** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-QSB**
| **T**      | ** ** | **Quarterly report under Section 13 or 15(d) of  the Securities Exchange Act of 1934.** |
|------------|------------|-----------------------------------------------------------------------------------------|
|       |       |                                                                                    |
| ** ** |       | **For the  quarterly period ended September 30, 2006**                                  |
|       |       |                                                                                    |
| ** ** |       | **OR**                                                                                  |
|       |       |                                                                                    |
| **£** | ** ** | **Transition report under Section 13 or 15(d) of  the Exchange Act.**                   |

 

**For the transition period from                        to                           **

**Commission file number 0001170106**

**EASTKANSAS AGRI-ENERGY, LLC**

(Exact name of small business issuer as specified inits charter)

| **KANSAS**                                                           |   | **48-1251578**                            |
|----------------------------------------------------------------------|--------|-------------------------------------------|
| **(STATE  OR OTHER JURISDICTION OF  INCORPORATION OR ORGANIZATION)** |   | **(I.R.S.  EMPLOYER IDENTIFICATION NO.)** |

 

**P.O.Box 225,****1304 S. Main, Garnett, Kansas 66032**

(Address of principalexecutive offices)

 

**(785)448-2888**

(Issuer’stelephone number)

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  x Yes   o  No

 Indicate by check mark whether the registrant isa large accelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):

Large Accelerated Filer o            AcceleratedFiler o            Non-AcceleratedFiler x

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes          x No

Indicatethe number of shares outstanding for each of the issuer’s classes of commonequity as of the latest practicable date:

As of November 14, 2006,there were 21,898 membership units outstanding.

Transitional Small Business Disclosure Format (Check one):oYes  x No

 

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**INDEX**
| **PART I.**       | ** ** | **FINANCIAL INFORMATION** |
|-------------------|------------|---------------------------|
|              |       | **Item 1.**               |   | **Financial Statements** |
|              |       | **Item 2.**               |   | **Management’s  Discussion and Analysis and Plan of Operation** |
|              |       | **Item 3.**               |   | **Controls and  Procedures** |
| **PART II.** | ** ** | **OTHER INFORMATION**     |
|              |       | **Item 1.**               |   | **Legal Proceedings** |
|              |       | **Item 1A.**              |   | **Risk Factors** |
|              |       | **Item 2.**               |   | **Unregistered  Sales of Equity Securities and Use of Proceeds** |
|              |       | **Item 3.**               |   | **Defaults Upon  Senior Securities** |
|              |       | **Item 4.**               |   | **Submission of  Matters to a Vote of Security Holders** |
|              |       | **Item 5.**               |   | **Other Information** |
|              |       | **Item  6.**              |   | **Exhibits** |
|                   |            |                           |  |  |  |

 

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**PARTI.     FINANCIAL INFORMATION**

**ITEM 1. FINANCIAL STATEMENTS.**

EASTKANSAS AGRI-ENERGY, LLCBALANCE SHEET (UNAUDITED)SEPTEMBER 30, 2006

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| **ASSETS**                                 | ** ** | ** **     | ** **      |
|--------------------------------------------|------------|----------------|-----------------|
| CURRENT ASSETS                             | ** ** | ** **     | ** **      |
| Cash and cash  equivalents                 | ** ** | **$ **    | **6,981,340**   | ** ** |
| Trade accounts  receivable - related party | ** ** | **3,859,480**  | ** **      |
| Inventory                                  | ** ** | **1,541,387**  | ** **      |
| Investment in  commodity contracts         | ** ** | **337,111**    | ** **      |
| Interest  receivable                       | ** ** | **1,290,103**  | ** **      |
| Prepaid expense                            | ** ** | **231,448**    | ** **      |
| Total current  assets                      | ** ** | **14,240,869** | ** **      |
| PROPERTY, PLANT AND  EQUIPMENT             | ** ** | ** **     | ** **      |
| Land                                       | ** ** | **580,322**    | ** **      |
| Land  improvements                         | ** ** | **2,164,402**  | ** **      |
| Office equipment                           | ** ** | **270,866**    | ** **      |
| Buildings                                  | ** ** | **1,785,915**  | ** **      |
| Equipment                                  | ** ** | **45,010,668** | ** **      |
| Vehicles                                   | ** ** | **22,743**     | ** **      |
| Construction in  progress                  | ** ** | **797,808**    | ** **      |
|                                       | ** ** | **50,632,724** | ** **      |
| Less accumulated  depreciation             | ** ** | **(3,913,003** | **)**           |
| Total property,  plant and equipment       | ** ** | **46,719,721** | ** **      |
| OTHER ASSETS                               | ** ** | ** **     | ** **      |
| Investment in  Industrial Revenue Bonds    | ** ** | **47,866,117** | ** **      |
| Idle property                              | ** ** | **2,332,575**  | ** **      |
| Financing costs                            | ** ** | **622,538**    | ** **      |
| Less accumulated  amortization             | ** ** | **(88,041**    | **)**           |
| Total other  assets                        | ** ** | **50,733,189** | ** **      |
| Total assets                               | ** ** | **$ **    | **111,693,779** | ** ** |

** **

See Notes to UnauditedFinancial Statements

3

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EAST KANSASAGRI-ENERGY, LLC BALANCE SHEET (UNAUDITED) (page 2) SEPTEMBER 30, 2006

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| **LIABILITIES  AND MEMBERS' EQUITY**                                                                                 | ** ** | ** **     | ** **      |
|----------------------------------------------------------------------------------------------------------------------|------------|----------------|-----------------|
| CURRENT  LIABILITIES                                                                                                 | ** ** | ** **     | ** **      |
| Current portion of long-term debt                                                                                    | ** ** | **$**          | **3,249,408**   | ** ** |
| Accounts payable                                                                                                     | ** ** | ** **     | ** **      |
| Trade                                                                                                                | ** ** | **322,788**    | ** **      |
| Related parties                                                                                                      | ** ** | **484,914**    | ** **      |
| Accrued payroll, taxes and withholdings                                                                              | ** ** | **156,018**    | ** **      |
| Other accrued expenses                                                                                               | ** ** | **499,733**    | ** **      |
| Accrued interest                                                                                                     | ** ** | **1,329,426**  | ** **      |
| Total current liabilities                                                                                            | ** ** | **6,042,287**  | ** **      |
| LONG-TERM DEBT  (less current maturities)                                                                            | ** ** | **15,556,854** | ** **      |
| LEASE OBLIGATION                                                                                                     | ** ** | **47,866,117** | ** **      |
| MEMBERS' EQUITY                                                                                                      | ** ** | ** **     | ** **      |
| Capital contributions, 40,000 units authorized,  23,798 units issued of which 1,900 units are held as treasury stock | ** ** | **24,707,100** | ** **      |
| Treasury stock, at cost                                                                                              | ** ** | **(3,800,000** | **)**           |
| Retained earnings                                                                                                    | ** ** | **21,321,421** | ** **      |
| Total members' equity                                                                                                | ** ** | **42,228,521** | ** **      |
| Total  liabilities and members' equity                                                                               | ** ** | **$ **    | **111,693,779** | ** ** |

** **

See Notes to UnauditedFinancial Statements

4

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EAST KANSAS AGRI-ENERGY, LLC STATEMENT OF OPERATIONS (UNAUDITED)

