**U.S.
      SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**










**FORM
      10-KSB**










x
            **Annual
                report under section 13 or 15(d) of the Securities Act of
                1934.**




**For
      the fiscal year ended December 31, 2006**




o
            **Transition
                report under section 13 or 15(d) of the Securities Act of
                1934.**




**For
      the Transition period from ______ to _______.**




**Commission
      file number: 000-15579**





**Orion
      Ethanol, Inc.**


(Exact
      name of registrant as specified in its charter)







**Nevada**
            **87-0348444**(State
                or other jurisdiction of
            (I.R.S.
                Employerincorporation
                or organization)
            Identification
                Number)**307
                South Main Street****Pratt,
                Kansas 67124**(Address
                and zip code of principal executive offices)**(620)
                672-2814**(Registrant’s
                telephone number including area
                code)









**Securities
      to be registered pursuant to Section 12(b) of the Exchange Act:** None




**Securities
      registered or to be registered pursuant to Section 12(g) of the Exchange
      Act:**







Check
      whether the issuer (1) has filed all reports required to be filed by Section
      13
      or 15(d) of the Securities and Exchange Act of 1934 during the past 12 months
      (or for such shorter period that the registrant was required to file such
      reports), and (2) has been subject to such filing requirements for the past
      90
      days. Yes x No
o




Check
      if
      no disclosure of delinquent filers to Item 405 of Regulation S-B is contained
      in
      this form, and no disclosure will be contained, to the best of registrant’s
      knowledge, in definitive proxy or information statements incorporated by
      reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
      x




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes o No x







The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by average bid and ask prices as March 15, 2007 was
      $36,197,330 .




The
      number of shares of the issuer’s common stock outstanding, as of March 15, 2006
      was 32,661,025.




Transitional
      Small Business Disclosure Format: Yes o No x




**DOCUMENTS
      INCORPORATED BY REFERENCE:**




Portions
      of the Registrant’s Definitive Proxy Statement for its 2007 Annual Meeting of
      Shareholders to be filed with the Commission within 120 days after the close
      of
      the Registrant’s fiscal year are incorporated by reference into Part III of this
      Annual Report on Form 10-KSB.





**FORWARD-LOOKING
      STATEMENTS**




This
      Annual Report on Form 10-KSB contains forward-looking statements within the
      meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as
      amended (the “Exchange Act”). These forward-looking statements are not
      historical facts but rather are based on current expectations, estimates and
      projections. We use words such as “anticipate,” “expect,” “intend,” “plan,”
“believe,” “foresee,” “estimate” and variations of these words and similar
      expressions to identify forward-looking statements. These statements are not
      guarantees of future performance and are subject to certain risks, uncertainties
      and other factors, some of which are beyond our control, are difficult to
      predict and could cause actual results to differ materially from those expressed
      or forecasted. These risks and uncertainties include the following *:*




·
            The
                availability and adequacy of our cash flow to meet our requirements,
                including payment of loans;




·
            Economic,
                competitive, demographic, business and other conditions in our local
                and
                regional markets;




·
            Changes
                or developments in laws, regulations or taxes in the ethanol, agricultural
                or energy industries;




·
            Actions
                taken or omitted to be taken by third parties including our suppliers
                and
                competitors, as well as legislative, regulatory, judicial and other
                governmental authorities;




·
            Competition
                in the ethanol industry;




·
            The
                loss of or failure to obtain any license or permit necessary or desirable
                in the operation of our business;




·
            The
                temporary or permanent delay in the construction of our plant or,
                once
                built, loss of our plant due to casualty, weather, mechanical failure
                or
                any extended or extraordinary maintenance or inspection that may
                be
                required;




·
            Changes
                in our business strategy, capital improvements or development
                plans;




·
            The
                availability of additional capital to support capital improvements
                and
                development; and




·
            Other
                risks identified in this report and in our other filings with the
                Securities and Exchange Commission or the
                SEC.




You
      should read this report completely and with the understanding that actual future
      results may be materially different from what we expect. The forward looking
      statements included in this report are made as of the date of this report and
      should be evaluated with consideration of any changes occurring after the date
      of this Report. We will not update forward-looking statements even though our
      situation may change in the future and we assume no obligation to update any
      forward-looking statements, whether as a result of new information, future
      events or otherwise.







**TABLE
      OF CONTENTS**




PageITEM
                  1.
              
              
              DESCRIPTION
                  OF BUSINESS
              
              
              1ITEM
                  2.
              
              
              DESCRIPTION
                  OF PROPERTY
              
              
              28ITEM
                  3.
              
              
              LEGAL
                  PROCEEDINGS
              
              
              28ITEM
                  4.
              
              
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITIES HOLDERS
              
              
              28ITEM
                  5.
              
              
              MARKET
                  FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
              
              
              28ITEM
                  6.
              
              
              MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
              
              
              30ITEM
                  7.
              
              
              FINANCIAL
                  STATEMENTS
              
              
              37ITEM
                  8.
              
              
              CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTS ON ACCOUNTING AND FINANCIAL
                  MATTERS
              
              
              38ITEM
                  8A.
              
              
              CONTROLS
                  AND PROCEDURES
              
              
              38ITEM
                  8B.
              
              
              OTHER
                  INFORMATION
              
              
              39ITEM
                  9.
              
              
              DIRECTORS,
                  EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE;
                  COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
              
              
              39ITEM
                  10.
              
              
              EXECUTIVE
                  COMPENSATION
              
              
              39ITEM
                  11.
              
              
              SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                  STOCKHOLDER MATTERS
              
              
              39ITEM
                  12.
              
              
              CERTAIN
                  RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
                  INDEPENDENCE
              
              
              39ITEM
                  13.
              
              
              EXHIBITS
              
              
              39ITEM
                  14.
              
              
              PRINCIPAL
                  ACCOUNTANT FEES AND SERVICES
              
              
              43




i


Except
      as
      otherwise indicated by the context, references in this annual report on Form
      10-KSB to “Orion,” “we,” “us,” or “our,” are references to the combined business
      of Orion Ethanol, Inc., its wholly-owned subsidiary, Orion Ethanol, LLC, and
      its
      majority-owned subsidiary, Gateway Ethanol, LLC.




**PART
      I**




**ITEM
      1. DESCRIPTION OF BUSINESS**




***Background***




We
      are a
      start-up company in the development stage organized under the laws of Nevada
      and
      are in the business of building bio-refineries to produce ethanol and animal
      feed products. We were originally incorporated in the State of Utah on February
      1, 1979, under the name Faro Mining and Milling Corporation for the purpose
      of
      developing mining properties. In 1986, we discontinued our mining business
      and
      thereafter, we had no active business operations until August 28, 2006, when
      we
      completed a reverse acquisition transaction with Orion Ethanol, LLC, as
      described below.




***Our
      Reverse Acquisition of Orion***




*Events
      Prior to the Acquisition*




On
      April
      19, 2006, our Board of Directors approved and authorized (i) a 1,000 to 1
      reverse stock split of our common stock, (ii) a change of our state of
      incorporation from Utah to Nevada and (iii) an increase in our authorized
      capital stock from 20,000,000 shares to 110,000,000 shares comprising
      100,000,000 shares of common stock, par value $.001 and 10,000,000 shares of
      preferred stock, par value $.001 par value.




On
      June
      16, 2006, to effect our reincorporation from Utah to Nevada, we entered into
      a
      merger agreement under which we merged with and into a newly formed Nevada
      corporation called RTO Holdings, Inc., with RTO Holdings, Inc., the surviving
      entity of the merger. The merger became effective after the filing of the
      Articles of Merger on June 16, 2006.




On
      June
      21, 2006, Jeff Jenson, our then-principal shareholder, entered into a Stock
      Purchase Agreement with Halter Financial Investments, L.P., or Halter Financial,
      a Texas limited partnership, pursuant to which Mr. Jenson sold 11,000
      post-reverse split shares of our common stock to Halter Financial for a purchase
      price of $650,000. As a condition of the consummation of the Stock Purchase
      Agreement, an additional 1,335,000 post-reverse split shares of our common
      stock
      were sold to Halter Financial and 25,000 post-reverse split shares of our common
      stock were sold to Tryant, LLC, an entity owned and controlled by Mr. Jenson,
      at
      a price of $0.01 per share. As a result of these transactions, Halter Financial
      became the holder of approximately 98% of our issued and outstanding common
      stock. Upon the consummation of the transactions under the Stock Purchase
      Agreement and following the resignation of our incumbent officers and directors,
      Timothy Halter, the principal of Halter Financial, became our sole officer
      and
      director.




*Consummation
      of the Acquisition*




On
      August
      28, 2006, we entered into a Securities Exchange Agreement with Orion Ethanol,
      LLC or Orion LLC and its members pursuant to which we acquired all of the issued
      and outstanding membership units of Orion LLC in exchange for a total of
      31,272,740 shares of our common stock, which constituted 95.75% of our issued
      and outstanding common stock. As a result of the foregoing transactions, Halter
      Financial’s holdings of our common stock were reduced from approximately 98% to
      approximately 4% of our issued and outstanding common stock. Upon consummation
      of the exchange transaction, Mr. Halter resigned as our sole officer and
      director and Patrick N. Barker was appointed as our sole director and the
      executive officers if Orion LLC became our executive officers.







Following
      the reverse acquisition Orion LLC became our wholly-owned subsidiary and the
      holding company for all of our commercial operations. Our commercial operations
      constitute those of a renewable energy company focusing on commercial ethanol
      production.




Effective
      November 2, 2006, we changed our name to Orion Ethanol, Inc. to reflect our
      business as a renewable energy company focusing on commercial ethanol
      production. Effective November 7, 2006, we changed our symbol on the OTC
      Bulletin Board to “OEHL.OB.”




***Our
      Business***




As
      noted
      above, we are a start-up company in the development stage and are in the
      business of building bio-refineries to produce ethanol and animal feed products.
      Ethanol is a fuel component utilized to enhance gasoline performance and reduce
      gasoline exhaust emissions. As further discussed in detail below, ethanol is
      derived primarily from the processing of corn into alcohol and because it is
      derived from corn, a readily available agricultural commodity, ethanol is a
      renewable source of energy that is an eco-friendly alternative to methyl
      tertiary butyl ether, or MTBE, a petroleum-based additive. Typically, ethanol
      is
      blended with gasoline in a formulation consisting of 10% alcohol and 90%
      gasoline (known as E10). However, ethanol is increasingly being used in an
      E85
      formulation (85% ethanol and 15% gasoline) for use in Flexible Fuel Vehicles
      or
      FFV. FFVs can run on E85, gasoline, or any combination of the two, and are
      currently offered by major automotive manufacturers such as General Motors,
      Ford
      and Daimler Chrysler. We intend to use a continuous dry milling process to
      produce fuel-grade ethanol as our main product and distillers grains and carbon
      dioxide as co-products. Corn and grain sorghum will be the primary raw
      materials. Once completed and operational, we expect each of our ethanol
      production facilities to produce a minimum of 55 million gallons per year of
      fuel-grade ethanol which we intend to distribute throughout the United
      States.




Our
      majority owned subsidiary, Gateway Ethanol, is currently constructing a 55
      million gallon per year dry-mill ethanol plant near Pratt, Kansas. Orion
      indirectly owns 62% of Gateway Ethanol with Indeck Energy, Noble Americas Corp.
      and White Pines, LLC holding minority interests of 23.8%, 9.5% and 4.7%
      respectively. We have entered into an engineering, procurement, and construction
      or EPC agreement with Lurgi PSI, Inc. for the design and construction of the
      Pratt facility. Construction of the Pratt facility is scheduled to be completed
      in the third quarter of 2007, at which point we expect that the Pratt facility
      will have the capacity to process more than 18 million bushels of corn and
      grain
      sorghum annually.




In
      addition, we have entered into agreements to acquire an aggregate of
      approximately 1,400 acres of land at four locations (Enid, Oklahoma; Shattuck,
      Oklahoma; Hugoton, Kansas; and Colby, Kansas) where we plan on constructing
      our
      other prospective ethanol production facilities. We also have an option,
      expiring in September 2008, to purchase land in Wellington, Kansas to be used
      as
      the site for an ethanol production facility. We believe there are sufficient
      infrastructure such as water rights, rail, natural gas pipelines, **** electricity
      and other infrastructure to meet our anticipated ethanol production needs at
      the
      referenced locations. Proposed facilities at these locations are in the
      development stage, and we are currently evaluating whether to engage Lurgi
      PSI
      or to consider other design-build alternatives for the construction of our
      other
      proposed ethanol production facilities. Air quality permits for our planned
      facilities in Enid, Oklahoma and Shattuck, Oklahoma were signed on October
      18,
      2006. We expect these facilities to be complete and in full production by the
      third quarter of 2009. We intend to apply for air permits for our Hugoton,
      Wellington and Colby, Kansas sites in 2007.




We
      are
      currently studying the feasibility of expanding the Pratt facility to a 110
      million plus gallon capacity. Should we determine that the economics of such
      an
      expansion is favorable, we may institute an expansion of the Pratt facility
      prior to the construction of our other sites in development. We expect to
      complete the feasibility study in the second quarter of 2007.




We
      believe that our ability to successfully compete in the ethanol production
      industry depends on many factors, including the location of our planned ethanol
      facilities, development of strategic relationships, achievement of our
      anticipated low cost production model and, where necessary, recruitment of
      experienced management.




2




***Our
      Industry***




Ethanol
      or Ethyl alcohol is commercially produced principally through the fermentation
      of grain: in the United States it is principally produced by processing corn.
      Ethanol is a blend component in the U.S. gasoline fuel market. In 2006,
      approximately 140 billion gallons of gasoline were used in the US **** according
      to the U.S. Department of Energy’s Energy Information Administration or the EIA.
      Refiners and marketers have historically blended ethanol with gasoline to
      increase octane and decrease tailpipe emissions. According to the Renewable
      Fuels Association, or RFA, a national trade association for the US fuel ethanol
      industry, an estimated 4.9 billion gallons of ethanol were produced in the
      U.S.
      in 2006 accounting for approximately 3% of the U.S. gasoline fuel supply. In
      30%
      of the U.S. gasoline fuel supply, the blend of ethanol is 5.7% to 10.0% of
      the
      volume. According to the RFA, approximately 6.0 million vehicles out of the
      approximately 230 million total vehicles on the road in the U.S. in 2006 were
      FFVs capable of utilizing ethanol and other biofuels. Gasoline blended with
      up
      to 10% ethanol is approved for use under the warranties of all domestic major
      motor vehicle manufactures and all major manufacturers of power equipment,
      motorcycles, snowmobiles and outboard motors permit the use of ethanol blends
      in
      their products.




Ethanol
      is primarily used for the following purposes:




*Octane
      enhancer* .
      Adding
      ethanol, which has an average octane rating of 113, to regular unleaded
      gasoline, which has an octane rating of 87, and premium unleaded, which has
      an
      octane rating of 91, enables production of greater quantities of suboctane
      fuel
      with an octane rating of less than 87. Ethanol is commonly added to finished
      regular grade gasoline at the wholesale terminal as a means of increasing the
      octane level of gasoline to reach mid-grade and premium standards.




*Clean
      air additive* .
      Ethanol
      acts as a clean air additive and when added to gasoline reduces tailpipe
      emissions resulting in improved air quality. Ethanol contains 35% oxygen which
      is twice that of MTBE, an alternate oxygenate to ethanol which is being phased
      out because of environmental and health concerns. As an oxygenate, ethanol
      causes more complete combustion of the fuel and engine cylinder resulting in
      reduced tailpipe emissions by as much as 30%, including a 12% reduction in
      volatile organic compound emissions when blended at a 10% level. Use of ethanol
      also displaces some gasoline components such as benzene, which may be
      carcinogenic. Ethanol is non-toxic, water soluble and
      biodegradable.




*Fuel
      extender* .
      In
      addition to its performance and environmental benefits, ethanol is used to
      extend fuel supplies. By adding ethanol to sub-octane gasoline, the refiner
      or
      blender is able to increase the octane reading of sub-octane fuel so that is
      conforms to gasoline standards by also expanding the total volume of fuel to
      be
      sold. As a result, the refiner benefits from increased fuel production from
      a
      given barrel of oil thereby expanding its ability to meet consumer demand,
      especially during times when the refinery capacity and octane sources are
      limited. Due to ever increasing need for automotive fuel and U.S. dependence
      on
      foreign oil and refined products, the U.S. has a critical need to find domestic
      sources of fuel. Current ethanol production efficiencies enable 7 **** bushels
      of grain to replace the gasoline refined from 1 barrel of crude oil. Unlike
      oil,
      however, the grain used for ethanol is replaced year after year, while a barrel
      of oil, once consumed, is gone forever. Much of the ethanol blending throughout
      the U.S. today is done simply for the purpose of extending the volume of fuel
      sold at the gas pump.




*Gasoline
      alternative* .
      E85 is
      a gasoline alternative consisting of 85% ethanol and 15% gasoline which can
      be
      used in FFVs, specially designed to use E85 as a fuel. The number of service
      stations that sell E85 is increasing rapidly. The RFA, in its *Ethanol
      Industry Outlook for 2007* ,
      citing
      the National Ethanol Vehicle Coalition, stated that there are 1,120 service
      stations in the U.S. that sell E85. In the U.S. auto makers are receiving
      incentives under the federal fuel economy standards for producing FFVs. E85
      is
      generally priced lower per gallon than gasoline because most FFVs experience
      some reduction in mileage when running on E85. According to the RFA, GM,
      DaimlerChrysler and Ford have pledged to increase production of FFVs to half
      of
      all new vehicles by 2012, about 4 million new FFVs a year. Expanded use of
      E85
      could significantly increase the demand for ethanol over that created by the
      more common 10% blending.




3




***Demand
      for Ethanol***




We
      believe that the demand for ethanol will grow as a result of the confluence
      of
      several favorable economic factors; the voluntary and involuntary replacement
      of
      MTBE; a shortage of domestic petroleum refining capacity; geopolitical concerns
      including continued instability in the Middle East; and federal mandated
      renewable fuel usage. These factors, together with continued growth in the
      utilization of E85 when combined with the growing public consensus that ethanol
      is the equivalent of gasoline and its logical replacement in many circumstances
      should contribute to the rapid growth of the ethanol industry.




*Favorable
      production economics relative to gasoline.* We
      believe that the current cost of producing a gallon of ethanol is significantly
      lower than the refining cost of producing a gallon of gasoline from crude oil.
      This economic reality alone will enable ethanol to grow, not only as a strategic
      blend component, but also as an alternative to gasoline, especially in the
      form
      of E85.




*Replacement
      of MTBE* .
      Ethanol
      and MTBE have been the two primary additives used to meet the Clean Air Act’s
      oxygenate requirements. MTBE is produced and blended with gasoline at the
      refinery and transported through a pipeline and, therefore, it was initially
      the
      preferred oxygenate blending ingredient used to make most reformulated gasoline.
      Before 2003, ethanol’s use as a fuel extender and octane enhancer was
      predominantly in the Midwest. As a result of health and environmental concerns,
      25 states representing most of the MTBE consumed in the U.S., including
      California, New York and Connecticut, have banned or significantly limited
      the
      use of MTBE. Product liability concerns regarding MTBE have hastened the
      phase-out of MTBE nationwide, creating additional demand for ethanol outside
      of
      the Midwest. As MTBE is replaced, ethanol is the most viable substitute for
      MTBE
      because of its production economics, octane rating and clean burning
      characteristics and because there is presently no other alternative product
      currently commercially available.




*Shortage
      of domestic petroleum refining capacity* .
      EIA
      information shows the number of operable U.S. petroleum refineries has
      decreased from 319 in 1980 to 148 in 2005. Also according to the EIA, even
      though domestic refining capacity has decreased approximately 5% from 1980
      to
      2005, domestic demand has increased 21% over the same period. The EIA expects
      growth in refining capacity to average 1.3% per year until 2025, while demand
      for refined petroleum products will grow at 1.5% per year over the same
      period. Ethanol when blended with gasoline after the refining process, directly
      increases domestic fuel capacity. Domestic fuel refining shortages should result
      in greater demand for ethanol.




*Geopolitical
      concerns* .
      Crude
      oil imports represented 65% of the U.S. crude oil supply in 2006 and are
      estimated to rise to 71% by 2025 according to the EIA. Political unrest, and
      attacks on oil production infrastructure in the oil exporting nations,
      particularly in the Middle East, have periodically disrupted the flow of oil.
      Terrorist attacks have added a “risk premium” to world oil prices. Developing
      nations such as China and India have significantly increased their demand for
      oil. As a result, world oil prices averaged between $60 - $70 a barrel during
      2006. Ethanol, as a domestic, renewable source of energy, reduces the U.S.’s
      dependence on foreign oil and eliminates the need to import, on annual basis,
      an
      estimated 170 million barrels of oil according to the RFA.




*Renewable
      Fuels Standard* .
      The
      Energy Policy Act was passed in August 2005, establishing the Renewable Fuels
      Standard or RFS, which eliminated the mandated use of oxygenates but mandated
      annual use of 7.5 billion gallons of renewable fuels in the U.S. fuel supply
      by
      2012. The RFS requires motor fuels sold in the U.S. to contain in the aggregate
      the following minimum volumes of renewable fuels in future years:




**Year**
            
            **Renewable
                Fuel Usage**
              **(in
                billions of gallons)**2006
            
            4.02007
            
            4.72008
            
            5.42009
            
            6.12010
            
            6.82011
            
            7.42012
            
            7.5





4




This
      mandate may result in an increase in the demand for ethanol, as a form of
      renewable fuel. Implementation rules for the RFS and the Energy Policy Act
      are
      still under development and some or all of the RFS may be waived. Even though
      the RFS should provide an impetus to increased use of ethanol, for the reasons
      discussed above, we believe actual use of ethanol as a renewable fuel will
      surpass the mandated requirements, especially in the early years of RFS
      implementation. Other additional legislation that may affect the demand for
      ethanol, including the federal tax incentives, is discussed below under
“Regulation.”




***Supply
      of Ethanol***




According
      to the RFA, a significant portion of ethanol production is concentrated in
      a few
      producers, but as a whole, production in the ethanol industry remains
      fragmented. The RFA outlook indicates that while domestic ethanol production
      increased from 1.3 billion gallons in 1997 to an estimated 4.9 billion gallons
      in 2006, the top five ethanol producers accounted for approximately 37% of
      the
      industry’s total estimated production capacity, with the remaining production
      being generated by more than 50 smaller producers and farmer-owned cooperatives,
      most with production capacity of 50 million gallons or less. Because most
      ethanol facilities can be constructed in approximately 14 months to
      18 months capacity additions can be forecasted for up to 18 months in the
      future. The RFA estimates that 73 new ethanol facilities and 8 other expanding
      facilities with the capacity for an additional 6.0 billion gallons per year
      are
      under construction and are scheduled to be completed by 2009.




The
      ethanol industry continues to explore production technologies involving
      alternative feedstocks, such as biomass, but corn- and sorghum-based production
      technologies remain the most practical and provide the lowest operating risks.
      Most U.S. ethanol is produced from corn grown in the upper Midwest in
      Illinois, Iowa, Minnesota, Nebraska and South Dakota, but corn is grown in
      significant quantities elsewhere. The production process employs natural gas
      or,
      in some cases, coal to power the facility and dry distillers grains. Proximity
      to sufficient corn or sorghum and natural gas supply, therefore, is a key for
      ethanol producers.




Ethanol
      is usually produced by a dry-milling or wet-milling process. The processes
      feature numerous technical differences, but the primary operating trade-off
      of
      the wet-milling process is a higher co-product yield in exchange for a lower
      ethanol yield (see “Ethanol Co-Products” below). A substantial majority of new
      ethanol production facilities being constructed in the past five years are
      dry-mill because of increased efficiencies and lower capital costs. Older
      dry-mill ethanol facilities were generally designed and built to produce between
      five and 50 million gallons per year, with newer dry-mill facilities,
      however, producing over 100 million gallons per year. The larger facilities
      enjoy economies of scale in both construction and operating costs per gallon.
      Wet-mill facilities have capacities of 200 to 300 million gallons per year
      but
      according to the RFA, 82% of ethanol production capacity is generated from
      dry-mill facilities, with only 18% from wet-mill facilities.




More
      than
      half of U.S. ethanol production is consumed in the east and west coast markets,
      primarily as a result of the stricter air quality requirements in large parts
      of
      those markets. Ethanol is primarily transported from the Midwest to the coasts
      by rail. Adequate access to rail transportation is another key consideration
      for
      locating ethanol production facilities. Good rail access plus a producer’s
      ability to form grain and ethanol unit trains, consisting entirely of cars
      from
      one facility, allows for reduced transportation costs and faster delivery times.
      Movement of ethanol by pipeline is restricted due to the tendency of ethanol
      to
      absorb water and other impurities found in the pipelines, logistical limitations
      of existing pipelines and limited volumes of ethanol that need to be
      transported. Barges and trucks are also used in the transportation of
      ethanol.




***Ethanol
      Production Process***




The
      modern ethanol industry utilizes biological fermentation of plant starches
      and
      sugars into ethanol. Although the actual yield and process of ethanol production
      varies by the feedstock used, the general production process is similar
      throughout the industry.




In
      the
      dry milling process, corn or other high-starch grains are first ground into
      meal
      and then mixed with water and enzymes to form a mash. The mash is then passed

      through cookers, where the starch is liquefied. After cooling, more enzymes
      are
      added to convert the starch into fermentable sugars. Yeast is then added, and
      the sugars are fermented to ethanol and carbon dioxide. The fermented mash
      is
      called “beer,” and contains approximately 10% alcohol. The “beer” is pumped into
      a distillation system where the alcohol is removed from the mash. The alcohol
      is
      then passed through a dehydration system where the remaining water is removed.
      At this stage, the ethanol is essentially 200 proof, and is called anhydrous
      ethanol. The resulting anhydrous ethanol is then blended with about 5%
      denaturant, which is usually gasoline, and is then ready for shipment to
      market.




5




***Ethanol
      Co-Products***




*Dried
      distillers grain with solubles* .
      A
      co-product of dry-mill ethanol production, DDGS is a high-protein and
      high-energy animal feed that is sold primarily as an ingredient in beef and
      dairy cattle rations. DDGS consists of the concentrated nutrients (protein,
      fat,
      fiber, vitamins and minerals) remaining after starch in corn is converted to
      ethanol. Over 85% of DDGS is fed to dairy cattle because it contains high
“by-pass protein,” which results in more milk production. It is also used in
      poultry, swine and other livestock feed. It is anticipated that our facilities
      will utilize the latest DDGS production technology and produce high quality,
      or
“golden,” DDGS, which commands a premium over products from older plants. Golden
      DDGS has higher availability of nutrients and is more easily digested than
      other
      products.




*Wet
      distillers grains with solubles* .
      WDGS is
      similar to DDGS except that the final drying stage of DDGS is bypassed and
      the
      product is sold as a wet feed containing 35% to 50% dry matter, as compared
      to
      DDGS, which contains about 90% dry matter. WDGS is an excellent livestock feed
      with better nutritional characteristics than DDGS because it has not been
      exposed to the heat of drying. The sale of WDGS is usually more profitable
      because the plant saves the cost of natural gas for drying. The product is
      sold
      locally because of the higher cost of transporting the product to distant
      markets and its reduced shelf life. We plan to sell approximately half of our
      distillers grains as WDGS.




