTIVE  COMPENSATION**                                                                                                                | 56     |
| **ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED  MEMBER MATTERS**                                            | 57     |
| **ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR   INDEPENDENCE**                                                            | 58     |
| **ITEM 13. EXHIBITS**                                                                                                                               | 59     |
| **ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES**                                                                                                | 59     |
| ** **                                                                                                                                          |   |
| **SIGNATURES**                                                                                                                                      | 60     |

 

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**AVAILABLE INFORMATION**

 

Ourwebsite address is www.highwaterethanol.com. Our annual report on Form 10-KSB, quarterly reports on Form 10-QSB,current reports on Form 8-K, and amendments to those reports filed orfurnished pursuant to Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934 (the “Exchange Act”), are available, free of charge, onour website under the link “Invest,” as soon as reasonably practicable after weelectronically file such materials with, or furnish such materials to, theSecurities and Exchange Commission.  Thecontents of our website are not incorporated by reference in this annual reporton Form 10-KSB.

 

**PART I**

 

**ITEM1.  DESCRIPTION OF BUSINESS.**

 

**BusinessDevelopment**

 

HighwaterEthanol, LLC is a development-stage Minnesota limited liability companyorganized on May 2, 2006, for the purpose of raising capital to develop,construct, own and operate a 50 million gallon per year ethanol plant nearLamberton, Minnesota in Redwood County. We have not yet engaged in the production of ethanol or distillersgrains.  Based upon engineeringspecifications from our design-builder, Fagen, Inc., we expect the ethanolplant, once built, will process approximately 18.5 million bushels of corn peryear into 50 million gallons of denatured fuel grade ethanol and 160,000 tonsof dried distillers grains with solubles. We expect to be operational in spring 2009.

 

Weare financing the development and construction of the ethanol plant with acombination of equity and debt.  Through private placements, we raisedaggregate proceeds of $1,680,000 to fund our development, organizational andoffering expenses.  In March 2007,we obtained interim financing in the amount of $800,000 from a bank to financeour land purchase for our site.  Weexecuted a promissory note which is secured by a mortgage on our two parcels ofproperty, a personal guarantee from Ron Fagen, the principal owner of ourdesign-build contractor, and by a limited personal guarantee from WarrenPankonin, a member of our board of governors and a seed capital investor in ourproject.  The note carries annualinterest at 7.50% and is payable in full on March 13, 2008. We do notexpect the funds raised in our private placements or our interim financing tosupply us with enough cash to cover our costs until we close on our anticipateddebt financing.   We have received a $300,000loan from Fagen, Inc., our design-builder, to provide us with additionalcapital to help fund our expenses. The loan was payable in full at the earlierof financial close or January 2, 2008. We have obtained a verbal extension from Fagen, Inc. for therepayment of the loan.  However, there isnot guarantee that we will be able to repay this loan on a timely basis or atall.

 

We filed a RegistrationStatement for an initial public offering of our units with the Securities andExchange Commission on Form SB-2 (SEC Registration No. 333-137482),as amended, which became effective on April 5, 2007.  We also registered these units with the statesecurities authorities in Florida, Georgia, Illinois, Iowa, Kansas, Louisiana,Minnesota, Missouri, South Dakota and Wisconsin.  We plan to raise a minimum of $45,000,000 anda maximum of $60,000,000 in the offering and secure the balance needed toconstruct the plant through federal, state and local grants and debt financing.

 

As of January 28,2008, we received subscriptions for approximately 4,510 units, for an aggregateamount of approximately $45,100,000. However, we have not yet closed the offering, accepted any of thesubscription agreements or released funds from escrow. Our offering will closeno later than April 5, 2008.  Wewill require a significant amount of debt financing to complete ourproject.  We will not release funds fromescrow until we have obtained the necessary debt financing. We are engaging indiscussions with potential senior lenders, however, no agreement has been executedyet. We expect to enter into definitive agreements for our debt financingwithin the next fiscal quarter. If we do not secure the necessary debtfinancing, we will not be able to construct our proposed ethanol plant and mayhave to abandon our business.

 

We have entered into a design-build contract with Fagen, Inc. ofGranite Falls, Minnesota for the design and construction of the ethanol plantfor a total price of $66,026,000, which does not include the anticipated costof our water treatment facility, any change orders, or increases in the costsof materials provided by the Construction 

 

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CostIndex published by Engineering News-Record Magazine (“CCI”) costs escalator provision contained inthe design-build agreement. The design-build agreement as amendedstates that the design-builder must receive a valid notice to proceed from usby November 15, 2007 or the Design-Build Agreement may be terminated.  That date has been extended pursuant to anoral agreement with Fagen, Inc. and we are in the process of getting thatextension in writing. However, there is no guarantee that Fagen, Inc. willnot terminate our design-build agreement.  Ourdesign-build agreement with Fagen, Inc. provides for an upward adjustmentof the construction price in an amount equal to the percentage increase in the CCI forthe month in which we give notice to proceed to Fagen, Inc., over the CCIpublished for January 2006. Therefore, the cost of our plant could be significantly higher than the$66,026,000 construction price in the design-build agreement.  We have budgeted $3,279,250 for ourconstruction contingency to help offset higher construction costs; however,based on the CCI for January 2008, this is not sufficient to offsetincreased costs. We intend to seek additional debt financing to offset anyincrease in the total project cost.  Wemay also seek additional equity investments in our offering if necessary.  In no event will we exceed the maximumoffering amount of $60,000,000.

 

We have executed a Phase Iand Phase II Engineering Services Agreement with Fagen Engineering, LLC, anentity related to our design-builder, Fagen, Inc., for the performance ofcertain engineering and design work. Fagen Engineering, LLC performs theengineering services for projects constructed by Fagen, Inc. In exchangefor certain engineering and design services, we have agreed to pay FagenEngineering, LLC a lump-sum fixed fee of $92,500 which will be credited againstthe total design-build costs for which the Company has incurred $92,500 as of October 31,2007.

 

We also entered into a license agreement with ICM, Inc. forlimited use of ICM, Inc.’s proprietary technology and information toassist us in operating, maintaining, and repairing the ethanol productionfacility.  We are not obligated to pay afee to ICM, Inc. for use of the proprietary information and technologybecause our payment to Fagen, Inc. for the construction of the plant underour design-build agreement is inclusive of these costs.   Under the license agreement, ICM, Inc.retains the exclusive right and interest in the proprietary information andtechnology and the goodwill associated with that information.  ICM, Inc. may terminate the agreementupon written notice if we improperly use or disclose the proprietaryinformation or technology at which point all proprietary property must bereturned to ICM, Inc.

 

We commenced site work at the plant site in November 2007.  We anticipate that we will issue our noticeto proceed with construction to Fagen, Inc. in February 2008.  We expect completion of plant constructionapproximately 16 to 18 months after construction commences.

 

We have engaged Renewable Products Marketing Group, LLC (“RPMG”) tomarket our ethanol and CHS, Inc. to market our distillers grains.  *See Distribution ofPrincipal Products.*  Inaddition, we have entered into a grain procurement agreement with MeadowlandFarmers Co-op (“Meadowland”) for the exclusive right and responsibility toprovide us with our daily requirements of corn.

 

We have received our AirEmissions Permit, a Stormwater Permit, and an Above Ground Storage TankPermit.  We expect to receive ourEnvironmental Assessment Worksheet within the next fiscal quarter.  In addition, we have submitted our applicationfor our Permit for Discharge of Stormwater During Construction Activities.

 

We are still inthe development phase, and until the ethanol plant is operational, we willgenerate no revenue. We have incurred accumulated losses and we anticipate thataccumulated losses will continue to increase until the ethanol plant isoperational.  Since we have not yetbecome operational, we do not yet have comparable income, production or salesdata.

 

**PrincipalProducts and Markets**

 

Theprincipal products we anticipate producing at the plant are fuel-grade ethanoland distillers grains.  Raw carbondioxide gas is another co-product of the ethanol production process but we haveno plans to capture or market it.

 

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***Ethanol***

 

Ethanolis ethyl alcohol, a fuel component made primarily from corn and various othergrains.  According tothe Renewable Fuels Association, approximately 85 percent of ethanol inthe United States today is produced from corn, and approximately 90 percentof ethanol is produced from a corn and other input mix. The ethanol we expectto produce is manufactured from corn. Corn produces large quantities of carbohydrates, which convert intoglucose more easily than most other kinds of biomass. The Renewable FuelsAssociation estimates current annual domestic ethanol production capacity is atapproximately 7.42 billion gallons as of December 18, 2007.

 

An ethanol plant is essentially afermentation plant.  Ground corn andwater are mixed with enzymes and yeast to produce a substance called “beer,”which contains about 10% alcohol and 90% water. The “beer” is boiled to separate the water, resulting in ethyl alcohol,which is then dehydrated to increase the alcohol content.  This product is then mixed with a certifieddenaturant to make the product unfit for human consumption and commerciallysaleable.

 

Ethanol can be used as: (i) an octaneenhancer in fuels; (ii) an oxygenated fuel additive for the purpose ofreducing ozone and carbon monoxide vehicle emissions; and (iii) anon-petroleum-based gasoline substitute. Approximately 95% of all ethanol is used in its primary form forblending with unleaded gasoline and other fuel products.  Used as a fuel oxygenate, ethanol provides ameans to control carbon monoxide emissions in large metropolitan areas.  The principal purchasers of ethanol aregenerally the wholesale gasoline marketer or blender.  The principal markets for our ethanol are petroleumterminals in the continental United States.

 

***Distillers Grains***

 

The principal co-product of the ethanolproduction process is distillers grains, a high protein, high-energy animalfeed supplement primarily marketed to the dairy, beef, poultry and swineindustries.  Distillers grains containby-pass protein that is superior to other protein supplements such ascottonseed meal and soybean meal. By-pass proteins are more digestible to the animal, thus generatinggreater lactation in milk cows and greater weight gain in beef cattle.  Dry mill ethanol processing creates three formsof distiller grains: Distillers Wet Grains with Solubles (“DWS”), DistillersModified Wet Grains with Solubles (“DMWS”) and Distillers Dried Grains withSolubles (“DDGS”).  DWS is processed cornmash that contains approximately 70% moisture. DWS has a shelf life of approximately three days and can be sold only tofarms within the immediate vicinity of an ethanol plant.  DMWS is DWS that has been dried toapproximately 50% moisture.  DMWS have aslightly longer shelf life of approximately ten days and are often sold tonearby markets.  DDGS is DWS that hasbeen dried to 10% to 12% moisture.  DDGShas an almost indefinite shelf life and may be sold and shipped to any marketregardless of its vicinity to an ethanol plant.

 

***Local Ethanol and DistillersGrains Markets***

 

As described below in “*Distribution of Principal Products*,” we intend to market anddistribute our ethanol and distillers grains through third parties.  Whether or not ethanol or distillers grainsproduced by our ethanol plant are sold in local markets will depend ondecisions made in cooperation with our marketers.

 

Local ethanol markets will be limited and must be evaluated on acase-by-case basis.  Although localmarkets will be the easiest to service, they may be oversold.  Oversold markets depress ethanol prices.

 

***Regional Ethanol Markets***

 

Typically a regional marketis one that is outside of the local market, yet within the neighboringstates.  We believe our regional market is within a 450-mile radius of ourplant and will be serviced by rail.  Weexpect to construct a railroad spur to our plant so that we may reach regionaland national markets with our products.  Because ethanol use results inless air pollution than regular gasoline, regional markets typically includelarge cities that are subject to anti-smog measures such as either carbonmonoxide or ozone non-attainment areas.

 

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***National Ethanol Markets***

 

According to theRenewable Fuels Association, demand for fuel ethanol in the United Statesreached a new high in 2006 at nearly five billion gallons per year.  In its report titled, “Ethanol IndustryOutlook 2007,” the RFA anticipates demand for ethanol to remain strong as aresult of the national renewable fuels standard contained in the Energy PolicyAct of 2005, rising gasoline and oil prices and increased state legislationbanning the use of MTBE or requiring the use of renewable fuels.  The RFA also notes that interest in E85, ablend of 85% ethanol and 15% gasoline, has been invigorated due to continuedefforts to stretch United States gasoline supplies.  The RFA also expects that the passage of theVolumetric Ethanol Excise Tax Credit (VEETC) will provide the flexibilitynecessary to expand ethanol blending into higher blends of ethanol such as E85,E diesel and fuel cell markets.

 

While we believe that thenationally mandated usage of renewable fuels is currently driving demand, webelieve that an increase in voluntary usage will be necessary for the industryto continue its growth trend.  Thepassage of the new Energy Independence and Security Act of 2007, whichincreased the RFS standard, may encourage blenders to increase blending ofethanol.  In addition, we believe thatheightened consumer awareness and consumer demand for ethanol-blended gasolinemay play an important role in growing overall ethanol demand and voluntaryusage by blenders.  If blenders do notvoluntarily increase the amount of ethanol blended into gasoline and consumerawareness does not increase, it is possible that additional ethanol supply willoutpace demand and further depress ethanol prices.

 

**Distributionof Principal Products**

 

Ourethanol plant will be located near Lamberton, Minnesota in Redwood County.  We selected the site because of its locationto existing ethanol consumption and accessibility to road and railtransportation.  We purchased the realestate that encompasses the site in March 2007, pursuant to the terms ofthe option agreements which we had previously executed.  Our site is in close proximity to rail andmajor highways that connect to major population centers such as Minneapolis,Minnesota, Detroit, Michigan, and Chicago, Illinois.

 

***Ethanol Distribution***

 

We have entered into anethanol marketing agreement with Renewable Products Marketing Group, LLC(“RPMG”) pursuant to which RPMG will be our exclusive ethanol marketer.  RPMG will use its best efforts to market andobtain the best price for the ethanol we expect to produce in exchange for apercentage of the price we receive for each gallon of ethanol sold.  The initial term of the RPMG agreement is for24 months and shall be automatically extended for 12 months unless either partygives the other prior written notice. The RPMG agreement can be terminated for any uncured breach of the termsof the agreement.

 

***Distillers Grains Distribution***

 

Weentered into a distillers grains marketing agreement with CHS, Inc. forthe purpose of marketing and distributing all of the distillers grains weproduce at our plant.  CHS, Inc. isa diversified energy, grains and foods company owned by farmers, ranchers andcooperatives.  CHS, Inc. providesproducts and services ranging from grain marketing to food processing to meetthe needs of its customers around the world. CHS, Inc. will market our distillers grains and we will receive apercentage of the selling price actually received by CHS, Inc. inmarketing our distillers grains to its customers.  The term of our agreement with CHS, Inc.is for one year commencing as of the completion and start-up of the plant.  Thereafter, the agreement will remain ineffect unless otherwise terminated by either party with 120 days notice.  Under the agreement, CHS, Inc. will beresponsible for all transportation arrangements for the distribution of ourdistillers grains.

 

**New Products and Services**

 

We have not introduced any new products orservices during this fiscal year.

 

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**Federal EthanolSupports and Governmental Regulation**

 

***Federal Ethanol Supports***

 

*Energy Independence and Security Act of 2007*

 

The ethanol industry is heavily dependent on severaleconomic incentives to produce ethanol, including federal ethanolsupports.  The most recent ethanolsupports are contained in the Energy Independence and Security Act of 2007 (the“2007 Act”), which was signed into law on December 19, 2007.  This legislation amends the Renewable FuelsStandard (RFS), a national flexible program, which was enacted as part of theEnergy Policy Act of 2005.  Under the Energy Policy Act of 2005, the RFS required refiners to use4.7 billion gallons of renewable fuels in 2007, increasing to7.5 billion gallons by 2012.  TheRenewable Fuels Association estimates that domestic ethanol production as of December 2007was approximately 7.42 billion gallons. This rapid increase in production has placed downward pressure on theprice of ethanol as demand has struggled to keep pace with the increase insupply.   The new 2007 Act expands theexisting RFS to require the use of 9 billion gallons of renewable fuel in 2008increasing to 36 billion gallons of renewable fuel by 2022.  With the exception of the 2008 RFS of 9billion gallons, the 2007 Act will take effect on January 1, 2009.

 

Only a portion of the renewable fuel used to satisfythe expanded RFA may come from conventional corn-based ethanol.  The 2007 Act requires that 600 milliongallons of renewable fuel used in 2009 must come from advanced biofuels, suchas ethanol derived from cellulose, sugar, or crop residue and biomass-baseddiesel, increasing to 21 billion gallons in 2022.  The 2007 Act further includes a requirementthat 500 million gallons of biodiesel and biomass-based diesel fuel be blendedinto the national diesel pool in 2009, gradually increasing to 1 billiongallons by 2012.  While the provisions inthe 2007 Act are intended to stimulate an increase in the usage and price ofethanol, there is no guarantee or assurance that this legislation will have thedesired impact on the ethanol industry.

 

The 2007 Act also authorizes several grants for theadvancement of the renewable fuels industry. It authorizes $500 million annually for 2008 to 2015 for the productionof advanced biofuels that have at least an 80% reduction in GHG emissions.  In addition, it authorizes $25 millionannually in 2008 through 2010 for research and development and commercialapplication of biofuels production in states with low rates of ethanol andcellulosic ethanol production.  Further,$200 million annually in 2008 through 2014 is authorized for infrastructuregrants for the installation of E85 fuel pumps. Funding is also dedicated for government departments to conduct studieson the feasibility of constructing a dedicated ethanol pipeline, the adequacyof rail transportation of renewable fuel and the impact of the RFS program onvarious industries such as the livestock and food industry.  As enacted, the 2007 Act’s provisions did notinclude any new tax incentives for the production or use of renewable fuels;however, remaining tax incentives explained below remain in force.

 

The 2007 Act also contained extensive fuelefficiency standards, which management believes may contribute to the increaseduse of renewable fuels.  Automakers willbe required to achieve an industry-wide average fuel efficiency of 35 miles pergallon by 2020 for cars, sport utility vehicles and light trucks.

 

*Clean Air Act*

 

Historically,ethanol sales have also been favorably affected by the Clean Air Act amendmentsof 1990, particularly the Federal Oxygen Program which became effective November 1,1992.  The Federal Oxygen Programrequires the sale of oxygenated motor fuels during the winter months in certainmajor metropolitan areas to reduce carbon monoxide pollution.  Ethanol use has increased due to a secondClean Air Act program, the Reformulated Gasoline Program.  This program became effective January 1,1995, and requires the sale of reformulated gasoline in nine major urban areasto reduce pollutants, including those that contribute to ground level ozone,better known as smog.  The two major oxygenatesadded to reformulated gasoline pursuant to these programs are MTBE and ethanol,however MTBE has caused groundwater contamination and was banned from use bymany states.  Although the Energy Policy Act of 2005 did not impose a national ban of MTBE, itsfailure to include liability protection for manufacturers of MTBE has resultedin refiners and blenders using ethanol almost exclusively as an oxygenaterather than MTBE to satisfy the reformulated gasoline oxygenate requirement,according to the Environmental Protection Agency.  While this may create increased demand in theshort term, we do not expect this 

 

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to have a long term impact on the demand for ethanolas the Energy Policy Act repealed the Clean Air Act’s 2% oxygenate requirementfor reformulated gasoline.  However, theEnergy Policy Act did not repeal the 2.7% oxygenate requirement for carbonmonoxide non-attainment areas which are required to use oxygenated fuels in thewinter months.  While we expect ethanolto be the oxygenate of choice in these areas, there is no assurance thatethanol will in fact be used.

 

The voluntary shift away from MTBE to ethanol hasput increased focus on America’s ethanol and gasoline supplies.  By removing the oxygenate requirementsmandated by the Clean Air Act, the Energy Policy Act of 2005 effectivelyeliminated RFG requirements; however, federal air quality laws in some areas ofthe country still require the use of RFG.  As petroleum blenders now phaseaway from MTBE due to environmental liability concerns, the demand for ethanolas an oxygenate could increase.  However, on April 25, 2006,President Bush announced that he asked EPA Administrator Stephen Johnson togrant temporary reformulated gas waivers to areas that need them to relievecritical fuel supply shortages.  Such waivers may result in temporarydecreases in demand for ethanol in some regions, driving down the price ofethanol.

 

*Volumetric Ethanol Excise Tax Credit*

 

The use ofethanol as an alternative fuel source has been aided by federal taxpolicy.  On October 22, 2004, President Bush signed H.R. 4520, whichcontained the Volumetric Ethanol Excise Tax Credit (VEETC) and amended thefederal excise tax structure effective as of January 1, 2005.  Prior to VEETC, ethanol-blended fuel wastaxed at a lower rate than regular gasoline ($0.132 on a 10% blend).  Under VEETC, the ethanol excise tax exemptionhas been eliminated, thereby allowing the full federal excise tax of $0.184 pergallon of gasoline to be collected on all gasoline and allocated to the highwaytrust fund.  This is expected to addapproximately $1.4 billion to the highway trust fund revenue annually.  In place of the exemption, the bill creates anew volumetric ethanol excise tax credit of $0.51 per gallon of ethanol blendedwith gasoline.  Refiners and gasolineblenders apply for this credit on the same tax form as before only it is acredit from general revenue, not the highway trust fund.  Based on volume, the VEETC is expected toallow much greater refinery flexibility in blending ethanol since it makes thetax credit available on all ethanol blended with all gasoline, diesel and ethyltertiary butyl ether (ETBE), including ethanol in E85.  The VEETC is scheduled to expire on December 31,2010.  Legislation has been introduced inCongress that may remove the sunset provisions of the VEETC, thereby making ita permanent tax credit.  We cannot assureyou that this legislation will be adopted.

 

*Small Ethanol Producer Tax Credit*

 

The Energy Policy Act of 2005 expanded who qualifiesfor the small ethanol producer tax credit. Historically, small ethanol producers were allowed a 10-cent per gallonproduction income tax credit on up to 15 million gallons of productionannually.  The size of the plant eligiblefor the tax credit was limited to 30 million gallons.  Under the Energy Policy Act of 2005, the sizelimitation on the production capacity for small ethanol producers increasedfrom 30 million to 60 million gallons. The credit can be taken on the first 15 million gallons ofproduction.  The tax credit is capped at$1.5 million per year per producer.  Thesmall producer tax credit is scheduled to expire on December 31, 2010. Weexpect that due to our expected capacity of 50 million gallons per year, wecould qualify for this tax credit. However, we may not take advantage if it expires before we areoperating.   Legislation has beenintroduced in Congress that may extend this tax credit, but we cannot assureyou that this legislation will be adopted.

 

In addition, the Energy Policy Act of 2005 created atax credit that permits taxpayers to claim a 30% credit (up to $30,000) for thecost of installing clean-fuel vehicle refueling equipment, such as an E85 fuelpump, to be used in a trade or business of the taxpayer or installed at theprincipal residence of the taxpayer. Under the provision, clean fuels are anyfuel of at least 85% of the volume of which consists of ethanol, natural gas,compressed natural gas, liquefied natural gas, liquefied petroleum gas, andhydrogen and any mixture of diesel fuel and biodiesel containing at least 20%biodiesel.  The provision is effectivefor equipment placed in service on, or after, January 9, 2007 and before January 1,2010. While it is unclear how this credit will affect the demand for ethanol inthe short term, we expect it will help raise consumer awareness of alternativesources of fuel and could positively impact future demand for ethanol.

 

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***Effect of Governmental Regulation***

 

Theethanol industry and our business depend upon continuation of the federalethanol supports discussed above.  Theseincentives have supported a market for ethanol that might disappear without theincentives.  Alternatively, the incentivesmay be continued at lower levels than at which they currently exist.  The elimination or reduction of such federalethanol supports would make it more costly for us to sell our ethanol once weare operational and would likely reduce our net income and negatively impactour future financial performance.

 

Thegovernment’s regulation of the environment changes constantly.  Weare subject to extensive air, water and other environmental regulations and weare required to obtain a number of environmental permits to construct andoperate the plant.  It ispossible that more stringent federal or state environmental rules orregulations could be adopted, which could increase our operating costs andexpenses.  It also is possible thatfederal or state environmental rules or regulations could be adopted thatcould have an adverse effect on the use of ethanol.  For example, changes in the environmentalregulations regarding the required oxygen content of automobile emissions couldhave an adverse effect on the ethanol industry. Furthermore, plant operations likely will be governed by theOccupational Safety and Health Administration (“OSHA”).  OSHA regulations may change such that the costsof the operation of the plant may increase. Any of these regulatory factors may result in higher costs or othermaterially adverse conditions effecting our operations, cash flows andfinancial performance.

 

**Competition**

 

We will be in direct competition withnumerous other ethanol producers, many of whom have greater resources than wedo. We also expect that additional ethanol producers will enter the market ifthe demand for ethanol continues to increase. Ethanol is a commodity product, like corn, which means our ethanol plant competes with other ethanol producers on thebasis of price and, to a lesser extent, delivery service.  We expect to compete favorably with otherethanol producers due to our proximity to ethanol markets and multiple modes oftransportation.  In addition, we believeour plant’s location offers an advantage over other ethanol producers in thatit has ready access by rail to growing ethanol markets, which may reduce ourcost of sales.

 

Ethanol productioncontinues to rapidly grow as additional plants and plant expansions becomeoperational. According to the Renewable Fuels Association, as of December 18,2007, 135 ethanol plants were producing ethanol with a combined annualproduction capacity of 7.42 billion gallons per year and current expansions andplants under construction constituted an additional future production capacityof 6.06 billion gallons per year.  POETand ADM control a significant portion of the ethanol market, producing anaggregate of over 2 billion gallons of ethanol annually.  POET plans to produce an additional 375million gallons of ethanol per year and ADM plans to produce an additional 550million gallons of ethanol per year through plant expansions, which willstrengthen their positions in the ethanol industry and cause a significantincrease in domestic ethanol supply. In addition, in late November 2007,VeraSun Energy Corporation and US Bio Energy Corp. announced that they enteredinto a merger agreement which is expected to close during the first quarter of2008.  The new entity will retain theVeraSun name and, by the end of 2008, is expected to own 16 ethanol facilitieswith a total production capacity of more than 1.6 billion gallons per year,which would make it one of the largest ethanol producers in the country.

