**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM10-KSB**
| **x**                                            | **Annual report under Section 13 or 15(d) of the  Securities Exchange Act of 1934.** |
|--------------------------------------------------|--------------------------------------------------------------------------------------|
|                                             |
| For the fiscal  year ended **December 31, 2006** |
| ** **                                       | ** **                                                                           |
| **o**                                            | **Transition report under Section 13 or 15(d) of  the Exchange Act.**                |
|                                             |
| ‘34 Act  Commission number **000-51278**    |

** **

**EASTKANSAS AGRI-ENERGY, LLC**

(Name of small businessissuer in its charter)

** **

| **Kansas**                                                       |   | **48-1251578**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |

** **

**P.O. Box225, 1304 S. Main, Garnett, Kansas 66032**

(Address of principalexecutive offices)

 

**(785) 448-2888**

(Issuer’s telephonenumber)

 

Securitiesregistered under Section 12(b) of the Exchange Act:

** **

**None**

 

Securitiesregistered under Section 12(g) of the Exchange Act:

 

**MembershipUnits**

** **

Indicate by check mark if the registrant is a well-known seasoned issuer,as defined in Rule 405 of the Securities Act  o  Yes     x  No

Indicate by check mark if the registrant is not required to file reportspursuant to Section 13 or Section 15(d) of the Act.  o  Yes     x  No

Check whether theissuer:  (1) filed all reports requiredto be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months(or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days.      x  Yes     o  No

Check ifthere is no disclosure of delinquent filers in response to Item 405 ofRegulation S-B is not contained in this form, and no disclosure will becontained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form10-KSB or any amendment to this Form 10-KSB. o

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).

o  Yes     x  No

State issuer’srevenues for its most recent fiscal year.   **$96,642,827**

As of December 31,2006, the aggregate market value of the membership units held by non-affiliates(computed by reference to the most recent offering price of membership units)was **$23,498,200**

As of December 31,2006, there were 21,898 membership units outstanding.

DOCUMENTSINCORPORATED BY REFERENCE:   None.

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

 

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**INDEX**
|             | ** **                                                                  | **Page No.** |
|-------------|-----------------------------------------------------------------------------|--------------|
| **PART I**  | ** **                                                                  | ** **   | ** ** |
| ** **  | ** **                                                                  | ** **   | ** ** |
| ** **  | **ITEM:  1. DESCRIPTION OF BUSINESS**                                       | ** **   | **3** |
| ** **  | **ITEM  1A. RISK FACTORS**                                                  | ** **   | **12** |
| ** **  | **ITEM 2. DESCRIPTION OF PROPERTY**                                         | ** **   | **18** |
| ** **  | **ITEM  3. LEGAL PROCEEDINGS**                                              | ** **   | **18** |
| ** **  | **ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS**            | ** **   | **19** |
| ** **  | ** **                                                                  | ** **   | ** ** |
| **PART II** | ** **                                                                  | **19**       |
| ** **  | ** **                                                                  | ** **   | ** ** |
| ** **  | **ITEM 5: MARKET FOR MEMBERSHIP UNITS AND RELATED MEMBER  MATTERS**         | **19**       |
| ** **  | **ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN  OF OPERATION** | ** **   | **20** |
| ** **  | **ITEM  7. FINANCIAL STATEMENTS**                                           | ** **   | **29** |
| ** **  | **ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS  ON ACCOUNTING**    | ** **   | ** ** |
| ** **  | **AND FINANCIAL DISCLOSURES**                                               | ** **   | **49** |
| ** **  | **ITEM 8A. CONTROLS AND PROCEDURES**                                        | ** **   | **49** |
| ** **  | **ITEM  8B. OTHER INFORMATION**                                             | ** **   | **49** |
|             |                                                                             |              |  |  |  |

** **
| **PART III** | ** ** | **49** |
|--------------|------------|--------|

** **
| ** ** | **ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS**                 | ** ** |
|------------|----------------------------------------------------------------------------------------|------------|
| ** ** | **AND CORPORATE  GOVERNANCE; COMPLIANCE WITH SECTION  16(A) OF THE EXCHANGE ACT**      | **49**     |
| ** ** | **ITEM 10. EXECUTIVE COMPENSATION**                                                    | **52**     |
| ** ** | **ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL  OWNERS AND**                      | ** ** |
| ** ** | **MANAGEMENT AND RELATED MEMBER MATTERS**                                              | **54**     |
| ** ** | **ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE** | **55**     |
| ** ** | **ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K**                                         | **57**     |
| ** ** | **ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**                                    | **61**     |

 
| **SIGNATURES** | ** ** | **61** |
|----------------|------------|--------|

** **

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**CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKINGSTATEMENTS**

This report contains historical information, as wellas forward-looking statements that involve known and unknown risks and relateto future events, our future financial performance, or our expected futureoperations and actions.  In some cases,you can identify forward-looking statements by terminology such as “may,” “will,”“should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “future,” “intend,”“could,” “hope,” “predict,” “target,” “potential,” or “continue” or thenegative of these terms or other similar expressions.  These forward-looking statements are only ourpredictions based upon current information and involve numerous assumptions,risks and uncertainties.  Our actualresults or actions may differ materially from these forward-looking statementsfor many reasons, including the reasons described in this report.  While it is impossible to identify all suchfactors, factors that could cause actual results to differ materially from thoseestimated by us include:
| · | Overcapacity within the ethanol industry;                                                                            |
|--------|----------------------------------------------------------------------------------------------------------------------|
| · | Actual ethanol and distillers grains production  varying from expectations;                                          |
| · | Availability and costs of products and raw  materials, particularly corn and natural gas;                            |
| · | Changes in the price and market for ethanol and  distillers grains;                                                  |
| · | Our ability to market and our reliance on third  parties to market our products;                                     |
| · | Changes in or elimination of governmental laws,  tariffs, trade or other controls or enforcement practices such as:  |
|   | –                                                                                                               | national, state or local energy policy; |
|   | –                                                                                                               | federal ethanol tax incentives; |
|   | –                                                                                                               | legislation establishing a renewable fuel standard  or other legislation mandating the use of ethanol or other oxygenate  additives; |
|   | –                                                                                                               | state and federal regulation restricting or banning  the use of MTBE; or |
|   | –                                                                                                               | environmental laws and regulations that apply to our  plant operations and their enforcement; |
| · | Changes in the weather or general economic  conditions impacting the availability and price of corn and natural gas; |
| · | Total U.S. consumption of gasoline;                                                                                  |
| · | Fluctuations in petroleum prices;                                                                                    |
| · | Changes in plant production capacity or technical  difficulties in operating the plant;                              |
| · | Changes in our business strategy, capital  improvements or development plans;                                        |
| · | Results of our hedging strategies;                                                                                   |
| · | Changes in interest rates or the availability of  credit;                                                            |
| · | Our ability to generate free cash flow to invest in  our business and service our debt;                              |
| · | Our liability resulting from litigation;                                                                             |
| · | Our ability to retain key employees and maintain  labor relations;                                                   |
| · | Changes and advances in ethanol production  technology;                                                              |
| · | Competition from alternative fuels and alternative  fuel additives; and                                              |
| · | Other factors described elsewhere in this report.                                                                    |

 

Thecautionary statements referred to in this section also should be considered inconnection with any subsequent written or oral forward-looking statements thatmay be issued by us or persons acting on our behalf.  We undertake no duty to update theseforward-looking statements, even though our situation may change in the future.Furthermore, we cannot guarantee future results, events, levels of activity,performance, or achievements.  We cautionyou not to put undue reliance on any forward-looking statements, which speakonly as of the date of this report.  You should read this report and thedocuments that we reference in this report and have filed as exhibits,completely and with the understanding that our actual future results may bematerially different from what we currently expect.  We qualify all of ourforward-looking statements by these cautionary statements.

**AVAILABLE INFORMATION**

Information about us is also available at our websiteat**www.ekaellc.com, under “SEC Compliance,” which includeslinks to reports we have filed with the Securities and Exchange Commission. Thecontents of our website are not incorporated by reference in this Annual Reporton Form 10-KSB.

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**PART 1**

**ITEM 1. DESCRIPTIONOF BUSINESS****Overview**

East Kansas Agri-Energy, L.L.C. was formed as aKansas limited liability company on October 16, 2001.  References to “we”, “us”, “our” and “EastKansas” refer to East Kansas Agri-Energy, L.L.C.  Our principal business office is currentlylocated at 1304 South Main Street, Garnett, Kansas 66032.  We are managed by an 11 member Board ofDirectors.

InJune 2005, we completed the construction of our 35 million gallon per yearethanol plant and shortly thereafter, we commenced operations.  We currently produce ethanol and distillersgrains for sale throughout the continental United States.

Wefinanced the development and construction of the ethanol plant with acombination of equity and debt capital. We raised equity proceeds of $610,000 in our seed capital offering and$13,457,000 in our initial registered offering.   We entered into debt financing agreementswith Home Federal Savings Bank of Rochester, Minnesota on November 23,2004, pursuant to which it lent us $26,000,000 of construction financing, whichwas converted to two term loans on September 20, 2005.  To supplement our equity financing and debtfinancing and complete our capitalization plan, we issued 6,250 units toICM, Inc. of Colwich, Kansas and Fagen, Inc. of Granite Falls,Minnesota for additional equity proceeds of $6,250,000, which we subsequentlyredeemed on August 1, 2005 at a total redemption price of $6,875,000 pursuantto a Unit Purchase and Redemption Agreement with ICM, Inc. and Fagen,Inc.  To raise the proceeds necessary toredeem the units, we commenced a registered offering for additional membershipunits on April 20, 2005 and on July 20, 2005, we closed ourpublic offering.  During the offering, we sold 9,091 units for anaggregate price of $10,000,100.  After redeeming the units fromICM, Inc. and Fagen, Inc., we retained the balance of the offeringproceeds for working capital.

OnMay 4, 2006, we renegotiated the terms of our bank financing with Home FederalSavings Bank.  The new terms provide fora $4,000,000 term revolving loan in addition to the existing term loans.  The interest rate on the term revolving loanis the prime rate.  The term revolvingloan available credit balance is reduced by $400,000 annually beginningDecember 31, 2007 and matures on October 1, 2010.

We engaged United Bio Energy Management, LLC, United Bio Energy Fuels,LLC, United Bio Energy Ingredients, LLC and United Bio Energy Trading, LLC toprovide us services including ethanol plant general management, ethanol anddistillers grains marketing, grain origination services and overall riskmanagement. These companies are owned by United Bio Energy, LLC of Wichita,Kansas.  United Bio Energy, LLC was ownedby an affiliate of ICM, Inc. and an affiliate of Fagen, Inc.  However, in the second quarter of 2005,United Bio Energy, LLC merged with US BioEnergy Corporation of Brookings, SouthDakota, which builds and operates biofuel production facilities which may be incompetition with our plant. We are highly dependent on United Bio Energy, LLCand its subsidiaries.  As a result of themerger between United Bio Energy, LLC and US BioEnergy Corporation, a conflictof interest may develop between us and US BioEnergy Corporation and it mayadversely affect our ability to make a profit.

On January 3, 2007, we executed a termination agreement with UBEServices, LLC (“UBE Services”), successor to United Bio Energy Management, LLC,terminating, effective December 31, 2006, our management agreement with UBEServices.   The termination agreementprovides that the parties mutually agree to release each other from theircontractual obligations and any and all claims, losses, expenses or damagesarising as to or under the management agreement.  In exchange for early termination, we agreedto pay UBE Services the fixed annual fee and incentive bonus set forth in themanagement agreement through December 31, 2006. In addition, the termination agreement provides that we have the rightto continue to participate in the UBE Plant Manager Program and UBE GroupBuying Program for one year in exchange for the payment of $10,000 per month.

We expect to fundour operations during the next 12 months using cash flow from continuingoperations and our credit facilities.

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Fuel grade ethanolis our primary product accounting for the majority of our revenue.  Wealso sell distillers grains, a principal co-product of the ethanol productionprocess, which may be sold as distillers dried grains and distillers modifiedwet grains.   We commenced operations in June 2005.  During the fiscal year ending December 31,2006, we processed approximately 14.7 million bushels of corn intoapproximately 40.7 million gallons of ethanol.  We also processedapproximately 256,000 tons of distillers grains in 2006.  In 2007, weanticipate producing approximately 42.5 million gallons of ethanol and 256,000 tonsof distillers grains, from approximately 15 million bushels of corn.  Thereis no assurance that we will be able to operate at these levels.

We are subject toindustry-wide factors that affect our operating and financial performance.  These factors include, but are not limitedto, the available supply and cost of corn from which our ethanol and distillersgrains are processed; the cost of natural gas, which we use in the productionprocess; dependence on our ethanol marketer and distillers grains marketer tomarket and distribute our products; the intensely competitive nature of theethanol industry; possible legislation at the federal, state, and/or locallevel; changes in federal ethanol tax incentives and the cost of complying withextensive environmental laws that regulate our industry.

**Description of Dry Mill Process**

An ethanol plant is essentially afermentation plant which makesethanol by processing corn, milo and various other grains.  The corn and/or milo is received by semi-trailer truck, and isweighed and cleaned of rocks and debris before it is conveyed to one of twoconcrete storage silos. The corn/milo is then transported to a hammermill orgrinder where it is ground into flour and conveyed into a slurry tank forprocessing.  We add water, heat and enzymes to break the ground corn/milointo a mash.  This mash is heat sterilized and pumped to a tank whereother enzymes are added to convert the starches into glucose sugars. Next, the mash is pumped into one of four fermenters, where yeast isadded, to begin a forty-eight to fifty hour batch fermentation process. Carbon dioxide is produced during the fermentation process.  Adistillation process vaporizes the alcohol from the corn mash.  Thealcohol is further dried in a rectifier and molecular sieve.  Theresulting 200 proof alcohol is then pumped to shift tanks and blended with fivepercent gasoline as it is pumped into denatured ethanol storage tanks.  The denaturant is used to make the product unfit for humanconsumption and commercially saleable.

The mash exiting the distillation process is pumpedinto one of several centrifuges.  Water from the centrifuges, called thinstillage, is condensed into a thicker syrup called condensed solubles. The solids that exit the centrifuge are called wet cake or distillers wetgrains.  Typically, this wet cake is conveyed to dryers where condensedsolubles are added and moisture is removed to produce distillers dried grains,which may be used as animal feed.

**Principal Products and Markets**

The principal products we produce at theplant are fuel-grade ethanol and distillers grains.  Raw carbon dioxide gas is by-product of theethanol production process, but, at present, we do not capture or market it.

***Ethanol***

Ethanolis ethyl alcohol, a fuel component made primarily from corn and various othergrains, and can be used as: (i) an octane enhancer in fuels; (ii) an oxygenatedfuel additive for the purpose of reducing ozone and carbon monoxide vehicleemissions; and (iii) a non-petroleum-based gasoline substitute.  Ethanol is used primarily as a highquality octane enhancer and an oxygenate capable of reducing air pollution andimproving automobile performance.  Approximately 95% of all ethanol is used inits primary form for blending with unleaded gasoline and other fuel products.  The implementation of the Federal Clean Airact has made ethanol fuels an important domestic renewable fuel additive.  Used as a fuel oxygenate, ethanol provides ameans to control carbon monoxide emissions in large metropolitan areas.

Ethanol Markets.  The principal markets for our ethanol areregional petroleum terminals located in major population centers in Kansas andneighboring states, including such cities as Kansas City, Missouri; Wichita, Kansas; Tulsa, Oklahoma; and St. Louis,Missouri.  The principal purchasers of ethanol aregenerally oil refiners and wholesale gasoline marketers and distributors thatuse ethanol for blending with gasoline. According to the

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RenewableFuels Association statistics, the demand for fuel ethanol exceeded 5.37 billiongallons in 2006.  The passageof the Volumetric Ethanol Excise Tax Credit (“VEETC”) is expected to providethe flexibility necessary to expand ethanol blending into higher blends ofethanol such as E85, E diesel and fuel cell markets.  In addition, the implementation of aRenewable Fuels Standard in August 2005 is expected to favorably impact theethanol industry by enhancing the use of ethanol by allowing refiners to userenewable fuel blends in those areas where it is most cost-effective.  See, “DESCRIPTIONOF BUSINESS — Governmental Supports and Regulation, Federal Ethanol Supports.”

Asdescribed below in “Sales and Distribution of Principal Products,” we marketand distribute our ethanol through third parties.

***Distillers Grains***

Aprincipal co-product of the ethanol production process is distiller grains, ahigh protein, high-energy animal feed supplement.  Distillersgrains contains nutrients that have important growth promoting properties fordairy and beef cattle, poultry and swine.  Our dry mill ethanol processing creates two forms of distiller grains:Distillers Wet Grains and Distillers Dried Grains with Solubles.  Distillers Wet Grains is processed corn mashthat contains approximately 70% moisture. Distillers Wet Grains has a shelf life of approximately three days andis generally sold locally.  DistillersDried Grains are Distillers Wet Grains dried to 10% to 12% moisture.  It has a longer shelf life and may be soldand shipped to any market regardless of its vicinity to our ethanol plant.  Of our total distillers grains production, wecurrently market about 20% as DDGS and 80% as DWS.

Distillers Grains Markets.  Themarket for distillers grains is generally confined to locations where freightcosts allow it to be competitively priced against other feed ingredients. Distillers grains competes with other feed formulations: corn gluten feed, drybrewers grain and mill feeds.  The primary value of these products asanimal feed is their protein content.  Dry brewers grain and distillersgrains have about the same protein content, and corn gluten feed and mill feedshave slightly lower protein contents.  Distiller grains contain by-pass protein that is superior to otherprotein supplements.  For dairy cattle, the high digestibility andnet energy content of by-passproteins found in distillersgrains, as well as its high fat content, yields greater milk production ascompared to other feed ingredients.  For beef cattle, feedlot studies havefound that the improved rumen health, energy effect of the fiber andpalatability promotes faster and more efficient growth.  For poultry and swine, feeding trials havefound that distillers grains is a useful and economic source of protein, fatand beneficial unidentified growth and health factors.  Although poultryand swine account for a small portion of the distillers grains market, webelieve that with the advancement of research into the feeding rations ofpoultry and swine, these markets may grow.

Asdescribed below in “Sales Distribution of Principal Products,” we market anddistribute our distillers grains through third parties.

**Sales andDistribution of Principal Products**

Our ethanol plant is located in Garnett, Kansas in easternKansas.  The plant site is located in the Golden Prairie Industrial Park on theedge of Garnett. We selected Garnett because of its location relative toexisting grain production and its close proximity to major highways thatconnect to major population centers such as Kansas City, Missouri; Wichita,Kansas; Tulsa, Oklahoma; and St. Louis, Missouri.  Although, the site has accessibility to rail transportation, our distribution needs arecurrently satisfied by truck transportation and we do not anticipateconstructing a rail spur to access such rail transportation in the immediatefuture.   We are always assessing themarket demands and will address construction of the rail spur as the need foradditional transportation methods arise.

***Ethanol Distribution***

We market the ethanol produced at the plant throughProvista Renewable Fuels Marketing, LLC (Provista), successor to United BioEnergy Fuels, LLC.  Pursuant to ourmarketing agreement with Provista, Provista purchases and markets all of thefuel-grade ethanol produced at our plant. Provista is responsible fordetermining the price and terms at which the ethanol acquired from the plant issold and to whom it is sold.  The price received by us from the sale ofethanol is based upon the price that Provista receives from the sale of ethanolto its customers, minus a $0.01 fee per gallon sold and any expenses incurredin connection with the sale and delivery of the ethanol. The marketing

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agreement between us and Provista is in effect until2009 and is renewed automatically for one-year terms, unless either partyprovides ninety days written notice of termination prior to the end of thecurrent term.

***Distillers GrainsDistribution***

We contract with United Bio Energy Ingredients, LLC (“UBEIngredients”) to market all of the dried and wet distillers grains produced atthe plant.  Forour distillers grains, we receive 98% of the price UBE Ingredientscharges its buyers of dried distillers grains, and 95% of the price UBEIngredients charges its buyers of wet distillers grains.  The distillers grains marketing contract isin effect until 2009 and automatically renews for additional one-year terms,unless discontinued by either party upon at least ninety days prior writtennotice.  UBE Ingredients has also hired a distillers grains merchandiserwho is located at our plant and is expected to sell a portion of our distillersgrains to local markets.

**SeasonalFactors in Business**

In aneffort to improve air quality in regions where carbon monoxide and ozone are aproblem, such as St. Louis, Missouri, the Federal Oxygen Program of the Clean Air Act requires the saleof oxygenated motor fuels during the winter months to reduce carbon monoxidepollution.  Because ethanol is afuel oxygenate additive, we expect fairly light seasonality with respect to ourgross profit margins on our ethanol.

**New Products and Services**

Wehave not introduced any new products or services during this fiscal year.

**Dependence on One or aFew Major Customers**

Asdiscussed above, we have marketing agreements with Provista and UBE Ingredientsand we rely on Provista and UBE Ingredients for the sale and distribution ofall of our products.  In the eventour relationship with Provista or UBE Ingredients is interrupted or terminatedfor any reason, we believe that another entity to market our ethanol anddistillers grains could be located.  Any interruption, however, couldtemporarily disrupt the sale of ethanol and distillers grains and adverselyaffect our business and operations.  See “Sales and Distribution of Principal Products.”

**Governmental Supports andRegulation**

***Federal Ethanol Supports***

Ethanolhas important applications, primarily as a high-quality octane enhancer and anoxygenate capable of reducing air pollution and improving automobileperformance. The ethanol industry isdependent on several economic incentives to produce ethanol, including federalethanol supports, including the ethanol supports contained in the Energy PolicyAct of 2005.

*2007 State of the Union Address:  Twenty in Ten. *In his January 2007 Stateof the Union Address, President Bush called for the reduction of 20% of theNation’s gasoline usage in the next ten years—Twenty in Ten.  To accomplish this goal, he called for i****ncreasing the Nation’ssupply of renewable and alternative fuels by setting a mandatory fuels standardto require********35 billiongallons of renewable and alternative fuel use by 2017.  If enacted, in 2017, this would be expectedto displace 15% of projected annual gasoline use.  To bring about the other five percent reductionin gasoline usage, the President proposed a plan to increase fuel efficiencystandards for cars and further extend those for light trucks and sport utilityvehicles.  As proposed, these standardswould reduce projected annual gasoline use by up to 8.5 billion gallons, orfive percent. If enacted, the President’s proposal would also increase thescope of the current Renewable Fuel Standard (RFS), expanding it to an AlternativeFuel Standard (AFS).  As proposed,the AFS would include sources such as corn ethanol, cellulosic ethanol,biodiesel, methanol, butanol, hydrogen and alternative fuels. Under thePresident’s plan, the EPA Administrator and the Secretaries of Agriculture andEnergy would have authority to waive or modify the standard if they deem itnecessary, and the new fuel standard would include an automatic “safety valve”to protect against unforeseen increases in the prices of alternative fuels ortheir feedstocks.  The President’sambitious goals are not likely to be reached with current

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technology and exclusively corn-derived ethanol;although we expect that the initiatives would stimulate new investment incellulosic ethanol technologies.

*Energy Policy Act. *The ethanol industry isassisted by various federal ethanol production and tax incentives, includingthose included in the Energy Policy Act of 2005, which was signed into law byPresident George W. Bush on August 8, 2005.

*Renewable Fuels Standard. *The provision of the EnergyPolicy Act of 2005 likely to have the greatest impact on the ethanol industryis the creation of a national 7.5 billion gallon renewable fuels standard(RFS). The RFS requires that gasoline sold by refiners, importers and blendersmust contain an increasing amount of renewable fuel, such as ethanol orbiodiesel.  The RFS began at 4 billiongallons in 2006, and will increase to 7.5 billion gallons by 2012. The RFShelps support a market for ethanol that might disappear without thisincentive.  The RFS for 2007 was set bythe Environmental Protection Agency and requires 4.7 billion gallons of all thegasoline sold or dispensed to U.S. motorists be renewable fuel.  According to the RFA, production capacityfrom operating ethanol plants is approximately 5.6 billion gallons as ofFebruary 2007.

Compliancewith the RFS program will be shown through the acquisition of a uniqueRenewable Identification Numbers (RIN) assigned by the producer to every batchof renewable fuel produced.  The RINshows that a certain volume of renewable fuel was produced.  Refiners, importers and blenders must acquiresufficient RINs to demonstrate compliance with their performance obligation. Inaddition, RINs can be traded and a record keeping and electronic reportingsystem for all parties that have RINs ensures the integrity of the RIN pool.

