Exhibit 13

KENTUCKY BANCSHARES, INC.

ANNUAL REPORT 2006


Introduction

Kentucky Bank sponsors and co-sponsors many types of community events
throughout our regions. The events in 2006 included the Kentucky Bank High
School Basketball Shootout, Big Brothers Big Sisters Duck Race, various
community picnics, Chamber of Commerce events, grand openings, Wealth
Managements Polo event, and sponsorships at school events in every community.

We are proud to have fifteen banking centers in the eight Kentucky Counties we
serve. Cynthiana, Georgetown, Morehead, N. Middletown, Nicholasville, Paris,
Versailles, Sandy Hook, Wilmore and Winchester make up the communities
Kentucky Bank calls home.

Kentucky Bank increased its service markets by two communities in 2006. Our
new East Kentucky Region includes banking offices in Morehead and Sandy Hook.
To accommodate our growth in Rowan County, we will begin construction in 2007
on another office to serve our Morehead customers.

During 2006 we purchased an additional building in downtown Paris. We will be
remodeling that office and converting it to our downtown lobby to better serve
our customers. This will provide our Bourbon County customers with more
convenient drive-through and parking facilities.

Technology has changed the manner and speed in which the world conducts its
banking. The collection of funds, the movement of actual checks and electronic
transmissions, as well as communication with customers, grows faster by the
moment. We maintain our commitment to be at the forefront of new opportunities
in technology. Online Banking continues to grow as a popular way for our
customers to conduct their banking business.

We strongly believe that whether the customer is served directly or
indirectly, each of us has an obligation to deliver premier service.
Our strategy is such that we want to distinguish ourselves from other
financial institutions by providing excellent service. Throughout this annual
report you will see photos of our employees and directors, certainly our
greatest assets.

At Kentucky Bank we are committed to an ongoing education program.  As an
organization, we can only reach our goals with a committed, intelligent, and
service oriented staff. We have continuing education opportunities readily
available to our employees. Whether they are interested in attending a
graduate school of banking or simply an online education course, we encourage
everyone to gain additional knowledge. By acquiring this knowledge, we feel
that our customers can obtain the product that best meets their financial
needs and we can provide the best in customer service.



Dear Shareholders:

For the year ended December 31, 2006, the assets of your company reached a
year-end record high of $629.5 million, which represents a 9.9% increase over
last year's total assets of $572.7 million.  Loans increased 19.7% to reach
$444.1 million; also a new year-end high.

Deposits grew 8.6% over the prior year to reach a record high of $468.8
million.  Much of that growth, along with growth in the loan area, can be
attributable to not only our natural growth in our current markets, but also
to our merger with Peoples Bank of Morehead and Sandy Hook which took place on
July 7, 2006. Earnings per share, on a diluted basis, were $2.34, an 8.3%
increase over the year ended December 31, 2005.  Net income reached a record
high of $6.5 million, which represented an 11.4% increase over the prior year-
end.  Again, these positive results can be traced to not only our natural
growth in earnings, but also the addition of the earnings contributed by
Peoples Bank.  Our net interest margins continue to be compressed not only as
a result of the flat, if not inverted, yield curve that exists in today's
credit markets, but additionally as a result of the competitive markets in
which we operate.

As was mentioned above, one of our most noteworthy events in 2006 was the
acquisition of Peoples Bancorp, Inc. of Sandy Hook and Morehead.  The
consideration of this transaction was $14 million with 40% in the form of
Kentucky Bancshares, Inc. stock and 60% in the form of cash. We are very
pleased that the accretion to earnings is occurring as anticipated.   I want
to take this time to thank both our employees in Rowan and Elliott Counties,
as well as our operational people here in Paris, for working so hard to make
this transition go as smoothly as possible.

Other recent events of import that took place during 2006 consist of the
purchasing of a lot in northern Jessamine County, on which we intend to build
another full service facility to be operational by the latter part of 2008.
Additionally, we purchased the former Fifth-Third Bank building in downtown
Paris, and we are undertaking the necessary steps to make that facility fully
functional for us in the next few months.  We are also in the process of
expanding our footprint in Rowan County with an additional location to be
added in 2008.

B. Proctor Caudill, Jr., former Chairman and CEO of Peoples Bank, has now
become a member of the Kentucky Bank and Kentucky Bancshares, Inc. boards of
directors.  Also, he has become our Manager of Special Projects, and we look
forward to his contribution not only as a board member, but also as an
employee of the bank.

We wanted to take this opportunity to also recognize two people who have
recently retired from their service at Kentucky Bank. Dr. James Ferrell
retired from our Board of Directors at the end of this year.  Jim has served
on our board since 1980, and his contributions have been significant, and have
by no small measure contributed to the success of the bank and your company.

Hugh Crombie, our Director of Operations, after 43 years of service has
retired from Kentucky Bank.  Hugh started out his work for the bank in 1963 as
an assistant installment loan manager and has worked in various areas of the
department, including our bookkeeping area.  He worked his way up through the
organization over the years, and ultimately brought our bank into the age of
the computer. There are no words to express Hugh's contribution to the growth
and well being of our bank. He will be greatly missed and we wish him nothing
but the best in his retirement years.

We are also pleased to announce that Martha W. Woodford, former Assistant
Director of Operations, has assumed the responsibilities of Director of
Operations.  Martha started with the bank in 1984 in our Audit Department, and
subsequent to that she has worked in our Loan Center, our Customer Service
area, and became manager of our Corporate and Automated Products.  In 2004
Martha became the Assistant Director of Operations in anticipation of Hugh's
retirement.  We are fortunate to have someone with her depth and breadth of
experience, and we look forward to her future contributions to Kentucky Bank.

Additionally, we are pleased to announce the directors for our newly created
Rowan/Elliott Regional Advisory Board. Madonna Weathers is Vice President of
Student Affairs at Morehead State University. G. R. (Sonny) Jones is CFO of St.
Claire Regional Medical Center. Tod Barhorst is the owner of Abner Construction
Company.  Rocky Adkins is Majority Floor Leader of the Kentucky House of
Representatives. We are confident that these community leaders will make
significant contributions to our ongoing success in the Rowan/Elliott region.

We also want to also announce the addition in January 2007 of Edwin S.
Saunier, president of Saunier North American, Inc. to both our bank and
holding company boards.  Ed has been a long time Clark County regional board
member, and has a successful moving and storage business located in
Winchester. Ed has served on various committees within the bank and we very
much look forward to his assuming the duties of bank and holding company
director.

After completing two acquisitions within the last five years, we believe that
this is an opportune time to look at how our bank operates and delivers
customer service. As we continue to grow, a paramount goal of Kentucky Bank is
to ensure that we are able to continue to deliver outstanding customer service
in the markets we serve.  As our mission statement indicates, "Kentucky Bank
will be the premier community financial institution in our markets."  As a
result of that desired goal, we have created a multitude of teams to examine
our operating and administrative processes so that we will be able to continue
to provide our customers the services and products they deserve, while at the
same time providing an appropriate return to our shareholders. We are very
encouraged by the progress of these teams and we look forward to the
successful implementations of the recommendations they offer.

In closing, we want to thank you for investing in Kentucky Bancshares, Inc.
Your confidence in all of us is greatly appreciated, and we will do our best
to enhance the value of your investment.

Sincerely,
/s/Louis Prichard
Louis Prichard
President and CEO
Kentucky Bancshares, Inc.

/s/Buck Woodford
Buckner Woodford
Chairman of the Board
Kentucky Bancshares, Inc.




Financial Highlights...

Kentucky Bancshares, Inc.           2006         2005          2004

Assets ($ thousands)             $ 629,542    $ 572,750     $ 528,544

Net Income ($ thousands)         $   6,486    $   5,820     $   5,762

Per Share Results...

  Earnings (assuming dilution)   $    2.34    $    2.16     $    2.07

  Dividend                       $    1.00    $     .92     $     .84

Annual Meeting
The annual meeting of Kentucky Bancshares, Inc. will be held Friday, May 9,
2007 at 11:00 in the corporate headquarters.

Investor Information
Any individual requesting a copy of the Corporation's 2006 Form 10-K Report may
obtain these by writing to Investor Relations at the Corporate Headquarters.

Shareholder Information...

  Corporate Headquarters
    Kentucky Bancshares, Inc.
    4th and Main Streets
    Paris, Kentucky 40361
    859-987-1795

  Transfer, Registrar and Dividend Agent
    Registrar and Transfer Company
    10 Commerce Drive
    Cranford, New Jersey 07016
    800-368-5948
    rtco.com

  Acquiring Stock

    Kentucky Banchshares common stock is available through your broker of
    Kentucky Bank's Wealth Management Department.  We are listed on the over-
    the-counter board.  Symbol KTYB.OB.




CONSOLIDATED BALANCE SHEETS
                                  December 31


                                                    2006             2005
ASSETS
Cash and due from banks                        $  14,905,672    $  11,456,496
Federal funds sold                                 4,106,000        2,708,000
  Cash and cash equivalents                       19,011,672       14,164,496
Securities available for sale                    127,890,612      160,652,346
Loans                                            444,150,390      370,911,882
  Allowance for loan losses                       (4,991,277)      (4,309,403)
    Net loans                                    439,159,113      366,602,479

Federal Home Loan Bank stock                       6,468,200        5,398,100
Bank premises and equipment, net                  14,327,050       10,701,541
Interest receivable                                5,653,869        3,719,135
Mortgage servicing rights                            745,834          801,501
Goodwill                                          13,116,710        9,110,524
Other intangible assets                            2,058,149          765,885
Other assets                                       1,111,094          834,288

Total assets                                   $ 629,542,303    $ 572,750,295

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
  Non-interest bearing                         $  87,503,263    $  72,192,661
  Time deposits, $100,000 and over                67,255,274       61,597,420
  Other interest bearing                         314,049,382      297,841,297
    Total deposits                               468,807,919      431,631,378
Repurchase agreements and other borrowings        11,326,913       16,837,573
Federal Home Loan Bank advances                   80,030,283       66,748,641
Subordinated debentures                            7,217,000        7,217,000
Interest payable                                   3,682,785        2,714,506
Other liabilities                                  3,196,604        1,054,954
  Total liabilities                              574,261,504      526,204,052

Stockholders' equity
  Preferred stock, 300,000 shares
   authorized and unissued                                 -                -
  Common stock, no par value; 10,000,000
   shares authorized; 2,864,586 and
   2,666,897 shares issued and
   outstanding in 2006 and 2005                   12,474,039        6,812,805
  Additional paid-in capital                          59,375                -
  Retained earnings                               44,061,889       40,666,332
  Accumulated other comprehensive income (loss)   (1,314,504)        (932,894)
    Total stockholders' equity                    55,280,799       46,546,243

Total liabilities and stockholders' equity     $ 629,542,303    $ 572,750,295











                           See Accompanying notes.