 

Excess capacity in theethanol industry may have an adverse effect on our results of operations, cashflows and financial condition.  In amanufacturing industry with excess capacity, producers have an incentive tomanufacture additional products for so long as the price exceeds the marginalcost of production (i.e., the cost of producing only the next unit, withoutregard to interest, overhead or fixed costs). This incentive can result in the reduction of the market price ofethanol to a level that is inadequate to generate sufficient cash flow to covercosts.  If the demand for ethanol doesnot grow at the same pace as increases in supply, we expect the price forethanol to continue to decline. Declining ethanol prices will result in lower revenues and may reduce oreliminate profits causing the value of your investment to be reduced.

 

Accordingto the Renewable Fuels Association, as of December 18, 2007 Minnesota had16 operational ethanol plants with the capacity to produce approximately 613million gallons of ethanol per year.  Inaddition, there are another five plants under construction and one plant undergoing an expansion which are expected to produce an 

 

9

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additional458 million gallons of ethanol per year. According to the Minnesota Pollution Control Agency there are at least11 more facilities proposed or in the early planning stages.

 

                We also expect that there aremore entities that have been recently formed or in the process of formationthat will begin construction on plants in Minnesota and surrounding states andbecome operational in the future. However, there is often little information available to the publicregarding ethanol projects that are in the earlier stages of planning anddevelopment; therefore it is difficult to estimate the total number ofpotential ethanol projects within our region.

 

Thefollowing table identifies most of the ethanol producers in the UnitedStates along with their production capacities.

 

**U.S. FUEL ETHANOL BIOREFINERIES ANDPRODUCTION CAPACITY**

**milliongallons per year (mmgy)**

** **
| ** **

** **

** **

** **

** **

**Company** | ** ** | **Location**                                                                                       | ** ** | **Feedstock**                                   | ** ** | **Current   Capacity  (mgy)** | ** ** | **Under Construction/  Expansions  (mgy)** |
|-------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------|------------|--------------------------------------------|
| Abengoa  Bioenergy Corp.

                                         |       | York,  NE  Colwich, KS  Portales, NM  Ravenna, NE                                                  |       | Corn/milo                                       |       | 55  25  30  88                |       |                                       |
| Aberdeen  Energy*                                                       |       | Mina,  SD                                                                                          |       | Corn                                            |       |                          |       | 100                                        |
| Absolute  Energy, LLC*                                                  |       | St.  Ansgar, IA                                                                                    |       | Corn                                            |       |                          |       | 100                                        |
| ACE  Ethanol, LLC                                                       |       | Stanley,  WI                                                                                       |       | Corn                                            |       | 41                            |       |                                       |
| Adkins  Energy, LLC*                                                    |       | Lena,  IL                                                                                          |       | Corn                                            |       | 40                            |       |                                       |
| Advanced  Bioenergy                                                     |       | Fairmont,  NE                                                                                      |       | Corn                                            |       | 100                           |       |                                       |
| AGP*                                                                    |       | Hastings,  NE                                                                                      |       | Corn                                            |       | 52                            |       |                                       |
| Agri-Energy,  LLC*  Al-Corn Clean Fuel*                                 |       | Luverne,  MN  Claremont, MN                                                                        |       | Corn  Corn                                      |       | 21  35                        |       | 15                                         |
| Amaizing  Energy, LLC*                                                  |       | Denison,  IA  Atlantic, IA                                                                         |       | Corn  Corn                                      |       | 48                            |       | 110                                        |
| Archer  Daniels Midland                                                 |       | Decatur,  IL  Cedar Rapids, IA  Clinton, IA  Columbus, NE  Marshall, MN  Peoria, IL  Wallhalla, ND |       | Corn  Corn  Corn  Corn  Corn  Corn  Corn/barley |       | 1,070                         |       | 550                                        |
| Arkalon  Energy, LLC                                                    |       | Liberal,  KS                                                                                       |       | Corn                                            |       |                          |       | 110                                        |
| Aventine  Renewable Energy, LLC                                         |       | Pekin,  IL  Aurora, NE  Mt. Vernon, IN                                                             |       | Corn  Corn  Corn                                |       | 207                           |       | 226                                        |
| Badger  State Ethanol, LLC*                                             |       | Monroe,  WI                                                                                        |       | Corn                                            |       | 48                            |       |                                       |
| Big  River Resources, LLC*                                              |       | West  Burlington, IA                                                                               |       | Corn                                            |       | 52                            |       |                                       |
| BioFuel  Energy - Pioneer Trail                                         |       | Wood  River, NE                                                                                    |       | Corn                                            |       |                          |       | 115                                        |

 

 

10

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| Energy,  LLC                                            |   |                            |   |                  |   |     |   |    |
|---------------------------------------------------------|--------|---------------------------------|--------|-----------------------|--------|----------|--------|---------|
| BioFuel  Energy - Buffal Lake   Energy, LLC             |   | Fairmont,  MN                   |   | Corn                  |   |     |   | 115     |
| Blue  Flint Ethanol                                     |   | Underwood,  ND                  |   | Corn                  |   | 50       |   |    |
| Bonanza  Energy, LLC                                    |   | Garden  City, KS                |   | Corn/milo             |   | 55       |   |    |
| Bushmills  Ethanol, Inc.*                          |   | Atwater,  MN                    |   | Corn                  |   | 40       |   |    |
| Cardinal  Ethanol                                       |   | Harrisville,  IN                |   | Corn                  |   |     |   | 100     |
| Cargill, Inc.                                      |   | Blair,  NE  Eddyville, IA       |   | Corn  Corn            |   | 85  35   |   |    |
| Cascade  Grain  Castle Rock Renewable Fuels, LLC        |   | Clatskanie,  OR  Necedah, WI    |   | Corn  Corn            |   |     |   | 108  50 |
|                                                    |   |                            |   |                  |   |     |   |    |
| Celunol                                                 |   | Jennings,  LA                   |   | Sugar  cane 

bagasse |   |     |   | 1.5     |
| Center  Ethanol Company                                 |   | Sauget,  IL                     |   | Corn                  |   |     |   | 54      |
| Central  Indiana Ethanol, LLC                           |   | Marion,  IN                     |   | Corn                  |   | 40       |   |    |
| Central  Illinois Energy, LLC                           |   | Canton,  IL                     |   | Corn                  |   |     |   | 37      |
| Central  MN Ethanol Coop*  Chief Ethanol                |   | Little  Falls, MN  Hastings, NE |   | Corn  Corn            |   | 21.5  62 |   |    |
| Chippewa  Valley Ethanol Co.*                           |   | Benson,  MN                     |   | Corn                  |   | 45       |   |    |
| Cilion  Ethanol                                         |   | Keyes,  CA                      |   | Corn                  |   | 50       |   |    |
| Commonwealth  Agri-Energy, LLC*                         |   | Hopkinsville,  KY               |   | Corn                  |   | 33       |   |    |
| Corn,  LP*                                              |   | Goldfield,  IA                  |   | Corn                  |   | 50       |   |    |
| Cornhusker  Energy Lexington, LLC                       |   | Lexington,  NE                  |   | Corn                  |   | 40       |   |    |
| Corn  Plus, LLP*                                        |   | Winnebago,  MN                  |   | Corn                  |   | 44       |   |    |
| Coshoctan  Ethanol, OH                                  |   | Coshoctan,  OH                  |   | Corn                  |   |     |   | 60      |
| Dakota  Ethanol, LLC*                                   |   | Wentworth,  SD                  |   | Corn                  |   | 50       |   |    |
| DENCO,  LLC                                             |   | Morris,  MN                     |   | Corn                  |   | 21.5     |   |    |
| E  Energy Adams, LLC  E Caruso (Goodland Energy Center) |   | Adams,  NE  Goodland, KS        |   | Corn  Corn            |   | 50       |   | 20      |
| East  Kansas Agri-Energy, LLC*                          |   | Garnett,  KS                    |   | Corn                  |   | 35       |   |    |
| Elkhorn  Valley Ethanol, LLC                            |   | Norfolk,  NE                    |   | Corn                  |   | 40       |   |    |
| ESE  Alcohol Inc.                                       |   | Leoti,  KS                      |   | Seed  corn            |   | 1.5      |   |    |
| Ethanol  Grain Processors, LLC                          |   | Obion,  TN                      |   | Corn                  |   |     |   | 100     |
| First  United Ethanol, LLC (FUEL)                       |   | Mitchell  Co., GA               |   | Corn                  |   |     |   | 100     |
| Front  Range Energy, LLC                                |   | Windsor,  CO                    |   | Corn                  |   | 40       |   |    |
| Gateway  Ethanol                                        |   | Pratt,  KS                      |   | Corn                  |   | 55       |   |    |
| Glacial  Lakes Energy, LLC*                             |   | Watertown,  SD                  |   | Corn                  |   | 100      |   |    |
| Global  Ethanol/Midwest Grain   Processors              |   | Lakota,  IA  Riga, MI           |   | Corn  Corn            |   | 95  57   |   |    |
| Golden  Cheese Company of   California*                 |   | Corona,  CA                     |   | Cheese  whey          |   | 5        |   |    |
| Golden  Grain Energy, LLC*                              |   | Mason  City, IA                 |   | Corn                  |   | 110      |   | 50      |
| Golden  Triangle Energy, LLC*                           |   | Craig,  MO                      |   | Corn                  |   | 20       |   |    |
| Grand  River Distribution                               |   | Cambria,  WI                    |   | Corn                  |   |     |   | 40      |
| Grain  Processing Corp.                                 |   | Muscatine,  IA                  |   | Corn                  |   | 20       |   |    |
| Granite  Falls Energy, LLC*                             |   | Granite  Falls, MN              |   | Corn                  |   | 52       |   |    |

 

 

11

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| Greater  Ohio Ethanol, LLC             |   | Lima,  OH                                                |   | Corn                   |   |     |   | 54       |
|----------------------------------------|--------|----------------------------------------------------------|--------|------------------------|--------|----------|--------|----------|
| Green  Plains Renewable Energy         |   | Shenandoah,  IA  Superior, IA                            |   | Corn  Corn             |   | 50       |   | 50       |
| Hawkeye  Renewables, LLC               |   | Iowa  Falls, IA  Fairbank, IA  Menlo, IA  Shell Rock, IA |   | Corn  Corn  Corn  Corn |   | 105  115 |   | 100  110 |
| Heartland  Corn Products*              |   | Winthrop,  MN                                            |   | Corn                   |   | 100      |   |     |
| Heartland  Grain Fuels, LP*            |   | Aberdeen,  SD  Huron, SD                                 |   | Corn  Corn             |   | 9  12    |   | 18       |
| Heron  Lake BioEnergy, LLC             |   | Heron  Lake, MN                                          |   | Corn                   |   |     |   | 50       |
| Holt  County Ethanol                   |   | O’Neill,  NE                                        |   | Corn                   |   |     |   | 100      |
| Husker  Ag, LLC*                       |   | Plainview,  NE                                           |   | Corn                   |   | 26.5     |   |     |
| Idaho  Ethanol Processing              |   | Caldwell,  ID                                            |   | Potato  Waste          |   | 4        |   |     |
| Illinois  River Energy, LLC            |   | Rochelle,  IL                                            |   | Corn                   |   | 50       |   |     |
| Indiana  Bio-Energy                    |   | Bluffton,  IN                                            |   | Corn                   |   |     |   | 101      |
| Iroquois  Bio-Energy Company, LLC      |   | Rensselaer,  IN                                          |   | Corn                   |   | 40       |   |     |
| KAAPA  Ethanol, LLC*                   |   | Minden,  NE                                              |   | Corn                   |   | 40       |   |     |
| Kansas  Ethanol, LLC                   |   | Lyons,  KS                                               |   | Corn                   |   |     |   | 55       |
| Land  O’ Lakes*                   |   | Melrose,  MN                                             |   | Cheese  whey           |   | 2.6      |   |     |
| Levelland/Hockley  County Ethanol, LLC |   | Levelland,  TX                                           |   | Corn                   |   |     |   | 40       |
| Lifeline  Foods, LLC                   |   | St.  Joseph, MO                                          |   | Corn                   |   | 40       |   |     |
| Lincolnland  Agri-Energy, LLC*         |   | Palestine,  IL                                           |   | Corn                   |   | 48       |   |     |
| Lincolnway  Energy, LLC*               |   | Nevada,  IA                                              |   | Corn                   |   | 50       |   |     |
| Little  Sioux Corn Processors, LP*     |   | Marcus,  IA                                              |   | Corn                   |   | 52       |   |     |
| Marquis  Energy, LLC                   |   | Hennepin,  IL                                            |   | Corn                   |   |     |   | 100      |
| Marysville  Ethanol, LLC               |   | Marysville,  MI                                          |   | Corn                   |   |     |   | 50       |
| Merrick &  Company            |   | Golden,  CO                                              |   | Waste  beer            |   | 3        |   |     |
| MGP  Ingredients, Inc.            |   | Pekin,  IL  Atchison, KS                                 |   | Corn/wheat    starch   |   | 78       |   |     |
| Mid  America Agri   Products/Wheatland |   | Madrid,  NE                                              |   | Corn                   |   |     |   | 44       |
| Mid-Missouri  Energy, Inc.*       |   | Malta  Bend, MO                                          |   | Corn                   |   | 45       |   |     |
| Midwest  Renewable Energy, LLC         |   | Sutherland,  NE                                          |   | Corn                   |   | 25       |   |     |
| Minnesota  Energy*                     |   | Buffalo  Lake, MN                                        |   | Corn                   |   | 18       |   |     |
| NEDAK  Ethanol                         |   | Atkinson,  NE                                            |   | Corn                   |   |     |   | 44       |
| New  Energy Corp.                      |   | South  Bend, IN                                          |   | Corn                   |   | 102      |   |     |
| North  Country Ethanol, LLC*           |   | Rosholt,  SD                                             |   | Corn                   |   | 20       |   |     |
| Northeast  Biofuels                    |   | Volney,  NY                                              |   | Corn                   |   |     |   | 114      |
| Northwest  Renewable, LLC              |   | Longview,  WA                                            |   | Corn                   |   |     |   | 55       |
| Otter  Tail Ag Enterprises             |   | Fergus  Falls, MN                                        |   | Corn                   |   |     |   | 57.5     |
| Pacific  Ethanol                       |   | Madera,  CA  Boardman, OR  Burley, ID                    |   | Corn  Corn  Corn       |   | 35  35   |   | 50       |

 

12

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|                              |   | Stockton,  CA  Imperial, CA                                                                                                                                                                                                                                                                                                                                                                         |   | Corn  Corn                                                                                                                                                 |   |   |   | 50  50             |
|-----------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------------------|
| Panda  Ethanol                    |   | Hereford,  TX                                                                                                                                                                                                                                                                                                                                                                                       |   | Corn/milo                                                                                                                                                  |   |   |   | 115                |
| Parallel  Products                |   | Louisville,  KY  R. Cucamonga, CA                                                                                                                                                                                                                                                                                                                                                                   |   | Beverage    waste                                                                                                                                          |   | 5.4    |   |               |
| Patriot  Renewable Fuels, LLC     |   | Annawan,  IL                                                                                                                                                                                                                                                                                                                                                                                        |   | Corn                                                                                                                                                       |   |   |   | 100                |
| Penford  Products                 |   | Cedar  Rapids, IA                                                                                                                                                                                                                                                                                                                                                                                   |   | Corn                                                                                                                                                       |   |   |   | 45                 |
| Phoenix  Biofuels                 |   | Goshen,  CA                                                                                                                                                                                                                                                                                                                                                                                         |   | Corn                                                                                                                                                       |   | 25     |   |               |
| Pinal  Energy, LLC                |   | Maricopa,  AZ                                                                                                                                                                                                                                                                                                                                                                                       |   | Corn                                                                                                                                                       |   | 55     |   |               |
| Pine  Lake Corn Processors, LLC*  |   | Steamboat  Rock, IA                                                                                                                                                                                                                                                                                                                                                                                 |   | Corn                                                                                                                                                       |   | 20     |   |               |
| Plainview  BioEnergy, LLC         |   | Plainview,  TX                                                                                                                                                                                                                                                                                                                                                                                      |   | Corn                                                                                                                                                       |   |   |   | 100                |
| Platinum  Ethanol, LLC*           |   | Arthur,  IA                                                                                                                                                                                                                                                                                                                                                                                         |   | Corn                                                                                                                                                       |   |   |   | 110                |
| Plymouth  Ethanol, LLC*           |   | Merrill,  IA                                                                                                                                                                                                                                                                                                                                                                                        |   | Corn                                                                                                                                                       |   |   |   | 50                 |
| POET                              |   | Sioux  Falls, SD  Alexandria, IN  Ashton, IA  Big Stone, SD  Bingham Lake, MN  Caro, MI  Chancellor, SD  Coon Rapids, IA  Corning, IA  Emmetsburg, IA  Fostoria, OH  Glenville, MN  Gowrie, IA  Groton, SD  Hanlontown, IA  Hudson, SD  Jewell, IA  Laddonia, MO  Lake Crystal, MN  Leipsic, OH  Macon, MO  Marion, OH  Mitchell, SD  North Manchester, IN  Portland, IN  Preston, MN  Scotland, SD |   | Corn  Corn  Corn  Corn  Corn  Corn  Corn  Corn  Corn  Corn  Corn  Corn  Corn  Corn  Corn  Corn  Corn  Corn  Corn  Corn  Corn  Corn  Corn  Corn  Corn  Corn |   | 1,110  |   | 375  #  #  #  #  # |
| Prairie  Horizon Agri-Energy, LLC |   | Phillipsburg,  KS                                                                                                                                                                                                                                                                                                                                                                                   |   | Corn                                                                                                                                                       |   | 40     |   |               |
| Quad-County  Corn Processors*     |   | Galva,  IA                                                                                                                                                                                                                                                                                                                                                                                          |   | Corn                                                                                                                                                       |   | 27     |   |               |

 

 

13

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| Red  Trail Energy, LLC                       |   | Richardton,  ND                                                                                                  |   | Corn                                           |   | 50     |   |         |
|----------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|--------|--------|--------|--------------|
| Redfield  Energy, LLC*                       |   | Redfield,  SD                                                                                                    |   | Corn                                           |   | 50     |   |         |
| Reeve  Agri-Energy                           |   | Garden  City, KS                                                                                                 |   | Corn/milo                                      |   | 12     |   |         |
| Renew  Energy                                |   | Jefferson  Junction, WI                                                                                          |   | Corn                                           |   |   |   | 130          |
| Siouxland  Energy & Livestock Coop* |   | Sioux  Center, IA                                                                                                |   | Corn                                           |   | 25     |   | 35           |
| Siouxland  Ethanol, LLC                      |   | Jackson,  NE                                                                                                     |   | Corn                                           |   | 50     |   |         |
| Southwest  Iowa Renewable Energy, LLC*       |   | Council  Bluffs, IA                                                                                              |   | Corn                                           |   |   |   | 110          |
| Sterling  Ethanol, LLC                       |   | Sterling,  CO                                                                                                    |   | Corn                                           |   | 42     |   |         |
| Tate &  Lyle                        |   | Loudon,  TN  Ft. Dodge, IA                                                                                       |   | Corn  Corn                                     |   | 67     |   | 38  105      |
| The  Andersons Albion Ethanol LLC            |   | Albion,  MI                                                                                                      |   | Corn                                           |   | 55     |   |         |
| The  Andersons Clymers Ethanol, LLC          |   | Clymers,  IN                                                                                                     |   | Corn                                           |   | 110    |   |         |
| The  Andersons Marathon Ethanol, LLC         |   | Greenville,  OH                                                                                                  |   | Corn                                           |   |   |   | 110          |
| Tharaldson  Ethanol                          |   | Casselton,  ND                                                                                                   |   | Corn                                           |   |   |   | 110          |
| Trenton  Agri Products, LLC                  |   | Trenton,  NE                                                                                                     |   | Corn                                           |   | 40     |   |         |
| United  Ethanol                              |   | Milton,  WI                                                                                                      |   | Corn                                           |   | 52     |   |         |
| United  WI Grain Producers, LLC*             |   | Friesland,  WI                                                                                                   |   | Corn                                           |   | 49     |   |         |
| US  BioEnergy Corp.                          |   | Albert  City, IA                                                                                                 |   | Corn                                           |   | 310    |   | 440          |
|                                         |   | Woodbury,  MI                                                                                                    |   | Corn                                           |   |   |   |         |
|                                         |   | Hankinson,  ND                                                                                                   |   | Corn                                           |   |   |   | #            |
|                                         |   | Central  City , NE                                                                                               |   | Corn                                           |   |   |   | #            |
|                                         |   | Ord,  NE                                                                                                         |   | Corn                                           |   |   |   |         |
|                                         |   | Dyersville,  IA                                                                                                  |   | Corn                                           |   |   |   | #            |
|                                         |   | Janesville,  MN                                                                                                  |   | Corn                                           |   |   |   | #            |
|                                         |   | Marion,  SD                                                                                                      |   | Corn                                           |   |   |   |         |
| U.S.  Energy Partners, LLC (White Energy)    |   | Russell,  KS                                                                                                     |   | Milo/wheat  starch                             |   | 48     |   |         |
| Utica  Energy, LLC                           |   | Oshkosh,  WI                                                                                                     |   | Corn                                           |   | 48     |   |         |
| VeraSun  Energy Corporation                  |   | Aurora,  SD  Ft. Dodge, IA  Albion, NE  Charles City, IA  Linden, IN  Welcome, MN  Hartely, IA  Bloomingburg, OH |   | Corn  Corn  Corn  Corn  Corn  Corn  Corn  Corn |   | 560    |   | 330  #  #  # |
| Western  New York Energy, LLC                |   | Shelby,  NY                                                                                                      |   | Corn                                           |   | 50     |   |         |
| Western  Plains Energy, LLC*                 |   | Campus,  KS                                                                                                      |   | Corn                                           |   | 45     |   |         |
| Western  Wisconsin Renewable   Energy, LLC*  |   | Boyceville,  WI                                                                                                  |   | Corn                                           |   | 40     |   |         |
| White  Energy                                |   | Hereford,  TX                                                                                                    |   | Corn/Milo                                      |   |   |   | 100          |

 

 

14

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| Wind  Gap Farms                                                     |       | Baconton,  GA                |   | Brewery  waste |   | 0.4          |   |        |
|---------------------------------------------------------------------|------------|------------------------------|--------|----------------|--------|--------------|--------|-------------|
| Renova  Energy                                                      |       | Torrington,  WY  Hayburn, ID |   | Corn  Corn     |   | 5            |   | 20          |
|                                                                |       |                         |   |           |   |         |   |        |
| Xethanol  BioFuels, LLC                                             |       | Blairstown,  IA              |   | Corn           |   | 5            |   |        |
| Yuma  Ethanol                                                       |       | Yuma,  CO                    |   | Corn           |   | 40           |   |        |
| ****Total Current Capacity  at********135 ethanol biorefineries**** | ** ** |                         |   |           |   | **7,415.4**  |   |        |
| ****Total Under  Construction (65)/Expansions (9)****               | ** ** |                         |   |           |   |         |   | **6,056.9** |
| **Total  Capacity**                                                 | ** ** |                         |   |           |   | **13,472.3** |   |        |

----

* locally-owned

# plant under construction Updated:  December 18, 2007

 

**Competitionfrom Alternative Fuels**

 

Alternative fuelsand ethanol production methods are continually under development by ethanol andoil companies with far greater resources. The major oil companies have significantly greater resources than wehave to develop alternative products and to influence legislation and publicperception of ethanol.  New ethanolproducts or methods of ethanol production developed by larger and better-financedcompetitors could provide them competitive advantages and harm our business.

 

        The current trend in ethanol productionresearch is to develop an efficient method of producing ethanol fromcellulose-based biomass, such as agricultural waste, forest residue, municipalsolid waste, and energy crops.   Largecompanies, such as Iogen Corporation, Abengoa, Royal Dutch Shell Group, GoldmanSachs Group, Dupont and Archer Daniels Midland have all indicated that they areinterested in research and development in this area.  In addition, Xethanol Corporation has statedplans to convert a six million gallon per year plant in Blairstown, Iowa toimplement cellulose-based ethanol technologies after 2007.  Furthermore, the Department of Energy and thePresident have recently announced support for the development ofcellulose-based ethanol, including a $160 million Department of Energy programfor pilot plants producing cellulose-based ethanol.  On February 28, 2007 the Department ofEnergy announced six recipients for grants to help the producers with theupfront capital costs associated with the construction of cellulosic ethanolbiorefineries.  The grant recipientsexpect to build plants in Florida, California, Iowa, Idaho, Kansas andGeorgia.  In addition, the enactment ofthe Energy Independence and Security Act of 2007 mandates that over half of theRenewable Fuels Standard be met by renewable fuels, other than corn-derivedethanol, in the year 2022.  The biomasstrend is driven by the fact that cellulose-based biomass is generally cheaperthan corn, and producing ethanol from cellulose-based biomass would createopportunities to produce ethanol in areas which are unable to grow corn.  Additionally, the enzymes used to producecellulose-based ethanol have recently become less expensive. Although currenttechnology is not sufficiently efficient to be competitive on a large-scale, arecent report by the United States Department of Energy entitled “Outlook forBiomass Ethanol Production and Demand” indicates that new conversiontechnologies may be developed in the future. If an efficient method ofcollecting biomass for ethanol production and producing ethanol fromcellulose-based biomass is developed, we may not be able to competeeffectively. We do not believe it will be cost-effective to convert the ethanolplant we are proposing into a plant which will use cellulose-based biomass toproduce ethanol.  As a result, it ispossible we could be unable to produce ethanol as cost-effectively ascellulose-based producers.