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| ** **                                   | ** ** | **Three Months**  | ** **     | **Nine Months**   | ** ** | **Three Months**  | ** ** | **Nine Months**   | ** ** |
|----------------------------------------------|------------|------------------------|----------------|------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                   | ** ** | **Ended**              | ** **     | **Ended**              | ** ** | **Ended**              | ** ** | **Ended**              | ** ** |
| ** **                                   | ** ** | **September 30,** | ** **     | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                   | ** ** | **2006**               | ** **     | **2006**               | ** ** | **2005**               | ** ** | **2005**               | ** ** |
| REVENUE                                      | ** ** | ** **             | ** **     | ** **             | ** ** | ** **             | ** ** | ** **             |       |
| Related parties                              | ** ** | **$**                  | **26,494,091** | ** **             | **$**      | **70,787,304**         | ** ** | $                      | 14,977,726 |   | $ | 15,716,708 |   |
| Incentive funds                              | ** ** | **943,000**            | ** **     | **1,876,037**          | ** ** | (23,003                | )          | 81,714                 |       |
|                                         | ** ** | **27,437,091**         | ** **     | **72,663,341**         | ** ** | 14,954,723             |       | 15,798,422             |       |
|                                         | ** ** | ** **             | ** **     | ** **             | ** ** |                   |       |                   |       |
| COST OF SALES                                | ** ** | ** **             | ** **     | ** **             | ** ** |                   |       |                   |       |
| Related parties                              | ** ** | **(9,238,787**         | **)**          | **(25,561,050**        | **)**      | (7,296,186             | )          | (7,715,786             | )          |
| Other                                        | ** ** | **(5,677,168**         | **)**          | **(17,502,735**        | **)**      | (4,673,904             | )          | (5,242,910             | )          |
|                                         | ** ** | **(14,915,955**        | **)**          | **(43,063,785**        | **)**      | (11,970,090            | )          | (12,958,696            | )          |
|                                         | ** ** | ** **             | ** **     | ** **             | ** ** |                   |       |                   |       |
| GROSS PROFIT                                 | ** ** | **12,521,136**         | ** **     | **29,599,556**         | ** ** | 2,984,633              |       | 2,839,726              |       |
|                                         | ** ** | ** **             | ** **     | ** **             | ** ** |                   |       |                   |       |
| OPERATING  EXPENSES                          | ** ** | ** **             | ** **     | ** **             | ** ** |                   |       |                   |       |
| General, administrative and selling expenses | ** ** | **821,989**            | ** **     | **2,489,255**          | ** ** | 375,277                |       | 422,657                |       |
| Start-up expenses                            | ** ** | **—**             | ** **     | **—**             | ** ** | **—**             |       | 926,057                |       |
|                                         | ** ** | **821,989**            | ** **     | **2,489,255**          | ** ** | 375,277                |       | 1,348,714              |       |
|                                         | ** ** | ** **             | ** **     | ** **             | ** ** |                   |       |                   |       |
| INCOME (LOSS)  FROM OPERATIONS               | ** ** | **11,699,147**         | ** **     | **27,110,301**         | ** ** | 2,609,356              |       | 1,491,012              |       |
|                                         | ** ** | ** **             | ** **     | ** **             | ** ** |                   |       |                   |       |
| OTHER INCOME  (EXPENSE)                      | ** ** | ** **             | ** **     | ** **             | ** ** |                   |       |                   |       |
| Interest income                              | ** ** | **1,017,204**          | ** **     | **2,803,048**          | ** ** | 25,024                 |       | 25,906                 |       |
| Interest expense                             | ** ** | **(409,614**           | **)**          | **(1,533,033**         | **)**      | (1,177,132             | )          | (1,222,550             | )          |
| Plant lease interest expense                 | ** ** | **(978,596**           | **)**          | **(2,706,148**         | **)**      | 0                      |       | 0                      |       |
| Other income                                 | ** ** | **232**                | ** **     | **968**                | ** ** | **—**             |       | 2,200                  |       |
|                                         | ** ** | **(370,774**           | **)**          | **(1,435,165**         | **)**      | (1,152,108             | )          | (1,194,444             | )          |
|                                         | ** ** | ** **             | ** **     | ** **             | ** ** |                   |       |                   |       |
| NET INCOME                                   | ** ** | **$**                  | **11,328,373** | ** **             | **$**      | **25,675,136**         | ** ** | $                      | 1,457,248  |   | $ | 296,568 |   |
|                                         | ** ** | ** **             | ** **     | ** **             | ** ** |                   |       |                   |       |
| BASIC AND  DILUTED                           | ** ** | ** **             | ** **     | ** **             | ** ** |                   |       |                   |       |
| BASIC INCOME PER UNIT                        | ** ** | **$**                  | **517**        | ** **             | **$**      | **1,172**              | ** ** | $                      | 65         |   | $ | 14 |   |
|                                         | ** ** | ** **             | ** **     | ** **             | ** ** |                   |       |                   |       |
| DILUTED INCOME PER UNIT                      | ** ** | **$**                  | **517**        | ** **             | **$**      | **1,172**              | ** ** | $                      | 63         |   | $ | 14 |   |
|                                         | ** ** | ** **             | ** **     | ** **             | ** ** |                   |       |                   |       |
| WEIGHTED AVERAGE  UNITS OUTSTANDING          | ** ** | ** **             | ** **     | ** **             | ** ** |                   |       |                   |       |
| BASIC                                        | ** ** | **21,898**             | ** **     | **21,898**             | ** ** | 22,568                 |       | 21,500                 |       |
|                                         | ** ** | ** **             | ** **     | ** **             | ** ** |                   |       |                   |       |
| DILUTED                                      | ** ** | **21,898**             | ** **     | **21,898**             | ** ** | 23,180                 |       | 21,294                 |       |

** **

See Notes to UnauditedFinancial Statements

5

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EAST KANSAS AGRI-ENERGY, LLC STATEMENT OF CASH FLOWS (UNAUDITED)

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| ** **                                                                  | ** ** | **Nine Months**   | ** **     | **Nine Months**   | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|----------------|------------------------|------------|
| ** **                                                                  | ** ** | **Ended**              | ** **     | **Ended**              | ** ** |
| ** **                                                                  | ** ** | **September 30,** | ** **     | **September 30,** | ** ** |
| ** **                                                                  | ** ** | **2006**               | ** **     | **2005**               | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES                                       |       | ** **             |           |                   |       |
| Net income                                                                  |       | **$**                  | **25,675,136** |                   | $          | 296,568 |   |
| Adjustments to  reconcile net loss to net cash used in operating activities |       | ** **             |           |                   |       |
| Depreciation                                                                |       | **2,334,983**          |           | 881,889                |       |
| Amortization                                                                |       | **69,680**             |           | 1,635                  |       |
| (Increase)  decrease in current assets                                      |       | ** **             |           |                   |       |
| Accounts  receivable                                                        |       | **(1,207,934**         | )              | (2,564,686             | )          |
| Inventory                                                                   |       | **54,160**             |           | (1,230,463             | )          |
| Commodity  contracts                                                        |       | **(114,160**           | )              | (380,539               | )          |
| Grants  receivable                                                          |       | **—**             |           | 54,906                 |       |
| Prepaid expense                                                             |       | **180,725**            |           | (539,222               | )          |
| Interest  receivable                                                        |       | **(975,367**           | )              | —                 |       |
| Increase  (decrease) in current liabilities:                                |       | ** **             |           |                   |       |
| Accounts payable                                                            |       | **(474,981**           | )              | 911,514                |       |
| Accrued expenses                                                            |       | **1,436,051**          |           | 386,585                |       |
| NET CASH PROVIDED BY  (USED IN) OPERATING ACTIVITIES                        |       | **26,978,293**         |           | (2,181,813             | )          |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                       |       | ** **             |           |                   |       |
| Purchase of  plant and equipment, including construction in progress        |       | **(4,990,526**         | )              | (36,532,924            | )          |
| Proceeds from refund  of prior year plant and equipment cost                |       | **90,207**             |           | —                 |       |
| Purchase of land  and land option payments                                  |       | **—**             |           | (390,000               | )          |
| NET CASH (USED IN)  INVESTING ACTIVITIES                                    |       | **(4,900,319**         | )              | (36,922,924            | )          |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                       |       | ** **             |           |                   |       |
| Cost of raising  capital                                                    |       | **—**             |           | (168,483               | )          |
| Payment of  financing fees                                                  |       | **(24,379**            | )              | (36,351                | )          |
| Proceeds from  refund of financing fees                                     |       | **80,000**             |           | —                 |       |
| Proceeds from  notes payable                                                |       | **—**             |           | 90,000                 |       |
| Repayment of  notes payable                                                 |       | **—**             |           | (90,000                | )          |
| Proceeds from  long-term debt                                               |       | **—**             |           | 25,750,000             |       |
| Repayment of long-term  debt                                                |       | **(8,147,610**         | )              | —                 |       |
| Acquisition of  treasury units                                              |       | **(3,800,000**         | )              | —                 |       |
| Distributions                                                               |       | **(7,773,790**         | )              | —                 |       |
| Capital  contributions                                                      |       | **—**             |           | 10,000,100             |       |
| Redemption of  units converted to a liability                               |       | **—**             |           | (6,250,000             | )          |
| Proceeds from  units subject to redemption                                  |       | **—**             |           | 6,250,000              |       |
| NET CASH PROVIDED BY  (USED IN) FINANCING ACTIVITIES                        |       | **(19,665,779**        | )              | 35,545,266             |       |
| NET INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS                       |       | **2,412,195**          |           | (3,559,471             | )          |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                             |       | **4,569,145**          |           | 6,210,819              |       |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                    |       | **$**                  | **6,981,340**  |                   | $          | 2,651,348 |   |

 

See Notes to UnauditedFinancial Statements

6

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EAST KANSAS AGRI-ENERGY, LLC STATEMENT OF CASH FLOWS (UNAUDITED) (page 2)

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| ** **                                                                | ** ** | **Nine Months**   | ** **    | **Nine Months**   | ** ** |
|---------------------------------------------------------------------------|------------|------------------------|---------------|------------------------|------------|
| ** **                                                                | ** ** | **Ended**              | ** **    | **Ended**              | ** ** |
| ** **                                                                | ** ** | **September 30,** | ** **    | **September 30,** | ** ** |
| ** **                                                                | ** ** | **2006**               | ** **    | **2005**               | ** ** |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION                         |       |                   |          |                   |       |
| Cash paid for interest, net of capitalized interest  of $254,282 for 2005 |       | **$**                  | **3,317,012** |                   | $          | 1,112,155 |   |
|                                                                      |       | ** **             |          |                   |       |
| NON CASH  INVESTING AND FINANCING ACTIVITIES                              |       | ** **             |          |                   |       |
|                                                                      |       | ** **             |          |                   |       |
| Property, plant, and equipment costs incurred                             |       | **$**                  | **949,747**   |                   | $          | 1,009,961 |   |
|                                                                      |       | ** **             |          |                   |       |
| Accrued interest payable capitalized                                      |       | **$**                  | **—**    |                   | $          | 34,164 |   |
|                                                                      |       | ** **             |          |                   |       |
| Restricted cash financed by note payable                                  |       | **$**                  | **—**    |                   | $          | 250,000 |   |
|                                                                      |       | ** **             |          |                   |       |
| Property, plant, and equipment financed by a note  payable                |       | **$**                  | **—**    |                   | $          | 1,760,274 |   |
|                                                                      |       | ** **             |          |                   |       |
| Units subject to redemption converted to a liability                      |       | **$**                  | **—**    |                   | $          | 6,250,000 |   |
|                                                                      |       | ** **             |          |                   |       |
| Cost of raising  capital reclassified to members' equity                  |       | **$**                  | **—**    |                   | $          | 168,483 |   |

 

See Notes to UnauditedFinancial Statements

7

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**EAST KANSAS AGRI-ENERGY, LLC NOTES TO UNAUDITED FINANCIAL STATEMENTS SEPTEMBER 30, 2006**

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**NOTE 1 -**                  SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES

*Nature of Business*

East Kansas Agri-Energy,LLC, (a Kansas limited liability company) located in Garnett, Kansas, wasorganized to own and operate a 35 million gallon ethanol plant withdistribution within the United States. East Kansas Agri-Energy, LLC (theCompany) was formally organized as a limited liability company as of October16, 2001. Prior to that date the Company operated as a general partnership withno formal partnership agreement. The Company began its principal operationsJune 15, 2005.  Prior to that date, theCompany was considered to be in development stage.