                       CONSOLIDATED STATEMENTS OF INCOME
                            Years Ended December 31

                                         2006          2005          2004
Interest income
  Loans, including fees              $ 29,068,728  $ 23,373,434  $ 20,470,306
  Securities
   Taxable                              4,395,404     3,388,793     3,574,235
   Tax exempt                           1,666,382     1,444,090     1,518,275
  Other                                   462,333       690,660       283,196
                                       35,592,847    28,896,977    25,846,012
Interest expense
  Deposits                             12,117,444     8,180,571     5,765,690
  Repurchase agreements and other
   borrowings                           1,162,350       603,812       411,492
  Federal Home Loan Bank advances       2,944,217     2,487,062     2,395,898
  Subordinated debentures                 494,197       494,227       494,052
                                       16,718,208    11,765,672     9,067,132

Net interest income                    18,874,639    17,131,305    16,778,880
Provision for loan losses                 475,000       508,100       840,000
Net interest income after provision
 for loan losses                       18,399,639    16,623,205    15,938,880

Other income
  Service charges                       5,223,973     4,511,270     4,357,658
  Loan service fee income, net             33,020         9,023        (2,993)
  Trust department income                 602,884       458,328       299,448
  Securities gains (losses), net           34,259        64,395       288,950
  Gain on sale of mortgage loans          290,035       333,742       376,157
  Other                                 1,051,765     1,118,289     1,227,614
                                        7,235,936     6,495,047     6,546,834

Other expenses
  Salaries and employee benefits        9,612,798     8,547,607     8,053,306
  Occupancy expenses                    2,320,418     2,194,431     2,255,071
  Amortization                            184,736        95,736       275,490
  Advertising and marketing               519,685       473,848       378,410
  Taxes other than payroll, property
   and income                             537,485       547,509       499,251
  Other                                 3,506,589     3,361,280     3,044,294
                                       16,681,711    15,220,411    14,505,822

Income before income taxes              8,953,864     7,897,841     7,979,892
Provision for income taxes              2,467,810     2,077,741     2,217,783

Net income                            $ 6,486,054   $ 5,820,100   $ 5,762,109

Earnings per share:
  Basic                               $      2.35   $      2.17   $      2.09
  Diluted                                    2.34          2.16          2.07










                           See Accompanying notes.



                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                            Years Ended December 31

                                          2006         2005          2004

Net income                            $ 6,486,054   $ 5,820,100   $ 5,762,109

Other comprehensive income (loss)
   Unrealized gains (losses) on
    securities arising during
    the period                            735,236    (1,839,887)   (1,522,118)
   Reclassification of realized amount    (34,259)      (64,395)     (288,950)
     Net change in unrealized
      gain (loss) on securities           700,977    (1,904,282)   (1,811,068)
   Less:  Tax impact                      238,332      (647,456)     (615,763)

Comprehensive income                  $ 6,948,699   $ 4,563,274   $ 4,566,804













































                           See Accompanying notes.



<TABLE>
<CAPTION>
                              CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                     Years Ended December 31, 2006, 2005 and 2004
                                                                                               Accumulated
                                                                   Additional                     Other          Total
                                           Common Stock              Paid-in      Retained    Comprehensive   Stockholders'
                                        Shares       Amount          Capital      Earnings        Income         Equity

                                  <c>         <c>              <c>         <c>            <c>           <c>
Balances, January 1, 2004            2,799,781   $ 6,984,784      $      -    $ 37,552,620   $ 1,519,237   $ 46,056,641

Common stock issued (including
 employee gifts of 89 shares)            7,019       131,041             -               -             -        131,041
Common stock purchased                (122,302)     (297,161)            -      (3,127,295)            -     (3,424,456)
Net change in unrealized gain (loss)
 on securities available for sale,
 net of tax                                  -             -             -               -    (1,195,305)    (1,195,305)
Net income                                   -             -             -       5,762,109             -      5,762,109
Dividends declared - $.84 per share          -             -             -      (2,303,219)            -     (2,303,219)

Balances, December 31, 2004          2,684,498     6,818,664             -      37,884,215       323,932     45,026,811

Common stock issued (including
 employee gifts of 75 shares)            3,375        47,595             -               -             -         47,595
Common stock purchased                 (20,976)      (53,454)            -        (575,945)            -       (629,399)
Net change in unrealized gain (loss)
 on securities available for sale,
 net of tax                                  -             -             -               -    (1,256,826)    (1,256,826)
Net income                                   -             -             -       5,820,100             -      5,820,100
Dividends declared - $.92 per share          -             -             -      (2,462,038)            -     (2,462,038)

Balances, December 31, 2005          2,666,897     6,812,805             -      40,666,332      (932,894)    46,546,243

Common stock issued including tax
 benefit, net (including
 stock grants of 3,845 shares)          11,754       117,741             -               -             -        117,741
Stock compensation expense                   -             -        59,375               -             -         59,375
Common stock purchased                 (12,901)      (56,385)            -        (322,069)            -       (378,454)
Common stock issued in connection
 with Purchase of Peoples
 Bancorp, Inc.                         198,836     5,599,878             -               -             -      5,599,878
Net change in unrealized gain (loss)
 on securities available for sale,
 net of tax                                  -             -             -               -       462,645        462,645
Adjustment to initially apply
 SFAS No. 158, net of tax (Note 1)           -             -             -               -      (844,255)      (844,255)
Net income                                   -             -             -       6,486,054             -      6,486,054
Dividends declared - $1.00 per share         -             -             -      (2,768,428)            -     (2,768,428)

Balances, December 31, 2006          2,864,586   $12,474,039     $  59,375    $ 44,061,889   $(1,314,504)  $ 55,280,799


</TABLE>



                                      See Accompanying notes.


<TABLE>
<CAPTION>
                         CONSOLIDATED STATEMENTS OF CASH FLOWS
                            Years Ended December 31

                                               2006           2005           2004

                                        <c>            <c>            <c>
Cash flows from operating activities
  Net income                               $  6,486,054   $  5,820,100   $  5,762,109
  Adjustments to reconcile net
   income to net cash from
   operating activities
    Depreciation and amortization             1,313,476      1,174,954      1,419,794
    Provision for loan losses                   475,000        508,100        840,000
    Securities amortization
     (accretion), net                           (14,717)       331,355        635,725
    Securities (gains) losses, net              (34,259)       (64,395)      (288,950)
    Originations of loans held
     for sale                               (17,156,711)   (18,036,701)   (22,065,215)
    Proceeds from sale of loans              17,446,746     18,454,914     30,024,484
    Gain on sale of mortgage loans             (290,035)      (333,742)      (376,157)
    Stock based compensation expense             59,375              -              -
    Federal Home Loan Bank stock
     dividends                                 (342,200)      (261,600)      (206,400)
    Losses (gain) on sale of fixed
     assets                                      (1,100)       (71,045)       (16,722)
  Changes in:
    Interest receivable                      (1,318,246)      (492,656)        23,355
    Other assets                             (1,906,617)       425,569      1,135,547
    Interest payable                            836,125        865,038        213,684
    Other liabilities                           723,683        624,374        942,501
      Net cash from operating activities      6,276,574      9,035,265     18,043,755

Cash flows from investing activities
  Purchases of securities available
   for sale                                 (30,905,332)   (53,539,693)   (70,689,970)
  Proceeds from sales of securities
   available for sale                        42,207,571      1,323,500     37,973,553
  Proceeds from principal payments
   and maturities of securities
   available for sale                        53,343,210     16,159,467     32,581,271
  Cash paid for bank acquisition             (2,841,873)             -              -
  Net change in loans                       (22,106,318)   (13,067,340)   (45,775,823)
  Purchases of bank premises and equipment   (1,540,977)      (758,929)      (948,546)
  Proceeds from sale of bank premises and
   Equipment                                      1,100        581,881        199,722
    Net cash from investing activities       38,157,381    (49,301,114)   (26,659,793)

Cash flows from financing activities
  Net change in deposits                    (35,102,694)    43,676,556      3,356,226
  Net change in repurchase agreements and
   other borrowings                          (9,380,282)    (8,755,271)    18,307,586
  Advances from Federal Home Loan Bank       90,000,000     15,000,000     25,000,000
  Payments on Federal Home Loan
   Bank advances                            (83,074,662)    (7,902,073)   (18,383,678)
  Proceeds from note payable                  8,000,000              -              -
  Payments on note payable                   (7,000,000)             -              -
  Proceeds from issuance of common stock,
   including options and grants, including
   tax benefits                                 117,741         47,595        131,041
  Purchase of common stock                     (378,454)      (629,399)    (3,424,456)
  Dividends paid                             (2,768,428)    (2,462,038)    (2,303,219)
    Net cash from financing activities      (39,586,779)    38,975,370     22,683,500

                           See Accompanying notes.



                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  Years Ended December 31

                                               2006           2005           2004

Net change in cash and cash equivalents    $  4,847,176   $ (1,290,479)  $ (5,932,538)

Cash and cash equivalents at
 beginning of year                           14,164,496     15,454,975     21,387,513

Cash and cash equivalents at end of year   $ 19,011,672   $ 14,164,496   $ 15,454,975

Supplemental disclosures of cash flow information
  Cash paid during the year for:
    Interest expense                       $ 15,749,929   $ 10,900,634   $  8,853,448
    Income taxes                              2,498,021      1,971,443        777,401

Supplemental schedules of non-cash investing
 activities
  Real estate acquired through foreclosure $    396,472   $    391,743   $  1,325,942
  Common stock issued in connection with
   purchase of Peoples Bancorp, Inc.          5,599,878              -              -


</TABLE>






































                           See Accompanying notes.



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation:  The consolidated financial statements include the
accounts of Kentucky Bancshares, Inc. (the Company) and its wholly-owned
subsidiary, Kentucky Bank (the Bank).  Intercompany transactions and balances
have been eliminated in consolidation.  On July 7, 2006, the Company acquired
100% of the outstanding shares of Peoples Bancorp of Sandy Hook, Inc.
(Peoples), parent of Peoples Bank of Sandy Hook and Morehead in Elliott and
Rowan Counties, Kentucky, as discussed in Note 15.

Nature of Operations:  The Bank operates under a state bank charter and
provides full banking services, including trust services, to customers located
in Bourbon, Clark, Elliot, Harrison, Jessamine, Rowan, Scott, Woodford and
adjoining counties in Kentucky.  As a state bank, the Bank is subject to
regulation by the Kentucky Office of Financial Institutions and the Federal
Deposit Insurance Corporation (FDIC).  The Company, a bank holding company, is
regulated by the Federal Reserve.

Estimates in the Financial Statements:  The preparation of financial statements
in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.  The allowance for loan
losses, mortgage servicing rights and fair value of financial instruments are
particularly subject to change.

Cash Flows:  For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, federal funds sold, and certain
short-term investments with maturities of less than three months.  Generally,
federal funds are sold for one-day periods.  Net cash flows are reported for
loan, deposit and short-term borrowing transactions.

