Summary of GREENHUNTER ENERGY, INC.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with our consolidated financial statements and the notes associated with them contained in our Form 10-K for the year ended December 31, 2007 and with the financial statements and accompanying notes included herein. The discussion should not be construed to imply that the results contained herein will necessarily continue into the future or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment by our management. The discussion contains forward-looking statements that involve risks and uncertainties (see "Forward-Looking Statements" above). Actual events or results may differ materially from those indicated in such forward-looking statements. Overview
Prior to April 13, 2007, we were a start-up company in the development stage pursuant to Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by Development Stage Enterprises." Our plan is to acquire and operate assets in the renewable energy sectors of wind, solar, geothermal, biomass and biofuels. We currently have ongoing business initiatives at GreenHunter Energy, Inc. ("GreenHunter") in wind through GreenHunter Wind Energy, LLC ("Wind Energy"), biodiesel and methanol through GreenHunter BioFuels, Inc. ("BioFuels") and biomass through GreenHunter Mesquite Lake, Inc. We intend to become a leading provider of clean energy products.
We believe that our ability to successfully compete in the renewable energy industry depends on many factors, including the location and low cost construction of our planned facilities, development of strategic relationships, achievement of our anticipated low cost production model, vertical integration of our various businesses, and recruitment of experienced management.
Current and Prospective Capital Needs We had available cash of $2.2 million and working capital of $2.5 million at September 30, 2008; however, our financial condition weakened further by the date of this filing. As of the date of this filing, we had approximately $13 million in current liabilities payable and approximately $2.7 million of cash and assets readily convertible to cash. These figures exclude property insurance claims and working feedstock inventory and biodiesel finished product inventory.
Our adverse change in financial condition can be explained by significant pricing decreases experienced over the last ninety (90) days across energy markets, the overall deterioration across all capital markets, as well as damages and lost production time at our biodiesel refinery as a result of Hurricane Ike which occurred in mid-September. Falling market prices of both biodiesel and our feedstock inventories have also adversely impacted our inventory values and resulting working capital positions. While we had sufficient working capital to serve as collateral on our working capital line of credit at the date of filing, further declines in the future could possibly cause us to not be in compliance with required collateral obligations.
To address our immediate capital needs, we are continuing to market up to $20 million of our Series B Convertible Debentures, under which we have recently raised $2.6 million to date. We also are pursuing a number of different financing proposals of direct equity and debt placements with interested financial institutions. We hope to finalize these negotiations over the next thirty (30) days. Additionally, we are considering the sale of certain of our assets that could generate significant liquidity. We anticipate collecting up to $6 million in hurricane-related insurance proceeds in the near term due to claims made on four separate insurance policies related to our biodiesel refinery. If we are unable to raise sufficient capital to fund our operating needs for the next sixty days, or if certain creditors file claims against us, it may have a material adverse impact on our financial condition.
We believe that our biodiesel refinery will begin to generate significant revenues when it resumes operations during the fourth quarter, and we expect to acquire revenue streams with our L&L acquisition (pending acceptable financing commitments). Assuming that we do raise adequate capital in the near term, we will likely require significant additional funding in addition to our anticipated cash flows from the operations of BioFuels and L&L to develop current and future projects (predominantly wind and biomass) and to fund our operations over the next twelve months. Fortunately, most of the future capital expenditures on our existing assets is at our sole discretion with regard to timing.

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To address these capital needs, including the purchase of L&L , we are pursuing various credit facilities, and additional debt and equity raises under both private placements as well as our recent shelf registration statement filing. While we believe that our management team has demonstrated a proven track record for raising substantial capital in the past, there is no guarantee, particularly under the current market conditions, that we will obtain the necessary funding. In the event that we do not obtain the required financing, we may choose to delay project development, sell certain of our existing projects or properties or pursue acquisitions of operating facilities that have existing cash flows.
