**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-K**





x
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**For
                the fiscal year ended December 31, 2007ORo
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**





For
      the
      transition period from ____________ to ____________





Commission
      file number: **000-50154**





**XETHANOL
      CORPORATION**


(Exact
      name of registrant as specified in its charter)





**Delaware**
            
            **84-1169517**(State
                or other jurisdiction of
            
            (I.R.S.
                Employerincorporation
                or organization)
            
            Identification
                No.)**3348
                Peachtree Road NE**
              **Suite
                250 Tower Place 200**
              **Atlanta,
                Georgia**
            
            **30326**(Address
                of principal executive offices)
            
            (Zip
                Code)





**(** **404)
      814-2500**


(Registrant’s
      telephone number, including area code)





Securities
      registered under Section 12(b) of the Exchange Act:




Title
                of each class
            
            Name
                of each exchange on which registered**Common
                Stock, par value $.001 per share**
            
            **American
                Stock Exchange**





Securities
      registered pursuant to Section 12(g) of the Act: None




Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act.




Yes o No
x




Indicate
        by check mark if the registrant is not required to file reports pursuant
        to
        Section 13 or Section 15(d) of the Exchange Act.





Yes o No
x





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 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





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not 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-K or any amendment to
      this
      Form 10-K. o









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





As
      of June 29, 2007, the aggregate market value of the registrant’s common
      stock held by non-affiliates of the registrant was $47,800,232 based on the
      closing sale price of $1.68 per share as reported on the American Stock
      Exchange.





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting company.
      See
      the definitions of “large accelerated filer,” “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large
                accelerated filer o
            Accelerated
                filer oNon-accelerated
                filer o
              (Do
                not check if a smaller reporting company)
            Smaller
                reporting company x





Indicate
      the number of shares outstanding of each of the registrant’s classes of common
      stock, as of the latest practicable date.




Class
            
            Outstanding
                at March 24,****2008Common
                Stock, $.001 par value per share
            
            28,609,103shares





**DOCUMENTS
      INCORPORATED BY REFERENCE**





Document
            
            Parts
                into which incorporatedNone









**TABLE
      OF CONTENTS**





PAGESPECIAL
                NOTE REGARDING FORWARD-LOOKING STATEMENTS**PART
                I**
            
            
            1ITEM
                1.
            BUSINESS
            
            1ITEM
                1A.
            RISK
                FACTORS
            
            26ITEM
                1B.
            UNRESOLVED
                STAFF COMMENTS
            
            37ITEM
                2.
            PROPERTIES
            
            37ITEM
                3.
            LEGAL
                PROCEEDINGS
            
            38ITEM
                4
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS
            
            39**PART
                II**
            
            
            40ITEM
                5.
            MARKET
                FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
                PURCHASES OF EQUITY SECURITIES
            
            40ITEM
                6.
            SELECTED
                FINANCIAL DATA
            
            40ITEM
                7.
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS
            
            41ITEM
                7A.
            QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            
            48ITEM
                8.
            FINANCIAL
                STATEMENTS AND SUPPLEMENTARY DATA
            
            F-1ITEM
                9.
            CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE
            
            49ITEM
                9A(T).
            CONTROLS
                AND PROCEDURES
            
            49ITEM
                9B.
            OTHER
                INFORMATION
            
            50**PART
                III**
            
            
            51ITEM
                10.
            DIRECTORS,
                EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
            
            51ITEM
                11.
            EXECUTIVE
                COMPENSATION
            
            54ITEM
                12.
            SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                STOCKHOLDER MATTERS
            
            64ITEM
                13.
            CERTAIN
                RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
                INDEPENDENCE
            
            68ITEM
                14.
            PRINCIPAL
                ACCOUNTANT FEES AND SERVICES
            
            72


**PART
                IV**
            
            
            73ITEM
                15.
            EXHIBITS
                AND FINANCIAL STATEMENT SCHEDULES
            
            73










**SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**





This
      report contains forward-looking statements that involve a number of risks and
      uncertainties. Although our forward-looking statements reflect the good faith
      judgment of our management, these statements can be based only on facts and
      factors of which we are currently aware. Consequently, forward-looking
      statements are inherently subject to risks and uncertainties. Actual results
      and
      outcomes may differ materially from results and outcomes discussed in the
      forward-looking statements.





Forward-looking
      statements can be identified by the use of forward-looking words such as “may,”
“will,” “should,” “anticipate,” “believe,” “expect,” “plan,” “future,” “intend,”
“could,” “estimate,” “predict,” “hope,” “potential,” “continue,” or the negative
      of these terms or other similar expressions. These statements include, but
      are
      not limited to, statements in Items 1, 1A and 7 as well as other sections in
      this report. You should be aware that the occurrence of any of the events
      discussed under these captions and elsewhere in this report could substantially
      harm our business, the results of our operations and our financial condition.
      You should also be aware that, if any of these events occurs, the trading price
      of our common stock could decline, and you could lose all or part of the value
      of your shares of our common stock. These events include, but are not limited
      to, the following:





·
            the
                availability and adequacy of our cash to meet our liquidity and capital
                resources needs;


·
            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 not 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 any license or permit;


·
            the
                interruption of production at our Blairstown, Iowa plant due to casualty,
                weather, mechanical failure or any extended or extraordinary maintenance
                or inspection that may be required;


·
            changes
                in our business and growth strategy, capital improvements or development
                plans;


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


·
            other
                factors discussed in Item 1A, Risk Factors, or elsewhere in this
                report.





The
      cautionary statements made in this report are intended to be applicable to
      all
      related forward-looking statements wherever they may appear in this report.
      These forward-looking statements are not guarantees of future performance and
      involve risks and uncertainties, and actual results may differ materially from
      those that are anticipated in the forward-looking statements. See Item 1A,
      Risk
      Factors, for a description of some of the important factors that may affect
      actual outcomes.





We
      urge
      you not to place undue reliance on these forward-looking statements, which
      speak
      only as of the date of this report. We undertake no obligation to publicly
      update any forward looking-statements, whether as a result of new information,
      future events or otherwise.










**PART
      I**





**ITEM
      1.**  **BUSINESS.**





**Company
      Overview**





We
      are a
      renewable energy and clean technology company. We have broadened our business
      strategy to pursue opportunities in biomass gasification for electricity
      production, wind power, solar power, energy storage, energy infrastructure,
      energy efficiency, waste recycling and agricultural processes. We are meeting
      with investment bankers and other referral sources as we seek attractive
      companies to invest in or acquire. We also may decide to invest in profitable
      businesses in industries outside renewable energy and clean technology.





We
      currently own one operating plant in Blairstown, Iowa that produces ethanol
      from
      corn. As a result of the continued high prices for corn and natural gas, we
      are
      considering cutting back our production at this plant to reduce our operating
      losses. We have indefinitely deferred construction of a new ethanol plant next
      to our Blairstown facility due to the changing ethanol market and our inability
      to arrange debt or equity financing for the project. We intend to build a
      demonstration plant in Florida for converting citrus peel waste into ethanol,
      although we will need to raise additional capital to fund construction. We
      are
      evaluating our research and development agreements, and we intend to continue
      to
      fund some of agreements with the aim of commercializing that technology. After
      evaluating our agreements to manufacture and sell a diesel biofuel based on
      technology that H2Diesel Holdings, Inc. sublicensed to us, we have decided
      not
      to pursue that business and have begun to sell our shares of H2Diesel common
      stock. We also own a former pharmaceutical manufacturing complex in Augusta,
      Georgia and a former medium density fiberboard plant in Spring Hope, North
      Carolina. We have decided that our Augusta and Spring Hope facilities do not
      fit
      within our long-term corporate strategy, and on March 20, 2008, our board
      authorized management to pursue the sale of each facility.





Our
      corporate headquarters are located at 3348 Peachtree Road NE, Suite 250 Tower
      Place 200, Atlanta, Georgia 30326, and our telephone number is (404) 814-2500.
      Our website is located at www.xethanol.com.





This
      Item
      1 is divided into two parts. The first part describes our formation,
      capitalization, acquisitions, proposed dispositions and impairments. The second
      part describes our current business and strategy.





**DESCRIPTION
      OF FORMATION AND CAPITALIZATION**





**Historical
      Overview**





This
      section of the report describes our formation, the reverse merger in 2005 by
      which we became a public company, and several other transactions in which we
      have issued our shares to raise capital or to acquire business, assets or
      technology. This section also describes the dispositions or proposed
      dispositions of some of those assets, as well as impairments we have
      accrued.





Xethanol
      Corporation is the successor to a corporation of the same name that was
      organized under the laws of Delaware on January 24, 2000. In this report, we
      refer to that predecessor corporation as “Old Xethanol.” In 2005, Old Xethanol
      structured a series of transactions to gain access to the capital markets.
      In
      connection with these transactions, which we collectively refer to as the
      reverse merger, Zen Pottery Equipment, Inc., a Colorado publicly traded
      corporation (“Zen”), organized Zen Acquisition Corp. as a wholly owned Delaware
      subsidiary (“Zen Acquisition”). Thereafter, under an agreement of merger and
      plan of reorganization dated as of February 2, 2005 among Zen, Zen Acquisition
      and Old Xethanol, Zen Acquisition merged with and into Old Xethanol, which
      then
      became a wholly owned subsidiary of Zen. Following an exchange of shares between
      the stockholders of Old Xethanol and Zen, Old Xethanol changed its name to
      Xethanol BioEnergy, Inc. Zen then discontinued its previous business activities,
      reincorporated as a Delaware corporation, changed its name to Xethanol
      Corporation, and succeeded to the business of Old Xethanol as its sole line
      of
      business.





Under
      the
      merger agreement, stockholders of Old Xethanol received in the merger
      approximately .88 of a share of our common stock for each share of Old Xethanol
      common stock they held. As a result, at closing we issued 9,706,781 shares
      of
      our common stock to the former stockholders of Old Xethanol, representing 74.0%
      of our




1




outstanding
      common stock following the merger, in exchange for 100% of the outstanding
      capital stock of Old Xethanol. The consideration issued in the merger was
      determined as a result of arm’s-length negotiations between the
      parties.





All
      outstanding warrants issued by Old Xethanol before the merger to purchase shares
      of Old Xethanol common stock were amended to become warrants to purchase our
      common stock on the same terms and conditions as those warrants issued by Old
      Xethanol, except that the number of shares issuable on the exercise of those
      warrants was amended to reflect the applicable exchange ratio. Before the
      closing of the merger, all outstanding Old Xethanol warrants were exercisable
      for 1,465,068 shares of Old Xethanol common stock. At the closing of the merger,
      these warrants were amended to become warrants to purchase 1,293,370 shares
      of
      our common stock. Neither Old Xethanol nor our company had any stock options
      outstanding as of the closing of the merger.





In
      connection with the merger, we repurchased 8,200,000 shares of our common stock
      owned by Zen Zachariah Pool III and Walter C. Nathan for aggregate consideration
      of $300,000 and then cancelled those shares at the closing of the merger.
      Immediately following the closing, and as part of the consideration for the
      repurchase of his shares, we sold to Mr. Pool our pottery kiln operations,
      and
      Mr. Pool assumed the historical liabilities of those operations. Giving effect
      to the cancellation of these stockholders’ shares, there were 1,874,303 shares
      of our common stock outstanding before giving effect to the stock issuances
      in
      the merger and the concurrent private offering of 1,190,116 shares of our common
      stock at a purchase price of $3.25 per share, as explained in more detail
      below.





In
      November 2004, before the merger, Zen Zachariah Pool III, Zen’s Chief Executive
      Officer and President and a member of its board of directors, and Walter C.
      Nathan, Zen’s Chief Financial Officer and a member of its board of directors,
      sold options to purchase a total of 700,000 shares of Zen’s common stock owned
      by them at an exercise price of $0.20 per share as follows: (a) 250,000 options
      to a company controlled by the brother of Christopher d’Arnaud-Taylor, a
      director, officer and significant shareholder of Old Xethanol and our former
      director, Chairman, President and Chief Executive Officer; (b) 250,000 options
      to the mother-in-law of Jeffrey S. Langberg, a significant shareholder of Old
      Xethanol and our former director; and (c) 200,000 options to another significant
      shareholder of Old Xethanol. Each purchaser paid $10.00 for that purchaser’s
      options. Exercise of the options was conditional upon the closing of the private
      offering and reverse merger, and the options were exercisable at any time within
      200 days after the closing of the reverse merger. On February 2, 2005, each
      of
      the company controlled by the brother of Mr. d’Arnaud-Taylor and the
      mother-in-law of Mr. Langberg entered into and consummated an agreement with
      a
      stockholder of Zen to purchase 100,000 shares of Zen’s common stock at a
      purchase price of $0.40 per share. Also in connection with the merger, each
      of
      Mr. d’Arnaud-Taylor and Mr.
      Langberg agreed to contribute or cause to be contributed 250,000 shares of
      our
      common stock to us for cancellation. We reflected those contributions to capital
      in connection with the reverse merger in the consolidated statements of changes
      in stockholder’s equity in the audited consolidated financial statements
      included in this report.





We
      accounted for the reverse merger as a recapitalization of Old Xethanol, because
      the former stockholders of Old Xethanol now own a majority of the outstanding
      shares of our common stock as a result of the merger. Old Xethanol was deemed
      to
      be the acquiror in the reverse merger and, consequently, the assets and
      liabilities and the historical operations that are reflected in our financial
      statements are those of Old Xethanol and are recorded at the historical cost
      basis of Old Xethanol. No arrangements or understandings exist among present
      or
      former controlling stockholders with respect to the election of members of
      our
      board of directors and, to our knowledge, no other arrangements exist that
      might
      result in a change of control of our company. Further, as a result of the
      issuance of the 9,706,781 shares of our common stock to the former stockholders
      of Old Xethanol, a change in control of our company occurred on the date of
      the
      consummation of the merger.





**Board
      of Directors**





In
      accordance with our by-laws for filling newly-created board vacancies, Zen
      Zachariah Pool III and Walter C. Nathan, our existing pre-merger directors,
      elected Christopher d’Arnaud-Taylor and Franz A. Skryanz, previous directors of
      Old Xethanol, to serve as additional directors of our company effective at
      the
      closing of the merger. Susan Pool resigned as a director effective at the
      closing of the merger. On February 18, 2005, Mark Austin and Jeffrey S. Langberg
      were elected as directors effective as of February 28, 2005. Mr. Pool and Mr.
      Nathan also resigned as directors following the closing, with their resignations
      effective as of February 28, 2005.




2




On
      February 2, 2005, Mr. d’Arnaud-Taylor was named Chairman, President and Chief
      Executive Officer and Franz A. Skryanz was named Vice President, Secretary
      and
      Treasurer. At the same time, Mr. Pool, Mr. Nathan and Ms. Pool resigned as
      our
      officers. On April 13, 2005, Lawrence S. Bellone was elected to be our Chief
      Financial Officer. On May 27, 2005, Mark Austin resigned as a director, but
      he
      remains on our advisory board. In December 2005, Mr. Austin entered into a
      consulting agreement with us to assist us in the development of our technology
      portfolio and overall technology strategy, and he is presently assisting us
      under a month-to-month consulting arrangement. On June 2, 2005, Louis B.
      Bernstein and Richard D. Ditoro were elected to our board of directors. On
      July
      28, 2005, Richard L. Ritchie was elected to our board of directors. On August
      10, 2005, Marc S. Goodman was elected to our board of directors. On June 12,
      2006, Jeffrey S. Langberg resigned as a director. Richard D. Ditoro did not
      stand for re-election as a director at our 2006 annual meeting of stockholders
      in August 2006 but was again elected to our board of directors on September
      7,
      2006. On August 22, 2006, Mr. d’Arnaud-Taylor’s position as Chairman, President
      and Chief Executive Officer was terminated but he remained on our board of
      directors. Mr. Ritchie and Mr. Goodman resigned from our board on September
      28,
      2006. David R. Ames, William P. Behrens and Mark Oppenheimer were elected to
      our
      board on October 1, 2006.





On
      November 9, 2006, Mr. Ames became our Chief Executive Officer and President;
      Mr.
      Behrens became our non-executive Chairman of the Board; and Mr. Bernstein and
      Mr. Oppenheimer resigned from our board. On December 7, 2006, Edwin L. Klett
      was
      elected to our board of directors. On January 29, 2007, Gary Flicker was elected
      as our Chief Financial Officer and Mr. Bellone, formerly our Chief Financial
      Officer, was elected our Executive Vice President, Corporate Development. Also
      on January 29, 2007, the board elected Gil Boosidan and Robert L. Franklin
      to
      the company’s board of directors. Mr. Bellone continued to serve as our
      principal accounting officer until December 2007, when his employment with
      us
      terminated.





On
      January 16, 2008, Mr. Bellone resigned as a director. At our 2007 annual meeting
      of stockholders held in January and February 2008, Mr. Ames, Mr. Behrens, Mr.
      Boosidan, Mr. Ditoro, Mr. Franklin and Mr. Klett were elected to our board
      for a
      one-year term. Mr. d’Arnaud-Taylor did not stand for re-election as a director
      at that meeting.





**Private
      Offering Concurrent with Merger**





In
      connection with the merger, we closed a private offering of 1,190,116 shares
      of
      our common stock at a purchase price of $3.25 per share to purchasers that
      qualified as accredited investors, as defined in Regulation D promulgated under
      the Securities Act of 1933. Gross proceeds from the initial closing of the
      private offering were $3,000,028. We received an additional $867,849 upon a
      second closing of the private offering on February 15, 2005, for total private
      offering proceeds of $3,867,877. Placement agents and advisors received an
      aggregate of 665,834 shares of our common stock in connection with the private
      offering and reverse merger. After the closing of the reverse merger and the
      closing of the private offering, we had outstanding 13,437,033 shares of common
      stock and warrants to purchase 1,293,376 shares of common stock.





**Permeate
      Facility**





Old
      Xethanol was formed to capitalize on the growing market for ethanol and its
      co-products. Old Xethanol commenced ethanol production in August 2003 with
      the
      acquisition of Iowa-based Permeate Refining, Inc. Permeate had operated for
      more
      than a decade, principally using non-corn-based feedstocks such as waste candy
      sugars sourced from the greater-Chicago candy industry and waste starches
      sourced from regional wet millers. Permeate had a nominal production capacity
      of
      1.6 million gallons of ethanol per year. In April 2005, we ceased operations
      at
      Permeate and planned to upgrade the site. Given Permeate’s small production size
      and location in a residential community, as well as recent acquisitions of
      more
      attractive sites, we determined that Permeate was no longer a core asset. At
      September 30, 2007, we recorded a $522,000 impairment loss on fixed assets
      related to our Permeate assets. On October 3, 2007, we agreed to sell the
      Permeate facility for $500,000 in cash. On November 9, 2007, we sold the
      Permeate facility, at no gain or loss, for $500,000.





**Relationship
      with UTEK**





In
      April
      2004, we formalized our engagement of UTEK Corporation, a publicly-traded
      technology transfer company, to assist us in identifying technologies to enable
      us to lower costs throughout the ethanol production cycle




3




and
      create a technology platform for biomass conversion. We entered into a strategic
      alliance agreement with UTEK that detailed the research and development
      activities to be performed by UTEK on our behalf. The UTEK agreement expired
      on
      March 31, 2007. Under this arrangement, we acquired a portfolio of diverse
      technologies and developed strategic alliances with government-sponsored
      research facilities at the National Renewable Energy Laboratory and the U.S.
      Department of Agriculture’s Forest Products Labs, as well as research labs at
      Queen’s University, Ontario, Canada, Virginia Tech and the University of North
      Dakota. Through these strategic alliances, we outsourced our research and
      development to specialists in the fields of enzyme, fermentation and
      gasification technologies. Under this arrangement, we issued UTEK 1,142,152
      shares of our common stock (after adjustment for our reverse merger
      transaction): (a) 109,205 shares in consideration of the services performed
      by
      UTEK under the agreement; and (b) the remaining 1,251,357 shares to acquire
      Advanced Bioethanol Technologies, Inc., Ethanol Extraction Technologies, Inc.,
      Superior Separation Technologies, Inc., Xylose Technologies, Inc. and Advanced
      Biomass Gasification Technologies, Inc.





**Blairstown
      Facilities**





In
      October 2004, Old Xethanol purchased its second facility located on 25.5 acres
      in Blairstown, Iowa. Our Xethanol BioFuels subsidiary now operates this
      facility. When we acquired it, the Blairstown plant was idle and in bankruptcy.
      After substantial upgrades and refurbishment, we recommenced production in
      July
      2005. The facility is currently producing ethanol at a rate of approximately
      5.6
      million gallons per year, using corn as its feedstock. In addition to ethanol
      production, BioFuels also produces distillers wet grains, or DWG, a by-product
      of the traditional corn-to-ethanol process. Our sales during 2007 relate
      entirely to the BioFuels facility.





In
      July
      2006, we announced plans to construct a second ethanol facility at the
      Blairstown site with an additional production capacity of 35 million gallons
      of
      ethanol per year. We engaged The Facility Group to provide construction services
      and PRAJ Industries to provide engineering and design services. To date, we
      have
      acquired all necessary permits, purchased an adjacent 55-acre lot and completed
      site preparation. The Facility Group has completed the design and engineering
      work for the new facility, which includes on-site cogeneration that would allow
      the facility to be energy self-sufficient by using waste by-products from the
      plant as feedstock. We have indefinitely deferred construction of the second
      Blairstown ethanol plant as a result of the changing ethanol market, continued
      high prices for corn and our inability to arrange debt or equity financing
      for
      the project. For these reasons, we have concluded that we should record an
      impairment loss to reflect some of the costs related to this project. At
      December 31, 2007, we recorded a $2.6 million impairment loss on costs
      previously spent for the second ethanol facility.





**Senior
      Secured Note Financing**





On
      January 19, 2005, we completed a transaction with two institutional investors
      to
      refinance the acquisition bank debt of Xethanol BioFuels, LLC, the subsidiary
      that operates our Blairstown, Iowa ethanol facility. At the closing of that
      transaction, Xethanol BioFuels issued senior secured royalty income notes in
      the
      total principal amount of $5,000,000. The proceeds of the financing were used
      to:





·
            satisfy
                the $3,000,000 demand note held by an Omaha, Nebraska commercial
                bank in
                connection with the purchase of the
                facility;


·
            refurbish
                and upgrade production capacity at the
                facility;


·
            fund
                start-up activities at the facility and related working capital
                requirements; and


·
            pay
                legal and other professional fees.





In
      addition, on August 8, 2005, we completed another transaction with the same
      two
      institutional investors and, at the closing of that transaction, Xethanol
      BioFuels issued senior secured royalty income notes in the aggregate principal
      amount of $1,600,000. We used the proceeds of the financing to repay funds
      we
      had advanced to Xethanol BioFuels, and we used those repaid funds for working
      capital and general corporate purposes.





The
      senior secured royalty income notes provided for interest to be paid
      semi-annually at the greater of 10% per year or 5% of gross revenues from sales
      of ethanol, wet distillers grain and any other co-products, including xylitol,
      at the Blairstown facility, with principal becoming due in January 2012. We
      had
      the right to require the holders of the notes, from and after January 2008,
      to
      surrender their notes for an amount equal to 130% of the outstanding




4




principal,
      plus unpaid accrued interest. The holders of the notes had the right to convert
      their notes into shares of our common stock at any time at a conversion price
      equal to $4.00 per share (equivalent to 1,650,000 shares), which was in excess
      of the $3.25 purchase price for shares sold in our February 2005 private
      offering.





On
      April
      21, 2006, the holders of our $5,000,000 senior secured royalty income notes
      and
      $1,600,000 senior secured royalty income notes exercised their rights to convert
      the principal amounts of the notes into shares of our common stock at a price
      equal to $4.00 per share. In connection with the conversions, we issued: (a)
      1,250,000 shares of common stock and a three-year warrant to purchase 250,000
      shares of common stock at a purchase price of $12.50 to the holders of the
      $5,000,000 notes; and (b) 400,000 shares and a three-year warrant to purchase
      80,000 shares of our common stock at a purchase price of $12.50 to the holders
      of the $1,600,000 notes.





Under
      a
      security agreement, Xethanol BioFuels had pledged its land, buildings and site
      improvements, mechanical and process equipment and specific personal property
      as
      security for the payment of the principal and interest of the notes. Upon the
      conversion of the secured notes into our common stock on April 21, 2006, the
      security interest in our property was released.





**Fusion
      Capital Common Stock Purchase Agreement**





On
      October 18, 2005, we entered into a common stock purchase agreement with Fusion
      Capital Fund II, LLC, under which Fusion
      Capital agreed,
      under certain conditions, to purchase on each trading day $40,000 of our common
      stock up to an aggregate of $20 million over a 25-month period, subject to
      earlier termination at our discretion. Under the terms of the Fusion Capital
      agreement, we issued 303,556 shares of our common stock to Fusion Capital as
      a
      commitment fee. We sold a total of 1,894,699 shares to Fusion Capital for net
      cash proceeds of $9,611,680. On November 13, 2007, we entered into an agreement
      with Fusion Capital to terminate the agreement and a related registration rights
      agreement.





**April
      2006 Investor Purchase Agreement**





On
      April
      3, 2006, we entered into a securities purchase agreement with 100 investors.
      Under this agreement, on April 13, 2006, we issued to the
      investors:





·
            6,697,827
                shares of our common stock to the investors at a purchase price of
                $4.50
                per share;


·
            three-year
                Series A warrants to purchase up to 1,339,605 shares of common stock
                at an
                exercise price of $4.50 per share; and


·
            three-year
                Series B warrants to purchase up to 669,846 shares of common stock
                at an
                exercise price of $6.85 per share.





We
      received $30,139,951 from the investors for these securities. We may receive
      up
      to an additional $6,028,222 on exercise of the Series A warrants and up to
      an
      additional $4,588,445 on exercise of the Series B warrants. If the investors
      exercise all of the warrants, the investors will have invested a total of
      $40,756,618 in our company.





**April
      2006 Issuance of Equity Securities to Goldman Sachs &
Co.**





Also
      on
      April 3, 2006, we entered into a securities purchase agreement with Goldman
      Sachs. Under this agreement, on April 13, 2006, we issued to Goldman
      Sachs:





·
            888,889
                shares of our common stock at a purchase price of $4.50 per
                share;


·
            three-year
                Series A warrants to purchase up to 177,778 shares of common stock
                at an
                exercise price of $4.50 per share; and


·
            three-year
                Series B warrants to purchase up to 88,889 shares of common stock
                at an
                exercise price of $6.85 per share.





We
      received $4,000,000 from Goldman Sachs for these securities. We may receive
      up
      to an additional $800,001 if Goldman Sachs exercises the Series A warrants
      and
      up to an additional $608,889 if Goldman Sachs exercises the




5




Series
      B
      warrants. Assuming Goldman Sachs exercises of all of its warrants, its total
      investment would be $5,408,890.





**Investment
      in H2Diesel**





On
      April
      14, 2006, we entered into a sublicense agreement with H2Diesel, Inc., a
      development stage company that has not generated any revenues. The sublicense
      agreement was amended and restated on June 15, 2006, effective as of April
      14,
      2006. H2Diesel is the licensee of a proprietary vegetable oil-based diesel
      biofuel to be used as a substitute for conventional petroleum diesel and
      biodiesel, heating and other fuels, under an exclusive license agreement with
      the inventor of the biofuel. Under the amended and restated sublicense agreement
      dated June 15, 2006, we were granted (a) an exclusive sublicense to make, use
      and sell use and sell products manufactured by using the H2Diesel fuel additive
      in Maine, Vermont, New Hampshire, Massachusetts, Connecticut, Rhode Island,
      New
      York, Pennsylvania, Delaware, New Jersey, Virginia, West Virginia, North
      Carolina, South Carolina, Georgia and Florida, and (b) a non-exclusive license
      to sell those products anywhere else within North America, Central America
      and
      the Caribbean. We do not presently intend to pursue the manufacture and sale
      of
      a diesel biofuel based on H2Diesel’s technology.





We
      hold
      5,670,000 shares of H2Diesel common stock and recently sold 180,000 shares
      of
      H2Diesel common stock for net proceeds of approximately $777,000. H2Diesel
      common stock has recently traded at over $5.00 per share on the OTC Bulletin
      Board. Because we own more than 30% of the outstanding shares of H2Diesel,
      we
      relied on SEC Rule 144 in selling those shares. Under that rule, the volume
      of
      our sales of H2Diesel common stock is limited to 1% of the outstanding shares
      of
      H2Diesel common stock every 90 days. We may seek to sell a larger block of
      our
      H2Diesel shares in some other manner at a substantial discount to the market
      price, but we can offer no assurances that we will be able to do
      so.





The
      material terms of the sublicense agreement are described under “Intellectual
      Property Rights and Patents - Licensing and Collaborative Agreements - H2Diesel”
below. We entered into the sublicense agreement in connection with (a) an
      investment agreement dated as of April 14, 2006 among H2Diesel, two
      institutional investors and us; and (b) a management agreement dated as of
      April
      14, 2006 between H2Diesel and us. (Both the investment agreement and the
      management agreement were amended on June 15, 2006, effective as of April 14,
      2006, and H2Diesel terminated the management agreement effective as of September
      25, 2006.)





Under
      the
      amended investment agreement, on April 14, 2006: (a) H2Diesel issued to us
      a
      total of 2,600,000 shares of its common stock and granted us the right to
      purchase up to an additional 2,000,000 shares of its common stock at an
      aggregate purchase price of $3,600,000 (the “Xethanol Option”); and (b) we
      granted the institutional investors the right to require us to purchase the
      3,250,000 shares of H2Diesel’s common stock they owned in exchange for 500,000
      shares of our common stock (the “Put Right”). H2Diesel had issued the 3,250,000
      shares of its common stock to the institutional investors on March 20, 2006,
      together with stock options to purchase 2,000,000 shares of its common stock
      at
      an aggregate exercise price of $5,000,000 (the “Investor Option”). The
      institutional investors paid H2Diesel $2,000,000 for the H2Diesel common stock
      and options. Of the 2,600,000 shares of H2Diesel common stock issued to us,
      1,300,000 shares were issued as an inducement to enter into the Put Right.
      The
      fair value of these shares was $793,815, based on a price per share of
      approximately $0.61, which we credited to additional paid-in capital.
      Concurrently, on April 14, 2006, the institutional investors exercised the
      Put
      Right, and we purchased their 3,250,000 shares of H2Diesel common stock in
      exchange for 500,000 shares of our common stock. We have entered in to a
      registration rights agreement dated as of April 14, 2006 with the institutional
      investors under which they have the right to require us to register the resale
      of these shares of our common stock with the SEC under the Securities Act.
      Under
      the registration rights agreement, subject to its terms and conditions, the
      investors are entitled to require us to file up to two registration statements
      and to “piggyback” registration rights. The Xethanol Option and the Investor
      Option expired unexercised on August 21, 2006. We consider our investment in
      H2Diesel as a variable interest in a variable interest entity. Because we are
      not the primary beneficiary of the variable interest entity, we have accounted
      for our investment in H2Diesel using the equity method of accounting under
      APB
      Opinion No. 18, *The
      Equity Method of Accounting for Investments in Common Stock* ,
      at the
      fair value of the 500,000 shares of our common stock that we issued, or
      $5,425,000.





For
      the
      period from April 14, 2006 through December 31, 2006, we recorded a loss on
      our
      investment in H2Diesel of $1.6 million. For the year ended December 31, 2007,
      we
      recorded a loss on our investment in H2Diesel




6




of
      $1.2
      million. This loss represents our portion of H2Diesel’s net losses, based on the
      equity method of accounting. We have capitalized our amended sublicense
      agreement with H2Diesel and have estimated its useful life to be 10 years from
      the date on which H2Diesel first notifies us that it can produce and deliver
      additive in sufficient quantities to meet our requirements. As of December
      31,
      2007 (and as the filing date of this report), H2Diesel has not notified us
      that
      it has met our requirements. Accordingly, we recorded no royalty expense for
      the
      period ended December 31, 2007. We will amortize the value of the amended
      sublicense agreement commencing on the date on which H2Diesel first notifies
      us
      that it can produce and deliver additive in sufficient quantities to meet our
      requirements. We will record expense under our sublicense with H2Diesel based
      on
      the greater of minimum royalties due or royalties per gallon of product
      purchased from H2Diesel. Minimum royalty expense is recognized on a
      straight-line basis over each period if guaranteed, as defined, in the license
      agreement. Royalties exceeding the defined minimum amounts are recorded as
      expense during the period corresponding to product purchases. We will recognize
      a loss in the value of the investment in H2Diesel that is other than a temporary
      decline in accordance with APB18.





