This filing is made pursuant to Rule  424(b)(3)
of the Securities Act of 1933 with respect to
Registration Statement No. 333-137482

Highwater Ethanol, LLC

a Minnesota Limited Liability Company

April 5, 2007

The Securities being offered by Highwater Ethanol, LLC are Limited Liability Company Membership Units

Minimum Offering Amount	$	45,000,000	Minimum Number of Units	4,500
Maximum Offering Amount	$	60,000,000	Maximum Number of Units	6,000

Offering Price: $10,000 per Unit

Minimum Purchase Requirement: One Unit ($10,000)

Additional Purchases in Increments of One Unit

We are offering limited liability company membership units in Highwater Ethanol, LLC, a development stage Minnesota limited liability company. We intend to use the offering proceeds to develop, construct and operate a 50 million gallon per year dry mill corn-processing ethanol manufacturing plant expected to be located in Redwood County, Minnesota near the City of Lamberton, Minnesota. However, our board of governors reserves the right to change the location of the plant site, in their sole discretion, for any reason. We estimate the total project, including operating capital, will cost approximately $110,000,000. We expect to use debt financing to complete project capitalization.  The offering will end no later than April 5, 2008. If we sell the maximum number of units prior to April 5, 2008, the offering will end on or about the date that we sell the maximum number of units. We may also end the offering any time after we sell the minimum number of units and prior to April 5, 2008. In addition, if we abandon the project for any reason prior to April 5, 2008, we will terminate the offering and promptly return offering proceeds to investors.  Proceeds from subscriptions for the units will be deposited in an interest-bearing escrow account under a written escrow agreement.  We will not release funds from the escrow account until specific conditions are satisfied.  Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

These securities are speculative securities and involve a significant degree of risk.  You should read this prospectus including the “RISK FACTORS” beginning on page 11.  You should consider these risk factors before investing in us.

·Your investment in us will be an investment in securities subject to restrictions on transfer;

·We will need to obtain significant debt financing to fund construction of our proposed ethanol plant;

·Our directors and officers will be selling our units without the use of an underwriter;

·Investors may not receive any cash distributions even though they may incur tax liability;

·Overcapacity within the ethanol industry may limit our ability to operate profitably;

·Availability and costs of products and raw materials, particularly corn, natural gas and an adequate water supply may limit our ability to operate profitably;

·Changes in the costs of construction and equipment will influence the total cost of the project; and

·Changes and advances in ethanol production technology may render our facility obsolete.

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TABLE OF CONTENTS

	Page
PROSPECTUS SUMMARY	5
The Company	5
The Offering	5
The Project	6
Most Significant Risk Factors	7
Our Financing Plan	8
Financial Information	8
Membership in Highwater Ethanol and Our Member Control Agreement	9
Suitability of Investors	9
Subscription Period and Procedures	10
Escrow Procedures	10
RISK FACTORS	11
Risks Related to the Offering	11
Risks Related to the Units	12
Risks Related to Our Financing Plan	14
Risks Related to Highwater Ethanol as a Development Stage Company	16
Risks Related to Construction of the Ethanol Plant	17
Risks Related to Conflicts of Interest	19
Risks Related to the Production of Ethanol	20
Risks Related to the Ethanol Industry	22
Risks Related to Regulation and Governmental Action	23
Risks Related to Tax Issues	24
IMPORTANT NOTICES TO INVESTORS	25
FORWARD LOOKING STATEMENTS	26
DETERMINATION OF OFFERING PRICE	26
DILUTION	27
CAPITALIZATION	28
Capitalization Table	28
DISTRIBUTION POLICY	29
SELECTED FINANCIAL DATA	29
MANAGEMENT’S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION	30
Overview	30
Plan of Operations Until Start-Up of Ethanol Plant	31
Liquidity and Capital Resources	35
Critical Accounting Estimates	36
Off-Balance Sheet Arrangements	36
ESTIMATED SOURCES OF FUNDS	36
ESTIMATED USE OF PROCEEDS	37
INDUSTRY OVERVIEW	39
General Ethanol Demand and Supply	40
Federal Ethanol Supports	41
State Ethanol Supports	42
Our Primary Competition	43
Competition from Alternative Fuels	47
DESCRIPTION OF BUSINESS	47

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Primary Product - Ethanol	48
Description of Dry Mill Process	49
Ethanol Markets	50
Ethanol Pricing	50
Co-Products	52
Distillers Grains Markets	53
Distillers Grains Pricing	53
Corn Feedstock Supply	54
Project Location and Proximity to Markets	55
Transportation and Delivery	56
Thermal Oxidizer	56
Utilities	56
Employees	58
Design-Build Team	58
Other Consultants	61
Regulatory Permits	61
Nuisance	64
GOVERNORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS	65
Identification of Governors, Executive Officers and Significant Employees	65
Business Experience of Governors and Officers	65
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT	67
Security Ownership of Certain Beneficial Owners	67
Security Ownership of Management	67
EXECUTIVE COMPENSATION	68
Employment Agreements	68
Reimbursement of Expenses	68
INDEMINIFICATION FOR SECURITIES ACT LIABILITIES	68
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	69
PLAN OF DISTRIBUTION	69
The Offering	69
Suitability of Investors	70
Subscription Period	72
Subscription Procedures	72
Escrow Procedures	73
Delivery of Unit Certificates	74
Summary of Promotional and Sales Material	74
DESCRIPTION OF MEMBERSHIP UNITS	74
Membership Units	75
Restrictive Legend on Membership Certificate	75
Voting Limitations	75
Separable Interests	75
Distributions	76
Capital Accounts and Contributions	77
Allocation of Profits and Losses	77
Special Allocation Rules	77
Restrictions on Transfers of Units	77
SUMMARY OF OUR MEMBER CONTROL AGREEMENT	78
Binding Nature of the Agreement	78
Management	78
Replacement of Governors	79
Members’ Meetings and Other Members’ Rights	79
Unit Transfer Restrictions	80

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Amendments	81
Dissolution	81
FEDERAL INCOME TAX CONSEQUENCES OF OWNING OUR UNITS	81
Partnership Status	82
Publicly Traded Partnership Rules	82
Tax Treatment of Our Operation, Flow-Through Taxable Income and Loss; Use of the Calendar Year	84
Tax Consequences to Our Unit Holders	84
Tax Treatment of Distributions	84
Initial Tax Basis of Units and Periodic Basis Adjustments	84
Deductibility of Losses; At-Risk and Passive Loss Limitations	85
Passive Activity Income	86
Alternative Minimum Tax	86
Allocations of Income and Losses	86
Tax Consequences Upon Disposition of Units	86
Effect of Tax Code Section 754 Election on Unit Transfers	86
Our Dissolution and Liquidation may be Taxable to Investors, Unless our Properties are Distributed In-Kind	87
Reporting Requirements	87
Tax Information to Members	87
Audit of Income Tax Returns	87
Interest on Underpayment of Taxes; Accuracy-Related Penalties; Negligence Penalties	88
State and Local Taxes	89
LEGAL MATTERS	89
EXPERTS	89
TRANSFER AGENT	89
ADDITIONAL INFORMATION	89
INDEX TO FINANCIAL STATEMENTS	F-1

EXHIBITS
Articles of Organization	Appendix A
Amended and Restated Member Control Agreement	Appendix B
Subscription Agreement	Appendix C

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PROSPECTUS SUMMARY

This summary only highlights selected information from this prospectus and may not contain all of the information that is important to you. You should carefully read the entire prospectus, the financial statements, and attached exhibits before you decide whether to invest.

The Company

Highwater Ethanol, LLC was formed as a Minnesota limited liability company on May 2, 2006, for the purpose of developing a project to build and operate a 50 million gallon dry mill corn-processing ethanol plant expected to be located in Redwood County, Minnesota near Lamberton. We are a development stage company with no prior operating history. We do not expect to generate any revenue until we begin operating the plant. Our ownership interests are represented by membership interests, which are designated as units. Our principal address and location is 205 S. Main Street, PO Box 96, Lamberton, Minnesota 56152. Our telephone number is (507) 752-6160.

The Offering

Minimum number of units offered                                       4,500 units

Maximum number of units offered6,000 units

Purchase price per unit$10,000

Minimum purchase amountOne ($10,000)

Additional PurchasesOne unit increments

Use of proceedsThe purpose of this offering is to raise equity to help fund the construction and start-up costs of a 50 million gallon dry mill ethanol plant expected to be located in Redwood County, Minnesota.

Offering start dateWe expect to start selling units as soon as possible following the declaration of effectiveness of this registration statement by the Securities and Exchange Commission.

Offering end dateThe offering will end no later than April 5, 2008. If we sell the maximum number of units prior to April 5, 2008, the offering will end on or about the date that we sell the maximum number of units. We may also end the offering any time after we sell the minimum number of units and prior to April 5, 2008. In addition, if we abandon the project for any reason prior to April 5, 2008, we will terminate the offering and promptly return offering proceeds to investors.

Subscription ProceduresBefore purchasing units, you must read and complete the subscription agreement, draft a check payable to “Minnwest Bank, Escrow Agent for Highwater Ethanol, LLC” in the amount of not less than 10% of the amount due for units for which subscription is sought, which amount will be deposited in the escrow account; sign a full recourse promissory note and security agreement for the remaining 90% of the total subscription price; and deliver to us these items and an executed copy of the signature page of our amended and restated member control agreement. Anytime after we receive subscriptions for the minimum offering amount of $45,000,000 and before April 5, 2008, we will mail written notice to our investors that full payment under the promissory note is due within 20 days. We will deposit funds paid in satisfaction of the promissory notes into our escrow account where they will be held until we satisfy the conditions for releasing funds from escrow. If you subscribe to purchase units after we have received subscriptions for the aggregate minimum offering amount of $45,000,000, you will be required to pay the full purchase price immediately upon subscription. In the event we have not reached the minimum offering amount within the twelve month term of the offering period the balance of the

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promissory notes will not become due and any subscription proceeds in the escrow account will be returned to investors pursuant to the terms of the escrow agreement.

Escrow ProceduresProceeds from the subscriptions for the units will be deposited in an interest bearing account that we have established with Minnwest Bank as escrow agent under a written escrow agreement.  We will not release funds from the escrow account until the following conditions are satisfied: (1) cash proceeds from unit sales deposited in the escrow account equals or exceeds $45,000,000, exclusive of interest; (2) our receipt of a written debt financing commitment for debt financing ranging from $48,320,000 to $63,320,000, depending on the amount necessary to fully capitalize the project; (3) we have signed a definitive design build agreement with Fagen, Inc.; (4) we have been issued the environmental permits necessary to construct the ethanol plant; (5) we elect, in writing, to terminate the escrow agreement; (6) Minnwest Bank provides an affidavit to the states in which the units have been registered stating that the requirements to release funds have been satisfied and shall have provided to the Commissioner of the Minnesota Department of Commerce documentation that the foregoing conditions have been met; and (7) we obtain consents to releasing funds from escrow from each state securities department from which such consent is required provided, however, that none of the funds, regardless of the state of residence of the investor contributing such funds, shall be released until the Commissioner of the Minnesota Department of Commerce has authorized the release of the the escrow proceeds.

Units issued and outstanding if min. sold4,886(1)

Units issued and outstanding if max. sold6,386(1)

States in which we plan to registerFlorida, Georgia, Illinois, Iowa, Kansas, Louisiana, Minnesota, Missouri, South Dakota and Wisconsin

Risk FactorsSee “Risk Factors” beginning on page 12 of this prospectus for a discussion of factors that you should carefully consider before deciding to invest in our units.

(1)Includes 236 seed capital units and 150 founder units currently issued and outstanding from our previous private placements.

We may offer or sell our units in other states in reliance upon exemptions from the registration requirements of the laws of those other states. The governors and officers identified on page 25 of this prospectus will offer the securities on our behalf directly to investors without the use of an underwriter.

The Project

If we are able to fully capitalize the project as described below, we intend to use the offering proceeds to build and operate a 50 million gallon per year dry mill corn-processing ethanol manufacturing plant in Redwood County, Minnesota. Ethanol is an alcohol that can be burned in engines like gasoline. Ethanol can be blended with gasoline as an oxygenate to decrease harmful emissions and meet clean air standards. We plan to build an ethanol plant with a name plate capacity of manufacturing 50 million gallons of denatured ethanol (fuel-grade ethanol) per year. Ethanol plants grind up the entire corn kernel, sending the non-fermentable corn oil, protein and fiber to the distillery along with the starch. These components, which make up a third of the kernel, remain after the starch is converted to alcohol and are dried and sold as distillers grains, also known by the acronyms DDG or DDGS (Distillers Dried Grains or Distillers Dried Grains with Solubles). Distillers grains are typically sold as a nutrient-rich ingredient for animal feed.  According to the engineering specifications from our anticipated design-builder, Fagen, Inc., we anticipate that on an annual basis the plant may be able to produce approximately 50 million gallons of ethanol, 160,000 tons of dried distillers grains with solubles, and 110,200 tons of carbon dioxide. While we believe our production estimates are reasonable, we can offer no assurances that our plant will produce in excess of 50 million gallons of ethanol per year.

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We have entered into a design-build agreement with Fagen, Inc. for the design and construction of our proposed ethanol plant for a price of approximately $66,026,000, which does not include the anticipated cost of our water treatment facility we intend to construct, any change orders, or increases in the costs of materials provided by the CCI costs escalator provision contained in the design-build agreement.  See “DESCRIPTION OF BUSINESS – Design-Build Team” for detailed information about our design-build agreement with Fagen, Inc.

Construction of the project is expected to take approximately 16 to 18 months after construction commences. Our anticipated completion date is currently scheduled for autumn 2008. The anticipated completion date of autumn 2008 assumes that we are able to complete our financing arrangements, including this offering and debt financing in less than 12 months after the effective date of this registration statement. If we are not able to complete the equity offering and arrange debt financing, in less than 12 months after the effective date of our registration statement, our plant will likely not be complete in autumn 2008. Fagen, Inc.’s commitments to build other plants may also delay construction of our plant and postpone our start-up date. Except for our design-build agreement with Fagen, Inc., we do not have any binding or non-binding agreements with any other contractor or supplier for labor or materials necessary to construct the plant.

Our Anticipated Construction Schedule

·March – April 2007 – Conduct equity drive

·May 2007 – Negotiate and close debt financing

·Spring 2007 – Commence plant construction

·Summer 2007 to  Autumn 2008 – Manage plant construction

·Autumn 2008 – Plant completion and commencement of operations

Most Significant Risk Factors

·Your investment in us will be an investment in illiquid securities;

·We will need to obtain significant debt financing to fund construction of our proposed ethanol plant;

·Our ability to continue as a going concern is dependant on the success of this offering and our ability to secure senior debt financing;

·The initial board of governors will serve until the first annual meeting following the date on which substantial operations of the proposed ethanol plant commence, which is not expected until autumn 2008;

·Our governors and officers are inexperienced in the ethanol business;

·We may experience overcapacity within the ethanol industry which may limit our ability to operate profitably;

·Actual ethanol, distillers grains and corn oil production may vary from our current expectations;

·There may be limitations to the availability and costs of products and raw materials, particularly corn, natural gas and an adequate water supply may limit our ability to operate profitably;

·Adverse changes in the price and market for ethanol and distillers grains may limit our ability to operate profitably;

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

·Railroad and highway access for input of natural gas and outgoing distillers grains and ethanol may limit our ability to market our products;

·Changes in or elimination of governmental laws, tariffs, trade or other controls or enforcement practices such as national, state or local energy policy; federal ethanol tax incentives; or environmental laws and regulations that apply to our plant operations and their enforcement may limit our ability to operate the proposed plant;

·Adverse changes in the weather or general economic conditions impacting the availability and price of corn will increase price risk for our feedstock;

·Fluctuations in petroleum prices will influence the price of which we are able to sell ethanol;

·Changes in plant production capacity or technical difficulties in operating the plant may limit our ability to profitably operate the plant;

·Changes in costs of construction and equipment will influence the total cost of the project;

·Changes in interest rates or the availability of credit may limit our ability to obtain the necessary debt financing;

·Limitations on our ability to generate free cash flow to invest in our business and service our debt may limit our long term performance;

·Our ability to attract and retain key employees and maintain labor relations will influence our ability to succeed;

·Changes and advances in ethanol production technology may render our facility obsolete;

·Competition from alternative fuels and alternative fuel additives may limit our ability to operate profitability; and

·Other factors described elsewhere in this registration statement pose risks to subscribers.

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Our Financing Plan

We estimate the total project will cost approximately $110,000,000. We expect that the design and construction of the plant and the associated water treatment facility will cost approximately $78,526,000, with additional start-up and development costs of approximately $31,474,000. This is a preliminary estimate based primarily upon the experience of our anticipated general contractor, Fagen, Inc. with other plants it has built. We expect our estimate to change as we continue to develop the project. We expect to capitalize our project using a combination of equity and debt to supplement our seed capital proceeds. We raised $1,680,000 of seed capital equity in two private placements to fund our development, organizational and offering expenses. We intend to raise a minimum of $45,000,000 and a maximum of $60,000,000 of additional equity through this offering.  See “MANAGEMENT’S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION – Project Capitalization.”

Depending on the level of equity raised in this offering and the amount of any bond financing and/or grants we may be awarded, we will need to obtain debt financing ranging from approximately $48,320,000 to $63,320,000 in order to supplement our seed capital proceeds of $1,680,000 and fully capitalize the project. We do not currently have a debt commitment from any financial institution or other lender for our debt financing.  We have started identifying and interviewing potential lenders, however, we have not signed any commitment for debt financing.  We estimated the range of debt financing we will need by subtracting the minimum and maximum amount of equity in this offering and the $1,680,000 we raised as seed capital from the estimated total project cost.  The following table describes our anticipated uses of equity and debt proceeds.