Even if we remedy our working capital and future capital expenditure requirements as discussed above, if biodiesel pricing continues to deteriorate, if we experience significant cost overruns at our facilities under construction, if our capital requirements or cash flows otherwise vary materially and adversely from our current projections, or if other adverse unforeseen circumstances occur, our working capital may still be inadequate to fully fund our operations or meet our future capital needs. BioFuels
On April 13, 2007, we purchased 100% of the outstanding stock of Channel Refining Corporation ("CRC") which we subsequently renamed GreenHunter BioFuels, Inc. CRC was a specialty chemical and waste oil manufacturer with facilities located in Houston, Texas. CRC's operations principally consisted of producing petroleum diesel and naphtha from contaminated sources of trans-mix or other petroleum based products. Our interest in CRC was not for its existing operations, but was for the existing location for a biodiesel manufacturing, storage and terminal operation located along the Houston Ship Channel, which would allow for multiple land and water based transportation options and the possibility of sourcing raw material from worldwide supplies. The specialty chemical and waste oil operation previously based on trans-mix raw material was continued through July 2007, and processing of contaminated methanol commenced in September 2007.
During the third quarter of 2008, we began commercial operations of our 105 million gallon per year capacity biodiesel refinery on this site which also includes terminal operations and 550 thousand barrels of product storage, as well as the ability to process up to 45,000 barrels per month of contaminated methanol (a chemical used in biodiesel production.) We also intend to construct an additional 150 thousand barrels of product storage and a 200 million pound per year capacity glycerin (a byproduct of biodiesel manufacturing) refinery on site. We began commercial production of biodiesel during August 2008 and had to shut the refinery down in September 2008 due to damage incurred by Hurricane Ike. The refinery is expected to resume production mid-November. We expect the glycerin refinery to be completed and operational during the second quarter of 2009, and we expect the remainder of our product storage to be completed during the first quarter of 2009. Any future profits will depend on the successful operation of the refinery as well as on feedstock costs, the price of diesel fuel, and the continuation of tax credits.
During September 2008, our BioFuels campus incurred moderate damage as a result of Hurricane Ike. As a result of wind and flood damage, we recognized actual losses during the third quarter of approximately $4.0 million, which included initial repairs and environmental cleanup of our campus as well as equipment and inventory losses. As a result of the storm damage, our refinery and terminal operations were not operational during the second half of September and through October. We were able to sell and deliver product out of our terminal in November, and we expect our refinery to begin production again by mid-November.
Estimated claims and related amounts recoverable under our insurance policies are shown below:

                              Estimated Claim       Retainage      Estimated Recovery
     Environmental Cleanup            334,000          25,000                309,000
     Inventory Loss                 2,400,000          25,000              2,375,000
     Property Loss                  4,315,000       5,000,000                      -

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We also carry business interruption insurance at our BioFuels plant. Due to the start-up nature of our operations, it is difficult to determine the appropriate loss, thus we have not accrued for any claim receivable as of September 30, 2008. We estimate that the eventual claim could be in excess of $2 million. We are currently in the process of filing these claims with the insurance carriers.
Also related to our BioFuels business segment, we are actively pursuing direct investments in feedstock sources for our biodiesel refinery, including but not limited to various ventures in jatropha nurseries and plantations as well as soybean farms.
BioPower
In May 2007, we acquired Mesquite Lake, an inactive 18.5 megawatt (nameplate capacity) biomass plant located in Brawley, California, which we began refurbishing during July 2008. During the same time period, we also acquired a power purchase agreement with a major southern California utility to take the full electric production output capacity of the Mesquite Lake when operational. The plant will operate on a combination of wood, manure and agricultural-based fuels. We originally expected to commence electric power generation during either the fourth quarter of 2008 or the first quarter of 2009, however, our project has been delayed due to a permit status review conducted by the Environmental Protection Agency. We now anticipate that the project will be completed during the second half of 2009.