Under
      the
      H2Diesel management agreement, we agreed to provide administrative, management,
      and consulting services to H2Diesel for a period of one year from the date
      of
      the agreement. H2Diesel issued 1,300,000 shares of H2Diesel common stock under
      the investment agreement in consideration of the services we are obligated
      to
      perform under the management agreement. H2Diesel terminated the management
      agreement effective as of September 25, 2006. On June 30, 2006, we loaned
      H2Diesel $50,000. The loan bears interest at the prime rate and remains
      outstanding.





On
      October 16, 2006, we entered into a registration rights agreement with H2Diesel.
      On October 20, 2006, H2Diesel consummated a “reverse merger” transaction, as a
      result of which H2Diesel became a wholly owned subsidiary of Wireless Holdings,
      Inc., a Florida shell corporation without any continuing operations or assets,
      and each share of H2Diesel’s common stock outstanding immediately before the
      merger automatically converted into one share of Wireless Holdings common stock.
      Wireless Holdings, Inc. changed its name to H2Diesel Holdings, Inc. on November
      27, 2006. As of March 1, 2008, we owned 5,670,000 shares of H2Diesel Holdings
      common stock, which represented approximately 31.2% of the common stock then
      outstanding. In connection with the reverse merger, H2Diesel Holdings, Inc.
      (then named Wireless Holdings, Inc.) assumed H2Diesel’s obligations under the
      registration rights agreement. The agreement requires H2Diesel Holdings, upon
      our written request, but not before six months after the date of effectiveness
      of the resale registration statement to be filed by H2Diesel Holdings in
      connection with the then pending private offering of its securities, to file
      a
      registration statement with the SEC in form and substance sufficient to
      facilitate the distribution to our stockholders of the shares of H2Diesel
      Holdings common stock issued to us in the reverse merger, and to use its
      commercially reasonable efforts to cause the registration statement to be
      declared effective as soon as practicable thereafter.





In
      a
      Current Report on Form 8-K dated October 5, 2007 and filed with the SEC on
      October 10, 2007, we announced that we had entered into a stock purchase and
      termination Agreement with H2Diesel Holdings and H2Diesel .
      Under
      the agreement, we agreed to sell to H2Diesel Holdings 5,460,000 shares of the
      common stock of H2Diesel Holdings, or approximately 31.6% of H2Diesel Holdings’
outstanding common stock, for the aggregate price of $7.0 million, or
      approximately $1.28 per share. In addition, the agreement provided for
      termination, at the closing of the agreement, of the agreements described above
      to which H2Diesel and we are parties and cancellation of our $50,000 loan to
      H2Diesel. On signing the agreement, H2DieselHoldings paid us a $250,000
      non-refundable deposit to apply towards the purchase price described above.





The
      Current Report on Form 8-K also noted that the closing was conditioned on
      H2Diesel Holdings’ obtaining a minimum of $10,000,000 of new financing and that
      if the closing did not occur on or before November 9, 2007, or a later date
      as
      the parties might agree in writing, each party would have an independent right
      to terminate the agreement on 10 calendar days’ written notice to the other
      party. We had the right to retain the non-refundable deposit of $250,000 if
      the
      agreement was terminated other than as a result of a breach by us of our
      obligations under the agreement. On or about November 13, 2007, the parties
      agreed in writing to amend the agreement to extend the closing date referenced
      above from November 9, 2007 to November 23, 2007.





The
      closing did not occur on or before November 23, 2007. Accordingly, on January
      7,
      2008, we provided H2Diesel Holdings and H2Diesel with written notice to
      terminate the agreement effective January 17, 2008, 10 calendar days from the
      date of the notice. The agreement was terminated on January 17, 2008.
      Accordingly, we




7




retained
      the non-refundable deposit of $250,000 and the shares of H2Diesel Holdings’
common stock; the other agreements to which H2Diesel and we are parties remain
      in effect; and the $50,000 loan from us to H2Diesel remains outstanding.





**CoastalXethanol
      LLC**





In
      May
      2006, we organized CoastalXethanol LLC to develop plants for the production
      of
      ethanol in Georgia and parts of South Carolina. CoastalXethanol is a joint
      venture with Coastal Energy Development, Inc. (“CED”). We entered into an
      organizational agreement with CED under which, among other things, we issued
      to
      CED a warrant to purchase 200,000 shares of our common stock. We acquired an
      80%
      membership interest in CoastalXethanol for a capital contribution of $40,000,
      and CED acquired a 20% membership interest in CoastalXethanol for a capital
      contribution of $10,000. In August 2006, Augusta BioFuels, LLC, a wholly owned
      subsidiary of CoastalXethanol, purchased a former pharmaceutical manufacturing
      complex located in Augusta, Georgia from Pfizer Inc. for approximately
      $8,400,000 in cash. In October 2006, Augusta BioFuels sold surplus equipment
      from the Augusta facility for $3,100,000 in cash. On March 5, 2007, we, along
      with CoastalXethanol, initiated litigation against CED alleging that it failed
      to repay loans and failed to account properly for the funds it spent. On April
      3, 2007, CED filed an answer and counterclaim, asserting various claims. On
      September 14, 2007, we reached a settlement with CED and agreed to pay CED
      $400,000 in exchange for CED’s 20% interest in CoastalXethanol, which owns
      (through a wholly owned subsidiary) a former pharmaceutical manufacturing
      complex located in Augusta, Georgia. The parties executed releases and replaced
      the warrant described above with a warrant to purchase 200,000 shares of our
      common stock that is exercisable at an exercise price of $6.85 per share through
      May 30, 2009. The payment and purchase of CED’s 20% interest in CoastalXethanol
      LLC was completed on September 24, 2007. We dismissed our claims against CED
      with prejudice.





We
      have
      reevaluated our Augusta facility and have decided that it does not fit within
      our long-term corporate strategy. On March 20, 2008, our board authorized
      management to pursue the sale of the facility. We have interviewed real
      estate brokerage firms to assist us in marketing the property for sale, but
      we
      have not retained such a firm. If we do decide to sell our Augusta facility
      and
      are successful in selling it, we estimate that we would reduce our annual
      overhead by approximately $600,000. We can offer no assurances regarding how
      long it would take to sell the facility or the price we might receive. In
      connection with the potential sale of the property, we performed a market study
      analysis of the amount that we can expect to realize upon the sale of the site
      and, based on this analysis, have recorded a $2.1 million impairment loss as
      of
      December 31, 2007.





**NewEnglandXethanol,
      LLC**





On
      June
      23, 2006, we entered into an organizational agreement with Global Energy and
      Management, LLC (“Global Energy”) under which, among other things, we issued to
      Global Energy a warrant to purchase 20,000 shares of our common stock at a
      purchase price of $6.85 per share that is first exercisable on the first
      anniversary of the date of the organizational agreement and expires on the
      fourth anniversary of the date of the organizational agreement. In
      December 2006, the NewEnglandXethanol joint venture effectively ended based
      on a
      disagreement between Global Energy and us with respect to the actions that
      Global Energy and we were required to take pursuant to our joint venture. We
      do
      not believe that the NewEnglandXethanol joint venture will conduct any further
      business.





In
      December 2007, Global Energy filed an action in the federal court for the
      Southern District of New York against Xethanol and nine of our current or former
      officers, directors and employees. The lawsuit alleges fraud by the defendants
      in connection with Global Energy’s alleged investment of $250,000 in
      NewEnglandXethanol. On March 19, 2008, Global Energy served its second amended
      complaint on us. Based on an alleged investment of $250,000, Global Energy
      seeks
      more than $10,000,000 in damages plus pre-judgment interest and costs.
      Management has instructed counsel to vigorously represent and defend our
      interests in this litigation.





**Spring
      Hope Acquisition**





In
      November 2006, we acquired the assets of Carolina Fiberboard Corporation, LLC, a
      former
      medium density fiberboard plant located in Spring Hope, North
      Carolina ,
      for:
      $4,000,000 in cash; 1,197,000 shares of our common stock; and warrants to
      purchase an additional 300,000 shares of our common stock at an exercise price
      of $4.00 per




8




share.
      We
      agreed to file a registration statement registering the resale of the shares
      of
      common stock issued at closing and the shares of common stock issuable on
      exercise of the warrants no later than 20 days after the effective date of
      another registration statement that became effective on August 10, 2007. The
      warrants are exercisable until the third anniversary of issuance. We have not
      filed a registration statement for these shares of common stock and
      warrants.





We
      have
      reevaluated this facility and have determined that it does not fit within our
      long-term corporate strategy. On March 20, 2008, our board authorized
      management to pursue the sale of the facility. If we do decide to sell the
      facility and are successful in selling it, we estimate that we would reduce
      our
      annual overhead by approximately $250,000. Before we sell the property (or
      as a
      term of its sale), we will have to resolve certain liens on the property filed
      by companies that performed, or have claimed to have performed, environmental
      remediation and demolition work on the property. We can offer no assurances
      regarding how long it would take to sell the facility or the price we might
      receive. We performed an analysis of the fair market value of the property
      at
      December 31, 2007 and determined that we should record an additional impairment
      loss of $4.2 million at December 31, 2007.





**Southeast
      BioFuels, LLC**





In
      December 2006, Southeast BioFuels, LLC, a newly formed subsidiary of
      CoastalXethanol, purchased assets from Renewable Spirits, LLC for $100,000
      in
      cash, a $600,000 note payable over 120 months and a 22% membership interest
      in
      Southeast BioFuels. The purchased assets consisted of equipment and intellectual
      property associated with an experimental system for the production of ethanol
      and other marketable co-products from waste citrus biomass, including Renewable
      Spirits’ rights under a cooperative research and development agreement with the
      U.S. Department of Agriculture’s Agricultural Research Service. As described
      below, we intend to build, through Southeast BioFuels, LLC, a demonstration
      plant in Florida for converting citrus peel waste into ethanol.





**Registration
      Statement on Form SB-2 Effective August 10, 2007**





On
      August
      10, 2007, our registration statement on Form SB-2 was declared effective by
      the
      SEC. The registration covers the resale of up to 6,697,827 shares of our common
      stock by certain stockholders and the resale of up to 2,009,451 additional
      shares of common stock that we may issue on the exercise of Series A Warrants
      and Series B Warrants issued to those stockholders. We issued the shares of
      common stock, the Series A Warrants and the Series B Warrants to the selling
      stockholders in a private placement on April 13, 2006. In connection with that
      private placement, we also issued Series A Warrants to placement agents. The
      registration also covers the resale of up to 606,938 additional shares of common
      stock that we may issue on exercise of the Series A Warrants we issued to those
      placement agents.





**Investments
      in 2008**





In
      January 2008, we invested $250,000 in Carbon Motors Corporation, a new American
      automaker developing a specially-built law enforcement vehicle featuring a
      clean
      diesel engine that can run on biodiesel fuel. For its investment, we received
      a
      warrant that is initially exercisable for 30,000 shares of Series B Preferred
      Stock at a price of $1.05 per share with a term of 5 years.





Also
      in
      January 2008, we made a $500,000 investment in Consus Ethanol, LLC of
      Pittsburgh, Pennsylvania pursuant to a convertible promissory note. Consus
      has a
      permitted site in western Pennsylvania, where it plans to build the first of
      several ethanol plants. Its business model calls for a cogeneration plant using
      waste coal to power the companion ethanol plant - allowing significant energy
      cost savings. The note bears interest at the rate of 10% per annum and has
      an
      initial term of six months. Prior to the maturity date, the note can be extended
      for an additional six months or can be converted to equity.




9




**DESCRIPTION
      OF BUSINESS**





**Company
      Overview**





We
      are a
      renewable energy and clean technology company. We have broadened our business
      strategy to pursue opportunities in biomass gasification for electricity
      production, wind power, solar power, energy storage, energy infrastructure,
      energy efficiency, waste recycling and agricultural processes. We are meeting
      with investment bankers and other referral sources as we seek attractive
      companies to invest in or acquire. We also may decide to invest in profitable
      businesses in industries outside renewable energy and clean technology.





**Current
      Business Operations and Investments**





Our
      business currently includes:





·
            an
                operating plant in Blairstown, Iowa that produces ethanol from
                corn;


·
            a
                planned demonstration plant in Florida for converting citrus peel
                waste
                into ethanol;


·
            bio-separation
                and bio-fermentation technologies, along with strategic relationships
                with
                government and university research labs to further develop and prove
                out
                these technologies; and


·
            minority
                investments in other renewable energy or clean tech
                businesses.





We
      describe each of these aspects of our business in more detail
      below.





As
      noted
      above, we have decided not to pursue certain business opportunities and have
      decided to sell some of our assets. After evaluating our agreements to
      manufacture and sell a diesel biofuel based on technology that H2Diesel
      Holdings, Inc. sublicensed to us, we have decided not to pursue that business
      and have begun to sell our shares of H2Diesel common stock. We also own a former
      pharmaceutical manufacturing complex in Augusta, Georgia and a former medium
      density fiberboard plant in Spring Hope, North Carolina. We have decided that
      our Augusta and Spring Hope facilities do not fit within our long-term corporate
      strategy, and on March 20, 2008, our board authorized management to pursue
      the sale of each facility.





*Blairstown
      Facilities*





We
      currently own one operating plant in Blairstown, Iowa that produces ethanol
      from
      corn. As a result of the continued high prices for corn and natural gas, we
      are
      considering cutting back our production at this plant to reduce our operating
      losses. The facility is currently producing ethanol at a rate of approximately
      5.6 million gallons per year, using corn as its feedstock. In addition to
      ethanol production, the Blairstown plant also produces distillers wet grains,
      or
      DWG, a by-product of the traditional corn-to-ethanol process. Our sales during
      2007 relate entirely to the Blairstown facility.





In
      July
      2006, we announced plans to construct a second ethanol facility at the
      Blairstown site with an additional production capacity of 35 million gallons
      of
      ethanol per year. We engaged The Facility Group to provide construction services
      and PRAJ Industries to provide engineering and design services. To date, we
      have
      acquired all necessary permits, purchased an adjacent 55-acre lot and completed
      site preparation. The Facility Group has completed the design and engineering
      work for the new facility, which includes on-site cogeneration that would allow
      the facility to be energy self-sufficient by using waste by-products from the
      plant as feedstock. In light of the changing ethanol market and our inability
      to
      arrange debt or equity financing for the project, we have indefinitely deferred
      construction of a new ethanol plant next to our Blairstown facility .





*Florida
      Demonstration Plant for Converting Citrus Waste into Alcohol*





On
      December 18, 2007, we announced in a press release that Southeast Biofuels
      filed
      a grant application with the Florida Department of Agriculture and Consumer
      Services to expand our work on converting waste to energy, using citrus waste
      as
      the raw material and converting it into ethanol. On January 22, 2008, the
      Florida Department of Agriculture and Consumer Services approved a $500,000
      grant to Southeast Biofuels. We intend to build a demonstration plant for
      converting citrus peel waste into ethanol and are negotiating an agreement
      to
      locate the plant at an existing citrus facility in Florida owned by one of
      the
      largest citrus processors in the state. The planned cost




10




for
      the
      two-year build-out of the demonstration plant is approximately $5,900,000.
      We
      plan to apply for federal government grants and combine private equity with
      those grants to supplement the state grant. If we do not receive these federal
      grants, we will need to raise additional equity to build this plant as we
      intend.





*Research
      and Development Agreements*





We
      have
      research and development agreements with leading national laboratories and
      universities such as the U.S. Department of Agriculture’s Forestry Products
      Laboratory (FPL); the U.S. Department of Energy’s National Renewable Energy
      Laboratory (NREL); Virginia Tech; and The University of North Dakota’s Energy
& Environmental Research Center (EERC). To date, however, we have been
      unable to commercialize any of the technologies identified under these
      agreements. We are evaluating our research and development agreements, and
      we
      intend to continue to fund some of these agreements with the aim of
      commercializing that technology. We are also reviewing opportunities to license
      our technologies to third parties to create royalty income streams.





*Minority
      Investments*





In
      January 2008, we invested $250,000 in Carbon Motors Corporation, a new American
      automaker developing a specially-built law enforcement vehicle featuring a
      clean
      diesel engine that can run on biodiesel fuel. Also in January 2008, we invested
      $500,000 in Consus Ethanol, LLC of Pittsburgh, Pennsylvania. Consus has a
      permitted site in western Pennsylvania, where it plans to build the first of
      several ethanol plants. Its business model calls for a cogeneration plant using
      waste coal to power the companion ethanol plant - allowing significant energy
      cost savings.





**Industry
      Overview**





*The
      Ethanol Market*





The
      growth in ethanol market has been supported by regulatory requirements mandating
      the use of renewable fuels, including ethanol. Historically, producers and
      blenders had a choice of fuel additives to increase the oxygen content of fuels.
      MTBE (methyl tertiary butyl ether), a petroleum-based additive, was the most
      popular additive, accounting for up to 75% of the fuel oxygenate market.
      Although the federal oxygenate requirement was eliminated in May 2006 as part
      of
      the Energy Policy Act of 2005, oxygenated gasoline continues to be used to
      help
      meet separate federal and state air emission standards. Because MTBE is a
      suspected carcinogen that may contaminate ground water, the refining industry
      has mostly abandoned the use of MTBE, making ethanol the primary clean oxygenate
      currently used.





The
      Energy Policy Act of 2005 transformed ethanol from a gasoline additive under
      the
      1990 Clean Air Act to a primary gasoline substitute, which we believe has
      strengthened and expanded the role of ethanol in the U.S. fuel economy. The
      Energy Policy Act of 2005 created a renewable fuel standard, or RFS, increasing
      use of renewable domestic fuels such as ethanol and biodiesel. The RFS mandated
      that at least 7.5 billion gallons of ethanol be used annually by 2012. In
      addition, the Energy Policy Act established a 30% tax credit up to $30,000
      for
      the cost of installing clean fuel refueling equipment, such as an E85 ethanol
      fuel pump.





On
      December 19, 2007, President Bush signed into law the Energy Independence and
      Security Act of 2007, which establishes new levels of renewable fuel mandates
      for conventional biofuel and advanced biofuel. The Energy Independence and
      Security Act increased the mandated minimum use of renewable fuels to 9 billion
      gallons per year in 2008 (up from 5.4 billon gallons per year under the previous
      RFS), which further increases to 36 billon gallons per year in 2022. The revised
      RFS requires the increased use of advanced biofuel, which includes ethanol
      derived from cellulose, hemicellulose or other non-corn starch sources. By
      2022,
      60%, or 22 billion gallons, of the mandated 36 billion gallons of renewable
      fuel
      must come from advanced biofuels. According to estimates published by the
      Renewable Fuels Association in Washington, D.C., the Energy Independence and
      Security Act is expected to lead toward the commercialization of cellulosic
      ethanol.





Ethanol
      is commonly blended in gasoline. Because the ethanol molecule contains oxygen,
      it allows an automobile engine to more completely combust fuel, resulting in
      fewer emissions and improved performance. Ethanol is produced by the
      fermentation of starches and sugars such as those found in grains and other
      crops.




11




Ethanol
      contains 35% oxygen by weight and, when combined with gasoline, artificially
      introduces oxygen into gasoline and raises oxygen concentration in the
      combustion mixture with air. As a result, the gasoline burns more completely
      and
      releases less unburnt hydrocarbons, carbon monoxide and other harmful exhaust
      emissions into the atmosphere. The use of ethanol as an automotive fuel is
      commonly viewed as a way to reduce harmful automobile exhaust emissions. Ethanol
      can also be blended with regular unleaded gasoline as an octane booster to
      provide a mid-grade octane product that is commonly distributed as a premium
      unleaded gasoline. Fuel ethanol has an octane value of 113 compared to 87 for
      regular unleaded gasoline.





According
      to the Renewable Fuels Association, ethanol is blended into more than 50% of
      all
      U.S. gasoline. Ethanol blends accounted for approximately 4.8%, or approximately
      6.8 billion gallons, of the U.S. gasoline supply in 2007. The Energy Information
      Administration, a statistical agency of the U.S. Department of Energy, estimates
      that U.S. ethanol consumption will exceed 9.2 billion gallons in 2008. The
      most
      common blend is E10, which contains 10% ethanol and 90% gasoline. There is
      also
      growing federal government support for E85, which is a blend of 85% ethanol
      and
      15% gasoline. Increasingly, motor manufacturers are producing flexible fuel
      vehicles (particularly sports utility vehicle models) which can run off ethanol
      blends of up to 85% (E85) to obtain exemptions from fleet fuel economy quotas.
      According to the National Ethanol Vehicle Coalition (NEVC), more than six
      million flexible fuel vehicles are now on the road in the United States,
      offering further potential for significant growth in ethanol
      demand.





During
      the last 20 years, ethanol production capacity in the United States has grown
      from almost nothing to about 7.9 billon gallons per year as of January 2008.
      According to the Renewable Fuels Association, approximately 139 ethanol
      production plants were operational in the United States in January 2008, with
      an
      additional 68 plants under expansion or construction. The ethanol production
      industry is fragmented, with two companies, Archer Daniels Midland and Poet,
      accounting for nearly 30% of U.S. production and the next largest producer
      accounting for less than 7% of the same market. The majority of plants are
      in
      the 20 million to 60 million gallons per year capacity range, with a number
      of
      these plants affiliated with local farmer cooperatives. We expect recent
      consolidation trends in the ethanol industry to continue.





In
      the
      United States, ethanol is primarily made from starch crops, principally from
      the
      starch fraction of corn. Consequently, the production plants are concentrated
      in
      the grain belt of the Midwest, principally in Illinois, Iowa, Minnesota,
      Nebraska and South Dakota. Ethanol producers in the U.S. are sensitive to the
      price volatility of corn. After hovering around $2 a bushel for a decade, corn
      prices have significantly increased in the recent years. Over the ten-year
      period from 1998 through 2007, corn prices (based on the Chicago Board of Trade
      daily futures data) have ranged from a low of $1.75 per bushel on August 11,
      2000 to a high of $4.55 per bushel on December 31, 2007, with prices averaging
      $2.42 per bushel during this period. Beginning in the fourth quarter of 2006,
      the biofuels industry experienced significantly higher corn prices. In
      2007,
      corn prices ranged from a low of $3.10 per bushel to a high of $4.55 per bushel,
      with prices averaging $3.73 per bushel. Corn prices have continued to increase
      in 2008, to a high of $5.72 per bushel through March 24, 2008.





According
      to 2007 Crop Production Summary published by the U.S. Department of Agriculture,
      farmers planted approximately 93.6 million acres, up 19% from 2006 to the
      highest level since 1944. Corn production is affected by weather, governmental
      policy, disease and other conditions. A significant reduction in the quantity
      of
      corn harvested due to adverse weather conditions, farmer planting decisions,
      domestic and foreign government farm programs and policies, global demand and
      supply or other factors could result in increased corn costs that would increase
      our cost to produce ethanol. The significance and relative impact of these
      factors on the price of corn is difficult to predict.





*The
      Ethanol Production Process*





In
      the
      United States, ethanol is primarily made from starch crops, principally from
      the
      starch fraction of corn. It can also be made using industrial food processing
      wastes, and extensive research and development is ongoing to improve the
      economics of using cellulosic biomass feedstocks - woody and fibrous materials;
      agricultural residues including corn cobs, stalks and husks, stalks from sugar
      cane and the waste product remaining after refining sugar cane; forestry
      residues, yard waste, and restaurant and municipal solid waste Ethanol is
      produced by extracting, fermenting and distilling the sugars trapped in these
      diverse feedstocks.




12




Corn
      dry
      mill ethanol production processing can be divided into five basic
      steps:





·
            milling,
                which physically breaks down the corn kernel using mechanical processes
                allowing for extraction of the starch
                portion;


·
            liquefaction
                and saccharification, which applies heat and enzymes to break down
                the
                starches into fermentable sugars;


·
            fermentation,
                which converts sugar to carbon dioxide and ethanol through yeast
                metabolization;


·
            distillation
                and dehydration, which separates ethanol from water through the use
                of
                heat and a molecular sieve dehydrator;
                and


·
            by-product
                recovery, which employs heat and mechanical processes to process
                non-fermentable corn components into saleable feed
                products.





By-product
      recovery is an important contributor to revenues for corn-based plants. The
      two
      principal by-products are distillers wet grains, or DWG, and distillers dry
      grains, or DDG. DWG and DDG are high protein, high fat products for the animal
      feed ingredient market. There is a well-established market for DWG and DDG.
      The
      vast majority of United States ethanol production relies on mature, proven
      corn-based technology. Historically and over the longer term, the economics
      of
      corn ethanol have favored large scale plants, producing more than 60 million
      gallons per year, which are located in close proximity to the Corn Belt, and
      away from the major consuming markets.





Ethanol
      can also be made using industrial food processing wastes such as waste starches
      and sugars. Examples of starches and sugars that can be used for ethanol
      production include brewing waste, candy waste, spoiled soft drinks and other
      diverse food processing residues as well as bakery waste. The principal
      advantage of these feedstocks is that they are often available at low cost.
      While corn is a commodity that is almost always available at the prevailing
      market price, the availability of starch and sugar feedstocks is less
      predictable and depends on regional opportunities, plant location and processor
      efficiencies. Production from waste starches and sugars is a mature technology
      very similar to that from corn, except that the process is simplified in the
      case of sugars, which are already in a chemical form suitable for
      fermentation.





*Biomass
      Ethanol Production*





In
      a
      recent report, “Outlook for Biomass Ethanol Production Demand,” the U.S. Energy
      Information Administration found that advancements in production technology
      of
      ethanol from cellulose could reduce costs and result in production increases
      of
      40% to 160% by 2010. Biomass (cellulosic feedstocks) includes agricultural
      waste
      (including citrus waste), woody fibrous materials, forestry residues, waste
      paper, municipal solid waste and most plant material. Like waste starches and
      sugars, they are often available at a relatively low cost. Cellulosic feedstocks
      are more abundant than corn, global and renewable in nature. These waste
      streams, which would otherwise be abandoned, land-filled or incinerated, exist
      in populated metropolitan areas where ethanol prices are higher.





If
      we can
      develop or license a cost-effective method of producing ethanol from biomass,
      it
      would have the following advantages over corn-based production, in addition
      to
      its lower raw material costs:





·
            biomass
                would allow producers to avoid the pressure on margins created by
                rises in
                corn prices;


·
            biomass
                ethanol could be produced locally with a variety of waste products;
                and


·
            biomass
                ethanol would generate an additional class of valuable co-products,
                such
                as xylitol, which are not derived from
                corn.





There
      are
      three basic steps in converting biomass to ethanol:





(1)
            converting
                biomass to a fermentation feedstock (some form of fermentable sugar)
                -
                this can be achieved using a variety of different extraction
                technologies;





(2)
            fermenting
                biomass intermediates using biocatalysts (microorganisms including
                yeast
                and bacteria) to produce ethanol;
                and




13




(3)
            processing
                the fermentation product, which yields fuel-grade ethanol and by-products
                such as xylitol.





Cellulose
      and hemicellulose, which are the two major components of plants and give plants
      their structure, are made of sugars that are linked together in long chains.
      Advanced bioethanol technology is seeking to break those chains down into their
      component sugars and then ferment them to make ethanol or xylitol. This
      technology has the potential to turn ordinary low-value plant materials such
      as
      corn stalks, sawdust or waste paper into fuel ethanol. We have acquired a
      portfolio of technologies for biomass-to-ethanol production. For more
      information on these technologies, see “Technology Platform” below.





While
      the
      sale of DWG improves the economics of corn-to-ethanol production, biomass
      feedstocks also present opportunities to monetize waste streams beyond revenues
      derived from ethanol itself. A valuable co-product derived from
      biomass-to-ethanol production is xylitol. Xylitol is a natural sweetener that
      the FDA approved in the 1960’s for use in foods and beverages, including chewing
      gums, candies, toothpastes and diabetic regimens. Because of its high price and
      potential for wider consumer acceptance, we are evaluating whether to seek
      to
      produce it.





**Technology
      Platform**




*Overview*





The
      major
      variable costs associated with the production of ethanol are the feedstock
      (traditionally corn) and the natural gas for heat generation at various stages
      of the process. We are pursuing a number of technologies to reduce these costs.
      We believe that margin improvements can be achieved by substituting lower cost
      feedstocks for corn, reducing natural gas intake, increasing the effective
      capacity of each plant by accelerating the separation and fermentation
      processes, and reducing the amount of water used in the production
      cycle.





We
      have
      acquired a portfolio of diverse technologies and developed strategic alliances
      with government-sponsored research facilities at the National Renewable Energy
      Laboratory and the U.S. Department of Agriculture’s Forest Products Labs, as
      well as research labs at Queen’s University, Ontario, Canada, Virginia Tech and
      the University of North Dakota. Through these strategic alliances, we outsourced
      our research and development to specialists in the fields of enzyme,
      fermentation and gasification technologies.





*Advanced
      Bioethanol Technologies, Inc.*





In
      June
      2004, we acquired Advanced Bioethanol Technologies, Inc., which holds the
      exclusive worldwide license to an innovative biomass extraction and fermentation
      process developed by researchers at Virginia Tech. Dr. Foster Aryi Agblevor
      is
      the developer of the process. The benefits of Advanced Bioethanol’s technology
      are that:





·
            the
                process reduces the amount of additives required for healthy
                fermentation;


·
            the
                process uses waste paper sludge as an active ingredient and source
                of
                cellulose; and


·
            the
                process requires fewer purification steps before
                fermentation.





We
      acquired this technology to be able to take a mixture of cellulosic biomass
      feedstocks and combine them. The material terms of the license are described
      under “Intellectual Property Rights and Patents - Licensing and Collaborative
      Agreements - Virginia Tech” below.





Recent
      research has shown that Advanced Bioethanol’s technology can produce ethanol,
      and researchers at Virginia Tech are now seeking to scale up the process to
      produce larger quantities of ethanol. We believe this technology offers the
      potential to reduce the volume of feedstocks used and costs associated with
      their integration into the production process. We are currently unable to
      estimate the timetable or costs of completing the commercialization of this
      technology.




14




*Superior
      Separation Technologies, Inc.*





In
      January 2005, we acquired Superior Separation Technologies, Inc., which owns
      the
      worldwide exclusive license to patented technology developed by the National
      Renewable Energy Laboratory, the principal research laboratory for the U.S.
      Department of Energy’s Office of Energy Efficiency and Renewable Energy, for the
      enhanced separation of biomass feedstocks into their constituent fractions
      to
      facilitate subsequent conversion into ethanol and xylitol. We acquired this
      technology to be able to separate the components of cellulosic biomass (lignin,
      cellulose and hemicellulose) which would allow access to the fermentable sugars
      that can then be turned into ethanol. The material terms of the license are
      described under “Intellectual Property Rights and Patents - Licensing and
      Collaborative Agreements - National Renewable Energy Laboratory” below. The
      potential benefits of Superior Separation’s clean fractionation of biomass
      technology are that:





·
            the
                process separates biomass into very pure cellulose, hemicellulose
                and
                lignin fractions;


·
            the
                process can be used on a variety of biomass
                feedstocks;


·
            the
                process reduces water requirement in biomass
                treatment;


·
            the
                clean fractions allow easier hydrolysis and fermentation;
                and


·
            the
                solvent is easily recoverable, and
                economical.





We
      are
      currently unable to estimate the time or the cost required to complete the
      commercialization of this technology.





*Xylose
      Technologies, Inc.*





In
      August
      2005, we acquired Xylose Technologies, Inc., which holds a license certain
      rights to commercialize technology based on research done by the U.S. Department
      of Agriculture’s Forest Products Laboratory, which has developed a
      genetically-engineered, xylose fermenting yeast strain providing enhanced
      ethanol production from xylose, a sugar extracted from wood or straw. We
      acquired this technology in an effort to create a yeast that will be more
      powerful and robust in the fermentation of hemicellulose sugars present in
      wood
      and the by-products produced from paper mills, allowing us to use those
      materials in our plants. Our extended agreement with the FPL was scheduled
      to
      expire in March 2007. In January 2007, we negotiated a second cooperative
      research and development agreement with FPL. In March 2008, we extended the
      term
      of this agreement, at no additional cost, until September 2008. The material
      terms of the license are described under “Intellectual Property Rights and
      Patents - Licensing and Collaborative Agreements - U.S. Department of
      Agriculture’s Forest Products Laboratory” below. Because xylose is present in
      biomass materials such as agricultural wastes, corn hulls and the like, as
      well
      as in pulping wastes and fast-growing hardwoods, which are currently
      under-exploited, we believe a method to more easily convert xylose to ethanol
      and value-added co-products such as xylitol will prove to be valuable. The
      potential benefits of Xylose Technologies’ xylose fermenting yeast strain
      technology are that:





·
            the
                process allows more efficient fermentation of biomass
                feedstock;


·
            the
                process can allow many forestry products to be used to make ethanol;
                and


·
            the
                process can also be used to make
                xylitol.





