--------------------------------------------------------------------------------
                      SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C. 20549

                               -----------------
                                   FORM 10-K
                               -----------------

 [X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MAY 31, 1998 OR


 [ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______.


                       COMMISSION FILE NUMBER: 333-17865

                               -----------------

                       CENEX HARVEST STATES COOPERATIVES
            (Exact name of registrant as specified in its charter)

           MINNESOTA                                  41-0251095
(State or other jurisdiction of                   (I.R.S. Employer
 incorporation or organization)                 Identification Number)

       5500 CENEX DRIVE                            (651) 451-5151
INVER GROVE HEIGHTS, MINNESOTA 55077   (Registrant's Telephone number, including
(Address of principal executive office)              area code)

                               -----------------

       SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
       SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

                               -----------------

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

                                 YES _X_   NO ___

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: Not applicable

     State the aggregate market value of the voting stock held by non-affiliates
of the registrant: The registrant has no voting stock outstanding.

     Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: The registrant has
no common stock outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

Form 8-K, dated June 10, 1998
Form S-8, dated December 12, 1997
--------------------------------------------------------------------------------

<PAGE>


                                     INDEX



<TABLE>
<CAPTION>
                                                                                     PAGE
                                                                                      NO.
                                                                                     -----
<S>      <C>                                                                         <C>
PART I.
Item 1.  Business
         The Company .............................................................     1
         Petroleum ...............................................................     2
         Crop Inputs .............................................................     3
         Grain Merchandising .....................................................     3
         Oilseed Processing and Refining Defined Business Unit ...................     8
         Wheat Milling Defined Business Unit .....................................    12
         Farm Marketing and Supply ...............................................    15
         Feed ....................................................................    16
         Services ................................................................    17
         Membership in the Company and Authorized Capital ........................    18
         Equity Participation Units ..............................................    23
Item 2.  Properties ..............................................................    27
Item 3.  Legal Proceedings .......................................................    28
Item 4.  Submission of Matters to a Vote of Security Holders .....................    28

PART II.

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters ...    29
Item 6.  Selected Financial Data
         Consolidated Company ....................................................    29
         Oilseed Processing and Refining Defined Business Unit ...................    30
         Wheat Milling Defined Business Unit .....................................    31
Item 7.  Management's Discussion and Analysis of Financial Condition and
          Results of Operation
         Consolidated Company ....................................................    32
         Oilseed Processing and Refining Defined Business Unit ...................    36
         Wheat Milling Defined Business Unit .....................................    38
Item 8.  Financial Statements and Supplementary Data .............................    41
Item 9.  Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosure ...................................................    41

PART III.

Item 10. Directors and Executive Officers of the Registrant
         Board of Directors ......................................................    41
         Executive Officers ......................................................    45
Item 11. Executive Compensation ..................................................    46
Item 12. Security Ownership of Certain Beneficial Owners and Management ..........    50
Item 13. Certain Relationships and Related Transactions ..........................    51

PART IV.

Item 14. Exhibits, Financial Statements and Reports Filed on Form 8-K ............    52

SUPPLEMENTAL INFORMATION .........................................................    52
SIGNATURES .......................................................................    53
</TABLE>



<PAGE>

                                    PART I.


ITEM 1. BUSINESS



                                  THE COMPANY

     Pursuant to a Plan of Combination dated May 29, 1998 (the "Plan of
Combination"), CENEX, Inc. ("Cenex") and Harvest States Cooperatives ("Harvest
States") combined through merger on June 1, 1998 (the "Combination") and Harvest
States Cooperatives became the surviving corporation. In accordance with the
Plan of Combination, the Articles of Incorporation and Bylaws of Harvest States
Cooperatives were restated and the name of Harvest States Cooperatives was
changed to "Cenex Harvest States Cooperatives".

     As a result of the Combination, the Company has changed its fiscal year end
to August 31, and will file a Form 10-Q Transition Report under Rule
15(d)(10)(c) for the three-month period ended August 31, 1998.

     Each person serving as a director of Cenex or Harvest States at the time of
the Combination became a director of Cenex Harvest States Cooperatives.

     As a result of the Combination, each holder of common stock of Cenex became
a member of Cenex Harvest States Cooperatives, to the extent eligible for
membership, and all equity interests of Cenex were determined and exchanged for
equal equity interests in Cenex Harvest States Cooperatives at its stated dollar
amount on a dollar for dollar basis as more thoroughly set forth in the Plan of
Combination, a copy of which was filed as part of the Company's Form 8-K dated
June 10, 1998.

     The Company remains an agricultural cooperative. Primary businesses of the
former Cenex include both the wholesaling and retailing of petroleum products,
fertilizers and chemicals, as well as the offering of agricultural services to
its cooperative members. Primary businesses of the former Harvest States include
grain merchandising, which involves the purchase of various grains from its
Individual Members, Cooperative Association Members and others, sale of the
grain to users, exporters and other intermediaries and arranging for the
transportation and storage of purchased grain for delivery to buyers. The former
Harvest States operations also sells feed and other farm supplies to its
Individual Members and others, offers services to its Individual Members and
Cooperative Association Members, crushes and refines soybeans, mills wheat, and
through a joint venture participates in the food processing and packaging
business. Harvest States was the largest customer of Cenex.

     The Company has authorized three classes of membership: Individual Members
("Individual Members"), Cooperative Association Members ("Cooperative
Association Members") and Defined Members ("Defined Members"). Individual
Members are producers of agricultural products who have done business with the
Company during its last fiscal year and have consented to take patronage into
account as contemplated by Section 1388 of the Internal Revenue Code. In the
patronage consent filed with the Company, the producer agrees to include both
the cash and noncash portion of any patronage refund in taxable income for
federal income tax purposes. Cooperative Association Members are associations of
producers of agricultural products complying with certain federal requirements
which have conducted a minimum amount of business with the Company as prescribed
by the Board of Directors during its fiscal year and have consented to take
patronage into account for tax purposes. Defined Members are persons otherwise
eligible for membership who hold Equity Participation Units.

     Individual Members, Defined Members and Cooperative Association Members who
sell grain to the Company, and Individual Members, Defined Members and
Cooperative Association Members and consenting patrons who purchase goods and
services from the Company are entitled to receive patronage refunds from the
Company, which are declared on an annual basis. The Company may elect to add to
the Capital Reserve an amount not to exceed 10% of the distributable net income
from patronage income, and may also elect to allocate non-member-sourced income
to its Members and Non-Member Consenting Patrons in proportion to patronage.

     The Board of Directors created the Oilseed Processing and Refining Defined
Business Unit for the purpose of purchasing soybeans and crude soybean oil and
the processing and sale thereof into meal,


                                       1


<PAGE>


flour, oil and various byproducts, effective at the close of business on May 31,
1997, to carry on the operations of the Processing and Refining Division. On
that date there was allocated to the Oilseed Processing and Refining Defined
Business Unit the assets and liabilities, including commitments, contingencies
and obligations, appropriately belonging to the Division. In connection with the
organization of the Oilseed Processing and Refining Defined Business Unit, the
Company has withdrawn an amount sufficient to bring its net worth to
$53,390,998, which was its net worth on May 31, 1996.

     The Board of Directors created the Wheat Milling Defined Business Unit for
the purpose of purchasing wheat (including durum) and the processing and sale
thereof into flour and various byproducts, effective at the close of business on
May 31, 1997, to carry on the operations of the Milling Division. On that date
there was allocated to the Wheat Milling Defined Business Unit the assets and
liabilities, including commitments, contingencies and obligations, appropriately
belonging to the Division. In connection with the organization of the Wheat
Milling Defined Business Unit, the Company contributed additional capital so
that the construction of the Pocono facility could be financed from equity
capital.



                                   PETROLEUM

     The petroleum operations brought to Cenex Harvest States Cooperatives by
the former Cenex includes a 42,500 barrel per day refinery in Laurel, Montana,
which is wholly owned by the Company, and a 74.5% ownership interest in a 75,000
barrel per day refinery in McPherson, Kansas. The Company is not in the oil
exploration business but rather purchases crude oil from both domestic and
foreign sources.

     The Laurel, Montana refinery processes primarily heavy, high sulfur
Canadian oil and produces approximately 44% gasoline, 32% diesel and other
distillates and 24% asphalt and other residual products. Refined fuels are
shipped west on the Yellowstone Pipeline to Montana terminals and Spokane and
Moses Lake, Washington; south on common carrier pipelines to Wyoming terminals
and Denver, Colorado, and east on the Company's wholly owned pipeline to
Glendive, Montana as well as to Minot and Fargo, North Dakota.

     The McPherson refinery operated by National Cooperative Refinery
Association (NCRA) of which the Company owns 74.5% receives its supply of crude
oil via the Jayhawk pipeline, which is wholly owned by NCRA, and through the
common carrier pipelines of Osage and Kaw. The Company holds ownership interests
of 35% and 33%, respectively, in these two pipelines. Approximately 81% of the
crude oil processed is domestic from Kansas, Oklahoma and Texas, and 19% is
Venezuelan crude. The McPherson refinery produces approximately 60% gasoline,
36% distillates and 4% propane and other products. Refined fuels are shipped via
NCRA's proprietary products pipeline to its terminal in Council Bluffs, Iowa and
to other markets via Kaneb and Williams common carrier pipelines. Approximately
15% of refined products are loaded to transport trucks at the refinery.

     The production from these two refineries is sold to the Company's member
cooperatives, where the product is sold to farmers, ranchers and the general
public under the Cenex brand name. Approximately 1,200 such members retail Cenex
gasoline and diesel fuel. In addition to distilled fuels, the Company also
wholesales other auto and farm machinery products such as oil, grease, batteries
and tires, as well as providing propane for heating fuel and grain drying.

     The Company also operates approximately 43 convenience stores where it
retails its own brand of distilled fuels along with typical convenience
products.

     Upon the purchase of crude oil, the Company has risks of carrying the
inventory, including price changes and performance risk (including delivery,
quality, quantity and shipment period). To reduce the price change risk
associated with holding fixed price positions, the Company generally takes
opposite and offsetting positions by entering into a commodity futures contract
on a regulated mercantile exchange. While hedging activities reduce the risk of
loss from changing market values of crude oil and distilled products, such
activities also limit the gain potential which otherwise could result from
changes in market prices.


                                       2


<PAGE>


     Because most of the Company's petroleum product market is located in rural
areas, sales activity tends to follow the planting and harvest cycles. More fuel
efficient equipment, reduced crop tillage, depressed prices for crops, warm
winter weather, and government programs which encourage idle acres all have the
effect of reducing demand for the Company's petroleum products. In addition,
private petroleum companies compete with the Company.

     Effective September 1, 1998, the Company will form a petroleum marketing
alliance with Farmland Industries, a large Kansas City, Missouri based
cooperative to jointly market petroleum products in the trade areas currently
served by the two companies. This alliance, Country Energy, LLC, will serve as a
marketing agent for the Company and Farmland Industries, and will not own or
operate the refineries.



                                  CROP INPUTS

     The Company, through a joint venture established by Cenex with Land O'
Lakes (another regional cooperative headquartered in the St. Paul, Minnesota
area) participates in the crop input business. The Company has a 50% ownership
interest in the Cenex/Land O' Lakes Agronomy Company, which acts as sales agent
for the two companies. The agronomy company markets plant food (fertilizers) and
crop protection products (herbicides and insecticides) on behalf of its two
owners. Such products are sold to the member cooperatives of the Company on a
wholesale basis, as well as marketed through approximately 220 company owned
facilities on a retail basis to individual farmer-patrons.

     The Company distributes a complete line of fertilizers, including potash,
nitrogen-based fertilizers and phosphate-based fertilizers. Approximately 80% of
the fertilizer products sold by the Company through its agency arrangement are
purchased from CF Industries, of which the Company owns 22%. CF Industries is a
large domestic fertilizer producer. The Company purchases crop protection
products from several chemical companies, including Imperial, Inc., a wholly
owned subsidiary of the Cenex/Land O'Lakes Agronomy Company.

     Many of the risk factors for the petroleum operations also apply to the
agronomy product operations. Spring and fall weather conditions, depressed grain
prices, idle acreage and genetic engineering of crops which are more insect and
disease resistant all effect the demand for agronomy products. Competition in
most of the Company's trade area for such products is also intense. Supply and
price of fertilizer ingredients fluctuates widely, which exposes the Company to
risk on any fixed price commitment. In addition, increased domestic and foreign
production of fertilizer expands supply and tends to depress the profitability
of CF Industries, of which the Company is a major equity holder.



                              GRAIN MERCHANDISING

     Grain and oilseed merchandising involves the sale and distribution of grain
and oilseeds from producer to processor, to be processed for human and animal
consumption and other uses. These commodities are produced and consumed
throughout the world. Increased worldwide demand is generated through population
growth and, for certain regions, increased per capita food consumption supported
by growing affluence. Demand for these commodities is satisfied by worldwide
production, which is in part determined by prevailing prices.

     A significant portion of high production grains (wheat, corn and soybeans)
grown domestically have been exported. United States production competes with
production in numerous other countries to supply the worldwide demand for these
grains. The ability of producers in particular countries to compete on a
worldwide basis may be enhanced by governmental support and protection. Given
the relatively low prices for the coming year, this activity is expected to
increase, particularly in the European Union. Wheat, corn and soybean exports
from the U.S. are projected to increase marginally in the crop year ending May
31, 1999. Increased net costs to Asian buyers due to negative currency
fluctuations will greatly limit any further growth in exports to this region for
next year. United States wheat exports are projected to decrease from 29 million
metric tons (MMT) in 1998 to 28.1 MMT in 1999. The U.S. continues to face
competition from Canada, Australia, Argentina and the European Union (EU).
Production from these competitors is expected to increase 4 MMT for the crop
year ending


                                       3


<PAGE>


May 31, 1999. United States corn exports are projected to increase from 36.8 MMT
to 41.3 MMT in 1999. World feed grain production is expected to increase 7 MMT
for crop year 1999. This increase, however, is mainly due to the increased
production in the United States. United States soybean exports are projected to
decrease from 24.1 MMT in 1998 to 23 MMT in 1999. Argentina and Brazil, the
major competitors for U.S. exports, are projected to increase their exports 4.8
MMT due to record yields in both countries resulting in a 12.5 MMT increase in
production. The Company expects that its export business will increase
consistent with the increase in U.S. exports. Any substantial increase in U.S.
export business will be limited by the historically strong dollar relative to
other major currencies. Historical information and projections for the 1998 and
1999 crop years are from information published by the United States Department
of Agriculture.

     Imports of grains into the U.S. consist mainly of wheat, oats and barley.
The amounts imported have not had a material effect on grain merchandising.

     In the United States, grain merchandising involves the purchase of grain,
sale for export or further domestic use and storage and transportation to export
facilities or to users.

     Grain merchandising may be adversely affected by supply and demand
relationships, both domestic and international. Supply is affected by weather
conditions, disease, insect damage, acreage planted, government regulation and
policies and commodity price levels. The business is also affected by
transportation conditions, including rail, vessel, barge and truck. Demand may
be affected by foreign governments and their programs, relationships of foreign
countries with the United States, the affluence of foreign countries, acts of
war, currency exchange fluctuations and substitution of commodities. Demand may
also be affected by changes in eating habits, by population growth and increased
or decreased per capita consumption of some products.

     RECENT DEVELOPMENTS. High grain and oilseed prices in the years ended May
31, 1996 and 1997 promoted increased production and resulted in larger
inventories held by producers at May 31, 1998. Prices for most grains and
oilseeds are at or near three year lows due to the increased supplies. The
following table shows the cash prices per bushel for the major grains on May 31,
1997 and 1998:


                                              MAY 31,        MAY 31, 
               GRAIN                           1998          1997
               -------------------------   -------------   ----------
               Wheats ..................    $  3.89 1/2     $  3.91
               Corn ....................       2.31 1/2        2.51
               Soybeans ................       6.13            6.98

     Because the profitability of the Company is primarily determined by
margins, changes in grain prices do not directly impact the Company's income.
However, grain prices may be reflective of the demand for grain (particularly
grain to be exported) and therefore give an indication of the grain volume the
Company may handle within a crop year.

     The Freedom to Farm Act of 1996, enacted in April 1996, has had a profound
effect on the production patterns within the United States. The flexibility of
the program allows producers to grow crops, which provide the highest financial
return. For example, this year the U.S. producer reacted to short supplies and
high prices of soybeans in the year ended May 31, 1997 with an increase in
acreage for all oilseeds for the year ended May 31, 1998. U.S. export subsidies,
principally the Export Enhancement Program, continue to decline in importance
and overall use.

     The Company's operations depend more on the volume of grain handled than
the price of grain. In addition, the price of grain should have little effect on
either the Wheat Milling or Oilseed Processing and Refining Defined Business
Units, which are more dependent on manufacturing margins.


INTRODUCTION

     The Company buys grain through its Grain Marketing Division from
Cooperative Association Members (typically a cooperative organization of local
producers), directly from Individual Members (to a limited extent) and from
third parties (such as grain dealers, non-Member producers, marketing
associations or marketing pools, elevators and other grain merchandising
companies) and through its Agri-Service Centers, which are country elevators
owned by the Company. Grain purchased by


                                       4


<PAGE>


Agri-Service Centers is usually sold to the Grain Marketing Division for resale.
A small portion of grain is handled on a consignment basis.

     Grain is sold by the Company for future delivery at a specified location.
Grain sold by a producer is typically trucked to a local elevator for sale. From
local elevators, grain may be transported in a variety of ways to the purchaser.
The Company arranges transportation to delivery locations using truck, rail and
barge transportation. Grain intended for export may be shipped by rail to an
export terminal or to a barge loading facility to be shipped by barge to an
export terminal, where it is loaded on an ocean-going vessel. Grain intended for
domestic use may be shipped by truck or rail to various locations throughout the
United States. Because of its facilities, the Company has significant capacity
to sell grain for export.

     PURCHASES. The number of bushels of grain purchased from Individual Members
and Cooperative Association Members, the total grain purchased and the
percentage relationship for each of the years ended May 31 are set forth below:

                                           YEARS ENDED MAY 31,
                             -----------------------------------------------
                                 1998             1997             1996
                             -------------    -------------    -------------
Member purchases .........     720,420,802      757,704,610      959,166,596
Total purchases ..........   1,145,851,767    1,280,557,384    1,692,438,700
Percentage ...............            62.9%            59.2%           56.7%

     Substantially all of the grain purchased by the Company is grown in the
Midwest, Great Plains and Pacific Northwest. The Company also purchases grain
grown in other parts of the United States and other countries.

     GRAINS HANDLED. The primary grains merchandised by the Company are corn,
wheat and soybeans. The Company also merchandises barley, milo, sunflowers and
oats as well as smaller quantities of canola, flax, rye, millet and others.

     The number of bushels of grain purchased by the Company for the periods
indicated is set forth below:

                                        YEARS ENDED MAY 31,
                       ------------------------------------------------------
                             1998               1997               1996
                       ----------------   ----------------   ----------------
Wheat ..............      416,066,868        478,978,426        505,606,729
Corn ...............      347,494,014        425,851,278        777,631,466
Soybeans ...........      229,558,195        219,686,914        234,930,247
Barley .............       66,085,222         61,839,145         75,225,773
Milo ...............       37,816,184         51,722,961         48,199,610
Sunflowers .........       28,788,424         14,603,180         25,952,855
Oats ...............        9,008,016         22,487,231         20,008,442
All other ..........       11,034,844          5,388,249          4,883,578
                          -----------        -----------        -----------
                        1,145,851,767      1,280,557,384      1,692,438,700
                        =============      =============      =============

     Sales of grain by the Company for each of the years ended May 31 are set
forth below:

                              1998                1997                1996
                       -----------------   -----------------   -----------------

Wheat ..............   $1,794,441,582      $2,490,328,502      $2,631,202,689
Corn ...............      989,831,098       1,558,440,294       2,518,939,007
Soybeans ...........    1,431,966,669       1,421,789,252       1,431,485,630
All other ..........      413,313,294         565,944,576         545,596,081
                       --------------      --------------      --------------
 Total .............   $4,629,552,643      $6,036,502,624      $7,127,223,407
                       ==============      ==============      ==============

     RECENT DEVELOPMENTS. For the year ended May 31, 1998: U.S. grain exports
continued to slide to a four year low for wheat, soybeans and corn (89.7
million metric tons). Exports are projected to rebound modestly in 1998/99 to
93 million metric tons for the same three commodity groups. The U.S. as well as
its export competitors will again produce above average crops providing large
available supplies.


                                       5


<PAGE>


Therefore, the world grain markets will experience strong competition for
limited demand into foreign markets as was the case in 1997/98. Nevertheless,
the Company projects that its export handle will be similar to that of 1997/98.
Historical information and projections for the 1998 and 1999 crop years are from
information published by the United States Department of Agriculture.

MERCHANDISING

     The Company buys and sells grain through offices of its Grain Marketing
Division located in Portland, Oregon; Great Falls, Montana; Lincoln, Nebraska;
Kansas City, Kansas; St. Paul, Minnesota; Winona, Minnesota; Davenport, Iowa;
and at its Agri-Service Centers.

     Grain purchased through Agri-Service Centers is purchased on a cash and
futures basis. Grain purchased through the Grain Marketing Division is usually
purchased for future delivery.

     Grain is sold for future delivery at a specified location, with the Company
usually responsible for arranging necessary transportation to that location.
Purchasers include millers, malters, exporters and foreign buyers as well as the
soybean, wheat and feed operations of the Company. The Company is not dependent
on any one customer. The Company has supply relationships calling for delivery
of grain at prevailing market prices. Grain users store varying amounts of grain
for their own use.

     The Company's ability to arrange transportation is a significant part of
the service it offers to its customers. The Company's loading capabilities onto
unit trains, ocean going vessels and barges is a component of the selling price
of grain handled by the Company. Rail transportation is through independent
railroads, although approximately 30% of rail movement for Grain Merchandising
for the year ended May 31, 1998 was carried out through leased railcars (either
directly or by use of pools in which such leased railcars participate). Vessel
and truck transportation is carried out exclusively by third parties. Barge
transportation is carried out by third parties, but the Company is a party to
long-term affreightment agreements for approximately 20% of current needs.

     Virtually all grain sold domestically is sold by employees while
approximately half of grain exported is sold by brokers or agents and the
balance by employees. The Company has a small ownership position in Intrade, a
company that owns part of a Germany-based marketing organization involved in
trading grain and feedstuffs in Germany and international markets. The Company
also has relationships with agents, brokers and marketing companies in other
countries to assist it in export sales.

COMPETITION

     The Company competes for both the purchase and sale of grain. Competition
is intense and margins are low. Some of the Company's competitors are integrated
food producers, which may also be customers. Many competitors have substantially
greater financial resources than the Company.

     In the purchase of grain from producers, location of a delivery facility is
a prime consideration but producers are willing to truck grain for sale over
increasingly longer distances. Grain prices are affected by reported trading
prices on national markets, shipping costs and storage capabilities. Price is
affected by the capabilities of the facility. For example, if it is cheaper to
deliver to a customer by unit train than by truck, a facility with unit train
capability provides a price advantage. The Company believes that its
relationship with Individual Members serviced by local Agri-Service Centers and
with Cooperative Association Members gives it a broad origination capability.

     The Company competes in the sale of grain based on price and its ability to
provide quantity and quality of grains required and its ability to deliver.
Location of facilities is a major factor in ability to compete. Major grain
merchandising companies in addition to the Company include Archer-Daniels-
Midland, Cargill, Continental, ConAgra, Bunge and Louis Dreyfus, each of which
handles grain volumes of more than one billion bushels annually. The Company
estimates it would be among the smaller merchandisers among these seven. The
Company also competes with numerous other grain merchandisers with annual
volumes of less than one billion bushels.

     Since the Company's facilities are located primarily in the Midwest, Great
Plains and Pacific Northwest, with a terminal in the Gulf, the Company primarily
competes with the companies whose facilities are in these areas. The Company's
export facilities in three major areas allow it to ship to anyplace in the
world.


                                       6


<PAGE>


GRAIN HANDLING AND TRANSPORTATION

     The Company owns export terminals, river terminals and other elevators
involved in the handling of grain. All such facilities can receive inbound truck
and rail. Export facilities on river systems can receive grain by barge. In
addition, the Company owns 160 Agri-Service Centers, which are country
elevators, which receive grain from producers.

     The Company operates river terminals at Kansas City, Missouri (two), St.
Paul, Savage and Winona, Minnesota, and Davenport, Iowa (two), which are used to
load grain onto barges for shipment to both domestic and export customers via
the Mississippi River system, on trucks for domestic markets and on rail for
both domestic and export markets. The Company owns and operates a terminal at
Kennewick, Washington, on the Columbia River. The Company has interests in three
river terminals located on the Snake River: Lewis and Clark Terminal
Association's facility located at Lewiston, Idaho, Central Ferry Terminal
Association's facility located at Central Ferry, Washington and Co-Grain
Elevator Company's facilities located at Upper Monumental and Burbank,
Washington. Much of the grain from these terminals is loaded onto barges for
shipment to Pacific Northwest export terminals.

     The Company's export terminal at Superior, Wisconsin provides access to the
Great Lakes and St. Lawrence Seaway, and the Company's export terminal at Myrtle
Grove, Louisiana, serves the Gulf market. An export terminal at Kalama,
Washington, leased by the Company, and an export terminal at Vancouver,
Washington, owned by a joint venture partner, serve the Pacific market. A
partnership between the Company and Continental Grain Company operates an export
terminal at Tacoma, Washington, for feed grain and oilseed shipments to Pacific
Rim customers. A facility in Spokane, Washington is used for storage and
transloading. An elevator in Petersburg, North Dakota is used to standardize
barley for a particular customer.

     The Company has been negotiating a joint venture proposal with United
Grain, Portland, Oregon, to form a grain marketing company called United
Harvest, LLC. United Harvest, LLC will be a joint venture 50% owned by each
company, and is projected to begin operation in September 1998. United Harvest,
LLC will operate the Kalama, WA terminal elevator owned by the Company, and the
Vancouver, WA terminal of United Grain as well as market the grain for each of
the parent companies in the western United States, including Washington, Oregon,
Idaho, Utah and Montana.

     The Division leases a fleet of covered hopper cars and enters into various
contracts for covered grain barges. In addition, at various times the Company
may charter vessels.

PRICE RISK AND HEDGING

     Upon purchase, the Company has risks of carrying grain, including price
changes and performance risks (including delivery, quality, quantity and
shipment period), depending upon the type of purchase contract entered into.
These contracts include flat price, basis fixed, delayed price, deferred
payment, hedge to arrive and futures fixed. The Company is exposed to risk of
loss in the market value of positions held, consisting of grain inventory and
purchase contracts at a fixed or partially fixed price, in the event market
prices decrease. The Company is also exposed to risk of loss on its fixed price
or partially fixed price sales contracts in the event market prices increase.

     To reduce the price change risks associated with holding fixed price
positions, the Company generally takes opposite and offsetting positions by
entering into grain commodity futures contracts (either a straight futures
contract or an options futures contract) on regulated commodity futures
exchanges. Most of the grain volume handled by the Company can be hedged. Some
grains cannot be hedged because there are no futures for certain commodities.
For those commodities, risk is managed through the use of forward sales and
different pricing arrangements and to some extent cross-commodity futures
hedging. While hedging activities reduce the risk of loss from changing market
values of grain, such activities also limit the gain potential which otherwise
could result from changes in market prices of grain. The Company's policy is to
generally maintain hedged positions in grain, which is hedgeable, but the
Company can be long or short at any time. The Grain Marketing Division's
profitability is primarily derived from margins on grain merchandised and
revenues generated from other merchandising activities with its customers, not
from hedging transactions. Hedging arrangements do not protect against
nonperformance of a contract.


                                       7


<PAGE>


     When a futures contract is entered into, an initial margin deposit must be
sent to the applicable exchange. The amount of the deposit is set by the
exchange and varies by commodity. If the market price of a short futures
contract increases, then an additional margin deposit (maintenance margin) would
be required. Similarly, if the price of a long futures contract decreases, a
maintenance margin deposit would be required to be sent to the applicable
exchange. Subsequent price changes could require additional maintenance margins
or could result in the return of maintenance margins.

     At any one time the Grain Marketing Division's inventory and purchase
contracts for delivery to the Company may be substantial. The Grain Marketing
Group has a risk management policy and procedures that include net position
limits. It is defined by commodity and includes both trader and management
limits. This policy and computerized procedure triggers a review by management
of the Grain Marketing Division when any trader is outside of position limits
and also triggers review by management of the Company if the Grain Marketing
Division is outside of its position limits. The position limits are reviewed at
least annually with management of the Company. The Company monitors current
market conditions and may expand or reduce the purchasing program in response to
changes in those conditions. In addition, certain purchase and sale contracts
are subject to credit approvals and appropriate terms and conditions.


SEASONALITY

     Harvest for most crops occurs in the summer and fall, and the Company
purchases more grain during that period. Because of the Company's geographic
location and the fact that it is further from its export facilities, grain tends
to be sold later than in other parts of the country. Because many producers have
significant on-farm storage capacity and because of the Company's own storage
capacity, grain is bought and moved throughout the year.

WORKING CAPITAL

     Due to the amount of grain purchased and held in inventory, the Company has
significant working capital needs at various times of the year. The amount of
borrowings for this purpose and the interest rate charged on such borrowings
directly affect the profitability of the grain merchandising operations.

EMPLOYEES

     As of May 31, 1998, the Grain Marketing Division had 435 employees, of
which 74 were traders, 239 production staff, 14 management and 108 support
staff. See "Farm Marketing and Supply" with respect to employment by
Agri-Service Centers. Of these employees, 149 at five locations are subject to
collective bargaining agreements expiring at various times through 1999.



             OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT

     The soybean crushing industry converts soybeans into meal used for feeding
animals, soy flour used for specialty food and other purposes and crude soybean
oil. The soybean refining industry refines the crude oil for use in processed
foods, such as margarine, salad dressings and baked goods, and to a more limited
extent industrial uses. Soybean production is concentrated in the central United
States, Brazil, China and Argentina. Crushing plants are generally located close
to adequate sources of soybeans and strong demand for meal. Refineries are
generally located next to the crushing plants. Oil is shipped throughout the
United States and for export.

     At its integrated crushing and refining facility in Mankato, Minnesota, the
Oilseed Processing and Refining Defined Business Unit processes soybeans into
soybean meal, soyflour and crude soybean oil. The crude soybean oil, with
additional purchased crude oil, is refined.

     Per capita domestic consumption of soybean oil has remained fairly stable
in recent years. Exports of soybean oil are variable but generally a minor
portion of total production. In recent years, exports have varied widely, which
dramatically influenced margins in both crushing and refining.

     Usage of meal is dependent on the amount of livestock being raised, which
has increased in recent years. While per capita domestic consumption of meat has
been stable in recent years, demand for meal has increased due to an increase in
the domestic consumption of pork and poultry and an increase in


                                       8


<PAGE>


meat exports. Soybean meal provides a ready source of protein with a 44% or
higher protein content, compared to corn at 9%, wheat at 9.5% and barley at
11.5%

     Major competitors in the industry include the Company,
Archer-Daniels-Midland ("ADM"), Cargill, Ag Processing, Inc. ("AGP"), Central
Soya and Bunge. Competition is driven by price, transportation costs, service
and product quality. The industry is highly competitive. These and other
competitors are acquiring other processors, expanding capacity of existing
plants or building new plants, domestically or internationally. Unless exports
increase or existing facilities are closed, this extra capacity is likely to put
additional pressure on prices and challenge margins. Several competitors operate
over various market segments and may be suppliers to or customers of other
competitors.

     Historically, in the Company's trade area there has been an adequate supply
of soybeans, even in years when there has been a substantial amount of soybeans
exported. While the price of soybeans has fluctuated substantially, the prices
of meal and oil have followed, so that margin relationships have been
maintained.

EQUITY PARTICIPATION UNITS

     At May 31, 1998 Equity Participation Units in the Oilseed Processing and
Refining Defined Business Unit represented the right to deliver 1,050,000
bushels of soybeans, approximately 3% of the processing capacity of the Defined
Business Unit.

PRICE RISK AND HEDGING

     To reduce the price change risks associated with holding fixed price
commodity positions, the Company generally takes opposite and offsetting
positions by entering into commodity futures contracts (either a straight
futures contract or an options futures contract) on regulated commodity futures
exchanges. While hedging activities reduce the risk of loss from changing market
values of oilseeds, such activities also limit the gain potential which
otherwise could result from changes in market prices of oilseeds. The Company's
policy is to generally maintain hedged positions within limits, but the Company
can be long or short at any time. The Defined Business Unit's profitability is
primarily derived from margins on oilseeds processed, not from hedging
transactions. Management does not anticipate that its hedging activity will have
a significant impact on future operating results or liquidity. Hedging
arrangements do not protect against nonperformance of a cash contract.

     At any one time the Defined Business Unit's inventory and purchase
contracts for delivery to the Defined Business Unit may be substantial. The
Defined Business Unit has a risk management policy and procedures that include
net position limits. It is defined by commodity and includes both trader and
management limits. This policy and computerized procedure triggers a review by
management of the Defined Business Unit when any trader is outside of position
limits and also triggers review by management of the Company if the Defined
Business Unit is outside of its position limits. The position limits are
reviewed at least annually with management of the Company. The Defined Business
Unit monitors current market conditions and may expand or reduce the purchasing
program in response to changes in those conditions. In addition, certain
purchase and sale contracts are subject to credit approvals and appropriate
terms and conditions.

SUPPLY

     The Oilseed Processing and Refining Defined Business Unit purchases
virtually all of the soybeans processed by it from Members. Because the Oilseed
Processing and Refining Defined Business Unit has not had long-term contracts
with customers, it does not obligate itself to purchase soybeans based on orders
received from customers but instead on its contemplation of future production.
The Oilseed Processing and Refining Defined Business Unit does not hold
significant inventories of raw beans; capacity for raw bean storage is
approximately three to four weeks of production. At any one time, inventories of
beans and contracts for future delivery represent two to ten weeks of
requirements. Inventories of raw beans and contracted purchases for future
delivery are substantially hedged.

     The Oilseed Processing and Refining Defined Business Unit also purchases
crude soybean oil for processing at its refinery. Approximately 40% of the crude
oil refined is produced by the Oilseed Processing and Refining Defined Business
Unit, and the balance is purchased. Major suppliers have been AGP and ADM.
Because ADM opened a refinery late in 1997 in Minnesota, it is no longer a


                                       9


<PAGE>


supplier of crude oil. However, there are several producers of crude oil, and
the Company believes it will be able to replace this supply source. The refining
facility has storage capacity for approximately 10 days' supply of crude oil, so
it depends on a steady supply of crude oil to supplement its own output of crude
oil to maintain constant production. It typically commits for several months'
supply, to be priced prior to delivery.