 

                Our ethanol plant will alsocompete with producers of other gasoline additives having similar octane andoxygenate values as ethanol, such as producers of MTBE, a petrochemical derivedfrom methanol that costs less to produce than ethanol.  Although currently the subject of severalstate bans, many major oil companies can produce MTBE.  Because it is petroleum-based, MTBE’s use isstrongly supported by major oil companies.

 

        Ethanol supply is also affected byethanol produced or processed in certain countries in Central America and theCaribbean region.  Ethanol produced inthese countries is eligible for tariff reduction or elimination uponimportation to the United States under a program known as the Caribbean BasinInitiative (CBI).  Large ethanolproducers, such as Cargill, have expressed interest in building dehydrationplants in participating Caribbean Basin 

 

 

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countries, such asEl Salvador, which would convert ethanol into fuel-grade ethanol for shipmentto the United States.  Ethanol importedfrom Caribbean Basin countries may be a less expensive alternative to domesticallyproduced ethanol.  According to the RFA,the U.S. International Trade Commission (USITC) announced the 2007CBI import quota, which will allow approximately 350 million gallonsof duty-free ethanol to enter the U.S., up from 268.1 million gallonsin 2006.  The USITC has yet toannounce the 2008 CBI import quota.  Inthe past, legislation has been introduced in the Senate that would limit thetransshipment of ethanol through the CBI. It is possible that similar legislation will be introduced this year,however, there is no assurance or guarantee that such legislation will beintroduced or that it will be successfully passed.

 

***DistillersGrains Competition***

 

Ethanolplants in the Midwest produce the majority of distillers grains and primarilycompete with other ethanol producers in the production and sales of distillersgrains.  According to the Renewable FuelsAssociation’s Ethanol Industry Outlook 2007, ethanol plants produced ninemillion metric tons of distillers grains in 2005 and 12 million metric tons in2006.  The amount of distillers grainsproduced is expected to increase significantly as the number of ethanol plantsincrease.

 

Theprimary consumers of distillers grains are dairy and beef cattle, according tothe Renewable Fuels Association’s Ethanol Industry Outlook 2007.  In recent years, an increasing amount ofdistillers grains have been used in the swine and poultry markets.  Numerous feeding trials show advantages inmilk production, growth, rumen health, and palatability over other dairy cattlefeeds.  With the advancement of researchinto the feeding rations of poultry and swine, we expect these markets toexpand and create additional demand for distillers grains; however, noassurance can be given that these markets will in fact expand, or if they do,that we will benefit from it.  The marketfor distillers grains is generally confined to locations where freight costsallow it to be competitively priced against other feed ingredients.  Distillers grains compete with three otherfeed formulations:  corn gluten feed, drybrewers grain and mill feeds.  Theprimary value of these products as animal feed is their protein content. Drybrewers grain and distillers grains have about the same protein content, andcorn gluten feed and mill feeds have slightly lower protein contents.

 

**Sources andAvailability of Raw Materials**

 

***CornFeedstock Supply***

 

Themajor raw material required for our ethanol plant to produce ethanol anddistillers grain is corn.  To produce 50million gallons of ethanol per year, our ethanol plant will need approximately18.5 million bushels of corn per year, as the feedstock for its dry millingprocess.  We expect to obtain the cornsupply for our plant primarily from local markets, but may be required topurchase some of the corn we need from other markets and transport it to ourplant via truck or rail.   Traditionally,corn grown in the area of the plant site has been fed locally to livestock orexported for feeding or processing and/or overseas export sales.

 

We have entered into agrain procurement agreement with Meadowland Farmers Co-op (“Meadowland”).  Meadowland has the exclusive right andresponsibility to provide us with our daily requirements of corn meetingquality specifications set forth in the grain procurement agreement.  Under the agreement, we will purchase corn atthe local market price delivered to the ethanol plant plus a fixed fee perbushel of corn purchased.  We willprovide Meadowland with an estimate of our usage at the beginning of eachfiscal quarter and Meadowland agrees to at all times maintain a minimum of 7days corn usage at our plant.  Theinitial term of the agreement is 7 years from the time we request our firstdelivery of corn.

 

Wewill be significantly dependent on the availability and price of corn. Theprice at which we will purchase corn will depend on prevailing market prices. Over the past year, corn prices reachedrecord highs approaching $5.00 a bushel. Over the same period, ethanol prices fell to nearly $1.55 a gallon.   There is no assurance that a shortage will notdevelop, particularly if there are other ethanol plants competing for corn oran extended drought or other production problem.  We anticipate that we will have to pay morefor corn than the ten year average price as corn prices continue to rise.  If the higher corn prices continue, ourprofitability will be reduced.  Becausethe market price of ethanol is not directly related to grain prices, ethanolproducers are generally not able to compensate for increases in the cost ofgrain feedstock through adjustments in prices charged for their 

 

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ethanol.  We thereforeanticipate that our plant’s profitability will be negatively impacted duringperiods of high grain prices.

 

In an attempt to minimize the effects ofthe volatility of corn costs on operating profits, we will likely take hedgingpositions in corn futures markets. Hedging means protecting the price at which we buy corn and the price atwhich we will sell our products in the future. It is a way to attempt to reduce the risk caused by pricefluctuation.  The effectiveness ofhedging activities is dependent upon, among other things, the cost of corn andour ability to sell sufficient amounts of ethanol and distillers grains toutilize all of the corn subject to the futures contracts.  Hedging activities can result in costs to usbecause price movements in grain contracts are highly volatile and areinfluenced by many factors beyond our control. These costs may be significant.

 

***Utilities***

 

Natural Gas.  Natural gasaccounts for approximately 10-15 percent of the total production cost ofethanol. The plant will produce process steam from its own boiler system anddry the distillers dried grains co-product via a direct gas-fired dryer. If weoperate at our project production volume of 50 million gallons per year, wewill require approximately 1,600,000 Million British Thermal Units (“MMBtu”) ofnatural gas annually.

 

Our proposed site has access to an existing NorthernNatural Gas interstate natural gas pipeline located approximately one half milefrom the expected plant location.  Theexisting interstate pipeline is expected to have enough capacity to service theproposed plant and for future plant expansion. We anticipate contracting with an independent company to construct thenecessary lateral pipeline connecting the proposed plant site to the interstatepipeline. We have also entered into a energy management agreement with U.S.Energy Services, Inc. pursuant to which U.S. Energy will provide us withthe necessary natural gas management services. Some of their services mayinclude an economic comparison of distribution service options, negotiation andminimization of interconnect costs, submission of the necessary pipeline “tap”request, supplying the plant with and/or negotiating the procurement of naturalgas, development and implementation of a price risk management plan targeted atmitigating natural gas price volatility and maintaining profitability,providing consolidated monthly invoices that reflect all natural gas costs, andU.S. Energy will be responsible for reviewing and reconciling all invoices. Inexchange for these services, we will pay U.S. Energy a monthly retainer fee of$3,050 for an initial contract term of 12 months.  If we decide to utilize U.S. Energy’s hedgingservice we will have to pay an additional $.01 per MMBTu administrative fee forphysical or financial natural gas hedging. Additional fees may apply for additional services and for time andtravel.

 

Electricity. Based upon engineering specifications, we anticipate the plant willrequire approximately 4.5 MW of power per year at peak demand.  On June 28, 2007 we entered into anAgreement for Electric Service with Redwood Electric Cooperative, Inc. forthe sale and delivery of electric power and energy necessary to operate ourethanol plant.  In exchange for itsservices, we agreed to pay Redwood Electric Cooperative, Inc. an annualfacilities charge of approximately $12,000 plus the Cooperative’s standardelectrical rates. In addition, we agreed that in the event our plant does notbecome operational or does not continue to be operational for the entire termof the contract, we will reimburse the Cooperative for its expenses related tothe installation of the facilities necessary to supply our electricalneeds.  Pursuant to the agreement thecontract rate will be guaranteed for up to five years. Upon execution of theagreement, we became a member of the Cooperative and are bound by its articlesof incorporation and bylaws. This agreement will remain in effect for ten yearsfollowing the initial billing period.  Inthe event we wish to continue receiving electrical service from the Cooperativebeyond the ten year period, we will need to enter into a new agreement with theCooperative at least one year prior to the expiration of the initial ten yearperiod.  If the agreement is terminatedby either party for any reason prior to the expiration of the initial ten yearperiod, we will be required to pay for the entire amount of the facility chargefor the remainder of the initial ten year period.

 

Water.  We willrequire a significant supply of water. We anticipate obtaining water from newor existing high capacity wells.  Permitsare required for all water usage. Engineering specifications show our plantwater requirements to be approximately 384 gallons per minute. That isapproximately 553,000 gallons per day. We are in the process of applying forthe necessary permits, however, there is no assurance that we will be able toobtain the requisite permits to use the water we need to operate the plant. Inthe event we are unable to locate a sufficient supply of water at the proposedLamberton, Minnesota site, we would have to either locate an alternative plantlocation or abandon the project.

 

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Muchof the water used in an ethanol plant is recycled back into the process. Thereare, however, certain areas of production where fresh water is needed. Thoseareas include boiler makeup water and cooling tower water. Boiler makeup wateris treated on-site to minimize all elements that will harm the boiler andrecycled water cannot be used for this process. Cooling tower water is deemednon-contact water because it does not come in contact with the mash, and, therefore,can be regenerated back into the cooling tower process. The makeup waterrequirements for the cooling tower are primarily a result of evaporation.Depending on the type of technology utilized in the plant design, we anticipatethat much of the water can be recycled back into the process, which willminimize the discharge water. This will have the long-term effect of loweringwastewater treatment costs. Many new plants today are zero or near zeroeffluent discharge facilities. We anticipate our plant design will incorporatethe ICM/Phoenix Bio-Methanator wastewater treatment process resulting in a zerodischarge of plant process water.

 

**Research andDevelopment**

 

Wedo not conduct any research and development activities associated with thedevelopment of new technologies for use in producing ethanol and distillersgrains.

 

**Dependence on One ora Few Major Customers**

 

Asdiscussed above, we have entered into a marketing agreement with RPMG for thepurpose of marketing and distributing our ethanol and have engaged CHS, Inc.for the purpose of marketing and distributing our distillers grains.  We expect to rely on RPMG for the sale anddistribution of our ethanol and CHS, Inc. for the sale and distribution ofour distillers grains.  Therefore,although there are other marketers in the industry, we expect to be highlydependent on RPMG and CHS, Inc. for the successful marketing of ourproducts.  Any loss of RPMG or CHS, Inc.as our marketing agent for our ethanol and distillers grains, respectively,could have a significant negative impact on our revenues.

 

**Costs and Effects of Compliance withEnvironmental Laws**

 

We are subject toextensive air, water and other environmental regulations.  We have received our Air Emissions Permit, aStormwater Permit, and an Above Ground Storage Tank Permit.  We expect to receive our EnvironmentalAsessment Worksheet within the next fiscal quarter.  In addition, we have submitted ourapplication for our Permit for Discharge of Stormwater During ConstructionActivities. The remaining permits will be required shortly before or shortlyafter we begin to operate the plant.   Wehave entered into a service agreement with Earth Tech Consulting, Inc.pursuant to which Earth Tech Consulting, Inc. is providing assistance insecuring state approval (environmental permits) to start construction of theplant.  The costs of Earth TechConsulting, Inc.’s services are based on a time and material basis.  Additional costs may be imposed if Earth TechConsulting, Inc. is required to address significant public comment and/orassist in lengthy agency negotiations regarding specific permit terms andconditions.   Fagen, Inc. and EarthTech Consulting, Inc. are coordinating and assisting us with obtainingcertain environmental permits, and advising us on general environmentalcompliance.  In addition, we may retainother consultants with specific expertise for the permit being pursued toensure all permits are acquired in a cost efficient and timely manner.

 

We anticipate incurringcosts and expenses of approximately $43,460 in the next 12 months in complyingwith environmental laws.  Even if we aresuccessful in obtaining all of the permits currently required, any retroactivechange in environmental regulations, either at the federal or state level, couldrequire us to obtain additional or new permits or spend considerable resourceson complying with such regulations.

 

We are subject tooversight activities by the EPA.  Thereis always a risk that the EPA would enforce certain rules and regulationsdifferently than Minnesota’s environmental administrators.  Minnesota and EPA rules are also subjectto change, and any such changes could result in greater regulatory burdens onour future plant operations.  We couldalso be subject to environmental or nuisance claims from adjacent propertyowners or residents in the area arising from possible foul smells or other airor water discharges from the plant.  Suchclaims may result in an adverse result in court if we are deemed to engage in anuisance that substantially impairs the fair use and enjoyment of real estate.

 

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**Employees**

 

Wecurrently have three part-time office employees.  Prior to completion of the plant constructionand commencement of operations, we intend to hire approximately 32 full-timeemployees. Approximately six of our employees will be involved primarily inmanagement and administration and the remainder will be involved primarily inplant operations. Our executive officers are Brian D. Kletscher, President;John M. Schueller, Vice President; Jason R. Fink, Treasurer; and Timothy J. VanDer Wal, Secretary.

 

Thefollowing table represents some of the anticipated positions within the plantand the minimum number of individuals we expect will be full-time personnel:

 

| ** **             | ** ** | **# Full-Time** | ** ** |
|------------------------|------------|-----------------|------------|
| **Position**           | ** ** | **Personnel**   | ** ** |
| General Manager        |       | 1               |       |
| Plant Manager          |       | 1               |       |
| Commodities Manager    |       | 1               |       |
| Controller             |       | 1               |       |
| Lab Manager            |       | 1               |       |
| Lab Technician         |       | 2               |       |
| Secretary/Clerical     |       | 3               |       |
| Office Manager         |       | 1               |       |
| Shift Supervisor       |       | 4               |       |
| Maintenance Supervisor |       | 1               |       |
| Maintenance Craftsmen  |       | 4               |       |
| Plant Operators        |       | 12              |       |
| **TOTAL**              | ** ** | **32**          | ** ** |

 

The positions, titles, job responsibilities and numberallocated to each position may differ when we begin to employ individuals foreach position.

 

We intend to enter into written confidentiality andassignment agreements with our key officers and employees. Among other things,these agreements will require such officers and employees to keep allproprietary information developed or used by us in the course of our businessstrictly confidential.

 

Our success willdepend in part on our ability to attract and retain qualified personnel at acompetitive wage and benefit level. We must hire qualified managers and otherpersonnel. We operate in a rural area with low unemployment. There is noassurance that we will be successful in attracting and retaining qualifiedpersonnel at a wage and benefit structure at or below those we have assumed inour project. If we are unsuccessful in this regard, we may not be competitivewith other ethanol plants and your investment may lose value.

 

**ITEM 1A.               RISKFACTORS.**

 

*You should carefully read andconsider the risks and uncertainties below and the other information containedin this report.  The risks anduncertainties described below are not the only ones we may face.  The following risks, together with additionalrisks and uncertainties not currently known to us or that we currently deemimmaterial could impair our financial condition and results of operation.*

 

**RisksRelated to Highwater Ethanol as a Development-Stage Company**

 

***Highwater Ethanolhas no operating history, which could result in errors in******management and operations causing a reduction in thevalue of your investment.* **We were recently formed and have nohistory of operations. We may not manage start-up effectively or properly staffoperations, and any failure to manage our start-up effectively could delay thecommencement of plant operations. A delay in start-up operations is likely tofurther delay our ability to generate revenue and satisfy our debt obligations.We anticipate a period of significant growth, involving the construction andstart-up of operations of the plant. This period of growth and the start-up ofthe plant 

 

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are likely to be a substantial challenge to us. If wefail to manage start-up effectively, we may be able to operate our plantprofitably or at all.

 

***We have little to no experience in the ethanol industry andour governors do******not dedicate theirefforts to our project on a full time basis, which may**affect our ability to build and operate the ethanolplant.* **We are presently, and are likely for sometime to continue to be, dependent upon our initial governors. Most of theseindividuals are experienced in business generally but have very little or noexperience in organizing and building an ethanol plant, and governing andoperating a public company. Our governors also have little to no expertise inthe ethanol industry. In addition, certain governors on our board are presentlyengaged in business and other activities which impose substantial demand on thetime and attention of such governors. Our governors do not dedicate theirefforts to our project on a full time basis which may affect our ability tobuild and develop our ethanol plant. Our member control agreement provides thatthe initial board of governors will serve until the first annual or specialmeeting of the members following commencement of substantial operations of theethanol plant. If our project suffers delays due to financing or construction,our initial board of governors could serve for an extended period of time. Inthat event, our only recourse to replace these governors would be through anamendment to our operating agreement which could be difficult to accomplish.

 

***We will depend onFagen, Inc. for expertise in beginning operations in the******ethanol industry and any loss of this relationshipcould cause us delay and**addedexpense, placing us at a competitive disadvantage.* **We are dependent on our relationship with Fagen, Inc.and its employees. Any loss of this relationship with Fagen, Inc.,particularly during the construction and start-up period of the plant mayprevent us from commencing operations and result in the failure of ourbusiness. The time and expense of locating new consultants and contractorswould result in unforeseen expenses and delays which may reduce our ability togenerate revenue and operate profitability and significantly damage ourcompetitive position in the ethanol industry.

 

***If we fail tofinalize critical agreements, or the final agreements are unfavorable comparedto what we******currently anticipate, ourproject may fail or be harmed in ways that**significantly reduce the value of your investment.* **You should be aware that this report makes referenceto documents or agreements that are not yet final or executed, and plans thathave not been implemented. In some instances such documents or agreements arenot even in draft form. The definitive versions of those agreements, documents,plans or proposals may contain terms or conditions that vary significantly fromthe terms and conditions described. These tentative agreements, documents,plans or proposals may not materialize or, if they do materialize, may notprove to be profitable.

 

***Our business is notdiversified.***** **We expect our business to solely consistof ethanol and distillers grains production and sales. We do not have any otherlines of business or other sources of revenue if we are unable to complete theconstruction and operation of the plant or if we are unable to operate ourplant and generate ethanol and distillers grains. If we are unable to generaterevenues by the production and sales of ethanol and distillers grains ourbusiness may fail since we do not expect to have any other lines of business oralternative revenue sources.

 

***We have a historyof losses and may not ever operate profitably.***** **We have incurred and may continue to incur significantlosses until we successfully complete construction and commence operations ofthe plant. Through October 31, 2007, we generated losses and have adeficit in working capital.  We alsopurchased two parcels of land in March 2007.  We obtained an $800,000 loan from a bank tofinance the land purchase for our site.   The note is secured by a mortgage on our two parcels of property, apersonal guarantee from Ron Fagen, the principal owner of our design-buildcontractor, and by a limited personal guarantee from Warren Pankonin, a memberof our board of governors and a seed capital investor in our project. The notecarries annual interest at 7.50% and is payable in full on March 13,2008.  In addition, we have received a$300,000 loan from Fagen, Inc., our design-builder.  The note carries interest at 7.50% and ispayable in full at the earlier of financial close or January 2, 2008.  We have received a verbal extension of theloan repayment from Fagen, Inc. However, there is no guarantee that we will be able to repay this loanin a timely manner or at all.  Althoughwe have received interim financing, our ability to continue is dependent on thesuccess of generating cash from our equity drive and through obtaining our debtfinancing so that we may ultimately proceed with the construction of theplant.   There is no assurance that wewill be successful in our efforts to build and operate an ethanol plant. Evenif we successfully begin operations at the ethanol plant, there is no assurancethat we will be able to operate profitably.

 

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***We have threepart-time office employees, but we may not be able to hire employees******capable of effectively operating the ethanol plant,which may hinder our**ability tooperate profitably.* **Because we are a development-stagecompany, we have only three part-time employees. If we are not able to hireadditional employees who can effectively operate the plant, our ability togenerate revenue will be significantly reduced or prevented altogether.

 

**Risks Related to Construction of the Ethanol Plant**

 

***We depend on Fagen, Inc.and ICM, Inc. to design and build our ethanol******plant**andtheir failure to perform could force us to abandon business, hinder our**ability to operate profitably or decreasethe value of your investment.* **We arehighly dependent upon Fagen, Inc. and ICM, Inc. to design and buildthe plant.  We have entered into adesign-build agreement with Fagen, Inc. for the design and construction ofour plant, under which Fagen, Inc. has engaged ICM, Inc. to providedesign and engineering services. We have also entered into a phase I and phaseII engineering services agreement with Fagen Engineering, LLC for certainengineering and design work. Fagen Engineering, LLC and Fagen, Inc. areboth owned by Ron Fagen. Fagen Engineering, LLC provides engineering servicesfor projects constructed by Fagen, Inc.

 

We have not yet commenced construction of ourplant.  Our design-build agreement withFagan, Inc., as amended, states that thedesign-builder must receive a valid notice to proceed from us by November 15,2007 or the design-build agreement may be terminated.  That date has been extended pursuant to anoral agreement with Fagen, Inc. We are in the process of obtaining awritten extension of the agreement.  If Fagen, Inc. terminates itsrelationship with us, we may not be able to obtain a replacement generalcontractor. Any such event may force us to abandon our business. Fagen, Inc.and ICM, Inc. and their affiliates, may have a conflict of interest withus because Fagen, Inc., ICM, Inc. and their employees or agents areinvolved as owners, creditors and in other capacities with other ethanol plantsin the United States. We cannot require Fagen, Inc. or ICM, Inc. todevote their full time and attention to our activities. As a result, Fagen, Inc.and ICM, Inc. may have, or come to have, a conflict of interest inallocating personnel, materials and other resources to our plant.

 

***We may need toincrease cost estimates for construction of the ethanol plant,******and such increase could result in devaluation of ourunits if ethanol plant**constructionrequires additional capital.* **We anticipate that Fagen, Inc. willconstruct the plant for a contract price, based on the plans and specificationsin the design-build agreement. We have based our capital needs on a design forthe plant that will cost approximately $78,526,000 which does not include anychange orders, or increases in the cost of materials, with additional start-upand development costs of approximately $31,474,000 for a total projectcompletion cost of approximately $110,000,000. The final cost of the plant maybe higher.  Our design-build agreementwith Fagen, Inc. provides for an upward adjustment of the constructionprice in an amount equal to the percentage increase in the CCI forthe month in which we give notice to proceed to Fagen, Inc., over the CCIpublished for January 2006.  We havebudgeted $3,279,250 for our construction contingency to help offset higherconstruction costs; however, based on the CCI for January 2008, this isnot sufficient to offset increased costs. We intend to seek additional debtfinancing to offset any increase in the total project cost.  We may also seek additional equityinvestments in our offering if necessary. In no event will we exceed the maximum offering amount of $60,000,000.  There may be additional design changes or costoverruns associated with the construction of the plant. The cost of our plantcould be significantly higher than the construction price in the design-buildagreement.

 

Additionally, shortages of steel or other buildingmaterials could affect the final cost of the plant. In addition, as productionof ethanol increases, it is likely that the price of the materials utilized inplant construction will continue to rise, resulting in high building costs.  Advances and changes in technology mayrequire changes to our current plans in order to remain competitive. Anysignificant increase in the estimated construction cost of the plant coulddelay our ability to generate revenues because our revenue stream may not beable to adequately support the increased cost and expense attributable toincreased construction costs.

 

***Construction delayscould result in delays in our ability to generate profits if our production******and sale of ethanol and its co-products are similarlydelayed.* **We currently expect our plant to beoperating in spring of 2009; however, construction projects often involvedelays in obtaining permits, construction delays due to weather conditions, orother events that delay the construction schedule. In addition, changes in interestrates or the credit 

 

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environment, our ability to obtain our debt financingor changes in political administrations at the federal, state or local levelthat result in policy change towards ethanol or this project, could causeconstruction and operation delays. If it takes longer to construct the plantthan we anticipate, it will delay our ability to generate revenue and make itdifficult for us to meet our debt service obligations.

 

***Fagen, Inc. andICM, Inc. may have current or future commitments to design and******build other ethanol manufacturing facilities ahead ofour plant and those**commitmentscould delay construction of our plant and our ability to generate**revenues.* **We do notknow how many ethanol plants Fagen, Inc. and ICM, Inc. have currentlycontracted to design and build. It is possible that Fagen, Inc. and ICM, Inc.have outstanding commitments to other facilities that may cause theconstruction of our plant to be delayed. It is also possible that Fagen, Inc.and ICM, Inc. will continue to contract with new facilities for plantconstruction and with operating facilities for expansion construction. Thesecurrent and future building commitments may reduce the resources of Fagen, Inc.and ICM, Inc. to such an extent that construction of our plant issignificantly delayed. If this occurs, our ability to generate revenue willalso be delayed.

 

***Defects in plantconstruction could result in delays in our ability to generate revenues if our******plant does not produce ethanol and its co-products asanticipated.* **Defects in materials and/or workmanshipin the plant may occur. Under the terms of the design-build agreement withFagen, Inc., Fagen, Inc. will warrant that the material and equipmentfurnished to build the plant will be new, of good quality, and free frommaterial defects in material or workmanship at the time of delivery. Though thedesign-build agreement requires Fagen, Inc. to correct all defects inmaterial or workmanship for a period of one year after substantial completionof the plant, material defects in material or workmanship may still occur. Suchdefects could delay the commencement of operations of the plant, or, if suchdefects are discovered after operations have commenced, could cause us to haltor discontinue the plant’s operation. Halting or discontinuing plant operationscould delay our ability to generate revenues.