Securities:  The Company is required to classify its securities portfolio into
one of three categories:  trading securities, securities available for sale and
securities held to maturity.  Fair value adjustments are made to the securities
based on their classification with the exception of the held to maturity
category.  The Company has no investments classified as trading securities, or
securities held to maturity.  Securities available for sale are carried at fair
value, with unrealized holding gains and losses reported in other
comprehensive income.

Interest income includes amortization of purchase premium or discount.
Premiums and discounts on securities are amortized on the level-yield method
without anticipating prepayments, except for mortgage backed securities where
prepayments are anticipated.  Gains and losses on sales are recorded on the
settlement date and determined using the specific identification method.

Declines in the fair value of securities below their cost that are other than
temporary are reflected as realized losses.  In estimating other than
temporary losses, management considers: (1) the length of time and extent that
fair value has been less than cost, (2) the financial condition and near term
prospects of the issuer, and (3) the Company's ability and intent to hold the
security for a period sufficient to allow for any anticipated recovery in fair
value.

Loans Held for Sale:  Loans held for sale are valued at the lower of cost or
market as determined by outstanding commitments from investors or current
secondary market prices, calculated on the aggregate loan basis.  The Company
also provides for any losses on uncovered commitments to lend or sell.



Loans:  Loans are stated at the amount of unpaid principal, reduced by an
allowance for loan losses.  Interest income on loans is recognized on the
accrual basis except for those loans on a nonaccrual status.  The accrual of
interest on impaired loans is discontinued when management believes, after
consideration of economic and business conditions and collection efforts, that
the borrowers' financial condition is such that collection of interest is
doubtful.  Interest income on mortgage and consumer loans is discontinued at
the time the loan is 90 days delinquent, and interest income on commercial
loans is discontinued at the time the loan is 120 days delinquent, unless the
loan is well-secured and in process of collection.  Past due status is based
on the contractual terms of the loan.  When interest accrual is discontinued,
interest income received on such loans is accounted for on the cash-basis or
cost-recovery method, until qualifying for return to accrual.  Loans are
returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.  Consumer and credit card loans are typically charged off no later
than 120 days past due.  Loans are placed on nonaccrual or charged-off at an
earlier date if collection of principal or interest is considered doubtful.

Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield on the related loan.

Allowance for Loan Losses:  The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries.  Management estimates
the allowance balance required using past loan loss experience, the nature and
volume of the portfolio, information about specific borrower situations and
estimated collateral values, economic conditions, and other factors.
Allocations of the allowance may be made for specific loans, but the entire
allowance is available for any loan that, in management's judgment, should be
charged-off.  Loan losses are charged against the allowance when management
believes the uncollectibility of a loan balance is confirmed.

A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage, consumer, and credit card loans, and on an
individual loan basis for other loans.  If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral.  Large
groups of smaller balance homogeneous loans, such as consumer and residential
real estate loans are collectively evaluated for impairment, and accordingly,
they are not separately identified for impairment disclosures.

Mortgage Servicing Rights:  The Bank has sold certain residential mortgage
loans to the Federal Home Loan Mortgage Corporation (FHLMC) while retaining the
servicing rights.  Gains and losses on sales of mortgage loans are based on
the difference between the selling price and the carrying value of the related
loan sold.  The Bank receives a servicing fee from the FHLMC on each loan sold.
 Servicing rights represent the allocated value of retained servicing rights
on loans sold and the cost of purchased rights.  Servicing assets are expensed
in proportion to, and over the period of, estimated net servicing revenues.
Impairment is evaluated based on the fair value of the assets, using interest
rates, and prepayment characteristics.  Fair value is determined using prices
for similar assets with similar characteristics, when available, or based upon
discounted cash flows using market-based assumptions.  Any impairment of a
grouping is reported as a valuation allowance, to the extent that fair value
is less than the capitalized amount for a grouping.



Federal Home Loan Bank (FHLB) Stock:  The Bank is a member of the FHLB system.
 Members are required to own a certain amount of stock based on the level of
borrowings and other factors, and may invest in additional amounts.  FHLB
stock is carried at cost, classified as a restricted security, and
periodically evaluated for impairment based on ultimate recovery of par value.
 Both cash and stock dividends are reported as income.

Bank Premises and Equipment:  Land is carried at cost.  Bank premises and
equipment are stated at cost less accumulated depreciation.  Buildings and
related components are depreciated using the straight-line method with useful
lives ranging from 5 to 50 years.  Furniture, fixtures and equipment are
depreciated using the straight-line (or accelerated) method with useful lives
ranging from 3 to 10.

Real Estate Acquired Through Foreclosure:  Real estate acquired through
foreclosure is carried at the lower of the recorded investment in the property
or its fair value.  The value of the underlying loan is written down to the
fair value of the real estate to be acquired by a charge to the allowance for
loan losses, if necessary.  Any subsequent write-downs are charged to operating
expenses.  Operating expenses of such properties, net of related income, and
gains and losses on their disposition are included in other expenses.

Repurchase Agreements:  Substantially all repurchase agreement liabilities
represent amounts advanced by various customers.  Securities are pledged to
cover these liabilities, which are not covered by federal deposit insurance.

Stock Compensation:  Effective January 1, 2006, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 123(R), Share-based Payment,
using the modified prospective transition method.  Accordingly, the Company
has recorded stock-based employee compensation cost using the fair value
method starting in 2006.  For 2006, adopting this standard resulted in a
reduction of income before income taxes of $59,375, a reduction in net income
of $39,188, a decrease in both basic and diluted earnings per share of $0.02.

Prior to January 1, 2006, employee compensation expense under stock options
was reported using the intrinsic value method; therefore, no stock-based
compensation cost is reflected in net income for the years ending December 31,
2005 and 2004, as all options granted had an exercise price equal to or
greater than the market price of the underlying common stock at date of grant.



The following table illustrates the effect on net income and earnings per
share if expense was measured using the fair value recognition provisions of
FASB Statement No. 123, Accounting for Stock-Based Compensation, for the years
ending December 31.

                                              2005           2004
Net income
  As reported                             $ 5,820,100    $ 5,762,109
  Deduct:  Stock-based compensation
   expense determined under fair
   value based method                         (56,241)       (42,178)
  Pro forma                                 5,763,859      5,719,931

                                              2005           2004
Basic earnings per share
  As reported                             $      2.17    $      2.09
  Pro forma                                      2.15           2.07

Diluted earnings per share
  As reported                             $      2.16    $      2.07
  Pro forma                                      2.14           2.06

Weighted averages
  Fair value of options granted           $      4.82    $      5.68
  Risk free interest rate                        3.98%          3.86%
  Expected life                                8 years        8 years
  Expected volatility                           15.11%         13.74%
  Expected dividend yield                        3.03%          2.47%

Income Taxes:  Income tax expense is the total of the current year income tax
due or refundable and the change in deferred tax assets and liabilities.  The
Company uses the liability method for computing deferred income taxes.  Under
the liability method, deferred income taxes are based on the change during the
year in the deferred tax liability or asset established for the expected future
tax consequences of differences in the financial reporting and tax bases of
assets and liabilities.

Retirement Plans:  Pension expense is the net of service cost, interest cost,
return on plan assets and amortization of gains and losses not immediately
recognized.  See "Effect of Newly Issued But Not Yet Effective Accounting
Standards" below for further discussion of the effect of adopting FASB
Statement No. 158.  Employee 401(k) and profit sharing plan expense is the
amount of matching contributions.

Goodwill:   Goodwill results from prior business acquisitions and represents
the excess of the purchase price over the fair value of acquired tangible
assets and liabilities and identifiable intangible assets.  Goodwill is
assessed at least annually for impairment and any such impairment will be
recognized in the period identified.

Intangible Assets:  Intangible assets consist of core deposit intangible assets
arising from whole bank and branch acquisitions.  They are initially measured
at fair value and then are amortized on either an accelerated or straight-line
basis, over ten or fifteen years.

Earnings Per Common Share:  Basic earnings per common share is net income
divided by the weighted average number of common shares outstanding during the
period.  Diluted earnings per common share include the dilutive effect of
additional potential common shares issuable under stock options.  Earnings and
dividends per share are restated for all stock splits and dividends through the
date of issuance of the financial statements.



Comprehensive Income:  Comprehensive income consists of net income and other
comprehensive income.  Other comprehensive income includes unrealized gains and
losses on securities available for sale, which are also recognized as a
separate component of equity.

Derivatives:  The Company periodically enters into non-exchange traded
mandatory forward sales contracts in conjunction with its mortgage banking
operation.  These contracts, considered derivatives, typically last 60 to 90
days and are used to offset the risk of interest rate changes between the time
of the commitment to make a loan to a borrower at a stated rate and when the
loan is sold.  These derivatives are carried at fair value.  The Company did
not have any mandatory forward sales contracts at December 31, 2006 and 2005.


Adoption of New Accounting Standards:  Effective January 1, 2006, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 123(R),
Share-based Payment.  See "Stock Compensation" above for further discussion of
the effect of adopting this standard.

FASB Statement No. 158:  In September 2006, the Financial Accounting Standards
Board (FASB) issued SFAS No. 158, Employers' Accounting for Defined Benefit
Pension and Other Postretirement Plans - an amendment of FASB Statements No.
87, 88, 106 and 132(R).  This Statement requires an employer to recognize the
overfunded or underfunded status of a defined benefit postretirement plan
(other than a multiemployer plan) as an asset or liability in its balance
sheet, beginning with year end 2006, and to recognize changes in the funded
status in the year in which the changes occur through comprehensive income
beginning in 2007.  Additionally, defined benefit plan assets and obligations
are to be measured as of the date of the employer's fiscal year-end, starting
in 2008.  Adoption had the following effect on individual line items in the
2006 balance sheet:
<TABLE>
<CAPTION>

                                                Before                           After
                                            Application of                   Application of
                                             SFAS No. 158    Adjustments      SFAS No. 158

                                           <c>               <c>            <c>
  Liability for pension benefits              $    460,511      $ 1,279,174    $  1,739,685
  Deferred income taxes                            813,410         (434,919)        378,491
  Total liabilities                            573,417,249          844,255     574,261,504
  Accumulated other comprehensive income          (470,249)        (844,255)     (1,314,504)
  Total stockholders' equity                    56,125,054         (844,255)     55,280,799
</TABLE>

SAB 108:  In September 2006, the Securities and Exchange Commission (SEC)
released Staff Accounting Bulletin No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements (SAB 108), which is effective for fiscal years ending on or after
November 15, 2006.  SAB 108 provides guidance on how the effects of prior-year
uncorrected financial statement misstatements should be considered in
quantifying a current year misstatement.  SAB 108 requires public companies to
quantify misstatements using both an income statement (rollover) and balance
sheet (iron curtain) approach and evaluate whether either approach results in
a misstatement that, when all relevant quantitative and qualitative factors
are considered, is material.  If prior year errors that had been previously
considered immaterial now are considered material based on either approach, no
restatement is required so long as management properly applied its previous
approach and all relevant facts and circumstances were considered.
Adjustments considered immaterial in prior years under the method previously
used, but now considered material under the dual approach required by SAB 108,
are to be recorded upon initial adoption of SAB 108.  Adoption of this
statement did not materially affect the Company's consolidated financial
position or results of operations.