     As with other agricultural commodities, the availability and price of
soybeans fluctuate with forces of supply and demand. The Oilseed Processing and
Refining Defined Business Unit has never experienced an inability to source
soybeans.

CUSTOMERS

     REFINED OILS. The Oilseed Processing and Refining Defined Business Unit
sells refined oil throughout most of the United States although it concentrates
on customers located in Minnesota, Wisconsin, North Dakota, South Dakota,
northern Iowa and northern Illinois, which can be reached by truck rather than
rail and are therefore slightly more profitable. Customers in these states
accounted for more than 50% of refined oil sales in the year ended May 31, 1998.
The Company estimates that of oil sold, 25% is used for margarine, 15 to 20% for
salad dressing and smaller percentages for snack foods, baked goods, imitation
cheese goods, processed potato goods and others. Approximately 5% of oil sales
are for industrial use. During the year ended May 31, 1998, the Oilseed
Processing and Refining Defined Business Unit had over 100 customers, the
largest of which was Ventura Foods and its predecessor operations described in
the next paragraph. One other customer was responsible for over 9% of refined
oil sales by the Defined Business Unit. Sales of refined oil are made by Defined
Business Unit employees and to a lesser extent by brokers.

     The Company has a long-term supply agreement with Ventura Foods, LLC. which
commenced January 1, 1997 and will continue for 15 years or longer if the
Company continues to hold at least a 25.5% interest in Ventura Foods. The
Company has agreed to supply and Ventura has agreed to purchase a minimum
quantity of soybean salad oil, hydrogenated soybean oil and other edible oils
that the Company may refine during the term of the agreement. The Company has
agreed to sell to Ventura Foods, and Ventura Foods has agreed to purchase from
the Company, during each calendar year at least 430,000,000 pounds of products
or 50% of its requirements if greater, but not more than 100% of its
requirements. The price for the products sold to Ventura Foods is a formula
adjusted annually to be competitive with alternative sources.

     SOYBEAN MEAL. Soybean meal sold by the Oilseed Processing and Refining
Defined Business Unit is used for feeding livestock. During the year ended May
31, 1998, the Defined Business Unit sold meal to over 500 customers, primarily
feed lots and feed mills. During the year ended May 31, 1998, ten customers
accounted for approximately 52% of meal sold, and two customers, which would be
difficult to replace, accounted for approximately 30% of meal sold. For the year
ended May 31, 1998, 56% of meal was sold in Minnesota, 28% in Wisconsin, 11% in
Canada and the balance in Iowa, North Dakota, South Dakota and Montana. These
sales could be adversely affected by a decline in the livestock or turkey
industries in these areas. Substantially all meal sales are made directly by
employees of the Defined Business Unit.

     SOYFLOUR. Soyflour is used in the baking industry, as milk replacers in
animal feed and in industrial applications. Sales of soyflour have not been
significant relative to sales of meal.

     DEPENDENCE ON CUSTOMERS. Other than Ventura Foods, only one additional
customer accounted for more than 10% of the Oilseed Processing and Refining
Defined Business Unit's sales in the year ended May 31, 1998.

COMPETITION

     The Company believes that the Oilseed Processing and Refining Defined
Business Unit has 6 to 8% of the domestic refined soybean oil market and less
than 3% of the domestic soybean crushing capacity.

PROCESSING

     Soybeans arriving by truck or rail are sampled, weighed, dumped and
unloaded into bean storage. When brought out of storage, beans are cleaned,
dehulled, cracked and conditioned and are compressed


                                       10


<PAGE>


into flakes. Oil is removed from the flakes through a solvent process. Flakes
are then further processed into soyflour or soymeal. Soymeal can be made into
animal feed at various protein levels.

     Crude oil is filtered to remove remaining meal particles and centrifuged to
separate out trace constituents. The oil can be sold as an industrial product
used in plastics, inks and paints. Further processing prepares the oil for food
use, by bleaching with a special clay to remove trace metals, chlorophyll and
other impurities to make salad oil. By adding hydrogen under pressure to
bleached oil, the Company makes partially hydrogenated soybean oil that may be
used in products such as shortenings or margarines. To remove unwanted odors,
flavors and mild color constituents, bleached or hydrogenated oil is heated
under vacuum. The result is a product that is flavorless, odorless, tasteless
and virtually clear.

     While the Oilseed Processing and Refining Defined Business Unit runs at
between 80 to 100% of capacity throughout the year, volume is typically higher
at harvest time since soybean supplies are more abundant in the fall. Producer
and cooperative elevator storage capabilities allow suppliers to sell for
delivery throughout the year.

FACILITIES

     The Oilseed Processing and Refining Defined Business Unit currently has one
facility located in Mankato, Minnesota, comprised of a crushing plant, a
refinery, a soyflour plant and self contained utilities. A quality control lab
with technically sophisticated equipment assures high quality standards.

     In July 1998 the Company announced its site selection for the construction
of a new soybean processing and refining plant in southwestern Minnesota. The
facility, to be constructed near the city of Fairmont, Minnesota, is expected to
cost between $60 million and $90 million. The precise configuration and size of
the crushing plant and oil refinery has yet to be determined.

EMPLOYEES

     The Oilseed Processing and Refining Defined Business Unit currently employs
201 employees, 36 in the office in administration, sales and support service and
165 in the plant. Certain production workers are subject to collective
bargaining agreements with the American Federation of Grain Millers (137
employees) expiring in 2002 and the Pipefitters' Union (2 employees) expiring in
2000.

VENTURA FOODS

     On August 30, 1996, the Company and Wilsey Foods, Inc. combined the assets
and certain liabilities of the Company's Holsum Foods Consumer Products
Packaging Division with the assets and liabilities of Wilsey Foods, Inc. as
Ventura Foods, LLC ("Ventura Foods"). A joint venture owned by Wilsey Foods,
Inc. and the Company that operated a manufacturing facility in Chambersburg,
Pennsylvania was merged into Ventura Foods. The Company owns 40% and Wilsey
Foods owns 60% of the equity and rights to distribution of profits of Ventura
Foods. The Company's total net investment in Ventura Foods was $40,953,585 as of
May 31, 1998.

     Sales by the Oilseed Processing and Refining Defined Business Unit to
Ventura Foods and its predecessors in interest are shown below:


<TABLE>
<CAPTION>
                                                OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT'S
                                                           SALES TO HOLSUM, WILSEY & VENTURA
                                               ---------------------------------------------------------
                                                                  YEARS ENDED MAY 31,
                                               ---------------------------------------------------------
                                                      1998                1997                1996
                                               -----------------   -----------------   -----------------
<S>                                            <C>                 <C>                 <C>
Sales ($) ..................................     $ 101,440,009       $ 110,679,000       $ 124,299,000
Percentage of total refinery sales .........                38%                 45%                 45%
</TABLE>

     Ventura Foods is in the business of manufacturing and/or packaging and
selling food products, including salad dressings, mayonnaise, margarine, salad
oils, jams, jellies, olives, syrups, soup bases and sauces. Its customers are
national. Ventura Foods is governed by a committee, and each of the Company and
Wilsey Foods appoints half the committee members. Neither the Company nor Wilsey
Foods may transfer any part of its interest in Ventura Foods until September 1,
1999. Thereafter a transferring party must retain at least a 25.5% interest in
Ventura Foods. Ventura Foods will be dissolved if it has cumulative losses in
excess of $25 million or is unable to discharge its liabilities as they become
due.


                                       11


<PAGE>


                      WHEAT MILLING DEFINED BUSINESS UNIT


     The Company's Wheat Milling Defined Business Unit mills durum wheat into
flour and semolina and mills spring and winter (hard) wheats into bread flour.
The Wheat Milling Defined Business Unit is the largest miller of durum wheat in
the United States. The Wheat Milling Defined Business Unit had historically
concentrated on durum wheat milling at its Rush City and Huron facilities. With
the opening of its Kenosha mill in late 1995, which can produce durum and bakery
flours, and its Houston facility, which began limited production in June 1997
and produces bakery flour, the Defined Business Unit has broadened its markets
and significantly increased its capacity.

     SEMOLINA AND DURUM FLOUR. Durum wheat millers process durum wheat into
semolina and durum flours. Semolina and high grade durum flours are the chief
ingredients in pasta; low-grade durum flour is used for pet food. Durum is grown
in arid regions of the United States, such as North Dakota and certain areas of
the Southwest, as well as in other countries. Most of the quality durum is grown
in the Midwest, particularly North Dakota. Durum milling plants are generally
located in proximity to customers; wheat is shipped to the mill for milling.

     Sale of semolina and durum flour is entirely dependent on pasta production.
Per capita consumption of pasta has continued to increase in recent years, and
the number of consumers continues to grow with population growth. Pasta in its
many forms is sold at retail, for restaurants and institutional use and for use
in other processed food products.

     Imported pasta accounted for approximately 13% of the domestic market in
the year ended May 31, 1998. The International Trade Commission in July 1996
determined that certain Italian and Turkish companies benefited unfairly from
subsidies and had sold product in the United States at less than fair value and
imposed countervailing and anti-dumping duties. Despite the imposition of
duties, imports have slightly increased.

     Major competitors in the industry include the Company, Italgrani and Miller
Milling. Competition is driven by price, service and product quality. Some
competitors have developed long-term relationships with customers by locating
plants adjacent to pasta manufacturing plants.

     BAKERY FLOUR. Bakery flour milled from spring and hard winter wheat is used
in breads, cookies, pizza crusts, tortillas and other products. The baking
industry is highly fragmented, with the largest participant being no more than
four percent of the market.

     Demand for bakery flour has been stable, as total production and per capita
consumption increased in the year ended May 31, 1998. New dietary guidelines
established by the United States Department of Agriculture emphasize cereal
grains in the food pyramid. The Company believes that demand for bakery flour
will increase based on population growth. Imports and exports of bakery flour do
not significantly affect the domestic business.

EQUITY PARTICIPATION UNITS

     At May 31, 1998, Equity Participation Units in the Wheat Milling Defined
Business Unit represented the right to deliver 4,739,000 bushels of wheat,
approximately 11% of the processing capacity of the Defined Business Unit before
the construction of the Pocono mill.

PRICE RISK AND HEDGING

     To reduce the price change risks associated with holding fixed price
commodity positions, the Company generally takes opposite and offsetting
positions by entering into commodity futures contracts (either a straight
futures contract or an options futures contract) on regulated commodity futures
exchanges. While hedging activities reduce the risk of loss from changing market
values of grain, such activities also limit the gain potential which otherwise
could result from changes in market prices of grain. The Defined Business Unit's
policy is to generally maintain hedged positions in grain that is hedgable, but
the Company can be long or short at any time. The Defined Business Unit's
profitability is primarily derived from margins on grain processed, not from
hedging transactions. Management does not anticipate that its hedging activity
will have a significant impact on future operating results or liquidity. Hedging
arrangements do not protect against nonperformance of a contract.


                                       12


<PAGE>


     At any one time the Defined Business Unit's inventory and purchase
contracts for delivery to the Defined Business Unit may be substantial. The
Defined Business Unit has a risk management policy and procedures that include
net position limits. It is defined by commodity and includes both trader and
management limits. This policy triggers a review by management of the Defined
Business Unit when any trader is outside of position limits and also triggers
review by management of the Company if the Defined Business Unit is outside of
its position limits. The position limits are reviewed at least annually with
management of the Company. The Defined Business Unit monitors current market
conditions and may expand or reduce the purchasing program in response to
changes in those conditions. In addition, certain purchase and sale contracts
are subject to credit approvals and appropriate terms and conditions.

SUPPLY

     Most of the durum, spring and winter wheats processed by the Wheat Milling
Defined Business Unit are purchased from Members. Some grain is purchased from
Canada and a small percentage is purchased from the Southwest.

     Semolina and durum flour sales are hedged to a significant extent by buying
durum at the time of pricing the semolina or flour. Additionally, the new durum
futures market offers some limited potential for hedging. To minimize the price
volatility for winter and spring wheats, the Wheat Milling Defined Business Unit
usually hedges by purchasing wheat futures at the time of pricing the flour.

     The availability, price and quality of durum and spring and winter wheat
affect the operations and profitability of the Wheat Milling Defined Business
Unit. The Wheat Milling Defined Business Unit has never experienced a supply
shortage of durum, but shortages have affected prices.

CUSTOMERS

     SEMOLINA & DURUM FLOUR. The Wheat Milling Defined Business Unit sells
semolina and durum flour to ten major customers and approximately 50 smaller
customers, which are large and mid-size pasta manufacturers in the United
States. The customer base is broad and diverse with no single customer being
more than 11.4% of the total durum milling demand.

     In July 1998, American Italian Pasta Company ("AIPC") began construction of
a new pasta plant adjacent to the Wheat Milling Defined Business Unit's mill in
Kenosha, Wisconsin. AIPC is this country's second largest pasta manufacturer.
Direct pipelines from the mill to the pasta plant will reduce costs to transfer
product, creates efficiencies for both companies, as well as providing a
dedicated customer/supplier relationship. Production startup for the American
Italian Pasta Company plant is expected in about a year.

     The Wheat Milling Defined Business Unit would be adversely affected by a
decline in pasta production in the United States.

     Most of the Wheat Milling Defined Business Unit's products are marketed by
employees of the Defined Business Unit. The Wheat Milling Defined Business Unit
uses outside agents and distributors for the balance of its production.

     BREAD FLOUR. The baking industry is composed of many companies. No one
customer buys more than 12% of the Wheat Milling Defined Business Unit's bread
flour production. The Company believes because of the large number of potential
customers and the fact that the Wheat Milling Defined Business Unit is not
dependent on any customer, it would not have substantial difficulty in replacing
an existing customer.

     The Wheat Milling Defined Business Unit's first hard wheat milling unit
(Kenosha) began production in late 1995. In October 1996, the Wheat Milling
Defined Business Unit expanded hard wheat capacity with the addition of a swing
mill at Kenosha capable of milling either durum or hard wheat flour. A plant in
Houston, which began limited production in June 1997, added additional hard
wheat capacity. The Company believes that there is a substantial customer base
available in the Houston area, as well as export markets. The mill serves a
sizeable population base and there are no other milling facilities within the
area.

     Borden, traditionally a major customer serviced from the Rush City, MN
mill, sold its two pasta plants in the Minneapolis, MN area during the year
ended May 31, 1998. Although the Rush City mill


                                       13


<PAGE>


still provides semolina to these pasta plants, volumes have been reduced to a
level at which the Defined Business Unit could service the Minneapolis, MN area
customers nearly as efficiently from its Kenosha, WI mill. Consequently, the
Company may elect to sell the Rush City facility, close the facility, or
continue to operate at somewhat reduced volumes, depending upon the
opportunities offered by the market place.


COMPETITION

     DURUM MILLING. The Wheat Milling Defined Business Unit's largest
competitors in durum milling are Italgrani and Miller Milling Company.

     Dakota Growers has expanded its Carrington, North Dakota, milling facility
and its pasta production capacity and has announced plans for additional milling
capacity to supply its recently acquired New Hope, Minnesota plant. Philadelphia
Macaroni is building a semolina mill in Minot, North Dakota. Miller Milling has
recently expanded its Winchester, Virginia, semolina mill. Barilla, an Italian
pasta manufacturer and durum miller, is constructing an integrated mill and
pasta plant in Ames, Iowa. In the past, they have exported significant volumes
of pasta from Italy into the U.S. and will now compete with domestic
manufacturers in the dry retail pasta market.

     BREAD FLOUR. Competitors include ConAgra, ADM, Cargill, Bay State Milling,
Cereal Foods and General Mills. All of these competitors have multiple milling
facilities with larger bakery flour production capacity than the Wheat Milling
Defined Business Unit. Capacity for hard wheat milling has been expanding faster
than consumption. This additional capacity may put pressure on margins.

PROCESSING

     The Defined Business Unit mills wheat into flour using standard industry
processes. More recently manufactured equipment has reduced the labor component
of wheat milling. The Company believes that its facilities are, on average,
newer than its competitors. Operations are somewhat seasonal in anticipation of
reduced demand for pasta in summer months.

FACILITIES

     The Wheat Milling Defined Business Unit has four milling facilities in
operation, including Houston that began limited production in June 1997. Each
facility includes a milling plant as well as an elevator to store grain.
Information on the four mills, plus the planned Pocono mill described below,
follows:


<TABLE>
<CAPTION>

LOCATION                         GRAIN MILLED              CAPACITY        BUSHEL EQUIVALENT
-----------------------   -------------------------   -----------------   ------------------
<S>                       <C>                         <C>                 <C>
  Rush City, MN           Primarily durum             10,000 cwts/day      23,500 bu/day
  Huron, OH               Primarily durum              9,500 cwts/day      22,800 bu/day
                          Spring and winter wheat      5,000 cwts/day      11,000 bu/day
  Kenosha, WI             Durum                       11,000 cwts/day      26,400 bu/day
                          Spring and winter wheat     10,000 cwts/day      22,000 bu/day
  Houston, TX             Spring and winter wheat     13,000 cwts/day      28,600 bu/day
  Pocono, PA              Durum                        4,000 cwts/day       9,600 bu/day
                          Spring and winter wheat     14,000 cwts/day      30,800 bu/day
                                                      -----------------   ------------------
   Total                                              76,500 cwts/day     172,700 bu/day
                                                      =================   ==================
</TABLE>

     At Huron, Ohio, the land and buildings are leased from ConAgra. In June
1998, the Huron Mill began a conversion of one of the three milling units to
manufacture bakery flour rather than durum semolina. This change will result in
a decrease of approximately 5,000 cwts. of semolina to be converted to 5,000
cwts. of hard wheat bakery flour.

     The Rush City and Kenosha facilities are owned entirely by the Company.

     At Houston, the milling plant is constructed on property leased from the
Port of Houston on a long-term basis and the elevator is owned by the Port of
Houston, but is subject to a put through agreement with the Company.


                                       14


<PAGE>


     Because transportation costs for durum, spring and winter wheats are
cheaper than for the milled products, it is a strategic advantage for a mill to
be located close to a large customer base rather than close to the producer.
Each of the Huron, Kenosha and Houston mills are in proximity to a large
customer base.

     Approximately 85% of the Wheat Milling Defined Business Unit's current
milling capacity uses equipment that is less than 10 years old. This newer
equipment generates cost advantages in labor, energy, improved yields and better
and more consistent products. In the last few years, some competitors have
closed less efficient mills in less strategic locations.

     The Wheat Milling Defined Business Unit began constructing semolina and
flour and bread flour mills in Pocono, Pennsylvania in September 1997. The
Harvest States Board of Directors has increased the authorized expenditures from
$38,800,000 to $41,350,000 for the construction of this mill. Of this amount,
$15,165,000 was expended in fiscal year 1998.

     For the year ended May 31, 1998 the Wheat Milling Defined Business Unit
facilities ran at 81% of capacity based upon a year of 307 operating days being
100%, compared to 97% in 1997. This decrease in run time was due to startup in
Houston and a temporary shut down of Rush City in June and early July of 1997.

EMPLOYEES

     As of May 31, 1998 the Wheat Milling Defined Business Unit employed the
following full time equivalents: production (98), plant management (30) and
headquarters (24). Of these, 23 production workers at the Rush City Mill are
subject to a collective bargaining agreement with the American Federation of
Grain Millers expiring in 1998.


                           FARM MARKETING AND SUPPLY

     The Farm Marketing and Supply Division owns and operates Agri-Service
Centers at 160 locations in Minnesota, North Dakota, South Dakota, Montana,
Idaho and Washington. Agri-Service Centers sell farm supplies, including
fertilizer, feed, seed and crop protection products, and other related services
and have grain elevator operations that buy grain. Some Centers have only grain
operations or grain and feed operations, while some have only supply operations.
Locations are grouped together into 50 units for operational purposes. A small
number of Centers are grouped into seven regionalizations, which have their own
producer board and participate in separate patronage pools.

     Agri-Service Centers purchase grain from member and non-member producers
and others, such as other elevators and grain dealers. Of these facilities, 64
have the capability of loading unit trains, while other facilities can load only
single cars or are truck stations. Most of the grain purchased is sold through
the Company's Grain Marketing Division, with the balance going to local feed and
grain processors.

     The supplies and services offered vary from location to location. Agronomy
supplies and services are sold at approximately 82 locations to member and
non-member producers. Feed is sold at approximately 92 locations. Agronomy and
feed sales are considered distinct operations involving different expertise and
sales forces.

     Most feed sold is purchased from the Feed Division. Fertilizer is obtained
from co-op sources and other suppliers. Crop protection products are bought
through co-op programs and directly from industry sources. Other goods are
obtained through commercial channels.

     The Company has increased the number of Agri-Service Centers in recent
years. The number of centers, operating units, bushels of grain sold and sales
at centers for the years ended May 31 are shown below:


<TABLE>
<CAPTION>
                                     1998                1997                1996              1995             1994
                              -----------------   -----------------   -----------------   --------------   --------------
<S>                           <C>                 <C>                 <C>                 <C>              <C>
No. of centers ............              160                 154                 144               121              115
No. of op. units ..........               50                  47                  47                43               43
Grain sales (bu) ..........      214,770,000         199,922,000         214,085,000       159,891,000      141,238,000
Sales .....................   $1,072,950,000      $1,136,700,000      $1,126,600,000      $679,200,000     $613,151,000
</TABLE>

                                       15


<PAGE>


     As of June 1, 1998, through the merger with Cenex, the Farm Marketing and
Supply Division added 92 locations which comprise 22 operating units handling
primarily agronomy supplies and petroleum.

     Competitors for the purchase of grain include other elevators and large
grain marketing companies. Competitors for the sale of agronomy supplies and
feed include a variety of cooperative and privately owned facilities. The
Company competes on the basis of service and patronage.

     The Division is exploring and pursuing the expansion of track at a number
of locations to accommodate 108-car loading due to recent rate changes by the
railroads which provide a rate advantage for 108-car trains over 54-car trains.

     On May 31, 1998, the Division had 879 full time employees and 404 temporary
employees.

     FIN-AG, INC. Fin-Ag, Inc. is a wholly owned subsidiary of the Company
located in Sioux Falls, South Dakota. It provides seasonal cattle feeding and
swine financing loans, facility financing loans and crop production loans for
producers. It also provides consulting services to member cooperatives. Its
competitors are other financial institutions. Most whole loans are sold to the
St. Paul Bank for Cooperatives, on which the Company bears a 15% residual
exposure. The Company's exposure at May 31, 1998, was approximately $4,000,000.
Under the Company's borrowing arrangements the maximum amount of the loans
outstanding at any one time may not exceed $50,000,000.


                                     FEED

     The Company manufactures and sells feed products and sells feed
ingredients, supplements and animal health products under several brand names,
including GTA Feeds(R), Norco Feeds, CC Bar Feeds, Let'er Buck Feeds(R) and
Pantec(TM). In addition, it provides livestock production services, including
customized ration planning, feedstuffs analysis, profit projections, livestock
nutritional management, recordkeeping, animal health and environmental
engineering and facility management. Sales are made at retail through five
retail stores and through Agri-Service Centers and at wholesale to cooperatives
(both Cooperative Association Members and otherwise) and to other retail farm
supply businesses located in Minnesota, North Dakota, South Dakota, Nebraska,
Montana, Wyoming, Idaho, Washington and Oregon.

     Sales of feed for the years ended May 31 are set forth below:


<TABLE>
<CAPTION>
                                         1998        1997        1996        1995       1994
                                      ---------   ---------   ---------   ---------   --------
<S>                                   <C>         <C>         <C>         <C>         <C>
Manufactured feed (tons) ..........   377,000     326,000     351,000     333,000     306,000
</TABLE>

     The Company has been able to increase sales and production capacity through
several joint venture arrangements entered into in recent years. The decrease in
manufactured feed tons from 1996 to 1997 was primarily due to the high cost of
feed in relation to the low cattle price, which caused a decline in feed demand.

     The Company owns ten manufacturing facilities located in Sioux Falls, South
Dakota; Great Falls, Montana; Hardin, Montana; Snohomish, Washington; Dickinson,
North Dakota; Minot, North Dakota; Edgeley, North Dakota; Willmar, Minnesota;
Gettysburg, South Dakota; and Norfolk, Nebraska. The Company also has an
interest in three joint ventures with facilities in Hermiston, Oregon;
Tillamook, Oregon; and Owatonna, Minnesota. The administrative office for the
feed business is located in Sioux Falls, South Dakota.

     The Feed Division's operations reflect the condition of the livestock
business. Recent increases in poultry and swine production have been driven by
increased exports. The transition from individual producers to more integrated
producers has affected the demand for and composition of the Division's
products.

     As of June 1, 1998 the Feed Division has entered into a joint venture with
Land O' Lakes. The joint venture is named Land O' Lakes/Harvest States Feed.

     The joint venture includes the company owned plants in the states of
Montana, North Dakota, South Dakota, Nebraska and Minnesota along with four
plants owned by Land O' Lakes in the same


                                       16


<PAGE>


territory. The joint venture is governed by a four person board (2 from Cenex
Harvest States and 2 from Land O' Lakes) and the administrative office and the
general manager of the new joint venture is located in the Company's Sioux
Falls, South Dakota feed administration office building.

     At May 31, 1998, the Division had 284 full time and 10 part time employees.

     Competitors in the feed business are other cooperatives and private
companies.

     The Company is a part of the Cooperative Research Farms, a research
partnership of 12 regional cooperatives in the United States, Canada and France.
This partnership provides the Company with production research.


                                   SERVICES

     The Company's Country Services Division provides certain services to
Individual Members and Cooperative Association Members.

COUNTRY HEDGING, INC.

     Country Hedging, Inc. offers full service commodity futures and options
brokerage. For the year ended May 31, 1998, 57% of revenues were from
Cooperative Association Members, 29% from Individual Members and 14% from
others. This separate subsidiary of the Company is a registered futures
commission merchant and a clearing member of both the Minneapolis Grain Exchange
and the Kansas City Board of Trade. On May 31, 1998, it had 38 employees
operating primarily out of St. Paul, Minnesota.

     Competitors include international brokerage firms, national brokerage
firms, regional brokerage firms (both co-op and non-co-op) as well as local
introducing brokers. Competition is driven by price and service.

AG STATES AGENCY, LLC

     Ag States Agency, LLC, 93% owned by the Company as of June 1, 1998, is an
independent insurance agency which sells insurance primarily to local
cooperatives, including group benefits, property and casualty, and bonding
programs. For the year ended May 31, 1998, substantially all of its revenues
were from local cooperatives. Ag States Agency, LLC competes with other
insurance agencies.

     On January 1, 1998 Ag States Agency, LLC acquired 50% ownership in Ag
States Benefits, LLC. Ag States Benefits, LLC is an independent insurance agency
which sells primarily group benefit policies such as health, life, dental, long
term care and disability insurance to primarily local cooperative employees and
members of local cooperatives.

FINANCIAL SERVICES DEPARTMENT

     The Financial Services Department provides business planning consulting and
financing to Cooperative Association Members. It offers open account financing,
involving the discretionary extension of credit, and term and seasonal loans.
Most of the term and seasonal loans are participated up to 90% by National Bank
for Cooperatives (CoBank). Participation by CoBank is subject to credit approval
on a loan-by-loan basis by CoBank, subject to an overall limit of participation
of $150,000,000. In addition to financing, the open account between the Company
and an Affiliated Association is used as a clearing account for settlement of
grain purchases and as a cash management tool. Open account financing has been
provided to more than 200 Cooperative Association Members in the past year.

     During the year ended May 31, 1998, average aggregate loan balances
outstanding were $49,865,070 (of which CoBank's participation was $33,520,924)
and the highest aggregate loan balance outstanding at any one time was
$84,050,441 (of which CoBank's participation was $48,213,799). The Company's
borrowing arrangements limit loan balances outstanding to not more than
$150,000,000 at any one time.

     Pursuant to its agreement with CoBank, the Company has additional credit
risk on CoBank participations to 10% of total loan commitments.

     Fin-Ag, Inc., a wholly owned subsidiary of the Company provides certain
types of financing to members. See "Farm Marketing and Supply".


                                       17


<PAGE>


AFFILIATED ACCOUNTING DEPARTMENT

     The Affiliated Accounting Department offers computerized country elevator
accounting systems and a full complement of accounting support systems for local
cooperatives, including tax and patronage allocation services, dividend ledger
services and payroll services. For the year ended May 31, 1998, substantially
all of its revenues were from local cooperatives.

FIELD SERVICES DEPARTMENT

     The Field Service Department acts as a liaison between Cooperative
Association Members and the Company, providing consulting services in marketing,
management, operations, accounting, tax, finance and government regulations.

MEMBER RELATIONS DEPARTMENT

     The Member Relations Department conducts cooperative education programs for
Cooperative Association Members and assists in planning meetings and organizing
visits to Company facilities.


               MEMBERSHIP IN THE COMPANY AND AUTHORIZED CAPITAL

INTRODUCTION

     The Company is a membership cooperative organized to receive, handle,
store, warehouse, manufacture, process, market, purchase, sell and otherwise
deal in the agricultural products of its members, non-member patrons and others,
including without limitation, the processing and exporting of grain and other
agricultural products; to manufacture, buy, sell, market, store, warehouse,
acquire, transport, distribute, process, drill, mine, refine and otherwise deal
in and procure for its members, non-member patrons and others, petroleum
products, fuels, oil, grease, automotive parts and accessories, supplies,
services, minerals, feed, seed, fertilizer, machinery, equipment, supplies, and
other goods, products, and merchandise, primarily for use upon farms or by
farmers, or used or useful in the business of farming, recognizing that they may
also be incidentally useful to other patrons; and to engage in any other
activity connected with or related to any such purposes, and to engage in any
other lawful purpose. Net savings from member patronage of the Company shall be
distributed to members on the basis of patronage, except that the Board of
Directors may elect to add to the Capital Reserve an amount not to exceed 10% of
the distributable net income from patronage business. These net savings, when
distributed, are referred to as "patronage dividends," regardless of whether
distributed in cash or Patron Equities. The Company may obligate itself to do
business with a nonmember on a patronage basis. The determination of net savings
may be made by allocation units which may be functional, divisional,
departmental, geographic, or otherwise as determined by the Board of Directors,
provided that each Defined Business Unit shall be accounted for as a separate
allocation unit. Patronage refunds shall be distributed in cash, allocated
patronage equities, revolving fund certificates, securities of this cooperative,
other securities, or any combination thereof designated by the Board of
Directors. Any non-cash allocations are redeemable only in the discretion of the
Board of Directors.

     The net earnings (after provision for income taxes) of the Company, as
reported in its financial statements for the year, less patronage dividends paid
with respect to the fiscal year may be distributed in the discretion of the
Board of Directors to member patrons and to non-member "consenting patrons"
(defined as cooperative associations meeting all requirements for membership in
this Association other than transacting the minimum amount of business) on the
basis of their patronage. Distributions may be in cash, property, Non-Patronage
Earnings Certificates or any combination thereof designated by the Board of
Directors. To date, the Board of Directors has always used Non-Patronage
Earnings Certificates for distributions, and the current redemption policy is to
redeem to estates.

     In making any such non-member/non-patronage distributions, the Board of
Directors may use any method of allocating the earnings on the basis of
patronage to member patrons and Non-Member Consenting Patrons as shall be
reasonable and equitable in the judgment of the Board of Directors.

     The method of allocation for the non-member/non-patronage earnings of the
Company for the fiscal year ended May 31, 1998 is based on bushels of the grain
marketing/processing activity and dollars on the purchasing and other activity.
This method is subject to change, in the discretion of the Board of Directors.


                                       18


<PAGE>


GOVERNANCE

     The business and affairs of the Company are managed by a Board of Directors
of not less than 17 persons (currently set at 27), elected by the members at the
Company's annual meeting. Various rights and obligations of members are
contained in its Articles of Incorporation and Bylaws (together, the "governing
documents"), each of which was amended and restated in June, 1998. The governing
documents may only be amended upon approval of a majority of the votes cast at
an annual or special meeting of the members, except for the higher vote
described under " -- Certain Antitakeover Effects."

MEMBERSHIP

     Membership in the Company is restricted to associations of producers of
agricultural products which are organized and operating so as to adhere to the
provisions of the Agricultural Marketing Act and the Capper-Volstead Act, as
amended, and to certain producers of agricultural products. The Board of
Directors may establish a minimum amount of business that cooperative
associations must transact with or through the Company to be eligible for
membership, and also may adopt such additional conditions, qualifications,
methods of acceptance, duties, rights and privileges of membership in this
Company as it may from time to time deem advisable.

     Under the Company's governing documents, the Company has several classes of
membership and has authority to issue a variety of debt and equity instruments
to members. As a membership cooperative, the Company does not issue capital
stock. Under the Minnesota Cooperative Law, under which the Company is
organized, a cooperative may be organized on a membership basis or a capital
stock basis. A cooperative is organized on a capital stock basis if holding
shares of common stock entitles the holder to vote. Membership is transferable
only with the consent and approval of the Board of Directors. The Company may
issue equity or debt securities, on a patronage basis or otherwise, but unless
authorized in, or by the Board of Directors pursuant to, the Company's Bylaws,
such securities shall not entitle the holders thereof to any voting, membership
or other rights to participate in the affairs of the Company and are not
transferable without the prior consent of the Board of Directors.

          The Company's governing documents establish three classes of
     membership:

          Individual Members are individuals or entities actually engaged in the
     production of agricultural products. Such Individual Members include both
     natural persons as well as any legal entity owned or controlled by
     individual farmers or their families, such as joint ventures, corporations,
     partnerships, limited liability companies and other entities.

          Cooperative Associations are associations of agricultural producers.
     Cooperative Associations must be cooperatives or other associations of
     agricultural producers organized and operating under the provisions of the
     Agricultural Marketing Act and the Capper-Volstead Act.

          Defined Members are either persons actually engaged in the production
     of agricultural products or associations of producers of agricultural
     products that are holders of Equity Participation Units. See "-- Defined
     Members" below.

     Membership in the Company will be terminated by the Board of Directors if a
member has become ineligible for membership (for example, by the cessation of
agricultural production activities). The Board of Directors has the discretion
to terminate membership for a variety of reasons, including repeated violations
of the Company's Bylaws, failure to patronize the Company for a period of 12
consecutive months and breach of any contract with the Company. In addition, any
member's membership in the Company is terminated when that member either dies or
is legally dissolved. Upon termination of membership, a former member loses any
and all voting rights in the Company. A former member has no right to require
immediate repayment of patronage.

VOTING RIGHTS

     Cooperative Association Members are entitled to: (i) one vote for each
producer of agricultural products registered and accepted as a member of such
cooperative association who patronized the Cooperative Association within the
preceding year; (ii) one vote for each $10,000 or major fraction thereof, of the
average annual business transacted with the Company during the past three fiscal
years;


                                       19


<PAGE>


and (iii) one vote for each $1,000, or major fraction thereof, of equity issued
by the Company as patronage refund and standing on the books of the Company in
the name of the Cooperative Association Member.

