There's a lot of unsubstantiated rumors and negativity going around (and in this thread) about E85. It is true that MPG will drop when using E85 versus regular 87 octane unleaded in a flex-fuel vehicle. My experience in a GM 5.3L V8 is about 20% drop in MPG. Performance seems the same to me though, I can't tell any difference in regular use. Ethanol (the 85% in E85) does contain less BTU/unit than gasoline, but that absolutely does NOT mean that an ethanol engine cannot run at the same/better efficiency or must produce less power. Ethanol has around 105 octane rating (think racing fuel), and if you had an engine designed to use only E85 or 100% ethanol, you could increase the compression ratio substantially which would yield more power and more efficiency than the same unleaded gas engine. The Indy Racing League is going to be using ethanol instead of methanol next year I think. The big problem is that in a flex-fuel engine the compression ratio must be low enough to run low-grade 85 octane unleaded, thereby not taking advantage of the high octane E85. If there was such a thing a variable compression (I thought Saab had something like that in the works once) then maybe that compromise would be lessened. But for now, flex-fuel engines are a compromise and must be designed for the lowest commmon denominator - cheap low octane unleaded gasoline.
If somebody used E85 in a non-flex fuel engine, it could do nothing at all or it could do some serious damage. All gasoline now has 10% ethanol content, so it may not be as bad as you think. Ethanol does absorb water, and if you have an older vehicle with any water in the system and run E85 you will probably have a problem. But then again, since all gas now has 10% ethanol, the fuel systems may be dried out fairly well. It is not like the old gasohol days when crappy carburated engines wouldn't start because there was a quart of water at the bottom of the tank. Since the octane of ethanol is so high, and when running it in a low compression flex fuel engine, really cold starts might be a problem (it doesn't want to ignite as easily). I havn't had any problems down to about 0 degrees though. That's actually why the 15% gas is in there to begin with - to aid cold starts. You could run a flex-fuel engine on 100% ethanol just fine. I wouldn't recommend it, but you might be able to run E85 just fine in a non flex-fuel vehicle, the problem is you just don't know for sure and nobody wants to take that chance.
All of the GM 5.3 V8 engines sold around here are flex-fuel, nothing special to order to get them and they cost the same. We have one E85 station in town and it seems to be selling OK. The problem this summer is that with the transition from MTBE to ethanol as an octane enhancer in unleaded gas, the price of ethanol went through the roof. E85 was selling for more than unleaded, which made it a double bad economic chocie since it also gets about 20% less MPG. That seems to have corrected itself now, with E85 at about 30 cents less per gallon. I don't think ethanol is the long term answer, but it can help in the transition. When I fill up with E85, I think about each gallon coming from a nearby farm field instead of an overseas oil field. At least it makes me feel better!