Newly Issued Not Effective:  New accounting standards have been issued that
the Company does not expect will have a material effect on the financial
statements when adopted in future years or for which the Company has not yet
completed its evaluation of the potential effect upon adoption.  In general,
these standards revise the accounting for derivatives embedded in other
financial instruments for 2007, revise the recognition and accounting for
servicing of financial assets for 2007, establish a hierarchy about the
assumptions used to measure fair value for 2008, change the recognition
threshold and measurement guidance for tax positions that contain significant
uncertainty in 2007, revise the accrual of post-retirement benefits associated
with providing life insurance for 2008, and revise the accounting for cash
surrender value for 2007.

Additionally, a new accounting standard will require the company to record
servicing assets at fair value instead of at allocated cost, and thereafter
will allow the Company to carry new and existing classes of servicing assets
at either fair value or amortized original basis, beginning in 2007.  Adoption
of this standard may increase servicing assets to the extent the Company
elects to apply it to existing classes of servicing assets and to the extent
fair value of servicing exceeds amortized cost.

Operating Segments:  While the Company's chief decision makers monitor the
revenue streams of the various Company products and services, operations are
managed and financial performance is evaluated on a Company-wide basis.
Accordingly, all of the Company's operations are considered by management to be
aggregated into one reportable operating segment.

NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS

Included in cash and due from banks are certain non-interest bearing deposits
that are held at the Federal Reserve or maintained in vault cash in accordance
with average balance requirements specified by the Federal Reserve Board of
Governors.  The reserve requirement at December 31, 2006 and 2005 was $322,000
and $156,000.

NOTE 3 - SECURITIES

Year-end securities available for sale are as follows:

                                        Fair        Unrealized     Unrealized
                                        Value          Gains         Losses

2006
  U. S. government agencies         $  31,492,403   $    93,134   $  (124,991)
  States and municipals                44,129,640       703,114      (181,988)
  Mortgage-backed                      51,981,681             -    (1,218,655)
  Equity securities                       286,888        16,888             -

    Total                           $ 127,890,612   $   813,136   $(1,525,634)

2005
  U. S. Treasury                    $   2,974,354   $         -   $   (32,397)
  U. S. government agencies            67,032,587        14,427      (825,849)
  States and municipals                37,462,770       756,298      (337,944)
  Mortgage-backed                      52,340,502         4,150    (1,309,489)
  Equity securities                       842,133       317,329             -

    Total                           $ 160,652,346   $ 1,092,204   $(2,505,679)

The fair value of securities available for sale at December 31, 2006, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.  Securities not due
at a single maturity are shown separately.

                                                  Fair
                                                  Value

  Due in one year or less                    $  13,955,375
  Due after one year through five years         24,659,350
  Due after five years through ten years        21,759,873
  Due after ten years                           15,247,445
                                                75,622,043
  Mortgage-backed                               51,981,681
  Equity                                           286,888

    Total                                    $ 127,890,612

Proceeds from sales of securities during 2006, 2005 and 2004 were $42,207,571,
$1,323,500 and $37,973,553.  Gross gains of $452,218, $89,943 and $483,888 and
gross losses of $417,959, $25,548 and $194,938, were realized on those sales,
respectively.  The tax provision related to these realized gains and losses was
$11,648, $21,894 and $98,243, respectively.

Securities with an approximate carrying value of $108,120,000 and $122,961,000
at December 31, 2006 and 2005, were pledged to secure public deposits, trust
funds, securities sold under agreements to repurchase and for other purposes as
required or permitted by law.

Securities with unrealized losses at year end 2006 and 2005 not recognized in
income are as follows:

<TABLE>
<CAPTION>
2006
                                  Less than 12 Months        12 Months or More               Total
                                 Fair       Unrealized    Fair        Unrealized      Fair       Unrealized
Description of Securities        Value         Loss       Value          Loss         Value         Loss

                           <c>          <c>           <c>           <c>           <c>           <c>
U.S. Government securities    $ 5,115,257  $    (9,164)  $ 9,795,703   $  (115,827)  $ 14,910,960  $  (124,991)
States and municipals           4,918,106      (15,531)   10,263,653      (166,457)    15,181,759     (181,988)
Mortgage-backed                         -                 40,662,549    (1,218,655)    40,662,549   (1,218,655)

Total temporarily impaired    $10,033,363  $   (24,695)  $60,721,905   $(1,500,939)  $ 70,755,268  $(1,525,634)

2005
                                  Less than 12 Months        12 Months or More               Total
                                 Fair       Unrealized    Fair        Unrealized      Fair       Unrealized
Description of Securities        Value         Loss       Value          Loss         Value         Loss

U.S. Treasury                 $         -  $         -   $ 2,974,354   $   (32,397)  $  2,974,354  $   (32,397)
U.S. Government securities     38,032,999     (289,833)   23,442,038      (536,016)    61,475,037     (825,849)
States and municipals          11,774,597     (186,615)    4,210,864      (151,329)    15,985,461     (337,944)
Mortgage-backed                17,876,194     (187,827)   32,745,358    (1,121,662)    50,621,552   (1,309,489)

Total temporarily impaired    $67,683,790  $  (664,275)  $63,372,614   $(1,841,404)  $131,056,404  $(2,505,679)
</TABLE>

The Company evaluates securities for other than temporary impairment at least
on an annual basis, and more frequently when economic or market concerns
warrant such evaluation.  Consideration is given to the length of time and the
extent to which the fair value has been less than cost, the financial
condition and near-term prospects of the issuer, and the intent and ability of
the Company to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value.  In analyzing
an issuer's financial condition, the Company may consider whether the
securities are issued by the federal government or its agencies, whether
downgrades by bond rating agencies have occurred, and the results of reviews
of the issuer's financial condition.



At December 31, 2006, eleven mortgage-backed securities have unrealized losses
with aggregate depreciation of 3% from their amortized cost basis.  The decline
in fair value from these and other securities is largely due to changes in
interest rates.  As management has the ability to hold debt securities until
maturity, or for the foreseeable future, no declines are deemed to be other
than temporary.

NOTE 4 - LOANS

Loans at year-end were as follows:

                                 2006              2005

Commercial                  $  29,335,344     $  27,301,633
Real estate construction       29,033,790        29,822,067
Real estate mortgage          290,068,211       245,138,321
Agricultural                   79,627,134        59,327,772
Consumer                       15,683,984         8,953,943
Other                             401,927           368,146

                            $ 444,150,390     $ 370,911,882

Activity in the allowance for loan losses was as follows:

                                 2006            2005            2004

Beginning balance            $  4,309,403    $  4,163,315    $  3,819,842
Allowance from acquisition        775,913               -               -
Charge-offs                      (642,664)       (526,735)       (687,798)
Recoveries                         73,625         164,723         191,271
Provision for loan losses         475,000         508,100         840,000

Ending balance               $  4,991,277    $  4,309,403    $  4,163,315

Impaired loans totaled $2,379,000 and $774,000 at December 31, 2006 and 2005.
The average recorded investment in impaired loans during 2006, 2005 and 2004
was $1,624,000, $1,547,000 and $1,444,000.  The total allowance for loan losses
related to these loans was $553,000 and $240,000 at December 31, 2006 and 2005.
 Interest income on impaired loans of $62,000, $25,000 and $22,000 was
recognized for cash payments received in 2006, 2005 and 2004.

Nonperforming loans were as follows:
                                        2006         2005
Loans past due over 90 days still
 on accrual                          $  253,000   $  206,000
Nonaccrual loans                      2,379,000      774,000

Nonperforming loans include impaired loans and smaller balance homogeneous
loans, such as residential mortgage and consumer loans, that are collectively
evaluated for impairment.

Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets.  The unpaid principal balances of mortgage loans
serviced for others were approximately $107,766,000 and $104,575,000 at
December 31, 2006 and 2005.  Custodial escrow balances maintained in connection
with the foregoing loan servicing, and included in demand deposits, were
approximately $369,000 and $509,000 at December 31, 2006 and 2005.



Changes in mortgage servicing rights were as follows:

                         2006          2005          2004

Beginning balance    $  801,501    $  875,633    $  861,120
Additions               179,507       179,474       263,861
Amortization	           (235,174)     (253,606)     (249,348)

Ending balance       $  745,834    $  801,501    $  875,633

Certain directors and executive officers of the Company and companies in which
they have beneficial ownership were loan customers of the Bank during 2006 and
2005.  An analysis of the activity with respect to all director and executive
officer loans is as follows:

                                                            2006

Balance, beginning of year                             $  4,707,000
New loans                                                 1,076,000
Effect of changes in composition of related parties               -
Repayments                                               (1,110,000)

Balance, end of year                                   $  4,673,000

NOTE 5 - PREMISES AND EQUIPMENT

Year-end premises and equipment were as follows:

                                     2006             2005

Land and buildings               $ 16,554,057     $ 12,560,227
Furniture and equipment            11,756,195       10,200,440
Construction projects                 217,591            9,500
                                   28,527,843       22,770,167
Less accumulated depreciation     (14,200,793)     (12,068,626)

                                 $ 14,327,050     $ 10,701,541

Depreciation expense was $956,221, $924,564 and $993,907 in 2006, 2005, and
2004.

NOTE 6 - GOODWILL AND INTANGIBLE ASSETS

The change in balance for goodwill during the year is as follows:

                                 2006                 2005

  Beginning of year          $  9,110,524         $  9,110,524
  Acquired goodwill             4,006,186                    -
  Impairment                            -                    -

  End of year                $ 13,116,710         $  9,110,524

Goodwill will not be amortized but instead evaluated periodically for
impairment.



Acquired intangible assets were as follows at year-end:

                                      2006                      2005
                                Gross                    Gross
                              Carrying   Accumulated    Carrying   Accumulated
                               Amount    Amortization    Amount    Amortization
Amortized intangible assets:
  Core deposit intangibles   $5,133,403   $3,075,254   $3,656,403   $2,890,518

Core deposit intangibles of $1,477,000 were acquired during 2006 in the Peoples
acquisition, as further described in Note 15 - Business Combination.

Aggregate amortization expense was $184,736, $95,736 and $275,490 for 2006,
2005 and 2004.  The core deposit from the 1994 Clark County branch acquisition
was completely amortized in 2004.