*Carbon
      Dioxide.* Carbon
      dioxide, or CO 2 ,
      is
      produced in large quantities during the fermentation stage of ethanol
      production. After scrubbing the CO 2 for any
      residual alcohol, the CO 2 is
      either vented, or captured and sold into beverage or other industrial markets.
      We believe that the CO 2 market
      in Oklahoma and Kansas is significantly different than the CO 2 market
      surrounding the greatest concentration of ethanol production facilities (i.e.,
      the corn belt). Currently, CO 2 is being
      used by Oklahoma and Kansas energy companies in secondary and tertiary oil
      recovery operations. We are exploring opportunities to market the CO 2 we will
      produce to these energy companies.




*Corn
      oil* .
      Corn
      oil can be produced as a co-product of ethanol production by installing
      equipment to separate the oil from the distillers grains during the production
      process. Corn oil can be sold as an animal feed and commands higher prices
      than
      DDGS. It can also be used to produce biodiesel, a clean burning alternative
      fuel
      that can be used in diesel engines with petroleum diesel to lower emissions
      and
      improve lubricity. We are exploring the available corn oil extraction
      technologies, and we may incorporate these technologies into our process if
      we
      determine it is economically feasible to do so.




***Overview
      of Raw Material Supply, Pricing and Hedging***




We
      will
      seek to mitigate our exposure to commodity price fluctuations by purchasing
      forward a portion of our corn requirements on a fixed price basis and by
      purchasing corn and natural gas futures contracts. To mitigate ethanol price
      risk, we will sell a portion of our production forward under fixed price and
      indexed contracts. The indexed contracts are typically referenced to a futures
      contract such as unleaded gasoline on the NYMEX or denatured ethanol on the
      CBOT, and we may hedge a portion of the price risk associated with index
      contracts by selling exchange-traded unleaded gasoline or ethanol futures
      contracts. We believe our strategy of managing exposure to commodity price
      fluctuations will reduce somewhat the volatility of our results.




*Corn
      procurement and hedging strategy* .
      We plan
      to employ the following corn procurement methods and related hedging
      strategies:




·
            we
                will purchase corn through spot cash, fixed-price forward and delayed
                pricing contracts; and




·
            we
                will utilize hedging positions in the corn futures market to manage
                the
                risk of excessive corn price fluctuations for a portion of our corn
                requirements.




6


We
      plan
      to buy futures positions on the CBOT to hedge a portion of our exposure to
      corn
      price risk. In addition, it is anticipated that our facilities will have
      significant corn storage capacity. To help protect against potential supply
      disruptions, we will maintain inventories of corn at each of our facilities.
      This corn inventory should range generally from 10 days to 30 days of
      supply, depending on the time of year, the current market price for corn and
      other factors.




*Natural
      gas procurement and hedging strategy* .
      We will
      be subject to market risk with respect to our supply of natural gas that is
      consumed in the ethanol production process and has historically been subject
      to
      volatile market conditions. Natural gas prices and availability are affected
      by
      weather conditions and overall economic conditions. Accordingly, we will hedge
      a
      portion of our exposure to natural gas price risk from time to time by using
      fixed price or indexed exchange-traded futures contracts.




***Strategy***




Our
      primary goal is to become a large regional ethanol producer, with access to
      low-cost feedstock and an ethanol distribution network into the emerging ethanol
      market of the southern third of the United States. Key elements of our strategy
      to achieve this objective include:




*Complete
      Construction of our Pratt facility by the Third Quarter of 2007* .
      We
      anticipate the completion of the Pratt facility by the third quarter of 2007.
      We
      expect to produce at our Pratt facility ethanol, distillers grains, and
      CO 2 .
      Once
      the Pratt facility, which should have the capacity to produce a minimum of
      55
      million gallons per year of fuel-grade ethanol, is online, we plan to utilize
      as
      much locally grown grain as possible. Additionally, we will have the capability
      to receive and load unit trains of grain and load and dispatch unit trains
      of
      ethanol.




*Complete
      expansion of our Pratt facility by the Fourth Quarter of 2008* .
      We
      expect to complete the expansion of our Pratt facility by the third quarter
      of
      2007. We expect this expansion, when completed, to allow the Pratt facility
      to
      produce a minimum of 110 million gallons per year of fuel-grade
      ethanol.




*Complete
      Construction of our Enid, Oklahoma and Shattuck, Oklahoma Facilities by the
      Third Quarter of 2009* .
      We
      expect our Enid and Shattuck facilities to be constructed and be fully
      operational by the third quarter of 2009. We anticipate that each of these
      facilities will initially produce 55 million gallons of ethanol per year, and
      will be designed to be expanded to 110 million gallons per year.




*Complete
      construction of our Hugoton, Colby and Wellington, Kansas
      Facilities* .
      We
      intend to apply for air permits in 2007 for our Hugoton, Colby and Wellington
      sites. We expect that each of these facilities will produce 110 million gallons
      per year when completed.




We
      believe that, following the completion of our ethanol facilities, we will be
      attractively situated in the ethanol industry to supply ethanol to the southern
      third of the United States. In addition to access to local natural gas supplies,
      our ethanol facilities are uniquely situated in the ethanol industry for four
      reasons:




•
            We
                have access to supplies of locally grown corn and sorghum, which
                represents the lowest-cost grain available; we will also have the
                capability of receiving unit trains of grain when locally grown grain
                is
                not available and using unit trains to ship our finished ethanol
                and
                distillers grains products.****




•
            We
                are located in close proximity to large emerging markets for our
                ethanol
                such as Texas, Oklahoma, Arkansas, and Kansas.




•
            We
                are located in the heart of the U.S. cattle feeding industry, providing
                an
                advantageous market for our distillers
                grains.




•
            We
                are situated to sell our CO2to
                oil and gas producers who can utilize this co-product to enhance
                oil
                production.





7


The
      locations of each of our planned ethanol facilities were strategically chosen
      based on a number of important reasons, two of which are the facilities’ access
      to efficient transportation, and proximity to its end users. Other
      considerations include the availability of its raw material supplies, natural
      gas, water supply, electric service, skilled labor, air quality, water rights
      and permitting considerations.





*Add
      low-cost production capacity* .
      We
      intend to capitalize on the growing U.S. demand for ethanol by expanding our
      production capacity rapidly over the next several years. In pursuing our
      expansion strategy, we would seek to build large-scale facilities, leverage
      proven facility design, incorporate technology improvements and continue to
      locate facilities with access to multiple transportation services. Using similar
      facility designs enables us to lower our costs relating to spare parts and
      to
      take advantage of our operations experience at our other facilities. We expect
      to ultimately operate at six sites with an aggregate production capacity of
      660
      million gallons per year. In addition to the facilities described above, we
      are
      considering additional opportunities for growing our production capacity,
      including the development of other sites. When our construction phase is
      complete, we plan to take advantage of our large production capacity and greater
      economies of scale to become more energy efficient and increase yield. We will
      also continue to use our on-site grain storage facilities to purchase corn
      and
      sorghum during peak supply periods to reduce our feedstock costs. We intend
      to
      reduce our per-unit transportation costs by using unit trains to ship our
      finished ethanol and distillers grains products. We intend to supply the large
      regional cattle feeding market with wet distillers grains when possible, which
      will reduce our consumption of natural gas. We will have the capacity to dry
      100% of our distillers grains at each location, which will provide flexibility
      in the marketing of our distillers grain products.




*Explore
      alternative technologies and renewable fuels* .
      We are
      studying the costs and feasibility of t echnologies
      that may increase the efficiency of our ethanol production facilities and reduce
      our use of carbon-based fuels. In addition, we are exploring the feasibility
      of
      using different and potentially abundant and cost-effective feedstocks, such
      as
      cellulosic plant biomass, to supplement corn as the basic raw material used
      in
      the production of ethanol.




*Expand
      market demand for ethanol* .
      We plan
      to create additional demand for ethanol by working with refiners and blenders
      to
      introduce ethanol into new markets. Additionally, we plan to work directly
      with
      retail fuel stations to introduce E-85 fuel pumps in our region.




*Use
      risk mitigation strategies* .
      We seek
      to mitigate our exposure to commodity price fluctuations by purchasing forward
      a
      portion of our corn requirements on a fixed price basis and purchasing corn
      and
      natural gas futures contracts. To mitigate ethanol price risk, we will sell
      a
      portion of our production forward under fixed price and indexed contracts.
      The
      indexed contracts are typically referenced to a futures contract such as
      unleaded gasoline on the NYMEX or denatured ethanol on the CBOT, and we may
      hedge a portion of the price risk associated with index contracts by selling
      exchange-traded unleaded gasoline or ethanol contracts. We believe our strategy
      of managing exposure to commodity price fluctuations somewhat reduce the
      volatility of our results.




*Pursue
      potential acquisition opportunities* .
      We
      believe that opportunities for expansion of our business through industry
      acquisitions may arise as the ethanol industry matures. We will evaluate
      opportunities to acquire additional ethanol production, storage or distribution
      facilities and related infrastructure. In addition to operational production
      facilities, we may also seek to acquire potential facility sites under
      development. We will also evaluate opportunities to acquire other companies
      in
      the renewable energy space.




***Our
      Major Customers***




*Ethanol
      Marketing.* We have
      an agreement with Noble Americas Corp. for the marketing, billing, receipt
      of
      payment and other administrative services for all of the ethanol that we produce
      at our Pratt facility. Under the terms of the agreement, we sell our ethanol
      to
      Noble for the price at which Noble resells the ethanol, less costs of
      distribution and a market rate sales commission. We may enter into ethanol
      marketing agreements for each of our proposed ethanol production facilities
      but
      are also considering developing our own marketing expertise with the addition
      of
      individuals with current ethanol marketing experience.




*Distillers
      Grains Marketing* .
      Our
      majority-owned subsidiary, Gateway Ethanol entered into a Distillers Grains
      Marketing Agreement with Cargill, whereby it agreed to sell to Cargill 100%
      of
      its production of distillers grains in all forms produced at the Pratt facility.
      Under this agreement, we will sell all of our distillers grains to Cargill
      for
      the price at which Cargill resells the distillers grains, less costs of
      distribution and a market rate sales commission.




8


We
      may
      enter into distillers grain marketing agreements for each of our proposed
      ethanol production facilities but are also considering developing our own
      marketing expertise with the addition of individuals with current grain
      marketing experience.




***Our
      Major Suppliers***




The
      major
      raw materials that we use to produce our products are corn and sorghum. With
      respect to our Pratt facility, we have long term contracts with Cargill relating
      to the supply of these raw materials.




Gateway
      Ethanol has entered into a master agreement, dated March 30, 2006, with Cargill,
      under which Cargill agreed to provide certain goods and services to Gateway
      Ethanol in connection with the Pratt facility. Pursuant to the master agreement
      the parties entered into a corn supply agreement and a corn futures advisory
      agreement. These agreements generally have an initial term of ten years
      commencing either six months prior to, or on the date of, completion of
      construction of the Pratt facility and its placement into commercial
      operation.




Under
      the
      terms of the corn supply agreement, Gateway Ethanol is required to purchase
      corn
      and sorghum exclusively from Cargill for the purpose of ethanol production
      at
      the Pratt facility and Cargill is required to supply all of Gateway Ethanol’s
      needs for corn and sorghum. Under the terms of the corn futures advisory
      agreement, Gateway Ethanol retained Cargill to provide advice pursuant to the
      Cargill direct protein and grain risk management program. These services include
      the provision of advice regarding transactions in futures and futures
      options.




We
      may
      enter into similar grain origination agreements for our other ethanol production
      facilities.




***Our
      Competition***




According
      to the RFA, the ethanol market today is fragmented, with over 110 different
      producers of ethanol. The average producer currently generates approximately
      60
      million gallons per year of ethanol. The majority of these producers are
      farmer-led cooperatives generally consisting of single plants formed as limited
      liability companies.




According
      to the RFA, the largest ethanol producer in the United States is
      Archer-Daniels-Midland Company with wet and dry mill plants in the Midwest
      and a
      total production capacity of about 1.2 billion gallons per year, or about 30%
      of
      total United States ethanol production. The RFA indicates that there are
      approximately 110 ethanol plants currently operating with a combined annual
      production capacity of approximately 4.9 billion gallons. In addition, 73
      ethanol plants and 8 expansions were under construction with a combined annual
      capacity of approximately 6.0 billion gallons by 2009.




***Our
      Competitive Position***




We
      believe that our ability to successfully compete in the ethanol production
      industry depends on many factors, including the following principal competitive
      factors:




(1)  Location


(2)  Strategic
      Relationships


(3)  Low
      Cost
      production


(4)  Risk
      Management


(5)  Experienced
      Management




*Location*




9


We
      believe that the location of each of our planned ethanol facilities offers
      a
      competitive advantage for the sale of our ethanol and co-products. The ethanol
      industry has historically concentrated itself in the corn-producing regions
      of
      the upper Midwest, with 74% of existing and construction plant capacity
      currently operating in Illinois, Iowa, Nebraska, Minnesota and South Dakota.
      Many of these plants have followed a supply-side model by locating in
      corn-producing areas near low cost feedstock sources. This strategy, we believe,
      had the advantage of utilizing the lowest net costs for corn Now, with the
      demand for ethanol and distillers grains expanding, we believe that grain
      processors are searching for more efficient ways to develop these products
      and
      deliver to end users.




The
      locations of each of our planned ethanol facilities were strategically chosen
      based on a number of important reasons, two of which are the facilities’ access
      to efficient transportation, and proximity to its end users. Other
      considerations include the availability of its raw material supplies, natural
      gas, water supply, electric service, skilled labor, air quality, water rights
      and permitting considerations.




*Transportation.* Each
      of
      our planned ethanol facilities is designed with rail facilities and connections
      to a rail system and will have the capacity to receive inputs and ship outputs
      via truck or rail car. The planned ethanol facilities are located near cities
      which provide essential labor pools, and adjacent to railroads which service
      Texas, New Mexico, Colorado, Arizona and the western United States (the key
      state being California). In terms of freight rates, we believe that rail is
      considerably more cost effective than truck and, therefore, we intend to ship
      by
      rail for distances over 300 miles or whenever the rail option proves to be
      more
      cost effective. Access to rail provides us the ability to market ethanol
      locally, regionally, or nationally.




We
      anticipate that each location will ultimately require approximately 40 million
      bushels of corn annually (with the ability to shift to grain sorghum as a
      feedstock depending on market conditions), as the feedstock for the dry milling
      operations. We intend to meet this need primarily by using unit trains (110+
      grain cars) to source feedstock from more distant locations and delivering
      it by
      rail directly to each facility. This capability, we believe, would allow us
      to
      obtain the best available grain prices anywhere in the nation. This is unique
      among most grain processing facilities, which mainly rely on local markets
      and
      delivery by truck.




Specifically,
      with the assistance of our grain originators, we will be the first ethanol
      production facility in the area around Pratt, KS to incorporate a unit train
      delivery system to provide us with cost competitive grains from markets outside
      the local market area. Due to its massive cattle feeding industry, the
      Southwestern US is a grain deficit area, so assurances of alternative market
      access for the acquisition of large amounts of grain required for this must
      begin with this transportation advantage. As the ethanol industry grows, and
      the
      need for low cost grains increases, the ability to draw on the expertise and
      expansive resources of our grain origination partners and access to our unit
      train system, will be critical elements in controlling the cost and managing
      the
      risk of procuring the feedstock for the facility.




Finally,
      another key aspect of our region is the availability of grain sorghum produced
      within it. The use of corn or sorghum as the facility’s feedstock is
      interchangeable. That is, there is no considerable down time to switch from
      one
      grain to another and the use of sorghum instead of corn does not decrease the
      ethanol yield per bushel or degrade the distillers grains in any aspect. In
      fact, we believe the distillers grains made from sorghum are superior in protein
      content than the distillers grains derived from corn. It is our intent to
      maximize the use of locally grown sorghum. Locally grown grain will typically
      carry the lowest price, especially given the historic 9-10% discount that
      sorghum enjoys to the price of corn.




*Proximity
      to End User.* Historically,
      the ethanol industry has been centered in the US corn market. While this
      provides access to the local grain markets, it has the inherent disadvantage
      of
      being isolated from its natural customer base.




In
      comparison, we believe that the locations of our facilities will be the closest
      to the Southwest gasoline markets (Texas, Oklahoma, Arkansas, Kansas, and
      Arizona) and with access to the rail system, this provides a sustainable ethanol
      marketing cost advantage over ethanol competitors to the North and East.
      Increasing ethanol demand in regional markets will also provide a low-cost
      outlet for our ethanol.




10


A
      regional market is generally serviced by truck or rail and is within a 750-mile
      radius of the plant. A regional price tends to follow national pricing less
      a
      freight differential. The use of a nationwide ethanol marketer is advantageous
      to the plant to get the highest price for the plant ethanol.




The
      regional markets for our facilities include all of Oklahoma, Arkansas, Colorado,
      Kansas, New Mexico and Texas. Major regional markets include Oklahoma City,
      Denver, Tulsa, Dallas, Houston and Albuquerque.




Our
      regional market is relatively large and is predicted to become much larger
      in
      2007 as the Texas market becomes fully developed. We expect to be one of the
      closest ethanol producers to Texas, which, according to the EIA, represents
      the
      second largest gasoline (and therefore ethanol) market in the United States.
      In
      addition to Texas, our plants should be well-positioned to serve the Arkansas,
      New Mexico, Arizona and Southern California ethanol markets.




Finally,
      we will place our business in the heart of the most densely populated cattle
      feeding area in North America, a natural outlet for the distillers grains.
      A key
      opportunity exists to provide a consistent supply to the surrounding feed mills
      and feedlots that serve the majority of the cattle market. In addition, each
      our
      ethanol production facilities are ideally situated to export dry distillers
      grains to the expanding markets such as Mexico. In both instances, we anticipate
      that we will be one of the closest producers to end users and therefore has
      an
      inherent competitive advantage over other more distant production
      facilities.




*Strategic
      Relationships*




We
      have
      established a series of strategic relationships with industry leaders, such
      WB
      Johnston Grain Company and Cargill, which we believe will provide us with a
      competitive advantage. Such relationships will focus on the effective design,
      construction and operation of each facility, grain and co-product origination
      and marketing, risk management, and low cost production capabilities.
      Furthermore, the value chain will help control a certain amount of the input
      and
      output prices, leading to stabilized operating performance. We believe this
      is a
      significant difference from many of the existing grain processing facilities,
      which typically operate independently from their suppliers and
      customers.




*Low
      Cost Production*




We
      believe a critical element to long-term success in the ethanol industry is
      to be
      a low-cost producer. Although the location of each facility has specific
      opportunities, we believe that based on the following factors, we are
      well-positioned to produce and market ethanol and the by-products at a lower
      cost than most other ethanol producers:




·
            Feedstock
                - The region where each of our facilities will be located is surrounded
                by
                sorghum - a grain that typically trades at about a 9% discount to
                corn. We
                expect to use as much sorghum as possible since this will be the
                lowest
                cost grain available to us. As a backstop, purchasing power and unit
                train
                capability will provide access to low cost grain anywhere in the
                nation
                when necessary.




·
            Purchasing
                Power - Some facilities, especially those operating under the farmer
                co-op
                business model, do not have the flexibility of accessing grain outside
                their immediate area as they are locked into purchase contracts with
                the
                local farmers/owners.




·
            Marketing
                of Distillers Grains - This element provides two opportunities to
                reduce
                costs. First, per BBI International Consulting, the region is home
                to
                approximately 30,000,000 head of cattle within 450 miles of our Pratt
                facility and over 2,000,000 within 100 miles,****we
                have the option of not drying our distillers grains (thereby saving
                on
                energy costs) and selling into this market on a wet basis. Second,
                selling
                into the local market will also save on transportation costs. We
                will
                evaluate the relative prices of dry and wet distillers grains and
                optimize
                production to maximize the revenue stream from this co-product at
                each
                location.




11


*Risk
      Management*




The
      input
      prices of corn and the output prices of ethanol are the commodities most exposed
      to risk. While we believe that commodity price volatility cannot be controlled
      and that absolute price can not be predicted, we do believe that total commodity
      risk with respect to corn and ethanol can be managed effectively. We intend
      to
      manage the risk of volatile commodity prices through a deliberate risk
      management strategy including the use of futures, options, and cash contracts
      designed and executed with the intent to stabilize performance and preserve
      profitability.




When
      operational, we intend to employ risk management strategies and hedging tactics
      commonly utilized in the commodity industry to stabilize the balance between
      the
      cost of feedstock and the price of primary end products—ethanol and distillers
      grains. Proper hedging techniques for both the inputs and outputs can minimize
      risks due to lack of control of disparate commodity markets (grain feedstock
      versus ethanol, which is tied to the pricing of gasoline), while enhancing
      the
      profit opportunities of value added distillers grains. Our strategy is to
      utilize the expertise of our various strategic investors, and other professional
      relationships, to help analyze market situations on a day-by-day basis. We
      believe that the industry has shown that a properly managed team of experienced
      professionals can substantially mitigate the risk of fluctuating corn and
      ethanol prices.




*Experienced
      Management*




Our
      management team consists of seasoned energy investment and ethanol production
      professionals with significant knowledge in energy and agricultural related
      industries. We believe that this level of experience will provide us with a
      significant advantage in comparison with small-producing and/or farmer-owned
      grain processing facilities.




***Competitive
      Disadvantages***




Although
      we believe that our ethanol production business will ultimately be in an
      advantageous position relative to our competitors, we do have certain
      competitive vulnerabilities, including the fact that we are not yet producing
      ethanol. Because we are not presently in the ethanol production business, we
      are
      not capturing profits. Our inability to capture profits may provide our
      competitors, who are presently producing ethanol, with greater relative
      advantages resulting from greater capital resources available to these
      competitors.




Although
      we believe that when producing ethanol we will have certain competitive
      advantages over our competitors, realizing and maintaining those advantages
      will
      require a continued high level of investment in marketing and customer service
      and support. We may not have sufficient resources to continue to make such
      investments. Even if sufficient funds are available, we may not be able to
      make
      the modifications and improvements necessary to maintain our competitive
      advantages.




***Regulation***




We
      and
      our proposed business operations are subject to extensive federal, state and
      local laws rules, and regulations relating to the protection of the environment.
      These laws will impact our business by imposing:




·
            restrictions
                on our proposed business;




·
            the
                need to obtain and comply with permits and
                authorizations;




·
            liability
                for exceeding applicable permit limits or legal requirements, in
                certain
                cases for the remediation of contaminated soil and groundwater at
                our
                facilities, contiguous and adjacent properties and other properties
                owned
                and/or operated by third parties;
                and




·
            specifications
                for the ethanol we plan to produce.




12


In
      addition, we are subject to some regulations that are beneficial to our proposed
      ethanol production business. The fuel ethanol industry is highly dependent
      upon
      environmental and tax regulations that favor the use of ethanol in motor fuel
      blends in the United States. Some of these regulations are briefly described
      below.




*Energy
      Policy Act* .
      The
      Energy Policy Act, passed in 2005, established minimum annual volumes of
      renewable fuels to be used by petroleum refiners in the fuel supply. The annual
      requirement grows from its current level to 7.5 billion gallons per year by
      2012. Also, this legislation did not provide liability protection to refiners
      who use MTBE as a fuel additive. Because of environmental concerns surrounding
      MTBE, we believe this will accelerate replacement of MTBE blending with ethanol
      blending. Also, the Energy Policy Act removed the oxygenate requirements that
      were put in place by the Clean Air Act. Finally, The Energy Policy Act includes
      anti-backsliding provisions that require refiners to maintain emissions quality
      standards in the fuels that they produce, thus providing a potential source
      of
      additional demand for ethanol.




Current
      legislation provides that some or all of the renewable fuel standard may be
      waived. The U.S. Department of Energy, in consultation with the Secretary of
      Agriculture and the Secretary of Energy, may waive the renewable fuels mandate
      with respect to one or more states if the Administrator of the U.S. EPA
      determines that implementing the requirements would severely harm the economy
      or
      the environment of a state, a region or the U.S., or that there is inadequate
      supply to meet the requirement.




*The
      Federal Blenders’ Credit* .
      First
      implemented in 1979, the federal excise tax incentive program allows gasoline
      distributors who blend ethanol with gasoline to receive a federal excise tax
      rate reduction of $0.51 per gallon of ethanol. The incentive program is
      scheduled to expire in 2010 (unless extended).




*The
      Federal Clean Air Act* .
      The use
      of ethanol as an oxygenate is driven, in part, by environmental regulations.
      The
      federal Clean Air Act requires the use of oxygenated gasoline during winter
      months in areas with unhealthy levels of carbon monoxide.




*State
      Legislation Banning or Significantly Limiting the Use of MTBE* .
      In
      recent years, due to environmental concerns, 25 states have banned, or
      significantly limited, the use of MTBE, including California, Connecticut and
      New York. Ethanol has served as a replacement for much of the discontinued
      MTBE
      volumes and is expected to continue to replace future MTBE volumes that are
      removed from the fuel supply.




*Federal
      Tariff on Imported Ethanol* .
      In
      1980, Congress imposed a tariff on foreign produced ethanol, made from cheaper
      sugar cane, to encourage the development of a domestic, corn-derived ethanol
      supply. This tariff was designed to prevent the federal tax incentive from
      benefiting non-U.S. producers of ethanol. The tariff is $0.54 per gallon and
      is
      scheduled to expire in 2007 (unless extended).




Ethanol
      imports from 24 countries in Central America and the Caribbean Islands are
      exempted from the tariff under the Caribbean Basin Initiative, which provides
      that specified nations may export an aggregate of 7.0% of U.S. ethanol
      production per year into the U.S., with additional exemptions from ethanol
      produced from feedstock in the Caribbean region over the 7.0% limit. As a result
      of new plants under development, we believe imports from the Caribbean region
      will continue, subject to the limited nature of the exemption.




NAFTA
      also allows Canada and Mexico to export ethanol to the United States duty-free
      or at a reduced rate. Canada is exempt from duty under the current NAFTA
      guidelines, while Mexico’s duty rate is $0.10 per gallon. In addition, there is
      a flat 2.5% ad valorem tariff on all imported ethanol.




***Environmental
      Matters***




We
      are
      subject to various federal, state and local environmental laws and regulations,
      including those relating to the discharge of materials into the air, water
      and
      ground; the generation, storage, handling, use, transportation and disposal
      of
      hazardous materials; and the health and safety of our employees. These laws,
      regulations and permits also can require expensive pollution control equipment
      or operational changes to limit actual or potential impacts to the environment.
      A violation of these laws and regulations or permit conditions can result in
      substantial fines, natural resource damage, criminal sanctions, permit
      revocations and/or facility shutdowns. We do not anticipate a material adverse
      effect on our business or financial condition as a result of our efforts to
      comply with these requirements.