We
      are
      currently unable to estimate the time or the cost required to complete the
      commercialization of this technology.





*Advanced
      Biomass Gasification Technologies, Inc. (ABGT)*





In
      June
      2006, we acquired Advanced Biomass Gasification Technologies, Inc. (“ABGT”),
      which had no
      operations before we purchased it. Until that time, its assets consisted solely
      of cash and a license and research agreement. ABGT
      is
      the licensee from the University of North Dakota’s Energy & Environmental
      Research Center (“EERC”) of certain patents and know-how related to
      microgasification and a party to a base research agreement with the EERC. We
      acquired this technology in an effort to develop small-scale gasification
      technology for the production of syngas. Our development program for the
      commercialization of this technology is in its early stages. The material terms
      of the license and research agreement are described under “Intellectual Property
      Rights and




15




Patents
      -
      Licensing and Collaborative Agreements - University of North Dakota” below. The
      potential benefits of ABGT’s microgasification technologies are
      that:





·
            the
                process provides a lower cost alternative to steam boiler power
                generation;


·
            the
                process uses low-cost biomass feedstocks and waste streams, including
                lignin, a byproduct of cellulosic ethanol production;
                and


·
            the
                process has applications in numerous industries such as forest products,
                wood processing, agricultural processing and secondary
                milling.





We
      are
      currently unable to estimate the time or the cost required to complete the
      commercialization of this technology.





*H2Diesel,
      Inc.*





On
      April
      14, 2006, we entered into a sublicense agreement with H2Diesel, Inc., which
      was
      amended and restated on June 15, 2006, effective as of April 14, 2006. H2Diesel
      is the licensee of a proprietary vegetable oil-based diesel biofuel to be used
      as a substitute for conventional petroleum diesel and biodiesel, heating and
      other fuels, under an exclusive license agreement with the inventor of the
      diesel biofuel. Under the amended and restated sublicense agreement, we were
      granted (a) an exclusive sublicense to make, use and sell use and sell products
      manufactured by using the H2Diesel fuel additive in Maine, Vermont, New
      Hampshire, Massachusetts, Connecticut, Rhode Island, New York, Pennsylvania,
      Delaware, New Jersey, Virginia, West Virginia, North Carolina, South Carolina,
      Georgia and Florida, and (b) a non-exclusive license to sell those products
      anywhere else within North America, Central America and the Caribbean. The
      other
      material terms of the sublicense agreement are described under “Intellectual
      Property Rights and Patents - Licensing and Collaborative Agreements - H2Diesel”
below. For more information about our transactions with H2Diesel, see
“Description of Formation and Capitalization - Investment in H2Diesel”
above.





We
      do not
      presently intend to pursue the manufacture and sale of a diesel biofuel based
      on
      H2Diesel’s technology.





**Intellectual
      Property Rights and Patents**





We
      license U.S. patents and have two pending patent applications in the field
      of
      biomass conversion. The issued United States patents expire between 2015 and
      2020.





Patent
      and other proprietary rights are important for the development of our business.
      We have sought and intend to continue to seek patent protection for our
      inventions and rely upon patents, trade secrets, know-how, continuing
      technological innovations and licensing opportunities to develop and maintain
      a
      competitive advantage. To protect these rights, know-how and trade secrets,
      we
      typically require employees, consultants, collaborators and advisors to enter
      into confidentiality agreements with us, generally stating that they will not
      disclose any confidential information about us to third parties for a certain
      period of time, and will otherwise not use confidential information for anyone’s
      benefit but ours. We cannot assure you that any of our confidentiality and
      non-disclosure agreements will provide meaningful protection of our confidential
      or proprietary information in the case of unauthorized use or
      disclosure.





The
      patent positions of companies like ours involve complex legal and factual
      questions and, therefore, their enforceability cannot be predicted with any
      certainty. We cannot assure you that any patents will issue on any of our
      pending patent applications. The patents licensed to us, and those that may
      issue or be licensed to us in the future, may be challenged, invalidated or
      circumvented, and the rights granted thereunder may not provide us with
      proprietary protection or competitive advantages against competitors with
      similar technology. Furthermore, our competitors may independently develop
      similar technologies or duplicate any technology developed or licensed by us.
      Because of the extensive time required for development and testing of new
      technologies, it is possible that, before any of our proprietary technologies
      can be commercialized, our relevant patent rights may expire or remain in force
      for only a short period following commercialization. Expiration of patents
      we
      license or own could adversely affect our ability to protect future technologies
      and, consequently, our operating results and financial position. In




16




addition,
      we cannot assure you that we will not incur significant costs and expenses,
      including the cost of litigation in the future, to defend our rights under
      those
      patents, licenses and non-disclosure agreements.





**Patent
      Applications**





On
      August
      4, 2005, we filed an international patent application under the Patent
      Cooperation Treaty based on U.S. Provisional Patent Application Serial No.
      60/598,880 entitled “Method of Converting a Biomass into a Biobased Product.”
The invention uses an “impact” process for cleanly separating, or fractionating,
      the basic fibrous components that are present in a biomass and from which
      fermentable sugars are obtained. The fibrous components of the biomass are
      then
      uniquely processed into a wide range of environmentally advantageous biobased
      products such as ethanol, fossil fuel derivatives, biodegradable plastics or
      edible protein.





On
      December 12, 2005, we filed a provisional U.S. patent application Serial No.
      11/301,970 entitled “Method for Producing Bioethanol from Lignocellulosic
      Biomass and Recycled Paper Sludge.” We believe the invention will improve the
      ethanol yield for lignocelluosics by increasing the amount of sugars available
      for fermentation.





**Licensing
      and Collaborative Agreements**





To
      date,
      we have entered into a number of license and collaborative research and
      development agreements with various institutions to obtain intellectual property
      rights and patents relating to biomass conversion. Our strategy includes
      possible future in-licensing of intellectual property, as well as collaborations
      with companies that may use our intellectual property in their products, or
      develop, co-develop, market and sell our product candidates in markets outside
      of the United States.





*Virginia
      Tech*





In
      June
      2004, through our acquisition of Advanced Bioethanol Technologies, Inc., we
      obtained an exclusive, royalty-bearing license from Virginia Polytechnic
      Institute and State University, or Virginia Tech, to any patent rights issuing
      from Virginia Tech’s invention relating to bioethanol production from cotton gin
      waste and recycled paper sludge. This license is subject to certain research
      rights retained by Virginia Tech. Under the license, we agreed to spend at
      least
      $100,000 annually during the first five years of the agreement to develop
      products using the licensed technology and to market and reasonably fill market
      demand for licensed products following commencement of marketing. Virginia
      Tech
      may terminate the license or convert it to an non-exclusive license if we fail
      to perform any of these obligations or fail to make any payment under the
      license when due, subject to our right to cure that failure within 30 days
      of
      notice of the failure. We may terminate the license without cause upon 90 days’
written notice. Otherwise, this agreement will terminate upon the later of
      the
      expiration of the longest-lived patents rights or June 25, 2025. As of the
      date
      of this report, no patents relating to the invention have been issued.





Under
      this license agreement, we paid to Virginia Tech a license issue fee of $25,000.
      We are obligated to pay Virginia Tech royalties equal to of 3.0% of our net
      sales of equipment using licensed methods and 0.25% of net sales of ethanol
      or
      other fermentation products, subject to a minimum annual royalty of $7,500
      in
      the third year of the agreement, $15,000 in the fourth year of the agreement
      and
      $30,000 thereafter throughout the term of the license. We also agreed to pay
      50%
      of any fees that are not earned royalties that we may receive in connection
      with
      the sublicense of the licensed technology and to pay on each sublicense royalty
      payment, the higher of (a) 50% of the royalties received or (b) royalties based
      on at least 50% of the royalty rate specified in the agreement.





In
      connection with this license agreement, in December 2005 we entered into a
      research agreement with Virginia Tech. Under this agreement, Virginia Tech
      will
      own any intellectual property created solely by Virginia Tech researchers in
      the
      performance of this agreement, and we and Virginia Tech will jointly own any
      intellectual property created jointly by our researchers and Virginia Tech
      researchers. We have the right, for six months after the termination of the
      project, to obtain a non-exclusive, nontransferable, royalty-free license to
      any
      intellectual property generated by the project or to negotiate a royalty-bearing
      exclusive license to any intellectual property generated by the project, subject
      to research rights retained by Virginia Tech. We may terminate this
      collaboration upon 60 days’ written notice.





Under
      these agreements, we have paid Virginia Tech $171,874 through December 31,
      2007.




17




*National
      Renewable Energy Laboratory*





In
      January 2005, through our acquisition of Superior Separation Technologies,
      Inc.,
      we obtained an exclusive, worldwide royalty-bearing license from Midwest
      Research Institute, or MRI, as manager and operator of the U.S. Department
      of
      Energy’s National Renewable Energy Laboratory, or the NREL, for an issued United
      States patent with claims directed toward a method of biomass feedstock
      separation. Our license is subject to the rights to the licensed patent retained
      by the U.S. Government. Under the license agreement, we provided MRI with a
      five-year plan for our commercial use of the licensed technologies, including
      sales forecasts for products produced by and equipment incorporating the
      licensed technologies for the five-year period. We are required to provide
      MRI
      with annual updates of our commercial use plan throughout the term of the
      agreement. MRI has the right to terminate our license if we fail to meet 75%
      of
      our then current sales forecast or if we fail to make any payment when due
      under
      the agreement, subject to our right to cure the failure in each case. We have
      the right to terminate the license in the event of any material breach by MRI,
      subject to their right to cure that breach. The agreement automatically
      terminates if we cease to do business or become insolvent or bankrupt or if
      we
      attempt to assign our license. Otherwise, this license will terminate upon
      the
      earlier of January 10, 2030 or the extinguishment of all the licensed patent
      rights. Currently, the latest to expire of the issued patents under the license
      agreement expires in 2015.





Pursuant
      this agreement, we paid MRI an up-front royalty fee of $60,000 and also agreed
      to pay MRI a continuous royalty of 3.0% on the sale of any equipment that
      incorporates the licensed technologies and 0.25% on any ethanol and 5.0% on
      any
      value added byproducts produced by the licensed technologies, subject to an
      annual minimum royalty of $10,000 in 2007, $25,000 in 2008 and between $50,000
      and $75,000 (depending on the feedstocks included within the licensed field
      of
      use) thereafter throughout the term of the license. We also agreed to pay 50%
      of
      any revenues we receive through the sublicensing of the licensed
      technologies.





In
      connection with this license agreement, in May 2006 we entered into a
      cooperative research and development agreement with MRI as operator of the
      NREL.
      Under the agreement, we were required to pay $300,000 to the NREL to finance
      the
      research to be performed under the agreement. We have the right to assert
      copyright in works our employees create in performing under the agreement,
      and
      we have the right to retain ownership of any invention our employees make in
      performing under the agreement, exercisable within twelve months of the
      disclosure of the invention. We have the right, for six months after the
      termination of the project, to negotiate a royalty-bearing exclusive license
      to
      any invention made by the employees of and retained by the NREL. Our rights
      under this agreement are subject to the rights retained by the U.S. Government.
      Either party may terminate this agreement upon 30 days’ written
      notice.





Under
      these agreements, we have paid MRI $60,000 and the NREL $300,000 through
      December 31, 2007.





*U.S.
      Department of Agriculture’s Forestry Products Laboratory*





In
      August
      2005, through our acquisition of Xylose Technologies, Inc., we obtained a
      non-exclusive license, limited to the United States, to two issued United States
      patents and a patent application relating to xylose-fermenting yeast from the
      Wisconsin Alumni Research Foundation, or WARF, the licensee of the U.S.
      Department of Agriculture’s Forestry Products Laboratory, or the FPL. Our
      license is subject to the rights to the licensed patent retained by the U.S.
      Government. Under this license, we had the options, exercisable for six months
      from the date of the agreement, to extend the license territory to include
      South
      America and Africa and to obtain a worldwide, exclusive license to use the
      licensed patents in the United States. Our right to exercise the second option
      was conditioned on our entering into a cooperative research and development
      agreement with the FPL, under which we agreed to provide at least $250,000
      to
      finance the research that the FPL is to perform under the agreement. WARF has
      the right to terminate our license if we breach any of our obligations under
      the
      agreement, subject to our right to cure within 90 days of notice of the breach
      by WARF, or if we become insolvent or bankrupt. We have the right to terminate
      the agreement at any time on 90 days’ written notice. Otherwise, this license
      will terminate upon the earlier of the date on which no licensed patent remains
      enforceable or our payment of royalties, once begun, ceases for more than eight
      calendar quarters. Currently, the latest to expire of the issued patents under
      the license agreement expires in 2019.




18




Pursuant
      this agreement, we paid WARF a license issue fee of $30,000 and an option fee
      of
      $50,000. We also agreed to pay WARF a royalty of 0.5% on the sale of any product
      that incorporates the licensed technology, subject to an annual minimum royalty
      of $15,000 beginning in 2008 and $25,000 thereafter and throughout the term
      of
      the license.





In
      connection with this license, in November 2005 we entered into a cooperative
      research and development agreement with the FPL. The agreement provides for
      us
      to pay the FPL a total of $250,000, payable in four equal installments, to
      finance the research to be performed under the agreement. Under this agreement,
      we have agreed to confer with the FPL regarding the ownership of any inventions
      made in the performance of the agreement. We have the right to negotiate an
      exclusive license to any invention retained by the FPL. Our rights under this
      agreement are subject to the rights retained by the U.S. Government. In December
      2006, this agreement was extended, at no additional cost, until March 2007.
      In
      January 2007, we negotiated a second cooperative research and development
      agreement with FPL with a term that expires on November 30, 2007, which was
      subsequently extended to April 30, 2008. In March 2008, we extended the term
      of
      this agreement, at no additional cost, until September 2008. The new agreement
      requires us to pay to FPL a total of $250,000, payable in four equal quarterly
      installments beginning January 15, 2007. As of December 31, 2007, under these
      agreements, we have paid WARF and the FPL $250,000 under the first agreement
      and
      $192,500 under the second agreement.





*University
      of North Dakota*





In
      June
      2006, through our acquisition of Advanced Biomass Gasification Technologies,
      Inc. (“ABGT”), we obtained a worldwide royalty-bearing license from the
      University of North Dakota’s Energy and Environmental Research Center (the
“EERC”) in Grand Forks for two U.S. provisional patent applications with claims
      directed toward a method and apparatus for supply of low-BTU gas to an engine
      generator and wet solids removal and separation system from a gasifier and
      related know-how. Our license is limited to the field of lignin and biomass
      feedstock gasification in Imbert gasifiers of up to 10 megawatt thermal. Our
      license is subject to the rights to the licensed patents retained by the EERC
      and the U.S. Government. Our license is exclusive with in the specified field
      through 2012 and thereafter exclusivity will automatically be renewed for the
      following year on a country-by-country basis if the royalty payments from that
      country are at least $50,000 on an annual basis. Otherwise, the license becomes
      non-exclusive. We have the right to sublicense the licensed technology
      throughout the exclusivity period.





Under
      the
      license, we are obligated to complete long-term testing of the licensed
      technologies at the pilot stage by December 31, 2008, to make a first commercial
      sale of a licensed product on or before June 30, 2009 and to make minimum annual
      net sales of licensed products of $500,000 in 2009, $2,000,000 in 2010 and
      $5,000,000 in 2011 and each year thereafter. The EERC has the right to terminate
      our license if we fail to perform any of these obligations, subject to our
      right
      to cure that failure within 60 days after receiving written notice, or if we
      fail to pay any amount when due, subject to our right to cure that failure
      within 30 days after receiving written notice, or if we cease to do business.
      We
      may terminate the license upon six months written notice to the EERC, subject
      to
      our payment of all amounts due under the license. Unless earlier terminated,
      this license will terminate upon the later of May 24, 2026 or the end of the
      life of the licensed intellectual property.





Under
      this agreement, we paid the EERC a license issue fee of $50,000 and agreed
      to
      pay the EERC an annual license maintenance fee of $10,000 in 2007 and 2008,
      $25,000 in 2009, $50,000 in 2010 and $100,000 each year thereafter throughout
      the term of the license. Under the license, we are obligated to pay the EERC
      a
      running royalty of 2.0% on our net sales of equipment incorporating the licensed
      technology, 0.25% on net savings of electricity and/or fuel by any of our
      customers and 4.0% on any of our service fee income. The running royalties
      due
      on net sales paid during the previous twelve-month period, if any, may be
      credited to the license maintenance fee payable in respect of any year. License
      maintenance fees paid in excess of running royalties due in that 12-month period
      shall not be creditable to amounts due for future years. We also agreed to
      pay
      35% of any revenues we receive through the sublicensing of the licensed
      technologies.





In
      connection with this license agreement, in May 2006 we entered into a base
      research agreement with the EERC to develop the licensed technology. The
      agreement provides for us to pay the EERC a cost-reimbursable amount of $300,000
      in advance to finance the initial project to be performed under the agreement.
      Under this agreement, the EERC retains ownership of any invention made in the
      performance of the agreement. We have the




19




exclusive
      right to negotiate an exclusive commercial license to any such invention,
      exercisable for twelve months after disclosure of the invention. At a minimum,
      we will have a non-exclusive, perpetual, royalty-free license to use the
      invention in our internal operations, but not for commercial use or in
      conjunction with others. Our rights under this agreement are subject to the
      rights retained by the U.S. Government. Unless earlier terminated, the agreement
      will expire on May 24, 2009. Either party may terminate this agreement upon
      30
      days’ written notice for any reason.





Under
      these agreements, we have paid the EERC approximately $322,000 through December
      31, 2007.





*H2Diesel,
      Inc.*





On
      April
      14, 2006, we entered into management and sublicense agreements with H2Diesel,
      Inc., each of which was amended and restated on June 15, 2006, effective as
      of
      April 14, 2006. H2Diesel cancelled the management agreement on September 25,
      2006. Under
      the
      amended and restated sublicense agreement, we were granted (a) an exclusive
      sublicense to make, use and sell use and sell products manufactured by using
      the
      H2Diesel fuel additive in Maine, Vermont, New Hampshire, Massachusetts,
      Connecticut, Rhode Island, New York, Pennsylvania, Delaware, New Jersey,
      Virginia, West Virginia, North Carolina, South Carolina, Georgia and Florida,
      and (b) a non-exclusive license to sell those products anywhere else within
      North America, Central America and the Caribbean. Additional territories may
      be
      added by written agreement of the parties.





Under
      the
      amended and restated sublicense agreement, H2Diesel must sell us additive in
      quantities sufficient to meet our requirements for the production of product
      at
      the lower of its actual cost or the price at which it sells additive to
      unrelated third parties, or at such other price as we and H2Diesel may agree.
      We
      are obligated to pay certain royalties to H2Diesel based on sales of products
      by
      us or our sublicensees. The royalty that we must pay per gallon of product
      that
      we or our distributors sell is the lesser of $0.10 per gallon or the lowest
      per
      gallon royalty that H2Diesel charges to unrelated entities. During the initial
      term of the agreement, for each twelve-month period beginning on the date (the
      “Trigger Date”) on which H2Diesel first notifies us that it can produce and
      deliver additive in sufficient quantities to meet our requirements, is able
      to
      do so and provides us with the technical and engineering specifications
      necessary for a plant to produce the products, we are obligated to pay H2Diesel
      a minimum royalty equal to the royalty that would have been paid had a specified
      amount been sold during that twelve month period. For the first twelve-month
      period, the specified amount is 20,000,000 gallons of product and for each
      succeeding twelve-month period the amount increases by 10,000,000 gallons.
      If we
      do not sell the minimum amount or pay the minimum royalties due with respect
      to
      the second or third twelve-month periods after the Trigger Date, then H2Diesel
      has the option to terminate the sublicense or to convert our exclusive rights
      under the sublicense to non-exclusive rights and if H2Diesel elects to convert
      our exclusive rights to non-exclusive rights we will still be obligated to
      pay
      the minimum royalties due with respect to the initial twelve-month period.
      If we
      do not sell the minimum amount or pay the minimum royalties due with respect
      to
      the fourth or any subsequent twelve-month period, then our exclusive rights
      under the sublicense automatically convert to non-exclusive rights and our
      obligation to pay the minimum royalties due with respect to any subsequent
      twelve-month period is terminated. In effect, beginning in the fourth
      twelve-month period we may terminate our minimum royalty payment obligations
      with respect to subsequent twelve-month periods by electing not to cure any
      failure to make the minimum royalty payments due with respect to the current
      year. If our minimum royalty payment obligations are terminated, throughout
      the
      term of the agreement we will continue to pay royalties to H2Diesel for any
      licensed product actual sold. The initial term of the amended and restated
      sublicense agreement is for ten years from the Trigger Date. Thereafter, the
      agreement automatically renews for successive one-year periods provided there
      is
      no existing default at the time of renewal. As of March 1, 2008, the Trigger
      Date had not yet occurred and accordingly, we had not recorded any royalty
      expense under the sublicense.





The
      following table sets forth our minimum royalty payments obligations in each
      twelve-month period during the initial term of the agreement assuming that
      (a)
      the maximum royalty rate of $0.10 per gallon applies throughout the term and
      (b)
      we do not terminate our minimum payment obligations in the fourth or any
      subsequent year on the terms described above:




20




**Twelve-Month
                Period**
            **Minimum**
              **Royalty
                Payment**First
            $
                2,000,000Second
            3,000,000Third
            4,000,000Fourth
            5,000,000Fifth
            6,000,000Sixth
            7,000,000Seventh
            8,000,000Eighth
            9,000,000Ninth
            10,000,000Tenth
            11,000,000





Also
      on
      June 15, 2006, we also entered into a technology access agreement with H2Diesel,
      under which H2Diesel agreed to deliver to us the formula for its additive and
      all know-how in its possession, under its control or available from its licensor
      of the technology that relates to the manufacture of the additive. H2Diesel
      is
      required to continue to provide us with information regarding modifications
      to
      that formula or know-how. We have no right to use the formula or the know-how
      so
      long as H2Diesel is not in default of its obligations under the amended and
      restated sublicense agreement. After an event of default, we have the right
      to
      use the formula and know-how to produce the additive to meet our needs to
      exercise our right to sell licensed product under the amended and restated
      sublicense agreement. We must pay H2Diesel the royalties we would otherwise
      have
      paid in connection with sales of licensed product, but may offset the amount
      by
      which the cost we incur in manufacturing the licensed product ourselves exceeds
      the price that we would otherwise have paid H2Diesel. We have retained the
      right
      to seek damages from H2Diesel for any excess cost of the additive. For more
      information about our transactions with H2Diesel, see “Description of Formation
      and Capitalization - Investment in H2Diesel” above.





**Joint
      Venture Agreements**





To
      date,
      we have organized three subsidiaries: CoastalXethanol, NewEnglandXethanol and
      Advanced Cellulosic BioTechnologies LLC (formerly named
      BlueRidgeXethanol).





*CoastalXethanol
      LLC*





We
      formed
      CoastalXethanol LLC in May 2006 to develop plants for the production of ethanol
      in Georgia and parts of South Carolina. CoastalXethanol is a joint venture
      with
      Coastal Energy Development, Inc. (“CED”). We acquired an 80% membership interest
      in CoastalXethanol for a capital contribution of $40,000 and CED acquired a
      20%
      membership interest in CoastalXethanol for a capital contribution of $10,000.
      For accounting purposes, the operations of CoastalXethanol are consolidated
      into
      our financial statements.





As
      of
      March 1, 2008, we had advanced approximately $8.2 million to CoastalXethanol
      for
      working capital and investment purposes, net of repayments from CoastalXethanol
      to us. CoastalXethanol has loaned $630,000 to CED for working capital purposes.
      In 2007, subsequent to the settlement of a lawsuit between CED and us, as
      described in more detail below, CoastalXethanol recognized the balance of
      $630,000 loan to CED as bad debts.





In
      August
      2006, Augusta BioFuels, LLC, a wholly owned subsidiary of CoastalXethanol,
      purchased a former pharmaceutical manufacturing complex located in Augusta,
      Georgia from Pfizer Inc. for approximately $8,400,000 in cash. In October 2006,
      Augusta BioFuels sold surplus equipment from the Augusta facility for $3,100,000
      in cash. The buyer of the surplus equipment also agreed to perform demolition
      work at the site.





In
      December 2006, Southeast BioFuels, LLC, a newly formed subsidiary of
      CoastalXethanol, purchased assets from Renewable Spirits, LLC for $100,000
      in
      cash, a $600,000 note payable over 120 months and a 22% membership interest
      in
      Southeast BioFuels. The purchased assets consisted of equipment and intellectual
      property associated with an experimental system for the production of ethanol
      and other marketable co-products from waste citrus biomass, including Renewable
      Spirits’ rights under a cooperative research and development agreement with




21




the
      U.S.
      Department of Agriculture’s Agricultural Research Service. Through our indirect
      ownership in Southeast Biofuels, we are evaluating the feasibility of producing
      ethanol from waste citrus biomass.





On
      December 18, 2007, we announced in a press release that Southeast Biofuels
      filed
      a grant application with the Florida Department of Agriculture and Consumer
      Services to expand our work on converting waste to energy, using citrus waste
      as
      the raw material and converting it into ethanol. On January 22, 2008, the
      Florida Department of Agriculture and Consumer Services approved a $500,000
      grant to Southeast Biofuels. We intend to build a demonstration plant for
      converting citrus peel waste into ethanol and are negotiating an agreement
      to
      locate the plant at an existing citrus facility in Florida owned by one of
      the
      largest citrus processors in the state.





On
      March
      5, 2007, we, along with CoastalXethanol initiated an action against CED in
      the
      Supreme Court of the State of New York. Our complaint alleges, among other
      things, that CED failed to repay to CoastalXethanol loans in the principal
      amount of $630,000, plus interest, and that CED has failed to account properly
      for the expenditure of certain of our funds and those of CoastalXethanol. In
      the
      complaint, we and CoastalXethanol seek from CED damages in an amount not less
      than $630,000, plus interest, an accounting of funds, and reasonable attorneys'
      fees and expenses incurred in connection with the litigation. On April 3, 2007,
      CED filed an answer and counterclaim, asserting various claims (breach of
      contract, fraud in the inducement, negligent misrepresentation, tortious
      interference, alter ego and identical instrumentality liability and conversion)
      relating to the relationship between Xethanol and CED. CED sought unspecified
      compensatory and punitive damages. On September 14, 2007, we reached a
      settlement with CED and agreed to pay CED $400,000 in exchange for CED’s 20%
      interest in CoastalXethanol, which owns (through a wholly owned subsidiary)
      a
      former pharmaceutical manufacturing complex located in Augusta, Georgia. The
      parties executed releases and replaced the warrant issued in the organization
      of
      CoastalXethanol with a warrant to purchase 200,000 shares of our common stock
      that is exercisable at an exercise price of $6.85 per share through May 30,
      2009. The payment and purchase of CED’s 20% interest in CoastalXethanol LLC was
      completed on September 24, 2007. We dismissed our claims against CED with
      prejudice.





We
      have
      reevaluated our Augusta facility and have decided that it does not fit within
      our long-term corporate strategy. On March 20, 2008, our board authorized
      management to pursue the sale of the facility. We have interviewed real estate
      brokerage firms to assist us in marketing the property for sale, but we have
      not
      retained such a firm. If we do decide to sell our Augusta facility and are
      successful in selling it, we estimate that we would reduce our annual overhead
      by approximately $600,000. We can offer no assurances regarding how long it
      would take to sell the facility or the price we might receive.





*NewEnglandXethanol,
      LLC*





We
      formed
      NewEnglandXethanol, LLC in June 2006 with a goal of developing plants for the
      production of ethanol in the New England states. NewEnglandXethanol was a joint
      venture with Global Energy and Management LLC, with both Global Energy and
      us
      each owning 50% of the membership interests in NewEnglandXethanol. On June
      23,
      2006, we entered into an operating agreement and an organizational agreement
      with Global Energy and NewEnglandXethanol. Under the organization agreement,
      Global Energy agreed to contribute capital to NewEnglandXethanol over time
      and
      based on the achievement of certain milestones. Under the organizational
      agreement, we also granted Global Energy a warrant to purchase shares of our
      common stock. In December of 2006, our NewEnglandXethanol joint venture
      effectively ended based on a disagreement between Global Energy and us with
      respect to the actions that Global Energy and we were required to take pursuant
      to our joint venture. We do not believe that the NewEnglandXethanol joint
      venture will conduct any further business.





In
      December 2007, Global Energy filed an action in the federal court for the
      Southern District of New York against Xethanol and nine of our current or former
      officers, directors and employees. The lawsuit alleges fraud by the defendants
      in connection with Global Energy’s alleged investment of $250,000 in
      NewEnglandXethanol. On March 19, 2008, Global Energy served its second amended
      complaint on us. Based on an alleged investment of $250,000, Global Energy
      seeks
      more than $10,000,000 in damages plus pre-judgment interest and costs.
      Management has instructed counsel to vigorously represent and defend our
      interests in this litigation.




22




**Research
      and Development**





In
      conjunction with the development of our licensed technologies, we incurred
      research and development costs of $601,000 during the year ended December 31,
      2007 and $852,000 during the year ended December 31, 2006.





**Sales
      and Marketing**





We
      sell
      all of the ethanol we produce at our Blairstown plant to Aventine Renewable
      Energy Holdings, Inc., the second largest marketer of ethanol, under a
      renewable, three-year off-take agreement. Sales are made at monthly prices
      determined on a pooled basis and are estimated at the beginning of each month.
      Each business day, we deliver ethanol to Aventine’s trucks at our plant, and
      Aventine pays us from time to time during the month. Estimates may be revised
      during the month based on changing market conditions, and Aventine typically
      provides a final true-up adjustment within 10 days after the end of each month,
      then pays us the final payment for the month on the first Friday following
      the
      delivery of the final true-up adjustment. The adjustment is included in the
      prior month’s sales revenue. The pool includes ethanol production by Aventine,
      other small producers that are members of the Aventine marketing alliance and
      us. The pooled price is a combination of forward and spot sales less the cost
      of
      transportation and marketing overhead. Aventine also receives a sales commission
      that is recorded net, in sales. The agreement originally contemplated that
      we
      would produce and Aventine would purchase all of the 6 million gallons per
      year
      that we were capable of producing at Blairstown. In July 2006, Aventine agreed
      that it would purchase all of the 41 million gallons that might be at Blairstown
      if it is ever expanded.





We
      sell
      the distillers wet grains that we produce as a by-product at Blairstown through
      a local merchandising agent.





**Raw
      Material Supply**





Our
      Blairstown facility annually purchases approximately 2.1 million bushels of
      #2 yellow corn. Due to its location in the Corn Belt, the plant has ample access
      to various corn markets and suppliers. The facility’s corn supply has
      historically been priced at approximately the price of #2 yellow corn as traded
      on the Chicago Board of Trade plus or minus typical regional or local basis.
      During 2006 and 2007, the plant purchased corn from one supplier with whom
      we
      have a contractual arrangement. The seller delivers corn to the facility by
      truck. At any given time, we keep on site approximately 8,000 bushels, or
      approximately one and a half days supply.





**Transportation
      and Logistics**





Logistics
      include truck loading and unloading. The plant site does not have direct access
      to a railroad. We believe that the ample local supply of grain and the central
      location among three major ethanol terminal markets make rail freight
      unnecessary. We deliver to Aventine’s trucks at our plant the ethanol that we
      sell to Aventine.





**Energy**





We
      have
      purchased all of our electricity for our Blairstown plant from Alliant Energy
      at
      its standard industrial rate. For the six-month period during which the plant
      was operational in 2005, we purchased 4,029 megawatt hours. For the years ended
      December 31, 2006 and December 31, 2007, we purchased 8,017 megawatt hours
      and
      7,725 megawatt hours, respectively.





Throughout
      2005 and the first six months of 2006, Alliant Energy supplied natural gas
      to
      the plant under a supply and transportation contract that expired on June 30,
      2006. On July 1, 2006, we entered into contracts with Center Point Energy
      Services to provide natural gas and with Alliant Energy to provide related
      transport services.





We
      currently buy natural gas in the spot market, but have the option to forward
      price all or a portion of our needs through our current natural gas supplier,
      Center Point Energy. Total energy usage for the six-month period during which
      the plant was operational in 2005 and for the year ended December 31, 2006
      averaged approximately 42,870 BTUs per denatured gallon produced. Total energy
      usage for the year ended December 31, 2007 averaged approximately 41,412 BTUs
      per denatured gallon produced.