     Individual Members and Defined Members are entitled to one vote. Individual
Members and Defined Members may directly cast their votes on matters presented
to the members of the Company only if, for Defined Members, they have provided
notice of such intention to the Company, and, for Individual Members, if they
have obtained a certificate signed by a manager of the Company facility
patronized by such Individual Member. Any such certificate or notice must be
provided to the Company at least 10 days before the meeting at which the voting
rights are to be exercised.

     Individual Members and Defined Members may exercise their voting power
through the designation of a "Patrons' Association." A Patrons' Association is
an association of the Individual Members and Defined Members associated with a
grain elevator, feed mill, seed plant or any other Company facility, except
supply and marketing locations brought to the Company by Cenex, as designated
and recognized by the Board of Directors. The Individual Members and Defined
Members that are identified with a particular Patrons' Association may, at an
annual meeting of the Patrons' Association, elect delegates and alternates for
the Patrons' Association on the basis of one vote per member. Patrons'
Associations are entitled to: (i) one vote for each Individual Member and
Defined Member grouped in such Patrons' Association (minus one vote for each
Individual Member or Defined Member in such Patrons' Association who chooses to
cast a vote personally); (ii) one vote for each $10,000 or major fraction
thereof, of the average annual business transacted with the Company by the
Individual Members and Defined Members grouped into such Patrons' Associations,
during the past three fiscal years; and (iii) one vote for each $1,000,or major
fraction thereof, of equity issued by this cooperative as a patronage refund and
standing on the books of this Company in the name of the Individual Members and
Defined Members grouped in such Patrons' Associations, calculated on an
aggregate basis.

     Members may cast their votes, if the Board of Directors so elects, by mail
voting in certain situations. At least 50 members of the Company represented in
person, by delegates or by mail votes constitutes a quorum for business at any
meeting, unless the Company has fewer than 500 members, in which case a quorum
is comprised of 10% of the total number of members.


DEFINED MEMBERS

     Each Defined Member is affiliated with a "Defined Business Unit" and holds
Equity Participation Units in that Defined Business Unit. Holders of Equity
Participation Units have delivery rights and obligations for farm products
pursuant to a member marketing agreement between such Defined Member and the
Company.

     Each Defined Business Unit is represented by a Defined Member Board,
comprised of between five and ten individuals. The members of a Defined Member
Board must be either Defined Members or representatives of Defined Members and
in good standing and in full compliance with all delivery obligations with
respect to the applicable Defined Business Unit, provided, however, no employee
of the Company may serve as a member of the Defined Member Board. The initial
Defined Member Board of each Defined Business Unit was elected by the Company's
Board of Directors in June, 1997. Eight individuals were appointed to serve on
the Wheat Milling Defined Member Board, a Chairman plus one member from District
1, three members from District 2, one from District 3, one from District 4 and
one from District 5. Six individuals were appointed to serve on the Oilseed
Processing and Refining Defined Member Board, a Chairman plus three members from
District 1, one member from District 2 and one member from District 3. In
November of 1997 the Defined Member Boards of each Defined Business Unit were
elected by the Defined Members associated with the particular Defined Business
Unit on a one Defined Member/one vote basis. The Defined Member Boards adopted a
Nominating and Election Procedure that was sent to each Defined Member. In
subsequent years, Defined Members will elect members of the Defined Member
Boards as their terms expire. The Chairperson is selected by and from the
Company's Board of Directors. Individuals serving on a Defined Member Board
shall serve staggered three-year terms. Each Defined Member Board shall meet at
least quarterly and shall be charged with reflecting Defined Member concerns and
providing a direct communication mechanism to the Company's Board of Directors.


                                       20


<PAGE>


     While the Board of Directors has no present intention of doing so, the
Company is authorized to retain a portion of the payments otherwise due to
Defined Members for purchases of products from them. Such retention is referred
to as a "unit retain." Unit retains would only be established by the Board of
Directors to provide a source of cash for its immediate needs and would be
limited to a small percentage of the payments due for purchase of products
pursuant to the Agreement. The imposition of unit retains would adversely affect
a member's cash income and cash position. The Company has the option to treat
any such unit retains as taxable to the Company or to treat the unit retains as
nontaxable by declaring the unit retains as "qualified." Qualified unit retains
are taxable to the Defined Member in the tax year when the Defined Member
receives notification that a unit retain has been established. When a qualified
unit retain is reimbursed or redeemed, the Defined Member reports no additional
income. Unit retains may be called for payout at the lesser of their stated or
book value at the discretion of the Board of Directors. The Company intends to
establish a redemption schedule if it authorizes unit retains.

DEBT AND EQUITY INSTRUMENTS

     The Company is authorized to issue a variety of debt and equity instruments
to its current members, patrons and to persons who are neither members nor
patrons. The Company's outstanding capital is represented by Capital Equity
Certificates, non-patronage certificates, Equity Participation
Units and certain capital reserves.

     The Company's Bylaws provide the following securities may be issued to
current or former members or patrons:

          EQUITY PARTICIPATION UNITS. Equity Participation Units may be held
     only by Defined Members and have no voting rights. Defined Members have
     voting rights to elect a Defined Member Board.

          CAPITAL EQUITY CERTIFICATES. Capital Equity Certificates may be issued
     by the Company in partial or complete distribution of patronage refunds.
     Capital Equity Certificates do not bear any interest or carry any
     dividends. They do not have a specified maturity date unless established by
     the Company's Board of Directors.

          CERTIFICATES OF INDEBTEDNESS. The Board of Directors may issue
     Certificates of Indebtedness from time to time. Such Certificates will
     carry such terms and conditions as the Board of Directors establishes in
     its discretion. The Board may also establish the conditions upon which such
     Certificates of Indebtedness may be called for payment by the Company.

          NON-PATRONAGE EARNINGS CERTIFICATES. The Board of Directors may issue
     Non-Patronage Earnings Certificates. Such certificates will not have a
     maturity date and will not bear interest or annual dividends. They will be
     issued and distributed only to member patrons and to Non-Member Consenting
     Patrons as part of a non-member/non-patronage distribution. (Non-Member
     Consenting Patrons include Cooperative Association Members that meet all of
     the requirements of membership as a Cooperative Association Member except
     that they do not transact at least the minimum volume of business with the
     Company during the preceding fiscal year.)

          PREFERRED CAPITAL CERTIFICATES. The Board of Directors may establish
     and designate the designation, preferences and relative rights of one or
     more series of Preferred Capital Certificates. Preferred Capital
     Certificates will not carry any voting rights.

          OTHER. The Board of Directors may issue other debt or equity
     instruments. The Bylaws contain no restrictions on the issuance or the
     terms of such other debt or equity instruments.

     Voting rights arise by virtue of membership in the Company, not because of
holding any instrument. The Board of Directors may issue "Preferred Equities"
and other debt or equity instruments to individuals who are not members or
patrons of the Company. The Board of Directors has the discretion to establish
and designate one or more series of Preferred Equities and to fix the relative
rights, preferences and privileges of such Preferred Equities. Any Preferred
Equities will not carry voting rights. No such Preferred Equities are presently
outstanding, and the Board of Directors has no present plan or intent to issue
Preferred Equities. However, if it were to do so, it could establish rights,
preferences and privileges relative to the holders of the Units and other
securities of the Company. Such preferences could include provisions for
priority in payment. The Board of Directors may authorize the issuance of


                                       21


<PAGE>


Preferred Capital Certificates pertaining to a particular Defined Business Unit.
If such Certificates were issued, they could have a preference in payment over
patronage refunds of a particular Business Unit.

     TRANSFER OF PATRONS' EQUITIES. Debt or equity instruments held by the
Company's members and patrons, including Equity Participation Units, Capital
Equity Certificates, Certificates of Indebtedness, Non-Patronage Earning
Certificates and Preferred Capital Certificates, may be transferred only with
the consent and approval of the Company's Board of Directors. The Company may
require the execution of appropriate transfer documentation, as well as
representations and warranties from the proposed transferee indicating that he
or she is eligible to be the holder of the instrument proposed to be
transferred.

     Beginning June 1, 1998, inactive direct members and patrons and active
direct members and patrons age 61 and older on that date will continue to be
eligible for patronage certificate redemption at age 72 or death. For active
direct members and patrons who were age 60 or younger on June 1, 1998, and
Cooperative Association Members, equities will be redeemed annually based on a
prorata formula where the numerator is dollars available for such purpose as
determined by the Board of Directors, and the denominator is the sum of the
patronage certificates held by such eligible members and patrons. There can be
no assurance that the Company's Board of Directors will not elect to modify its
policy regarding the redemption of equities. The Board is under no restriction
in modifying such policy, other than legal agreements to which the Company may
be a party from time to time. Members are not required to approve a change in
such policy. The Board of Directors will establish a redemption policy for
Patrons' Equities arising from the Defined Business Units.

DISTRIBUTION OF ASSETS UPON DISSOLUTION

     In the event of any dissolution, liquidation or winding up this
cooperative, whether voluntary or involuntary, all debts and liabilities of this
cooperative shall be paid first according to their respective priorities. As
more particularly provided in the Bylaws, the remaining assets shall then be
paid to the holders of equity capital to the extent of their interests therein
and any excess shall be paid to the patrons of this cooperative on the basis of
their past patronage. The Bylaws provide more particularly for the allocation
among the members and nonmember patrons of this cooperative of the consideration
received in any merger or consolidation to which this cooperative is a party.

CERTAIN ANTITAKEOVER EFFECTS

     The governing documents may be amended upon the approval of a majority of
the votes cast at an annual or special meeting. However, in the event that the
Board of Directors declares, by resolution adopted by a majority of the Board of
Directors present and voting, that the amendment involves or is related to a
hostile takeover, the proposed amendment must be adopted by the approval of 80%
of the total voting power of the members of the Company. It is within the sole
determination of the Board of Directors to declare that a transaction involves a
"hostile takeover," which term is not further defined in the Minnesota
cooperative law or the governing documents.

TAX TREATMENT

     Subchapter T of the Internal Revenue Code sets forth rules for the tax
treatment of cooperatives and applies to both cooperatives exempt from taxation
under Section 521 of the Internal Revenue Code and to nonexempt corporations
operating on a cooperative basis. The Company is a nonexempt cooperative.

     As a cooperative, the Company is not taxed on amounts withheld from its
members in the form of qualified unit retains or patronage dividends, or in the
amount distributed in the form of patronage payments. Consequently, such amounts
are taxed only at the patron level. However, the amounts of any non-qualified
unit retains or patronage dividends are taxable to the Company when allocated.
Upon redemption of any such non-qualified unit retains or patronage dividends,
the amount is deductible to the Company and taxable at the member level.

     Income derived by the Company from non-patronage sources is not entitled to
the "single tax" benefit of Subchapter T and is taxed to the Company at
corporate income tax rates.


                                       22


<PAGE>


                          EQUITY PARTICIPATION UNITS

     Equity Participation Units ("Units") may be held only by Defined Members.
Defined Members are either persons actually engaged in the production of
agricultural products or associations of producers of agricultural products.
Each Defined Member is affiliated with a Defined Business Unit and holds Equity
Participation Units in that Defined Business Unit. Holders of Equity
Participation Units have delivery rights and obligations for farm products
pursuant to the Agreements between such Defined Members and the Company.

     Each Defined Business Unit and the respective Equity Participation Units
were created by resolutions (the "Resolutions") of the Board of Directors,
acting pursuant to the governing documents, on January 11, 1997. The terms of
the Units are governed by the governing documents and the Resolutions. The
Resolutions may be amended by the Board of Directors, except in certain
respects, without a vote of holders of the Units. Holders of the Units have the
rights and remedies provided by the Minnesota Cooperative Law.

WHEAT MILLING DEFINED BUSINESS UNIT

     Holders of Equity Participation Units in the Wheat Milling Defined Business
Unit have a right to participate in the patronage sourced income from the
operations of the Wheat Milling Defined Business Unit. Prior to the sale of any
Unit to any person, such person entered into an Agreement that gave the right
and obligation to such person to deliver the number of bushels of wheat equal to
the number of Units purchased by such Member. The delivery obligation and right
under the Agreement for the Wheat Milling Defined Business Unit will become
fully effective for the fiscal year in which the Pocono facility begins
operating. Defined Members will be notified. Until the Agreement becomes fully
effective, it will represent a right and obligation to deliver 78% of the wheat
set forth therein.

     Patronage sourced income from the operations of the Wheat Milling Defined
Business Unit will be allocated by the Company as patronage refunds based on the
total amount of wheat processed. As between the holders of Equity Participation
Units, patronage sourced income will be allocated to each Defined Member
proportionate to the wheat delivered pursuant to the Agreement.

     While Defined Members are entitled to the allocation of patronage refunds
originating from the Wheat Milling Defined Business Unit, they may also receive,
upon allocation by the Board of Directors, nonpatronage income from operations
of the Company, including operations of the Wheat Milling Defined Business Unit
generating nonpatronage income.

OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT 

     Holders of Equity Participation Units in the Oilseed Processing and
Refining Defined Business Unit have a right to participate in the patronage
sourced income from the operations of the Oilseed Processing and Refining
Defined Business Unit. Prior to the sale of any Unit to any person, such person
entered into an Agreement that gave the right and obligation to such person to
deliver the number of bushels of soybeans equal to the number of Units purchased
by such Member.

     Patronage sourced income from the operations of the Oilseed Processing and
Refining Defined Business Unit, excluding patronage sourced income from the
refining of crude oil purchased from others and excluding patronage sourced
income from Ventura Foods, will be allocated by the Company as patronage refunds
based on the total amount of soybeans processed, giving effect to Units held and
Units deemed to be held by the Company. As between the holders of Equity
Participation Units, patronage sourced income will be allocated to each Defined
Member proportionate to the soybeans delivered pursuant to the Agreement.

     While Defined Members are entitled to the allocation of patronage refunds
originating from the Oilseed Processing and Refining Defined Business Unit, they
may also receive, upon allocation by the Board of Directors, nonpatronage income
from operations of the Company, including operations of the Oilseed Processing
and Refining Defined Business Unit generating nonpatronage income.

ALLOCATIONS RELATING TO DEFINED BUSINESS UNITS

     Revenues from the sale of products of a Defined Business Unit shall be
credited to the Defined Business Unit, and all direct expenses incurred by a
Defined Business Unit shall be charged against the


                                       23


<PAGE>


Defined Business Unit. Corporate, general and administrative expenses of the
Company shall be allocated to each Defined Business Unit in a reasonable manner
based on the utilization by such Defined Business Unit. Intracompany accounts
have been established for the advancements to, and the loan of funds by, each
Defined Business Unit, with interest thereon imputed at prevailing rates. Income
taxes shall be allocated to each Defined Business Unit as if it were a separate
taxpayer. Each Defined Business Unit shall perform and be responsible for
commitments, contingencies and obligations allocated to such Defined Business
Unit.

     Patronage sourced income from the operations of a Defined Business Unit
(except as set forth above with respect to the Oilseed Processing and Refining
Defined Business Unit) will be allocated by the Company as patronage refunds
based on the total amount of grain processed, giving effect to Units held and
Units deemed to be held by the Company. As between holders of the Units,
patronage sourced income will be allocated to each Defined Member proportionate
to the number of bushels of grain delivered pursuant to the Agreement. Defined
Members may also receive, upon allocation by the Board of Directors,
nonpatronage income from operations of the Company, including operations of a
Defined Business Unit generating nonpatronage income.

     With respect to each year, the total net income from a Defined Business
Unit will be withdrawn by the Company from the Defined Business Unit, except to
the extent that patronage dividends are not paid in cash and are retained in the
Business Unit as equity. The Company will be responsible for the allocation of
net income arising from operations of a Defined Business Unit between Defined
Members of any one or more Defined Business Units and the remainder of the
Company's operations.

     Upon the acquisition by the Company from a third party of any assets
(whether by means of an acquisition of assets or stock, merger, consolidation or
otherwise) reasonably related to a Defined Business Unit, such assets and
related liabilities, including commitments, contingencies and obligations, shall
be allocated to that Defined Business Unit and the aggregate cost or fair market
value of such assets and liabilities shall be paid by the Defined Business Unit.
Such allocation and determination of fair market value may be made by the Board
of Directors taking into account such matters as it and its advisers, if any,
deem relevant, and any such allocation and determination of fair market value
shall be final and binding for all purposes whatsoever.

     Upon any sale, transfer, assignment or other disposition by the Company of
any or all assets of a Defined Business Unit (whether by means of a disposition
of assets, merger, consolidation, liquidation or otherwise), all proceeds
(including non-cash consideration received) or the fair market value from such
disposition shall be allocated to the Defined Business Unit. If an asset is
allocated to more than one Defined Business Unit, the proceeds or the fair
market value of the disposition shall be allocated among all Defined Business
Units, based upon their respective interests in such assets. Such allocation and
determination of fair market value shall be made by the Board of Directors
taking into account such matters as the Board of Directors and its advisers, if
any, deem relevant, and any such allocation and determination of fair market
value shall be final and binding for all purposes whatsoever.

     The Board of Directors may from time to time reallocate any asset from one
Defined Business Unit to the Company or any other Defined Business Unit of the
Company at fair market value. Such determination of fair market value shall be
made by the Board of Directors taking into account such matters as the Board of
Directors and its advisers, if any, deem relevant, and any such allocation and
determination of fair market value shall be final and binding for all purposes
whatsoever.

     The Company shall not enter into any agreement by which the net patronage
sourced earnings of a Defined Business Unit shall be allocated to any person
except to a person who owns or is deemed to own Units proportionate to the
patronage being so allocated.

ADDITIONAL EQUITY PARTICIPATION UNITS; SALE

     The Board of Directors from time to time may authorize the sale by the
Company of Units deemed owned by the Company for the account of the Company
provided that sales shall be at a price determined by the Board of Directors
taking into account such matters as the Board of Directors and its financial
advisers, if any, deem relevant.

     The Board of Directors may authorize the creation, issuance and sale of
additional Equity Participation Units from time to time on such terms and for
such consideration as it shall deem


                                       24


<PAGE>


appropriate. Any proceeds from the sale of such additional Equity Participation
Units shall be allocated to the applicable Defined Business Unit.

     There are no limitations on the issuance or sale of additional Units in the
governing documents or in any loan agreements or other agreements or instruments
to which the Company is a party.

     Holders of Units shall have no preemptive rights to subscribe for or
purchase additional Units or any other securities issued by a Defined Business
Unit or the Company. The Company intends to provide an opportunity for existing
holders to subscribe for additional Equity Participation Units.

     The Company may, if authorized by the Board of Directors, purchase Units at
such price as it shall determine from time to time for its own account, or for
the account of a Defined Business Unit.

MERGER, CONSOLIDATION OR SALE

     In connection with the merger, consolidation, liquidation or sale of all or
substantially all of the assets of the Company as an entirety or upon the sale
of all or substantially all of the assets of a Defined Business Unit, all, but
not less than all, Units of such Defined Business Unit shall be redeemed by the
Company at their original purchase price, provided that the Preferred Capital
Certificates or unit retains of such Defined Business Unit not previously paid
are also redeemed in connection therewith; that such payments include any
prorata profit (or loss) associated with disposition of the assets of the
Defined Business Unit as though the assets, subject to the liabilities, of the
Defined Business Unit had been sold in connection with such event at their fair
market value; and that provision is made for the allocations of patronage
sourced income arising prior to such transaction. Any determination of fair
market value shall be made by the Board of Directors taking into account such
matters as the Board of Directors and its advisers, if any, deem relevant. A
sale of more than 75% of the assets or earning power will be deemed "all or
substantially all" of the assets of the Company or a Defined Business Unit.

OPERATIONS

     The operations of a Defined Business Unit shall be carried out by the
Company through the Board of Directors, officers and management of the Company.
The capital assets of a Defined Business Unit may be disposed of in the ordinary
course of business and the disposition of any substantial portion of the assets
of a Defined Business Unit as an entirety may be authorized by the Board of
Directors. The Board of Directors may determine to sell the assets and
operations of a Defined Business Unit or to abandon or shut down the operations
of a Defined Business Unit. Abandonment or shutting down the operations of a
Defined Business Unit (other than on a temporary basis) will be considered sale
of all of the assets of the Defined Business Unit and will have the effect
described under "-- Merger, Consolidation or Sale."

AMENDMENT OF BOARD RESOLUTIONS

     The resolutions adopted by the Board of Directors establishing the Wheat
Milling Defined Business Unit and the Oilseed Processing and Refining Defined
Business Unit may be amended from time to time by the Board of Directors of the
Company, except for those matters described under "Allocations Relating to
Business Units" and "Merger, Consolidation or Sale," which may be amended only
with the approval of a majority of Defined Members owning Units not held or
deemed held by the Company.

MEMBER MARKETING AGREEMENT

     A Defined Member will be obligated to deliver during each delivery year one
bushel of wheat or soybeans which is of merchantible quality, according to
industry standards, to the Company for each applicable Unit held, subject to
adjustment as described below, at delivery points designated by the Company;
provided, however that, until the Pocono facility commences operation, a Defined
Member contracting to deliver wheat shall only have the right and obligation to
deliver 78% of the contracted bushels. Wheat or soybeans that do not meet
applicable standards may either be rejected or accepted with such discounts as
may be established by the Company or agents. Deliveries may be made at any time
during the Processing Year. Certain Cooperative Association Members have
contracted with the Company to act as an agent for handling required deliveries
(and will receive funds for that service). In addition, the Company has
designated most of its owned and operated elevators as delivery points (approx.
135). The Board of Directors may establish annual "tolerance ranges" allowing a
Defined Member the option to deliver more or less wheat or soybeans in any given
year. Upon transfer of Units,


                                       25


<PAGE>


the remaining obligations under the Agreement must also be assumed by the
transferee of the Units. The Agreement may be terminated by an Individual Member
effective on May 31 of any year upon written notice of termination. In addition,
the Agreement may be terminated following a breach of the Agreement by either
party, upon thirty days' written notice from the party not in breach. The
Agreement may be terminated by the Company upon sale, liquidation, dissolution
or winding up of the applicable Defined Business Unit in accordance with the
Company's Bylaws.

     The Company is obligated to take and pay for deliveries in accordance with
the Agreement. The price to be paid is based on the prevailing price at the
point of delivery agreed to between the Defined Member and the Company or its
agent at the time of sale. The final settlement price must be established prior
to the end of the processing year. In case of fire, explosions, interruption of
power, strikes or other labor disturbances, lack of transportation facilities,
shortage of labor or supplies, floods, action of the elements, riot,
interference of civil or military authorities, enactment of legislation or any
unavoidable casualty or cause beyond the control of the Company affecting the
conduct of the Company's business to the extent of preventing or unreasonably
restricting the receiving, handling, production, marketing or other operations,
the Company shall be excused from performance during the period that the
Company's business or operations are so affected. The Member shall not be liable
for failure or delay in performance of the Agreement to the extent such failure
or delay is caused by a crop failure due to an Act of God, such as drought or
flood.

     The Company will pay to each Defined Member an annual patronage refund
equal to the portion arising from the net savings of the applicable Defined
Business Unit attributable to such Defined Member's patronage of the Defined
Business Unit.

     Each Agreement is subject to amendment upon the approval of the Company and
the majority vote of the voting power of the applicable Defined Business Unit.
As a result, in the event that Members holding the majority of the voting power
of the applicable Defined Business Unit approve an amendment to the Agreement
which has been approved by the Company, those Defined Members who voted against
or oppose the amendment will be bound to performance of the Agreement as
amended.

     Upon the termination of the operations of a Defined Business Unit, the
Marketing Agreement will automatically terminate.

     The Company is authorized to retain a portion of the payments otherwise due
to Defined Members for purchases of products from them. Such retention is
referred to as a "unit retain." The Company has the option to treat any such
unit retains as taxable to the Company or to treat the unit retains as
nontaxable by declaring the unit retains as "qualified." Qualified unit retains
are taxable to the Defined Member in the tax year when the Defined Member
receives notification that a unit retain has been established. When a qualified
unit retain is reimbursed or redeemed, the Defined Member reports no additional
income. Unit retains may be called for payout at the lesser of their stated or
book value at the discretion of the Board of Directors.

TAXATION

     Patronage dividends arising under the Agreements with respect to the Units
will have the same tax treatment as patronage currently payable to members.

TRANSFER OF EQUITY PARTICIPATION UNITS

     Upon any transfer of Units, the transferee will be required to certify as
to eligibility and then current anticipated annual production and to sign an
Agreement. In approving any transfer, the Board of Directors will require that
such certificate show that the number of Units transferred does not exceed
anticipated annual production, that any transferee does not own more than 1% of
the outstanding capacity of any one Defined Business Unit and that the Units
held by each transferor retaining units and transferee represent at least 3,000
bushels of wheat or 1,500 bushels of soybeans.


                                       26


<PAGE>


ITEM 2. PROPERTIES

     The Company owns or leases petroleum, grain handling and processing, and
agronomy related facilities throughout the United States. Below is a summary of
these locations.

PETROLEUM

     Owned or leased facilities brought into the Company from the Cenex merger
include the following:


<TABLE>
<S>                                 <C>
Refinery                            Laurel, Montana
Propane Plants                      38 locations in Iowa, Idaho, Minnesota, North Dakota, Oregon,
                                         South Dakota, Wisconsin, and Wyoming
Propane Terminals                   3 locations in Minnesota, North Dakota and Wisconsin
Transportation Terminals/
 Repair Facilities                  12 locations in Iowa, Minnesota, Montana, North Dakota,
                                         South Dakota, Washington and Wisconsin, 2 of
                                         which are leased
Petroleum & Asphalt
 Terminals/Storage Facilities       19 locations in Iowa, Kansas,
                                         Minnesota, Montana, North Dakota, Oregon,
                                         Washington and Wisconsin, 5 of which are
                                         leased
Pump Stations                       18 locations in Montana and North Dakota
Pipelines                           8 locations in Montana and North Dakota
Convenience Stores/Gas Stations     43 locations in Iowa, Minnesota, Montana, Nebraska,
                                         South Dakota, Wisconsin and Wyoming
Lube Plants/Warehouses              4 locations in Minnesota and Ohio
</TABLE>

     A 74.5% interest in the following facilities was also brought into the
Company from the Cenex merger:


<TABLE>
<S>                             <C>
Refinery                        McPherson, Kansas
Petroleum Terminals/Storage     14 locations in Iowa, Kansas, Nebraska, Oklahoma and Texas
Pipeline                        McPherson, Kansas to Council Bluffs, Iowa
Jayhawk Pipeline                Throughout Kansas, with branches in Oklahoma and Texas
Jayhawk Stations                40 locations located in Kansas and Oklahoma
</TABLE>

GRAIN MERCHANDISING

     The Company owns or leases grain terminals at the following locations:



                      Davenport, Iowa I(1)       
                      Davenport, Iowa II(2) 
                      Kalama, Washington(2) 
                      Kansas City, Missouri I(2) 
                      Kansas City, Missouri II(2) 
                      Kennewick, Washington(1) 
                      Myrtle Grove, Louisiana(1) 
                      Petersburg, North Dakota(2) 
                      St. Paul, Minnesota(2) 
                      Savage, Minnesota(1) 
                      Spokane, Washington(1) 
                      Superior, Wisconsin(1) 
                      Winona, Minnesota(1)


------------------
(1) Owned
(2) Leased

OILSEED PROCESSING AND REFINING

     The Oilseed Processing and Refining Defined Business Unit owns one facility
in Mankato, Minnesota, comprised of a crushing plant, a refinery, a soyflour
plant, and a quality control laboratory.


                                       27


<PAGE>


WHEAT MILLING

     The Wheat Milling Defined Business Unit owns or leases flour milling
facilities at the following locations:


                Rush City, MN(1) ................   10,000 cwts/day
                Huron, OH(2) ....................   14,500 cwts/day
                Kenosha, WI(1) ..................   21,000 cwts/day
                Houston, TX(1) ..................   13,000 cwts/day

------------------
(1) Owned
(2) Owned equipment, leased land and facilities

AGRI SERVICES CENTERS

     The Company owned 160 Agri Service Centers (of which some of the facilities
are on leased land) located in Minnesota, North Dakota, South Dakota and
Montana, as of May 31, 1998.

     As a result of the June 1, 1998 merger with Cenex, the Company added 92
additional Agri Service Centers located in Minnesota, North Dakota, South
Dakota, Montana, Washington, Oregon, Idaho, Iowa, and Colorado.

FEED

     The Company owns the following feed manufacturing facilities:

                  Dickinson, North Dakota  
                  Edgeley, North Dakota
                  Gettysburg, South Dakota
                  Great Falls, Montana
                  Hardin, Montana
                  Minot, North Dakota
                  Norfolk, Nebraska
                  Sioux Falls, South Dakota
                  Snohomish, Washington
                  Willmar, Minnesota

ITEM 3. LEGAL PROCEEDINGS

     The Company is a party to various lawsuits and administrative proceedings
incidental to its business. It is impossible at this time, to estimate what the
ultimate legal and financial liability of the Company will be; nevertheless,
management believes, based on the information available to date and the
resolution of prior proceedings, that the ultimate liability of all litigation
and proceedings will not have a material impact on the financial statements of
the Company taken as a whole.


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

     On or about February 3, 1998 the Company submitted to its members a vote by
mail ballot on the merger with Cenex, Inc. The members voted in favor. On or
about February 27, 1998, the Company submitted to its Defined Members a vote by
mail ballot to (i) amend Section 13 of the resolutions creating the Defined
Business Units to delete the requirement that Equity Participation Units be
redeemed in connection with the unification of Harvest States Cooperatives and
Cenex, Inc.; and (ii) amend the Member Marketing Agreement to: (a) change
"Harvest States Cooperatives" to "Cenex Harvest States Cooperatives"; (b) change
the Processing Year to match the fiscal year of Cenex Harvest States
Cooperatives; and (c) allow Members the option to either deliver a pro-rata
share of their bushels during any short fiscal year or roll said pro-rata share
of bushels to the next full fiscal year. The Defined Members voted in favor of
the amendments.


                                       28


<PAGE>


                                   PART II.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
       AND RELATED STOCKHOLDER MATTERS

     No equity securities were sold by the Registrant during the year ended May
31, 1998, that were not registered under the Securities Act of 1933, as amended.

ITEM 6. SELECTED FINANCIAL DATA


                             CONSOLIDATED COMPANY

     The selected financial information below has been derived from the
Company's consolidated financial statements for the years ended May 31, 1998,
1997, 1996, 1995 and 1994. The selected consolidated financial information
should be read in conjunction with the Company's consolidated financial
statements and notes thereto included elsewhere in this filing.


                      SUMMARY CONSOLIDATED FINANCIAL DATA


<TABLE>
<CAPTION>
                                                                              YEARS ENDED MAY 31,               
                                           --------------------------------------------------------------------------------------
                                                  1998              1997             1996              1995              1994    
                                           ----------------- ------------------ --------------- ----------------- ---------------
<S>                                        <C>               <C>              <C>               <C>               <C>            
Income Statement Data:                                                                                                           
Revenues                                                                                                                         
 Sales:                                                                                                                          
   Grain .................................  $4,629,552,643    $6,036,502,624   $7,127,223,407    $4,191,665,535    $3,086,531,429
   Processed grain .......................     615,048,982       730,101,124      819,863,541       708,219,307       593,116,553
   Feed and farm supplies ................     262,792,836       258,235,512      207,252,696       156,699,068       165,925,459
                                            --------------    --------------   --------------    --------------    --------------
                                             5,507,394,461     7,024,839,260    8,154,339,644     5,056,583,910     3,845,573,441
   Patronage dividends ...................      15,534,215        15,947,049       13,278,997         6,512,481         6,609,602
   Other revenues ........................      84,520,889        68,627,552       68,339,523        57,556,984        45,895,922
                                            --------------    --------------   --------------    --------------    --------------
                                             5,607,449,565     7,109,413,861    8,235,958,164     5,120,653,375     3,898,078,965
Costs and expenses:                                                                                                              
   Cost of goods sold ....................   5,464,036,841     6,967,937,476    8,076,073,326     4,981,820,272     3,786,336,764
   Marketing, general, and                                                                                                       
      administrative .....................      62,311,965        63,341,552       70,054,248        69,509,491        60,847,099
   Interest ..............................      17,442,718        19,378,833       31,921,936        19,268,575        10,250,765
                                            --------------    --------------   --------------    --------------    --------------
                                             5,543,791,524     7,050,657,861    8,178,049,510     5,070,598,338     3,857,434,628
                                            --------------    --------------   --------------    --------------    --------------
Earnings before income taxes .............      63,658,041        58,756,000       57,908,654        50,055,037        40,644,337
Income taxes .............................       6,400,000         6,200,000        6,900,000         5,100,000         5,500,000
                                            --------------    --------------   --------------    --------------    --------------
Net earnings .............................  $   57,258,041    $   52,556,000   $   51,008,654    $   44,955,037    $   35,144,337
                                            ==============    ==============   ==============    ==============    ==============


                                                                                   MAY 31,              
                                           --------------------------------------------------------------------------------------
                                                 1998              1997             1996              1995              1994     
                                           ---------------   ---------------  ---------------   ---------------   ---------------
Balance Sheet Data (at end of period):                                                                                           
 Working capital .........................  $  102,454,578    $  111,811,047   $   95,874,938    $   66,904,085    $   69,409,621
 Net property, plant and equipment .......     254,475,188       224,150,965      232,145,401       205,837,690       156,311,551
 Total assets ............................     945,703,463       976,705,753    1,228,772,684       924,533,569       734,655,223
 Long-term debt, including current                                                                                               
    maturities ...........................     140,610,625       134,458,466      132,629,176        84,816,525        39,135,097
 Total equity ............................     414,003,905       385,099,313      337,252,119       299,487,893       270,761,017

</TABLE>


                                       29


<PAGE>


             OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT

     The selected financial information presented below has been derived from
the Oilseed Processing and Refining Defined Business Unit's financial statements
for the years ended May 31, 1998, 1997, 1996, 1995 and 1994. The selected
financial information should be read in conjunction with the Defined Business
Unit's financial statements and notes thereto included elsewhere in
this filing.