13


There
      is
      a risk of liability for the investigation and cleanup of environmental
      contamination at each of the properties that we own or operate and at off-site
      locations where we arranged for the disposal of hazardous substances. If these
      substances have been or are disposed of or released at sites that undergo
      investigation and/or remediation by regulatory agencies, we may be responsible
      under the Comprehensive Environmental Recovery Claims Liability Act or other
      environmental laws for all or part of the costs of investigation and/or
      remediation and for damage to natural resources. We may also be subject to
      related claims by private parties alleging property damage and personal injury
      due to exposure to hazardous or other materials at or from these properties.
      Some of these matters may require us to expend significant amounts for
      investigation and/or cleanup or other costs. We do not have material
      environmental liabilities relating to contamination at or from our facilities
      or
      at off-site locations where we have transported or arranged for the disposal
      of
      hazardous substances.




In
      addition, new laws, new interpretations of existing laws, increased governmental
      enforcement of environmental laws or other developments could require us to
      make
      additional significant expenditures. Continued government and public emphasis
      on
      environmental issues can be expected to result in increased future investments
      for environmental controls at our ongoing operations. Present and future
      environmental laws and regulations (and related interpretations) applicable
      to
      our operations, more vigorous enforcement policies and discovery of currently
      unknown conditions may require substantial capital and other expenditures.
      Our
      air emissions are subject to the federal Clean Air Act, the federal Clean Air
      Act Amendments of 1990 and similar state and local laws and associated
      regulations. The U.S. EPA has promulgated National Emissions Standards for
      Hazardous Air Pollutants, or NESHAP, under the federal Clean Air Act that could
      apply to facilities that we own or operate if the emissions of hazardous air
      pollutants exceed certain thresholds. If a facility we operate is authorized
      to
      emit hazardous air pollutants above the threshold level, then we are required
      to
      comply with the NESHAP related to our manufacturing process and would be
      required to come into compliance with another NESHAP applicable to boilers
      and
      process heaters by September 13, 2007. New or expanded facilities would be
      required to comply with both standards upon startup if they exceed the hazardous
      air pollutant threshold. In addition to costs for achieving and maintaining
      compliance with these laws, more stringent standards may also limit our
      operating flexibility. Because other domestic ethanol manufacturers will have
      similar restrictions, however, we believe that compliance with more stringent
      air emission control or other environmental laws and regulations is not likely
      to materially affect our competitive position.




The
      hazards and risks associated with producing and transporting our products,
      such
      as fires, natural disasters, explosions, abnormal pressures, blowouts and
      pipeline ruptures also may result in personal injury claims or damage to
      property and third parties. As protection against operating hazards, we maintain
      insurance coverage against some, but not all, potential losses. Our coverage
      includes physical damage to assets, employer’s liability, comprehensive general
      liability, automobile liability and workers’ compensation. We believe that our
      insurance is adequate and customary for our industry, but losses could occur
      for
      uninsurable or uninsured risks or in amounts in excess of existing insurance
      coverage. We do not currently have pending material claims for damages or
      liability to third parties relating to the hazards or risks of our
      business.




**RISK
      FACTORS**




*The
      following summarizes material risks relating to us that you should carefully
      consider. Any of the following risks, if they actually occur, would likely
      harm
      our business, financial condition and results of operations. As a result, the
      trading price of our common stock could decline, and you could lose the money
      you paid to buy our common stock.*




**Risks
      Related to Our Business**




***The
      assumptions we use may not materialize and our actual business and operations
      could differ materially as a result*** **.**




Many
      of
      our assumptions regarding our business plan are based on documents or agreements
      that are not yet final or even negotiated, and, as our first ethanol plant
      is
      not yet in commercial operations, proposals or plans have not occurred or been
      implemented. Definitive versions of such agreements, documents, plans, or
      proposals may contain terms or conditions that vary significantly from our
      assumptions and may not materialize, or, if they do materialize, may not prove
      to be profitable. Our actual results or actual business or other conditions
      may
      differ materially from those presently contemplated.




14


***We
      are dependent upon Lurgi PSI to design, engineer and construct the Pratt
      facility. If Lurgi PSI does not perform as anticipated, our operations will
      be
      delayed or otherwise negatively affected.***




We
      are
      depending on Lurgi PSI to design, engineer and construct our ethanol production
      facility in Pratt, Kansas. We will also depend upon Lurgi’s experience and
      ability to train us in operating the facility upon completion. If the Pratt
      facility is not built or does not operate as we expect, our right to rely on
      Lurgi to remedy any deficiencies or defects may be limited by the terms of
      our
      contract. If Lurgi is unable to complete the design and construction of the
      Pratt facility or otherwise provide us with services or meet any of its material
      obligations to us for any reason, our business would likely be adversely
      affected and we might be required to seek additional capital or discontinue
      development of the Pratt facility. We also face the similar risks as it applies
      to our other proposed facilities. We will be dependent on Lurgi or other
      companies to design, engineer and construct our proposed ethanol production
      facilities. To the extent that any of the proposed facilities are not built
      or
      do not operate as we expect or according to specifications, our right to seek
      a
      remedy or redress for any deficiency or defect may be limited by the terms
      of
      the contract, a situation that might adversely affect our business plans and
      financial condition.




***We
      may encounter defective material and workmanship or process engineering that
      could delay the commencement of commercial operations and negatively affect
      our
      financial conditions.***




Under
      the
      terms of the design and engineering contract for the Pratt facility, we expect
      Lurgi (or any other firm we retain to construct our other facilities) to warrant
      that the material and equipment which they procure to build either the Pratt
      facility or any of our other proposed ethanol facilities to be free from
      mechanical defects and defects in material and workmanship for a period of
      time
      from the date of the ethanol facilities’ start-up. In addition, we expect Lurgi
      (or any other firm we retain to construct our other facilities) to warrant
      that
      the process design and engineering will satisfy certain performance criteria
      and
      expect that the contracts will include significant liquidated damages should
      the
      ethanol facilities not meet the stated performance criteria set forth under
      the
      applicable contracts. Any defects in material or workmanship may cause
      substantial delay in the commencement of operation of the ethanol facilities.
      If
      defects are discovered after operation, or if the ethanol facilities **** fail
      to
      meet the performance criteria, it could cause substantial delay in the
      commencement of operation of the ethanol facilities and may have a material
      adverse impact on our financial performance and could harm our business. Such
      delays at the Pratt facility will negatively impact our cash flow and impair
      our
      ability to satisfy the current debt obligations for the Pratt
      facility.




***The
      condition of our construction sites may differ from what we expect. These
      differences may result in additional unanticipated capital expenditures that
      would negatively affect our financial condition.***




If
      we or
      Lurgi encounter concealed, unknown or unexpected conditions at our construction
      sites and if the conditions affect costs, then an adjustment in the contract
      price and time of performance time may be required. In any event, concealed,
      unknown or unexpected conditions will increase the cost of the ethanol
      facilities. By concealed, unknown or unexpected conditions, we mean any
      concealed physical conditions at a **** site
      that
      materially differ from **** the
      conditions contemplated in the proposed project plans, or any unknown or
      unexpected conditions that differ materially from the conditions ordinarily
      encountered in similar work. Although the sites will have been inspected,
      concealed, unknown or unexpected conditions are often very difficult to
      detect.




***We
      will be dependent on third parties for our grain handling. If these third
      parties do not perform as anticipated, our operations will be materially
      adversely affected.***




We
      will
      depend on third parties for all of our grain handling services for both our
      feedstock supply and marketing of the outputs of our distillers grains -
      including grain purchases, grain hedging and grain transportation. Although
      we
      have signed agreements for the Pratt facility, we have not yet executed a formal
      agreement for any of the other proposed ethanol production facilities. If our
      grain handlers are not able to complete the grain handling services or defaults
      on their agreement to provide us grain handling services, we would be materially
      adversely affected.




15


***Delays
      to the construction of our ethanol facilities could harm our
      business.***




We
      have
      developed an ambitious timetable for completion of the financing, regulatory,
      design and engineering, and construction phases of our ethanol facilities.
      Our
      schedule depends upon how quickly we can obtain required debt and equity
      capital. Our timetable also depends upon how weather and seasonal factors would
      affect our construction projects generally. While we have no knowledge of any
      events or circumstances such as permitting delays, construction delays or other
      events that could hinder our schedule, delays often occur in connection with
      large-scale construction projects. Changes in interest rates or changes in
      political administrations at the federal, state or local level that result
      in
      policy changes towards ethanol, could cause construction and operational delays.
      If it takes longer to complete the financing, obtain necessary permits or build
      the proposed ethanol facilities **** than
      we
      anticipate, we could be forced to seek additional sources of capital and our
      ability to sell increased amounts of ethanol products may be delayed, which
      would harm our business, make it more difficult to service our debt
      obligations.




***We
      may not be able to implement our expansion strategy as planned or at
      all.***




We
      have
      initiated the development of twelve state-of-the-art ethanol production
      facilities, located on six sites throughout Western Kansas and Oklahoma that
      will produce ethanol, distillers grains and carbon dioxide (CO 2 ).
      We
      obtained air quality permits for our facilities in Enid, Oklahoma and Shattuck,
      Oklahoma on October 18, 2006, and we expect these facilities to be completed
      by
      the third quarter of 2009.




We
      will
      require additional financing to implement our expansion strategy but we may
      not
      have access to the funding required for the expansion of our business or such
      funding may not be available to us on acceptable terms. We may finance the
      expansion of our business with additional indebtedness or by issuing additional
      equity securities. We could face financial risks associated with incurring
      additional indebtedness, such as reducing our liquidity and access to financial
      markets and increasing the amount of cash flow required to service such
      indebtedness, or associated with issuing additional stock, such as dilution
      of
      ownership and earnings.




We
      must
      also obtain numerous regulatory approvals and permits in order to construct
      and
      operate additional or expanded facilities. These requirements may not be
      satisfied in a timely manner or at all. In addition, federal and state
      governmental requirements may substantially increase our costs, which could
      have
      a material adverse effect on our results of operations and financial position.
      Our expansion plans may also result in other unanticipated adverse consequences,
      such as the diversion of management’s attention from our existing
      operations.




Our
      construction costs may also increase to levels that would make a new facility
      too expensive to complete or unprofitable to operate. We have not entered into
      any construction contracts or other arrangements with respect to the
      construction of our proposed facilities, other than our Pratt facility, that
      might limit our exposure to higher costs in developing and completing the
      facilities. Contractors, engineering firms, construction firms and equipment
      suppliers also receive requests and orders from other ethanol companies and,
      therefore, we may not be able to secure their services or products on a timely
      basis or on acceptable financial terms. We may suffer significant delays or
      cost
      overruns as a result of a variety of factors, such as shortages of workers
      or
      materials, transportations constraints, adverse weather, unforeseen difficulties
      or labor issues, any of which could prevent us from commencing operations as
      expected at our facilities.




Accordingly,
      we may not be able to implement our expansion strategy as planned or at all.
      We
      may not be able to finance, construct, develop or operate these new or expanded
      facilities successfully.




***Our
      results of operations, financial position and business outlook are highly
      dependent on commodity prices, which are subject to significant volatility
      and
      uncertainty, and the availability of supplies, so our results could fluctuate
      substantially.***




16


Our
      results from operations will be substantially dependent on commodity prices,
      especially prices for corn, natural gas, ethanol and unleaded gasoline. As
      a
      result of the volatility of the prices for these items, our results may
      fluctuate substantially and we may experience periods of declining prices for
      our products and increasing costs for our raw materials, which could result
      in
      operating losses. Although we may attempt to offset a portion of the effects
      of
      fluctuations in prices by entering into forward contracts to supply ethanol
      or
      purchase corn, natural gas or other items or by engaging in transactions
      involving exchange-traded futures contracts, the amount and duration of these
      hedging and other risk mitigation activities may vary substantially over time
      and these activities also involve substantial risks.




***We
      have no operating history and our business may not be as successful as we
      envision***




We
      currently have no operating ethanol facilities.




As
      we are
      not presently in the ethanol production business, unlike our competitors, we
      are
      not benefiting from sales of ethanol at the current price levels. Our inability
      to capture profits based on the current price levels may provide our
      competitors, who are presently producing ethanol, with greater relative
      advantages resulting from greater capital resources available to these
      competitors.




In
      addition, our prospects must be considered in light of the risks and
      uncertainties encountered by an early-stage company and in rapidly evolving
      markets, such as the ethanol market, where supply and demand may change
      significantly in a short amount of time.




Some
      of
      these risks relate to our potential inability to:




·
            effectively
                manage our business and operations;




·
            recruit
                and retain key personnel;




·
            successfully
                maintain our low-cost structure as we expand the scale of our
                business;




·
            manage
                rapid growth in personnel and
                operations;




·
            develop
                new products that complement our existing
                business; and




·
            successfully
                address the other risks described throughout this
                prospectus.




If
      we
      cannot successfully address these risks, our business and our results of
      operations and financial position would suffer.




***We
      will be dependent on our one ethanol production facility until our other
      facilities are operational, and any operational disruption could result in
      a
      reduction of our sales volumes and could cause us to incur substantial
      losses.***




All
      of
      our initial revenues will be derived from the sale of ethanol and the related
      co-products that we produce at our Pratt facility until our other facilities
      are
      operational. Our operations may be subject to significant interruption if the
      Pratt facility experiences a major accident or is damaged by severe weather
      or
      other natural disasters. In addition, our operations may be subject to labor
      disruptions and unscheduled downtime, or other operational hazards inherent
      in
      our industry, such as equipment failures, fires, explosions, abnormal pressures,
      blowouts, pipeline ruptures, transportation accidents and natural disasters.
      Some of these operational hazards may cause personal injury or loss of life,
      severe damage to or destruction of property and equipment or environmental
      damage, and may result in suspension of operations and the imposition of civil
      or criminal penalties. Our insurance may not be adequate to fully cover the
      potential operational hazards described above or that we will be able to renew
      this insurance on commercially reasonable terms or at all.




17


***Potential
      future acquisitions could be difficult to find and integrate, divert the
      attention of key personnel, disrupt our business, dilute shareholder value
      and
      adversely affect our financial results.***




As
      part
      of our business strategy, we may consider acquisitions of building sites,
      production facilities, storage or distribution facilities and selected
      infrastructure, however we may not find suitable acquisition
      opportunities.




Acquisitions
      involve numerous risks, any of which could harm our business,
      including:




·
            difficulties
                in integrating the operations, technologies, products, existing contracts,
                accounting processes and personnel of the target and realizing the
                anticipated synergies of the combined
                businesses;




·
            difficulties
                in supporting and transitioning customers, if any, of the target
                company
                or assets;




·
            diversion
                of financial and management resources from existing
                operations;




·
            the
                price we pay or other resources that we devote may exceed the value
                we
                realize, or the value we could have realized if we had allocated
                the
                purchase price or other resources to another
                opportunity;




·
            risks
                of entering new markets or areas in which we have limited or no experience
                or are outside our core
                competencies;




·
            potential
                loss of key employees, customers and strategic alliances from either
                our
                current business or the business of the
                target;




·
            assumption
                of unanticipated problems or latent liabilities, such as problems
                with the
                quality of the products of the
                target; and




·
            inability
                to generate sufficient revenue to offset acquisition
                costs.




Acquisitions
      also frequently result in the recording of goodwill and other intangible assets
      which are subject to potential impairments in the future that could harm our
      financial results. In addition, if we finance acquisitions by issuing
      convertible debt or equity securities, our existing shareholders may be diluted,
      which could affect the market price of our common stock. As a result, if we
      fail
      to properly evaluate acquisitions or investments, we may not achieve the
      anticipated benefits of any such acquisitions, and we may incur costs in excess
      of what we anticipate. The failure to successfully evaluate and execute
      acquisitions or investments or otherwise adequately address these risks could
      materially harm our business and financial results.




***Our
      operating results may suffer if Cargill or Noble do not perform their
      obligations under existing arrangements***




If
      Cargill does not perform under our existing arrangements, we may be forced
      to
      buy grain at undesirable or uneconomic rates, or we may not have access to
      grain
      at all. Additionally, we may have difficulty selling our distillers grains
      if
      Cargill does not perform. These conditions may cause our operating results
      to
      suffer.




Our
      operating results may suffer if Noble does not perform its obligations under
      the
      existing marketing agreements we have with Noble. If Noble does not perform
      under our marketing agreement, we may be forced to sell our ethanol at
      undesirable or uneconomic rates, or we may not be able to sell our ethanol
      at
      all. These conditions may cause our operating results to suffer.




***We
      are dependent upon our officers for management and direction, and the loss
      of
      any of these persons could adversely affect our operations and
      results.***




18


We
      are
      dependent upon our officers for implementation of our proposed expansion
      strategy and execution of our business plan. The loss of any of our officers
      could have a material adverse effect upon our results of operations and
      financial position. We have employment agreements with some of our officers
      or
      other key personnel. We maintain insurance for our directors and officers.
      The
      loss of any of our officers could delay or prevent the achievement of our
      business objectives.




***Our
      failure to attract and retain key personnel could adversely affect our business,
      financial condition and results of operations.***




We
      are a
      small company with seven employees as of **** December
      31, **** 2006.
      Our
      future success is dependent in part on our ability to attract and retain skilled
      technical, clerical and managerial personnel in all areas of our business to
      continue to grow. The competition for such individuals in the growing ethanol
      production and marketing industry is very intense. There can be no assurance
      that we will be able to retain our existing personnel or attract additional
      qualified personnel in the future. If we are unable to attract and retain key
      personnel, our business, financial condition and results of operations could
      adversely be affected.




**Risks
      Relating to Our Industry**




***Our
      business is highly sensitive to corn prices and we generally cannot pass on
      increases in corn prices to our customers.***




The
      principal raw materials we will use to produce ethanol and co-products,
      including dry and wet distillers grains, are corn and sorghum. As a result,
      changes in the price of corn or sorghum can significantly affect our business.
      In general, rising corn prices produce lower profit margins. Because ethanol
      competes with non-corn-based fuels, we may not be able to pass along increased
      corn costs to our customers. At certain levels, corn prices may make ethanol
      uneconomical to use in fuel markets. Over the ten-year period from 1997 through
      2006, corn prices (based on the Chicago Board of Trade, or CBOT, daily futures
      data) have ranged from a low of $1.75 per bushel in 2000 to a high of
      $5.48 per bushel in 1996, with prices averaging $2.47 per bushel
      during this period . At December 29, 2006, the CBOT nearby contract price for
      price per bushel of corn was $3.90.




The
      price
      of corn is influenced by weather conditions and other factors affecting crop
      yields, farmer planting decisions and general economic, market and regulatory
      factors. These factors include government policies and subsidies with respect
      to
      agriculture and international trade, and global and local demand and supply.
      The
      significance and relative effect of these factors on the price of corn is
      difficult to predict. Any event that tends to negatively affect the supply
      of
      corn, such as adverse weather or crop disease, could increase corn prices and
      potentially harm our business. In addition, we may also have difficulty, from
      time to time, in physically sourcing corn on economical terms due to supply
      shortages. Such a shortage could require us to suspend operations until corn
      is
      available at economical terms, which would have a material adverse effect on
      our
      business, results of operations and financial position. The price we will have
      pay for corn at a facility could increase if an additional ethanol production
      facility is built in the same general vicinity as any of our proposed
      facilities.




***The
      spread between ethanol and corn prices can vary significantly and we do not
      expect the spread to remain at recent high levels.***




Our
      gross
      margin will depend principally on the spread between ethanol and corn prices.
      During the five-year period from 2002 to 2006, ethanol prices (based on average
      U.S. ethanol rack prices from Bloomberg, L.P., or Bloomberg) have ranged
      from a low of $0.94 per gallon to a high of $2.76 per gallon,
      averaging $1.50 per gallon during this period. In recent periods, the
      spread between ethanol and corn prices has been at an historically high level,
      driven in large part by high oil prices and historically low corn prices. During
      2006, however, this spread fluctuated widely and fluctuations are likely to
      continue to occur. Any reduction in the spread between ethanol and corn prices,
      whether as a result of an increase in corn prices or a reduction in ethanol
      prices, would adversely affect our results of operations and financial
      position.




***The
      market for natural gas is subject to market conditions that create uncertainty
      in the price and availability of the natural gas that we will use in our
      manufacturing process.***




19


We
      will
      rely upon third parties for our supply of natural gas, which is consumed in
      the
      manufacture of ethanol. The prices for and availability of natural gas are
      subject to volatile market conditions. These market conditions often are
      affected by factors beyond our control such as higher prices resulting from
      colder than average weather conditions and overall economic conditions.
      Significant disruptions in the supply of natural gas could impair our ability
      to
      manufacture ethanol for our customers. Furthermore, increases in natural gas
      prices or changes in our natural gas costs relative to natural gas costs paid
      by
      competitors may adversely affect our results of operations and financial
      position. The price fluctuations in natural gas prices over the five-year period
      from December 31, 2001 through December 31, 2006, based on the NYMEX
      daily futures data, has ranged from a low of $2.04 per MMBTU in 2002 to a high
      of $15.78 **** per
      MMBTU
      in 2005, averaging $6.47 **** per
      MMBTU
      during this period. At December 29, 2006, the NYMEX price of natural gas was
      $6.29 **** per
      MMBTU.




***Fluctuations
      in the selling price and production cost of gasoline may reduce our profit
      margins.***




Ethanol
      is marketed both as a fuel additive to reduce vehicle emissions from gasoline
      and as an octane enhancer to improve the octane rating of gasoline with which
      it
      is blended. As a result, ethanol prices are influenced by the supply and demand
      for gasoline and our results of operations and financial position may be
      materially adversely affected if gasoline demand or price decreases. In
      addition, some of our sales contracts will provide for pricing on an indexed
      basis, so that the price we will receive for products sold under these
      arrangements will be adjusted as gasoline prices change.




***Our
      business is subject to seasonal fluctuations.***




Our
      operating results will be influenced by seasonal fluctuations in the price
      of
      our primary operating inputs, corn and natural gas, and the price of our primary
      product, ethanol. The spot price of corn tends to rise during the spring
      planting season in May and June and tends to decrease during the fall harvest
      in
      October and November. The price for natural gas, however, tends to move opposite
      that of corn and tends to be lower in the spring and summer and higher in the
      fall and winter. In addition, ethanol prices are substantially correlated with
      the price of unleaded gasoline especially in connection with indexed, gas-plus
      sales contracts. The price of unleaded gasoline tends to rise during each of
      the
      summer and winter. We do not know yet how these seasonal fluctuations will
      affect our results over time.




***We
      engage in hedging transactions and other risk mitigation strategies that could
      harm our results.***




In
      an
      attempt to partially offset the effects of volatility of ethanol prices and
      corn
      and natural gas costs, we will enter into contracts to supply a portion of
      our
      ethanol production or purchase a portion of our corn or natural gas requirements
      on a forward basis and also engage in other hedging transactions involving
      exchange-traded futures contracts for corn, natural gas and unleaded gasoline
      from time to time. The price of unleaded gasoline will also affect the price
      we
      receive for our ethanol under indexed contracts. The financial statement impact
      of these activities is dependent upon, among other things, the prices involved
      and our ability to sell sufficient products to use all of the corn and natural
      gas for which we have futures contracts. Hedging arrangements also expose us
      to
      the risk of financial loss in situations where the other party to the hedging
      contract defaults on its contract or, in the case of exchange-traded contracts,
      where there is a change in the expected differential between the underlying
      price in the hedging agreement and the actual prices paid or received by us.
      Hedging activities can themselves result in losses when a position is purchased
      in a declining market or a position is sold in a rising market. A hedge position
      is often settled in the same time frame as the physical commodity is either
      purchased (corn and natural gas) or sold (ethanol). Hedging losses may be offset
      by a decreased cash price for corn and natural gas and an increased cash price
      for ethanol. We may also vary the amount of hedging or other risk mitigation
      strategies we may undertake, and we may choose not to engage in hedging
      transactions at all. As a result, our results of operations and financial
      position may be adversely affected by increases in the price of corn or natural
      gas or decreases in the price of ethanol or unleaded gasoline.




***Growth
      in the sale and distribution of ethanol is dependent on the changes to and
      expansion of related infrastructure which may not occur on a timely basis,
      if at
      all, and our operations could be adversely affected by infrastructure
      disruptions.***




20


Substantial
      development of infrastructure will be required by persons and entities outside
      our control for our operations, and the ethanol industry generally, to grow.
      Areas requiring expansion include, but are not limited to:




·
            additional
                rail capacity;




·
            additional
                storage facilities for ethanol;




·
            increases
                in truck fleets capable of transporting ethanol within localized
                markets;




·
            expansion
                of refining and blending facilities to handle ethanol;
                and




·
            growth
                in service stations equipped to handle ethanol
                fuels.




Substantial
      investments required for these infrastructure changes and expansions may not
      be
      made or they may not be made on a timely basis. Any delay or failure in making
      the changes to or expansion of infrastructure could hurt the demand or prices
      for our products, impede our delivery of products, impose additional costs
      on us
      or otherwise have a material adverse effect on our results of operations or
      financial position. Our business is dependent on the continuing availability
      of
      infrastructure and any infrastructure disruptions could have a material adverse
      effect on our business.




***New
      plants under construction or decreases in the demand for ethanol may result
      in
      excess production capacity in our industry.***




According
      to the RFA, a trade association for the U.S. fuel ethanol industry, domestic
      ethanol production capacity has increased from 1.9 BGY as of January 2001 to
      an
      estimated 4.9 BGY at present. The RFA estimates that ethanol plants with
      approximately 6.0 BGY of additional production capacity are currently under
      construction with expected completion in 2009. The ethanol industry in the
      U.S.
      now consists of about 110 biorefineries located in about 19 states with an
      additional 73 plants under construction across the country. Excess capacity
      in
      the ethanol industry would have an adverse effect on our results of operations,
      cash flows and financial position. In a manufacturing industry with excess
      capacity, producers have an incentive to manufacture additional products for
      so
      long as the price exceeds the marginal cost of production ( *i.e* .,
      the
      cost of producing only the next unit, without regard for interest, overhead
      or
      fixed costs). This incentive can result in the reduction of the market price
      of
      ethanol to a level that is inadequate to generate sufficient cash flow to cover
      costs.




Excess
      capacity may also result from decreases in the demand for ethanol, which could
      result from a number of factors, including regulatory developments and reduced
      U.S. gasoline consumption. Reduced gasoline consumption could occur as a
      result of increased prices for gasoline or crude oil, which could cause
      businesses and consumers to reduce driving or acquire vehicles with more
      favorable gasoline mileage. There is some evidence that this has occurred in
      the
      recent past as U.S. gasoline prices have increased.