23




**Regulatory
      Approvals and Environmental Laws**





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. We also do not expect to incur material capital
      expenditures for environmental controls in this or the succeeding fiscal
      year.





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 CERCLA 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 believe that 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. We expect continued government and public
      emphasis on environmental issues to require us to increase 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 another NESHAP
      applicable to boilers and process heaters. New or expanded facilities would
      be
      required to comply with both standards upon startup if they exceed the hazardous
      air pollutant threshold. The emission control systems at our existing Blairstown
      facility are designed to meet the current threshold level of emission, and
      we
      are in compliance with the applicable NESHAP standards. 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.





We
      have
      decided that our Spring Hope facility does not fit within our long-term
      corporate strategy, and on March 20, 2008, our board authorized management
      to
      pursue the sale of the facility. Before we sell the property (or as a term
      of
      its sale), we will have to resolve certain liens on the property filed by
      companies that performed, or have claimed to have performed, environmental
      remediation and demolition work on the property. We have accrued $500,000 to
      settle claims and $450,000 for environmental clean-up at December 31, 2007.
      We
      have not completed an environmental study or remediation. These estimates may
      require adjustment.





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




24




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.





We
      are
      also required to obtain a permit issued by the Bureau of Alcohol, Tobacco and
      Firearms before any of our ethanol facilities can make ethanol.




**Competition**





A
      number
      of our competitors have substantially greater financial and other resources
      than
      we do. Their larger plants have cost advantages and economies of scale. We
      believe that our ability to compete successfully in the ethanol production
      industry depends on many competitive factors, including price, quality and
      reliability of production processes, the cost of corn and delivery and volume
      of
      ethanol produced and sold. At our current and projected levels of output, our
      production is insignificant relative to the overall size of the U.S. ethanol
      market. Most of the ethanol supply in the United States is derived from corn
      and
      is produced at approximately 139 ethanol production plants, located
      predominately in the Corn Belt in the Midwest, with additional 68 plants under
      expansion or construction. The ethanol production industry is fragmented, with
      two companies, Archer Daniels Midland and Poet, accounting for nearly 30% of
      U.S. production and the next largest producer accounting for less than 7% of
      the
      same market. The majority of plants are in the 20 million to 60 million gallons
      per year capacity range, with a number of these plants affiliated with local
      farmer cooperatives. We expect recent consolidation trends in the ethanol
      industry to continue.





Traditional
      corn-based production techniques are mature and well entrenched in the
      marketplace, and the industry’s infrastructure is geared toward corn as the
      principal feedstock. The technology and infrastructure for commercial
      biomass-to-ethanol production is yet to be developed.





**Employees**





We
      had 30
      employees as of March 14, 2008, and all of these employees are full time. None
      of these employees is covered by a collective bargaining agreement, and our
      management believes that our relations with our employees are good.


25
  **ITEM
      1A.**  **RISK
      FACTORS.**





*If
      you purchase our common stock, you will be taking on a high degree of financial
      risk. In deciding whether to purchase our common stock, you should carefully
      read and consider the risks and uncertainties described below and the other
      information contained in this report. The occurrence of any of the following
      risks could materially impair our business, financial condition and results
      of
      operation. In these circumstances, the market price of our common stock could
      decline, and you may lose all or part of your investment.*





**Risks
      Related to Our Business and Industry**





***We
      have a history of net losses.***





We
      incurred net losses of $31.3 million for the year ended December 31, 2007;
      $20.2
      million for the year ended December 31, 2006; $11.4 million for the year ended
      December 31, 2005; and $2.6 million for the year ended December 31, 2004. From
      our inception on January 24, 2000 through December 31, 2007, we reported an
      accumulated deficit of $66.8 million. We
      have
      funded our operations primarily through the sale of our securities and expect
      to
      continue doing so for the foreseeable future. We expect to continue to incur
      net
      losses for the foreseeable future as we continue to further develop our ethanol
      production technologies. Our ability to generate and sustain significant
      additional revenues or achieve profitability will depend on the factors
      discussed elsewhere in this “Risk Factors” section. We cannot assure you that we
      will achieve or sustain profitability or that our operating losses will not
      increase in the future. If we do achieve profitability, we cannot be certain
      that we can sustain or increase profitability on a quarterly or annual basis
      in
      the future.





***The
      market for ethanol produced from corn has continued to
      deteriorate.***





Corn
      is
      the principal raw material we use to produce ethanol and ethanol by-products.
      Recently, the prices of corn have significantly increased, averaging over $5.25
      per bushel in March 2008, while purchases of ethanol by oil refiners to blend
      into gasoline have flattened. In general, rising corn prices result in lower
      profit margins and may result in negative margins if not accompanied by
      increases in ethanol prices. We believe that the increasing ethanol production
      capacity has contributed to, and will continue to contribute to, a period of
      elevated corn prices compared to historical levels. Under current market
      conditions, because ethanol competes with fuels that are not corn-based, we
      generally cannot pass along increased corn costs to our customers. At certain
      levels, corn prices may make ethanol uneconomical to use in markets and volumes
      above the requirements set forth in the renewable fuels standard or for which
      ethanol is used as an oxygenate in order to meet federal and state fuel emission
      standards.





The
      vast
      increase in U.S. ethanol capacity under construction could outpace increases
      in
      corn production, which may further increase corn prices and increase our
      operating losses. According to the Renewable Fuels Association, as of December
      2007, approximately 5.8 billion gallons per year of production capacity is
      currently under construction. Demand for ethanol may not increase as quickly
      as
      expected or to a level that exceeds supply, or may not increase at all. If
      the
      ethanol industry has excess capacity resulting from the increases in capacity
      coupled with insufficient demand, the market price of ethanol may decline to
      a
      level that is inadequate to general sufficient cash flow to cover our costs.
      The
      lower profit margins caused by rising corn prices coupled with the decline
      in
      the prices of ethanol would have a material adverse effect on our business,
      results of operation and financial condition.





***Our
      Blairstown, Iowa ethanol plant, which is our only operating asset, is not
      competitive with newer, larger plants operated by our competitors and continues
      to operate at a loss.***





The
      ethanol production industry is highly competitive with approximately 139 ethanol
      production plants currently operational in the U.S., with additional 68 plants
      under expansion or construction. A number of our competitors have substantially
      greater financial resources and depth of operations than we do. In addition,
      there is clearly a consolidation trend in the ethanol industry. As of March
      4,
      2008, the top five producers accounted for approximately 41% of the ethanol
      production capacity in the U.S. according to the Renewable Fuels Association.
      The lower profit margins caused by rising corn prices favor the larger ethanol
      producers who have economies of scale and cost advantages, which we do not
      have.
      We have continued to operate at a loss and cannot provide any assurance that
      we
      will be able to operate profitably in a more competitive environment.




26




***We
      will need to raise additional funds to achieve our business
      objectives.***





As
      of
      March 14, 2008, we had cash and cash equivalents of approximately $9.5 million,
      compared to cash and cash equivalents of $20.8 million as of March 31, 2007. We
      need
      additional funds to pursue our revised business strategy. In particular, we
      intend to build a demonstration plant in Florida to convert citrus peel waste
      into ethanol. The planned cost for the two-year build-out of the demonstration
      plant is approximately $5,900,000. On January 22, 2008, the Florida Department
      of Agriculture and Consumer Services approved a $500,000 grant that we expect
      to
      use to defray part of these costs. We plan to apply for federal government
      grants and combine private equity with those grants to supplement the state
      grant. If we do not receive these federal grants, we will need to raise
      additional equity to build this plant as we intend. We will also use cash on
      hand to cover corporate overhead and fund our research and development
      agreements.





We
      currently have no commitments for any additional financing, and there can be
      no
      assurance that we can obtain additional capital on commercially acceptable
      terms
      or at all. Our failure to raise capital as needed would significantly restrict
      our growth and hinder our ability to compete. We have curtailed our expenses
      and
      may need to take further steps in that regard. We may also have to reduce
      planned investments in technology and research and development and to forgo
      other business opportunities. Additional equity financings are likely to be
      dilutive to holders of our common stock, and debt financing, if available,
      may
      require significant payment obligations and covenants that restrict how we
      operate our business.





***We
      do not presently intend to pursue the manufacture and sale of a diesel biofuel
      based on H2Diesel’s technology, which previously was one of our key strategies.***





In
      April
      2006, we entered into an exclusive, sublicense agreement with H2Diesel, Inc.
      that permits us to manufacture and sell a diesel biofuel based on H2Diesel’s
      technology. H2Diesel is the licensee of a proprietary vegetable oil-based diesel
      biofuel to be used as a substitute for conventional petroleum diesel and
      biodiesel, heating and other fuels. We previously stated that we intended to
      collaborate with H2Diesel in the development and testing of the technology
      to
      accelerate its commercialization. We have decided not to pursue the manufacture
      and sale of a diesel biofuel based on H2Diesel’s technology, thus we no longer
      have the ability to use that technology to grow our business.





***We
      may be unable to liquidate our investment in H2Diesel Holdings,
      Inc.***





As
      of
      March 1, 2008, we owned 5,670,000 shares of H2Diesel Holdings, Inc. common
      stock, which represented approximately 31.2% of the common stock then
      outstanding. H2Diesel Holdings’ common stock has recently traded on the OTC
      Bulletin Board at approximately $5.00 per share. Because we are an “affiliate”
of H2Diesel Holdings, however, we can sell our H2Diesel Holdings stock on
      the
      OTC Bulletin Board only
      in
      compliance with SEC Rule 144, which limits the amount of shares we can sell
      in
      any three month period to 1% of the shares of the class outstanding as shown
      by
      the most recent report or statement published by H2Diesel Holdings. Due to
      this
      limitation, the size of our investment, uncertainties in the future business
      and
      financial performance of H2Diesel Holdings and the fact that the trading prices
      of shares of H2Diesel Holdings on the OTC Bulletin Board have varied
      considerably over time, we cannot realize the nominal value of those shares
      and
      may be unable to realize a material portion of it.





***Because
      we are smaller and have fewer financial and other resources than many ethanol
      producers, we may not be able to compete successfully in the very competitive
      ethanol industry.***





Ethanol
      is a commodity, and there is significant competition among existing ethanol
      producers. Our business faces competition from a number of producers that can
      produce significantly greater volumes of ethanol than we can or expect to
      produce, producers that can produce a wider range of products than we can,
      and
      producers that have the financial and other resources that would enable them
      to
      expand their production rapidly if they chose to do so. Some of these producers
      have achieved substantial economies of scale and scope, thereby substantially
      reducing their fixed production costs and their marginal production costs.
      We
      may be unable to produce ethanol at a cost that allows us to operate profitably.
      Even if we are able to operate profitably, these other producers may be
      substantially more profitable than we are, which may make it more difficult
      for
      us to raise any financing necessary for us to achieve our business plan and
      may
      have a materially adverse effect on the market price of our common
      stock.




27




***Competition
      from large producers of petroleum-based gasoline additives and other competitive
      products may adversely affect our financial
      performance.***





Our
      success depends substantially upon continued demand for ethanol from major
      oil
      refiners. We believe that other gasoline additives that have octane and
      oxygenate values similar to those of ethanol currently cannot be produced at
      a
      cost that makes them competitive. The major oil refiners have significantly
      greater financial, technological and personal resources than we have to reduce
      the costs of producing these alternative products or to develop other
      alternative products that may be produced at lower cost. The major oil refiners
      also have significantly greater resources than we have to influence legislation
      and public perception of ethanol. If the major oil refiners are able to produce
      ethanol substitutes at a cost that is lower than the cost of ethanol production,
      the demand for ethanol may substantially decrease. A substantial decrease in
      the
      demand for ethanol will reduce the price of ethanol, adversely affect our
      profitability and decrease the value of your stock.





***Our
      financial results are directly affected by corn supply and feedstock prices,
      which could adversely affect the value of your
      investment.***





We
      currently produce ethanol only from corn as our feedstock. Corn, as with most
      other crops, is affected by weather, governmental policy, disease and other
      conditions. A significant reduction in the quantity of corn harvested due to
      adverse weather conditions, farmer planting decisions, domestic and foreign
      government farm programs and policies, global demand and supply or other factors
      could result in increased corn costs which would increase our cost to produce
      ethanol. The significance and relative impact of these factors on the price
      of
      corn is difficult to predict. Corn prices have in fact increased sharply over
      the past several months, and those higher prices have made it more costly for
      us
      to produce ethanol. We believe that growing demand for ethanol has been a key
      factor in this increase. Significant variations in actual growing conditions
      from normal growing conditions may also adversely affect our ability to procure
      corn for our plants. Any events that tend to reduce the supply of corn will
      tend
      to increase prices and harm our business.





Rising
      corn prices have resulted in lower margins for the production of ethanol and,
      therefore, represent unfavorable market conditions. This is especially true
      when
      market conditions do not allow us to pass along increased corn costs to our
      customers. The price of corn has fluctuated significantly in the past and may
      fluctuate significantly in the future, and the price of corn increased
      materially in 2007 and has continued to increase in 2008. Substantial increases
      in the price of corn have in the past caused some ethanol plants to temporarily
      cease production or lose money. A $1.00 per bushel increase in the price of
      corn
      at our Blairstown plant increases our costs by approximately $1.8 million per
      year. Due in part to the high cost of corn, our Blairstown facility operates
      at
      a loss. We cannot assure you that we will be able to offset any increase in
      the
      price of corn by increasing the price of our products. If we cannot offset
      increases in the price of corn, our financial performance may be materially
      and
      adversely affected.





***If
      ethanol and gasoline prices drop significantly, we will also be forced to reduce
      our prices, which potentially may lead to further
      losses.***





Prices
      for ethanol products can vary significantly over time and decreases in price
      levels could adversely affect our financial results and viability. The price
      of
      ethanol has some relation to the price of gasoline. The price of ethanol tends
      to increase as the price of gasoline increases, and the price of ethanol tends
      to decrease as the price of gasoline decreases. Any lowering of gasoline prices
      will likely also lead to lower prices for ethanol and adversely affect our
      operating results. We cannot assure you that we will be able to sell our ethanol
      profitably, or at all.





***Increased
      ethanol production in the United States is expected to increase the demand
      for
      feedstocks and the resulting price of feedstocks, which will adversely affect
      our financial performance.***





New
      ethanol plants are under construction throughout the United States. This
      increased ethanol production has increased and is expected to continue to
      increase feedstock demand and prices (particularly for corn), resulting in
      higher production costs and lower financial performance.




28




***We
      currently rely*** ***on a*** ***single
      production facility. If there is a natural disaster or other serious disruption
      at the facility, we may be unable to produce ethanol.***





Since
      July 2005, we have relied on
      our
      Xethanol BioFuels facility in Blairstown, Iowa for the production of ethanol.
      All of our sales in 2006 and 2007 were from our Blairstown facility. Any natural
      disaster or other serious disruption at this facility due to fire, tornado,
      flood or any other cause could impair our ability to produce ethanol at the
      facility. While we maintain business interruption insurance, as well as general
      property insurance, the amount of insurance coverage may not be sufficient
      to
      cover our losses in such an event. Any of these occurrences could impair our
      ability to produce ethanol and adversely affect our operating
      results. For
      example, production at our Blairstown facility was interrupted for approximately
      two weeks in the first quarter of 2007 caused by power outages resulting from
      severe weather during the quarter, and we can offer no assurances that similar
      or even longer disruptions will not occur in the future.





***We
      rely on a single customer to purchase all of the ethanol we produce, and if
      that
      customer fails to purchase our production, we may be unable to sell
      ethanol.***





We
      sell
      all of the ethanol produced at our Blairstown facility to Aventine Renewable
      Energy, Inc. under an exclusive, renewable three-year off-take agreement. Our
      sales are at market prices less the costs of transportation and Aventine’s
      marketing commission. Aventine is the second-largest producer and marketer
      of
      ethanol in the United States. We cannot assure you that if Aventine fails to
      purchase our ethanol production for any reason, we would be able to find other
      customers to purchase all or any part of it. If this occurs, our operating
      results would be materially adversely affected.





***Price
      increases or interruptions in needed energy supplies could cause loss of
      customers and impair our financial performance.***





Ethanol
      production requires a constant and consistent supply of energy. If there is
      any
      interruption in our supply of energy for whatever reason, such as availability,
      delivery or mechanical problems, we may be required to halt production. If
      we
      halt production for any extended period, it will have a material, adverse effect
      on our business. Natural gas and electricity prices have historically fluctuated
      significantly. We purchase significant amounts of these resources as part of
      our
      ethanol production. Increases in the price of natural gas or electricity would
      harm our business and financial results by increasing our energy costs. In
      fact,
      during the past 18 months, the price of natural gas has varied from a high
      of
      $8.53 per dekatherm to a low of $4.52, causing a change in production cost
      of
      $0.17 per gallon of ethanol we produce. During the same period, our purchase
      price of corn has also varied from a high of $4.17 per bushel to a low of $2.14,
      causing a change in production cost of $0.75 per gallon of ethanol we
      produce.





***Our
      biomass-to-ethanol technologies are unproven on a large-scale commercial basis
      and we have been unable to implement them in a commercial production
      environment.***





While
      production of ethanol from corn, sugars and starches is a mature technology,
      newer technologies for production of ethanol from biomass are still in a
      development stage. The technologies that we are pursuing for ethanol production
      from biomass have never been used on a large-scale commercial basis. All of
      the
      tests that we have conducted to date on our biomass technologies have been
      performed on limited quantities of feedstocks, and we cannot assure you that
      we
      can obtain the same or similar results at competitive costs on a large-scale
      commercial basis. We have never used these biomass technologies under the
      conditions or in the volumes that will be required to be profitable, and we
      cannot predict all of the difficulties that may arise. These technologies will
      require further research, development, design and testing before we can
      implement them on a larger-scale commercial application. Accordingly, we cannot
      assure you that these technologies will perform successfully on a large-scale
      commercial basis or that they will be profitable to us.





***Any
      strategic acquisitions we make could have a dilutive effect on your investment.
      Failure to make accretive acquisitions and successfully integrate them could
      adversely affect our future financial results.***





As
      part
      of our growth strategy, we will seek to acquire or invest in complementary
      businesses, facilities or technologies. We intend, after we make an acquisition,
      to integrate the acquired assets into our operations and




29




reduce
      operating expenses. The process of integrating these acquired assets into our
      operations may result in unforeseen operating difficulties and expenditures,
      and
      may absorb significant management attention that would otherwise be available
      for the ongoing development of our business. We cannot assure you that we will
      in fact realize the anticipated benefits of any acquisitions we make. In
      addition, our future acquisitions could result in potentially dilutive issuances
      of equity securities, the incurrence of debt and contingent liabilities and
      amortization expenses related to goodwill and other intangible assets, any
      of
      which could materially and adversely affect our operating results and financial
      position. Acquisitions also involve other risks, including entering geographic
      markets in which we have no or limited prior experience and the potential loss
      of key employees.





As
      of
      March 1, 2008, we have issued 2,948,357 shares of our common stock in connection
      with strategic acquisitions. During the fourth quarter of 2005, we charged
      $3,635,416 to expense, representing the unamortized cost of license agreements
      obtained as a result of four of our technology acquisitions and to write off
      $205,000 of goodwill associated with our now-closed Permeate
      facility.





***The
      success of our business depends, in part, upon proprietary technologies and
      information that may be difficult to protect and may infringe on the
      intellectual property rights of third parties.***





We
      believe that the identification, acquisition and development of proprietary
      technologies are key drivers of our business. Our success depends, in part,
      on
      our ability to obtain patents, license the patents of others, maintain the
      secrecy of our proprietary technology and information, and operate without
      infringing on the proprietary rights of third parties. We currently license
      a
      number of issued United States patents. We also have patent applications pending
      and are in the process of filing additional patent applications in the United
      States. We may in the future file foreign patent applications. We cannot assure
      you that the patents of others will not have an adverse effect on our ability
      to
      conduct our business, that the patents that we license will provide us with
      competitive advantages or will not be challenged by third parties, that any
      of
      our pending patent applications will be approved, that we will develop
      additional proprietary technology that is patentable or that any patents issued
      to us will provide us with competitive advantages or will not be challenged
      by
      third parties. Further, we cannot assure you that others will not independently
      develop similar or superior technologies, duplicate elements of our biomass
      technology or design around it.





To
      successfully commercialize our proprietary technologies, we may need to acquire
      licenses to, or to contest the validity of, issued or pending patents or claims
      of third parties. We cannot assure you that any license acquired under those
      patents would be made available to us on acceptable terms, if at all, or that
      we
      would prevail in any such contest. In addition, we could incur substantial
      costs
      in defending ourselves in suits brought against us for alleged infringement
      of
      another party’s patents or in defending the validity or enforceability of our
      patents, or in bringing patent infringement suits against other parties based
      on
      our patents.





In
      addition to the protection afforded by patents, we also rely on trade secrets,
      proprietary know-how and technology that we seek to protect, in part, by
      confidentiality agreements with our prospective joint venture partners,
      employees and consultants. We cannot assure you that these agreements will
      not
      be breached, that we will have adequate remedies for any such breach, or that
      our trade secrets and proprietary know-how will not otherwise become known
      or be
      independently discovered by others.





***We
      depend upon our officers and key personnel, and the loss of any of these persons
      could adversely affect our operations and results.***





We
      believe that the implementation of our proposed expansion strategy and execution
      of our business plan will depend to a significant extent upon the efforts and
      abilities of our officers and key personnel. We believe that the personal
      contacts of our officers and key personnel within the industry and within the
      scientific community engaged in related research are a significant factor in
      our
      continued success. Our failure to retain our officers or key personnel, or
      to
      attract and retain additional qualified personnel, could adversely affect our
      operations and results. We do not currently carry key-man life insurance on
      any
      of our officers. See “Management.”




30




**Risks
      Related to Government Regulation and Subsidization**





***The
      United States ethanol industry depends heavily on federal and state legislation
      and regulation, and any changes in that legislation or regulation could
      materially adversely affect our results of operations and financial
      condition.***





***The
      elimination or significant reduction in the federal ethanol tax incentive could
      have a material adverse effect on our results of
      operations.***





The
      cost
      of producing ethanol has historically been significantly higher than the market
      price of gasoline. Federal tax incentives make the production of ethanol
      significantly more competitive. The federal excise tax incentive program, which
      is scheduled to expire on December 31, 2010, allows gasoline distributors
      who blend ethanol with gasoline to receive a federal excise tax rate reduction
      for each blended gallon they sell regardless of the blend rate. The current
      federal excise tax on gasoline is $0.184 per gallon, which is paid at the
      terminal by refiners and marketers. If the fuel is blended with ethanol, the
      blender may claim a $0.51 per gallon tax credit for each gallon of ethanol
      used
      in the mixture. The tax credit is scheduled to be reduced to $0.46 per gallon
      in
      2009. We cannot assure you that the federal ethanol tax incentives will be
      renewed in 2010 or if renewed, on what terms they will be renewed. The
      elimination or significant reduction in the federal ethanol tax incentive could
      have a material adverse effect on our results of operations.





***Waivers
      or repeal of the minimum levels of renewable fuels included in gasoline mandated
      by the Energy Independence and Security Act of 2007 could have a material
      adverse affect on our results of operations*** ***.***





The
      Energy Policy Act of 2005 established a renewable fuel standard of 7.5 billion
      gallons of renewable fuels to be included in gasoline annually by 2012. On
      December 19, 2007, President Bush signed into law the Energy Independence and
      Security Act of 2007, which establishes new levels of renewable fuel mandates
      for conventional biofuel and advanced biofuel. The Energy Independence and
      Security Act increased the mandated minimum use of renewable fuels to 9 billion
      gallons per year in 2008 (up from 5.4 billon gallons per year under the previous
      renewable fuel standard), which further increases to 36 billon gallons per
      year
      in 2022.





Under
      the
      Energy Policy Act, the Department of Energy, in consultation with the Secretary
      of Agriculture and the Secretary of Energy, may waive the renewable fuel
      standard mandate with respect to one or more states if the administrator
      determines that implementing the requirements would severely harm the economy
      or
      the environment of a state, a region or the United States, or that there is
      inadequate supply to meet the requirement. Shortly after passage of the Energy
      Independence and Security Act of 2007 in December 2007, a Congressional
      sub-committee held hearings on the potential impact of the new renewable fuel
      standard on commodity prices. Although the sub-committee took no action towards
      repeal of the new renewable fuel standard, any attempt by Congress to re-visit,
      repeal or grant waivers from the new renewable fuel standard could adversely
      affect demand for ethanol and could have a material adverse effect on our
      results of operations and financial condition.





***While
      the Energy Policy Act of 2005, as amended by the Energy Independence and
      Security Act of 2007, imposes a renewable fuel standard, it does not mandate
      the
      use of ethanol and eliminates the oxygenate requirement for reformulated
      gasoline in the reformulated gasoline program included in the Clean Air
      Act.***





The
      reformulated gasoline program’s oxygenate requirements contained in the Clean
      Air Act, which accounted for approximately 1.95 billion gallons of ethanol
      use
      in 2004, was eliminated on May 5, 2006 by the Energy Policy Act of 2005. While
      the Renewable Fuels Association expects that ethanol should account for the
      largest share of renewable fuels produced and consumed under the renewable
      fuel
      standard, that standard is not limited to ethanol and also includes biodiesel
      and any other liquid fuel produced from biomass or biogas. We cannot assure
      you
      that the elimination of the oxygenate requirement for reformulated gasoline
      in
      the reformulated gasoline program included in the Clean Air Act will not result
      in a decline in ethanol consumption, which in turn could have a material adverse
      effect on our results of operations and financial condition.




31




***Some
      countries can import ethanol into the United States duty free, which may
      undermine the ethanol industry in the United States.***





Imported
      ethanol is generally subject to a $0.54 per gallon tariff and a 2.5% ad valorem
      tax that was designed to offset the $0.51 per gallon ethanol subsidy available
      under the federal excise tax incentive program for refineries that blend ethanol
      in their fuel. A special exemption from the tariff for ethanol imported from
      24
      countries in Central America and the Caribbean islands is limited to a total
      of
      7.0% of United States production per year, with additional exemptions for
      ethanol produced from feedstock in the Caribbean region over the 7.0% limit.
      Although bills were introduced in both the U.S. House of Representatives and
      U.S. Senate in May 2006 to repeal the $0.54 per gallon tariff, the Omnibus
      Tax
      bill passed by Congress on December 8, 2006 and signed by President Bush
      included a provision to extend the secondary tariff offset for ethanol through
      January 1, 2009. If total U.S. production increases as many predict, the volume
      of ethanol that can be imported duty-free from the Caribbean region will
      increase proportionately. In addition, under the North America Free Trade
      Agreement, Canada and Mexico are exempt from this tariff. Imports from the
      exempted countries have increased in recent years and are expected to increase
      further as a result of new plants under development.





***Lax
      enforcement of environmental and energy policy regulations may adversely affect
      the demand for ethanol.***





Our
      success will depend, in part, on effective enforcement of existing environmental
      and energy policy regulations. Many of our potential customers are unlikely
      to
      switch from conventional fuels unless compliance with applicable regulatory
      requirements leads, directly or indirectly, to the use of ethanol. The entities
      affected by those requirements are likely to vigorously oppose both the
      additional regulation and the enforcement of those regulatory provisions. If
      existing emissions-reducing standards are weakened, or if governments are not
      active and effective in enforcing those standards, our business and results
      of
      operations could be adversely affected. Even if the current trend toward more
      stringent emissions standards continues, our future prospects will depend on
      the
      ability of ethanol to satisfy these emissions standards more efficiently than
      other alternative technologies. Certain standards imposed by regulatory programs
      may limit or preclude the use of our products to comply with environmental
      or
      energy requirements. Any decrease in the emission standards or the failure
      to
      enforce existing emission standards and other regulations could result in a
      reduced demand for ethanol. A significant decrease in the demand for ethanol
      will reduce the price of ethanol, adversely affect our financial performance
      and
      decrease the value of your stock.





***Costs
      of compliance with burdensome or changing environmental and operational safety
      regulations could divert our focus from our business and cause our results
      of
      operations to suffer.***





Ethanol
      production involves the emission of various airborne pollutants, including
      particulate matter, carbon monoxide, carbon dioxide, nitrous oxide, volatile
      organic compounds and sulfur dioxide. Our plants also will discharge water
      into
      the environment. As a result, we are subject to complicated environmental
      regulations of the U.S. Environmental Protection Agency and regulations and
      permitting requirements of the State of Iowa. These regulations are subject
      to
      change, and those changes may require additional capital expenditures or
      increased operating costs. Consequently, considerable resources may be required
      to comply with existing or future environmental regulations. In addition, our
      ethanol plants could be subject to environmental nuisance or related claims
      by
      employees, property owners or residents near the ethanol plants arising from
      air
      or water discharges. Ethanol production can produce an unpleasant odor to which
      surrounding residents could object. Environmental and public nuisance claims,
      or
      tort claims based on emissions, or increased environmental compliance costs
      could significantly increase our operating costs.





Our
      existing and proposed new ethanol plants will also be subject to federal and
      state laws regarding occupational safety. Risks of substantial compliance costs
      and liabilities are inherent in ethanol production. We may be subject to costs
      and liabilities related to worker safety and job related injuries, some of
      which
      may be significant. Possible future developments, including stricter safety
      laws
      for workers and other individuals, regulations and enforcement policies and
      claims for personal or property damages resulting from operation of the ethanol
      plants could reduce the amount of cash that would otherwise be available to
      further enhance our business.




32




***We
      may be required to pay material amounts to address environmental issues at
      our
      Spring Hope facility.***





We
      are
      aware of soil, groundwater or surface contamination involving asbestos at our
      Spring Hope facility, a former medium density fiberboard plant we acquired
      from
      Carolina Fiberboard Corporation, LLC in November 2006. We are also aware that
      the facility has asbestos insulation surrounding existing boilers, potential
      Polychlorinated Biphenyls (PCBs) contamination of the soil and oil leakage
      in
      several areas of the plant from past operations. We have not yet completed
      our
      environmental assessment of the facility and cannot determine the extent of
      contamination or remedial actions required. There
      may be other contamination or environmental concerns of which we are currently
      unaware. Under
      the
      purchase agreement, Carolina Fiberboard is required to pay or reimburse us
      for
      all reasonable costs and expenses incurred for cleanup or other remedial actions
      performed at the Spring Hope facility as needed. Under the purchase agreement,
      $128,000 in cash and 1,000,000 shares of our common stock are held in escrow
      to
      cover these costs and expenses. We cannot assure you, however, that we will
      be
      able to recover all our costs and expenses from Carolina Fiberboard or at all,
      or that the escrowed funds will be sufficient to cover our costs and expenses.
      The potential environmental liabilities could have a material adverse effect
      on
      our results of operations and financial condition.





**Risks
      Related to an Investment in Our Common Stock**





***Our
      common stock price has fluctuated considerably, and stockholders may not be
      able
      to resell their shares at or above the price at which they purchased those
      shares.***





The
      market price of our common stock has fluctuated in the past, and may continue
      to
      fluctuate significantly in response to factors, some of which are beyond our
      control. For example, since our reverse merger in February 2005 and through
      March 14, 2008, the high and low bid or closing sale price for our common stock
      has been $15.19 and $0.30 per share, respectively. Factors that could affect
      the
      market price of our common stock include the following:





·
            our
                inability to manufacture ethanol as efficiently as we expect due
                to
                factors related to costs and supply of corn, energy or
                water;


·
            market
                factors affecting the demand for ethanol such as price, competition
                and
                general economic conditions;


·
            discontinuation
                or limitations on state and federal ethanol
                subsidies;


·
            negative
                public sentiment toward ethanol production and use;
                and


·
            environmental
                restrictions increasing the costs and liabilities of ethanol
                production.





The
      market prices of securities of fuel-related companies have experienced
      fluctuations that often have been unrelated or disproportionate to the operating
      results of these companies. Continued market fluctuations could result in
      extreme volatility in the price of our common stock, which could cause a decline
      in the value of our common stock. Price volatility might be intensified under
      circumstances where the trading volume of our common stock is low.





***We
      are unlikely to attract the attention of major brokerage firms for research
      and
      support, which may adversely affect the market price of our common
      stock.***





Securities
      analysts of major brokerage firms have not published research on our common
      stock. The number of securities competing for the attention of those analysts
      is
      large and growing. Moreover, because we went public through a “reverse merger,”
some major brokerage firms may be reluctant to publish research on us regardless
      of our results of operations. Coverage of a security by analysts at major
      brokerage firms increases the investing public’s knowledge of and interest in
      the issuer, which may stimulate demand for and support the market price of
      the
      issuer’s securities. The failure of major brokerage firms to cover our common
      stock may adversely affect the market price of our common stock.