<TABLE>
<CAPTION>
                                                                              YEARS ENDED MAY 31,
                                                -------------------------------------------------------------------------------
                                                     1998            1997            1996            1995            1994
                                                 ------------    ------------    ------------    ------------    ------------
<S>                                             <C>             <C>             <C>             <C>             <C>
Revenues:
 Processed oilseed sales ......................  $410,385,807    $441,737,923    $399,271,001    $398,095,108    $358,372,039
 Other revenues and costs .....................     1,745,743      (1,659,881)      1,435,708       1,162,518       1,349,484
                                                 ------------    ------------    ------------    ------------    ------------
                                                  412,131,550     440,078,042     400,706,709     399,257,626     359,721,523
Costs and expenses
 Cost of goods sold: ..........................   379,271,678     405,791,384     371,424,566     366,407,451     334,968,474
 Marketing and administrative .................     4,729,820       4,341,904       4,544,763       5,137,663       4,722,900
 Interest .....................................       380,030         321,700         151,500              --         164,300
                                                 ------------    ------------    ------------    ------------    ------------
                                                  384,381,528     410,454,988     376,120,829     371,545,114     339,855,674
                                                 ------------    ------------    ------------    ------------    ------------
Earnings before income taxes ..................    27,750,022      29,623,054      24,585,880      27,712,512      19,865,849
Income taxes ..................................     1,825,000       2,100,000       1,600,000       1,500,000       1,650,000
                                                 ------------    ------------    ------------    ------------    ------------
Net earnings ..................................  $ 25,925,022    $ 27,523,054    $ 22,985,880    $ 26,212,512    $ 18,215,849
                                                 ============    ============    ============    ============    ============
Operating Data:
 Quantities processed
   Soybeans (bu.) .............................    32,625,799      32,231,520      30,446,475      30,807,933      24,136,364
   Crude oil (lb.) ............................   953,359,351     960,406,920     920,492,402     894,970,248     860,221,089
 Production
   Meal (tons) ................................       754,168         741,922         728,435         741,190         588,873
   Flour (tons) ...............................        32,451          35,714          39,914          40,614          31,614
   Refined oil (lbs.) .........................   948,796,640     957,398,000     858,240,000     835,396,000     799,908,000


                                                     1998            1997            1996            1995            1994
                                                 ------------    ------------    ------------    ------------    ------------
Balance Sheet Data (at end of period):
 Working capital ..............................  $ 23,110,970    $ 20,305,438    $ 28,619,585    $ 32,980,590    $ 33,813,064
 Net property, plant and equipment..............   34,952,626      33,085,560      24,771,413      20,410,408      19,577,934
 Total assets .................................    91,481,942      92,416,098      74,112,937      63,672,994      74,191,110
 Long-term debt, including current
  maturities ..................................            --              --              --              --              --
 Total equity .................................    58,063,596      53,390,998      53,390,998      53,390,998      53,390,998
Other Data(1):
 Pretax earnings ..............................  $ 27,750,022    $ 29,623,054    $ 24,585,880    $ 27,712,512    $ 19,865,849
 Earnings from purchased oil ..................    (3,265,480)     (7,014,758)     (3,557,406)     (4,680,813)     (4,511,979)
 Non-patronage joint venture income ...........      (737,836)       (614,967)     (1,353,708)       (990,191)     (1,300,427)
 Book to tax differences ......................      (383,719)      2,209,575         (71,485)        393,608         135,170
                                                 ------------    ------------    ------------    ------------    ------------
Tax basis soybean earnings ....................  $ 23,362,987    $ 24,202,904    $ 19,603,281    $ 22,435,116    $ 14,188,613
                                                 ============    ============    ============    ============    ============
 Bushels processed ............................    32,625,799      32,231,520      30,466,475      30,807,933      22,630,472
 Earnings per bushel ..........................  $       0.72    $       0.75    $       0.64    $       0.73    $       0.63
</TABLE>

                                                             YEAR ENDED 
                                                            MAY 31, 1998
                                                           -------------
          Equity Participation Units Outstanding .........    1,074,000
          Patronage rate .................................  $      0.72
                                                            -----------
          Earnings to holders ............................  $   769,080
                                                            ===========
-----------------
(1) Because patronage dividends attributable to the Units will be allocated
    based on the number of bushels of soybeans delivered, information on
    earnings per bushel is believed by the Company to be the most relevant
    indicator of performance of the Oilseed Processing and Refining Defined
    Business Unit.


                                       30


<PAGE>


                      WHEAT MILLING DEFINED BUSINESS UNIT


     The selected financial information presented below has been derived from
the Wheat Milling Defined Business Unit's financial statements for the years
ended May 31, 1998, 1997, 1996, 1995 and 1994. The selected financial
information should be read in conjunction with the Defined Business Unit's
financial statements and notes thereto included elsewhere in this filing.


<TABLE>
<CAPTION>
                                                                           YEARS ENDED MAY 31,
                                         ----------------------------------------------------------------------------------------
                                                1998              1997              1996              1995              1994
                                         -----------------  ----------------  ---------------  -----------------  ---------------
<S>                                      <C>                <C>               <C>              <C>                <C>
Revenues:
 Sales ................................    $ 205,281,433       $199,078,687    $173,315,613      $ 119,725,183     $103,716,012
Other revenues and costs ..............        1,820,294
                                           -------------       ------------    ------------      -------------     ------------
                                             207,101,727       199,078,687      173,315,613        119,725,183      103,716,012
Costs and expenses:
 Cost of goods sold ...................      189,614,207       181,565,899      161,293,430        112,690,679       97,206,374
 Marketing and administrative .........        8,071,913         6,749,237        4,471,563          3,834,289        2,415,155
 Interest .............................        3,121,893         5,229,669        4,457,797          2,278,544        1,832,037
 Other ................................          162,283         2,000,000
                                           -------------       ------------    ------------      -------------     ------------
                                             200,970,296       195,544,805      170,222,790        118,803,512      101,453,566
Earnings before income taxes ..........        6,131,431         3,533,882        3,092,823            921,671        2,262,446
Income taxes ..........................          475,000           300,000          200,000            125,000          150,000
                                           -------------       ------------    ------------      -------------     ------------
Net earnings ..........................    $   5,656,431       $ 3,233,882     $  2,892,823      $     796,671     $  2,112,446
                                           =============       ============    ============      =============     ============
Operating Data:
 Wheat used (bu.)
   Durum ..............................       19,306,816        21,372,000       19,376,000         16,058,000       15,763,000
   Spring .............................        8,891,000         6,732,000        3,013,000          1,638,000        1,167,000
Spring ................................        3,164,915
 Shipments (cwt)
   Semolina/flour .....................       10,505,000        11,168,000       10,085,000          8,718,000        8,088,000
   Baking flour .......................        4,270,000         2,599,000          634,000                 --               --
Balance Sheet Data (at end of period):
 Working capital ......................    $  12,787,010      ($ 1,938,733)    $  3,338,206      $   1,604,146     $ (4,703,152)
 Net property and equipment ...........       85,627,365        69,130,520       59,233,046         43,395,670       19,739,029
 Total assets .........................      146,310,885       120,918,192      125,321,564         82,606,055       55,031,562
 Long-term debt, including current
  maturities ..........................       51,209,270        61,214,270       54,000,000         33,750,000       19,000,000
 Total equity .........................       67,957,981        27,797,072       27,797,072         27,797,072       27,797,072
Other Data(1):
 Pretax earnings ......................    $   6,131,431       $ 3,533,882     $  3,092,823      $     921,671     $  2,262,446
 Book to tax differences ..............          689,446         2,375,920          (84,481)           123,844         (135,715)
                                           -------------       ------------    ------------      -------------     ------------
Tax basis earnings ....................    $   6,820,877       $ 5,909,802     $  3,008,342      $   1,045,515     $  2,126,731
                                           =============       ============    ============      =============     ============
Bushels milled ........................       31,362,731        28,103,677       22,390,011         17,696,689       16,930,702
Earnings per bushel ...................    $        0.22       $      0.21     $       0.13      $        0.06     $       0.13
</TABLE>


                                                                YEAR ENDED  
                                                                  MAY 31,
                                                                   1998
                                                              --------------
             Equity Participation Units Outstanding .........    4,787,000
             Patronage rate .................................   $     0.22
                                                                ----------
             Earnings to holders ............................   $1,041,094
                                                                ==========
-----------------
(1) Because patronage dividends attributable to the Units will be allocated
    based on the number of bushels of wheat delivered, information on earnings
    per bushel is believed by the Company to be the most relevant indicator of
    performance of the Wheat Milling Defined Business Unit.


                                       31


<PAGE>


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATION

                             CONSOLIDATED COMPANY

     The Year 2000 issue is the result of computer systems being written using
two digits rather than four to define the applicable year. Computer programs
used by the Company that have date-sensitive software may recognize a date using
"00" for the year 1900 rather than as the year 2000, or vice versa. This could
result in a system failure or miscalculation causing disruption of operations
including an inability to process transactions or engage in similar business
activities. Furthermore, should other companies or entities with whom the
Company has a supplier or customer relationship encounter business disruption
because of the year 2000 issue, the Company in turn could experience disruption
of normal business processes and as a result incur additional costs or loss of
revenue.

     In preparation for the Year 2000, the Company has reviewed the primary
internally-developed software programs used within the divisions and defined
business units comprising the Company before the June 1, 1998 merger with Cenex.
Appropriate changes were made to that software to accommodate the Year 2000. In
addition, the Company has engaged an information technology consulting firm for
the purpose of appraising the Company's Year 2000 readiness, identifying
critical software applications which are not Year 2000 compliant, remediating
such applications, testing corrections to software, developing contingency plans
in the event that all software problems are not corrected by the year 2000, and
assisting with certifications of key supplier's Year 2000 readiness. This Year
2000 plan and action program encompasses all areas of the Company. The Company
will also assess, to the extent practical, embedded technology in its processing
equipment. It is expected that the assessment phase of the project will be
completed by December 31, 1998, and that the remedial portion of the project
will be completed by June 30, 1999. Management believes that the total cost to
the Company to review and correct its own computer systems will not exceed $1
million, of which approximately $100,000 was expended through May 31, 1998.

     Based on its assessment, the Company's management presently believes that
problems related to the Year 2000 computer issue will not have a material effect
on operations and financial results. The Company will, however, incur some risk
related to the Year 2000 issue if other entities not affiliated with the Company
do not appropriately address their own Year 2000 compliance issues. The Company
has not yet evaluated the full impact of the Year 2000 issue if third party
vendors and/or customers do not resolve this issue on a timely basis.
Furthermore, a contingency plan has not been completed as of this time, and will
be developed after the Company, through its Year 2000 project, identifies the
software applications requiring remediation.

     RESULTS OF OPERATIONS

     COMPARISON OF YEAR ENDED MAY 31, 1998 WITH 1997

     The Company's consolidated net earnings of approximately $57,300,000 for
the year ended May 31, 1998 represents a $4,700,000 (9%) increase from 1997.
This increase is primarily attributable to improved gross margins in 1998
compared to 1997.

     Consolidated net sales of $5,507,000,000 in 1998 decreased $1,518,000,000
(22%). This decrease was due primarily to reduced grain prices in 1998, when the
weighted average of all commodities sold declined 85 cents a bushel compared to
1997. These lower grain prices were reflected as well in the prices of the
processed grain products produced and sold by the Company. In addition, grain
volume declined approximately 135 million bushels in 1998.

     Patronage dividends received of $15,500,000 remained at about the same
level as a year ago.

     Other revenue of $84,500,000 in 1998 increased $15,900,000 (23%). Factors
contributing to this change was the expansion of various country elevator
services in 1998, and losses recognized on certain properties in 1997 in the
amount of approximately $4,000,000.

     Cost of goods sold of $5,464,000,000 decreased $1,504,000,000 (22%) in 1998
compared to 1997. This decrease is primarily attributable to lower grain prices
in 1998, when the weighted average cost of all


                                       32


<PAGE>


commodities was $3.97 per bushel, compared to $4.84 per bushel in 1997. These
comparably low grain prices also had the effect of reducing volume sold to the
Company, which declined approximately 135 million bushels in 1998 compared to
1997.

     Marketing and administrative costs of $62,300,000 in 1998 declined
approximately $1,000,000 (2%) compared to the prior year. This decrease is
primarily related to the transfer of the Consumer Products Packaging Division to
a nonconsolidated joint venture at the end of the first quarter of fiscal 1997,
partially offset by increased costs in the Company's growth areas, specifically
country elevator operations and wheat milling.

     Interest expense of $17,400,000 in 1998 decreased approximately $2,000,000
(10%) compared to 1997. This decrease is substantially attributable to the
reduced price and volume of grain described in the discussion on cost of goods
sold, which produced lower average inventory and receivable balances.

     Income tax expense of $6,400,000 and $6,200,000 for 1998 and 1997,
respectively, results in effective tax rates of 10.1% and 10.5%.

     COMPARISON OF YEAR ENDED MAY 31, 1997 WITH 1996

     The Company's consolidated net earnings of approximately $52,600,000 for
the year ended May 31, 1997 represents a $1,600,000 (3%) increase from 1996.
This increase is primarily attributable to improved gross margins and expanded
volume for refined oil products within the Company's Oilseed Processing and
Refining Defined Business Unit.

     Consolidated net sales of $7,025,000,000 in 1997 decreased $1,129,000,000
(14%). This decrease was due primarily to reduced grain volume of 400 million
bushels, from 1.7 billion bushels in 1996 to 1.3 billion bushels in 1997. The
reduced sales volume was partially offset by an increase in grain price as a
weighted average of all commodities sold which was 68 cents per bushel greater
in 1997 compared to 1996.

     Patronage dividends increased $2,600,000 (20%) in 1997 compared to 1996
resulting from higher patronage earnings distributed by cooperative customers
and suppliers.

     Other revenue of $68,600,000 was essentially unchanged in total from 1996,
although there were significant changes in the components of this category.
Service revenues increased $6,800,000 in 1997, primarily because the Myrtle
Grove, LA export terminal was operated as part of the Company's consolidated
operations, whereas a year ago this facility operated as part of a
nonconsolidated joint venture. Expansion of the Company's fertilizer and
chemical application services contributed an additional $5,000,000 over the
prior year. These increases in revenue were offset by a net change in gains and
losses on disposal of fixed assets of $5,500,000 which includes a reserve for
the impairment of value of the Rush City, MN mill of $2,000,000, a decline of
$2,100,000 in interest income and net decreases in several other revenue
categories of $4,500,000.

     Cost of goods sold of $6,968,000,000 decreased $1,108,000,000 (14%) in
1997. This decrease is primarily attributable to the decline in bushel volume of
approximately 400 million bushels, partially offset by an increase in the
weighted average cost of commodities from $4.16 per bushel in 1996 to $4.84 per
bushel in 1997.

     Marketing and administrative costs of $63,300,000 declined $6,800,000 (10%)
in 1997. The primary cause for this decrease is the elimination of such costs
related to the Consumer Products and Packaging Division of the Company which was
transferred to a nonconsolidated joint venture on August 30, 1996. This
transaction reduced such costs $9,000,000 in 1997.

     Interest expense of $19,400,000 decreased $12,500,000 (39%) in 1997.
$14,600,000 of this decrease is substantially attributable to the grain volume,
grain price situation described in the discussion on cost of goods sold, which
produced lower inventory and receivable levels. This short-term interest
reduction was partially offset in the amount of $2,100,000 of additional
long-term interest expense, incurred primarily to finance property, plant and
equipment.

     Income tax expense of $6,200,000 and $6,900,000 for 1997 and 1996,
respectively, results in effective tax rates of 10.5% and 11.9%. This decrease
in the effective tax rate is primarily attributable to an increase in patronage
earnings as a percentage of total pretax earnings.


                                       33


<PAGE>


     LIQUIDITY AND CAPITAL RESOURCES

     CASH FLOWS FROM OPERATIONS

     Operating activities of the Company provided net cash of $103,700,000 and
$271,600,000 for the years ended May 31, 1998 and 1997, respectively, and used
net cash of $105,700,000 for that same period ended in 1996. Net cash provided
and used by operations is primarily attributable to changes in working capital
requirements with such balances decreasing $48,500,000 in 1998 and $216,600,000
in 1997, thereby contributing cash, and increasing $154,200,000 in 1996, thereby
using cash.


     CASH FLOWS FROM INVESTING

     For the years ended May 31, 1998, 1997, and 1996, the net cash flows used
in the Company's investing activities totaled $29,300,000, $19,800,000 and
$37,600,000, respectively. The acquisition of property, plant and equipment
comprised the primary use of cash in each of the three years, totaling
$52,300,000, $42,400,000 and $40,500,000, in 1998, 1997 and 1996, respectively.
Capital expenditures for fiscal year 1999, including those for the former Cenex
divisions, are expected to be approximately $185,000,000.

     During the year ended May 31, 1998, the Company expended $2,500,000 for
convertible preferred stock of Sparta Foods, Inc., a tortilla manufacturing firm
based in the Minneapolis-St. Paul area. This investment represents an 18%
ownership interest in the company.

     These uses of cash were partially offset by proceeds from the disposition
of property, plant and equipment totaling $12,800,000, $1,800,000 and $3,700,000
in 1998, 1997 and 1996, respectively. $10,300,000 of the 1998 total represents
proceeds from the sale and leaseback of certain manufacturing equipment with the
Oilseed Processing and Refining Defined Business Unit.

     Also partially offsetting cash usage were proceeds received from joint
ventures and investments held in other cooperatives totaling $14,900,000,
$20,600,000 and $1,800,000 in 1998, 1997 and 1996, respectively.

     On August 30, 1996 the Company formed a joint venture with a regional
consumer products packaging company, and contributed substantially all of the
net assets of the Consumer Products Packaging Division then owned by the Company
as its capital investment in the joint venture. In return for these assets, the
Company received a 40% interest in the joint venture and the joint venture
assumed debt of approximately $33,700,000.

     CASH FLOWS FROM FINANCING

     The Company finances its working capital needs through short-term lines of
credit with the banks for cooperatives and commercial banks. On May 31, 1998 the
Company had short-term lines of credit totaling $525,000,000, all of which was
committed, and $37,000,000 outstanding.

     For the years ended May 31, 1998 and 1997, the Company decreased its
outstanding seasonal borrowings by $61,000,000 and $226,000,00, respectively,
while for the year ended May 31, 1996, the outstanding seasonal borrowing
balance increased $124,000,000. This short-term borrowing activity follows the
working capital requirements created by grain volumes and prices as discussed in
the "Cash flows from Operations" section of this analysis.

     In response to anticipated borrowing requirements after the merger with
Cenex, the Company entered into a new short-term loan agreement with the banks
for cooperatives and the commercial banks whereby the Company was extended a
364-day revolving credit facility of $400,000,000 and a five-year revolving
facility totaling $200,000,000, all of which is committed.

     The Company has in the past financed its long-term capital needs, primarily
for the acquisition of property, plant, and equipment, with long-term agreements
through the banks for cooperatives. Total indebtedness of those agreements on
May 31, 1998 and 1997 was approximately $136,000,000 and $125,000,000,
respectively. The Company also had long-term debt in the form of capital leases,
industrial development revenue bonds and miscellaneous notes payable totaling
$4,600,000 and $9,500,000 in 1998 and 1997, respectively.


                                       34


<PAGE>


     The Company borrowed on a long-term basis $25,000,000, $18,800,000 and
$58,000,000, and repaid long-term debt in the amounts of $19,400,000,
$17,400,000 and $11,300,000 in 1998, 1997 and 1996 respectively.

     In June 1998, the Company established a new long-term loan agreement
through the banks for cooperatives whereby the term loan balance outstanding on
May 31, 1998 was paid to the banks, and partially refinanced through the new
agreement. The new long-term loan agreement commits $200,000,000 of long-term
borrowing capacity to the Company, with repayments through the year 2009. The
outstanding balance on this facility after the refinancing was $134,000,000 with
$66,000,000 remaining available.

     Also in June 1998, as part of the refinancing program for the merged
operations, the Company issued a private placement with several insurance
companies for long-term debt in the amount of $225,000,000, with final payment
due in the year 2013.

     The Company anticipates further short-term financing needs to fund
increases in the volume of grain handled and further long-term needs to fund
acquisitions of facilities and for the expansion and development of existing
businesses. Management believes such needs can be financed with a combination of
debt and equity.

     In accordance with the bylaws and action of the Board of Directors, annual
net earnings from patronage sources were distributed to consenting patrons
following the close of each fiscal year and were based on amounts reportable for
federal income tax purposes as adjusted in accordance with the bylaws. The cash
portion of this distribution, deemed by the Board of Directors to be 30% of such
earnings for fiscal years 1997, 1996 and 1995 distributed in 1998, 1997 and
1996, respectively, totaled $13,400,000, $13,200,000 and $11,000,000.

     Cash patronage for fiscal year 1998, deemed by the Board of Directors to be
80% for Equity Participation Units and 30% for regular patronage earnings, to be
distributed in fiscal year 1999, is expected to be approximately $15,300,000 and
is classified as a current liability on the May 31, 1998 balance sheet.

     For years ended May 31, 1998, 1997 and 1996, the Company redeemed in cash
patronage certificates held by patrons who were 72 years of age and those held
by estates of deceased patrons, in accordance with authorization from the Board
of Directors, in the amounts of $10,100,000, $8,200,000 and $6,600,000,
respectively.

     Beginning June 1, 1998, inactive direct members and patrons and active
direct members and patrons age 61 and older on that date will continue to be
eligible for patronage certificate redemption at age 72 or death. For active
direct members and patrons who were age 60 or younger on June 1, 1998, and
member cooperatives, equities will be redeemed annually based on a prorata
formula where the numerator is dollars available for such purpose as determined
by the Board of Directors, and the denominator is the sum of the patronage
certificates held by such eligible members and patrons. Such redemptions related
to fiscal year 1998, to be distributed in fiscal year 1999, are expected to be
approximately $13,300,000 and are classified as a current liability on the May
31, 1998 balance sheet.

     During the year ended May 31, 1997, the Company offered securities in the
form of Equity Participation Units in its Wheat Milling and Oilseed Processing
and Refining Defined Business Units. These Equity Participation Units give the
holder the right and obligation to deliver to the Company a stated number of
bushels in return for a prorata share of the undiluted grain based patronage
earnings of these respective Defined Business Units. The offering resulted in
the issuance of such equity with a stated value of $13,870,000 and generated
additional capital and cash of $10,837,000, after issuance cost and conversion
privileges. Conversion privileges allowed a member to elect to use outstanding
patrons' equities for the payment of up to one-sixth the purchase price of the
Equity Participation Units.

     Holders of the Units will not be entitled to payment of dividends by virtue
of holding such Units. However, holders of the Units will be entitled to receive
patronage refunds attributable to the patronage sourced income from operations
of the applicable Defined Business Unit on the basis of wheat or soybeans
delivered pursuant to the Member Marketing Agreement. The Board of Directors'
goal is to distribute patronage refunds attributable to the Units in the form of
75% cash and 25% Patrons'


                                       35


<PAGE>


Equities, and to retire those Patron Equities on a revolving basis seven years
after declaration. However, the decision as to the percentage of cash patronage
will be made each fiscal year by the Board of Directors and will depend upon the
cash and capital needs of the respective Defined Business Units and is subject
to the discretion of the Board of Directors. The redemption policy will also be
subject to change at the discretion of the Board of Directors.


             OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT

     In May, 1998 the Company announced that it had entered into discussions
with Ag Processing, Inc., an oilseed processing and grain marketing cooperative
headquartered in Omaha, Nebraska for the purposes of exploring the potential for
an oilseed processing and refining joint venture of all or some of the
respective companies' oilseed processing and refining facilities. There is no
assurance that any form of joint venture will take place.

     RESULTS OF OPERATIONS

     Certain operating information pertaining to the Oilseed Processing and
Refining Defined Business Unit is set forth below, as a percentage of sales,
except processing margins.


<TABLE>
<CAPTION>
                                                              YEARS ENDED MAY 31,
                                         --------------------------------------------------------------
                                            1998         1997         1996         1995         1994
                                         ----------   ----------   ----------   ----------   ----------
<S>                                      <C>          <C>          <C>          <C>          <C>
Gross margin percentage ..............       7.58%        7.76%        7.33%        8.25%        6.91%
Marketing and administrative .........       1.15%         .98%        1.14%        1.29%        1.32%
Interest .............................        .09%         .07%        0.04%          --         0.05%
Processing margins
 Crushing/bu .........................    $ .57        $ .59        $ .60        $ .59        $ .50
 Refining/lb .........................    $ .0173      $ .0173      $ .0154      $ .0149      $ .0132
</TABLE>

     Because of the volatility of commodity prices, the Company believes that
processing margins are a better measure of the Defined Business Unit's
performance than gross margin percentages.


     COMPARISON OF YEAR ENDED MAY 31, 1998 WITH 1997

     The Oilseed Processing and Refining Defined Business Unit's net earnings of
$25,900,000 for the year ended May 31, 1998 represents a $1,600,000 decrease
(6%) compared to the same period in 1997. This decrease is primarily
attributable to reduced gross margins for soymeal and lower demand for refined
soyoil, which reduced the Defined Business Units sales volume for refined oil.
Net gains on the disposal of fixed assets of about $650,000 partially offset the
decline in gross margins.

     Net sales of $410,400,000 for the year ended May 31, 1998 decreased by
$31,300,000 (7%) compared to the same period in 1997. A reduced average sales
price for processed soybean products of $201.93 per ton in 1998 compared to
$241.59 per ton in 1997 was the primary contributor to the reduction in sales
dollars.

     Other revenues of $1,700,000 for the year ended May 31, 1998 compared to
1997, increased $3,400,000. During the year ended May 31, 1997 the Defined
Business Unit recognized a loss of $2,000,000 on equipment to be replaced by
plant expansion and recognized a loss of $250,000 on an investment. During the
current year, the Defined Business Unit recognized gains on fixed asset
disposals of approximately $650,000.

     Cost of goods sold for the year ended May 31, 1998 of $379,300,000
decreased $26,500,000 (7%) compared to the year ended May 31, 1997. This
reduction in cost is primarily attributable to a decline in the average price of
soybeans during the year ended May 31, 1998, from $7.50 a bushel in 1997 to
$6.80 during the current year, and to a reduction in refined oil volume, from
968 million pounds in 1997 to 953 million pounds in 1998.

     Interest expense for the year ended May 31, 1998 was $380,000, compared
with $322,000 a year ago.

     Income tax expense of $1,825,000 and $2,100,000 for the years ended May 31,
1998 and 1997 respectively, results in effective tax rates of 6.6% and 7.1%.


                                       36


<PAGE>


     COMPARISON OF YEAR ENDED MAY 31, 1997 WITH 1996

     The Oilseed Processing and Refining Defined Business Unit's net earnings of
$27,500,000 for the year ended May 31, 1997 represents a $4,500,000 decrease
(20%) compared to the same period in 1996. This increase is primarily
attributable to improved gross margins for oil products due to increased demand.

     Net sales of $441,700,000 for the year ended May 31, 1997 increased by
$42,400,000 (11%) compared to the same period in 1996. Volume increases in
processed soybean products, primarily soymeal and soyflour, contributed
$8,300,000 to sales and increased volumes of refined oil contributed
$11,100,000. Increased sales prices for soymeal and soyflour contributed
$44,900,000, offset by a decline in the sales prices for refined oil which
reduced total sales by $21,900,000.

     Other revenues declined $3,100,000 for the year ended May 31, 1997 compared
to 1996, primarily because of a loss of $2,000,000 on equipment to be replaced
as part of plant expansion and renovation during the summer of 1997, a writedown
of an investment of $250,000 and a reduction of income from an oilseed joint
venture of about $800,000.

     Cost of goods sold for the year ended May 31, 1997 of $405,800,000
increased $34,400,000 (9%) compared to the year ended May 31, 1996. This
increase is primarily attributable to higher prices for soybeans partially
offset by a price decrease in purchased crude oil, and a reduction in plant
operating expenses of $1,700,000.

     Marketing and administrative expenses declined $200,000 (4%) for the year
ended May 31, 1997 compared to 1996.

     Interest expense increased approximately $170,000 (113%) for the year ended
May 31, 1997 compared to 1996. This increase is attributable primarily to
increased cost of soybeans compared to 1996, and the capital expenditures of
1997.

     Income tax expense of $2,100,000 and $1,600,000 for the years ended 1997
and 1996, respectively, results in effective tax rates of 7.1% and 6.5%. This
increase in the effective tax rate is the result of a higher percentage of
nonpatronage income for the Defined Business Unit in 1997.

     LIQUIDITY AND CAPITAL RESOURCES

     The Oilseed Processing and Refining Defined Business Unit's cash
requirements result from capital improvements and from a need to finance
additional inventories and receivables based on increased raw material costs or
levels. These cash needs are expected to be fulfilled by the Company.

     CASH FLOWS FROM OPERATIONS

     Operating activities for the years ended May 31, 1998, 1997 and 1996
provided cash of $27,200,000, $23,600,000, and $14,400,000, respectively. Net
earnings of $25,900,000, $27,500,000 and $23,000,000 in 1998, 1997 and 1996, and
noncash revenues and expenses of $1,400,000, $3,800,000, and $1,600,000 during
each of those years, were partially offset by increased working requirements of
$100,000, $7,800,000, and $10,200,000, respectively.

     CASH FLOWS USED FOR INVESTING

     Net cash flows used in the Oilseed Processing and Refining Defined Business
Unit's investing activities for the years ended May 31, 1998, 1997 and 1996 were
$3,200,000, $12,100,000, and $6,000,000, respectively.

     During the year ended on May 31, 1998, the Defined Business Unit expended
$14,000,000 for the acquisition of property, plant and equipment and received
$10,700,000 for the sale of such assets. $10,300,000 of these proceeds were part
of a transaction whereby the Defined Business Unit entered into a sale and
operating leaseback arrangement of certain equipment purchased and installed
during fiscal 1998 and 1997.

     All net cash used for investing activities during the years ended May 31,
1997 and 1996 were for the acquisition of property, plant and equipment.


                                       37


<PAGE>


     CASH FLOWS FROM FINANCING ACTIVITIES

     The Defined Business Unit's financing activities are coordinated through
the Company's cash management department. Cash from all of the Company's
operations is deposited with the Company's cash management department and
disbursements are made centrally. As a result, the Defined Business Unit has a
zero cash position. Financing is available from the Company to the extent of the
Company's working capital position and corporate loan agreements with various
banks, and cash requirements of all other Company operations.

     Working capital requirements for a Defined Business Unit are reviewed on a
periodic basis, and could potentially be restricted based upon management's
evaluation of the prevailing business conditions and availability of funds.

     With respect to current year earnings, the total income from the Defined
Business Unit will be withdrawn by the Company from the Defined Business Unit
except to the extent that patronage dividends are not paid in cash and are
retained in the Business Unit as equity. Such dividends retained as equity from
Equity Participation Unit share of earnings total $153,816 and will be matched
with equity on behalf of the Company's open membership in proportion to
non-Equity Participation Unit bushel milled totalling $4,518,782.

     In July 1998 the Company announced its site selection for the construction
of a new soybean processing and refining plant in southwestern Minnesota. The
facility, to be constructed in the city of Fairmont, Minnesota, is expected to
cost between $60 million and $90 million. The precise configuration and size of
the crushing plant and oil refinery has yet to be determined.

     Debt outstanding and payable to the Company as of May 31, 1998 and 1997 was
$22,900,000 and $25,600,000, respectively. These interest bearing balances
reflect working capital and fixed asset financing requirements at the end of the
respective years.


                      WHEAT MILLING DEFINED BUSINESS UNIT

     Mr. Garry A. Pistoria, the current group vice president responsible for the
operations of the Wheat Milling Defined Business Unit, has announced his
intention to retire as of December 31, 1998. Mr. James Tibbetts, currently group
vice president responsible for the Oilseed Processing and Refining Defined
Business Unit, will assume responsibility for the Wheat Milling Defined Business
Unit as part of his current responsibilities for the newly created Foods Group.

     RESULTS OF OPERATIONS

     Certain operating information pertaining to the Defined Business Unit is
set forth below, as a percentage of sales, except for margins/cwt.


<TABLE>
<CAPTION>
                                                              YEARS ENDED MAY 31,
                                         --------------------------------------------------------------
                                            1998         1997         1996         1995         1994
                                         ----------   ----------   ----------   ----------   ----------
<S>                                      <C>          <C>          <C>          <C>          <C>
Gross margin percentage ..............       7.63%        8.80%        6.94%        5.88%        6.28%
Marketing and administrative .........       3.93%        3.39%        2.58%        3.20%        2.33%
Interest .............................       1.52%        2.63%        2.57%        1.90%        1.80%
Margins/cwt ..........................     $ 1.06       $ 1.27       $ 1.12       $  .81       $  .80
</TABLE>

     Because of the volatility of commodity prices, the Company believes that
margins per hundred weight (manufacturing margins) are a better measure of the
Defined Business Unit's performance than gross margin percentages.


     COMPARISON OF YEAR ENDED MAY 31, 1998 WITH 1997

     The Defined Business Unit's net earnings of $5,600,000 for the year ended
May 31, 1998 increased $2,400,000 (75%) compared to the same period in 1997. For
the year ended May 31, 1997, the Defined Business Unit recognized a $2,000,000
loss on the impairment of fixed asset value at its Rush City, Minnesota mill.
This 1997 loss represents the primary difference in net earnings between the two
fiscal years.


                                       38


<PAGE>


     Net sales for the year ended May 31, 1998 of $205,300,000 increased
$6,200,000 (3%) compared to the same period ended in 1997. Increased sales
volumes during the current twelve-month period contributed $19,400,000 to sales,
while lower average sales prices during this same period reduced sales revenue
by approximately $13,200,000. The increased sales volume was generated through
expanded Kenosha operations, the commencement of operations at the Houston,
Texas mill during fiscal 1998, partially offset by reduced production at the
Rush City, Minnesota mill.

     The Defined Business Unit recognized other income during the year ended May
31, 1998 of $1,820,000. $1,450,000 of this amount represents warranty proceeds
for milling equipment. Interest income of approximately $370,000 was generated
during the year ended May 31, 1998 on the Defined Business Unit's working
capital account with Harvest States. This interest income is primarily the
result of additional capital of $38,800,000 contributed by Harvest States on
June 1, 1997 for the purpose of constructing the mill at Mt. Pocono,
Pennsylvania. Construction at Mt. Pocono commenced in early September 1997, and
as disbursements have made for that purpose, interest-generating funds have been
depleted.

     Cost of goods sold of $189,600,000 for the year ended May 31, 1998,
increased $8,000,000 (4%) compared to the same period ended in 1997. The raw
material component of cost of goods sold increased approximately $5,700,000 in
1998. The Defined Business Unit milled approximately 31.4 million bushels during
the year ended May 31, 1998, an increase of approximately 3.2 million bushels
over the prior year. The cost of this additional volume was partially offset by
a decline of 42 cent a bushel in the average cost of raw material. The mill
expense component of cost of goods sold increased approximately $2,3000,000
during the year ended May 31, 1998 compared to the prior year. This increase is
primarily attributable to the commencement of operations in June at the mill in
Houston, Texas, partially offset by reduced variable costs at the Rush City,
Minnesota mill. As a start-up operation during fiscal 1998, the Houston mill ran
at approximately 50% of capacity, which generated inadequate revenue to cover
costs for that location. The Rush City mill, which was closed throughout the
month of June and early July of calendar year 1997, operated at approximately
two-thirds of its 1997 fiscal year production level.