*Basis ofAccounting*

The unauditedfinancial statements contained herein have been prepared pursuant to the rulesand regulations of the Securities and Exchange Commission.  Accordingly, they do not include all theinformation and footnotes required by accounting principles generally acceptedin the United States of America.

In the opinion ofmanagement, all adjustments considered necessary for a fair presentation havebeen included in the accompanying financial statements.  The results of operations for the nine monthsended September 30, 2006 and 2005, are not necessarily indicative of the resultsexpected for a full year.

These financialstatements should be read in conjunction with the financial statements andnotes included in the Company’s financial statements for the year endedDecember 31, 2005.

*AccountsReceivable*

Accountsreceivable are presented at face value, net of the allowance for doubtfulaccounts.  The allowance for doubtfulaccounts is established through provisions charged against income and ismaintained at a level believed adequate by management to absorb estimated baddebts based on historical experience and current economic conditions.  Management believes all receivables will becollected and therefore the allowance has been established to be zero atSeptember 30, 2006.

The Company’s policy is to charge simple interest ontrade receivables past due balances; accrual of interest is discontinued whenmanagement believes collection is doubtful. Receivables are considered past due based upon payment terms set forthat the date of the related sale.  TheCompany has no receivables accruing interest at September 30, 2006.

*PrepaidOffering Costs*

Costs incurredrelated to the sale of units are recorded as prepaid offering costs until therelated units are issued. Upon issuance of units, offering costs are deductedfrom additional paid-in capital, with any remaining amount applied to retainedearnings.  Offering costs include directcosts related to the offering such as legal fees, cost of meetings andmaterials and related costs associated with the Company’s private offering andpublic offering.

*Financing Costs*

Costs incurred related to origination of debt financing are recorded asan asset and amortized over the expected term of the debt.

*Estimates*

Management usesestimates and assumptions in preparing financial statements. Those estimatesand assumptions affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities at the date of the financialstatements, and the reported amounts of revenues and expenses. Actual resultscould differ from the estimates used.

8

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**EAST KANSAS AGRI-ENERGY, LLC NOTES TO UNAUDITED FINANCIAL STATEMENTS SEPTEMBER 30, 2006**

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*Earnings Per Unit*

Earnings per unitare calculated based on the period of time units have been issued andoutstanding. For purposes of calculating diluted earnings per capital unit,units subscribed for but not issued are included in the computation ofoutstanding capital units.

*General,administrative and selling expenses*

The primary components of general and administrative expenses aremanagement fees, insurance expense, selling expenses and payroll.

*RevenueRecognition*

Revenue from the production of ethanol and related products is recordedupon transfer of title to our customers. The transfer takes place at the plant site and therefore shipping termsare FOB shipping point.  Interest incomeis recognized as earned.  Income fromfederal and state incentives are recognized when received due to uncertainty ofavailable funds and pro-rations used by the sponsoring organizations.

*Costof Sales*

The primary components of cost of sales from the production of ethanoland related products are grain expense, energy expense (natural gas and electricity),raw materials expense (chemicals and denaturant), labor and depreciation onprocess equipment.

*Shippingand Handling*

Shipping and handling costs are expensed as incurred and are includedin the cost of sales.

*Organizationand Start-up Costs*

Organizational and start-up costs are expensed as incurred.  Organizational costs consist of amountsrelated to the formation of the company. Start-up costs consist of amounts incurred during the development stagerelated to the operation and management of the Company, which do not qualify ascapitalized costs.

*IncomeTaxes*

The Company is organized as a limited liability company under state lawand is treated as a partnership for income tax purposes.  Under this type of organization, the Company’searnings pass through to the partners and are taxed at the partner level.  Accordingly, no income tax provision has beencalculated.  Differences betweenfinancial statement basis of assets and tax basis of assets is related tocapitalization and amortization of organizational and start-up costs for taxpurposes, whereas these costs are expensed for financial statement purposes,and the difference between the recorded amounts of financial statement and taxdepreciation, unrealized gains or losses on commodity contracts and incentiveprograms payments.

*CashEquivalents*

For purposes of the statement of cash flows, the Company considers allhighly liquid debt instruments purchased with an original maturity of threemonths or less to be cash equivalents.

*FairValue of Financial Instruments*

The Company believes the carrying value of cash and cash equivalentsapproximates fair value due to the short maturity of these instruments.  The Company estimates the fair market valueof the investment in Industrial Revenue Bonds to approximate cost.

9

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**EAST KANSAS AGRI-ENERGY, LLC NOTES TO UNAUDITED FINANCIAL STATEMENTS SEPTEMBER 30, 2006**

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The Company believes the carrying amount of long-term note payableobligations approximates fair value.  Forthe permanent financing, fair value approximates the carrying amount due to thevariable interest rate feature of the debt.

*Inventory*

Inventory is stated atthe lower of cost, determined on a first in, first out basis, or market value.

*Investmentin Commodity Contracts*

SFAS No. 133 requires a company to evaluate itscontracts to determine whether the contracts are derivatives. Certain contractsthat literally meet the definition of a derivative may be exempted from SFASNo. 133 as normal purchases or normal sales. Normal purchases and normal salesare contracts that provide for the purchase or sale of something other than afinancial instrument or derivative instrument that will be delivered inquantities expected to be used or sold over a reasonable period in the normalcourse of business. Contracts that meet the requirements of normal aredocumented as normal and exempted from the accounting and reportingrequirements of SFAS No. 133.

The Company enters into short-term cash grain, optionand futures contracts as a means of securing grain for the ethanol plant andmanaging exposure to changes in commodity prices. All derivatives are designatedas non-hedge derivatives. Although the contracts are effective economic hedgesof specified risks, they are not designated as and accounted for as hedginginstruments.

As part of itstrading activity, the Company uses futures and option contracts offered throughregulated commodity exchanges to reduce risk and is exposed to risk of loss inthe market value of inventories. To reduce that risk, the Company generallytakes positions using cash and futures contracts and options. During theperiods ended September 30, 2006 and 2005 this activity resulted in net gains(losses) of ($1,214,840) and $78,815, respectively, which are reported in costof sales.

*Propertyand Equipment*

Depreciation is computedover the estimated useful life of each asset using the straight-linemethod.  Estimated useful lives generallyused in computing depreciation are:

| Land improvements        |   | 15 to 20 years |
|--------------------------|--------|----------------|
| Buildings                |   | 40 years       |
| Machinery and  equipment |   | 7 to 15 years  |
| Office equipment         |   | 5 to 10 years  |
| Computers and  software  |   | 3 to 5 years   |
| Vehicles                 |   | 5 years        |

 

The Company’sproperty and equipment were acquired under lease agreements pursuant to anindustrial revenue bond issue.  TheCompany is required to make semi-annual deposits with the Trustee sufficient toservice the principal maturities and interest requirements.  Title to the property will be transferred tothe Company when the lease is terminated upon retirement of the bonds.  Accordingly, the bonds have been recorded asa direct obligation of the Company.  TheCompany is also the holder of the bonds.

The Companyreviews its property and equipment for impairment whenever events indicate thatthe carrying amount of the asset may not be recoverable.  An impairment loss is recorded if the sum ofthe future cash flows is less than the carrying amount of the asset.  The amount of the loss is determined bycomparing the fair market value of the asset to the carrying amount of theasset.  Such assessments did not resultin any adjustment to the value of the non-current assets.

10

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**EAST KANSAS AGRI-ENERGY, LLC NOTES TO UNAUDITED FINANCIAL STATEMENTS SEPTEMBER 30, 2006**

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*IdleProperty*

The Company hasincurred $2,332,575 of costs related to the preliminary construction of a railspur project.  The Company does notcurrently have an estimate of when and if the project is going to be completed.  Accordingly, the costs have been reclassifiedas idle property as of September 30, 2006. The Company plans to continue to evaluate the status of this project infuture periods.

*EnvironmentalLiabilities*

The Company’s operations are subject to federal, state and local environmentallaws and regulations.  These laws requirethe Company to investigate and remediate the effects of the release or disposalof materials at its location. Accordingly, the Company has adopted policies, practices and proceduresin the areas of pollution control, occupational health, and the production,handling, storage and use of hazardous materials to prevent materialenvironmental or other damage; and to limit the financial liability which couldresult from such events.  Environmentalliabilities are recorded when the liability is probable and the costs can bereasonably estimated.

**NOTE 2 -**                  INCENTIVE PAYMENTS

The Company has qualified for the federal U.S.Department of Agriculture Bio Energy Program. The federal program is managed by the Commodity Credit Corporation andis designed to expand the production of fuel grade ethanol by offeringincentives for incremental production compared to the same quarter of the prioryear.  The annually funded program runsthrough fiscal year 2006 and incentive payments are pro-rated if applicationsfor incentives exceed the annual funding. The maximum annual incentive program payments the Company can receive is$7,500,000; individual producers are also subject to an annual limitation of 5%of the total funding.  The Company hasincluded federal incentives of $726,116 and $81,714 in revenue for the ninemonths ended September 30, 2006 and 2005, respectively.

The Company has been approved for the Kansas QualifiedAgricultural Ethanol Producer Incentive Fund. The incentive rate is $.075 per gallon of ethanol produced.  The Company must establish they have produced5,000,000 gallons of ethanol before the State of Kansas will disburse thefunds.  The Company has included stateincentives of $1,149,921 and $0 in revenue for the nine months ended September30, 2006 and 2005, respectively.