***Future
      sales of common stock or other dilutive events may adversely affect prevailing
      market prices for our common stock.***





We
      are
      currently authorized to issue up to 100,000,000 shares of common stock, of
      which
      28,609,103 shares were issued and outstanding and an additional 10,278,764
      were
      reserved for issuance as of March 1, 2008. Of the




33




shares
      of
      common stock we have reserved for issuance, 937,930 shares were reserved for
      issuance for options that have not yet been granted under our 2005 Incentive
      Compensation Plan. Our board of directors has the authority, without further
      action or vote of our stockholders, to issue any or all of the 61,076,821
      authorized shares of our common stock that are not reserved for issuance and
      to
      grant options or other awards under our 2005 Incentive Compensation Plan. The
      board may issue shares or grant options or awards relating to shares at a price
      that reflects a discount from the then-current market price of our common stock.
      The options and warrants referred to above include provisions that require
      the
      issuance of increased numbers of shares of common stock on exercise or
      conversion in the event of stock splits, redemptions, mergers or other
      transactions. The occurrence of any such event, the exercise of any of the
      options or warrants described above and any other issuance of shares of common
      stock will dilute the percentage ownership interests of our current stockholders
      and may adversely affect the prevailing market price of our common
      stock.





***A
      significant number of our shares will be eligible for sale, and their sale
      could
      depress the market price of our common stock.***





Sales
      of
      a significant number of shares of our common stock in the public market could
      harm the market price of our common stock. Up to 38,923,179 shares of our common
      stock may be offered from time to time in the open market, including the shares
      registered on the Registration Statement on Form SB-2 (No. 333-135121 ),
      which
      was originally declared effective on August 10, 2007, and shares reserved for
      issuance on the exercise of outstanding options and warrants. These sales may
      depress the market for the shares of our common stock. Moreover, additional
      shares of our common stock, including shares that have been issued in private
      placements, may be sold from time to time in the open market under Rule 144.
      Effective February 15, 2008, the SEC amended Rule 144 to shorten the holding
      period requirement for “restricted securities” of issuers that are subject to
      the reporting requirements of the Securities Exchange Act of 1934 to six months
      and substantially reduce the restrictions applicable to the resale of securities
      by non-affiliates. Under the new Rule 144, in general, affiliates who have
      held
      restricted shares of a reporting issuer for a period of six months may, upon
      filing with the SEC a notification on Form 144, sell into the market common
      stock in an amount equal to the greater of 1% of the outstanding shares or
      the
      average weekly number of shares sold in the last four weeks before the sale.
      Those sales may be repeated at specified intervals. Subject to satisfaction
      of a
      six-month holding requirement, non-affiliates of an issuer may make sales under
      Rule 144, as amended, without regard to the volume limitations, and any of
      the
      restricted shares may be sold by a non-affiliate after they have been held
      one
      year. Sales of our common stock by our affiliates are subject to Rule
      144.





***Failure
      to achieve and maintain effective internal controls over financial reporting
      in
      accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have a
      material adverse effect on our business and operating results. In addition,
      as a
      consequence of that failure, current and potential stockholders could lose
      confidence in our financial reporting, which could have an adverse effect on
      our
      stock price.***





Effective
      internal controls are necessary for us to provide reliable financial reports
      and
      effectively prevent fraud. If we cannot provide reliable financial reports
      or
      prevent fraud, we could be subject to regulatory action or other litigation
      and
      our operating results could be harmed. Beginning with our 2007 fiscal year,
      we
      are required to document and test our internal control procedures to satisfy
      the
      requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires
      our management to annually assess the effectiveness of our internal controls
      over financial reporting. Beginning with our 2009 fiscal year (assuming the
      one-year extension recently proposed by the SEC becomes effective), our
      independent registered public accounting firm will be required to issue an
      attestation report on our internal controls over financial reporting.





During
      the course of our testing, we may identify deficiencies that we may not be
      able
      to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act
      for
      compliance with the requirements of Section 404. In addition, if we fail to
      maintain the adequacy of our internal accounting controls, as those standards
      are modified, supplemented or amended from time to time, we may not be able
      to
      ensure that we can conclude on an ongoing basis that we have effective internal
      controls over financial reporting in accordance with Section 404. Failure to
      achieve and maintain an effective internal control environment could cause
      us to
      face regulatory action and also cause investors to lose confidence in our
      reported financial information, either of which could have an adverse effect
      on
      our stock price.




34




***Xethanol
      Corporation and some of our former officers and directors are defendants in
      litigation that could have a material adverse effect on our business, results
      of
      operations and financial condition.***





We
      and
      some of our present and former officers and directors are defendants in two
      lawsuits that may result in substantial costs and require significant
      involvement of our management and may divert our management’s attention from our
      business and operations.





In
      October 2006, a shareholder class action complaint was filed in the United
      States District Court for the Southern District of New York, purportedly brought
      on behalf of all purchasers of Xethanol common stock during the period January
      31, 2006 through August 8, 2006. The complaint alleges, among other things,
      that
      we and some of our former officers and directors made materially false and
      misleading statements regarding our operations, management and internal controls
      in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of
      1934
      and Rule 10b-5. The plaintiffs seek, among other things, unspecified
      compensatory damages and reasonable costs and expenses, including counsel fees
      and expert fees. Six nearly identical class actions complaints were thereafter
      filed in the same court, all of which have been consolidated into one action
      (the “Class Action”). The plaintiffs filed their amended consolidated complaint
      on March 23, 2007. The defendants filed a motion to dismiss the amended
      complaint on April 23, 2007. On September 7, 2007, the District Court denied
      that motion. On November 28, 2007, the defendants, including Xethanol
      Corporation, reached on an agreement in principle with the plaintiffs’ lead
      counsel to settle the Class Action. The tentative settlement agreement, which
      was reached during a mediation overseen by a retired United States District
      Court Judge, calls for the payment of $2.8 million to the plaintiffs, of which
      we will pay $400,000 and our insurance carriers will pay $2.4 million. The
      agreement remains subject to final negotiated writings executed by the parties
      and approval by the United States District Court for the Southern District
      of
      New York. Although we expect the District Court to approve the settlement
      agreement, we can give no assurance that the District Court will approve the
      settlement agreement as finalized by the parties or at all.





In
      December 2007, Global Energy and Management, LLC filed an action in the federal
      court for the Southern District of New York against Xethanol and nine current
      or
      former officers, directors and employees. The individual defendants include
      David Ames, our Chief Executive Officer and a director; and Thomas J. Endres,
      our Chief Operating Officer, Executive Vice President, Operations. The lawsuit
      alleges fraud by the defendants in connection with Global Energy’s alleged
      investment of $250,000 in NewEnglandXethanol, LLC, a joint venture of Xethanol
      and Global Energy. On March 19, 2008, Global Energy served its second amended
      complaint on us. Based on an alleged investment of $250,000, Global Energy
      seeks
      more than $10,000,000 in damages plus pre-judgment interest and costs.
      Management has instructed counsel to vigorously represent and defend our
      interests in this litigation.





Litigation
      is subject to inherent uncertainties, and an adverse result in this or other
      matters that may arise from time to time could have a material adverse effect
      on
      our business, results of operations and financial condition. We may incur
      material legal and other expenses, and our management may be
      distracted.





***Investors
      should not anticipate receiving cash dividends on our common
      stock.***





We
      have
      never declared or paid any cash dividends or distributions on our capital stock.
      We currently intend to retain our future earnings to support operations and
      to
      finance expansion and, therefore, we do not anticipate paying any cash dividends
      on our common stock in the foreseeable future.





***We
      may issue shares of preferred stock without stockholder approval that may
      adversely affect your rights as a holder of our common
      stock.***





Our
      certificate of incorporation authorizes us to issue up to 1,000,000 shares
      of
“blank check” preferred stock with such designations, rights and preferences as
      may be determined from time to time by our board of directors. Accordingly,
      our
      board of directors is empowered, without stockholder approval, to issue a series
      of preferred stock with rights to receive dividends and distributions upon
      liquidation in preference to any dividends or distributions upon liquidation
      to
      holders of our common stock and with conversion, redemption, voting or other
      rights which could dilute the economic interest and voting rights of our common
      stockholders. The issuance of preferred stock could also be used as a method
      of
      discouraging, delaying or preventing a change in control of our company or
      making removal of our management more difficult, which may not be in your
      interest as holders of common stock.




35




***Provisions
      in our certificate of incorporation and bylaws and under Delaware law could
      inhibit a takeover at a premium price.***





As
      noted
      above, our certificate of incorporation authorizes us to issue up to 1,000,000
      shares of “blank check” preferred stock with such designations, rights and
      preferences as our board of directors may determine from time to time. Our
      bylaws limit who may call a special meeting of stockholders and establish
      advance notice requirements for nominations for election to our board of
      directors or for proposing matters that can be acted upon at stockholder
      meetings. Each of these provisions may have the effect of discouraging, delaying
      or preventing a change in control of our company or making removal of our
      management more difficult, which may not be in your interest as holders of
      common stock. Delaware law also could make it more difficult for a third party
      to acquire us. Specifically, Section 203 of the Delaware General Corporation
      Law
      may have an anti-takeover effect with respect to transactions not approved
      in
      advance by our board of directors, including discouraging attempts that might
      result in a premium over the market price for the shares of common stock held
      by
      our stockholders. These provisions could also limit the price that investors
      might be willing to pay in the future for shares of our common
      stock.


36


**ITEM
      1B.**  **UNRESOLVED
      STAFF COMMENTS.** ****





Not
      applicable.





**ITEM
      2.**  **PROPERTIES.**





We
      maintain our principal executive and administrative offices in Atlanta, Georgia,
      where we lease 6,354 square feet of office space. The lease commenced on June
      15, 2007 on a 42-month term, including six months of free rent. The base monthly
      rent under the lease is $14,000.





We
      also
      maintain offices in New York, New York, where we sublease office space under
      a
      month-to-month sub-lease for a monthly rental rate of approximately $17,000
      from
      a company of which one of our former directors is the managing member. See
      Item
      13, “Certain Relationships and Related Transactions - Office Space” for a more
      detailed discussion of this arrangement.





In
      December 2006, we entered into a lease for a condominium unit located in New
      York City to be used by our Chief Executive Officer and other officers and
      employees who reside outside the greater New York City area. The term of the
      lease is one year beginning on January 1, 2007. The monthly rent under the
      lease
      is $6,400. In December 2006, we paid the full amount of the rent payable under
      the lease in advance through June 2008.





We
      own
      our Xethanol BioFuels facility located in Blairstown, Iowa that consists of
      a
      24,728 square foot ethanol plant on 25.5 acres of land and a 20.9-acre vacant
      lot adjoining the property; our facility located in Augusta, Georgia that
      consists of multiple facilities on 40.8 acres; and our facility located in
      Spring Hope, North Carolina that consists of 200,000 square feet of factory
      building on 212 acres. Our Blairstown facility also includes warehouse and
      distribution facilities, and available space for potential expansion.





We
      purchased our Augusta facility in August 2006 for approximately $8,400,000
      in
      cash. In October 2006, we sold surplus equipment from the Augusta facility
      for
      $3,100,000 in cash. We have decided that the Augusta facility does not fit
      within our long-term corporate strategy, and on March 20, 2008, our board
      authorized management to pursue the sale of the facility. We have interviewed
      real estate brokerage firms to assist us in marketing the property for sale,
      but
      we have not retained such a firm. We can offer no assurances regarding how
      long
      it would take to sell the facility or the price we might receive.





We
      have
      also reevaluated our Spring Hope facility and have decided that it does not
      fit
      within our long-term corporate strategy. On March 20, 2008, our board authorized
      management to pursue the sale of the facility. Before we sell our Spring Hope
      facility, we will have to resolve certain liens on the property filed by
      companies that performed, or have claimed to have performed, environmental
      remediation and demolition work on the property. We can offer no assurances
      regarding how long it would take to sell the facility or the price we might
      receive.





We
      believe that our Blairstown facility is in good working order.


37


**ITEM
      3.**  **LEGAL
      PROCEEDINGS.**





We
      are a
      party to the lawsuits described below. An adverse result in these lawsuits
      could
      have a material adverse effect on our business, results of operations and
      financial condition. In connection with the class action lawsuit described
      below
      (and a derivative action that has been dismissed), we accrued $200,000 at
      December 31, 2006 to cover the deductible amount we are required to pay under
      our director and officer liability insurance policy for those claims. Through
      December 31, 2007, we have paid $200,000 in legal fees, have accrued a liability
      for the approximately $346,000 in additional legal fees and have recorded a
      $300,000 receivable from our insurance carriers, which is the amount the
      insurance carriers have agreed to pay under the tentative settlement described
      below.





*Shareholder
      Class Action* .
      In
      October 2006, a shareholder class action complaint was filed in the United
      States District Court for the Southern District of New York, purportedly brought
      on behalf of all purchasers of Xethanol common stock during the period January
      31, 2006 through August 8, 2006. The complaint alleges, among other things,
      that
      Xethanol and some of its former officers and directors made materially false
      and
      misleading statements regarding the Xethanol’s operations, management and
      internal controls in violation of Sections 10(b) and 20(a) of the Securities
      Exchange Act of 1934 and Rule 10b-5. The individual defendants are Lawrence
      S.
      Bellone, a former director, Executive Vice President, Corporate Development,
      principal accounting officer and Chief Financial Officer; Christopher
      d’Arnaud-Taylor, a former director, Chairman, President and Chief Executive
      Officer; and Jeffrey S. Langberg, a former director. The plaintiffs seek, among
      other things, unspecified compensatory damages and reasonable costs and
      expenses, including counsel fees and expert fees. Six nearly identical class
      action complaints were thereafter filed in the same court, all of which have
      been consolidated into one action, In re Xethanol Corporation Securities
      Litigation, 06 Civ. 10234 (HB) (S.D.N.Y.) (the “Class Action”). The plaintiffs
      filed their amended consolidated complaint on March 23, 2007. The defendants
      filed a motion to dismiss the amended complaint on April 23, 2007. On September
      7, 2007, the District Court denied that motion. On November 28, 2007, the
      defendants, including Xethanol Corporation, reached an agreement in principle
      with plaintiffs’ lead counsel to settle the Class Action. The tentative
      settlement agreement, which was reached during a mediation overseen by a retired
      United States District Court Judge, calls for the payment of $2.8 million to
      the
      plaintiffs, of which we will pay $400,000 and our insurance carriers will pay
      $2.4 million. In addition, our insurance carriers have agreed to pay up to
      an
      additional $300,000 in legal costs. The agreement remains subject to final
      negotiated writings executed by the parties and approval by the United States
      District Court for the Southern District of New York. Although we expect the
      District Court to approve the settlement agreement, we can give no assurance
      that the District Court will approve the settlement agreement as finalized
      by
      the parties or at all.





*Global
      Energy and Management, LLC Lawsuit* .
      In
      December 2007, Global
      Energy and Management, LLC (“Global
      Energy”) filed an action in the federal court for the Southern District of New
      York against Xethanol and nine current or former officers, directors and
      employees. The lawsuit is entitled Global Energy and Management v. Xethanol
      Corporation, Mr. d’Arnaud-Taylor; Mr. Langberg; Mr. Bellone; Louis B. Bernstein,
      a former President, Interim Chief Executive Officer and director; David Ames,
      our Chief Executive Officer, President and a director; Thomas J. Endres, our
      Chief Operating Officer, Executive Vice President, Operations; Robin Buller,
      a
      former Executive Vice President - Strategic Development; David Kreitzer, a
      former employee; and John Murphy, a former consultant, 07 Civ. 11049 (NRB)
      (S.D.N.Y.). The lawsuit alleges fraud by the defendants in connection with
      Global Energy’s alleged investment of $250,000 in NewEnglandXethanol, LLC, a
      joint venture of Xethanol and Global Energy. On March 19, 2008, Global Energy
      served its second amended complaint on us. Based on an alleged investment of
      $250,000, Global Energy seeks more than $10,000,000 in damages plus pre-judgment
      interest and costs. Management has instructed counsel to vigorously represent
      and defend our interests in this litigation.





Litigation
      is subject to inherent uncertainties, and an adverse result in this or other
      matters that may arise from time to time could have a material adverse effect
      on
      our business, results of operations and financial condition. We may incur
      material legal and other expenses, and our management may be
      distracted.




38




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





**Proposals
      Submitted to Stockholders at 2007 Annual Meeting**





We
      held
      our annual meeting of stockholders on January 22, 2008, which was reconvened
      on
      February 12, 2008 to open and close the polls and announce the results of the
      voting on all three proposals. We asked our stockholders to vote on three
      proposals, which are described in more detail in the proxy statement dated
      December 27, 2007 that we sent to our stockholders and filed with the SEC:





1.
            to
                elect six directors to serve until the 2008 annual meeting of stockholders
                or until their successors have been duly elected and
                qualified;


2.
            to
                approve an amendment to our 2005 Incentive Compensation Plan, as
                amended
                on August 10, 2006 (the “Plan”) to increase the number of shares of common
                stock available for issuance under the Plan from 4,000,000 to 6,500,000;
                and


3.
            to
                ratify the appointment of Imowitz Koenig & Co., LLP as our independent
                registered public accounting firm for the fiscal year ending December
                31,
                2007.





We
      solicited proxies for the meeting pursuant to Section 14(a) of the Securities
      Exchange Act of 1934, and there was no solicitation in opposition to
      management’s solicitations.





*Election
      of Directors*





All
      six
      of management’s nominees for directors as listed in the proxy statement were
      elected with the following votes (there were no abstentions or broker non-votes)
      to serve until the 2008 annual meeting of stockholders or until their successors
      have been duly elected and qualified:





**Votes
                For**
            
            **Votes
                Withheld**David
                R. Ames
            17,240,574
            
            3,070,844William
                P. Behrens
            17,205,423
            
            3,105,995Gil
                Boosidan
            17,222,855
            
            3,088,563Richard
                D. Ditoro
            17,194,516
            
            3,116,900Robert
                L. Franklin
            17,234,238
            
            3,077,180Edwin
                L. Klett
            17,195,223
            
            3,116,195





*Approval
      of an Amendment to the Plan*





An
      amendment to the Plan to increase the number of shares of common stock available
      for issuance under the Plan from 4,000,000 to 6,500,000 was approved with the
      following votes:





**Votes
                For**
            
            **Votes
                Against**
            
            **Abstentions**
            
            **Broker
                Non-Votes**4,137,116
            
            3,405,366
            
            97,816
            
            12,671,121





*Ratification
      of the appointment of Imowitz Koenig & Co., LLP*





The
      appointment of Imowitz Koenig & Co., LLP as our independent registered
      public accounting firm for the fiscal year ending December 31, 2007 was approved
      and ratified with the following votes:





**Votes
                For**
            
            **Votes
                Against**
            
            **Abstentions**
            
            **Broker
                Non-Votes**18,711,628
            
            1,375,222
            
            224,066
            
            0


39




**PART
      II**





**ITEM
              5.**
            **MARKET
                FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
                PURCHASES OF EQUITY SECURITIES**.





**Holders**





As
      of
      March 1, 2008, there were approximately 128 record holders of our common stock
      and 28,609,103 shares of our common stock issued and outstanding.





**Market
      Information**





Our
      shares of common stock are listed on the American Stock Exchange under the
      trading symbol XNL. Before June 20, 2006, our common stock was quoted on the
      OTC
      Bulletin Board under the trading symbol XTHN.OB.





The
      following table sets forth, with respect to the periods between January 1,
      2006
      and June 19, 2006 (inclusive), the high and low bid prices for our common stock
      for the periods indicated as reported by the OTC Bulletin Board and, with
      respect to the periods between June 20, 2006 and December 31, 2007 (inclusive),
      the high and low sales prices for our common stock for the periods indicated
      as
      reported by AMEX. These bid prices represent prices quoted by broker-dealers
      on
      the OTC Bulletin Board. These quotations reflect inter-dealer prices, without
      retail mark-up, mark-down or commissions, and may not represent actual
      transactions.




**High**
            
            **Low****Year
                Ended December 31, 2006**First
                Quarter
            
            $
            6.80
            
            $
            2.30Second
                Quarter
            
            
            16.18
            
            
            6.85Third
                Quarter
            
            
            10.14
            
            
            2.58Fourth
                Quarter
            
            
            4.20
            
            
            2.18**Year
                Ended December 31, 2007**First
                Quarter
            
            $
            4.14
            
            $
            1.95Second
                Quarter
            
            
            2.57
            
            
            1.12Third
                Quarter
            
            
            1.93
            
            
            0.65Fourth
                Quarter
            
            
            0.99
            
            
            0.30




**Dividend
      Policy**





We
      have
      not previously declared or paid any dividends on our common stock and do not
      anticipate declaring any dividends in the foreseeable future. The payment of
      dividends on our common stock is within the discretion of our board of
      directors. We intend to retain any earnings for use in our operations and the
      expansion of our business. Payment of dividends in the future will depend on
      our
      future earnings, future capital needs and our operating and financial condition,
      among other factors that our board of directors may deem relevant. We are not
      under any contractual restriction as to our present or future ability to pay
      dividends.





**ITEM
      6.** **SELECTED
      FINANCIAL DATA.**





Not
      required for smaller reporting companies .


40


**ITEM
      7.** **MANAGEMENT’S
      DISCUSSION AND ANALYSIS** **OF
      FINANCIAL CONDITION AND RESULTS OF OPERATION.**





*This
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations contains forward-looking statements that involve future events,
      our
      future performance and our expected future operations and actions. In some
      cases, you can identify forward-looking statements by the use of words such
      as
“may,” “will,” “should,” “anticipate,” “believe,” “expect,” “plan,” “future,”
“intend,” “could,” “estimate,” “predict,” “hope,” “potential,” “continue,” or
      the negative of these terms or other similar expressions. These forward-looking
      statements are only our predictions and involve numerous assumptions, risks
      and
      uncertainties. Our actual results or actions may differ materially from these
      forward-looking statements for many reasons, including the matters discussed
      in
      this report under the caption “Risk Factors.” We urge you not to place undue
      reliance on these forward-looking statements, which speak only as of the date
      of
      this report. We undertake no obligation to publicly update any forward
      looking-statements, whether as a result of new information, future events or
      otherwise.*





*You
      should read the following discussion of our financial condition and results
      of
      operations in conjunction with our financial statements and the related notes
      included in this report.*





**Overview**





Our
      net
      sales were approximately $11.0 million for the year ended December 31, 2007.
      Currently, our only source of revenue is from our sales of ethanol and related
      products at our corn based Xethanol BioFuels plant in Blairstown, Iowa. We
      had
      cash and cash equivalents of approximately $12.3 million as of December 31,
      2007
      and approximately $9.5 million as of March 14, 2008.





In
      October 2007, we sold a portion of our property located at our Blairstown site
      for $554,000. In November 2007, we sold all of the assets at our Permeate
      facility for $500,000 in cash.





For
      the
      year ended December 31, 2007, we used a total of approximately $3.4 million
      in
      net cash in connection with investing activities, including a loss on marketable
      securities of $1.6 million. During 2007, we invested cash of approximately
      $1.3
      million related to our formerly planned ethanol facility at our Blairstown
      site.
      We have deferred construction of the new facility indefinitely as a result
      of
      the changing ethanol market, continued high prices for corn and our inability
      to
      arrange debt or equity financing for the project.





We
      intend
      to build a demonstration plant for converting citrus peel waste into ethanol
      and
      are negotiating an agreement to locate the plant at an existing citrus facility
      in Florida owned by one of the largest citrus processors in the state. The
      planned cost for the two-year build-out of the demonstration plant is
      approximately $5,900,000. On January 22, 2008, the Florida Department of
      Agriculture and Consumer Services approved a $500,000 grant for this purpose.
      We
      plan to apply for federal government grants and combine private equity with
      those grants to supplement the state grant. If we do not receive these federal
      grants, we will need to raise additional equity to build this plant as we
      intend.





We
      anticipate significant capital expenditures and investments over the next 12
      months and longer related to our growth program. We have reevaluated our
      Augusta, Georgia and Spring Hope, North Carolina facilities and have decided
      that they do not fit within our long-term corporate strategy. On March 20,
      2008, our board authorized management to pursue the sale of each
      facility. We do not presently intend to pursue the manufacture and sale of
      a diesel biofuel based on H2Diesel’s technology. We may seek to sell some of our
      H2 Diesel stock from time to time to raise capital.





We
      plan
      to use a portion of our current cash to provide seed equity for potential new
      projects while we analyze financing options. We will also use cash on hand
      to
      fund corporate overhead, and invest in technology and research and development.
      We will need substantial additional capital to pursue our plans, and we can
      give
      no assurance that we will be able to raise the additional capital we need on
      commercially acceptable terms or at all.





Please
      see the section entitled “Description of Formation and Capitalization” for a
      description of our corporate history and material capital-raising transactions.




41




**Results
      of Operations**





**Year
      Ended December 31, 2007 Compared to Year Ended December 31, 2006**





**Net
      Loss.** We
      incurred a net loss of $31.3 million for the year ended December 31, 2007 versus
      a net loss of $20.2 million for the year ended December 31, 2006. Included
      in
      the net losses for the years ended December 31, 2007 and 2006 were non-cash
      charges totaling $18.3 million and $14.4 million or 58.5% and 71.4% of our
      net
      losses, respectively. Significant 2007 non-cash charges included:





·
            $12.2
                million of impairment losses on fixed assets, composed of $7.0 million
                in
                impairment losses on our Spring Hope facility, a $2.6 million impairment
                loss relating to costs previously incurred for a planned second ethanol
                facility at Blairstown that we have deferred indefinitely; a $2.1
                million
                impairment loss at our Augusta site, and a $521,000 impairment loss
                on our
                Permeate assets that we sold in November
                2007;


·
            $4.0
                million in expenses related to stock options and warrants issued
                for
                services;


·
            $1.2
                million in loss on equity of H2Diesel; and


·
            $798,000
                in depreciation and amortization
                expenses.





The
      increase in net loss of $11.1 million for 2007 as compared to 2006 resulted
      primarily from:





·
            a
                $11.7 million increase in impairment loss on fixed
                assets;


·
            a
                $2.6 million increase in gross loss on net sales;
                and


·
            a
                $2.2 million increase in general and administrative expenses, including
                a
                $1.2 million increase in expenses at our Spring Hope
                facility





offset
      by





·
            a
                $3.0 million decrease in equity
                compensation;


·
            a
                $2.1 million decrease in other expenses;
                and


·
            a
                $251,000 decrease in research and development
                expenses.





Our
      ability to achieve profitable operations depends in part on increasing gross
      margin on our existing facility at Blairstown. Given the uncertainties of
      predicting gross margin, we cannot assure you when we will show profitable
      results.





**Net
      Sales.** Net
      sales for the year ended December 31, 2007 were $11.0 million compared to the
      same amount for the year ended December 31, 2006. Sales during 2007 and 2006
      relate entirely to the Blairstown facility. During the year ended December
      31,
      2007, Blairstown sold 5.4 million gallons of ethanol at monthly prices ranging
      between $1.51 and $2.09 per gallon with an average price of $1.87 per gallon
      and
      generated revenue of $1.0 million from the sales of by-products. Total average
      revenue per gallon including by-products was $2.06. During the year ended
      December 31, 2006, Blairstown sold 5.2 million gallons of ethanol at monthly
      prices ranging between $1.52 and $2.38 per gallon with an average price of
      $1.99
      per gallon and generated revenue of $664,000 from the sales of by-products.
      Total average revenue per gallon including by-products was $2.10.





**Cost
      of Sales.** Cost of
      sales for the year ended December 31, 2007 was $12.7 million compared to $10.1
      million for the year ended December 31, 2006. Cost of sales is comprised of
      direct materials, direct labor and factory overhead. Included in factory
      overhead are energy costs, depreciation, repairs and maintenance. The increase
      in cost of sales resulted primarily from an increase in the average monthly
      cost
      of corn and a small increase in gallons of ethanol produced during the
      period.





The
      average monthly cost of sales during the year ended December 31, 2007 was
      approximately $2.36 per gallon, reflecting the increased costs of grain during
      the period from a low of $2.09 per gallon in August to a high of $2.77 per
      gallon during February. The average monthly cost of sales during the year ended
      December 31, 2006 was approximately $1.91 per gallon, from a low of $0.79 per
      gallon in January to a high of $1.26 per gallon during December. The average
      monthly cost of corn during the year ended December 31, 2007 was $1.42 per
      gallon sold




42




as
      compared to $.87 in 2006. The Blairstown facility is a refurbished plant and,
      as
      a result, lacks the energy efficiencies of newer plants and requires more
      frequent repairs, which may result in temporary production stoppages.
      Additionally, because the plant is a smaller production facility, it cannot
      benefit from economies of scale available to larger plants, leading to per
      gallon expenses higher than those of our competitors’ larger
      plants.





**Gross
      (Loss) Profit.** Gross
      loss for the year ended December 31, 2007 was $1.6 million, or 14.9% of net
      sales, versus a gross profit of $$938,000, or 8.5% of net sales, for the year
      ended December 31, 2006. The increase in gross loss is principally due to a
      higher average corn price and a lower average selling price for the year ended
      December 31, 2007 compared to the prior year.





**General
      and Administrative Expenses.** General
      and administrative expenses (“G&A”) were $10.1 million for the year ended
      December 31, 2007 compared to $7.9 for the year ended December 31, 2006,
      reflecting a net increase of $2.2 million, or 27.8%. The primary components
      of
      2007 G&A expenses were:





·
            $2.5
                million for accounting and legal services or 24.8% of
                G&A;


·
            $1.4
                million of employee cash compensation or 13.9% of
                G&A;


·
            $1.4
                million for expenses of the Spring Hope facility or 13.9% of
                G&A;


·
            $1.3
                million for expenses of CoastalXethanol or 12.9% of G&A;
                and


·
            $994,000
                for fees to outside advisors, professionals and other service providers
                or
                9.8% of G&A.





Other
      significant items included in G&A were:





·
            $896,000
                in travel and entertainment
                expenses;


·
            $402,000
                in rent expense; and


·
            $306,000
                for expenses related to our Blairstown
                facility.





The
      increase in G&A in 2007 compared to 2006 was primarily attributable to:





·
            a
                $1.5 million increase in accounting and legal fees primarily resulting
                from our SEC filings and litigation costs;


·
            a
                $495,000 increase in travel and entertainment expenses resulting
                primarily
                from travel related to executive management’s assessment of our
                facilities, R&D projects and potential new business opportunities;
                and


·
            a
                $1.2 million increase in expenses related to our Spring Hope site,
                which
                we acquired during the fourth quarter of
                2006.





The
      increases in G&A costs were partially offset by:





·
            a
                $565,000 decrease in consulting costs;
                and


·
            a
                $341,000 decrease in payroll costs.





**Equity
      Compensation.** Equity
      compensation for the year ended December 31, 2007 was $4.0 million compared
      to
      $7.0 million for the year ended December 31, 2006. The significant items in
      equity compensation include:





·
            $2.6
                million in compensation expense for the year ended December 31, 2007
                related to stock options granted to employees and consultants under
                the
                2005 Incentive Compensation Plan, representing a decrease of $485,000
                from
                $3.1 million of expenses in the prior
                year;


·
            $942,000
                in compensation expense for the year ended December 31, 2007 related
                to
                stock options granted to outside directors under the 2005 Incentive
                Compensation Plan, representing a decrease of $1.4 million from $2.4
                million in the prior year; and


·
            $421,000
                in compensation expense related to warrants issued in 2006 and expensed
                during the year ended December 31, 2007, a decrease of $669,000 from
                $1.1
                million in the prior year; and


·
            no
                compensation expense for the year ended December 31, 2007 related
                to
                shares of common stock issued for services rendered, representing
                a
                decrease of $448,000 from the prior
                year.




43




**Depreciation
      and Amortization.** Depreciation expense for the year ended December 31, 2007 was $65,000 compared
      to $205,000 for the prior year. The $140,000 decrease resulted primarily from
      the impairment loss on fixed assets of Permeate at December 31, 2006 and the
      subsequent sale of Permeate’s assets in 2007.





Amortization
      expense for the year ended December 31, 2007 was $273,000 compared to $136,000
      for the prior year. The $137,000 increase was as a result of an entire year
      of
      amortization in 2007 on our research and development agreements as compared
      to
      six months in 2006.