Use of Proceeds	Amount			Percent of Total
Plant construction		$	66,026,000		60.02	%
Water treatment facility		12,500,000			11.36	%
CCI Contingency		3,279,250			2.98	%
Land cost		810,000			0.74	%
Site development costs		8,140,000			7.40	%
Construction contingency		919,750			0.84	%
Construction performance bond		350,000			0.32	%
Construction insurance costs		150,000			0.14	%
Administrative building		350,000			0.32	%
Office equipment		80,000			0.07	%
Computers, Software, Network		150,000			0.14	%
Railroad		3,000,000			2.73	%
Rolling stock		400,000			0.36	%
Fire Protection and water supply		3,495,000			3.18	%
Capitalized interest		1,500,000			1.36	%
Start up costs:
Financing costs		600,000			0.55	%
Organization costs(1)		1,500,000			1.36	%
Pre-production period costs		750,000			0.68	%
Working capital		2,000,000			1.83	%
Inventory - corn		1,100,000			1.00	%
Inventory - chemicals and ingredients		400,000			0.36	%
Inventory - Ethanol		1,500,000			1.36	%
Inventory - DDGS		500,000			0.45	%
Spare parts - process equipment		500,000			0.45	%
Total		$	110,000,000		100.00	%

(1)Includes estimated offering expenses of $550,000.

Financial Information

We are a development stage company with no operating history and no revenues. Please see “SELECTED FINANCIAL DATA” for a summary of our finances and the index to our financial statements for our detailed financial information.

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Membership in Highwater Ethanol and Our Member Control Agreement

If you purchase one or more of our units, you will become a member in Highwater Ethanol and your rights as a member will be governed by our member control agreement. Each member will have one vote per unit owned. Members may vote on a limited number of issues, such as dissolving the company, amending the member control agreement, and electing future governors. Generally we will allocate our profits and losses based upon the ratio each unit holder’s units bear to total units outstanding.

In the opinion of our counsel, Brown, Winick, Graves, Gross, Baskerville and Schoenebaum, P.L.C. of Des Moines, Iowa, we will be treated as a partnership for federal income tax purposes. As such, we will not pay any federal income taxes at the company level and will instead allocate net income to unit holders. Our unit holders must then include that income in his or her taxable income.

The transfer of units is restricted by our member control agreement, which, except in limited circumstances, does not allow unit transfers until the plant is operational. Once we are operational, certain unit transfers will be permitted. However, our units will not be listed on any national exchange and may not be readily traded due to certain restrictions imposed by tax and securities laws.  Please see “SUMMARY OF OUR MEMBER CONTROL AGREEMENT” and “FEDERAL TAX CONSEQUENCES OF OWNING OUR UNITS.”

Suitability of Investors

Investing in the units offered hereby involves a high degree of risk. Due to the high degree of risk, you cannot invest in this offering unless you meet the following suitability tests, which vary depending on the state in which you reside as follows:

For investors that reside in states other than Iowa and Kansas, the following suitability standard applies:

(1)You have annual income from whatever source of at least $45,000 and you have a net worth of at least $45,000 exclusive of home, furnishings and automobiles; or (2) you have a net worth of at least $150,000 exclusive of home, furnishings and automobiles.

For Iowa investors the following suitability standard applies:

(2)Iowa investors must have a net worth of $60,000 (exclusive of home, auto and furnishings) and annual income of $60,000 or, in the alternative, a net worth of $150,000 (exclusive of home, auto and furnishings).

For Kansas investors the following suitability standard applies:

(3)Kansas investors must have a net worth of $60,000 (exclusive of home, auto and furnishings) and annual income of $60,000 or, in the alternative, a net worth of $225,000 (exclusive of home, auto and furnishings).

For married persons, the tests will be applied on a joint husband and wife basis regardless of whether the purchase is made by one spouse or the husband and wife jointly.

With the exception of the specific suitability requirements for investors from Iowa and Kansas, we determined our suitability standards based on the North American Securities Administrators Association (“NASAA”) Statement of Policy Regarding Unsound Financial Condition.  This Statement defines an issuer in unsound financial condition as one with a going concern qualification on its financial statements and an accumulated deficit, negative stockholders’ equity, an inability to satisfy current obligations as they come due or negative cash flow/no revenue from operations.  Because we are a development-stage company with no revenue history, we are classified as an issuer in unsound financial condition.  Thus, we have imposed the above suitability standards for investors, and Iowa and Kansas each have additional investor suitability requirements for investors from their respective states.

Units will be sold only to persons that meet these and other specific suitability requirements. Even if you represent that you meet the required suitability standards, the board of governors reserves the right to reject any portion or all of your subscription for any reason, including if the board determines that the units are not a suitable investment for you.  See “PLAN OF DISTRIBUTION — Suitability of Investors.”

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Subscription Period and Procedures

The offering will end no later than April 5, 2008. If we sell the maximum number of units prior to April 5, 2008, the offering will end on or about the date that we sell the maximum number of units. We may also end the offering any time after we sell the minimum number of units and prior to April 5, 2008. In addition, if we abandon the project for any reason prior to April 5, 2008, we will terminate the offering and return offering proceeds to investors, including nominal interest on your investment less fees. We may continue to offer any remaining units to reach the maximum number to be sold until the offering closes. We reserve the right to cancel or modify the offering, to reject subscriptions for units in whole or in part, and to waive conditions to the purchase of units. Additionally, in our sole discretion, we may also determine that it is not necessary to sell all available units.

Before purchasing any units, you must read and complete the subscription agreement, draft a check payable to “Minnwest Bank, Escrow Agent for Highwater Ethanol, LLC” in the amount of not less than 10% of the amount due for units for which subscription is sought, which amount will be deposited in the escrow account; sign a full recourse promissory note and security agreement for the remaining 90% of the total subscription price; and deliver to us these items and an executed copy of the signature page of our amended and restated operating agreement.

Pursuant to our member control agreement, no person may become a member without the approval of the board of governors.  Membership units will be issued to members when the funds are released from escrow.  We will not issue units to subscribers if there is an outstanding balance on the promissory note executed by the subscriber.  Therefore, the membership units will be fully paid when issued.  It is the issuance of membership units by the board that grants to the subscriber all the rights of membership and shifts the status of the subscriber to that of a member of Highwater Ethanol.

Once you have executed the subscription agreement, you will not be able to withdraw funds from escrow, sell or transfer your units or otherwise cancel this agreement. Any time after we sell the minimum aggregate offering amount of $45,000,000, we may give written demand for payment and you will have 20 days to pay the balance of the purchase price due pursuant to the promissory note and security agreement. If you fail to pay the balance of the purchase price, you will forfeit your 10 percent cash deposit and you will not be entitled to any ownership interest in Highwater Ethanol. If we acquire sufficient equity cash proceeds to release funds from escrow prior to your initial investment, then you must pay the full purchase price at the time of subscription for the total number of units you wish to purchase.  See “PLAN OF DISTRIBUTION – Subscription Period” and “PLAN OF DISTRIBUTION – Subscription Procedures.”

Escrow Procedures

Proceeds from subscriptions for the units will be deposited in an interest-bearing escrow account that we have established with Minnwest Bank of Redwood Falls, Minnesota, as escrow agent, under a written escrow agreement.

We will not release funds from the escrow account until the following conditions are satisfied: (1) cash proceeds from unit sales deposited in the escrow account equals or exceeds $45,000,000, exclusive of interest; (2) our receipt of a written debt financing commitment for debt financing ranging from $48,320,000 to $63,320,000 depending on the amount necessary to fully capitalize the project; (3) we elect, in writing, to terminate the escrow agreement; (3) we have signed a definitive design build agreement with Fagen, Inc.; (4) we have been issued the environmental permits necessary to construct the ethanol plant; (5) we elect, in writing, to terminate the escrow agreement; (6) Minnwest Bank provides an affidavit to the states in which the units have been registered stating that the requirements to release funds have been satisfied and shall have provided to the Commissioner of the Minnesota Department of Commerce documentation that the foregoing conditions have been met; and (7) we obtain consents to releasing funds from escrow from each state securities department from which such consent is required provided, however, that none of the funds, regardless of the state of residence of the investor contributing such funds, shall be released until the Commissioner of the Minnesota Department of Commerce has authorized the release of the escrow proceeds.

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RISK FACTORS

The purchase of units involves substantial risks and the investment is suitable only for persons with the financial capability to make and hold long-term investments not readily converted into cash. Investors must, therefore, have adequate means of providing for their current and future needs and personal contingencies. Prospective purchasers of the units should carefully consider the Risk Factors set forth below, as well as the other information appearing in this prospectus, before making any investment in the units. Investors should understand that there is a possibility that they could lose their entire investment in us.

Risks Related to the Offering

If we fail to sell the minimum number of units, the offering will fail and your investment may be returned to you with nominal interest or no interest.

We may not be able to sell the minimum amount of units required to close on this offering. We must sell at least $45,000,000 worth of units to close the offering. If we do not sell units with a purchase price of at least $45,000,000 by April 5, 2008, we cannot close the offering and must return investors’ money with nominal interest, less expenses for escrow agency fees. This means that from the date of your investment, you may earn a nominal rate of return on the money you deposit with us in escrow. If escrow fees exceed interest, investments may be returned without interest, but you will receive no less than the purchase price you paid for the units. We do not expect the termination date to be later than April 5, 2008.

We are not experienced in selling securities and no one has agreed to assist us or purchase any units that we cannot sell ourselves, which may result in the failure of this offering.

We are making this offering on a direct primary offering, which means that we will not use an underwriter or placement agent and if we are unsuccessful in selling the minimum aggregate offering amount by April 5, 2008, we will be required to return your investment. We have no firm commitment from any prospective buyer to purchase our units and there can be no assurance that the offering will be successful. We plan to offer the units directly to investors by registering our securities in the states of Florida, Georgia, Illinois, Iowa, Kansas, Louisiana, Minnesota, Missouri, South Dakota and Wisconsin. We may hold informational meetings in each of these states. Our governors have significant responsibilities in their primary occupations in addition to trying to raise capital. Governors Brain D. Kletscher, John M. Schueller, Jason R. Fink and Timothy J. Van Der Wal all have full-time outside employment.  See “BUSINESS EXPERIENCE OF OUR GOVERNORS AND OFFICERS.”

Each of our governors involved in the sale of our units believes that he will be able to devote a significant portion (10-20 hours per  week) of his or her time to the offering. Nonetheless, the time that Governors Brain D. Kletscher, John M. Schueller, Jason R. Fink and Timothy J. Van Der Wal spend on our activities may prove insufficient to result in a successful equity offering.

These individuals have no broker-dealer experience or any experience with public offerings of securities. There can be no assurance that our governors will be successful in securing investors for the offering.

Our ability to continue as a going concern is dependant on the success of this offering and our ability to secure senior debt financing. If we are unable to continue as a going concern, the project may fail.

Our financial statements dated January 31, 2007, do not reflect our subsequent purchase of two parcels of land for our proposed plant location.  The purchase of this real estate in March 2007 significantly reduced our near-term cash position and may create future liquidity problems for Highwater Ethanol.  Our ability to continue as a going concern is dependant on the success of this offering and our ability to secure senior debt financing.  If we fail to meet our ongoing cash obligations we will be unable to complete our equity drive, resulting in the failure of our offering.

Proceeds of this offering are subject to promissory notes due after the offering is closed and investors unable to pay the 90 percent balance on their investment may have to forfeit their 10 percent cash deposit.

As much as 90 percent of the total offering proceeds of this offering could be subject to promissory notes that may not be due until after the offering is closed. If we sell the minimum number of units by April 5, 2008, we may be able to break escrow without closing the offering. The promissory note will become due within 20 days of the

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subscribers receipt of written notice from Highwater Ethanol.  Nonetheless, we will not be able to release funds from escrow until the notes are paid off and the cash proceeds in escrow equal or exceed $45,000,000, we have signed a definitive design build agreement with Fagen, Inc., we have been issued the environmental permits necessary to construct the ethanol plant, we have received a written debt financing commitment, the escrow agent provides an affidavit to the securities department of each state in which we have registered stating that the escrow agreement requirements have been satisfied, and we have received consent to release the funds on deposit from the state securities commissioners that condition escrow termination on our receipt of such consent.

The success of our offering will depend on the investors’ ability to pay the outstanding balances on these promissory notes.  We may choose to wait to call the balance on the notes for a variety of reasons related to construction and development of the project.  Under the terms of the offering, we may wait until the tenth day of the 11th month to call the balance.  If we wait to call the balance on the notes for a significant period of time after we sell the minimum, the risk of nonpayment on the notes may increase.  In order to become a member in Highwater Ethanol, each investor must, among other requirements, submit a check in the amount of 10 percent of the total amount due for the number of units for which subscription is sought, and a promissory note for the remaining 90 percent of the total amount due for the units. That balance will become due within 20 days of the date of our notice that our sales of units, including the amounts owed under the promissory notes, have exceeded the minimum escrow deposit of $45,000,000. We will take a security interest in the units. We intend to retain the initial payment and to seek damages from any investor who defaults on the promissory note obligation. This means that if you are unable to pay the 90 percent balance of your investment within 20 days of our notice, you may have to forfeit your 10 percent cash deposit. Accordingly, the success of the offering depends on the payment of these amounts by the obligors.

Investors will not be allowed to withdraw their investments, which means that you should invest only if you are willing to have your investment unavailable to you for an indefinite period of time.

Investors will not be allowed to withdraw their investments for any reason, absent a rescission offer tendered by Highwater Ethanol. We do not anticipate making a rescission offer. You should only invest in us if you are willing to have your investment be unavailable until we break escrow, which could be up to one year after the effective date of our registration statement. If our offering succeeds, and we convert your cash investment into units of Highwater Ethanol, your investment will be denominated in our units until you transfer those units. There are significant transfer restrictions on our units. You will not have a right to withdraw from Highwater Ethanol and demand a cash payment from us. Therefore, your investment may be unavailable to you for an indefinite period of time.

Risks Related to the Units

There has been no independent valuation of the units, which means that the units may be worth less than the purchase price.

The per unit purchase price has been determined by us without independent valuation of the units and is $10,000 per unit.  We established the offering prices based on our estimate of capital and expense requirements, not based on perceived market value, book value, or other established criteria. We did not obtain an independent appraisal opinion on the valuation of the units. The units may have a value significantly less than the offering prices and there is no guarantee that the units will ever obtain a value equal to or greater than the offering price.

No public trading market exists for our units and we do not anticipate the creation of such a market, which means that it will be difficult for you to liquidate your investment.

There is currently no established public trading market for our units and an active trading market will not develop despite this offering. To maintain partnership tax status, you may not trade the units on an established securities market or readily trade the units on a secondary market (or the substantial equivalent thereof). We, therefore, will not apply for listing of the units on any national securities exchange or on the NASDAQ Stock Market. As a result, you will not be able to readily sell your units.

Public investors will experience immediate and substantial dilution as a result of this offering.

Our founders paid $3,333.33 per unit and our seed capital investors paid $5,000 per unit, which is substantially less per unit for our membership units than the current public offering price of $10,000 per unit. Accordingly, if you purchase units in this offering, you will experience immediate and substantial dilution of your investment. Based upon the issuance and sale of the minimum number of units (4,500) at the public offering price of $10,000 per unit, you will incur immediate dilution of $692.85 in the net tangible book value per unit if you purchase units in this offering. If we sell the maximum number of units (6,000) at the public offering price of

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$10,000 per unit, you will incur immediate dilution of $530.11 in the net tangible book value per unit if you purchase units in this offering.

We have placed significant restrictions on transferability of the units, limiting an investor’s ability to withdraw from the company.

The units are subject to substantial transfer restrictions pursuant to our member control agreement. In addition, transfers of the units may be restricted by state securities laws. As a result, you may not be able to liquidate your investment in the units and, therefore, may be required to assume the risks of investment in us for an indefinite period of time. See “SUMMARY OF OUR MEMBER CONTROL AGREEMENT.”

To help ensure that a secondary market does not develop, our amended and restated member control agreement prohibits transfers without the approval of our board of governors. The board of governors will not approve transfers unless they fall within “safe harbors” contained in the publicly-traded partnership rules under the tax code, which include, without limitation, the following:

·transfers by gift to the member’s spouse or descendants;

·transfer upon the death of a member;

·transfers between family members; and

·transfers that comply with the “qualifying matching services” requirements.

A qualified matching service is qualified only if: (1) it consists of a computerized or printed system that lists customers’ bid and/or ask prices in order to match unit holders who want to sell with persons who want to buy; (2) matching occurs either by matching the list of interested buyers with the list of interested sellers or through a bid and ask process that allows interested buyers to bid on the listed interest; (3) the seller cannot enter into a binding agreement to sell the interest until the 15th calendar day after his interest is listed, which time period must be confirmable by maintenance of contemporaneous records; (4) the closing of a sale effectuated through the matching service does not occur prior to the 45th calendar day after the interest is listed; (5) the matching service displays only quotes that do not commit any person to buy or sell an interest at the quoted price (nonfirm price quotes), or quotes that express an interest in acquiring an interest without an accompanying price (nonbinding indications of interest), and does not display quotes at which any person is committed to buy or sell an interest at the quoted price; (6) the seller’s information is removed within 120 days of its listing and is not reentered into the system for at least 60 days after its deletion; and (7) the sum of the percentage interests transferred during the entity’s tax year, excluding private transfers, cannot exceed ten percent of the total interests in partnership capital or profits.  See “Publicly Traded Partnership Rules,” below.

There is no assurance that an investor will receive cash distributions which could result in an investor receiving little or no return on his or her investment.

Distributions are payable at the sole discretion of our board of governors, subject to the provisions of the Minnesota Limited Liability Company Act, our amended and restated member control agreement and the requirements of our creditors. We do not know the amount of cash that we will generate, if any, once we begin operations. Cash distributions are not assured, and we may never be in a position to make distributions. See “DESCRIPTION OF MEMBERSHIP UNITS.” Our board may elect to retain future profits to provide operational financing for the plant, debt retirement and possible plant expansion or the construction of additional plants. This means that you may receive little or no return on your investment and be unable to liquidate your investment due to transfer restrictions and lack of a public trading market. This could result in the loss of your entire investment.