**NOTE 3 -**                  INVENTORY

As of September 30, 2006,inventory consists of:

| Raw Material       |   | $       | 984,699   |   |
|--------------------|--------|---------|-----------|--------|
| Work in Progres  s |   | 360,610 |      |
| Finis hed Goods    |   | 196,078 |      |
|               |   | $       | 1,541,387 |   |

 

**NOTE 4 -**                  UNITS SUBJECT TOREDEMPTION

On October 11, 2004, the Company executed a UnitPurchase and Redemption Agreement with ICM, Inc. and Fagen, Inc. in which theCompany agreed to issue a total of 6,250 units to them in exchange for their combinedcapital contribution of $6,250,000. The Company also agreed to redeem all 6,250units from ICM, Inc. and Fagen, Inc. using the proceeds from the sale of unitsin a future registered offering or, to the extent the future offering isunsuccessful, from cash flow generated by operations subject to certain loancovenants, restrictions and tax distributions. The redemption price was $1,100per unit.  In connection with thiscapital contribution, the Company amended the Operating Agreement to allow ICM,Inc. and Fagen, Inc. to appoint a total of three directors to the Company’sboard of directors, subject to the Company’s ability to terminate one of theirdirector positions for every $2,000,000 dollars in redemption payments made toeither or both of ICM, Inc. and Fagen, Inc. On January 19, 2005, the Companyclosed on the purchase of these units by ICM, Inc. and Fagen, Inc. and issued3,125 units to 

11

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**EAST KANSAS AGRI-ENERGY, LLC NOTES TO UNAUDITED FINANCIAL STATEMENTS SEPTEMBER 30, 2006**

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Fagen, Inc. and 3,125 units to ICM, Inc. at a purchaseprice of $1,000 per unit. The purchases were made with cash and the totalamount of cash consideration for those securities was $6,250,000.  On August 1, 2005, the Company redeemed the6,250 units from ICM, Inc. and Fagen, Inc. at a price of $1,100 per unit for atotal of $6,875,000.

On December 16, 2004, the Company filed a registrationstatement on Form SB-2 (Commission File 333-121323) with pre-effectiveamendments to the registration statement on February 1, 2005, April 6, 2005 andApril 19, 2005, which became effective April 20, 2005.

The Company accepted units for an aggregate price of$10,000,100 and used the proceeds of the registered offering to redeem theunits from ICM, Inc. and Fagen, Inc. in accordance with the agreement andretained the balance of the proceeds for working capital.  The $6,250,000 of equity associated with theunits subject to redemption was converted to a liability.  Interest expense of $625,000 was recorded forthe year ended December 31, 2005 when the liability was paid.

**NOTE 5 -**                  LONG-TERM DEBT

On November 23, 2004, the Company entered into aCredit Agreement with Home Federal Savings Bank, establishing a constructionloan facility for the construction of a 35 million gallon per year ethanolplant. The construction financing is in the amount of $26,000,000 consisting ofa $21,000,000 conventional term loan and a $5,000,000 loan potentiallyguaranteed 80% by the USDA, and is secured by substantially all of our assets.

During the construction phase, the Company mademonthly payments of interest only at a variable interest rate equal to primeplus 1.75% with a floor of 6%. On September 20, 2005, following constructioncompletion, the loan was segmented into two loans (1) a $5,000,000 loan(Loan A), and (2) a $21,000,000 conventional term loan (Loan B). The $5,000,000loan has an amortization period and maturity date of 10 years. The Companymakes monthly payments of principal and interest on the $5,000,000 loan at ainterest rate of prime.  The $21,000,000conventional loan has an amortization period of ten years but will mature at theend of five years. The Company makes monthly payments of principal and intereston the $21,000,000 loan at a rate equal to prime.  The effective interest rate for both loans atSeptember 30, 2006 was 8.25%.

The Company pays a $30,000 annual administration feerelated to the credit facility.  This feehas been reduced to $20,000, beginning with the payment due in December of2006.  The credit facility is secured bya mortgage on our real property and a security interest in all personal andintangible assets of the Company, including assignment of all materialcontracts.

The $5,000,000loan imposes a prepayment penalty depending on the year of refinancing startingwith the 5% penalty in year one and decreasing to 1% in year five. The$21,000,000 conventional loan imposes a prepayment penalty starting with a 3%penalty in year one and decreasing to 1% in year three.

On May 4, 2006,the Company agreed to renegotiate terms of their bank financing.  The new terms provide for a $4,000,000 termrevolving loan in addition to the existing term loans.  The interest rate on the term revolving loanis the prime rate.  The term revolvingloan available credit balance is reduced by $400,000 annually beginningDecember 31, 2007 and matures on October 1, 2010.

During the term of the loan, all deposit accountsrelated to the Company must be maintained at Home Federal Savings Bank. TheCompany is subject to certain financial loan covenants consisting of minimumworking capital, minimum fixed charge coverage, minimum current ratio, minimumdebt service, minimum net worth and maximum debt to net worth covenants duringthe term of the loan. The Company is also prohibited from making distributionsto their members; however, the Company is allowed to distribute 50% of our netincome to our members after our lender has received audited financialstatements for the fiscal year. If the Company meets certain financial ratiorequirements, it may distribute an additional 10% of net income.  The Company must be in compliance with allfinancial ratio requirements and loan covenants before and after anydistributions to the members.  The lendertemporarily waived, through December 31, 2006, certain minimum net worth andmaximum debt to net worth 

12

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**EAST KANSAS AGRI-ENERGY, LLC NOTES TO UNAUDITED FINANCIAL STATEMENTS SEPTEMBER 30, 2006**

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covenants.  Withthe waiver, the Company is in compliance with the applicable loan covenants asof September 30, 2006.

The Company isonly allowed to make annual capital expenditures up to $500,000 annuallywithout the lender’s prior approval. During the term of the loan, the Companyis required to pay to the lender an annual amount equal to the greater of: 1)75% of any Commodity Credit Corporation Bio-Energy income payments receivedduring the year, or 2) 25% of the Company’s free cash flow for each year.Payments consisting of USDA Commodity Credit Corporation Bio-Energy income mustbe paid to the lender within 15 days of receipt of any such payments. Thesepayments will continue until an aggregate sum of $7,500,000 has been receivedby the lender.  The Company is incompliance with the applicable loan covenants as of September 30, 2006.

On May 10, 2005 the Company entered into a contractwith ICM, Inc. to purchase a steam turbine electric generator for$1,760,274.  The note is payable inquarterly installments of $146,689.50 plus interest at a variable rate of primeplus 1%, starting October 1, 2005 and maturing July 1, 2008.  The variable interest rate will be adjustedquarterly on the first day of January, April, July and October.  The note was paid in full on March 1, 2006.

The Company financed its waste water reuse facilitythrough two bond issues by the City of Garnett. The Utility System Revenue Bonds require annual principal paymentsbeginning on October 1, 2006 and continue through 2015.  Interest payments on these bonds are duesemi-annually, at interest rates ranging from 4.6% to 5.2%.  The first interest payment was due April 1,2006.  The Community Development BlockGrant (CDBG) Bonds require semi-annual principal and interest paymentsbeginning on July 1, 2006 and continue through 2015.  The bonds have a fixed interest rate of 2%

Long-termobligations of the Company are summarized as follows at September 30, 2006:

| Loan B                        |   | $     | 14,516,974 |   |
|-------------------------------|--------|------------|------------|--------|
| Loan A                        |   | 3,463,368  |       |
| Utility System  Revenue Bonds |   | 485,000    |       |
| CDBG Bonds                    |   | 340,920    |       |
| Less current portion          |   | (3,249,408 | )          |
| Long-term  portion            |   | $          | 15,556,854 |   |

 

The estimatedmaturities of long-term debt at September 30, 2006, are as follows:

| 12 Month Period Ending 9/30 | ** ** | **Amount** | ** ** |
|-------------------------------------------------|------------|------------|------------|
| 2007                                            |       | $          | 3,249,408  |   |
| 2008                                            |       | 2,927,655  |       |
| 2009                                            |       | 3,177,338  |       |
| 2010                                            |       | 7,708,375  |       |
| 2011                                            |       | 736,871    |       |
| Thereafter                                      |       | 1,006,615  |       |
|                                            |       | $          | 18,806,262 |   |

 

**NOTE 6 -**                  MEMBERS’ EQUITY

As specified inthe Company’s Operating Agreement, voting rights are one vote for each votingunit registered in the name of such Member as shown on the MembershipRegistration maintained by the Company. No Member shall directly or indirectlyown or control more than 25% of the issued and outstanding voting membershipinterest in the Company at any time.

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**EAST KANSAS AGRI-ENERGY, LLC NOTES TO UNAUDITED FINANCIAL STATEMENTS SEPTEMBER 30, 2006**

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Income and lossesof the Company shall be allocated among the Members in proportion to eachMember’s respective percentage of units when compared with the total Unitsissued.

The Company’s cashflow shall first be applied to the payment of the Company’s operating expenses(including debt service) and then to maintenance of adequate cash reserves asdetermined by the board of directors in its sole discretion, and then shall bedistributed from time to time to the Members in proportion to their respectivepercentage units. No member has the right to demand and receive anydistribution from the Company other than in cash. No distribution shall be madeif, as a result thereof, the Company would be in violation of any loanagreement, and of if the Company would be in violation of any loan agreement,of if the Company’s total assets would be less than the sum of its totalliabilities.

Transfer,disposition or encumbrance of Capital Units is subject to certain restrictions,including approval by the board of directors.

The Companycompleted its second public offering and escrow was broken in July 2005.  A total of 9,091 units were subscribed andpaid for during the year ended December 31, 2005.  Uponissuance of the units related to the second public offering, costs related tothe issuance of the units of $168,453 was charged to members’ equity.

The board ofdirectors approved the redemption of 1,900 units from a member.  The redemption represents the member’s entireunit balance.  On May 10, 2006, theCompany purchased the member’s units for a total of $3,800,000.