In September 2006, theEnvironmental Protection Agency (EPA) released a proposed final rule for acomprehensive, long-term RFS program starting in 2007.  The new regulation proposes that 3.71 percent(or 4.7 billion gallons) of all the gasoline sold or dispensed to U.S.motorists in 2007 be renewable fuel. In 2006, approximately 4.5 billion gallonsof renewable fuel was consumed as motor vehicle fuel in the United States.  The rule also contains compliance tools and acredit and trading system which allows renewable fuels to be used where they aremost economical, while providing a flexible means for industry to comply withthe standard.  Various renewable fuels,including biodiesel and ethanol, can be used to meet the requirements of theRFS program.  The RFS must be met byrefiners, blenders and importers.  Inorder to comply with the RFS, each batch of renewable fuel produced is assigneda unique Renewable Identification Number (RIN). Final rules are expected to be promulgated by the EPA in 2007; however,there is no guarantee that the EPA’s proposed final rule will be enacted, or thatwe will comply with the rule’s requirements.

*Volumetric Ethanol Excise TaxCredit (VEETC). *TheAmerican Jobs Creation Act of 2004 created tax incentives for biodiesel andextended the tax credit for ethanol.  Indoing so, the Jobs Act established the VEETC, which provides ethanol blendersand retailers with a credit of $0.51 per pure gallon of ethanol blended, or$0.0051 per percentage point of ethanol blended (i.e., E10 has a 10% ethanolcontent and is eligible for a credit of $0.051 per gallon, while E85 iseligible for a credit of $0.4335 per gallon). This incentive is set to expire in 2010; however, legislation wasintroduced to Congress in January 2007 that proposes to make the tax creditpermanent.

*Small Ethanol ProducerCredit. *The EnergyPolicy Act of 2005 changed the definition of a small ethanol producer toinclude a production capacity of up to 60 million gallons, increased from 30million gallons under the original version of the credit.

*Federal Fleets. *Under the Energy Policy Actof 2005, federal fleets are required to use alternative fuels in dual-fuelvehicles unless they qualify for a waiver from the Secretary of Energy.  Fleets may obtain a waiver is alternativefuel is not reasonably available or the cost of alternative fuel is unreasonablymore expensive than conventional fuel. In 2000, the President signed an executive order requiring federalagencies to reduce their vehicular petroleum use by 20% by 2005 and beyond.  In response, the Energy Policy Act of 2005allows fleets to either:  (i) ensure that75% of new light-duty vehicles acquired are alternative fuel vehicles; or (ii)obtain a waiver by proving to the Department of Energy that they will achievepetroleum reductions equivalent to their alternative fuel vehicles running on alternativefuels 100% of the time.

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***Effect of GovernmentalRegulation***

The government’s regulation of theenvironment changes constantly.  We are subject to extensive air, water and other environmentalregulations and we have been required to obtain a number of environmentalpermits to construct and operate the plant. It is possible that more stringent federal or stateenvironmental rules or regulations could be adopted, which could increase ouroperating costs and expenses.  It also ispossible that federal or state environmental rules or regulations could beadopted that could have an adverse effect on the use of ethanol.  For example, changes in the environmentalregulations regarding the required oxygen content of automobile emissions couldhave an adverse effect on the ethanol industry. Furthermore, plant operations likely will be governed by theOccupational Safety and Health Administration (“OSHA”).  OSHA regulations may change such that thecosts of the operation of the plant may increase.  Any of these regulatory factors may result inhigher costs or other materially adverse conditions effecting our operations,cash flows and financial performance.

Wehave obtained all of the necessary permits to operate the plant including, airpollution construction permits, a pollutant discharge elimination systemgeneral permit, storm water discharge permits, a water withdrawal permit, andan alcohol fuel producer’s permit. Although we have been successful in obtaining all of the permitscurrently required, any retroactive change in environmental regulations, eitherat the federal or state level, could require us to obtain additional or newpermits or spend considerable resources on complying with such regulations.

In2006, our costs of environmental compliance were approximately $34,000, andconsisted primarily of permitting and licensing fees and environmentalcompliance testing.

**Our Competition**

We are in directcompetition with numerous other ethanol producers, many of whom have greaterresources than we do. We also expect that additional producers will enter themarket if the demand for ethanol continues to increase.  Ourethanol plant competes with other ethanol producers on the basis of price and,to a lesser extent, delivery service.  Webelieve we compete favorably with other ethanol producers due to our proximityto ample grain supplies and our proximity to regional petroleum terminals.

According to the Renewable FuelsAssociation, as of March 13, 2007, the ethanol industry has grown toapproximately 114 production facilities in the United States with an additional80 plants under construction and 7 expansions of existing plants.  The Renewable Fuels Association estimatesthat the United States ethanol industry has capacity to produce more than 5.6billion gallons of ethanol per year.  Thenew ethanol plants along with the plant expansions under construction couldpush United States production of fuel ethanol in the near future to more than12.0 billion gallons per year.  Thelargest ethanol producers include Abengoa Bioenergy Corp., Archer DanielsMidland (“ADM”), Aventine Renewable Energy, Inc., Cargill, Inc., New EnergyCorp. and VeraSun Energy Corporation, all of which are each capable ofproducing more ethanol than we produce. Archer Daniels Midland has announced its plan to add approximately500 million gallons per year of additional ethanol production capacity inthe United States.  Management is unableto determine the number and production capacity of plants that ultimately maybe constructed, the timing of such construction or the effect of resultingproduction upon the demand for or price of our ethanol. However, it is possiblethat the plant-building boom will create a market glut for ethanol therebydriving ethanol prices, along with our revenues, down due to the increasingsupply.

According to the RFA’s Ethanol IndustryOutlook 2007, as of January 2007, Kansas ranks seventh in the nation amongethanol producers.  Kansas has 212.5million gallons per year production capacity online, plus an additional 295million gallons under construction or expansion, for a total of 507.5 milliongallons of production capacity.  As ofFebruary 2007 there are eight operating ethanol plants in Kansas.  In addition, there are four ethanol plants invarious stages of planning, construction and development in the state.  Due to the preliminary nature of many ofthese projects, it is difficult to estimate the number of potential ethanolprojects within our region.  Thesurrounding plants will likely impact the demand for corn and milo in our areaand may increase the price for corn, milo and other resources such aselectricity and natural gas.  At times,we expect that we will have to pay higher prices for corn and milo to ensure wehave adequate supply to produce ethanol for our plant.

 

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The following map from the RenewableFuels Association identifies the location of most of the ethanolproducers in the United States.

***InternationalCompetition***

Ethanol production is also expandinginternationally and we may have to compete with international ethanolproducers, which may be able to produce and sell ethanol moreinexpensively.  Brazil has long beenthe world’s largest producer and exporter of ethanol; however, in 2005, USethanol production slightly exceeded Brazilian production.  Ethanol is produced more cheaply inBrazil than in the United States because of the use of sugarcane, a lessexpensive raw material alternative to corn.  However, because of varioustariffs on the importation of ethanol into the United States, the price of ethanolproduced in the United States is currently more competitive than ethanolimported from Brazil.

Ethanol imported from Brazil is subjectto a 54 cents per gallon tariff. However, the Central America-Dominican Republic Free Trade Agreement,which was ratified in 2005, may provide a means to circumvent the tariff.  Some Brazilian producers hope to export theirlow-cost ethanol to Central America, mix it with Central American ethanol, andimport this inexpensive product into the United States duty-free.  Ethanol shipments through countries in theCaribbean such as El Salvador, Jamaica, and Costa Rica are shipped intariff-free due to the Caribbean Basin Initiative (CBI).  It is unclear whether Brazilian producerswill be able to utilize this design to circumvent the tariff, but if theysucceed domestic producers will lose the advantage provided by the tariff.

***Competition from AlternativeFuels***

Alternative fuels,gasoline oxygenates and alternative ethanol production methods are alsocontinually under development by ethanol and oil companies with fargreater resources. The major oil companies have 

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significantlygreater resources than we have to develop alternative products and to influencelegislation and public perception of MTBE and ethanol.  These companies also havesufficient resources to begin production of ethanol should they choose to doso.  New ethanol products ormethods of ethanol production developed by larger and better-financedcompetitors could provide them competitive advantages and harm our business.

A number ofautomotive, industrial and power generation manufacturers are developingalternative clean power systems using fuel cells or clean burning gaseousfuels.  Like ethanol, the emerging fuelcell industry offers a technological option to address increasing worldwideenergy costs, the long-term availability of petroleum reserves andenvironmental concerns.  Fuel cells haveemerged as a potential alternative to certain existing power sources because oftheir higher efficiency, reduced noise and lower emissions. Fuel cell industryparticipants are currently targeting the transportation, stationary power andportable power markets in order to decrease fuel costs, lessen dependence oncrude oil and reduce harmful emissions. If the fuel cell and hydrogen industries continue to expand and gainbroad acceptance and hydrogen becomes readily available to consumers for motorvehicle use, we may not be able to compete effectively.  This additional competition could reduce thedemand for ethanol, which would negatively impact our profitability.

***Distillers Grains***

Our plant primarily competes with otherethanol producers in the production and sales of distillers grains.  The United States ethanol industry isexpected to produce as much as 17 million tons of distillers grains annually by2012.  Our distillers grains also competewith other livestock feed formulations: corn glutenfeed, dry brewers grain, soybean meal and mill feeds.  Distillers grainsprimarily compete with these products on the basis of price and proteincontent.

**Sources of Raw Materials- Corn and Milo Feedstock Supply**

To operate at a name-plate capacity of 35 milliongallons of ethanol annually, our plant requires approximately 13 million bushels of grain per year for itsdry milling process.  Because ofimprovements made to our facility and the technological process, we expect toproduce approximately 42.5 million gallons of ethanol in 2007 requiringapproximately 15 million bushels of grain. The grain supply for our plant willbe obtained pursuant to our Raw Grains Agreement with United Bio EnergyIngredients, LLC, described below.  Wewill depend heavily on the performance of United Bio Energy Ingredients, LLCfor our grain inputs.

We are dependent on theavailability and price of corn and milo. Although the area surrounding the plant produces a significant amount ofcorn and milo and we do not anticipate problems sourcing grain, there is noassurance that a shortage will not develop, particularly if there is anextended drought or other production problem.

***Raw Grains Agreement***

We purchase the raw grains (corn and milo) necessaryfor ethanol production at our plant from United Bio Energy Ingredients, LLC (“UBEIngredients”).  Pursuant to our rawgrains agreement with UBE Ingredients, we pay UBE Ingredients the actual cashprocurement price and all reasonable and necessary expenses to get the grain tothe plant plus a per bushel fee.  Thetitle, risk of loss, and responsibility for the quality of grain transfers tous when we unload the grain at the plant. Prior to that time, UBE Ingredients bears the risk of loss.  All grain delivered to the plant must meetcertain quality standards and we have the option to reduce the price we pay orfully reject any delivery that fails to conform to these standards, dependingupon the severity of the noncompliance. The raw grains agreement between us and UBE Ingredients is in effectuntil 2009 and is renewed automatically for one-year terms, unless either partyprovides ninety days written notice of termination prior to the end of thecurrent term.

***TradingAgreement***

We have engaged United Bio Energy Trading, LLC (“UBETrading”) to provide us with market information, hedging consulting servicesand to assist with internal risk management procedures.  Due to fluctuations in energy and feedstockmarkets, UBE Trading utilizes forward contracting and hedging strategies tomanage our commodity risk exposure and optimize finished product pricing. For these services, we will pay UBE Trading a monthly fee of $6,000.  The trading agreement between us and UBETrading is in effect until 2009 and is renewed automatically for one-yearterms, unless either party provides ninety days written notice of terminationprior to the end of the current term.

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See “MANAGEMENT’S DISCUSSION AND ANALYSIS — Results ofOperations for Fiscal Year 2006, Cost of Sales” for a more detailed discussionof our corn supply.

**Utilities**

Theplant requires a significant and uninterrupted supply of electricity, naturalgas and water to operate.  We have enteredinto agreements with providers of these utilities as follows:

***Natural Gas***

Our plant requires a natural gas supply of approximately2,900 MMBtu per day when drying.   If thedirect gas-fired dryer operates 100% of the time for an entire year, the plantcould consume 1,030,000 MMBtu per year. We engaged U.S. Energy Services, Inc. of Wayzata, Minnesota, toprovide consulting and energy management services for supplies of electricityand natural gas.  Our natural gasrequirements are supplied by Southern Star Central Gas Pipeline and KinderMorgan Interstate Gas Transmission.  Wehave not experienced any interruptions in the supply of natural gas to ourplant from our suppliers in 2006 and all of our natural gas requirements havebeen met.

***Electricity***

Electricity isnecessary for lighting and powering much of the machinery and equipment used inthe production process.  Our plantrequires approximately 20,000,000 kilowatt hours per year.  We have entered into an agreement with KansasCity Power and Light Company to provide for our electricity needs for a term of15 years.

On May 10, 2005, we entered into anagreement with ICM, Inc. for the purchase of a steam turbinegenerator.  In order to finance thepurchase of the generator, we executed a promissory note for $1,760,274 toICM, Inc and granted a security interest in the generator toICM, Inc. as collateral for the loan. See MANAGEMENT’S DISCUSSION AND ANALYSIS — Liquidity and CapitalResources, Debt Financing” for a more detailed discussion of this note. The generator can generate up to approximately 25% of the plant’s electricityneeds and results in a net energy savings. The generator was online and in production for all of 2006. On March 31, 2006 the note to ICM, Inc. was paid in full.

***Water***

We will require asignificant supply of water, approximately 350,000 gallons per day.  We have entered into an agreement with theCity of Garnett for our water requirements at the usual rates.

**Research and Development**

We donot conduct any research and development activities associated with thedevelopment of new technologies for use in producing ethanol and distillersgrains.

**Management and Employees**

UBE Services, LLC, successor to United Bio EnergyManagement, LLC, managed the day-to-day operations of our ethanol plantpursuant to a management agreement dated November 12, 2004.  On January 3, 2007, the Company and UBEServices executed a Termination Agreement terminating the management agreementeffective December 31, 2006 (the “Termination Date”).  The Termination Agreement provides that theCompany and UBE Services mutually agree to release each other from theircontractual obligations and any and all claims, losses, expenses or damagesarising as to or under the management agreement as of the Termination Date.  In exchange for early termination, theCompany agreed to pay UBE Services the fixed annual fee and incentive bonus setforth in the management agreement through December 31, 2006.  In addition, the Termination Agreementprovides that we shall have the right to continue to participate in the UBEPlant Manager Program and UBE Group Buying Program for one year following theTermination date in exchange for the payment of 10,000 per month.

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Effective January 15, 2007, we hired Steven L. Gardnerto serve as our general manager. Pursuant to the employment agreement, we will pay Mr. Gardner a basesalary of $125,000 and a one-time payment for moving expenses.  In addition, he will be eligible for anannual bonus based on his achievement of performance conditions and is entitledto participate in any and all benefit plans adopted by the Company, subject toeligibility requirements imposed by such plans, including group medical,dental, vision and term life insurance and 401(k) retirement savings plan.

We employ 33 full-time employees, 29 ofwhom are employed in ethanol production operations and 4 are employed ingeneral management and administration. The following table represents the positions held by our currentemployees:

 
| ** ** | **Position**                             | ** ** | ** ** | **# Employed** | ** ** | ** ** |
|------------|------------------------------------------|------------|------------|----------------|------------|------------|
|       | General Manager                          |       |       | 1              |       |       |
|       | Chief Financial  Officer &Controller |       |       | 1              |       |       |
|       | Administrative /  Clerical               |       |       | 2              |       |       |
|       | Plant Manager                            |       |       | 1              |       |       |
|       | Operations  Manager                      |       |       | 1              |       |       |
|       | Lab, Safety  & Environmental         |       |       | 3              |       |       |
|       | Shift  Supervisors                       |       |       | 4              |       |       |
|       | Plant Operators                          |       |       | 9              |       |       |
|       | Maintenance  Supervisor                  |       |       | 1              |       |       |
|       | Maintenance  Craftsmen                   |       |       | 5              |       |       |
|       | Material  Handlers                       |       |       | 4              |       |       |
|       | Scale Operator                           |       |       | 1              |       |       |
| ** ** | **TOTAL**                                | ** ** | ** ** | **33**         | ** ** | ** ** |

 

We do not expect a significant change in the numberemployees over the next 12 months.

**ITEM 1A.  RISK FACTORS.**

*You should carefully read and consider the risks anduncertainties below and the other information contained in this report. The risks and uncertainties described below are not the only ones we mayface.  The following risks, together with additional risks anduncertainties not currently known to us or that we currently deem immaterialcould impair our financial condition and results of operation.*

**Risks Relating to Our Business**

***We have a limited operating history and our******operating results could fluctuate significantly******. ***We began our business in 2001 and commencedproduction of ethanol at our plant in June 2005.  Accordingly, we have alimited operating history from which you can evaluate our business andprospects.  Our operating results could fluctuate significantly inthe future as a result of a variety of factors many of which are outside ourcontrol. These factors include:

·                  Weather, supply and demand and othervariables affecting the price and supply of corn;

·                  Changes in interest rates andavailability of credit;

·                  Reliability and construction qualityof the ethanol plant to permit it to operate at a level that we expect;

·                  Legislative changes in policy at thefederal or state level concerning ethanol and gasoline additives;

·                  Amount and timing of capitalexpenditures and other costs relating to maintenance or expansion of ouroperations;

·                  Technical difficulties in operatingthe ethanol plant;

·                  New products and new plants fromethanol producers or oil companies; and

·                  Generaleconomic conditions, or economic events specific to agriculture, oil or automobilemarkets.

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As a result of these factors, and other risk factorsdescribed herein, our operating results may not be indicative of futureoperating results and you should not rely on them as indications of our futureperformance.  In addition, our prospects must beconsidered in light of the risks and uncertainties encountered by anearly-stage company and in rapidly growing industries, such as the ethanolindustry, where supply and demand may change substantially in a short amount oftime.

***We aredependent upon United Bio Energy, LLC and its subsidiaries to operate ourethanol plant.**** *There areseveral material agreements in effect with subsidiaries of United Bio Energy, LLC (“UBE”) with respectto the operations of the plant.  Provista is the sole buyer of our ethanol.UBE Ingredients is the sole marketer of our distillers grains and procures allof the corn and milo needed for ethanol production at our plant. UBE Tradingprovides us with overall risk management. In addition, UBE is owned by US BioEnergy Corporation of Brookings,South Dakota which builds and operates biofuel production facilities which maybe in competition with our plant.  Ifany of these parties were to terminate any of these relationships, we believethat we can locate other arrangements for the sale and distribution of ourproducts and procurement of our grain inputs. However, if we are not able to secure suitable and timely replacementsfor those services at a reasonable cost or at all, it would materially harm ourbusiness.

***Our business is not diversified.***  Our success depends largely upon ourability to profitably operate our ethanol plant. We do not have any other linesof business or other sources of revenue if we are unable to operate our ethanolplant and manufacture ethanol and distillers grains.  If economic orpolitical factors adversely affect the market for ethanol, the Company has noother line of business to fall back on if the ethanol business declines. Ourbusiness would also be significantly harmed if its ethanol plant could notoperate at full capacity for any extended period of time.

***Increases in the price of corn,milo and natural gas would reduce our profitability*. **Our results of operations and financialcondition are significantly affected by the cost and supply of corn, milo andnatural gas. Changes in the price and supply of these commodities are subjectto and determined by market forces over which we have no control.

Ethanol production requires substantial amounts ofcorn.  The availability and price of cornis influenced by weather, governmental policy, disease and other marketconditions.  Generally, higher cornprices will produce lower profit margins. Competition for corn hassignificantly increased and we expect it will continue to increase.  As a result, corn prices have trendedhigher.  If we experience a sustainedperiod of high corn or milo prices, such pricing may reduce our ability togenerate revenue and our profit may significantly decrease.

Theprices for and availability of natural gas, like corn, are also subject tovolatile market conditions.  In addition, natural gas has recently beenavailable only at prices exceeding historical averages.  Moreover, significant disruptions in thesupply of natural gas could impair our ability to manufacture ethanol for ourcustomers.  Generally, higher input prices produce lower profit margins.  Thisis especially true if market conditions do not allow us to pass to ourcustomers these increased costs.  In the event of higher prices, there isno assurance that we will be able to pass these costs through to ourcustomers.  Furthermore, increases in our corn or natural gasprices or changes in our corn or natural gas costs relative to corn and naturalgas costs paid by competitors may adversely affect our results of operationsand financial condition.  We seek to minimize the risks fromfluctuations in the prices of corn and natural gas through the use of hedginginstruments.  However, these hedging transactions also involve risks toour business.  See “**Risks Relating to OurBusiness - *We engage in hedging transactionswhich involve risks that could harm our business***.”

***Declines in the price of ethanolor distillers grains would significantly reduce our revenues.***  Ourrevenues are exclusively dependent on the market prices for ethanol anddistillers grains.  These prices can be volatile as a result of a numberof factors.  These factors include the overall supply and demand, theprice of gasoline, level of government support, and the availability and priceof competing products.  For instance, the price of ethanol generally tendsto increase as the price of gasoline increases, and the price of ethanolgenerally tends to decrease as the price of gasoline decreases.  Anylowering of gasoline prices will likely lead to lower prices for ethanol, whichmay decrease our ethanol revenues.  Similarly, the price of distillersgrains generally tends to fluctuate in the same direction as the price of cornand soybean meal.  Therefore, any lowering of corn or soybean meal priceswill likely lead to lower prices of distillers grains.

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The price of ethanol has recently been much higherthan its 10-year average.  We do notexpect these prices to be sustainable as supply from new and existing ethanolplans increases to meet increased demand. The total production of ethanol is at an all time high and continues torapidly expand at this time.  Increasedproduction of ethanol may lead to lower prices. Any decrease in the price at which we can sell our ethanol willnegatively impact our future revenues.

The increased production of ethanol could have otheradverse effects.  For example, theincreased ethanol production could lead to increased supplies of co-productsfrom the production of ethanol, such as distillers grains.  Those increased supplies could outpacedemand, which would lead to lower prices for those co-products.  In addition, distillers grains compete withother protein based animal feed products. The price of distillers grains may decrease in part on the price of thecommodity from which it is derived. Downward pressure on commodity prices, such as soybeans, will generallycause the price of competing animal feed products to decline, resulting indownward pressure on the price of distillers grains.  Any decrease in the prices at which we cansell our distillers grains will negatively affect our revenues.

***The spread between ethanol andcorn prices can vary significantly and we do not expect the spread to remain atrecent high levels. ***Recently, the spread between ethanol and corn prices has been narrowing,due in large part to lower oil prices and high corn prices.  However, thisspread has fluctuated significantly and may fluctuate significantly in thefuture.  Any reduction in the spread between ethanol and corn prices,whether as a result of an increase in corn prices or a reduction in ethanolprices, would adversely affect our results of operations and financialcondition.

***We engage in hedgingtransactions which involve risks that could harm our business.***  We are exposed to market risk fromchanges in commodity prices.  Exposure to commodity price risk resultsfrom our dependence on corn and natural gas in the ethanol productionprocess.  We seek to minimize the risks from fluctuations in the prices ofcorn, natural gas and ethanol through the use of hedging instruments. However, our hedging activities may not successfully reduce the risk caused byprice fluctuation which may leave us vulnerable to high corn and natural gasprices.  In addition, hedging activitiesthemselves can result in costs because price movements in corn, natural gas andethanol contracts are highly volatile and are influenced by many factors,including commodity cash prices that are beyond our control.  We mayincur such costs and they may be significant.

***Changes and advances in ethanolproduction technology may hinder our ability to**compete in the ethanol industry or operateprofitably.*** Advances and changes in the technology of ethanol production are expected tooccur.  Such advances and changes may make the ethanol productiontechnology installed in our plant less desirable or obsolete.  Theseadvances could also allow our competitors to produce ethanol at a lower costthan we are able.  If we are unable to adopt or incorporate technological advances,our ethanol production methods and processes could be less efficient than ourcompetitors, which could cause our plant to become uncompetitive or completelyobsolete.  If our competitors develop, obtain or license technology thatis superior to ours or that makes our technology obsolete, we may be requiredto incur significant costs to enhance or acquire new technology so that ourethanol production remains competitive.