Estimated amortization expense for each of the next five years:

     2007          $ 270,736
     2008            264,736
     2009            259,736
     2010            253,736
     2011            243,736

NOTE 7 - DEPOSITS

At December 31, 2006, the scheduled maturities of time deposits are as follows:

     2007        $ 193,732,730
     2008           27,425,545
     2009            5,953,109
     2010            1,271,792
     2011              590,105

Certain directors and executive officers of the Company and companies in which
they have beneficial ownership are deposit customers of the Bank. The amount of
these deposits was approximately $3,994,000 and $1,700,000 at December 31, 2006
and 2005.

NOTE 8 - REPURCHASE AGREEMENTS AND OTHER BORROWINGS

Securities sold under agreements to repurchase are secured by U.S. Government
securities with a carrying amount of $23,665,328 and $23,246,420 at year-end
2006 and 2005.

Repurchase agreements generally mature within one year from the transaction
date and range in maturities from 1 day to 1 year. The securities underlying
the agreements are maintained in a third-party custodian's account under a
written custodial agreement.  Information concerning repurchase agreements for
2006 and 2005 is summarized as follows:

                                                2006           2005

Average daily balance during the year       $ 15,660,750    $ 16,014,304
Average interest rate during the year               3.79%           3.19%
Maximum month-end balance during the year   $ 18,372,446    $ 18,071,544
Weighted average interest rate at year end          3.83%           3.18%

Promissory note payable of $1,000,000 at December 31, 2006, has principal due
at July 7, 2009, interest payable quarterly at prime less 1.75%, and is secured
by 100% of the common stock of the bank.


NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES

At year-end, advances from the Federal Home Loan Bank were as follows:

                                                      2006           2005
Maturities February 2007 through March
 2030, fixed rates from 1.00% to 3.08%        $ 17,226,422   $ 19,802,691
Maturities February 2007 through February
 2026, fixed rates from 3.55% to 4.43%          36,060,120     30,781,074
Maturities February 2007 through January
 2026, fixed rates from 4.77% to 7.55%      	   26,743,741     16,164,876

Total                                      $ 80,030,283   $ 66,748,641

Advances are paid either on a monthly basis or at maturity.  All advances
require a prepayment penalty and certain advances are callable by the FHLB at
various call dates throughout the term of the advance.  Advances are secured by
the FHLB stock and substantially all first mortgage loans.

Scheduled principal payments due on advances during the years subsequent to
December 31, 2006 are as follows:

     2007              $ 14,556,348
     2008                15,268,240
     2009                26,759,315
     2010                 6,250,000
     2011                 1,480,136
     Thereafter          15,716,244

                       $ 80,030,283

NOTE 10 - SUBORDINATED DEBENTURES

In August 2003, the Company formed Kentucky Bancshares, Statutory Trust I
("Trust").  The Trust issued $217,000 of common securities to the Company and
$7,000,000 of trust preferred securities as part of a pooled offering of such
securities.  The Company issued $7,217,000 subordinated debentures to the Trust
in exchange for the proceeds of the offering, which debentures represent the
sole asset of the Trust.  The debentures pay interest quarterly at 7.06% for
the first 5 years.  Starting September 2008, the rate converts to three-month
LIBOR plus 3.00 adjusted quarterly.  The Company may redeem the subordinated
debentures, in whole or in part, beginning September 2008 at a price of 100% of
face value.  The subordinated debentures must be redeemed no later than 2033.

In accordance with FASB Interpretation No. 46, the Trust is not consolidated
with the Company.  Accordingly, the Company does not report the securities
issued by the Trust as liabilities, and instead reports as liabilities the
subordinated debentures issued by the Company and held by the Trust, as these
are no longer eliminated in consolidation.



NOTE 11 - INCOME TAXES

Income tax expense was as follows:
                     2006            2005            2004

Current          $ 2,476,648     $ 1,969,865     $ 2,063,949
Deferred              (8,838)        107,876         153,834

                 $ 2,467,810     $ 2,077,741     $ 2,217,783

Year-end deferred tax assets and liabilities were due to the following.  No
valuation allowance for the realization of deferred tax assets is considered
necessary.

                                                   2006            2005

Deferred tax assets
  Allowance for loan losses                   $ 1,645,241    $ 1,355,432
  Unrealized loss on securities                   242,249        480,581
  Core deposit intangibles                              -         13,753
  Adjustment to initially apply SFAS No. 158      434,919              -
  Other                                           327,074        121,049

Deferred tax liabilities
  Bank premises and equipment                    (776,157)      (429,886)
  FHLB stock                                   (1,254,026)    (1,018,338)
  Mortgage servicing rights                      (253,584)      (272,510)
  Core deposit intangibles                       (491,132)             -
  Other                                          (253,075)      (188,099)

    Net deferred tax asset (liability)        $  (378,491)   $    61,982

Effective tax rates differ from federal statutory rates applied to financial
statement income due to the following:
                                                2006       2005       2004

U. S. federal income tax rate                   34.0%      34.0%      34.0%
Changes from the statutory rate
  Tax-exempt investment income                  (7.8)      (7.3)      (7.0)
  Non-deductible interest expense related to
   carrying tax-exempt investments               1.1        0.8        0.6
  Other                                          0.3       (1.2)       0.2

                                                27.6%      26.3%      27.8%

Federal income tax laws provided the Federal Savings Bank, acquired by the
Company in 2003, with additional bad debt deductions through 1987, totaling
$1.3 million.  Accounting standards do not require a deferred tax liability to
be recorded on this amount, which otherwise would total a $441,000 liability at
December 31, 2006.  The Company's acquisition of First Federal Savings Bank did
not require the recapture of the bad debt reserve.  However, if Kentucky Bank
was liquidated or otherwise ceased to be a bank, or if tax laws were to change,
the $441,000 would be recorded as expense.



NOTE 12 - EARNINGS PER SHARE

The factors used in the earnings per share computation follow:

                                      2006           2005           2004
Basic Earnings Per Share
  Net income                      $ 6,486,054    $ 5,820,100    $ 5,762,109
Weighted average common
   shares outstanding               2,761,826      2,676,890      2,757,233
  Basic earnings per share        $      2.35    $      2.17    $      2.09

Diluted Earnings Per Share
  Net income	                      $ 6,486,054    $ 5,820,100    $ 4,233,377
  Weighted average common
   shares outstanding               2,761,826      2,676,890      2,781,146
  Add dilutive effects of
   assumed exercise of
   stock options                       11,736         14,965         45,640
  Weighted average common and
   dilutive potential common
   shares outstanding               2,773,562      2,691,855      2,826,786
  Diluted earnings per share      $      2.34    $      2.16    $      2.07

Stock options of 11,736 shares common stock from 2006, 31,100 shares common
stock from 2005 and 11,350 shares of common stock from 2004 were excluded from
diluted earnings per share because their impact was antidilutive.

NOTE 13 - RETIREMENT PLANS

The Company has a defined benefit pension plan covering substantially all of
its employees.  The Company's funding policy is to contribute annually the
maximum amount that can be deducted for federal income tax purposes.   Benefits
are based on one percent of employee average earnings for the previous five
years times years of credited service.

Information about the pension plan was as follows:

                                            2006            2005
Change in benefit obligation:
  Beginning benefit obligation          $ 6,737,359     $ 5,481,513
  Service cost                              472,140         432,429
  Interest cost                             364,248         346,223
  Actuarial adjustment                     (327,181)        581,964
  Benefits paid                            (161,825)       (104,770)
    Ending benefit obligation             7,084,741       6,737,359

Change in plan assets, at fair value:
  Beginning plan assets                   5,071,504       4,795,708
  Actual return                             378,550         166,535
  Employer contribution                           -         211,031
  Benefits paid                            (104,998)       (104,770)
    Ending plan assets                    5,345,056       5,071,504

Funded status                            (1,739,685)     (1,665,855)
Unrecognized net actuarial (gain) loss            -       1,683,609
Unrecognized prior transition asset               -          (1,113)

Net pension prepaid (accrued) benefit   $(1,739,685)    $    16,641



Prior to adoption of FAS Statement 158, amounts recognized in the balance
sheet at December 31, 2005 consist of:

	Prepaid benefit cost                         $ 16,641
	Intangible assets                                   -
	Accumulated other comprehensive income              -
		Net amount recognized                     $ 16,641

Amounts recognized in accumulated other comprehensive income at December 31,
2006 consist of:

	Net loss (gain)                              $ 1,279,916
	Transition obligation (asset)                       (742)
                                                 $ 1,279,174

The accumulated benefit obligation for defined benefit pension plans was
$5,312,906 and $4,973,145 at year-end 2006 and 2005.

Net periodic pension cost include the following components:

                                        2006           2005           2004

Service cost                         $  472,140     $  432,429     $  369,481
Interest cost                           364,248        346,223        286,326
Expected return on plan assets         (400,485)      (376,195)      (319,050)
Amortization                             41,249         39,818           (372)

Net periodic cost                    $  477,152     $  442,275     $  336,385

The estimated net loss and transition obligation for the defined benefit
pension plan that will be amortized from accumulated other comprehensive
income into net periodic benefit cost over the next fiscal year are $33,853
and $(371).

Weighted-average assumptions used to determine pension benefit obligations at
year-end

                                       2006        2005        2004
Discount rate on benefit obligation    5.75%       5.75%       6.00%
Rate of compensation increase          4.00%       4.00%       4.00%

Weighted-average assumptions used to determine net periodic net cost

                                       2006        2005        2004
Discount rate on benefit obligation    5.75%       5.75%       6.00%
Long-term expected rate of return
 on plan assets                        8.00%       8.00%       8.00%
Rate of compensation increase          4.00%       4.00%       4.00%

The assumptions described above were determined using various factors.  Based
on the history of domestic investment experience, the expected long-term rate
of return on assets for the income segment is assumed to be 6.0%.  The
expected long-term return on assets for the growth segment is assumed to be
10.0%.  Thus, the assumed rate of return on the total portfolio is 8.0% per
year.  The rate of compensation increase assumption of 4.0% is based upon
historical compensation increases at the Bank.  The discount rate assumption
of 5.75% is based on the expected movements of interest rates from economic
forecasts, Federal Reserve monetary actions and commentary, the expected pace
of economic activity, the issuance of new debt to finance significant fiscal
policy deficits, and the benchmark Moody's AA rated long term corporate bond
rate.



The Company's pension plan asset allocation at year-end and expected long-term
rate of return by asset category are as follows:
                                                        Weighted
                         Percentage    Percentage        Average
                           of Plan       of Plan        Expected
                          Assets at     Assets at       Long-Term
                          Year-End      Year-End     Rate of Return
Asset Category              2006          2005            2006

Equity securities            63            62             10%
Debt securities              35            36              6
Cash                          2             2              4

  Total                     100           100

The asset allocation objective for 2006 and thereafter is to be 60% in equity
securities and 40% in debt securities.  These percentages may vary 5-10 basis
points based on market conditions of equity and bond markets.  There is no
target allocation for cash balances.