 

***The plant site mayhave unknown environmental problems that could be expensive******and time consuming to correct, which may delay orhalt plant construction and**delayour ability to generate revenue.* **Our plantsite is located in Redwood County, Minnesota, near the City of Lamberton,Minnesota. We may encounter hazardous environmental conditions that may delaythe construction of the plant. We do not anticipate Fagen, Inc. will beresponsible for any hazardous environmental conditions encountered at the plantsite. Upon encountering a hazardous environmental condition, Fagen, Inc.may suspend work in the affected area. If we receive notice of a hazardousenvironmental condition, we may be required to correct the condition prior tocontinuing construction. The presence of a hazardous environmental conditionwill likely delay construction of the plant and may require significantexpenditure of our resources to correct the condition. In addition, Fagen, Inc.will be entitled to an adjustment in price and time of performance if it hasbeen adversely affected by the hazardous environmental condition. If weencounter any hazardous environmental conditions during construction thatrequire time or money to correct, such event could delay our ability togenerate revenues.

 

***The ethanol industry is afeedstock limited industry.  Aninadequate supply of corn, our primary feedstock, could cause the price of cornto continue to increase and threaten the viability of our plant****.*The number of ethanol manufacturing plants either inproduction or in the planning or construction phases continues to increase at arapid pace.  This increase in the numberof ethanol plants has affected and will continue to affect both the supply andthe demand for corn. As a result, corn prices have increasedsubstantially.  As more plants developand go into production there may not be an adequate supply of feedstock tosatisfy the demand of the ethanol industry and the livestock industry, whichuses corn in animal rations. Consequently, the price of corn may rise to the point where it threatensthe viability of our project, or significantly decreases our ability to operateprofitably.  Over the past year, cornprices reached record highs approaching $5.00 a bushel.  Over the same period, ethanol prices fell tonearly $1.55 a gallon.  This resulted inan inability of some ethanol plants to operate profitably, and caused someplants to decide to delay construction of their projects or scale backproduction at existing plants.  If cornprices rise and ethanol prices fall, we may face a similar decision and beforced to halt construction, or if we are operational, to reduce or ceaseproduction until market conditions improve, or permanently.

 

**RisksRelating to Our Business**

 

***We have no operating history and our business may not be as successfulas we anticipate. ***We have not yet begun plantoperations.  Accordingly, we have nooperating history from which you can evaluate our business 

 

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and prospects.  Our operating results could fluctuatesignificantly in the future as a result of a variety of factors, includingthose discussed throughout these risk factors. Many of these factors are outside our control.   As a result of these factors, our operatingresults may not be indicative of future operating results and you should notrely on them as indications of our future performance.  In addition, our prospects must be consideredin light of the risks and uncertainties encountered by an early-stage companyand in rapidly growing industries, such as the ethanol industry, where supplyand demand may change substantially in a short amount of time.

 

***We expect to be heavily dependent on rail as our primarymode of transporting our product to distribution terminals****. *Most ethanol producers shipethanol by rail to distribution terminals, which then send the ethanol on abarge or truck to blenders.  Increasedproduction of ethanol has created a bottleneck between producers and blenders,and the rail system’s capacity is strained to meet demand.  According to a study by the U.S. Departmentof Agriculture, almost 75% of new rail car orders are to transportethanol.  In addition, there is a backlogin rail tank car orders, which could discourage growth in the ethanolindustry.  Railroads are also facingpressure from increased corn production, and have found it difficult to meetthe demand to transport the grain to storage facilities.  If the nation’s rail system cannot keep pacewith the production of ethanol and corn, we may be forced to pay higher pricesfor rail cars in order to compete with other plants for access totransportation.  The lack of railinfrastructure may prevent us from shipping our ethanol to target markets andmay even cause our plant to slow or halt production.  This could lead to a decrease in ourprofitability and you could lose some or all of your investment.

 

***The expansion of domestic ethanol production in combinationwith state bans on Methyl Tertiary Butyl Ether (MTBE) and/or state renewablefuels standards may place strains on destination terminal and blenderinfrastructure such that our ethanol cannot be marketed and shipped to theblending terminals that would otherwise provide us the best cost advantages****. *If the volume of ethanolshipments continues to increase with the nation’s increased production capacity and blenders switch from MTBE to ethanol,there may be weaknesses in infrastructure and its capacity to transport ethanolsuch that our product cannot reach its target markets.  In addition, ethanol destination terminalsmay not have adequate capacity to handle the supply of ethanol, and will haveto quickly adapt by building more tanks to hold increased inventory beforeshipping ethanol to the blenders.  Manyblending terminals may need to make infrastructure changes to blend ethanolinstead of MTBE and to blend the quantities of ethanol that are being produced.  Refineries may be unwilling to spend largeamounts of capital to expand infrastructure, or may be disinclined to blendethanol absent a legislative mandate to increase blending.  If the blending terminals do not havesufficient capacity or the necessary infrastructure to make this switch, or arereluctant to make such large capital expenditures to blend ethanol, there maybe an oversupply of ethanol on the market, which could depress ethanol pricesand negatively impact our financial performance.

 

***Our financial performance will be significantly dependent oncorn and natural gas prices and market prices for ethanol and distillersgrains.**** *Our results of operations and financialcondition are significantly affected by the cost and supply of corn and naturalgas. Changes in the price and supply of corn and natural gas are subject to anddetermined by market forces over which we have no control.

 

The availabilityand price of corn will significantly influence our financial performance.Ethanol production requires substantial amounts of corn. Corn, as with mostother crops, is affected by weather, disease and other environmentalconditions.  The price of corn is alsoinfluenced by general economic, market and government factors.  These factors include weather conditions,farmer planting decisions, domestic and foreign government farm programs andpolicies, global demand and supply and quality. Changes in the price of corn can significantly affect our business.Generally, higher corn prices will produce lower profit margins and, therefore,represent unfavorable market conditions. This is especially true if market conditions do not allow us to passalong increased corn costs to our customers. The price of corn has fluctuated significantly in the past and may fluctuatesignificantly in the future.  Recently,corn prices have substantially increased well above historical averages. If a period of high corn prices were to be sustained for some time, suchpricing may reduce our ability to generate revenues because of the higher costof operating and may make ethanol uneconomical to use in fuel markets.  We cannot offer any assurance that we will beable to offset any increase in the price of corn by increasing the price of ourproducts.  If we cannot offset increases inthe price of corn, our financial performance may be materially and adverselyaffected.

 

Naturalgas has recently been available only at prices exceeding historicalaverages.  These prices will increase our costs of production.  The prices for and availability of natural gas aresubject to volatile market 

 

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conditions.  These market conditions often are affected byfactors beyond our control such as higher prices as a result of colder thanaverage weather conditions, overall economic conditions and foreign anddomestic governmental regulations and relations.Significant disruptions in the supply of natural gas could impair our abilityto manufacture ethanol for our customers. Furthermore, increases in natural gas prices or changes in our naturalgas costs relative to natural gas costs paid by competitors may adverselyaffect our results of operations and financial condition.

 

We will seek to minimizethe risks from fluctuations in the prices of corn and natural gas through theuse of hedging instruments.  However,these hedging transactions also involve risks to our business*.*

 

Our revenues willbe greatly affected by the price at which we can sell our ethanol anddistillers grains.  These prices can bevolatile as a result of a number of factors. These factorsinclude the overall supply and demand, the price of gasoline, level ofgovernment support, and the availability and price of competing products. Forinstance, the price of ethanol tends to increase as the price of gasolineincreases, and the price of ethanol tends to decrease as the price of gasolinedecreases. Any lowering of gasoline prices will likely also lead to lowerprices for ethanol, which may decrease our ethanol sales and reduce revenues,causing a reduction in the value of your investment.

 

Since 2005 the price of ethanol has dropped from about$2.00 per gallon to a low of near $1.55 per gallon. Increased production fromnew and existing ethanol plants has lead to lower prices for ethanol. Theincreased production of ethanol could have other adverse effects. For example,the increased production could lead to increased supplies of co-products fromthe production of ethanol, such as distillers grains. Those increased suppliescould outpace demand, which would lead to lower prices for those co-products.For example, the increased production of ethanol has resulted in increaseddemand for corn. This has resulted in higher prices for corn and cornproduction, creating lower profits for ethanol producers. In the past year,corn prices have increased drastically, largely due to the demand for ethanol production,and demand may continue to increase with expanded ethanol production.  There can be no assurance as to the price ofethanol or distillers grains in the future. If ethanol and distillers grainsprices continue to stay low or decrease even further, it may result in lessincome which would decrease our revenues and you could lose some or all of yourinvestment as a result.

 

***Weexpect to sell all of the ethanol we produce to RPMG in accordance with anexclusive ethanol marketing agreement.******* We have engagedRPMG as our exclusive marketing agent for all of the ethanol we produce at theplant.  We will rely heavily on itsmarketing efforts to successfully sell our product.  Because RPMG sells ethanol for itself and anumber of other producers, we expect to have limited control over its salesefforts.  Our financial performance maybe dependent upon the financial health of RPMG as a significant portion of ouraccounts receivable are expected to be attributable to RPMG and itscustomers.  If RPMG fails to competitivelymarket our ethanol or breaches the ethanol marketing agreement, we couldexperience a material loss and we may not have any readily available means tosell our ethanol.

 

***We expect to engage in hedging transactions whichinvolve risks that can harm our business.***  In an attempt to partially offset the effects ofvolatility of ethanol prices and corn costs, we may enter into contracts tosupply a portion of our ethanol production or purchase a portion of our cornrequirements on a forward basis and also engage in other hedging transactionsinvolving exchange-traded futures and options contracts for corn from time totime. The price of unleaded gasoline also affects the price we may receive forour ethanol under indexed contracts. If we do not hire a third-party, we maynot obtain the same level of service from an in-house employee. The financialstatement impact of these activities will be dependent upon, among otherthings, the prices involved and our ability to sell sufficient products to useall of the corn for which we may have futures contracts. Hedging arrangementsalso will expose us to the risk of financial loss in situations where the otherparty to the hedging contract defaults on its contract or, in the case ofexchange-traded contracts, where there is a change in the expected differentialbetween the underlying price in the hedging agreement and the actual pricespaid or received by us. Hedging activities can themselves result in losses whena position is purchased in a declining market or a position is sold in a risingmarket. A hedge position is often settled in the same time frame as thephysical commodity is either purchased (corn) or sold (ethanol). Hedginglosses may be offset by a decreased cash price for corn and an increased cashprice for ethanol. We do not assure you that we will not experience hedginglosses in the future. We also intend to vary the amount of hedging or otherprice mitigation strategies we undertake, and we may choose not to engage in 

 

 

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hedging transactions atall. As a result, our results of operations and financial position may beadversely affected by increases in the price of corn or decreases in the priceof ethanol or unleaded gasoline.

 

Hedging activitiesthemselves can result in costs because price movements in corn and natural gascontracts are highly volatile and are influenced by many factors that arebeyond our control.  There are severalvariables that could affect the extent to which our derivative instruments areimpacted by price fluctuations in the cost of corn or natural gas. However, it is likely that commodity cash prices will have the greatest impacton the derivatives instruments with delivery dates nearest the current cashprice.  We may incur such costs and theymay be significant.

 

***Changes andadvances in ethanol production technology could require us to incur******costs to update our plant or could otherwise hinderour ability to**compete in theethanol industry or operate profitably.*** Advances and changes in the technology of ethanol production areexpected to occur.  Such advances andchanges may make the ethanol production technology we installed in our plantless desirable or obsolete.  Theseadvances could also allow our competitors to produce ethanol at a lower costthan us.  If we are unable to adopt orincorporate technological advances, our ethanol production methods andprocesses could be less efficient than our competitors, which could cause ourplant to become uncompetitive or completely obsolete.  If our competitors develop, obtain or licensetechnology that is superior to ours or that makes our technology obsolete, wemay be required to incur significant costs to enhance or acquire new technologyso that our ethanol production process remains competitive.  Alternatively, we may be required to seekthird-party licenses, which could also result in significant expenditures.  Third-party licenses may not be available or,once obtained, may not continue to be available on commercially reasonableterms, if at all.  These costs couldnegatively impact our financial performance by increasing our operating costsand reducing our net income.

 

**RisksRelated to Ethanol Industry**

 

***Competition from the advancement of alternative fuels maylessen the demand for******ethanoland negatively impact our profitability, which could reduce the value**of your investment****.* Alternative fuels, gasoline oxygenates and ethanol production methodsare continually under development. Although currently in the experimentalstage, future large-scale biobutanol production may increase competition foragricultural feedstocks or provide a competitive advantage to pipelineowners.  Additionally, a number ofautomotive, industrial and power generation manufacturers are developingalternative clean power systems using fuel cells or clean burning gaseousfuels. Like ethanol, the emerging fuel cell industry offers a technologicaloption to address increasing worldwide energy costs, the long-term availabilityof petroleum reserves and environmental concerns. Fuel cells have emerged as apotential alternative to certain existing power sources because of their higherefficiency, reduced noise and lower emissions. Fuel cell industry participantsare currently targeting the transportation, stationary power and portable powermarkets in order to decrease fuel costs, lessen dependence on crude oil andreduce harmful emissions. If the fuel cell and hydrogen industries continue toexpand and gain broad acceptance, and hydrogen becomes readily available toconsumers for motor vehicle use, we may not be able to compete effectively.This additional competition could reduce the demand for ethanol, which wouldnegatively impact our profitability, causing a reduction in the value of yourinvestment.

 

***Corn-based ethanol may competewith cellulose-based ethanol in the future, which could make it more difficultfor us to produce ethanol on a cost-effective basis and could reduce the valueof your investment***.  Most ethanol is currently produced fromcorn and other raw grains, such as milo or sorghum - especially in the Midwest.The current trend in ethanol production research is to develop an efficientmethod of producing ethanol from cellulose-based biomass, such as agriculturalwaste, forest residue, municipal solid waste, and energy crops. This trend isdriven by the fact that cellulose-based biomass is generally cheaper than corn,and producing ethanol from cellulose-based biomass would create opportunitiesto produce ethanol in areas which are unable to grow corn. Although currenttechnology is not sufficiently efficient to be competitive, a recent report bythe United States Department of Energy entitled “Outlook for Biomass EthanolProduction and Demand” indicates that new conversion technologies may bedeveloped in the future.  In addition,the enactment of the Energy Independence and Security Act of 2007 mandates thatover half of the Renewable Fuels Standard be met by renewable fuels, other thancorn-derived ethanol, in the year 2022. The legislation also provides funding for grants for research anddevelopment and production of advanced biofuels such as cellulosic ethanol.

 

 

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        If an efficient method of producingethanol from cellulose-based biomass is developed, we may not be able tocompete effectively.  At this time, we donot believe it will be cost-effective to convert the ethanol plant we areconstructing into a plant which will use cellulose-based biomass to produceethanol. If we are unable to produce ethanol as cost-effectively ascellulose-based producers, our ability to generate revenue will be negativelyimpacted.

 

***As domestic ethanolproduction continues to grow, ethanol supply may exceed******demand causing ethanol prices to decline****.* The number of ethanol plants being developed and constructed in theUnited States continues to increase at a rapid pace. The passage of the EnergyPolicy Act of 2005 included a renewable fuels mandate that we expect willfurther increase the number of domestic ethanol production facilities.According to the RFA’s Ethanol Industry Outlook 2007, ethanol productionreached a record high of 4.9 billion gallons in 2006.  The RFA further states that domestic ethanolproduction capacity has increased from 1.9 billion gallons per year at December 31,2001 to an estimated 7.4 billion gallons per year in December 2007.  The RFA estimates that, as of December 2007,approximately 6.0 billion gallons per year of additional production capacity isunder construction or expansion at  newand existing facilities.  In addition,POET, LLC (“POET”) is planning to expand its ethanol production capacity by 375million gallons per year for 1,485 million gallons of total capacity and ArcherDaniels Midland (“ADM”) is undergoing expansion to add 550 million gallons ofethanol production for 1,620 million gallons of total capacity uponcompletion.  In addition, in late NovemberVeraSun Energy Corporation and US BioEnergy Corp. announced that they enteredinto a merger agreement which is expected to close during the first quarter of2008.  The new entity will retain theVeraSun name and, by the end of 2008, is expected to own 16 ethanol facilitieswith a total production capacity of more than 1.6 billion gallons peryear.  This clearly indicates theirdesire to maintain a significant share of the ethanol market.

 

Excess capacity in the ethanol industry may have anadverse effect on our results of operations, cash flows and financialcondition.  As these new plants beginoperations, we expect domestic ethanol production to significantlyincrease.  If the demand for ethanol doesnot grow at the same pace as increases in supply, the price for ethanol maycontinue to decline. Declining ethanol prices will result in lower revenues andmay reduce or eliminate profits.

 

*                **Consumer resistance to the use of ethanol based on thebelief that ethanol is******expensive,adds to air pollution, harms engines, reduces fuel efficiency, takes moreenergy to**produce than itcontributes and leads to increased food prices which may affect the demand forethanol and could**affect ourability to market our product****.*  Media reportsin the popular press indicate that some consumers believe that use of ethanolwill have a negative impact on gasoline prices at the pump. Many also believethat ethanol adds to air pollution and harms car and truck engines. It is alsowidely reported that ethanol products such as E85 significantly reduce fueleconomy and cause overall fuel costs to substantially increase.  E85 fuel is a blend of 85% ethanol and 15%gasoline.    Researchers have publishedstudies reporting that the production of ethanol actually uses more fossilenergy, such as oil and natural gas, than the amount of ethanol that isproduced. In addition, recent high corn prices have added to consumer backlashagainst ethanol and criticism of the recently enacted Energy Independence andSecurity Act of 2007, as many consumers blame ethanol for high foodprices.  These consumer beliefs couldpotentially be wide-spread. If consumers choose not to buy ethanol, it wouldaffect the demand for the ethanol we produce which could lower demand for ourproduct and negatively affect our profitability.

 

***                Increasedproduction of ethanol may have widespread environmental and agriculturaleffects, which may hinder our ability to successfully market our products****. *Corndemand and corn prices have risen due to the rapid expansion of the ethanolindustry.  According to the USDA EconomicResearch Service, market adjustments due to ethanol expansion reach well beyondthe corn sector, as increased corn production will alter the agricultural mixof crops grown across the U.S.  As aresult of increased acreage devoted to corn, ethanol has also indirectly causedincreased soybean prices as soybean crops have declined.  Higher corn prices also reduce theprofitability of meat production due to corn’s use for livestock feed.  The USDA projects that red meat and poultryproduction will decline as a result.

 

According to a 2007 report by the National Academy ofSciences entitled “Water Implications of Biofuels Production in the UnitedStates,” the ethanol industry also impacts water resources.  Corn, the main feedstock for ethanolproduction, requires significant amounts of water.  In many parts of the country, irrigation isrequired to grow corn, which depletes water resources.  The National Academy of Science believes thatcrop production for renewable fuels such as ethanol will have a significantregional impact where water resources are already stressed.  

 

 

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Further, of the potential feedstocks for biofuels,corn has the highest applications rates of both fertilizer and pesticides.  Fertilizer and pesticide runoff fromirrigation may lead to contamination of the nation’s water supplies.

 

Ethanol production may also be an indirect cause ofsoil erosion.  The National Academy ofScience believes that one of the most likely causes of increased erosion in thenear future may be a result of withdrawal of lands from the USDA’s voluntaryConservation Reserve Program (CRP). Wildlife and environmental advocates have indicated that if the value ofan acre of corn exceeds the value of CRP payments, farmers may desert the CRP.  CRP pays farmers not to cultivate acres offarmland that are at high risk for soil erosion.  Supporters of the CRP state that livestockowners are also contemplating getting out of their CRP contracts in order togrow crops for animal feed, as corn animal feed prices have increaseddrastically in recent years.  If lessacreage is devoted to the CRP, wildlife could suffer and soil erosion couldincrease.  Soil erosion moves higheramounts of sediments and agricultural pollutants into groundwater supplies,negatively impacting water quality.  Wecannot assure you of the overall impact that our plant, our feedstocks, and theethanol industry as a whole will have on the environment and agriculturalpractices, but the impact could be negative and could decrease the value ofyour investment.

 

*                **The inability of retailers to obtain pumpcertifications and availability of flex fuel vehicles for use by consumerscould prevent retailers from selling E85, which could decrease the overalldemand for ethanol.** *The demand for E85 is driven by both theuse of flex fuel vehicles by consumers and by the availability of E85 at retailstations.  Distributing E85 to consumersthrough retail stations depends, in part, on the ability of retailers to obtainquality certifications for E85 pumps.* *Recently, a private product-safetytesting group suspended its approval of various internal component parts of E85pumps and its issuance of E85 pump certifications pending its own research onthe ability of various component parts to withstand the corrosive properties ofethanol.  As a result, two stations inOhio recently shut down E85 pumps and it is currently unclear whether morepumps will be shut down due to pending pump certifications.  If additional E85 pumps are shut down thedistribution of E85 could be curtailed, which could decrease our ability togenerate revenue.

 

                Accordingto the National Ethanol Vehicle Coalition, there are currently about 6.0million FFVs capable of operating on E85 in the United States, and 31 modelsfrom varying automakers will be available in 2008.  Currently only a few automobile manufacturersare producing flex fuel vehicles. Recently Daimler-Chrysler, Ford and General Motors pledged to doubleannual production of vehicles capable of running on renewable fuels to approximatelytwo million cars and trucks by 2010.  However, this was only a pledge by the automakers.  If the automakers do not actually increaseproduction of flex fuel vehicles, the lack of demand for E85 could significantlyreduce the amount of ethanol we are able to sell, which could negatively affectour profitability.

 

*                **Competition from ethanol imported from Caribbean Basincountries may be a less******expensivealternative to our ethanol, which would cause us to lose market share**and reduce the value of your investment****.* Typically, imported ethanol is subject to a 54 cent per gallontariff.  However, ethanol produced orprocessed in certain countries in Central America and the Caribbean region iseligible for tariff reduction or elimination upon importation to the UnitedStates under a program known as the Caribbean Basin Initiative. Large ethanolproducers, such as Cargill, have expressed interest in building dehydrationplants in participating Caribbean Basin countries, such as El Salvador, whichwould convert ethanol into fuel-grade ethanol for shipment to the UnitedStates. Ethanol imported from Caribbean Basin countries may be a less expensivealternative to domestically produced ethanol. Competition from ethanol importedfrom Caribbean Basin countries may affect our ability to sell our ethanol profitably,which would reduce the value of your investment.

 

*                **Competition from ethanol imported from Brazil may be aless expensive******alternativeto our ethanol, which would cause us to lose market share and**reduce the value of your investment****.*  Brazil is currently the world’s largest producerand exporter of ethanol.  In Brazil,ethanol is produced primarily from sugarcane, which is also used to producefood-grade sugar.  Due in part tothe phase-outs of MTBE, Brazil has experienced a dramatic increase in ethanolproduction and trade in recent years, and the United States is the country’slargest importer.  According to the RFA’s Ethanol Industry Outlook2007, Brazil produced approximately 4.5 billion gallons of ethanol in2006.  In addition, according to the RFA,Brazil exported 400 million gallons of ethanol into the United States in2006.  Ethanolimported from Brazil may be a less expensive alternative to domesticallyproduced ethanol, which is primarily made from corn.  Tariffs presently protecting United Statesethanol producers may be reduced or eliminated. Competition from ethanol imported from Brazil may affect our ability tosell our ethanol profitably.

 

 

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*                **Competition from major oil companies may prevent theexpansion of ethanol use and blending of gasoline and ethanol, as the oilindustry may see ethanol as a threat to its market power.** *The ethanol industry is dependent upon oil companiesto blend ethanol with gasoline at their refineries.  Blenders receive a tax credit of 51 cents forevery gallon of ethanol blended into gasoline. Despite this tax credit, the oil industry lobbied against legislativemandates for blending ethanol contained in the Energy Independence and SecurityAct of 2007.  In addition, the oilcompanies may resist installing E85 pumps at retail fueling stations that theyown or lease.  If our competitors in theoil industry refuses to blend the increased capacity of ethanol produced at newand existing plants, it is possible that you may lose some or all of yourinvestment.

 

**Risks Related to Regulation and GovernmentalAction**

 

*                **A change in government policies favorable to ethanolmay cause demand for******ethanolto decline, which could reduce our ability to operate profitably****.* Growth and demand for ethanol may be driven primarily by federal andstate government policies, such as state laws banning Methyl Tertiary ButylEther (MTBE) and the national renewable fuels standard. The continuation ofthese policies is uncertain, which means that demand for ethanol may decline ifthese policies change or are discontinued. A decline in the demand for ethanolis likely to cause a reduction in the value of your investment.