**RisksRelated to Ethanol Industry**

***There are several ethanol plants in various stages of development inthe area surrounding our proposed plant site, which will increase ourcompetition for resources, such as corn, milo, electricity and natural****. * According to the RFA’s Ethanol IndustryOutlook 2007, as of January 2007 Kansas ranks seventh in the nation amongethanol producers.  Kansas has 212.5million gallons per year production capacity online, plus an additional 295million gallons under construction or expansion, for a total of 507.5 milliongallons of production capacity.  As ofFebruary 2007 there are eight operating ethanol plants in Kansas.  In addition, there are four ethanol plants invarious stages of planning, construction and development in the state.  Due to the preliminary nature of many ofthese projects, it is difficult to estimate the number of potential ethanolprojects within our region.  Thesurrounding plants will likely impact the demand for corn and milo in our areaand may increase the price for corn, milo and other resources such aselectricity and natural gas.  At times,we expect that we will have to pay higher prices for corn and milo to ensure wehave adequate supply to produce ethanol at our plant.  As a result, our ability to operateprofitably may be negatively impacted.

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***Increased acceptance of ethanol as a fuel may lead to greater demand,increase in price and shortages of corn, which may cause our plants to becomeunable to produce ethanol or such production may become unprofitable****.*  We anticipate thatincrease in ethanol production will lead to significantly greater demand forcorn.  Such increase may lead todifficulty sourcing corn on economical terms, due to supply shortages.  According to the October 2006 issue ofEthanol Producer Magazine, industry insiders admit that if the United States’entire current corn crop were converted to ethanol, it would only yield enoughethanol to satisfy approximately a quarter of the United States’ currentgasoline consumption.  Supply shortagescould require us to suspend operations at our plant until corn or milo becameavailable at affordable prices. Suspension of operations would adversely affect our business andfinancial condition.  Additionally, theprice we pay for corn or milo at our production facility could increase ifother ethanol production facilities are built in the same general vicinity orif we expand our facility.  Due to theproximity of our proposed plant to other plants, a corn or milo shortage in thegeographic region where we anticipate operating our plant could result inhigher costs of corn or milo and cause us to incur significant transportationcosts to ship in our feedstocks for production which could negatively impactour ability to operate profitably.

***As domesticethanol production continues to grow, ethanol supply may exceed**demand, causing ethanol prices to declineand the value of your investment to be**reduced.* **Thenumber of ethanol plants being developed and constructed in the United Statescontinues to increase at a rapid pace. The recent passage of the Energy PolicyAct of 2005 included a renewable fuels mandate that we expect will furtherincrease the number of domestic ethanol production facilities. According to theRFA’s Ethanol Industry Outlook 2007, ethanol production reached a record highof 4.9 billion gallons in 2006.  The RFAfurther states that domestic ethanol production capacity has increased from 1.9billion gallons per year at December 31, 2001 to an estimated 5.6 billiongallons per year in February 2007.  TheRFA estimates that, as of February 2007, approximately 6.2 billion gallons peryear of additional production capacity is under construction or expansion at 85new and existing facilities.  Inaddition, ADM is undergoing expansion to add 275 million gallons of ethanolproduction, clearly indicating its desire to maintain a significant share ofthe ethanol market with approximately 1,345 million gallons of capacity uponcompletion.

Excess capacity in theethanol industry would have an adverse effect on our results of operations,cash flows and financial condition.  Asthese new plants begin operations, we expect domestic ethanol production tosignificantly increase.  If the demandfor ethanol does not grow at the same pace as increases in supply, we expectthe price for ethanol to decline. Declining ethanol prices will result in lowerrevenues and may reduce or eliminate profits.

***The recenttrend toward consolidation in the ethanol industry may put us at a**competitive disadvantage to the buying andselling power of newly-formed**coalitions****.* There is a recent trend toward consolidation in the ethanol industry asmany farmer-owned plants are aligning themselves with marketing blocks, formingcoalitions to market their ethanol. The advantages to consolidation are theincreased efficiencies and market share that accompany newly-formed coalitionsto sell ethanol. In some cases, lenders influence consolidation by requiringparticular marketers to reduce their risk. In addition to consolidation in themarketing area, ethanol industry leaders are moving towards consolidation inother areas such as plant management, feedstock, services and maintenance. Wemay not be able to compete in this increasingly consolidated market as we maynot have the buying and selling power of these new coalitions. The newcoalitions will likely be able to produce ethanol at a lower cost due to theirpooled resources, which could negatively impact our profitability.

***We operate in an intenselycompetitive industry and compete with larger, better financed entities whichcould impact our ability to operate profitably.***  There is significant competition amongethanol producers.  There are numerousproducer-owned and privately-owned ethanol plants planned and operatingthroughout the Midwest and elsewhere in the United States.  We compete with plants similar to our size, aswell as a number of plants that can produce a wider range of products than wecan and have greater resources than we do.  In addition, the number of ethanol plants being developed andconstructed in the United States continues to increase at a rapid pace.  The recent passage of the Energy Policy Actof 2005 included a renewable fuels mandate that we expect will further increasethe number of domestic ethanol production facilities.  If the demand forethanol does not grow at the same pace as increases in supply, we expect thatlower prices for ethanol will result which may adversely affect our ability togenerate profits and our financial condition.

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***Competition from the advancementof alternative fuels may lessen the demand for**ethanol.***  Alternative fuels, gasoline oxygenates and ethanol productionmethods are continually under development. A number of automotive, industrialand power generation manufacturers are developing alternative clean powersystems using fuel cells or clean burning gaseous fuels. Like ethanol, theemerging fuel cell industry offers a technological option to address increasingworldwide energy costs, the long-term availability of petroleum reserves andenvironmental concerns. Fuel cells have emerged as a potential alternative tocertain existing power sources because of their higher efficiency, reducednoise and lower emissions. Fuel cell industry participants are currently targetingthe transportation, stationary power and portable power markets in order todecrease fuel costs, lessen dependence on crude oil and reduce harmfulemissions. If the fuel cell and hydrogen industries continue to expand and gainbroad acceptance, and hydrogen becomes readily available to consumers for motorvehicle use, we may not be able to compete effectively. This additionalcompetition could reduce the demand for ethanol, resulting in lower ethanolprices that might adversely affect our results of operations and financialcondition.

***Corn-based ethanol may competewith cellulose-based ethanol in the future,**which could make it more difficult for us to produceethanol on a**cost-effective basis****.*  Most ethanol is currently producedfrom corn and other raw grains, such as milo or sorghum.  This is especially true for the Midwest. Thecurrent trend in ethanol production research is to develop an efficient methodof producing ethanol from cellulose-based biomass, such as agricultural waste,forest residue, municipal solid waste, and energy crops. This trend is drivenby the fact that cellulose-based biomass is generally cheaper than corn, andproducing ethanol from cellulose-based biomass would create opportunities toproduce ethanol in areas which are unable to grow corn. Significant resourcesare being allocated to promote research and development of cellulose-basedethanol.  If an efficient method ofproducing ethanol from cellulose-based biomass is developed, we may not be ableto compete effectively.  If we are unableto produce ethanol as cost-effectively as cellulose-based producers, ourability to generate revenue and financial condition may be negatively impacted.

**C*ompetitionfrom ethanol imported from Brazil and Caribbean Basin countries may be a less**expensive alternative to our ethanol.***  Brazil is currently one of the world’slargest producers and exporters of ethanol. Ethanol is produced morecheaply in Brazil than in the United States because of the use of sugarcane, aless expensive raw material alternative to corn.  In addition, ethanol produced or processed in certain countries in Central America andthe Caribbean region is eligible for tariff reduction or elimination uponimportation to the United States under a program known as the Caribbean BasinInitiative.  Competition from ethanolimported from Caribbean Basin countries or Brazil may affect our ability tosell our ethanol profitably, adversely affecting our results of operations andfinancial condition.

***Consumer resistance to the useof ethanol based on the belief that ethanol is**expensive, adds to air pollution, harms enginesand/or takes more energy to**producethan it contributes may affect the demand for ethanol.***  Certain individuals believe that useof ethanol will have a negative impact on gasoline prices at the pump. Manyalso believe that ethanol adds to air pollution and harms car and truckengines. Still other consumers believe that the process of producing ethanolactually uses more fossil energy, such as oil and natural gas, than the amountof ethanol that is produced. These consumer beliefs could potentially bewide-spread. If consumers choose not to buy ethanol, it would affect the demandfor the ethanol we produce which could lower demand for our product andnegatively affect our profitability and financial condition.

**RisksRelated to Regulation and Governmental Action**

***A change in government policiesfavorable to ethanol may cause demand for**ethanol to decline.***  Growth and demand for ethanol may bedriven primarily by federal and state government policies, such as state lawsbanning MTBE and the national renewable fuels standard. The continuation ofthese policies is uncertain, which means that demand for ethanol may decline ifthese policies change or are discontinued. A decline in the demand for ethanolis likely to cause lower ethanol prices which in turn will negatively affectour results of operations, financial condition and cash flows.

***A change ingovernment policies favorable to ethanol may cause demand for**ethanol to decline, which could reduce thevalue of your investment.* **Growthand demand for ethanol may be driven primarily by federal and state governmentpolicies, such as state laws banning Methyl Tertiary Butyl Ether (MTBE) and thenational renewable fuels standard. The continuation of these policies isuncertain, which means that demand for ethanol may decline if these policieschange or are discontinued. A decline in the demand for ethanol may affect ourability to sell our ethanol profitably.

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***Loss offavorable incentives for the ethanol industry as a whole or ineligibility fortax benefits for ethanol production could hinder our ability to operate at aprofit and reduce the value of your investment in us****.*

*Renewable Fuels Standard. *The ethanol industry isassisted by various federal ethanol production and tax incentives, includingthose set forth in the Energy Policy Act of 2005.  The provision of the Energy Policy Act of2005 likely to have the greatest impact on the ethanol industry is the creationof a national 7.5 billion gallon renewable fuels standard (RFS).  The RFS requires that gasoline sold byrefiners, importers and blenders must contain an increasing amount of renewablefuel, such as ethanol or biodiesel.  TheRFS began at 4 billion gallons in 2006, and will increase to 7.5 billiongallons by 2012.  The RFS for 2007 is 4.7billion gallons, which is slightly less than the amount of ethanol produced in2006. The RFS helps support a market for ethanol that might disappear withoutthis incentive; as such, waiver of RFS minimum levels of renewable fuelsincluded in gasoline could have a material adverse effect on our results ofoperations.

In September 2006, theEnvironmental Protection Agency (EPA) released a proposed final rule for acomprehensive, long-term RFS program starting in 2007.  The new regulation proposes that 3.71 percent(or 4.7 billion gallons) of all the gasoline sold or dispensed to U.S.motorists in 2007 be renewable fuel. In 2006, approximately 4.5 billion gallonsof renewable fuel was consumed as motor vehicle fuel in the United States.  The rule also contains compliance tools and acredit and trading system which allows renewable fuels to be used where theyare most economical, while providing a flexible means for industry to complywith the standard.  Various renewablefuels, including biodiesel and ethanol, can be used to meet the requirements ofthe RFS program.  The RFS must be met byrefiners, blenders and importers.  Inorder to comply with the RFS, each batch of renewable fuel produced is assigneda unique Renewable Identification Number (RIN). Final rules are expected to be promulgated by the EPA in 2007; however,there is no guarantee that the EPA’s proposed final rule will be enacted, orthat the industry will comply with the rule’s requirements.

PresidentBush’s 2007 State of the Union Address proposed an expansion and reform of theRenewable Fuels Standard (RFS).  Tocomply with the current standard, fuel blenders must use 7.5 billion gallons ofrenewable fuels in 2012.  Under thePresident’s proposal, the fuel standard will be set at ****35 billion gallons ofrenewable and alternative fuels in 2017.****  The President’s proposal will also increasethe scope of the current Renewable Fuel Standard (RFS), expanding it to anAlternative Fuel Standard (AFS).  The AFSwill include sources such as corn ethanol, cellulosic ethanol, biodiesel,methanol, butanol, hydrogen and alternative fuels.

The President’s ambitiousgoals are not likely to be reached with current technology and exclusively miloor corn-derived ethanol.  We cannotassure you that legislation addressing these goals will be adopted.

*Volumetric Ethanol Excise TaxCredit.*** **On October 22, 2004, PresidentBush signed into law the American Jobs Creation Act of 2004 (JOBS Bill), whichincludes the provisions of the Volumetric Ethanol Excise Tax Credit(VEETC).  The VEETC provides a credit of5.1 cents per gallon on 10% ethanol blends. This tax credit is received by gasoline refiners and blenders forblending ethanol into their fuel.  Thecredit took effect in 2005 and is set to expire in 2008.  Legislation was introduced in the first dayof the 2007 Congress which proposes a permanent extension of the VEETC;however, there is no guarantee that this proposed legislation will be adopted.

*Small Ethanol Producer TaxCredit. *Anotherimportant provision of the Energy Policy Act of 2005 involves an expansion inthe definition of who qualifies as a small ethanol producer.  Historically, small ethanol producers wereallowed a 10 cents per gallon production income tax credit on up to 15 milliongallons of production annually.  The sizeof the plant eligible for the tax credit was limited to 30 milliongallons.  Under the Energy Policy Act of2005, the size limitation on the production capacity for small ethanolproducers increases from 30 million to 60 million gallons.  The small ethanol producer tax credit is setto expire December 31, 2010.  As with theVEETC, legislation was introduced in the first 2007 session of Congress whichproposes to make the small ethanol producer credit permanent.  There is no guarantee that this proposedlegislation will be adopted.

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The elimination orreduction of tax incentives to the ethanol industry, such as the VolumetricEthanol Excise Tax Credit (VEETC) available to gasoline refiners and blenders,could also reduce the market demand for ethanol, which could reduce prices andour revenues by making it more costly or difficult for us to produce and sellethanol. If the federal tax incentives are eliminated or sharply curtailed, webelieve that a decreased demand for ethanol will result, which could result inthe failure of our business.

***Changes inenvironmental regulations or violations of the regulations could be**expensive and reduce our profit and thevalue of your investment.* **Wewill be subject to extensive air, water and other environmental regulations andwe will need to obtain a number of environmental permits to construct andoperate the proposed plant. In addition, it is likely that our senior debtfinancing will be contingent on our ability to obtain the various environmentalpermits that we will require. If for any reason, any of these permits are notgranted, construction costs for the plant may increase, or the plant may not beconstructed at all. Additionally, any changes in environmental laws andregulations, both at the federal and state level, could require us to invest orspend considerable resources in order to comply with future environmentalregulations. The expense of compliance could be significant enough to reduceour profit.

**ITEM 2. DESCRIPTION OF PROPERTY.**

The ethanol plantis located on an approximately 59 acres located in the Golden Prairie Industrial Park on the edge ofGarnett, Kansas.  The plant’s address is 1304 S. Main Street, Garnett, Kansas 66032.

The plant isdesigned to grind approximately 13 million bushels of corn and milo per year toproduce approximately 35 million gallons of ethanol.  Construction of the plant was substantiallycompleted in July 2005 with final construction items completed in September2005.  The ethanol plant consists of thefollowing buildings:

·                  A fermentation and processing building, which contains processingequipment, laboratories, control room and offices.  This building also includes a maintenancearea with offices, spare parts storage, welding shop and maintenance equipment;

·                  A grain handling and storage building, which contains a controlroom and 1st and 2nd level mezzanines for cleaning, grinding and conveyingcorn;

·                  An administrative building, along with furniture and fixtures,office equipment and computer and telephone systems.

·                  An energy building which contains centrifuges, DDGS dryers,thermal oxidizer, steam turbine generator and reverse osmosis water filtrationssystem.

·                  A pump house which contains a motor control room, diesel poweredfire pump and water pump for process water.

Inaddition, the plant includes a fermenter walkway, evaporator and storagefacilities for ethanol and distillers grains. The site also contains improvements such as landscaping, drainagesystems and paved access roads.  OnApril 5, 2005, we received an easement from the State of Kansas inexchange for $1.00 which will allow us to construct and operate a railroad spurline across state park property owned by the State of Kansas.  Althoughthe site has accessibility to rail transportation, our distribution needs are currently satisfied by truck transportationand we do not anticipate constructing a rail spur to access such railtransportation  in the immediatefuture.  We are always assessing themarket demand and will address construction of the rail spur as the need foradditional transportation methods arise.

We have transferred title to the plantsite and improvements to the City of Garnett as the security for the industrialrevenue bond financing from the City of Garnett and are leasing back the sitein exchange for lease payments in an amount that is equal to the amount ofinterest to be paid on the City of Garnett Bonds.  The industrial revenue bonds that wepurchased from the City of Garnett serve as collateral for our term debtfinancing with HomeFederal Savings Bank.  SeeMANAGEMENT’S DISCUSSION AND ANALYSIS — Liquidity and Capital Resources, DebtFinancing” for a more detailed discussion of these transactions.

**ITEM3.  LEGAL PROCEEDINGS**

OnNovember 17, 2006, the County of Anderson, Kansas appealed to the Court ofAppeals of the State of Kansas, the decision of the Kansas Board of Tax Appealsaffirming exemption from ad valorem taxation through the 

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issuance ofrevenue bonds to us by the City of Garnett. On December 20, 2005, we completed an industrial revenue bond financingwith the City of Garnett, Kansas, which we expect to provide property taxsavings for 10 years on the plant site. We purchased all of the Bonds offered by the City of Garnett.  In the appeal filed with the Kansas Court ofAppeals, the County is seeking to have the issuance of those bondsoverturned.  The action is being vigorouslydefended and we believe the issuance of the bonds will be upheld.

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

Wedid not submit any matter to a vote of our unit holders through thesolicitation of proxies or otherwise during the fourth quarter ended December31, 2006.

**PART II**

**ITEM 5. MARKET FOR MEMBERSHIP UNITS AND RELATED MEMBER MATTERS**

**MarketInformation**

There is no public trading market for ourunits.  We have created a private qualifiedonline matching service in order to facilitate trading of our units.  Our online matching service consists of anelectronic bulletin board that provides information to prospective sellers andbuyers of our units.  We do not receiveany compensation for creating or maintaining the matching service.  We do not become involved in any purchase orsale negotiations arising from our qualified matching service.  In advertising our qualified matchingservice, we do not characterize the Company as being a broker or dealer or anexchange.  We do not give advice regardingthe merits or shortcomings of any particular transaction.  We do not receive, transfer or hold funds orsecurities as an incident of operating the online matching service.  We do not use the bulletin board to offer tobuy or sell securities other than in compliance with the securities laws,including any applicable registration requirements.  We have no role in effecting the transactionsbeyond approval, as required under our operating agreement and the issuance ofnew certificates.  So long as we remain apublicly reporting company, information about the Company will be publiclyavailable through the SEC’s filing system. However, if at any time we cease to be a publicly reporting company, wewill continue to make information about the Company publicly available on ourwebsite.

**Unit Holders**

As of December 31, 2006, we have approximately 703unit holders of record.  There is noother class of membership units issued or outstanding.

**Distributions**

OnJune 10, 2006 our Board of Directors approved a cash distribution of $196 perunit to the holders of membership units of record at the close of business onMay 10, 2006.  The distribution was paid in June 2006.  On August 18, 2006, our Board of Directorsapproved a cash distribution of $159 per unit to the holders of membershipunits of record at the close of business on June 30, 2006.  Thedistribution was paid in August 2006.  OnNovember 10, 2006, our Board of Directors approved a cash distribution ofapproximately $207 per unit to the holders of membership units of record at theclose of business on September 30, 2006.  The distribution was paid inNovember 2006. Revenuesgenerated from plant operations are distributed by the Company to our unitholders in proportion to the number of units held by each unit holder.  A unit holder’s distribution is determined bydividing the number of units owned by such unit holder by the total number ofunits outstanding.   Our board of directors has completediscretion over the timing and amount of distributions to our unit holders,however, our operating agreement requires the board of directors to endeavor tomake cash distributions at such times and in such amounts as will permit ourunit holders to satisfy their income tax liability in a timely fashion. Ourexpectations with respect to our ability to make future distributions arediscussed in greater detail under “MANAGEMENTS DISCUSSION AND ANALYSIS-Liquidity and Capital Resources, Debt Financing.”

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**ITEM6.  MANAGEMENT’S DISCUSSION AND ANALYSIS**

This report contains historical information, as wellas forward-looking statements that involve known and unknown risks and relateto future events, our future financial performance, or our expected futureoperations and actions.  In some cases,you can identify forward-looking statements by terminology such as “may,” “will,”“should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “future,” “intend,”“could,” “hope,” “predict,” “target,” “potential,” or “continue” or thenegative of these terms or other similar expressions.  These forward-looking statements are only ourpredictions based upon current information and involve numerous assumptions,risks and uncertainties.  Our actualresults or actions may differ materially from these forward-looking statementsfor many reasons, including the reasons described in this report.  While it is impossible to identify all suchfactors, factors that could cause actual results to differ materially fromthose estimated by us include:

·       Overcapacitywithin the ethanol industry;

·       Actualethanol and distillers grains production varying from expectations;

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

·       Changesin the price and market for ethanol and distillers grains;

·       Ourability to market and our reliance on third parties to market our products;

·       Changesin or elimination of governmental laws, tariffs, trade or other controls orenforcement practices such as:

—                    national,state or local energy policy;

—                    federalethanol tax incentives;

—                    legislationestablishing a renewable fuel standard or other legislation mandating the useof ethanol or other oxygenate additives;

—                    stateand federal regulation restricting or banning the use of MTBE; or

—                    environmentallaws and regulations that apply to our plant operations and their enforcement;

·       Changesin the weather or general economic conditions impacting the availability andprice of corn and natural gas;

·       TotalU.S. consumption of gasoline;

·       Fluctuationsin petroleum prices;

·       Changesin plant production capacity or technical difficulties in operating the plant;

·       Changesin our business strategy, capital improvements or development plans;

·       Resultsof our hedging strategies;

·       Ourability to generate free cash flow to invest in our business and service ourdebt;

·       Changesand advances in ethanol production technology; 

·       Competitionfrom alternative fuels and alternative fuel additives; and

·       Otherfactors described elsewhere in this report.

 

The cautionary statements referred to in this sectionalso should be considered in connection with any subsequent written or oralforward-looking statements that may be issued by us or persons acting on ourbehalf.  We undertake no duty to updatethese forward-looking statements, even though our situation may change in thefuture. Furthermore, we cannot guarantee future results, events, levels ofactivity, performance, or achievements. We caution you not to put undue reliance on any forward-lookingstatements, which speak only as of the date of this report.  You shouldread this report and the documents that we reference in this report and havefiled as exhibits completely and with the understanding that our actual futureresults may be materially different from what we currently expect.  Wequalify all of our forward-looking statements by these cautionary statements.

**Overview**

Wewere formed as a Kansas limited liability company on October 16, 2001, for thepurpose of constructing and operating an ethanol plant near Garnett in easternKansas.   In June 2005, we completed theconstruction of our 35 million gallon per year ethanol plant and since then, wehave been engaged in the production of ethanol and distillers grains.

Ourrevenues are derived from the sale and distribution of our ethanol anddistillers grains throughout the continental United States.  We purchase all of our corn and milo from UBEIngredients.  See “DESCRIPTION OFBUSINESS — Sources of Raw Materials- Corn and Milo Feedstock Supply, Raw Grains Agreement” forinformation regarding our raw grains agreement with UBE Ingredients.  After processing the corn, our ethanol and 

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distillers grains aresold to Provista and UBE Ingredients, respectively, which subsequently marketsand sells our products.  See “DESCRIPTION OF BUSINESS — Sales and Distribution of Principal Products,” forinformation regarding our ethanol agreement with Provista and our distillersgrains marketing agreement with UBE Energy Ingredients.

Weexpect to fund our operations during the next 12 months using cash flow fromcontinuing operations and our credit facilities.

We are subject to industry-wide factors that affectour operating income and cost of production. Our operating results are largely driven by the prices at which we sellethanol, distillers grain and corn oil and the costs related to theirproduction.  Historically, the price of ethanol tends to fluctuate in thesame direction as the price of unleaded gasoline and other petroleumproducts.  Surplus ethanol supplies alsotend to put downward price pressure on ethanol. In addition, the price of ethanol is generally influenced by factorssuch as general economic conditions, the weather, and government policies andprograms.  The price of distillers grains is generally influenced bysupply and demand, the price of substitute livestock feed, such as corn andsoybean meal, and other animal feed proteins. Surplus grain supplies also tend to put downward price pressure ondistillers grains.  In addition, ourrevenues are also impacted by such factors as our dependence on one or a fewmajor customers who market and distribute our products; the intensely competitivenature of our industry; possible legislation at the federal, state, and/orlocal level; changes in federal ethanol tax incentives, and the rapid growth inethanol production capacity.