These units will be subordinate to company debts and other liabilities, resulting in a greater risk of loss for investors.

The units are unsecured equity interests and are subordinate in right of payment to all our current and future debt. In the event of our insolvency, liquidation, dissolution or other winding up of our affairs, all of our debts, including winding-up expenses, must be paid in full before any payment is made to the holders of the units. In the event of our bankruptcy, liquidation, or reorganization, all units will be paid ratably with all our other equity holders, and there is no assurance that there would be any remaining funds after the payment of all our debts for any distribution to the holders of the units.  In March 2007, we obtained an $800,000 note from a bank to provide us with interim financing until we can close on our anticipated debt financing. We do not anticipate having additional debt until we execute a debt financing loan in an amount ranging from $48,320,000 to $63,320,000.  Once we have executed a debt financing loan, our membership units will be subordinated in right of payment to all of Highwater Ethanol’s debt.

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You may have limited access to information regarding our business because our obligations to file periodic reports with the Securities and Exchange Commission could be automatically suspended under certain circumstances.

Except for our duty to deliver audited annual financial statements to our members pursuant to our member control agreement, we are not required to deliver an annual report to security holders and currently have no plan to do so. We also will not be required to furnish proxy statements to security holders and our governors, officers and beneficial owners will not be required to report their beneficial ownership of units to the Securities and Exchange Commission pursuant to Section 16 of the Securities Exchange Act of 1934 until we have both 500 or more unit holders and greater than $10 million in assets. This means that your access to information regarding our business will be limited. However, as of effectiveness of our registration statement, we will be required to file periodic reports with the Securities and Exchange Commission which will be immediately available to the public for inspection and copying.  Except during the fiscal year that our registration statement becomes effective these reporting obligations will be automatically suspended under Section 15(d) of the Securities Exchange Act of 1934 if we have less than 300 members. If this occurs after the fiscal year in which our registration statement becomes effective, we will no longer be obligated to file periodic reports with the SEC and your access to our business information would then be even more restricted.

The presence of members holding 50 percent or more of the outstanding units is required to take action at a meeting of our members.

In order to take action at a meeting, a quorum of members holding at least 50 percent of the outstanding units must be represented in person, by proxy or by mail ballot. See “SUMMARY OF OUR MEMBER CONTROL AGREEMENT.” Assuming a quorum is present, members take action by a vote of the majority of the units represented at the meeting and entitled to vote on the matter. The requirement of a 50 percent quorum protects the Company from actions being taken when less than 50 percent of the members have not considered the matter being voted upon.  The requirement of a 50 percent quorum also means that members will not be able to take actions which may be in the best interests of the Company if we cannot secure the presence in person, by proxy, or by mail ballot of members holding 50 percent or more of the outstanding units.

After the plant is substantially operational, our amended and restated member control agreement provides for staggered terms for our governors.

The terms of our initial governors expire at the first annual meeting following substantial completion of the ethanol plant. At that time, our members will elect governors for staggered three-year terms. Because our governors will serve on the board for staggered terms, it will be difficult for our members to replace our board of governors. In that event, your only recourse to replace these governors would be through an amendment to our amended and restated member control agreement which could be difficult to accomplish.

Risks Related to Our Financing Plan

Even if we raise the minimum amount of equity in this offering, we may not obtain the debt financing necessary to construct and operate our ethanol plant, which would result in the failure of the project and Highwater Ethanol and the potential loss of your investment.

Our financing plan requires a significant amount of debt financing. We do not have contracts or commitments with any bank, lender, governmental entity, underwriter or financial institution for debt financing.

We will not release funds from escrow until we secure a written debt financing commitment sufficient to construct and operate the ethanol plant. If debt financing on acceptable terms is not available for any reason, we will be forced to abandon our business plan and return your investment from escrow plus nominal interest less deduction for escrow agency fees. Depending on the level of equity raised in this offering, we expect to require approximately $48,320,000 to $63,320,000 (less any grants we are awarded and any bond financing we can procure) in senior or subordinated long term debt from one or more commercial banks or other lenders. Because the amounts of equity, bond financing and grant funding are not yet known, the exact amount and nature of total debt is also unknown. If we do not sell the minimum amount of units, the offering will not close. Even though we must receive a debt financing commitment as a condition of closing escrow, the agreements to obtain debt financing may not be fully negotiated when we close on escrow. Therefore, there is no assurance that such commitment will be received, or if it is received, that it will be on terms acceptable to us. If agreements to obtain debt financing are arranged and executed, we expect that we will be required to use the funds raised from this offering prior to receiving the debt financing funds.

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If we decide to spend equity proceeds and begin plant construction before we have fulfilled all of the loan commitment conditions, signed binding loan agreements or received loan proceeds, we may be unable to close the loan and you may lose all of your investment.

If we sell the aggregate minimum number of units prior to April 5, 2008 and satisfy the other conditions of releasing funds from escrow, including our receipt of a written debt financing commitment, we may decide to begin spending the equity proceeds to begin plant construction or for other project-related expenses. If, after we begin spending equity proceeds, we are unable to close the loan, we may have to seek another debt financing source or abandon the project. If that happens, you could lose some or all of your investment.

If we successfully release funds from escrow but are unable to close our loan, we may decide to hold your investment while we search for alternative debt financing sources, which means your investment will continue to be unavailable to you and may decline in value.

We must obtain a written debt financing commitment prior to releasing funds from escrow. However, a debt financing commitment does not guarantee that we will be able to successfully close the loan. If we fail to close the loan, we may choose to seek alternative debt financing sources. While we search for alternative debt financing, we may continue to hold your investment in another interest-bearing account. Your investment will continue to be unavailable while we search for alternative debt financing. It is possible that your investment will decline in value while we search for the debt financing necessary to complete our project.

Future loan agreements with lenders may hinder our ability to operate the business by imposing restrictive loan covenants, which could delay or prohibit us from making cash distributions to our unit holders.

Our debt load necessary to implement our business plan will result in substantial debt service requirements. Our debt load and service requirements could have important consequences which could hinder our ability to operate, including our ability to:

·Incur additional indebtedness;

·Make capital expenditures or enter into lease arrangements in excess of prescribed thresholds;

·Make distributions to unit holders, or redeem or repurchase units;

·Make certain types of investments;

·Create liens on our assets;

·Utilize the proceeds of asset sales; and

·Merge or consolidate or dispose of all, or substantially all, of our assets.

In the event that we are unable to pay our debt service obligations, our creditors could force us to (1) reduce or eliminate distributions to unit holders (even for tax purposes); or (2) reduce or eliminate needed capital expenditures. It is possible that we could be forced to sell assets, seek to obtain additional equity capital or refinance or restructure all or a portion of our debt. In the event that we would be unable to refinance our indebtedness or raise funds through asset sales, sales of equity or otherwise, our ability to operate our plant would be greatly affected and we may be forced to liquidate.

We do not have any bond financing commitments or contracts and if we are unable to obtain bond financing or if the bond financing is provided on unfavorable terms, our financial performance may suffer and the value of your investment may be reduced.

We may use bond financing to help capitalize the project, however, we do not have contracts or commitments with any lender, bank, financial institution, governmental entity or underwriter to provide bond financing for our project. There is no assurance that we will be able to use bond financing or that bond financing, if available, will be secured on terms that are favorable to us. If we do not use bond financing, we may be charged a higher interest rate or our secured lenders may require a greater amount of equity financing in order to complete project capitalization. If bond financing is not available or is only available on terms that are not favorable to us, our financial performance may suffer and your investment could lose value.

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Risks Related to Highwater Ethanol as a Development Stage Company

Highwater Ethanol has no operating history, which could result in errors in management and operations causing a reduction in the value of your investment.

We were recently formed and have no history of operations. We cannot provide assurance that Highwater Ethanol can manage start-up effectively and properly staff operations, and any failure to manage our start-up effectively could delay the commencement of plant operations. A delay in start-up operations is likely to further delay our ability to generate revenue and satisfy our debt obligations. We anticipate a period of significant growth, involving the construction and start-up of operations of the plant. This period of growth and the start-up of the plant are likely to be a substantial challenge to us. If we fail to manage start-up effectively, you could lose all or a substantial part of your investment.

We have little to no experience in the ethanol industry, which increases the risk of our inability to build and operate the ethanol plant.

We are presently, and are likely for some time to continue to be, dependent upon our founding members, some of whom will serve as our initial governors. Most of these individuals are experienced in business generally but have very little or no experience in raising capital from the public, organizing and building an ethanol plant, and governing and operating a public company. None of our governors has expertise in the ethanol industry. See “GOVERNORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.” In addition, certain governors on our board are presently engaged in business and other activities which impose substantial demand on the time and attention of such governors. You should not purchase units unless you are willing to entrust all aspects of our management to our board of governors.

We will depend on Fagen, Inc. for expertise in beginning our operations in the ethanol industry and any loss of this relationship could cause us delay and added expense, placing us at a competitive disadvantage.

We will be dependent on our relationship with Fagen, Inc. and its employees. Any loss of this relationship with Fagen, Inc., particularly during the construction and start-up period for the plant, may prevent us from commencing operations and result in the failure of our business. The time and expense of locating new consultants and contractors would result in unforeseen expenses and delays. Unforeseen expenses and delays may reduce our ability to generate revenue and profitability and significantly damage our competitive position in the ethanol industry such that you could lose some or all of your investment.

If we fail to finalize critical agreements, such as the co-product marketing agreements and utility supply agreements, or the final agreements are unfavorable compared to what we currently anticipate, our project may fail or be harmed in ways that significantly reduce the value of your investment.

You should be aware that this prospectus makes reference to documents or agreements that are not yet final or executed, and plans that have not been implemented. In some instances such documents or agreements are not even in draft form. The definitive versions of those agreements, documents, plans or proposals may contain terms or conditions that vary significantly from the terms and conditions described. These tentative agreements, documents, plans or proposals may not materialize or, if they do materialize, may not prove to be profitable.

Our lack of business diversification could result in the devaluation of our units if our revenues from our primary products decrease.

We expect our business to solely consist of ethanol and distillers grains and any other co-product we are able to market. We do not have any other lines of business or other sources of revenue if we are unable to complete the construction and operation of the plant. Our lack of business diversification could cause you to lose all or some of your investment if we are unable to generate revenues by the production and sale of ethanol and distillers grain and other co-products since we do not expect to have any other lines of business or alternative revenue sources.

We have a history of losses and may not ever operate profitably.

From our inception on May 2, 2006 through January 31, 2007, we incurred an accumulated net loss of $655,265. We will continue to incur significant losses until we successfully complete construction and commence operations of the plant. There is no assurance that we will be successful in completing this offering and/or in our efforts to build and operate an ethanol plant. Even if we successfully meet all of these objectives and begin operations at the ethanol plant, there is no assurance that we will be able to operate profitably.

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Your investment may decline in value due to decisions made by our initial board of governors and until the plant is built, your only recourse to replace these governors will be through amendment to our member control agreement.

Our amended and restated member control agreement provides that the initial board of governors will serve until the first annual or special meeting of the members following commencement of substantial operations of the ethanol plant. If our project suffers delays due to financing or construction, our initial board of governors could serve for an extended period of time. In that event, your only recourse to replace these governors would be through an amendment to our amended and restated member control agreement which could be difficult to accomplish.

We may not be able to hire employees capable of effectively operating the ethanol plant, which may hinder our ability to operate profitably.

We are a development stage company, and therefore, we currently have only one part-time office employee. If we are not able to hire additional employees who can effectively operate the plant, our ability to generate revenue will be significantly reduced or prevented altogether such that you could lose all or a substantial portion of your investment.

Risks Related to Construction of the Ethanol Plant

We will depend on Fagen, Inc. and ICM, Inc. to design and build our ethanol plant and their failure to perform could force us to abandon our business, hinder our ability to operate profitably or decrease the value of your investment.

We will be highly dependent upon Fagen, Inc. and ICM, Inc. to design and build the plant. We have entered into a design-build agreement with Fagen, Inc. for various design and construction services. Fagen, Inc. will serve as our general contractor and will engage ICM, Inc. to provide design and engineering services.

If Fagen, Inc. terminates its relationship with us after initiating construction, there is no assurance that we would be able to obtain a replacement general contractor. Any such event may force us to abandon our business.

We are relying on Fagen, Inc. and ICM, Inc. to supply all of the technology necessary for the construction of our plant and the production of fuel-grade ethanol and distillers grains and we expect they will either own this technology or obtain a license to utilize it.

We will be dependent upon Fagen, Inc. and/or ICM, Inc. for all of the technology used in our plant that relates to construction of the plant and the plant’s production of fuel-grade ethanol and distillers grains.  We expect that Fagen, Inc. or ICM, Inc. will either own the technology or obtain a license necessary for its use.  If either Fagen, Inc. or ICM, Inc. fails to provide the necessary technology, we may not be able to build our plant or successfully operate it.

We may need to increase cost estimates for construction of the ethanol plant, and such increase could result in devaluation of our units if ethanol plant construction requires additional capital.

Fagen, Inc. will construct the plant for a fixed contract price of approximately $66,026,000 based on the plans and specifications in the design-build agreement. We have based our capital needs on a design for the plant that will cost approximately $78,526,000, which includes the cost of our water treatment equipment not contemplated by our design-build agreement, with additional start-up and development costs of approximately $31,474,000 for a total project completion cost of approximately $110,000,000. This price includes construction period interest. The estimated cost of the plant is based on preliminary discussions, and there is no assurance that the final cost of the plant will not be higher. There is no assurance that there will not be design changes or cost overruns associated with the construction of the plant. In addition, shortages of steel or other building materials could affect the final cost and final completion date of the project. Any significant increase in the estimated construction cost of the plant could delay our ability to generate revenues and reduce the value of your units because our revenue stream may not be able to adequately support the increased cost and expense attributable to increased construction costs.

Our design-build agreement with Fagen, Inc. terminates on August 15, 2007, unless a valid notice to proceed has been accepted by Fagen, Inc. and we may not be able to meet this deadline, which may result in our inability to proceed and may force us to abandon our business.

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Our design-build agreement with Fagen, Inc., dated September 28, 2006, as amended by agreement, terminates unless we have provided and Fagen, Inc. has accepted a valid notice to proceed by August 15, 2007.  We may not be able to provide Fagen, Inc. with a notice to proceed by the specified date in which case Fagen, Inc. could decide to discontinue its relationship with us and we would be forced to either contract with an alternative design-builder or abandon our project and our business.

Project construction costs may increase with the cost of construction materials which may result in a devaluation of our units.

 The Company signed an agreement in September 2006 with Fagen, Inc. to design and build the ethanol plant at a total contract price of approximately $66,026,000. This contract price may be further increased if the construction cost index (“CCI”) published by Engineering News-Record Magazine reports a CCI greater than 7,660.29 in the month in which we issue to Fagen, Inc., a notice to proceed with plant construction. The amount of the contract price increase will be equal to the percentage increase in the CCI based upon the January 2006 CCI of 7,660.29. As of February 2007, the CCI was reported at 7,879.54, which is significantly higher than the January 2006 level stated in the design build agreement. If the CCI remains at the February 2007 level or increases above that level in the month in which we issue to Fagen, Inc. a notice to proceed with plant construction, the contract price will accordingly increase by at least approximately $1,890,000.  Thus, we have allowed for a $3,279,250 contingency in our total estimated costs of the project. This may not be sufficient to offset any upward adjustment in our construction cost. Under the design-build agreement, our expenses will increase for any change orders we may approve.

Construction delays could result in devaluation of our units if our production and sale of ethanol and its co-products are similarly delayed.

We currently expect our plant to be complete and operating by autumn 2008; however, construction projects often involve delays in obtaining permits, construction delays due to weather conditions, or other events that delay the construction schedule. In addition, Fagen, Inc.’s involvement in the construction of a number of other plants while constructing our plant could cause delays in our construction schedule. Also, any changes in interest rates or the credit environment or any changes in political administrations at the federal, state or local level that result in policy changes toward ethanol or this project, could also cause construction and operation delays. If it takes longer to construct the plant than we anticipate, it would delay our ability to generate revenue and make it difficult for us to meet our debt service obligations. This could reduce the value of your units.

Fagen, Inc. and ICM, Inc. may have current or future commitments to design and build other ethanol manufacturing facilities ahead of our plant and those commitments could delay construction of our plant and our ability to generate revenues.

We do not know how many ethanol plants Fagen, Inc. and ICM, Inc. have currently contracted to design and build.  It is possible that Fagen, Inc. and ICM, Inc. have outstanding commitments to other facilities that may cause the construction of our plant to be delayed.  It is also possible that Fagen, Inc. and ICM, Inc. will continue to contract with new facilities for plant construction and with operating facilities for expansion construction.  These current and future building commitments may reduce the available resources of Fagen, Inc. and ICM, Inc. to such an extent that construction of our plant is significantly delayed.  If this occurs, our ability to generate revenue will also be delayed and the value of your investment will be reduced.

Defects in plant construction could result in devaluation of our units if our plant does not produce ethanol and its co-products as anticipated, or could put us at increased risk for fire or an explosion.

There is no assurance that defects in materials and/or workmanship in the plant will not occur. Such defects could delay the commencement of operations of the plant, or, if such defects are discovered after operations have commenced, could cause us to halt or discontinue the plant’s operation. Halting or discontinuing plant operations could delay our ability to generate revenues and reduce the value or your units.  In addition, defects in materials or workmanship could put us at an increased risk of loss due to fire or an explosion.  A loss due to fire or an explosion could cause us to slow or halt production which could reduce the value of your investment.

We have not received certain permits and failure to obtain these permits would prevent operation of the plant.

We expect that we will use water to cool our closed circuit systems in the proposed plant based upon engineering specifications. Permits will need to be acquired for the discharge of certain cooling waters. There can be no assurances that these permits will be granted to us. If these permits are not granted, then our plant may not be allowed to operate.