In August 2008, we acquired an inactive 14 megawatt (nameplate capacity) biomass plant and an associated entity, Telogia Power Unit #2, LLC, located in Telogia, Florida ("Telogia") for approximately $2.5 million. Telogia has been inactive since the beginning of 2008. The acquisition includes approximately 125 acres of associated land. The plant will operate on wood waste-based fuels. After making certain renovations and improvements to the existing plant, we expect to resume commercial operation during the first quarter of 2009. Wind Energy
Until April 2007, our primary business was the investment in and development of wind energy farms. We continue to own rights to potential wind energy farm locations in Montana, New Mexico, California and Texas, and continue to operate and gather data produced from wind measurement equipment located on certain of these sites. We also continue to seek additional potential development sites, particularly those that would be near existing power transmission lines or our other renewable energy projects. The nature of these wind energy projects necessitates a longer term outlook than our other projects before they become operational, if ever. We expect to commence construction on two of our Montana wind farms in early 2009, which would involve construction of two ten megawatt wind farms. We expect one of these wind farms to become operational by the third quarter of 2009. Power would be sold into either the merchant market or under a special tariff for projects of this size.
During 2008, we entered into two additional wind development projects. On May 14, 2008, we entered into an agreement to participate in our first wind energy development project ("Haining City Wind") outside of the United States, which is located south of Shanghai, Peoples Republic of China. Once fully constructed, the project has the potential to generate up to 300 MW of power and will be developed in partnership with one other party, Chem-Energy, Inc., a U.S.-based developer. GreenHunter Wind Energy will manage and control approximately 85% of the ownership equity of this project. We have also installed two meteorological towers which are obtaining the necessary wind speed data prior to further development of the site.
During October 2008, we completed the acquisition of an initial 30% membership interest in a wind development project in southeastern Wyoming ("Wheatland Wind") for $281 thousand. Our ownership interest will increase over time pursuant to a series of development milestones of the project. Assuming all milestones are met, we will ultimately own 65% of the project, and the Southern Ute Growth Fund, a significant shareholder of GreenHunter, will own the remaining 35% of this project. Wheatland Wind will be located on more than 20,000

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acres of federal land (BLM) located near the town of Wheatland, Wyoming and has the potential to be up to 600 MW in size. The Southern Ute Growth Fund earned the right to participate in this project by posting an irrevocable standby letter of credit to Wyoming Colorado Intertie, LLC on our behalf for approximately $11.3 million. This letter of credit will secure capacity on a new transmission line for electricity related to this project.
We have also taken steps to address one of the biggest challenges facing wind energy companies, which is the limited availability of wind turbines. To address this challenge, on November 28, 2007, we entered into a master wind turbine supply agreement with Guandong MingYang Wind Power Technology Co., LTD ("MingYang"), a Chinese Company. This agreement provides that MingYang will supply twenty-two 1.5 megawatt (MW) capacity wind turbines to the Company in early 2009 at a price of ten million Chinese RMB each (approximately $1.5 million per turbine at the exchange rate in effect at September 30, 2008). Due to certain conditions that must be met by the supplier under the contract, approximately twenty of these new wind turbine purchases will be extended into 2009. The agreement also provides for the preference to purchase any size of wind turbines supplied by MingYang for use on our wind farm projects in North America through December 31, 2012. The total capacity of wind turbines that could be purchased under this agreement could potentially be more than 900 MW through 2012. We are also seeking additional supply agreements with other domestic and foreign manufacturers.
We have entered into an additional agreement with MingYang on November 28, 2007 to allow us to invest 75 million RMB (approximately $11.0 million at the exchange rate in effect at September 30, 2008) for an approximate 6% equity interest in MingYang. This investment has been approved by the government of the Peoples Republic of China and is waiting for certain other conditions to be met before it is final. We have deposited a total of $6.3 million, and it is anticipated that the remainder of our investment will be made during the fourth quarter of 2008 if all further conditions are met. We believe this investment will further our goal of developing renewable energy sources on a worldwide basis.
Results of Operations
Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007:
Biofuels Revenues and Operating Costs For the period ended September 30, 2008, we had revenues from methanol sales of $313 thousand and terminal logistic storage and service revenues of $19 thousand. The majority of our sales of methanol during the quarter resulted from excess volumes on hand due to the delay of production at our plant. During 2007, we had revenues from fuel oil sales of $136 thousand and processing revenues of $21 thousand. The 2007 revenues were derived from the specialty chemical and fuel oil operations of CRC which were continued for only a short period after our acquisition of CRC.