Ourtwo largest costs of production are corn and natural gas.  Both of these costs are affected by factorslargely out of our control.  The cost ofcorn is affected primarily by the market’s perception of supply and demandfactors such as crop production, industry year end inventories, exports,government policies and programs, risk management and weather.  The growth of the ethanol industry itself hasincreased the average price of corn and is expected to continue to increase theaverage price of corn as demand for corn continues to rise.  Natural gas prices fluctuate with the energycomplex in general, but also have independent cost factors such as weather inthe production areas, storage, pipeline capacity, and weather in useareas.  Over the last few years, naturalgas prices have trended higher than average and it appears prices will continueto remain above previous averages due to the high price of alternative fuelssuch as fuel oil.  Our costs ofproduction are also affected by the cost of complying with the extensiveenvironmental laws that regulate our industry.

**Analysis of Financial Condition andResults of Operations**

***Comparison of the fiscal yearsended December 31, 2006 and 2005***

The following table shows the results of ouroperations and the percentage of revenues, cost of goods sold, operatingexpenses and other items to total revenues in our statement of operations forthe fiscal years ended December 31, 2006 and 2005 (It is important to note whencomparing these two periods that the fiscal year ending December 31, 2005represents only 7 months of production since the plant only became operationalin June of 2005):

 
| ** **                 | ** ** | **Year Ended   December 31, 2006** | ** ** | **Year Ended  December 31, 2005** | ** ** |
|----------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------|------------|
| **Income  Statement Data** | ** ** | **Amount**                                             | ** ** | **%**                                            |       | **Amount** |   | **%** |   |
| Revenues                   |       | $                                                      | 96,642,827 |                                             | 100.0      |   | $ | 35,591,321 |   | 100.0 |   |
|                       |       |                                                   |       |                                             |       |   |   |   |   |
| Cost of Goods  Sold        |       | $                                                      | 58,748,450 |                                             | 60.8       |   | $ | 26,879,985 |   | 75.5 |   |
|                       |       |                                                   |       |                                             |       |   |   |   |   |
| Gross Profit               |       | $                                                      | 37,894,377 |                                             | 39.2       |   | $ | 8,711,336 |   | 24.5 |   |
|                       |       |                                                   |       |                                             |       |   |   |   |   |
| Operating  Expenses        |       | $                                                      | 3,256,094  |                                             | 3.4        |   | $ | 1,781,495 |   | 5.0 |   |
|                       |       |                                                   |       |                                             |       |   |   |   |   |
| Operating Income           |       | $                                                      | 34,638,283 |                                             | 35.8       |   | $ | 6,929,841 |   | 19.5 |   |
|                       |       |                                                   |       |                                             |       |   |   |   |   |
| Other Income  (Expense)    |       | $                                                      | (1,736,993 | )                                                | (1.8       | ) | $ | (1,822,302 | ) | (5.1 | ) |
|                       |       |                                                   |       |                                             |       |   |   |   |   |
| **Net Income**             |       | $                                                      | 32,901,290 |                                             | 34.0       |   | $ | 5,107,539 |   | 14.4 |   |

 

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*Revenues*.  Revenues from operations for the fiscal yearended December 31, 2006 totaled $96,642,827. In the fiscal year ended December 31, 2006 ethanol comprisedapproximately 86% of our sales and DDGS comprised approximately 12% of oursales.  Revenues from operations for thefiscal year ended December 31, 2005 totaled $34,591,321, of which ethanolcomprised approximately 81% of our sales and DDGS comprised approximately14%.  The increase in revenues fromoperations for the fiscal year ended December 31, 2006 compared to the fiscalyear ended December 31, 2005 is substantially a result of a 32% increase in theprice per gallon of ethanol and a 213% increase in gallons produced.   The 213% increase in gallons produced is aresult of a full year in production in 2006 as compared to only 7 months ofproduction in 2005 as well as an approximate 10% increase in the averageproduction rate in 2006.  The sales pricefor our distillers grains has remained relatively unchanged in the fiscal yearended December 31, 2006 compared to the previous fiscal year ended December 31,2005.  Distillers grains prices areexpected to remain stable in relation to corn prices for the foreseeable futureunless the price of soybean meal or other protein sources changesignificantly.  Additionally, anincreased supply of distillers grains resulting from additional ethanolproduction may put downward pressure on distillers grain prices.

Althoughthe price of ethanol continues to exceed historical averages, values havetrended lower since their peak in July of 2006. Management currently expects short-term and mid-term ethanol prices toremain higher than historical averages. However, management believes the industry will need to continue to growdemand in order to sustain these higher values. According to the Renewable Fuels Association, as of March 13, 2007 therewere 114 ethanol plants in operation nationwide with the capacity to producemore than 5.6 billion gallons annually, with an additional 80 new plants andseven expansions under construction expected to add an additional estimated 6.4billion gallons of annual production capacity in the next 12 to 18 months.  Unless the new supply is equally met withincreased demand, downward pressure on ethanol prices could occur.  If ethanol prices start to decline, ourearnings will decline in the process, especially if corn costs rise.  Areas where demand for ethanol may increaseare new growing markets in New Jersey, Pennsylvania, Massachusetts, NorthCarolina, South Carolina, Michigan, Ohio, Tennessee, Louisiana, Georgia andTexas.

Ourrevenues and profits are impacted by federal ethanol supports and tax incentives.  Changes to these supports or incentives couldsignificantly impact demand for and value of ethanol.  The Volumetric Ethanol Excise Tax Credit (“VEETC”)is expected to provide the flexibility necessary to expand ethanol blendinginto higher blends of ethanol such as E85, E diesel and fuel cell markets.  In addition, the Energy Policy Act of 2005created a Renewable Fuels Standard (“RFS”) which is expected to favorablyimpact the ethanol industry by enhancing both the production and use ofethanol, at least up to the 7.5 billion gallon mandate required by 2012.  The RFS allows refiners to use renewable fuelblends in those areas where it is most cost-effective.  The RFS required refiners to use 4 billiongallons of renewable fuels in 2006, increasing to 7.5 billion gallons by2012.  The industry surpassed themandated volumes in 2006 and maintained relatively high values.  Although this is a favorable trend for theindustry, it may not continue if future ethanol production outpaces demand andleads to lower ethanol prices.

On September 7, 2006, theEPA proposed rules to govern the implementation of the 2006 RFSrequirement.  The proposed rules wouldrequire that 3.71% of all gasoline sold or dispensed to U.S. motorists in 2007be renewable fuel.  This would be anincrease from the rule issued in December 2005 by the EPA, which implementedthe Energy Policy Act’s default standard of 2.78% for calendar year 2006.  The RFS program is designed to cut petroleumuse by approximately 3.9 billion gallons per year by 2012 and reduce greenhousegas emissions by up to 14 million tons annually.  In addition to preliminary analyses of theeconomic and environmental impacts, the December 2005 regulation explains howindustry is likely to comply with the RFS for 2007 and beyond.  The rule contains compliance tools and acredit trading system that is integral to the overall program.  The system allows renewable fuels to be usedwhere they are most economical, while providing a flexible means for theindustry to comply with the standard. Various renewable fuels can be used to meet the requirements of the RFSprogram, including ethanol and biodiesel. While the RFS program provides certainty that a minimum amount ofrenewable fuel will be consumed in the United States, an even greater quantitycan be consumed if fuel producers and blenders choose to do so.  In 2006, there was approximately 4.5 billiongallons of renewable fuel consumed as motor vehicle fuel in the United States.  The RFS program requires that this volumeincrease to at least 7.5 billion gallons by 2012.

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Since the currentnational ethanol production capacity exceeded the 2006 RFS requirement and willlikely meet or exceed the 2007 RFS requirement, it is management’s belief thatother market factors are primarily responsible for current ethanolprices.  Accordingly, it is possible that the RFS requirements may notsignificantly impact ethanol prices in the short-term.  The majority ofthe ethanol produced is blended with gasoline at 10% or less, and is utilizedas an oxygenate to make the fuel burn cleaner for the environment.  Fuel oxygenates are required in many areasthroughout the United States, where air quality standards are difficult tomaintain.  Methyl Tertiary Butyl Ether(M.T.B.E.) has been a more economical oxygenate source in the past; however,many M.T.B.E. producers and blenders have chosen to discontinue production oruse of the product due to recent elimination of liability protection in therecent RFS legislation.  The rapidphase-out of M.T.B.E. as an oxygenate caused a sharp increase in demand forethanol to supply the much larger oxygenate market in 2006.  For this reason, we saw ethanol trading at alarge premium to gasoline when ethanol was sold as blending stock.   At this time, approximately 80% of theM.T.B.E. market volume has been replaced with ethanol, with the balanceexpected to be replaced by the end of 2007. A large portion of the rapid increase in the supply of ethanol ispresently being absorbed into this oxygenate market; however, when the industryhas met the demand of this market, the price of ethanol may be dictated bytraditional fuel prices.   If the supplyof ethanol continues to increase due to the addition of plants and capacity,and demand is not able to maintain the same pace, there may be a negativeimpact on the price of ethanol and our earnings.

Demandfor ethanol may be enhanced as a result of increased consumption of E85 fuel.E85 fuel is a blend of 70% to 85% ethanol and gasoline. According to the EnergyInformation Administration, E85 consumption is projected to increase from anational total of 11 million gallons in 2003 to 47 million gallons in 2025. E85can be used as an aviation fuel, as reported by the National Corn GrowersAssociation, and as a hydrogen source for fuel cells. According to theRenewable Fuels Association, there are currently more than 5 million flexiblefuel vehicles capable of operating on E85 in the United States and automakerssuch as Ford and General Motors have indicated plans to produce several millionmore flexible fuel vehicles per year. The American Coalition for Ethanol reports that there are currentlyapproximately 1,000 retail gasoline stations supplying E85.  However, this remains a relatively smallpercentage of the total number of U.S. retail gasoline stations, which isapproximately 170,000.

Publishedstudies on ethanol indicate that, in high concentrations, it may havesignificantly enhanced corrosive effects versus traditional gasoline.  While there have been no documented reports ofcorrosion for UL Listed or Recognized components used with E85, on October 5,2006, Underwriters Laboratories suspended authorization to use the UL Mark oncomponents used in dispensing devices that will dispense any alcohol-blendedfuels containing over 15% alcohol until updated certification requirements areestablished and the effected components have been found to comply withthem.  The lack of a UL seal for fillingstation pumps carrying E85 means that some of these stations may be violatingfire codes, and that new stations intending to install E85 systems may needwaivers from local or state fire marshals. It is the decision of each authority having jurisdiction as to whetherexisting E85 dispensing equipment is allowed to remain in service or is takenout of service until additional supporting information is received.  Underwriters Laboratories has not set adeadline for creating standards that could lead to certification, which couldresult in the closure of some existing E85 fueling stations and delay inopening others.

*Cost of Goods Sold*.  Our cost of goods sold from the production ofethanol and distillers grains is primarily made up of raw grains expenses(corn) and energy expenses (natural gas and electricity).  Cost of goods sold for the fiscal year endedDecember 31, 2006 totaled $58,748,450 as compared to $26,879,985 for the fiscalyear ended December 31, 2005.  Theincrease in cost of goods sold in the fiscal year ended December 31, 2006 ascompared to the previous year is primarily a result of a full 12 months ofoperations in 2006 as opposed to seven months in 2005.

While our corn costs remained stable to what weexperienced in 2005, increased emphasis on alternative fuel sources and use ofcorn in the production of ethanol may put upward pressure on corn prices forthe long term.   We avoided the higherprices in the short-term through use of our risk management program, but thereare limits to our ability to avoid sustained increases in the price ofcorn.   Final USDA crop reports reflect a2006 national corn crop of approximately 10.8 billion bushels, compared to a2005 national corn crop of 11.11 billion bushels.  Although the carryoutsupplies for the 2006 marketing year appear adequate, any production shortfallduring the 2007 growing season will create volatility and may increase our costof corn.  Should supplies of corn tightenor be perceived to be tightening, the market will react with higher prices toencourage producers to plant more acres to corn. These higher prices will havea negative impact to our costs of goods sold.

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Cost of goods sold includes a gain of $590,000 for thefiscal year ending December 31, 2006 related to our corn derivativeinstruments.  We recognize the gains or losses that result from thechanges in the value of our derivative instruments in cost of goods sold as thechanges occur.  As corn prices fluctuate, the value of our derivativeinstruments are impacted, which affects our financial performance.  Weanticipate continued volatility in our cost of goods sold due to the timing ofthe changes in value of the derivative instruments relative to the cost and useof the commodity being hedged.  These instruments are the primary tools of our risk management program.

Natural gas is also an important input to our manufacturingprocess.  We estimate that our natural gas usage is approximately 78,000million British thermal units (“MMBTU”) per month.  We use natural gas todry a majority of our distillers grains products to moisture contents at whichthey can be stored for long periods and transported greater distances, so thatwe can market them to broader livestock markets, including poultry and swinemarkets in the continental United States and to markets in Asia.  Natural gas hasrecently been available only at prices exceeding historical averages. Theseheightened prices increased our costs of production.  Although natural gasprices trended lower as the year progressed, we expect natural gas prices toremain higher than historic value given the higher value of energy sourcesgenerally.  This could increase our gas costs substantially, which willadversely impact our cost of goods sold. We have secured a marketing firm and energy consultant for our naturalgas and will continue to work with them on an on-going basis to mitigate ourexposure to volatile gas prices.

*Gross Profit*.  Gross profit for the fiscal year endedDecember 31, 2006 was approximately $37,894,377 as compared to approximately$8,711,336 for the fiscal year ended December 31, 2005.  This increase is due primarily to a full yearof production in 2006 as compared to only 7 months of production in 2005,increased efficiency and production at the plant, and the favorable spreadbetween the selling prices of our products and the costs of the raw materialsrequired to produce our products.

In the fiscal year ended December 31, 2006, we enjoyeda very favorable spread between the selling price of the ethanol and distillersgrains we sold and the cost of the raw materials we require to produce ourethanol and distillers grains.  We do notexpect the spread between the price we receive for our products and the costsof our raw materials to continue to exist at such a favorable rate in thefuture.  A decrease in this spread willadversely affect our financial performance.

*Operating Expenses*.  Operating expenses for the fiscal year endedDecember 31, 2006 totaled approximately $3,256,094.  Theincrease in operating expenses for the fiscal year ended December 31, 2006 wasprimarily due to a full twelve months of operations as opposed to only sevenmonths in the previous fiscal year ended December 31, 2005.

*Operating Income*. Operating income for the fiscal year ended December 31, 2006 totaledapproximately $34,638,283.  Operatingincome for the fiscal year ended December 31, 2005 totaled approximately$6,929,841.  The increase inoperating income for fiscal year ended December 31, 2006 compared to the fiscalyear ended December 31, 2005 is substantially a result of a 32% increase in theprice per gallon of ethanol and a 213% increase in production.  The production increase is primarily a resultof twelve months of production in 2006 as opposed to seven months of productionin 2005, as well a 10% increase in year over year average rate of production.

*Other Income (Expense)*.  Ourother income and expense for the fiscal year ended December 31, 2006 was anexpense of $1,736,993.  Other income andexpense for the fiscal year ended December 31, 2005 was an expense of$1,822,302.  Our other income and expenseitems consist primarily of interest income, lease interest expense and interestexpense.  Interest expense is the majoritem in the Other Income (Expense) category and it was consistent in 2005 and2006.

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***Changes in Financial Condition for the Fiscal Year Ended December 31,2006 Compared to the Fiscal Year Ended December 31, 2005.***

Assets totaled $110,707,641 on December 31, 2006 ascompared to $103,859,381 on December 31, 2005. Current assets totaled $13,149,554 on December 31, 2006 as compared to$9,766,098 on December 31, 2005.  Currentliabilities totaled $5,859,819 on December 31, 2006 as compared to $4,428,030on December 31, 2005.  Long term debt,net of current maturities, totaled $12,059,916 on December 31, 2006 as comparedto $23,438,059 on December 31, 2005.  Ourcapital lease obligation totaled $47,866,117 for the fiscal year ended December31, 2006 as well as for the same period the previous year.

**Liquidityand Capital Resources**

The following table showscash flows for the fiscal years ended December 31, 2006 and 2005:
| ** **                                           | ** ** | **Fiscal year ended December 31** | ** **  |
|------------------------------------------------------|------------|-------------------------------------------------------|-------------|
| ** **                                           | ** ** | **2006**                                              | ** **  | **2005** | ** ** |
| Net cash  provided by operating activities           |       | $                                                     | 34,147,252  |   | $ | 3,175,168 |   |
| Net cash used in  investing activities               |       | (5,544,585                                            | )           | (38,817,615 | ) |
| Net cash provided by  (used in) financing activities |       | $                                                     | (27,890,540 | ) | $ | 34,000,773 |   |

 

***Cash Flow from Operations***

Our net cash flowprovided from operating activities for the fiscal year ended December 31, 2006was $34,147,252, as compared to $3,175,168 for the same period the previousyear.  The increase in net cash flowprovided from operating activities for the fiscal year ended December 31, 2006compared to fiscal year ended December 31, 2005 was primarily due to our plantbeing operational for the entire twelve months in 2006 as compared to onlyseven months in 2005 and the increased revenues from higher ethanolprices.  Our capital needs are being adequately met through cash from ouroperating activities and our current credit facilities.

***Cash Flow Used In Investing Activities***

Our net cash flow used in investing activities for thefiscal year ended December 31, 2006 constituted expenditures of $5,544,585, ascompared to expenditures of $38,817,615 for the same period the previousyear.  The decrease in expenditures forthe fiscal year ended December 31, 2006 compared to the fiscal year endedDecember 31, 2005 is primarily due to the fact that the plant was completed and capitalized in 2005.

***Cash Flow UsedIn Financing Activities***

During 2006, we used approximately $28,000,000 of ourcash to reduce our long term debt ($11,817,424), to acquire treasury units($3,800,000) and to make distributions to our members ($12,306,676).    In contrast, 2005 showed a cash inflow ofapproximately $34,000,000, resultant primarily of our second equity drive($10,000,000) and the proceeds from the long term debt ($26,000,000).  There were no cash distributions made to ourmembers in 2005.

### ***Long-Term Debt Sources***

Long-Term Debt.  In November 23, 2004, we entered into aCredit Agreement with Home Federal Savings Bank of Rochester, Minnesota,establishing a construction loan facility in the amount of $26,000,000 andsecured by substantially all of our assets. We converted the construction loaninto two term loans on September 20, 2005, consisting of (1) a$21,000,000 conventional term loan (“Loan B”), and (2) a $5,000,000 termloan with a potential USDA guarantee of up to 80% of the loan value (“Loan A”). The $5,000,000 loan has an amortization period and maturity date of 10years.  We make monthly payments ofprincipal and interest on the $5,000,000 loan at an interest rate ofprime.  The $21,000,000 conventional loanhas an amortization period of ten years but will mature at the end of fiveyears.  We make monthly payments ofprincipal and interest on the $21,000,000 loan at a rate equal to prime.  We pay a $20,000 annual administration feefor the credit facility.  As ofDecember 31, 2006, the principal balance on Loan A was $2,747,614 and theprincipal balance on the Loan B was $11,580,282 .  At December 31, 2006, the effective interestrate for both loans was 8.25%.  Asinterest rates increase, we will incur higher interest payments, which couldadversely affect our net income.

25

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On May 4, 2006, we renegotiated the term of our bankfinancing.  The new terms provide for a$4,000,000 term revolving loan in addition to the existing term loans.  The interest rate on the term revolving loanis the prime rate.  The term revolvingloan available credit balance is reduced by $400,000 annually beginningDecember 31, 2007 and matures on October 1, 2010.  As of December 31, 2006, we had not used anyamount related to the term revolving loan.

During the term of the loan, all our deposit accountsmust be maintained at Home Federal Savings Bank.  We are subject to certain financial loancovenants consisting of minimum working capital, minimum fixed charge coverage,minimum current ration, minimum debt service, minimum net worth and maximumdebt to net worth covenants during the term of the loan.  We are also prohibited from makingdistributions to our members; however, we are allowed to distribute 50% of ournet income to our members after our lender has received audited financialstatements for the fiscal year.  If wemeet certain financial ratio requirements, we may distribute an additional 10%of net income.  We must be in compliancewith all financial ratio requirements and loan covenants before and after anydistributions to the members.  The lendertemporarily waived, through December 31, 2006, certain minimum net worth andmaximum debt to net worth covenants. With the waiver, we are in compliance with the applicable loan covenantsas of December 31, 2006.

We are only allowed to make annual capitalexpenditures up to $500,000 annually without our lender’s prior approval.  During the term of the loan, we are requiredto pay to the lender an annual amount equal to the greater of: 1) 75% of anyCommodity Credit Corporation bio-Energy income payments received during theyear, or 2) 25% of our free cash flow for each year.  Payments consisting of USDA Commodity CreditCorporation Bio-Energy income must be paid to the lender within 15 days ofreceipt of any such payments.  Thesepayments will continue until an aggregate sum of $7,500,000 has been receivedby the lender.  We are in compliance withthe applicable loan covenants as of December 31, 2006.

Industrial Revenue BondFinancing.  OnDecember 20, 2005, we completed an industrial revenue bond financing withthe City of Garnett, Kansas, which we expect to provide property tax savingsfor 10 years on the plant site.  In order to obtain the property taxsavings, we transferred title to the plant site and improvements to the City ofGarnett as security for the repayment of the bonds, and we are leasing back thesite in exchange for lease payments in an amount that is equal to the amount ofinterest to be paid on the City of Garnett Bonds (the “sale-leasebacktransaction”).  We purchased all of the Bonds offered by the City ofGarnett.  Our senior lender, Home Federal Savings Bank, consented to thesale-leaseback transaction, and the bonds have been pledged to Home FederalSavings Bank as security for our obligations under the term debt credit facility. The maximum principal amount of the bonds is $50,000,000.  The bonds wereinitially issued in the principal amount of $47,866,117.  Both the bondsand the corresponding lease have terms of 10 years.  Assuming we have paidall of the interest due under the financing agreements at the end of the10-year period, the financing agreements provide that the City of Garnett willtransfer the plant site and improvements back to East Kansas in return fornominal consideration.

Waste Water BondFinancing.  We financedour waste water reuse facility through two bond issues by the City of Garnett —The Utility System Revenue Bonds (“USR Bonds”) and Community Development BlockGrant Bonds (“CDBG Bonds”).  The USRBonds require annual principal payments beginning on October 1, 2006 andcontinuing through 2015.  Interestpayments on these bonds are due semi-annually, at interest rates ranging from4.6% to 5.2%.  The fist interest paymentwas due April 1, 2006.  The CDBG Bondsrequire semi-annual principal and interest payments beginning on July 1, 2006and continue through 2015.  The bondshave a fixed interest rate of 2%.   As ofDecember 31, 2006, the principal balance on the USR Bonds was $485,000 andthe principal balance on the CDBG Bonds was $323,552.

***Bioenergy Program Payments***

We were enrolled in theUSDA Commodity Credit Corporation’s Bioenergy program.  Under the USDA CCC Bioenergy program, theCommodity Credit Corporation reimbursed eligible ethanol producers of less than65 million gallons of bioenergy in the amount of one bushel of corn for everytwo and one-half bushels of corn used for the increased production ofethanol.  No eligible producer was ableto receive more than $7.5 million under the program. Because we qualified as aneligible producer and annually utilize at least 15 million bushels of corn inthe increased production of ethanol, we were potentially eligible to receivethe maximum award of $7.5 million. However, the Commodity Credit Corporation was able to award only $100million annually for fiscal years 2005 

26

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through 2006, and anyaward we received was reduced based upon the volume of applications from othereligible producers.  Furthermore, CCC’sfunds were exhausted in the third quarter of the government fiscal year, andthe program terminated as of June 30, 2006.

For the fiscal year ended December 31, 2006, werecorded Bioenergy Program income of $726,116 and we do not anticipate any morerevenue from the Bioenergy Program since it was terminated on June 30, 2006.

***State IncentiveFund***

During the 2006 fiscal year, we received payment of$1,580,671 from the Kansas Qualified Agricultural Ethanol Producer IncentiveFund.  These incentive payments are onlyavailable for the first seven years of production.  The available statewide funding for theseincentive payments was $1.5 million per year for 2002-2004 and increased to$3.5 million per year for 2005-2011 plus any excess balance carried over fromthe prior year’s current production account. Any shortfall in the available funds will result in a pro rata decreasein the incentive paid to the individual ethanol producers.