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While we expect the plant to be located in Redwood County, Minnesota, we currently anticipate obtaining water from high capacity wells in Cottonwood County, Minnesota, which borders Redwood County. We have applied for a water permit application for appropriation of water from the State of Minnesota. The application is being processed, however, there is no assurance that this permit can be obtained.

We anticipate that we will obtain a number of other permits from the Minnesota Pollution Control Agency related to air emissions and wastewater and stormwater discharge.  While we anticipate receiving these permits, there is no assurance that we will obtain all of the necessary permits.  Our inability to obtain the necessary environmental permits could prohibit commencement of construction or operation of the plant thereby reducing the value of your investment.

The ethanol industry is a feedstock limited industry.  An inadequate supply of corn, our primary feedstock, could cause the price of corn to increase and threaten the viability of our plant and cause you to lose some or all of your investment.

The number of ethanol manufacturing plants either in production or in the planning or construction phases continues to increase at a rapid pace.  This increase in the number of ethanol plants will affect both the supply and the demand for corn.  As more plants develop and go into production there may not be an adequate supply of feedstock to satisfy the demand of the ethanol industry and the livestock industry, which uses corn in animal rations.  Consequently, the price of corn may rise to the point where it threatens the viability of our project, or significantly decreases the value of your investment or threatens your investment altogether. See “Plan of Operations Until Start-Up of Ethanol Plant.”

Risks Related to Conflicts of Interest

We will have no independent governors which means that the agreements we enter into may not be negotiated on as favorable terms as they might have been if we had independent governors.

Our board will have no independent governors as defined by the North American Securities Administrators Association. Accordingly, any contracts or agreements we enter into, including those with Fagen, Inc. will not be approved by independent governors since there are none at this time.

Our governors and officers have other business and management responsibilities which may cause conflicts of interest in the allocation of their time and services to our project.

Since our project is currently managed by the board of governors rather than a professional management group, the devotion of the governors’ time to the project is critical. However, the governors and officers have other management responsibilities and business interests apart from our project. As a result, our governors and officers may experience conflicts of interest in allocating their time and services between us and their other business responsibilities. In addition, conflicts of interest may arise if the governors and officers, either individually or collectively, hold a substantial percentage of the units because of their position to substantially influence our business and management.

We may have conflicting financial interests with Fagen, Inc., and ICM, Inc., which could cause Fagen, Inc. and ICM, Inc. to put their financial interests ahead of ours.

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

Affiliated investors may purchase additional units and influence decisions in their favor.

We may sell units to affiliated or institutional investors and they may acquire enough units to influence the manner in which we are managed. These investors may influence our business in a manner more beneficial to themselves than to our other investors. This may reduce the value of your units, impair the liquidity of your units and/or reduce our profitability.

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Risks Related to the Production of Ethanol

We may not be able to purchase the necessary amounts of corn in the area surrounding our ethanol plant or the purchase may not be cost-effective due to the limited corn supply in our geographical area, potential disease, agricultural risks, and competition with other new plants.

Ethanol production at our ethanol plant will require significant amounts of corn. Our corn availability study prepared by PRX Geographic, Inc. indicates that adequate corn is available in the area surrounding our potential site for the plant   The corn availability study may not be accurate and may overstate the availability of corn in the Lamberton, Minnesota area.  Currently, we have a corn origination agreement with Meadowland Farmers Coop, however, if an adequate supply of corn is unavailable we may be forced to pay more for corn than our competitors, which may lead to a reduction in our profitability and may ultimately cause our project to fail.

Additionally, corn supplies, as with most other crops, can be subject to interruption or shortages caused by weather, transportation difficulties, disease and other various planting, growing or harvesting problems. A significant reduction in the quantity of corn harvested due to these factors could result in increased corn costs, which will reduce our profitability and the value of your units.

Finally, other new ethanol plants may be developed in the State of Minnesota or other nearby states. If these plants are successfully developed and constructed, we expect to compete with them for corn origination. Competition for corn origination may increase our costs of corn and harm our financial performance and the value of your investment.

The expansion of domestic ethanol production in combination with state bans on Methyl Tertiary Butyl Ether (MTBE) and/or state renewable fuels standards  may place strains on rail and terminal infrastructure such that our ethanol cannot be marketed and shipped to the blending terminals that would otherwise provide us the best cost advantages.

If the volume of ethanol shipments continues to increase and blenders switch from MTBE to ethanol, there may be weaknesses in infrastructure and its capacity to transport ethanol such that our product cannot reach its target markets.  Many terminals may need to make infrastructure changes to blend ethanol instead of MTBE.  If the blending terminals do not have sufficient capacity or the necessary infrastructure to make this switch, there may be an oversupply of ethanol on the market, which could depress ethanol prices and negatively impact our financial performance.  In addition, rail infrastructure may be inadequate to meet the expanding volume of ethanol shipments, which could prevent us from shipping our ethanol to target markets and may even cause our plant to slow or halt production.

Our financial performance will be significantly dependent on corn and natural gas prices and market prices for ethanol and distillers dried grains, and the value of your investment in us will be directly affected by changes in these market prices.

Our results of operations and financial condition will be significantly affected by the cost and supply of corn and natural gas. Changes in the price and supply of corn and natural gas are subject to and determined by market forces over which we have no control.

The availability and price of corn will significantly influence our financial performance. We will purchase our corn in the cash market and expect to hedge corn price risk through futures contracts and options to reduce short-term exposure to price fluctuations.   See “DESCRIPTION OF BUSINESS-Corn Feedstock Supply” for a  table illustrating corn prices and the amount of corn produced in the seven county area surrounding our proposed plant location. There is no assurance that our hedging activities will successfully reduce the risk caused by price fluctuation which may leave us vulnerable to high corn prices. Hedging activities themselves can result in costs because price movements in corn contracts are highly volatile and are influenced by many factors that are beyond our control. We may incur such costs and they may be significant.

Generally, higher corn prices will produce lower profit margins. This is especially true if market conditions do not allow us to pass through increased corn costs to our customers. There is no assurance that we will be able to pass through higher corn prices. If a period of high corn prices were to be sustained for some time, such pricing may reduce our ability to generate revenues because of the higher cost of operating and could potentially lead to the loss of some or all of your investment.

Our revenues will be greatly affected by the price at which we can sell our ethanol and distillers grains. These prices can be volatile as a result of a number of factors. These factors include the overall supply and demand, the price of gasoline, level of government support, and the availability and price of competing products. For instance, the price of ethanol tends to increase as the price of gasoline increases, and the price of ethanol tends to decrease as the price of gasoline decreases. Any lowering of gasoline

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prices will likely also lead to lower prices for ethanol, which may decrease our ethanol sales and reduce revenues, causing a reduction in the value of your investment.  See “DESCRIPTION OF BUSINESS-Distillers Grains Pricing” for a table illustrating the price of distillers grains pricing.

The price of ethanol has recently been much higher than its 10-year average. See “DESCRIPTION OF BUSINESS-Ethanol Pricing” for comparison charts of average ethanol and gasoline rack prices and a chart of the ten year history of the market price for ethanol. We do not expect these prices to be sustainable as supply from new and existing ethanol plants increases to meet increased demand. Increased production of ethanol may lead to lower prices. The increased production of ethanol could have other adverse effects. For example, the increased production could lead to increased supplies of co-products from the production of ethanol, such as distillers grains. Those increased supplies could outpace demand, which would lead to lower prices for those co-products. Also, the increased production of ethanol could result in increased demand for corn. This could result in higher prices for corn and corn production creating lower profits. There can be no assurance as to the price of ethanol or distillers grains in the future. Any downward changes in the price of ethanol and/or distillers grains may result in less income which would decrease our revenues and you could lose some or all of your investment as a result.

We rely on third parties for our supply of natural gas, which is consumed in the production of ethanol. The prices for and availability of natural gas are subject to volatile market conditions. These market conditions often are affected by factors beyond our control such as higher prices resulting from colder than average weather conditions, overall economic conditions and foreign and domestic governmental regulations. Significant disruptions in the supply of natural gas could impair our ability to manufacture ethanol for our customers. Furthermore, increases in natural gas prices or changes in our natural gas costs relative to natural gas costs paid by competitors may adversely affect our results of operations and financial condition. See “DESCRIPTION OF BUSINESS-Utilites” for a table  illustrating the price of natural gas in recent years.

We will depend on others for sales of our products, which may place us at a competitive disadvantage and reduce profitability.

We have hired a third-party marketing firm to market all of the ethanol we plan to produce. We currently expect to market our own distillers grains by selling to local livestock markets. However, if the local markets do not provide an adequate outlet for our distillers grains at the prices we desire, we expect to contract with a broker to market and sell a portion or all of our distillers grains. As a result, we expect to be dependent on the ethanol broker and any distillers grains broker we engage. There is no assurance that we will be able to enter into contracts with any ethanol broker or distillers grains broker on terms that are favorable to us. If the ethanol or distillers grains broker breaches the contract or does not have the ability, for financial or other reasons, to market all of the ethanol or distillers grains we produce, we will not have any readily available means to sell our products. Our lack of a sales force and reliance on third parties to sell and market our products may place us at a competitive disadvantage. Our failure to sell all of our ethanol and distillers dried grains feed products may result in less income from sales, reducing our revenue stream, which could reduce the value of your investment.

Changes and advances in ethanol production technology could require us to incur costs to update our ethanol plant or could otherwise hinder our ability to compete in the ethanol industry or operate profitably.

Advances and changes in the technology of ethanol production are expected to occur. Such advances and changes may make the ethanol production technology installed in our plant less desirable or obsolete. These advances could also allow our competitors to produce ethanol at a lower cost than us. If we are unable to adopt or incorporate technological advances, our ethanol production methods and processes could be less efficient than our competitors, which could cause our plant to become uncompetitive or completely obsolete. If our competitors develop, obtain or license technology that is superior to ours or that makes our technology obsolete, we may be required to incur significant costs to enhance or acquire new technology so that our ethanol production remains competitive. Alternatively, we may be required to seek third-party licenses, which could also result in significant expenditures. We cannot guarantee or assure you that third-party licenses will be available or, once obtained, will continue to be available on commercially reasonable terms, if at all. These costs could negatively impact our financial performance by increasing our operating costs and reducing our net income, all of which could reduce the value of your investment.

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Risks Related to the Ethanol Industry

Competition from the advancement of alternative fuels may lessen the demand for ethanol and negatively impact our profitability, which could reduce the value of your investment.

Alternative fuels, gasoline oxygenates and ethanol production methods are continually under development. A number of automotive, industrial and power generation manufacturers are developing alternative clean power systems using fuel cells or clean burning gaseous fuels. Like ethanol, the emerging fuel cell industry offers a technological option to address increasing worldwide energy costs, the long-term availability of petroleum reserves and environmental concerns. Fuel cells have emerged as a potential alternative to certain existing power sources because of their higher efficiency, reduced noise and lower emissions. Fuel cell industry participants are currently targeting the transportation, stationary power and portable power markets in order to decrease fuel costs, lessen dependence on crude oil and reduce harmful emissions. If the fuel cell and hydrogen industries continue to expand and gain broad acceptance, and hydrogen becomes readily available to consumers for motor vehicle use, we may not be able to compete effectively. This additional competition could reduce the demand for ethanol, which would negatively impact our profitability, causing a reduction in the value of your investment.

Corn-based ethanol may compete with cellulose-based ethanol in the future, which could make it more difficult for us to produce ethanol on a cost-effective basis and could reduce the value of your investment.

Most ethanol is currently produced from corn and other raw grains, such as milo or sorghum - especially in the Midwest. The current trend in ethanol production research is to develop an efficient method of producing ethanol from cellulose-based biomass, such as agricultural waste, forest residue, municipal solid waste, and energy crops. This trend is driven by the fact that cellulose-based biomass is generally cheaper than corn, and producing ethanol from cellulose-based biomass would create opportunities to produce ethanol in areas which are unable to grow corn. Although current technology is not sufficiently efficient to be competitive, a recent report by the U.S. Department of Energy entitled “Outlook for Biomass Ethanol Production and Demand” indicates that new conversion technologies may be developed in the future. If an efficient method of producing ethanol from cellulose-based biomass is developed, we may not be able to compete effectively. We do not believe it will be cost-effective to convert the ethanol plant we are proposing into a plant which will use cellulose-based biomass to produce ethanol. If we are unable to produce ethanol as cost-effectively as cellulose-based producers, our ability to generate revenue will be negatively impacted and your investment could lose value.

As domestic ethanol production continues to grow, ethanol supply may exceed demand causing ethanol prices to decline and the value of your investment to be reduced.

The number of ethanol plants being developed and constructed in the United States continues to increase at a rapid pace. The recent passage of the Energy Policy Act of 2005 included a renewable fuels mandate that we expect will further increase the number of domestic ethanol production facilities. Archer Daniels Midland recently announced its plan to add approximately 500 million gallons per year of additional ethanol production capacity in the United States. ADM is currently the largest ethanol producer in the U.S. and controls a significant portion of the ethanol market. ADM’s plan to produce an additional 500 million gallons of ethanol per year will strengthen its position in the ethanol industry and cause a significant increase in domestic ethanol supply. As these plants begin operations, we expect domestic ethanol production to significantly increase. If the demand for ethanol does not grow at the same pace as increases in supply, we would expect the price for ethanol to decline. Declining ethanol prices will result in lower revenues and may reduce or eliminate profits causing the value of your investment to be reduced.

Consumer resistance to the use of ethanol based on the belief that ethanol is expensive, adds to air pollution, harms engines, reduces fuel efficiency and takes more energy to produce that it contributes may affect the demand for ethanol which could affect our ability to market our product and reduce the value of your investment.

Media reports in the popular press indicate that some consumers believe that use of ethanol will have a negative impact on gasoline prices at the pump. Many also believe that ethanol adds to air pollution and harms car and truck engines. It is also widely reported that ethanol products such as E-85 significantly reduce fuel economy and cause overall fuel costs to substantially increase.   Researchers have published studies reporting that the production of ethanol actually uses more fossil energy, such as oil and natural gas, than the amount of ethanol that is produced. These consumer beliefs could potentially be wide-spread. If consumers choose not to buy ethanol, it would affect the demand for the ethanol we produce which could lower demand for our product and negatively affect our profitability.

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The inability of retailers to obtain pump certifications could prevent retailers from selling E85, which could decrease the overall demand for ethanol and could  reduce the value of your investment.

The demand for E85 is driven in part by the availability of E85 at retail stations.  Distributing E85 to consumers through retail stations depends, in part, on the ability of retailers to obtain quality certifications for E85 pumps.  Recently, a private product-safety testing group suspended its approval of various internal component parts of E85 pumps and its issuance of E85 pump certifications pending its own research on the ability of various component parts to withstand the corrosive properties of ethanol.  As a result, two stations in Ohio recently shut down E85 pumps and it is currently unclear whether more pumps will be shut down due to pending pump certifications.  If additional E85 pumps are shut down the distribution of E85 could be curtailed and the value of your investment in us may be reduced.

Competition from ethanol imported from Caribbean Basin countries may be a less expensive alternative to our ethanol, which would cause us to lose market share and reduce the value of your investment.

Ethanol produced or processed in certain countries in Central America and the Caribbean region is eligible for tariff reduction or elimination upon importation to the United States under a program known as the Caribbean Basin Initiative. Large ethanol producers, such as Cargill, have expressed interest in building dehydration plants in participating Caribbean Basin countries, such as El Salvador, which would convert ethanol into fuel-grade ethanol for shipment to the United States. Ethanol imported from Caribbean Basin countries may be a less expensive alternative to domestically produced ethanol. Competition from ethanol imported from Caribbean Basin countries may affect our ability to sell our ethanol profitably, which would reduce the value of your investment.

Competition from ethanol imported from Brazil may be a less expensive alternative to our ethanol, which would cause us to lose market share and reduce the value of your investment.

Brazil is currently the world’s largest producer and exporter of ethanol. In Brazil, ethanol is produced primarily from sugarcane, which is also used to produce food-grade sugar. Brazil experienced a dramatic increase in ethanol production and trade in 2004, exporting approximately 112 million gallons to the U.S. alone. In 2005, the U.S. imported approximately 20 million gallons of ethanol from Brazil.  Ethanol imported from Brazil may be a less expensive alternative to domestically produced ethanol, which is primarily made from corn. Tariffs presently protecting U.S. ethanol producers may be reduced or eliminated. Competition from ethanol imported from Brazil may affect our ability to sell our ethanol profitably, which would reduce the value of your investment.

Risks Related to Regulation and Governmental Action

A change in government policies favorable to ethanol may cause demand for ethanol to decline, which could reduce the value of your investment.

Growth and demand for ethanol may be driven primarily by federal and state government policies, such as state laws banning Methyl Tertiary Butyl Ether (MTBE) and the national renewable fuels standard. The continuation of these policies is uncertain, which means that demand for ethanol may decline if these policies change or are discontinued. A decline in the demand for ethanol is likely to cause a reduction in the value of your investment.

Government incentives for ethanol production, including federal tax incentives, may be eliminated in the future, which could hinder our ability to operate at a profit and reduce the value of your investment in us.

The ethanol industry and our business are assisted by various federal ethanol tax incentives, including those included in the Energy Policy Act of 2005. The provision of the Energy Policy Act of 2005 likely to have the greatest impact on the ethanol industry is the creation of a national 7.5 billion gallon renewable fuels standard (RFS). The RFS began at 4 billion gallons in 2006, increasing to 7.5 billion gallons by 2012. The RFS helps support a market for ethanol that might disappear without this incentive. The elimination or reduction of tax incentives to the ethanol industry could reduce the market for ethanol, which could reduce prices and our revenues by making it more costly or difficult for us to produce and sell ethanol. If the federal tax incentives are eliminated or sharply curtailed, we believe that a decreased demand for ethanol will result, which could result in the failure of the business and the potential loss of some or all of your investment.