Our cost of sales and services were $2.9 million. These costs included costs of methanol sales of $319 thousand, an inventory valuation adjustment of $533 thousand, and idle barge costs of $659 thousand. The idle barge costs are associated with the short-term lease of several barges beginning March 15, 2008 to transport goods in and out of our Houston facility; these expenses represent both idle time for the barges as well as costs for barge time spent moving product out of our facility for our terminal operations. This lease was cancelled during September 2008. The inventory valuation was a result of decreases in the pricing of our raw materials inventory when compared to their acquisition costs as well as decreases in the market value of biodiesel over our cost to produce. The remainder of our costs related operating supplies, plant labor, and other overhead charges which were not allocated to inventory as a result of start-up activities and excess capacity during the quarter.
We also incurred losses at our BioFuels plant as a result of Hurricane Ike of $4.0 million. Of these losses, a non-cash loss of $1.1 million was the result of equipment being lost, a non-cash loss of $2.1 million was due to inventory that was lost or contaminated, and the remainder was incurred for repairs to the facility.

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Wind Energy Operating Costs
We incurred project costs associated with our wind energy projects of approximately $165 thousand in the 2008 period compared to approximately $49 thousand in the 2007 period. Our costs increased significantly as we identified and began evaluating new lease opportunities in Texas, China, and Montana. Project costs primarily consist of land lease costs and engineering studies.
Depreciation Expense
Depreciation expense was approximately $1.0 million during the 2008 period versus approximately $23 thousand during the 2007 period, due primarily to beginning commercial operations and the resulting depreciation of our BioFuels refinery and terminal operations during August.
Selling, General and Administrative Expense Selling, general and administrative ("SG&A") expense was approximately $2.9 million during the 2008 period versus approximately $794 thousand during the 2007 period.
Our unallocated corporate SG&A expenses were $1.2 million and $664 thousand during the 2008 and 2007 periods, respectively. Personnel-related costs for the 2008 quarter resulted in a credit of $132 thousand and included a credit of $757 thousand due to performance-based options which were not deemed likely to vest or were forfeited during the third quarter, which was partially offset by increases due to the hiring of additional executive and other management staff to manage the increased scope of operations in 2008. We also had state and local taxes of $87 thousand, travel and marketing costs of $224 thousand, legal and other professional fees of $771 thousand, and office-related costs of $176 thousand during the 2008 period. Increases across all of these categories were associated with becoming a publicly-traded company as well as increasing the scope of our operations during 2008.
Wind Energy incurred $330 thousand of SG&A expense in the 2008 period as compared to $55 thousand in the 2007 period. The largest component of our 2008 expense is personnel-related due to the increased scope of our operations as we added project developers and established new offices in Texas and Minnesota related to our wind projects.
BioFuels incurred $1.1 million of SG&A expense, including $122 thousand of selling costs in the 2008 period, versus $76 thousand of SG&A expense in the 2007 period. Costs of $485 thousand related to consultants, temporary labor, employee benefits and training that were incurred as we prepared for operations at our Houston campus while $104 thousand relates to marketing and logistics efforts at our campus. Additional SG&A expenses relate to legal fees, governmental initiatives, and business insurance costs related to our BioFuels campus.
BioPower incurred approximately $136 thousand of SG&A expense due to operations versus none in the 2007 period. BioPower's expense is related to consulting and other administrative expense incurred related to our Mesquite Lake and Telogia biomass projects.
We expect to continue to hire additional employees both on an operating related level as well as management and administrative staff as our projects come online. We also expect future office and related costs will continue to grow as we expand operations, and we expect professional fees and various other administrative costs will increase due to the public registration of our common stock and related reporting requirements.
Operating Loss
Our operating loss was approximately $10.7 million in the 2008 period versus a loss of approximately $920 thousand in the 2007 period, due principally to increases in costs of goods and services as our BioFuels plant is beginning operations as well as increases in selling, general and administrative expenses as a result of our increased scope of operations during the 2008 period and the hurricane loss.