     Marketing and administrative expenses were $8,100,000 during the year ended
May 31, 1998, an increase of $1,400,000 (21%) from 1997. This increase is
primarily attributable to additional staffing and system expansion costs related
to the Houston mill, and in anticipation of future volumes from the Mt.
Pocono mill.

     The Defined Business Unit incurred interest expense of $3,100,000 and
$5,200,000 during the years ended May 31, 1998 and 1997, respectively. This
decrease of approximately $2,100,000 (40%) during the current twelve-month
period is primarily the result of the additional capital contributed by Harvest
States on June 1, 1997, which decreased short-term borrowing.

     Other expenses were $162,283 and $2,000,000 for the years ended May 31,
1998 and 1997, respectively. During the current year, the Defined Business Unit
recognized a loss on certain equipment; during 1997 the company assessed the
carry value of the Rush City mill relative to expected cash flows and recognized
a loss due to impairment value.

     Income tax expenses of $475,000 and $300,000 for the years ended May 31,
1998 and 1997, respectively, result in effective tax rates of 7.7% and 8.5%.

     COMPARISON OF YEAR ENDED MAY 31, 1997 WITH 1996

     The Defined Business Unit's net earnings of $3,200,000 for the year ended
May 31, 1997 increased $300,000 (10%) over 1996. This increase in net earnings
is attributable primarily to higher volumes of production at improved gross
margins for flour products, offset by a $2,000,000 loss on the impairment of
fixed asset value at the Rush City, Minnesota mill. Because of the uncertainty
of future business volumes and margins to be generated by this mill, management
assessed the carrying value of these assets against projected cash flows and
recognized the resulting loss in conformity with Statement of Financial
Accounting Standards (SFAS) No. 121.

     Net sales for the year ended May 31, 1997 of $199,100,000 increased
$25,800,000 (15%) from 1996. This increase is primarily the result of an
increase in total volume of product sold, partially offset by an overall
reduction in sales price per cwt.


                                       39


<PAGE>


     Cost of goods sold of $181,600,000 increased $20,300,000 (13%) from 1996.
Raw material costs increased $17,500,000 due to a 25% increase in bushels
milled, from 22.4 million bushels in 1996 to 28.1 million bushels in 1997,
partially offset by an average decrease of 74 cents per bushel for durum and
wheat. Plant expenses increased $2,800,000 in 1997, primarily due to a full year
of operations at the Kenosha mill compared to a half year in 1996.

     Marketing and administrative expenses were $6,700,000 in 1997, an increase
of $2,200,000 (49%) from 1996. This increase reflects a full year of activity
for the Kenosha mill while 1996 represented a half year as that mill began
operations in November 1995, as well as some additional staffing and system
expansion costs in anticipation of the future volumes from the Houston mill
which began limited operation in June 1997.

     The Defined Business Unit incurred interest expense of $5,200,000 in 1997
compared to $4,500,000 in 1996. This increase of $700,000 (16%) is primarily
related to the long-term debt used to finance the Kenosha mill.

     LIQUIDITY AND CAPITAL RESOURCES

     The Defined Business Unit's cash requirements result from capital
improvements and from a need to finance additional inventories and receivables
based on increased raw material cost and levels.

     In September 1997, the Defined Business Unit began construction of a mill
at Mount Pocono, Pennsylvania. As committed in the registration statement for
the original equity participation unit offering, this mill is to be financed
with equity from the Company. Anticipated final cost is $41,350,000, of which
approximately $15,000,000 was expended through May 31, 1998. Projected
completion is for the spring of 1999.

     The Cenex Harvest States Board of Directors has authorized the purchase of
land near Orlando, Florida as the site for a new mill. The Board has authorized
between $1,350,000 and $1,755,000 for the cost of the land, depending upon
whether an access road is built. Plans for this mill are subject to due
diligence, routine regulatory review and cost verification. Anticipated cost for
this mill is approximately $35,000,000, and may be financed with debt, open
member equity, additional equity participation units, or a combination of these
financing alternatives.

     CASH FLOWS FROM OPERATIONS

     Operating activities provided net cash of approximately $1,500,000 for the
year ended May 31, 1998. Net earnings of approximately $5,600,000 and noncash
costs and expenses of approximately $4,900,000 were partially offset by
increased working capital requirements of approximately $9,000,000 for the
current year.

     For the year ended May 31, 1997, net earnings of approximately $3,200,000,
noncash costs and expenses of $6,100,000, and decreased working capital
requirements of approximately $10,2000,000 all contributed to net cash provided
by operating activities totaling approximately $19,600,000.

     Increased working capital requirements of about $22,400,000 were partially
offset by net earnings of $2,900,000 and noncash expenses of $3,300,000 to use
net cash of approximately $16,200,000 in operating activities for the year ended
May 31, 1996.

     CASH FLOWS USED FOR INVESTING

     Net cash flows used in the Defined Business Unit's investing activities for
the years ended 1998, 1997 and 1996 were approximately $20,300,000, $15,000,000
and $18,600,000, respectively. All of these amounts were for the acquisition of
property, plant and equipment except for approximately $500,000 in 1996 which
was related to the elimination of a minority interest effective June 1, 1994.

     Capital expenditures for the fifteen months ended September 1999 are
expected to be approximately $32,000,000, which includes $26,000,000 for the
completion of the Mount Pocono mill.

     CASH FLOWS FROM FINANCING ACTIVITIES

     The Defined Business Unit's financing activities are coordinated through
the Company's cash management department. Cash from all of the Company's
operations is deposited with the Company's


                                       40


<PAGE>


cash management department and disbursements are made centrally. As a result,
the Defined Business Unit has a zero cash position. Financing is available from
the Company to the extent of the Company's working capital position and
corporate loan agreements with various banks and cash requirements of all other
Company operations.

     Working capital requirements for a Defined Business Unit of the Company are
reviewed on a periodic basis, and could potentially be restricted based upon
management's evaluation of the prevailing business conditions and the
availability of funds.

     Short-term debt outstanding and payable to the Company as of May 31, 1998
and 1997 was $16,800,000 and $22,400,000, respectively. These interest-bearing
balances reflect working capital and fixed asset financing requirements of the
respective years.

     On May 31, 1998 and 1997, the Defined Business Unit's long-term debt was
$51,200,000 and $61,200,000, respectively. This debt, net of subsequent
repayments, was incurred for the acquisition, expansion and construction of
certain mills within the Defined Business Unit since 1990.

     On June 1, 1997, the Company contributed $38,800,000 in equity to the
Defined Business Unit for the purpose of constructing the Mount Pocono mill.

     With respect to current year earnings, the total income from the Defined
Business Unit will be withdrawn by the Company from the Defined Business Unit
except to the extent that patronage dividends are not paid in cash and are
retained in the Business Unit as equity. Such dividends retained as equity from
Equity Participation Unit share of earnings total $208,219 and will be matched
with equity on behalf of the Company's open membership in proportion to
non-Equity Participation Unit bushel milled totaling $1,152,690.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial statements listed in 14(a)(1) follow the signatures.
Registrant is not required to provide the supplementary financial information
required by Item 302.


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

     As a result of the merger with Cenex, the Company changed accountants on
June 1, 1998. A complete discussion is incorporated by reference to Form 8-K
dated June 10, 1998.


                                   PART III.


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

BOARD OF DIRECTORS

     The table below lists the directors of the Company as of May 31, 1998,
consisting of four members from District One (comprised of the states of
Minnesota, Illinois, Iowa and Wisconsin), four members from District Two
(comprised of the state of North Dakota), two members from District Three
(comprised of the states of South Dakota, Kansas and Nebraska), two members from
District Four (comprised of the states of Montana and Wyoming) and two members
from District Five (comprised of the states of Washington, Oregon, Utah and
Idaho). (In addition to the states referenced above, the Board of Directors has
temporarily assigned the State of Missouri to District One, the States of Texas
and Oklahoma to District Three, and the State of Colorado to District Four.)
Each director had to be an agricultural producer and an active patron of the
Company (either directly or through an Affiliated Association) for a period of
five years at the time of the director's election, had to be less than 68 years
of age at the time of election and could not be an employee of the Company or of
an Affiliated Association. Each director had been an agriculture producer for
the past five years.


                                       41


<PAGE>


                                                     DIRECTOR          
           NAME AND ADDRESS                  AGE     DISTRICT     SINCE
           ------------------------------   -----   ----------   ------

           Steven Burnet                     57         5         1983
           94699 Monkland Lane
           Moro, OR 97039-9705
         
           Steve Carney                      47         4         1988
           P.O. Box 1122
           Scobey, MT 59263-1122
         
           Edward Ellison                    62         1         1978
           401 Hamburg Ave.,
           P.O. Box 8
           Herman, MN 56248-0008

           Sheldon Haaland                   59         1         1984
           RR 2, Box 55
           Hanley Falls, MN 56245-9731
         
           Jerry Hasnedl                     51         1         1995
           RR 1, Box 39
           St. Hilaire, MN 56754
         
           Edward Hereford                   59         5         1983
           1902 Cashup Flat Road
           Thornton, WA 99176-9710
         
           Gerald Kuster                     63         2         1979
           780 First Ave. N.E.
           Reynolds, ND 58275-9742
         
           Leonard Larsen                    62         2         1993
           5128 - 11th Ave. N.
           Granville, ND 58741-9595
         
           Tyrone Moos                       60         3         1991
           HCR 1, Box 1
           Philip, SD 57567-9601
         
           Duane Risan                       62         2         1989
           7452 - 37th Street N.W.
           Parshall, ND 58770-9403
         
           Duane Stenzel                     52         1         1993
           RR 2, Box 173
           Wells, MN 56097
         
           Russell Twedt                     48         4         1993
           P.O. Box 296
           Rudyard, MT 59540-0296
         
           Merlin Van Walleghen              62         3         1993
           24106 - 408th Avenue
           Letcher, SD 57359-6021
         
           William Zarak                     63         2         1983
           3711 124th Ave. S.W.
           South Heart, ND 58655-9767

     STEVEN BURNET. Mr. Burnet has been a director since 1983. He grows dryland
wheat and barley and supports a cow/calf and yearling operation. Mr. Burnet is
a member of the Oregon Wheat Growers League and the Oregon Cattlemen's
Association. He also serves as a director on the Agricultural Co-op Council of
Oregon.

     STEVE CARNEY. Mr. Carney has been a director since 1988 and served as
Secretary Treasurer through May 31, 1998. Mr. Carney operates a spring wheat
and durum farm with his wife and brother. He is a former president


                                       42


<PAGE>


of Farmers Union Grain Company (Peerless) and Farmers Union Grain Terminal of
Daniels County. He is also a member of several local cooperatives.

     EDWARD ELLISON. Mr. Ellison has been a director since 1978. Together with
his sons, he raises wheat, soybeans and corn on his Grant County, Minnesota
farm. Mr. Ellison is on the board of the Minnesota Association for Cooperatives
and an alternate to the Agricultural Cooperative Development International
(ACDI) board of directors. He also serves as a member of the Farmland Insurance
and the Ag Utilization Research Institute (AURI) boards of directors.

     SHELDON HAALAND. Mr. Haaland has been a director since 1984 and served as
Assistant Secretary and Treasurer through May 31, 1998. He and his family farm
550 acres of corn, soybeans and wheat. Mr. Haaland is a member of several
cooperatives and has previously served on the boards of Cottonwood Co-op Oil
Company and Western Transport Co-op and as an advisory board member of the
Southwest State University Co-op Program.

     JERRY HASNEDL. Mr. Hasnedl has been a director since 1995. He farms wheat,
barley, sunflowers, corn, alfalfa and registered seed for MCIA. Mr. Hasnedl is
a member of several cooperatives as well as the Minnesota Crop Improvement
Association and Minnesota Farmers Union. He also is a farmer/dealer for
Northrup King Seeds.

     EDWARD HEREFORD. Mr. Hereford has been a director since 1983 and served as
Second Vice Chairman through May 31, 1998. He and his two sons produce wheat,
barley, peas and lentils on his dryland farm. Mr. Hereford is a director of the
Idaho Co-op Council, a board member of the ACDI and a member of the Thornton
Grange, the Washington Association of Wheat Growers and the Washington
Association of Peas and Lentils Growers.

     GERALD KUSTER. Mr. Kuster has been a director since 1979 and served as
Chairman of the Board through May 31, 1998. He and his sons operate a
3,000-acre farm. Mr. Kuster is President of Agri City Cooperative Services in
Grand Forks, North Dakota, and Central Valley Bean Cooperative in Buxton, North
Dakota. He also serves as president of Reynolds United Cooperative.

     LEONARD LARSEN. Mr. Larsen has been a director since 1993. He farms a
1,440-acre grain and sunflower operation and is vice president of the Granville
area Development Corp. Mr. Larsen is also a member of Dakota Growers Pasta
Company.

     TYRONE MOOS. Mr. Moos has been a director since 1991 and served as Second
Vice Chairman through May 31, 1998. He and his wife, together with their son and
son-in-law, operate a combination farm and ranch raising winter wheat, barley
and millet as well as managing cow-calf and hog finishing operations. Mr. Moos
is a former member of the local co-op elevator board.

     DUANE RISAN. Mr. Risan has been a director since 1989. He raises durum,
spring wheat and barley and, as a former educator, has a degree in mathematics
and education from Jamestown College. He is a member of Dakota Growers Pasta
Company and a patron of Dakota Quality Grain Co-op.

     DUANE STENZEL. Mr. Stenzel has been a director since 1993. He raises 620
acres of sweet corn, corn and soybeans on his south central Minnesota farm. Mr.
Stenzel is a board member of Grainland Cooperative and past president of the
Wells Farmer Elevator.

     RUSSELL TWEDT. Mr. Twedt has been a director since 1993. He is a
third-generation Hill County farmer and rancher, and he and his family raise
wheat and barley, with a cow/calf operation. He is a member of the Montana
Grain Growers Association and Montana Farmers Union.

     MERLIN VAN WALLEGHEN. Mr. Van Walleghen has been a director since 1993 and
served as First Vice Chairman through May 31, 1998. He and his son raise corn
and soybeans and operate a livestock finishing operation. He is a past Board
president of the Mitchell Farmers Cooperative Elevator Association and past
member of Mitchell Technical Institutes Agricultural Advisory Board. He is also
Chairman of the Sanborn County Development Board.

     WILLIAM ZARAK. Mr. Zarak has been a director since 1983. He owns and
operates a 2,000-acre farm with his wife and two sons where they raise small
grains, corn, beef cows and hogs and also backgrounds calves. Mr. Zarak is also
a member of Dakota Growers Pasta Company.


                                       43


<PAGE>


     In order to preserve continuity in governance and achieve an efficient
board size, representatives of Cenex and the Company have adopted the following
governance plan as part of the business combination. Cenex Harvest States will
initially be governed by a 27 member Board of Directors consisting of the 14
incumbent directors of the Company and the 13 incumbent directors of Cenex,
whose terms will be extended to accomplish the Plan to downsize and stagger
terms described below. Until the 1999 Annual Meeting, the duties of the Chairman
of the Board of Cenex Harvest States will be handled by an Office of the Chair,
held by Elroy Webster and Gerald Kuster. This transition Board will serve until
the annual meeting for the fiscal year ended August 31, 1999, which is expected
to be held in December 1999. After the 1999 annual meeting, the combined company
will be governed by a Board of Directors consisting of 17 directors, to be
elected from the following regions:

          REGION (STATES)                             NUMBER OF DIRECTORS 
          -----------------------------------------   --------------------
          Region 1 (MN)                               5 directors
          Region 2 (MT, WY)                           1 director
          Region 3 (ND)                               3 directors
          Region 4 (SD)                               2 directors
          Region 5 (WI, MI, IL)                       2 directors
          Region 6 (AK, AZ, CA, ID, OR, WA, UT)       2 directors
          Region 7 (IA, MO)                           1 director
          Region 8 (CO, NE, KS, OK, TX)               1 director

     At the 1999 annual meeting, the Board will downsize from 27 to 17.
Downsizing will be accomplished through "runoff elections" of incumbent
directors, if necessary. Immediately following such downsizing, neither Cenex or
the Company may have more than 10 carryover directors on the Board. The Board is
also obligated to establish staggered terms so that not less than six elections
will occur at the 1999 annual meeting. Approximately 1/3 of the directors will
be elected at each annual meeting of members thereafter. The incumbent directors
facing each other in the runoff elections and the staggered terms will be
established in a fair and equitable manner prior to the 1999 elections.

     In all director elections, individuals must meet the following criteria to
be eligible as a director candidate: (1) the candidate must be less than the age
of 68, (2) the candidate must be a direct member or a member of an affiliate
member, (3) the candidate must reside in the region from which he or she is to
be elected, (4) the candidate must be an active farmer or rancher whose primary
occupation is that of farming or ranching, and (5) the candidate must have at
least one full term's experience as a director of a Cooperative Association
Member. These qualifications will be reviewed by the Board of Directors of the
combined company prior to the 1999 annual meeting of members.


DIRECTORS' COMPENSATION

     The Board of Directors met monthly. Through May 31, 1998 the Company
provided its directors with annual compensation of $24,000, paid in twelve
monthly payments, with the Chairman of the Board receiving an additional annual
compensation of $6,000, paid in twelve monthly payments, a per diem payment of
$122.50 plus travel allowance for days away from home while attending Board
Meetings, a per diem of $250 plus actual expenses and travel allowance for each
day spent on other Company business, life insurance, and an annuity plan
providing for benefits to become payable monthly when a director reaches age 62.


COMMITTEES OF THE BOARD OF DIRECTORS

     As of May 31, 1998 the Board of Directors did not have any standing
committees. The Board appointed ad hoc committees from time to time to review
certain matters and make reports and recommendations to the full Board of
Directors for action. The entire Board of Directors determined the salary and
incentive compensation of the Chief Executive Officer and reviewed the results
and scope of the audit and other services provided by the Company's independent
auditors, as well as the Company's accounting principles and its system of
internal controls.


COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION 

     As noted above, the Company's Board of Directors did not have a
Compensation Committee. The entire Board of Directors determined the
compensation of the Chief Executive Officer and the terms of the employment
agreement with the Chief Executive Officer. The Chief Executive Officer
determined the compensation for all other executive officers.


                                       44


<PAGE>

LIMITATION OF LIABILITY AND INDEMNIFICATION

     The Company's Articles of Incorporation limit the liability of directors in
their capacity as directors to the full extent permitted by Minnesota law. As
permitted by Minnesota law, the Company's Articles of Incorporation provide that
a director shall not be personally liable to the Company or its members for
monetary damages for breach of fiduciary duty as a director, except for
liability for a breach of the director's duty of loyalty to the Company or its
members, for acts of omissions not in good faith or that involve intentional
misconduct or a knowing violation of law, for a transaction from which the
director derived an improper personal benefit or for an act or omission
occurring prior to the date when such provisions became effective.

     The provision of the Articles of Incorporation limits only the liability of
directors, not officers. These provisions do not affect the availability of
equitable remedies, such as an action to enjoin or rescind a transaction
involving a breach of fiduciary duty, although, as a practical matter, equitable
relief may not be available. The above provisions also do not limit liability of
the directors for violations of, or relieve them from the necessity of complying
with, the federal securities laws.

     The Bylaws of the Company require the Company to indemnify each director,
officer, manager, employee or agent of the Company, and any person serving at
the request of the Company as a director, officer, manager, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses, including attorneys' fees, judgments, fines and amounts paid
in settlement actually and reasonably incurred to the fullest extent permitted
under the laws of Minnesota.

EXECUTIVE OFFICERS

     The table below lists the executive officers of the Company as of May 31,
1998, none of whom holds any equity in the Company. Officers are elected
annually by the Board of Directors.


<TABLE>
<CAPTION>

   NAME                      AGE                             POSITION
   ----------------------   -----   ---------------------------------------------------------
<S>                         <C>     <C>
   John D. Johnson           50     President and Chief Executive Officer
   T. F. Baker               56     Group Vice President -- Finance
   Michael H. Bergeland      53     Group Vice President -- Grain & Agri Services
   Garry A. Pistoria         57     Group Vice President -- Wheat Milling
   James Tibbetts            49     Group Vice President -- Oilseed Processing and Packaging
</TABLE>

     JOHN D. JOHNSON. Mr. Johnson was appointed President and Chief Executive
Officer on January 1, 1995. Prior to his appointment to that position he held
positions as Group Vice President of Farm Marketing & Supply, GTA Feeds
Division General Manager, Director of Sales and Marketing for the GTA Feeds
Division, Regional Sales Manager for GTA Feeds Division, and Feed Consultant
GTA Feeds Division. He has 21 years total experience with the Company. He
currently serves on the Board of Directors of the National Council of Farmer
Cooperatives (NCFC), Sparta Foods, Inc. and A. C. Toepfer Intrade Grain
Companies, and is Chairman of the NCFC Agriculture, Trade and Credit Committee.
Mr. Johnson also serves on the Management Committee for Ventura Foods, LLC. Mr.
Johnson graduated in 1970 from Black Hills State University at Spearfish, South
Dakota, with a degree in Business Administration and Economics.

     THOMAS F. BAKER. Mr. Baker joined the Company in 1982 as Vice President of
Finance. In 1992 he was appointed Group Vice President of Finance and holds
that position at the present time. Mr. Baker obtained a Bachelor's Degree in
accounting from the College of St. Thomas, did graduate work at the University
of Minnesota, and obtained his CPA in the State of Minnesota. Mr. Baker serves
on the Board of Governors for Ag States Agency, LLC and on the Management
Committee for Ventura Foods, LLC. He is also a member of Minnesota Certified
Public Accountants and Financial Executives Institute.

     MICHAEL H. BERGELAND. Mr. Bergeland, Group Vice President of Grain and
Agri-Services, joined the Company in 1967. He is a native of Minnesota and
attended Moorhead State College. Mr. Bergeland also serves as a board member of
the Minneapolis Grain Exchange, Chairman of the Grain Committee for the
National Council of Farmer Cooperatives, and a Committee Member and alternate
director for A.C. Toepfer Intrade Grain.

     GARRY A. PISTORIA. Mr. Pistoria has been Group Vice President of Wheat
Milling since 1985 and has been with the Company since 1961. Mr. Pistoria
attended Montana State University and the College of


                                       45


<PAGE>


Great Falls. He is a member of the National Pasta Association, the American
Bakers Association and the Minneapolis Grain Exchange.

     JAMES TIBBETTS. On January 1, 1997, Mr. Tibbetts was appointed to the
position of Group Vice President of the Oilseed Processing and Refining
Division. From November of 1995 (when he joined the Company) through 1996, Mr.
Tibbetts was Senior Vice President for the former Consumer Products Packaging
Division (Holsum Foods Division). From 1977 to 1995, Mr. Tibbetts was a Senior
Vice President for Farm Credit Leasing in Minneapolis, Minnesota. Mr. Tibbetts
received a Bachelor of Science Degree in Business Administration in 1972 from
Northern State University in Aberdeen, South Dakota. He serves on the
Management Committee for Ventura Foods, LLC.

     As of June 1, 1998, Noel Estenson, who was the President and Chief
Executive Officer of Cenex, became the Chief Executive Officer of Cenex Harvest
States to serve through no later than December 31, 2000. John D. Johnson, who
was the President and Chief Executive Officer of the Company, will become the
President and General Manager of Cenex Harvest States, reporting to the Chief
Executive Officer. Mr. Johnson will assume the position of Chief Executive
Officer of Cenex Harvest States upon Mr. Estenson's retirement.

ITEM 11. EXECUTIVE COMPENSATION

     SUMMARY COMPENSATION. The following table sets forth the cash and noncash
compensation earned by the Chief Executive Officer and each of the four most
highly compensated executive officers of the Company (other than the Chief
Executive Officer) whose total salary and bonus or similar incentive payment
earned during the year ended May 31, 1998, exceeded $100,000 (the "Named
Executive Officers") (The titles of these officers have changed since the merger
on June 1, 1998):

                          SUMMARY COMPENSATION TABLE


<TABLE>
<CAPTION>
                                             ANNUAL COMPENSATION
                                           ------------------------
                             YEAR ENDED                                  OTHER ANNUAL         ALL OTHER
                               MAY 31,      SALARY(1)     BONUS(1)     COMPENSATION(2)     COMPENSATION(3)
                            ------------   -----------   ----------   -----------------   ----------------
<S>                         <C>            <C>           <C>          <C>                 <C>
John D. Johnson                1998         $550,000      350,000          $ 6,699             $11,600
 President and Chief
 Executive Officer

Thomas F. Baker                1998          244,200      147,000           10,271              13,735
 Group Vice President --
 Finance

Michael H. Bergeland           1998          233,100      140,000            6,099              10,352
 Group Vice President --
 Grain and Agri-Services

Garry A. Pistoria              1998          190,200      114,000            1,473              11,341
 Group Vice President --
 Wheat Milling

James Tibbetts                 1998          180,000      108,000            2,489               5,266
 Group Vice President --
 Oilseed Processing
 and Refining Division
------------------
</TABLE>

(1) Amounts shown include amounts deferred at the employee's election under the
    Company's Deferred Compensation Program and amounts waived for share
    options.
(2) Amounts shown include personal use of a Company vehicle.
(3) Other compensation includes the Company's matching contributions under the
    Company's 401(K) Plan and the portion of group term life insurance premiums
    paid by the Company.

     On January 23, 1997, the Company entered into an Employment Agreement with
John D. Johnson. The Employment Agreement provides for a rolling three-year
period of employment commencing on January 23, 1997, at an initial base or
fixed salary of at least $500,000, subject to annual review. Mr.


                                       46


<PAGE>


Johnson's employment may be terminated by either party on at least 30 days'
written notice, subject to the rights and obligations set forth in the
Employment Agreement. The Company is obligated to pay Mr. Johnson a severance
allowance for three years equal to Mr. Johnson's base or fixed salary and to
continue family health insurance coverage for at least one year in the event Mr.
Johnson's employment is terminated for any reason other than for cause (as such
term is defined in the Employment Agreement), death, disability or voluntary
termination. The Employment Agreement also contains covenants by Mr. Johnson not
to compete with the Company and not to solicit the Company's customers or
employees during the period that Mr. Johnson accepts the severance allowance.
The Company and Mr. Johnson have also agreed that in the event of Mr. Johnson's
voluntary termination the Company will not owe Mr. Johnson any severance
allowance and Mr. Johnson will not compete against the Company for a period of
three years. Either party may terminate the Employment Agreement and all of the
rights and obligations of the parties thereunder, upon at least three years'
written notice to the other party.

     THE FOLLOWING SUMMARIZES CERTAIN BENEFITS IN EFFECT AS OF 5/31/98 TO THE
NAMED EXECUTIVE OFFICERS. DUE TO THE MERGER WITH CENEX, IT IS EXPECTED THAT
THERE WILL BE CHANGES TO THESE BENEFIT PLANS, WITH MOST CHANGES OCCURRING ON
JANUARY 1, 1999.

MANAGEMENT COMPENSATION INCENTIVE PROGRAM

     Each Named Executive Officer is eligible to participate in the Management
Compensation Incentive Program (the "Incentive Program") for the year ending May
31, 1998. The Incentive Program is based on Company and group or division
performance. The criteria for measurement consists of Economic Value Added
(EVA), earnings and Member Value Index; a subjective evaluation of value
provided to members and customers. These amounts were paid after May 31, 1998.
The maximum incentive is 60% of base compensation.

RETIREMENT PLAN

     Each of the Named Executive Officers is entitled to receive benefits under
the Harvest States Cooperatives Cash Balance Retirement Plan (the "Retirement
Plan"). An employee's benefit under the Retirement Plan depends on credits to
the employee's account, which are based on the employee's total salary each year
the employee works for the Company, the length of service with the Company and
the rate of interest credited to the employee's account balance each year.
Credits are made to the employee's account from Pay Credits, Special Career
Credits and Investment Credits.

     The amount of Pay Credits added to an employee's account each year is a
percentage of the employee's gross salary, including overtime pay, commissions,
severance pay, bonuses, any compensation reduction pursuant to the 401(K) Plan
and any pretax contribution to any of the Company's welfare benefit plans, paid
vacations, paid leaves of absence and pay received if away from work due to a
sickness or injury. The Pay Credits percentage received is determined on a
yearly basis, based on the years of Benefit Service completed as of January 1 of
each year. An employee receives one year of Benefit Service for every calendar
year of employment in which the employee completed at least 1,000 hours of
service.

     Effective January 1, 1998, Pay Credits are earned according to the
following schedule:

        YEARS OF BENEFIT SERVICE:      PAY CREDIT EQUALS:
        ----------------------------   -------------------
        1 to 7 years ...............   4% of total salary
        8 to 11 years ..............   5% of total salary
        12 years and more ..........   6% of total salary

     Special Career Credits were designed to supplement the benefits of
mid-career employees affected by the change from the former plan to the current
Retirement Plan. Employees qualify for Special Career Credits only if they were
employed by the Company and met certain age and service requirements (as defined
by the Retirement Plan) on January 1, 1988. The following table shows the
credits for those who qualify:


                                       47


<PAGE>


             TOTAL OF AGE AND BENEFIT
             SERVICE ON JANUARY 1, 1988:   SPECIAL CAREER CREDITS:
             ---------------------------   -----------------------
             50 to 54 ..................     1% of total salary
             55 to 59 ..................     2% of total salary
             60 to 64 ..................     3% of total salary
             65 to 69 ..................     4% of total salary
             70 or more ................     5% of total salary

     Special Career Credits continue at the percentage rate determined from the
employee's status on January 1, 1988, for as long as the employee is with the
Company.

     The Company credits an employee's account at the end of the year with an
Investment Credit based on the balance at the beginning of the year. The
Investment Credit is based on the average return for one-year U.S. Treasury
Bills for the preceding 12-month period. The maximum Investment Credit will not
exceed 12% for any year.

     As of December 31, 1997, the dollar value of the account of each of the
Named Executive Officers was:

             John D. Johnson .....................    $193,012
             Thomas F. Baker .....................     238,952
             Michael H. Bergeland ................     415,030
             Garry A. Pistoria ...................     483,650
             James Tibbetts ......................       7,983

     Mr. Pistoria and Mr. Bergeland could be eligible for a retirement benefit,
under a grandfather provision of a prior provision of the plan, instead of the
above amount. Such amount would be affected by age at retirement and salary.

DEFERRED COMPENSATION PLAN

     Effective April 1, 1994, the Company established the Harvest States
Cooperatives Deferred Compensation Plan (the "Deferred Compensation Plan").
Participants in the Deferred Compensation Plan are select management or highly
compensated employees of the Company who have been designated as eligible by the
President of the Company to participate in such plan. Under the Deferred
Compensation Plan, a participant may elect to have an amount of deferred
compensation credited to the participant's account for the applicable Plan Year
(as defined in the Deferred Compensation Plan). The compensation actually earned
during the Plan Year by a participant who elects deferred compensation is
reduced by the percentage or amount so elected. A participant may elect to
contribute no more than 30% of each payment of base compensation, provided that
the percentage selected is expected to result in annual contributions totaling
at least $1,000. Also, the participant may elect to contribute either a
percentage or a specific dollar amount of any bonus or similar incentive payment
that may become payable during the Plan Year, provided the contribution will not
be less than the smaller of $1,000 or 100% of the bonus payable. The deferred
compensation credited under the Deferred Compensation Plan is allocated to the
account of the participant as of the date that the compensation would otherwise
have been paid to the Participant in cash. Income is credited to each account
each Plan Year at an annual rate equal to 1% over the five-year U.S. Treasury
Bond rate as of October 1 of the year preceding the Plan Year, as adjusted as
appropriate to reflect contributions to and distributions from the account
during the Plan Year.

     A participant's credits to his or her account are unsecured obligations of
the Company to pay the participant the actual amount of the credits upon
distribution pursuant to the Deferred Compensation Plan. Each participant or
beneficiary is only a general creditor of the Company with respect to his or her
account. Accounts are maintained for recordkeeping purposes only. Obligations of
the Company to pay benefits under the Deferred Compensation Plan may be
satisfied by distributions from a grantor trust created by the Company in its
sole discretion for such purpose. The Company has not created any such trust.


                                       48


<PAGE>


     Amounts credited to a participant's account are distributed on a
predetermined date, such as the date of retirement or the date the participant
attains a particular age, in either a lump sum or in installments pursuant to
the participant's prior irrevocable election. The Deferred Compensation Plan
also provides for distribution upon the participant's death or disability, for
unforeseeable emergencies and upon termination of the plan.

     The President of the Company may at any time amend the Plan in whole or in
part for any reason. No amendment may decrease the benefits under the Plan which
have accrued prior to the date of such amendment, but any amendment may modify
the interest rate to be used for future deferrals and for the balance in each
account on the date the amendment was adopted. The Company, by action of the
President, may at any time terminate the Plan.

     In October 1997, the Company adopted a share option plan, which allows
executive officers to waive bonuses and up to a certain percent of salary in
exchange for options to purchase at a discount, shares of mutual funds. The
Company has filed a Form S-8, dated December 12, 1997 on this program, 
incorporated herewith by reference.

401(K) PLAN

     Each Named Executive Officer is eligible to participate in the Harvest
States Cooperatives Savings Plan (the "401(k) Plan"). All employees of the
Company who are eligible for the Retirement Plan and who are not production
employees and who are not covered by a collective bargaining agreement are
eligible to participate in the 401(k) Plan. Effective January 1, 1997
participants may contribute between 1% and 15% (not to exceed 8% in the case of
"highly compensated" employees) of their pay on a pre-tax basis. Each of the
Named Executive Officers is a "highly compensated" employee. The Company matches
50% of the first 6% of pay contributed each year. The Company's Board of
Directors may elect to reduce or eliminate matching contributions for any year
or any portion thereof. Participants are 100% vested in their own contributions
and in any Company matching contribution made on the participant's behalf.