***We
      may not be able to compete effectively in our
      industry.***




In
      the
      U.S., we compete with other corn processors, ethanol producers and refiners,
      including Archer Daniels Midland Company, Cargill, Inc., Aventine Renewable
      Energy, Inc., and Abengoa Bioenergy Corp. According to the RFA, the top ten
      producers accounted for 46.5% of the ethanol production capacity in the U.S.
      A
      number of our competitors are divisions of substantially larger enterprises
      and
      have substantially greater financial resources than we do. Smaller competitors
      also pose a threat. Farmer-owned cooperatives and independent firms consisting
      of groups of individual farmers and investors have been able to compete
      successfully in the ethanol industry. These smaller competitors operate smaller
      facilities which do not affect the local price of corn grown in the proximity
      to
      the facility as much as larger facilities like ours do. In addition, many of
      the
      farmer-owned cooperatives are often required to commit to selling to the
      cooperative a certain amount of corn as a requirement of ownership. A
      significant portion of production capacity in our industry consists of
      smaller-sized facilities owned by the farmer-owned cooperative. According to
      the
      RFA, most new ethanol plants under development across the country are
      individually owned. In addition, institutional investors and high net worth
      individuals could heavily invest in ethanol production facilities and oversupply
      the demand for ethanol, resulting in lower ethanol price levels that might
      adversely affect our results of operations and financial position.




21


We
      also
      face increasing competition from international suppliers. Although there is
      a
      $0.54 per gallon tariff (which is scheduled to expire in 2007) on foreign
      produced ethanol that is approximately equal to the blenders’ credit, ethanol
      imports **** equivalent
      to up to 7% of total domestic production in any given year from various
      countries were exempted from this tariff under the Caribbean Basin Initiative
      to
      spur economic development in Central America and the Caribbean. Currently,
      international suppliers produce ethanol primarily from sugar cane and have
      cost
      structures that may be substantially lower than ours.




Any
      increase in domestic or foreign competition could cause us to reduce our prices
      and take other steps to compete effectively, which could adversely affect our
      results of operations and financial position.




***The
      U.S. ethanol industry is highly dependent upon a myriad of federal and state
      legislation and regulation and any changes in legislation or regulation could
      materially and adversely affect our results of operations and financial
      position.***




Historically,
      small ethanol producers (30 million gallons or less) were allowed a 10-cents
      per
      gallon income tax credit on up to the 15 million gallons of production annually.
      Under the Energy Policy Act of 2005, the size limitation on the production
      capacity for small ethanol producers increased from 30 million to 60 million
      gallons. The credit, or the blenders’ credit, can be taken on the first 15
      million gallons of production or a maximum credit of $1.5 million per year
      per
      producer. The elimination or significant reduction in the blenders’ credit could
      have a material adverse effect on our results of operations and financial
      position. The cost of production of ethanol is made significantly more
      competitive with regular gasoline by federal tax incentives. Before
      January 1, 2005, the federal excise tax incentive program allowed gasoline
      distributors who blended ethanol with gasoline to receive a federal excise
      tax
      rate reduction for each blended gallon they sold. If the fuel was blended with
      10% ethanol, the refiner/marketer paid $0.052 per gallon less tax, which
      equated to an incentive of $0.52 per gallon of ethanol. The $0.52 per
      gallon incentive for ethanol was reduced to $0.51 per gallon in 2005 and is
      scheduled to expire (unless extended) in 2010. The blenders’ credits may not be
      renewed in 2010 or may be renewed on different terms. In addition, the blenders’
credits, as well as other federal and state programs benefiting ethanol (such
      as
      tariffs), generally are subject to U.S. government obligations under
      international trade agreements, including those under the World Trade
      Organization Agreement on Subsidies and Countervailing Measures, and might
      be
      the subject of challenges thereunder, in whole or in part. The elimination
      or
      significant reduction in the blenders’ credit or other programs benefiting
      ethanol may have a material adverse effect on our results of operations and
      financial position.




***Ethanol
      can be imported into the U.S. duty-free from some countries, which may
      undermine the ethanol industry in the U.S.***




Imported
      ethanol is generally subject to a $0.54 per gallon tariff that was designed
      to offset the $0.51 per gallon ethanol incentive available under the
      federal excise tax incentive program for refineries that blend ethanol into
      their fuel. A special exemption from the tariff exists for ethanol imported
      from
      24 countries in Central America and the Caribbean Islands, which is limited
      to a
      total of 7% of U.S. production per year. Imports from the exempted
      countries may increase as a result of new plants under development. Since
      production costs for ethanol in these countries are estimated to be
      significantly less than what they are in the U.S., the duty-free import of
      ethanol through the countries exempted from the tariff may negatively affect
      the
      demand for domestic ethanol and the price at which we sell our ethanol. Any
      changes in the tariff or exemption from the tariff could have a material adverse
      effect on our results of operations and financial position. In addition, the
      North America Free Trade Agreement, or NAFTA, which entered into force on
      January 1, 1994, allows Canada and Mexico to export ethanol to the United
      States duty-free or at a reduced rate. Canada is exempt from duty under the
      current NAFTA guidelines, while Mexico’s duty rate is $0.10 per
      gallon.




***The
      effect of the Renewable Fuels Standard in the recent Energy Policy Act is
      uncertain.***




The
      use
      of fuel oxygenates, including ethanol, was mandated through regulation, and
      much
      of the forecasted growth in demand for ethanol was expected to result from
      additional mandated use of oxygenates. Most of this growth was projected to
      occur in the next few years as the remaining markets switch from MTBE to
      ethanol. A Renewable Fuels Standard, or RFS, under the Energy Policy Act of
      2005, eliminated the mandated use of oxygenates and established minimum
      nationwide levels of renewable fuels (ethanol, biodiesel or any other liquid
      fuel produced from biomass or biogas) to be included in gasoline. Because
      biodiesel and other renewable fuels in addition to ethanol are counted toward
      the minimum usage requirements of the RFS, the elimination of the oxygenate
      requirement for reformulated gasoline may result in a decline in ethanol
      consumption, which in turn could have a material adverse effect on our results
      of operations and financial condition. The legislation also included provisions
      for trading of credits for use of renewable fuels and authorized potential
      reductions in the RFS minimum by action of a governmental administrator. In
      addition, the rules for implementation of the RFS and the energy bill are still
      under development.




22


The
      Energy Policy Act did not ban the use of MTBE neither did it include an MTBE
      liability protection for providers of MTBE based fuel products. This lack of
      liability protection may spur a decline in the production and use of MTBE as
      a
      fuel additive and may result in a corresponding increase in demand for ethanol
      as a replacement fuel additive. Refineries may also use other possible
      replacement additives, such as iso-octane, iso-octene or alkylate. Accordingly,
      the actual demand for ethanol may increase at a lower rate than production
      for
      estimated demand, resulting in excess production capacity in our industry,
      which
      would negatively affect our results of operations, financial position and cash
      flows. See “New plants under construction or decreases in the demand for ethanol
      may result in excess production capacity in our industry.”




***Waivers
      of the RFS minimum levels of renewable fuels included in gasoline could have
      a
      material adverse affect on our results of operations.***




Under
      the
      Energy Policy Act, the U.S. Department of Energy, in consultation with the
      Secretary of Agriculture and the Secretary of Energy, may waive the renewable
      fuels mandate with respect to one or more states if the Administrator of the
      U.S. Environmental Protection Agency, or EPA, determines that implementing
      the requirements would severely harm the economy or the environment of a state,
      a region or the U.S., or that there is inadequate supply to meet the
      requirement. Any waiver of the RFS with respect to one or more states would
      adversely offset demand for ethanol and could have a material adverse effect
      on
      our results of operations and financial condition.




***We
      may be adversely affected by environmental, health and safety laws, regulations
      and liabilities.***




We
      are
      subject to various federal, state and local environmental laws and regulations,
      including those relating to the discharge of materials into the air, water
      and
      ground, the generation, storage, handling, use, transportation and disposal
      of
      hazardous materials, and the health and safety of our employees. In addition,
      some of these laws and regulations require our facilities to operate under
      permits that are subject to renewal or modification. These laws, regulations
      and
      permits can often require expensive pollution control equipment or operational
      changes to limit actual or potential impacts to the environment. A violation
      of
      these laws and regulations or permit conditions can result in substantial fines,
      natural resource damages, criminal sanctions, permit revocations and/or facility
      shutdowns. In addition, we have made, and expect to make, significant capital
      expenditures on an ongoing basis to comply with increasingly stringent
      environmental laws, regulations and permits.




We
      may be
      liable for the investigation and cleanup of environmental contamination at
      each
      of the properties that we own or operate and at off-site locations where we
      arrange for the disposal of hazardous substances. If these substances have
      been
      or are disposed of or released at sites that undergo investigation and/or
      remediation by regulatory agencies, we may be responsible under the
      Comprehensive Environmental Response, Compensation and Liability Act of 1980,
      or
      CERCLA, or other environmental laws for all or part of the costs of
      investigation and/or remediation, and for damages to natural resources. We
      may
      also be subject to related claims by private parties alleging property damage
      and personal injury due to exposure to hazardous or other materials at or from
      those properties. Some of these matters may require us to expend significant
      amounts for investigation, cleanup or other costs.




In
      addition, new laws, new interpretations of existing laws, increased governmental
      enforcement of environmental laws or other developments could require us to
      make
      additional significant expenditures. Continued government and public emphasis
      on
      environmental issues can be expected to result in increased future investments
      for environmental controls at our production facilities. Present and future
      environmental laws and regulations (and interpretations thereof) applicable
      to
      our operations, more vigorous enforcement policies and discovery of currently
      unknown conditions may require substantial expenditures that could have a
      material adverse effect on our results of operations and financial
      position.




23


The
      hazards and risks associated with producing and transporting our products (such
      as fires, natural disasters, explosions, and abnormal pressures and blowouts)
      may also result in personal injury claims or damage to property and third
      parties. As protection against operating hazards, we maintain insurance coverage
      against some, but not all, potential losses However, we could sustain losses
      for
      uninsurable or uninsured risks, or in amounts in excess of existing insurance
      coverage. Events that result in significant personal injury or damage to our
      property or third parties or other losses that are not fully covered by
      insurance could have a material adverse effect on our results of operations
      and
      financial position.




***Our
      competitive position, financial position and results of operations may be
      adversely affected by technological advances.***




The
      development and implementation of new technologies may result in a significant
      reduction in the costs of ethanol production. For instance, any technological
      advances in the efficiency or cost to produce ethanol from inexpensive,
      cellulosic sources such as wheat, oat or barley straw could have an adverse
      effect on our business, because our facilities are designed to produce ethanol
      from corn, which is, by comparison, a raw material with other high value uses.
      We do not predict when new technologies may become available, the rate of
      acceptance of new technologies by our competitors or the costs associated with
      new technologies. In addition, advances in the development of alternatives
      to
      ethanol could significantly reduce demand for or eliminate the need for
      ethanol.




Any
      advances in technology which require significant capital expenditures to remain
      competitive or which reduce demand or prices for ethanol would have a material
      adverse effect on our results of operations and financial position.




**Financial
      Risks**




***Our
      level of indebtedness could adversely affect our ability to react to changes
      in
      our business, and we may be limited in our ability to use debt to fund future
      capital needs.***




As
      of
      December 31, 2006, our total debt was $29,783,982. Our substantial indebtedness
      could have important consequences by adversely affecting our financial position.
      Our substantial indebtedness could:




·
            require
                us to dedicate a substantial portion of our cash flow from operations
                to
                payments with respect to our indebtedness, thereby reducing the
                availability of our cash flow for working capital, capital expenditures
                and other general corporate
                expenditures;




·
            increase
                our vulnerability to adverse general economic or industry
                conditions;




·
            limit
                our flexibility in planning for, or reacting to, competition or changes
                in
                our business or industry;




·
            limit
                our ability to borrow additional
                funds;




·
            restrict
                us from building new facilities, making strategic acquisitions,
                introducing new products or services or exploiting business
                opportunities; and




·
            place
                us at a competitive disadvantage relative to competitors that have
                less
                debt or greater financial
                resources.




Our
      ability to make payments on and refinance our indebtedness will depend on our
      ability to generate cash from our future operations. Our ability to generate
      cash from future operations is subject, in large part, to general economic,
      competitive, legislative and regulatory factors and other factors that are
      beyond our control.




24


If
      we
      cannot service or refinance our indebtedness, we may have to take actions such
      as selling assets, seeking additional equity or reducing or delaying capital
      expenditures, strategic acquisitions, investments or alliances. We may not
      be
      able to take these actions, if necessary, on commercially reasonable terms
      or at
      all. In addition, our secured lenders could foreclose on and sell our assets
      if
      we default on our indebtedness.




Moreover,
      we have the ability under our debt instruments to incur substantial additional
      indebtedness, and any additional indebtedness we incur could exacerbate the
      risks described above.




***Construction
      of the ethanol facilities could cost more than
      anticipated.***




Although
      the contract with Lurgi to engineer, design and build the Pratt facility (we
      anticipate similar arrangement for our other proposed facilities) contemplates
      a
      lump sum, guaranteed maximum price arrangement, construction and other cost
      overruns can occur. Cost overruns in connection with our ethanol facilities
      are
      very possible due to change orders approved by us, delays in completion of
      the
      proposed ethanol facilities due to various factors, including acts of God,
      destruction of the ethanol facilities by fire or other hazards, and inability
      to
      obtain materials or labor or other factors. Cost overruns could cause
      substantial delays in the commencement of operation of the ethanol facilities
      and may have a material adverse impact on our financial performance and could
      harm our business. Our estimated project costs and use of funds will include
      a
      construction contingency to cover such costs, however, there can be no assurance
      that such cost overruns will not exceed the contingency and we could be required
      to borrow additional debt capital to cover such overruns. There are no
      assurances that such debt capital would be available or if available would
      be on
      terms favorable or acceptable to us.




***We
      need third party debt financing to construct and operate the ethanol
      facilities.***




Based
      on
      current cost estimates, we believe we will need approximately $530
      million **** to
      pay
      for the ethanol facilities, excepting the Pratt facility, including initial
      working capital needs. We intend to seek debt financing of approximately
      $345 **** million
      for costs of construction and initial operation of the ethanol facilities,
      depending on how much equity we raise. The use of debt financing increases
      the
      risk that we will not be able to operate profitably because we will need to
      make
      principal and interest payments on the indebtedness. Debt financing will also
      expose us to the risk of a default on the indebtedness and a foreclosure and
      sale of the ethanol facilities.




The
      interest rate on the promissory notes that we issued in our bridge financing
      will increase 1% per month until maturity or until we consummate a qualified
      financing and we may begin to accrue liquidated damages for failure to timely
      file, and cause to go effective, a registration statement relating to the resale
      of the shares of common stock issuable upon conversion of those promissory
      notes.




Upon
      the
      closing of a private placement in November 3, 2006, we entered into subscription
      agreements with 19 accredited investors who acquired at face value, in the
      aggregate, $12,430,000 in principal amount of our 8% convertible senior notes.
      The notes bear interest at a rate of 8% per annum with the accrued and unpaid
      interest payable quarterly. The per annum interest rate increases by 1% per
      annum to 9% on April 1, 2007 and by an additional 1% on each quarterly interest
      payment date thereafter until maturity or conversion. The notes mature on
      October 31, 2008. The notes automatically convert upon the closing of an equity
      financing that results in $100 million of gross cash proceeds to us, including
      the gross proceeds from the conversion of the notes. We have reserved shares
      for
      issuance in the event of the exercise of conversion rights by the holders of
      the
      notes. The issuance of these shares upon conversion of the notes will result
      in
      substantial dilution to stockholders who held our common stock prior to the
      private placement.




In
      connection with the private placement, we also entered into a registration
      rights agreement with the investors. The registration rights agreement requires
      us to register for re-sale the securities issuable upon conversion of the notes.
      More specifically, we must file a registration statement with the SEC on or
      before the filing deadline, which is 150 days after the closing of the private
      placement. The number of days will be extended to the date we are required
      to
      file a registration statement for the investors in the qualified financing
      if
      the qualified financing occurs before the end of the 150 day period. We also
      are
      required to use our best efforts to cause the registration statement to become
      effective before the effectiveness deadline, which is (i) 180 calendar days
      after the closing of the private placement, if the registration statement is
      not
      reviewed by the SEC, or (ii) 240 days after the closing of the private
      placement, if the registration statement is reviewed by the SEC. However, if
      we
      consummate a qualified financing on or before the 150 th day
      following the closing of the private placement, then the effectiveness deadline
      would be extended to the date that we are required to cause any resale
      registration statement relating to securities issued in the qualified financing
      to go effective. If we (i) fail to file the registration statement before the
      filing deadline, (ii) fail to cause the registration statement to go effective
      before the effectiveness deadline, or (iii) fail to maintain the effectiveness
      of the registration statement after it has gone effective during the period
      we
      are required to do so, then as partial relief for the damages to any holder
      by
      reason of any such delay in or reduction of its ability to sell the underlying
      securities, we must pay to each holder an amount in cash equal to 1.5% of the
      aggregate purchase price paid by that investor for his note. We would not,
      however, be liable for more than 1.5% of penalties during any thirty day period
      or for multiple events during any thirty day period. The maximum amount that
      we
      would be required to pay as liquidated damages under the registration statement
      is 12.5% of the purchase price of the notes. The registration rights agreement
      also contained standard indemnification provisions.




25


Furthermore,
      upon such registration of the shares issued in the private placement, these
      shares will become generally available for immediate resale in the public
      market. The market price of our common stock could fall due to an increase
      in
      the number of shares available for sale in the public market.




**Risks
      Related to our Common Stock**




***Our
      common stock has a small public float and shares of our common stock eligible
      for public sale could cause the market price of our stock to drop, even if
      our
      business is doing well, and make it difficult for us to raise additional capital
      through sales of equity securities.***




As
      of December
      31, 2006 ,
      we had
      outstanding 32,661,025 shares of our common stock. Approximately 32,646,938 of
      these
      shares were restricted under the Securities Act of 1933, including approximately
      25,700,000 **** shares
      beneficially owned, in the aggregate, by our executive officers, directors
      and
      10% stockholders. Accordingly, our common stock has a public float of
      approximately 14,000 **** shares
      held by a relatively small number of public investors.




***The
      ownership interests of our officers and directors could conflict with the
      interests of our other stockholders.***




As
      of
      December 31, 2006, our officers and directors beneficially own approximately 78.6% of our common stock. As
      a result, these stockholders, acting together, will be able to significantly
      influence all matters requiring approval by our stockholders, including the
      election of directors and the approval of mergers or other business combination
      transactions. The interests of this group of stockholders may not always
      coincide with our interests or the interests of other stockholders.




***Our
      stock price is highly volatile, which could result in substantial losses for
      investors purchasing shares of our common stock and in litigation against
      us.***




The
      market price of our common stock has fluctuated significantly in the past and
      may continue to fluctuate significantly in the future. The market price of
      our
      common stock may continue to fluctuate in response to one or more of the
      following factors, many of which are beyond our control:




·
            changing
                conditions in the ethanol and fuel
                markets;




·
            the
                volume and timing of the receipt of orders for ethanol from major
                customers;




·
            competitive
                pricing pressures;




·
            our
                ability to produce, sell and deliver ethanol on a cost-effective
                and
                timely basis;




·
            the
                introduction and announcement of one or more new alternatives to
                ethanol
                by our competitors;




·
            changes
                in market valuations of similar
                companies;




26




·
            stock
                market price and volume fluctuations
                generally;




·
            regulatory
                developments or increased
                enforcement;




·
            fluctuations
                in our quarterly or annual operating
                results;




·
            additions
                or departures of key personnel;




·
            our
                inability to obtain construction, acquisition, capital equipment
                and/or
                working capital financing; and




·
            future
                sales of our common stock or other
                securities.




Furthermore,
      we believe that the economic conditions in the United States as a whole, could
      have a negative impact on our results of operations. Demand for ethanol could
      also be adversely affected by a slow-down in overall demand for oxygenate and
      gasoline additive products. The levels of our ethanol production and purchases
      for resale will be based upon forecasted demand. Accordingly, any inaccuracy
      in
      forecasting anticipated revenues and expenses could adversely affect our
      business. Furthermore, we recognize revenues from ethanol sales at the time
      of
      delivery. The failure to receive anticipated orders or to complete delivery
      in
      any quarterly period could adversely affect our results of operations for that
      period. Quarterly results are not necessarily indicative of future performance
      for any particular period, and we may not experience revenue growth or
      profitability on a quarterly or an annual basis.




***Our
      common stock is quoted on the OTC Bulletin Board which may have an unfavorable
      impact on our stock price and liquidity.***




Our
      common stock is quoted on the OTC Bulletin Board. The OTC Bulletin Board is
      a
      significantly more limited market than the New York Stock Exchange or NASDAQ
      system. The quotation of our shares on the OTC Bulletin Board may result in
      a
      less liquid market available for existing and potential stockholders to trade
      shares of our common stock, could depress the trading price of our common stock
      and could have a long-term adverse impact on our ability to raise capital in
      the
      future.




***We
      are subject to penny stock regulations and
      restrictions.***




The
      SEC
      has adopted regulations which generally define so-called “penny stocks” to be an
      equity security that has a market price less than $5.00 per share or an exercise
      price of less than $5.00 per share, subject to certain exemptions. Although
      since September 30, 2006, we have met the net worth exemption from the “penny
      stock’ definition, no assurance can be given that such exemption will be
      maintained. As a “penny stock”, our common stock may become subject to Rule
      15g-9 under the Exchange Act of 1934, or the “Penny Stock Rule”. This rule
      imposes additional sales practice requirements on broker-dealers that sell
      such
      securities to persons other than established customers and “accredited
      investors” (generally, individuals with a net worth in excess of $1,000,000 or
      annual incomes exceeding $200,000, or $300,000 together with their spouses).
      For
      transactions covered by Rule 15g-9, a broker-dealer must make a special
      suitability determination for the purchaser and have received the purchaser’s
      written consent to the transaction prior to sale. As a result, this rule may
      affect the ability of broker-dealers to sell our securities and may affect
      the
      ability of purchasers to sell any of our securities in the secondary
      market.




For
      any
      transaction involving a penny stock, unless exempt, the rules require delivery,
      prior to any transaction in a penny stock, of a disclosure schedule prepared
      by
      the SEC relating to the penny stock market. Disclosure is also required to
      be
      made about sales commissions payable to both the broker-dealer and the
      registered representative and current quotations for the securities. Finally,
      monthly statements are required to be sent disclosing recent price information
      for the penny stock held in the account and information on the limited market
      in
      penny stock.




27


There
      can
      be no assurance that our common stock will continue to qualify for exemption
      from the Penny Stock Rule. In any event, even if our common stock were exempt
      from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the
      Exchange Act, which gives the SEC the authority to restrict any person from
      participating in a distribution of penny stock, if the SEC finds that such
      a
      restriction would be in the public interest.




***Because
      we do not intend to pay dividends, you will benefit from an investment in our
      common stock only if it appreciates in value.***




We
      have
      paid no cash dividends on any of our capital stock to date, and we currently
      intend to retain our future earnings, if any, to fund the development and growth
      of our business. As a result, we do not expect to pay any cash dividends in
      the
      foreseeable future. The success of your investment in our common stock will
      likely depend entirely upon any future appreciation. There is no guarantee
      that
      our common stock will appreciate in value or even maintain the price at which
      you purchased your shares.




**ITEM
      2. DESCRIPTION OF PROPERTY**




Our
      principal executive office is located at: 307 South Main Street, Pratt, Kansas
      67124. We occupy these premises on a month-to-month basis. Our monthly payment
      under our current arrangement is $500.




We
      are in
      the process of constructing the Pratt facility with is located in Pratt, Kansas.
      Once complete the Pratt facility is expected to employ approximately
      35 **** skilled
      workers on a full-time basis and to have the capacity to process approximately
      18 million bushels of corn and sorghum per year and to produce
      approximately 55 million gallons per year of ethanol and 160,000 tons of
      dry distillers grains per year. Construction of the Pratt facility is scheduled
      to be completed in the third quarter of 2007.




In
      addition, we have entered into agreements to acquire an aggregate of
      approximately 1,400 acres of land at four locations (Enid, Oklahoma; Shattuck,
      Oklahoma; Hugoton, Kansas; and Colby, Kansas) where we plan on constructing
      our
      other prospective ethanol production facilities. We also have an option,
      expiring in September 2008, to purchase land in Wellington, Kansas to be used
      as
      the site for an ethanol production facility. Proposed facilities at these
      locations are in the development stage, and we are currently evaluating whether
      to engage Lurgi PSI or to consider other design-build alternatives for the
      construction of our other proposed ethanol production facilities. Air quality
      permits for our planned facilities in Enid, Oklahoma and Shattuck, Oklahoma
      were
      signed on October 18, 2006. We expect these facilities to be complete and in
      full production by the third quarter of 2009. We intend to apply for air permits
      for our Hugoton and Colby, Kansas sites in 2007.




**ITEM
      3. LEGAL PROCEEDINGS**




None.




**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS**




None.




**PART
      II**




**ITEM
      5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS**




***Market
      Information***




Our
      common shares are quoted on the Over-the-Counter Bulletin Board under the symbol
      “ **OEHL.OB** ”.
      The
      following quotations reflect the high and low bids for our common stock based
      on
      inter-dealer prices, without retail mark-up, mark-down or commission and may
      not
      represent actual transactions. The high and low bid prices for our common shares
      for each full financial quarter for the two most recent full fiscal years were
      as follows




Closing
                Bid Prices (1)High
            
            Low***Year
                Ended December 31, 2005***1st
                Quarter
            
            $
            N/A
            
            $
            N/A2nd
                Quarter
            
            $
            N/A
            
            $
            N/A3rd
                Quarter
            
            $
            N/A
            
            $
            N/A4th
                Quarter
            
            $
            N/A
            
            $
            N/A***Year
                Ended December 31, 2006***1st
                Quarter
            
            
            N/A
            
            
            N/A2nd
                Quarter
            
            
            N/A
            
            
            N/A3rd
                Quarter
            
            $
            30.25
            
            $
            30.254th
                Quarter
            
            $
            8.00
            
            $
            8.00





(1)
      The
      above tables set forth the range of high and low closing bid prices per share
      of
      our common stock as reported by www.finance.yahoo.com for the
      periods indicated.




28




***Holders***




As
      of
      December 31, 2006, there were approximately 91 holders of record of our common
      stock.




***Dividends***




We
      have
      not paid any cash dividends on our common stock or preferred stock since
      inception and presently anticipate that all earnings, if any, will be retained
      for development of our business and that no dividends on our common stock or
      preferred will be declared in the foreseeable future. Any future dividends
      will
      be subject to the discretion of our Board of Directors and will depend upon,
      among other things, future earnings, operating and financial condition, capital
      requirements, general business conditions and other pertinent facts. Therefore,
      there can be no assurance that any dividends on our common stock or preferred
      stock will be paid in the future.




***Securities
      Authorized for Issuance Under Equity Compensation
      Plans***




On
      November 28, 2006, the board of directors adopted the 2006 Equity Incentive
      Plan
      or the 2006 Plan. The 2006 Plan was approved by written consent of the majority
      of our shareholders on December 8, 2006. The 2006 Plan reserves 15,000,000
      shares of our common stock for issuance in connection with stock options,
      restricted stock awards and other equity-based awards to be granted under the
      2006 Plan. No award has been issued under the 2006 Plan.