On July 28, 2006,the Company made an initial dividend distribution to its members in the amountof $196 per share, for a total payment of $4,292,008.  On August 28, 2006, the Company made anadditional dividend distribution to its members in the amount of $159 pershare, for a total payment of $3,481,782.

**NOTE 7 -**                  CONCENTRATION OFCREDIT RISK

The Companymaintains cash balances at five financial institutions in its trade area. Theaccounts are secured by the Federal Deposit Insurance Corporation up to$100,000. At times, the Company’s bank balance may exceed $100,000.

**NOTE 8 -**                  COMMITMENTS ANDCONTINGENCIES

On November 12, 2004, the Company entered into aTrading Agreement with United Bio Energy Trading, LLC, an affiliated relatedparty, in which United Bio Energy Trading, LLC will provide market informationand consulting services for the Company. The Company anticipates that the termof the agreement will be for at least five years and will pay a monthly fee of$6,000.

On November 12,2004, the Company entered into a Distillers Grains Marketing Agreement withUnited Bio Energy Ingredients, LLC, an affiliated related party, pursuant towhich United Bio Energy Ingredients, LLC will purchase all dried and wet distillersgrains produced at the plant for a term of at least five years at a price of98% of the FOB plant price United Bio Energy Ingredients, LLC charges itsbuyers of dried distillers grains, and 95% of the FOB plant price United BioEnergy Ingredients, LLC charges its buyers of wet distillers grains. United BioEnergy Ingredients, LLC, will use its best efforts to achieve the highestresale price available under prevailing market conditions. The Company isresponsible for supplying all labor and equipment to load or unload trucks orrail cars without charge to United Bio Energy Ingredients, LLC and is requiredto provide storage for at least 10 days production of wet and dry distillergrains. In addition, the distiller grains must meet quality requirements sothat they will meet current industry standards for primary animal feedingredients. If the Company fails to supply distiller grains that comply withindustry standards, United Bio Energy Ingredients, LLC may reject them.  The Company paid commissions of $235,583 and$52,382, respectively, for the nine months ended September 30, 2006 and 2005related to this marketing agreement.

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**EAST KANSAS AGRI-ENERGY, LLC NOTES TO UNAUDITED FINANCIAL STATEMENTS SEPTEMBER 30, 2006**

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On November 12,2004, the Company entered into a Raw Grains Agreement with United Bio EnergyIngredients, LLC, an affiliated related party. The Raw Grains Agreementprovides for the Company to purchase all raw grains necessary for ethanolproduction from United Bio Energy Ingredients, LLC for a period of at leastfive years. Pursuant to the agreement, United Bio Energy Ingredients, LLC willuse its best efforts to arrange for the purchase of grain at the lowest priceavailable under prevailing market conditions and we will supply all labor andequipment necessary to load or unload trucks or rail cars. For its service, theCompany will pay United Bio Energy Ingredients, LLC the actual cash procurementprice and all reasonable and necessary expenses to get the grain to the plantplus a $.02 per bushel fee. The title, risk of loss, and responsibility for thequality of grain will transfer to the Company when it unloads the grain at theplant. Prior to that time, United Bio Energy Ingredients, LLC will bear therisk of loss. All grain delivered to the plant shall meet certain qualitystandards and the Company will have the option to reduce the price the Companywill pay or fully reject any delivery that fails to conform to these standards,depending upon the severity of the noncompliance.  For the nine months ended September 30, 2006and 2005, the Company paid $215,526 and $73,767, respectively, in brokeragefees for grain purchases made under this agreement.

On November 12, 2004, the Company also entered into anEthanol Agreement with United Bio Energy Fuels, LLC, an affiliated relatedparty. The terms of the agreement provide that United Bio Energy Fuels, LLCwill market all fuel-grade ethanol produced at our plant. In exchange, theCompany agrees to pay United Bio Energy Fuels, LLC a fee of $.01 for eachgallon of ethanol produced at the Company’s plant during the term of theagreement. The Company expects that the term of the agreement will be at least5 years. United Bio Energy Fuels, LLC also agreed to use its best efforts toobtain the highest price for ethanol available under prevailing marketconditions.  For the nine months endedSeptember 30, 2006 and 2005, the Company paid $302,804 and $93,877,respectively, in marketing fees for ethanol marketing under this agreement.

On November 12, 2004, the Company entered into aManagement Agreement with United Bio Energy Management, LLC, a related party,in which United Bio Energy Management, LLC will supervise and direct thegeneral operations of the plant for an anticipated period of at least fiveyears. United Bio Energy Management, LLC will provide the services of afull-time general manager to the plant. The Company has agreed to compensate United Bio Energy Management, LLCan annual fee of $250,000 for these services payable in monthly installments of$20,833, plus an incentive bonus based on the attainment of certain financialbenchmarks. United Bio Energy Management, LLC will appoint a general manager tobe based on site at our plant, and shall work exclusively for us. In the eventof a dispute, the Management Agreement provides that the Company will firstattempt to amicably settle any dispute or difference privately between UnitedBio Energy Management, LLC and the Company. If the Company cannot resolve thedispute as a result of the discussions, then the Company must submit the matterto non-binding mediation. In the event that the dispute is not settled throughmediation, the matter must be resolved by non-appealable arbitration inaccordance with the rules of the American Arbitration Association as applicablein the State of Kansas. The determination of the arbitrator is expected to befinal and may not be appealed to any court. The prevailing party in anyarbitration proceeding is entitled to recover reasonable attorneys’ fees andexpenses incurred. The agreement commenced during March 2005. For the ninemonths ended September 30, 2006 and 2005, the Company incurred costs of$462,500 and $83,332, respectively, related to this agreement includingreimbursable expenses, of which $89,324 is in related party accounts payable.

The Company has an agreement with the City of Garnett,Kansas to share the cost of certain highway improvements.  The Company paid $133,300 on September 7,2006 and has no future obligation related to this agreement.

On July 28, 2005,the Company entered into an agreement with HDB Construction, Inc. for additionalwork on the railroad spur project not to exceed an amount of $1,567,268.  As of September 30, 2006 costs related to theagreement of $1,567,268 and additional costs related to the project of $298,116had been incurred and paid for.  Thesecosts are included in idle property as of September 30, 2006.

On March 23, 2006,the Company entered into an agreement with Jade Millrights, Inc. forconstruction of a grain bin for $862,000. As of September 30, 2006 costs related to the agreement of $673,923 havebeen incurred and paid for and are included in construction in progress.

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**EAST KANSAS AGRI-ENERGY, LLC NOTES TO UNAUDITED FINANCIAL STATEMENTS SEPTEMBER 30, 2006**

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Due to a builder’sdesign change during construction of the ethanol plant an extra beerwell wasinstalled and remains the property of the design/builder.  The Company has the option to purchase thebeerwell as part of the expansion option in the original design/buildagreement.  If the Company does not electto exercise the expansion option the purchase price will be negotiated at thattime.  On May 10, 2006, an agreement wasreached on a purchase price of $1,800,000 for the additional beerwell.  This amount has been paid for in full as ofSeptember 30, 2006.

The Company hasissued purchase orders in the amount of $322,592 for planned capitalexpenditures.

The following is a schedule of the annual commitments related to theabove agreements.

| 12 months ending September 30, | ** ** |
|----------------------------------------------------|------------|
| ** **                                         | ** ** | ** ** | ** ** |
| 2007                                               |       | $  | 656,400 |   |
| 2008                                               |       | 654,108 |   |
| 2009                                               |       | 654,108 |   |
| 2010                                               |       | 466,275 |   |
| 2011                                               |       | 332,108 |   |
| Thereafter                                         |       | 1,198,386 |   |
|                                               |       |   |   |
|                                               |       | $ | 3,961,385 |   |

 

The Company is involved in various claims arising inthe normal course of business. Management believes that any financial responsibility that may beincurred would not be material and therefore no additional accrual is deemednecessary.

**NOTE 9 -**                  SALE/LEASEBACK TRANSACTION

On December 20, 2005, the Company completed anindustrial revenue bond financing with the City of Garnett, Kansas that willprovide property tax savings for 10 years on the plant site.  As part of the financing, title to the plantsite and improvements have been transferred to the City of Garnett, Kansas, assecurity for the repayment of the bonds, and the Company is leasing back thesite in an amount that is equal to the amount of the principal and interest tobe paid on The City of Garnett, Kansas bonds. Home Federal Savings Bank consented to this transaction, and the bondshave been pledged to Home Federal Savings Bank as security for any obligationsunder the Home Federal Savings Bank Credit Agreement.  As part of the financing, the Company paidthe bond underwriter, Gilmore & Bell, P.C. $40,000.  The maximum principal amount of the bonds is$50,000,000.  The bonds were initiallyissued in the principal amount of $47,866,117, which is the amount of theCompany’s expenditures on the plant as of December 20, 2005.  Additional project costs of $2,133,883 areplanned and are expected to be eligible for submission for the bond trustee foradditional bond issuances.

The $40,000 of financing fees paid to the bondunderwriter and $20,656 of legal and other cost associated with the bondclosing will be amortized over the approximately 10.5 year life of thebonds.  A total of $4,301 of amortizationexpense related to these costs was recognized during the nine months endedSeptember 30, 2006.

From the proceeds of the bond, the Company purchasedthe bonds as an investment.  The Company,as holder of the industrial revenue bonds, is due interest at 8.0% per annumwith interest payable semi-annually on June 1st and December 1st, commencing June 1, 2006.  The interest income is directly offset by thelease payments on the plant.  Both thebond and the corresponding lease have terms commencing December 20, 2005 andterminating on June 1, 2016.  The entireoutstanding principal is due upon termination of the bonds.  The outstanding principal at September 30,2006 was $47,866,117.  The leasequalifies as a capital lease.  Interestincome recognized on the Industrial Revenue Bonds for the nine months endedSeptember 30, 2006 was $2,706,148.  Thisamount is equal to the lease expense of the plant.