***Subsequent Events***

OnJanuary 3, 2007, we executed a termination agreement with United Bio EnergyServices, LLC (“UBE Services”) the successor to United Bio Energy Management,LLC, effective December 31, 2006 (the “termination date”).  The termination agreement provides that weand UBE Services mutually agree to release each another from their contractualobligations and any and all claims, losses, expenses or damages arising as toor under the management agreement as of the termination date.  In exchange for early termination, we paidUBE Services the fixed annual fee and incentive bonus set forth in themanagement agreement through December 31, 2006. In addition, the termination agreement provides that we have the rightto continue to participate in the UBE Plant Manager Program and UBE GroupBuying Program for one year following the termination date in exchange for thepayment of $10,000 per month.

OnDecember 19, 2006, we hired Steve Gardner to serve as the general manager forour plant beginning January 19, 2007. Pursuant to the employment agreement, we agreed to pay Mr. Gardner abase salary of $125,000 and a one-time payment for moving expenses.  In addition, he will be eligible for anannual bonus based on his achievement of performance conditions and is entitledto participate in any and all benefit plans adopted by us, subject toeligibility requirements imposed by such plans, including group medical,dental, vision and term life insurance and 401(k) retirement savings plans.

OnMarch 21, 2007 our board of directors approved a cash distribution of $132 perunit to the holders of membership units of record at the close of business onDecember 31, 2006.  We expect to pay out the distribution in March  2007.

**Commodity Price Risk Protection**

We seek to minimize therisks from price fluctuations in the prices of raw material inputs and finishedproducts through the use of hedging instruments.  We are using non-hedgederivative accounting for our hedge positions, which means as the currentmarket price of our hedge positions changes, the gains and losses areimmediately recognized in our cost of sales. The immediate recognition ofhedging gains and losses under fair value accounting can cause net income to bevolatile from quarter to quarter due to the timing of the change in value ofthe derivative instruments relative to the cost and use of the commodity beinghedged.  As of December 31, 2006, the fairvalue of our derivative instruments relating to corn are reflected as an assetin the amount of $1,233,359.

Asof December 31, 2006, we have price protection in place for approximately 45%of our corn needs through September 2007. As we move forward, additional protection may be necessary.  As corn prices move in reaction to markettrends and information, our income statement will be affected depending on theimpact such market movements have on the value of our derivativeinstruments.  Depending on marketmovements, crop prospects and weather, these price protection positions maycause immediate adverse effects, but are expected to produce long-term positivegrowth for East Kansas.

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Asof December 31, 2006 we have price protection in place for approximately 50% ofour natural gas needs through March 2007. As we move forward in fiscal year 2007, we may determine that priceprotection for natural gas purchases is necessary to attempt to reduce oursusceptibility to price increases. However, we may not be able to secure natural gas for prices less thancurrent market price and we may not recover high costs of production resultingfrom high natural gas prices, which may raise our costs of production andreduce our net income.

**Off Balance Sheet Arrangements.**

We currently do not have any off-balance sheetarrangements.

**Application of CriticalAccounting Estimates**

Management uses estimatesand assumptions in preparing our financial statements in accordance withgenerally accepted accounting principles. These estimates and assumptions affect the reported amounts of assetsand liabilities, the disclosure of contingent assets and liabilities, and thereported revenues and expenses.  We didnot have any critical accounting estimates as of fiscal year ended December 31,2006.

(Remainder of Page Intentionally Left Blank)

 

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**ITEM 7. FINANCIAL STATEMENTS.**

Table of Contents

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|                          |                                                     | **  Page  ** |
|--------------------------|----------------------------------------------------------|----------------------------------|
|                     |                                                     |                             |   |
| **FINANCIAL STATEMENTS** |                                                     |                             |
|                     | Report of Independent Registered Public Accounting  Firm |                             | 30 |
|                     | Balance Sheets                                           |                             | 31 |
|                     | Statements  of Operations                                |                             | 32 |
|                     | Statements of Changes in Members’ Equity            |                             | 33 |
|                     | Statements  of Cash Flows                                |                             | 34 |
|                     | Notes to Financial Statements                            |                             | 36 |

 

29

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[Eide Bailly LOGO]

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Audit Committee

**EastKansas Agri-Energy, LLC**

Garnett, Kansas

 

We haveaudited the accompanying balance sheets of **EastKansas Agri-Energy, LLC** (a limited liability company) as of December31, 2006 and 2005, and the related statements of operations, changes in members’equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements based upon our audits.

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.   An auditincludes consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting.  Accordingly, we do not express such anopinion.  An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of **EastKansas Agri-Energy, LLC** as of December 31, 2006 and 2005, and theresults of its operations and its cash flows for the years then ended, inconformity with accounting principles generally accepted in the United Statesof America.

/s/ EideBailly LLP

Minneapolis, MinnesotaMarch 27, 2007

[LETTERHEAD]

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**EAST KANSAS AGRI-ENERGY, LLC**

Balance Sheet
| ** **                                                                                                            | ** ** | **2006**       | ** **      | **2005**   | ** **  |
|-----------------------------------------------------------------------------------------------------------------------|------------|----------------|-----------------|------------|-------------|
| **ASSETS**                                                                                                            |       |           |            |       |        |
| CURRENT ASSETS                                                                                                        |       |           |            |       |        |
| Cash and cash  equivalents                                                                                            | ** ** | **$**          | **5,281,272**   |       | 4,569,145 $ |   |
| Trade accounts  receivable - related party                                                                            | ** ** | **3,423,118**  |            | 2,651,546  |        |
| Inventory                                                                                                             | ** ** | **2,282,222**  |            | 1,595,547  |        |
| Investment in  commodity contracts                                                                                    | ** ** | **1,345,752**  |            | 222,951    |        |
| Interest  receivable                                                                                                  | ** ** | **319,107**    |            | 314,736    |        |
| Prepaid expense                                                                                                       | ** ** | **498,083**    |            | 412,173    |        |
| Total current  assets                                                                                                 | ** ** | **13,149,554** |            | 9,766,098  |        |
| PROPERTY, PLANT AND  EQUIPMENT                                                                                        |       |           |            |       |        |
| Land                                                                                                                  | ** ** | **580,322**    |            | 580,322    |        |
| Land  improvements                                                                                                    | ** ** | **2,179,578**  |            | 1,178,941  |        |
| Office equipment                                                                                                      | ** ** | **270,866**    |            | 270,866    |        |
| Buildings                                                                                                             | ** ** | **1,785,915**  |            | 1,668,527  |        |
| Equipment                                                                                                             | ** ** | **46,675,432** |            | 42,019,400 |        |
| Vehicles                                                                                                              | ** ** | **22,743**     |            | 22,743     |        |
| Construction in  progress                                                                                             | ** ** | **65,698**     |            | 1,404,589  |        |
|                                                                                                                  | ** ** | **51,580,554** |            | 47,145,388 |        |
| Less accumulated  depreciation                                                                                        | ** ** | **(4,742,172** | **)**           | (1,578,020 | )           |
| Total property,  plant, and equipment                                                                                 | ** ** | **46,838,382** |            | 45,567,368 |        |
| OTHER ASSETS                                                                                                          |       |           |            |       |        |
| Investment in  Industrial Revenue Bonds                                                                               | ** ** | **47,866,117** |            | 47,866,117 |        |
| Idle property                                                                                                         | ** ** | **2,317,398**  |            | —     |        |
| Other investment                                                                                                      | ** ** | **200**        |            | —     |        |
| Financing costs                                                                                                       | ** ** | **615,288**    |            | 679,099    |        |
| Less accumulated  amortization                                                                                        | ** ** | **(79,298**    | **)**           | (19,301    | )           |
| Total other  assets                                                                                                   | ** ** | **50,719,705** |            | 48,525,915 |        |
| Total assets                                                                                                          | ** ** | **$**          | **110,707,641** |       | $           | 103,859,381 |   |
| **LIABILITIES AND MEMBERS’ EQUITY**                                                                              |       |           |            |       |        |
| CURRENT LIABILITIES                                                                                                   |       |           |            |       |        |
| Current portion  of long-term debt                                                                                    | ** ** | **$**          | **3,076,532**   |       | $           | 2,615,813 |   |
| Accounts payable                                                                                                      |       |           |            |       |        |
| Trade                                                                                                                 | ** ** | **595,285**    |            | 449,316    |        |
| Related parties                                                                                                       | ** ** | **1,384,572**  |            | 813,775    |        |
| Accrued payroll,  taxes and withholdings                                                                              | ** ** | **136,871**    |            | 52,574     |        |
| Other accrued  expenses                                                                                               | ** ** | **302,817**    |            | 89,295     |        |
| Accrued interest                                                                                                      | ** ** | **363,742**    |            | 407,257    |        |
| Total current  liabilities                                                                                            | ** ** | **5,859,819**  |            | 4,428,030  |        |
| LONG-TERM DEBT (less  current maturities)                                                                             | ** ** | **12,059,916** |            | 23,438,059 |        |
| LEASE OBLIGATION                                                                                                      | ** ** | **47,866,117** |            | 47,866,117 |        |
| MEMBERS’ EQUITY                                                                                                  |       |           |            |       |        |
| Capital  contributions, 40,000 units authorized, 23,798 units issued of which 1,900 units  are held as treasury stock | ** ** | **24,707,100** |            | 24,707,100 |        |
| Treasury stock,  at cost                                                                                              | ** ** | **(3,800,000** | **)**           | —     |        |
| Retained  earnings                                                                                                    | ** ** | **24,014,689** |            | 3,420,075  |        |
| Total members’  equity                                                                                           | ** ** | **44,921,789** |            | 28,127,175 |        |
| Total liabilities and  members’ equity                                                                           | ** ** | **$**          | **110,707,641** |       | $           | 103,859,381 |   |

 

31

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**EASTKANSAS AGRI-ENERGY, LLC**

Statements ofOperations
| ** **                                    | ** ** | **Year**              | ** **     | **Year**              | ** ** |
|-----------------------------------------------|------------|-----------------------|----------------|-----------------------|------------|
| ** **                                    | ** ** | **Ended**             | ** **     | **Ended**             | ** ** |
| ** **                                    | ** ** | **December 31,** | ** **     | **December 31,** | ** ** |
| ** **                                    | ** ** | **2006**              | ** **     | **2005**              | ** ** |
|                                          |       |                  |           |                  |       |
| REVENUE                                       |       |                  |           |                  |       |
| Related parties                               | ** ** | **$**                 | **94,336,041** |                  | $          | 33,645,065 |   |
| Incentive funds                               | ** ** | **2,306,786**         |           | 1,946,256             |       |
|                                          | ** ** | **96,642,827**        |           | 35,591,321            |       |
|                                          |       |                  |           |                  |       |
| COST OF SALES                                 |       |                  |           |                  |       |
| Related parties                               | ** ** | **(37,510,636**       | **)**          | (15,371,411           | )          |
| Other                                         | ** ** | **(21,237,814**       | **)**          | (11,508,574           | )          |
|                                          | ** ** | **(58,748,450**       | **)**          | (26,879,985           | )          |
|                                          |       |                  |           |                  |       |
| GROSS PROFIT                                  | ** ** | **37,894,377**        |           | 8,711,336             |       |
|                                          |       |                  |           |                  |       |
| OPERATING EXPENSES                            |       |                  |           |                  |       |
| General,  administrative and selling expenses | ** ** | **3,256,094**         |           | 855,438               |       |
| Start-up  expenses                            | ** ** | **—**            |           | 926,057               |       |
|                                          | ** ** | **3,256,094**         |           | 1,781,495             |       |
|                                          |       |                  |           |                  |       |
| INCOME FROM OPERATIONS                        | ** ** | **34,638,283**        |           | 6,929,841             |       |
|                                          |       |                  |           |                  |       |
| OTHER INCOME (EXPENSE)                        |       |                  |           |                  |       |
| Interest income                               | ** ** | **3,802,903**         |           | 359,580               |       |
| Interest expense                              | ** ** | **(1,888,269**        | **)**          | (1,869,346            | )          |
| Plant lease  interest expense                 | ** ** | **(3,652,833**        | **)**          | (314,736              | )          |
| Other income                                  | ** ** | **1,206**             |           | 2,200                 |       |
|                                          | ** ** | **(1,736,993**        | **)**          | (1,822,302            | )          |
|                                          |       |                  |           |                  |       |
| NET INCOME                                    | ** ** | **$**                 | **32,901,290** |                  | $          | 5,107,539 |   |
|                                          |       |                  |           |                  |       |
| BASIC AND DILUTED                             |       |                  |           |                  |       |
| BASIC INCOME PER  UNIT                        | ** ** | **$**                 | **1,502**      | ** **            | **$**      | **235** | ** ** |
|                                          |       |                  |           |                  |       |
| DILUTED INCOME PER UNIT                       | ** ** | **$**                 | **1,502**      | ** **            | **$**      | **233** | ** ** |
|                                          |       |                  |           |                  |       |
| WEIGHTED AVERAGE UNITS  OUTSTANDING           |       |                  |           |                  |       |
| BASIC                                         | ** ** | **21,898**            |           | 21,771                |       |
|                                          |       |                  |           |                  |       |
| DILUTED                                       | ** ** | **21,898**            |           | 21,925                |       |

 

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**EAST KANSAS AGRI-ENERGY, LLC**

Statements ofChanges in Members’ Equity
| ** **                      | ** ** | **Units**  | ** ** | **Contributed  Capital** | ** **     | **Treasury  Stock** | ** **      | **Retained  (Deficit)  Earnings** | ** ** | **Total**      | ** ** |
|---------------------------------|------------|------------|------------|--------------------------|----------------|---------------------|-----------------|-----------------------------------|------------|----------------|------------|
| BALANCE, DECEMBER 31,  2004     |       | 14,707     |       | $                        | 14,707,000     |                | —          |                              | $          | (1,518,981     | )          | $ | 13,188,019 |   |
| Units is sued                   |       | 15,341     |       | 16,250,100               |           | —              |            | —                            |       | 16,250,100     |       |
| Units converted to a  liability |       | (6,250     | )          | (6,250,000               | )              | —              |            | —                            |       | (6,250,000     |       |
| Cost of raising capital         |       | —     |       | —                   |           | —              |            | (168,483                          | )          | (168,483       | )          |
| Net income for the year  ended  |       |       |       |                     |           | —              |            |                              |       |           |       |
| December 31,  2005              |       | —     |       | —                   |           | —              |            | 5,107,539                         |       | 5,107,539      |       |
| BALANCE, DECEMBER 31,  2005     |       | 23,798     |       | 24,707,100               |           | —              |            | 3,420,075                         |       | 28,127,175     |       |
| Treasury units  purchased       |       | (1,900     | )          | —                   |           | (3,800,000          | )               | —                            |       | (3,800,000     |       |
| Distributions                   |       | —     |       | —                   |           | —              |            | (12,306,676                       | )          | (12,306,676    | )          |
| Net income for the year  ended  |       |       |       |                     |           |                |            |                              |       |           |       |
| December 31,  2006              |       | —     |       | —                   |           | —              |            | 32,901,290                        |       | 32,901,290     |       |
|                            |       |       |       |                     |           |                |            |                              |       |           |       |
| **BALANCE, DECEMBER 31, 2006**  | ** ** | **21,898** | ** ** | **$**                    | **24,707,100** | ** **          | **(3,800,000$** | **)**                             | **$**      | **24,014,689** | ** ** | **$** | **44,921,789** | ** ** |

 

(Remainder of PageIntentionally Left Blank)

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**EAST KANSAS AGRI-ENERGY, LLC**

Statements of Cash Flows
| ** **                                                                    | ** ** | **Year**         | ** ** | **Year**         | ** ** |
|-------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                    | ** ** | **Ended**        | ** ** | **Ended**        | ** ** |
| ** **                                                                    | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                                                    | ** ** | **2006**         | ** ** | **2005**         | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES                                          |       |             |       |             |       |
| Net income                                                                    | ** ** | **$32,901,290**  |       | $5,107,539       |       |
| Adjustments to  reconcile net income to net cash used in operating activities |       |             |       |             |       |
| Depreciation                                                                  | ** ** | **3,164,152**    |       | 1,571,399        |       |
| Amortization                                                                  | ** ** | **90,248**       |       | 19,301           |       |
| (Increase) decrease in  current assets                                        |       |             |       |             |       |
| Accounts receivable                                                           | ** ** | **(771,572**     | **)**      | (2,651,546       | )          |
| Inventory                                                                     | ** ** | **(686,675**     | **)**      | (1,595,547       | )          |
| Commodity contracts                                                           | ** ** | **(1,122,801**   | **)**      | (222,951         | )          |
| Grants receivable                                                             | ** ** | **—**       |       | 54,906           |       |
| Prepaid expense                                                               | ** ** | **(85,910**      | **)**      | (407,235         | )          |
| Interest receivable                                                           | ** ** | **(4,371**       | **)**      | (314,736         | )          |
| Increase (decrease) in  current liabilities:                                  |       |             |       |             |       |
| Accounts payable                                                              | ** ** | **408,587**      |       | 1,125,975        |       |
| Accrued expenses                                                              | ** ** | **254,304**      |       | 488,063          |       |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                                     | ** ** | **34,147,252**   |       | 3,175,168        |       |
| CASH FLOWS FROM INVESTING ACTIVITIES                                          |       |             |       |             |       |
| Purchase of plant and  equipment, including construction in progress          | ** ** | **(5,634,592**   | **)**      | (38,427,615      | )          |
| Proceeds from refund of  prior year plant and equipment cost                  | ** ** | **90,207**       |       | —           |       |
| Cash payment for  purchase of investment                                      | ** ** | **(200**         | **)**      | —           |       |
| Purchase of land and  land option payments                                    | ** ** | **—**       |       | (390,000         | )          |
| NET CASH (USED IN) INVESTING ACTIVITIES                                       | ** ** | **(5,544,585**   | **)**      | (38,817,615      | )          |
| CASH FLOWS FROM FINANCING ACTIVITIES                                          |       |             |       |             |       |
| Cost of raising capital                                                       | ** ** | **—**       |       | (168,483         | )          |
| Payment of financing  fees                                                    | ** ** | **(46,440**      | **)**      | (124,442         | )          |
| Proceeds from refund of  financing fees                                       | ** ** | **80,000**       |       | —           |       |
| Proceeds from notes  payable                                                  | ** ** | **—**       |       | 90,000           |       |
| Repayment of notes  payable                                                   | ** ** | **—**       |       | (90,000          | )          |
| Proceeds from long-term  debt                                                 | ** ** | **—**       |       | 26,000,000       |       |
| Repayment of long-term  debt                                                  | ** ** | **(11,817,424**  | **)**      | (1,706,402       | )          |
| Acquisition of treasury  units                                                | ** ** | **(3,800,000**   | **)**      | —           |       |
| Distributions                                                                 | ** ** | **(12,306,676**  | **)**      | —           |       |
| Capital contributions                                                         | ** ** | **—**       |       | 10,000,100       |       |
| Redemption of units  converted to a liability                                 | ** ** | **—**       |       | (6,250,000       | )          |
| Proceeds from units  subject to redemption                                    | ** ** | **—**       |       | 6,250,000        |       |
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                           | ** ** | **(27,890,540**  | **)**      | 34,000,773       |       |

 

34

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**EAST KANSAS AGRI-ENERGY, LLC**

Statements of Cash Flows(page 2)
| ** **                                                                | ** ** | **Year**              | ** **    | **Year**              | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------|---------------|-----------------------|------------|
| ** **                                                                | ** ** | **Ended**             | ** **    | **Ended**             | ** ** |
| ** **                                                                | ** ** | **December 31,** | ** **    | **December 31,** | ** ** |
| ** **                                                                | ** ** | **2006**              | ** **    | **2005**              | ** ** |
| NET INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS                     | ** ** | **712,127**           |          | (1,641,674            | )          |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                           | ** ** | **4,569,145**         |          | 6,210,819             |       |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                 | ** ** | **$**                 | **5,281,272** |                  | $          | 4,569,145 |   |
|                                                                      |       |                  |          |                  |       |
| SUPPLEMENTAL DISCLOSURE  OF CASH FLOW INFORMATION                         |       |                  |          |                  |       |
| Cash paid for  interest, net of capitalized interest of $254,282 for 2005 | ** ** | **$**                 | **5,584,617** |                  | $          | 1,776,825 |   |
|                                                                      |       |                  |          |                  |       |
| NON CASH INVESTING AND  FINANCING ACTIVITIES                              |       |                  |          |                  |       |
|                                                                      |       |                  |          |                  |       |
| Property, plant,  and equipment costs incurred                            | ** ** | **$**                 | **338,335**   |                  | $          | 30,155 |   |
|                                                                      |       |                  |          |                  |       |
| Financing costs  incurred                                                 | ** ** | **$**                 | **—**    |                  | $          | 2,272 |   |
|                                                                      |       |                  |          |                  |       |
| Property, plant,  and equipment financed by a note payable                | ** ** | **$**                 | **900,000**   |                  | $          | 1,760,274 |   |
|                                                                      |       |                  |          |                  |       |
| Units subject to  redemption converted to a liability                     | ** ** | **$**                 | **—**    |                  | $          | 6,250,000 |   |
|                                                                      |       |                  |          |                  |       |
| Cost of raising  capital reclassified to members’ equity             | ** ** | **$**                 | **—**    |                  | $          | 168,483 |   |
|                                                                      |       |                  |          |                  |       |
| Lease obligation  issued                                                  | ** ** | **$**                 | **—**    |                  | $          | 47,866,117 |   |
|                                                                      |       |                  |          |                  |       |
| Investment in  Industrial Revenue Bonds                                   | ** ** | **$**                 | **—**    |                  | $          | 47,866,117 |   |

 

35

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**EAST KANSAS AGRI-ENERGY, LLC**

** **

Notes to Financial Statements

December 31, 2006

**NOTE 1 -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

*Nature of Business*

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

*Accounts Receivable*

Accountsreceivable are presented at face value, net of the allowance for doubtfulaccounts.  The allowance for doubtfulaccounts is established through provisions charged against income and ismaintained at a level believed adequate by management to absorb estimated baddebts based on historical experience and current economic conditions.  Management believes all receivables will becollected and therefore the allowance has been established to be zero as of December 31, 2006 and 2005.

The Company’s policy is to charge simple interest ontrade receivables past due balances; accrual of interest is discontinued whenmanagement believes collection is doubtful. Receivables are considered past due based upon payment terms set forthat the date of the related sale.  TheCompany has no receivables accruing interest as of December 31, 2006 and 2005.

*Financing Costs*

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

*Estimates*

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

*Earnings Per Unit*

Earnings per unit arecalculated based on the period of time units have been issued and outstanding.For purposes of calculating diluted earnings per capital unit, units subscribedfor but not issued are included in the computation of outstanding capital units.

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**EAST KANSAS AGRI-ENERGY, LLC**

** **

Notes to Financial Statements

December 31, 2006

*General,administrative and selling expenses*

The primary components of general andadministrative expenses are management fees, insurance expense, sellingexpenses and payroll.

*Revenue Recognition*

Revenue from the production of ethanol andrelated products is recorded upon transfer of title to our customers.  The transfer takes place at the plant siteand therefore shipping terms are FOB shipping point.  Interest income is recognized as earned.  Income from federal and state incentives isrecognized when received due to uncertainty of available funds and pro-rationsused by the sponsoring organizations.

*Cost of Sales*

The primary components of cost of sales fromthe production of ethanol and related products are grain expense, energyexpense (natural gas and electricity), raw materials expense (chemicals anddenaturant), labor and depreciation on process equipment.

*Shipping and Handling*

Shipping and handling costs are expensed asincurred and are included in the cost of sales.

*Organization and Start-up Costs*

Organizational and start-up costs areexpensed as incurred.  Organizationalcosts consist of amounts related to the formation of the company.  Start-up costs consist of amounts incurredduring the development stage related to the operation and management of theCompany, which do not qualify as capitalized costs.

*Income Taxes*

The Company is organized as a limitedliability company under state law and is treated as a partnership for incometax purposes.  Under this type oforganization, the Company’s earnings pass through to the partners and are taxedat the partner level.  Accordingly, noincome tax provision has been calculated. Differences between financial statement basis of assets and tax basis ofassets is related to capitalization and amortization of organizational andstart-up costs for tax purposes, whereas these costs are expensed for financialstatement purposes, and the difference between the recorded amounts offinancial statement and tax depreciation, unrealized gains or losses oncommodity contracts and incentive programs payments.