·
            The
                awards (which may include grants of stock options, stock appreciation
                rights, performance units, restricted stock, restricted stock units
                or
                performance shares) under the 2006 Plan are subject to the administration
                and interpretation by the board of directors or any of its committees
                administering the 2006 Plan. The following is a summary of principal
                terms
                of the 2006 Plan.




·
            The
                exercise price per share for the shares to be issued pursuant to
                an
                exercise of a stock option will be no less than the fair market value
                per
                share on the grant date, except in the case of an incentive stock
                option
                granted to a 10% owner, where the exercise price per share will be
                no less
                than 110% of the fair market value per share on the grant
                date.




·
            The
                term, vesting regime, exercise date and exercise of the stock option
                will
                be set forth under the respective award agreement. The form of payment
                for
                the exercise of the stock option is determined by the administrator
                and
                may consist of any combination of cash, check, other shares and,
                to the
                extent not prohibited by the Sarbanes-Oxley Act of 2002, promissory
                notes
                or a cashless exercise program.




29




·
            Unvested
                stock options are cancelled as of 90 days after termination of employment
                as set forth in the respective award agreement and the shares covered
                by
                such unvested portion of the award agreement will be forfeited to
                the
                Registrant and revert back to the 2006 Plan and the shares subject
                to the
                award will become available for future grant or sale under the 2006
                Plan.
                Options that have vested remain exercisable for 90 days after termination;
                depending on award agreement, other forms of award may terminate
                on the
                day of employment termination.




·
            On
                the date set forth in the award agreement or on a date determined
                by the
                administrator, as applicable, all (i) restricted stock grants for
                which
                restrictions have not lapsed; (ii) unearned restricted stock units;
                (iii)
                stock appreciation rights; and (iv) performance units and shares
                shall be
                forfeited to the Registrant and will revert back to the 2006 Plan
                and the
                shares subject to the award will become available for future grant
                or sale
                under the 2006 Plan.




·
            No
                more than an aggregate of 2,000,000 shares (or for awards denominated
                in
                cash, the fair market value of 2,000,000 shares on the grant date)
                may be
                subject to awards under the 2006 Plan to any individual participant
                in any
                one fiscal year of the Registrant. In addition, subject to certain
                terms
                under the 2006 Plan and the Internal Revenue Code, no more than an
                aggregate of 5,000,000 shares may be issued under an option that
                qualifies
                as an incentive stock option.




**Number
                  of securities to be issued upon exercise of outstanding options,
                  warrants
                  and rights**
                **(a)**
              
              **Weighted-average
                  exercise price of outstanding options, warrants and rights
                  (b)**
              
              **Number
                  of securities remaining available for future issuance under equity
                  compensation plans (excluding securities reflected in column (a))
                  (c)**Equity
                  compensation plans approved by security holders
              
              0
                  (1)
              
              0
                  (1)
              
              0
                  (1)Equity
                  compensation plans not approved by security holders
              
              N/A
              
              N/A
              
              N/ATotal
              
              0
              
              0
              
              0


(1)  No
      incentive awards have been issued under the 2006 Plan.





***Recent
      Sales of Unregistered Securities***




None.




**ITEM
      6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION**




*The
      following discussion and analysis provides information which management believes
      is relevant to an assessment and understanding of our condensed financial
      condition and results of operations. The discussion contains forward-looking
      statements that involve risks and uncertainties (see “Forward-Looking
      Statements”). Actual events or results may differ materially from those
      indicated in such forward-looking statements. The discussion should be read
      in
      conjunction with the financial statements and accompanying notes included
      herewith.*




***Overview***




We
      are a
      start-up company in the development stage pursuant to Financial Accounting
      Standards Board Statement No. 7, “Accounting and Reporting by Development Stage
      Enterprises,” and are in the business of building bio-refineries to produce
      ethanol and animal feed products in Pratt, Kansas, Enid, Oklahoma, Shattuck,
      Oklahoma, Hugoton, Kansas, Colby, Kansas and Wellington, Kansas. We do not
      expect to operate at a profit before our first ethanol plant is completely
      constructed and becomes operational.




30


Gateway
      Ethanol, is currently constructing a 55 million gallon per year dry-mill ethanol
      plant near Pratt, Kansas. Orion indirectly owns 62% of Gateway Ethanol with
      Indeck, Noble and White Pines holding minority interests of 23.8%, 9.5% and
      4.7%
      respectively. Construction of the Pratt facility is scheduled to be completed
      in
      the third quarter of 2007, at which point we expect that the Pratt facility
      will
      process more than 18 million bushels of corn and grain sorghum annually. In
      addition, we have entered into agreements to acquire an aggregate of
      approximately 1,400 acres of land at four locations (Enid, Oklahoma; Shattuck,
      Oklahoma; Hugoton, Kansas; and Colby, Kansas) where we plan on constructing
      our
      other prospective ethanol production facilities. We also have an option,
      expiring in September 2008, to purchase land in Wellington, Kansas to be used
      as
      the site for an ethanol production facility. We believe there are sufficient
      infrastructure such as water rights, rail, natural gas, electricity and other
      infrastructure to meet our anticipated ethanol production needs at these
      locations. Once our planned construction at all our proposed sites is completed
      and our sites are in full production, we optimally expect to produce in excess
      of 660 million gallons of ethanol per year. Air quality permits for our planned
      facilities in Enid, Oklahoma and Shattuck, Oklahoma were signed on October
      18,
      2006. We expect these facilities to be complete and in full production by the
      third quarter of 2009. We intend to apply for air permits for our Hugoton,
      Colby
      and Wellington, Kansas sites in 2007. We are currently conducting a feasibility
      study on expanding the Pratt facility to 110+ million gallons of nameplate
      capacity. We expect the feasibility study to be completed in the second quarter
      of 2007. Should we determine that the economics of such an expansion is
      favorable, we may institute an expansion of the Pratt facility prior to the
      construction of our other sites in development.




We
      have
      entered into an engineering, procurement, and construction or EPC agreement
      with
      Lurgi PSI, Inc. for the design and construction of our Pratt facility. We are
      currently evaluating whether to use Lurgi or whether to consider other
      design-build alternatives for the construction of our other proposed ethanol
      production facilities.




We
      intend
      to use a continuous dry milling process to produce fuel-grade ethanol as our
      main product and distillers grains and carbon dioxide as co-products. Corn
      and
      grain sorghum will be the primary raw materials. We expect each of our ethanol
      production facilities to have a minimum nameplate design capacity (i.e.,
      guaranteed production amount under the applicable EPC agreement) to produce
      55
      million gallons per year of fuel-grade ethanol, and we intend to distribute
      our
      ethanol throughout the United States.




To
      construct the ethanol production facilities, other than the Pratt facility,
      we
      will need to raise additional capital. However, due to a number of factors,
      including the current high costs of construction, a significant increase in
      the
      price of corn and a significant drop in oil and ethanol prices, there can be
      no
      assurance given that we will be able to acquire the funding necessary for these
      additional projects on terms acceptable to us, or at all.




We
      have
      incurred an accumulated loss of $ 11,359,000 on a consolidated basis from
      January 1, 2003 through December 31, 2006. We believe we will incur significant
      losses from this time forward until we complete the construction of our Pratt
      facility and commence operations. Even if we successfully meet all of these
      objectives and begin operations of our ethanol plants, there is no assurance
      that we will be able to operate profitably.




***Plan
      of Operation***




Over
      the
      next twelve months we intend to continue construction of the Pratt facility,
      these construction efforts may entail our acquisition of equipment and materials
      required to complete the construction of the facility. Upon completion of the
      Pratt facility, we intend to begin the commercial production and sale of ethanol
      and ethanol by-products. We currently have the financial resources necessary
      to
      complete construction of the Pratt facility and to commence operations at the
      Pratt facility.




We
      also
      intend to (i) expand our Pratt facility, (ii) begin construction of two
      additional ethanol production facilities at sites located in Enid and Shattuck,
      Oklahoma and (iii) continue development of our Hugoton, Colby and Wellington
      (all located in Kansas) projects. Current cash on hand is adequate to cover
      our
      administrative costs, but additional funding will be required to provide for
      the
      construction of the additional ethanol production facilities and to provide
      working capital for general corporate or other purposes associated with the
      construction, development and operation of the proposed facilities.




31


We
      expect
      to hire additional employees as construction progresses on the Pratt facility
      as
      we will need a fully trained staff to operate this facility. We anticipate
      having to do the same with our other facilities if and when they are built.
      We
      have not had any operating revenues through December 31, 2006 and do not expect
      to have any revenues until the Pratt facility is constructed and operational,
      which we anticipate will be sometime in mid-2007.




We
      have
      expended capital to defray costs associated with engineering costs, surveying
      expenses, performed environmental studies and made down payments for long
      lead-items such as storage tanks at our sites in Enid, Shattuck, Hugoton and
      Colby.




***Weaknesses
      and Uncertainties that Affect our Financial Condition***




One
      uncertainty that affects the execution of our business plan is whether we will
      be able to obtain the requisite capital to design, construct and commence
      operation of the ethanol production facilities. In order to build our proposed
      ethanol production facilities we estimate that the total construction costs
      for
      our prospective ethanol production facilities will be approximately $220 million
      assuming average project costs of $130 million for the initial 55 million
      gallons of production capacity at each new facility and an additional $90
      million to expand each facility to 110 million gallons of capacity. We will
      need
      to raise approximately $530 million within the next twelve months in order
      to
      meet these objectives. We do not have any commitments for this capital and
      the
      viability of our business plan is based largely on our ability to obtain such
      commitments over the next few months.




Another
      uncertainty that affects our financial condition is that the assumptions that
      we
      have used in our business plan have not been tested as we have not yet begun
      the
      production of ethanol. As a result, we have based our business plan on
      agreements that are not yet operational or on proposals that have not yet been
      finalized or implemented. Definitive versions of such agreements, documents,
      plans, or proposals may never be finalized or, when finalized, may contain
      terms
      or conditions that vary significantly from our assumptions or may not prove
      to
      be profitable or may otherwise not perform in accordance with our
      assumptions.




We
      face
      uncertainty as to the actual construction cost for our proposed ethanol
      production facilities. Although our contract with Lurgi to construct the Pratt
      facility is based on a lump sum; guaranteed maximum price arrangement as may
      be
      called for under other future EPC contracts or construction cost overruns that
      may occur due to (i) change orders approved by us or (ii) delays in the
      construction of our proposed ethanol production facilities caused by numerous
      factors, including, but not limited to force majeure, the destruction of the
      ethanol production facilities by fire or other hazards or an inability to obtain
      materials or labor.




Additionally,
      our financial condition may be adversely impacted by delays in the completion
      of
      our ethanol production facilities. We have developed an ambitious timetable
      for
      completion of the financing, regulatory, design and engineering, and
      construction phases of our ethanol production facilities, which is dependent
      upon several factors, including: (i) how quickly we can obtain debt and equity
      capital required for the financing and construction of our ethanol production
      facilities; (ii) weather and seasonal factors that generally affect construction
      projects and (iii) construction delays or other events beyond our control.
      If it
      takes longer to complete the financing, obtain necessary permits, build the
      proposed ethanol production facilities or achieve commercial operations at
      the
      facilities than we anticipate, our costs of capital could increase, we could
      be
      forced to seek additional sources of capital and we would lose the additional
      revenues related to the ethanol products to be produced at the facilities,
      each
      of which could harm our business and make it more difficult to service our
      debt
      obligations.




***Off-Balance
      Sheet Arrangements***




We
      do not
      have any off-balance sheet arrangements.




***Liquidity
      and Capital Resources***




Available
      and Restricted Cash




As
      of
      December 31, 2006, we had cash and cash equivalents of $9,480,000.




32




Loan
      Facilities




On
      March
      30, 2006, we entered into a debt agreement with Dougherty Funding, LLC, our
      senior lender (the “Dougherty Agreement”), which provides for advances up to
      $54,300,000 towards the construction of the Pratt facility. The interest rate
      is
      variable at prime plus 1.75%. Interest is payable monthly during construction
      and principal and interest payments are required upon completion of construction
      sufficient to fully repay the debt in 10 years. The loan matures on March 31,
      2011. Our debt obligations under the Dougherty Agreement are secured by
      substantially all of our assets. The Dougherty Agreement also contains covenants
      that restrict certain activities such as incurring additional debt. In the
      event
      of default, such as failure to make required payments or a failure to comply
      with covenants after any applicable grace period, Dougherty Funding would be
      entitled to, among other remedies, declare all amounts outstanding under the
      facility immediately due and payable, and to enforce its security interest
      and
      mortgage on our assets. There was $10,513,000 outstanding under this debt
      agreement as of December 31, 2006.




On
      March
      30, 2006, we entered into a Tax Increment Secured Promissory Note with Dougherty
      Funding, LLC to provide funding for the Pratt facility. Dougherty agreed to
      advance Gateway $11,340,000 against future revenues from a Property Tax
      Increment Rebate Agreement between Gateway Ethanol and Pratt County, Kansas
      dated February 1, 2006. The initial interest rate of 8.75%, is to be adjusted
      on
      the third, sixth and ninth anniversaries of the note to a rate per annum equal
      to the three-year U.S. Treasury Note constant maturity index plus 4.25%. The
      note matures on February 1, 2017. Interest is payable monthly in arrears
      beginning April 1, 2006 through February 1, 2007 and annually thereafter in
      arrears on February 1 of each year, commencing on February 1, 2008 and the
      principal of the Note shall be payable on each February 1 commencing
      February 1, 2008. There was $10,962,000 outstanding on this note as of
      December 31, 2006.




On
      March
      30, 2006, we entered into a subordinated promissory note with Lurgi for advances
      up to $7,000,000 plus capitalized interest for construction costs. The interest
      rate is 12% per annum and the note matures on March 30, 2011. There was
      $7,149,000 outstanding under this debt agreement as of December 31,
      2006.




We
      have a
      debt service reserve letter of credit of $3,250,000 and a revolving line of
      credit for up to $7,500,000 for working capital needs through Noble. Interest
      accrues on the line of credit at a rate of LIBOR plus 4.00%. We have not drawn
      on this line of credit as of December 31, 2006.




As
      of
      December 31, 2006, the maturities of our various debt arrangements related
      to
      the construction of our Pratt facility were as follows:




**Lender**
            
            **Purpose
                of facility**
            
            **Amount
                of facility**
            
            **Current
                Balance**
            
            **Maturity**Dougherty
                Funding, LLC
            
            
            Senior
                Debt Revolving Facility
            
            $
            54,300,000
            
            $
            10,513,000
            
            
            3/31/2011Dougherty
                Funding, LLC
            
            
            Promissory
                Note
            
            $
            11,340,000
            
            $
            10,962,000
            
            
            2/1/2017Lurgi
                PSI, Inc.
            
            
            Subordinated
                Debt Revolving Facility
            
            $
            7,000,000
            
            $
            7,149,000
            
            
            3/30/2011Noble
                Americas Corp.
            
            
            Debt
                Reserve LOC
            
            $
            3,250,000
            
            $
            0
            
            
            4/5/2009Noble
                Americas Corp.
            
            
            Working
                Capital LOC
            
            $
            7,500,000
            
            $
            0
            
            
            3/30/2011**Total**
            
            
            
            
            **$**
            **83,390,000**
            
            **$**
            **28,624,000**





On
      September 1, 2006, certain of our shareholders and officers advanced to Orion
      a
      total of $1,000,000 evidenced by promissory notes for the purpose of placing
      deposits on long lead items needed for our projects in Enid, Oklahoma; Shattuck,
      Oklahoma; Hugoton, Kansas and Colby Kansas. These promissory notes have a
      two-year term, payable on August 31, 2008, and carry an interest rate of 11.0%
      per annum calculated on a 360 day year. On November 10, 2006, we repaid in
      full
      the $1,000,000 principal amount of notes, plus interest to the date of
      repayment.




33


In
      addition, on November 3, 2006, we issued $12,430,000 aggregate principal amount
      of convertible senior notes. The notes which mature on October 31, 2008,were
      issued at face value. Accrued and unpaid interest is payable quarterly. On
      April
      1, 2007, the per annum interest rate increases by 1% per annum to 9% and then
      by
      an additional 1% on each quarterly interest payment date thereafter until the
      earlier of maturity or conversion. For additional information concerning these
      notes, see Note D of the Notes to Condensed Consolidated Financial
      Statements.




Obligations
      Under Material Contracts




Below
      is
      a brief summary of the payment obligations under material contracts to which
      we
      are a party.




·
            On
                or about August 14, 2006, Orion entered into an exclusive Financial
                Advisory Agreement with Global Hunter Securities pursuant to which
                Global
                Hunter Securities would be entitled to transaction-based commissions
                in
                connection with certain of our securities offerings and debt
                financings.




·
            On
                May 18, 2006, we entered into an exclusive Financial Advisory Agreement
                with Halter Financial, which remains in effect following our reverse
                acquisition of Orion. Under this agreement, Halter Financial agreed
                to
                provide certain financial advisory and consulting services related
                to
                Orion’s efforts to go public through an alternative public offering and
                to
                advise Orion in its efforts to complete an equity financing transaction.
                In return for these services, Halter retained its interest in us
                following
                the reverse acquisition transaction and, subject to certain conditions,
                will be entitled to receive $450,000 in cash upon the consummation
                of the
                next equity financing transaction that we
                undertake.




·
            On
                March 30, 2006, Gateway Ethanol and Power to Go, L.L.C., a company
                that
                markets generators as well as fuel-storage solutions for businesses
                (“Power to Go”), entered into a Sublease Agreement in which Power to Go
                agreed to construct a Substation (the “Substation”) on the Substation site
                (the “Substation site”) and sublease the Substation site and the
                Substation to Gateway Ethanol. In consideration for this sublease,
                Gateway
                agreed to the following terms:




·
            During
                the period beginning with the first day of the month following six
                months
                after the completion of the Substation and until the Pratt facility
                has
                reached final completion, Gateway must pay rent to Power to Go at
                the rate
                of $6,000 per month.




·
            After
                the Pratt facility reaches final completion, sublease rental payments
                in
                the amount of $23,302.82 per month shall begin and continue thereafter
                until the sublease is terminated.




·
            Gateway
                has the right to terminate the Sublease Agreement under the following
                conditions through the purchase of the Substation at its fair market
                value
                as determined pursuant to the Sublease
                Agreement:




·
            On
                March 30, 2006, Gateway Ethanol and Power to Go entered into a Ground
                Lease to remain in effect until the termination of the Sublease Agreement.
                Gateway Ethanol has agreed to lease the real property on which the
                Substation is to be built to Power to Go for no cash consideration
                in
                connection with the Sublease
                Agreement.




·
            On
                March 30, 2006, Gateway Ethanol and Dougherty Funding, LLC entered
                into a
                Loan and Security Agreement to provide senior debt for the Pratt
                facility,
                which provides for advances up to $54,300,000 towards the construction
                of
                the Pratt facility. The interest rate is variable at prime plus 1.75%.
                Interest is payable monthly during construction and principal and
                interest
                payments are required upon completion of construction sufficient
                to fully
                repay the debt in 10 years. The loan matures on March 31, 2011. There
                was
                $10,513,000 outstanding under this debt agreement as of December
                31,
                2006.




34




·
            On
                March 30, 2006, Gateway Ethanol and Dougherty Funding, LLC entered
                into a
                Tax Increment Secured Promissory Note to provide funding for the
                Pratt
                facility. Dougherty agreed to advance Gateway $11,340,000 against
                future
                revenues from a Property Tax Increment Rebate Agreement between Gateway
                Ethanol and Pratt County, Kansas dated February 1, 2006. The promissory
                note has the following provisions:




·
            An
                initial interest rate of 8.75%, to be adjusted on the third, sixth
                and
                ninth anniversaries of the note to a rate per annum equal to the
                three-year U.S. Treasury Note constant maturity index plus
                4.25%;




·
            A
                maturity date of February 1, 2017;




·
            Interest
                is payable monthly in arrears beginning April 1, 2006 through February
                1,
                2007 and annually thereafter in arrears on February 1 of each year,
                commencing on February 1, 2008; and




·
            The
                principal of the Note shall be payable on each February 1 commencing
                February 1, 2008.




·
            On
                November 3, 2006, Gateway Ethanol and Noble signed a Working Capital
                Facilities Agreement in which Noble agreed to provide Gateway with
                a
                revolving line of credit for up to $7,500,000, the proceeds of which
                are
                to be made available to Gateway Ethanol for working capital needs,
                including financing the acquisition of corn for processing into ethanol.
                Under this revolving facility, Noble is required to make advances
                to
                Gateway Ethanol upon the request of Gateway Ethanol. Interest accrues
                on
                these advances at a rate of thirty day LIBOR plus 4.00% and outstanding
                amounts are offset by amounts due from Noble to Gateway Ethanol under
                the
                Ethanol Purchase and Sale
                Agreement.




·
            On
                March 29, 2006, Gateway Ethanol and Noble entered into an Agreement
                for
                Letter of Credit under which Noble agreed to provide Gateway Ethanol
                with
                a Debt Service Letter of Credit of $3.25 million pursuant to the
                Dougherty
                Funding, LLC Loan and Security Agreement. Noble has agreed to provide
                funding for the Debt Service Reserve should Gateway Ethanol not be
                able to
                fully fund the Debt Service Reserve Account per the Dougherty Funding
                Loan
                and Security Agreement. The annual interest rate is one-month LIBOR
                plus
                4% for any draw against the Letter of
                Credit.




·
            On
                March 30, 2006, Gateway Ethanol and Lurgi, entered into a subordinated
                promissory note, for advances up to $7,000,000 plus capitalized interest
                for construction costs. The interest rate is 12% per annum and the
                note
                matures on March 30, 2011. There was $7,149,000 outstanding under
                this
                debt agreement as of December 31,
                2006.




**Operating
      Expenses**




Our
      current operating expenses are comprised of costs associated with
      administrative, salary, marketing, legal and business development. We will
      have
      additional operating expenses for additional staff members as they are hired.
      Along with such operating expenses, we anticipate that we have significant
      expenses related to financing and interest, which we expect to increase. We
      have
      allocated funds in our capital structure for our current expenses. However,
      there can be no assurance that the funds allocated are sufficient to cover
      our
      current or future expenses. We may need additional funding to cover these costs
      if sufficient funds are not retained up-front or if costs are higher than
      expected.




35




**Results
      of Operations**




For
      the
      twelve months ended December 31, 2006, we realized a net loss of $9,411,000,
      compared to a net loss of $659,000 during the comparable period from the prior
      year. Our net loss for the fiscal year ended December 31, 2006 resulted
      primarily from $5,553,000 in non-cash expense related to stock issued to the
      previous shareholders of RTO Holdings and $1,533,000 in legal, audit and
      professional fees spent in relation to our reverse merger and ongoing
      development work for our projects in Enid, Shattuck, Hugoton and Colby. During
      the fiscal year ended December 31, 2005, our operating loss was driven primarily
      by $245,000 salaries and benefits and $323,000 in legal and professional fees
      spent to complete the financing for our Pratt facility.




We
      expect
      to hire additional employees as construction progresses on the Pratt facility
      as
      we will need a fully trained staff to operate this facility. We anticipate
      having to do the same with our other facilities if and when they are built.
      We
      earned $196,000 of interest income in the fiscal period ended December 31,
      2006,
      compared to $0 for the comparable period in 2005. We have not had any operating
      revenues through December 31, 2006 and do not expect to have any revenues until
      the Pratt facility is constructed and operational, which we anticipate will
      be
      sometime in mid-2007.




We
      have
      expended capital to defray costs associated with engineering costs, surveying
      expenses, performed environmental studies and made down payments for long
      lead-items such as storage tanks at our sites in Enid, Shattuck, Hugoton and
      Colby.




**Critical
      Accounting Policies**




*Property
      and equipment* —
      Property and equipment are stated at cost less accumulated depreciation.
      Depreciation is provided principally on the straight-line method over the
      estimated useful lives of the assets which is currently 3-5 years. Land
      improvements and construction in progress will be depreciated upon the
      commencement of operations at the property, which is expected to occur in
      mid-2007. The money withheld on work performed for land improvements and
      construction in progress is included in these accounts and offset by a current
      liability for accrued retainage.




*Impairment
      of long-lived asset* - After
      assets have been placed into service, we will periodically review the carrying
      value of its property and equipment to determine if events and circumstances
      exist indicating that the assets might be impaired. If facts or circumstances
      support the possibility of impairment, we will prepare projections of
      undiscounted cash flows, without interest charges, to determine if the amounts
      estimated to be generated by those assets are less than the carrying amounts
      of
      those assets. If impairment is indicated, an adjustment is made to the carrying
      amount based on the difference between the sum of the expected future discounted
      net cash flows and the carrying amount of the asset.




*Intangible
      assets* -
      Consist of costs related to water rights. The water rights are considered to
      have infinite lives at this time and for that reason will have no corresponding
      amortization. We will evaluate the remaining useful life each year to determine
      whether events and circumstances continue to support an indefinite useful
      life.




*Earnings
      Per Share* -
      Earnings per share represents net loss available to common shareholders divided
      by the weighted average number of common shares outstanding during the period.
      Weighted average shares were calculated giving effect to the issuance of
      31,272,740  shares
      for all the outstanding units of Orion, as if the reverse acquisition had
      occurred at the beginning of each period presented.




*Income
      Taxes* -
      We
      account for income taxes in accordance with SFAS No. 109, “Accounting for Income
      Taxes”, which requires that deferred taxes be provided at enacted tax rates on
      temporary differences between the carrying amounts of assets and liabilities
      for
      financial and tax reporting purposes. We provide a valuation allowance on net
      deferred tax assets when it is more likely than not that these assets will
      not
      be realized. We will file a federal income tax return, which will include the
      taxable income or loss from our subsidiary, Orion, from the Acquisition Date.
      Our net operating loss for the period from August 28, 2006 through December
      31,
      2006 was approximately $8,868,000. Prior to the merger transaction, Orion was
      a
      non-income tax paying entity. Taxable income or loss flowed through to the
      members, and the resulting tax liabilities are payable by the
      members.




36




**Recent
      Accounting Pronouncements**




In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      (“SFAS”) No. 157, “Fair Value Measurements.”  This statement establishes a
      framework for measuring fair value in generally accepted accounting principles
      and expands disclosures about fair value measurements.  SFAS No. 157 is
      effective for financial statements issued for fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years *.*





The
      provisions of SFAS No. 157 should be applied prospectively as of the beginning
      of the fiscal year in which SFAS No. 157 is initially applied, except in limited
      circumstances. The Company expects to adopt SFAS No. 157 beginning January
      1,
      2008.  The Company is currently evaluating the impact that this
      interpretation may have on our consolidated financial statements.





In
      September 2006, the SEC released Staff Accounting Bulletin No. 108, “Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements” (SAB No. 108), which provides interpretive
      guidance on how the effects of the carryover or reversal of prior year
      misstatements should be considered in quantifying a current year misstatement.
      The SEC staff believes that registrants should quantify errors using both a
      balance sheet and an income statement approach and evaluate whether either
      approach results in quantifying a misstatement that, when all relevant
      quantitative and qualitative factors are considered, is material. The provisions
      of SAB No. 108 are effective for the Company beginning in the first quarter
      of
      2007. The Company does not expect any impact to our consolidated financial
      statements up adoption of SAB No. 108.