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**EAST KANSAS AGRI-ENERGY, LLC NOTES TO UNAUDITED FINANCIAL STATEMENTS SEPTEMBER 30, 2006**

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Future debt servicerequirements on the Industrial Revenue Bonds at September 30, 2006 are asfollows:

| 12 months ending  September 30, | ** ** | **Interest  Rate** | ** ** | **Principal** | ** ** | **Interest** | ** ** | **Total**   | ** ** |
|------------------------------------------------|------------|--------------------|------------|---------------|------------|--------------|------------|-------------|------------|
|                                           |       |               |       |          |       |         |       |        |       |
| 2007                                           |       | 8%                 |       | $             | —     |         | $          | 3,829,289   |       | $ | 3,829,289 |   |
| 2008                                           |       | 8%                 |       | —        |       | 3,829,289    |       | 3,829,289   |       |
| 2009                                           |       | 8%                 |       | —        |       | 3,829,289    |       | 3,829,289   |       |
| 2010                                           |       | 8%                 |       | —        |       | 3,829,289    |       | 3,829,289   |       |
| 2011                                           |       | 8%                 |       | —        |       | 3,829,289    |       | 3,829,289   |       |
| Thereafter                                     |       | 8%                 |       | 47,866,117    |       | 19,146,449   |       | 67,012,566  |       |
|                                           |       |               |       |          |       |         |       |        |       |
| Totals                                         |       |               |       | $             | 47,866,117 |         | $          | 38,292,894  |       | $ | 86,159,011 |   |
|                                           |       |               |       |          |       |         |       |        |       |
| Amount  representing interest                  |       |               |       |          |       |         |       | (38,292,894 | )          |
|                                           |       |               |       |          |       |         |       |        |       |
| Long-Term Obligation                           |       |               |       |          |       |         |       | $           | 47,866,117 |   |

 

**NOTE10 — RETIREMENT PLAN**

During 2005, the Company began a SIMPLE 401(k),Savings Incentive Match Plan for Employees, retirement plan for all eligibleemployees.  All employees are eligible toparticipate in the plan.  The Companymakes a matching contribution of 3% of participants’ eligible wages.  The employees are fully vested uponcontribution to the plan.  The Companymatch for the nine months ended September 30, 2006 and 2005 was $30,767 and $0,respectively.

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**ITEM 2.                  MANAGEMENT’S DISCUSSION ANDANALYSIS AND PLAN OF OPERATION.**

Weprepared the following discussion and analysis to help you better understandour financial condition, changes in our financial condition, and results ofoperations for the three and nine months ended September 30, 2006.  This discussion and analysis should be readin conjunction with the financial statements and notes to financial statementsincluded elsewhere in this report and the information contained in our annualreport on Form 10-KSB for the fiscal year ended December 31, 2005.

**ForwardLooking Statements**

This report contains or incorporates by reference “forward-lookingstatements” that involve future events, our future performance and our expectedfuture operations and actions.  In some cases you can identifyforward-looking statements by the use of words such as “may,” “will,” “should,”“anticipate,” “believe,” “expect,” “plan,” “future,” “intend,” “could,” “estimate,”“predict,” “hope,” “potential,” “continue,” or the negative of these terms orother similar expressions.  These forward-looking statements are only ourpredictions and involve numerous assumptions, risks and uncertainties,including, but not limited to those described in the “Risk Factors” section ofour Annual Report on Form 10-KSB, those listed below and those business risksand factors described elsewhere in this report and our other Securities andExchange Commission filings.
| · |   | Projected growth, overcapacity or contraction in the  ethanol market in which we operate;                                                                                                                                                                                                                                                                                                                                                                       |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | Fluctuations in the price and market for ethanol and  distillers grains;                                                                                                                                                                                                                                                                                                                                                                                        |
| · |   | Changes in plant production capacity, variations in  actual ethanol and distillers grains production from expectations or  technical difficulties in operating the plant;                                                                                                                                                                                                                                                                                       |
| · |   | Availability and costs of products and raw  materials, particularly corn and natural gas;                                                                                                                                                                                                                                                                                                                                                                       |
| · |   | Changes in our business strategy, capital  improvements or development plans for expanding, maintaining or contracting  our presence in the market in which we operate;                                                                                                                                                                                                                                                                                         |
| · |   | Costs of construction and equipment;                                                                                                                                                                                                                                                                                                                                                                                                                            |
| · |   | Our ability to market and our reliance on third  parties to market our products;                                                                                                                                                                                                                                                                                                                                                                                |
| · |   | Our ability to distinguish ourselves from our  current and future competition;                                                                                                                                                                                                                                                                                                                                                                                  |
| · |   | Changes to infrastructure, including 

- expansion of rail capacity, 

- increases in truck fleets capable of transporting ethanol  within localized markets, 

- additional storage facilities for ethanol, expansion of  refining and blending facilities to handle ethanol, 

- growth in service stations equipped to handle ethanol fuels,  and 

- growth in the fleet of flex fuel vehicles capable of using  E85 fuel;                                  |
| · |   | 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; 

- legislation mandating the use of ethanol or other oxygenate  additives; 

- state and federal regulation restricting or banning the use  of MTBE; or 

- environmental laws and regulations that apply to our plant  operations and their enforcement; |
| · |   | Increased competition in the ethanol and oil  industries;                                                                                                                                                                                                                                                                                                                                                                                                       |
| · |   | Fluctuations in US oil consumption and petroleum  prices;                                                                                                                                                                                                                                                                                                                                                                                                       |
| · |   | Changes in general economic conditions or the  occurrence of certain events causing an economic impact in the agriculture,  oil or automobile industries;                                                                                                                                                                                                                                                                                                       |
| · |   | Anticipated trends in our financial condition and  results of operations                                                                                                                                                                                                                                                                                                                                                                                        |
| · |   | Our liability resulting from litigation;                                                                                                                                                                                                                                                                                                                                                                                                                        |
| · |   | Our ability to retain key employees and maintain  labor relations;                                                                                                                                                                                                                                                                                                                                                                                              |
| · |   | Changes and advances in ethanol production  technology; and                                                                                                                                                                                                                                                                                                                                                                                                     |
| · |   | Competition from alternative fuels and alternative  fuel additives.                                                                                                                                                                                                                                                                                                                                                                                             |

 

Our actual results or actions could and likely willdiffer materially from those anticipated in the forward-looking statements formany reasons, including the reasons described in this report.  We are notunder any duty to update the forward-looking statements contained in thisreport.  We cannot guarantee future results, levels of activity, performanceor achievements.  We caution you not to put undue reliance on anyforward-looking statements, which speak only as of the date of thisreport.  You should read this report and the documents that we 

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reference in this report and have filed as exhibits,completely and with the understanding that our actual future results may bematerially different from what we currently expect.  We qualify all of ourforward-looking statements by these cautionary statements.

**Overview**

Since June 2005, wehave been engaged in the production of ethanol and distillers grains.  Our ethanol plant is managed by United BioEnergy Management, LLC, an affiliate of US BioEnergy Corporation of Brookings,South Dakota, which builds and operates biofuel production facilities which maybe in competition with our plant.   Wepurchase all of our corn and milo from United Bio Ingredients, LLC, anotheraffiliate of US BioEnergy Corporation. Our revenues are derived from the sale and distribution of our ethanoland distillers grains, which are sold to United Bio Energy Fuels, LLC (also anaffiliate of US BioEnergy Corporation) and United Bio Energy Ingredients, LLC,respectively, which subsequently markets and sells our products.  The principal markets for ourethanol are regional petroleum terminals located in major population centers inKansas and neighboring states, including such cities as Kansas City, Missouri; Wichita, Kansas; Tulsa,Oklahoma; and St. Louis, Missouri.

Our operating results arelargely driven by the prices at which we sell ethanol and distillers grain andthe costs related to their production.  Historically, the price of ethanolhas fluctuated with the price of petroleum-based products such as unleadedgasoline, heating oil, and crude oil. The price of distillers grains is primarily influenced the price of cornas a substitute livestock feed.  Weexpect these price relationships to continue for the foreseeable future.

Our largest costsof production are corn, natural gas, and manufacturing chemicals.  The cost of corn is largely impacted bygeopolitical supply and demand factors. Natural gas and chemical/denaturant pricing levels are tied directly tothe overall energy sector; crude oil, and unleaded gasoline.

**Resultsof Operations**

Sincewe only became operational in June 2005, our income, production and sales datafor the nine months ended September 30, 2005, are for less than seven month ofoperations and, therefore, do not provide meaningful comparable information tothe first nine months of 2006.  If youundertake your own comparison of nine months ending September 30, 2005 and thenine months ending September 30, 2006, it is important that you keep that inmind.  However, our results from the third fiscal quarter of 2005 should providea reasonable basis for comparison with the results from the third fiscalquarter results of 2006.