 

*                **Government incentives for ethanol production,including federal tax incentives,******maybe eliminated in the future, which could hinder our ability to operate at a**profit****.*

 

*        RenewableFuels Standard. *The ethanol industry is assisted byvarious federal ethanol production and tax incentives, including those setforth in the Energy Policy Act of 2005 and the Energy Independence and SecurityAct of 2007.  The Energy Policy Actcreated a national renewable fuels standard (RFS) which began at 4 billiongallons in 2006 and was set to increase to 7.5 billion gallons by 2012.  The Energy Independence and Security Act,however, amended the RFS to set the volume at 9 billion gallons in 2008 andwill increase to 36 billion gallons in 2022. The RFS requires that gasoline sold by refiners, importers and blendersmust contain an increasing amount of renewable fuel, such as ethanol.  The Energy Independence and Security Actexpanded the renewable fuels that can be used to meet the RFS, and the RFS mustbe met by an increasing amount of “advanced biofuels” and “cellulosic biofuels”each year.  Ethanol derived from cornstarch, such as the ethanol we intend to produce, falls under the definition ofa “conventional biofuel.”  The RFS forconventional biofuel is 9 billion gallons in 2008 and will increase to 15 billiongallons in 2015.  From 2015 through 2022,the RFS for conventional biofuel will remain at 15 billion gallons.  The nation’s current production capacity,including ethanol plants under construction or expansion, exceeds 13 billiongallons.  To this point, the RFS hashelped to support a market for ethanol that might have disappeared without thisincentive; however, the RFS, even as amended, may not continue to support theproduction of corn-based ethanol.  Inaddition, waiver of RFS minimum levels of renewable fuels included in gasolinecould have a material adverse effect on our results of operations.

 

        In April 2007,the Environmental Protection Agency (EPA) issued final regulations for acomprehensive, long-term RFS program in which became effective in September 2007.The Energy Independence and Security Act directed the EPA to continue toimplement the rules of the RFS program until January 1, 2009, atwhich time the regulations may be revised to ensure that transportation fuelsold or introduced into commerce in the United States contains the requiredvolume of renewable fuels.  The rules containcompliance tools and a credit and trading system which allows renewable fuelsto be used where they are most economical, while providing a flexible means forindustry to comply with the standard. Advanced biofuels, cellulosic biofuels and conventional biofuels can beused to meet the requirements of the RFS program.  The RFS must be met by any party thatproduces gasoline in the contiguous U.S. or exports renewable fuels, includingrefiners and blenders (collectively the “obligated parties”).  All obligated parties were expected to meetthe RFS beginning in 2007.  In order tocomply with the RFS, each batch of renewable fuel produced is assigned a uniqueRenewable Identification Number (RIN). Obligated parties may then use the trading system to comply with the RFSby purchasing RIN’s which can be traded and transferred to other parties tomeet the expected annual requirements.

 

*        VolumetricEthanol Excise Tax Credit.*** **On October 22,2004, President Bush signed into law the American Jobs Creation Act of 2004(JOBS Bill), which includes the provisions of the Volumetric Ethanol Excise TaxCredit (VEETC).  The VEETC provides acredit of 51 cents per gallon on 10% ethanol blends.  This tax credit is received by gasolinerefiners and blenders for blending ethanol into their fuel.  The credit took effect in 2005 and is set to 

 

 

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expire in 2010. Legislation was introduced in the first day of the 2007 Congress whichproposes a permanent extension of the VEETC; however, there is no guaranteethat this proposed legislation will be adopted.

 

*SmallEthanol Producer Tax Credit. *Another important provision of the EnergyPolicy Act of 2005 involved an expansion in the definition of who qualifies asa small ethanol producer.  Historically,small ethanol producers were allowed a 10 cents per gallon production incometax credit on up to 15 million gallons of production annually.  The size of the plant eligible for the taxcredit was limited to 30 million gallons. Under the Energy Policy Act of 2005, the size limitation on theproduction capacity for small ethanol producers increased from 30 million to 60million gallons.  Based on ouranticipated production capacity of 60 million gallons per year, we expect toqualify for this tax credit.  The smallethanol producer tax credit is set to expire December 31, 2010.  As with the VEETC, legislation was introducedin the first 2007 session of Congress which proposes to make the small ethanolproducer credit permanent; however, there is no guarantee that this proposedlegislation will be adopted.

 

          Theelimination or reduction of tax incentives to the ethanol industry, such as theVolumetric Ethanol Excise Tax Credit (VEETC) available to gasoline refiners andblenders, could also reduce the market demand for ethanol, which could reduceprices and our revenues by making it more costly or difficult for us to produceand sell ethanol. If the federal tax incentives are eliminated or sharplycurtailed, we believe that a decreased demand for ethanol will result, whichcould result in the failure of the business and the potential loss of some orall of your investment.

 

*                **Changes in environmental regulations or violations ofthe regulations could be******expensiveand reduce our profit****.*  We will besubject to extensive air, water and other environmental regulations and we willneed to obtain a number of environmental permits to construct and operate theplant. If, for any reason, any of these permits are not granted, constructioncosts for the plant may increase, or the plant may not be constructed at all.Additionally, any changes in environmental laws and regulations, both at thefederal and state level, could require us to invest or spend considerableresources in order to comply with future environmental regulations. The expenseof compliance could be significant enough to reduce our profit and the value ofyour investment.

 

*                **Carbon dioxide may be regulated in the future by theEPA as an air pollutant requiring us to obtain additional permits and installadditional environmental mitigation equipment, which could adversely affect ourfinancial performance***.  The SupremeCourt recently determined that carbon dioxide is an air pollutant under theClean Air Act for the purposes of vehicle emissions.  Similar lawsuits have been filed seeking torequire the EPA to regulate carbon dioxide emissions from stationary sourcessuch as our ethanol plant under the Clean Air Act. Our plant will produce a significantamount of carbon dioxide that we plan to vent into the atmosphere.  If the EPA regulates carbon dioxide emissionsby plants such as ours, we may have to apply for additional permits or we maybe required to install carbon dioxide mitigation equipment or take other as yetunknown steps to comply with these potential regulations.  Compliance with any future regulation ofcarbon dioxide, if it occurs, could be costly and may prevent us from operatingthe ethanol plant profitably.

 

**ITEM 2.  DESCRIPTION OF PROPERTY.**

 

We are building our plantnear Lamberton, Minnesota in Redwood County. In March 2007, we purchased approximately 125 acres of land relatedto two adjacent land options that were exercised in December 2006. Thetotal purchase price was approximately $876,000. This property is subject to amortgage given to secure an $800,000 note from a bank to finance the purchaseof the property.  The note carries annualinterest at 7.50% and is payable in full on March 13, 2008.

 

In September 2006,we obtained the right and option to purchase two additional adjacent parcels ofland.  The first is to purchaseapproximately six to twelve acres of land for $7,000 per acre until December 31,2008.  We paid $1,000 for the optionwhich will apply towards the purchase price if we elect to complete thepurchase.  The second is to purchase anundisclosed amount of land for $8,000 per acre until September 30, 2007,which has been extended until December 31, 2008.  We paid $1,000 for the option which willapply towards the purchase price if we elect to complete the purchase.

 

OnSeptember 28, 2006, we entered into a design-build contract with Fagen, Inc.of Granite Falls, Minnesota for the design and construction of the ethanolplant for a total price of $66,026,000, subject to adjustment 

 

 

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forchange orders and increases in the costs of materials.  As of our fiscal year end on October 31, 2007,construction of the plant has not yet begun. We began site work for our plant in November 2007.  We expect to provide notice to proceed to ourdesign-builder, Fagen, Inc. in February 2008.  We expect to be operating in the spring of2009.  We anticipate that our plant willhave an approximate production capacity of 50 million gallons per year.

 

We expect all of ourtangible and intangible property, real and personal, will serve as thecollateral for our debt financing.

 

**ITEM3.  LEGAL PROCEEDINGS.**

 

From time to timein the ordinary course of business, Highwater Ethanol, LLC may be named as adefendant in legal proceedings related to various issues, including withoutlimitation, workers’ compensation claims, tort claims, or contractualdisputes.  We are not currently involvedin any material legal proceedings, directly or indirectly, and we are not awareof any claims pending or threatened againstus or any of the directors that could result in the commencement oflegal proceedings.

 

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS.**

 

We did not submitany matter to a vote of our unit holders through the solicitation of proxies orotherwise during the fourth fiscal quarter of 2007.

 

**PART II**

 

**ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED MEMBERMATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.**

 

                                                There is no public trading market for ourunits.

 

                                                As of October 31, 2007 we hadapproximately 386 unit holders of record.

 

We have notdeclared or paid any distributions on our units. Our board of governors hascomplete discretion over the timing and amount of distributions to our unitholders, however, our member control agreement requires the board of governorsto endeavor to make cash distributions at such times and in such amounts aswill permit our unit holders to satisfy their income tax liability in a timely fashion.   Our expectations with respect to our abilityto make future distributions are discussed in greater detail in “**Item 6 — MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.**”

 

Through our privateplacements, we have raised aggregate proceeds of $1,680,000. We issued a totalof 236 units to our seed capital investors at a price of $5,000 per unit. Inaddition, we issued 150 units to our founders at a price of $3,333.33 per unit.Our seed capital private placement was made directly by us without useof an underwriter or placement agent and without payment of commissions orother remuneration.

 

Ourprivate placement was made under the registration exemption provided for in Section 4(2) ofthe Securities Act and Rule 506 of Regulation D. With respect to theexemption, neither we, nor any person acting on our behalf, offered or sold thesecurities by means of any form of general solicitation or advertising. Priorto making any offer or sale, we had reasonable grounds to believe and believedthat each prospective investor was capable of evaluating the merits and risksof the investment and were able to bear the economic risk of the investment.Each purchaser represented in writing that the securities were being acquiredfor investment for such purchaser’s own account and agreed that the securitieswould not be sold without registration under the Securities Act or exemptiontherefrom. Each purchaser agreed that a legend was placed on each certificateevidencing the securities stating the securities have not been registered underthe Securities Act and setting forth restrictions on their transferability.

 

The Securities andExchange Commission declared our Registration Statement on Form SB-2 (SECRegistration No. 333-137482) effective on April 5, 2007.  We commenced our initial public offering ofour units shortly thereafter.  Certain ofour officers and governors are offering and selling the units on a best effortsbasis 

 

 

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without the assistance ofan underwriter.  We are not paying theseofficers or governors any compensation for services related to the offer orsale of the units. We are planning to raise a minimum of $45,000,000 and amaximum of $60,000,000 in the offering and secure the balance needed toconstruct the plant through federal, state and local grants and debtfinancing.   As of January 28, 2008,we have received subscription for approximately 4,510 units for an aggregateamount of approximately $45,100,000.  Wehave not yet accepted any subscriptions or released funds from escrow andtherefore have not used any proceeds from the offering.

 

Our units aresubject to transfer restrictions under our operating agreement and byapplicable tax and securities laws. Transfers are subject to approval by our board and must be made incompliance with the conditions set forth in our member control agreement andapplicable tax and securities laws.  As aresult, investors will not be able to easily liquidate their investment in ourcompany.

 

**ITEM6.  MANAGEMENT’S DISCUSSION AND ANALYSISOR PLAN OF OPERATION.**

 

**Forward Looking Statements**

 

Thisreport contains forward-looking statements that involve future events, ourfuture performance and our expected future operations and actions. In somecases you can identify forward-looking statements by the use of words such as“may,” “should,” “anticipate,” “believe,” “expect,” “plan,” “future,” “intend,”“could,” “estimate,” “predict,” “hope,” “potential,” “continue,” or thenegative of these terms or other similar expressions. These forward-lookingstatements are only our predictions and involve numerous assumptions, risks anduncertainties. Our actual results or actions may differ materially from theseforward-looking statements for many reasons, including the following factors:

 

·                  Changes in our businessstrategy, capital improvements or development plans;

·                  Construction delays andtechnical difficulties in constructing the plant;

·                  Changes in theenvironmental regulations that apply to our plant site and operations;

·                  Ability to securemarketing services;

·                  Changes in generaleconomic conditions or the occurrence of certain events causing an economicimpact in the agriculture, oil or automobile industries;

·                  Changes in theavailability and price of natural gas and corn, and the market and price forethanol and distillers grains;

·                  Changes in federal and/orstate laws (including the elimination of any federal and/or state ethanol taxincentives);

·                  Overcapacity within theethanol industry;

·                  Changes and advances in ethanolproduction technology; and

·                  Competition fromalternative fuel additives.

 

Ouractual results or actions could and likely will differ materially from thoseanticipated in the forward-looking statements for many reasons, including thereasons described in this report. We are not under any duty to update theforward-looking statements contained in this report. We cannot guarantee futureresults, levels of activity, performance or achievements. We caution you not toput undue reliance on any forward-looking statements, which speak only as ofthe date of this report. You should read this report and the documents that wereference in this report and have filed as exhibits completely and with theunderstanding that our actual future results may be materially different fromwhat we currently expect. We qualify all of our forward-looking statements bythese cautionary statements.

 

**Overview**

 

                HighwaterEthanol, LLC is a development-stage Minnesota limited liability company. It wasformed on May 2, 2006 for the purpose of raising capital to develop,construct, own and operate a 50 million gallon per year ethanol plant nearLamberton, Minnesota.  We have not yetengaged in the production of ethanol and distillers grains. Based uponengineering specifications from Fagen, Inc., we expect the ethanol plant,once built, will process approximately 18.5 million bushels of corn peryear into 50 million gallons of denatured fuel grade ethanol and 160,000tons of dried distillers grains with solubles. Construction of the project is expected to take 16 to 18 months 

 

 

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fromthe date construction commences. We commenced site work in November 2007.  We expect to issue our notice to proceed withconstruction to Fagen, Inc., our design-builder in February 2008.  We anticipate that our plant will beoperational in spring of 2009.

 

Weare financing the development and construction of the ethanol plant with acombination of equity and debt.  Through private placements, we raisedaggregate proceeds of $1,680,000 to fund our development, organizational andoffering expenses.  In March 2007,we obtained interim financing in the amount of $800,000 from a bank to financeour land purchase for our site.  Weexecuted a promissory note which is secured by a mortgage on our two parcels ofproperty, a personal guarantee from Ron Fagen, the principal owner of ourdesign-build contractor, and by a limited personal guarantee from WarrenPankonin, a member of our board of governors and a seed capital investor in ourproject.  The note is payable in full on March 13,2008. We do not expect the funds raised in our private placements or ourinterim financing to supply us with enough cash to cover our costs until weclose on our anticipated debt financing.  We have received a $300,000 loan from Fagen, Inc., ourdesign-builder, to provide us with additional capital to help fund ourexpenses. The loan was payable in full at the earlier of financial close or January 2,2008.  We have obtained a verbal extensionfrom Fagen, Inc. for the repayment of the loan.  However, there is not guarantee that we willbe able to repay this loan on a timely basis or at all. .

 

We filed a RegistrationStatement for an initial public offering of our units with the Securities andExchange Commission on Form SB-2 (SEC Registration No. 333-137482),as amended, which became effective on April 5, 2007.  We also registered these units with the statesecurities authorities in Florida, Georgia, Illinois, Iowa, Kansas, Louisiana,Minnesota, Missouri, South Dakota and Wisconsin.  We plan to raise a minimum of $45,000,000 anda maximum of $60,000,000 in the offering and secure the balance needed toconstruct the plant through federal, state and local grants and debt financing.

 

As of January 28,2008, we have received subscriptions for approximately 4,510 units, for anaggregate amount of approximately $45,100,000. However, we have not yet closed the offering, accepted any of thesubscription agreements or released funds from escrow. We will close ouroffering no later than April 5, 2008. We will require a significant amountof debt financing to complete our project. We will not release funds from escrow until we have obtained thenecessary debt financing. We are engaging in discussions with potential seniorlenders, however, no agreement has been executed yet. We expect to enter intodefinitive agreements for our debt financing within the next fiscal quarter. Ifwe do not secure the necessary debt financing, we will not be able to constructour proposed ethanol plant and may have to abandon our business.

 

OnSeptember 28, 2006, we entered into a design-build contract with Fagen, Inc.for the design and construction of the ethanol plant for a total price of$66,026,000, whichdoes not include the anticipated cost of our water treatment facility, anychange orders, or increases in the costs of materials provided by the ConstructionCost Index published by Engineering News-Record Magazine (“CCI”) costs escalator provision contained inthe design-build agreement. Our design-build agreement with Fagen, Inc.provides for an upward adjustment of the construction price in an amount equalto the percentage increase in the CCI for the month in which we givenotice to proceed to Fagen, Inc., over the CCI published for January 2006.  Therefore, the cost of our plant could besignificantly higher than the $66,026,000 construction price in thedesign-build agreement.  We have budgeted$3,279,250 for our construction contingency to help offset higher constructioncosts; however, based on the CCI for January 2008, this is not sufficientto offset increased costs. We intend to seek additional debt financing tooffset any increase in the total project cost. We may also seek additional equity investments in our offering ifnecessary.  In no event will we exceedthe maximum offering amount of $60,000,000. In addition, our contract price assumes the use of non-union labor.  If Fagen, Inc. is required to employunion labor, excluding union labor for the grain system and energy center, thecontract price will be increased to include any increased costs associated withthe use of union labor.  Thedesign-build agreement as amended states that the design-builder must receive avalid notice to proceed from us by November 15, 2007 or the Design-BuildAgreement may be terminated.  That datehas been extended pursuant to an oral agreement with Fagen, Inc. and weare in the process of getting that extension in writing. However, there is noguarantee that Fagen, Inc. will not terminate our design-build agreement.

 

Wehave engaged CHS, Inc. to market our distillers grain and RPMG to marketour ethanol.  In addition, we haveentered into a grain procurement agreement with Meadowland Farmers Co-op.

 

 

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                We are still in the developmentphase, and until the ethanol plant is operational, we will generate no revenue.We anticipate incurring net losses until the ethanol plant is operational.Since we have not yet become operational, we do not yet have comparable income,production or sales data.

 

**Plan of Operations for the Next 12 Months**

 

We expect to spend at least the next 12 monthsfocused on project capitalization, site development, and plantconstruction.  We do not expect to completeconstruction and begin operations until 16 to 18 months from the commencementof construction.

 

*Project Capitalization*

 

In the next fiscal quarter our primary focus isexpected to be on project capitalization. We expect to raise adequate equity through our registered offering,collect the offering proceeds from investors and secure our debt financing froma senior lender.

 

Through October 31, 2007, we generated losses andhave a deficit in working capital.  Wealso purchased two parcels of land in March 2007.  We obtained an $800,000 note from a bank tofinance the purchase of our land for our plant site.  The note is secured by a mortgage on our twoparcels of property, a personal guarantee from Ron Fagen, the principal ownerof our design-build contractor, and by a limited personal guarantee from WarrenPankonin, a member of our board of governors and a seed capital investor in ourproject.  In addition, we have received a$300,000 loan from Fagen, Inc., our design-builder.  The loan carries interest at 7.50% and ispayable in full at the earlier of financial close or January 2, 2008.  We have received a verbal extension of therepayment of this loan from Fagen, Inc. However, there is no guarantee that we will be able to repay this loanin a timely manner or at all.  Althoughwe have received interim financing, our ability to continue is dependent on thesuccess of generating cash from our equity drive and through obtaining our debtfinancing so that we may ultimately proceed with the construction of theplant.  If we are unable to obtain ourdebt financing or close on our registered offering we will be forced to abandonour project altogether.

 

                We have not yet closed on our registeredoffering.  Our registered offering is for a minimum of 4,500 units and a maximum of6,000 units at a purchase price of $10,000 per unit. There is a minimumpurchase requirement of one unit to participate in the offering with additionalunits to be purchased in one unit increments. The minimum aggregate offering amount is $45,000,000 and the maximumaggregate offering amount is $60,000,000. As of January 28, 2008, we have received subscriptions forapproximately 4,510 units from investors, for an aggregate amount ofapproximately $45,100,000.   Oursubscription procedures require subscribers to send 10% of the amount due atthe time they sign the subscription agreement. At that time, investors are also required to provide a promissory notefor the remainder of the amount due.  Assuch, even if we receive subscriptions for a sufficient number of units, we maynot ultimately be able to collect all funds owed to us by investors under thesubscription agreements.  We will notrelease funds from escrow until we obtain a written debt financing commitmentfor the debt financing we need. We have begun discussions with potential lenders, but have nocommitments or agreements in place.

 

A debt financingcommitment obligates the lender to lend us the debt financing that we need ifwe satisfy all the conditions of the commitment.  These conditions may include, among others,the total cost of the project being within a specified amount; the receipt ofengineering and construction contracts acceptable to the lender; evidence ofthe issuance of all permits, acceptable insurance coverage and titlecommitment; the contribution of a specified amount of equity; and attorneyopinions.  At this time, we do not knowwhat business and financial conditions will be imposed on us by our lender.  We may not satisfy the loan commitmentconditions before closing the offering, or at all.  If this occurs we may:

 

·                  commence construction of the plant usingall or a part of the equity funds raised while we seek another debt financingsource;

 

·                  hold the equity funds raised indefinitelyin an interest-bearing account while we seek another debt financing source; or

 

 

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·                  return the equity funds, if any, toinvestors with accrued interest, after deducting the currently indeterminateexpenses of operating our business or partially constructing the plant beforewe return the funds.

 

While the foregoingalternatives may be available, we do not expect to begin substantial plantconstruction activity before satisfying the loan commitment conditions orclosing the loan transaction because it is very likely that Fagen, Inc.and any lending institution would prohibit substantial plant constructionactivity until satisfaction of loan commitment conditions or loan closing.  In the unlikely event that the loancommitment and Fagen, Inc. permit us to spend equity proceeds prior toclosing the loan and obtaining loan proceeds, we may decide to spend equityproceeds on project development expenses, such as securing critical operatingcontracts or owner’s construction costs.

 

We planto apply for grants from the USDA and other sources. Although we may applyunder several programs simultaneously and may be awarded grants or otherbenefits from more than one program, it must be noted that some combinations ofprograms are mutually exclusive. Under some state and federal programs, awardsare not made to applicants in cases where construction on the project hasstarted prior to the award date. There is no guarantee that applications willresult in awards of grants or loans.

 

*Plant construction and start-up of plant operations*

 

For the next twelvemonths, we expect to continue working principally on the development of ourproposed ethanol plant; the development of a plant site in Redwood County,Minnesota; obtaining the necessary construction and operating permits andnegotiating the utility and other contracts. We expect to hire 32 full-time employees before plant operations begin.

 

On September 28, 2006, we entered into adesign-build contract with Fagen, Inc. for the design and construction ofour ethanol plant for a total price of 66,026,000, which does not include theanticipated cost of our water treatment facility, any change orders, orincreases in the CCI costs escalator provision contained in the design-buildagreement.  We agreed to pay amobilization fee of $5,000,000 to Fagen, Inc. when we issue our notice toproceed with construction pursuant to the terms of the design-build contract.

 

We have executed a Phase Iand Phase II Engineering Services Agreement with Fagen Engineering, LLC, anentity related to our design-builder Fagen, Inc., for the performance ofcertain engineering and design work. Fagen Engineering, LLC performs theengineering services for projects constructed by Fagen, Inc. In exchangefor certain engineering and design services, we have agreed to pay FagenEngineering, LLC a lump-sum fixed fee, which will be credited against the totaldesign-build costs.

 

We also entered into a license agreement with ICM, Inc.for limited use of ICM, Inc.’s proprietary technology and information toassist us in operating, maintaining, and repairing the ethanol productionfacility.  We are not obligated to pay afee to ICM, Inc. for use of the proprietary information and technologybecause our payment to Fagen, Inc. for the construction of the plant underour design-build agreement is inclusive of these costs.   Under the license agreement, ICM, Inc.retains the exclusive right and interest in the proprietary information andtechnology and the goodwill associated with that information.  ICM, Inc. may terminate the agreementupon written notice if we improperly use or disclose the proprietaryinformation or technology at which point all proprietary property must bereturned to ICM, Inc.

 

On November 28,2007 we executed a Phase 1 Mass Grading and Drainage Agreement with R and GConstruction Co. for certain improvements to the project site which involvesmass grading and drainage activities. We agreed to pay a monthly fee of 90% ofthe value based on the amount of work completed with the remaining 10% held asretainage.   R and G has completed itswork for the winter.

 

Construction of the project is expected to take 16 to18 months from the date construction commences. We commenced site work in November 2007.  We expect to issue notice to proceed withconstruction to Fagen, Inc. within the next fiscal quarter.  We anticipate completion of plantconstruction in spring 2009.

 

 

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Assuming the successful completion of our offering andour obtaining the necessary debt financing, we expect to have sufficient cashon hand to cover construction and related start-up costs necessary to make theplant operational.  We estimate that wewill need approximately $78,526,000 to construct the plant and our watertreatment facility, subject to construction cost index increases, and a totalof approximately $31,474,000 to cover all other expenditures necessary tocomplete the project, commence plant operations and produce revenue.  We have budged $3,279,250 for the CCIincreases.  However, based on the CCI forJanuary 2008, the increase had exceeded the budgeted reserve.  We intend to seek additional debt financingto offset any increase in the total project cost.  We may also seek additional equityinvestments in our offering if necessary. In no event will we exceed the maximum offering amount of $60,000,000.

 

*Marketing and GrainProcurement Agreements*

 

                We have entered into an ethanol marketing agreementwith Renewable Products Marketing Group, LLC (“RPMG”) pursuant to which RPMGwill be our exclusive ethanol marketer. RPMG will use its best efforts to market and obtain the best price forthe ethanol we expect to produce in exchange for a percentage of the price wereceive for each gallon of ethanol sold. The initial term of the RPMG agreement is for 24 months and shall beautomatically extended for 12 months unless either party gives the other priorwritten notice.  The RPMG agreement canbe terminated for any uncured breach of the terms of the agreement.