In
      June
      2006, FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income
      Taxes”, an interpretation of FASB Statement 109 Accounting for Income Taxes, was
      issued.  FIN No. 48 describes accounting for uncertainty in income taxes,
      and includes a recognition threshold and measurement attribute for recognizing
      the effect of a tax position taken or expected to be taken in a tax return.
       FIN No. 48 is effective for fiscal years beginning after December 15,
      2006.  The Company adopted FIN No. 48 on January 1, 2007, but is not
      expected to have a material effect on the Company’s financial condition, results
      of operations, or cash flows.





In
      December 2004, SFAS No. 123 “Accounting for Stock-Based Compensation” was
      revised (“SFAS No. 123R”). SFAS No. 123R focuses primarily on accounting for
      transactions in which an entity obtains employee services in share-based payment
      transactions and requires that companies record compensation expense for
      employee stock option awards. SFAS No. 123R is effective for annual periods
      beginning after June 15, 2005. There was no effect on the Company of adoption
      of
      SFAS No. 123R.





In
      February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments - an amendment of FASB Statements No. 133 and 140”. SFAS
      No. 155 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging
      Activities”, and SFAS No. 140, “Accounting for Transfers and Servicing of
      Financial Assets and Extinguishments of Liabilities”. This Statement also
      resolves issues addressed in Statement No. 133 Implementation Issue No. D1,
      “Application of Statement 133 to Beneficial Interests in Securitized Financial
      Assets.” SFAS No. 155 permits fair value remeasurement for any hybrid financial
      instrument that contains an embedded derivative that otherwise would require
      bifurcation and clarifies which interest-only strips and principal-only strips
      are not subject to the requirements of SFAS No. 133. SFAS No. 140 is amended
      to
      eliminate the prohibition on a qualifying special-purpose entity from holding
      a
      derivative financial instrument that pertains to a beneficial interest other
      than another derivative financial instrument. SFAS No. 155 is effective for
      all
      financial instruments acquired or issued during fiscal years beginning after
      September 15, 2006. The Company does not expect this statement to have a
      material impact on its consolidated financial statements.





**ITEM
      7. FINANCIAL STATEMENTS**




The
      full
      text of our audited consolidated financial statements as of December 31, 2006
      and 2005 begins on page F-1 of this Annual Report on Form 10-KSB.




37




**ITEM
      8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTS ON ACCOUNTING AND FINANCIAL
      MATTERS**




On
      August
      28, 2006, our board of directors elected to continue the existing relationship
      of our new subsidiary Orion with Hein & Associates LLP, as our Independent
      Registered Public Accounting Firm. Additionally, concurrent with the decision
      to
      maintain our relationship with Hein & Associates LLP, our board of directors
      approved the dismissal of Mantyla McReynolds as our independent
      auditor.




No
      accountant’s report issued by Mantyla McReynolds on the financial statements for
      either of the past two (2) years contained an adverse opinion or a disclaimer
      of
      opinion or was qualified or modified as to uncertainty, audit scope or
      accounting principles, except for a going concern opinion expressing substantial
      doubt about the ability of us to continue as a going concern.




During
      the fiscal year ended December 31, 2005 and from January 1, 2006 to August
      28,
      2006, there were no disagreements with Mantyla McReynolds on any matter of
      accounting principles or practices, financial disclosure, or auditing scope
      or
      procedure. From August 28, 2006 to December 31, 2006, there were no
      disagreements with Hein & Associates on any matter of accounting principles
      or practices, financial disclosure, or auditing scope or procedure. There were
      no reportable events, as described in Item 304(a)(1)(v) of Regulation S-B,
      during our two most recent fiscal years ended December 31, 2006 and
      2005.




We
      furnished a copy of foregoing disclosure to Mantyla McReynolds and requested
      Mantyla McReynolds to furnish us with a letter addressed to the Securities
      and
      Exchange Commission stating whether it agrees with the statements made by us
      herein in response to Item 304(a) of Regulation S-B and, if not, stating the
      respect in which it does not agree. A copy of the letter was filed by us as
      Exhibit 16.1 to the Current Report on Form 8-K filed on August 29,
      2006.




**ITEM
      8A. CONTROLS AND PROCEDURES**




***Evaluation
      of Disclosure Controls and Procedures***




We
      carried out an evaluation, under the supervision and with the participation
      of
      our management, including our Chief Executive Officer and Chief Financial
      Officer, of the effectiveness of the design and operation of our disclosure
      controls and procedures. Based upon that evaluation, our Chief Executive Officer
      and Chief Financial Officer concluded that our disclosure controls and
      procedures are effective. Disclosure controls and procedures are designed to
      ensure that information required to be disclosed in our reports filed or
      submitted under the Securities Exchange Act of 1934 is recorded, processed,
      summarized and reported within the time periods specified in Securities and
      Exchange Commission rules and forms.




***Changes
      in internal controls***




Our
      management, with the participation of our chief executive officer and chief
      financial officer, evaluated the effectiveness of our disclosure controls and
      procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
      Act)
      as of December 31, 2006.




In
      connection with its audit of, and in the issuance of its report on our financial
      statements for the year ended December 31, 2006, Hein & Associates LLP,
      included in their report to our audit committee and management, a communication
      that identified certain items that it considers deficient in our internal
      control over financial reporting. Hein, pursuant to standards established by
      the
      Public Company Accounting Oversight Board, identified, as a material weakness,
      a
      deficiency in the design of our internal control over financial reporting.
      A
      deficiency in design exists when a control necessary to meet the control
      objective is missing, or when an existing control is not properly designed
      so
      that even if the control operates as designed, the control objective is not
      always met.. As a result of the deficiency in design of internal controls,
      certain legal and consulting expenses that were incurred during fiscal 2006
      were
      not accrued as of December 31, 2006 which deficiency resulted in an adjustment
      to our financial statements.




38


Based
      on
      this evaluation of our internal controls, we have taken all necessary steps
      to
      remedy this deficiency in design over internal control by putting in place
      processes that would help us identify and record all our accrued liabilities.
      While remediating this design deficiency is a very high priority for our
      management and our audit committee, we cannot assure you that our independent
      registered public accounting firm will agree with our management’s assessment
      that we have remediated it or that we will not encounter further instances
      of
      breakdowns in our internal control over financial reporting or disclosure
      controls and procedures.




Other
      than what was discussed above, no other change in our internal controls over
      financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
      Exchange Act) occurred during the fiscal year ended December 31, 2006 that
      has
      materially affected, or is reasonably likely to materially affect, our internal
      controls over financial reporting.




**ITEM
      8B. OTHER INFORMATION**




None.




**PART
      III**




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




Information
      required by Item 9 of Part III is included in our Proxy Statement relating
      to
      our 2007 Annual Meeting of Stockholders, and is incorporated herein by
      reference. Information relating to our Code of Ethics, governance and compliance
      with Section 16(a) of the Exchange is set forth in our Proxy Statement to be
      relating to our 2007 Annual Meeting of Shareholders and is incorporated herein
      by reference.




**ITEM
      10. EXECUTIVE COMPENSATION**




Information
      required by Item10 of Part III is included in our Proxy Statement relating
      to
      our 2007 Annual Meeting of Stockholders and is incorporated herein by
      reference.




**ITEM
      11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS**




Information
      required by Item11 of Part III is included in our Proxy Statement relating
      to
      our 2007 Annual Meeting of Stockholders and is incorporated herein by
      reference.




**ITEM
      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE**




Information
      required by Item 12 of Part III is included in our Proxy Statement relating
      to
      our 2007 Annual Meeting of Stockholders and is incorporated herein by
      reference.




**ITEM
      13. EXHIBITS**




Exhibits
      (including those incorporated by reference).




***Exhibit
      No.***  ***Description***




**Exhibit
                No.**
            
            **Title
                of Agreement/Document**2.1
            
            Securities
                Exchange Agreement, dated August 28, 2006, among Orion, Orion Ethanol,
                LLC
                and members of Orion Ethanol, LLC. [Filed as Exhibit 2.1 to the Form
                8-K
                filed with Commission on August 29, 2006].2.2
            
            Unit
                Exchange Agreement, dated as of August 28, 2006, among Orion Ethanol,
                LLC
                and of the members of Orion Development, LLC. [Filed as Exhibit 2.2
                to the
                Form 8-K filed with the Commission on August 29, 2006].




39




2.3
            
            Unit
                Exchange Agreement, dated August 28, 2006, among Orion Ethanol, LLC
                and
                each of the member of Gateway Holdco, LLC. [Filed as Exhibit 2.3
                to the
                Form 8-K filed with the Commission on August 29, 2006].3.1
            
            Amended
                Articles of Incorporation. [Filed as Exhibit to Information Statement
                on
                Schedule 14C filed with the Commission on October 23, 2006 (Change
                of
                Name); Filed as Exhibit to Information Statement on Schedule 14C
                with the
                Commission on December 21, 2006 (Blank check shares)].3.2
            
            Amended
                and Restated Bylaws [Filed as Exhibit 3.1 to Form the Form 8-K filed
                with
                the Commission on October 10, 2006].3.3
            
            Amended
                and Restated Orion Ethanol, LLC Operating Agreement, dated August
                28,
                2006. [Filed as Exhibit 3.3 to the Form 8-K filed with the Commission
                on
                August 29, 2006].3.4
            
            Gateway
                Holdco, LLC Operating Agreement, dated March 30, 2006. [Filed as
                Exhibit
                3.4 to the Form 8-K filed with the Commission on August 29,
                2006].3.5
            
            Gateway
                Ethanol, LLC Operating Agreement, dated March 30, 2006. [Filed as
                Exhibit
                3.5 to the Form 8-K filed with the Commission on August 29,
                2006].3.6
            
            Amended
                and Restated Orion Development, LLC Operating Agreement, dated August
                28,
                2006. [Filed as Exhibit 3.6 to the Form 8-k filed with the Commission
                on
                August 29, 2006].4.1
            
            Form
                of Senior 8% Convertible Note. [Filed as Exhibit 4.1 to the Form
                8-K filed
                with the Commission on November 7, 2006].10.1
            
            Financial
                Advisory Agreement, dated May 18, 2006, between Halter Financial
                Group,
                L.P. and Orion Ethanol. [Filed as Exhibit 10.1 to the Form 8-K filed with
                the Commission on August 29, 2006].10.2
            
            Ground
                Lease, dated March 30, 2006, between Gateway Ethanol and Power To
                Go,
                L.L.C. [Filed as Exhibit 10.2 to the Form 8-K filed with the Commission
                on
                August 29, 2006].10.3
            
            Sublease
                Agreement, dated March 30, 2006, between Power to Go, L.L.C. and
                Gateway
                Ethanol, LLC. [Filed as Exhibit 10.3 to the Form 8-K filed with the
                Commission on August 29, 2006].10.4
            
            Loan
                and Security Agreement, dated March 30, 2006 between Gateway Ethanol
                and
                Dougherty Funding. [Filed as Exhibit 10.14 to the Form 10-QSB filed
                with
                the Commission on November 14, 2006. Incorrect document previously
                filed
                as Exhibit 10.4 to the Form 8-K filed with the Commission on August
                29,
                2006].10.5
            
            Tax
                Increment Secured Promissory Note by Gateway Ethanol, LLC in favor
                of
                Dougherty Funding, LLC in the principal amount of $11,340,000. [Filed
                as
                Exhibit 10.5 to the Form 8-K filed with the Commission on August
                29,
                2006].10.6
            
            Working
                Capital Facilities Term Sheet, dated February 2, 2006, between Gateway
                Ethanol and Noble Americas. [Filed as Exhibit 10.6 to the Form 8-K
                filed
                with the Commission on August 29, 2006].




40




10.7
            
            Agreement
                for Letter of Credit, dated March 29, 2006, between Gateway Ethanol
                and
                Noble Americas. [Filed as Exhibit 10.7 to the Form 8-K filed with
                the
                Commission on August 29, 2006].10.8
            
            Subordinated
                Loan Agreement, dated March 30, 2006, between Gateway Ethanol, LLC
                and
                Lurgi PSI. [Filed as Exhibit 10.8 to the Form 8-K filed with the
                Commission on August 29, 2006].10.9
            
            Employment
                Agreement between Orion Ethanol, LLC and Dr. Patrick N. Barker, dated
                August 15, 2006. [Filed as Exhibit 10.9 to the Form 8-K filed with
                the
                Commission on August 29, 2006].10.10
            
            Employment
                Agreement between Orion Ethanol, LLC and H. Richard Jarboe, dated
                August
                15, 2006. [Filed as Exhibit 10.10 to the Form 8-K filed with the
                Commission on August 29, 2006].10.11
            
            Employment
                Agreement between Orion Ethanol, LLC and Lane Hamm, dated August
                15, 2006.
                [Filed as Exhibit 10.11 to the Form 8-K filed with the Commission
                on
                August 29, 2006].10.12
            
            Employment
                Agreement between Orion Ethanol, LLC and Joshua Barker, dated August
                15,
                2006. [Filed as Exhibit 10.12 to the Form 8-K filed with the Commission
                on
                August 29, 2006].10.13
            
            Employment
                Agreement between Orion Ethanol, LLC and Timothy Barker, dated August
                15,
                2006. [Filed as Exhibit 10.13 to the Form 8-K filed with the Commission
                on
                August 29, 2006].10.14
            
            Property
                Tax Increment Rebate Agreement dated as of February 1, 2006 between
                Pratt
                County, Kansas and Gateway Ethanol, LLC. [Filed as Exhibit 10.14
                to the
                Form 8-K filed with the Commission on August 29, 2006].10.15
            
            Natural
                Gas Risk Management Advisory Agreement, dated March 30, 2006, by
                and
                between Cargill Commodity Services, Inc., d/b/a Cargill Energy Services
                and Gateway Ethanol, LLC and Cargill, Inc. [Filed as Exhibit 10.15
                to the
                Form 8-K filed with the Commission on October 6, 2006, portions of
                which
                exhibit were omitted pursuant to a request for confidential
                treatment].10.16
            
            Energy
                Supply Representation and Management Agreement, dated as of March
                30,
                2006, by and between Cargill, Inc., through its Cargill Energy and
                Risk
                Management Solutions division and Gateway Ethanol. [Filed as Exhibit
                10.16
                to the Form 8-K filed with the Commission on October 6, 2006, portions
                of
                which exhibit were omitted pursuant to a request for confidential
                treatment].10.17
            
            Corn
                Supply Agreement, dated as of March 30, 2006, by and between Cargill,
                Inc., through its AgHorizons Business Unit and Gateway Ethanol. [Filed
                as
                Exhibit 10.17 to the Form 8-K filed with the Commission on October
                6,
                2006, portions of which exhibit were omitted pursuant to a request
                for
                confidential treatment].10.18
            
            Futures
                Advisory Agreement, dated as of March 30, 2006, by and between Cargill
                Commodity Services, Inc d/b/a Cargill Direct and Gateway Ethanol,
                LLC.
                [Filed as Exhibit 10.15 to the Form 8-K filed with the Commission
                on
                October 6, 2006, portions of which exhibit were omitted pursuant
                to a
                request for confidential treatment].




41




10.19
            
            CD
                Protein and Grain Risk Management Program Disclosure Document dated
                as of
                January 12, 2006. [Filed as Exhibit 10.19 to the Form 8-K filed with
                the
                Commission on October 6, 2006, portions of which exhibit were omitted
                pursuant to a request for confidential treatment].10.20
            
            Ethanol
                Purchase and Sale Agreement, dated as of December 14, 2005, by and
                between
                Noble Americas Corp. and Gateway Ethanol, LLC. [Filed as Exhibit
                10.15 to
                the Form 8-K filed with the Commission on October 6, 2006, portions
                of
                which exhibit were omitted pursuant to a request for confidential
                treatment].10.21
            
            Master
                Agreement dated, as of March 30, 2006, by and between Cargill, Inc.,
                Cargill Commodity Services, Inc. and Gateway Ethanol, LLC. [Filed
                as
                Exhibit 10.21 to the Form 8-K filed with the Commission on October
                6,
                2006].10.22
            
            Base
                Contract for Sale and Purchase of Natural Gas, dated as of March
                30, 2006,
                by and between Cargill, Inc and Gateway Ethanol, LLC. [Filed as Exhibit
                10.22 to the Form 8-K filed with the Commission on October 6,
                2006].10.23
            
            Distillers
                Grains Marketing Agreement, dated as of March 30, 2006, by and between
                Cargill, Inc and Gateway Ethanol, LLC. [Filed as Exhibit 10.23 to
                the Form
                8-K filed with the Commission on October 6, 2006].10.24
            
            Option
                to Purchase Real Property Agreement, dated as of October 5, 2006,
                by and
                between Charter Equities, Inc. and Orion Ethanol, LLC. [Filed as
                Exhibit
                10.1 to the Form 8-K filed with the Commission on October 25,
                2006].10.25
            
            Form
                of Subscription Agreement. [Filed as Exhibit 10.1 to the Form 8-K
                filed
                with the Commission on November 7, 2006].10.26
            
            Registration
                Rights Agreement, dated November 3, 2006, among Orion Ethanol, Inc.
                and
                the several investors party thereto. [Filed as Exhibit 10.2 to the
                Form
                8-K filed with the Commission on November 7, 2006].10.27
            
            Promissory
                Notes dated September 1, 2006 by Orion Ethanol, LLC and each of Patrick
                Barker, Timothy Barker and Jerry Nash respectively.10.28
            
            Orion
                Ethanol, Inc. 2006 Equity Incentive Plan. [Filed as Exhibit 10.1
                to the
                Form 8-K filed with the Commission on December 4,
                2006].14.1
            
            Code
                of Ethics. [Filed as Exhibit 14.1 to the Form 8-K filed with the
                Commission on August 29, 2006].16.1
            
            Letter
                from Mantyla McReynolds regarding change in certifying accountants.
                [Filed
                as Exhibit 16.1 to the Form 8-K filed with the Commission on August
                29,
                2006].21.1
            
            Subsidiaries.
                [Filed as Exhibit 21.1 to the Form 8-K filed with the Commission
                on August
                29, 2006].31.1*
            
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.31.2*
            
            Certification
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.32.1*
            
            Certification
                of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002.




42




32.2*
            
            Certification
                of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002.







*
      Filed
      herewith.





**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**




Information
      required by Item 14 of Part III is included in our Proxy Statement relating
      our
      2007 Annual Meeting of Stockholders and is incorporated herein by
      reference.


43





**ORION
        ETHANOL, INC**
 **(A
        development Stage Company)**
 
 **INDEX
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 PageReport
                  of Independent Registered Public Accounting Firm
              F-2Consolidated
                  Balance Sheets
              F-3Consolidated
                  Statements of Operations
              F-4Consolidated
                  Statements of Shareholders’ Equity
              F-5Consolidated
                  Statements of Cash Flows
              F-6Notes
                  to Consolidated Financial Statements
              F-7
 
 
 F-1
 **REPORT
          OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 To
          the
          Board of Directors
 Orion
          Ethanol, Inc.
 
 We
          have
          audited the consolidated balance sheets of Orion Ethanol, Inc. as of December
          31, 2006 and 2005, and the related consolidated statements of operations,
          shareholders’equity and cash flows for each of the years in the two year period
          ended December 31, 2006 and for the period from January 1, 2003 (inception
          of
          development stage) to December 31, 2006. These financial statements are
          the
          responsibility of the Company's management. Our responsibility is to express
          an
          opinion on these financial statements based on our audits.
 
 We
          conducted our audits in accordance with the standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audits to obtain reasonable assurance about whether the
          financial statements are free of material misstatement. An audit includes
          examining, on a test basis, evidence supporting the amounts and disclosures
          in
          the financial statements. An audit also includes assessing the accounting
          principles used and significant estimates made by management, as well as
          evaluating the overall financial statement presentation. We believe that
          our
          audits provide a reasonable basis for our opinion.
 
 In
          our
          opinion, the consolidated financial statements referred to above present
          fairly,
          in all material respects, the consolidated financial position of Orion
          Ethanol,
          Inc. as of December 31, 2006 and 2005, and the results of their operations
          and
          their cash flows for each of the years in the two year period ended December
          31,
          2006 and for the period from January 1, 2003 (inception of development
          stage) to
          December 31, 2006, in conformity with U.S. generally accepted accounting
          principles.
 
 
 *HEIN* *&
ASSOCIATES
          LLP*
 
 Houston,
          Texas
 March
          19,
          2007
 
 F-2
 
 **Orion
        Ethanol, Inc.**
 (A
        Development Stage Company)
 CONSOLIDATED
        BALANCE SHEETS
 (In
        thousands)
  December
                  31,
              
              December
                  31,2006
              
              2005**ASSETS**CURRENT
                  ASSETSCash
                  and cash equivalents
              
              $
              9,480
              
              $
              124Prepaid
                  expenses
              
              
              109
              
              
              -Note
                  receivable - related parties
              
              
              5
              
              
              -Total
                  current assets
              
              
              9,594
              
              
              124PROPERTY
                  AND EQUIPMENTLand
                  and improvements
              
              
              2,692
              
              
              2,675Building
                  and improvements
              
              
              301
              
              
              -Construction
                  in progress
              
              
              42,466
              
              
              1,885Deposits
                  on construction
              
              
              4,416
              
              
              -New
                  site development
              
              
              548
              
              
              -50,423
              
              
              4,560Less
                  accumulated depreciation and amortization
              
              
              (23
              )
              
              -Net
                  property and equipment
              
              
              50,400
              
              
              4,560OTHER
                  ASSETSWater
                  rights
              
              
              1,166
              
              
              1,166Land
                  and water options
              
              
              173
              
              
              -Loan
                  costs, net of accumulated amortization of $128 in 2006
              
              
              2,543
              
              
              -Long-term
                  deposits
              
              
              428
              
              
              -4,310
              
              
              1,166TOTAL
                  ASSETS
              
              $
              64,304
              
              $
              5,850**LIABILITIES
                  AND SHAREHOLDERS' EQUITY**CURRENT
                  LIABILITIESAccounts
                  payable
              
              $
              5,723
              
              $
              -Accrued
                  expenses
              
              
              511
              
              
              -Advances
                  payable-related parties
              
              
              552
              
              
              -Accrued
                  interest payable
              
              
              161
              
              
              -Current
                  portion of long-term debt
              
              
              165
              
              
              -Total
                  current liabilities
              
              
              7,112
              
              
              -LONG-TERM
                  DEBTLong-term
                  debt
              
              
              28,459
              
              
              -Senior
                  convertible debt, net of unamortized discount of $11,429
              
              
              1,001
              
              
              -Accrued
                  interest
              
              
              158
              
              
              -29,618
              
              
              -Minority
                  interest in Gateway Holdco, LLC
              
              
              8,142
              
              
              -COMMITMENTS
                  AND CONTINGENCIES (See Note G)SHAREHOLDERS'
                  EQUITYPreferred
                  Stock; $.001 par value; 10,000,000 authorized; noneissued
                  and outstanding
              
              
              -
              
              
              -Common
                  Stock; $.001 par value; 100,000,000 authorized; 32,661,025 and
                  2,303,285issued
                  and outstanding at December 31, 2006 and 2005,
                  respectively
              
              
              33
              
              
              3Additional
                  paid-in capital
              
              
              30,758
              
              
              7,795Accumulated
                  deficit during development stage
              
              
              (11,359
              )
              
              (1,948
              )Total
                  shareholders' equity
              
              
              19,432
              
              
              5,850TOTAL
                  LIABILITIES & SHAREHOLDERS' EQUITY
              
              $
              64,304
              
              $
              5,850
 See
        accompanying notes to these consolidated financial statements.
  F-3
  **Orion
          Ethanol, Inc.**
 (A
          Development Stage Company)
 CONSOLIDATED
          STATEMENTS OF OPERATIONS
 (In
          thousands)
  For
                    the year ended December 31, 2006
                
                For
                    the year ended December 31, 2005
                
                For
                    the Period from January 1, 2003 (inception) through December
                    31,
                    2006REVENUESManagement
                    fee income
                
                $
                46
                
                $
                -
                
                $
                46OPERATING
                    EXPENSESLabor,
                    contract labor and payroll taxes
                
                
                475
                
                
                245
                
                
                727Legal,
                    accounting and consulting
                
                
                1,533
                
                
                323
                
                
                2,973Non-cash
                    consulting expense
                
                
                5,553
                
                
                -
                
                
                5,553Severance
                
                
                511
                
                
                -
                
                
                511Other
                
                
                389
                
                
                91
                
                
                6488,461
                
                
                659
                
                
                10,412LOSS
                    FROM OPERATIONS
                
                
                (8,415
                )
                
                (659
                )
                
                (10,366
                )OTHER
                    INCOME AND (EXPENSES)Interest
                    expense
                
                
                (1,265
                )
                
                -
                
                
                (1,265
                )Interest
                    income
                
                
                196
                
                
                -
                
                
                199Other
                
                
                (70
                )
                
                -
                
                
                (70
                )Loss
                    before minority interest
                
                
                (9,554
                )
                
                (659
                )
                
                (11,502
                )Minority
                    interest in net loss of Gateway Holdco, LLC
                
                
                143
                
                
                -
                
                
                143NET
                    LOSS
                
                $
                (9,411
                )
                $
                (659
                )
                $
                (11,359
                )BASIC
                    AND DILUTED LOSS PER COMMON SHARE
                
                $
                (0.42
                )
                $
                (0.29
                )
                $
                (1.78
                )WEIGHTED
                    AVERAGE COMMON SHARES OUTSTANDING:BASIC
                    AND DILUTED
                
                
                22,293
                
                
                2,303
                
                
                6,368
 See
          accompanying notes to these consolidated financial
          statements.
 F-4
 
 **Orion
          Ethanol, Inc.**
 (A
          Development Stage Company)
 CONSOLIDATED
          STATEMENTS OF SHAREHOLDERS' EQUITY
 (In
          thousands, except share data)
  Common
                    Shares
                
                Common
                    Stock Par Value
                
                Additional
                    Paid-in Capital
                
                Accumulated
                    Deficit During Development Stage
                
                Total
                    Shareholder's Equity**Balance
                    January 1, 2003**Issuance
                    of common shares for cash ($3.04 per share)
                
                
                296,403
                
                $
                1
                
                $
                899
                
                $
                -
                
                $
                900Issuance
                    of common shares for property ($2.99 per share)
                
                
                14,392
                
                
                -
                
                
                43
                
                
                
                
                
                43Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                (289
                )
                
                (289
                )**Balance
                    December 31, 2003**
                
                
                310,795
                
                
                1
                
                
                942
                
                
                (289
                )
                
                654Issuance
                    of common shares for cash ($3.04 per share)
                
                
                1,992,490
                
                
                2
                
                
                6,048
                
                
                
                
                
                6,050Distribution
                
                
                
                
                
                
                
                
                (58
                )
                
                
                
                
                (58
                )Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                (1,000
                )
                