**Research
      and Development.** Research
      and development expenses for the year ended December 31, 2007 decreased by
      $251,000 to $601,000 as compared to $852,000 for the year ended December 31,
      2006. This decrease is primarily due to the expiration of the research agreement
      with UTEK in March 2007 and as the result of an extension to the contract with
      the National Renewable Energy Laboratory, at no additional cost to us.





**Impairment
      Loss - Fixed Assets** .
      The
      impairment loss on fixed assets for the year ended December 31, 2007 was $12.2
      million. We recognized impairment losses composed of $7.0 million in impairment
      losses on our Spring Hope facility, a $2.6 million impairment loss relating
      to
      costs previously incurred for a planned second ethanol facility at Blairstown
      that we have deferred indefinitely; a $2.1 million impairment loss at our
      Augusta site, and a $521,000 impairment loss on our Permeate assets that we
      sold
      in November 2007. We charged $514,000 to expense to recognize an impairment
      loss
      on fixed assets at our Permeate facility in 2006. In anticipation of the
      probable sale or disposal of these assets, we concluded that the carrying amount
      of the remaining assets exceeded their likely disposition value based on an
      analysis of current market prices.





**Interest
      Income.** Interest
      income for the year ended December 31, 2007 decreased by $438,000 from $1.2
      million for the year ended December 31, 2006 to $746,000 for the year ended
      December 31, 2007. This decrease is due directly to the decrease in our cash
      and
      cash equivalents resulting from our use of cash for operations, financing and
      investing activities.





**Impairment
      Loss - H2Diesel.** At
      December 31, 2006, we recorded a loss on our investment in H2Diesel of $2.3
      million, after considering H2Diesel’s estimated value at December 31, 2006 and
      the illiquidity of our investment.





**Loss
      on Royalty Note Conversion.** During
      the year ended December 31, 2006, in connection with the conversion of our
      royalty notes, we issued 330,000 warrants with an exercise price of $12.50
      to
      the holders of the royalty notes. The value of these warrants at the time of
      issuance was $2,170,212. Also in connection with the conversion, the holders
      of
      the notes waived $203,500 in interest accrued to the date of conversion. The
      accrual was reflected in interest expense and as an offset to the cost of the
      warrants in 2006.





**Loss
      on Equity of H2Diesel.** For the
      year ended December 31, 2007, we recorded loss on equity of H2Diesel of $1.2
      million compared to $1.6 million for the year ended December 31, 2006. This
      loss
      represents our portion of H2Diesel’s net losses, based on the equity method of
      accounting.




**Loss
      on Marketable Securities.** During
      the year ended December 31, 2007, we **** recorded
      an expense of $1.6 million for a loss on an investment in marketable securities
      as described in “Liquidity and Capital Resources” below.





**Legal
      Settlement Costs.** During
      the year ended December 31, 2007, we recorded an expense of $400,000 as the
      result of the tentative settlement of a class action lawsuit.





**Other
      Income.** Other
      income for the year ended December 31, 2007 decreased by $314,000 to $178,000
      from $492,000 for the corresponding period in 2006. The decrease is primarily
      attributable to the decrease in management fees resulting from the termination
      of our management agreement with H2Diesel in 2006.




44




**Liquidity
      and Capital Resources**





We
      had
      cash and cash equivalents of approximately $12.3
      million as of December 31, 2007 and approximately $9.5 million as
      of
      March 14, 2008 .
      Our
      working capital as of December 31, 2007 was $10.8 million, representing a
      decrease in working capital of $13.6 million compared to $24.4 million at
      December 31, 2006. We had outstanding debt instruments totaling $309,000 as
      of December 31, 2007 and $305,000 as of March 14, 2008.





During
      the year ended December 31, 2007, we used net cash of $9.7 million for operating
      activities. We used additional cash of $2.4 million for investing activities.
      Included in cash used for investing was:





·
            approximately
                $1.3 million used in the preconstruction phase of our Blairstown
                expansion
                project;


·
            approximately
                $328,000 for equipment and improvements at our Georgia and Florida
                sites;
                and


·
            a
                $1.6 million loss from an investment in marketable securities as
                described
                below.





During
      the year ended December 31, 2007, we received cash proceeds of $224,000 from
      the
      exercise of stockholder warrants. In addition, we received cash proceeds of
      $1.1
      million from the sale of assets at our Permeate and Blairstown facilities.





In
      our
      Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, we disclosed
      that we had cash, cash equivalents and marketable securities of approximately
      $17.1 million as of August 1, 2007, including a net investment in marketable
      securities of $13.3 million. The $13.3 million investment in marketable
      securities was comprised of two auction rate securities for which Deutsche
      Bank
      Securities Inc. served as initial purchaser and broker-dealer. Each auction
      rate
      security holds a fixed portfolio of corporate bonds. Until August 2007, the
      securities were purchased and sold through an auction-type mechanism at a 28-day
      interval. Deutsche Bank Securities Inc. also facilitated the purchase and sale
      of the securities at par between auction dates. We learned in late August 2007
      that the most recent auctions of each of the two securities had failed. We
      also
      learned that Deutsche Bank Securities Inc. was no longer facilitating the
      purchase and sale of the securities at par between auction dates and that the
      securities could be sold only at a discount to par.





In
      light
      of the current credit markets and our inability to sell the securities at par,
      our board of directors evaluated the risks of continuing to hold the securities,
      which included the risk that the sales price of the securities might decline
      even further. Based on this evaluation, the board authorized management to
      sell
      all of the securities. We did so on September 20, 2007 through Deutsche Bank
      Securities Inc. at a discount to par. The sales resulted in a loss of $1.6
      million of our $13.3 million total investment in the securities. We reflected
      a
      $1.6 million loss resulting from the sale of the securities for the year ended
      December 31, 2007.





In
      December 2006, we formed a joint venture to invest in a research project to
      produce ethanol from citrus waste. We agreed to pay $600,000 to our joint
      venture partner over the next five years. We intend to build a demonstration
      plant for converting citrus peel waste into ethanol and are negotiating an
      agreement to locate the plant at an existing citrus facility in Florida owned
      by
      one of the largest citrus processors in the state. The planned cost for the
      two-year build-out of the demonstration plant is approximately $5,900,000.
      On
      January 22, 2008, the Florida Department of Agriculture and Consumer Services
      approved a $500,000 grant for this purpose. We plan to apply for federal
      government grants and combine private equity with those grants to supplement
      the
      state grant. If we do not receive these federal grants, we will need to raise
      additional equity to build this plant as we intend.





We
      will
      need substantial additional capital to pursue the demonstration plant and any
      other growth opportunities we pursue. We may seek to raise capital through
      additional equity offerings, debt financing, bond financing, asset sales or
      a
      combination of these methods. Our primary sources of capital are as
      follows:





·
            We
                have cash and cash equivalents of $9.5 million on hand as of March
                14,
                2008.


·
            We
                hold 5,670,000 shares of H2Diesel common stock and recently sold
                180,000
                shares of H2Diesel common stock for net proceeds of approximately
                $665,000. H2Diesel common stock has recently traded at over $5.00
                per
                share on the OTC Bulletin Board. Because we own more than 30% of
                the
                outstanding shares of H2Diesel, we relied on SEC Rule 144 in selling
                those
                shares. Under that rule, the volume of our sales of H2Diesel common
                stock
                is limited to 1% of the outstanding shares of H2Diesel common stock
                every
                90 days. We may seek to sell a larger block of our H2Diesel shares
                in






45




some other manner at a substantial discount to the
              market
              price, but we can offer no assurances that we will be able to do
              so. ·
            We
                have reevaluated our Augusta, Georgia and Spring Hope, North Carolina
                facilities and have decided that they do not fit within our long-term
                corporate strategy. On March 20, 2008, our board authorized
                management to pursue the sale of each facility. We can offer no
                assurances regarding the proceeds of the sale of one or both of those
                properties or the timing of any such sale or
                sales.





To
      conserve our cash and cash equivalents, we have taken or expect to take several
      actions:





·
            We
                have downsized our operations by terminating personnel and electing
                not to
                renew certain consulting agreements. We estimate that these measures
                will
                save us approximately $800,000 annually.


·
            If
                we are successful in selling our Augusta facility, we estimate that
                we
                would reduce our annual overhead by approximately $600,000.


·
            If
                we are successful in selling our Spring Hope facility, we
                estimate that we would reduce our annual overhead by approximately
                $250,000.


·
            We
                have indefinitely deferred construction of a new Blairstown ethanol
                plant
                as a result of the changing ethanol market, continued high prices
                for corn
                and our inability to arrange debt or equity financing for the
                project.


·
            We
                have decided to close our New York office and relocate our headquarters
                to
                Atlanta, Georgia.





As
      noted
      above, we can offer no assurances regarding the proceeds of the sale of one
      or
      both of our Augusta and Spring Hope properties or the timing of any such sale
      or
      sales. Further,
      before we can sell the Spring Hope property, we will
      have to resolve certain liens on the property filed by companies that performed,
      or have claimed to have performed, environmental remediation and demolition
      work
      on the property.





We
      currently have no commitments for any additional financing, and we can give
      no
      assurance that we will be able to raise the additional capital we need on
      commercially acceptable terms or at all. Our failure to raise capital as needed
      would significantly restrict our growth and hinder our ability to compete.
      We
      will need to curtail expenses further, reduce planned investments in technology
      and research and development and forgo business opportunities. Additional equity
      financings are likely to be dilutive to holders of our common stock, and debt
      financing, if available, may involve significant payment obligations and
      covenants that restrict how we operate our business.





**Off-Balance
      Sheet Arrangements**





We
      have
      not entered into any transactions with unconsolidated entities in which we
      have
      financial guarantees, subordinated retained interests, derivative instruments
      or
      other contingent arrangements that expose us to material continuing risks,
      contingent liabilities or any other obligations under a variable interest in
      an
      unconsolidated entity that provides us with financing, liquidity, market risk
      or
      credit risk support.





**Critical
      Accounting Policies**





The
      preparation of our consolidated financial statements requires us to make
      estimates and judgments that affect the reported amounts of assets, liabilities,
      revenues and expenses, and related disclosure of contingent assets and
      liabilities. We evaluate our estimates on an ongoing basis, including those
      related to valuation of intangible assets, investments, property and equipment;
      contingencies and litigation; and the valuation of shares issued for services
      or
      in connection with acquisitions. We base our estimates on historical experience
      and on various other assumptions that we believe are reasonable under the
      circumstances, the results of which form the basis for making judgments about
      the carrying values of assets and liabilities that are not readily apparent
      from
      other sources. Actual results may differ from these estimates under different
      assumptions or conditions. The accounting policies that we follow are described
      in Note 2 to our audited consolidated financial statements included in this
      report.





With
      regard to our policies surrounding the valuation of shares issued for services
      or in connection with acquisitions, we rely on the fair value of the shares
      at
      the time they were issued. After considering various trading aspects of our
      stock, including volatility, trading volume and public float, we believe that
      the price of our stock as




46




reported
      on the American Stock Exchange is the most reliable indicator of fair value.
      The
      fair value of options and warrants issued for services is determined at the
      grant date using a Black-Scholes option pricing model and is expensed over
      the
      respective vesting periods. A modification of the terms or conditions of an
      equity award is treated as an exchange of the original award for a new award
      in
      accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123R.





We
      evaluate impairment of long-lived assets in accordance with SFAS No. 144,
“ Accounting
      for the Impairment or Disposal of Long-Lived Assets.” We
      assess the impairment of long-lived assets, including property and equipment
      and
      purchased intangibles subject to amortization, whenever events or changes in
      circumstances indicate that the carrying amount of an asset may not be
      recoverable. The asset impairment review assesses the fair value of the assets
      based on the future cash flows the assets are expected to generate. We recognize
      an impairment loss when estimated undiscounted future cash flows expected to
      result from the use of the asset plus net proceeds expected from the disposition
      of the asset (if any) are less than the related asset’s carrying amount.
      Impairment losses are measured as the amount by which the carrying amounts
      of
      the assets exceed their fair values. Estimates of future cash flows are
      judgments based on management’s experience and knowledge of our operations and
      the industries in which we operate. These estimates can be significantly
      affected by future changes in market conditions, the economic environment,
      capital spending decisions of our customers and inflation.





At
      December 31, 2006, after considering H2Diesel’s estimated value at December 31,
      2006 and the illiquidity of our investment in H2Diesel, we recognized a $2.3
      million loss in the value of our investment in H2Diesel. We concluded that
      this
      is other than a temporary decline in our investment in accordance with APB
      No.
      18, *The
      Equity Method of Accounting for Investments in Common Stock* .
      As of
      December 31, 2007, our carrying value of our investment in H2Diesel was $647,000
      in accordance APB No. 18. During the first quarter of 2008, we sold 180,000
      shares of H2Diesel’s common stock under SEC Rule 144 for an aggregate sales
      price of $782,000. As of March 1, 2008, we own 5,670,000 shares of H2Diesel
      Holdings common stock, which represented approximately 31.2% of the common
      stock
      then outstanding.





Our
      remaining $623,000 of intangible assets at December 31, 2007 consisted of
      research and license agreements relating to our 2006 acquisition of Advanced
      Biomass Gasification Technologies, Inc. (“ABGT”). The research agreement
      ($390,000, net of amortization) is currently being amortized over its three-year
      term. The license agreement ($233,000, net of amortization) is currently being
      amortized over its 20-year life.





After
      an
      assessment of the current state of the relevant business plan surrounding the
      development of ABGT gasification technology, including discussions with
      scientists, review of milestones and on site visits to demonstration facilities,
      we do not believe there are any impairments. We will review the useful life
      of
      our license agreement at least annually, and we will determine its
      recoverability in accordance with SFAS No. 144. Future impairments may occur
      if
      our remaining technology is not viable.





At
      September 30, 2007, we recorded a $522,000 impairment loss on fixed assets
      at
      our Permeate facility. Because we sold those assets on November 9, 2007 under
      a
      sales contract executed October 3, 2007, we recorded an impairment loss on
      those
      assets.





At
      June
      30, 2007, we recorded a $2.8 million impairment loss on property held for
      development. The impairment loss relates to our assets in Spring Hope, North
      Carolina, which we had initially purchased in November 2006 for $7.8 million,
      of
      which $4.0 million was in cash with the balance in common stock and warrants.
      Based on discussions with a party potentially interested in acquiring the
      assets, we determined that we should record an impairment loss on these assets.
      The discussions with the party that was interested in purchasing the property
      have not resulted in a purchase agreement. Therefore, we performed an analysis
      of the fair market value of the property at December 31, 2007 and determined
      that an additional impairment loss of $4.2 million should be recorded.





At
      December 31, 2007, we recorded a $2.6 million impairment loss on costs
      previously incurred for a planned second ethanol facility at Blairstown.
      Currently, we have indefinitely deferred construction of a new Blairstown
      ethanol plant as a result of the changing ethanol market, continued high prices
      for corn and our inability to arrange debt or equity financing for the project.
      For these reasons, we have concluded that we should record an impairment loss
      to
      reflect some of the costs related to this project.




47




At
      December 31, 2007, we recorded a $2.1 million impairment loss on our Augusta
      property. On March 20, 2008, our board authorized management to pursue the
      sale
      of the property. We have performed a market study analysis of the amount that
      we
      can expect to realize upon the sale of the site and have recorded an impairment
      based on this analysis.





**ITEM
      7A.**  **QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.** ****





Not
      required for smaller reporting companies.





48


**ITEM
      8.**  **FINANCIAL
      STATEMENT** **S
      AND SUPPLEMENTARY DATA** **.**





Our
      financial statements are filed as part of this annual report on the pages
      indicated.





Consolidated
      Financial Statements for the years ended December 31, 2007 and 2006





Report
                of Independent Registered Public Accounting Firm
            
            F-2Consolidated
                Balance Sheets
            
            F-3Consolidated
                Statements of Operations
            
            F-4Consolidated
                Statements of Changes in Stockholders’ 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 and Stockholders of


Xethanol
      Corporation





We
      have
      audited the accompanying consolidated balance sheets of Xethanol Corporation
      (the “Company”) as of December 31, 2007 and 2006 and the related consolidated
      statements of operations, stockholders’ equity, and cash flows for the years
      then ended. These consolidated financial statements are the responsibility
      of
      the Company’s management. Our responsibility is to express an opinion on these
      consolidated financial statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the
      consolidated financial statements are free of material misstatement. The Company
      is not required to have, nor were we engaged to perform, an audit of its
      internal control over financial reporting. Our audit included consideration
      of
      internal control over financial reporting as a basis for designing audit
      procedures that are appropriate in the circumstances, but not for the purposes
      of expressing an opinion on the effectiveness of the Company’s internal control
      over financial reporting. Accordingly, we express no such opinion. An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the consolidated financial statements. An audit also includes
      assessing the accounting principles used and significant estimates made by
      management, as well as, evaluating the overall consolidated 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 financial position of Xethanol Corporation as
      of
      December 31, 2007 and 2006, and the results of its operations and its cash
      flows
      for the years then ended in conformity with accounting principles generally
      accepted in the United States of America.





/s/
      Imowitz Koenig & Co., LLP





New
      York,
      New York


March
      24,
      2008


F-2


**Xethanol
      Corporation**


**Consolidated
      Balance Sheets**


**(in
      thousands, except share data)**


**December
                      31, 2007**
                  
                  **December
                      31, 2006****ASSETS**Current
                      assets:Cash
                      and cash equivalents
                  
                  $
                  12,322
                  
                  $
                  24,183Receivables
                  
                  
                  564
                  
                  
                  582Inventories
                  
                  
                  294
                  
                  
                  291Other
                      current assets
                  
                  
                  879
                  
                  
                  846Total
                      current assets
                  
                  
                  14,059
                  
                  
                  25,902Property
                      and equipment, net
                  
                  
                  4,316
                  
                  
                  8,596Property
                      held for development
                  
                  
                  554
                  
                  
                  12,553Property
                      previously held for development
                  
                  
                  5,416
                  
                  
                  -Investment
                      in and advances to H2Diesel Holdings, Inc.
                  
                  
                  647
                  
                  
                  1,963Research
                      and license agreements, net of amortizationof
                      $409 and $136 in 2007 and 2006, respectively
                  
                  
                  623
                  
                  
                  895Other
                      assets
                  
                  
                  403
                  
                  
                  1,537**TOTAL
                      ASSETS**
                  
                  $
                  26,018
                  
                  $
                  51,446**LIABILITIES
                      AND STOCKHOLDERS' EQUITY**Current
                      liabilities:Accounts
                      payable and accrued expenses
                  
                  $
                  3,221
                  
                  $
                  1,229Accounts
                      payable - related parties
                  
                  
                  -
                  
                  
                  318Total
                      current liabilities
                  
                  
                  3,221
                  
                  
                  1,547Note
                      payable
                  
                  
                  295
                  
                  
                  310Minority
                      interest
                  
                  
                  116
                  
                  
                  116Capitalized
                      lease obligation
                  
                  
                  14
                  
                  
                  22Total
                      liabilities
                  
                  
                  3,646
                  
                  
                  1,995Commitments
                      and contingenciesStockholders’
                      equity:Preferred
                      stock, $0.01 par value, 1,000,000shares
                      authorized; 0 shares issued and outstanding
                  
                  
                  -
                  
                  
                  -Common
                      stock, $0.001 par value, 100,000,000 sharesauthorized;
                      28,609,103 and 28,497,648 shares issued andoutstanding
                      in 2007 and 2006, respectively
                  
                  
                  29
                  
                  
                  28Additional
                      paid-in-capital
                  
                  
                  89,171
                  
                  
                  84,974Accumulated
                      deficit
                  
                  
                  (66,828
                  )
                  
                  (35,551
                  )Total
                      stockholders’ equity
                  
                  
                  22,372
                  
                  
                  49,451**TOTAL
                      LIABILITIES AND STOCKHOLDERS' EQUITY**
                  
                  $
                  26,018
                  
                  $
                  51,446
  See
            Notes
            to Consolidated Financial Statements
 F-3
  **Xethanol
        Corporation**
 **Consolidated
        Statements of Operations**
 **(in
        thousands, except per share data)**
 **Year
                  Ended December 31,****2007**
              
              **2006**Net
                  sales
              
              $
              11,037
              
              $
              11,029Cost
                  of sales, including depreciation of $461 and $451for
                  2007 and 2006, respectively
              
              
              12,686
              
              
              10,091Gross
                  (loss) profit
              
              
              (1,649
              )
              
              938Operating
                  expenses:General
                  and administrative expenses
              
              
              10,110
              
              
              7,932Equity
                  compensation
              
              
              3,974
              
              
              7,022Depreciation
                  and amortization
              
              
              338
              
              
              341Impairment
                  loss on property
              
              
              12,249
              
              
              514Research
                  and development
              
              
              601
              
              
              852Total
                  operating expenses
              
              
              27,272
              
              
              16,661Loss
                  from operations before other (expense) income
              
              
              (28,921
              )
              
              (15,723
              )Other
                  (expense) income:Interest
                  income
              
              
              746
              
              
              1,184Interest
                  expense
              
              
              (55
              )
              
              (217
              )Loss
                  on marketable securities
              
              
              (1,589
              )
              
              -Impairment
                  loss - investment in H2Diesel Holdings, Inc.
              
              
              -
              
              
              (2,322
              )Loss
                  on equity of H2Diesel Holdings, Inc.
              
              
              (1,236
              )
              
              (1,626
              )Loss
                  on royalty note conversion
              
              
              -
              
              
              (1,967
              )Legal
                  settlement costs
              
              
              (400
              )
              
              -Other
                  income
              
              
              178
              
              
              492Total
                  other (expense) income
              
              
              (2,356
              )
              
              (4,456
              )Net
                  loss
              
              $
              (31,277
              )
              $
              (20,179
              )Basic
                  and diluted net loss per share
              
              $
              (1.09
              )
              $
              (0.93
              )Weighted
                  average number ofshares
                  outstanding
              
              
              28,592,919
              
              
              21,604,355
  See
          Notes
          to Consolidated Financial Statements
 F-4
 **Xethanol
        Corporation**
 **Consolidated
        Statements of Stockholders’ Equity**
 **(in
        thousands)**
 **Common
                  Stock**
              
              **Additional**
                **Paid-in-**
              
              **Accumulated****Shares**
              
              **Amount**
              
              **Capital**
              
              **Deficit**
              
              **Total**Balance
                  at December 31, 2005
              
              
              15,011
              
              $
              15
              
              $
              15,586
              
              $
              (15,372
              )
              $
              229Shares
                  issued for cash to FusionCapital,
                  net of placement fees
              
              
              1,895
              
              
              2
              
              
              9,610
              
              
              -
              
              
              9,612Shares
                  issued for cash in privateofferings,
                  net of placment fees
              
              
              7,587
              
              
              8
              
              
              31,629
              
              
              -
              
              
              31,637Shares
                  issued in exchange forH2Diesel,
                  Inc. common stockand
                  sublicense
              
              
              500
              
              
              1
              
              
              5,425
              
              
              -
              
              
              5,425Shares
                  issued to UTEKCorporation
                  for acquisition
              
              
              137
              
              
              -
              
              
              1,132
              
              
              -
              
              
              1,132Shares
                  issued in connection with acquisitionin
                  Spring Hope, NC
              
              
              1,197
              
              
              1
              
              
              3,518
              
              
              -
              
              
              3,519Warrants
                  issued in connection with acquisitionin
                  Spring Hope, NC
              
              
              -
              
              
              -
              
              
              277
              
              
              -
              
              
              277Shares
                  issued for exchange ofmortgage
                  note
              
              
              135
              
              
              -
              
              
              432
              
              
              -
              
              
              432Cancellation
                  of mortgage note
              
              
              -
              
              
              -
              
              
              450
              
              
              -
              
              
              450Shares
                  issued for exercise ofoutstanding
                  warrants
              
              
              311
              
              
              -
              
              
              945
              
              
              -
              
              
              945Shares
                  issued for conversion ofof
                  secured notes payable
              
              
              1,650
              
              
              1
              
              
              6,598
              
              
              -
              
              
              6,600Shares
                  issued for services
              
              
              75
              
              
              -
              
              
              568
              
              
              -
              
              
              568Options
                  granted under 2005Incentive
                  Compensation Plan
              
              
              -
              
              
              -
              
              
              5,483
              
              
              -
              
              
              5,483Warrants
                  issued in royalty note conversion
              
              
              -
              
              
              -
              
              
              2,170
              
              
              -
              
              
              2,170Warrants
                  issued for services
              
              
              -
              
              
              -
              
              
              1,152
              
              
              -
              
              
              1,152Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              (20,179
              )
              
              (20,179
              )Balance
                  at December 31, 2006
              
              
              28,498
              
              
              28
              
              
              84,975
              
              
              (35,551
              )
              
              49,452Shares
                  issued for exercise of warrants
              
              
              111
              
              
              1
              
              
              223
              
              
              -
              
              
              224Options
                  granted under 2005 Incentive
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Compensation
                  Plan
              
              
              -
              
              
              -
              
              
              3,552
              
              
              -
              
              
              3,552Warrants
                  issued for services
              
              
              -
              
              
              -
              
              
              421
              
              
              -
              
              
              421Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              (31,277
              )
              
              (31,277
              )Balance
                  at December 31, 2007
              
              
              28,609
              
              $
              29
              
              $
              89,171
              
              $
              (66,828
              )
              $
              22,372
  See
          Notes
          to Consolidated Financial Statements
 F-5
 **Xethanol
        Corporation**
 **Consolidated
        Statements of Cash Flows**
 **(in
        thousands)**
 **Year
                  Ended December 31,****2007**
              
              **2006****Cash
                  flows from operating activities**Net
                  loss
              
              $
              (31,277
              )
              $
              (20,179
              )Adjustments
                  to reconcile net loss tonet
                  cash used in operating activities:Depreciation
                  and amortization
              
              
              798
              
              
              791Amortization
                  of management fee income
              
              
              -
              
              
              (437
              )Issuance
                  of common stock, stock optionsand
                  warrants for services rendered
              
              
              3,974
              
              
              7,203Issuance
                  of warrants for debt conversion
              
              
              -
              
              
              1,967Issuance
                  of warrants in settlement of interest liabilityon
                  secured notes
              
              
              -
              
              
              204Impairment
                  loss - investments
              
              
              14
              
              
              2,390Impairment
                  losses - property
              
              
              12,249
              
              
              514Loss
                  on equity of H2Diesel Holdings, Inc.
              
              
              1,236
              
              
              1,627Loss
                  on retirement of fixed assets
              
              
              -
              
              
              154Loss
                  on marketable securities
              
              
              1,589
              
              
              -Changes
                  in operating assets and liabilities:Receivables
              
              
              18
              
              
              (17
              )Inventories
              
              
              (4
              )
              
              (95
              )Other
                  assets and liabilities
              
              
              46
              
              
              (472
              )Accounts
                  payable and accrued expenses
              
              
              1,993
              
              
              164Accounts
                  payable-related parties
              
              
              (318
              )
              
              262Net
                  cash used in operating activities
              
              
              (9,682
              )
              
              (5,924
              )**Cash
                  flows from investing activities**Purchase
                  of property and equipment
              
              
              (1,517
              )
              
              (3,237
              )Purchase
                  of property held for development
              
              
              (328
              )
              
              (12,551
              )Investment
                  in research agreement
              
              
              -
              
              
              (300
              )Investment
                  in marketable securities
              
              
              (38,100
              )
              
              -Redemption
                  of marketable securities
              
              
              36,511
              
              
              -Cash
                  received for sale of fixed assets
              
              
              1,054
              
              
              -Cash
                  received from sale of Augusta GA assets
              
              
              -
              
              
              3,100Advances
                  to H2Diesel Holdings, Inc.
              
              
              -
              
              
              (50
              )Net
                  cash used in investing activities
              
              
              (2,380
              )
              
              (13,038
              )**Cash
                  flows from financing activities**Cash
                  received for common stock
              
              
              224
              
              
              42,194Cash
                  received from acqusition
              
              
              -
              
              
              400Payment
                  of note payable
              
              
              (15
              )
              
              -Payment
                  of mortgage payable
              
              
              -
              
              
              (243
              )Payment
                  of capitalized lease obligation
              
              
              (8
              )
              
              (8
              )Net
                  cash provided by financing activities
              
              
              201
              
              
              42,343**Net
                  (decrease) increase in cash and cash equivalents**
              
              
              (11,861
              )
              
              23,381**Cash
                  and cash equivalents - beginning of year**
              
              
              24,183
              
              
              802**Cash
                  and cash equivalents - end of year**
              
              $
              12,322
              
              $
              24,183**Supplemental
                  Disclosures**Interest
                  paid
              
              $
              55
              
              $
              13Income
                  taxes paid
              
              
              124
              
              
              17**Non-cash
                  activity**Issuance
                  of common stock in partial exchange formortgage
                  payable
              
              $
              -
              
              $
              432Issuance
                  of new mortgage payable in partial exchangefor
                  mortgage payable
              
              
              -
              
              
              243Increase
                  in stockholders' equity as a result of the exchangeof
                  mortgage payable with stockholders
              
              
              -
              
              
              450Research
                  and license agreements acquired in exchange forcommon
                  stock
              
              
              -
              
              
              732Investment
                  acquired in exchange for common stock
              
              
              -
              
              
              5,425Investment
                  acquired in exchange for management services
              
              
              -
              
              
              794Conversion
                  of notes payable to common stock
              
              
              -
              
              
              6,600
  See
        Notes
        to Consolidated Financial Statements
 F-6


**XETHANOL
        CORPORATION**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE
        1.**  **DESCRIPTION
        OF BUSINESS AND ORGANIZATION**





Xethanol
      Corporation (the “Company”) is a renewable energy and clean technology company.
      The Company’s business currently includes an operating plant in Blairstown, Iowa
      that produces ethanol from corn; a planned demonstration plant in Florida for
      converting citrus peel waste into ethanol; bio-separation and bio-fermentation
      technologies, along with strategic relationships with government and university
      research labs to further develop and prove out these technologies; and minority
      investments in other renewable energy or clean tech businesses. For 2007, the
      Blairstown facility produced ethanol at a rate of approximately 5.4 million
      gallons, using corn as its feedstock. The Company’s sales during 2007 relate
      entirely to the Blairstown facility.





**NOTE
      2.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**





***Basis
      of Presentation***





The
      consolidated financial statements include the accounts of the Company and its
      wholly-owned subsidiaries. All significant intercompany accounts and
      transactions have been eliminated in consolidation.





The
      accompanying consolidated financial statements and related footnotes are
      presented in accordance with accounting principles generally accepted in the
      United States of America (“GAAP”). Certain reclassifications have been made to
      previously reported amounts to conform to the current presentation, with no
      effect on the Company’s consolidated financial position, results of operations
      or cash flows.





***Use
      of Estimates***





The
      preparation of consolidated financial statements in conformity with accounting
      principles generally accepted in the United States requires management to make
      estimates and assumptions that affect the reported amounts of assets,
      liabilities, revenues and expenses and related disclosure of contingent assets
      and liabilities. Significant estimates include the valuation of shares issued
      for services or in connection with acquisitions and the valuation of
      investments, fixed assets and intangibles and their estimated useful lives.
      The
      Company evaluates its estimates on an ongoing basis. Actual results could differ
      from those estimates under different assumptions or conditions.





***Cash
      and Cash Equivalents and Marketable Securities***





The
      Company invests its excess cash in money market funds and in highly liquid
      debt
      instruments of the U.S. government and its agencies, and debt instruments
      secured by bonds of U.S. corporations. All highly liquid investments with stated
      maturities of three months or less from date of purchase are classified as
      cash
      equivalents; all investments with stated maturities of greater than three months
      are classified as marketable securities.





Investments
      in marketable securities are accounted for as “available for sale” securities.
“Available for sale” securities are stated at fair value with changes in market
      value recorded in shareholders’ equity. The Company determines the appropriate
      classification of its investments in marketable debt and equity securities
      at
      the time of purchase and reevaluates such designation at each balance sheet
      date. Marketable debt and equity securities have been classified and accounted
      for as available for sale. The Company may or may not hold securities with
      stated maturities greater than twelve months until maturity.





***Loss
      per Common Share***





Loss
      per
      share (“EPS”) is computed based on weighted average number of common shares
      outstanding and excludes any potential dilution. Diluted EPS reflects the
      potential dilution that could occur if securities or other contracts to issue
      common stock were exercised or converted into common stock or resulted in the
      issuance of common stock, which would then share in the earnings of the Company.
      The shares issuable upon the exercise of stock options and warrants are excluded
      from the calculation of net loss per share, as their effect would be
      antidilutive.