Another important provision involves an expansion in the definition of who qualifies as a small ethanol producer. Historically, small ethanol producers were allowed a 10 cents per gallon production income tax credit on up to 15 million gallons of production annually. The size of the plant eligible for the tax credit was limited to 30 million gallons. Under the Energy Policy Act of 2005 the

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size limitation on the production capacity for small ethanol producers increases from 30 million to 60 million gallons. Historically, small ethanol producers have been allowed a 10-cent per gallon production income tax credit on up to 15 million gallons of production annually. Thus the tax credit is capped at $1.5 million per year per producer. This tax credit may foster additional growth in ethanol plants of a larger size and increase competition in this particular plant size category. We anticipate that our plant will produce 50 million gallons of ethanol annually and therefore, we expect to be eligible for the credit if our plant is completed before the tax credit expires. The small ethanol producer tax credit is set to expire December 31, 2010.

Changes in environmental regulations or violations of the regulations could be expensive and reduce our profit and the value of your investment.

We will be subject to extensive air, water and other environmental regulations and we will need to obtain a number of environmental permits to construct and operate the plant. In addition, it is likely that our senior debt financing will be contingent on our ability to obtain the various environmental permits that we will require. If for any reason, any of these permits are not granted, construction costs for the plant may increase, or the plant may not be constructed at all. Additionally, any changes in environmental laws and regulations, both at the federal and state level, could require us to invest or spend considerable resources in order to comply with future environmental regulations. The expense of compliance could be significant enough to reduce our profit and the value of your investment.

The lack of any Minnesota ethanol supports or tax incentives may damage our competitive position in the ethanol industry and may weaken our financial performance relative to other ethanol plants operating in other states.

Currently, Minnesota does not provide incentives for the production or sale of ethanol. This may cause our plant to be less competitive than ethanol plants in other states that provide ethanol supports or tax incentives.

Risks Related to Tax Issues

EACH PROSPECTIVE MEMBER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR CONCERNING THE IMPACT THAT HIS OR HER PARTICIPATION IN THE COMPANY MAY HAVE ON HIS OR HER FEDERAL INCOME TAX LIABILITY AND THE APPLICATION OF STATE AND LOCAL INCOME AND OTHER TAX LAWS TO HIS OR HER PARTICIPATION IN THIS OFFERING.

IRS classification of the company as a corporation rather than as a partnership would result in higher taxation and reduced profits, which could reduce the value of your investment in us.

We are a Minnesota limited liability company that has elected to be taxed as a partnership for federal and state income tax purposes, with income, gain, loss, deduction and credit passed through to the holders of the units. However, if for any reason the IRS would successfully determine that we should be taxed as a corporation rather than as a partnership, we would be taxed on our net income at rates of up to 35 percent for federal income tax purposes, and all items of our income, gain, loss, deduction and credit would be reflected only on our tax returns and would not be passed through to the holders of the units. If we were to be taxed as a corporation for any reason, distributions we make to investors will be treated as ordinary dividend income to the extent of our earnings and profits, and the payment of dividends would not be deductible by us, thus resulting in double taxation of our earnings and profits. See “FEDERAL INCOME TAX CONSEQUENCES OF OWNING OUR UNITS- Partnership Status.” If we pay taxes as a corporation, we will have less cash to distribute to our Unit holders.

The IRS may classify your investment as passive activity income, resulting in your inability to deduct losses associated with your investment.

If you are not involved in our operations on a regular, continuing and substantial basis, it is likely that the Internal Revenue Service will classify your interest in us as a passive activity. If an investor is either an individual or a closely held corporation, and if the investor’s interest is deemed to be “passive activity,” then the investor’s allocated share of any loss we incur will be deductible only against income or gains the investor has earned from other passive activities. Passive activity losses that are disallowed in any taxable year are suspended and may be carried forward and used as an offset against passive activity income in future years. These rules could restrict an investor’s ability to currently deduct any of our losses that are passed through to such investor.

Income allocations assigned to an investor’s units may result in taxable income in excess of cash distributions, which means you may have to pay income tax on your investment with personal funds.

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Investors will pay tax on their allocated shares of our taxable income. An investor may receive allocations of taxable income that result in a tax liability that is in excess of any cash distributions we may make to the investor. Among other things, this result might occur due to accounting methodology, lending covenants that restrict our ability to pay cash distributions or our decision to retain the cash generated by the business to fund our operating activities and obligations. Accordingly, investors may be required to pay some or all of the income tax on their allocated shares of our taxable income with personal funds.

An IRS audit could result in adjustments to our allocations of income, gain, loss and deduction causing additional tax liability to our members.

The IRS may audit our income tax returns and may challenge positions taken for tax purposes and allocations of income, gain, loss and deduction to investors. If the IRS were successful in challenging our allocations in a manner that reduces loss or increases income allocable to investors, you may have additional tax liabilities. In addition, such an audit could lead to separate audits of an investor’s tax returns, especially if adjustments are required, which could result in adjustments on your tax returns. Any of these events could result in additional tax liabilities, penalties and interest to you, and the cost of filing amended tax returns.

Before making any decision to invest in us, investors should read this entire prospectus, including all of its exhibits, and consult with their own investment, legal, tax and other professional advisors to determine how ownership of our units will affect your personal investment, legal, and tax situation.

IMPORTANT NOTICES TO INVESTORS

This prospectus does not constitute an offer to sell or the solicitation of an offer to purchase any securities in any jurisdiction in which, or to any person to whom, it would be unlawful to do so.

Investing in our units involves significant risk. Please see “RISK FACTORS” to read about important risks you should consider before purchasing units in Highwater Ethanol. No representations or warranties of any kind are intended or should be inferred with respect to economic returns or tax benefits of any kind that may accrue to the investors of the securities.

These securities have not been registered under the securities laws of any state other than the states of Florida, Georgia, Illinois, Iowa, Kansas, Louisiana, Minnesota, Missouri, South Dakota and Wisconsin and may be offered and sold in other states only in reliance on exemptions from the registration requirements of the laws of those other states.

In making an investment decision, investors must rely upon their own examination of the entity creating the securities and the terms of the offering, including the merits and risks involved. Investors should not invest any funds in this offering unless they can afford to lose their entire investment. There is no public market for the resale of the units in the foreseeable future. Furthermore, state securities laws and our amended and restated member control agreement place substantial restrictions on the transferability of the units. Investors should be aware that they will be required to bear the financial risks of this investment for an indefinite period of time.

During the course of the offering of the units and prior to the sale of the units, each prospective purchaser and his or her representatives, if any, are invited to ask questions of, and obtain additional information from, our representatives concerning the terms and conditions of this offering, us, our business, and other relevant matters. We will provide the requested information to the extent that we possess such information or can acquire it without unreasonable effort or expense. Prospective purchasers or representatives having questions or desiring additional information should contact us at (507) 752-6160, or at our business address: Highwater Ethanol, LLC, 205 S. Main Street, PO Box 96, Lamberton, Minnesota 56152. Also, you may contact any of the following directors directly at the phone numbers listed below:

NAME	POSITION		PHONE NUMBER
Brian D. Kletscher	President and Governor	507-762-3376
John M. Schueller	Vice President and Governor	507-342-5621
Jason R. Fink	Treasurer and Governor	507-637-4355
Timothy J. Van Der Wal	Secretary and Governor	507-342-5187

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FORWARD LOOKING STATEMENTS

Throughout this prospectus, we make “forward-looking statements” that involve future events, our future performance, and our expected future operations and actions. In some cases, you can identify forward-looking statements by the use of words such as “may,” “should,” “plan,” “future,” “intend,” “could,” “estimate,” “predict,” “hope,” “potential,” “continue,” “believe,” “expect” or “anticipate” or the negative of these terms or other similar expressions. The forward-looking statements are generally located in the material set forth under the headings “MANAGEMENT’S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS,” “PLAN OF DISTRIBUTION,” “RISK FACTORS,” “USE OF PROCEEDS,” and “DESCRIPTION OF BUSINESS,” but may be found in other locations as well. These forward-looking statements generally relate to our plans and objectives for future operations and are based upon management’s reasonable estimates of future results or trends. Although we believe that our plans and objectives reflected in or suggested by such forward-looking statements are reasonable, we may not achieve such plans or objectives. Any forward-looking statements are not guarantees of our future performance and are subject to risks and uncertainties that could cause actual results, developments and business decisions to differ materially from those contemplated by any forward-looking statements. Actual results may differ from projected results due, but not limited to, unforeseen developments, including developments relating to the following:

·The availability and adequacy of our cash flow to meet its requirements, including payment of loans;

·Economic, competitive, demographic, business and other conditions in our local and regional markets;

·Changes or developments in laws, regulations or taxes in the ethanol, agricultural or energy industries;

·Actions taken or not taken by third-parties, including our suppliers and competitors, as well as legislative, regulatory, judicial and other governmental authorities;

·Competition in the ethanol industry;

·Overcapacity within the ethanol industry;

·Availability and costs of products and raw materials, particularly corn and natural gas;

·Fluctuations in petroleum prices;

·Changes and advances in ethanol production technology;

·The loss of any license or permit;

·The loss of our plant due to casualty, weather, mechanical failure or any extended or extraordinary maintenance or inspection that may be required;

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

·The availability of additional capital to support capital improvements and development; and

·Other factors discussed under the section entitled “RISK FACTORS” or elsewhere in this prospectus.

You should read this prospectus completely and with the understanding that actual future results may be materially different from what we expect. The forward-looking statements contained in this prospectus have been compiled as of the date of this prospectus and should be evaluated with consideration of any changes occurring after the date of this prospectus. Except as required under federal securities laws and SEC rules and regulations, we will not update forward-looking statements even though our situation may change in the future.

DETERMINATION OF OFFERING PRICE

There is no established market for our units. We established the offering price without an independent valuation of the units. We established the offering price based on our estimate of capital and expense requirements, not based on perceived market value, book

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value, or other established criteria. In considering our capitalization requirements, we determined the minimum and maximum aggregate offering amounts based upon our cost of capital analysis and debt to equity ratios generally acceptable in the industry. In determining the offering price per unit we considered the additional administrative expense which would likely result from a lower offering price per unit, such as the cost of increased unit trading. We also considered the dilution impact of our recent private placement offering to our founders and seed capital investors where units were priced at $3,333.33 per unit and $5,000.00 per unit, respectively, in determining an appropriate public offering price per unit. The units may have a value significantly less than the offering price and there is no guarantee that the units will ever obtain a value equal to or greater than the offering price.

DILUTION

As of January 31, 2007, we had 386 outstanding units. We sold 150 units to our founders for $3,333.33 per unit. We sold an additional 236 units to our seed capital investors for $5,000.00 per unit. The units, as of January 31, 2007, had a net tangible book value of $831,453, or $2,154.02 per unit. The net tangible book value per unit represents members’ equity less intangible assets which includes, divided by the number of units outstanding. The offering price of $10,000 per unit exceeds the net tangible book value per unit of our outstanding units. Therefore, all current holders will realize, on average, an immediate increase of at least $7,153.13 per unit in the pro forma net tangible book value of their units if the minimum is sold at a price of $10,000 per unit, and an increase of at least $7,315.87 per unit if the maximum is sold at a price of $10,000 per unit. Purchasers of units in this offering will realize an immediate dilution of at least $692.85 per unit in the net tangible book value of their units if the minimum is sold at a price of $10,000 per unit, and a decrease of at least $530.11 per unit if the maximum is sold at a price of $10,000 per unit.

An investor purchasing units in this offering will receive units diluted by the prior purchase of units by our founders and our seed capital investors in our previous private placement offerings. We have sold units to our founders at prices below the price at which we are currently selling units. The presence of these previously sold units will dilute the relative ownership interests of the units sold in this offering because these earlier investors received a relatively greater share of our equity for less consideration than investors are paying for units issued in this offering. Generally, all investors in this offering will notice immediate dilution. We have and will continue to use this previously contributed capital to finance development costs and for initial working capital purposes. We intend to use any remaining balance for the same purposes as those of this offering.

The following table illustrates the increase to existing unit holders and the dilution to purchasers in the offering in the net tangible book value per unit assuming the minimum or the maximum number of units is sold. The table does not take into account any other changes in the net tangible book value of our units occurring after January 31, 2007, or offering expenses related to this offering.

	Minimum			Maximum
Net tangible book value per unit at January 31, 2007	$	2,154.02		$	2,154.02
Increase in pro forma net tangible book value per unit attributable to the sale of 4,500 (minimum) and 6,000 (maximum) units at $10,000 per unit(1)	$	7,153.13		$	7,315.87
Pro forma net tangible book value per unit at January 31, 2007, as adjusted for the sale of units	$	9,307.15		$	9,469.89
Dilution per unit to new investors in this offering	$	(692.85	)	$	(530.11	)

(1)The minimum and maximum number of units is circumscribed by the minimum offering amount of $45,000,000 and maximum offering amount of $60,000,000, less estimated remaining offering costs of $412,070. Total offering costs for the registered offering are estimated at $550,000.

We may seek additional equity financing in the future, which may cause additional dilution to investors in this offering, and a reduction in their equity interest. The holders of the units purchased in this offering will have no preemptive rights on any units to be issued by us in the future in connection with any such additional equity financing. We could be required to issue warrants to purchase units to a lender in connection with our debt financing. If we sell additional units or warrants to purchase additional units, the sale or exercise price could be higher or lower than what investors are paying in this offering.

The tables below set forth as of January 31, 2007, on an “as-if-converted” basis, the difference between the number of units purchased, and total consideration paid for those units, by existing unit holders, compared to units purchased by new investors in this offering without taking into account any offering expenses.

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	Total Number of Units Purchased
	Minimum			Maximum
	Number	Percent		Number	Percent
Existing unit holders	386	7.90	%	386	6.04	%
New investors	4,500	92.10	%	6,000	93.96	%
Total	4,886	100.00	%	6,386	100.00	%

			Minimum						Maximum
	Amount		Percent		Average		Amount		Percent		Average
Existing unit holders	$	1,680,000	3.60	%	$	4,352.33	$	1,680,000	2.72	%	$	4,352.33
New investors	45,000,000		96.40	%	10,000.00		60,000,000		97.28	%	10,000.00
Total	$	46,680,000	100.00	%	$	9,553.83	$	61,680,000	100.00	%	$	9,658.63

CAPITALIZATION

We have issued a total of 386 units to our founders and seed capital investors. We sold 150 units to our founders for $3,333.33 per unit. We sold an additional 236 units to our seed capital investors for $5,000.00 per unit. We have total proceeds from our two previous private placements of $1,680,000. If the minimum offering amount of $45,000,000 is attained, we will have total membership proceeds of $46,680,000 at the end of this offering, less offering expenses. If the maximum offering of $60,000,000 is attained, we will have total membership proceeds of $61,680,000 at the end of this offering, less offering expenses.

Capitalization Table

The following table sets forth our capitalization at January 31, 2007, which is unaudited, on an actual and pro forma basis to reflect the units offered in this offering.

							Pro Forma (1)
	Actual						Minimum						Maximum
Unit holders’ equity		$	1,680,000					$	46,130,000					$	61,130,000
Accumulated deficit					(655,265	)					(655,265	)					(655,265	)
Total Unit holder’s equity				1,024,735						45,474,735						60,474,735
Total Capitalization (2)		$	1,024,735					$	45,474,735					$	60,474,735

(1)As adjusted to reflect gross proceeds from this offering less estimated offering costs of $550,000 and prior to securing a debt financing commitment.

(2)In order to fully capitalize the project, we will also need to obtain debt financing ranging from approximately $48,320,000 to $63,320,000 depending on the amount raised in this offering and less any grants we are awarded and any bond financing we can obtain. Our estimated long-term debt requirements are based upon our anticipated equity investments, preliminary discussions with lenders and our independent research regarding capitalization requirements for ethanol plants of similar size.

Our seed capital private placement was made directly by us without use of an underwriter or placement agent and without payment of commissions or other remuneration. The aggregate sales proceeds, after payment of offering expenses in immaterial amounts, were applied to our working capital and other development and organizational purposes.

With respect to the exemption from registration of issuance of securities claimed under Rule 506 and Section 4(2) of the Securities Act, neither we, nor any person acting on our behalf offered or sold the securities by means of any form of general solicitation or advertising. Prior to making any offer or sale, we had reasonable grounds to believe and believed that each prospective investor was capable of evaluating the merits and risks of the investment and were able to bear the economic risk of the investment. Each purchaser represented in writing that the purchaser was an accredited investor and that the securities were being acquired for investment for such purchaser’s own account. Each purchaser also agreed that the securities would not be sold without registration under the Securities Act or exemption from the Securities Act. Each purchaser further agreed that a legend was placed on each certificate evidencing the securities stating the securities have not been registered under the Securities Act and setting forth restrictions on their transferability.

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DISTRIBUTION POLICY

We have not declared or paid any distributions on the units. We do not expect to generate revenues until the proposed ethanol plant is operational, which is expected to occur approximately 16 to 18 months after construction commences. After operation of the proposed ethanol plant begins, it is anticipated, subject to any loan covenants or restrictions with any senior and term lenders, that we will distribute “net cash flow” to our members in proportion to the units that each member holds relative to the total number of units outstanding. “Net cash flow,” means our gross cash proceeds less any portion, as determined by the board of governors in their sole discretion, used to pay or establish reserves for operating expenses, debt payments, capital improvements, replacements and contingencies. However, there can be no assurance that we will ever be able to pay any distributions to the unit holders, including you. Additionally, our lenders may further restrict our ability to make distributions during the initial period of the term debt.

SELECTED FINANCIAL DATA

The following table summarizes important financial information from our January 31, 2007 unaudited financial statements. You should read this table in conjunction with the financial statements and the notes included elsewhere in this prospectus.