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**EAST KANSAS AGRI-ENERGY, LLC**

** **

Notes to Financial Statements

December 31, 2006

*Cash Equivalents*

For purposes of the statement of cash flows,the Company considers all highly liquid debt instruments purchased with anoriginal maturity of three months or less to be cash equivalents.

*Fair Value of Financial Instruments*

The Company believes the carrying value ofcash and cash equivalents approximates fair value due to the short maturity ofthese instruments.  The Company estimatesthe fair market value of the investment in Industrial Revenue Bonds toapproximate cost.

The Company believes the carrying amount oflong-term note payable obligations approximates fair value.  For the permanent financing, fair valueapproximates the carrying amount due to the variable interest rate feature ofthe debt.

*Inventory*

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

*Investment in Commodity Contracts*

SFAS No. 133 requires acompany to evaluate its contracts to determine whether the contracts arederivatives. Certain contracts that literally meet the definition of aderivative may be exempted from SFAS No. 133 as normal purchases or normalsales. Normal purchases and normal sales are contracts that provide for thepurchase or sale of something other than a financial instrument or derivativeinstrument that will be delivered in quantities expected to be used or soldover a reasonable period in the normal course of business. Contracts that meetthe requirements of normal are documented as normal and exempted from theaccounting and reporting requirements of SFAS No. 133.

The Company enters intoshort-term cash grain, option and futures contracts as a means of securinggrain for the ethanol plant and managing exposure to changes in commodityprices. All derivatives are designated as non-hedge derivatives. Although thecontracts are effective economic hedges of specified risks, they are notdesignated as and accounted for as hedging instruments.

As part of its trading activity, the Company uses futures and optioncontracts offered through regulated commodity exchanges to reduce risk and isexposed to risk of loss in the market value of inventories. To reduce thatrisk, the Company generally takes positions using cash and futures contractsand options. During the years ended December 31, 2006 and 2005 this activity resulted in net gains(losses) of ($206,199) and $38,327, respectively, which are reported in cost ofsales.

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**EAST KANSAS AGRI-ENERGY, LLC**

** **

Notes to Financial Statements

December 31, 2006

*Property and Equipment*

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

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

 

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

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

*Idle Property*

The Company hasincurred $2,317,398 of costs related to the preliminary construction of a railspur project.  The Company does notcurrently have an estimate of when and if the project is going to becompleted.  Accordingly, the costs havebeen reclassified as idle property as of December 31, 2006.  The Company plans to continue to evaluate thestatus of this project in future periods.

*Environmental Liabilities*

The Company’s operations are subject tofederal, state and local environmental laws and regulations.  These laws require the Company to investigateand remediate the effects of the release or disposal of materials at itslocation.  Accordingly, the Company hasadopted policies, practices and procedures in the areas of pollution control,occupational health, and the production, handling, storage and use of hazardousmaterials to prevent material environmental or other damage; and to limit thefinancial liability which could result from such events.  Environmental liabilities are recorded whenthe liability is probable and the costs can be reasonably estimated.

39

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**EAST KANSAS AGRI-ENERGY, LLC**

** **

Notes to Financial Statements

December 31, 2006

**NOTE 1 -   INCENTIVE PAYMENTS**

The Company has qualified for the federal U.S.Department of Agriculture Bio Energy Program. The federal program is managed by the Commodity Credit Corporation andis designed to expand the production of fuel grade ethanol by offeringincentives for incremental production compared to the same quarter of the prioryear.  The annually funded program runsthrough fiscal year 2006 and incentive payments are pro-rated if applicationsfor incentives exceed the annual funding. The maximum annual incentive program payments the Company can receive is$7,500,000; individual producers are also subject to an annual limitation of 5%of the total funding.  The Company hasincluded federal incentives of $726,116 and $1,276,927 in revenue for the yearsended December 31, 2006 and 2005, respectively.

TheCompany has been approved for the Kansas Qualified Agricultural EthanolProducer Incentive Fund.  The incentiverate is $.075 per gallon of ethanol produced. The Company must establish they have produced 5,000,000 gallons ofethanol before the State of Kansas will disburse the funds.  The Company has included state incentives of$1,580,671 and $669,329 in revenue for the years ended December 31, 2006 and 2005,respectively.

**NOTE 2 -       INVENTORY**

Inventories aresummarized as follows:

|                  | ** ** | **December 31,** | ** ** |
|------------------|------------|-----------------------|------------|
| ** **       | ** ** | **2006**              | ** ** | **2005** | ** ** |
|             |       |                  |       |   |   |
| Raw Material     |       | $                     | 977,820    |   | $ | 836,322 |   |
| Work in Progress |       | 563,362               |       | 301,995 |   |
| Finished Goods   |       | 741,040               |       | 457,230 |   |
|             |       |                  |       |   |   |
|             |       | $                     | 2,282,222  |   | $ | 1,595,547 |   |

 

**NOTE 3 -       UNITSSUBJECT TO REDEMPTION**

On October 11, 2004, the Company executed a UnitPurchase and Redemption Agreement with ICM, Inc. and Fagen, Inc. in which theCompany agreed to issue a total of 6,250 units to them in exchange for theircombined capital contribution of $6,250,000. The Company also agreed to redeemall 6,250 units from ICM, Inc. and Fagen, Inc. using the proceeds from the saleof units in a future registered offering or, to the extent the future offeringis unsuccessful, from cash flow generated by operations subject to certain loancovenants, restrictions and tax distributions. The redemption price was $1,100per unit.  In connection with thiscapital contribution, the Company

40

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**EAST KANSAS AGRI-ENERGY, LLC**

** **

Notes to Financial Statements

December 31, 2006

amended theOperating Agreement to allow ICM, Inc. and Fagen, Inc. to appoint a total ofthree directors to the Company’s board of directors, subject to the Company’sability to terminate one of their director positions for every $2,000,000 inredemption payments made to either or both of ICM, Inc. and Fagen, Inc. OnJanuary 19, 2005, the Company closed on the purchase of these units by ICM,Inc. and Fagen, Inc. and issued 3,125 units to Fagen, Inc. and 3,125 units to ICM, Inc. at a purchase price of$1,000 per unit. The purchases were made with cash and the total amount of cashconsideration for those securities was $6,250,000.  On August 1, 2005, the Company redeemed the6,250 units from ICM, Inc. and Fagen, Inc. at a price of $1,100 per unit for atotal of $6,875,000.

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

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

**NOTE 4 -       LONG-TERMDEBT**

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

During the construction phase, the Company mademonthly payments of interest only at a variable interest rate equal to primeplus 1.75% with a floor of 6%. On September 20, 2005, following constructioncompletion, the loan was segmented into two loans (1) a $5,000,000 loan (LoanA), and (2) a $21,000,000 conventional term loan (Loan B). The $5,000,000 loanhas an amortization period and maturity date of 10 years. The Company makesmonthly payments of principal and interest on the $5,000,000 loan at a interestrate of prime.  The $21,000,000conventional loan has an amortization period of ten years but will mature atthe end of five years. The Company makes monthly payments of principal andinterest on the $21,000,000 loan at a rate equal to prime.  The effective interest rate for both loans atDecember 31, 2006 was 8.25%.

The Company pays a $20,000 annual administration feerelated to the credit facility.  Thecredit facility is secured by a mortgage on our real property and a securityinterest in all personal and intangible assets of the Company, includingassignment of all material contracts.

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**EAST KANSAS AGRI-ENERGY, LLC**

Notes to Financial Statements

December 31, 2006

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

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

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

The Company is only allowed to make annual capital expenditures up to$500,000 annually without the lender’s prior approval. During the term of theloan, the Company is required to pay to the lender an annual amount equal tothe greater of: 1) 75% of any Commodity Credit Corporation Bio-Energy incomepayments received during the year, or 2) 25% of the Company’s free cash flowfor each year. Payments consisting of USDA Commodity Credit CorporationBio-Energy income must be paid to the lender within 15 days of receipt of anysuch payments. These payments will continue until an aggregate sum of$7,500,000 has been received by the lender.  TheCompany is in compliance with the applicable loan covenants as of December 31,2006.

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

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

42

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**EAST KANSAS AGRI-ENERGY, LLC**

Notes to Financial Statements

December 31, 2006

Long-term obligations of the Company are summarized asfollows at December 31,2006:

 
| ** **                    | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2006**              | ** ** | **2005** | ** ** |
|                          |       |                  |       |   |   |
| Loan B                        |       | $                     | 11,580,282 |   | $ | 19,734,115 |   |
| Loan A                        |       | 2,747,614             |       | 4,706,173 |   |
| Equipment loan                |       | —                |       | 1,613,584 |   |
| Utility System Revenue  Bonds |       | 485,000               |       | — |   |
| CDBG Bonds                    |       | 323,552               |       | — |   |
| Less current  portion         |       | (3,076,532            | )          | (2,615,813 | ) |
| Long-term portion             |       | $                     | 12,059,916 |   | $ | 23,438,059 |   |

 

The estimatedmaturities of long-term debt at December 31, 2006, are as follows:

| 12 Month Period Ending 12/31 | ** ** | **Amount** | ** ** |
|--------------------------------------------------|------------|------------|------------|
|                                             |       |       |       |
| 2007                                             |       | $          | 3,076,532  |   |
| 2008                                             |       | 3,267,004  |       |
| 2009                                             |       | 3,545,767  |       |
| 2010                                             |       | 4,404,172  |       |
| 2011                                             |       | 439,779    |       |
| Thereafter                                       |       | 403,194    |       |
|                                             |       |       |       |
|                                             |       | $          | 15,136,448 |   |

 

**NOTE 5 -       MEMBERS’ EQUITY**

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

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

43

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**EAST KANSAS AGRI-ENERGY, LLC**

Notes to Financial Statements

December 31, 2006

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

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

The Companycompleted its second public offering and escrow was broken in July 2005.  A total of 9,091 units were subscribed andpaid for during the year ended December 31, 2005.  Uponissuance of the units related to the second public offering, costs related tothe issuance of the units of $168,483 was charged to members’ equity.

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

On July 28, 2006,the Company made an initial dividend distribution to its members in the amountof $196 per share, for a total payment of $4,292,008.  On August 28, 2006, the Company made anadditional dividend distribution to its members in the amount of $159 pershare, for a total payment of $3,481,782. On November 17, 2006, the Company made another dividend distribution toits members in the amount of $207 per share, for a total payment of $4,532,886.

**NOTE 6 -       CONCENTRATION OFCREDIT RISK**

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

**NOTE 7 -       COMMITMENTS ANDCONTINGENCIES**

On November 12, 2004, theCompany entered into a Trading Agreement with United Bio Energy Trading, LLC,an affiliated related party, in which United Bio Energy Trading, LLC willprovide market information and consulting services for the Company. The Companyanticipates that the term of the agreement will be for at least five years andwill pay a monthly fee of $6,000.

On November 12, 2004, the Company entered into a Distillers GrainsMarketing Agreement with United Bio Energy Ingredients, LLC, an affiliatedrelated party, pursuant to which United Bio Energy Ingredients, LLC willpurchase all dried and wet distillers grains produced at the plant for a termof at least five years at a price of 98% of the FOB plant price United BioEnergy Ingredients, LLC charges its buyers of dried distillers grains, and 95%of the FOB plant price United Bio Energy Ingredients, LLC charges its buyers ofwet distillers grains. United Bio Energy Ingredients, LLC, will use its bestefforts to achieve the highest resale price available 

44

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**EAST KANSAS AGRI-ENERGY, LLC**

Notes to Financial Statements

December 31, 2006

under prevailing market conditions. The Company is responsible forsupplying all labor and equipment to load or unload trucks or rail cars withoutcharge to United Bio Energy Ingredients, LLC and is required to provide storagefor at least 10 days production of wet and dry distiller grains. In addition,the distiller grains must meet quality requirements so that they will meet currentindustry standards for primary animal feed ingredients. If the Company fails tosupply distiller grains that comply with industry standards, United Bio EnergyIngredients, LLC may reject them.  TheCompany paid commissions of $346,058 and $121,953, respectively, for the yearsended December 31, 2006 and 2005 related to this marketing agreement.

On November 12, 2004, theCompany entered into a Raw Grains Agreement with United Bio Energy Ingredients,LLC, an affiliated related party. The Raw Grains Agreement provides for theCompany to purchase all raw grains necessary for ethanol production from UnitedBio Energy Ingredients, LLC for a period of at least five years. Pursuant tothe agreement, United Bio Energy Ingredients, LLC will use its best efforts toarrange for the purchase of grain at the lowest price available underprevailing market conditions and we will supply all labor and equipmentnecessary to load or unload trucks or rail cars. For its service, the Companywill pay United Bio Energy Ingredients, LLC the actual cash procurement priceand all reasonable and necessary expenses to get the grain to the plant plus a$.02 per bushel fee. The title, risk of loss, and responsibility for thequality of grain will transfer to the Company when it unloads the grain at theplant. Prior to that time, United Bio Energy Ingredients, LLC will bear therisk of loss. All grain delivered to the plant shall meet certain qualitystandards and the Company will have the option to reduce the price the Companywill pay or fully reject any delivery that fails to conform to these standards,depending upon the severity of the noncompliance.  For the years ended December 31, 2006 and2005, the Company paid $292,660 and $143,373, respectively, in brokerage feesfor grain purchases made under this agreement.

On November 12, 2004, theCompany also entered into an Ethanol Agreement with United Bio Energy Fuels,LLC, an affiliated related party.  UnitedBio Energy Fuels, LLC changed their name to Provista Renewable Fuels Marketing,LLC (Provista).  The terms of theagreement provide that Provista will market all fuel-grade ethanol produced atour plant. In exchange, the Company agrees to pay Provista a fee of $.01 foreach gallon of ethanol produced at the Company’s plant during the term of theagreement. The Company expects that the term of the agreement will be at least5 years. Provista also agreed to use its best efforts to obtain the highestprice for ethanol available under prevailing market conditions.  For the years ended December 31, 2006 and2005, the Company paid $406,930 and $191,113, respectively, in marketing feesfor ethanol marketing under this agreement.

On November 12, 2004, theCompany entered into a Management Agreement with United Bio Energy Management,LLC, a related party, in which United Bio Energy Management, LLC will superviseand direct the general operations of the plant for an anticipated period of atleast five years. United Bio Energy Management, LLC will provide the servicesof a full-time general manager to the plant. The Company has agreed to compensate United Bio Energy Management, LLCan annual fee of $250,000 for these services payable in monthly installments of$20,833, plus an incentive bonus based on the attainment of certain financialbenchmarks. United Bio Energy Management, LLC will appoint a general manager tobe based on site at our plant, and shall work exclusively for us. In the eventof a dispute, the Management Agreement provides that the Company will firstattempt to amicably settle any dispute or difference privately between UnitedBio Energy Management, LLC and the Company. If the Company cannot resolve thedispute as a result of the discussions, then the Company must submit the matterto non-binding mediation. In the event that the dispute is not settled throughmediation, the matter must be 

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**EAST KANSAS AGRI-ENERGY, LLC**

Notes to Financial Statements

December 31, 2006

resolved by non-appealablearbitration in accordance with the rules of the American ArbitrationAssociation as applicable in the State of Kansas. The determination of thearbitrator is expected to be final and may not be appealed to any court. Theprevailing party in any arbitration proceeding is entitled to recoverreasonable attorneys’ fees and expenses incurred. The agreement commencedduring March 2005.  For the years endedDecember 31, 2006 and 2005, the Company incurred costs of $525,000 and$319,777, respectively, related to this agreement including reimbursableexpenses, of which $89,324 is in related party accounts payable. On December13, 2006 the Company reached an agreement with United Bio Energy Management,LLC to terminate the above Management Agreement effective December 31,2006.  The Company has agreed to continueparticipating in the UBE Plant Manager Program and Group Buying Program for a monthlyfee of $10,000 for a term of one year, with the first monthly installment dueand payable on January 1, 2007.

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

On July 28, 2005,the Company entered into an agreement with HDB Construction, Inc. foradditional work on the railroad spur project not to exceed an amount of$1,567,268.  As of December 31, 2006 costs related to theagreement of $1,567,268 and additional costs related to the project of $298,116had been incurred and paid for.  Thesecosts are included in idle property as of December 31, 2006.

On March 23, 2006,the Company entered into an agreement with Jade Millrights, Inc. forconstruction of a grain bin for $862,000. As of December 31, 2006 the project was completed and costs related tothe agreement of $862,000 and additional costs related to the project of$32,286 have been incurred, of which $143,732 is included in accounts payable.

On December 1,2006, the Company entered into an agreement with Jade Millrights, Inc. forconstruction of a grain bin for $905,100. As of December 31, 2006, the Company has not incurred any costs relatedto the agreement.

Due to a builder’sdesign change during construction of the ethanol plant an extra beerwell wasinstalled and remains the property of the design/builder.  The Company has the option to purchase thebeerwell as part of the expansion option in the original design/buildagreement.  If the Company does not electto exercise the expansion option the purchase price will be negotiated at thattime.  On May 10, 2006, an agreement wasreached on a purchase price of $1,800,000 for the additional beerwell.  This amount has been paid for in full as of December 31, 2006.

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**EAST KANSAS AGRI-ENERGY, LLC**

Notes to Financial Statements

December 31, 2006

The Company hasissued purchase orders in the amount of $122,622 for planned capitalexpenditures.

The following is aschedule of the annual commitments related to the above agreements.

 

| 12 months ending December 31, | ** ** |
|---------------------------------------------------|------------|
|                                              |       |   |   |
| 2007                                              |       | $ | 550,775 |   |
| 2008                                              |       | 404,108 |   |
| 2009                                              |       | 404,108 |   |
| 2010                                              |       | 344,108 |   |
| 2011                                              |       | 332,108 |   |
| Thereafter                                        |       | 1,100,359 |   |
|                                              |       |   |   |
|                                              |       | $ | 3,135,566 |   |

 

The Company is involved in various claims arising inthe normal course of business.  Managementbelieves that any financial responsibility that may be incurred would not bematerial and therefore no additional accrual is deemed necessary.

**NOTE 8 -       SALE / LEASEBACKTRANSACTION**

On December 20, 2005, theCompany completed an industrial revenue bond financing with the City ofGarnett, Kansas that will provide property tax savings for 10 years on theplant site.  As part of the financing,title to the plant site and improvements have been transferred to the City ofGarnett, Kansas, as security for the repayment of the bonds, and the Company isleasing back the site in an amount that is equal to the amount of the principaland interest to be paid on The City of Garnett, Kansas bonds.  Home Federal Savings Bank consented to thistransaction, and the bonds have been pledged to Home Federal Savings Bank assecurity for any obligations under the Home Federal Savings Bank CreditAgreement.  As part of the financing, theCompany paid the bond underwriter, Gilmore & Bell, P.C. $40,000.  The maximum principal amount of the bonds is$50,000,000.  The bonds were initiallyissued in the principal amount of $47,866,117, which is the amount of theCompany’s expenditures on the plant as of December 20, 2005.  Additional project costs of $2,133,883 areplanned and are expected to be eligible for submission for the bond trustee foradditional bond issuances.

The $40,000 of financingfees paid to the bond underwriter and $23,656 of legal and other costassociated with the bond closing will be amortized over the approximately 10.5year life of the bonds.  A total of$5,762 and $448 of amortization expense related to these costs was recognizedduring the years ended December 31, 2006 and 2005, respectively.

From the proceeds of the bond, the Company purchasedthe bonds as an investment.  The Company,as holder of the industrial revenue bonds, is due interest at 8.0% per annumwith interest payable semi-annually on June 1st and December 1st, commencing June 1, 2006.  The interest income is directly offset by thelease payments on the plant.  Both thebond and the corresponding lease have terms commencing December 20, 2005 andterminating on June 1, 2016.  The entireoutstanding principal is due upon termination of the bonds.  The outstanding principal at December 31,2006 was $47,866,117.  The leasequalifies as a capital lease.  Interestincome recognized on the Industrial Revenue Bonds for the years ended December31, 2006 and 2005 was $3,652,833 and $314,736, respectively.  These amounts are equal to the lease expenseof the plant for those years.

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**EAST KANSAS AGRI-ENERGY, LLC**

Notes to Financial StatementsDecember, 31, 2006

Future debtservice requirements on the Industrial Revenue Bonds at December 31, 2006 areas follows:
| **12 months ending** | ** ** | **Interest** | ** ** | ** ** | ** ** | ** **    | ** ** | ** **   | ** ** |
|--------------------------------|------------|--------------|------------|------------|------------|---------------|------------|--------------|------------|
| **December 31,**          | ** ** | ** **   | ** ** | **Rate**   | ** ** | **Principal** | ** ** | **Interest** | ** ** | **Total** | ** ** |
|                           |       |         |       |       |       |          |       |         |       |
| 2007                           |       | 8            | %          | $          | —     |          | $          | 3,829,289    |       | $ | 3,829,289 |   |
| 2008                           |       | 8            | %          | —     |       | 3,829,289     |       | 3,829,289    |       |
| 2009                           |       | 8            | %          | —     |       | 3,829,289     |       | 3,829,289    |       |
| 2010                           |       | 8            | %          | —     |       | 3,829,289     |       | 3,829,289    |       |
| 2011                           |       | 8            | %          | —     |       | 3,829,289     |       | 3,829,289    |       |
| Thereafter                     |       | 8            | %          | 47,866,117 |       | 17,231,803    |       | 65,097,920   |       |
|                           |       |         |       |       |       |          |       |         |       |
| Totals                         |       |         |       | $          | 47,866,117 |          | $          | 36,378,248   |       | $ | 84,244,365 |   |
|                           |       |         |       |       |       |          |       |         |       |
| Amount representing  interest  |       |         |       |       |       |          |       | (36,378,248  | )          |
|                           |       |         |       |       |       |          |       |         |       |
| Long-Term Obligation           |       |         |       |       |       |          |       | $            | 47,866,117 |   |
|                           |       |         |       |       |       |          |       |         |       |
|                                |            |              |            |            |            |               |            |              |            |  |  |  |  |  |

 

**NOTE10 — INCOME TAXES**

As of December 31, 2006 and 2005, the book basis ofassets exceeded the tax basis of assets by approximately $17,747,000 and$5,012,000, respectively.  There were nosignificant differences between the book basis and tax basis of liabilities asof December 31, 2006 or 2005.

**NOTE11 — RETIREMENT PLAN**

During 2005, the Company began a SIMPLE 401(k),Savings Incentive Match Plan for Employees, retirement plan for all eligibleemployees.  All employees are eligible toparticipate in the plan.  The Companymakes a matching contribution of 3% of participants’ eligible wages.  The employees are fully vested uponcontribution to the plan.  The Companymatch for the years ended December,2006 and 2005 was $44,418 and $18,097, respectively.

**NOTE 12 — SUBSEQUENT EVENT**

On March 21, 2007, the board of directors approved a$132 per unit distribution for unit holders of record as of December 31,2006.  The total distribution was$2,890,536.

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**ITEM 8.  CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES**

Eide Bailly LLP has been our independentregistered public accounting firm since our inception and is our independentregistered public accounting firm at the present time.  We have had no disagreements with ourauditors.

**ITEM 8A.  CONTROLS AND PROCEDURES**

**DisclosureControls and Procedures**

Ourmanagement, including our Chief Executive Officer (the principal executiveofficer), William Pracht along with our Chief Financial Officer (the principalfinancial officer), Thomas D. Leitnaker, have reviewed and evaluated theeffectiveness of our disclosure controls and procedures (as defined in Rule13a-15(e) under the Securities Exchange Act of 1934, as amended) as of December31, 2006.  Based upon this review and evaluation, these officers haveconcluded that our disclosure controls and procedures are effective to ensurethat information required to be disclosed in the reports that we file or submitunder the Exchange Act  is recorded,processed, summarized and reported within the time periods required by theforms and rules of the Securities and Exchange Commission; and to ensure thatthe information required to be disclosed by an issuer in the reports that itfiles or submits under the Exchange Act is accumulated and communicated to ourmanagement including our principal executive and principal financial officers,or persons performing similar functions, as appropriate to allow timelydecisions regarding required disclosure.

Ourmanagement, including our principal executive officer and principal financialofficer, have reviewed and evaluated any changes in our internal control overfinancial reporting that occurred as of December 31, 2006 and there has been nochange that has materially affected or is reasonably likely to materiallyaffect our internal control over financial reporting.