F-7


**XETHANOL
        CORPORATION**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


During
      the periods presented, the Company had securities outstanding that could
      potentially dilute basic earnings per share in the future, but were excluded
      from the computation of diluted earnings per share, as their effect would have
      been anti-dilutive. The anti-dilutive securities are as follows:





**Balance
                at December 31,****2007**
            
            **2006**Employee
                stock options
            
            
            5,245,000
            
            
            4,430,000Series
                A warrants
            
            
            1,517,383
            
            
            1,517,383Series
                B warrants
            
            
            758,735
            
            
            758,735Placement
                agent warrants
            
            
            606,938
            
            
            606,938Other
                warrants
            
            
            1,248,090
            
            
            2,314,7209,376,146
            
            
            9,627,776





***Concentration
      of Credit Risk***





Cash
      that
      is deposited with major financial institutions or invested in money market
      funds
      is not insured by the Federal Deposit Insurance Corporation.





***Costs
      Associated with Issuance of Stock***





Investment
      banking fees and related costs associated with the sale of stock are charged
      to
      stockholders’ equity.





***Stock
      Issued for Non-Cash Consideration***





Shares
      of
      common stock issued for services, and in connection with acquisitions, have
      been
      valued at the estimated fair value of the shares at the time they were
      issued.





***Receivables***





The
      Company records trade accounts receivable at net realizable value. This value
      includes an allowance for estimated uncollectible accounts, if necessary, to
      reflect any loss anticipated on the trade accounts receivable balance. At
      December 31, 2007, the Company has determined that an allowance for estimated
      uncollectible accounts is not necessary.





***Investments***





The
      Company accounts for its investments in accordance with FASB Interpretation
      46,
      Consolidation of Variable Interest Entities, an Interpretation of Accounting
      Research Bulletin No. 51 (“FIN 46”). A variable interest entity (“VIE”) is a
      corporation, partnership, trust, or any other legal structure used for business
      purposes that does not have equity investors with voting rights nor has equity
      investors that provide sufficient financial resources for the entity to support
      its activities. FIN 46 requires a VIE to be consolidated by a company if that
      company is the primary beneficiary of the VIE. The primary beneficiary of a
      VIE
      is an entity that is subject to a majority of the risk of loss from the VIE’s
      activities, or entitled to receive a majority of the entity’s residual returns,
      or both.





For
      investments that are not required to be consolidated, the Company follows the
      guidance provided by APB 18 “The Equity Method of Accounting for Investments in
      Common Stock.”





***Costs
      of Start-up Activities***





Start-up
      activities are defined broadly in Statement of Position 98-5, *Reporting
      on the Costs of Start-Up Activities* ,
      as
      those one-time activities related to opening a new facility, introducing a
      new
      product or service, conducting business in a new territory, conducting business
      with a new class of customer or beneficiary, initiating a new process in an
      existing facility, commencing some new operation or activities related to
      organizing a new entity. The Company’s start-up activities consist primarily of
      costs associated with new or potential sites for ethanol production




F-8


**XETHANOL
        CORPORATION**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


facilities.
      All the costs associated with a potential site are expensed, until the site
      is
      consider viable by management, at which time costs would be considered for
      capitalization based on authoritative accounting literature. These costs are
      included in selling, general, and administrative expenses in the consolidated
      statement of operations.





***Inventories***





Raw
      materials are carried at average cost. Work in process is based on the amount
      of
      average product costs currently in the production pipeline. Finished goods
      are
      carried at the lower of cost using the average cost method or market.





Inventories
      consist of the following:





**December
                31,**
              **2007**
            
            **December
                31,**
              **2006**Raw
                materials
            
            $
            85,000
            
            $
            81,000Work
                in process
            
            
            109,000
            
            
            94,000Finished
                goods
            
            
            100,000
            
            
            116,000$
            294,000
            
            $
            291,000





***Property,
      Plant and Equipment***





Property,
      plant and equipment are recorded at cost. Major additions are capitalized and
      depreciated over their estimated useful lives. Repairs and maintenance costs
      are
      expensed as incurred. Depreciation is computed using straight-line and
      accelerated methods over the estimated useful lives of the assets. The range
      of
      useful lives for each category of fixed assets is as follows: buildings and
      land
      improvements - 20 years, process equipment - 10 years, lab equipment - 7 years,
      office equipment - 5 years, and computers - 3 years.





***Impairment
      of Long-Lived Assets***





The
      Company evaluates impairment of long-lived assets in accordance with SFAS No.
      144, *Accounting
      for the Impairment or Disposal of Long-Lived Asset.* The Company assesses the impairment of long-lived assets, including property
      and
      equipment and purchased intangibles subject to amortization, whenever events
      or
      changes in circumstances indicate that the carrying amount of an asset may
      not
      be recoverable. The asset impairment review assesses the fair value of the
      assets based on the future cash flows the assets are expected to generate.
      An
      impairment loss is recognized when estimated undiscounted future cash flows
      expected to result from the use of the asset plus net proceeds expected from
      the
      disposition of the asset (if any) are less than the related asset’s carrying
      amount. Impairment losses are measured as the amount by which the carrying
      amounts of the assets exceed their fair values. Estimates of future cash flows
      are judgments based on management’s experience and knowledge of the Company’s
      operations and the industries in which the Company operates. These estimates
      can
      be significantly affected by future changes in market conditions and the
      economic environment.





***Goodwill
      and License Agreements***





Goodwill
      represents the excess of cost of an acquired entity over the net of the amounts
      assigned to net assets acquired and liabilities assumed. The Company accounts
      for goodwill and license agreements with indefinite lives in accordance with
      SFAS No. 142, *Goodwill
      and Other Intangible Assets* ,
      which requires an annual review for impairment or more frequently if impairment
      indicators arise. At December 31, 2007 and 2006, the Company had no
      goodwill.





License
      agreements owned by the Company are reviewed for possible impairment whenever
      events or circumstances indicate the carrying amount may be impaired. License
      agreements are amortized using the straight-line method over the shorter of
      the
      estimated useful life or legal term of the agreement.




F-9


**XETHANOL
        CORPORATION**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***Revenue
      Recognition***





The
      Company follows a policy of recognizing sales revenue at the time the product
      is
      shipped to its customers.





***Research
      and Development***





Research
      and development costs are expensed as incurred. Research and development costs
      were $601,000 and $852,000 for the years ended December 31, 2007 and 2006,
      respectively.





***Income
      Taxes***





Deferred
      tax assets and liabilities are computed based on the difference between the
      book
      and income tax bases of assets and liabilities using the enacted marginal tax
      rate. Deferred income tax expenses or credits are based on changes in the assets
      and liabilities from period to period. These differences arise primarily from
      the Company’s net operating loss. Valuation allowances are established when
      necessary to reduce deferred tax assets to the amount expected to be realized.





***Fair
      Value of Financial Instruments***





The
      carrying amount of cash and cash equivalents, trade receivables, accounts
      payable and accrued expenses approximate fair value because of the short-term
      nature of these instruments.





***Segment
      Reporting***





The
      Company operates as a single segment.





***Recently
      Issued Accounting Standards***





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      157, Fair Value Measurements (“SFAS 157”), which clarifies that fair value is
      the amount that would be exchanged to sell an asset or transfer a liability
      in
      an orderly transaction between market participants. Further, the standard
      establishes a framework for measuring fair value in generally accepted
      accounting principles and expands certain disclosures about fair value
      investments. SFAS 157 became effective for financial assets and liabilities
      on
      January 1, 2008. This standard is not expected to materially affect how the
      Company determines fair value during 2008, but it may result in certain
      additional disclosures. The FASB has deferred the implementation of the
      provisions of SFAS 157 relating to certain nonfinancial assets and liabilities
      until January 1, 2009. The Company is evaluating whether this standard will
      affect the Company’s determination of fair value in 2009.





In
      December 2007, the FASB issued Statement No. 141R, Business Combinations (“SFAS
      141R”). SFAS 141R broadens the guidance of SFAS 141, extending its applicability
      to all transactions and other events in which one entity obtains control over
      one or more other businesses. It broadens the fair value measurement and
      recognition of assets acquired, liabilities assumed, and interests transferred
      as a result of business combinations; and stipulates that acquisition related
      costs be expensed rather than included as part of the basis of the acquisition.
      SFAS 141R expands required disclosures to improve the ability to evaluate the
      nature and financial effects of business combinations. SFAS 141R is effective
      for all transactions entered into on or after January 1, 2009. The adoption
      of
      this standard on January 1, 2009 could materially impact the Company’s future
      financial results to the extent that the Company makes significant acquisitions,
      as related acquisition costs will be expensed as incurred compared to the
      Company’s current practice of capitalizing those costs and amortizing them over
      the estimated useful life of the assets acquired.





In
      December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in
      Consolidated Financial Statements (“SFAS No. 160”). SFAS No. 160 will require
      noncontrolling interests (previously referred to as minority interests) to
      be
      treated as a separate component of equity, not as a liability or other item
      outside of permanent equity. SFAS No. 160 is effective for periods beginning
      on
      or after December 15, 2008. The adoption of this statement will result




F-10


**XETHANOL
        CORPORATION**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


in
      minority interest currently classified in the “mezzanine” section of the balance
      sheet to be reclassified as a component of stockholders’ equity, and minority
      interest expense will no longer be recorded in the consolidated statement of
      operations.





**NOTE
      3.**  **LOSS
      ON SALE OF AUCTION RATE SECURITIES**





At
      December 31, 2007, the Company’s cash equivalents were invested in money market
      funds. As of August 1, 2007, the Company had a net investment in marketable
      securities of $13.3 million, which was composed of two auction rate securities
      for which Deutsche Bank Securities Inc. served as initial purchaser and
      broker-dealer. Each auction rate security held a fixed portfolio of corporate
      bonds. Until the summer of 2007, the securities were purchased and sold through
      an auction-type mechanism at a 28-day interval. Deutsche Bank Securities Inc.
      also facilitated the purchase and sale of the securities at par between auction
      dates. The Company learned in late August 2007 that the most recent auctions
      of
      each of the two securities had failed. The Company also learned that Deutsche
      Bank Securities Inc. was no longer facilitating the purchase and sale of the
      securities at par between auction dates and that the securities could be sold
      only at a discount to par.





In
      light
      of the current credit markets and the inability of the Company to sell the
      securities at par, the Company sold all of the securities at a discount to
      par.
      The sales resulted in a loss of $1.6 million of the Company’s $13.3 million
      total investment in the securities. The Company has reflected a $1.6 million
      loss resulting from the sale of the securities for the year ended December
      31,
      2007.





**NOTE
      4.**  **ACQUISITIONS**





***Acquisition
      of Advanced Biomass Gasification Technologies, Inc.***





Pursuant
      to an Agreement and Plan of Acquisition dated June 13, 2006, the Company
      purchased all of the outstanding capital stock of Advanced Biomass Gasification
      Technologies, Inc. (“ABGT”) from UTEK Corporation in exchange for 136,838 shares
      of the Company’s Common Stock at a price of $8.27 for a total consideration of
      $1,131,650.





ABGT
      is
      the licensee from the University of North Dakota’s Energy & Environmental
      Research Center (the “EERC”) of certain patents and know-how related to lignin
      and biomass gasification in Imbert gasifiers (the “Gasification Technology”). At
      the time of the acquisition, ABGT had cash of $400,000. ABGT is also a party
      to
      a Base Research Agreement with EERC, which has agreed to perform initial
      research, development, demonstration, and project implementation work with
      respect to the Gasification Technology (the “Project”), to provide the results
      of that work to ABGT, to give ABGT a one-year exclusive right of first
      negotiation to license inventions, discoveries or computer software developed
      as
      a result of that project and to grant ABGT a non-exclusive right to use any
      such
      invention, discovery, computer software or improvement internally to ABGT.
      The
      Base Research Agreement was scheduled to expire on August 31, 2007. In December
      2007, EERC extended the term of the agreement to June 30, 2008. Under the Base
      Research Agreement, as of December 31, 2007, ABGT had contributed $300,000
      to
      the Project that was supplemented with funding from two EERC programs with
      the
      Department of Energy, which provided an additional $480,000.





The
      license that the EERC granted to ABGT is a worldwide license having a term
      that
      is the longer of 20 years or the life of the licensed Gasification Technology.
      Subject to the satisfaction by ABGT of certain royalty obligations, the license
      is exclusive in the fields of Lignin and Biomass Feedstock Gasification in
      Imbert gasifiers of up to 10 megawatt thermal. ABGT has the right to sublicense
      its rights. ABGT is obligated to pay the EERC royalties based upon its sales
      of
      equipment that use the licensed technology, the fuel and/or electricity savings
      of ABGT’s customers, and ABGT’s sublicensing income. If ABGT does not meet
      certain minimum royalty thresholds, which apply on a country-by-country basis,
      its rights in that country become non-exclusive and extend for the term of
      the
      license agreement. ABGT also has certain obligations to commercialize the
      technology based upon milestones that are set forth in the license agreement.
      ABGT had no operations prior to the Company’s acquisition and accordingly,
      management viewed this acquisition as a purchase of assets rather than a
      business.




F-11


**XETHANOL
          CORPORATION**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 The
      values of the assets acquired at June 13, 2006 were as follows:





Cash
            
            $
            400,000License
            
            
            252,000Research
                Agreement
            
            
            480,000$
            1,132,000





On
      June
      28, 2006, ABGT contributed $300,000 to the Project, and the Research Agreement
      was increased to $780,000.





The
      amortized values of the intangible assets of ABGT as of December 31, 2007 are
      as
      follows:





License
            
            $
            233,000Research
                Agreement
            
            
            390,000$
            623,000





The
      value
      of the Base Research Agreement is being amortized over its three-year term.
      The
      Company recorded amortization expense of the AGBT license and research agreement
      of $273,000 for the year ended December 31, 2007 and $136,000 for the period
      from June 13, 2006 through December 31, 2006. The license agreement is being
      amortized over 20 years. The useful life of the license agreement will be
      reviewed at least annually. Its recoverability will be determined in accordance
      with SFAS 144.





***Acquisition
      of Site in Augusta, Georgia***





On
      August
      23, 2006, CoastalXethanol LLC (“CoastalXethanol”), an 80% owned subsidiary of
      the Company at the time, purchased the assets of a former pharmaceutical
      manufacturing complex located in Augusta, Georgia from Pfizer, Inc.
      CoastalXethanol was a joint venture with Coastal Energy Development, Inc.
      (“CED”). The Company originally acquired an 80% membership interest in
      CoastalXethanol for a capital contribution of $40,000, and CED acquired a 20%
      membership interest in CoastalXethanol for a capital contribution of $10,000.
      The purchased assets included 40 acres of land, buildings, machinery and
      equipment. Under the purchase agreement, CoastalXethanol, through its
      newly-formed, wholly-owned subsidiary, Augusta BioFuels, LLC, paid approximately
      $8.4 million in cash for the facility. The Company provided the cash to acquire
      the facility.





On
      March
      5, 2007, the Company, along with CoastalXethanol initiated an action against
      CED
      in the Supreme Court of the State of New York. On April 3, 2007, CED filed
      an
      answer and counterclaim. On September 14, 2007, the Company reached a settlement
      with CED and agreed to pay CED $400,000 in exchange for CED’s 20% interest in
      CoastalXethanol. The parties executed releases, the payment and purchase of
      CED’s 20% interest in CoastalXethanol was completed on September 24, 2007, and
      CoastalXethanol became a wholly-owned subsidiary of the Company.





On
      October 31, 2006, Augusta BioFuels, LLC entered into a purchase and sale
      agreement for the sale of certain surplus equipment at the Augusta site. The
      buyer paid $3,100,000 in cash to Augusta BioFuels, LLC and agreed to perform
      certain demolition work valued at $1,600,000. The Company initially recorded
      the
      $4,700,000 value of the consideration received under this agreement as a
      reduction in machinery and equipment with a corresponding offset to cash and
      a
      deferred asset for the value of the demolition work. As of December 31, 2007,
      the Company has reduced the deferred asset by $1,600,000 with a corresponding
      increase to construction in progress. The demolition work was substantially
      completed during the fourth quarter of 2007.





The
      Company has determined that the Augusta facility does not fit within its
      long-term corporate strategy, and on March 20, 2008, its board authorized
      management to pursue the sale of the facility. In connection with the potential
      sale of the property, the Company performed a market study analysis of the
      amount that it can expect to realize upon the sale of the site and has recorded
      an impairment loss of $2.1 million as of December 31, 2007, based on this
      analysis.




F-12


**XETHANOL
          CORPORATION**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**


***Acquisition
      of Site in Spring Hope, North Carolina***





On
      November 7, 2006, pursuant to an amended and restated asset purchase agreement,
      the Company purchased all of the fixed assets of a former fiberboard
      manufacturing facility in Spring Hope, North Carolina from Carolina Fiberboard
      Corporation LLC. The assets included 212 acres of land, approximately 250,000
      square feet of manufacturing and office space and machinery and equipment.
      As
      consideration for the acquisition, the Company paid $4,000,000 in cash,
      1,197,000 shares of the Company’s common stock valued at $2.94, the closing
      price of the Company’s common stock on the preceding business day, and warrants
      to purchase 300,000 shares of the Company’s common stock at an exercise price of
      $4.00 per share. The fair value of the warrants using the Black-Scholes option
      pricing model was $277,470. Total consideration paid for the facility including
      closing costs of $36,747, amounted to $7,833,397.





At
      June
      30, 2007, the Company recorded a $2.8 million impairment loss on the Spring
      Hope
      facility. Based upon discussions with a party potentially interested in
      acquiring the assets, the Company determined that it should record an impairment
      loss on these assets. The discussions with the party that was interested in
      purchasing the property have not resulted in a purchase agreement. Therefore,
      the Company performed an analysis of the fair market value of the property
      at
      December 31, 2007 and determined that an additional impairment loss of $4.2
      million should be recorded at December 31, 2007. The Company has determined
      that
      the Spring Hope facility does not fit within its long-term corporate strategy,
      and on March 20, 2008, its board authorized management to pursue the sale of
      the
      facility.




***Acquisition
      of Assets in Bartow, Florida***





In
      December 2006, CoastalXethanol, through a newly formed subsidiary Southeast
      BioFuels LLC, purchased assets from Renewable Spirits, LLC for $100,000 in
      cash,
      a $600,000 non-interest bearing note payable over 120 months and a 22%
      membership interest in Southeast BioFuels. On September 14, 2007, Renewable
      Spirits’ interest in Southeast Biofuels LLC was reduced to 19.8% in connection
      with the settlement of the CED lawsuit described above. As part of the
      settlement, the Company acquired CED’s 10% interest in Renewable Spirits. The
      purchased assets consisted of equipment and intellectual property including
      Renewable Spirits’ rights under a cooperative research and development agreement
      with the U.S. Department of Agriculture’s Agricultural Research Service. The
      note payable at closing was recorded at its discounted value of $309,914, and
      Renewable Spirits’ interest in Southeast Biofuels has been recorded as minority
      interest of $115,617.





The
      Company plans to use the assets acquired in this transaction to develop a
      demonstration plant processing ethanol from citrus waste. The Company has not
      obtained financing for this facility.





**NOTE
      5.**  **IMPAIRMENTS**





***Blairstown
      2 Site***





On
      June
      30, 2006, the Company entered into an agreement with PRAJ Industries, Ltd.
      (“PRAJ”) to supply process license, design, engineering and supervision services
      to construct a second ethanol facility at the Blairstown site with an additional
      production capacity of 35 million gallons of ethanol per year. The cost of
      the
      contract was originally $1,845,000 and was payable over seven installments
      based
      on predetermined deliverables. As of December 31, 2007, total payments of
      $810,000 have been made to PRAJ under the contract. During 2007, the Company
      elected not to proceed with any remaining phases of the contract and is no
      longer obligated under the contract for future payments.





As
      of
      December 31, 2007, $3.7 million of costs, including the purchase of land, had
      been expended on the previously purchased second ethanol facility at Blairstown.
      At December 31, 2007, the Company recorded a $2.6 million impairment loss on
      costs previously spent for the second ethanol facility. The Company has
      indefinitely deferred construction of the second Blairstown ethanol plant as
      a
      result of the changing ethanol market, continued high prices for corn and its
      inability to arrange debt or equity financing for the project. For these
      reasons, the Company has concluded that it should record an impairment loss
      against some of the costs related to this project.




F-13


**XETHANOL
          CORPORATION**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**


The
      remaining costs are included on the Company’s consolidated balance sheet in
      property previously held for investment.





***Site
      in Spring Hope, North Carolina***





On
      November 7, 2006, the Company purchased all of the fixed assets of a former
      fiberboard manufacturing facility in Spring Hope, North Carolina from Carolina
      Fiberboard Corporation LLC. The assets included 212 acres of land, manufacturing
      and office space, and machinery and equipment. Total consideration paid for
      the
      facility was $7.9 million. At June 30, 2007, the Company recorded a $2.8 million
      impairment loss on this facility. Based upon discussions with a party
      potentially interested in acquiring the assets, the Company determined that
      it
      should record an impairment loss on these assets. The discussions with the
      party
      that was interested in purchasing the property have not materialized into a
      purchase agreement. The Company has determined that the Spring Hope facility
      does not fit within its long-term corporate strategy, and on March 20, 2008,
      its
      board authorized management to pursue the sale of the facility. The Company
      performed an analysis of the fair market value of the property at December
      31,
      2007 and determined that it should record an additional impairment loss of
      $4.2
      million at December 31, 2007.





***Site
      in Augusta, Georgia***





The
      Company owns a former pharmaceutical manufacturing complex located in Augusta,
      Georgia for which it paid approximately $8.4 million in cash. Later in 2006,
      the
      Company sold certain surplus equipment at the Augusta site for $3,100,000 in
      cash to a buyer that also agreed to perform certain demolition work valued
      at
      $1,600,000. The Company initially recorded the $4,700,000 value of the
      consideration received under this agreement as a reduction in machinery and
      equipment with a corresponding offset to cash and a deferred asset for the
      value
      of the demolition work. As of December 31, 2007, the Company has reduced the
      deferred asset by $1,600,000 with a corresponding increase to construction
      in
      progress. The demolition work was substantially completed during the fourth
      quarter of 2007. The Company has determined that the Augusta facility does
      not
      fit within its long-term corporate strategy, and on March 20, 2008, its board
      authorized management to pursue the sale of the facility. In connection with
      the
      potential sale of the property, the Company performed a market study analysis
      of
      the amount that it can expect to realize upon the sale of the site and, based
      on
      this analysis, has recorded a $2.1 million impairment loss as of December 31,
      2007.





***Permeate
      Facility***





During
      2006 and 2007, the Company recorded impairment losses of $514,000 and $522,000,
      respectively, on fixed assets related to its Permeate assets. On October 3,
      2007, the Company agreed to sell the Permeate facility for $500,000 in cash.
      On
      November 9, 2007, the Company sold the Permeate facility, at no gain or loss,
      for $500,000.





**NOTE
      6.**  **PROPERTY
      AND EQUIPMENT AND PROPERTY HELD FOR DEVELOPMENT**





Property
      and equipment consists of the following:





**December
                31,**
              **2007**
            
            **December
                31,**
              **2006**Land
            
            $
            28,000
            
            $
            62,000Buildings
            
            
            732,000
            
            
            1,166,000Machinery
                and equipment
            
            
            3,906,000
            
            
            5,063,000Land
                improvements
            
            
            569,000
            
            
            569,000Furniture
                and fixtures
            
            
            259,000
            
            
            84,000Construction
                in progress
            
            
            -
            
            
            2,913,0005,494,000
            
            
            9,857,000Less
                accumulated depreciation and amortization
            
            
            1,178,000
            
            
            1,261,000$
            4,316,000
            
            $
            8,596,000




F-14


**XETHANOL
          CORPORATION**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 Construction
      in progress consisted of expenditures related to the Company’s Blairstown
      expansion. As of December 31, 2007, these assets were considered impaired,
      and
      an impairment charge was recorded against these assets. See Note 7.





Property
      held for development consists of the following fixed assets:





**December
                31,**
              **2007**
            
            **December
                31,**
              **2006**Land
            
            $
            -
            
            $
            1,227,000Buildings
            
            
            -
            
            
            1,589,000Machinery
                and equipment
            
            
            554,000
            
            
            9,257,000Construction
                in progress
            
            
            -
            
            
            480,000$
            554,000
            
            $
            12,553,000





In
      2006,
      property held for development consisted of the assets purchased in connection
      with the Company’s acquisitions in Augusta, Georgia; Spring Hope, North
      Carolina; and Bartow, Florida. (See Note 4.) In 2007, property held for
      development consisted of only the machinery and equipment purchased in
      connection with the proposed demonstration plant in Bartow, Florida.
      Depreciation will not be recorded on these assets until they are placed into
      use.





**NOTE
      7.**  **PROPERTY
      PREVIOUSLY HELD FOR DEVELOPMENT**





The
      Company has reevaluated its facility in Augusta, Georgia and has decided that
      the facility does not fit within its long-term corporate strategy. On March
      20,
      2008, the Company’s
      board authorized management to pursue the sale of the facility. The Company
      expects to use a real estate brokerage firm to assist in marketing the property
      for sale, but the Company has not retained such a firm as of December 31, 2007.
      The Company can offer no assurances regarding how long it would take to sell
      the
      facility or the price the Company might receive. The carrying value of this
      property at December 31, 2007, after an impairment charge of $2.1 million,
      is
      $3.5 million.





The
      Company has reevaluated its facility in Spring Hope, North Carolina and has
      determined that the facility does not fit within its long-term corporate
      strategy. On March 20, 2008, the Company’s
      board authorized management to pursue the sale of the facility. Before the
      Company sells the property (or as a term of its sale), the Company will have
      to
      resolve certain liens on the property filed by companies that performed, or
      have
      claimed to have performed, environmental remediation and demolition work on
      the
      property. The Company has accrued $500,000 to settle claims and $450,000 for
      environmental clean-up at December 31, 2007. The Company has not completed
      an
      environmental study or remediation. These estimates may require adjustment.
      The
      Company can offer no assurances regarding how long it would take to sell the
      facility or the price the Company might receive. The carrying value of this
      property at December 31, 2007, after impairment charges of $7.0 million, is
      $856,000.





The
      Company has determined to defer indefinitely its expansion project at its second
      ethanol site at Blairstown and is currently evaluating several alternatives
      in
      which to dispose of or use the property. The carrying value of this property
      at
      December 31, 2007, after an impairment charge of $2.6 million, is
      $1,060,000.





Property
      previously held for development consists of the following fixed
      assets:





**December
                31,**
              **2007**Land
            
            $
            1,709,000Buildings
            
            
            1,817,000Machinery
                and equipment
            
            
            1,890,000$
            5,416,000




F-15


**XETHANOL
          CORPORATION**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
      8.**  **INVESTMENT
      IN H2DIESEL, INC.**





The
      Company considers its investment in H2Diesel Holdings, Inc. (“H2Diesel”) as a
      variable interest in a Variable Interest Entity (“VIE”). H2Diesel is the
      licensee of a proprietary vegetable oil-based diesel biofuel to be used as
      a
      substitute for conventional petroleum diesel and biodiesel, heating and other
      fuels, under an exclusive license agreement with the inventor of the biofuel.
      Because the Company is not the primary beneficiary of the VIE, the Company
      has
      accounted for its investment in H2Diesel utilizing the equity method of
      accounting pursuant to APB Opinion No. 18, *The
      Equity Method of Accounting for Investments in Common Stock* .
      The
      Company has recorded a loss of $1,236,000 and $1,626,000 on its investment
      in
      H2Diesel for the years ended December 31, 2007 and December 31, 2006,
      respectively. At December 31, 2007, the Company owned 5,850,000 shares of
      H2Diesel common stock, which represented 32.2% of the outstanding common stock
      of H2Diesel. H2Diesel is currently a development stage company that has not
      yet
      generated any revenues. In February 2008, the Company sold 180,000 shares of
      H2Diesel common stock for net proceeds of approximately $777,000 and as of
      the
      date of this filing owns 5,670,000 shares of H2Diesel common stock. The Company
      does not presently intend to pursue the manufacture and sale of a diesel biofuel
      based on H2Diesel’s technology.





H2Diesel
      is a development stage company with no operations. According to its SEC filings,
      H2Diesel is obligated to pay $7.0 million in additional payments, including
      $1.0
      million on March 20, 2008, to the owner of the technology it has licensed and
      in
      turn has sublicensed to the Company. H2Diesel’s most recent quarterly report on
      Form 10-QSB notes that these matters raise substantial doubt about H2Diesel’s
      ability to continue as a going concern. If H2Diesel fails to make the license
      payments as required, the Company could lose its sublicense of the technology
      as
      well as its entire investment in H2Diesel.





On
      April
      14, 2006, the Company entered into a sublicense agreement with H2Diesel, Inc.
      The sublicense agreement was amended and restated on June 15, 2006, effective
      as
      of April 14, 2006. The Company entered into the sublicense agreement in
      connection with (a) an investment agreement dated as of April 14, 2006 among
      H2Diesel, two institutional investors and the Company; and (b) a management
      agreement dated as of April 14, 2006 between H2Diesel and the Company. (Both
      the
      investment agreement and the management agreement were amended on June 15,
      2006,
      effective as of April 14, 2006, and H2Diesel terminated the management agreement
      effective as of September 25, 2006.)





Under
      the
      amended investment agreement, on April 14, 2006: (a) H2Diesel issued to the
      Company a total of 2,600,000 shares of its common stock and granted the Company
      the right to purchase up to an additional 2,000,000 shares of its common stock
      at an aggregate purchase price of $3,600,000 (the “Xethanol Option”); and (b)
      the Company granted the institutional investors the right to require the Company
      to purchase the 3,250,000 shares of H2Diesel’s common stock they owned in
      exchange for 500,000 shares of the Company’s common stock (the “Put Right”).
      H2Diesel had issued the 3,250,000 shares of its common stock to the
      institutional investors on March 20, 2006, together with stock options to
      purchase 2,000,000 shares of its common stock at an aggregate exercise price
      of
      $5,000,000 (the “Investor Option”). The institutional investors paid H2Diesel
      $2,000,000 for the H2Diesel common stock and options. Of the 2,600,000 shares
      of
      H2Diesel common stock issued to the Company, 1,300,000 shares were issued as
      an
      inducement to enter into the Put Right. The fair value of these shares was
      $793,815, based on a price per share of approximately $0.61, which the Company
      credited to additional paid-in capital. Concurrently, on April 14, 2006, the
      institutional investors exercised the Put Right, and the Company purchased
      their
      3,250,000 shares of H2Diesel common stock in exchange for 500,000 shares of
      the
      Company’s common stock. The Company’s 5,850,000 shares of H2Diesel common stock
      represented 45.0% of the H2Diesel common stock then outstanding from April
      14,
      2006 until October 20, 2006.





On
      October 20, 2006, H2Diesel completed a reverse merger in which Wireless
      Holdings, Inc., a Florida shell corporation without any continuing operation
      or
      assets, caused its newly-formed, wholly owned subsidiary, Wireless Acquisition
      Holdings Corp., a Delaware corporation, to be merged with and into H2Diesel.
      The
      common stock of H2Diesel is quoted on the OTC Bulletin Board under the symbol
      HTWO.OB. Upon the effectiveness of the reverse merger, each share of H2Diesel
      common stock outstanding immediately before the merger was converted into one
      share of the common stock of Wireless Holdings, which subsequently changed
      its
      name to H2Diesel Holdings, Inc.




F-16


**XETHANOL
          CORPORATION**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 The
      Company estimated the fair value of its investment in H2Diesel as of April
      14,
      2006 as follows:





Net
                assets of H2Diesel
            
            $
            988,747Sublicense
                agreement
            
            
            1,000,000Master
                license agreement
            
            
            3,436,253Investment
                in H2Diesel
            
            $
            5,425,000





The
      sublicense agreement and the master license agreement are described
      below.


F-17


**XETHANOL
        CORPORATION**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


Summarized
      financial information of H2Diesel Holdings, Inc. as of December 31, 2007
      (estimated) and December 31, 2006 is as follows:





**(In
                thousands)**
            
            **December
                31, 2007**
            
            **December
                31, 2006****Balance
                Sheet:**
            
            **(Unaudited)**Cash
            
            $
            1,644
            
            $
            1,032Prepaid
                expenses
            
            
            85
            
            
            70Total
                current assets
            
            
            1,729
            
            
            1,102License
                agreement
            
            
            8,061
            
            
            8,061Total
                assets
            
            $
            9,790
            
            $
            9,163Accounts
                payable and accrued expenses
            
            $
            635
            
            $
            190Accrued
                dividend on preferred stock
            
            
            210
            
            
            -Liability
                under registration rights agreement
            
            
            79
            
            
            -Note
                payable-Xethanol Corp.
            