	From Inception (May 2, 2006) to January 31, 2007
Income Statement Data:
Revenues		$	—
Operating Expenses
Professional fees		640,635
General and administrative						52,131
Total					692,766
Operating Loss		(692,766					)
Other Income
Interest income						37,501
Net Loss				$      (655,265			)
Net Loss Per Unit (337 weighted average units outstanding)		$	(1,944.41				)

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	January 31, 2007
Balance Sheet Data:
Assets:
Cash		$	922,871
Other receivable		3,882
Prepaid and other expenses				14,133
Total current assets		940,886
Equipment
Office equipment		10,766
Accumulated depreciation		(412			)
Net equipment		10,354
Other Assets
Deferred offering costs		193,282
Land options		42,000
Total other assets		235,282
Total Assets		$	1,186,522
Liabilities and equity:
Current Liabilities
Accounts payable		$	155,869
Accounts payable - members		5,918
Total current liabilities		161,787
Commitments and Contingencies
Members’ Equity
Members contributions, 386 units outstanding		1,680,000
Deficit accumulated during development stage		(655,265			)
Total members’ equity		1,024,735
Total Liabilities and Members’ Equity		$	1,186,522

MANAGEMENT’S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION

Overview

This prospectus contains forward-looking statements that involve risks and uncertainties. Actual events or results may differ materially from those indicated in such forward-looking statements. These forward-looking statements are only our predictions and involve numerous assumptions, risks and uncertainties, including, but not limited to those risk factors described elsewhere in this prospectus. The following discussion of the financial condition and results of our operations should be read in conjunction with the financial statements and related notes thereto included elsewhere in this prospectus.

We are a development stage Minnesota limited liability company formed on May 2, 2006, for the purpose of constructing a 50 million gallon per year ethanol plant expected to be located near Lamberton, Minnesota, approximately 150 miles southwest of Minneapolis, Minnesota. We do not expect to generate any revenue until the plant is completely constructed and operational. For more information about our potential plant site, please refer to “Description of Business - Project Location and Proximity to Markets.” Our board of governors reserves the right to change the location of the plant site, in their sole discretion, for any reason. We anticipate the final plant site will have access to both truck and rail transportation.

Based upon engineering specifications produced by Fagen, Inc., we expect the plant to annually consume approximately 18.5 million bushels of corn and annually produce approximately 50 million gallons of fuel grade ethanol and approximately 160,000 tons distillers grain. We currently estimate that it will take approximately 16 to 18 months after construction commences to complete plant construction.

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We expect the project will cost approximately $110,000,000 to complete. Fagen, Inc. will construct the plant for a contract price of approximately $66,026,000 based on the plans and specifications in the design-build agreement, which does not include the anticipated cost of our water treatment facility we intend to construct, any change orders, or increases in the costs of materials provided by the CCI costs escalator provision contained in the design-build agreement. The agreement terminates on August 15, 2007, unless a valid Notice to Proceed has been accepted by Fagen, Inc. The termination date may be extended upon mutual written agreement.  We have based our capital needs on a design for the plant that will cost approximately $78,526,000, which includes the cost of our water treatment equipment not contemplated by our design-build agreement, with additional start-up and development costs of approximately $31,474,000 for a total project completion cost of approximately $110,000,000. Except for our design-build agreement with Fagen, Inc., we do not have any binding or non-binding agreements with any other contractor for the labor or materials necessary to build the plant. As a result, our anticipated total project cost is not a firm estimate and is expected to change from time to time as the project progresses. We are still in the development phase, and until the proposed ethanol plant is operational, we will generate no revenue. We anticipate that accumulated losses will continue to increase until the ethanol plant is operational.

Plan of Operations Until Start-Up of Ethanol Plant

We expect to spend at least the next 12 months focused on three primary activities: (1) project capitalization; (2) site acquisition and development; and (3) plant construction and start-up operations. Assuming the successful completion of this offering and the related debt financing, we expect to have sufficient cash on hand to cover all costs associated with construction of the project, including, but not limited to, site acquisition and development, utilities, construction and equipment acquisition. In addition, we expect our seed capital proceeds to supply us with enough cash to cover our costs through this period, including staffing, office costs, audit, legal, compliance and staff training.  We currently rent office space located at 205 S. Main Street in Lamberton, Minnesota for $422 per month.

Project Capitalization

We will not close the offering until we have raised the minimum offering amount of $45,000,000. We have until April 5, 2008 to sell the minimum number of units required to raise the minimum offering amount. If we sell the minimum number of units prior to April 5, 2008, we may decide to continue selling units until we sell the maximum number of units or April 5, 2008, whichever occurs first. Even if we successfully close the offering by selling at least the minimum number of units by April 5, 2008, we will not release the offering proceeds from escrow until the cash proceeds in escrow equal $45,000,000 or more and we secure a written debt financing commitment for debt financing ranging from a minimum of $48,320,000 to a maximum of $63,320,000 depending on the level of equity raised and the amount of bond financing and any grant funding we may receive. We estimated the range of debt financing we will need by subtracting the minimum and maximum amount of equity in this offering and the $1,680,000 contributed by our founders and seed capital investors from the estimated total project cost of $110,000,000.

In March 2007 we closed on the two parcels of real estate for which we had exercised our options.  We paid approximately $810,000 for approximately 116 acres of land and subsequently obtained an $800,000 note from a bank to provide us with interim financing until we can close on our anticipated debt financing. We have not yet obtained any commitments for equity, senior debt or bond financing. We have started identifying and interviewing potential lenders, however, we have not signed any commitment or contract for senior debt financing. Completion of the project relies entirely on our ability to attract these loans and close on this offering.

A senior debt financing commitment only obligates the lender to lend us the debt financing that we need if we satisfy all the conditions of the commitment. These conditions may include, among others, the total cost of the project being within a specified amount, the receipt of engineering and construction contracts acceptable to the lender, evidence of the issuance of all permits, acceptable insurance coverage and title commitment, the contribution of a specified amount of equity and attorney opinions. At this time, we do not know what business and financial conditions will be imposed on us. We may not satisfy the loan commitment conditions before closing, or at all. If this occurs we may:

·commence construction of the plant using all or a part of the equity funds raised while we seek another debt financing source;

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

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·return the equity funds, if any, to investors with accrued interest, after deducting the currently indeterminate expenses of operating our business or partially constructing the plant before we return the funds.

While the foregoing alternatives may be available, we do not expect to begin substantial plant construction activity before satisfying the loan commitment conditions or closing the loan transaction because it is very likely that Fagen, Inc. will not begin any substantial plant construction and any lending institution will prohibit substantial plant construction activity until satisfaction of loan commitment conditions or loan closing. However, in the unlikely event that the loan commitment and Fagen, Inc. permit us to spend equity proceeds prior to closing the loan and obtaining loan proceeds, we may decide to spend equity proceeds on project development expenses, such as securing critical operating contracts or owner’s construction costs such as site development expenses. If we decide to proceed in that manner, we expect the minimum aggregate offering amount would satisfy our cash requirements for approximately three to four months and the maximum aggregate offering amount would satisfy our cash requirements for approximately six to seven months. We expect that proceeding with plant construction prior to satisfaction of the loan commitment conditions or closing the loan transaction could cause us to abandon the project or terminate operations. As a result, you could lose all or part of your investment.

Our design-build agreement signed on September 28, 2006 with Fagen, Inc., as amended, terminates on August 15, 2007, unless a valid Notice to Proceed has been accepted by Fagen, Inc.  If we fail to find a new debt financing source and Fagen, Inc. refused a renewal or extension of its letter of intent with us, we would expect to return your investment with any accrued interest after deducting operating expenses. Please refer to the section of the prospectus entitled, “RISK FACTORS - Risks Related to Our Financing Plan,” on page 14 for a discussion of the risks involved in project capitalization.

Site Acquisition and Development

During and after the offering, we expect to continue working principally on the preliminary design and development of our proposed ethanol plant, the acquisition and development of a plant site in Redwood County, Minnesota, obtaining the necessary construction permits, identifying potential sources of debt financing and negotiating the corn supply, ethanol and co-product marketing, utility and other contracts. We plan to fund these activities and initiatives using the $1,680,000 of seed capital. We believe that our existing funds will permit us to continue our preliminary activities through the end of this offering. If we are unable to close on this offering by that time or otherwise obtain other funds, we may need to delay or abandon operations.

On June 7, 2006, we obtained the exclusive right and option to purchase a parcel of land, consisting of approximately 68 acres of land, in Redwood County, Minnesota. We paid $5,000 for the exclusive right and option. The purchase price is approximately $476,000.  We exercised this option on December 31, 2006, and closed on the property in March 2007.

In September 2006, we obtained the right and option to purchase three additional adjacent parcels of land.  The first is to purchase approximately six to twelve acres of land for $7,000 per acre until December 31, 2008. We paid $1,000 for the option which will apply towards the purchase price if we elect to complete the purchase. The second is to purchase an undisclosed amount of land for $8,000 per acre until March 31, 2007. We paid $1,000 for the option which will apply towards the purchase price if we elect to complete the purchase. The third is to purchase an undisclosed amount of land for $7,000 per acre. We paid $5,000 for the option which will apply towards the purchase price if we elect to complete the purchase.  We elected to exercise the third option for approximately 48 acres on December 31, 2006, and closed on the property in March 2007.

In March 2007 we closed on the two parcels for which we had exercised land options.  The two parcels total approximately 116 acres and we paid a total of approximately $810,000 for the properties. Also in March 2007 we obtained an $800,000 note from a bank to provide us with interim financing until we can close on our anticipated debt financing.  The note is secured by a mortgage on the two parcels of property, a personal guarantee from Ron Fagen, the principal owner of our design-build contractor, and by a limited personal guarantee from Warren Pankonin, a member of our board of governors and a seed capital investor in our project.  Neither Mr. Fagen nor Mr. Pankonin are related parties.

Plant Construction and Start-up of Plant Operations

We expect to complete construction of the proposed plant and commence operations approximately 16 to 18 months after construction commences. Our work will include completion of the final design and development of the plant. We also plan to negotiate and execute finalized contracts concerning the construction of the plant, provision of necessary electricity, natural gas and other power sources and marketing agreements for ethanol and co-products. Assuming the successful completion of this offering and our obtaining the necessary debt financing, we expect to have sufficient cash on hand to cover construction and related start-up costs necessary to make the plant operational. We estimate that we will need approximately $78,526,000 to construct the plant, which

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includes the anticipated cost of our water treatment facility we intend to construct, and a total of approximately $31,474,000 to cover all capital expenditures necessary to complete the project, make the plant operational and produce revenue.

Grain origination

We have signed a grain procurement agreement with Meadowland Farmers Co-op (“Meadowland”).  Meadowland has the exclusive right and responsibility to provide Highwater Ethanol with its daily requirements of corn meeting quality specifications set forth in the grain procurement agreement. Under the agreement, Highwater Ethanol will purchase corn at the local market price delivered to the ethanol plant plus a fixed fee per bushel of corn purchased.  Highwater Ethanol will provide Meadowland with an estimate of its usage at the beginning of each fiscal quarter and Meadowland agrees to at all times maintain a minimum of 7 days corn usage at the Highwater Ethanol plant.  The initial term of the agreement is 7 years from the time Highwater Ethanol requests its first delivery of corn.

Future Plans to Develop or Participate in Other Ethanol Manufacturing Facilities

In the future, we may pursue opportunities to develop or invest in other ethanol manufacturing facilities. We do not have any agreement or arrangement concerning any other ethanol project at this time. We will continue to monitor and evaluate these opportunities as they present themselves to determine if participation in any other project is in our best interests.

Trends and Uncertainties Impacting the Ethanol Industry and Our Future Revenues

If we are successful in building and constructing the ethanol plant, we expect our future revenues will primarily consist of sales of ethanol and distillers grains. We expect ethanol sales to constitute the bulk of our revenues. Recently, the demand for ethanol increased relative to supply causing upward pressure on ethanol market prices. Increased demand, firm crude oil and gas markets, public acceptance, and positive political signals have all contributed to a strengthening of ethanol prices. In order to sustain these higher price levels however, management believes the industry will need to continue to grow demand to offset the increased supply brought to the market place by additional production.

We also will expect to benefit from federal ethanol supports and federal tax incentives. Changes to these supports or incentives could significantly impact demand for ethanol. On August 8, 2005, President George W. Bush signed into law the Energy Policy Act of 2005 (the “Act”). The Act contains numerous provisions that are expected to favorably impact the ethanol industry by enhancing both the production and use of ethanol. Most notably, the Act created a 7.5 billion gallon renewable fuels standard (the “RFS”). The RFS is a national renewable fuels mandate as to the total amount of national renewable fuels usage but allows flexibility to refiners by allowing them to use renewable fuel blends in those areas where it is most cost-effective rather than requiring renewable fuels to be used in any particular area or state. The RFS began at 4 billion gallons in 2006, and increase to 7.5 billion gallons by 2012. According to the Renewable Fuels Association, the Act is expected to lead to about $6 billion in new investment in ethanol plants across the country.

Ethanol production continues to rapidly grow as additional plants and plant expansions become operational. According to the Renewable Fuels Association, as of February 2007, 113 ethanol plants were producing ethanol with a combined annual production capacity of 5.58 billion gallons per year and current expansions and plants under construction constituted an additional future production capacity of 6.14 billion gallons per year. ADM recently announced its plan to add 500 million gallons of ethanol production, clearly indicating its desire to maintain a significant share of the ethanol market. Since the current national ethanol production capacity exceeds the 2006 RFS requirement, we believe that other market factors, such as the growing trend for reduced usage of MTBE by the oil industry, state renewable fuels standards and increases in voluntary blending by terminals, are primarily responsible for current ethanol prices. Accordingly, it is possible that the RFS requirements may not significantly impact ethanol prices in the short-term. However, the increased requirement of 7.5 billion by 2012 is expected to support ethanol prices in the long term. A greater supply of ethanol on the market from these additional plants and plant expansions could reduce the price we are able to charge for our ethanol. This may decrease our revenues when we begin sales of product.

Demand for ethanol may increase as a result of increased consumption of E85 fuel. E85 fuel is a blend of 70 percent to 85 percent ethanol and gasoline. According to the Energy Information Administration, E85 consumption is projected to increase from a national total of 11 million gallons in 2003 to 47 million gallons in 2025. E85 is used as an aviation fuel and as a hydrogen source for some fuel cells. In the U.S., there are currently about 3 million flexible fuel vehicles capable of operating on E85 and over 600 retail stations supplying it. Ford and General Motors have recently begun national campaigns to promote ethanol and flexible fuel vehicles. Ford and General Motors have recently begun national campaigns to promote ethanol and flexible fuel vehicles. Automakers have indicated

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plans to produce an estimated 2 million more flexible fuel vehicles per year. The demand for E85 is largely driven by flexible fuel vehicle penetration of the U.S. vehicle fleet, the retail price of E85 compared to regular gasoline and the availability of E85 at retail stations. Because flexible fuel vehicles can operate on both ethanol and gasoline, if the price of regular gasoline falls below E85, demand for E85 will decrease as well. In addition, gasoline stations offering E85 are relatively scarce. At the end of 2005, only 608 of the country’s 170,000 gas stations offered E85 as an alternative to ordinary gasoline. However, most of these stations are in the Upper Midwest, which will be our target market area. The National Ethanol Vehicle Coalition expects 2,000 stations to sell E85 by the end of 2006, which would represent approximately 1 percent of all refueling stations. The Energy Policy Act of 2005 established a tax credit of 30 percent for infrastructure and equipment to dispense E85, which became effective in 2006 and is scheduled to expire December 31, 2010. This tax credit is expected to encourage more retailers to offer E85 as an alternative to regular gasoline. According to the Minnesota Corn Growers Association, there are approximately 75 gasoline retailers offering E85 throughout Minnesota.

Demand for ethanol has been supported by higher oil prices and its refined components.  While the mandated usage required by the renewable fuels standard is driving demand, our management believes that the industry will require an increase in voluntary usage in order to experience long-term growth.  We expect this will happen only if the price of ethanol is deemed economical by blenders.  Our management also believes that increased consumer awareness of ethanol-blended gasoline will be necessary to motivate blenders to voluntarily increase the amount of ethanol blended into gasoline.  In the future, a lack of voluntary usage by blenders in combination with additional supply may damage our ability to generate revenues and maintain positive cash flows.

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

Consumer resistance to the use of ethanol may affect the demand for ethanol which could affect our ability to market our product and reduce the value of your investment. According to media reports in the popular press, some consumers believe that use of ethanol will have a negative impact on retail gasoline prices. Many also believe that ethanol adds to air pollution and harms car and truck engines. Still other consumers believe that the process of producing ethanol actually uses more fossil energy, such as oil and natural gas, than the amount of energy in the ethanol that is produced. These consumer beliefs could potentially be wide-spread. If consumers choose not to buy ethanol, it would affect the demand for the ethanol we produce which could negatively affect our ability sell our product and negatively affect our profitability.

Trends and Uncertainties Impacting the Corn and Natural Gas Markets and Our Future Cost of Goods Sold

We expect our future cost of goods sold will consist primarily of costs relating to the corn and natural gas supplies necessary to produce ethanol and distillers grains for sale. On January 12, 2007, the United States Department of Agriculture (“USDA”) released its Crop Production report, which estimated the 2006 grain corn crop at 10.53 billion bushels, down approximately 2.0 percent from its December 11, 2006, estimate of 10.74 billion bushes.  The January 12, 2007, estimate is approximately 5.2 percent below the USDA’s estimate of the 2005 corn crop of 11.11 billion bushels. Although we do not expect to begin operations until autumn 2008, we expect continued volatility in the price of corn, which will significantly impact our cost of goods sold. The number of operating and planned ethanol plants in our immediate surrounding area and nationwide will also significantly increase the demand for corn. This increase will likely drive the price of corn upwards in our market which will impact our ability to operate profitably.