                (1,000
                )**Balance
                    December 31, 2004**
                
                
                2,303,285
                
                
                3
                
                
                6,932
                
                
                (1,289
                )
                
                5,646Distribution
                
                
                
                
                
                
                
                
                (100
                )
                
                
                
                
                (100
                )Step-up
                    in basis-change in control
                
                
                
                
                
                
                
                
                963
                
                
                
                
                
                963Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                (659
                )
                
                (659
                )**Balance
                    December 31, 2005**
                
                
                2,303,285
                
                
                3
                
                
                7,795
                
                
                (1,948
                )
                
                5,850Issuance
                    of common shares for cash ($.17 per share)
                
                
                28,969,455
                
                
                29
                
                
                4,971
                
                
                
                
                
                5,000Shares
                    issued for acquisition costs ($4.05 per share)
                
                
                1,371,000
                
                
                1
                
                
                5,552
                
                
                
                
                
                5,553Shares
                    issued in reverse merger with RTO ($.58 per share)
                
                
                17,285
                
                
                -
                
                
                10
                
                
                
                
                
                10Beneficial
                    conversion feature of convertible debt
                
                
                
                
                
                
                
                
                12,430
                
                
                
                
                
                12,430Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                (9,411
                )
                
                (9,411
                )**Balance
                    December 31, 2006**
                
                
                32,661,025
                
                $
                33
                
                $
                30,758
                
                $
                (11,359
                )
                $
                19,432
 See
          accompanying notes to these consolidated financial statements.
  F-5
 **Orion
          Ethanol, Inc.**
 (A
          Development Stage Company)
 CONSOLIDATED
          STATEMENTS OF CASH FLOWS
 (In
          thousands)
  For
                    the year ended December 31, 2006
                
                For
                    the year ended December 31, 2005
                
                For
                    the period from January 1, 2003 (inception) through December
                    31,
                    2006OPERATING
                    ACTIVITIESNet
                    loss
                
                $
                (9,411
                )
                $
                (659
                )
                $
                (11,359
                )Adjustments
                    to reconcile net loss to net cashprovided
                    by (used in) operating activities:Depreciation
                    and amoritzation
                
                
                23
                
                
                -
                
                
                23Minority
                    interest in net loss of Gateway Holdco, LLC
                
                
                (143
                )
                
                -
                
                
                (143
                )Non-cash
                    consulting expense
                
                
                5,553
                
                
                -
                
                
                5,553Amortization
                    of discount on convertible debt
                
                
                1,001
                
                
                -
                
                
                1,001Water
                    option expiration
                
                
                75
                
                
                -
                
                
                75Severance
                    expense
                
                
                511
                
                
                -
                
                
                511Changes
                    in operating assets and liabilities:Prepaid
                    expenses and other current assets
                
                
                (114
                )
                
                -
                
                
                (114
                )Accounts
                    payable and accrued expenses
                
                
                6,042
                
                
                (549
                )
                
                6,042Deposits
                
                
                (428
                )
                
                
                
                
                (428
                )Net
                    cash provided by (used in) operating activities
                
                
                3,109
                
                
                (1,208
                )
                
                1,161INVESTING
                    ACTIVITIESCapital
                    expenditures
                
                
                (41,567
                )
                
                (1,474
                )
                
                (46,345
                )Deposits
                    on construction
                
                
                (4,416
                )
                
                -
                
                
                (4,416
                )Net
                    cash used in investing activities
                
                
                (45,983
                )
                
                (1,474
                )
                
                (50,761
                )FINANCING
                    ACTIVITIESLoan
                    costs
                
                
                (2,671
                )
                
                -
                
                
                (2,671
                )Proceeds
                    from long-term debt
                
                
                28,624
                
                
                -
                
                
                28,624Proceeds
                    from convertible debt
                
                
                12,430
                
                
                -
                
                
                12,430Issuance
                    of common stock for cash
                
                
                5,000
                
                
                -
                
                
                12,008Issuance
                    of stock for acquisition
                
                
                10
                
                
                -
                
                
                10Distributions
                
                
                -
                
                
                (100
                )
                
                (158
                )Contribution
                    from minority interest
                
                
                8,285
                
                
                -
                
                
                8,285Advances
                    from related parties
                
                
                552
                
                
                -
                
                
                552Net
                    cash provided by (used in) financing activities
                
                
                52,230
                
                
                (100
                )
                
                59,080Net
                    increase (decrease) in cash and cash equivalents
                
                
                9,356
                
                
                (2,782
                )
                
                9,480Cash
                    and cash equivalents at beginning of period
                
                
                124
                
                
                2,906
                
                
                -Cash
                    and cash equivalents at end of period
                
                $
                9,480
                
                $
                124
                
                $
                9,480
 See
          accompanying notes to these consolidated financial statements.
 F-6
  **Orion
        Ethanol, Inc.**
 (A
        Development Stage Company)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 December
        31, 2006 and 2005
 
 **NOTE
        A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
 
 *Organization*
 
 Orion
        Ethanol, Inc. (the Company) was originally incorporated in the State of Utah
        on
        February 1, 1979, under the name Faro Mining and Milling Corporation for
        the
        purpose of developing mining properties. In 1986, the Company’s name was changed
        to T.W.A.R., Inc. and the mining business was discontinued. On June 7, 1995,
        the
        Company’s name was changed to LenTech Imaging, Inc. The Company had no active
        business operations from 1986 until August 28, 2006, when a reverse acquisition
        transaction with Orion Ethanol, LLC (Orion) was completed, as described
        below.
  On
        April
        19, 2006, the Board of Directors approved and authorized the following events
        (i) a 1,000 to 1 reverse stock split of common stock, (ii) a change of the
        state
        of incorporation from Utah to Nevada and (iii) an increase in authorized
        capital
        stock from 20,000,000 to 110,000,000 shares (100,000,000 common and 10,000,000
        preferred) at $.001 par value per share, and (iv) the change of name to “RTO
        Holdings, Inc.”
  On
        June
        16, 2006, the Company entered into an agreement to merge with and into a
        newly
        formed Nevada corporation called RTO Holdings, Inc., (RTO). The merger became
        effective after the filing of the Articles of Acquisition on June 16,
        2006.
  On
        June
        21, 2006, Jeff Jenson, the then-principal shareholder, entered into a Stock
        Purchase Agreement with Halter Financial Investments, L.P., a Texas limited
        partnership (Halter Financial). Pursuant to the Stock Purchase Agreement,
        Mr.
        Jenson sold 11,000 post-reverse split shares of common stock to Halter Financial
        for a purchase price of $650,000. As a condition of the consummation of the
        Stock Purchase Agreement, an additional 1,335,000 post-reverse split shares
        of
        common stock was sold to Halter Financial and 25,000 post-reverse split shares
        of common stock to Tryant, LLC, an entity owned and controlled by Mr. Jenson,
        at
        a price of $0.01 per share. As a result of these transactions, Halter Financial
        became the holder of approximately 98% of the Company’s issued and outstanding
        common stock. Upon the consummation of the transactions under the Stock Purchase
        Agreement and following the resignation of the incumbent officers and directors,
        Timothy Halter, the principal of Halter Financial, became the Company’s officer
        and director.
  Effective
        June 21, 2006, the Company’s symbol on the OTC Bulletin Board was changed to
“RTOH.”
  F-7
  **Orion
        Ethanol, Inc.**
 (A
        Development Stage Company)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 **NOTE
        A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)**
 
 *Reverse
        Acquisition of Orion*
  On
        August
        28, 2006, (the Acquisition Date) the Company entered into a Securities Exchange
        Agreement (the Securities Exchange Agreement) with Orion and Orion’s members
        pursuant to which the Company acquired all of the issued and outstanding
        membership units of Orion in exchange for a total of 31,272,740 shares of
        common
        stock, which constituted 95.75% of the Company’s issued and outstanding common
        stock. As a result of the foregoing transactions, Halter Financial’s holdings of
        the Company’s common stock was reduced from approximately 98% to approximately
        4% of issued and outstanding common stock. Upon consummation of the exchange
        transaction, Mr. Halter resigned as the Company’s sole officer and director and
        Patrick N. Barker was appointed as sole director and officer.
  *Background
        of Orion Ethanol, LLC* .
  Orion
        was
        formed on August 28, 2006 as a holding company for membership interests in
        Gateway Holdco, LLC, a Kansas limited liability company and Orion Development,
        LLC, a Kansas limited liability company. In August 2006, prior to, and in
        contemplation of, the consummation of the transactions contemplated by the
        Securities Exchange Agreement, the members of Gateway Holdco (the Former
        Gateway
        Members) and the members of Orion Development (the Former Orion Development
        Members) exchanged their units in Gateway Holdco and Orion Development,
        respectively, for units of Orion (the Unit Exchanges). Following the Unit
        Exchanges, Orion became the parent of Gateway Holdco (Orion owns 62% of Gateway
        Holdco with Indeck Energy Services, Inc. (Indeck), Noble Americas Corp. (Noble)
        and White Pines, LLC (White Pines) holding minority interests of 23.8%, 9.5%
        and
        4.7% respectively) and Orion Development (Orion owns 100% of Orion Development).
        Gateway Ethanol, LLC (Gateway), a Kansas limited liability company which
        was a
        wholly-owned subsidiary of Gateway Holdco became a majority-owned subsidiary
        of
        Orion.
 
 F-8
  **Orion
        Ethanol, Inc.**
 (A
        Development Stage Company)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 **NOTE
        A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        (continued)**
  *Post
        Reverse Acquisition*
  Following
        the reverse acquisition Orion became a wholly-owned subsidiary and the holding
        company for all of the Company’s commercial operations. Commercial operations
        constitute those of a renewable energy company focusing on commercial ethanol
        production. Ethanol, or ethyl alcohol, is 200-proof grain alcohol. An ethanol
        plant produces fuel-grade ethanol, which may be blended in a percentage with
        gasoline to make a finished motor fuel.
  Since
        the
        former members of Orion owned a majority of the issued and outstanding shares
        of
        the Company’s common stock after the reverse acquisition, the transaction was
        accounted for as a recapitalization of RTO Holdings where Orion is deemed
        to be
        the accounting acquirer and has adopted the capital structure of RTO. The
        assets
        and liabilities of RTO were therefore deemed to have been acquired by Orion
        from
        RTO, at the Acquisition Date. Accordingly, all financial information included
        in
        this report on Form 10-KSB prior to the Acquisition Date is that of Orion,
        as if
        Orion had been the registrant. The financial information since the Acquisition
        Date is that of RTO, Orion and other subsidiaries, consolidated.
  The
        Company does not have any active manufacturing operations and has not yet
        commenced the production of ethanol, however, Gateway Ethanol is currently
        constructing a 55 million gallon per year dry-grind ethanol plant near Pratt,
        Kansas (the Pratt facility). The Company has entered into agreements to acquire
        an aggregate of approximately 1,400 acres of land for the construction of
        ethanol production facilities at the following locations: Enid, Oklahoma,
        Shattuck, Oklahoma, Hugoton, Kansas and Colby Kansas. The air quality permits
        for the planned facilities in Enid, Oklahoma and Shattuck, Oklahoma were
        signed
        on October 18, 2006.
  Effective
        November 2, 2006, the Company’s name was changed to Orion Ethanol, Inc. to
        reflect the business as a renewable energy company focusing on commercial
        ethanol production. The new stock symbol is OEHL.
  F-9
  **Orion
        Ethanol, Inc.**
 (A
        Development Stage Company)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (continued)
  **NOTE
        A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)**
 
 *Principles
        of consolidation*
 
 The
        consolidated financial statements include the accounts of Orion Ethanol,
        Inc and
        wholly owned subsidiaries Orion Ethanol, LLC, Orion Development, LLC and
        a
        62.08% owned subsidiary, Gateway Holdco, LLC along with Holdco’s wholly owned
        subsidiary, Gateway Ethanol, LLC. All significant intercompany transactions
        and
        balances have been eliminated.
 
 *Use
        of estimates*
 
 Preparing
        financial statements in conformity with accounting principles generally accepted
        in the United States of America requires management to make estimates and
        assumptions that affect the reported amounts of assets and liabilities, the
        disclosure of contingent assets and liabilities at the date of the financial
        statements and the reported amounts of revenues and expenses during the
        reporting period. Actual results could differ from those estimates.
 
 *Cash
        and cash equivalents*
 
 The
        Company considers cash and cash equivalents to include all highly liquid
        investments with original maturities of three months or less.
 
 *Concentrations
        of credit risk*
  The
        Company’s cash balances are maintained in depository accounts with high quality
        financial institutions and, at times, may exceed federally insured limits.
        The
        Company does not believe it is exposed to significant credit risk as it relates
        to cash balances.
 
 *Debt
        service escrow*
  The
        senior debt agreement for the Pratt facility requires the maintenance of
        a debt
        service escrow. To fund this account, 75% of the excess cash flow from Gateway
        shall be deposited to the escrow account until the account balance reaches
        a
        minimum of $4,150,000. There was no excess cash flow as of December 31,
        2006.
 
 F-10
  **Orion
        Ethanol, Inc.**
 (A
        Development Stage Company)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 **NOTE
        A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)**
  *Fair
        value of financial instruments*
  The
        carrying amounts of financial instruments, including cash and cash equivalents,
        and accounts payable, approximate fair value because of the relatively short
        maturity of these instruments. The carrying value of long-term debt, including
        the current portion, approximates fair value due to either the interest being
        determined by variable rates, repricing periodically, or because the fixed
        rate
        approximates the current market rate of interest available to the Company.
  *Property
        and equipment*
 
 Property
        and equipment are stated at cost. Construction in progress consists of amounts
        incurred for construction of the Pratt facility, capitalized interest and
        other
        costs that meet capitalization criteria. Capitalized interest was $999,000
        and
        $0 for the periods ending December 31, 2006, and December 31, 2005 respectively.
        Depreciation is computed using the straight-line method over the estimated
        useful lives of the assets when construction is completed and the assets
        are
        placed into service.
  *Impairment
        of long-lived assets*
 
 The
        Company periodically reviews the carrying value of its property and equipment
        to
        determine if events and circumstances exist indicating that the assets might
        be
        impaired. If facts or circumstances support the possibility of impairment,
        the
        Company will prepare projections of undiscounted cash flows, without interest
        charges, to determine if the amounts estimated to be generated by those assets
        are less than the carrying amounts of those assets. If impairment is indicated,
        an adjustment is made to the carrying amount based on the difference between
        the
        sum of the expected future discounted net cash flows and the carrying amount
        of
        the asset.
 
 *Intangible
        assets*
 
 Intangible
        assets consist of costs related to water rights and the option to purchase
        land
        and water. The water rights are considered to have infinite lives at this
        time
        and for that reason will have no corresponding amortization. The Company
        will
        evaluate the remaining useful life each year to determine whether events
        and
        circumstances continue to support an indefinite useful life. The land and
        water
        options have finite lives, one-year. Accordingly, the costs are capitalized
        as
        incurred and will be expensed should the options lapse without being exercised.
        If the options are exercised, the costs of the options will be capitalized
        as a
        portion of the cost to acquire the land and water for the project.
  F-11
  **Orion
        Ethanol, Inc.**
 (A
        Development Stage Company)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 **NOTE
        A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)**
 ****
 *Loan
        costs*
 
 Loan
        costs are capitalized and amortized over the term of the related debt using
        the
        interest method of amortization.
  *Organizational
        and start-up costs*
 
 Organizational
        and start-up costs including professional fees, travel, salaries, insurance
        and
        other costs are expensed as incurred.
 
 *Earnings
        Per Share*
  Earnings
        per share represents net loss available to common shareholders divided by
        the
        weighted average number of common shares outstanding during the period. Weighted
        average shares were calculated giving effect to the issuance of 31,272,740
        shares for all the outstanding units of Orion, as if the reverse acquisition
        had
        occurred at the beginning of each period presented.
  *Income
        taxes*
 
 Income
        taxes are accounted for in accordance with SFAS No. 109, “Accounting for Income
        Taxes”, which requires that deferred taxes be provided at enacted tax rates on
        temporary differences between the carrying amounts of assets and liabilities
        for
        financial and tax reporting purposes. A valuation allowance is recorded on
        net
        deferred tax assets when it is more likely than not that these assets will
        not
        be realized. The Company will file a federal income tax return, which will
        include the taxable income or loss from Orion, from the Acquisition Date.
        Prior
        to the merger transaction, Orion was a non-income tax paying entity. Taxable
        income or loss flowed through to the members, and the resulting tax liabilities
        are payable by the members.
  *Recent
        Accounting Pronouncements*
  In
        September 2006, the FASB issued Statement of Financial Accounting Standards
        (“SFAS”) No. 157, “Fair Value Measurements.”  This statement establishes a
        framework for measuring fair value in generally accepted accounting principles
        and expands disclosures about fair value measurements.  SFAS No. 157 is
        effective for financial statements issued for fiscal years beginning after
        November 15, 2007, and interim periods within those fiscal years.
  F-12
  **Orion
        Ethanol, Inc.**
 (A
        Development Stage Company)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 **NOTE
        A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)**
 
 *Recent
        Accounting Pronouncements (continued)*
 
 The
        provisions of SFAS No. 157 should be applied prospectively as of the beginning
        of the fiscal year in which SFAS No. 157 is initially applied, except in
        limited
        circumstances. The Company expects to adopt SFAS No. 157 beginning January
        1,
        2008.  The Company is currently evaluating the impact that this
        interpretation may have on our consolidated financial statements.
  In
        September 2006, the SEC released Staff Accounting Bulletin No. 108, “Considering
        the Effects of Prior Year Misstatements when Quantifying Misstatements in
        Current Year Financial Statements” (SAB No. 108), which provides interpretive
        guidance on how the effects of the carryover or reversal of prior year
        misstatements should be considered in quantifying a current year misstatement.
        The SEC staff believes that registrants should quantify errors using both
        a
        balance sheet and an income statement approach and evaluate whether either
        approach results in quantifying a misstatement that, when all relevant
        quantitative and qualitative factors are considered, is material. The provisions
        of SAB No. 108 are effective for the Company beginning in the first quarter
        of
        2007. The Company does not expect any impact to our consolidated financial
        statements up adoption of SAB No. 108.
  In
        June
        2006, FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income
        Taxes”, an interpretation of FASB Statement 109 Accounting for Income Taxes, was
        issued.  FIN No. 48 describes accounting for uncertainty in income taxes,
        and includes a recognition threshold and measurement attribute for recognizing
        the effect of a tax position taken or expected to be taken in a tax return.
         FIN No. 48 is effective for fiscal years beginning after
        December 15, 2006.  The Company adopted FIN No. 48 on January 1, 2007, but is
        not expected
        to have a material effect on the Company’s financial condition, results of
        operations, or cash flows.
  In
        December 2004, SFAS No. 123 “Accounting for Stock-Based Compensation” was
        revised (“SFAS No. 123R”). SFAS No. 123R focuses primarily on accounting for
        transactions in which an entity obtains employee services in share-based
        payment
        transactions and requires that companies record compensation expense for
        employee stock option awards. SFAS No. 123R is effective for annual periods
        beginning after June 15, 2005. There was no effect on the Company of adoption
        of
        SFAS No. 123R.
 
 F-13
  **Orion
        Ethanol, Inc.**
 (A
        Development Stage Company)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 **NOTE
        A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)**
 
 *Recent
        Accounting Pronouncements (continued)*
 
 In
        February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
        Financial Instruments - an amendment of FASB Statements No. 133 and 140”. SFAS
        No. 155 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging
        Activities”, and SFAS No. 140, “Accounting for Transfers and Servicing of
        Financial Assets and Extinguishments of Liabilities”. This Statement also
        resolves issues addressed in Statement No. 133 Implementation Issue No. D1,
        “Application of Statement 133 to Beneficial Interests in Securitized Financial
        Assets.” SFAS No. 155 permits fair value remeasurement for any hybrid financial
        instrument that contains an embedded derivative that otherwise would require
        bifurcation and clarifies which interest-only strips and principal-only strips
        are not subject to the requirements of SFAS No. 133. SFAS No. 140 is amended
        to
        eliminate the prohibition on a qualifying special-purpose entity from holding
        a
        derivative financial instrument that pertains to a beneficial interest other
        than another derivative financial instrument. SFAS No. 155 is effective for
        all
        financial instruments acquired or issued during fiscal years beginning after
        September 15, 2006. The Company does not expect this statement to have a
        material impact on its consolidated financial statements.
  **NOTE
        B - PREDECESSOR COMPANIES**
  Development
        of the Pratt ethanol plant site began in 2003 with the formation of Southwest
        Ethanol, LLC (Southwest) on February 27, 2003. On December 27, 2004, Southwest
        contributed all of the assets related to the future plant site to Wildcat
        Bio-Energy, LLC (Wildcat) in exchange for an 18% interest in Wildcat.
 
 Wildcat
        continued development of the Pratt ethanol plant site through 2005. In December
        2005, SNB Associates purchased the original Wildcat members’ interests resulting
        in a change in control of Wildcat. Due to the change in control, a step-up
        in
        basis of $963,000 was recorded to land and improvements. The step-up was
        based
        on a current appraisal.
 
 On
        March
        30, 2006, Wildcat contributed all of its assets related to the ethanol plant
        site to Gateway Holdco, LLC. These assets consisted of land, land improvements,
        water rights and construction in progress.
 
 Southwest
        and Wildcat are considered predecessor companies to Gateway Holdco, LLC and
        as
        such are presented in these financial statements as one entity.
 
 F-14
 
 **Orion
        Ethanol, Inc.**
 (A
        Development Stage Company)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 **NOTE
        C - LONG-TERM DEBT**
 
 Long-term
        debt consists of the following:
 December
                    31, 2006
                
                December
                    31, 2005Note
                    payable to senior lender secured by property tax rebate payments
                    of
                    Gateway Ethanol, variable interest rate at three-year U.S. Treasury
                    Note +
                    4.25% (8.7% at December 31, 2006), adjusted every three years,
                    monthly
                    interest payments through February 1, 2007 and annual principal
                    and
                    interest payments thereafter, with a final payment due February
                    1,
                    2017.
                
                $
                10,962,000
                
                $
                -Note
                    payable to Lurgi, secured by the plant assets under construction,
                    at 12.0%
                    interest, quarterly interest payments through February 2012 with
                    principal
                    due on March 30, 2011
                
                
                7,149,000
                
                
                -Note
                    payable to senior lender secured by property and assets of Gateway
                    Ethanol, variable interest rate at Prime Rate +1.75% (10.0% at
                    December
                    31,2006), adjusted monthly, principal and interest payments monthly
                    beginning October 1, 2007 with a maturity date of March 31,
                    2011.
                
                
                10,513,000
                
                
                -Subtotal
                
                
                28,624,000
                
                
                -Less:
                    Current maturities
                
                
                165,000
                
                
                -Total
                
                $
                28,459,000
                
                $
                -
 
 F-15
 
 **Orion
        Ethanol, Inc.**
 (A
        Development Stage Company)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 **NOTE
        C - LONG-TERM DEBT (continued)**
 
 Future
        maturities of long-term debt as of December 31, 2006 are as
        follows:
  Years
                  ending December 31,2007
              
              $
              165,0002008
              
              
              1,373,0002009
              
              
              1,595,0002010
              
              
              1,778,0002011
              
              
              9,129,000Thereafter
              
              
              14,584,000Total
              
              $
              28,624,000
 
 On
        March
        30, 2006, Gateway Ethanol and Dougherty Funding, LLC entered into a Tax
        Increment Secured Promissory Note to provide funding for the Pratt facility.
        Dougherty agreed to advance Gateway $11,340,000 against future revenues from
        a
        Property Tax Increment Rebate Agreement between Gateway Ethanol and Pratt
        County, Kansas dated February 1, 2006 with a maturity date of February 1,
        2017.
        The initial interest rate is 8.75%, to be adjusted on the third, sixth and
        ninth
        anniversaries of the note to a rate per annum equal to the three-year U.S.
        Treasury Note constant maturity index plus 4.25%. Interest is payable monthly
        in
        arrears beginning April 1, 2006 through February 1, 2007 and annually thereafter
        in arrears on February 1 of each year, commencing on February 1, 2008. The
        principal of the Note shall be payable on each February 1 commencing
        February 1, 2008. See Note H.
  On
        March
        30, 2006, Gateway entered into a debt agreement with the senior lender,
        outlining the terms of its construction and term debt financing arrangements.
        The agreement includes provisions for construction advances up to $54,300,000
        for the construction of the ethanol plant in Pratt County. The interest rate
        is
        variable at prime plus 1.75%. Interest is payable monthly during construction
        and principal and interest payments are required upon completion of construction
        sufficient to fully repay the debt in 10 years. The construction and term
        debt
        is secured by substantially all of the assets of Gateway. The debt agreement
        contains financial and other covenants, and includes restrictions on certain
        activities of Gateway, such as incurring additional debt. If an event of
        default, such as failure to make required payments or a failure to comply with
        covenants after any applicable grace period, were to occur, the senior lender
        would be entitled to, among other remedies, declare all amounts outstanding
        under the facility immediately due and payable, and to enforce its security
        interest and mortgage on the assets of Gateway.
 
 F-16
 **Orion
        Ethanol, Inc.**
 (A
        Development Stage Company)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 **NOTE
        C - LONG-TERM DEBT (continued)**
 
 Gateway
        has obtained a debt service reserve letter of credit of $3,250,000 and a
        revolving line of credit for up to $7,500,000 for working capital needs through
        Noble Americas Corp, a member of Gateway. Interest accrues on the line of
        credit
        at a rate of LIBOR plus 4.00%. There were no amounts outstanding on these
        debt
        agreements at December 31, 2006. See note F.
 
 **NOTE
        D - CONVERTIBLE SENIOR NOTES**
 
 On
        November 3, 2006, the Company entered into several subscription agreements
        with
        19 accredited investors (as defined in Section 501(a) of Regulation D
        promulgated under the Securities Act of 1933, as amended). Pursuant to the
        subscription agreements, on November 3, 2006, the investors acquired, in
        the
        aggregate, $12,430,000 in principal amount of convertible senior notes. The
        notes were acquired at face value. Except for Gary C. Evans, CEO, who is
        also an
        investor acquiring $1,000,000 in principal amount of notes, the investors
        do not
        have any material relationship with the Company or the Company’s affiliates
        other than this transaction.
  The
        notes
        are unsecured and bear interest at a rate of 8% per annum. Accrued and unpaid
        interest is payable quarterly. On April 1, 2007, the per annum interest rate
        increases by 1% per annum to 9% and then by an additional 1% on each quarterly
        interest payment date thereafter until the earlier of maturity or conversion.
        The notes mature on October 31, 2008. The notes automatically convert upon
        the
        closing of an equity financing that results in $100 million of gross cash
        proceeds to the Company, including the gross proceeds from the conversion
        of the
        notes. If there is such a qualified financing, then the principal amount
        of the
        notes would be convertible into the same securities that were issued in the
        qualified financing utilizing the same valuation as was used in the qualified
        financing. However if any warrants are issued in the qualified financing,
        then
        the holders of the notes would be entitled to twice as many warrants as the
        investors in the qualified financing.
  Also,
        in
        accordance with a beneficial conversion feature, at any time after May 1,
        2007,
        at the option of the individual note holders, the outstanding balance of
        the
        notes may be converted into the company’s common stock at a conversion price of
        $1.00. The intrinsic value of the conversion option is limited to the amount
        of
        proceeds from the notes, or $12,430,000, and is assigned to paid-in capital
        and
        treated as a discount on the note payable. The discount on the note will
        be
        amortized to interest expense over the term of the note. As of December 31,
        2006, the unamortized discount was $11,429,000. The Company does not have
        the
        option to prepay the notes without the consent of the holders of a majority
        in
        principal amount of the notes.
  F-17
  **Orion
        Ethanol, Inc.**
 (A
        Development Stage Company)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 **NOTE
        D - CONVERTIBLE SENIOR NOTES (continued)**
 
 In
        connection with this private placement, the Company also entered into a
        registration rights agreement with the investors. The registration rights
        agreement requires the Company to register for re-sale the securities issuable
        upon conversion of the notes with the times and subject to the terms of the
        registration rights agreement.
  **NOTE
        E - SHAREHOLDERS’ EQUITY**
 
 *Preferred
        Stock*
 
 The
        Company has 10,000,000 shares of preferred stock authorized. As of December
        31,
        2006, no shares were issued and outstanding.
 