 

                On October 11,2007, we entered into a Distillers Grains Marketing Agreement with CHS, Inc.  CHS, Inc. is a diversified energy,grains and foods company owned by farmers, ranchers and cooperatives.  CHS, Inc. provides products and servicesranging from grain marketing to food processing to meet the needs of itscustomers around the world.  CHS, Inc.will market our distillers grains and we receive a percentage of the sellingprice actually received by CHS, Inc. in marketing our distillers grains toits customers.  Under the agreement, CHS, Inc.will pay to us a price equal to 98% of the FOB plant price actually received byCHS, Inc. for all dried distillers grains removed by CHS, Inc. fromour plant and a price equal to 96% of the FOB plant price actually received byCHS, Inc. for all our wet distillers grains. The term of our agreementwith CHS, Inc. is for one year commencing as of the completion andstart-up of the plant.  Thereafter, theagreement will remain in effect unless otherwise terminated by either partywith 120 days notice.  Under theagreement, CHS, Inc. will be responsible for all transportationarrangements for the distribution of our distillers grains.

 

We have entered into agrain procurement agreement with Meadowland Farmers Co-op (“Meadowland”).  Meadowland has the exclusive right andresponsibility to provide us with our daily requirements of corn meetingquality specifications set forth in the grain procurement agreement.  Under the agreement, we will purchase corn atthe local market price delivered to the ethanol plant plus a fixed fee perbushel of corn purchased.  We willprovide Meadowland with an estimate of our usage at the beginning of eachfiscal quarter and Meadowland agrees to at all times maintain a minimum of 7days corn usage at our plant.  Theinitial term of the agreement is 7 years from the time we request our firstdelivery of corn.

 

*Permitting and Regulatory Activities*

 

We are subject to extensive air, water and otherenvironmental regulations.  We haveobtained the required air and construction permits necessary to beginconstruction of the plant and are in the process of obtaining any additionalpermits necessary to operate the plant. Fagen, Inc. and Earth TecConsulting, Inc. are coordinating and assisting us with obtaining certainenvironmental permits, and advising us on general environmentalcompliance.  In addition, we will retainconsultants with expertise specific to the permits being pursued to ensure allpermits are acquired in a cost efficient and timely manner.

 

We havereceived our Air Emissions Permit, a Stormwater permit and an Above GroundStorage Tank Permit.  We expect toreceive our environmental Assessment Worksheet within the next fiscal quarter.  In addition, we have submitted ourapplication for our Permit for Discharge of Stormwater During ConstructionActivities.

 

                The remaining permits will berequired shortly before or shortly after we begin to operate the plant.  If for any reason any of these permits arenot granted, construction costs for the plant may increase, or the plant maynot be constructed at all.  Currently, wedo not anticipate problems in obtaining the required permits; however, suchproblems may arise in which case our plant may not be allowed to operate.

 

 

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*Trends and Uncertainties Impacting the Ethanol Industry andOur Future Operations*

 

If we are successful in building and constructing theethanol plant, we expect our future revenues will primarily consist of sales ofethanol and distillers grains. We expect ethanol sales to constitute the bulkof our revenues. Historically, the demand for ethanol increased relative tosupply, which caused upward pressure on ethanol market prices. Increaseddemand, firm crude oil and gas markets, public acceptance, and positivepolitical signals contributed to those strong ethanol prices.  Those high prices were not sustained,however, due to increased ethanol production, and transportation and logisticsproblems in the industry.  Managementbelieves the industry will need to continue to grow demand and havegovernmental support, and transportation and logistical problems will need tobe alleviated in order for the industry to realize higher ethanol marketprices.

 

We expect to benefit from federal ethanol supports andfederal tax incentives. Changes to these supports or incentives couldsignificantly impact demand for ethanol, and could negatively impact ourbusiness. On August 8, 2005, President George W. Bush signed into law theEnergy Policy Act of 2005 which contained numerous provisions that favorablyimpacted the ethanol industry by enhancing both the production and use ofethanol. Most notably, the Energy Policy Act created a 7.5 billion gallonrenewable fuels standard (the “RFS”). The RFS is a national renewable fuelsmandate as to the total amount of national renewable fuels usage but allowsflexibility to refiners by allowing them to use renewable fuel blends in thoseareas where it is most cost-effective rather than requiring renewable fuels tobe used in any particular area or state.  The recently enacted Energy Independence and Security Act (the “Act”)amended the RFS to set the volume at 9 billion gallons in 2008, increasing to36 billion gallons in 2022.  The Actexpanded the definition of several renewable fuels which may be used byblenders to meet the RFS requirement. The RFS now includes conventional biofuels, advanced biofuels,cellulosic biofuels and biodiesel, all of which can be used to meet theRFS.  In addition, the RFS total annualrequirement is allocated different in each subsequent year to encourage the useof more cellulosic biofuels, advanced biofuels and biodiesel.  The RFS for conventional biofuel, includingcorn-based ethanol, will reach 15 billion gallons in 2015 and will not increasein subsequent years.

 

Ethanol productioncontinues to rapidly grow as additional plants and plant expansions becomeoperational. According to the Renewable Fuels Association, as of December 18,2007, 135 ethanol plants were producing ethanol with a combined annualproduction capacity of 7.42 billion gallons per year and current expansions andplants under construction constituted an additional future production capacityof 6.06 billion gallons per year.  POETand ADM control a significant portion of the ethanol market, producing anaggregate of over 2 billion gallons of ethanol annually.  POET plans to produce an additional 375million gallons of ethanol per year and ADM plans to produce an additional 550million gallons of ethanol per year through plant expansions, which willstrengthen their positions in the ethanol industry and cause a significantincrease in domestic ethanol supply.  Inaddition, in late November 2007, VeraSun Energy Corporation and US BioEnergy Corp. announced that they entered into a merger agreement which isexpected to close during the first quarter of 2008.  The new entity will retain the Vera Sun nameand, by the end of 2008, is expected to own 16 ethanol facilities with a totalproduction capacity of more than 1.6 billion gallons per year, which would makeit one of the largest ethanol producers in the country.  Excess capacity in the ethanol industry wouldhave an adverse effect on our results of operations, cash flows and financialcondition.  In a manufacturing industrywith excess capacity, producers have an incentive to manufacture additionalproducts for so long as the price exceeds the marginal cost of production(i.e., the cost of producing only the next unit, without regard to interest,overhead or fixed costs).  This incentivecan result in the reduction of the market price of ethanol to a level that isinadequate to generate sufficient cash flow to cover costs.  If the demand for ethanol does not grow atthe same pace as increases in supply, we expect the price for ethanol tocontinue to decline.  Declining ethanolprices will result in lower revenues and may reduce or eliminate profitscausing the value of your investment to be reduced.

 

Demand for ethanol may increase as a result ofincreased consumption of E85 fuel. E85 fuel is a blend of 70% to 85% ethanoland gasoline. According to the Energy Information Administration, E85consumption is projected to increase from a national total of 22 milliongallons in 2004 to 200 million gallons in 2030. E85 can be used as an aviation fuel, as reported by the National CornGrowers Association, and as a hydrogen source for fuel cells. According to theRFA, virtually every vehicle in the United States is capable of using ethanolblends up to 10%, but it takes a flexible fuel vehicle (FFV) to use higherblends up to E85.  According to the National Ethanol Vehicle Coalition,there are currently about 6.0 million FFVs capable of operating on E85.  Automakers such as 

 

 

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Ford and General Motors have begun national campaignsto promote ethanol and have indicated plans to produce an estimated 4 millionmore FFVs per year.

 

The demand for E85 is largely driven by flexible fuelvehicle penetration of the United States vehicle fleet, the retail price of E85compared to regular gasoline and the availability of E85 at retail stations.Because flexible fuel vehicles can operate on both ethanol and gasoline, if theprice of regular gasoline falls below E85, demand for E85 will decrease aswell. In addition, gasoline stations offering E85 are relatively scarce. From2003 to 2007, the number of retail stations that supply E85 increased from lessthan 200 to over 1,300 as reported by the American Coalition for Ethanol.  This remains a relatively small percentage ofthe total number of retail gasoline stations in the United States, which isapproximately 170,000.  The Energy PolicyAct of 2005 established a tax credit of 30% for infrastructure and equipment todispense E85 which became effective in 2006, and is scheduled to expire December 31,2010. Legislation was introduced on the first day of the 2007 Congress whichproposes a permanent extension of this tax credit; however, there is noguarantee that this proposed legislation will be adopted.  This tax credit is expected to encourage moreretailers to offer E85 as an alternative to regular gasoline. However, some gasstation operators may be hesitant to install pumps to dispense E85, as it isessentially a competitor to the stations’ main product, gasoline.  The Energy Independence and Security Act madeit unlawful for a franchiser to prohibit a franchise from installing E85 fueltanks and pumps within the franchise agreement. This provision responded to concerns that many oil companies wereprohibiting the installation of E85 fuel pumps at the stations they owned oroperated.  In addition, the Act created agrant program for the installation of refueling infrastructure for E85.  Although the Act does not become effectiveuntil January 1, 2009, management believes these provisions will encouragethe availability and use of E85.

 

Demand for ethanol has historically been supported byhigher oil prices and its refined components. While the mandated usage required by the renewable fuels standard isdriving demand, management believes that the industry will require an increasein voluntary usage in order to experience long-term growth.  We expect this will happen only if the priceof ethanol is deemed economical by blenders. In addition, increased consumer awareness of ethanol-blended gasolinewill be necessary to motivate blenders to voluntarily increase the amount ofethanol blended into gasoline.  In thefuture, a lack of voluntary usage by blenders in combination with additionalsupply may damage our ability to generate revenues and maintain positive cashflows.

 

Although the Energy Policy Act of 2005 did not imposea national ban of MTBE, the primary competitor of ethanol as a fuel oxygenate,the Act’s failure to include liability protection for manufacturers of MTBEcould result in refiners and blenders using ethanol as an oxygenate rather thanMTBE to satisfy the Clean Air Act’s reformulated gasoline oxygenaterequirement. While this may create some additional demand in the short term,the Act repeals the Clean Air Act’s 2% oxygenate requirement for reformulatedgasoline immediately in California and 270 days after enactment elsewhere.However, the Clean Air Act also contains an oxygenated fuel requirement forareas classified as carbon monoxide non-attainment areas. These areas arerequired to establish an oxygenated fuels program for a period of no less thanthree months each winter. The minimum oxygen requirement for gasoline sold inthese areas is 2.7% by weight. This is the equivalent of 7.7% ethanol by volumein a gasoline blend. This requirement was unaffected by the Act and a number ofstates, including California, participate in this program.

 

Consumer resistance to theuse of ethanol may affect the demand for ethanol which could affect our abilityto market our product and reduce the value of your investment. According tomedia reports in the popular press, some consumers believe that use of ethanolwill have a negative impact on retail gasoline prices. Many also believe thatethanol adds to air pollution and harms car and truck engines. Still otherconsumers believe that the process of producing ethanol actually uses morefossil energy, such as oil and natural gas, than the amount of energy in theethanol that is produced. In addition, recent high corn prices have added toconsumer backlash against ethanol, as many consumers blame ethanol for highfood prices.  These consumer beliefscould potentially be wide-spread. If consumers choose not to buy ethanol, itwould affect the demand for the ethanol we produce which could negativelyaffect our ability to sell our product and negatively affect our profitability.

 

*Trends and uncertaintiesimpacting the corn and natural gas markets and our future cost of goods sold*

 

We expect our future cost of goods sold will consistprimarily of costs relating to the corn and natural gas supplies necessary toproduce ethanol and distillers grains for sale. As of December 11, 2007, United States Department of Agricultureestimated the 2007 corn crop at 13.17 billion bushels, which is25 percent larger than the 

 

 

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2006 corn crop.  Despite the large 2007 corn crop, corn priceshave increased sharply since 2006 and remained high throughout 2007.  We expect the price of corn to remain atcurrent price levels well into 2008. Although we do not expect tobegin operations until spring 2009, we expect continued volatility in the priceof corn, which could significantly impact our cost of goods sold. The number of operating and planned ethanol plants in our immediatesurrounding area and nationwide will also significantly increase the demand forcorn. This increase will likely drive the price of corn upwards in our marketwhich will impact our ability to operate profitably.

 

There is no assurance that a corn shortage will notdevelop, particularly if there are other ethanol plants competing for corn, anextended drought or other production problems. Historical grain pricinginformation indicates that the price of grain has fluctuated significantly inthe past and may fluctuate significantly in the future. Because the marketprice of ethanol is not related to grain prices, ethanol producers are generallynot able to compensate for increases in the cost of grain feedstock throughadjustments in prices charged for their ethanol. We, therefore, anticipate thatour plant’s profitability will be negatively impacted during periods of highcorn prices.  However, the negativeimpact on profitability resulting from high corn prices will be mitigated, inpart, by the increased value of the distillers grains we intend to market, asthe price of corn and the price of distillers grains tend to fluctuate intandem.

 

Natural gas isalso an important input commodity to our manufacturing process. We estimatethat our natural gas usage will be approximately 15% to 20% of our annual totalproduction cost. We use natural gas to dry our distillers grain products tomoisture contents at which they can be stored for extended periods of time andtransported greater distances. Distillers dried grains have a much broader market base, including thewestern cattle feedlots, and the dairies of California and Florida. Recently,the price of natural gas has risen along with other energy sources. Natural gasprices are considerably higher than the 10-year average.  We expect continued volatility in the naturalgas market. Any ongoing increases in the price of natural gas will increase ourcost of production and may negatively impact our future profit margins.

 

*Technology Developments*

 

                Most ethanol is currently produced from corn andother raw grains, such as milo or sorghum. The current trend in ethanol production research is to develop anefficient method of producing ethanol from cellulose-based biomass, such asagricultural waste, forest residue, municipal solid waste, and energycrops.  This trend is driven by the factthat cellulose-based biomass is generally cheaper than corn, and producingethanol from cellulose-based biomass would create opportunities to produceethanol in areas which are unable to grow corn. Although current technology is not sufficiently efficient to becompetitive, a recent report by the United States Department of Energy entitled“Outlook for Biomass Ethanol Production and Demand” indicates that newconversion technologies may be developed in the future.

 

                The Energy Independence and Security Act expanded thedefinition of several renewable fuels which may be used by blenders to meet theRFS requirement.  The RFS now includesconventional biofuels, advanced biofuels, cellulosic biofuels and biodiesel,all of which can be used to meet the RFS. In addition, the RFS total annual requirement is allocated different ineach subsequent year to encourage the use of more cellulosic biofuels, advancedbiofuels and biodiesel.

 

                TheAct also authorizes several grants for the advancement of the renewable fuelsindustry.  It authorizes $500 millionannually for 2008 to 2015 for the production of advanced biofuels that have atleast an 80% reduction in GHG emissions. In addition, it authorizes $25 million annually in 2008 through 2010 forresearch and development and commercial application of biofuels production instates with low rates of ethanol and cellulosic ethanol production.  Further, $200 million annually in 2008through 2014 is authorized for infrastructure grants for the installation ofE85 fuel pumps.  Funding is alsodedicated for government departments to conduct studies on the feasibility ofconstructing a dedicated ethanol pipeline, the adequacy of rail transportationof renewable fuel and the impact of the RFS program on various industries suchas the livestock and food industry.  Asenacted, the Act’s provisions did not include any new tax incentives for theproduction or use of renewable fuels; however, remaining tax incentivesexplained below remain in force.

 

 

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**Liquidity and Capital Resources**

 

*Estimated Sources of Funds*

 

The following schedule sets forth estimatedsources of funds to build our ethanol plant near Lamberton, Minnesota. This schedule could change in the future depending on the level of equityand debt financing we receive and the amount of grants, if any we are able toobtain.

 

| **Sources of  Funds (1)**                   | ** ** | ** ** | ** **  | **Percent** | ** ** |
|---------------------------------------------|------------|------------|-------------|-------------|------------|
| Offering Proceeds (2)                       |       | $          | 50,000,000  |        | 45.45      | % |
| Seed Capital Proceeds (3)                   |       | $          | 1,680  ,000 |        | 1.53       | % |
| Senior and Subordinated  Debt Financing (4) |       | $          | 58,320,000  |        | 53.02      | % |
| **Total  Sources of Funds**                 |       | $          | 110,000,000 |        | 100.00     | % |

----

(1)  The amount of senior debt financing may beadjusted depending on the amount of grants we are able to obtain.

 

(2)  As of January 28, 2008 we havesubscriptions from investors for approximately $45,100,000.

 

(3)  We have issued a total of 386 units toour seed capital investors in exchange for proceeds of $1,680,000.  We issued a total of 236 units to our seedcapital investors at a price of $5,000 per unit.  In addition, we issued 150 units to ourfounders at a price of $3,333.33 per unit.

 

(4)  We currently do not have a debtcommitment, nor have we entered into definitive loan agreements with a seniorlender or subordinated debt lender for debt financing.  We are in negotiations with a potentiallender, but have no commitments or agreements in place.

 

                We do not expect to beginsubstantial plant construction activity before closing our equity offering,satisfying any loan commitment conditions and closing the loan transaction.

 

                Assuming the successfulcompletion of our offering and execution of loan closing agreements, we expectto have sufficient cash on hand  to coverall costs associated with construction of the project, including, but notlimited to, site development, utilities, construction and equipmentacquisition.

 

*Estimated Uses of Proceeds*

 

The followingtable reflects our estimate of costs and expenditures for the ethanol plant tobe built near Lamberton, Minnesota. These estimates are based on discussions with Fagen, Inc., ourdesign-builder. The following figures are intended to be estimates only, andthe actual use of funds may vary significantly from the descriptions givenbelow due to a variety of factors described elsewhere in this report.

 

          Estimate of Costs as ofthe Date of this Report.

 

| **Use of Proceeds**            | ** ** | **Amount** | ** ** | **Percent of  Total** | ** ** |
|--------------------------------|------------|------------|------------|-----------------------|------------|
| Plant construction             |       | $          | 66,026,000 |                  | 60.02      | % |
| Water treatment facility       |       | 12,500,000 |       | 11.36                 | %          |
| CCI Contingency                |       | 3,279,250  |       | 2.98                  | %          |
| Land cost                      |       | 876,400    |       | 0.80                  | %          |
| Site development costs         |       | 8,073,600  |       | 7.34                  | %          |
| Construction contingency       |       | 919,750    |       | 0.84                  | %          |
| Construction performance  bond |       | 350,000    |       | 0.32                  | %          |
| Construction insurance  costs  |       | 150,000    |       | 0.14                  | %          |
| Administrative building        |       | 350,000    |       | 0.32                  | %          |
| Office equipment               |       | 80,000     |       | 0.07                  | %          |
|                                |            |            |            |                       |            |  |

 

 

39

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| Computers, Software, Network                |       | 150,000   |            | 0.14   | %      |
|---------------------------------------------|------------|-----------|-----------------|--------|--------|
| Railroad                                    |       | 3,000,000 |            | 2.73   | %      |
| Rolling stock                               |       | 400,000   |            | 0.36   | %      |
| Fire Protection and water  supply           |       | 3,495,000 |            | 3.18   | %      |
| Capitalized interest                        |       | 1,500,000 |            | 1.36   | %      |
| **Start up  costs:**                        |       |      |            |   |   |
| Financing costs                             |       | 600,000   |            | 0.55   | %      |
| Organization costs                          |       | 1,500,000 |            | 1.36   | %      |
| Pre-production period  costs                |       | 750,000   |            | 0.68   | %      |
| Working capital                             |       | 2,000,000 |            | 1.83   | %      |
| Inventory – corn                       |       | 1,100,000 |            | 1.00   | %      |
| Inventory – chemicals and  ingredients |       | 400,000   |            | 0.36   | %      |
| Inventory – Ethanol                    |       | 1,500,000 |            | 1.36   | %      |
| Inventory – DDGS                       |       | 500,000   |            | 0.45   | %      |
| Spare parts – process  equipment       |       | 500,000   |            | 0.45   | %      |
| **Total**                                   | ** ** | **$**     | **110,000,000** |   | 100.00 | % |
|                                             |            |           |                 |        |        |  |

 

We expect thetotal funding required for the plant to be approximately $110,000,000, whichincludes $78,526,000 to build the plant and our water treatment facility andapproximately $31,474,000 for other project development costs including land,site development, utilities, start-up costs, capitalized fees and interest,inventories and working capital.  Ourdesign-build agreement with Fagen, Inc. provides for an upward adjustmentof the construction price in an amount equal to the percentage increase in the CCI forthe month in which we give notice to proceed to Fagen, Inc., over the CCIpublished for January 2006. Therefore, the cost of our plant could be significantly higher than the$66,026,000 construction price in the design-build agreement.  Accordingly, we have budgeted $3,279,250 forour construction contingency to help offset higher construction costs; however,based on the CCI for December 2007, this is not sufficient to offsetincreased costs. We intend to seek additional senior debt or subordinated debtfinancing to offset any increase in the total project cost.  We may also seek additional equityinvestments in our offering if necessary. In no event will we exceed the maximum offering amount of$60,000,000.  The Company believes the increases in the CCI will notsubstantially affect the total project cost.

 

*Financial Results*

 

                As of October 31, 2007, wehave total assets of approximately $1,966,000 consisting primarily of propertyand equipment and deferred offering costs. We have current liabilities ofapproximately $1,817,000 consisting primarily of accounts payable and notespayable. Total members’ equity as of October 31, 2007, was approximately$149,000.  Since our inception, we havegenerated no revenue from operations. From inception to October 31, 2007,we had an accumulated deficit of approximately $1,531,000.

 

                Based on our business plan andcurrent construction cost estimates, we believe the total project will costapproximately $110,000,000. We are seeking to raise a minimum of $45,000,000and a maximum of $60,000,000 of equity in our registered offering. As of January 28,2008 we have subscriptions from our investors in the aggregate amount ofapproximately $45,100,000.

 

**Critical Accounting Estimates**

 

                Managementuses estimates and assumptions in preparing our financial statements inaccordance with generally accepted accounting principles. These estimates andassumptions affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities, and the reported revenues andexpenses.  The Company defers the costsincurred to raise equity financing until that financing occurs.  At such time that the issuance of new equityoccurs, these costs will be netted against the proceeds received; or if thefinancing does not occur, they will be expensed.

 

**Off-Balance Sheet Arrangements**

 

                We do not have any off-balancesheet arrangements.

 

 

40

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**Employees**

 

                We currently have three part-time employees.   See “**DESCRIPTIONOF BUSINESS — Employees.”**

 

 

41

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** **

**ITEM 7. FINANCIAL STATEMENTS.**

 

 

REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM

 

Boardof Governors

HighwaterEthanol, LLC

Lamberton,Minnesota

 

Wehave audited the accompanying balance sheet of Highwater Ethanol, LLC (adevelopment stage company) as of October 31, 2007, and the relatedstatements of operations, changes in members’ equity, and cash flows for theyear ended October 31, 2007, the period from inception (May 2, 2006)to October 31, 2006, and the period from inception (May 2, 2006) to October 31,2007. Highwater Ethanol, LLC’s management is responsible for these financialstatements. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. The Company is notrequired to have, nor were we engaged to perform, an audit of its internalcontrol over financial reporting. Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of Highwater Ethanol, LLC (adevelopment stage company) as of October 31, 2007, and the results of itsoperations and its cash flows for the year ended October 31, 2007, for theperiod from inception (May 2, 2006) to October 31, 2006 and for theperiod from inception (May 2, 2006) to October 31, 2007 in conformitywith accounting principles generally accepted in the United States of America.

 

Theaccompanying financial statements have been prepared assuming that the Companywill continue as a going concern.  Asdisclosed in Note 2 to the financial statements, the Company has experiencedlosses, has a deficit in working capital, and may experience a shortage of cashresources in the near term.  Theseconditions raise substantial doubt about its ability to continue as a goingconcern.  Management’s plan in regard tothese matters is also described in Note 2. The financial statements do not include any adjustments that mightresult from the outcome of this uncertainty.

 

/s/ Boulay, Heutmaker, Zibell & Co.,P.L.L.P

 

Certified Public Accountants

 

Minneapolis,Minnesota

January 28,2008

 

 

42

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**HIGHWATERETHANOL, LLC**

(A Development StageCompany)

 

Balance Sheet

 
| **ASSETS**                                   | ** ** | **October 31,   2007** | ** ** |
|----------------------------------------------|------------|------------------------|------------|
| **Current  Assets**                          |       |                   |       |
| Cash                                         |       | $                      | 98,697     |   |
| Restricted cash                              |       | 56,254                 |       |
| Prepaids and other                           |       | 35,353                 |       |
| Total current assets                         |       | 190,304                |       |
|                                         |       |                   |       |
| **Property  and Equipment**                  |       |                   |       |
| Land and land improvements                   |       | 1,018,252              |       |
| Construction in progress                     |       | 20,854                 |       |
| Office equipment                             |       | 17,283                 |       |
| Accumulated depreciation                     |       | (2,386                 | )          |
| Total property and equipment                 |       | 1,054,003              |       |
|                                         |       |                   |       |
| **Other  Assets**                            |       |                   |       |
| Deferred offering costs                      |       | 717,363                |       |
| Debt issuance costs, net                     |       | 2,209                  |       |
| Land options                                 |       | 2,000                  |       |
| Total other assets                           |       | 721,572                |       |
|                                         |       |                   |       |
| **Total Assets**                             |       | $                      | 1,965,879  |   |
| ** **                                   | ** ** | ** **             | ** ** |
| **LIABILITIES  AND EQUITY**                  | ** ** | **October 31,   2007** | ** ** |
| **Current  Liabilities**                     |       |                   |       |
| Note payable                                 |       | $                      | 1,100,000  |   |
| Accounts payable                             |       | 577,231                |       |
| Accounts payable -members                    |       | 125,589                |       |
| Accrued expenses                             |       | 13,956                 |       |
| Total current liabilities                    |       | 1,816,776              |       |
|                                         |       |                   |       |
| **Commitments  and Contingencies**           | ** ** | ** **             | ** ** |
| ** **                                   | ** ** | ** **             | ** ** |
| **Members'  Equity**                         |       |                   |       |
| Member contributions, 386 units outstanding  |       | 1,680,000              |       |
| Deficit accumulated during development stage |       | (1,530,897             | )          |
| Total members' equity                        |       | 149,103                |       |
|                                         |       |                   |       |
| **Total Liabilities and Members' Equity**    |       | $                      | 1,965,879  |   |
|                                              |            |                        |            |  |  |

 

Notes to Financial Statements are an integral part ofthis Statement.