Natural gas is also an important input commodity to our manufacturing process. We estimate that our natural gas usage will be approximately 10 percent to 15 percent of our annual total production cost. We use natural gas to dry our distillers grain products to moisture contents at which they can be stored for long periods of time, and can be transported greater distances. Dried distillers grains have a much broader market base, including the western cattle feedlots, and the dairies of California and Florida. Recently, the price of natural gas has risen along with other energy sources. Natural gas prices are considerably higher than the 10-year average. In late August 2005, Hurricane Katrina caused dramatic damage to areas of Louisiana, which is the location of one of the largest natural gas hubs in the United States. As the damage from the hurricane became apparent, natural gas prices substantially increased. Hurricane Rita also impacted the Gulf Coast and caused shutdowns at several Texas refineries, which further increased natural gas prices. We

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expect continued volatility in the natural gas market. Any ongoing increases in the price of natural gas will increase our cost of production and may negatively impact our future profit margins.

Employees

We expect to hire approximately 32 full-time employees before commencing plant operations. Our officers are Brian D. Kletscher, President; John M. Schueller, Vice President; Jason R. Fink, Treasurer; and Timothy J. Van Der Wal, Secretary. As of the date of this prospectus, we have hired one part-time office employee.

Liquidity and Capital Resources

From May 2006, through June 2006, we sold a total of 150 of our membership units to our to our founders at a price of $3,333.33 per unit and 236 of our membership units to our seed capital investors at a price of $5,000.00 per unit. We received aggregate seed capital proceeds of $1,680,000 from the two previous private placements. We determined the offering price per unit in the two previous private placements based upon the capitalization requirements necessary to fund our development, organization and financing activities as a development stage company. We did not rely upon any independent valuation, book value or other valuation criteria in determining the seed capital offering price per unit. We expect our seed capital offering proceeds to provide us with sufficient liquidity to fund the developmental, organizational and financing activities necessary to advance our project. All of the seed capital proceeds were immediately at-risk capital at the time of the investment.

As of January 31, 2007, we had total assets of $1,186,522 consisting primarily of cash. As of January 31, 2007, we had current liabilities of $161,787 consisting primarily of accounts payable. Total members’ equity as of January 31, 2007, was $1,024,735, taking into account the accumulated deficit. Since our inception, we have generated no revenue from operations. For the period from inception (May 2, 2006) through January 31, 2007, we have a net loss of $655,265, primarily due to start-up business costs.

Capitalization Plan

Based on our business plan and current construction cost estimates, we believe the total project will cost approximately $110,000,000. Our capitalization plan consists of a combination of equity, including our previous seed capital, debt financing, bond financing and government grants.  In March 2007 we closed on the two parcels for which we had exercised land options.  The two parcels total approximately 116 acres and we paid a total of approximately $810,000 for the properties.  Also in March 2007 we obtained an $800,000 note from a bank to provide us with interim financing until we can close on our anticipated debt financing.  The note is secured by a mortgage on the two parcels of property, a personal guarantee from Ron Fagen, the principal owner of our design-build contractor, and by a limited personal guarantee from Warren Pankonin, a member of our board of governors and a seed capital investor in our project.  Neither Mr. Fagen nor Mr. Pankonin are related parties.

Equity Financing

We are seeking to raise a minimum of $45,000,000 and a maximum of $60,000,000 of equity in this offering. Depending on the level of equity raised in this offering, the amount of any grants awarded to us, and the amount of bond financing able to be procured, we expect to require debt financing ranging from approximately a minimum of $48,320,000 to a maximum of $63,320,000.

Senior Debt and Bond Financing

We hope to attract senior debt financing from a major bank (with participating loans from other banks) and/or bond financing to construct the proposed ethanol plant. We expect the senior debt financing will be secured by all of our real property, including receivables and inventories. We plan to pay near prime rate on this loan, plus annual fees for maintenance and observation of the loan by the lender, however, there is no assurance that we will be able to obtain the senior debt financing or that adequate debt financing will be available on the terms we currently anticipate. Our senior debt financing may also include bond financing issued through a governmental entity or bonds guaranteed by a governmental agency. We do not have any contracts or commitments with any governmental entity or underwriter for bond financing and there is no assurance that we will be able to secure bond financing as part of the senior debt financing for the project. If we are unable to obtain senior debt in an amount necessary to fully capitalize the project, we may have to seek subordinated debt financing which would increase the cost of debt and could require us to issue warrants. The increased cost of the subordinated debt financing could reduce the value of our units.

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We do not have contracts or commitments with any bank, lender, underwriter, governmental entity or financial institution for senior debt financing. We have started identifying and interviewing potential lenders, however, we have not signed any commitment or contract for debt financing. Completion of the project relies entirely on our ability to attract these loans and close on this offering.

Grants and Government Programs

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

Critical Accounting Estimates

Management uses estimates and assumptions in preparing our financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Significant estimates include the deferral of expenditures for offering costs, which are dependent upon successful financing of the project. We defer the costs incurred to raise equity financing until that financing occurs. At the time we issue new equity, we will net these costs against the equity proceeds received. Alternatively, if the equity financing does not occur, we will expense the offering costs. It is at least reasonably possible that this estimate may change in the near term.

Off-Balance Sheet Arrangements.

We do not have any off-balance sheet arrangements.

ESTIMATED SOURCES OF FUNDS

The following tables set forth various estimates of our sources of funds, depending upon the amount of units sold to investors and based upon various levels of equity that our lenders may require. The information set forth below represents estimates only and actual sources of funds could vary significantly due to a number of factors, including those described in the section entitled “RISK FACTORS” and elsewhere in this prospectus.

Sources of Funds(1)	Maximum 6,000 Units Sold			Percent of Total
Unit Proceeds		$	60,000,000		54.54	%
Seed Capital Proceeds		1,680,000			1.53	%
Senior Debt Financing		48,320,000			43.93	%
Total Sources of Funds		$	110,000,000		100.00	%

Sources of Funds(1)	If 5,332 Units Sold			Percent of Total
Unit Proceeds		$	53,320,000		48.47	%
Seed Capital Proceeds		1,680,000			1.53	%
Term Debt Financing		55,000,000			50.00	%
Total Sources of Funds		$	110,000,000		100.00	%

Sources of Funds(1)	Minimum 4,500 Units Sold			Percent of Total
Unit Proceeds		$	45,000,000		40.91	%
Seed Capital Proceeds		1,680,000			1.53	%
Senior Debt Financing		63,320,000			57.56	%
Total Sources of Funds		$	110,000,000		100.00	%

(1)We may receive federal and state grants, however, we have not yet entered into any written definitive agreements for the grants. Additionally, we may receive bond financing. If we receive grants or bond financing, we expect to reduce the amount of equity proceeds or senior debt financing necessary for our capitalization by the same or similar amount.

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ESTIMATED USE OF PROCEEDS

The gross proceeds from this offering, before deducting offering expenses, will be $45,000,000 if the minimum amount of equity offered is sold, and $60,000,000 if the maximum number of units offered is sold for $10,000 per unit. We estimate the offering expenses to be approximately $550,000.(1) Therefore, we estimate the net proceeds of the offering to be $44,450,000 if the minimum amount of equity is raised, and $59,450,000 if the maximum number of units offered is sold.

	Maximum Offering				Minimum Offering
Offering Proceeds ($10,000 per unit)		$	60,000,000			$	45,000,000
Less Estimated Offering Expenses (1)		(550,000		)		(550,000		)
Net Proceeds from Offering		$	59,450,000			$	44,450,000

(1) All of the following offering expenses are estimated, except for the SEC registration fee.

Securities and Exchange Commission registration fee	$	6,420
Legal fees and expenses	200,000
Consulting fees	75,000
Accounting fees	125,000
Blue Sky filing fees	5,000
Printing expenses	75,000
Advertising	50,000
Miscellaneous expenses	13,580
Total	$	550,000

We intend to use the net proceeds of the offering to construct and operate an ethanol plant with a 50 million gallon per year nameplate manufacturing capacity. We must supplement the proceeds of this offering with debt financing to meet our stated goals. We estimate that the total capital expenditures for the construction of the plant will be approximately $110,000,000. The total project cost is a preliminary estimate primarily based upon the experience of our general contractor, Fagen, Inc., with ethanol plants similar to the plant we intend to construct and operate. We expect the total project cost will change from time to time as the project progresses.

The following table describes our proposed use of proceeds. The actual use of funds is based upon contingencies, such as the estimated cost of plant construction, the suitability and cost of the proposed site, the regulatory permits required and the cost of debt financing and inventory costs, which are driven by the market. Therefore, the following figures are intended to be estimates only, and the actual use of funds may vary significantly from the descriptions given below depending on contingencies such as those described above.  In addition, depending on the level of equity raised, we may decide to implement technical or design upgrades or improvements to our plant.

Use of Proceeds	Amount			Percent of Total
Plant construction		$	66,026,000		60.02	%
Water treatment facility		12,500,000			11.36	%
CCI Contingency		3,279,250			2.98	%
Land cost		810,000			0.74	%
Site development costs		8,140,000			7.40	%
Construction contingency		919,750			0.84	%
Construction performance bond		350,000			0.32	%
Construction insurance costs		150,000			0.14	%
Administrative building		350,000			0.32	%
Office equipment		80,000			0.07	%
Computers, Software, Network		150,000			0.14	%
Railroad		3,000,000			2.73	%
Rolling stock		400,000			0.36	%
Fire Protection and water supply		3,495,000			3.18	%
Capitalized interest		1,500,000			1.36	%
Start up costs:
Financing costs		600,000			0.55	%
Organization costs(1)		1,500,000			1.36	%
Pre-production period costs		750,000			0.68	%

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Working capital	2,000,000		1.83	%
Inventory - corn	1,100,000		1.00	%
Inventory - chemicals and ingredients	400,000		0.36	%
Inventory - Ethanol	1,500,000		1.36	%
Inventory - DDGS	500,000		0.45	%
Spare parts - process equipment	500,000		0.45	%
Total	$	110,000,000	100.00	%

(1)Includes estimated offering expenses of $550,000.

Plant Construction. The construction of the plant itself is by far the single largest expense at approximately $66,026,000. We have a design-build agreement with Fagen, Inc.  See “Design-Build Team; Design-Build Agreement with Fagen, Inc.”

Water Treatment Facility.  We estimate that the construction of our water treatment facility will cost approximately $12,500,000, in addition to the cost of constructing the plant itself.

CCI Contingency. Under our design-build agreement, the contract price of approximately $66,026,000 may be further increased if the construction cost index (“CCI”) published by Engineering News-Record Magazine reports a CCI greater than 7,660.29 in the month in which we issue to Fagen, Inc., a notice to proceed with plant construction. The amount of the contract price increase will be equal to the increase in the CCI based upon the January 2006 CCI of 7,660.29. As of February 2007, the CCI was reported at 7,879.54, which is significantly higher than the January 2006 level stated in the design build agreement. If the CCI remains at the February 2007 level or increases above that level in the month in which we issue to Fagen, Inc. a notice to proceed with plant construction, the contract price will accordingly increase by at least approximately $1,890,000. Thus, we have allowed for a $3,279,250 contingency in our total estimated costs of the project. This may not be sufficient to offset any upward adjustment in our construction cost.

Land Cost. On June 7, 2006, we obtained the exclusive right and option to purchase a parcel of land, consisting of approximately 68 acres of land, in Redwood County, Minnesota. We paid $5,000 for the exclusive right and option. The purchase price is $7,000 per acre, which is equivalent to $476,000 for the 68 acre parcel. We exercised our option to purchase this parcel on December 31, 2006.  We closed on this property in March 2007.  It may be necessary to purchase an alternative site if unforeseen circumstances make this particular site unusable.

In September 2006, we obtained the right and option to purchase three additional adjacent parcels of land.  The first is to purchase approximately six to twelve acres of land for $7,000 per acre until December 31, 2008. We paid $1,000 for the option which will apply towards the purchase price if we elect to complete the purchase. The second is to purchase an undisclosed amount of land for $8,000 per acre until March 31, 2007. We paid $1,000 for the option which will apply towards the purchase price if we elect to complete the purchase. The third is to purchase an undisclosed amount of land for $7,000 per acre. We paid $5,000 for the option which will apply towards the purchase price if we elect to complete the purchase. We exercised the third option for approximately 48 acres on December 31, 2006, and closed on the property in March 2007. We may decide to exercise the other options or we may let the options expire, depending on our need for additional land.  In March 2007 we closed on the two parcels for which we had exercised land options.  The two parcels total approximately 116 acres and we paid a total of approximately $810,000 for the properties.  Also in March 2007 we obtained an $800,000 note from a bank to provide us with interim financing until we can close on our anticipated debt financing.  The note is secured by a mortgage on the two parcels of property, a personal guarantee from Ron Fagen, the principal owner of our design-build contractor, and by a limited personal guarantee from Warren Pankonin, a member of our board of governors and a seed capital investor in our project.

Site Development. We estimate that site development costs will be approximately $8,140,000.

Construction Contingency. We project approximately $919,750 for unanticipated expenditures in connection with the construction of our plant. We plan to use excess funds for our general working capital.

Construction Performance Bond and Insurance Costs. We estimate the construction bond for the project to cost approximately $350,000. We have budgeted approximately $150,000 for builder’s risk insurance, general liability insurance, workers’ compensation and property insurance. We have not yet determined our actual costs and they may exceed this estimate.

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Administration Building, Furnishings, Office and Computer Equipment. We anticipate spending approximately $350,000 to build our administration building on the plant site. We expect to spend an additional $80,000 on our furniture and other office equipment and $150,000 for our computers, software and network.

Rail Infrastructure and Rolling Stock. If the plant is constructed near Lamberton, Minnesota, rail improvements, such as siding and switches may need to be installed at an estimated cost of $3,000,000. We anticipate the need to purchase rolling stock at an estimated cost of $400,000.

Fire Protection and Water Supply. We anticipate spending $3,495,000 to equip the plant with adequate fire protection and water supply.

Capitalized Interest. This consists of the interest we anticipate incurring during the development and construction period of our project. For purposes of estimating capitalized interest and financing costs, we have assumed senior debt financing of approximately $55,000,000. We determined this amount of debt financing based upon an assumed equity amount of $53,320,000 and seed capital proceeds of $1,680,000. If any of these assumptions changed, we would need to revise the level of term debt accordingly. Loan interest during construction will be capitalized and is estimated to be $1,500,000, based upon senior debt of $55,000,000. We have estimated our financing costs of $600,000 based upon this same level of term debt.

Financing Costs. Financing costs consist of all costs associated with the procurement of approximately $55,000,000 of debt financing. These costs include bank origination and legal fees, loan processing fees, appraisal and title insurance charges, recording and deed registration tax, our legal and accounting fees associated with the financing and project coordinator fees, if any, associated with securing the financing. Our actual financing costs will vary depending on the amount we borrow.

Organizational Costs. We have budgeted $1,500,000 for developmental, organizational, consulting, legal, accounting and other costs associated with our organization and operation as an entity, including, but not limited to estimated offering expenses of $550,000.

Pre-Production Period Costs. We project $750,000 of pre-production period costs. These represent costs of beginning production after the plant construction is finished, but before we begin generating income.  Pre-production period costs are comprised of $120,000 of start-up costs, $200,000 of administrative labor, $400,000 of production labor and $30,000 of utilities.  We do not anticipate compensating our governors during this period.

Inventory.  We project $6,000,000 of inventory costs for the period between the completion of construction and our beginning generation of income.  The $6,000,000 inventory is comprised of $1,500,000 of initial inventories of corn and other ingredients,  initial $1,500,000 of ethanol inventory, $500,000 in initial dried distillers grain inventory, $500,000 of spare parts for our process equipment and $2,000,000 of working capital.

INDUSTRY OVERVIEW

Ethanol is ethyl alcohol, a fuel component made primarily from corn and various other grains, and can be used as: (i) an octane enhancer in fuels; (ii) an oxygenated fuel additive for the purpose of reducing ozone and carbon monoxide vehicle emissions; and (iii) a non-petroleum-based gasoline substitute. Approximately 95 percent of all ethanol is used in its primary form for blending with unleaded gasoline and other fuel products. The implementation of the Federal Clean Air Act has made ethanol fuels an important domestic renewable fuel additive. Used as a fuel oxygenate, ethanol provides a means to control carbon monoxide emissions in large metropolitan areas.  The principal purchasers of ethanol are generally the wholesale gasoline marketer or blender. Oxygenated gasoline is commonly referred to as reformulated gasoline.

Over the past twenty years the U.S. fuel ethanol industry has grown from almost nothing to an estimated 4.8 billion gallons of ethanol production per year. As of September 2006, plans to construct new ethanol plants or expand existing plants have been announced which would increase capacity by approximately 3 billion gallons per year. According to the Renewable Fuels Association, there are currently over 100 ethanol production facilities producing ethanol throughout the United States. Most of these facilities are based in the Midwest because of the nearby access to the corn and grain feedstocks necessary to produce ethanol.

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General Ethanol Demand and Supply

Demand for fuel ethanol in the United States reached a new high in 2004 of 3.57 billion gallons per year. In its report titled, “Ethanol Industry Outlook 2006,” (dated February 2006 and publicly available at www.ethanolrfa.org), the Renewable Fuels Association anticipates demand for ethanol to remain strong as a result of the national renewable fuels standard contained in the Energy Policy Act of 2005, rising gasoline and oil prices and increased state legislation banning the use of MTBE or requiring the use of renewable fuels.  The RFA also notes that interest in E85, a blend of 85 percent ethanol and 15 percent gasoline, has been invigorated due to continued efforts to stretch U.S. gasoline supplies. The RFA also expects that the passage of the Volumetric Ethanol Excise Tax Credit (“VEETC”) will provide the flexibility necessary to expand ethanol blending into higher blends of ethanol such as E85, E diesel and fuel cell markets.

The provision of the Energy Policy Act of 2005 likely to have the greatest impact on the ethanol industry is the creation of a 7.5 billion gallon renewable fuels standard (RFS). The RFS began at 4 billion gallons in 2006, increasing to 7.5 billion gallons by 2012. The RFS is a national flexible program that does not require that any renewable fuels be used in any particular area or state, allowing refiners to use renewable fuel blends in those areas where it is most cost-effective. We expect the bill to lead to about $6 billion in new investment in ethanol plants across the country. An increase in the number of new plants will bring an increase in the supply of ethanol. Thus, while this bill may cause ethanol prices to increase in the short term due to additional demand, future supply could outweigh the demand for ethanol in the future. This would have a negative impact on our earnings. Alternatively, since the RFS begins at 4 billion gallons in 2006 and national production is expected to exceed this amount, there could be a short-term oversupply until the RFS requirements exceed national production. This would have an immediate adverse effect on our earnings.