**ITEM8B.  OTHER INFORMATION.**

None.

**PARTIII**

**ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS,CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THEEXCHANGE ACT.**

**Identificationof Directors, Executive Officers and Significant Employees**

Our current executive officers and directors are asfollows:

| Board Member         | ** ** | ** **                                                  | ** ** | **Role** |
|----------------------|------------|-------------------------------------------------------------|------------|----------|
| William R. Pracht    |       | Director,  Chairman/President & Chief Executive Officer |
| Jill A. Zimmerman    |       | Director &  Secretary                                   |
| Scott A. Burkdoll    |       | Director & Vice  Chairman/Vice President                |
| Glenn A. Caldwell    |       | Director                                                    |
| Daniel L. Guetterman |       | Director                                                    |
| Donald S. Meats      |       | Director                                                    |
| Steve Doering        |       | Director                                                    |
| Scott Brittenham     |       | Director                                                    |
| Charles P. Torrey    |       | Director                                                    |
| Roger J. Brummel     |       | Director                                                    |
| Daniel V. Morgan     |       | Director                                                    |
| Thomas D. Leitnaker  |       | Chief Financial Officer  & Controller                   |
| Steven L. Gardner    |       | General Manager                                             |

 

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Pursuant to our operatingagreement, the initial term of our directors ended following the substantialcompletion of our facilities, and all eleven directors were elected by themembers at the 2006 Annual Meeting.  Theboard passed a resolution dividing the board into three classes to serve staggeredterms until 2007, 2008, or 2009, and upon expiration of the terms ending in2007, 2008, and 2009, each successor director will be elected to a three yearterm.  Our directors were assigned to aterm as follows:
| **One year term: June 2006 to June 2007**   |   | Scott Brittenham  Steve Doering  Daniel Morgan  Donald Meats  |
|---------------------------------------------|--------|---------------------------------------------------------------|
| **Two year term: June 2006 to June 2008**   |   | Jill Zimmerman  Daniel Guetterman  Charles Torrey             |
| **Three year term: June 2006 to June 2009** |   | William Pracht  Scott Burkdoll  Roger Brummel  Glenn Caldwell |

 

The following is a briefdescription of the business experience and background of the above individuals.

***William R. Pracht, Age 49*** — Mr. Pracht has served as a director on ourboard since its inception.  For the pastfive years, Mr. Pracht has been a self-employed farmer/rancher workingnear Westphalia, Kansas.  He is one ofthe community leaders of the Cherry Mound 4-H Club as well as a member ofthe Anderson County Fair Board.  Mr.Pracht serves as member of the board of directors of Valley Agri-Service,Inc.  He has previously served on theKansas Livestock Association Board of Directors and Chairman of the TaxCommittee.

***Roger J. Brummel, Age 46*** — Mr. Brummel has served as a director onour board since its inception. Mr. Brummel has been the manager of the family owned business,Brummel Farm Service, since 1995.

***Jill A. Zimmerman, Age33*** — Ms.Zimmerman has served as a director on our board since its inception.  Since January 2006, Ms. Zimmerman hasbeen employed as the executive director of the Kansas FFA Foundation.  Previously, she was employed as a certifiedlender for United Cooperatives, Inc. Farm Service since September 2005.  From February 2003 to August 2005, she wasemployed as our equity drive coordinator. For the year prior to that, she was the Director of Value-Added Programsfor the Kansas Corn Growers Association in Garnett. From May 1996 toJanuary 2002, Ms. Zimmerman was the County Extension Agent,Agriculture for Kansas State Research and Extension, Anderson County.  In addition, Ms. Zimmerman is a partnerwith her brother in Zimmerman Farms, a small grain farming operation consistingof wheat and grain sorghum in Sumner County, Kansas.

***Daniel V. Morgan, Age 36*** — Mr. Morgan has served as a director on ourboard since its inception. Mr. Morgan is co-owner of H&M Angus Farms, Inc., aregistered Angus seedstock producer in eastern Kansas.  He is also a certified crop advisor andshares a Pioneer Seed dealership with his father.

***Scott A. Burkdoll, Age 50*** — Mr. Burkdoll has served as a director on ourboard since its inception. Mr. Burkdoll, is an owner and operator of Burkdoll Bros., Inc.a Kansas family farm corporation. Mr. Burkdoll has served as VicePresident for this company since 1978. He is part owner and has served since1989 as Secretary/Treasurer of Sunflower Pork, Inc., which produces 75,000head of market hogs annually. Mr. Burkdoll has been President of BG-5, anoil and gas production company in east central Kansas, since 1994.Mr. Burkdoll is an owner and has served since 1998 as managing member ofJ-6 Cattle Ranch LLC. He is also an owner and managing member ofSunflower Central, LLC.

*** Glenn A. Caldwell, Jr., Age 59*** — A retired U.S. Air Force Lt. Colonel, Mr.Caldwell has served as a director on our board since its inception.  Mr. Caldwell has served as theVice-President of Caldwell Enterprises Inc. 

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since 2000. Since 1982, he has served as the Presidentand General Manager of Caldwell Farms, Inc. operating several thousandtillable acres in 3 counties.

                ***Daniel L. Guetterman, Age 54*** — Mr. Guetterman has served as a director on our board since itsinception.    Mr. Guetterman hasbeen farming in northeast Kansas since 1969 and has been the owner/operator ofDKG Farms, Inc. since 1999. In 1978, he formed Guetterman Brothers Elevatorand built a grain elevator in Bucyrus. Some of his duties consisted of buyingand selling grain, fertilizer, seed and chemicals. Mr. Guetterman served9 years on the board of the Kansas Soybean Association and is currentlyserving his fourth year on the Kansas Corn Commission as treasurer.

                ***Donald S. Meats, Age 63*** — Mr. Meats has served as a director on ourboard since its inception. Mr. Meats lives on a farm near LeRoy, Kansas and operates a stockerprogram. He retired in 2001 from the LeRoy Coop after 36 years ofemployment; 33 years as general manager. He is currently employed by theFirst National Bank of LeRoy as an Agriculture Loan Officer.

***Scott Brittenham, Age 56*** — Mr. Brittenham has served as a director onour board since August 22, 2005.  Mr.Brittenham has served as the President for Ethanol Capital Partners, L.P. sinceApril 2003. For the five years prior to that, he served as the President ofFidelity Mortgage Corporation.

***Charles P. Torrey, Age60*** —Mr. Torreyhas served as a director on our board since August 22, 2005.  Mr. Torrey has spent his career in thesecurities and energy sectors as founder and past-Chairman/CEO of EnergySearch, Inc.  Currently Mr. Torrey servesas President of Alternative Energy Management, LLC.

***StevenB. Doering, Age 56 —*** Mr. Doering has served as a director on our board since June 10,2006.  Mr. Doering has been apracticing attorney since 1977. Mr. Doering is admitted to practice before the Kansas Court ofAppeals, the Kansas Supreme Court and the United States District Court forKansas.  He is a member of AndersonCounty, Fourth Judicial District, Kansas and American Bar Associations; KansasTrial Lawyers Association; and The Association of Trial Lawyers of America.  Mr. Doering previously served on the FourthJudicial District Nominating Commission and was a former member board ofdirectors, past president and vice president for the Kansas School AttorneysAssociation.  He graduated from KansasState University with a degree in mechanical engineering in 1973 and receivedhis juris doctorate from Kansas University in 1977.

**ExecutiveOfficers**

***Thomas D. Leitnaker, Age 53*** — Mr. Leitnakerjoined us on July 1, 2005 as Controller, and commenced his duties as ChiefFinancial Officer on August 1, 2005.  Mr.Leitnaker was employed as the controller for Kalmar Industries USA, Inc. from1990 to June 2004.

**Significant Employees**

***General Manager***

On December 19, 2006, we hired Steven L. Gardner, age49 to serve as our general manager beginning January 15, 2007.  Prior to joining us, Mr. Gardner spent 25years in domestic and international operating positions such as Supply Chainand Division Lean Manufacturing Manager with Colgate Palmolive, General Managerof Operations for General Electric/Harmon Industries and later as Director ofOperations for EaglePicher Technologies. Most recently he has worked as a business consultant with small to midsized manufacturers.

**Involvement in Certain Legal Proceedings**

One of our directors, Donald S. Meats, is subject to acontinuing Cease and Desist Order originally entered by the State of KansasSecurities Commissioner on November 27, 1996. This order required him to cease and desist from the sale ofunregistered securities.  Mr. Meats,along with others, was found to have participated in a program several yearsbefore his involvement with our organization which was determined to haveviolated the securities 

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laws of the State of Kansas as it constituted theunlawful sale of unregistered securities. Mr. Meats cooperated in the investigation of this matter and no furtheraction was taken against him.  Mr. Meatsdid not participate in the sale of our membership units during our previousofferings and will not participate in the sale of our membership units for anyfuture offering.

**Section16(a) Beneficial Ownership Reporting Compliance**

Section 16(a)of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),requires our officers and directors, and persons who own more than 10% of aregistered class of our equity securities, to file reports of ownership andchanges in ownership with the Securities and Exchange Commission (the “SEC”).Officers, directors and greater than 10% beneficial owners are required by SECregulations to furnish us with copies of all Section 16(a) forms theyfile. To our knowledge, based solely on a review of the copies of such reportsfurnished to us and written representations from our officers and directors,all Section 16(a) filing requirements were complied with during the fiscalyear ended December 31, 2006, except Steve Doering who inadvertentlyfailed to timely file Form 3.

**Adoption of Code of Ethics**

Our Board ofDirectors has adopted a code of ethics that applies to our principal executiveofficer, William Pracht, our principal financial officer, Thomas D. Leitnaker,our vice president, Scott Burkdoll, and our secretary, Jill Zimmerman.  Each of these individuals signed anacknowledgment of his or her receipt of our code of ethics.  We filed a copy of our Code of Ethics with the Securities Exchange Commissionby including the Code of Ethics as Exhibit 14.1 to our Annual Report of Form10-KSB for the fiscal year ended December 31, 2003, and it is included as acurrent exhibit 14.1 to this Report by incorporation by reference.

**Audit Committee and Audit Committee Financial Expert**

Theaudit committee of our board of directors operates under a charter adopted byour board of directors in fall 2004.  Our board of directors appointed an audit committee consisting of DanielV. Morgan, Jill Zimmerman, and Daniel Guetterman.  The audit committee is exempt fromindependence listing standards because our securities are not listed on anational securities exchange or listed in an automated inter-dealer quotationsystem of a national securities association or to issuers of suchsecurities.  Nevertheless, a majority ofour audit committee is independent within the definition of independenceprovided by NASDAQ rules 4200 and 4350. We do not have an audit committee financial expert serving on our auditcommittee because no member of our Board of Directors has the requisiteexperience and education to qualify as an audit committee financial expert asdefined in Item 401 of Regulation S-B and the Board of Directors has not yetcreated a new director position expressly for this purpose.  The Board ofDirectors intends to consider such qualifications in future nominations to ourBoard of Directors and appointments to the audit committee.

**ITEM 10.  EXECUTIVE COMPENSATION.**

**Compensationof Named Executive Officers**

Thefollowing table sets forth all compensation paid or payable by the Companyduring the last two fiscal years to our chief executive officer and chieffinancial officer.  We did not have anycompensatory security option plan or any other plan for long term compensationof our executive officers and directors in place as of December 31, 2006.  Further, as of December 31, 2006, none of ourdirectors or officers had any options, warrants, or other similar rights topurchase securities of the Company.

 
| **Name and  Principal  Position** | ** ** | ** ** | ** ** | **Year** | ** ** | **Salary** | ** ** | **Bonus** | ** ** | **Other Annual  Compensation** | ** ** | **All Other  Compensation** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|------------|------------|----------|------------|------------|------------|-----------|------------|-------------------------------------|------------|----------------------------------|------------|-----------|------------|
| William Pracht,  Chairman              |       | 2006       |       | $        | 0          |       | $          | 1,500     |       | $                                   | 0          |                             | $          | 8,200     |       | $ | 9,700 |   |
| and CEO                                |       | 2005       |       | $        | 0          |       | $          | 1,500     |       | $                                   | 0          |                             | $          | 900       |       | $ | 2,400 |   |

 

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| Thomas Leitnaker, Chief |   | 2006 |   | $ | 80,308 |   | $ | 25,964 |   | $ | 0 |   | $ | 0 |   | $ | 106,272 |   |
|-------------------------|--------|------|--------|---|--------|--------|---|--------|--------|---|---|--------|---|---|--------|---|---------|--------|
| Financial Officer       |   | 2005 |   | $ | 37,558 |   | $ | 8,604  |   | $ | 0 |   | $ | 0 |   | $ | 46,192  |   |

 

Thefollowing table sets forth all compensation paid or payable by the Companyduring the last fiscal year to our directors, other than those who also servedas Chief Executive Officer and Chief Financial Officer, during fiscal yearended December 31, 2006.
| **Name**          | ** ** | ** ** | ** ** | **Fees Earned or Paid  in Cash** | ** ** | **All Other  Compensation** | ** ** | **Total** | ** ** |
|-------------------|------------|------------|------------|------------------------------------------------------|------------|----------------------------------|------------|-----------|------------|
| Scott Burkdoll    |       | $          | 10,000     |                                                 | $          | 0                                |       | $         | 10,000     |   |
| Jill Zimmerman    |       | $          | 7,000      |                                                 | $          | 0                                |       | $         | 7,000      |   |
| Scott Brittenham  |       | $          | 1,500      |                                                 | $          | 0                                |       | $         | 1,500      |   |
| Roger Brummel     |       | $          | 6,200      |                                                 | $          | 0                                |       | $         | 6,200      |   |
| Glenn Caldwell    |       | $          | 10,000     |                                                 | $          | 0                                |       | $         | 10,000     |   |
| Steve Doering     |       | $          | 4,450      |                                                 | $          | 0                                |       | $         | 4,450      |   |
| Daniel Guetterman |       | $          | 5,300      |                                                 | $          | 0                                |       | $         | 5,300      |   |
| Daniel Morgan     |       | $          | 6,500      |                                                 | $          | 0                                |       | $         | 6,500      |   |
| Donald Meats      |       | $          | 5,100      |                                                 | $          | 0                                |       | $         | 5,100      |   |
| Charles Torrey    |       | $          | 200        |                                                 | $          | 0                                |       | $         | 200        |   |
| Jerry Jones       |       | $          | 600        |                                                 | $          | 0                                |       | $         | 600        |   |

 

On January23, 2006, our board of directors approved a revised director compensationpolicy effective for fiscal year 2006. The revised policy provides for payment to directors of a fee based onattendance at the regular monthly board meeting.  The fees we pay to our directors under therevised policy are as follows: $400.00 per meeting attended to the Chairman,$300.00 per month to our directors who are also serve as officers (Secretaryand Vice-President) and $200.00 per month to the other directors.  We also pay directors $100 per meeting forattendance at committee meetings.  We donot pay the fee if the director does not attend the monthly meeting orcommittee meeting.  We also pay formileage to and from the meeting at the standard mileage rate established fromtime to time by the IRS and will pay quarterly travel expenses for boardmembers who reside outside of Kansas.  We continue to reimburseour officers and directors for reasonable out-of-pocket expenses incurredrelating to services rendered on our behalf.

In the year ending December 31, 2006, we incurred an aggregate of$104,578 in director fees and related expenses.

**EmploymentAgreements with Directors or Officers**

On February 10, 2003, weentered into an employment agreement with Jill A. Zimmerman, one of ourdirectors and our former Treasurer and Chief Financial Officer.  Under the agreement, we engaged Ms. Zimmermanas a full-time equity drive coordinator and her duties as equity drivecoordinator included monitoring project development, public relations and otheron-site development issues.  In July2005, we terminated our employment agreement with Ms. Zimmerman upon completionof our equity drive. The contract provided that we pay Ms. Zimmerman $37,700.00annually plus a $101.75 monthly stipend for her services.  Pursuant to her employment agreement with us,Ms. Zimmermanwas compensated a total of $33,202.02, $45,692.72 and $33,951.23 in cash infiscal years 2003, 2004 and 2005, respectively. She also received 5 units totaling $5,000 as a bonus for her services infiscal year 2004.

On June 29, 2005, weentered into an employment agreement with our controller, Thomas D. Leitnaker.Pursuant to his employment agreement, Mr. Leitnaker will receive a base salaryand will be eligible for an annual bonus based on overall financial performanceof East Kansas compared to budgeted guidelines. On August 1, 2005, our board of directors appointed Mr. Leitnaker to theposition of Chief Financial Officer and terminated the position 

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of Treasurer, formerly held by Jill A. Zimmerman, oneof our directors.  The duties formerlyperformed by the Treasurer have been transferred to the Chief FinancialOfficer.

On December 19, 2006, we hired Steven L. Gardner to serve as ourgeneral manager, beginning January 15, 2007. Pursuant to the employment agreement, we will pay Mr. Gardner a basesalary of $125,000 and a one-time payment for moving expenses.  In addition, he will be eligible for anannual bonus based on his achievement of performance conditions and is entitledto participate in any and all benefit plans adopted by the Company, subject toeligibility requirements imposed by such plans, including group medical,dental, vision and term life insurance and 401(k) retirement savings plans.

Mr. Leitnaker and Mr.Gardner are eligible to participate in the Company’s SIMPLE 401(k) plan.  During 2005, the Company began a SIMPLE401(k), Savings Incentive Match Plan for Employees, retirement plan for alleligible employees.  All employees areeligible to participate in the plan.  TheCompany makes a matching contribution of 3% of participants’ eligiblewages.  The employees are fully vestedupon contribution to the plan.  For theyear ended December 31, 2006 Mr. Leitnaker contributed $4,947 and the Companymatched $3,188 on his behalf.  Mr.Gardner became eligible for the plan on January 15, 2007.

We do not have any employment agreements with any other officer ordirector.

**ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT AND RELATED MEMBER MATTERS.**

**Security Ownership of Certain BeneficialOwners **

The following table sets forth certain informationregarding the beneficial ownership of our units as of March 30, 2007, by eachperson or entity known by us to be the beneficial owner of more than 5% of theoutstanding units:

 
| **Title of Class** | ** ** | **Name and Address**                                                                                         | ** ** | ** ** | ** ** | **Amount and  Nature of  Beneficial Owner** | ** ** | **Percent of Class** | ** ** |
|------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------------------------------------------------------|------------|--------------------------------|------------|
| Membership Units             |       | Hoxie  Feedyard, Inc.  P O Box 65  Hoxie, KS 67740                                                                     |       | 1,450      |       | 6.6                                                        | %          |
| Membership Units             |       | Ethanol  Capital Partners, LP(1)  Rockefeller Center  1230 Avenue of the Americas, 7th Floor  New York, New York 10020 |       | 5,550      |       | 25.3                                                       | %          |

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(1)  Our director, Scott Brittenham is thePresident of Ethanol Capital Partners, LP.

**SecurityOwnership of Management**

The following table sets forth certain informationregarding the beneficial ownership of our units as of March 30, 2007, by ourdirectors and executive officers:

 
| **Title of Class** | ** ** | **Name of Beneficial Owner**(1) | ** ** | **Amount and Nature of  Beneficial Ownership**(2) | ** ** | **Percent of Class** | ** ** |
|------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------------------------------|------------|--------------------------------|------------|
| Membership Units             |       | William R. Pracht                              |       | 85 Units(3)                                                           |       | *                              |       |
|                         |       |                                           |       |                                                                  |       |                           |       |
| Membership Units             |       | Roger J. Brummel                               |       | 110 Units(4)                                                          |       | *                              |       |
|                         |       |                                           |       |                                                                  |       |                           |       |
| Membership Units             |       | Jill A. Zimmerman                              |       | 20 Units                                                              |       | *                              |       |
|                         |       |                                           |       |                                                                  |       |                           |       |
| Membership Units             |       | Daniel V. Morgan                               |       | 10 Units(5)                                                           |       | *                              |       |

 

54

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| Membership Units       |       | Scott A. Burkdoll    |       | 120 Units(6)    |       | *        |   |
|------------------------|------------|----------------------|------------|-----------------|------------|----------|--------|
|                   |       |                 |       |            |       |     |   |
| Membership Units       |       | Glenn A. Caldwell    |       | 100 Units(7)    |       | *        |   |
|                   |       |                 |       |            |       |     |   |
|  Membership Units |       | Daniel L. Guetterman |       | 86 Units(8)     |       | *        |   |
|                   |       |                 |       |            |       |     |   |
| Membership Units       |       | Donald S. Meats      |       | 10 Units        |       | *        |   |
|                   |       |                 |       |            |       |     |   |
|  Membership Units |       | Steven Doering       |       | 10 Units        |       | *        |   |
|                   |       |                 |       |            |       |     |   |
|  Membership Units |       | Scott Brittenham(9)  |       | 5,550 Units     |       | 25.3     | %      |
|                   |       |                 |       |            |       |     |   |
| **Membership Units**   | ** ** | **All directors**    | ** ** | **6,101 Units** | ** ** | **27.8** | **%**  |

----

(1)           Theaddress of each individual is in care of us at 1304 S. Main, Garnett, Kansas 66032.

(2)           Beneficial ownership is determined in accordance with SEC rules andgenerally includes holding voting and investment power with respect to thesecurities.

(3)           Units held in joint tenancy with spouse.

(4)           Units held by Brummel Farm Service, Inc. and Mr. Brummell is a principalof that business.

(5)           Includes 10 units held in the name of H & M Angus Farms, Inc., andMr. Morgan is a principal of that business.

(6)           Includes 60 units held in joint tenancy with spouse, 50 units held byBurkdoll Bros., Inc. and 10 units held by Sunflower Pork, Inc.  Mr. Burkdoll is an owner of Burkdoll Bros.,Inc. and Sunflower Pork, Inc.

(7)           Includes 50 units held by Mr. Caldwell’s spouse, Linda and 50 units heldin the name of Caldwell Farms, Inc.  Mr.Caldwell is a majority owner of Caldwell Farms, Inc.

(8)           Includes 30 units held in the name of DKG Farms, Inc., of which Mr.Guetterman is the sole owner, and 56 units held in the name of Fuel For theFuture Investments, of which Mr. Guetterman is a principal owner.

(9)           Units held by Ethanol Capital Partners, LP andScott Brittenham is the President of Ethanol Capital Partners, LP.

*Less than 1%.

**ITEM 12.  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS, AND DIRECTOR INDEPENDENCE.**

**CertainRelationships and Related Transactions**

Nofamily relationships exist between any of the directors of the board, officers,or key employees of East Kansas.  Weconsider all of our directors, other than Messrs. Brittenham and Torrey, to beour founders and promoters. We also consider two of our former directors,Douglas L. Strickler and James A. Westagard, as our founders and may beconsidered promoters.  Since ourinception, we have engaged in a number of transactions with related parties,including our promoters, directors, officers or 5% unit holders and theiraffiliates.  Management believes thatthese transactions were as favorable as those that could have been obtained inan arms-length transaction.

The following is adiscussion of the transactions we have engaged in during the past two years orplan to engage in with related parties:

***Project Coordinator Agreementwith Jill A. Zimmerman***

On February 10, 2003, weentered into an employment agreement with Jill A. Zimmerman, one of ourdirectors and our former Treasurer and principal financial officer.  Ms. Zimmerman is also a member of theCompany.  Under the agreement, we engagedMs. Zimmerman as a full-time equity drive coordinator until July 2005 when weterminated our second registered offering. See EXECUTIVE COMPENSATION — Employment Agreements with Directors andOfficers” for a more detailed discussion of our employment agreement with Ms.Zimmerman and her compensation thereunder.

55

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***Agreement withMike Burns***

In June 2005, we enteredinto a preliminary verbal agreement with Mike Burns, a member of East Kansas,for compacted fill to be used in connection with dirt work for our railspur.  On October 11, 2005, we enteredinto a definitive written agreement with Mr. Burns for approximately720,000 cubic yards of compacted fill in exchange for payment of $300,000 to bepaid in three equal payments of $100,000. All amounts due under the agreementhave been paid.