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Our Wind Energy segment generated an operating loss of approximately $510 thousand during 2008 as compared to an operating loss of approximately $112 thousand during 2007 due to an increase in general and administrative expense and project costs as we added personnel and expanded our portfolio of wind projects.
Our BioFuels segment generated operating losses of $8.7 million and $143 thousand during the third quarters of 2008 and 2007, respectively. The large increase in loss was due to the addition of personnel, initial operating costs and professional fees related to the construction and start-up operations of our Houston biodiesel refinery as well as the hurricane losses suffered by the plant during the third quarter of 2008.
Our BioPower segment generated an operating loss of approximately $139 thousand during the 2008 period versus none during the 2007 period, as this segment began operations after the second quarter of 2007.
Our unallocated corporate operating losses were approximately $1.3 million during the 2008 period versus approximately $664 thousand during the 2007 period as general and administrative expenses increased due to personnel additions, costs related to becoming a public company and the expansion of our operations.
Other Income and Expense
Interest income was approximately $120 thousand in the 2008 period versus approximately $65 thousand in the 2007 period due to interest which was earned on higher resulting cash balances as a result of the issuances of debt and common and preferred stock during 2007 and 2008. Interest and other expense was approximately $1.4 million in the 2008 period versus approximately $114 thousand in the 2007 period due to the increase in debt from the issuance of debentures as well as non-recourse and other debt to incurred to purchase and fund the construction of our renewable fuels campus and the purchase of our corporate headquarters.
Net Loss
We realized a net loss of approximately $11.9 million during the third quarter of 2008 compared to $969 thousand during the 2007 period. Increases in our cost of sales and services at our BioFuels campus as well as our general and administrative costs were the primary factors in the increased loss during the 2008 period.
Preferred Dividends
Dividends on our preferred stock were $250 thousand in the 2008 and 2007 periods due to quarterly payments on our Series A Preferred Stock.
Deemed Preferred Dividends
We recorded non-cash deemed preferred dividends of $13.9 million in relation to the Series B to reflect the excess of the fair value of the securities issued in the transaction over the carrying value of the warrants cancelled.
Additionally, in association with our September 15, 2008 dividend, we recorded non-cash dividends on both series of our preferred stocks of $599 thousand which was equal to the fair value of the warrants issued on that date.
Net Loss to Common Stockholders
Our net loss to common stockholders was approximately $26.7 million in the 2008 period versus approximately $1.2 million in the 2007 period, due to higher dividends during the 2007 period as a result of deemed dividends issued on our both series of our preferred stock as well as increased net losses as a result of increased operating expenses as we expanded our operations. Our net loss per share increased to $1.32 in the 2008 period, up from $0.07 in the 2007 period. Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007:

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Since we acquired 100% of the common stock of CRC on April 13, 2007, our operating results in the nine month period during 2007 only reflect approximately 5.5 months of operating results from CRC.
Biofuels Revenues and Operating Costs For the first nine months of 2008, we had revenues from methanol sales of approximately $610 thousand, animal fat sales of $18 thousand, and terminal service and storage revenues of $348 thousand. During 2007, we had revenues from fuel oil sales of $616 thousand and processing revenues of $96 thousand. The 2007 revenues were derived from the specialty chemical and fuel oil operations of CRC which were continued for only a short period after our acquisition of CRC.
We had costs of sales and services of approximately $4.1 million. The largest component of these costs was associated with freight charges of approximately $1.2 million. These costs are associated with the short-term lease of several barges beginning March 15, 2008 to transport goods in and out of our Houston facility; these expenses represent both idle time for the barges as well as costs for barge time spent moving product out of our facility for our terminal operations. This lease was cancelled during September 2008. We also had costs of methanol and animal fat sales of $475 thousand, labor and materials used in plant start-up and initial operations of $1.9 million, and an inventory valuation of $533 thousand. The inventory valuation was a result of decreases in the market pricing of our raw materials inventory when compared to their acquisition costs as well as decreases in the market value of biodiesel over our . . .