DEFERRED COMPENSATION SUPPLEMENTAL RETIREMENT PLAN

     Each of the Named Executive Officers may participate in the Harvest Sates
Cooperatives Deferred Compensation Supplemental Retirement Plan (the
"Supplemental Plan"). Participants in the Supplemental Plan are select
management or highly compensated employees of the Company who have been
designated as eligible by the President of the Company to participate in such
plan. Compensation deferred under the Deferred Compensation Plan or waived under
the Share Option Plan, is not eligible for Pay Credits or Special Career Credits
under the Cash Balance Retirement Plan or matching contributions under the
401(k) Plan. The Supplemental Plan is intended to replace the benefits lost
under those plans due to Section 415 of the Internal Revenue Code of 1986, as
amended (the "Code") which cannot be considered for purposes of benefits due to
Section 401(a)(17) of the Code under the qualified plans that the Company
offers. The Supplemental Plan is not funded or qualified for special tax
treatment under the Code. As of December 31, 1997, the dollar value of the
account of each of the Named Executive Officers will be approximately:

               John D. Johnson .......................   $ 196,642
               Thomas F. Baker .......................     105,867
               Michael H. Bergeland ..................     618,274
               Garry A. Pistoria .....................   1,345,932
               James Tibbetts ........................      14,202


                                       49


<PAGE>


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND 
         MANAGEMENT

     Beneficial ownership of equity securities as of May 31, 1998, is shown
below:


<TABLE>
<CAPTION>
                                                                AMOUNT AND
                                                                NATURE OF
                                                                BENEFICIAL
TITLE OF CLASS               NAME OF BENEFICIAL OWNER(1)        OWNERSHIP       % OF CLASS
-----------------------   --------------------------------   ---------------   -----------
<S>                       <C>                                <C>               <C>
Wheat Milling Equity
 Participation Units:     Directors:
                          Steven Burnet ..................    30,000 units            *
                          Steve Carney ...................    27,000 units            *
                          Edward Ellison .................     6,000 units            *
                          Sheldon Haaland ................         --
                          Jerry Hasnedl ..................    10,000 units            *
                          Edward Hereford ................         --
                          Gerald Kuster ..................    22,000 units            *
                          Leonard Larsen .................     9,000 units            *
                          Tyrone Moos ....................     3,000 units            *
                          Duane Risan ....................    24,000 units            *
                          Duane Stenzel ..................         --
                          Russell Twedt ..................     5,000 units            *
                          Merlin Van Walleghen ...........         --
                          William Zarak ..................     6,000 units            *

                          John D. Johnson ................         --
                          Thomas F. Baker ................         --
                          Michael H. Bergeland ...........         --
                          Garry A. Pistoria ..............         --
                          James Tibbetts .................         --
                                                             ---------------       ----
                          Directors and executive officers
                           as a group ....................   142,000 units         2.97%
                                                             ===============       ====
</TABLE>


<TABLE>
<CAPTION>
                                                               AMOUNT AND
                                                                NATURE OF
                                                               BENEFICIAL
TITLE OF CLASS               NAME OF BENEFICIAL OWNER(1)        OWNERSHIP      % OF CLASS
-----------------------   --------------------------------   --------------   -----------
<S>                       <C>                                <C>              <C>
Oilseed Processing
 and Refining Equity
 Participation Units:     Directors:
                          Steven Burnet ..................        --
                          Steve Carney ...................        --
                          Edward Ellison .................   12,000 units         1.12%
                          Sheldon Haaland ................    1,500 units            *
                          Jerry Hasnedl ..................    1,500 units            *
                          Edward Hereford ................        --
                          Gerald Kuster ..................    5,000 units            *
                          Leonard Larsen .................        --
                          Tyrone Moos ....................        --
                          Duane Risan ....................        --
                          Duane Stenzel ..................    2,500 units            *
                          Russell Twedt ..................        --
                          Merlin Van Walleghen ...........    6,000 units            *
                          William Zarak ..................        --

                          John D. Johnson ................        --
                          Thomas F. Baker ................        --
                          Michael H. Bergeland ...........        --
                          Garry A. Pistoria ..............        --
                          James Tibbetts .................        --
                                                             --------------       ----
                          Directors and executive officers
                           as a group ....................   28,500 units         2.65%
                                                             ==============       ====
------------------
</TABLE>

(1) Includes units held by spouse.
 * Less than 1%.

                                       50


<PAGE>


     No director listed above has the right or option to acquire beneficial
ownership in additional securities other than by purchase on the open market
from current holders of such securities. Executive officers, as non-producers,
are ineligible to hold these securities.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Because directors must be active patrons of the Company or an Affiliated
Association, transactions between the Company and directors are customary and
expected. Transactions include the sale of commodities to the Company and the
purchase of products and services from the Company. During each of the three
years ended May 31, 1998, 1997 and 1996 the value of those transactions between
a particular director (and members of such directors' immediate family, which
includes such director's spouse; parents; children; siblings; mothers and
fathers-in-law; sons and daughters-in-law; and brothers and sisters-in-law) and
the Company that exceeded $60,000 are shown below.


                                                 YEAR ENDED MAY 31,          
                                       --------------------------------------
      NAME                                 1998         1997          1996
      ------------------------------   -----------   ----------   -----------
      William Zarak ................    $102,422      $ 55,644     $303,125
      Russell Twedt ................      54,236       101,031      121,257
      Steve Carney .................     449,564       250,641      746,263
      Tyrone Moos ..................     149,860       172,527
      Jerry Hasnedl ................     341,744       143,369
      Merlin Van Walleghen .........     100,147       148,275
      Edward Ellison ...............      79,060
      Leonard Larsen ...............     122,056


                                       51


<PAGE>


                                   PART IV.


ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS FILED ON FORM 8-K


(a)(1) FINANCIAL STATEMENTS

     The following financial statements and the Report of Independent
Accountants therein are filed as part of this Form 10-K.

<TABLE>
<CAPTION>
                                                                                                   PAGE NO.
                                                                                                  ---------
<S>      <C>                                                                                       <C>
 I.      HARVEST STATES COOPERATIVES
         Report of Independent Accountants .....................................................     F-1
         Consolidated Balance Sheets as of May 31, 1998 and 1997 ...............................     F-2
         Consolidated Statements of Earnings for the Years Ended May 31, 1998, 1997,
         and 1996 ..............................................................................     F-3
         Consolidated Statements of Capital for the Years Ended May 31, 1998, 1997,
         and 1996 ..............................................................................     F-4
         Consolidated Statements of Cash Flows for the Years Ended May 31, 1998, 1997,
         and 1996 ..............................................................................     F-5
         Notes to Consolidated Financial Statements for the Years Ended May 31, 1998, 1997, and 
         1996 ..................................................................................     F-6

 II.     OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
         Report of Independent Accountants .....................................................     F-16
         Balance Sheets as of May 31, 1998 and 1997 ............................................     F-17
         Statements of Earnings for the Years Ended May 31, 1998, 1997, and 1996 ...............     F-18
         Statements of Defined Business Unit Equity for the Years Ended May 31, 1998, 1997,
         and 1996 ..............................................................................     F-19
         Statements of Cash Flows for the Years Ended May 31, 1998, 1997, and 1996 .............     F-20
         Notes to Financial Statements for the Years Ended May 31, 1998, 1997, and 1996 ........     F-21

III.     WHEAT MILLING DEFINED BUSINESS UNIT
         Report of Independent Accountants .....................................................     F-27
         Balance Sheets as of May 31, 1998 and 1997 ............................................     F-28
         Statements of Earnings for the Years Ended May 31, 1998, 1997, and 1996 ...............     F-29
         Statements of Defined Business Unit Equity for the Years Ended May 31, 1998, 1997,
         and 1996 ..............................................................................     F-30
         Statements of Cash Flows for the Years Ended May 31, 1998, 1997, and 1996 .............     F-31
         Notes to Financial Statements for the Years Ended May 31, 1998, 1997, and 1996 ........     F-32
</TABLE>

(a)(2) FINANCIAL STATEMENT SCHEDULES

   None.


(a)(3) EXHIBITS
   10.17  Operating Agreement of Land O' Lakes/Harvest States, L.L.C. dated May
          30, 1998 between Harvest States Cooperatives and Land O' Lakes, Inc.

   24     Power of Attorney.

   27     Financial Data Schedule.


(b) REPORTS ON FORM 8-K
     No reports on Form 8-K have been filed by the Registrant during the fourth
quarter of the year ended May 31, 1998.


(c) EXHIBITS
     The exhibits shown in Item 14(a)(3) above are being filed herewith.


(d) SCHEDULES 
     None.


SUPPLEMENTAL INFORMATION
     As a cooperative, the Company does not utilize proxy statements.


                                       52


<PAGE>


                                  SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized, on August
27, 1998.

                                        CENEX HARVEST STATES COOPERATIVES


                                        By:        /S/ JOHN D. JOHNSON
                                            ------------------------------------
                                                      John D. Johnson
                                              PRESIDENT AND GENERAL MANAGER


     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on August 27, 1998:





     SIGNATURE                                    TITLE
     ---------                                    -----

                                  
/s/ JOHN D. JOHNSON               President and General Manager
-------------------                (principal executive officer)
  John D. Johnson                 
        
 /s/ T. F. BAKER                  Executive Vice President -- Finance and
-------------------                Administration (principal financial officer)
    T. F. Baker                    
 
  /s/ JOHN SCHMITZ                Vice President -- Finance and Information
-------------------                Services (principal accounting officer)
    John Schmitz                        
   
Gerald Kuster*                                Chairman of the Board of Directors
                                                  (as of May 31, 1998)
Steven Burnet*                                Director
Steve Carney*                                 Director
Sheldon Haaland*                              Director
Jerry C. Hasnedl*                             Director
Edward Hereford*                              Director
Tyrone A. Moos*                               Director
Duane G. Risan*                               Director
William J. Zarak, Jr.*                        Director
Edward Ellison*                               Director
Leonard D. Larsen*                            Director
Duane Stenzel*                                Director
Russell W. Twedt*                             Director
Merlin Van Walleghen*                         Director


* By: /S/ JOHN D. JOHNSON
-------------------------
     John D. Johnson
     ATTORNEY-IN-FACT


                                       53
<PAGE>

                         INDEPENDENT AUDITORS' REPORT



Board of Directors
Harvest States Cooperatives
Saint Paul, Minnesota

     We have audited the consolidated balance sheets of Harvest States
Cooperatives and subsidiaries (the Company) as of May 31, 1998 and 1997 and the
related consolidated statements of earnings, capital, and cash flows for each
of the three years in the period ended May 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

     In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at May 31, 1998
and 1997 and the results of its operations and its cash flows for each of the
three years in the period ended May 31, 1998, in conformity with generally
accepted accounting principles.

     As discussed in Note 16 to the financial statements, effective June 1,
1998, the Company merged with CENEX, Inc. to form Cenex Harvest States
Cooperatives.




                                                          Deloitte & Touche, LLP
                                                              Minneapolis, MN
July 24, 1998

                                      F-1


<PAGE>

                 HARVEST STATES COOPERATIVES AND SUBSIDIARIES


                          CONSOLIDATED BALANCE SHEETS
                             MAY 31, 1998 AND 1997




<TABLE>
<CAPTION>
                                                                1998             1997
                                                           --------------   --------------
<S>                                                        <C>              <C>
ASSETS
CURRENT ASSETS:
 Cash ..................................................   $ 33,635,720     $ 38,064,191
 Receivables (Note 2) ..................................    231,093,679      267,517,690
 Inventories (Note 3) ..................................    210,895,285      248,373,247
 Prepaid expenses and deposits .........................     25,032,017       25,562,366
                                                           ------------     ------------
   Total current assets ................................    500,656,701      579,517,494
OTHER ASSETS:
 Investments (Note 4) ..................................    142,079,754      126,547,616
 Other (Note 5) ........................................     48,491,820       46,489,678
                                                           ------------     ------------
   Total other assets ..................................    190,571,574      173,037,294
PROPERTY, PLANT, AND EQUIPMENT (Notes 6 and 7) .........    254,475,188      224,150,965
                                                           ------------     ------------
                                                           $945,703,463     $976,705,753
                                                           ============     ============
LIABILITIES AND CAPITAL
CURRENT LIABILITIES:
 Notes payable (Note 7) ................................   $ 37,000,000     $ 98,000,000
 Patron credit balances ................................     36,933,087       25,190,513
 Advances received on grain sales ......................     87,637,756      125,071,207
 Drafts outstanding ....................................     33,568,876       32,698,943
 Accounts payable and accrued expenses .................    155,100,637      152,451,010
 Patronage dividends and retirements payable ...........     28,629,000       13,200,000
 Current portion of long-term debt (Note 7) ............     19,332,767       21,094,774
                                                           ------------     ------------
   Total current liabilities ...........................    398,202,123      467,706,447
LONG-TERM DEBT (Note 7) ................................    121,277,858      113,363,692
OTHER LIABILITIES ......................................     12,219,577       10,536,301
COMMITMENTS AND CONTINGENCIES (Notes 8 and 13)
CAPITAL (Note 8) .......................................    414,003,905      385,099,313
                                                           ------------     ------------
                                                           $945,703,463     $976,705,753
                                                           ============     ============
</TABLE>

                See notes to consolidated financial statements.

                                      F-2



<PAGE>

                 HARVEST STATES COOPERATIVES AND SUBSIDIARIES


                      CONSOLIDATED STATEMENTS OF EARNINGS
                   YEARS ENDED MAY 31, 1998, 1997, AND 1996




<TABLE>
<CAPTION>
                                                           1998                1997                1996
                                                    -----------------   -----------------   -----------------
<S>                                                 <C>                 <C>                 <C>
REVENUES:
 Sales:
   Grain ........................................   $4,629,552,643      $6,036,502,624      $7,127,223,407
   Processed grain ..............................      615,048,982         730,101,124         819,863,541
   Feed and farm supplies .......................      262,792,836         258,235,512         207,252,696
                                                    --------------      --------------      --------------
                                                     5,507,394,461       7,024,839,260       8,154,339,644
 Patronage dividends ............................       15,534,215          15,947,049          13,278,997
 Other revenues (Note 12) .......................       84,520,889          68,627,552          68,339,523
                                                    --------------      --------------      --------------
                                                     5,607,449,565       7,109,413,861       8,235,958,164
COSTS AND EXPENSES:
 Cost of goods sold .............................    5,464,036,841       6,967,937,476       8,076,073,326
 Marketing, general, and administrative .........       62,311,965          63,341,552          70,054,248
 Interest .......................................       17,442,718          19,378,833          31,921,936
                                                    --------------      --------------      --------------
                                                     5,543,791,524       7,050,657,861       8,178,049,510
                                                    --------------      --------------      --------------
EARNINGS BEFORE INCOME TAXES ....................       63,658,041          58,756,000          57,908,654
INCOME TAXES (Note 11) ..........................        6,400,000           6,200,000           6,900,000
                                                    --------------      --------------      --------------
NET EARNINGS ....................................   $   57,258,041      $   52,556,000      $   51,008,654
                                                    ==============      ==============      ==============
DISTRIBUTION OF NET EARNINGS:
 Cash to patrons ................................   $   15,300,000      $   13,200,000      $   13,220,462
 Patronage certificates .........................       32,478,313          30,800,000          30,877,406
 Nonpatronage certificates ......................        8,609,383           7,885,168           6,115,487
 Capital reserve ................................          870,345             670,832             795,299
                                                    --------------      --------------      --------------
    Net earnings ................................   $   57,258,041      $   52,556,000      $   51,008,654
                                                    ==============      ==============      ==============
</TABLE>

                See notes to consolidated financial statements.

                                      F-3



<PAGE>

                 HARVEST STATES COOPERATIVES AND SUBSIDIARIES


                      CONSOLIDATED STATEMENTS OF CAPITAL




<TABLE>
<CAPTION>
                                                              PATRONAGE     NONPATRONAGE
                                               TOTAL        CERTIFICATES    CERTIFICATES
                                          --------------- ---------------- --------------
<S>                                       <C>             <C>              <C>
BALANCE AT MAY 31, 1995:
 Stated as capital ......................  $ 299,487,893   $ 215,765,522    $ 1,832,136
 Stated as current liability ............     11,000,000
                                           -------------   -------------    -----------
                                             310,487,893     215,765,522      1,832,136
 Distribution of patronage dividends
  payable for preceding year,
  including cash payment of
  $10,992,918 ...........................    (10,992,918)     25,617,898      7,912,297
 Redemption of capital equity
  certificates ..........................     (6,554,160)     (6,547,372)        (6,788)
 Equities issued ........................      8,721,542       8,721,542
 Other ..................................     (2,318,892)     (2,041,438)         2,350
 Net earnings ...........................     51,008,654
 Patronage dividends payable in cash,
  stated as a current liability .........    (13,100,000)
                                           -------------   -------------    -----------
BALANCE AT MAY 31, 1996:
 Stated as capital ......................    337,252,119     241,516,152      9,739,995
 Stated as current liability ............     13,100,000
                                           -------------   -------------    -----------
                                             350,352,119     241,516,152      9,739,995
 Distribution of patronage dividends
  payable for preceding year,
  including cash payment of
  $13,220,462 ...........................    (13,220,462)     30,877,406      6,115,487
 Redemption of capital equity
  certificates ..........................     (8,204,091)     (8,130,378)       (73,713)
 Equities issued ........................      5,066,250       5,066,250
 Other ..................................        912,807          89,752       (637,329)
 Net earnings ...........................     52,556,000
 Initial investment offering ............     10,836,690      (2,035,171)
 Patronage dividends payable in cash,
  stated as a current liability .........    (13,200,000)
                                           -------------   -------------    -----------
BALANCE AT MAY 31, 1997:
 Stated as capital ......................    385,099,313     267,384,011     15,144,440
 Stated as current liability ............     13,200,000
                                           -------------   -------------    -----------
                                             398,299,313     267,384,011     15,144,440
 Distribution of patronage dividends
  payable for preceding year,
  including cash payment of
  $13,389,017 ...........................    (13,389,017)     31,257,996      6,862,964
 Redemption of capital equity
  certificates ..........................    (10,062,587)     (9,542,215)      (520,372)
 Equities issued ........................     10,560,902      10,560,902
 Other ..................................        (33,747)        127,898       (178,409)
 Net earnings ...........................     57,258,041                      8,609,383
 Patronage dividends payable in cash,
  stated as a current liability .........    (15,300,000)
 Retirements payable in cash, stated
  as a current liability ................    (13,329,000)    (13,329,000)
                                           -------------   -------------    -----------
BALANCE AT MAY 31, 1998 .................  $ 414,003,905   $ 286,459,592    $29,918,006
                                           =============   =============    ===========



<CAPTION>
                                                            OILSEED
                                              WHEAT       PROCESSING
                                             MILLING      & REFINING       PATRONAGE        CAPITAL
                                               EPUs          EPUs           PAYABLE         RESERVE
                                          ------------- -------------- ---------------- --------------
<S>                                       <C>           <C>            <C>              <C>
BALANCE AT MAY 31, 1995:
 Stated as capital ......................                               $   25,700,000   $ 56,190,235
 Stated as current liability ............                                   11,000,000
                                                                        --------------   ------------
                                                                            36,700,000     56,190,235
 Distribution of patronage dividends
  payable for preceding year,
  including cash payment of
  $10,992,918 ...........................                                  (36,700,000)    (7,823,113)
 Redemption of capital equity
  certificates ..........................
 Equities issued ........................
 Other ..................................                                                    (279,804)
 Net earnings ...........................                                   43,700,000      7,308,654
 Patronage dividends payable in cash,
  stated as a current liability .........                                  (13,100,000)
                                                                        --------------   ------------
BALANCE AT MAY 31, 1996:
 Stated as capital ......................                                   30,600,000     55,395,972
 Stated as current liability ............                                   13,100,000
                                                                        --------------   ------------
                                                                            43,700,000     55,395,972
 Distribution of patronage dividends
  payable for preceding year,
  including cash payment of
  $13,220,462 ...........................                                  (43,700,000)    (6,513,355)
 Redemption of capital equity
  certificates ..........................
 Equities issued ........................
 Other ..................................                                                   1,460,384
 Net earnings ...........................                                   44,000,000      8,556,000
 Initial investment offering ............  $9,574,000     $4,296,000                         (998,139)
 Patronage dividends payable in cash,
  stated as a current liability .........                                  (13,200,000)
                                           ----------     ----------    --------------   ------------
BALANCE AT MAY 31, 1997:
 Stated as capital ......................   9,574,000      4,296,000        30,800,000     57,900,862
 Stated as current liability ............                                   13,200,000
                                           ----------     ----------    --------------   ------------
                                            9,574,000      4,296,000        44,000,000     57,900,862
 Distribution of patronage dividends
  payable for preceding year,
  including cash payment of
  $13,389,017 ...........................                                  (44,000,000)    (7,509,977)
 Redemption of capital equity
  certificates ..........................
 Equities issued ........................
 Other ..................................     (96,000)       (96,000)                         208,764
 Net earnings ...........................                                   47,778,313        870,345
 Patronage dividends payable in cash,
  stated as a current liability .........                                  (15,300,000)
 Retirements payable in cash, stated
  as a current liability ................
                                           ----------     ----------    --------------   ------------
BALANCE AT MAY 31, 1998 .................  $9,478,000     $4,200,000    $   32,478,313   $ 51,469,994
                                           ==========     ==========    ==============   ============
</TABLE>

                See notes to consolidated financial statements.

                                      F-4



<PAGE>

                 HARVEST STATES COOPERATIVES AND SUBSIDIARIES


                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                   YEARS ENDED MAY 31, 1998, 1997, AND 1996




<TABLE>
<CAPTION>
                                                                  1998               1997               1996
                                                            ----------------   ----------------   ----------------
<S>                                                         <C>                <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net earnings ...........................................    $  57,258,041      $   52,556,000     $   51,008,654
 Adjustments to reconcile net earnings to net cash
  flows:
   Depreciation and amortization ........................       21,560,587          20,450,050         20,421,425
   Noncash gain on investment ...........................      (12,131,232)        (11,598,013)       (12,517,993)
   Noncash portion of patronage dividends received             (10,440,761)        (11,050,057)        (9,607,657)
   (Gain) loss on sale of property, plant, and
     equipment ..........................................       (1,040,902)          4,612,341           (853,024)
   Change in assets and liabilities:
    Receivables .........................................       36,524,214          99,499,286        (33,013,948)
    Inventories .........................................       37,477,962         186,133,871       (186,968,498)
    Patron credit balances ..............................       11,742,574          (3,816,906)       (30,483,224)
    Advances received on grain sales ....................      (37,433,451)        (76,753,983)        78,403,202
    Accounts payable, accrued expenses, and
     drafts outstanding .................................        3,519,560          (2,123,030)        43,477,378
    Prepaid expenses, deposits, and other ...............       (3,312,010)         13,693,059        (25,590,317)
                                                             -------------      --------------     --------------
     Total adjustments ..................................       46,466,541         219,046,618       (156,732,656)
                                                             -------------      --------------     --------------
     Net cash provided by (used in) operating
      activities ........................................      103,724,582         271,602,618       (105,724,002)
CASH FLOWS FROM INVESTING ACTIVITIES:
 Proceeds from disposition of property, plant, and
  equipment .............................................       12,830,798           1,763,543          3,729,810
 Investments redeemed ...................................       14,920,636          14,863,786          2,518,863
 Acquisition of property, plant, and equipment ..........      (52,323,604)        (42,372,618)       (40,501,980)
 Payments on notes receivable ...........................          339,290             632,526            398,851
 Investments ............................................       (3,050,100)                            (1,274,069)
 Investments in joint ventures ..........................          (35,000)          5,736,097           (727,266)
 Other ..................................................       (1,993,999)           (437,941)        (1,778,678)
                                                             -------------      --------------     --------------
     Net cash used in investing activities ..............      (29,311,979)        (19,814,607)       (37,634,469)
CASH FLOWS FROM FINANCING ACTIVITIES:
 Net (payments) borrowings under line of credit
  agreements ............................................      (61,000,000)       (226,000,000)       124,000,000
 Long-term debt borrowings ..............................       25,000,000          18,795,000         57,961,058
 Principal payments on long-term debt ...................      (14,458,874)        (16,094,879)       (10,546,075)
 Principal payments under capital lease obligations .....       (4,930,596)         (1,262,305)          (739,884)
 Redemption of capital equity certificates ..............      (10,062,587)         (8,204,091)        (6,554,160)
 Proceeds from sale of equity participation units,
  net of expenses .......................................                           10,836,690
 Cash patronage dividends paid ..........................      (13,389,017)        (13,220,462)       (10,992,918)
                                                             -------------      --------------     --------------
     Net cash (used in) provided by financing
      activities ........................................      (78,841,074)       (235,150,047)       153,128,021
                                                             -------------      --------------     --------------
(DECREASE) INCREASE IN CASH .............................       (4,428,471)         16,637,964          9,769,550
CASH AT BEGINNING OF YEAR ...............................       38,064,191          21,426,227         11,656,677
                                                             -------------      --------------     --------------
CASH AT END OF YEAR .....................................    $  33,635,720      $   38,064,191     $   21,426,227
                                                             =============      ==============     ==============
</TABLE>

                See notes to consolidated financial statements.

                                      F-5



<PAGE>

                 HARVEST STATES COOPERATIVES AND SUBSIDIARIES


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   YEARS ENDED MAY 31, 1998, 1997, AND 1996


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     NATURE OF BUSINESS -- Harvest States Cooperatives is a producer-owned
agricultural cooperative organized for the mutual benefit of its members.
Membership extends from the Midwest to the Pacific Northwest. The Cooperative's
primary lines of business are grain marketing, milling, and oilseed processing.
Members' grain is marketed through a network of inland and export elevators.
Sales are both domestic and international.

     CONSOLIDATION -- The consolidated financial statements include the
accounts of Harvest States Cooperatives and its majority-owned subsidiaries
(the Company). All significant intercompany balances and transactions have been
eliminated.

     INVENTORIES -- Grain and oilseed and processed grain and oilseed products
are stated at market, including appropriate adjustment of open purchase, sales,
and futures contracts. Feed and farm supply inventories are priced at the lower
of cost (first-in, first-out method) or market.

     The Company follows the general policy of hedging its grain and oilseed
inventories and unfilled orders for grain and oilseed products to the extent
considered practicable for minimizing risk from market price fluctuations.
Futures contracts used for hedging are purchased and sold through regulated
commodity exchanges. Inventories, however, are not completely hedged, due in
part to the absence of satisfactory hedging facilities for certain commodities
and geographical areas and in part to the Company's appraisal of its exposure
from expected price fluctuations. Noncommodity exchange purchase and sale
contracts may expose the Company to risk in the event that a counterparty to a
transaction is unable to fulfill its contractual obligation. The Company
manages its risk by entering into purchase contracts with preapproved producers
and establishing appropriate limits for individual suppliers. Sales contracts
are entered into with organizations of acceptable creditworthiness, as
internally evaluated.

     INVESTMENTS -- Investments in cooperatives are stated at cost including
allocated equity and retainings. Patronage dividends are recorded at the time
written notices of allocation are received. Joint ventures and other
significant equity investments are accounted for under the equity method. Under
the equity method, the Company recognizes its proportionate share of earnings
or loss of the investee. Investments in other debt and equity securities are
considered available for sale and are stated at market value, with unrealized
amounts included in other equity.

     PROPERTY, PLANT, AND EQUIPMENT -- Property, plant, and equipment are
stated at cost, less accumulated depreciation. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.

     INTANGIBLE ASSETS -- Leasehold rights and other intangible assets are
amortized using the straight-line method over 3 to 40 years.

     GRAIN AND OILSEED SALES -- Grain and oilseed sales are recorded at time of
shipment. Export sales, including those through joint ventures for the years
ended May 31, 1998, 1997, and 1996 were as follows:


<TABLE>
<CAPTION>
                                       1998               1997               1996
                                 ----------------   ----------------   ----------------
<S>                              <C>                <C>                <C>
      Africa .................  $  280,000,000     $  227,000,000     $  195,000,000
      Asia ...................   1,217,000,000      2,318,000,000      2,150,000,000
      Europe .................     404,000,000        577,000,000        465,000,000
      North America ..........     331,000,000        360,000,000        205,000,000
      South America ..........     268,000,000         18,000,000         85,000,000
</TABLE>

     INCOME TAXES -- Deferred income taxes are provided on temporary
differences between the tax basis of an asset or liability and its reported
amount in the financial statements. Due to the high proportion of patronage
earnings, deferred taxes resulting from temporary differences are not
significant.


                                      F-6



<PAGE>

                 HARVEST STATES COOPERATIVES AND SUBSIDIARIES


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                    YEARS ENDED MAY 31, 1998, 1997, AND 1996

 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
     IMPAIRMENT OF LONG-LIVED ASSETS -- Management periodically reviews the
carrying value of property and equipment for potential impairment by comparing
its carrying value to the estimated undiscounted future cash flows expected to
result from the use of these assets. Should the sum of the related, expected
future net cash flows be less than the carrying value, an impairment loss would
be recognized. An impairment loss would be measured by the amount by which the
carrying value of the asset exceeds the fair value of the asset.

     NEW ACCOUNTING STANDARDS -- In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 131, Disclosures about Segments of an Enterprise and Related
Information, which relates to financial reporting of operating or business
segments of a company. The new standard is effective for fiscal years beginning
after December 15, 1997. Management is currently evaluating this new standard
and has not yet determined its applicability or impact on the presentation of
the Company's financial statements.

     In June 1998, FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which relates to the accounting for
derivative transactions and hedging activities. This new standard is effective
for years beginning after June 15, 1999. While management does not believe this
standard will materially impact the financial results of the Company, it is
currently evaluating the reporting requirements under this new standard.

     ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.


2. RECEIVABLES
     Receivables as of May 31:


<TABLE>
<CAPTION>
                                                     1998              1997
                                               ---------------   ---------------
<S>                                            <C>               <C>
        Trade ..............................    $ 207,689,447     $ 213,501,012
        Elevator accounts ..................       23,478,016        56,172,256
        Other ..............................       11,911,216         8,819,422
                                                -------------     -------------
                                                  243,078,679       278,492,690
        Less allowance for losses ..........      (11,985,000)      (10,975,000)
                                                -------------     -------------
                                                $ 231,093,679     $ 267,517,690
                                                =============     =============
</TABLE>

3. INVENTORIES
     Inventories as of May 31:


<TABLE>
<CAPTION>
                                                                1998              1997
                                                          ---------------   ---------------
<S>                                                       <C>               <C>
        Grain and oilseed .............................    $138,838,640      $176,605,333
        Processed grain and oilseed products ..........      37,543,688        35,139,534
        Feed and farm supplies ........................      34,512,957        36,628,380
                                                           ------------      ------------
                                                           $210,895,285      $248,373,247
                                                           ============      ============
</TABLE>

 

                                      F-7



<PAGE>

                 HARVEST STATES COOPERATIVES AND SUBSIDIARIES


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                    YEARS ENDED MAY 31, 1998, 1997, AND 1996

4. INVESTMENTS
     Investments as of May 31:


<TABLE>
<CAPTION>
                                                                   1998              1997
                                                             ---------------   ---------------
<S>                                                          <C>               <C>
     Cooperatives:
       St. Paul Bank for Cooperatives ....................    $  9,495,183      $  8,666,195
       National Bank for Cooperatives ....................       3,998,435         3,546,889
       Cenex, Inc. .......................................      22,095,630        16,391,560
       Central Ferry Terminal Association ................       1,190,000         1,222,415
       Pro Fac Cooperative ...............................       1,810,256         1,789,706
       Land O' Lakes, Inc. ...............................      11,810,240         7,692,077
       Ag Processing, Inc. ...............................      19,410,569        16,614,505
       Intrade Corporation ...............................       1,167,266         1,869,073
       Farmland Industries ...............................       1,321,564         1,220,261
       Lewis-Clark Terminal, Inc. ........................       1,248,027         1,208,339
     Joint Ventures:
       Tacoma Export Marketing Company ...................       7,147,499         9,163,887
       Ventura Foods, L.L.C. .............................      40,953,585        40,505,480
       Harvest States -- Farmland Specialty Feed .........       1,166,135           854,678
       Ag States Agency, L.L.C. ..........................       5,071,273         5,018,293
       Farmland-Harvest States, L.L.C. ...................         909,100         1,092,660
     Archer Daniels Midland Common Stock .................       6,177,924         6,213,860
     Sparta Foods ........................................       2,500,000
     International Malting Company .......................         700,000           700,000
     Other ...............................................       3,907,068         2,777,738
                                                              ------------      ------------
                                                              $142,079,754      $126,547,616
                                                              ============      ============
</TABLE>

5. OTHER ASSETS
     Other assets as of May 31:


<TABLE>
<CAPTION>
                                                                      1998             1997
                                                                 --------------   --------------
<S>                                                              <C>              <C>
      Leasehold rights and other intangibles, less accumulated
       amortization of $8,189,990 and $6,824,986 .............    $14,332,674      $15,232,601
      Notes receivable .......................................      1,081,018        1,520,511
      Prepaid expenses and other assets ......................     33,078,128       29,736,566
                                                                  -----------      -----------
                                                                  $48,491,820      $46,489,678
                                                                  ===========      ===========
</TABLE>

 

                                      F-8



<PAGE>

                 HARVEST STATES COOPERATIVES AND SUBSIDIARIES


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                    YEARS ENDED MAY 31, 1998, 1997, AND 1996

6. PROPERTY, PLANT AND EQUIPMENT

     Property, plant, and equipment as of May 31:


<TABLE>
<CAPTION>
                                                      ESTIMATED
                                                     USEFUL LIFE
                                                      IN YEARS            1998                1997
                                                    ------------   -----------------   -----------------
<S>                                                 <C>            <C>                 <C>
  Grain terminals and country elevators .........     3 to 50       $  249,368,203      $  229,171,093
  Grain processing plants .......................     3 to 40          187,315,494         163,918,161
  Feed plants ...................................     3 to 40           27,060,403          24,706,884
  Corporate office facilities ...................     3 to 40           13,286,965          12,654,230
                                                                    --------------      --------------
                                                                       477,031,065         430,450,368
  Less accumulated depreciation .................                     (222,555,877)       (206,299,403)
                                                                    --------------      --------------
                                                                    $  254,475,188      $  224,150,965
                                                                    ==============      ==============
</TABLE>

     During the years ended May 31, 1998, 1997, and 1996, the Company
capitalized interest of $338,700, $588,731, and $739,101, respectively.


7. BORROWINGS

     NOTES PAYABLE:

     The Company has a seasonal loan agreement of $123,000,000 committed with
St. Paul Bank for Cooperatives, $3,500,000 and $9,000,000 of which were
outstanding on May 31, 1998 and 1997, respectively. The Company has a seasonal
loan agreement of $277,000,000 committed with National Bank for Cooperatives,
$3,500,000 and $44,000,000 of which were outstanding on May 31, 1998 and 1997,
respectively. The Company also has seasonal loan agreements of $125,000,000
committed with commercial banks ($150,000,000 at May 31, 1997), $30,000,000 and
$45,000,000 of which were outstanding on May 31, 1998 and 1997, respectively.
The average weighted interest rates as of May 31, 1998 and 1997 were 5.77% and
5.80%, respectively. Major financial covenants of these seasonal loan
agreements provide that (1) the Company will maintain a working capital amount
of not less than $100,000,000; (2) the Company shall have consolidated members
and patrons' equity of not less than $275,000,000; and (3) the Company shall
not have consolidated funded debt to consolidated members and patrons' equity
in excess of .80 to 1.00. The Company is also required to maintain investments
in the St. Paul Bank for Cooperatives and the National Bank for Cooperatives
based upon borrowing levels. Patronage allocations to the Company are used to
maintain such required level of investment. No direct cash investment is
required. The total unused seasonal loan commitment at May 31, 1998 was
$488,000,000.