 

 

43

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**HIGHWATERETHANOL, LLC**

(A Development StageCompany)

Statements of Operations

 
| ** **                              | ** ** | **Year  Ended  October 31, 2007** | ** ** | **From Inception  (May 2, 2006)  to October 31, 2006** | ** ** | **From Inception  (May 2, 2006)  to October 31, 2007** | ** ** |
|-----------------------------------------|------------|-----------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
|                                    |       |                              |       |                                                   |       |                                                   |       |
| **Revenues**                            |       | $                                 | —     |                                                   | $          | —                                                 |       | $ | — |   |
| ** **                              |       |                              |       |                                                   |       |                                                   |       |
| **Operating  Expenses**                 |       |                              |       |                                                   |       |                                                   |       |
| Professional fees                       |       | 990,707                           |       | 341,347                                                |       | 1,332,054                                              |       |
| General and administrative              |       | 199,720                           |       | 26,961                                                 |       | 226,681                                                |       |
| Total operating expenses                |       | 1,190,427                         |       | 368,308                                                |       | 1,558,735                                              |       |
|                                    |       |                              |       |                                                   |       |                                                   |       |
| **Operating  Loss**                     |       | (1,190,427                        | )          | (368,308                                               | )          | (1,558,735                                             | )          |
|                                    |       |                              |       |                                                   |       |                                                   |       |
| **Other  Income (Expense)**             |       |                              |       |                                                   |       |                                                   |       |
| Interest income                         |       | 30,507                            |       | 19,648                                                 |       | 50,155                                                 |       |
| Other income                            |       | 3,225                             |       | —                                                 |       | 3,225                                                  |       |
| Interest expense                        |       | (25,542                           | )          | —                                                 |       | (25,542                                                | )          |
| Total other income, net                 |       | 8,190                             |       | 19,648                                                 |       | 27,838                                                 |       |
|                                    |       |                              |       |                                                   |       |                                                   |       |
| **Net Loss**                            |       | $                                 | (1,182,237 | )                                                      | $          | (348,660                                               | )          | $ | (1,530,897 | ) |
|                                    |       |                              |       |                                                   |       |                                                   |       |
| **Weighted  Average Units Outstanding** |       | 386                               |       | 313                                                    |       | 362                                                    |       |
|                                    |       |                              |       |                                                   |       |                                                   |       |
| **Net Loss  Per Unit**                  |       | $                                 | (3,062.79  | )                                                      | $          | (1,113.93                                              | )          | $ | (4,229.00 | ) |

 

 

Notes to FinancialStatements are an integral part of this Statement. 

 

 

44

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**HIGHWATERETHANOL, LLC**

(A Development StageCompany)

 

Statement of Changes inMembers' Equity

 
| ** **                                                 | ** ** | **Member   Contributions** | ** ** | **Deficit Accumulated   During   Development Stage** | ** ** |
|------------------------------------------------------------|------------|----------------------------|------------|------------------------------------------------------|------------|
| **Balance -  May 2, 2006, Inception**                      |       | $                          | —     |                                                 | $          | — |   |
| ** **                                                 |       |                       |       |                                                 |       |
| Membership units - 150 units at $3,333 per unit, May 2006  |       | 500,000                    |       | —                                               |       |
|                                                       |       |                       |       |                                                 |       |
| Membership units - 236 units at $5,000 per unit, June 2006 |       | 1,180,000                  |       | —                                               |       |
|                                                       |       |                       |       |                                                 |       |
| Net loss                                                   |       | —                     |       | (348,660                                             | )          |
|                                                       |       |                       |       |                                                 |       |
| **Balance -  October 31, 2006**                            |       | 1,680,000                  |       | (348,660                                             | )          |
| ** **                                                 |       |                       |       |                                                 |       |
| Net loss                                                   |       | —                     |       | (1,182,237                                           | )          |
|                                                       |       |                       |       |                                                 |       |
| **Balance -  October 31, 2007**                            |       | $                          | 1,680,000  |                                                 | $          | (1,530,897 | ) |

 

 

Notes to FinancialStatements are an integral part of this Statement. 

 

45

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**HIGHWATERETHANOL, LLC**

(A Development StageCompany)

 

Statement of Cash Flows

 
| ** **                                                                 | ** ** | **Year  Ended  October 31, 2007** | ** ** | **From  Inception  (May 2, 2006)  to October 31, 2006** | ** ** | **From  Inception  (May 2, 2006)  to October 31, 2007** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **Cash  Flows from Operating Activities**                                  |       |                              |       |                                                    |       |                                                    |       |
| Net loss                                                                   |       | $                                 | (1,182,237 | )                                                       | $          | (348,660                                                | )          | $ | (1,530,897) |   |
| Adjustments to reconcile net loss to net cash from operations              |       |                              |       |                                                    |       |                                                    |       |
| Depreciation and amortization                                              |       | 6,179                             |       | 59                                                      |       | 6,238                                                   |       |
| Change in assets and liabilities                                           |       |                              |       |                                                    |       |                                                    |       |
| Prepaids and other                                                         |       | (20,080                           | )          | (16,527                                                 | )          | (36,607                                                 | )          |
| Accounts payable                                                           |       | 283,896                           |       | 69,984                                                  |       | 353,880                                                 |       |
| Accrued expenses                                                           |       | 13,956                            |       | —                                                  |       | 13,956                                                  |       |
| Net cash used in operating activities                                      |       | (898,286                          | )          | (295,144                                                | )          | (1,193,430                                              | )          |
|                                                                       |       |                              |       |                                                    |       |                                                    |       |
| **Cash  Flows from Investing Activities**                                  |       |                              |       |                                                    |       |                                                    |       |
| Capital expenditures                                                       |       | (874,415                          | )          | (1,416                                                  | )          | (875,831                                                | )          |
| Construction in progress                                                   |       | (20,854                           | )          | —                                                  |       | (20,854                                                 | )          |
| Payments for land options                                                  |       | (30,000                           | )          | (12,000                                                 | )          | (42,000                                                 | )          |
| Net cash used in investing activities                                      |       | (925,269                          | )          | (13,416                                                 | )          | (938,685                                                | )          |
|                                                                       |       |                              |       |                                                    |       |                                                    |       |
| **Cash  Flows from Financing Activities**                                  |       |                              |       |                                                    |       |                                                    |       |
| Proceeds from note payable                                                 |       | 1,038,939                         |       | —                                                  |       | 1,038,939                                               |       |
| Member contributions                                                       |       | —                            |       | 1,680,000                                               |       | 1,680,000                                               |       |
| Payments for deferred offering costs                                       |       | (381,058                          | )          | (107,069                                                | )          | (488,127                                                | )          |
| Net cash provided by financing activities                                  |       | 657,881                           |       | 1,572,931                                               |       | 2,230,812                                               |       |
|                                                                       |       |                              |       |                                                    |       |                                                    |       |
| **Net  Increase (Decrease) in Cash**                                       |       | (1,165,674                        | )          | 1,264,371                                               |       | 98,697                                                  |       |
| ** **                                                                 |       |                              |       |                                                    |       |                                                    |       |
| **Cash -  Beginning of period**                                            |       | 1,264,371                         |       | —                                                  |       | —                                                  |       |
| ** **                                                                 |       |                              |       |                                                    |       |                                                    |       |
| **Cash -End  of period**                                                   |       | $                                 | 98,697     |                                                    | $          | 1,264,371                                               |       | $ | 98,697 |   |
| ** **                                                                 |       |                              |       |                                                    |       |                                                    |       |
| **Supplemental  Cash Flow Information**                                    |       |                              |       |                                                    |       |                                                    |       |
| Cash paid for interest expense                                             |       | $                                 | 25,542     |                                                    | $          | —                                                  |       | $ | 25,542 |   |
| Cash paid for interest capitalized                                         |       | $                                 | 8,154      |                                                    | $          | —                                                  |       | $ | 8,154 |   |
| Total                                                                      |       | $                                 | 33,696     |                                                    | $          | —                                                  |       | $ | 33,696 |   |
| ** **                                                                 | ** ** | ** **                        | ** ** | ** **                                              | ** ** | ** **                                              | ** ** |
| **Supplemental  Disclosure of Noncash Financing and Investing Activities** |       |                              |       |                                                    |       |
| Restricted cash received as part of note payable                           | ** ** | $                                 | 55,000     | ** **                                              | $          | —                                                  | ** ** | $ | 55,000 | ** ** |
|                                                                       | ** ** |                              | ** ** |                                                    | ** ** |                                                    | ** ** |
| Capital expenditures included in accounts payable                          |       | $                                 | 119,704    |                                                    | $          | —                                                  |       | $ | 119,704 |   |
|                                                                       |       |                              |       |                                                    |       |                                                    |       |
| Deferred offering costs included in accounts payable                       |       | $                                 | 229,236    |                                                    | $          | 30,861                                                  |       | $ | 229,236 |   |
|                                                                       |       |                              |       |                                                    |       |                                                    |       |
| Debt issuance costs financed with note payable                             |       | $                                 | 6,061      |                                                    | $          | —                                                  |       | $ | 6,061 |   |
| ** **                                                                 | ** ** | ** **                        | ** ** | ** **                                              | ** ** | ** **                                              | ** ** |
| Land options exercised for land purchase                                   |       | $                                 | 40,000     |                                                    | $          | —                                                  |       | $ | 40,000 |   |

 

 

Notesto Financial Statements are an integral part of this Statement.

 

46

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**HIGHWATERETHANOL, LLC**

(A DevelopmentStage Company)

Notes to FinancialStatements

 

October 31,2007

 

**1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

*Nature ofBusiness*

 

HighwaterEthanol, LLC, (a Minnesota Limited Liability Company) was organized with theintentions of developing, owning and operating a 50 million gallon dry millcorn-processing ethanol plant near Lamberton, Minnesota. The Company was formedon May 2, 2006 to have a perpetual life. Construction is anticipated tobegin in early 2008 with expected completion in spring 2009. As of October 31,2007, the Company is in the development stage with its efforts beingprincipally devoted to equity raising and organizational activities.

 

*FiscalReporting Period*

 

TheCompany has adopted a fiscal year ending October 31 for reportingfinancial operations.

 

*Accounting Estimates*

 

Managementuses estimates and assumptions in preparing these financial statements inaccordance with generally accepted accounting principles.  Those estimates and assumptions affect thereported amounts of assets and liabilities, the disclosure of contingent assetsand liabilities, and the reported revenues and expenses.  Actual results could differ from thoseestimates.

 

Significantestimates include the deferral of expenditures for offering costs which aredependent upon successful financing and project development, as discussedbelow.  It is at least reasonablypossible that these estimates may change in the near term.

 

*Cash*

 

TheCompany maintains its accounts primarily at one financial institution.  At times throughout the year, the cashbalances may exceed amounts insured by the Federal Deposit InsuranceCorporation.

 

*Restricted Cash*

 

TheCompany is required to maintain cash balances to be held at a bank as part oftheir interim financing agreement as described in Note 3.

 

*Propertyand Equipment*

 

Property and equipment isstated at the lower of cost or estimated fair value.  Depreciation is provided over an estimateduseful life by use of the straight line method. Maintenance and repairs are expensed as incurred; major improvements andbetterments are capitalized.

 

The Company has incurredsubstantial consulting, permitting, and other pre-construction services relatedto building its plant facilities. Currently, due to substantial uncertainties regarding the Company’sability to proceed with the ultimate facility construction until the Companyhas raised debt and equity financing, the Company expenses pre-constructioncosts as incurred.

 

The Company capitalizesconstruction costs and construction period interest as construction in progressuntil the assets are placed in service. As of October 31, 2007, the Company had construction in progress ofapproximately $21,000 of capitalized interest, including amounts accrued.

 

 

47

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*Deferred Offering Costs*

 

TheCompany defers the costs incurred to raise equity financing until thatfinancing occurs. At such time that the issuance of new equity occurs, thesecosts will be netted against the proceeds received; or if the financing doesnot occur, they will be expensed.

 

*DebtIssuance Costs*

 

Debtissuance costs are amortized over the term of the related debt by use of theeffective interest method.

 

*Fair Value of FinancialInstruments*

 

Thecarrying value of cash and restricted cash approximates its fair value.

 

It isnot currently practicable to estimate the fair value of the interimfinancing.  Due to the unique terms ofthese agreements, as discussed in Note 3, there are no readily determinable similarinstruments on which to base an estimate of fair value.

 

*RecentlyIssued Accounting Pronouncements*

 

In September 2006,the FASB issued Statement of Financial Accounting Standards No. 157 (SFAS157), *Fair Value Measurements*.  SFAS 157 defines fair value, whichestablishes a framework for measuring fair value, and expands disclosures aboutfair value measurements.  The Statementis effective for financial assets and liabilities in financial statementsissued for fiscal years beginning after November 15, 2007.  It is effective for non-financial assets andliabilities in financial statements issued for fiscal years beginning after November 15,2008.  The Company is currentlyevaluating the effect that the adoption of SFAS 157 will have, if any, on itsresults of operations, financial position and related disclosures.

 

In February 2007,the FASB issued Statement of Financial Accounting Standards No. 159, (SFAS159), the *Fair Value Option for Financial Assets andFinancial Liabilities*, which included an amendment of FASB Statement115.  This Statement provides companieswith an option to report selected financial assets and liabilities at fairvalue.  This Statement is effective forfiscal years beginning after November 15, 2007 with early adoptionpermitted.  The Company is in the processof evaluating the effect, if any, that the adoption of SFAS No. 159 willhave on its results of operations and financial position.

 

**2.  GOING CONCERN**

 

Theaccompanying financial statements have been prepared assuming the Company willcontinue as a going concern.  Through October 31,2007, the Company generated losses since inception and has a deficit in workingcapital.  The Company has receivedinterim financing.  Although thefinancing is secured by the land, the Company’s ability to continue as a goingconcern is dependent on the success of generating cash from the Company’sequity drive described in Note 4 and/or through raising additional capital andultimately achieving the capital to proceed with the construction of theplant.  Management anticipates that, as aresult of the actions listed below, the Company will continue as a goingconcern.  The financial statements do notinclude any adjustments that might result should the Company be unable tocontinue as a going concern.

 

Managementbelieves that the Company may continue to exist in its present form as a resultof a successful equity drive and securing project debt financing.  However, no assurance can be given that thesesituations will result in furthering the start up of the Company or ifadditional capital will be available when needed.

 

 

48

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**3. INTERIM FINANCING**

 

** **The Company obtained a note payable for $800,000 froma bank to finance the land purchase described in Note 7.  The note carries annual interest at 7.50% andis payable in full on March 13, 2008. The note is secured by a mortgage on the property and personalguarantees by the principal owner of the general contractor and by a member ofthe Board of Governors, who is also an investor of the Company.  In addition, the Company agreed to restrict$55,000 in cash in favor of the bank.

 

In July 2007,the Company obtained an unsecured note payable for $300,000 from the generalcontractor.  The note carries interest at7.50% and is payable in full at the earlier of financial close or January 2,2008.  The Company has since received averbal extension of the repayment of this loan from the generalcontractor.  However, there is noassurance that a signed agreement will be reached.  The Company received funds under this note inAugust 2007.

 

**4.  MEMBERS’ EQUITY**

 

TheCompany has one class of membership units, which include certain transferrestrictions as specified in the operating agreement and pursuant to applicabletax and securities law, with each unit representing a pro rata ownership in theCompany’s capital, profits, losses and distributions. Income and losses areallocated to all members based upon their respective percentage of units held.

 

TheCompany was initially capitalized by 13 members, contributing an aggregate of$500,000 for 150 units. The Company was further capitalized by 117 additionalmembers contributing an aggregate of $1,180,000 in exchange for 236 units.

 

TheCompany filed a Form SB-2 Registration Statement with the Securities andExchange Commission (SEC) for a minimum of 4,500 and up to 6,000 membershipunits for sale at $10,000 per unit. The Registration Statement was declaredeffective on April 5, 2007. Offering proceeds are held in escrow until the earliest of the receiptof $45,000,000 or more in cash proceeds and a written debt commitment, one yearfrom the effective date of the registration statement, or termination of theoffering and a written debt commitment. As of January 28, 2008, the Companyhad subscriptions for 4,510 units totaling $45,100,000 and amounts of$31,670,000 in escrow under this offering. The Company is engaging in discussions with potential senior lenders,however, no agreement has been executed yet. The Company expects to enter into definitive agreements for the debtfinancing within the next fiscal quarter. If the necessary debt financing has not been secured, the Company willnot be able to construct the proposed ethanol plant and may have to abandon thebusiness.

 

**5.  INCOME TAXES**

 

The Company hasadopted an October 31 fiscal year end, but has a tax year end of December 31.

The differencesbetween financial statement basis and tax basis of assets are estimated asfollows:

 
| ** **                                                                   | ** ** | **October 31,****2007** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------|------------|
|                                                                         |       |                         |       |
| Financial statement basis  of total assets                                   |       | $                            | 1,965,879  |   |
|                                                                         |       |                         |       |
| Organizational and start up costs expensed for financial reporting  purposes |       | 1,544,339                    |       |
|                                                                         |       |                         |       |
| Taxable income tax basis  of total assets                                    |       | $                            | 3,510,218  |   |

 

There were nodifferences between the financial statement basis and tax basis of theCompany’s liabilities.

 

 

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**6. RELATED PARTY TRANSACTIONS**

 

A member is providing legal services for theCompany.  The Company has incurredapproximately $120,000 for the year ended October 31, 2007 related tothese services.

 

**7.  COMMITMENTS AND CONTINGENCIES**

 

*Designbuild agreement*

 

Thetotal cost of the project, including the construction of the ethanol plant andstart-up expenses, is expected to approximate $110,000,000.  The Company signed an agreement in September 2006with a general contractor, an unrelated party, to design and build the ethanolplant at a total contract price of approximately $66,026,000. The contractprice is subject to changes based on corresponding changes to the ConstructionCost Index (CCI), published by Engineering News-Record magazine, from January 2006(7660.29). The estimated contract price has increased based on increases in theCCI by approximately $3,704,000 based on the CCI in January 2008 of 8090.06.  The Company budgeted a reserve for increasesin the CCI of approximately $3,279,000. The Company intends to seek additional debt financing to offset anyincrease in the total project cost.  TheCompany may also seek additional equity investments if necessary.  In no event will the maximum offering amountexceed $60,000,000.  The Company believesthe increases in the CCI will not substantially affect the total project cost.  The agreement was initially set to terminateon March 26, 2007 unless a valid Notice to Proceed was accepted by thegeneral contractor. In March 2007, the general contractor agreed to extendthe termination date to August 15, 2007. In July 2007, the general contractor agreed to extend thetermination date to October 15, 2007. In October 2007, the generalcontractor agreed to extend the termination date to November 15,2007.  The Company has received a verbalextension on this agreement with the general contractor and they are in theprocess of getting this extension in writing. However, there is no guarantee that the general contractor will notterminate the design-build agreement.

 

TheCompany entered into a Phase I and Phase II engineering services agreement withan affiliate of the general contractor. In exchange for the performance ofcertain engineering and design services, the Company has agreed to pay $92,500,which will be credited against the total design-build cost, for which theCompany has incurred approximately $92,500 as of October 31, 2007. Someemployees of the general contractor are investors of the Company.  The Company anticipates funding thedevelopment of the ethanol plant by raising total equity of at least$46,680,000 and securing financing for up to $63,320,000, less any grantsreceived.  The amount of debt financingneeded depends on the amount of equity raised in the offering.

 

*Excavatingcontract*

 

In November 2007,the Company entered into an agreement with an unrelated party for dirt workrelated to the construction of the plant for an amount of approximately$1,162,700.  The Company shall pay amonthly fee of 90% of the value based on the amount of work completed, with theremaining 10% held as retainage.

 

*Landcontracts*

 

In March 2007,the Company purchased approximately 125 acres of land related to the two landoptions that were exercised in December 2006. The total purchase price wasapproximately $876,000. The Company subsequently secured financing for aportion of the land purchased as described in Note 3.  The Company’s comprehensive plan for theconstruction of the ethanol plant contemplates using this site and may alsoutilize one or both of the following adjacent parcels for its site.

 

In September 2006,the Company entered into an option with an unrelated party to purchaseapproximately six to twelve acres of land for $7,000 per acre until December 31,2008. The Company paid a non-refundable option deposit of $1,000 which willapply towards the purchase price if the Company elects to complete thepurchase. If the Company does not exercise the option by December 31,2008, the agreement is null and void with the seller retaining the initial$1,000 deposit.

 

 

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In September 2006,the Company entered into an option with an unrelated party to purchase an undisclosedamount of land for $8,000 per acre until March 31, 2007. The Company paida non-refundable option deposit of $1,000 which will apply towards the purchaseprice if the buyer elects to complete the purchase. In March 2007, theCompany extended the option through September 30, 2007, which was furtherextended to December 31, 2008.  TheCompany is also in the process of having the land surveyed to determine theactual number of acres.

 

*Consultingcontracts*

 

In May 2006,the Company entered into an agreement with an unrelated party for preliminaryengineering services to develop a conceptual railway service. The fee for theseservices will be approximately $6,000 plus reimbursable expenses, with monthlyprogress billings throughout the agreement. In July 2006, the agreement was expanded to include the design andspecifications of a conceptual railway service for a lump sum fee of $85,000.As of October 31, 2007, the Company has incurred approximately $51,000related to this agreement.

 

In June 2007,the Company entered into an agreement with an unrelated party to be theexclusive provider of electricity for the plant. The agreement is to commencethe earlier of the first day of the month in which the plant begins operationsor June 1, 2008. The agreement is to remain in effect for a period of tenyears following commencement. The rates for these services will be a fixedcharge of $12,000 per month along with monthly electric usage based on rateslisted in the agreement. The rates for the first five years of the agreementare guaranteed.  The estimatedconstruction cost of the electrical infrastructure is $1,300,000.  If the plant is not completed as planned orif the plant does not continue in operations for the entire term of thecontract, the Company is liable for incurred project costs to date minus anysalvage value,   The agreement requiresthe Company to provide a Letter of Credit upon request in the amount of$700,000 for the period of the construction and continuing for one year aftercommercial operation.

 

In September 2007,the Company entered into a consulting agreement with an unrelated party forassistance in negotiating financing activities. The Company paid a retainer of$10,000 and will pay an additional $10,000 for the following 30 day period andthereafter every 30 day period at the Company’s discretion, plus a success feeof .75% of any financings accepted by the Company, except for any financingprovided by First National Bank of Omaha of which the success fee shall be..10%.  The agreement provides forreimbursement of expenses.  Subsequent toyear end, the Company is negotiating with the Consultant to terminate thecontract.

 

*MarketingAgreements*

 

In September 2006,the Company entered into a marketing agreement with an unrelated party to purchase,market and distribute all the ethanol produced by the Company. The Company willpay the buyer one percent of the net sales price for certain marketing costs.The initial term is for two years beginning in the month when ethanolproduction begins with a one year renewal option.

 

In October 2007,the Company entered into a marketing agreement with an unrelated party topurchase all of the of distiller’s dried grains with solubles (DDGS), wetdistillers grains (WDG), and solubles the Company is expected to produce.  The buyer agrees to pay the Company 98% ofthe selling price for DDGS and 96% of the selling price for WDG and a fee of $2per ton for solubles, with a minimum fee of $1.50 per ton for sales of DDGS andWDG.  The agreement commences on completionand start-up of operations of the plant and continues for one year.  The agreement will remain in effectthereafter unless a 120 day advance written notice of termination is providedby either party.

 

*Grain Procurement Contract*

 

In July 2006, theCompany entered into a grain procurement agreement with an unrelated party toprovide all of the corn needed for the operation of the ethanol plant.  Under the agreement, the Company willpurchase corn at the 

 

 

51

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local market pricedelivered to the plant plus a fixed fee per bushel of corn.  The agreement begins when operations commenceand continues for seven years.

 

 

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**ITEM8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE.**

 

**               **Boulay, Heutmaker, Zibell & Co., P.L.L.P. hasbeen our independent registered public accounting firm since our inception andare the Company’s independent accountants at the present time. We have had nodisagreements with our accountants.

 

**ITEM8A. CONTROLS AND PROCEDURES.**

 

Ourmanagement, including our President and Principal Executive Officer, BrianKletscher, along with our Treasurer and Principal Financial and AccountingOfficer, Jason Fink, have reviewed and evaluated the effectiveness of ourdisclosure controls and procedures (as defined in Rule 13a — 15(e) underthe Securities Exchange Act of 1934, as amended) as of October 31, 2007. Basedupon this review and evaluation, these officers have concluded that ourdisclosure controls and procedures were not effective due to the materialweeknesses discussed below.

 

Dueto the current operations and size of the Company, there is a lack ofsegregation of duties in certain functions. In addition, there were adjustmentsto our financial statements and other factors during the course of the 2007audit which impacted our closing process. To address these weaknesses, theCompany performed additional analysis and other post-closing procedures toensure that our financial statements are prepared in accordance with generallyaccepted accounting principles. Accordingly, our executive officers andmanagement believe that the financial statements included in this report presentfairly in all material respects our financial condition, results of operationsand cash flows for the periods presented. The Company is in the process ofstrengthening internal controls including enhancing our internal controlsystems and procedures to assure that these weaknesses are corrected andremediated.