The Company expects to contribute $172,604 to its pension plan in 2007.

The following benefit payments, which reflect expected future service, are
expected:

                             Pension Benefits

     2007                      $  167,027
     2008                         184,078
     2009                         195,666
     2010                         245,191
     2011                         272,934
     Years 2012-2016            1,705,178


The Company also has a qualified profit sharing plan which covers substantially
all employees and includes a 401(k) provision.  Profit sharing contributions,
excluding the 401(k) provision, are at the discretion of the Company's Board of
Directors.  Expense recognized in connection with the plan was $369,847,
$320,670 and $309,741 in 2006, 2005 and 2004.

NOTE 14 - STOCK BASED COMPENSATION

The Company has two share based compensation plans as described below.  Total
compensation cost that has been charged against income for those plans was
$59,375, $0, and $0 for 2006, 2005 and 2004.  The total income tax benefit was
$911, $0, and $0.

Stock Option Plan

The Company grants certain officers and key employees stock option awards which
vest and become fully exercisable at the end of five years and provides for
issue of up to 220,000 options.  The Company also grants certain directors
stock option awards which vest and become fully exercisable immediately and
provides for issue of up to 20,000 options.  The exercise price of each option,
which has a ten year life, was equal to the market price of the Company's stock
on the date of grant.



The fair value of each option award is estimated on the date of grant using a
closed form option valuation (Black-Scholes) model that uses the assumptions
noted in the table below.  Expected volatilities are based on historical
volatilities of the Company's common stock.  The Company uses historical data
to estimate option exercise and post-vesting termination behavior.  The
expected term of options granted is based on historical data and represents
the period of time that options granted are expected to be outstanding, which
takes into account that the options are not transferable.  The risk-free
interest rate for the expected term of the option is based on the U.S.
Treasury yield curve in effect at the time of the grant.

The fair value of options granted was determined using the following
weighted-average assumptions as of grant date.

                                                   2006      2005       2004

Fair value of options granted                  $3.14     $4.82      $5.68
Risk-free interest rate                         4.59%     3.98%      3.86%
Expected term                                  8 years   8 years    8 years
Expected stock price volatility                 7.99%    15.11%     13.74%
Dividend yield                                  3.39%     3.03%      2.47%

Summary of activity in the stock option plan for 2006 follows:

                                                      Weighted
                                          Weighted     Average
                                          Average     Remaining   Aggregate
                                          Exercise   Contractual  Intrinsic
                                Options    Price        Term        Value

Outstanding, beginning of year   77,064    $25.32
Granted                           1,300     29.50
Expired                            (300)    29.97
Exercised                        (8,150)    15.22
Outstanding, end of year         69,914    $26.54   65.8 months   $344,090

Exercisable, end of year         44,072    $24.35   52.3 months   $308,190

<TABLE>
<CAPTION>
Options outstanding at year-end 2006 were as follows:
                                           Outstanding                    Exercisable
                                            Weighted
                                             Average     Weighted                 Weighted
                                            Remaining     Average                  Average
                                           Contractual   Exercise                 Exercise
Range of Exercise Prices         Options       Life        Price      Options       Price

                              <c>          <c>       <c>          <c>          <c>
From $12.50 to $15.50 per share    5,920       10.9       $15.26        5,920       $15.26
From $18.00 to $20.63 per share   11,990       24.0        20.51       11,990        20.51
From $23.50 to $28.00 per share   19,804       63.3        25.38       14,832        25.32
From $29.50 to $30.50 per share   21,050       97.4        30.34        6,210        30.19
From $33.90 to $34.00 per share   11,150       84.3        33.91        5,120        33.92
                                  69,914                               44,072
</TABLE>

Information related to the stock option plan during each year follows:

                                                     2006     2005      2004

	Intrinsic value of options exercised            $119,419  $53,586  $121,625
	Cash received from option exercises              124,756   43,650   105,223
	Tax benefit realized from option exercises           911        -         -
	Weighted average fair value of options granted     4,082   89,306    57,486

As of December 31, 2006, there was $89,575 of total unrecognized compensation
cost related to nonvested stock options granted under the Plan.  The cost is
expected to be recognized over a weighted-average period of 5 years.

Stock Grant Plan

On February 15, 2005, the Company's Board of Directors adopted a restricted
stock grant plan.  Total shares issuable under the plan are 50,000.  There
were 3,875 shares granted during 2006, and 30 shares were forfeited during
2006.

NOTE 15 - BUSINESS COMBINATION

On July 7, 2006, the Company acquired 100% of the outstanding shares of
Peoples Bancorp of Sandy Hook, Inc., parent of Peoples Bank of Sandy Hook.
Operating results of Peoples are included in the consolidated financial
statements since the date of acquisition.  As a result of this acquisition,
the Company expects to further solidify its market share in Central Kentucky,
expand its customer base to enhance deposit fee income, provide an opportunity
to market additional products and services to new customers, and reduce
operating costs through economies of scale.

The purchase price of $14 million was 40 percent stock and 60 percent cash.
The purchase price resulted in approximately $4,006,000 in goodwill, and
$1,477,000 in core deposit intangible.  The core deposit intangible asset will
be amortized over 10 years, using an accelerated method.  Goodwill will not be
amortized but instead evaluated periodically for impairment.  Management is
still in the process of evaluating the purchase accounting entries, and
additional adjustments may be made.

The following table summarizes the estimated fair value of assets acquired and
liabilities assumed at the date of acquisition.

Securities available for sale              $ 31,134,000
Loans                                        50,925,000
Goodwill                                      4,006,000
Core deposit intangibles                      1,477,000
Market value adjustments                        994,000
Other assets                                  7,844,000
Total assets acquired                     96,380,000
Deposits                                    (72,279,000)
Other liabilities                           (10,101,000)
Total liabilities assumed                (82,380,000)
Net assets acquired                 $  14,000,000

The following table presents pro forma information as if the acquisition had
occurred at the beginning of 2006 and 2005.  The pro forma information
includes adjustments for interest income on loans and securities acquired,
amortization of intangibles arising from the transaction, depreciation expense
on property acquired, interest expense on deposits acquired, and the related
income tax effects.  The pro forma financial information is not necessarily
indicative of the results of operations as they would have been had the
transactions been effected on the assumed dates.
                                              2006          2005
Net interest income                        $ 20,808,000     $ 20,946,000

Net income                                    6,879,000        6,591,000

Basis earnings per share                           2.32             2.29
Diluted earnings per share                         2.31             2.28



NOTE 16 - LIMITATION ON BANK DIVIDENDS

The Company's principal source of funds is dividends received from the Bank.
Banking regulations limit the amount of dividends that may be paid by the Bank
without prior approval of regulatory agencies.  Under these regulations, the
amount of dividends that may be paid in any calendar year is limited to the
current year's net profits, as defined, combined with the retained net profits
of the preceding two years.  During 2007 the Bank could, without prior
approval, declare dividends on any 2007 net profits retained to the date of the
dividend declaration less $635,000.

NOTE 17 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair values of the Company's financial instruments at December 31, 2006 and
2005 are as follows:

                                      2006                      2005
                               Carrying                  Carrying
                                Amount    Fair Value      Amount    Fair Value
                                              (In Thousands)
Financial assets
  Cash and cash equivalents   $  19,012   $  19,012     $  14,164   $  14,164
  Securities                    127,891     127,891       160,652     160,652
  Loans, net                    439,159     433,610       366,602     362,686
  FHLB stock                      6,468       6,468         5,398       5,398
  Interest receivable             5,654       5,654         3,719       3,719

Financial liabilities
  Deposits                    $ 468,808   $ 470,799     $ 431,631   $ 432,560
  Securities sold under
   agreements to repurchase
   and other borrowings          11,327      11,249        16,838      16,612
  FHLB advances                  80,030      77,711        66,749      64,937
  Subordinated debentures         7,217       7,232         7,217       7,328
  Interest payable                3,683       3,683         2,715       2,715

Carrying amount is the estimated fair value for cash and cash equivalents,
short-term borrowings, Federal Home Loan Bank stock, accrued interest
receivable and payable, demand deposits, short-term debt, and variable rate
loans or deposits that reprice frequently and fully.  Security fair values are
based on market prices or dealer quotes, and if no such information is
available, on the rate and term of the security and information about the
issuer.  For fixed rate loans or deposits and for variable rate loans or
deposits with infrequent repricing or repricing limits, fair value is based on
discounted cash flows using current market rates applied to the estimated life
and credit risk.  Fair values for impaired loans are estimated using discounted
cash flow analysis or underlying collateral values.  Fair value of debt is
based on current rates for similar financing. The fair value of commitments to
extend credit and standby letters of credit is not considered material.

NOTE 18 - OFF-BALANCE SHEET ACTIVITIES AND COMMITMENTS

Some financial instruments, such as loan commitments, credit lines, letters of
credit, and overdraft protection, are issued to meet customer financing needs.
These are agreements to provide credit or to support the credit of others, as
long as conditions established in the contract are met, and usually have
expiration dates.  Commitments may expire without being used.  Off-balance
sheet risk to credit loss exists up to the face amount of these instruments,
although material losses are not anticipated.  The same credit policies are
used to make such commitments as are used for loans, including obtaining
collateral at exercise of the commitment.



Financial instruments with off-balance sheet risk were as follows at year-end:

                                 2006             2005

Unused lines of credit       $ 67,921,443     $ 56,354,000
Commitments to make loans         658,000          156,000
Letters of credit                 639,538          183,000

Unused lines of credit are substantially all at variable rates.  Commitments to
make loans are generally made for a period of 60 days or less and are primarily
fixed at current market rates ranging from 5.625% to 6.125% with maturities
ranging from 15 to 30 years and are intended to be sold.

NOTE 19 - CONTINGENT LIABILITIES

The Bank is a defendant in legal actions arising from normal business
activities.  Management believes these actions are without merit or that the
ultimate liability, if any, resulting from them will not materially affect the
Company's consolidated financial position or results of operations.

NOTE 20 - CAPITAL REQUIREMENTS

The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possible
additional discretionary actions by regulators that, if undertaken, could have
a direct material effect on the Company's financial statements.  Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and the Bank's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices.  The Company and Bank capital amounts and classifications are also
subject to qualitative judgments by regulators about components, risk
weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the following table) of Total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital to
average assets (as defined).  Management believes, as of December 31, 2006 and
2005, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.

The most recent notification from the Federal Deposit Insurance Corporation
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action.  To be categorized as well capitalized, the Bank
must maintain minimum Total risk-based, Tier I risk-based and Tier I leverage
ratios as set forth in the following table.  There are no conditions or events
since that notification that management believes have changed the
institution's category.