The following table shows the results of ouroperations and the percentage of revenues, cost of goods sold, operatingexpenses and other items to total revenues in our statements of operations forthe fiscal quarters ended September 30, 2006 and 2005:

|                                     | ** ** | **September 30, 2006** | ** **     | **September 30, 2005**            | ** ** |
|-------------------------------------|------------|------------------------|----------------|-----------------------------------|------------|
| **Income Statement Data** | ** ** | **Amount**             | ** **     | **% of **

**Revenues** | ** ** | **Amount** | ** ** | **% of **

**Revenues** | ** ** |
| Revenues                            |       | $                      | 27,437,091     |                              | 100.0      | % | $ | 14,954,723 |   | 100.0 | % |
| Cost of Sales                       |       | $                      | 14,915,955     |                              | 54.4       | % | $ | 11,970,090 |   | 79.9 | % |
| Gross Profit                        |       | $                      | 12,521,136     |                              | 45.6       | % | $ | 2,984,633 |   | 19.9 | % |
|                                |       |                   |           |                              |       |   |   |   |   |
| Operating Expenses                  |       | $                      | 821,989        |                              | 3.0        | % | $ | 375,277 |   | 2.5 | % |
| Operating Income                    |       | $                      | 11,699,147     |                              | 42.6       | % | $ | 2,609,356 |   | 17.1 | % |
|                                |       |                   |           |                              |       |   |   |   |   |
| Other Income (Expense)              |       | $                      | (370,774       | )                                 | (1.3       | %) | $ | (1,152,108 | ) | (7.7 | %) |
| **Net Income**                      | ** ** | **$**                  | **11,328,373** | ** **                        | **41.3**   | **%** | **$** | **1,457,248** | ** ** | **9.7** | **%** |

 

Revenues.  Our revenues from operations come from threeprimary sources:  ethanol sales,distillers grain sales and ethanol incentive payments from the United StatesDepartment of Agriculture (USDA) and the State of 

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Kansas.  Thefollowing table shows the sources of our revenues for the fiscal quarters endedSeptember 30, 2006 and 2005:

|                             | ** ** | **September 30, 2006** | ** **     | **September 30, 2005**  | ** ** |
|-----------------------------|------------|------------------------|----------------|-------------------------|------------|
| **Revenue Sources**    | ** ** | **Amount**             | ** **     | **% of  Revenues** | ** ** | **Amount** | ** ** | **% of  Revenues** | ** ** |
| Ethanol Sales               |       | $                      | 23,484,496     |                    | 85.6       | % | $ | 12,819,281 |   | 85.7 | % |
| Distillers Grain Sales      |       | $                      | 3,009,595      |                    | 11.0       | % | $ | 2,158,445 |   | 14.4 | % |
| Ethanol Incentive  Payments |       | $                      | 943,000        |                    | 3.4        | % | $ | (23,003 | ) | (0.1 | )% |
| **Total Revenues**          | ** ** | **$**                  | **27,437,091** | ** **              | **100.0**  | **%** | **$** | **14,954,723** | ** ** | **100.0** | ** ** |

 

The increase in revenues from the three months endedSeptember 30, 2006 compared to the three months ended September 30, 2005 is dueto an increase in ethanol production and an increase in the average price pergallon received.  The average price per gallon of ethanol sold increasedby approximately 53% for the three months ended September 30, 2006 as comparedto the three months ended September 30, 2005. Our production in the third quarter of 2006 was significantly higherthan the same quarter of 2005 due to greater operational knowledge of our plantgained during our first full year of operations and production enhancementsincorporated in the plant during 2006. Revenue from sales of our co-products also increased by 39% for thethree months ended September 30, 2006 over the three months ended September 30,2005, due to the aforementioned increased ethanol production, which resulted inmore tons of distillers feed produced, and a more favorable mix of wet and drydistillers grains sold.

We continued to enjoy very favorable ethanol pricesduring the third quarter of 2006.  Thefavorable market price for ethanol is primarily due to high demand for ethanol,created by a number of factors, including the declining use of MTBE as anoxygenate, and the current price of gasoline. Although the price of gasoline has decreased in the last few months, weexpect revenue generated from sales of ethanol to remain at current levelsthrough the end of our fiscal year due to the increased demand for ethanol as areplacement for MTBE.  However, we cannotguarantee that the price of ethanol will not significantly decrease due tofactors beyond our control.

We received $248,749 from the United States Departmentof Agriculture’s Commodity Credit Corporation Bioenergy Program for the threemonth ending September 30, 2006 compared to an adjustment to incentive incomeof ($23,003) for the same period in 2005. This represents the final payment from the CCC program as a result oftermination of the program on June 30, 2006.

Income from the State ofKansas through the Kansas Qualified Agricultural Ethyl Alcohol Producer’sProgram totaled $694,251 for the three months ended September 30,2006.  East Kansas Agri-Energy, LLC didnot receive a state incentive during the same quarter of 2005.  We do not expect more than minimal payments under this program for theremainder of our 2006 fiscal year.

Cost of Sales.** ** Ourcost of sales as a percentage of revenues were 54.4% and 80.0% for the threemonths ended September 30, 2006 and 2005, respectively.  The percentagedecrease in our cost of sales from period to period is primarily due to theincreased revenues used to calculate the percentage, partially offset by a 7.1%increase in the cost per bushel of corn.

Operating Expenses.  Our operating expenses as a percentage ofrevenues were up slightly compared to the same period in 2005.  Thesepercentages were 3.0% and 2.5% for the three months ended September 30, 2006and 2005, respectively.  The increase isdue primarily to expenses associated with our ongoing operations that were notpresent in the first few months of operation in 2005.  We expect that these expenses will remainconstant and keep in line with sales and production.

Operating Income.  Our income from operations for the threemonths ended September 30, 2006 was 42.6% of revenues compared to 17.5% ofrevenues for the three months ended September 30, 2005.  This was due toincreased revenues and resultant increased gross profit for the three monthsended September 30, 2006, partially offset by higher operating expenses for thesame period.

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Other Income (Expense).  We had other expense of $370,774 for thethree months ended September 30, 2006 compared to other expenses totaling$1,152,108 for the three months ended September 30, 2005.  This change wasprimarily a result of an increase in interest income, as offset by a decreasein interest expense.  Our interest income has increased to $1,017,204 forthe three months ended September 30, 2006 from $25,024 for the three monthsended September 30, 2005.  This increase resulted from the interest incomefrom our participation in the Industrial Revenue Bonds used to abate our advalorem taxes.  Our interest expense decreased to approximately $409,000for the three months ended September 30, 2006 from approximately $1,177,000 forthe three months ended September 30, 2005.  The 2005 interest expenseincluded $625,000 paid to ICM, Inc. and Fagen, Inc. upon the redemption of unitspurchased by both parties.

**Changesin Financial Condition for the Nine Months Ended September 30, 2006**

Thefollowing table highlights the changes in our financial condition for the ninemonths ended September 30, 2006:

|                      | ** ** | **September 30,**

**2006** | ** ** | **December 31,**

**2005** | ** ** |
|----------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Current Assets       |       | $                                | 14,240,869 |                            | $          | 9,766,098 |   |
| Current Liabilities  |       | $                                | 6,042,287  |                            | $          | 4,428,030 |   |
| Long-Term Debt       |       | $                                | 15,556,854 |                            | $          | 23,438,059 |   |
| Members’ Equity |       | $                                | 42,228,521 |                            | $          | 28,127,175 |   |

 

Current Assets.  Current assets totaled $14,240,869 atSeptember 30, 2006 up from $9,766,098 at December 31, 2005.  The changeresulted from increased cash and cash equivalents of $6,981,340 at September30, 2006 compared to $4,569,145 at December 31, 2005.  In addition, our trade accounts receivableincreased to $3,859,480 at September 30, 2006 compared to $2,651,546 atDecember 31, 2005 and our interest receivable increased to $1,290,103 from$412,173 for the same periods respectively.

Current Liabilities.  Current liabilities totaled $6,042,287 atSeptember 30, 2006, up from the $4,428,030 at December 31,2005.  This change is largely due to a decrease in the currentportion of long-term debt which totaled $3,249,408 at September 30, 2006 upfrom $2,615,813 at December 31, 2005 and a decrease in related parties’accounts payable which was $484,914 and $813,775 for the same periods.

Long-Term Debt.  Long-term debt, net of current maturities,totaled $15,556,854 at September 30, 2006, down from $23,438,059 at December31, 2006, due to our regularly scheduled loan payments, reductions to theprincipal amounts due to the free flow cash covenants of our credit agreement,and a reduction required when we renegotiated our credit facility with HomeFederal Savings Bank.

Members’ Equity.  The members’ contributions are$24,707,100.  Retained earnings as of September 30, 2006 is $21,321,421compared to $3,420,075 at December 31, 2005. Total members’ equity as of September 30, 2006, is $42,228,521 up from$28,127,175 at December 31, 2006.

**Liquidityand Capital Resources**

Sincewe only became operational in June 2005, our income, production and sales datafor the nine months ended September 30, 2005, are for less than seven month ofoperations.   Accordingly, we do not have comparable income, production and sales datafor the nine months ended September 30, 2005. Any comparisons between the firstnine months of 2005 and the first nine months of 2006 should be reviewed withthese important distinctions in mind.

Our liquidity needs are primarily met through internallygenerated cash flow.  Our primary uses of cash are cost of sales,operating expenses, debt service and capital expenditures.  The following table shows cash flows for thenine months ended September 30, 2006:

|                                                      | ** ** | **September 30, 2006** | ** **  |
|------------------------------------------------------|------------|----------------------------------|-------------|
| Net cash provided by  (used in) operating activities |       | $                                | 26,978,293  |   |
| Net cash provided by  (used in) investing activities |       | $                                | (4,900,319  | ) |
| Net cash provided by (used in) financing activities  |       | $                                | (19,665,779 | ) |

 

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Cash Flow Provided By Operations*. *Ouroperating activities for the nine months ended September 30, 2006, generated$26,978,293 of net cash flow, which included energy production credits fromfederal and state programs, as discussed above. The net cash from operating activities primarily includes net incomefrom operations adjusted for depreciation and amortization.

Cash Flow Used In Investing Activities*. *We used $4,900,319 of cash for investing activities for the nine months ended September 30, 2006, all of which was used to purchase personal property and equipment for the plant.  Most of the equipment purchases are for infrastructure improvements to optimize the performance of our facility.

We estimate that approximately $5 million in capitalexpenditures will be made in the next twelve months, all of which are expectedto be financed from a portion of cash flows from operations or from cashprovided through a revolving credit agreement with Home Federal Savings Bank.

Cash Flow Used In Financing Activities*.*By far, the largest use of cash during the nine months ended September 30, 2006, was our financing activities, which used $19,665,779 of cash from our debt financing transactions, described below.  We also made approximately $7.8 million in cash distributions to our members during the nine months ended September 30, 2006.