***Agreementswith United Bio Energy, LLC Subsidiaries***

Wehave entered into operating contracts with UBE Management, Provista, UBE Ingredients and UBE Trading, allsubsidiaries of United Bio Energy, LLC, of Wichita, Kansas.  Underthe terms of these agreements, we will be paying subsidiaries of United BioEnergy, LLC a significant amount in fees for the management of our plant,marketing of our ethanol and distillers grains and overall risk managementservices.  United Bio Energy, LLC was majority owned by Dave Vander Griendthrough ICM Marketing, Inc. and by Ron Fagen through Fagen Management, LLC.  However,in the second quarter of 2005, United Bio Energy, LLC merged with US BioEnergyCorporation.  US BioEnergy Corporationbuilds and operates biofuel production facilities which may be in competitionwith our plant.  See “DESCRIPTIONOF BUSINESS” for a more detailed discussion of these agreements.

***Purchases of Raw Grains***

On November 12, 2004 weentered into a Raw Grains Agreement with United Bio Energy Ingredients, LLC (“UBEIngredients”).  The Raw Grains Agreementprovides for our purchase of all raw grains necessary for ethanol productionfrom UBE Ingredients for a period of at least 5 years.  Pursuant to the agreement, UBE Ingredientswill use its best efforts to arrange for the purchase of grain at the lowestprice available under prevailing market conditions.  From time to time, UBE Ingredients has andmay continue to contract to purchase corn and/or milo from individuals servingon our board of directors, as well as our members.  However, these contracts have been and willcontinue to be on the same terms and conditions as contracts withnon-affiliated third parties.  For theyear ending December 31, 2006, UBE Ingredients purchased approximately _492,814.49bushels of corn and milo from our promoters, directors, officers or 5% unitholders and their affiliates, which constitutes approximately 1% of theaggregate corn and milo purchases by UBE Ingredients on our behalf.

***Design-BuildAgreement with ICM, Inc. and Fagen, Inc.***

On August 9, 2004, weexecuted a design/build agreement with ICM, Inc. to design and build ourethanol plant using Fagen, Inc. as principal subcontractor.  ICM, Inc. is majority owned and controlled byDave Vander Griend and Fagen, Inc. is owned and controlled by Ron Fagen.  Pursuant to the terms of the design/buildagreement, we paid ICM, Inc. $35,900,000 to design and build our ethanol plantand we expect a significant portion of the contract price to be paid by ICM,Inc. to Fagen, Inc. for its work as our principal subcontractor.  As of December 31, 2006, we had incurred andpaid $37.7 million to ICM, Inc.

***UnitPurchase and Redemption Agreement with ICM, Inc. and Fagen, Inc.***

OnOctober 11, 2004, we executed a Unit Purchase and Redemption Agreement withICM, Inc. and Fagen, Inc. in which we agreed to issue a total of 6,250 units tothem in exchange for their combined capital contribution of $6,250,000.  On January 19, 2005, we issued 6,250 of ourunits to ICM, Inc. and Fagen, Inc. at a purchase price of $1,000 perunit in exchange for a combined capital contribution from them of$6,250,000.  Pursuant to the UnitPurchase and Redemption Agreement, we agreed to redeem all 6,250 units fromICM, Inc. and Fagen, Inc. using the proceeds from the sale of unitsin a registered offering or, to the extent the offering was unsuccessful, fromcash flow generated by operations subject to certain loan covenants,restrictions and tax distributions.  Under the Unit Purchase andRedemption Agreement, we agreed to redeem the units at a redemption price of$1,100 per unit if we were able to raise at least $6,875,000 in a futureregistered offering, or if the offering was unsuccessful at the fair marketvalue of the units at the time of redemption. In connection with this capital contribution, we amended our operatingagreement to allow ICM, Inc. and Fagen, Inc. to appoint a total of 3 directorsto our board of directors, subject to our ability to terminate one of theirdirector positions for every $2,000,000 in redemption payments made to eitheror both of ICM, Inc. and Fagen, Inc. ICM, Inc. and Fagen, Inc. appointed their three directors onFebruary 1, 2005.  On August 1, 2005, we redeemed all 6,250units from Fagen, Inc. and ICM, Inc. at a total redemption price of$6,875,000.  Therefore, pursuant to the Agreement, the terms of directorsappointed by ICM, Inc. and Fagen, Inc. expired.

56

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***Promissory Note and Security Agreement with ICM, Inc.***

On May 10,2005, we entered into an agreement with ICM, Inc. for the purchase of asteam turbine generator.  In order tofinance the purchase of the generator, we executed a promissory note payable toICM, Inc and granted a security interest in a steam turbine generator toICM, Inc. as collateral for the loan.  See “MANAGEMENT’S DISCUSSIONAND ANALYSIS — Liquidity and Capital Resources, Debt Financing” for a moredetailed discussion of this note.

**DirectorIndependence**

Our independentdirectors are William R. Pracht, Roger J. Brummel, Scott A. Burkdoll, Donald S.Meats, Daniel L. Guetterman, Daniel V. Morgan, Glenn Caldwell, Steven Doering,Scott Brittenham and Charles Torrey.  Ourdirector that is not independent is Jill A. Zimmerman.  Our former director, Jerry Jones, who serveduntil May 2006 is not considered independent. The determination of independence is made by reference to NASDAQ rule4200.  Jill A. Zimmerman is notconsidered independent due to her former position as our equitycoordinator.  Pursuant to her employmentagreement, we paid Ms. Zimmerman a total of $33,202.02, $45,692.72 and$33,951.23 in cash in fiscal years 2003, 2004, and 2005 respectively.  Jerry Jones is the Chief Financial Officerfor ICM, Inc. our design-builder.

***Audit Committee***

Our board ofdirectors appointed an audit committee consisting of Daniel V. Morgan, JillZimmerman, and Daniel Guetterman.  Theaudit committee is exempt from independence listing standards because oursecurities are not listed on a national securities exchange or listed in anautomated inter-dealer quotation system of a national securities association orto issuers of such securities. Nevertheless, Daniel V. Morgan and Daniel Guetterman are independentwithin the definition of independence provided by NASDAQ rules 4200 and 4350.  Jill Zimmerman is not considered independentdue to her previous position as our equity coordinator.

***Compensation Committee***

All members of ourcompensation committee are considered independent within the definition ofindependence provided by NASDAQ rules 4200 and 4350.

***Nominating Committee***

All members of ournominating committee are considered independent within the definition ofindependence provided by NASDAQ rules 4200 and 4350.

**ITEM 13.  EXHIBITS.**

**ExhibitsFiled as Part of this Report and Exhibits Incorporated by Reference**

The followingexhibits are filed as part of this report. Exhibits previously filed are incorporated by reference, as noted.
| Exhibit No. | ** ** | **Exhibit**                                                                                                                                                                                                                          |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1         |       | Articles of Organization of registrant. Filed as  Exhibit 3.1 to the registrant’s initial registration statement on Form SB-2  (Commission File 333-96703) and incorporated by reference herein.                                |
|        |       |                                                                                                                                                                                                                                 |
| 3.2.1       |       | Amended and Restated Operating Agreement of the  registrant. Filed as Exhibit 3.2 to the registrant’s initial  registration statement on Form SB-2 (Commission File 333-96703) and  incorporated by reference herein. |
|        |       |                                                                                                                                                                                                                                 |

 

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| 3.2.2  |   | First Amendment to Amended and Restated Operating  Agreement of East Kansas Agri-Energy, L.L.C., dated September 16, 2004. Filed  as Exhibit 3.2.1 to the registrant’s quarterly report on Form 10-QSB dated  September 30, 2004 and incorporated by reference herein.                                   |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                          |
| 4.1    |   | Form of Membership Unit Certificate. Filed as  Exhibit 4.1 to the registrant’s registration statement on Form SB-2  (Commission File 333-96703) and incorporated by reference herein.                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                          |
| 10.1   |   | Employment Agreement dated February 10, 2003  between East Kansas Agri-Energy, LLC and Jill Zimmerman. Filed as  Exhibit 10.6 to the registrant’s annual report dated December 31,  2003 on Form 10-KSB and incorporated by reference herein                                         |
|   |   |                                                                                                                                                                                                                                                                                                          |
| 10.2   |   | Option to Purchase Real Estate from Clarence L.  White and Berniece F. White dated July 1, 2004. Filed as Exhibit 10.10 to  registrant’s quarterly report dated June 30, 2004 on Form 10-QSB and  incorporated by reference herein.                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                          |
| 10.3   |   | Agreement between Owner and Design/Builder on the  Basis of a Stipulated Price dated August 9, 2004 between East Kansas  Agri-Energy, L.L.C. and ICM, Inc. Filed as Exhibit 10.11 to registrant’s  quarterly report dated September 30, 2004 on Form 10-QSB and incorporated by  reference herein.       |
|   |   |                                                                                                                                                                                                                                                                                                          |
| 10.4   |   | Unit Purchase and Redemption Agreement dated October  11, 2004 between East Kansas Agri-Energy, L.L.C., ICM, Inc., and Fagen, Inc.  Filed as Exhibit 10.12 to registrant’s quarterly report dated September 30, 2004  on Form 10-QSB and incorporated by reference herein.                               |
|   |   |                                                                                                                                                                                                                                                                                                          |
| 10.5   |   | Management Agreement dated November 12, 2004 between  East Kansas Agri-Energy, L.L.C. and United Bio Energy Management, LLC. Filed  as Exhibit 10.11 to registrant’s Pre-Effective Amendment No. 2 filed on  April 6, 2005 (Commission File 333-96703) and incorporated by reference  herein.  |
|   |   |                                                                                                                                                                                                                                                                                                          |
| 10.6   |   | Raw Grains Agreement dated November 12, 2004 between  East Kansas Agri-Energy, L.L.C. and United Bio Energy Ingredients, LLC. Filed  as Exhibit 10.12 to registrant’s Pre-Effective Amendment No. 2 filed on  April 6, 2005 (Commission File 333-96703) and incorporated by reference  herein. |
|   |   |                                                                                                                                                                                                                                                                                                          |
| 10.7   |   | Ethanol Agreement dated November 12, 2004 between  East Kansas Agri-Energy, L.L.C. and United Bio Energy Fuels, LLC. Filed as  Exhibit 10.13 to registrant’s Pre-Effective Amendment No. 2 filed on  April 6, 2005 (Commission File 333-96703) and incorporated by reference  herein.          |
|   |   |                                                                                                                                                                                                                                                                                                          |
| 10.8   |   | Distillers Grains Marketing Agreement dated November  12, 2004 between East Kansas Agri-Energy, L.L.C. and United Bio Energy  Ingredients, LLC. Filed as Exhibit  10.14 to Pre-Effective Amendment No. 2 filed on April 6,  2005 (Commission File 333-96703) and  incorporated by reference herein. |
|   |   |                                                                                                                                                                                                                                                                                                          |
| 10.9   |   | Trading Agreement dated November 12, 2004 between  East Kansas Agri-Energy, L.L.C. and United Bio Energy Trading, LLC. Filed as Exhibit 10.15 to registrant’s  Pre-Effective Amendment No. 2 filed on April 6, 2005 (Commission  File 333-96703) and incorporated by  reference herein.        |
|   |   |                                                                                                                                                                                                                                                                                                          |
| 10.10  |   | Credit Agreement dated November 23, 2004 between  East Kansas Agri-Energy, L.L.C. and Home Federal Savings Bank. Filed as Exhibit 10.16 to registrant’s  Pre-Effective Amendment No. 2 filed on April 6, 2005 (Commission  File 333-96703) and incorporated by  reference herein.              |
|   |   |                                                                                                                                                                                                                                                                                                          |
| 10.11  |   | Disbursing Agreement dated November 23, 2004 between  East Kansas Agri-Energy, L.L.C. and Home Federal Savings Bank. Filed as Exhibit 10.17 to registrant’s  Pre-Effective Amendment No. 2 filed on April 6, 2005 (Commission  File 333-96703) and incorporated by  reference herein.          |
|   |   |                                                                                                                                                                                                                                                                                                          |
| 10.12  |   | Security Agreement dated November 23, 2004 between  East Kansas Agri-Energy, L.L.C. and Home Federal Savings Bank. Filed as Exhibit 10.18 to registrant’s  Pre-Effective Amendment No. 2 filed on April 6, 2005 (Commission  File 333-96703) and incorporated by  reference herein.            |
|   |   |                                                                                                                                                                                                                                                                                                          |

 

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| 10.13  |   | Mortgage—Collateral Real Estate Mortgage dated  November 23, 2004 between East Kansas Agri-Energy, L.L.C. and Home Federal  Savings Bank. Filed as Exhibit 10.19  to Pre-Effective Amendment No. 2 filed on April 6, 2005  (Commission File 333-96703) and  incorporated by reference herein.                                       |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                               |
| 10.14  |   | Facility Construction, Ownership and Operating  Agreement dated February 24, 2005 between East Kansas Agri-Energy, LLC and  Southern Star Central Gas Pipeline, Inc. Filed as Exhibit 10.20 to registrant’s Pre-Effective Amendment  No. 2 filed on April 6, 2005 (Commission File 333-96703) and incorporated by reference herein. |
|   |   |                                                                                                                                                                                                                                                                                                                                               |
| 10.15  |   | Service Agreement dated February 28, 2005 between  East Kansas Agri-Energy, LLC and Kansas City Power & Light Company. Filed as Exhibit 10.21 to registrant’s  Pre-Effective Amendment No. 2 filed on April 6, 2005 (Commission  File 333-96703) and incorporated by  reference herein.                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                               |
| 10.16  |   | U.S. Water Services Agreement between East Kansas  Agri-Energy, LLC and US Water Services. Filed as Exhibit 10.22 to registrant’s Pre-Effective Amendment  No. 2 filed on April 6, 2005 (Commission File 333-96703) and incorporated by reference herein.                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                               |
| 10.17  |   | Real Estate Contract dated February 16, 2005 between  East Kansas Agri-Energy, LLC and City of Garnett, KS. Filed as Exhibit 10.23 to registrant’s Pre-Effective Amendment  No. 2 filed on April 6, 2005 (Commission File 333-96703) and incorporated by reference herein.                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                               |
| 10.18  |   | Letter Agreement with Derek  Peine dated May 5, 2005. Filed as Exhibit 10.5 to registrant’s  quarterly report dated March 31, 2005 on Form 10-QSB and  incorporated by reference herein.                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                               |
| 10.19  |   | Grant of Easement and Right of  Way Agreement dated April 5, 2005 between East Kansas Agri-Energy, LLC  and the State of Kansas. Filed  as Exhibit 10.2 to registrant’s quarterly report dated June 30,  2005 on Form 10-QSB and incorporated by reference herein.                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                               |
| 10.20  |   | Contract for Sale of Equipment  dated May 10, 2005 between East Kansas Agri-Energy, LLC and ICM, Inc. Filed  as Exhibit 10.3 to registrant’s quarterly report dated June 30,  2005 on Form 10-QSB and incorporated by reference herein.                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                               |
| 10.21  |   | Letter Agreement with Kennedy  and Coe, LLC dated May 17, 2005. Filed as Exhibit 10.4 to  registrant’s quarterly report dated June 30, 2005 on Form 10-QSB  and incorporated by reference herein.                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                               |
| 10.22  |   | Letter Agreement with Kennedy  and Coe, LLC dated May 17, 2005. Filed as Exhibit 10.5 to  registrant’s quarterly report dated June 30, 2005 on Form 10-QSB  and incorporated by reference herein.                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                               |
| 10.23  |   | Letter Agreement with Diane  Allen dated May 1, 2005. Filed as Exhibit 10.6 to registrant’s  quarterly report dated June 30, 2005 on Form 10-QSB and incorporated  by reference herein.                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                               |
| 10.24  |   | Letter Agreement with Thomas  Leitnaker dated June 29, 2005. Filed as Exhibit 10.8 to  registrant’s quarterly report dated June 30, 2005 on Form 10-QSB  and incorporated by reference herein.                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                               |
| 10.25  |   | Letter Agreement with Ethanol Capital Partners, L.P.  dated May 5, 2005. Filed as Exhibit 10.9 to registrant’s quarterly  report dated June 30, 2005 on Form 10-QSB and incorporated by  reference herein.                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                               |
| 10.26  |   | Agreement with Mike Burns dated October 11,  2005. Filed as Exhibit 10.1 to registrant’s quarterly report dated  June 30, 2005 on Form 10-QSB and incorporated by reference herein.                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                               |
| 10.27  |   | Bill of Sale dated December 20, 2005 between East Kansas Agri-Energy, LLC and  the City of Garnett, Kansas. Filed as Exhibit 10.27 to registrant’s  annual report dated December 31, 2005 on Form 10-KSB and incorporated by  reference herein.                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                               |

 

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| 10.28  |   | Warranty Deed dated December 20, 2005 between East Kansas Agri-Energy, LLC and  the City of Garnett, Kansas. Filed as Exhibit 10.28 to registrant’s  annual report dated December 31, 2005 on Form 10-KSB and incorporated by  reference herein.                                                         |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                          |
| 10.29  |   | Lease Agreement dated December 1, 2005 between East Kansas Agri-Energy, LLC and  the City of Garnett, Kansas. Filed as Exhibit 10.29 to registrant’s  annual report dated December 31, 2005 on Form 10-KSB and incorporated by  reference herein .                                                       |
|   |   |                                                                                                                                                                                                                                                                                                          |
| 10.30  |   | Tax Abatement Agreement dated December 1, 2005 between East Kansas Agri-Energy, LLC and  the City of Garnett, Kansas. Filed as Exhibit 10.30 to registrant’s  annual report dated December 31, 2005 on Form 10-KSB and incorporated by  reference herein.                                                |
|   |   |                                                                                                                                                                                                                                                                                                          |
| 10.31  |   | Master Amended and Restated Credit Agreement dated  June 10, 2006 by and between East Kansas Agri-Energy, LLC and Home Federal  Savings Bank. Filed as Exhibit 10.1 to registrant’s quarterly report dated  June 30, 2006 and incorporated by reference herein.                                          |
|   |   |                                                                                                                                                                                                                                                                                                          |
| 10.32  |   | First Supplement to the Master Amended and Restated  Credit Agreement dated June 10, 2006 by and between East Kansas Agri-Energy,  LLC and Home Federal Savings Bank. Filed as Exhibit 10.2 to registrant’s  quarterly report dated June 30, 2006 on Form 10-QSB and incorporated by  reference herein.  |
|   |   |                                                                                                                                                                                                                                                                                                          |
| 10.33  |   | Second Supplement to the Master Amended and Restated  Credit Agreement dated June 10, 2006 by and between East Kansas Agri-Energy,  LLC and Home Federal Savings Bank. Filed as Exhibit 10.3 to registrant’s  quarterly report dated June 30, 2006 on Form 10-QSB and incorporated by  reference herein. |
|   |   |                                                                                                                                                                                                                                                                                                          |
| 10.34  |   | Third Amendment to Future Advance Mortgage and  Security Agreement dated June 10, 2006 by and between East Kansas  Agri-Energy, LLC and Home Federal Savings Bank. Filed as Exhibit 10.4 to  registrant’s quarterly report dated June 30, 2006 and incorporated by reference  herein.                    |
|   |   |                                                                                                                                                                                                                                                                                                          |
| 10.35  |   | Termination Agreement dated January 3, 2007 between  East Kansas Agri-Energy, LLC and UBE Services, LLC. Filed as an exhibit  herewith.                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                          |
| 10.36  |   | General Manager Employment Agreement dated December  19, 2006 between East Kansas Agri-Energy, LLC and Steven Gardner. Filed as an  exhibit herewith.                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                          |
| 14.1   |   | Code of Ethics of East Kansas Agri-Energy, LLC,  adopted March 22, 2004. Filed as exhibit 14.1 to registrant’s annual report  dated December 31, 2003 and incorporated by reference herein.                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                          |
| 31.1   |   | Certificate pursuant to 17 CFR 240.15d-14(a).                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                          |
| 31.2   |   | Certificate pursuant to 17 CFR 240.15d-14(a).                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                          |
| 32.1   |   | Certificate pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                          |
| 32.2   |   | Certificate pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                                                                               |

 

 

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**ITEM 14. PRINCIPAL INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FEES ANDSERVICES.**

The aggregate fees billed by the principal independentregistered public accountants (Eide Bailly LLP) to East Kansas for the fiscalyear ended December 31, 2006, and the fiscal year ended December 31, 2005 areas follows:

| Category           | ** ** | **Year** | ** ** | **Fees** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
| Audit Fees         |       | 2006     |       | $        | 69,900     |   |
|                    |       | 2005     |       | $        | 70,522     |   |
| Audit-Related Fees |       | 2006     |       | $        | 0          |   |
|               |       | 2005     |       | $        | 5,555      |   |
| Tax Fees           |       | 2006     |       | $        | 0          |   |
|                    |       | 2005     |       | $        | 0          |   |
| All Other Fees     |       | 2006     |       | $        | 0          |   |
|               |       | 2005     |       | $        | 0          |   |

 

Prior to engagement of the principal independentregistered public accountants to perform audit services for East Kansas, theprincipal accountant was pre-approved by our Audit Committee pursuant to ourpolicy requiring such approval.

100% of all audit services, audit-related services andtax-related services were pre-approved by our Audit Committee.

**SIGNATURES**

In accordance withSection 13 or 15(d) of the Exchange Act, the registrant caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.
|        |        |   |           |   | EAST KANSAS AGRI-ENERGY, LLC                                                            |   |   |
|--------|--------|--------|----------------|--------|-----------------------------------------------------------------------------------------|--------|--------|
|   |   |   |           |   |                                                                                    |   |   |
|   | Date:  |   | March 29, 2006 |   | /s/ William R. Pracht                                                                   |   |   |
|   |   |   |           |   | William R. Pracht, President                                                            |   |   |
|   |   |   |           |   | (Principal Executive Officer)                                                           |   |   |
|   |   |   |           |   |                                                                                    |   |   |
|   | Date:  |   | March 29, 2006 |   | /s/ Thomas D. Leitnaker                                                                 |   |   |
|   |   |   |           |   | Thomas D. Leitnaker,                                                                    |   |   |
|   |   |   |           |   | Chief Financial Officer & Controller   (Principal Financial and Accounting Officer) |   |   |

 

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In accordance withthe Exchange Act, this report has been signed below by the following persons onbehalf of the registrant and in the capacities and on the dates indicated.
|        |        |   |           |   |                             |   |   |
|--------|-------------|--------|----------------|--------|----------------------------------|--------|--------|
|   | Date:       |   | March 29, 2006 |   | /s/ William R. Pracht            |   |   |
|   |        |   |           |   | William R. Pracht, Director      |   |   |
|   |        |   |           |   |                             |   |   |
|   | Date:       |   | March 29, 2006 |   | /s/ Daniel V. Morgan             |   |   |
|   |        |   |           |   | Daniel V. Morgan, Director       |   |   |
|   |        |   |           |   |                             |   |   |
|   | Date:       |   | March 29, 2006 |   | /s/ Jill A. Zimmerman            |   |   |
|   |        |   |           |   | Jill A. Zimmerman, Director      |   |   |
|   |        |   |           |   |                             |   |   |
|   | Date:       |   | March 29, 2006 |   | /s/ Roger J. Brummel             |   |   |
|   |        |   |           |   | Roger J. Brummel, Director       |   |   |
|   |        |   |           |   |                             |   |   |
|   |  Date: |   | March 29, 2006 |   | /s/ Scott A. Burkdoll            |   |   |
|   |        |   |           |   | Scott A. Burkdoll, Director      |   |   |
|   |        |   |           |   |                             |   |   |
|   | Date:       |   | March 29, 2006 |   | /s/ Glenn A. Caldwell, Jr.       |   |   |
|   |        |   |           |   | Glenn A. Caldwell, Jr., Director |   |   |
|   |        |   |           |   |                             |   |   |
|   | Date:       |   | March 29, 2006 |   | /s/ Daniel L. Guetterman         |   |   |
|   |        |   |           |   | Daniel L. Guetterman, Director   |   |   |
|   |        |   |           |   |                             |   |   |
|   | Date:       |   | March 29, 2006 |   | /s/ Donald S. Meats              |   |   |
|   |        |   |           |   | Donald S. Meats, Director        |   |   |
|   |        |   |           |   |                             |   |   |
|   | Date:       |   | March 29, 2006 |   | /s/ Steve Doering                |   |   |
|   |        |   |           |   | Steve Doering, Director          |   |   |
|   |        |   |           |   |                             |   |   |
|   | Date:       |   | March 29, 2006 |   | /s/ Charles P. Torrey            |   |   |
|   |        |   |           |   | Charles P. Torrey, Director      |   |   |
|   |        |   |           |   |                             |   |   |
|   | Date:       |   | March 29, 2006 |   | /s/ Scott Brittenham             |   |   |
|   |        |   |           |   | Scott Brittenham, Director       |   |   |

 

 

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