 *Common
        Stock*
  The
        Company has 100,000,000 shares of common stock authorized. As of December
        31,
        2006, there were 32,661,025 shares issued and outstanding. As described in
        NOTE
        A of these financial statements, 1,388,285 shares were issued in connection
        with
        the reverse acquisition.
 
 *Equity
        Compensation Plan*
 
 On
        November 28, 2006, the board of directors adopted the 2006 Equity Incentive
        Plan
        (the 2006 Plan). The 2006 Plan was approved by written consent of the majority
        of our shareholders on December 8, 2006. The 2006 Plan reserves 15,000,000
        shares of our common stock for issuance in connection with stock options,
        restricted stock awards and other equity-based awards to be granted under
        the
        2006 Plan. No award has been issued under the 2006 Plan.
 
 The
        awards (which may include grants of stock options, stock appreciation rights,
        performance units, restricted stock, restricted stock units or performance
        shares) under the 2006 Plan are subject to the administration and interpretation
        by the board of directors or any of its committees administering the 2006
        Plan.
        The following is a summary of principal terms of the 2006 Plan.
  F-18
  **Orion
        Ethanol, Inc.**
 (A
        Development Stage Company)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 **NOTE
        E - SHAREHOLDERS’ EQUITY (continued)**
 
 *Equity
        Compensation Plan (continued)*
 
 The
        exercise price per share for the shares to be issued pursuant to an exercise
        of
        a stock option will be no less than the fair market value per share on the
        grant
        date, except in the case of an incentive stock option granted to a 10% owner,
        where the exercise price per share will be no less than 110% of the fair
        market
        value per share on the grant date.
 
 The
        term,
        vesting regime, exercise date and exercise of the stock option will be set
        forth
        under the respective award agreement. The form of payment for the exercise
        of
        the stock option is determined by the administrator and may consist of any
        combination of cash, check, other shares and, to the extent not prohibited
        by
        the Sarbanes-Oxley Act of 2002, promissory notes or a cashless exercise
        program.
  Unvested
        stock options are cancelled as of 90 days after termination of employment
        as set
        forth in the respective award agreement and the shares covered by such unvested
        portion of the award agreement will be forfeited to the Registrant and revert
        back to the 2006 Plan and the shares subject to the award will become available
        for future grant or sale under the 2006 Plan. Options that have vested remain
        exercisable for 90 days after termination; depending on award agreement,
        other
        forms of award may terminate on the day of employment termination.
 
 On
        the
        date set forth in the award agreement or on a date determined by the
        administrator, as applicable, all (i) restricted stock grants for which
        restrictions have not lapsed; (ii) unearned restricted stock units; (iii)
        stock
        appreciation rights; and (iv) performance units and shares shall be forfeited
        to
        the Registrant and will revert back to the 2006 Plan and the shares subject
        to
        the award will become available for future grant or sale under the 2006
        Plan.
 
 No
        more
        than an aggregate of 2,000,000 shares (or for awards denominated in cash,
        the
        fair market value of 2,000,000 shares on the grant date) may be subject to
        awards under the 2006 Plan to any individual participant in any one fiscal
        year
        of the Registrant. In addition, subject to certain terms under the 2006 Plan
        and
        the Internal Revenue Code, no more than an aggregate of 5,000,000 shares
        may be
        issued under an option that qualifies as an incentive stock option.
  F-19
  **Orion
        Ethanol, Inc.**
 (A
        Development Stage Company)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 **NOTE
        F - RELATED PARTIES**
  *Pre-development
        costs*
 
 Upon
        final completion of the Pratt, Kansas ethanol facility, SNB Associates, LLC,
        the
        majority owner of Orion, will become entitled to a payment in an amount not
        to
        exceed $830,000 for reimbursement of pre-development costs relating to the
        Pratt
        facility. This payment will only be made if there are any unexpended
        construction contingency or interest reserves at the time of final completion
        of
        the Pratt facility. This obligation to reimburse SNB Associates, LLC arises
        under a verbal understanding of the parties. No payment is anticipated as
        the Company does not expect to have unexpended reserves upon completion of
        the
        facility.
  *Commitment
        fee*
 
 Wildcat
        Holdco, LLC, a shareholder of the Company paid a $100,000 commitment fee
        to the
        senior lender on behalf Gateway. Gateway is obligated to repay this amount
        to
        Wildcat Holdco, LLC without interest and upon demand.  This obligation is
        pursuant to a verbal arrangement. This amount has been reflected in advances
        from related parties in the accompanying financial statements.
 
 *Energy
        service agreement*
 
 An
        affiliate of Indeck Energy Services, Inc., a member of Gateway, entered into
        an
        Energy Services Agreement with the Company, dated October 21, 2005. 
Gateway is required to purchase steam and heated air from Indeck for use
        at the
        Pratt facility at a monthly capacity cost of $672,000 and to reimburse Indeck
        for the raw materials required to generate such steam and heated air.  The
        monthly capacity cost escalates at a rate of 3% per year over the term of
        12
        year term of the Energy Services Agreement.  The 12 year term starts at the
        in-service date of the Pratt facility.
  *Ethanol
        marketing agreement*
 
 Noble
        Americas Corp. (Noble), a member of Gateway, entered into an Ethanol Purchase
        and Sale Agreement with Gateway on December 14, 2005.  Pursuant to the
        Ethanol Purchase and Sale Agreement, Gateway is required to sell to Noble
        all of
        the ethanol that it produces at its Pratt facility at the price at which
        Noble
        resells the ethanol less the costs of distribution and a market rate sales
        commission.  In addition, Noble has arranged a debt service reserve letter
        of credit and a revolving line of credit for working capital needs, including
        financing the acquisition of corn input for processing into ethanol.  See
        Note C.
 
 F-20
 
 **Orion
        Ethanol, Inc.**
 (A
        Development Stage Company)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 **NOTE
        F - RELATED PARTIES (continued)**
 
 *Boiler
        Lease*
 
 Gateway
        has entered into a lease agreement with Indeck, a member, for the design
        and
        construction of a natural gas boiler. The operating lease requires 60 monthly
        lease payments of $93,500, as summarized in the table below, starting when
        the
        ethanol plant is operational, but no later than January 1, 2008. Should final
        completion of the plant per Gateway’s construction agreement with Lurgi not be
        met by August 1, 2007, Gateway shall be obligated to pay Indeck a sum of
        $25,000
        per month until January 1, 2008.
 
 The
        minimum annual payments are as follows:
 
 2007
              
              $
              561,0002008
              
              
              1,122,0002009
              
              
              1,122,0002010
              
              
              1,122,0002011
              
              
              1,122,000Thereafter
              
              
              561,000Total
              
              $
              5,610,000
  *Corn
        Supply Agreement*
 
 Cargill,
        Incorporated, a shareholder of the Company, entered into a Corn Supply Agreement
        with Gateway on March 30, 2006.  Pursuant to the Corn Supply Agreement, the
        Company is required to purchase exclusively from Cargill all of their grain
        requirements. The Company will pay Cargill the agreed price of the grain
        plus a
        grain origination fee.
  *Distillers
        Grain Marketing Agreement*
 
 Cargill,
        Incorporated, a member of the Company, entered into a Distillers Grain Marketing
        Agreement with Gateway on March 30, 2006.  Pursuant to the Distillers Grain
        Marketing Agreement, Gateway is required to sell to Cargill all of the
        Distillers Grain that it produces at its Pratt facility at the price at which
        Cargill resells the distillers grain less the costs of distribution and a
        market
        rate sales commission.
 
 F-21
  **Orion
        Ethanol, Inc.**
 (A
        Development Stage Company)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 **NOTE
        G - COMMITMENTS AND CONTINGENCIES**
 
 *Plant
        Construction Project*
 
 On
        January 31, 2006, Gateway entered into agreements for the construction of
        a
        grain and dry distiller’s grain handling and storage facility and a loop rail
        facility in connection with the proposed ethanol plant. On March 30, 2006,
        Gateway entered into an agreement for the construction of the ethanol plant.
        The
        project is expected to be completed during 2007 with estimated direct project
        costs of $75,400,000 and total project costs of $93,000,000. At December
        31,
        2006 and December 31, 2005, construction costs of $42,466,000 and $1,885,000
        respectively, are included in construction in progress.
  *Construction
        of Electrical Substation*
 
 On
        March
        30, 2006, Gateway entered into agreements for the construction of an electrical
        substation. Under these agreements, land owned by Gateway is leased to an
        unrelated third-party for a minimum of five and up to 10 years under the
        condition that the third-party must build a substation according to
        specifications and sublease it back to Gateway for $23,303 per month. Company
        has the right to purchase the substation at a Fair Market Value after 60
        months.
        The Fair Market Value will be negotiated by Gateway and the sublessor. Should
        the two parties be unable to reach an agreement on the value, an independent
        appraisal will be used to determine the value of the facility.
 
 *Environmental
        Compliance*
 
 Substantially
        all of the Company’s facilities will be subject to federal, state, and local
        regulations relating to the discharge of materials into the environment.
        Management believes that the currently anticipated practices and procedures
        for
        the control and disposition of such wastes comply with the applicable federal,
        state and local requirements.
 
 *Risk
        Management Agreements*
 
 On
        March
        30, 2006, Gateway entered into agreements with Cargill, Incorporated to manage
        its exposure to price risk related to forecasted corn, forward corn purchase
        contracts, and natural gas after the ethanol plant is operational.
 
 F-22
 
 **Orion
        Ethanol, Inc.**
 (A
        Development Stage Company)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 **NOTE
        G - COMMITMENTS AND CONTINGENCIES (continued)**
 
 *Risk
        Management Agreements (continued)*
 
 These
        agreements have an initial term of 10 years. Gateway also entered into an
        exclusive distiller grain marketing agreement with Cargill, Incorporated
        that
        will commence on the first day of distiller grain sales and continue for
        an
        initial term of 10 years. The agreement calls for a fixed marketing fee
        percentage based upon sales with a minimum annual production of 13,800 tons
        per
        month. Cargill Biofuels, LLC, an affiliate of Cargill, Incorporated, is a
        shareholder of the Company.
 
 *Water
        Purchase Agreement*
 
 Gateway
        has entered into an agreement with the City of Pratt to purchase a minimum
        of
        800 acre feet of water annually for a term of twenty years. The agreement
        calls
        for an initial rate of 39.95 cents per 1000 gallons of water plus
        1/120 th per
        month of the city’s cost of extending a pipeline to the facility. In addition,
        the agreement allows for a 2% annual rate adjustment.
 
 *Electricity
        Purchase Agreement*
 
 Gateway
        has entered into an agreement with Ninnescah Rural Electric Cooperative
        Association for the delivery of electricity to the facility for a term of
        ten
        years at the KEPCO 11/06/2003 rates.
 
 *Financial
        Advisory Agreement*
 
 On
        May
        18, 2006, the Company entered into a Financial Advisory Agreement with Halter
        Financial Group, L.P. In this agreement, Halter agreed to provide certain
        financial advisory and consulting services related to the Company’s efforts to
        go public via a public shell corporation and to advise the Company in its
        efforts to complete an equity financing transaction. In return for these
        services , Halter received 4.25% of the public entity’s common stock. In
        addition, Halter Financial will be paid $450,000 for the purchase of the
        public
        shell to be paid in conjunction with the Company’s equity financing transaction.
        This amount has been accrued and included in advances from related parties
        in
        the accompanying financial statements.
 
 F-23
  **Orion
        Ethanol, Inc.**
 (A
        Development Stage Company)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 **NOTE
        G - COMMITMENTS AND CONTINGENCIES (continued)**
 
 *Employee
        Severance Expense*
 
 Effective
        November 22, 2006 the Company eliminated the position of Chief Operating
        Officer
        and reassigned the prior duties of the office to the other executive officers
        of
        the company. Pursuant to his employment contract, the Company’s then current
        Chief Operating Officer, Richard Jarboe, resigned and is requesting severance
        payment. The Company is currently negotiating a settlement with Mr. Jarboe.
        At
        December 31, 2006 the company recorded the estimated maximum potential liability
        of $511,000 as severance expense.
 
 **NOTE
        H- PROPERTY TAX REBATES**
 
 On
        February 1, 2006, the Company entered into a property tax rebate agreement
        with
        Pratt County, Kansas. The agreement allows 95% of taxes collected associated
        with the ethanol plant for years 2007 through 2012 and 75% of the taxes for
        years 2013 through 2016 to be rebated. See Note C.
 
 **NOTE
        I - INCOME TAXES**
 
 Income
        tax rate differs from the statutory federal income tax rate of 35% as
        follows:
 
 2006
              
              2005Tax
                  benefit at U.S. federal statutory rate
              
              
              (35
              )%
              
              (35
              )%Nondeductible
                  merger costs
              
              
              23
              
              
              -Pre-merger
                  costs
              
              
              2
              
              
              35Nondeductible
                  interest on convertible debt
              
              
              4
              
              
              -Pre-merger
                  loss
              
              
              7
              
              
              -Other
              
              
              (1
              )
              
              -Effective
                  rate
              
              
              0
              %
              
              0
              %
 
 
 F-24
  **Orion
        Ethanol, Inc.**
 (A
        Development Stage Company)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 **NOTE
        I - INCOME TAXES (continued)**
 
 The
        tax
        effects of temporary differences which give rise to significant portions
        of
        deferred tax assets or liabilities and the corresponding valuation allowance
        at
        December 31, 2006 are as follows:
 
 IRS
                  Sec. 263(a) capitalized expenses
              
              $
              346,502Start-up
                  costs
              
              
              298,833Severance
                  reserve
              
              
              198,452Depreciation
              
              
              6,524Total
                  deferred tax asset
              
              
              850,311Valuation
                  allowance
              
              
              (850,311
              )Net
                  deferred tax asset, noncurrent
              
              $
              -
 
 Deferred
        tax assets have resulted primarily from the Company’s future deductible
        temporary differences. There were no deductible temporary differences at
        December 31, 2005. The Company’s ability to realize its deferred tax assets
        depends upon the generation of sufficient future taxable income to allow
        for the
        utilization of deductible temporary differences and tax planning strategies.
        There were no significant differences between the book basis and tax basis
        of
        liabilities as of December 31, 2006 or 2005.
  F-25


**SIGNATURES**




In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      authorized.


**ORION
              ETHANOL, INC.**Dated:
              March 28,
              2007
            By:
            /s/ Gary
              C.
              EvansGary
                C. Evans
              President
                and CEO




In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the registrant and in the capacities and on
      the
      dates indicated.




Signatures
            
            Title
            
            Date/s/
                Gary C. Evans
            
            President,
                Chief Executive
            
            March
                28,
                2007Gary
                C. Evans
            
            Officer and Director/s/
                Patrick N. Barker
            
            Director,
                Chairman of the Board
            
            March
                28,
                2007Patrick
                N. Barker/s/Lane
                Hamm
            
            Chief
                Financial Officer (Principal Financial Officer
            
            March
                28,
                2007Lane
                Hamm
            
            & Principal Accounting
              Officer)/s/
                Jerry Nash
            
            Director
            
            March
                28,
                2007Jerry
                Nash/s/
                Wallace Stanberry
            
            Director
            
            March
                28,
                2007Wallace
                Stanberry/s/
                J. Porter Loomis
            
            Director
            
            March
                28,
                2007J.
                Porter Loomis/s/
                J.L. Butch Meibergen
            
            Director
            
            March
                28,
                2007J.L.
                Butch Meibergen







**Exhibit
      Index**





***Exhibit
      No.***  ***Description***




**Exhibit
                No.**
            
            **Title
                of Agreement/Document**2.1
            
            Securities
                Exchange Agreement, dated August 28, 2006, among Orion, Orion Ethanol,
                LLC
                and members of Orion Ethanol, LLC. [Filed as Exhibit 2.1 to the Form
                8-K
                filed with Commission on August 29, 2006].2.2
            
            Unit
                Exchange Agreement, dated as of August 28, 2006, among Orion Ethanol,
                LLC
                and of the members of Orion Development, LLC. [Filed as Exhibit 2.2
                to the
                Form 8-K filed with the Commission on August 29, 2006].2.3
            
            Unit
                Exchange Agreement, dated August 28, 2006, among Orion Ethanol, LLC
                and
                each of the member of Gateway Holdco, LLC. [Filed as Exhibit 2.3
                to the
                Form 8-K filed with the Commission on August 29, 2006].3.1
            
            Amended
                Articles of Incorporation. [Filed as Exhibit to Information Statement
                on
                Schedule 14C filed with the Commission on October 23, 2006 (Change
                of
                Name); Filed as Exhibit to Information Statement on Schedule 14C
                with the
                Commission on December 21, 2006 (Blank check shares)].3.2
            
            Amended
                and Restated Bylaws [Filed as Exhibit 3.1 to Form the Form 8-K filed
                with
                the Commission on October 10, 2006].3.3
            
            Amended
                and Restated Orion Ethanol, LLC Operating Agreement, dated August
                28,
                2006. [Filed as Exhibit 3.3 to the Form 8-K filed with the Commission
                on
                August 29, 2006].3.4
            
            Gateway
                Holdco, LLC Operating Agreement, dated March 30, 2006. [Filed as
                Exhibit
                3.4 to the Form 8-K filed with the Commission on August 29,
                2006].3.5
            
            Gateway
                Ethanol, LLC Operating Agreement, dated March 30, 2006. [Filed as
                Exhibit
                3.5 to the Form 8-K filed with the Commission on August 29,
                2006].3.6
            
            Amended
                and Restated Orion Development, LLC Operating Agreement, dated August
                28,
                2006. [Filed as Exhibit 3.6 to the Form 8-k filed with the Commission
                on
                August 29, 2006].4.1
            
            Form
                of Senior 8% Convertible Note. [Filed as Exhibit 4.1 to the Form
                8-K filed
                with the Commission on November 7, 2006].10.1
            
            Financial
                Advisory Agreement, dated May 18, 2006, between Halter Financial
                Group,
                L.P. and Orion Ethanol. [Filed as Exhibit 10.1 to the Form 8-K filed
                with
                the Commission on August 29, 2006].10.2
            
            Ground
                Lease, dated March 30, 2006, between Gateway Ethanol and Power To
                Go,
                L.L.C. [Filed as Exhibit 10.2 to the Form 8-K filed with the Commission
                on
                August 29, 2006].10.3
            
            Sublease
                Agreement, dated March 30, 2006, between Power to Go, L.L.C. and
                Gateway
                Ethanol, LLC. [Filed as Exhibit 10.3 to the Form 8-K filed with the
                Commission on August 29, 2006].




1




10.4
            
            Loan
                and Security Agreement, dated March 30, 2006 between Gateway Ethanol
                and
                Dougherty Funding. [Filed as Exhibit 10.14 to the Form 10-QSB filed
                with
                the Commission on November 14, 2006].10.5
            
            Tax
                Increment Secured Promissory Note by Gateway Ethanol, LLC in favor
                of
                Dougherty Funding, LLC in the principal amount of $11,340,000. [Filed
                as
                Exhibit 10.5 to the Form 8-K filed with the Commission on August
                29,
                2006].10.6
            
            Working
                Capital Facilities Term Sheet, dated February 2, 2006, between Gateway
                Ethanol and Noble Americas. [Filed as Exhibit 10.6 to the Form 8-K
                filed
                with the Commission on August 29, 2006].10.7
            
            Agreement
                for Letter of Credit, dated March 29, 2006, between Gateway Ethanol
                and
                Noble Americas. [Filed as Exhibit 10.7 to the Form 8-K filed with
                the
                Commission on August 29, 2006].10.8
            
            Subordinated
                Loan Agreement, dated March 30, 2006, between Gateway Ethanol, LLC
                and
                Lurgi PSI. [Filed as Exhibit 10.8 to the Form 8-K filed with the
                Commission on August 29, 2006].10.9
            
            Employment
                Agreement between Orion Ethanol, LLC and Dr. Patrick N. Barker, dated
                August 15, 2006. [Filed as Exhibit 10.9 to the Form 8-K filed with
                the
                Commission on August 29, 2006].10.10
            
            Employment
                Agreement between Orion Ethanol, LLC and H. Richard Jarboe, dated
                August
                15, 2006. [Filed as Exhibit 10.10 to the Form 8-K filed with the
                Commission on August 29, 2006].10.11
            
            Employment
                Agreement between Orion Ethanol, LLC and Lane Hamm, dated August
                15, 2006.
                [Filed as Exhibit 10.11 to the Form 8-K filed with the Commission
                on
                August 29, 2006].10.12
            
            Employment
                Agreement between Orion Ethanol, LLC and Joshua Barker, dated August
                15,
                2006. [Filed as Exhibit 10.12 to the Form 8-K filed with the Commission
                on
                August 29, 2006].10.13
            
            Employment
                Agreement between Orion Ethanol, LLC and Timothy Barker, dated August
                15,
                2006. [Filed as Exhibit 10.13 to the Form 8-K filed with the Commission
                on
                August 29, 2006].10.14
            
            Property
                Tax Increment Rebate Agreement dated as of February 1, 2006 between
                Pratt
                County, Kansas and Gateway Ethanol, LLC. [Filed as Exhibit 10.14
                to the
                Form 8-K filed with the Commission on August 29, 2006].10.15
            
            Natural
                Gas Risk Management Advisory Agreement, dated March 30, 2006, by
                and
                between Cargill Commodity Services, Inc., d/b/a Cargill Energy Services
                and Gateway Ethanol, LLC and Cargill, Inc. [Filed as Exhibit 10.15
                to the
                Form 8-K filed with the Commission on October 6, 2006, portions of
                which
                exhibit were omitted pursuant to a request for confidential
                treatment].10.16
            
            Energy
                Supply Representation and Management Agreement, dated as of March
                30,
                2006, by and between Cargill, Inc., through its Cargill Energy and
                Risk
                Management Solutions division and Gateway Ethanol. [Filed as Exhibit
                10.16
                to the Form 8-K filed with the Commission on October 6, 2006, portions
                of
                which exhibit were omitted pursuant to a request for confidential
                treatment].




2




10.17
            
            Corn
                Supply Agreement, dated as of March 30, 2006, by and between Cargill,
                Inc., through its AgHorizons Business Unit and Gateway Ethanol. [Filed
                as
                Exhibit 10.17 to the Form 8-K filed with the Commission on October
                6,
                2006, portions of which exhibit were omitted pursuant to a request
                for
                confidential treatment].10.18
            
            Futures
                Advisory Agreement, dated as of March 30, 2006, by and between Cargill
                Commodity Services, Inc d/b/a Cargill Direct and Gateway Ethanol,
                LLC.
                [Filed as Exhibit 10.15 to the Form 8-K filed with the Commission
                on
                October 6, 2006, portions of which exhibit were omitted pursuant
                to a
                request for confidential treatment].10.19
            
            CD
                Protein and Grain Risk Management Program Disclosure Document dated
                as of
                January 12, 2006. [Filed as Exhibit 10.19 to the Form 8-K filed with
                the
                Commission on October 6, 2006, portions of which exhibit were omitted
                pursuant to a request for confidential treatment].10.20
            
            Ethanol
                Purchase and Sale Agreement, dated as of December 14, 2005, by and
                between
                Noble Americas Corp. and Gateway Ethanol, LLC. [Filed as Exhibit
                10.15 to
                the Form 8-K filed with the Commission on October 6, 2006, portions
                of
                which exhibit were omitted pursuant to a request for confidential
                treatment].10.21
            
            Master
                Agreement dated, as of March 30, 2006, by and between Cargill, Inc.,
                Cargill Commodity Services, Inc. and Gateway Ethanol, LLC. [Filed
                as
                Exhibit 10.21 to the Form 8-K filed with the Commission on October
                6,
                2006].10.22
            
            Base
                Contract for Sale and Purchase of Natural Gas, dated as of March
                30, 2006,
                by and between Cargill, Inc and Gateway Ethanol, LLC. [Filed as Exhibit
                10.22 to the Form 8-K filed with the Commission on October 6,
                2006].10.23
            
            Distillers
                Grains Marketing Agreement, dated as of March 30, 2006, by and between
                Cargill, Inc and Gateway Ethanol, LLC. [Filed as Exhibit 10.23 to
                the Form
                8-K filed with the Commission on October 6, 2006].10.24
            
            Option
                to Purchase Real Property Agreement, dated as of October 5, 2006,
                by and
                between Charter Equities, Inc. and Orion Ethanol, LLC. [Filed as
                Exhibit
                10.1 to the Form 8-K filed with the Commission on October 25,
                2006].10.25
            
            Form
                of Subscription Agreement. [Filed as Exhibit 10.1 to the Form 8-K
                filed
                with the Commission on November 7, 2006].10.26
            
            Registration
                Rights Agreement, dated November 3, 2006, among Orion Ethanol, Inc.
                and
                the several investors party thereto. [Filed as Exhibit 10.2 to the
                Form
                8-K filed with the Commission on November 7, 2006].10.27
            
            Promissory
                Notes dated September 1, 2006 by Orion Ethanol, LLC and each of Patrick
                Barker, Timothy Barker and Jerry Nash respectively.10.28
            
            Orion
                Ethanol, Inc. 2006 Equity Incentive Plan. [Filed as Exhibit 10.1
                to the
                Form 8-K filed with the Commission on December 4,
                2006].14.1
            
            Code
                of Ethics. [Filed as Exhibit 14.1 to the Form 8-K filed with the
                Commission on August 29, 2006].16.1
            
            Letter
                from Mantyla McReynolds regarding change in certifying accountants.
                [Filed
                as Exhibit 16.1 to the Form 8-K filed with the Commission on August
                29,
                2006].21.1
            
            Subsidiaries.
                [Filed as Exhibit 21.1 to the Form 8-K filed with the Commission
                on August
                29, 2006].




3




31.1*
            
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.31.2*
            
            Certification
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.32.1*
            
            Certification
                of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002.32.2*
            
            Certification
                of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002.




4