 

Ourmanagement, including our principal executive officer and principal financialofficer, have reviewed and evaluated any changes in our internal control overfinancial reporting that occurred as of October 31, 2007 and there hasbeen no change that has materially affected or is reasonably likely tomaterially affect our internal control over financial reporting.

 

**ITEM8B. OTHER INFORMATION.**

 

None.

 

**PART III****.**

 

**ITEM 9****.****GOVERNORS; EXECUTIVE OFFICERS,PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OFTHE EXCHANGE ACT.**

 

**Identification of Governors,Executive Officers and Significant Employees**

 

The following table shows the governors and officersof Highwater Ethanol:

 
| **Board Member**       | ** ** | **Position with the Company** |
|------------------------|------------|-------------------------------|
| Monica Rose Anderson   |       | Governor                      |
| Russell J. Derickson   |       | Governor                      |
| Jason R. Fink          |       | Treasurer/Governor            |
| George M. Goblish      |       | Governor                      |
| Ronald E. Jorgenson    |       | Governor                      |
| Brian D. Kletscher     |       | President/Governor            |
| Michael J. Landuyt     |       | Governor                      |
| David G. Moldan        |       | Governor                      |
| Warren Walter Pankonin |       | Governor                      |
| Todd A. Reif           |       | Governor                      |
| John M. Schueller      |       | Vice  President/Governor      |
| Timothy J. Van Der Wal |       | Secretary/Governor            |

 

 

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**Business Experience of Governors and Officers**

 

The following is a briefdescription of the business experience and background of our officers andgovernors.

 

**MonicaRose Anderson, Governor**, Age 45, 2736 211th Street, Walnut Grove, MN 56180.

 

For the past five years, MonicaRose Anderson has owned Brad Anderson Farms Limited Partnership of WalnutGrove, MN. She has also been an office manager at Clear Lake Farmers Elevatorin Clear Lake, Minnesota, and was a Lab Technician at Bauerly Brothers of SaukRapids, Minnesota. Ms. Anderson has served as a member of the board ofgovernors since May 2006. Ms. Anderson will serve until our firstannual meeting following substantial completion of our ethanol plant and in allcases until a successor is elected and qualified.

 

**RussellJ. Derickson, Governor**, Age 43, 37720 210th Street, Lamberton, Minnesota 56152.

 

For the past five years,Russell J. Derickson has owned and managed his own farming operation, whichproduced corn, soybeans, and wheat. He has also been an Agricultural Advisorand Warehouse Examiner for the Minnesota Department of Agriculture of St. Paul,Minnesota. Mr. Derickson attended South Dakota State University where hereceived a M.Ed in Ag Education and B.S. in Agricultural Education andMechanized Agriculture. Mr. Derickson has served as a member of the boardof governors since May 2006. Mr. Derickson will serve until our firstannual meeting following substantial completion of our ethanol plant and in allcases until a successor is elected and qualified.

 

**JasonR. Fink, Treasurer and Governor**, Age 28, 720 Mallard Ct., Young Amerin Minnesota55397.

 

Since August 2007,Jason R. Fink has been the Vice President of Commercial and Ag Lending forCitizen State Bank of Waverly, Minnesota. Prior to that Mr. Fink served asthe Assistant Vice President and Ag Loan Officer at Minnwest Bank of RedwoodFalls, Minnesota. Mr. Fink graduated from South Dakota State University ofBrookings, South Dakota with a major in Agronomy and minors in Ag Business, AgMarketing and Business. Mr. Fink has served as a member of the board ofgovernors since May 2006. Mr. Fink will serve until our first annualmeeting following substantial completion of our ethanol plant and in all casesuntil a successor is elected and qualified.

 

**GeorgeM. Goblish, Governor**,Age 38, 32866 Dayton Avenue, Vesta, Minnesota 56292.

 

For the past five years,George Michael Goblish has been farming near Vesta where he currently raisescorn and soybeans. He is also an Asgrow/Dekalb/Monsanto seed dealer. Mr. Goblishattended Willmar Technical College where he received his Associate’s Degree inAgricultural Production and Management. Mr. Goblish has served as a memberof the board of governors since May 2006. Mr. Goblish will serveuntil our first annual meeting following substantial completion of our ethanolplant and in all cases until a successor is elected and qualified.

 

**Ronald E. Jorgenson, Governor**, Age 47, 33689 County Road 4, Jeffers, Minnesota56145.

 

For the past five years,Ronald E. Jorgenson has owned and operated his own farming operation. Inaddition, Mr. Jorgenson attended the University of Minnesota of St. Paul,Minnesota. Mr. Jorgenson has served as a member of the board of governorssince May 2006. Mr. Jorgenson will serve until our first annualmeeting following substantial completion of our ethanol plant and in all casesuntil a successor is elected and qualified.

 

**BrianD. Kletscher, President and Governor**, Age 46, 30427 County Highway 10, Vesta, Minnesota56292.

 

For the past five years,Brian D. Kletscher has served as County Commissioner of Redwood County,Minnesota. In addition, Mr. Kletscher owns and manages farming operationsfor Kletscher Farms — Brian & Laura Kletscher. He has also been asales representative for Lucan Feed Service of Lucan, Minnesota. Mr. Kletscherhas served as a member of the board of governors since May 2006. Mr. Kletscherwill serve until our first annual meeting following substantial completion ofour ethanol plant and in all cases until a successor is elected and qualified.

 

54

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**MichaelJ. Landuyt, Governor**,Age 32, 13526 Camp Avenue, Walnut Grove, Minnesota 56180.

 

For the past five years,Michael J. Landuyt has owned and managed farming operations for Landuyt LandLivestock of Walnut Grove, Minnesota. Mr. Landuyt attended South DakotaState University where he received an Associate’s Degree in General Ag. Mr. Landuythas served as a member of the board of governors since May 2006. Mr. Landuytwill serve until our first annual meeting following substantial completion ofour ethanol plant and in all cases until a successor is elected and qualified.

 

**David G. Moldan, Governor**, Age 47, 25368 County Highway 4, Lamberton, Minnesota56152.

 

Forthe past five years, David G. Moldan has been the President and Treasurer ofMoldan & Sons, Inc., a farming operation, of Lamberton,Minnesota. Mr. Moldan attended the University of Minnesota of Waseca,Minnesota where he received his Associate’s Degree in Applied Science andDiversified Ag Production. Mr. Moldan has served as a member of the boardof governors since May 2006. Mr. Moldan will serve until our firstannual meeting following substantial completion of our ethanol plant and in allcases until a successor is elected and qualified.

 

**WarrenWalter Pankonin, Governor**, Age 69, 40840 200th Street, Lamberton, Minnesota 56152.

 

For the past five years,Warren Walter Pankonin has owned and managed Double Diamond Ranch, Inc.and Minnesota Supreme Feeders, Inc., where he buys and sells cattle. He alsocrop farms with his son, Mark. Mr. Pankonin has served as a member of theboard of governors since May 2006. Mr. Pankonin will serve until ourfirst annual meeting following substantial completion of our ethanol plant andin all cases until a successor is elected and qualified.

 

**ToddA. Reif, Governor**,Age 45, 123 Savannah Heights Boulevard, Lynd, Minnesota 56157.

 

For the past five years,Todd A. Reif has been the General Manager of Cenex Harvest States in Marshall,Minnesota, a grain buying and farm supply company. Mr. Reif attendedSouthwest State University of Marshall, Minnesota and graduated with a B.S.Degree in Ag Business. Mr. Reif has served as a member of the board ofgovernors since May 2006. Mr. Reif will serve until our first annualmeeting following substantial completion of our ethanol plant and in all casesuntil a successor is elected and qualified.

 

**JohnM. Schueller, Vice President and Governor**, Age 49, 29157 250th Street, Wabasso,Minnesota 56293.

 

For the past five years,John M. Schueller has been farming in Wabasso, Minnesota. He has also been acustom applicator for Crop Production in Wabasso, Minnesota, and a trucker forChristensen Family Farms of Sleepy Eye, Minnesota. Mr. Schueller hasserved as a member of the board of governors since May 2006. Mr. Schuellerwill serve until our first annual meeting following substantial completion ofour ethanol plant and in all cases until a successor is elected and qualified.

 

**TimothyJ. Van Der Wal, Secretary and Governor**, Age 41, 13347 U.S. Highway 71, Sanborn, Minnesota56083.

 

For the past five years,Timothy J. Van Der Wal has been an Ag Loan Officer at the Wanda State Bank,Wanda Minnesota. He had worked as a Beef Enterprise Consultant for the Land OLakes Feed Division of Arden Hills, Minnesota prior to joining the bank. Mr. VanDer Wal has served as a member of the board of governors since May 2006. Mr. VanDer Wal will serve until our first annual meeting following substantialcompletion of our ethanol plant and in all cases until a successor is electedand qualified.

 

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**Code ofEthics**

 

Our Board ofGovernors has not yet adopted a code of ethics. We expect to adopt a code ofethics within the next fiscal quarter.

 

**Identificationof Audit Committee**

 

Our board ofgovernors in its entirety is currently serving as our audit committee.

 

**AuditCommittee Financial Expert**

 

Ourboard of governors has determined that we do not currently have an auditcommittee financial expert serving on our audit committee. We do not have anaudit committee financial expert serving on our audit committee because nomember of our board of governors has the requisite experience and education toqualify as an audit committee financial expert as defined in Item 407 of RegulationS-B and the board has not yet created a new director position expressly forthis purpose. Our board of governors intends to consider such qualifications infuture nomination to our board and appointments to the audit committee.

 

**ITEM 10. EXECUTIVE COMPENSATION.**

 

**Compensationof Named Executive Officers and Governors**

 

Brian Kletscher is currently serving as our presidentand John Schueller is currently serving as our vice president. Jason R. Fink isour treasurer and Tim J. Van Der Wal is our secretary. We have compensationarrangements with three of our governors and officers. Brian D. Kletscher is toreceive $2,000 per month, Jason R. Fink is to receive $1,000 per month and TimJ. Van Der Wal is to receive $1,000 per month for their services as officers ofHighwater Ethanol. We did not compensate John M. Schueller for his service asan officer.

 

*Summary Compensation Table*. The following table summarizes allcompensation paid or payable by the Company during the last two fiscal years toour executive officers.

 
| ********Name and  Principal Position** | ** ** | **Year**             | ** ** | **Salary** | ** ** | **Option Awards** | ** ** | **Non-Equity   Incentive Plan  Compensation  Earnings** | ** ** | **All Other  Compensation** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|----------------------|------------|------------|------------|-------------------|------------|---------------------------------------------------------|------------|-----------------------------|------------|-----------|------------|
|                                   |       |                 |       |       |       |              |       |                                                    |       |                        |       |      |       |
| Brian   Kletscher,*Principal*          |       | Fiscal  Year   2007  |       | $          | 24,000     | (1)               | $          | 0                                                       |       | $                           | 0          |      | $          | 0 |   | $ | 20,000 |   |
| *Executive   Officer*                  |       | Fiscal  Year   2006  |       | $          | 6,000      |              | $          | 0                                                       |       | $                           | 0          |      | $          | 0 |   | $ | 12,000 |   |
| Jason Fink,*Principal   Financial*     |       | Fiscal   Year   2007 |       | $          | 12,000     | (2)               | $          | 0                                                       |       | $                           | 0          |      | $          | 0 |   | $ | 10,000 |   |
| *and   Accounting   Officer*           |       | Fiscal   Year   2006 |       | $          | 3,000      |              | $          | 0                                                       |       | $                           | 0          |      | $          | 0 |   | $ | 6,000 |   |
| Timothy  Van Der   Wal,                |       | Fiscal   Year   2007 |       | $          | 12,000     | (3)               | $          | 0                                                       |       | $                           | 0          |      | $          | 0 |   | $ | 2,000 |   |
| *Secretary*                            |       | Fiscal   Year   2006 |       | $          | 3,000      |              | $          | 0                                                       |       | $                           | 0          |      | $          | 0 |   | $ | 4,000 |   |
|                                        |            |                      |            |            |            |                   |            |                                                         |            |                             |            |           |            |  |  |  |  |  |  |

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(1) The Company haspaid Mr. Kletscher $8,000 and has an additional $16,000 in accountspayable for compensation to Mr. Kletscher for his service as an officer ofHighwater Ethanol.

(2) TheCompany has paid Mr. Fink $4,000 and has an additional $8,000 in accountspayable for compensation to Mr. Fink for his service as an officer ofHighwater Ethanol.

(3) The Company has paid Mr. Van Der Wal $4,000 and has an additional $8,000in accounts payable for compensation to Mr. Van Der Wal.

 

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Forour fiscal year ended October 31, 2007, none of our other governors orofficers received any compensation.

 

We donot have any other compensation arrangements with our governors and officers. Inthe future, we may enter into employment agreements with our governors,officers or other employees that we may hire.

 

**ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT AND RELATED MEMBER MATTERS.**

 

 **Security Ownership of Certain Beneficial Owners**

 

As ofthe date of this report, we have the following persons or entities known by usto be the beneficial owners of more than 5% of the outstanding units:

 
| **Title of Class** | ** ** | **Name (1)**        | ** ** | **Amount and nature of  beneficial owner** | ** ** | **Percent of Class** |
|--------------------|------------|---------------------|------------|--------------------------------------------|------------|----------------------|
| Membership Unit    |       | George M. Goblish   |       | 24 units                                   |       | 6.22 %               |
| Membership Unit    |       | Ronald E. Jorgenson |       | 24 units                                   |       | 6.22 %               |

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(1)  The address ofthe beneficial owner is deemed to be the same address indicated above.

(2)  Does notinclude units subscribed for in our registered offering.

 

**SecurityOwnership of Management**

 

As of the date ofthis report, our governors and officers beneficially own membership units asfollows:

 
| **Title of Class**                     | ** ** | **Name  and Address of  Beneficial Owner (1)** | ** ** | **Amount  and Nature of   Beneficial Ownership** | ** ** | **Percent  of   Class** |
|----------------------------------------|------------|------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------|
| Membership Units                       |       | Monica Rose Anderson                           |       | 18 units                                         |       | 4.66%                   |
| Membership Units                       |       | Russell J. Derickson                           |       | 9 units                                          |       | 2.33%                   |
| Membership Units                       |       | Jason R. Fink                                  |       | 6 units                                          |       | 1.55%                   |
| Membership Units                       |       | George M. Goblish                              |       | 24 units                                         |       | 6.22%                   |
| Membership Units                       |       | Ronald E. Jorgenson                            |       | 24 units                                         |       | 6.22%                   |
| Membership Units                       |       | Brian D. Kletscher                             |       | 12 units                                         |       | 3.11%                   |
| Membership Units                       |       | Michael J. Landuyt                             |       | 6 units                                          |       | 1.55%                   |
| Membership Units                       |       | David G. Moldan                                |       | 9 units                                          |       | 2.33%                   |
| Membership Units                       |       | Warren Walter Pankonin                         |       | 15 units                                         |       | 3.89%                   |
| Membership Units                       |       | Todd A. Reif                                   |       | 12 units                                         |       | 3.11%                   |
| Membership Units                       |       | John M. Schueller                              |       | 9 units                                          |       | 2.33%                   |
| Membership Units                       |       | Timothy J. Van Der Wal                         |       | 3 units                                          |       | 0.78%                   |
| All Governors and Officers as a Group: |       | 150 Units                                      |       | 38.86%                                           |

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(1)  The address of the beneficial owner isdeemed to be the same address indicated above.

(2)  Does notinclude units subscribed for in our registered offering.

 

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**ITEM 12.  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS AND DIRECTOR INDEPENDENCE.**

 

**CertainRelationships and Related Transactions**

 

***DistillersGrains Distribution***

 

On October 11,2007, we entered into a distillers grains marketing agreement with CHS, Inc.for the purpose of marketing and distributing all of the distillers grains weproduce at our plant.  CHS, Inc.will market our distillers grains and we will receive a percentage of theselling price actually received by CHS, Inc.  in marketing our distillers grains to itscustomers.  Todd Reif, one of ourgovernors is the general manager of grain and farm supply cooperative for CHS, Inc.

 

**Director Independence**

 

Our independent governors are Monica Rose Anderson,Russell J. Derickson, George M. Goblish, Ronald E. Jorgenson, Michael J.Landuyt, David G. Moldan and Warren Walter Pankonin,.  Our governors that are not independent areBrian Kletscher, John Schueller, Jason Fink, Timothy Van Der Wal and Todd A.Reif.  The determination of independenceis made by reference to NASDAQ rule 4200 and 4350.  Brian Kletscher, John Schueller, Jason Finkand Timothy Van Der Wal are not considered independent in that they are servingas our executive officers. Todd Reif is not considered independent in that heis the general manager of grain and farm supply cooperative for CHS, Inc.our distillers grain marketer.

 

***Audit Committee***

 

All the members of our board of govenors currentlyserve as our audit committee..  The auditcommittee is exempt from independence listing standards because our securitiesare not listed on a national securities exchange or listed in an automatedinter-dealer quotation system of a national securities association or toissuers of such securities. Nevertheless, Monica Rose Anderson, Russell J. Derickson, George M.Goblish, Ronald E. Jorgenson, Michael J. Landuyt, David G. Moldan and WarrenWalter Pankonin, are independent within the definition of independence providedby NASDAQ rules 4200 and 4350. Brian Kletscher, John Schueller, Jason Fink, Timothy Van Der Wal andTodd A. Reif are not considered independent for the reasons set forth above.

 

***Compensation Committee***

 

All the members of our board of governors serve as ourcompensation committee.  Monica RoseAnderson, Russell J. Derickson, George M. Goblish, Ronald E. Jorgenson, MichaelJ. Landuyt, David G. Moldan, and Warren Walter Pankonin are consideredindependent within the definition of independence provided by NASDAQ rules 4200and 4350.  For the reasons set forthabove, Brian Kletscher, John Schueller, Jason Fink. Timothy Van Der Wal, andTodd Reif are not considered independent.

 

***Nominating Committee***

 

All members of our board of governors serve as ournominating committee.  Monica RoseAnderson, Russell J. Derickson, George M. Goblish, Ronald E. Jorgenson, MichaelJ. Landuyt, David G. Moldan and Warren Walter Pankonin, are consideredindependent within the definition of independence provided by NASDAQ rules 4200and 4350.  For the reasons set forthabove, Brian Kletscher, John Schueller, Jason Fink, Timothy Van Der Wal andTodd Reif are not considered independent.

 

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**ITEM 13.**** EXHIBITS.**

 

The following exhibits are filed as part of, or areincorporated by reference into, this report:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                         | ** ** | **Method of Filing** | ** ** |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| 10.1                 |       | Agreement for Electric  Service between Highwater Ethanol, LLC and Redwood Electric  Cooperative, Inc. dated June 28, 2007    |       | 1                    |       |
| 10.2                 |       | Third Amendment to Lump  Sum Design-Build Agreement between Highwater Ethanol, LLC and  Fagen, Inc.                                |       | 2                    |       |
| 10.3                 |       | Fourth Amendment to Lump  Sum Design-Build Agreement between Highwater Ethanol, LLC and  Fagen, Inc.                               |       | 3                    |       |
| 10.4                 |       | Distiller’s Grain  Marketing Agreement between Highwater Ethanol, LLC and CHS dated  October 11, 2007                         |       | *                    |       |
| 10.5                 |       | Phase I Mass Grading and  Drainage Agreement between Highwater Ethanol, LLC and R and G Construction  Co. dated November 28, 2007. |       | *                    |       |
| 31.1                 |       | Certificate Pursuant to 17  CFR 240.13a-149(a)                                                                                          |       | *                    |       |
| 31.2                 |       | Certificate Pursuant to 17  CFR 240.13a-14(a)                                                                                           |       | *                    |       |
| 32.1                 |       | Certificate Pursuant to 18  U.S.C. § 1350                                                                                          |       | *                    |       |
| 32.2                 |       | Certificate Pursuant to 18  U.S.C. § 1350.                                                                                         |       | *                    |       |

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(*)                                   Filed herewith.

 

(1)                                    Incorporated by reference to Exhibit 99.1in Form 8-K filed with the Securities and Exchange Commission on July 5,2007.

 

(2)                                    Incorporated by reference to Exhibit 99.1in Form 8-K filed with the Securities and Exchange Commission on August 16,2007.

 

(3)                                    Incorporated by reference to Exhibit 99.1on Form 8-K filed with the Securities and Exchange Commission on October 12,2007.

 

(+)                                   Material has been omitted pursuant to arequest for confidential treatment and such materials have been filedseparately with the Securities and Exchange Commission.

 

**ITEM 14.  PRINCIPALACCOUNTANT FEES AND SERVICES.**

 

The aggregatefees billed by the independent registered public accountants (Boulay,Heutmaker, Zibell & Co. P.L.L.P.) to the Company for the fiscal yearended October 31, 2006, and the fiscal year ended October 31, 2007are as follows:

** **
| **Category**  | ** ** | **Year**     | ** ** | **Fees** | ** **     |
|---------------|------------|--------------|------------|----------|----------------|
| Audit Fees(1) |       | 2007    2006 |       | $  $     | 52,476  73,167 | ** ** |
|               |            |              |            |          |                |  |

 

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| Audit-Related Fees(1) |   | 2007    2006 |   | $  $ |   |   |
|-----------------------|--------|--------------|--------|------|--------|--------|
| Tax Fees              |   | 2007    2006 |   | $  $ |   |   |
| All Other Fees        |   | 2007    2006 |   | $  $ |   |   |

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(1)           Audit fees consist of fees forservices rendered related to the Company’s fiscal year end audits, quarterlyreviews, registration statement and related amendments.

 

                Prior to engagement of theprincipal independent registered public accountants to perform audit servicesfor the Company, the principal accountant was pre-approved by our Audit Committeepursuant to Company policy requiring such approval.

 

                100% of all audit services,audit-related services and tax-related services were pre-approved by our AuditCommittee.

 

**SIGNATURES**

 

                Inaccordance with Section 13 or 15(d) of the Exchange Act, theregistrant caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|   |                   | HIGHWATER ETHANOL, LLC                                               |
|--------|------------------------|----------------------------------------------------------------------|
|   |                   |                                                                 |
|   |                   |                                                                 |
| Date:  | January 29,  2008 |                                                                 |   |                 /s/ Brian Kletscher |
|   |                   | Brian Kletscher                                                      |
|   |                   | Chairman  , President and Governor (Principal Executive Officer)     |
|   |                   |                                                                 |
|   |                   |                                                                 |
| Date:  | January 29,  2008 |                                                                 |   |                 /s/ Jason R. Fink |
|   |                   | Jason  R. Fink                                                       |
|   |                   | Treasurer  and Governor (Principal Financial and Accounting Officer) |

 

                Inaccordance with the Exchange Act, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.

 
| Date: January 29, 2008 |   |                 /s/  Brian D. Kletscher     |
|-----------------------------|--------|------------------------------------------------------------------------------------------------------------------------|
|                        |   | Brian D. Kletscher                                                                                                     |
|                        |   | President and Governor                                                                                                 |
|                        |   | (Principal Executive Officer)                                                                                          |
|                        |   |                                                                                                                   |
| Date: January 29, 2008 |   |                 /s/  John M. Schueller      |
|                        |   | John M. Schueller                                                                                                      |
|                        |   | Vice President and Governor                                                                                            |
|                        |   |                                                                                                                   |
| Date: January 29, 2008 |   |                 /s/  Jason R. Fink          |
|                        |   | Jason R. Fink                                                                                                          |
|                        |   | Treasurer and Governor                                                                                                 |
|                        |   | (Principal Financial and Accounting Officer)                                                                           |
|                        |   |                                                                                                                   |
| Date: January 29, 2008 |   |                 /s/  Timothy J. Van Der Wal |
|                        |   | Timothy J. Van Der Wal                                                                                                 |
|                        |   | Secretary and Governor                                                                                                 |

 

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|                         |   |                                                                                                                   |
|------------------------------|--------|------------------------------------------------------------------------------------------------------------------------|
| Date: January 29, 2008  |   |                 /s/  Monica Rose Anderson   |
|                         |   | Monica Rose Anderson, Governor                                                                                         |
|                         |   |                                                                                                                   |
| Date: January 29, 2008  |   |                 /s/  Russell J. Derickson   |
|                         |   | Russell J. Derickson, Governor                                                                                         |
|                         |   |                                                                                                                   |
| Date: January 29, 2008  |   |                 /s/  George M. Goblish      |
|                         |   | George M. Goblish, Governor                                                                                            |
|                         |   |                                                                                                                   |
| Date: January 29, 2008  |   |                 /s/  Ronald E. Jorgenson    |
|                         |   | Ronald E. Jorgenson, Governor                                                                                          |
|                         |   |                                                                                                                   |
| Date: January 29, 2008  |   |                 /s/  Michael J. Landuyt     |
|                         |   | Michael J. Landuyt, Governor                                                                                           |
|                         |   |                                                                                                                   |
| Date: January 29, 2008  |   |                 /s/  David G. Moldan        |
|                         |   | David G. Moldan, Governor                                                                                              |
|                         |   |                                                                                                                   |
| Date: January 29, 2008  |   |                 /s/  Warren Walter Pankonin |
|                         |   | Warren Walter Pankonin, Governor                                                                                       |
|                         |   |                                                                                                                   |
| Date:  January 29, 2008 |   |                 /s/ Todd A. Reif            |
|                         |   | Todd A. Reif, Governor                                                                                                 |

 

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