Source: American Coalition for Ethanol (ACE)

While we believe that the nationally mandated usage of renewable fuels is currently driving demand, we believe that an increase in voluntary usage will be necessary for the industry to continue its growth trend.  We expect that voluntary usage by blenders will occur only if the price of ethanol makes increased blending economical.  In addition, we believe that heightened consumer awareness and consumer demand for ethanol-blended gasoline may play an important role in growing overall ethanol demand and voluntary usage by blenders.  If blenders do not voluntarily increase the amount of ethanol blended into gasoline and consumer awareness does not increase, it is possible that additional ethanol supply will outpace demand and depress ethanol prices.

The supply of domestically produced ethanol is at an all-time high. In 2005, 95 ethanol plants located in 19 states annually produced a record 4 billion gallons according to the RFA’s website; an approximately 17 percent increase from 2004 and nearly 1.5 times the ethanol produced in 2000. As of February 2007, there were 113 ethanol production facilities operating in 19 states with a combined annual production capacity of more than 5.58 billion gallons, with an additional 76 new plants and seven expansions under construction expected to add an additional estimated 6.14 billion gallons of annual production capacity.

We believe ethanol supply is also affected by ethanol produced or processed in certain countries in Central America and the Caribbean region. Ethanol produced in these countries is eligible for tariff reduction or elimination upon importation to the United States under a program known as the Caribbean Basin Initiative (“CBI”). Large ethanol producers, such as Cargill, have expressed

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interest in building dehydration plants in participating Caribbean Basin countries, such as El Salvador, which would convert ethanol into fuel-grade ethanol for shipment to the United States. Ethanol imported from Caribbean Basin countries may be a less expensive alternative to domestically produced ethanol. The International Trade Commission recently announced the 2006 CBI import quota of 268.1 million gallons of ethanol, up from 240.4 million gallons in 2005.  In the past, legislation has been introduced in the Senate that would limit the transshipment of ethanol through the CBI.  It is possible that similar legislation will be introduced this year, however, there is no assurance or guarantee that such legislation will be introduced or that it will be successfully passed.

Federal Ethanol Supports

The ethanol industry is heavily dependent on several economic incentives to produce ethanol, including federal ethanol supports. The most recent ethanol supports are contained in the Energy Policy Act of 2005. Most notably, the Act creates a 7.5 billion gallon renewable fuels standard (RFS). The RFS requires refiners to use 4 billion gallons of renewable fuels in 2006, increasing to 7.5 billion gallons by 2012.  On December 28, 2005, the EPA released interim rules governing the implementation of the 2006 RFS requirement.  The EPA’s interim rule imposes a collective compliance approach, which means the requirement for 2006 fuel use is determined in the aggregate rather than on a refiner-by-refiner basis.  The EPA adopted this approach for 2006 because current uncertainties regarding the RFS might result in unnecessarily high costs of compliance if each party was required to independently comply.  Although there is not a requirement for individual parties to demonstrate compliance in 2006, the EPA found that increases in ethanol production and projections for future demand indicate that the 2006 volume is likely to be met.  However, in the unlikely event that the RFS is not met in 2006, the EPA expects to adjust the volume requirement in 2007 to cover the deficit. There are no other consequences for failure to collectively meet the 2006 standard.  The EPA expects to promulgate more comprehensive regulations by August 8, 2006, but the interim rules and collective compliance approach are expected to apply for the entire 2006 calendar year.  In 2007 and subsequent years, the EPA expects to specifically identify liable parties, determine the applicable RFS, and develop a credit trading program.  Further, the standards for compliance, record-keeping and reporting are expected to be clarified.

Historically, ethanol sales have also been favorably affected by the Clean Air Act amendments of 1990, particularly the Federal Oxygen Program which became effective November 1, 1992. The Federal Oxygen Program requires the sale of oxygenated motor fuels during the winter months in certain major metropolitan areas to reduce carbon monoxide pollution. Ethanol use has increased due to a second Clean Air Act program, the Reformulated Gasoline Program. This program became effective January 1, 1995, and requires the sale of reformulated gasoline in nine major urban areas to reduce pollutants, including those that contribute to ground level ozone, better known as smog.

The two major oxygenates added to reformulated gasoline pursuant to these programs are MTBE and ethanol, however MTBE has caused groundwater contamination and has been banned from use by many states. The Energy Policy Act of 2005 did not impose a national ban of MTBE but it also did not include liability protection for manufacturers of MTBE.  We expect the failure to include liability protection for manufacturers of MTBE to result in refiners and blenders using ethanol as an oxygenate rather than MTBE to satisfy the reformulated gasoline oxygenate requirement. While this may create increased demand in the short-term, we do not expect this to have a long term impact on the demand for ethanol as the Act repeals the Clean Air Act’s 2 percent oxygenate requirement for reformulated gasoline immediately in California and 270 days after enactment elsewhere. However, the Act did not repeal the 2.7 percent oxygenate requirement for carbon monoxide nonattainment areas which are required to use oxygenated fuels in the winter months. While we expect ethanol to be the oxygenate of choice in these areas, there is no assurance that ethanol will in fact be used.

The government’s regulation of the environment changes constantly. It is possible that more stringent federal or state environmental rules or regulations could be adopted, which could increase our operating costs and expenses. It also is possible that federal or state environmental rules or regulations could be adopted that could have an adverse effect on the use of ethanol. For example, changes in the environmental regulations regarding ethanol’s use due to currently unknown effects on the environment could have an adverse effect on the ethanol industry. Furthermore, plant operations likely will be governed by the Occupational Safety and Health Administration (“OSHA”). OSHA regulations may change such that the costs of the operation of the plant may increase. Any of these regulatory factors may result in higher costs or other materially adverse conditions effecting our operations, cash flows and financial performance.

The use of ethanol as an alternative fuel source has been aided by federal tax policy. On October 22, 2004, President Bush signed H.R. 4520, which contained the Volumetric Ethanol Excise Tax Credit (“VEETC”) and amended the federal excise tax structure effective as of January 1, 2005. Prior to VEETC, ethanol-blended fuel was taxed at a lower rate than regular gasoline (13.2 cents on a 10 percent blend). Under VEETC, the ethanol excise tax exemption has been eliminated, thereby allowing the full federal excise tax of 18.4 cents per gallon of gasoline to be collected on all gasoline and allocated to the highway trust fund.  We expect the highway trust fund to add approximately $1.4 billion to the highway trust fund revenue annually. In place of the exemption, the bill creates a new

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volumetric ethanol excise tax credit of 5.1 cents per gallon of ethanol blended at 10 percent. Refiners and gasoline blenders apply for this credit on the same tax form as before only it is a credit from general revenue, not the highway trust fund. Based on volume, the VEETC is expected to allow much greater refinery flexibility in blending ethanol since it makes the tax credit available on all ethanol blended with all gasoline, diesel and ethyl tertiary butyl ether (“ETBE”), including ethanol in E-85 and the E-20 in Minnesota. The VEETC is scheduled to expire on December 31, 2010.

The Energy Policy Act of 2005 expands who qualifies for the small ethanol producer tax credit. Historically, small ethanol producers were allowed a 10 cents per gallon production income tax credit on up to 15 million gallons of production annually. The size of the plant eligible for the tax credit was limited to 30 million gallons. Under the Energy Policy Act of 2005 the size limitation on the production capacity for small ethanol producers increases from 30 million to 60 million gallons. The credit can be taken on the first 15 million gallons of production. The tax credit is capped at $1.5 million per year per producer. We do not anticipate that our annual production will exceed the production limit of 60 million gallons a year and that we will be eligible for the credit. The small ethanol producer tax credit is set to expire December 31, 2010.

In addition, the Energy Policy Act of 2005 creates a new tax credit that permits taxpayers to claim a 30 percent credit (up to $30,000) for the cost of installing clean-fuel vehicle refueling equipment, such as an E85 fuel pump, to be used in a trade or business of the taxpayer or installed at the principal residence of the taxpayer. Under the provision, clean fuels are any fuel of at least 85 percent of the volume of which consists of ethanol, natural gas, compressed natural gas, liquefied natural gas, liquefied petroleum gas, and hydrogen and any mixture of diesel fuel and biodiesel containing at least 20 percent biodiesel. The provision is effective for equipment placed in service after December 31, 2005, and before January 1, 2010. While it is unclear how this credit will affect the demand for ethanol in the short term, we expect it will help raise consumer awareness of alternative sources of fuel and could positively impact future demand for ethanol.

The ethanol industry and our business depend upon continuation of the federal ethanol supports discussed above. These incentives have supported a market for ethanol that might disappear without the incentives. Alternatively, the incentives may be continued at lower levels than at which they currently exist. The elimination or reduction of such federal ethanol supports would make it more costly for us to sell our ethanol and would likely reduce our net income and the value of your investment.

State Ethanol Supports

The State of Minnesota does not provide incentives for the production or sale of ethanol. This may cause our plant to be less competitive than plants in other states that are eligible to participate in incentive programs and receive tax credits or cash payments in exchange for transfer of the credits.

On May 30, 2006 the Governor of Iowa, signed HF 2754 and its companion appropriation bill HF 2759 into Iowa law. The bill creates a renewable fuels usage policy including several new incentives. First, it establishes an Iowa Renewable Fuels Standard starting at 10 percent in 2009 and increasing to 25 percent by 2019. In addition, the current 2.5 cents income tax credit that retailers can claim on gallons of ethanol blends sold in excess of 60 percent of their total volume will remain in effect until December 31, 2008. To assist Iowa retailers in achieving the RFS schedule, beginning in 2009, the current incentive will be replaced by an Ethanol Promotion Tax Credit. This will be available for each gallon of ethanol sold in Iowa and will be determined based on the retailer’s achievement of the RFS schedule as follows:

·Retailers meeting the Iowa RFS for a given year will be entitled to a 6.5 cents tax credit for every gallon of ethanol sold.

·Retailers within 2 percent of the Iowa RFS schedule will be entitled to a 4.5 cents tax credit for every gallon of ethanol sold.

·Retailers within 4 percent of the Iowa RFS schedule will be entitled to a 2.5 cents tax credit for every gallon of ethanol sold.

·Retailers more than 4 percent below the Iowa RFS schedule will not be entitled to a tax credit.

An E85 Promotion Tax Credit of 25 cents per gallon was created for 2006 through 2008. Beginning in 2009-2010, the E85 Promotion Tax Credit will be 20 cents per gallon, and beginning in calendar year 2011, the tax credit will be 10 cents per gallon and decreases by one cent each year through 2020. Additionally, an expanded infrastructure program designed to help retailers and wholesalers offset the cost of bringing E85 and biodiesel blends to customers was created. Over $13,000,000 over three years was appropriated to this grant program. Finally, cost-share grant programs will be available to retailers to upgrade or install new E85 equipment. Under this program, retailers could receive 50 percent of the total cost of the project to a maximum of $30,000.

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However, this new RFS does provide that in exigent circumstances the Governor may reduce or suspend the RFS schedule if: (1) Substantial economic harm would result from the schedule, (2) A shortage of feedstock supply occurs for renewable fuel production, or (3) Flexible Fuel Vehicle (FFV) fleet registration doesn’t reach target levels.

Although our ethanol plant is expected to be constructed in Minnesota, it is anticipated that it will be built approximately 70 miles north of the boarder between Iowa and Minnesota. While we expect the Iowa RFS to positively impact the ethanol market in the region, the schedule may also result in more ethanol plants being constructed in or near Iowa.  Additional ethanol plants in the region may increase competition for our corn feedstock supply and drive up our cost of corn. This could also result in a decrease in the price of ethanol and thus negatively impact your investment.

Our Primary Competition

We will be in direct competition with numerous other ethanol producers, many of whom have greater resources than we do. We also expect that additional ethanol producers will enter the market if the demand for ethanol continues to increase. Our plant will compete with other ethanol producers on the basis of price, and to a lesser extent, delivery service.  However, we believe that we can compete favorably with other ethanol producers due to the following factors:

·rail access facilitating use of unit trains with large volume carrying capacity;

·access to a skilled workforce;

·the modern plant design will help us to operate more efficiently than older plants; and

·the use of a state-of-the-art process control system to provide product consistency.

The ethanol industry has grown to over 100 production facilities in the United States. The largest ethanol producers include Abengoa Bioenergy Corp., Archer Daniels Midland, Aventine Renewable Energy, Inc., Cargill, Inc., New Energy Corp. and VeraSun Energy Corporation, each of which is capable of producing more ethanol than we expect to produce. Currently, there are 16 operating ethanol plants in the State of Minnesota and there are approximately 3 ethanol plants currently under construction in the State of Minnesota. Additionally, there over 20 operating ethanol plants in the State of Iowa and there are several ethanol plants in various stages of planning and development throughout the State of Iowa.  Due to the preliminary nature of many of these projects, it is difficult to estimate the number of potential ethanol projects within our region.

The following table identifies most of the ethanol producers in the United States along with their production capacities.

U.S. FUEL ETHANOL INDUSTRY BIOREFINERIES AND PRODUCTION CAPACITY

million gallons per year (mmgy)

COMPANY	LOCATION	FEEDSTOCK	Current Capacity (mmgy)		Under Construction/ Expansions (mmgy)
Abengoa Bioenergy Corp.	York, NE	Corn/milo		55
	Colwich, KS			25
	Portales, NM			30
	Ravenna, NE					88
Aberdeen Energy*	Mina, SD	Corn				100
Absolute Energy, LLC*	St. Ansgar, IA	Corn				100
ACE Ethanol, LLC	Stanley, WI	Corn		41
Adkins Energy, LLC*	Lena, IL	Corn		40
Advanced Bioenergy	Fairmont, NE	Corn				100
AGP*	Hastings, NE	Corn		52
Agra Resources Coop. d.b.a EXOL*	Albert Lea, MN	Corn		40		8
Agri-Energy, LLC*	Luverne, MN	Corn		21
Alchem Ltd. LLLP	Grafton, ND	Corn		10.5

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Al-Corn Clean Fuel*	Claremont, MN	Corn		35		15
Amaizing Energy, LLC*	Denison, IA	Corn		40
Archer Daniels Midland	Decatur, IL	Corn		1,070		275
	Cedar Rapids, IA	Corn
	Clinton, IA	Corn
	Columbus, NE	Corn
	Marshall, MN	Corn
	Peoria, IL	Corn
	Wallhalla, ND	Corn/barley
Akralon Energy, LLC	Liberal, KS	Corn			110
ASAlliances Biofuels, LLC	Albion, NE	Corn			100
	Linden, IN	Corn			100
	Bloomingburg, OH	Corn			100
Aventine Renewable Energy, Inc.	Pekin, IL	Corn	207
	Aurora, NE	Corn
Badger State Ethanol, LLC*	Monroe, WI	Corn	48
Big River Resources, LLC *	West Burlington, IA	Corn	52
Blue Flint Ethanol	Underwood, ND	Corn			50
Bonanza Energy, LLC	Garden City, KS	Corn/milo			55
Broin Enterprises, Inc.*	Scotland, SD	Corn	11
Bushmills Ethanol, Inc.*	Atwater, MN	Corn	40
Cardinal Ethanol	Harrisville, IN	Corn			100
Cargill, Inc.	Blair, NE	Corn	85
	Eddyville, IA	Corn	35
Cascade Grain	Clatskanie, OR	Corn			108
CassCo Amaizing Energy, LLC	Atlantic, IA	Corn			110
Castle Rock Renewable Fuels, LLC	Necedah, WI	Corn			50
Center Ethanol Company	Sauget, IL	Corn			54
Central Indiana Ethanol, LLC	Marion, IN	Corn			40
Central Illinois Energy, LLC	Canton, IL	Corn			37
Central MN Ethanol Coop*	Little Falls, MN	Corn	21.5
Central Wisconsin Alcohol	Plover, WI	Seed corn	4
Chief Ethanol	Hastings, NE	Corn	62
Chippewa Valley Ethanol Co.*	Benson, MN	Corn	45
Commonwealth Agri-Energy, LLC*	Hopkinsville, KY	Corn	33
Corn, LP*	Goldfield, IA	Corn	50
Cornhusker Energy Lexington, LLC	Lexington, NE	Corn	40
Corn Plus, LLP*	Winnebago, MN	Corn	44
Coshoctan Ethanol, OH	Coshoctan, OH	Corn			60
Dakota Ethanol, LLC*	Wentworth, SD	Corn	50
DENCO, LLC*	Morris, MN	Corn	21.5
Dexter Ethanol, LLC	Dexter, IA	Corn			100
E Energy Adams, LLC	Adams, NE	Corn			50
E3 Biofuels	Mead, NE	Corn			24
E Caruso (Goodland Energy Center)	Goodland, KS	Corn			20
East Kansas Agri-Energy, LLC*	Garnett, KS	Corn	35
Elkhorn Valley Ethanol, LLC	Norfold, NE	Corn			40
ESE Alcohol Inc.	Leoti, KS	Seed corn	1.5
Ethanol2000, LLP*	Bingham Lake, MN	Corn	32
Ethanol Grain Processors, LLC	Obion, TN	Corn			100
First United Ethanol, LLC	Mitchell Co., GA	Corn			100
Frontier Ethanol, LLC	Gowrie, IA	Corn	60
Front Range Energy, LLC	Windsor, CO	Corn	40

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Gateway Ethanol	Pratt, KS	Corn		55
Glacial Lakes Energy, LLC*	Watertown, SD	Corn	50	50
Global Ethanol/Midwest Grain Processors	Lakota, IA	Corn	95
	Riga, MI	Corn		57
Golden Cheese Company of California*	Corona, CA