                                      F-9



<PAGE>

                 HARVEST STATES COOPERATIVES AND SUBSIDIARIES


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                    YEARS ENDED MAY 31, 1998, 1997, AND 1996

 7. BORROWINGS (CONTINUED)

 
     LONG-TERM DEBT AT MAY 31:


<TABLE>
<CAPTION>
                                                                        1998               1997
                                                                  ----------------   ----------------
<S>                                                               <C>                <C>
   St. Paul Bank for Cooperatives, with fixed and variable
     interest rates from 6.41% to 8.75%, due in installments
     through 2007 .............................................    $  72,262,833      $  68,550,333
   National Bank for Cooperatives, with fixed and variable
     interest rates from 6.41% to 8.50%, due in installments
     through 2007 .............................................       63,770,833         56,458,333
   Industrial Development Revenue Bonds, payable through
     July 2004, interest rate of 7.4% .........................        1,850,000          2,100,000
   Capitalized lease obligations with fixed and variable rates,
     8.0% at May 31, 1998 .....................................          621,197          5,551,793
   Mortgages payable and other ................................        2,105,762          1,798,007
                                                                   -------------      -------------
                                                                     140,610,625        134,458,466
   Less current portion .......................................      (19,332,767)       (21,094,774)
                                                                   -------------      -------------
                                                                   $ 121,277,858      $ 113,363,692
                                                                   =============      =============
</TABLE>

     See Note 16 for changes to long-term borrowings effective June 1, 1998.


8. PATRONS' EQUITY
     In accordance with the bylaws and by action of the Board of Directors,
annual net earnings from patronage sources are distributed to consenting
patrons following the close of each year and are based on amounts reportable
for federal income tax purposes as adjusted in accordance with the bylaws. The
cash portion of this distribution is determined annually by the Board of
Directors, with the balance issued in the form of Patronage Certificates.

     Annual net earnings from sources other than patronage may be added to the
Capital Reserve or, upon action by the Board of Directors, allocated to members
in the form of Nonpatronage Certificates.

     The Board of Directors has authorized the redemption of Patronage
Certificates held by patrons who are 72 years of age and those held by estates
of deceased patrons. The Board of Directors has also authorized the redemption
of Nonpatronage Certificates held by estates of deceased patrons.

     On May 31, 1997, the Company completed an offering for the sale of Equity
Participation Units (EPUs) in its Wheat Milling Defined Business Unit and its
Oilseed Processing and Refining Defined Business Unit to qualified subscribers.
Qualified subscribers are identified as Defined Members or representatives of
Defined Members which are persons actually engaged in the production of
agricultural products or associations of producers of agricultural products.
Subscribers were allowed to purchase a portion of their EPUs by exchanging
existing patronage certificates. The purchasers of EPUs have the right and
obligation to deliver annually the number of bushels of wheat or soybeans equal
to the number of Units held. Beginning in the fiscal year ending May 31, 1998,
unit holders will participate in the net patronage sourced income from
operations of the applicable defined business unit as patronage refunds. It is
the Board of Directors' goal to distribute patronage refunds attributable to
EPUs in the form of 75% cash and 25% patrons' equities. Retirement of patrons'
equities attributable to EPUs is at the discretion of the Board of Directors,
and it is the Board's goal to retire such equity on a revolving basis seven
years after declaration.

     See Note 16 for changes to the Company's patronage policy effective June
1, 1998.

                                      F-10



<PAGE>

                 HARVEST STATES COOPERATIVES AND SUBSIDIARIES


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                    YEARS ENDED MAY 31, 1998, 1997, AND 1996

9. RETIREMENT PLANS
     The Company has noncontributory defined benefit retirement plans covering
substantially all salaried and full-time hourly employees. The retirement plan
benefits for salaried employees are based on years of service and the
participants' total compensation. Benefits for hourly employees are based on
various monthly amounts for each year of credited service. The plans are funded
by annual contributions to tax-exempt trusts in accordance with federal law and
regulations. Plan assets consist principally of corporate obligations, U.S.
Government bonds, money market funds, and immediate participation guarantee
contracts.

     Net pension expense for the years ended May 31 consists of the following:


<TABLE>
<CAPTION>
                                                                        1998               1997              1996
                                                                  ----------------   ---------------   ---------------
<S>                                                               <C>                <C>               <C>
   Service cost -- benefits earned during the period ..........    $   2,475,111      $  2,883,242      $  2,496,711
   Interest cost on projected benefit obligation ..............        5,802,681         5,907,204         5,587,377
   Actual return on plan assets ...............................      (14,400,220)       (2,441,078)       (6,860,278)
   Net amortization and deferral ..............................        8,170,903        (4,081,960)          555,130
                                                                   -------------      ------------      ------------
                                                                   $   2,048,475      $  2,267,408      $  1,778,940
                                                                   =============      ============      ============
</TABLE>

     The funded status of the plans and the amount recognized on the
consolidated balance sheets as of May 31 are as follows:


<TABLE>
<CAPTION>
                                                                               1998             1997
                                                                          --------------   --------------
<S>                                                                       <C>              <C>
   Actuarial present value of benefit obligations:
    Accumulated benefit obligation, including vested benefits of
     $84,901,955 and $75,515,800, respectively ........................    $ 89,428,668     $ 77,644,611
                                                                           ============     ============
    Projected benefit obligation for service rendered to date .........    $ 94,075,077     $ 78,660,275
   Plan assets at fair value ..........................................      86,888,669       76,348,832
                                                                           ------------     ------------
   Plan assets less than projected benefit obligation .................      (7,186,408)      (2,311,443)
   Unrecognized net loss ..............................................      33,879,357       27,737,539
   Unrecognized transition gain at June 1, 1985 recognized
    over 13 years .....................................................                       (1,259,030)
   Unrecognized prior-service cost ....................................      (1,282,266)      (1,330,578)
   Additional minimum liability .......................................        (864,612)        (837,742)
                                                                           ------------     ------------
   Prepaid pension cost ...............................................    $ 24,546,071     $ 21,998,746
                                                                           ============     ============
</TABLE>

     The determination of the actuarial present value of the projected benefit
obligation was based on a weighted average discount rate of 7.00% in 1998, and
7.75% in 1997 and 1996, and a rate of increase in future compensation of 5% in
1998, 1997, and 1996. The expected long-term rate of return on plan assets was
8.5% in 1998 and 1997, and 8% in 1996.


10. POSTRETIREMENT MEDICAL AND OTHER BENEFITS
     The Company provides certain health care benefits for retired employees.
Employees become eligible for these benefits if they meet minimum age and
service requirements and are eligible for retirement benefits.


                                      F-11



<PAGE>

                 HARVEST STATES COOPERATIVES AND SUBSIDIARIES


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                    YEARS ENDED MAY 31, 1998, 1997, AND 1996

 10. POSTRETIREMENT MEDICAL AND OTHER BENEFITS (CONTINUED)

 
     The accrued postretirement medical and other benefits costs which are not
funded were as follows at May 31:


<TABLE>
<CAPTION>
                                                                            1998              1997
                                                                      ---------------   ---------------
<S>                                                                   <C>               <C>
   Accumulated postretirement benefit obligation (APBO):
    Retirees ......................................................    $  4,469,542      $  4,371,635
    Fully eligible active plan participants .......................       1,290,572           775,433
    Other active plan participants ................................       4,500,895         3,032,288
                                                                       ------------      ------------
     Total APBO ...................................................      10,261,009         8,179,356
   Unrecognized transition obligation .............................      (7,970,082)       (8,501,474)
   Unrecognized net gains .........................................       1,850,292         3,526,263
                                                                       ------------      ------------
   Accrued postretirement medical and other benefits cost .........    $  4,141,219      $  3,204,145
                                                                       ============      ============
</TABLE>

     The components of the net periodic cost are as follows:


<TABLE>
<CAPTION>
                                                                     1998            1997            1996
                                                                -------------   -------------   -------------
<S>                                                             <C>             <C>             <C>
   Service cost -- benefits earned during the year ..........    $  474,502      $  320,925      $  337,182
   Interest cost on projected benefit obligation ............       658,729         594,742         548,997
   Amortization of unrecognized gains .......................      (102,810)       (147,241)       (228,025)
   Amortization of transition obligation ....................       531,392         531,392         554,710
   Curtailment cost .........................................                       205,947
                                                                 ----------      ----------      ----------
   Net periodic postretirement cost .........................    $1,561,813      $1,505,765      $1,212,864
                                                                 ==========      ==========      ==========
</TABLE>

     The calculations assumed a discount rate of 7.00% in 1998 and 7.75% in
1997 and 1996 and a health-care-cost trend rate of 9.00% in 1998, declining to
6.00% in 2004. If the health-care-cost trend rate increased by 1.00%, the APBO
would increase by 7.30% and the service cost and interest cost components would
increase by 9.90%.


11. PROVISION FOR INCOME TAXES
     The provision for income taxes for each of the three years ended May 31
was as follows:


<TABLE>
<CAPTION>
                                                     1998            1997            1996
                                                -------------   -------------   -------------
<S>                                             <C>             <C>             <C>
   Current provision ........................    $6,300,000      $6,200,000      $7,100,000
   Deferred -- principally federal ..........       100,000                        (200,000)
                                                 ----------      ----------      ----------
   Total provision ..........................    $6,400,000      $6,200,000      $6,900,000
                                                 ==========      ==========      ==========
</TABLE>

     Deferred income taxes, which are not significant, relate principally to
allowances and accruals.

     A reconciliation of the statutory federal tax rate to the effective rate
for each of the three years ended May 31 follows:


<TABLE>
<CAPTION>
                                                                                 1998         1997         1996
                                                                              ----------   ----------   ----------
<S>                                                                           <C>          <C>          <C>
   Statutory federal income tax rate ......................................       35.0%        35.0%        35.0%
   State and local income taxes, net of federal income tax benefit ........        5.0          4.9          4.3
   Patronage earnings .....................................................      (30.0)       (29.8)       (29.6)
   Other ..................................................................                      .5          2.2
                                                                                 -----        -----        -----
   Effective rate .........................................................       10.0%        10.6%        11.9%
                                                                                 =====        =====        =====
</TABLE>

 

                                      F-12



<PAGE>

                 HARVEST STATES COOPERATIVES AND SUBSIDIARIES


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                    YEARS ENDED MAY 31, 1998, 1997, AND 1996

12. OTHER REVENUES


<TABLE>
<CAPTION>
                                                               YEARS ENDED MAY 31,
                                                 -----------------------------------------------
                                                      1998             1997             1996
                                                 -------------   ---------------   -------------
<S>                                              <C>             <C>               <C>
   Storage and handling ......................   $ 9,260,012      $  7,424,823     $ 8,722,537
   Service revenues ..........................    31,897,431        27,419,350      20,572,679
   Commissions ...............................     6,886,616         5,879,621       6,837,272
   Joint venture income ......................    12,131,233        11,598,013      12,517,993
   Gain (loss) on sale of property, plant, and
    equipment ................................     1,040,903        (4,612,341)        853,024
   Interest income ...........................     9,449,895         9,448,433      11,581,221
   Other .....................................    13,854,799        11,469,653       7,254,797
                                                 -----------      ------------     -----------
                                                 $84,520,889      $ 68,627,552     $68,339,523
                                                 ===========      ============     ===========
</TABLE>

13. COMMITMENTS AND CONTINGENCIES
     At May 31, 1998 and 1997, the Company stored grain and processed grain
products for others totaling $69,000,000 and $61,200,000, respectively. Such
stored commodities and products are not the property of the Company and
therefore are not included in the Company inventory.

     The Company is a guarantor for lines of credit for related companies
totaling $27,000,000, of which $7,700,000 was outstanding as of May 31, 1998.
All outstanding loans are current with respective creditors as of May 31, 1998.
 
     The Company leases approximately 3,500 rail cars with remaining lease
terms of one to ten years. In addition, the Company leases vehicles and various
manufacturing equipment.

     Minimum rental payments due under these operating leases are as follows:


<TABLE>
<CAPTION>
                                      RAIL CARS        VEHICLES          OTHER           TOTAL
                                    -------------   -------------   --------------   -------------
<S>                                 <C>             <C>             <C>              <C>
   Years ending August 31:
    Three months ending
     August 31, 1998 ............   $ 4,850,251     $ 1,414,936      $   593,717     $ 6,858,904
    1999 ........................    17,113,709       5,552,907        3,621,460      26,288,076
    2000 ........................    11,631,412       4,411,889        3,167,012      19,210,313
    2001 ........................     7,694,315       3,156,696        2,860,200      13,711,211
    2002 ........................     5,446,817       1,864,238        2,595,524       9,906,579
    2003 ........................     4,028,270         839,761        2,433,682       7,301,713
    2004 and thereafter .........     2,381,915         336,902        9,452,679      12,171,496
                                    -----------     -----------      -----------     -----------
                                    $53,146,689     $17,577,329      $24,724,274     $95,448,292
                                    ===========     ===========      ===========     ===========
</TABLE>

     Total rent expense, net of rail car mileage credits received from the
railroad and subleases, was approximately $15,199,000, $13,624,000, and
$12,454,000 for the years ended May 31, 1998, 1997, and 1996, respectively.
Mileage credits and sublease income were approximately $14,175,000,
$13,641,000, and $7,257,000 for the years ended May 31, 1998, 1997, and 1996,
respectively.

     The Company is a party to various lawsuits and administrative proceedings
incidental to its business. It is impossible, at this time, to estimate what
the ultimate legal and financial liability of the Company will be;
nevertheless, management believes, based on the information available to date
and the resolution of prior proceedings, that the ultimate liability of all
litigation and proceedings will not have a material impact on the financial
statements of the Company taken as a whole.


                                      F-13



<PAGE>

                 HARVEST STATES COOPERATIVES AND SUBSIDIARIES


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                    YEARS ENDED MAY 31, 1998, 1997, AND 1996

14. SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION

     Additional information concerning supplemental disclosures of cash flow
activities for the years ended May 31 is as follows:


<TABLE>
<CAPTION>
                                                                    1998             1997             1996
                                                               --------------   --------------   --------------
<S>                                                            <C>              <C>              <C>
   Net cash paid during year for:
    Interest ...............................................    $17,879,119      $20,737,222      $31,836,722
    Income taxes ...........................................      4,808,699        4,457,322        3,934,688
   Significant noncash transactions:
    Noncash patronage refunds issued from prior
     year's earnings .......................................     31,257,996       30,877,406       25,617,898
    Noncash nonpatronage certificates issued from
     prior year's earnings .................................      6,862,964        6,115,487        7,912,297
    Capital equity certificates issued in exchange for
     elevator properties ...................................     10,560,902        4,985,585        8,721,542
    Capital equity certificates exchanged for EPUs .........                       2,035,171
</TABLE>

15. FAIR VALUE OF FINANCIAL INSTRUMENTS

     SFAS No. 107, Disclosure about Fair Value of Financial Instruments,
requires disclosure of the fair value of all financial instruments to which the
Company is a party. All financial instruments are carried at amounts that
approximate estimated fair value, except for investments in cooperatives, for
which it is not practicable to provide fair value information.


16. SUBSEQUENT EVENTS

     Effective June 1, 1998, the Company merged with CENEX, Inc. (Cenex) to
form Cenex Harvest States Cooperatives (CHS). All outstanding allocated
equities of the two merging companies will be exchanged for equity in Cenex
Harvest States Cooperatives with a stated value equal to the amount exchanged.

     Summarized financial information of Cenex as of May 31, 1998 is as
follows:


<TABLE>
<CAPTION>
                                      MAY 31, 1998    
                                   -----------------
<S>                                <C>
  Total assets .................   $1,620,420,163
  Total liabilities ............      953,837,823
  Equities .....................      666,582,340
</TABLE>                        


<TABLE>
<CAPTION>
                                       YEAR ENDED
                                      MAY 31, 1998
                                   -----------------
<S>                                <C>
  Revenues .....................   $2,725,605,331
  Net income ...................       98,387,443
</TABLE>

     In response to anticipated borrowing requirements after the merger with
Cenex, the Company replaced its existing short-term debt facility with a new
short-term loan agreement with the banks for cooperatives and the commercial
banks whereby the Company was extended a 364-day revolving credit facility of
$400,000,000 and a five-year revolving facility totaling $200,000,000, all of
which is committed.

     The Company also repaid its existing debt to the St. Paul Bank for
Cooperatives and the National Bank for Cooperatives and established a new
long-term loan agreement through the same institutions whereby the term loan
balance outstanding on May 31, 1998 was paid to the banks, and partially
refinanced through the new agreement. The new long-term loan agreement commits
$200,000,000 of long-term borrowing capacity to the Company, with repayments
through the year 2009. The outstanding balance on this facility after the
refinancing was $134,000,000 with $66,000,000 remaining available.


                                      F-14



<PAGE>

                 HARVEST STATES COOPERATIVES AND SUBSIDIARIES


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                    YEARS ENDED MAY 31, 1998, 1997, AND 1996

 16. SUBSEQUENT EVENTS (CONTINUED)

     Also in June 1998, as part of the refinancing program for the merged
operations, the Company issued a private placement with several insurance
companies for long-term debt in the amount of $225,000,000, with final payment
due in the year 2013.

     Annual maturities of outstanding long-term indebtedness of CHS due in
years ending after May 31, 1998 are as follows:


<TABLE>
<S>                                 <C>
  1999 ..........................   $   443,566
  2000 ..........................     5,101,327
  2001 ..........................     7,202,277
  2002 ..........................     7,449,557
  2003 ..........................     7,730,027
  2004 and thereafter ...........   354,172,114
</TABLE>

     Beginning June 1, 1998, inactive direct members and patrons and active
direct members and patrons age 61 and older on that date will continue to be
eligible for patronage certificate redemption at age 72 or death. For active
direct members and patrons who were age 60 or younger on June 1, 1998, and
member cooperatives, equities will be redeemed annually based on a pro rata
formula where the numerator is dollars available for such purpose as determined
by the Board of Directors, and the denominator is the sum of the patronage
certificates held by such eligible members and patrons. Such redemptions
related to fiscal year 1998, to be distributed in fiscal year 1999, are
expected to be approximately $13,300,000 and are classified as a current
liability on the May 31, 1998 balance sheet.


                                      F-15



<PAGE>

                         INDEPENDENT AUDITORS' REPORT








Board of Directors
Harvest States Cooperatives
Saint Paul, Minnesota

     We have audited the balance sheets of the Oilseed Processing and Refining
Defined Business Unit (the Defined Business Unit), formerly known as Honeymead
Products Company, a defined business unit of Harvest States Cooperatives as of
May 31, 1998 and 1997 and the related statements of earnings, defined business
unit equity, and cash flows for each of the three years in the period ended May
31, 1998. These financial statements are the responsibility of the Defined
Business Unit's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

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

     In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Oilseed Processing and Refining Defined
Business Unit at May 31, 1998 and 1997 and the results of its operations and
its cash flows for each of the three years in the period ended May 31, 1998, in
conformity with generally accepted accounting principles.




                                                          Deloitte & Touche, LLP
                                                              Minneapolis, MN
July 24, 1998

                                      F-16



<PAGE>

             OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
           (A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)


                                BALANCE SHEETS
                             MAY 31, 1998 AND 1997




<TABLE>
<CAPTION>
                                                              1998             1997
                                                         --------------   --------------
<S>                                                      <C>              <C>
ASSETS
CURRENT ASSETS:
 Receivables (Note 2) ................................    $32,585,292      $34,169,676
 Inventories (Note 3) ................................     23,758,625       22,850,699
 Prepaid expenses and deposits .......................        185,399        2,310,163
                                                          -----------      -----------
   Total current assets ..............................     56,529,316       59,330,538
PROPERTY, PLANT, AND EQUIPMENT (Note 4) ..............     34,952,626       33,085,560
                                                          -----------      -----------
                                                          $91,481,942      $92,416,098
                                                          ===========      ===========
LIABILITIES AND DEFINED BUSINESS UNIT EQUITY
CURRENT LIABILITIES:
 Due to Harvest States Cooperatives (Note 5) .........    $22,890,878      $25,584,178
 Accounts payable and accrued expenses ...............     10,527,468       13,440,922
                                                          -----------      -----------
   Total current liabilities .........................     33,418,346       39,025,100
COMMITMENTS AND CONTINGENCIES (Note 10)
DEFINED BUSINESS UNIT EQUITY (Note 6) ................     58,063,596       53,390,998
                                                          -----------      -----------
                                                          $91,481,942      $92,416,098
                                                          ===========      ===========
</TABLE>

                       See notes to financial statements.

                                      F-17



<PAGE>

             OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
           (A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)


                            STATEMENTS OF EARNINGS
                   YEARS ENDED MAY 31, 1998, 1997, AND 1996




<TABLE>
<CAPTION>
                                                          1998              1997              1996
                                                    ---------------   ---------------   ---------------
<S>                                                 <C>               <C>               <C>
REVENUES:
 Processed oilseed sales ........................    $410,385,807      $441,737,923      $399,271,001
 Other revenue (expense) ........................       1,745,743        (1,659,881)        1,435,708
                                                     ------------      ------------      ------------
                                                      412,131,550       440,078,042       400,706,709
COSTS AND EXPENSES:
 Cost of goods sold .............................     379,271,678       405,791,384       371,424,566
 Marketing, general, and administrative .........       4,729,820         4,341,904         4,544,763
 Interest .......................................         380,030           321,700           151,500
                                                     ------------      ------------      ------------
                                                      384,381,528       410,454,988       376,120,829
                                                     ------------      ------------      ------------
EARNINGS BEFORE INCOME TAXES ....................      27,750,022        29,623,054        24,585,880
INCOME TAXES (Note 9) ...........................       1,825,000         2,100,000         1,600,000
                                                     ------------      ------------      ------------
NET EARNINGS ....................................    $ 25,925,022      $ 27,523,054      $ 22,985,880
                                                     ============      ============      ============
</TABLE>

                       See notes to financial statements.

                                      F-18



<PAGE>

             OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
           (A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)


                  STATEMENTS OF DEFINED BUSINESS UNIT EQUITY



<TABLE>
<S>                                                   <C>
BALANCE AT MAY 31, 1995 ...........................    $  53,390,998
 Net earnings .....................................       22,985,880
 Divisional equity distributed ....................      (22,985,880)
                                                       -------------
BALANCE AT MAY 31, 1996 ...........................       53,390,998
 Net earnings .....................................       27,523,054
 Divisional equity distributed ....................      (27,523,054)
                                                       -------------
BALANCE AT MAY 31, 1997 ...........................       53,390,998
 Net earnings .....................................       25,925,022
 Defined business unit equity distributed .........      (21,252,424)
                                                       -------------
BALANCE AT MAY 31, 1998 ...........................    $  58,063,596
                                                       =============
</TABLE>

                      See notes to financial statements.

                                      F-19



<PAGE>

             OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
           (A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)


                           STATEMENTS OF CASH FLOWS
                   YEARS ENDED MAY 31, 1998, 1997, AND 1996




<TABLE>
<CAPTION>
                                                                  1998               1997               1996
                                                            ----------------   ----------------   ----------------
<S>                                                         <C>                <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net earnings ...........................................    $  25,925,022      $  27,523,054      $  22,985,880
 Adjustments to reconcile net earnings to net cash
  provided by operating activities:
   Depreciation and amortization ........................        2,021,430          1,777,475          1,598,965
   (Gain) loss on sale of property, plant, and
    equipment ...........................................         (658,290)         2,045,150             31,765
   Changes in assets and liabilities:
    Receivables .........................................        1,584,384        (11,374,064)        (2,407,691)
    Inventories .........................................         (907,926)         3,384,521         (8,980,005)
    Prepaid expenses and deposits .......................        2,124,764         (1,999,471)           213,459
    Accounts payable and accrued expenses ...............       (2,913,454)         2,201,334            957,592
                                                             -------------      -------------      -------------
      Total adjustments .................................        1,250,908         (3,965,055)        (8,585,915)
                                                             -------------      -------------      -------------
      Net cash provided by operating activities .........       27,175,930         23,557,999         14,399,965
CASH FLOWS FROM INVESTING ACTIVITIES:
 Proceeds from disposition of property, plant, and
  equipment .............................................       10,722,956
 Acquisition of property, plant, and equipment ..........      (13,953,162)       (12,136,772)        (5,991,735)
                                                             -------------      -------------      -------------
      Net cash used in investing activities .............       (3,230,206)       (12,136,772)        (5,991,735)
CASH FLOWS FROM FINANCING ACTIVITIES:
 Net (repayments to) borrowings from Harvest
  States Cooperatives ...................................       (2,693,300)        16,101,827         14,577,650
 Defined business unit equity distributed ...............      (21,252,424)       (27,523,054)       (22,985,880)
                                                             -------------      -------------      -------------
      Net cash used in financing activities .............      (23,945,724)       (11,421,227)        (8,408,230)
                                                             -------------      -------------      -------------
INCREASE IN CASH ........................................
CASH AT BEGINNING OF YEAR ...............................
                                                             -------------      -------------      -------------
CASH AT END OF YEAR .....................................    $          --      $          --      $          --
                                                             =============      =============      =============
</TABLE>

                       See notes to financial statements.

                                      F-20



<PAGE>

             OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
           (A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)


                         NOTES TO FINANCIAL STATEMENTS
                    YEAR ENDED MAY 31, 1998, 1997, AND 1996


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     ORGANIZATION AND NATURE OF BUSINESS -- Harvest States Cooperatives Oilseed
Processing and Refining Defined Business Unit (the Defined Business Unit),
formerly known as Honeymead Products Company, is a defined business unit of
Harvest States Cooperatives (the Company) and is not organized as a separate
legal entity. The purpose of the Defined Business Unit is to carry on the
operations of the Oilseed Processing and Refining Division. The assets and
liabilities of the Defined Business Unit continue to be 100% owned by the
Company. The Defined Business Unit operates a single soybean crushing and oil
refining plant in Mankato, Minnesota and serves customers throughout the United
States.

     CASH MANAGEMENT -- The Defined Business Unit draws all of its cash
requirements from and deposits all cash generated with the Company's
centralized cash management system.

     INVENTORIES -- Oilseed and processed oilseed products are stated at
market, including adjustment for open purchase, sales, and futures contracts
and deferral of profit on processed oilseed products.

     The Defined Business Unit follows the general policy of hedging its
oilseed inventories and unfilled orders for oilseed products to the extent
considered practicable for minimizing risk from market price fluctuations.
Futures contracts used for hedging are purchased and sold through regulated
commodity exchanges. Inventories, purchase commitments, and sales commitments,
however, are not completely hedged, due in part to the absence of satisfactory
hedging facilities for certain commodities and geographical areas and, in part,
to the Defined Business Unit's appraisal of its exposure from expected price
fluctuations. Noncommodity exchange purchase and sale contracts may expose the
Defined Business Unit to risk in the event that a counterparty to a transaction
is unable to fulfill its contractual obligation. The Defined Business Unit
manages its risk by entering into purchase contracts with preapproved producers
and companies and by establishing appropriate limits for individual suppliers.
Sales contracts are entered into with organizations of acceptable
creditworthiness, as internally evaluated.

     PROPERTY, PLANT, AND EQUIPMENT -- Property, plant, and equipment are
stated at cost, less accumulated depreciation. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.

     IMPAIRMENT OF LONG-LIVED ASSETS -- Management periodically reviews the
carrying value of property and equipment for potential impairment by comparing
its carrying value to the estimated undiscounted future cash flows expected to
result from the use of these assets. Should the sum of the related, expected
future net cash flows be less than the carrying value, an impairment loss would
be recognized. An impairment loss would be measured by the amount by which the
carrying value of the asset exceeds the fair value of the asset.

     INCOME TAXES -- Earnings generated on oilseed purchased by the Defined
Business Unit from nonmembers are characterized as nonpatronage and taxable.
Earnings generated on oilseed purchased from the Company are considered to be
patronage to the extent of the Company's patronage purchase percentage of that
particular commodity; the other portion of those earnings is considered
taxable. Due to the high proportion of patronage earnings, deferred taxes
resulting from temporary differences are not significant.

     SALES -- Sales of processed oilseeds are recognized upon shipment to
customers, net of freight charges.

     REVENUE FROM SIGNIFICANT CUSTOMERS -- Sales to two customers accounted for
25% and 10% of total sales for the year ended May 31, 1998, and 25% and 11% of
total sales for the year ended May 31, 1997. Sales to one customer accounted
for 31% of total sales for the year ended May 31, 1996.


                                      F-21



<PAGE>

             OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
            (A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)


                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                    YEARS ENDED MAY 31, 1998, 1997, AND 1996

 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 
     NEW ACCOUNTING STANDARDS -- In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, which relates to financial reporting of operating or business
segments of a company. The new standard is effective for fiscal years beginning
after December 15, 1997. Management is currently evaluating this new standard
and has not yet determined its applicability or impact on the presentation of
the Company's financial statements.

     In June 1998, FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which relates to the accounting for
derivative transactions and hedging activities. This new standard is effective
for years beginning after June 15, 1999. While management does not believe this
standard will materially impact the financial results of the Company, it is
currently evaluating the reporting requirements under this new standard.

     ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.


2. RECEIVABLES


<TABLE>
<CAPTION>
                                                        MAY 31,
                                            -------------------------------
                                                 1998             1997
                                            --------------   --------------
<S>                                         <C>              <C>
      Trade .............................    $32,980,292      $34,564,676
      Less allowance for losses .........       (395,000)        (395,000)
                                             -----------      -----------
                                             $32,585,292      $34,169,676
                                             ===========      ===========
</TABLE>

3. INVENTORIES


<TABLE>
<CAPTION>
                                                        MAY 31,
                                             ------------------------------
                                                  1998            1997
                                             -------------   --------------
<S>                                          <C>             <C>
      Oilseed ............................   $ 6,925,703      $11,740,227
      Processed oilseed products .........    16,832,922       11,110,472
                                             -----------      -----------
                                             $23,758,625      $22,850,699
                                             ===========      ===========
</TABLE>

 

                                      F-22



<PAGE>

             OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
            (A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)


                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                    YEARS ENDED MAY 31, 1998, 1997, AND 1996

4. PROPERTY, PLANT, AND EQUIPMENT



<TABLE>
<CAPTION>
                                                         ESTIMATED                    MAY 31,
                                                        USEFUL LIFE   --------------------------------------
                                                         IN YEARS           1998               1997
                                                       ------------   ----------------   ----------------
<S>                                                    <C>            <C>                <C>
   Land ............................................                   $     762,829      $     630,043
   Elevators, crushing plant, and refinery .........    15 to 20          22,103,417         21,262,318
   Machinery and equipment .........................     5 to 18          51,564,691         46,235,522
   Furniture and fixtures ..........................     3 to 12             379,363            379,363
   Other ...........................................     5 to 12             103,238             99,112
                                                                       -------------      -------------
                                                                          74,913,538         68,606,358
   Less accumulated depreciation ...................                     (44,392,138)       (42,576,795)
                                                                       -------------      -------------
                                                                          30,521,400         26,029,563
   Construction-in-progress ........................                       4,431,226          7,055,997
                                                                       -------------      -------------
                                                                       $  34,952,626      $  33,085,560
                                                                       =============      =============
</TABLE>

5. DUE TO HARVEST STATES COOPERATIVES
     The Defined Business Unit satisfies its working capital needs through
borrowings, both long-and short-term, from the Company to the extent the
Company's borrowing capacity permits.

     For the year ended May 31, 1996, interest on short-term borrowings from
the Company was charged to the divisions based upon a ratable allocation of the
Company's consolidated interest expense related to short-term borrowings based
upon working capital employed by each division. This results in an effective
borrowing rate that may be different than what the division could obtain on an
independent basis.

     During the years ended May 31, 1998 and 1997, respectively, the Company
charged the Defined Business Unit interest on its daily average of short-term
borrowings at a rate equivalent to the weighted average interest rate on
short-term borrowings of the Company. On May 31, 1998, the weighted average
borrowing rate of the Company's short-term borrowings was 5.8%. Amounts due
from the Company will receive interest in the same manner at the same rate.

     Long-term borrowings, if needed, could be obtained at the Company's
long-term borrowing rate.


6. DEFINED BUSINESS UNIT EQUITY
     On May 31, 1997, the Company completed an offering for the sale of Equity
Participation Units (EPUs) in its Oilseed Processing and Refining Defined
Business Unit to qualified subscribers. Qualified subscribers are persons
engaged in the production of agricultural products or associations of producers
of agricultural products. Qualified subscribers have the right and obligation
to deliver annually the number of bushels of soybeans equal to the number of
Units held. Qualified subscribers participate in the net patronage sourced
income from operations of the Oilseed Processing and Refining Defined Business
Unit as patronage refunds. EPUs represent an ownership interest in the Company,
not the Defined Business Unit. The assets and liabilities of the Defined
Business Unit continue to be 100% owned by the Company.


7. RETIREMENT PLANS
     The Defined Business Unit, through the Company, has noncontributory
defined benefit retirement plans covering substantially all salaried and
full-time hourly employees. The retirement plan benefits for salaried employees
are based on years of service and the participants' total compensation.
Benefits for hourly employees are based on various monthly amounts for each
year of credited service. The plans are


                                      F-23



<PAGE>

             OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
            (A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)


                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                    YEARS ENDED MAY 31, 1998, 1997, AND 1996

 7. RETIREMENT PLANS (CONTINUED)

 
funded by annual contributions to tax-exempt trusts in accordance with federal
law and regulations. Plan assets consist principally of corporate obligations,
U.S. Government bonds, money market funds, and immediate participation
guarantee contracts. Pension costs billed to the Defined Business Unit for the
years ended May 31, 1998, 1997, and 1996 were approximately $120,000, $147,000,
and $169,000, respectively. The Defined Business Unit's portion of the
actuarial present value or accumulated benefit obligations and net pension
assets available for benefits has not been determined. Selected information at
May 31 for the Company's plan is as follows:



<TABLE>
<CAPTION>
                                                                     1998             1997
                                                                --------------   --------------
<S>                                                             <C>              <C>
       Accumulated benefit obligation, including vested
        benefits of $84,901,955 and $75,515,800, respectively    $89,428,668      $77,644,611
       Projected benefit obligation for service rendered to
        date ................................................     94,075,077       78,660,275
       Plan assets at fair value ............................     86,888,669       76,348,832
</TABLE>

     The determination of the actuarial present value of the projected benefit
obligation was based on a weighted average discount rate of 7.0% in 1998 and
7.75% in 1997 and 1996, and a rate of increase in future compensation of 5% in
1998, 1997, and 1996. The expected long-term rate of return on plan assets was
8.5% in 1998 and 1997, and 8% in 1996.


