When to Apply for ILR

I need to apply for ILR this year, my FLR expires in October of this year.  I entered the UK on a Fiance Visa on July 31st, 2010 and was issued my FLR on October 1st 2010.  I'm a bit confused as to when I can apply for my ILR, is it two years after I've entered the UK or 28 days before I was issued my FLR?  Also, we are planning to apply by post, if I apply by post before my FLR expires, but don't get an answer back before it expires, can I still work while I am waiting for a decision?  If I can, how will my employer know I am eligible to continue working in the UK? 

Also, I have only started studying a bit, but how far in advance can/should I take my KOL test?  Sorry for all the questions!  Just getting a bit anxious to sort things now!
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As I understand it, it's 28 days before you were granted FLR(M).

You can still work while waiting for the decision so long as you applied before your current leave expires as your current status will continue until a decision is reached.

You can take the KOL test whenever you wish as the pass certificate doesn't expire.

As I understand it, it's 28 days before you were granted FLR(M).

Yes, this is correct.

The 2-year count for ILR starts on the date your FLR(M) was issued and you can't apply for ILR until 28 days before you reach the 2 years... which means that because FLR(M) is valid for exactly 2 years, the earliest you can apply is 28 days before it expires.