### Short-Term Debt.  We maintain a revolving line of credit with Home Federal Savings Bank of Rochester,Minnesota, to finance short-term working capital requirements.  Under the revolving line of credit, we mayborrow up to a maximum of $4,000,000 through December 31, 2007.  As ofSeptember 30, 2006, there was no outstanding balance on revolving line,although we may access these funds in the future.  Beginning on January 1, 2008, themaximum available credit balance will be reduced by $400,000 each year untilthe revolving line expires.  Interest on the revolving line of credit isat prime, which totaled 8.25% as of September 30, 2006.  The revolving line of credit expires onSeptember 30, 2010 and is payable in full on October 1, 2010.

Long-Term Debt.  Our long-term debt consists of two term loansheld by Home Federal Savings Bank: (1) a $21,000,000 conventional termloan (“Loan A”), and (2) a $5,000,000 term loan (“Loan B”).  As of September 30, 2006, the principalbalance on Loan A was $14,516,974 and the principal balance on the Loan B was$3,463,369.  Loan A and Loan B are payable in monthly installments.  Intereston Loan A and Loan B is at prime, which totaled 8.25% for both loans as of September 30, 2006. Loan A is payablein full on October 1, 2015, and Loan B is payable in full on October 1, 2010.

Industrial Revenue Bonds.  On December 20, 2005, we completed anindustrial revenue bond financing with the City of Garnett, Kansas, which weexpect to provide property tax savings for 10 years on the plant site.  The maximum principal amount of the bonds is$50,000,000, of which $47,866,117 is outstanding as of September 30, 2006.  Additional costs of $2,133,883 are plannedand are expected to be eligible for submission for the bond trustee foradditional bond issuances.  As holder ofthe industrial revenue bonds, we are due interest at 8.0% per annum withinterest payable semi-annually on June 1st and December 1st.  This interest income is directly offset bythe lease payments we pay on the plant. We and the City of Garnett have waived the payment of the lease paymentsand the interest income amounts since they offset; however, they are recordedfor accounting purposes.  Both the bondand the corresponding lease have 10-year terms which expire June 1, 2016.  The entire outstanding principal is due upontermination of the bonds.  Interestincome recognized on bonds for the period ended September 30, 2006, was$1,727,552, which was equal to the lease expense of the plant.

Waste Water BondFinancing.  We financedour waste water reuse facility through two bond issues by the City of Garnett -Utility System Revenue Bonds (“USR Bonds”) and Community Development BlockGrant Bonds (“CDBG Bonds”).  The USRBonds require annual principal payments beginning on October 1, 2006 andcontinue through 2015.  Interest on USR Bonds is at ratesranging from 4.6% to 5.2% and is due semi-annually beginning April 1,2006.  As of September 30, 2006, theoutstanding principal amount of the USR Bonds was $485,000.

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The CDBG Bonds require semi-annual principal andinterest payments beginning on July 1, 2006 and continue through 2015, at afixed interest rate of 2%.  As ofSeptember 30, 2006, the outstanding principal amount of the CDBG Bonds was$340,920.

**Distribution to Unit Holders**

The loan agreement with Home Federal Savings Bank limits distributions to our members; except we may distribute up to 50% of our net income if our lender has received audited financial statements for the fiscal year demonstrating our compliance with all financial ratio requirements and loan covenants before and after any distributions to the members.  We take all of these factors into consideration, in addition to our anticipated cash requirements for future operations, in evaluating the propriety of any future distributions to members.

On August 18, 2006 our board of directors approved atotal cash distribution of $159.00 per membership unit to all unit holders ofrecord as of June 30, 2006 for a total distribution of $3,481,782.  This distribution was paid on August 28,2006.  We expect that this distributionwill not affect our ability to maintain financial covenants and meet operatingcosts.

**Commodity Price Risk Protection**

We seek to minimize therisks from price fluctuations in the prices of raw material inputs and finishedproducts through the use of hedging instruments.  We are using non-hedgederivative accounting for our hedge positions, which means as the currentmarket price of our hedge positions changes, the gains and losses areimmediately recognized in our cost of sales. The immediate recognition of hedging gains and losses under fair valueaccounting can cause net income to be volatile from quarter to quarter due tothe timing of the change in value of the derivative instruments relative to thecost and use of the commodity being hedged. As of September 30, 2006, the fair value of our derivative instrumentsrelating to corn and natural gas are reflected as an asset in the amount of$337,111.

Asof September 30, 2006, we have price protection in place for approximately 55%of our corn needs through December 2006. As we move forward, additional protection may be necessary.  As corn prices move in reaction to markettrends and information, our income statement will be affected depending on theimpact such market movements have on the value of our derivativeinstruments.  Depending on marketmovements, crop prospects and weather, these price protection positions maycause immediate adverse effects, but are expected to produce long-term positivegrowth for East Kansas.

As of September 30, 2006,we do have price protection in place for our natural gas needs in fiscal year2006.  As we move closer to fiscal year2007, we may determine that price protection for natural gas purchases isnecessary to attempt to reduce our susceptibility to price increases.  However, we may not be able to secure naturalgas for prices less than current market price and we may not recover high costsof production resulting from high natural gas prices, which may raise our costsof production and reduce our net income.

**Applicationof Critical Accounting Estimates**

There were nomaterial changes in our accounting estimates during the nine months endedSeptember 30, 2006.

**OffBalance Sheet Arrangements.**

We do not have anyoff-balance sheet arrangements other than those described in the notes to ourFinancial Statements at September 30, 2006 located above in Note 4, describingour unit purchase and redemption transaction with ICM, Inc. and Fagen, Inc.,and Note 9, describing the sale-leaseback transaction with the City of Garnett.

**ITEM 3.                  CONTROLSAND PROCEDURES****.**

Wemaintain disclosure controls and procedures designed to ensure that informationrequired to be disclosed in our reports under the Securities and Exchange Actof 1934 is recorded, processed, summarized and 

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reported withinthe time periods specified in the Securities and Exchange Commission’s rulesand forms. These disclosure controls and procedures include, withoutlimitation, controls and procedures designed to ensure that the informationrequired to be disclosed is accumulated and communicated to management,including our Principal Executive Officer and Principal Financial Officer, toallow for timely decisions regarding required disclosure.   In designing and evaluating the disclosurecontrols and procedures, the Principal Executive Officer and PrincipalFinancial Officer recognize that any controls and procedures, no matter howwell designed and operated, can provide only reasonable assurance of achievingthe desired control objectives, and management is necessarily required to applyjudgment in evaluating the cost-benefit relationship of possible controls andobjectives.

Ourmanagement (including the Principal Executive Officer and Principal FinancialOfficer) has evaluated the effectiveness of our disclosure controls andprocedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as ofthe end of the period covered by this Quarterly Report on Form 10-QSB.  Based on such evaluation, The PrincipalExecutive Officer and Principal Financial Officer have agreed that, as of theend of such period, our disclosure controls and procedures are effective inrecording, processing, summarizing and reporting, on a timely basis,information required to be disclosed by the Company in the reports that itfiles or submits under the Exchange Act.

Ourmanagement (including the Principal Executive Officer and Principal Financial Officer)has reviewed and evaluated any changes in our internal control over financialreporting that occurred as of September 30, 2006 and there has been no changethat has materially affected or is reasonably likely to materially affect ourinternal control over financial reporting.

**PART II— OTHER INFORMATION**

**ITEM 1.                  LEGALPROCEEDINGS.**

None.

**ITEM IA.                RISK FACTORS.**

Therehave been no material changes from the factors discussed in Part I, “Item 1A.Risk Factors” in our Annual Report on Form 10-K for the year ended December 31,2005.  In addition to the otherinformation set forth in this report, you should carefully consider the factorsdiscussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form10-KSB for the year ended December 31, 2005, which could materially affectour business, financial condition or future results. The risks described in ourAnnual Report on Form 10-KSB are not the only risks facing us.  Additional risks and uncertainties not currentlyknown to us or that we currently deem to be immaterial also may materiallyadversely affect our business, financial condition and/or operating results.

**ITEM2.                  UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS.**

None.

**ITEM 3.                  DEFAULTS UPON SENIOR SECURITIES.**

None.

**ITEM 4.                  SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS****.**

None.

**ITEM 5.                  OTHER INFORMATION.**

None.

**ITEM6.  EXHIBITS.**

The following exhibits are filed as part of this report.  Exhibits previously filed are incorporated byreference, as noted.

 

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| Exhibit No. | ** ** | **Exhibit**                                          |
|------------------|------------|------------------------------------------------------|
| 31.1             |       | Certificate  Pursuant to 17 CFR 240.13(a)-14(a)      |
|             |       |                                                 |
| 31.2             |       | Certificate  Pursuant to 17 CFR 240.13(a)-14(a)      |
|             |       |                                                 |
| 32.1             |       | Certificate  Pursuant to 18 U.S.C. Section 1350 |
|             |       |                                                 |
| 32.2             |       | Certificate  Pursuant to 18 U.S.C. Section 1350 |

 

**SIGNATURES**

In accordance with Section 13 or 15(d) ofthe Exchange Act, the registrant caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.
|   |                     | EAST KANSAS  AGRI-ENERGY, LLC                                           |
|--------|--------------------------|-------------------------------------------------------------------------|
|   |                     |                                                                    |
| Date:  |  November  13, 2006 |                                                                    |   |   /s/ William R. Pracht |
|   |                     | William R.  Pracht                                                      |
|   |                     | President  (Principal Executive Officer)                           |
|   |                     |                                                                    |
| Date:  |  November  13, 2006 |                                                                    |   |   /s/ Thomas D. Leitnaker |
|   |                     | Thomas  D. Leitnaker                                               |
|   |                     | Chief Financial  Officer (Principal Financial & Accounting Officer) |

 

 

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