The Company's and the Bank's actual amounts and ratios are presented in the
table below:
<TABLE>
<CAPTION>

                                                                                    To Be Well
                                                                                   Capitalized
                                                                                   Under Prompt
                                                                  For Capital         Corrective
                                                 Actual       Adequacy Purposes   Action Provisions
                                             Amount   Ratio     Amount   Ratio     Amount   Ratio
                                                             (Dollars in Thoursands)


                                         <c>       <c>      <c>         <c>    <c>        <c>
2006
Consolidated
  Total Capital (to Risk-Weighted Assets)    $ 53,491  12.5%     $ 34,181    8%     $ 42,727    N/A
  Tier I Capital (to Risk-Weighted Assets)    48,420  11.3       17,091    4        25,636    N/A
  Tier I Capital (to Average Assets)          48,420   7.8       24,758    4        30,947    N/A

Bank Only
  Total Capital (to Risk-Weighted Assets)   $ 53,370  12.5%    $ 34,159    8%     $ 42,699    10%
  Tier I Capital (to Risk-Weighted Assets)    48,299  11.3       17,079    4        25,619     6
  Tier I Capital (to Average Assets)          48,299   7.8       24,723    4        30,904     5

2005
Consolidated
  Total Capital (to Risk-Weighted Assets)    $ 49,130  13.4%     $ 29,311    8%     $ 36,639    N/A
  Tier I Capital (to Risk-Weighted Assets)    44,602  12.2       14,656    4        21,984    N/A
  Tier I Capital (to Average Assets)          44,602   8.0       22,342    4        27,928    N/A

Bank Only
  Total Capital (to Risk-Weighted Assets)   $ 47,346  13.0%    $ 29,251    8%     $ 36,564    10%
  Tier I Capital (to Risk-Weighted Assets)    42,952  11.8       14,626    4        21,938     6
  Tier I Capital (to Average Assets)          42,952   7.7       22,309    4        27,887     5
</TABLE>



NOTE 21 - PARENT COMPANY FINANCIAL STATEMENTS

                    Condensed Balance Sheets
                          December 31

                                                  2006         2005
                                                   (In Thousands)
ASSETS
Cash on deposit with subsidiary                 $    940     $  1,163
Investment in subsidiary                          63,004       51,699
Securities available for sale                         20          573
Other assets                                         412          345

Total assets                                    $ 64,376     $ 53,780


LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
  Subordinated debentures                       $  7,217     $  7,217
  Notes payable                                    1,000            -
  Other liabilities                                   34           17
Stockholders' equity
  Preferred stock                                      -            -
  Common stock                                    12,587        6,813
  Retained earnings                               44,008       40,666
  Accumulated other comprehensive income (loss)     (470)        (933)

Total liabilities and stockholders' equity      $ 64,376     $ 53,780




           Condensed Statements of Income and Comprehensive Income
                           Years Ended December 31

                                                  2006       2005       2004
                                                       (In Thousands)
Income
  Dividends from subsidiary                    $  9,800   $  3,750   $  3,650
  Securities gains (losses), net                    409         60         82
  Interest income                                    16         13         24
    Total income                                 10,225      3,823      3,756

Expenses
  Interest expense                                  577        494        494
  Other expenses                                    250        134        157
    Total expenses                                  827        628        651

Income before income taxes and equity in
 undistributed income of subsidiary               9,398      3,195      3,105

Applicable income tax (expense) benefits            166        178        177

Income before equity in undistributed
 income of subsidiary                             9,564      3,373      3,282

Equity in undistributed income of subsidiary     (3,078)     2,447      2,480

Net income                                        6,486      5,820      5,762

Other comprehensive income (loss), net of tax:
  Unrealized gains (losses) on securities
   arising during the period                        486     (1,215)    (1,004)
  Reclassification of realized amount               (23)       (42)      (191)

  Net change in unrealized gain (loss)
   on securities                                    463     (1,257)    (1,195)

Comprehensive income                           $  6,949   $  4,563   $  4,567






                      Condensed Statements of Cash Flows
                           Years Ended December 31

                                                2006        2005       2004
                                                       (In Thousands)
Cash flows from operating activities
  Net income                                   $  6,486   $  5,820   $  5,762
  Adjustments to reconcile net income to net
   cash from operating activities
    Equity in undistributed earnings of
     subsidiary                                   3,083     (2,447)    (2,480)
    Securities (gains) losses, net                 (409)       (60)       (82)
    Change in other assets                           43         32        659
    Change in other liabilities                      18         (3)         -
      Net cash from operating activities          9,221      3,342      3,859

Cash flows from investing activities
  Proceeds from sales of securities
   available for sale                               664        143        675
  Acquisition of Peoples Bancorp, Inc.           (8,080)         -          -
    Net cash from investing activities           (7,416)       143        675

Cash flows from financing activities
  Proceeds from note payable                     8,000          -          -
  Payments on note payable                      (7,000)         -          -
  Dividends paid                                 (2,768)    (2,462)    (2,303)
  Proceeds from issuance of common stock            118         48        131
  Purchase of common stock                         (378)      (629)    (3,424)
    Net cash from financing activities           (2,028)    (3,043)    (5,596)

Net change in cash                                 (223)       442     (1,062)

Cash at beginning of year                         1,163        721      1,783

Cash at end of year                            $    940    $ 1,163    $   721



NOTE 22 - QUARTERLY FINANCIAL DATA (UNAUDITED)

                    Interest   Net Interest   Net         Earnings Per Share
                     Income      Income      Income     Basic    Fully Diluted

2006
  First quarter     $ 8,051     $ 4,476     $ 1,293     $ .48      $ .48
  Second quarter      8,245       4,511       1,716       .65        .64
  Third quarter       9,493       4,850       1,714       .60        .60
  Fourth quarter      9,804       5,038       1,763       .62        .62

2005
  First quarter     $ 6,720     $ 4,221     $ 1,333     $ .50      $ .49
  Second quarter      7,033       4,385       1,516       .56        .56
  Third quarter       7,321       4,246       1,430       .54        .54
  Fourth quarter      7,823       4,279       1,541       .57        .57






Report of Independent Registered Public Accounting Firm


Board of Directors
Kentucky Bancshares, Inc.
Paris, Kentucky

We have audited the accompanying consolidated balance sheets of Kentucky
Bancshares, Inc. as of December 31, 2006 and 2005, and the related statements
of operations, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 2006.  These financial statements are
the responsibility of the Company's management.  Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December
31, 2006 and 2005, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2006, in conformity
with U.S. generally accepted accounting principles.

As discussed in Note 1 of the consolidated financial statements, Kentucky
Bancshares, Inc. changed its method of accounting for defined benefit pension
and other postretirement plans as of December 31, 2006, in accordance with
Financial Accounting Standards Board Statement No. 158, Employers' Accounting
for Defined Benefit and Other Postretirement Plans.

                                          /s/Crowe Chizek and Company LLC
							Crowe Chizek and Company LLC

Lexington, Kentucky
February 27, 2007




Senior Management
Louis Prichard, President and CEO
Brenda Bragonier, VP, Director of Marketing and Human Resources
Hugh Crombie, VP, Director of Operations
Gregory J. Dawson, VP, Chief Financial Officer
Norman J. Fryman, Sr VP, Director of Sales & Service
Clark Nyberg, VP, Director of Wealth Management
Martha Woodford, VP, Asst. Director of Operations

Bourbon County
Nancye Fightmaster, VP, Regional Manager
Wallis Brooks, AVP, Branch Manager/CRA
Rhonda Brown, Sr. Consumer Lender
Lisa Highley, Consumer Lender
Philip Hurst, Asst. Branch Manager
Susan Lemons, AVP, Branch Manager/Consumer Lender

Clark County
Nick Carter, VP, Regional Manager
Kathy Newkirk, Sr. Consumer Lender
Teresa Shimfessel, AVP, Branch Manager/Consumer Lender
Brandon Sumpter, Sr. Consumer Lender

East Kentucky
William Hough, VP, Regional Manager
Benjamin Caudill, Asst. Branch Manager/Consumer Lender
Cynthia Faulkner, AVP, Branch Manager/Consumer Lender
Eulah Gray, Consumer Lender
Sherry Mathis, AVP, Branch Manager/Consumer Lender
Tammy Stegall, Consumer Lender

Harrison County
David Foster, VP, Regional Manager
Dreama Harris, AVP, Sr. Consumer Lender
Joyce Rainey, Consumer Lender

Jessamine County
Rick Walling, VP, Regional Manager
Deborah Hamilton, Consumer Lender

Scott County
Pam Jessie, VP, Regional Manager
Shane Foley, VP, Mortgage Lender
Sharon Whitlock, Branch Manager/Consumer Lender

Woodford County
Duncan Gardiner, VP, Regional Manager

Accounting/Risk Management
Gregory J. Dawson, VP, Chief Financial Officer
Heather Barger, VP, Director of Risk Management
Brenda Berry, AVP, Senior Accountant
Robbie Cox, Senior Auditor
Janice Hash, AVP, Sr. Accountant/Purchasing
Lydia Sosby, VP, Compliance Officer

Commercial Lending
Darren Henry, VP, Director of Commercial Lending
R. W. Collins, VP, Commercial Lender
Ken Devasher, VP, Commercial Lender
Brandon Eason, VP, Commercial Lender
A. J. Gullett, VP, Commercial Lender
James LeMaster, Business Development Officer
Michael Lovell, VP, Commercial Lender
George R. Wilder, VP, Commercial Lender

Human Resources
Brenda Bragonier, VP, Director of Marketing and Human Resources
Christopher J. LeMaster, Director of Training
Judith Taylor, VP, Human Resource Manager

Operations
Hugh Crombie, VP, Director of Operations
Karen Anderson, Electronic Banking Officer
Melinda Biddle, Government Reporting Officer
Patricia Carpenter, AVP, Data Management Officer
Cynthia Criswell, Data Processing Officer
Catherine Hill, VP, Head of Collections
Perry Ingram, AVP, Network Manager
Jane Mogge, Document Management Officer
Donald Roe, AVP, Sr. Data Processing Officer
Arnita Willoughby, AVP, Secondary Market Professional
Carolyn Wilkins, AVP, Overdraft Management Officer
Martha Woodford, VP, Asst. Director of Operations

Wealth Management
Clark Nyberg, VP, Director of Wealth Management
Rebecca Combs, Financial Consultant
Dixie Fite, Personal Trust Officer
Jan Worth, AVP, Personal Trust Officer
James Gray, Financial Consultant


Bourbon County
Proctor Blair, Partner, Ludwig, Blair and Bush, PLLC
Lonnie Conley, Businessman
Allyson Eads, Co-owner, Eads Hardware
Rodes Shackelford Parrish, President, Clay Ward Agency

Clark County
Mary Beth Hendricks, Director Clark County Child Support Services
Donald Pace, Executive Director Central Kentucky Educational Co-op with UK
John Roche, Optician
Edwin S. Saunier, President, Saunier North American, Inc.