8. POSTRETIREMENT MEDICAL AND OTHER BENEFITS
     The Defined Business Unit, through the Company, provides certain health
care benefits for retired employees. Employees become eligible for these
benefits if they meet minimum age and service requirements and are eligible for
retirement benefits.

     The accrued postretirement medical and other benefits costs of the Company
that are not funded were as follows at May 31:



<TABLE>
<CAPTION>
                                                                  1998              1997
                                                            ---------------   ---------------
<S>                                                         <C>               <C>
       Accumulated postretirement benefit obligation
        (APBO):
        Retirees ........................................    $  4,469,542      $  4,371,635
        Fully eligible active plan participants .........       1,290,572           775,433
        Other active plan participants ..................       4,500,895         3,032,288
                                                             ------------      ------------
         Total APBO .....................................      10,261,009         8,179,356

       Unrecognized transition obligation ...............      (7,970,082)       (8,501,474)
       Unrecognized net gains ...........................       1,850,292         3,526,263
                                                             ------------      ------------
       Accrued postretirement medical and other
        benefits costs ..................................    $  4,141,219      $  3,204,145
                                                             ============      ============
</TABLE>

     The net periodic costs billed to the Defined Business Unit for the years
ended May 31, 1998, 1997, and 1996 were approximately $246,000, $229,000, and
$197,000, respectively.

     The calculations assumed a discount rate of 7.00% in 1998 and 7.75% in
1997 and 1996 and a health care cost trend rate of 9.00% in 1998, declining to
6.00% in 2004. If the health care cost trend rate increased by 1.00%, the APBO
would increase by 7.30% and the service cost and interest cost components would
increase by 9.90%.


                                      F-24



<PAGE>

             OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
            (A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)


                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                    YEARS ENDED MAY 31, 1998, 1997, AND 1996

9. PROVISION FOR INCOME TAXES

     Results of operations of the Oilseed Processing and Refining Defined
Business Unit are included in the consolidated federal income tax return of the
Company. The Company has a policy that provides for the payment of taxes on an
individual company basis for each of its defined business units and divisions.


     The Defined Business Unit has no significant deferred income tax assets or
liabilities.


     A reconciliation of the statutory federal tax rate to the effective rate
for the years ended May 31 were as follows:



<TABLE>
<CAPTION>
                                                                  1998         1997         1996
                                                               ----------   ----------   ----------
<S>                                                            <C>          <C>          <C>
         Statutory federal income tax rate .................       35.0%        35.0%        35.0%
         State and local income taxes, net of federal income
          tax benefit ......................................        5.0          4.9          4.3
         Patronage earnings ................................      (32.7)       (32.6)       (35.0)
         Other .............................................      (  .7)       (  .2)         2.2
                                                                  -----        -----        -----
         Effective rate ....................................        6.6%         7.1%         6.5%
                                                                  =====        =====        =====
</TABLE>

10. COMMITMENTS AND CONTINGENCIES

     Leases for approximately 353 rail cars with remaining lease terms of one
to fifteen years are used by the Defined Business Unit.


     Minimum rental payments due under these operating leases at May 31, 1998
are as follows:



<TABLE>
<S>                                         <C>
  Year ending May 31:
  1999 ..................................    $1,705,740
  2000 ..................................     1,174,000
  2001 ..................................     1,000,205
  2002 ..................................       859,800
  2003 ..................................       706,440
  2004 and thereafter ...................       317,520
                                             ----------
                                             $5,763,705
                                             ==========
</TABLE>

     Total rent expense, net of rail car mileage credits received from the
railroad and subleases, was $1,887,118, $1,944,747, and $1,832,413 for the
years ended May 31, 1998, 1997, and 1996, respectively.


     In September 1997, the Defined Business Unit (the Lessee) entered into a
sales leaseback agreement. After 111 months, the Lessee has the option to: (i)
purchase the equipment at fair market value; (ii) continue the lease; or (iii)
return the equipment to the Lessor and pay a maximum termination fee of
$718,680 contingent upon the Lessor's inability to recover the full value of
the equipment, as determined from the casualty loss value schedule in the lease
agreement. After 120 months, the Lessee has the option to: (i) purchase the
equipment at fair market value, limited to 10% of the net equipment cost at
lease inception; (ii) renew the lease for a period of 36 months; or (iii)
return the equipment to the Lessor.


                                      F-25



<PAGE>

             OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
            (A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)


                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                    YEARS ENDED MAY 31, 1998, 1997, AND 1996

 10. COMMITMENTS AND CONTINGENCIES (CONTINUED)

 
Minimum rental payments due under the operating lease at May 31, 1998 are as
follows:


<TABLE>
<S>                                         <C>
  Year ending May 31:
  1999 ..................................   $ 1,239,655
  2000 ..................................     1,239,655
  2001 ..................................     1,239,655
  2002 ..................................     1,239,655
  2003 ..................................     1,309,290
  2004 and thereafter ...................     6,033,917
                                            -----------
                                            $12,301,827
                                            ===========
</TABLE>

     Total rent expense related to the sales leaseback was $829,880 for the
year ended May 31, 1998.
     There are various lawsuits and administrative proceedings incidental to
the business of the Defined Business Unit. It is impossible, at this time, to
estimate what the ultimate legal and financial liability of the Defined
Business Unit will be; nevertheless, management believes, based on the
information available to date and the resolution of prior proceedings, that the
ultimate liability of all litigation and proceedings will not have a material
impact on the financial statements of the Defined Business Unit taken as a
whole.

     At May 31, 1998, the operations of the Defined Business Unit had
outstanding oilseed purchase contracts of 748,435 bushels at prices ranging
from $6.92 per bushel to $7.37 per bushel, and outstanding oil purchase
contracts of 181,712,763 pounds at prices ranging from $0.2585 per pound to
$0.2803 per pound. In addition, the operations of the Defined Business Unit had
outstanding sales contracts totaling approximately $37,051,608.

11. RELATED-PARTY TRANSACTIONS
     Net sales for the years ended May 31, 1998, 1997, and 1996 included
$101,440,010, $110,678,770, and $124,299,369, respectively, to related parties.
 

     The operations of the Defined Business Unit purchases a portion of its
soybeans from the Company, a related party. Included in cost of goods sold for
the years ended May 31, 1998, 1997, and 1996 were $19,875,032, $5,726,038, and
$3,772,327, respectively, of these purchases.

     Additionally, the Company performs various direct management services and
incurs certain costs for its defined business units and divisions. Such costs,
including data processing, office services, and insurance, are charged directly
to the defined business units and divisions. Indirect expenses, such as
publications, board expense, executive management, legal, finance, and human
resources, are allocated to the defined business units and divisions based on
approximate usage. Costs allocated to the Oilseed Processing and Refining
Defined Business Unit for the years ended May 31, 1998, 1997, and 1996 were
$900,000, $825,000, and $750,000, respectively.

12. SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION
     Additional information concerning supplemental disclosures of cash flow
activities for the years ended May 31 is as follows:

<TABLE>
<CAPTION>
                                             1998          1997           1996
                                         -----------   ------------   ------------
<S>                                      <C>           <C>            <C>
    Net cash paid during the year for:
     Interest ........................    $380,030    $  321,700     $  151,500
     Income taxes ....................     789,505     2,300,000      1,500,000
</TABLE>

13. SUBSEQUENT EVENT
     Effective June 1, 1998, Harvest States Cooperatives combined with Cenex,
Inc. to form Cenex Harvest States Cooperatives, and as such, EPUs now represent
an ownership interest in Cenex Harvest States Cooperatives.


                                      F-26



<PAGE>

                         INDEPENDENT AUDITORS' REPORT








Board of Directors
Harvest States Cooperatives
Saint Paul, Minnesota

     We have audited the balance sheets of the Wheat Milling Defined Business
Unit (the Defined Business Unit), formerly known as Amber Milling Company, a
defined business unit of Harvest States Cooperatives, as of May 31, 1998 and
1997 and the related statements of earnings, defined business unit equity, and
cash flows for each of the three years in the period ended May 31, 1998. These
financial statements are the responsibility of the Defined Business Unit's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

     In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Wheat Milling Defined Business Unit at
May 31, 1998 and 1997 and the results of its operations and its cash flows for
each of the three years in the period ended May 31, 1998, in conformity with
generally accepted accounting principles.




                                                          Deloitte & Touche, LLP
                                                              Minneapolis, MN
July 24, 1998

                                      F-27



<PAGE>

                      WHEAT MILLING DEFINED BUSINESS UNIT
           (A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)


                                BALANCE SHEETS
                             MAY 31, 1998 AND 1997




<TABLE>
<CAPTION>
                                                               1998             1997
                                                          --------------   --------------
<S>                                                       <C>              <C>
ASSETS
CURRENT ASSETS:
 Receivables (Note 2) .................................   $ 35,757,497     $ 26,860,772
 Inventories (Note 3) .................................     13,785,062       12,271,615
 Prepaid expenses and deposits ........................        393,085          840,730
                                                          ------------     ------------
   Total current assets ...............................     49,935,644       39,973,117
OTHER ASSETS (Note 4) .................................     10,747,876       11,814,555
PROPERTY, PLANT, AND EQUIPMENT (Note 5) ...............     85,627,365       69,130,520
                                                          ------------     ------------
                                                          $146,310,885     $120,918,192
                                                          ============     ============
LIABILITIES AND DEFINED BUSINESS UNIT EQUITY
CURRENT LIABILITIES:
 Due to Harvest States Cooperatives (Note 6) ..........   $ 16,738,969     $ 22,413,445
 Accounts payable and accrued expenses ................     10,404,665        9,493,405
 Current portion of long-term debt (Note 6) ...........     10,005,000       10,005,000
                                                          ------------     ------------
   Total current liabilities ..........................     37,148,634       41,911,850
LONG-TERM DEBT, less current portion (Note 6) .........     41,204,270       51,209,270
COMMITMENTS AND CONTINGENCIES (Note 11)
DEFINED BUSINESS UNIT EQUITY (Note 7) .................     67,957,981       27,797,072
                                                          ------------     ------------
                                                          $146,310,885     $120,918,192
                                                          ============     ============
</TABLE>

                       See notes to financial statements.

                                      F-28



<PAGE>

                      WHEAT MILLING DEFINED BUSINESS UNIT
           (A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)


                            STATEMENTS OF EARNINGS
                   YEARS ENDED MAY 31, 1998, 1997, AND 1996




<TABLE>
<CAPTION>
                                                          1998              1997              1996
                                                    ---------------   ---------------   ---------------
<S>                                                 <C>               <C>               <C>
REVENUES:
 Processed grain sales ..........................    $205,281,433      $199,078,687      $173,315,613
 Other income ...................................       1,820,294
                                                     ------------      ------------      ------------
                                                      207,101,727       199,078,687       173,315,613
COSTS AND EXPENSES:
 Cost of goods sold .............................     189,614,207       181,565,899       161,293,430
 Marketing, general, and administrative .........       8,071,913         6,749,237         4,471,563
 Interest .......................................       3,121,893         5,229,669         4,457,797
 Other (Note 1) .................................         162,283         2,000,000
                                                     ------------      ------------      ------------
                                                      200,970,296       195,544,805       170,222,790
                                                     ------------      ------------      ------------
EARNINGS BEFORE INCOME TAXES ....................       6,131,431         3,533,882         3,092,823
INCOME TAXES (Note 10) ..........................         475,000           300,000           200,000
                                                     ------------      ------------      ------------
NET EARNINGS ....................................    $  5,656,431      $  3,233,882      $  2,892,823
                                                     ============      ============      ============
</TABLE>

                       See notes to financial statements.

                                      F-29



<PAGE>

                      WHEAT MILLING DEFINED BUSINESS UNIT
           (A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)


                  STATEMENTS OF DEFINED BUSINESS UNIT EQUITY



<TABLE>
<S>                                                   <C>
BALANCE AT MAY 31, 1995 ...........................    $ 27,797,072
 Net earnings .....................................       2,892,823
 Divisional equity distributed ....................      (2,892,823)
                                                       ------------
BALANCE AT MAY 31, 1996 ...........................      27,797,072
 Net earnings .....................................       3,233,882
 Defined business unit equity distributed .........      (3,233,882)
                                                       ------------
BALANCE AT MAY 31, 1997 ...........................      27,797,072
 Harvest States capital contributed ...............      38,800,000
 Net earnings .....................................       5,656,431
 Defined business unit equity distributed .........      (4,295,522)
                                                       ------------
BALANCE AT MAY 31, 1998 ...........................    $ 67,957,981
                                                       ============
</TABLE>

                       See notes to financial statements.

                                      F-30



<PAGE>

                      WHEAT MILLING DEFINED BUSINESS UNIT
           (A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)


                           STATEMENTS OF CASH FLOWS
                   YEARS ENDED MAY 31, 1998, 1997, AND 1996




<TABLE>
<CAPTION>
                                                                 1998              1997              1996
                                                           ---------------   ---------------   ----------------
<S>                                                        <C>               <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net earnings ..........................................    $   5,656,431     $   3,233,882     $   2,892,823
 Adjustments to reconcile net earnings to net cash
  flows:
   Depreciation and amortization .......................        4,717,198         4,137,440         3,309,307
   Loss on impairment ..................................          162,283         2,000,000
   Change in assets and liabilities:
    Receivables ........................................       (8,896,725)       16,888,362       (25,116,058)
    Inventories ........................................       (1,513,447)       (2,963,340)       (2,302,088)
    Prepaid expenses, deposits, and other ..............          447,645          (690,857)          (51,007)
    Accounts payable and accrued expenses ..............          911,260        (2,986,937)        5,063,539
                                                            -------------     -------------     -------------
      Total adjustments ................................       (4,171,786)       16,384,668       (19,096,307)
                                                            -------------     -------------     -------------
      Net cash provided by (used in) operating
       activities ......................................        1,484,645        19,618,550       (16,203,484)
CASH FLOWS FROM INVESTING ACTIVITIES:
 Acquisition of additional intangibles .................                                             (475,654)
 Acquisition of property, plant, and equipment .........      (20,309,651)      (14,968,233)      (18,080,009)
                                                            -------------     -------------     -------------
      Net cash used in investing activities ............      (20,309,651)      (14,968,233)      (18,555,663)
CASH FLOWS FROM FINANCING ACTIVITIES:
 Net (repayments to) borrowings from Harvest
  States Cooperatives ..................................       (5,674,472)       (8,630,705)       17,401,970
 Long-term debt borrowings .............................                         15,000,000        20,250,000
 Capital from Harvest States Cooperatives ..............       38,800,000
 Principal payments on long-term debt ..................      (10,005,000)       (7,785,730)
 Defined business unit equity distributed ..............       (4,295,522)       (3,233,882)       (2,892,823)
                                                            -------------     -------------     -------------
      Net cash provided by (used in) financing
       activities ......................................       18,825,006        (4,650,317)       34,759,147
                                                            -------------     -------------     -------------
INCREASE (DECREASE) IN CASH ............................
CASH AT BEGINNING OF YEAR ..............................
                                                            -------------     -------------     -------------
CASH AT END OF YEAR ....................................    $          --     $          --     $          --
                                                            =============     =============     =============
</TABLE>

                       See notes to financial statements.

                                      F-31



<PAGE>

                      WHEAT MILLING DEFINED BUSINESS UNIT
           (A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)


                         NOTES TO FINANCIAL STATEMENTS
                   YEARS ENDED MAY 31, 1998, 1997, AND 1996


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     ORGANIZATION AND NATURE OF BUSINESS -- Harvest States Cooperatives Wheat
Milling Defined Business Unit (the Defined Business Unit) is a defined business
unit of Harvest States Cooperatives (the Company) and is not organized as a
separate legal entity. The purpose of the Defined Business Unit is to carry on
the operations of the Wheat Milling Division. The assets and liabilities of the
Defined Business Unit continue to be 100% owned by the Company. In the year
ended May 31, 1995, the Defined Business Unit was operated as a joint venture
in which the Company owned a 70% interest. Effective June 1, 1995, the Company
purchased the minority interest. The Defined Business Unit operates commercial
bakery and semolina flour milling facilities in Rush City, Minnesota; Huron,
Ohio; Kenosha, Wisconsin; and Houston, Texas. These mills produce semolina and
durum flour, which are the primary ingredients in pasta products and wheat
flour in the bakery industry. The Defined Business Unit serves customers
throughout the United States.

     CASH MANAGEMENT -- The Defined Business Unit draws all of its cash
requirements from and deposits all cash generated with the Company's
centralized cash management system.

     INVENTORIES -- Grain and processed grain products are stated at market,
including adjustment for open purchase, sales, and futures contracts and
deferral of normal profit on processed grain products.

     The Defined Business Unit follows the general policy of hedging its grain
inventories and unfilled orders for grain products to the extent considered
practicable for minimizing risk from market price fluctuations. Futures
contracts used for hedging are purchased and sold through regulated commodity
exchanges. Inventories, purchase commitments, and sales commitments, however,
are not completely hedged, due in part to the absence of satisfactory hedging
facilities for certain commodities and geographical areas and, in part, to the
Defined Business Unit's appraisal of its exposure from expected price
fluctuations. Noncommodity exchange purchase and sale contracts may expose the
Defined Business Unit to risk in the event that a counterparty to a transaction
is unable to fulfill its contractual obligation. The Defined Business Unit
manages its risk by entering into purchase contracts with preapproved producers
and companies and by establishing appropriate limits for individual suppliers.
Sales contracts are entered into with organizations of acceptable
creditworthiness, as internally evaluated.

     PROPERTY, PLANT, AND EQUIPMENT -- Property, plant, and equipment are
stated at cost, less accumulated depreciation. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.

     OTHER ASSETS -- Leasehold rights and other intangible assets are amortized
using the straight-line method over 15 to 18 years.

     IMPAIRMENT OF LONG-LIVED ASSETS -- Management periodically reviews the
carrying value of property and equipment for potential impairment by comparing
its carrying value to the estimated undiscounted future cash flows expected to
result from the use of these assets. Should the sum of the related, expected
future net cash flows be less than the carrying value, an impairment loss would
be recognized. An impairment loss would be measured by the amount by which the
carrying value of the asset exceeds the fair value of the asset.

     INCOME TAXES -- Earnings generated on grain purchased by the Defined
Business Unit from nonmembers are characterized as nonpatronage and taxable.
Earnings generated on grain purchased from the Company are considered to be
patronage to the extent of the Company's patronage purchase percentage of that
particular commodity; the other portion of those earnings is considered
taxable. Due to the high proportion of patronage earnings, deferred taxes
resulting from temporary differences are not significant.

     SALES -- Sales of processed grains are recognized upon shipment to
customers, net of freight charges.

                                      F-32



<PAGE>

                      WHEAT MILLING DEFINED BUSINESS UNIT
            (A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)


                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                    YEARS ENDED MAY 31, 1998, 1997, AND 1996

 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 
     REVENUE FROM SIGNIFICANT CUSTOMERS -- Sales to two customers accounted for
23% and 11% of total sales for the year ended May 31, 1997 and 24% and 15% of
total sales for the year ended May 31, 1996.

     NEW ACCOUNTING STANDARDS -- In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 131, Disclosures About Segments of an Enterprise and Related
Information, which relates to financial reporting of operating or business
segments of a company. The new standard is effective for fiscal years beginning
after December 15, 1997. Management is currently evaluating this new standard
and has not yet determined its applicability or impact on the presentation of
the Company's financial statements.

     In June 1998, FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which relates to the accounting for
derivative transactions and hedging activities. This new standard is effective
for years beginning after June 15, 1999. While management does not believe this
standard will materially impact the financial results of the Company, it is
currently evaluating the reporting requirements under this new standard.

     ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.


2. RECEIVABLES


<TABLE>
<CAPTION>
                                                     MAY 31,
                                         -------------------------------
                                              1998             1997
                                         --------------   --------------
<S>                                      <C>              <C>
   Trade .............................    $35,703,123      $26,857,249
   Other .............................        738,178          324,792
   Less allowance for losses .........       (683,804)        (321,269)
                                          -----------      -----------
                                          $35,757,497      $26,860,772
                                          ===========      ===========
</TABLE>

3. INVENTORIES


<TABLE>
<CAPTION>
                                                    MAY 31,
                                        -------------------------------
                                             1998             1997
                                        --------------   --------------
<S>                                     <C>              <C>
   Grain ............................    $11,617,912      $10,556,495
   Processed grain products .........      1,395,277        1,295,324
   Other ............................        771,873          419,796
                                         -----------      -----------
                                         $13,785,062      $12,271,615
                                         ===========      ===========
</TABLE>

4. OTHER ASSETS


<TABLE>
<CAPTION>
                                                                                   MAY 31,
                                                                        -----------------------------
                                                                             1998            1997
                                                                        -------------   -------------
<S>                                                                     <C>             <C>
   Goodwill, less accumulated amortization of $1,594,995 and
    $1,188,315, respectively ........................................   $ 4,505,065     $ 4,911,744
   Leasehold rights and other intangibles, less accumulated
    amortization of $5,670,602 and $5,144,723, respectively .........     6,242,811       6,902,811
                                                                        -----------     -----------
                                                                        $10,747,876     $11,814,555
                                                                        ===========     ===========
</TABLE>

 

                                      F-33



<PAGE>

                      WHEAT MILLING DEFINED BUSINESS UNIT
            (A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)


                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                    YEARS ENDED MAY 31, 1998, 1997, AND 1996

5. PROPERTY, PLANT, AND EQUIPMENT


<TABLE>
<CAPTION>
                                             ESTIMATED                  MAY 31,
                                            USEFUL LIFE   -----------------------------------
                                             IN YEARS           1998               1997
                                           ------------   ----------------   ----------------
<S>                                        <C>            <C>                <C>
 Land ..................................                   $     397,726      $     397,726
 Grain processing plants ...............    15 to 45          37,015,956         29,767,710
 Machinery and equipment ...............     5 to 20          48,406,084         40,169,184
                                                           -------------      -------------
                                                              85,819,766         70,334,620
 Less accumulated depreciation .........                     (21,399,153)       (17,748,631)
                                                           -------------      -------------
                                                              64,420,613         52,585,989
 Construction-in-progress ..............                      21,206,752         16,544,531
                                                           -------------      -------------
                                                           $  85,627,365      $  69,130,520
                                                           =============      =============
</TABLE>

     During the years ended May 31, 1998, 1997, and 1996, the Defined Business
Unit capitalized interest of $338,700, $588,731, and $739,101, respectively.


6. BORROWINGS


     DUE TO HARVEST STATES COOPERATIVES:
     The Defined Business Unit satisfies its working capital needs through
borrowings, both long-and short-term, from the Company to the extent the
Company's borrowing capacity permits. Short-term borrowings of $16,738,969 and
$22,413,445 were outstanding on May 31, 1998 and 1997, respectively.

     During the year ended May 31, 1997, the Company began charging the Defined
Business Unit interest on its daily average of short-term borrowings at a rate
equivalent to the weighted average interest rate on short-term borrowings of
the Company. The weighted average borrowing rate of the Company's short-term
borrowings was 5.8% for each of the years ended May 31, 1998 and May 31, 1997,
respectively. Amounts due from the Company will receive interest in the same
manner at the same rate.

     Long-term borrowings:

<TABLE>
<CAPTION>
                                                                                      MAY 31,
                                                                        -----------------------------------
                                                                              1998               1997
                                                                        ----------------   ----------------
<S>                                                                     <C>                <C>
   Harvest States Cooperatives, with fixed and variable interest
    rates from 6.41% to 8.75%, due in installments through 2005 .....    $  49,359,270      $  59,114,270
   Industrial Development and Public Grain Elevator Revenue
    Bonds, payable through July 2004,
     with an interest rate of 7.4% ..................................        1,850,000          2,100,000
                                                                         -------------      -------------
                                                                            51,209,270         61,214,270
   Less current portion .............................................      (10,005,000)       (10,005,000)
                                                                         -------------      -------------
                                                                         $  41,204,270      $  51,209,270
                                                                         =============      =============
</TABLE>

     The principal maturities of long-term indebtedness outstanding at May 31,
1998 are as follows:


<TABLE>
<S>                                         <C>
  Year ending May 31:
  1999 ..................................    $10,005,000
  2000 ..................................     10,005,000
  2001 ..................................      8,130,000
  2002 ..................................      7,125,000
  2003 ..................................      7,125,000
  2004 and thereafter ...................      8,819,270
</TABLE>

 

                                      F-34



<PAGE>

                      WHEAT MILLING DEFINED BUSINESS UNIT
            (A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)


                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                    YEARS ENDED MAY 31, 1998, 1997, AND 1996

7. DEFINED BUSINESS UNIT EQUITY
     On May 31, 1997, the Company completed an offering for the sale of Equity
Participation Units (EPUs) in its Wheat Milling Defined Business Unit to
qualified subscribers. Qualified subscribers are identified as Defined Members
or representatives of Defined Members which have been defined as persons
actually engaged in the production of agricultural products or associations of
producers of agricultural products. The purchasers of EPUs have the right and
obligation to deliver annually the number of bushels of wheat equal to the
number of Units held. Beginning in the fiscal year ending May 31, 1998, unit
holders will participate in the net patronage sourced income from operations of
the Wheat Milling Defined Business Unit as patronage refunds. EPUs represent an
ownership interest in the Company, not the Defined Business Unit. The assets
and liabilities of the Defined Business Unit continue to be 100% owned by the
Company.

     See Note 12 for discussion of the Company's capital contribution to the
Defined Business Unit on June 1, 1997.


8. RETIREMENT PLANS
     The Defined Business Unit, through the Company, has noncontributory
defined benefit retirement plans covering substantially all salaried and
full-time hourly employees. The retirement plan benefits for salaried employees
are based on years of service and the participants' total compensation.
Benefits for hourly employees are based on various monthly amounts for each
year of credited service. The plans are funded by annual contributions to
tax-exempt trusts in accordance with federal law and regulations. Plan assets
consist principally of corporate obligations, U.S. Government bonds, money
market funds, and immediate participation guarantee contracts. Pension costs
billed to the Defined Business Unit for the years ended May 31, 1998, 1997, and
1996 were approximately $127,000, $136,000, and $46,000, respectively. The
Defined Business Unit's portion of the actuarial present value or accumulated
benefit obligations and net pension assets available for benefits has not been
determined. Selected information at May 31 for the Company's plan is as
follows:


<TABLE>
<CAPTION>
                                                                              1998             1997
                                                                         --------------   --------------
<S>                                                                      <C>              <C>
      Accumulated benefit obligation, including vested
       benefits of $84,901,955 and $75,515,800, respectively .........    $89,428,668      $77,644,611
      Projected benefit obligation for service rendered to date ......     94,075,077       78,660,275
      Plan assets at fair value ......................................     86,888,669       76,348,832
</TABLE>

     The determination of the actuarial present value of the projected benefit
obligation was based on a weighted average discount rate of 7.00% in 1998, and
7.75% in 1997 and 1996, and a rate of increase in future compensation of 5.00%
in 1998, 1997, and 1996. The expected long-term rate of return on plan assets
was 8.50% in 1998 and 1997 and 8.00% in 1996.


9. POSTRETIREMENT MEDICAL AND OTHER BENEFITS
     The Defined Business Unit, through the Company, provides certain health
care benefits for retired employees. Employees become eligible for these
benefits if they meet minimum age and service requirements and are eligible for
retirement benefits.


                                      F-35



<PAGE>

                      WHEAT MILLING DEFINED BUSINESS UNIT
            (A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)


                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                    YEARS ENDED MAY 31, 1998, 1997, AND 1996

 9. POSTRETIREMENT MEDICAL AND OTHER BENEFITS (CONTINUED)

 
     The accrued postretirement medical and other benefits costs of the Company
that are not funded were as follows at May 31:


<TABLE>
<CAPTION>
                                                                     1998              1997
                                                               ---------------   ---------------
<S>                                                            <C>               <C>
      Accumulated postretirement benefit obligation
       (APBO):
       Retirees ............................................    $  4,469,542      $  4,371,635
       Fully eligible active plan participants .............       1,290,572           775,433
       Other active plan participants ......................       4,500,895         3,032,288
                                                                ------------      ------------
        Total APBO .........................................      10,261,009         8,179,356
      Unrecognized transition obligation ...................      (7,970,082)       (8,501,474)
      Unrecognized net gains ...............................       1,850,292         3,526,263
                                                                ------------      ------------
      Accrued postretirement medical and other benefits cost    $  4,141,219      $  3,204,145
                                                                ============      ============
</TABLE>

     The net periodic costs billed to the Defined Business Unit for the years
ended May 31, 1998, 1997, and 1996 were approximately $72,000, $65,000, and
$42,000, respectively.


     The calculations assumed a discount rate of 7.00% in 1998 and 7.75% in
1997 and 1996 and a health care cost trend rate of 9.00% in 1998, declining to
6.00% in 2004. If the health care cost trend rate increased by 1.00%, the APBO
would increase by 7.30% and the service cost and interest cost components would
increase by 9.90%.


10. PROVISION FOR INCOME TAXES

     Results of operations of the Wheat Milling Defined Business Unit are
included in the consolidated federal income tax return of the Company. The
Company has a policy that provides for the payment of taxes on an individual
company basis for each of its defined business units and divisions.


     No significant deferred income tax provision was recorded by the Defined
Business Unit.


     A reconciliation of the statutory federal tax rate to the effective rate
for the years ended May 31 were as follows:


<TABLE>
<CAPTION>
                                                                 1998         1997         1996
                                                              ----------   ----------   ----------
<S>                                                           <C>          <C>          <C>
        Statutory federal income tax rate .................       35.0%        35.0%        35.0%
        State and local income taxes, net of federal income
         tax benefit ......................................        5.0          4.9          4.3
        Patronage earnings ................................      (36.5)       (31.2)       (35.6)
        Other .............................................        4.2        (  .2)         2.8
                                                                 -----        -----        -----
        Effective rate ....................................        7.7%         8.5%         6.5%
                                                                 =====        =====        =====
</TABLE>

11. COMMITMENTS AND CONTINGENCIES

     Leases for approximately 318 rail cars with remaining lease terms of one
to ten years are used by the Defined Business Unit. In addition, leases for a
milling facility, certain vehicles, and various manufacturing equipment are
used by the Defined Business Unit.


                                      F-36



<PAGE>

                      WHEAT MILLING DEFINED BUSINESS UNIT
            (A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)


                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                    YEARS ENDED MAY 31, 1998, 1997, AND 1996

 11. COMMITMENTS AND CONTINGENCIES (CONTINUED)

 
     Minimum rental payments due under these operating leases at May 31, 1998
are as follows:


<TABLE>
<CAPTION>
                                                       MILLING
                                      RAIL CARS       FACILITY        OTHER         TOTAL
                                    -------------   ------------   ----------   -------------
<S>                                 <C>             <C>            <C>          <C>
   Years ending May 31:
    1999 ........................    $2,278,640     $  440,004      $32,902     $ 2,751,546
    2000 ........................     2,083,410        440,004       19,190       2,542,604
    2001 ........................     1,692,920        440,004        2,645       2,135,569
    2002 ........................       567,605        440,004                    1,007,609
    2003 ........................        82,000        466,668                      548,668
    2004 and thereafter .........                    2,080,000                    2,080,000
                                     ----------     ----------      -------     -----------
                                     $6,704,575     $4,306,684      $54,737     $11,065,996
                                     ==========     ==========      =======     ===========
</TABLE>

     Total rent expense, net of rail car mileage credits received from the
railroad and subleases, was $2,107,630, $2,144,838, and $1,624,576 for the
years ended May 31, 1998, 1997, and 1996, respectively. Mileage credits and
sublease income were $214,999, $375,667, and $338,700 for the years ended May
31, 1998, 1997, and 1996, respectively.

     There are various lawsuits and administrative proceedings incidental to
the business of the Defined Business Unit. It is impossible, at this time, to
estimate what the ultimate legal and financial liability of the Defined
Business Unit will be; nevertheless, management believes, based on the
information available to date and the resolution of prior proceedings, that the
ultimate liability of all litigation and proceedings will not have a material
impact on the financial statements of the Defined Business Unit taken as a
whole.

     At May 31, 1998, the operations of the Defined Business Unit had
outstanding grain purchase contracts of approximately 7,846,000 bushels at
prices for durum ranging from $5.00 per bushel to $6.55 per bushel and prices
for spring wheat ranging from $3.98 per bushel to $4.35 per bushel. In
addition, the operations of the Defined Business Unit had outstanding sales
contracts of both semolina and commercial baking flour totaling approximately
$61,657,285.


12. RELATED-PARTY TRANSACTIONS
     Net sales for the year ended May 31, 1998, 1997, and 1996 included
$98,839, $753,583, and $647,416, respectively, to related parties.

     The operations of the Defined Business Unit purchases substantially all of
its durum and wheat from the Company, a related party. Included in cost of
goods sold for the years ended May 31, 1998, 1997, and 1996 were $141,454,000,
$138,000,000, and $122,900,000, respectively, of these purchases.

     Additionally, the Company performs various direct management services and
incurs certain costs for its defined business units and divisions. Such costs,
including data processing, office services, and insurance, are charged directly
to the defined business units and divisions. Indirect expenses, such as
publications, board expense, executive management, legal, finance, and human
resources, are allocated to the defined business units and divisions based on
approximate usage. Costs allocated to the Wheat Milling Defined Business Unit
for the years ended May 31, 1998, 1997, and 1996 were $1,020,000, $1,000,000,
and $950,000, respectively.

     On June 1, 1997, the Company contributed $38,800,000 in equity to the
Defined Business Unit for the purpose of constructing a mill at Mount Pocono,
Pennsylvania.


                                      F-37



<PAGE>

                      WHEAT MILLING DEFINED BUSINESS UNIT
            (A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)


                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                    YEARS ENDED MAY 31, 1998, 1997, AND 1996

13. SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION
     Additional information concerning supplemental disclosures of cash flow
activities for the years ended May 31 is as follows:


<TABLE>
<CAPTION>
                                            1998            1997            1996
                                       -------------   -------------   -------------
<S>                                    <C>             <C>             <C>
      Net cash paid during year for:
       Interest ....................    $3,121,893      $5,229,669      $4,457,797
       Income taxes ................       475,000         300,000         200,000
</TABLE>

14. SUBEQUENT EVENT
     Effective June 1, 1998 Harvest States Cooperatives combined with Cenex,
Inc. to form Cenex Harvest States Cooperatives and, as such, EPUs now represent
an ownership interest in Cenex Harvest States Cooperatives.


                                      F-38