East Kentucky
Rocky Adkins, Majority Floor Leader, House of Representatives
Ted Barhorst, President of Abner Construction
G.R. "Sonny" Jones, CPA, VP, CFO, St. Claire Regional Medical Center
Madonna Weathers, Vice President for Student Life at Morehead State University

Harrison County
K. Bruce Florence, Director, Licking Valley College
Betty Long, Retired President, First Federal Savings of Cynthiana
Brad Marshall, Farmer, Owner Marshall's Tractor Supply
Joel Techau, CEO, Techau Inc.
Gerry Whalen, Broker, Whalen and Company

Jessamine County
William M. Arvin, Attorney
Dan Brewer, President and CEO, Blue Grass Energy
Tom Buford, State Senator
Jonah Mitchell, President, Jonah Mitchell Real Estate and Auction Company
Eva McDaniel, Jessamine County Clerk

Scott County
Gus Bynum, Physician
Mike Hockensmith, Owner and President, The Hockensmith Agency, Inc.
R. C. Johnson, Jr., Owner, President, Johnson's Funeral Home
George Lusby, County Judge Executive
Everette Varney, Former Mayor

Woodford County
Loren Carl, Distric Coordinator for Congressman Ben Chandler
James Kay, Businessman, Farmer
Tricia Kittinger, Woodford County Circuit Clerk
Robert Richardson, Farmer





Board of Directors
LOUIS PRICHARD
  President and CEO, Kentucky Bank and Kentucky Bancshares, Inc.
BUCKNER WOODFORD
  Chairman, Kentucky Bank and Kentucky Bancshares, Inc.
WILLIAM M. ARVIN
  Attorney, Law Offices of William Arvin
B. PROCTOR CAUDILL, JR.
  Special Projects Manager, Kentucky Bank
HENRY HINKLE
  President, Hinkle Contacting Corporation
THEODORE KUSTER
  Farmer and Thoroughbred Breeder, Westview-Hillside Farms
BETTY LONG
  Retired President, First Federal Savings of Cynthiana
TED McCLAIN
  Agent, Hopewell Insurance Company
ROBERT G. THOMPSON
  Farmer and Thoroughbred Breeder, Snowhill Farm
WOODFORD VAN METER
  Ophthalmologist



KENTUCKY BANCSHARES, INC.

PROXY STATEMENT

Introduction

	This Proxy Statement is being furnished to shareholders of Kentucky
Bancshares, Inc., a Kentucky corporation (the "Company"), in connection with
the solicitation of proxies by the Board of Directors of the Company (the
"Board") from holders of record of the Company's outstanding Common Shares
(the "Common Shares") as of the close of business on March 23, 2007 (the
"Annual Meeting Record Date"), for use at the Annual Meeting of Shareholders
of the Company (the "Annual Meeting") to be held on Wednesday, May 9, 2007, at
11:00 a.m. (Eastern Daylight Time) in the Board Room of Kentucky Bank, 339
Main Street, Paris, Kentucky, and at any adjournment or postponement thereof.
 This Proxy Statement is first being mailed to the Company's shareholders on
or about April 9, 2007.  The principal executive offices of the Company are
located at 339 Main Street, Paris, Kentucky 40361.  Its telephone number is
(859) 987-1795.

Purposes of the Annual Meeting

	At the Annual Meeting, holders of Common Shares will be asked to consider
and to vote upon the following matters:

(1)	To elect four Class II directors; and
(2)	To transact such other business as may properly come before the
meeting.

	The Board recommends that shareholders vote FOR the election of the
Board's nominees for Class II directors.  As of the date of this Proxy
Statement, the Board knows of no other business to come before the Annual
Meeting.

Voting Rights and Proxy Information

	Only holders of record of Common Shares as of the close of business on
the Annual Meeting Record Date will be entitled to notice of and to vote at
the Annual Meeting or any adjournment or postponement thereof.  As of the
Annual Meeting Record Date, there were 2,871,090 Common Shares outstanding and
entitled to vote at the Annual Meeting.  The presence, either in person or by
properly executed proxy, of the holders of a majority of the outstanding
Common Shares as of the Annual Meeting Record Date is necessary to constitute
a quorum at the Annual Meeting.

Holders of Common Shares are entitled to one vote per share on any
matter, other than the election of directors, that may properly come before
the Annual Meeting.  In the election of directors, holders of Common Shares
have cumulative voting rights whereby each holder is entitled to vote the
number of Common Shares owned multiplied by four (the number of directors to
be elected at the Annual Meeting), and each holder may cast the whole number
of votes for one candidate or distribute such votes among two or more
candidates.  The Board of Directors is soliciting discretionary authority for
the individuals appointed in the proxies to cumulate votes represented by
properly executed proxies and to vote for less than all the Company's nominees
to the Board if deemed appropriate to ensure the election of as many of the
Company's nominees to the Board as possible.  Those persons receiving the four
highest number of votes in the election of directors will be elected to the
Board.

	All Common Shares that are represented at the Annual Meeting by properly
executed proxies received before or at the Annual Meeting and not revoked will
be voted at the Annual Meeting in accordance with the instructions indicated
in such proxies.  If no instructions are indicated, such proxies will be voted
"FOR" the election of the Board's four nominees as directors of the Company
(or, if deemed appropriate by the individuals appointed in the proxies,
cumulatively voted for less than all of the Board's nominees).

	Any proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before it is voted.  Proxies may be revoked by
(i) filing with the Company, to the attention of Gregory J. Dawson, Secretary,
at or before the Annual Meeting, a written notice of revocation bearing a
later date than the proxy, (ii) duly executing a subsequent proxy relating to
the same Common Shares and delivering it to the Company at or before the
Annual Meeting or (iii) attending the Annual Meeting and voting in person
(although attendance at the Annual Meeting will not in and of itself
constitute a revocation of a proxy).  Any written notice revoking a proxy
should be sent to Kentucky Bancshares, Inc., P. O. Box 157, Paris, Kentucky
40362-0157, Attention Gregory J. Dawson, Secretary.

	The Company will bear the cost of the solicitation of proxies by the
Board in connection with the Annual Meeting.  In addition to solicitation by
mail, the Company will request banks, brokers and other custodian nominees and
fiduciaries to supply proxy material to the beneficial owners of Common
Shares, and will reimburse them for their expenses in so doing.  Certain
directors, officers and other employees of the Company, not specially employed
for this purpose, may solicit proxies without additional remuneration
therefore, by personal interview, mail, telephone, facsimile or other
electronic means.

Item 1 - Election of Directors

	Under the Company's Amended and Restated Articles of Incorporation, the
Board of Directors consists of three different classes (Class I, Class II and
Class III), each member of a class to serve, subject to the provisions of the
Amended and Restated Articles of Incorporation and Bylaws, for a three-year
term and until the member's successor is duly elected and qualified.  The
names of the nominees proposed for election as Class II directors are set
forth below.  The Company is not aware of any other individual who may be
nominated for election to the Board of Directors at the Annual Meeting.

Class II Director Nominees

William Arvin is an attorney.  He has been a director of Kentucky Bank
and the Company since 1995.

B. Proctor Caudill is a Special Projects Manager.  He was appointed as a
director of the Company in August 2006 and as a director of Kentucky Bank in
July 2006.  In July 2006, the Company completed the merger of Peoples Bancorp
of Sandy Hook, Inc.  Before the merger, Mr. Caudill served as the president
and chief executive officer of Peoples Bancorp of Sandy Hook, Inc.

Louis Prichard is President and Chief Executive Officer of Kentucky
Bank.  He was President and Chief Operating Officer of Kentucky Bank from 2003
to 2004.  He has been a director of Kentucky Bank and the Company since 2003.

	Woodford Van Meter is an ophthalmologist.  He has been a director of
Kentucky Bank and the Company since 2004.

	The Board of Directors does not contemplate that any of the nominees
will be unable to accept election as a director for any reason.  However, if
one or more of such nominees is unable or unwilling to accept or is
unavailable to serve, the persons named in the proxies or their substitutes
shall have authority, according to their judgment, to vote or to refrain from
voting for other individuals as directors.

	The Board recommends that shareholders vote "FOR" each of the above
nominees for election as Class II directors of the Company.



Item 2 - Other Matters

	As of the date of this Proxy Statement, the Company knows of no business
that will be presented for consideration at the Annual Meeting other than that
referred to above.  At the Annual Meeting, only such business will be
conducted, and only such proposals or director nominations will be acted upon,
as have been properly brought before the meeting in accordance with the
Company's Bylaws.  Proxies in the enclosed form will be voted in respect of any
other business that is properly brought before the Annual Meeting in accordance
with the judgment of the person or persons voting the proxies.


                                    By Order of the Board of Directors


                                    /s/Gregory J. Dawson
                                    Gregory J. Dawson, Secretary

                                    April 9, 2007







This Proxy Form is Solicited by the Board of Directors

Kentucky Bancshares, Inc.
Paris, Kentucky

	The undersigned hereby appoints Buckner Woodford IV and Gregory J.
Dawson, or either one of them (with full power to act alone), my proxy, each
with the power to appoint his substitute, to represent me to vote all of the
Corporation's Common Shares which I held of record or am otherwise entitled to
vote at the close of business on March 23, 2007, at the 2007 Annual Meeting of
Shareholders to be held on May 9, 2007 and at any adjournments thereof, with
all powers the undersigned would possess if personally present, as follows:

1.	ELECTION OF DIRECTORS

		FOR all nominees listed below (except as otherwise indicated
below)

		AGAINST all nominees listed below

    William Arvin, B. Proctor Caudill, Louis Prichard, and Woodford Van Meter

(INSTRUCTION:  To withhold authority to vote for any
individual nominee, write the nominee's name on the line
below)

__________________________________________________________

2.	OTHER BUSINESS.  In their discretion, the Proxies are authorized to act
upon such other matters as may properly be brought before the Annual
Meeting or any adjournment thereof.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ALL OF THE NOMINEES LISTED IN
ITEM 1.

(PLEASE DATE, MARK, SIGN AND RETURN IMMEDIATELY)

This proxy form relates to ALL shares owned by the undersigned.

This proxy form is solicited by the Board of Directors and will be voted
as specified and in accordance with the accompanying proxy statement.  If no
instruction is indicated on a duly executed proxy form, all shares will be
voted "FOR" the nominees listed in Item 1.  A vote FOR the election of
nominees listed above includes discretionary authority to cumulate votes,
selectively among the nominees as to whom authority to vote has not been
withheld and to vote for a substitute nominee if any nominee becomes
unavailable for election for any reason.

Please sign exactly as name appears.  When shares are held by joint
tenants, both should sign.  When signing as attorney, as executor,
administrator, trustee, or guardian, please give full title as such.  If a
corporation, please sign full corporate name by President or other authorized
officer.  If a partnership, please sign partnership name by authorized person.

DATE___________, 2007
	________________________________
						Signature

				________________________________
					Signature if held jointly







83