            
            50
            
            
            50License
                agreement payable, current portion
            
            
            922
            
            
            1,449Total
                current liabilities
            
            
            1,896
            
            
            1,689License
                agreement payable
            
            
            4,006
            
            
            4,805Total
                liabilities
            
            
            5,902
            
            
            6,494Preferred
                stock
            
            
            1,625
            
            
            -Common
                stock
            
            
            18
            
            
            17Additional
                paid-in capital
            
            
            18,955
            
            
            8,044Deficit
                accumulated during the development stage
            
            $
            (16,710
            )
            $
            (5,392
            )Total
                stockholders’ equity
            
            
            3,888
            
            
            2,669Total
                liabilities and stockholders’ equity
            
            $
            9,790
            
            $
            9,163




**Statement
                  of Operations:**
              
              **For
                  the Year ended December 31, 2007**
              
              **For
                  the Period from February 28, 2006 (Inception) to December 31,
                  2006**Research
                  and development expenses
              
              $
              758
              
              $
              84General
                  and administrative expenses
              
              
              7,510
              
              
              4,329Merger
                  expenses
              
              
              -
              
              
              340Net
                  loss from operations
              
              
              (8,268
              )
              
              (4,753
              )Other
                  expense
              
              
              (250
              )
              
              -Gain
                  on fair value adjustment
              
              
              631
              
              
              -Interest
                  expense
              
              
              (774
              )
              
              (639
              )Interest
                  income
              
              
              50
              
              
              -Net
                  loss
              
              $
              (8,611
              )
              $
              (5,392
              )Preferred
                  dividends
              
              
              (2,707
              )
              
              -Net
                  loss available to common shareholders
              
              $
              (11,318
              )
              $
              (5,392
              )
 As
        noted
        above, the Company and H2Diesel entered into a management agreement and
        sublicense agreement, each of which is dated April 14, 2006. The sublicense
        agreement was amended and restated on June 15, 2006, effective April 14,
        2006.
        Under the management agreement, the Company was to manage the business of
        H2Diesel for a term of one year. The Company received 1,300,000 of the 2,600,000
        shares of H2Diesel common stock issued to the Company pursuant to the agreements
        as a non-refundable fee for the Company’s services under the management
        agreement. These shares had a fair value of $793,815, based on the Company’s
        estimate of the fair value of the services to be performed, and were recorded
        as
        deferred revenue.




F-18


**XETHANOL
          CORPORATION**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 On
      August
      25, 2006, H2Diesel notified the Company of its election to exercise its right
      to
      terminate the management agreement between the parties effective as of September
      25, 2006. The Company had no financial obligation to H2Diesel resulting from
      the
      termination of the management agreement and retained the 1,300,000 shares of
      H2Diesel common stock it received pursuant to the management agreement.
      Accordingly, during the period from April 14, 2006 through December 31, 2006,
      the Company has recorded management fee income of $436,598, net of the Company’s
      45% equity portion of the management fee expense as recorded by H2Diesel during
      the period, and is included in “Other income” in the Consolidated Statements of
      Operations. As a consequence of the investors’ exercise of the Put Right, the
      right to exercise the Investor Option was transferred to the Company. The
      investors retained the right to purchase up to 500,000 of the shares that are
      subject to the Investor Option if the Company exercises the transferred Investor
      Option. The Company elected not to exercise the Company Option or the Investor
      Option before they expired on August 15, 2006.





The
      Company has capitalized its amended sublicense agreement with H2Diesel (as
      discussed below) and has estimated its useful life to be ten years from the
      Trigger Date (see below). The Company will amortize the value of the amended
      sublicense agreement commencing on the Trigger Date. H2Diesel will begin to
      amortize its master license agreement over its estimated useful life once
      production begins. (As noted above, however, the Company does not presently
      intend to pursue the manufacture and sale of a diesel biofuel based on
      H2Diesel’s technology.)





At
      December 31, 2006, after considering H2Diesel’s estimated value at December 31,
      2006 and the illiquidity of the Company’s investment in H2Diesel, the Company
      recognized a $2,322,000 loss in value of its investment in H2Diesel. The Company
      has concluded that this is an “other than temporary decline” in its investment
      and has recognized the loss in “Impairment loss - Investment in H2Diesel
      Holdings, Inc.” in the Consolidated Statements of Operations in accordance with
      APB18. The
      difference between the estimated value of the Company’s investment in H2Diesel
      and the underlying net assets of H2Diesel represents the estimated fair value
      of
      the Company’s sublicense agreement.





On
      October 5, 2007, the Company entered into a Stock Purchase and Termination
      Agreement (the “Agreement”) with H2Diesel and its wholly owned subsidiary,
      H2Diesel, Inc. (“H2 Sub”). On signing the Agreement, H2Diesel paid the Company a
      $250,000 non-refundable deposit that was to apply towards the purchase price
      described below. As described below, the Company subsequently terminated the
      Agreement in accordance with its terms and retained the $250,000
      deposit.





Under
      the
      Agreement, the Company agreed to sell to H2Diesel 5,460,000 shares of the common
      stock of H2Diesel, or approximately 30.0% of H2Diesel’s outstanding common
      stock. The purchase price was to be $7.0 million. In addition, the Company’s
      agreements with H2Diesel were to be terminated at the closing, and a $50,000
      loan from the Company to H2Diesel was to be deemed satisfied and cancelled.
      The
      closing was conditioned on the closing of a transaction in which H2Diesel
      obtained a minimum of $10,000,000 of new financing and that if the closing
      did
      not occur on or before November 9, 2007, or a later date as the parties might
      agree in writing, each party would have an independent right to terminate the
      Agreement on 10 calendar days’ written notice to the other party.  The
      Company had the right to retain the non-refundable deposit of $250,000 if the
      Agreement was terminated other than as a result of a breach by the Company
      of
      its obligations under the Agreement. On or about November 13, 2007, the parties
      agreed in writing to amend the Agreement to extend the closing date referenced
      above from November 9, 2007 to November 23, 2007. On
      January 7, 2008, Xethanol provided H2Diesel and H2Sub with written notice to
      terminate the Agreement effective January 17, 2008, as permitted under the
      terms
      of the Agreement. Upon termination, the Company retained the non-refundable
      deposit of $250,000 and all shares of H2Diesel’s common stock that it owned, the
      other agreements to which the Company and H2Diesel are parties remained in
      effect and the $50,000 loan from Xethanol to H2Diesel remained outstanding.
      The
      Company recorded the $250,000 non-refundable deposit in other income for the
      year ended December 31, 2007.





**NOTE
      9.**  **RESTRUCTURING
      OF PERMEATE REFINING MORTGAGE NOTE**





In
      September 2001, the Company issued 1,000,000 shares of common stock to Robert
      and Carol Lehman (the “Lehmans”), the owners of Permeate Refining, Inc.
      (“Permeate”) as a “good faith” payment, pursuant to a non-




F-19


**XETHANOL
          CORPORATION**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**


binding
      letter of intent, in contemplation of the acquisition of Permeate. In July
      2003,
      the Company completed the transaction and acquired Permeate. The
      Company, through its wholly-owned subsidiary, Xethanol One, LLC, also
      acquired the real estate and certain production facilities associated with
      Permeate’s operations from the Lehmans for a total price of $1,250,000, payable
      as follows: (i) a down payment of $125,000, which was made on July 9, 2003,
      and
      (ii) a promissory note (the “Original Note”) for the balance of $1,125,000,
      which bore interest at the simple interest rate of 9% per year with monthly
      payments due on the first day of each month commencing August 1, 2003 until
      June
      1, 2006, at which time the entire balance owing on the promissory note was
      to be
      paid in full. The Company’s obligations under the Original Note were secured by
      a mortgage on the Permeate real estate granted to Master’s Trust (an entity
      formed by the Lehmans).





Pursuant
      to a memorandum of agreement entered into on October 18, 2005 by the Company,
      the Lehmans and Master’s Trust, the Company, the Lehmans and Master’s Trust
      entered into a Mutual General Release on January 23, 2006. Under the Mutual
      General Release, the Original Note was exchanged for a new promissory note
      (the
“New Note”) in the amount of $243,395 issued by the Company to the Lehmans, and
      the Company issued 135,000 shares of common stock to Master’s Trust in exchange
      for the full release and satisfaction of the mortgage on the Permeate real
      estate.





The
      New
      Note was payable on August 1, 2006 and was repaid in full at that date. Interest
      was due monthly on the outstanding principal amount of the New Note at a rate
      equal to 0.5% above the prime rate. The Company made monthly payments equal
      to
      $3,128 allocated between interest and principal based on the then-current prime
      rate.





The
      Company recorded the 135,000 shares of common stock issued to Master’s Trust at
      a value of $432,000 based on the closing price of the common stock on January
      23, 2006. At the time of the restructuring, the holders of the Original Note
      held a significant percentage of the common stock of the Company then
      outstanding. Therefore, the difference between the values of the New Note and
      135,000 shares and the Original Note was recorded as an increase in
      stockholders’ equity of $449,605.





**NOTE
      10.**  **SENIOR
      SECURED ROYALTY INCOME NOTES**





On
      January 19, 2005, the Company completed a transaction with two institutional
      investors, primarily to refinance a short-term note issued for the acquisition
      of its Blairstown, Iowa facility. At the closing of that transaction, Xethanol
      BioFuels issued senior secured royalty income notes in the aggregate principal
      amount of $5,000,000 (the “January Notes”). A portion of the proceeds of the
      financing was used to satisfy a $3,000,000 demand note held by the First
      National Bank of Omaha. The Company used the remaining proceeds to refurbish
      and
      upgrade capacity at the Blairstown facility, fund start-up activities at the
      facility and related working capital requirements, and pay legal and other
      professional fees related to the financing. The January Notes provided for
      interest to be paid semi-annually at the greater of 10% per year or 5% of
      revenues from sales of ethanol, distillers wet grain and any other co-products,
      including xylitol, at the Blairstown facility, with the principal becoming
      due
      in January 2012. The Company had the right to require the holders of the January
      Notes, from and after January 2008, to surrender the January Notes for an amount
      equal to 130% of the outstanding principal, plus unpaid accrued interest
      thereon. The holders of the January Notes had the right to convert the January
      Notes into shares of common stock of the Company at any time at a conversion
      price equal to $4.00 per share (equivalent to 1,250,000 shares of common
      stock).





On
      August
      8, 2005, the Company completed a second transaction with the institutional
      investors. At the closing of this transaction, the Company’s subsidiary that
      owns the Blairstown facility issued senior secured royalty notes in the
      aggregate principal amount of $1,600,000 (the “August Notes”). The Company used
      the proceeds from this financing for working capital and general corporate
      purposes. The terms of this financing provided for interest to be paid
      semi-annually at the greater of 10% per year or 1.6% of revenues from sales
      of
      ethanol, distillers wet grain and any other co-products, including xylitol,
      at
      the Blairstown facility, with the principal becoming due in August 2012. The
      Company had the right to require the holders of the August Notes, from and
      after
      August 2008, to surrender the August Notes for an amount equal to 130% of the
      outstanding principal, plus unpaid accrued interest thereon. The holders of
      the
      August Notes had the right to convert the August Notes into shares of common
      stock of the Company at any time at a conversion price equal to $4.00 per share
      (equivalent to 400,000 shares of common stock).




F-20


**XETHANOL
          CORPORATION**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 On
      April
      21, 2006, the holders of the January Notes and August Notes” (together, the
“Notes”) exercised their rights to convert the Notes into shares of common stock
      of the Company. The principal amounts of the Notes were convertible at a price
      equal to $4.00 per share.





In
      connection with the conversions, the Company issued 1,250,000 shares of common
      and a three-year warrant to purchase 250,000 shares of common stock at a
      purchase price of $12.50 to the holders of the January Notes and 400,000 shares
      and a three-year warrant to purchase 80,000 shares of common stock at a purchase
      price of $12.50 to the holders of the August Notes. The holders of the Notes
      also agreed to waive accrued and unpaid interest from January 1, 2006 through
      April 12, 2006 totaling $203,500.





A
      net
      expense of $1,967,000 related to issuance of the warrants and the waiver of
      interest is reflected in “Other expense” in the 2006 Consolidated Statements of
      Operations as “Loss on Royalty Note Conversion.”





**NOTE
      11.**  **FUSION
      CAPITAL TRANSACTION**





On
      October 18, 2005, the Company entered into a common stock purchase agreement
      with Fusion Capital Fund II, LLC (“Fusion”), pursuant to which Fusion agreed,
      under certain conditions, to purchase up to $20 million of Company common stock
      over a 25-month period, subject to earlier termination at the Company’s
      discretion. Under the terms of the common stock purchase agreement, the Company
      issued 303,556 shares to Fusion as a commitment fee on October 18, 2005.
      Pursuant to the terms of a registration rights agreement dated as of October
      18,
      2005, the Company agreed to file a registration statement with the SEC covering
      these 303,556 shares and 5,000,000 shares that could be issued to Fusion under
      the purchase agreement. On December 28, 2005, the registration statement was
      declared effective and the Company had the right to sell to Fusion up to $40,000
      of the Company’s common stock each trading day during the term of the purchase
      agreement, subject to certain limitations.





During
      the year ended December 31, 2006, the Company sold 1,894,699 shares of common
      stock to Fusion for total gross proceeds of $9,846,016. There have been no
      sales
      of common stock to Fusion since April 20, 2006. The agreement with Fusion
      terminated on November 18, 2007.





In
      January 2006, the Company issued 75,000 warrants to a group of consultants
      as
      compensation for introducing, arranging and negotiating the financing with
      Fusion. The Company also agreed to pay 2.38% of the gross funds received from
      Fusion to these consultants as further compensation. The amounts related to
      the
      warrants and fees paid to these consultants have been recorded as a reduction
      to
      additional paid-in-capital.





**NOTE
      12.**  **PRIVATE
      OFFERINGS**





On
      April
      13, 2006, the Company completed the closing of two separate private offerings
      of
      the Company’s common stock.





Under
      the
      first offering, the Company sold a total of 6,697,827 shares of its common
      stock
      at a purchase price of $4.50 per share to purchasers that qualified as
      accredited investors, as defined in Regulation D promulgated under the
      Securities Act. Gross proceeds from the offering were $30,139,864. The Company
      also issued warrants to purchase 1,339,605 shares of common stock at a purchase
      price of $4.50 per share and warrants to purchase 669,846 shares of common
      stock
      at a purchase price of $6.85 per share. The warrants have an expiration date
      of
      April 12, 2009. In connection with this offering, the Company agreed to file
      a
      registration statement with the SEC. Under the terms of this agreement, because
      the registration statement was not declared effective by the SEC by April 13,
      2007, the holders of the warrants may elect to use a cashless exercise. The
      registration statement became effective on August 8, 2007.





Under
      the
      second offering, the Company sold a total of 888,889 shares of its common stock
      at a purchase price of $4.50 per share to a purchaser that qualified as an
      accredited investor, as defined in Regulation D promulgated under the Securities
      Act. Gross proceeds from the offering were $4,000,000. The Company also issued
      warrants to purchase 177,778 shares of common stock at a purchase price of
      $4.50
      per share and warrants to purchase 88,889




F-21


**XETHANOL
          CORPORATION**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**


shares
      of
      common stock at a purchase price of $6.85 per share. The warrants have an
      expiration date of April 12, 2009.





In
      connection with these offerings, the Company incurred cash transaction expenses
      of $2,503,143, including placement agent fees. The Company also issued, as
      additional compensation to the placement agent, warrants to purchase 606,938
      shares of common stock at a purchase price of $4.50 per share.





**NOTE
      13.**  **INCENTIVE
      COMPENSATION PLAN**





On
      February 2, 2005, following the completion of the reverse merger, the Company’s
      board of directors adopted and approved the 2005 Incentive Compensation Plan
      (the “Plan”), which was subsequently approved by the Company’s shareholders on
      March 29, 2005.





The
      terms
      of the Plan provide for grants of stock options, stock appreciation rights
      or
      SARs, restricted stock, deferred stock, other stock-related awards and
      performance awards that may be settled in cash, stock or other property. The
      persons eligible to receive awards under the Plan are the officers, directors,
      employees and independent contractors of the Company and its subsidiaries.
      Until
      August 10, 2006, under the Plan, the total number of shares of the Company’s
      common stock that were subject to the granting of awards under the Plan was
      equal to 2,000,000 shares, plus the number of shares with respect to which
      awards previously granted thereunder are forfeited, expire, terminate without
      being exercised or are settled with property other than shares, and the number
      of shares that are surrendered in payment of any awards or any tax withholding
      requirements. On August 10, 2006, at the annual meeting of stockholders, the
      stockholders voted to amend the Plan to (i) increase the number of shares of
      common stock available for awards under the Plan from 2,000,000 to 4,000,000
      and
      (ii) eliminate a provision limiting to 250,000 the number of shares with respect
      to which each type of award may be granted to any participant during any fiscal
      year.





The
      total
      number of shares of common stock issuable on exercise of options granted on
      December 7, 2006, February 1, 2007 and June 19, 2007 exceeded the number of
      shares then available under the Plan by 1,652,070 shares (the “excess options”).
      The excess options were granted expressly subject to subsequent stockholder
      approval of an increase in the 4,000,000 limit in the Plan to cover those
      options. Specifically, on December 7, 2006, options to purchase 2,415,000 shares
      of the Company’s common stock were granted under the Plan to some of the
      Company’s officers, directors, employees and consultants. On that date, before
      the options were granted, there were 1,677,930 shares of common stock remaining
      available for awards under the Plan. Therefore, the number of shares issuable
      upon exercise of those options exceeded the number then available under the
      Plan
      by 737,070 shares, which represents approximately 30.5% of the shares issuable
      upon exercise of those options. Accordingly, the compensation committee of
      the
      Company’s board of directors has determined that each of those excess options
      was subject, on a pro rata basis, to approval by the Company’s stockholders of
      an amendment to the Plan to increase the number of shares available for awards
      under the Plan to cover those excess options. Subsequently, on February 1,
      2007,
      options under the Plan to purchase 865,000 shares were granted to the Company’s
      new chief financial officer and to two new directors. On June 19, 2007, an
      option under the Plan to purchase 50,000 shares was granted to the Company’s new
      chief operating officer. The compensation committee determined that each of
      those options was subject to approval by the Company’s stockholders of an
      amendment to the Plan to increase the number of shares available for awards
      under the Plan to cover those excess options. On February 12, 2008, at the
      conclusion of the Company’s annual meeting, the Company’s stockholders approved
      an amendment to the Plan to increase the number of shares of common stock
      available for issuance under the plan from 4,000,000 to 6,500,000, which covered
      all of the options granted subject to stockholder approval.





During
      the years ended December 31, 2007 and 2006, options to purchase 915,000 and
      4,440,000 shares of common stock, respectively, were granted to executive
      officers, employees and independent contractors. These options vest up to three
      years from the date of grant and are exercisable over periods ranging from
      three
      to ten years from the date of grant with exercise prices ranging from $1.19
      to
      $11.04 per share. During the years ended December 31, 2007 and 2006, options
      to
      purchase 100,000 and 490,000 shares of common stock were forfeited,
      respectively, by various directors, employees and independent contractors.
      The
      fair value of options granted during the years ended December 31, 2007 and
      2006,
      net of forfeitures, is $1,666,000 and $7,725,000, respectively, and was
      determined at




F-22


**XETHANOL
          CORPORATION**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**


their
      grant date using a Black-Scholes option pricing model and is being recorded
      as
      compensation expense over their respective vesting periods. The Company recorded
      net compensation expense for outstanding stock options of $3,552,000 and
      $5,483,000 for the years ended December 31, 2007 and 2006,
      respectively.





As
      of
      December 31, 2007 and 2006, options to purchase 5,245,000 and 4,430,000 shares
      of common stock were outstanding under the 2005 Plan, respectively. At December
      31, 2007 and 2006, the weighted average exercise price of outstanding options
      is
      $3.36 and $3.47, respectively.





A
      summary
      of stock option activity under the 2005 Plan for the years ended December 31,
      2007 and 2006 is as follows:





**2007**
            
            **2006****Shares**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Shares**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**Outstanding
                at beginning of year
            
            
            4,430,000
            
            $
            3.47
            
            
            480,000
            
            $
            3.95Options
                granted
            
            
            915,000
            
            
            2.70
            
            
            4,440,000
            
            
            3.75Options
                exercised
            
            
            -
            
            
            -
            
            
            -
            
            
            -Options
                forfeited
            
            
            (100,000
            )
            
            2.44
            
            
            (490,000
            )
            
            6.46Outstanding
                at end of year
            
            
            5,245,000
            
            $
            3.36
            
            
            4,430,000
            
            $
            3.47Exercisable
                at end of year
            
            
            4,762,500
            
            $
            3.43
            
            
            2,305,000
            
            $
            3.75





A
      summary
      of outstanding stock options at December 31, 2007 is as follows:





**Options
                Exercisable****Number**
              **Outstanding**
            
            **Range
                of**
              **Exercise**
              **Price**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Weighted**
              **Remaining**
              **Life**
              **In
                Years**
            
            **Number**
              **Exercisable**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**4,145,000
            
            $
            1.19
                - $3.99
            
            $
            2.68
            
            
            5.60
            
            
            3,662,500
            
            $
            2.68805,000
            
            
            4.00
                -   5.56
            
            
            4.82
            
            
            2.51
            
            
            805,000
            
            
            4.82295,000
            
            
            5.57
                - 11.04
            
            
            8.97
            
            
            2.05
            
            
            295,000
            
            
            8.975,245,000
            
            
            
            
            $
            3.36
            
            
            4.93
            
            
            4,762,500
            
            $
            3.43





The
      weighted average fair value of stock options is estimated at the grant date
      using the Black-Scholes option-pricing model with the following weighted average
      assumptions:





**Year
                Ended****December 31,****2007**
            
            **2006**Risk-free
                interest rate
            
            
            4.84
            %
            
            4.55
            %Expected
                life of options
            
            
            9.73
            
            
            6.20Expected
                dividend yield
            
            
            0
            %
            
            0
            %Expected
                volatility
            
            
            55.0
            %
            
            55.0
            %





**NOTE
      14.**  **WARRANTS**





During
      the year ended December 31, 2007, the Company issued no warrants. During the
      year ended December 31, 2006, the Company issued warrants to purchase 4,323,178
      shares of the Company’s common stock. At December 31, 2007 and 2006, there were
      warrants to purchase 4,131,146 and 5,197,776 shares of common stock, with
      weighted average exercise prices of $5.73 and $5.06, respectively.




F-23


**XETHANOL
          CORPORATION**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 The
      fair
      value of warrants issued as compensation for services rendered during the years
      ended December 31, 2007 and 2006 was estimated at the grant date using the
      Black-Scholes option pricing model and recorded as expense over their respective
      vesting periods. During the years ended December 31, 2007 and 2006, the Company
      recorded compensation expense related to warrants granted for services rendered
      of $421,426 and $1,151,714, respectively. During the year ended December 31,
      2006, the Company also recorded a loss on royalty note conversion of $1,966,712
      and a $203,500 reduction of interest payable related to the issuance of warrants
      issued in the debt conversion.





The
      weighted average fair value of warrants issued during the years ended December
      31, 2007 and 2006 was estimated at the grant date using a Black-Scholes
      option-pricing model with the following weighted average
      assumptions:





**Year
                Ended****December
                31,****2007**
            
            **2006**Risk-free
                interest rate
            
            
            -
            
            
            4.79
            %Expected
                life of options
            
            
            -
            
            
            3.47
            %Expected
                dividend yield
            
            
            -
            
            
            0
            %Expected
                volatility
            
            
            -
            
            
            55.0
            %





During
      the year ended December 31, 2007, warrants to purchase 111,455 shares of common
      stock were exercised for total cash proceeds of $224,000. During the year ended
      December 31, 2006, warrants to purchase 311,428 shares of common stock were
      exercised for total cash proceeds of $945,120.





A
      summary
      of stock warrant activity is as follows:





**2007**
            
            **2006****Shares**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Shares**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**Outstanding,
                beginning of year
            
            
            5,197,776
            
            $
            5.06
            
            
            1,456,026
            
            $
            2.52Issued
                to investors-Series A and B
            
            
            -
            
            
            
            
            
            2,276,118
            
            
            5.28Issued
                to placement agents
            
            
            -
            
            
            
            
            
            606,938
            
            
            4.50Issued
                for facility acquisition
            
            
            -
            
            
            
            
            
            300,000
            
            
            4.00Issued
                for services rendered
            
            
            -
            
            
            
            
            
            810,122
            
            
            7.01Issued
                for royalty note conversion
            
            
            -
            
            
            
            
            
            330,000
            
            
            12.50Exercised
            
            
            (111,455
            )
            
            2.00
            
            
            (311,428
            )
            
            3.03Forfeited
            
            
            (955,175
            )
            
            2.28
            
            
            (270,000
            )
            
            8.21Outstanding,
                end of year
            
            
            4,131,146
            
            $
            5.78
            
            
            5,197,776
            
            $
            5.06Exercisable,
                end of year
            
            
            4,131,146
            
            $
            5.78
            
            
            4,797,776
            
            $
            5.03




F-24


**XETHANOL
          CORPORATION**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 The
          following table summarizes warrant information as of December 31,
          2007:





**Number
                of**
              **Warrants**
            
            **Exercise**
              **Prices**
            
            **Expiration**
              **Date**35,312
            
            $
            3.75
            
            
            2008325,000
            
            $
            4.00
            
            
            2008-20092,217,099
            
            $
            4.50
            
            
            2009120,000
            
            $
            5.25
            
            
            2010-201120,000
            
            $
            5.50
            
            
            2009958,735
            
            $
            6.85
            
            
            2009125,000
            
            $
            8.32
            
            
            2011330,000
            
            $
            12.50
            
            
            20094,131,146
            
            $
            5.78





**NOTE
      15.**  **INCOME
      TAXES**





As
      of
      December 31, 2007 and 2006, the Company had unused net operating loss
      carryforwards approximating $28.0 million and $15.5 million, respectively,
      which
      may be applied against future taxable income. The net operating loss
      carryforwards expire in the years 2020 through 2026. Portions of these
      carryforwards may be subject to annual limitations, including Section 382 of
      the
      Internal Revenue Code. At December 31, 2007 and December 31, 2006, respectively,
      the deferred tax assets (representing the potential future tax savings) related
      to the carryforwards were as follows:





**2007**
            
            **2006**Deferred
                tax asset
            
            $
            11,033,000
            
            $
            6,263,000Less:
                Valuation allowance
            
            
            11,033,000
            
            
            6,263,000Net
                deferred tax asset
            
            $
            0
            
            $
            0





As
      a
      result of the uncertainty that net operating loss carryforwards will be used
      in
      the foreseeable future, a 100% valuation allowance had been provided. At
      December 31, 2007 and 2006, a wholly owned subsidiary had an unused net
      operating loss carry forward of approximately $226,000 that may be applied
      against future taxable income. The net operating loss carry forward expires
      in
      2023. A 100% valuation allowance has been provided for against this amount.





**NOTE
      16.**  **MAJOR
      CUSTOMER**





Since
      July 1, 2005, all of the Company’s ethanol sales have been to one customer. The
      Company has an exclusive marketing agreement with this customer. This customer
      represented 91% and 94% of the Company’s net sales for the years ended December
      31, 2007 and 2006, respectively.





**NOTE
      17.**  **JOINT
      VENTURE**





***Organization
      of CoastalXethanol LLC***





In
      April
      2006, the Company entered into a letter of intent with Coastal Energy
      Development, Inc., a Georgia corporation (“CED”), to jointly develop plants for
      the production of ethanol in the State of Georgia and in the South Carolina
      counties in which the cities of Charleston and Georgetown are located. In April
      2006, the Company formed a subsidiary, CoastalXethanol LLC (“CoastalXethanol”),
      for the purpose of implementing the projects contemplated by that letter of
      intent. CoastalXethanol was a joint venture with Coastal Energy Development,
      Inc. (“CED”). The Company originally acquired an 80% membership interest in
      CoastalXethanol for a capital contribution of $40,000, and CED acquired a 20%
      membership interest in CoastalXethanol for a capital contribution of $10,000.
      In
      connection with the formation of CoastalXethanol, the Company issued to CED
      a
      warrant to purchase 200,000 shares of the Company’s Common Stock at a purchase
      price of $6.85 per share that first became




F-25


**XETHANOL
          CORPORATION**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**


exercisable
      on May 30, 2007 and was exercisable until May 30, 2010. The fair value of this
      warrant was $1,011,420 and was amortized over its one-year vesting
      period.





On
      August
      23, 2006, CoastalXethanol purchased the assets of a former pharmaceutical
      manufacturing complex located in Augusta, Georgia from Pfizer, Inc. The
      purchased assets included 40 acres of land, buildings, machinery and equipment.
      Under the purchase agreement, CoastalXethanol, through its newly-formed,
      wholly-owned subsidiary, Augusta BioFuels, LLC, paid approximately $8.4 million
      in cash for the facility. The Company provided the cash to acquire the facility.





The
      organizational agreement of CoastalXethanol permitted CoastalXethanol to advance
      to CED funds for working capital to the extent necessary for CED to provide
      the
      services it was required to perform under the agreement. Those advances bore
      interest at the prime rate, and were repayable from any distributions by
      CoastalXethanol to CED in respect to CED’s membership interest in
      CoastalXethanol. As of December 31, 2007 and 2006, Xethanol had advanced
      $630,000 and $567,000, respectively, to CoastalXethanol for the purposes of
      funding working capital advances to CED. At December 31, 2006, the
      CoastalXethanol established a 100% reserve against the $567,000 receivable.
      In
      2007, CoastalXethanol wrote off 100% of the outstanding loans, and any interest
      thereon, in conjunction with the CED settlement. The Company consolidates the
      operations of CoastalXethanol.





On
      March
      5, 2007, the Company, along with CoastalXethanol, initiated an action against
      CED in the Supreme Court of the State of New York. On April 3, 2007, CED filed
      an answer and counterclaim. On September 14, 2007, the Company reached a
      settlement with CED and agreed to pay CED $400,000 in exchange for CED’s 20%
      interest in CoastalXethanol. The
      parties executed releases and replaced the warrant described above with a
      warrant to purchase 200,000 shares of the Company’s common stock that is
      exercisable at an exercise price of $6.85 per share through May 30,
      2009. The
      payment and purchase of CED’s 20% interest in CoastalXethanol was completed on
      September 24, 2007, and CoastalXethanol became a wholly-owned subsidiary of
      the
      Company.





**NOTE
      18.****RELATED
      PARTY TRANSACTIONS**





In
      February 2005, the Company entered into a Consulting Services Agreement with
      Jeffrey S. Langberg, then a major stockholder and a member of the Company’s
      Board of Directors, pursuant to which Mr. Langberg agreed to provide the Company
      general business advisory services. Under this agreement, the Company paid
      Mr.
      Langberg a monthly consulting fee of $15,000 and Mr. Langberg was eligible
      to
      receive awards under the Company’s 2005 Incentive Compensation Plan. On June 12,
      2006, Mr. Langberg resigned as a director but continued to serve as an advisor
      to the Board of Directors of the Company until December 2006. In October 2004,
      the Company began sharing office in New York City with other affiliated
      companies under a sublease with Xethanol Management Services, LLC, which is
      a
      single member limited liability company controlled by Mr. Langberg. For the
      years ended December 31, 2007 and 2006, total office rent expense plus
      reimbursements of other costs of $217,000 and $132,000, respectively, was paid
      under this arrangement. As of December 1, 2006, the Company became the sole
      occupant of this office space.





On
      June
      12, 2006, the Company issued to Mr. Langberg an option to purchase 250,000
      shares of common stock at an exercise price of $8.32 per share vesting upon
      the
      date on which NewEnglandXethanol, LLC has approved and commenced its initial
      project. For these purposes, the project shall have been approved and commenced
      when (a) the project has been approved, (b) financing for construction of the
      project has been obtained and closed and (c) the chief executive officer of
      the
      Company has notified the Board of Directors of the Company or the compensation
      committee thereof that conditions (a) and (b) have been met, which notification
      shall not be unreasonably withheld or delayed. The fair value of this option
      was
      $989,050 and was to be charged to operations when vested.





On
      September 25, 2006, the Company terminated Mr. Langberg’s consulting agreement
      effective immediately. Pursuant to the termination agreement with Mr. Langberg
      executed on December 20, 2006, the Company agreed to pay Mr. Langberg $235,000,
      with $60,000 payable in 2006 and $175,000 payable in 2007. With regard to this
      obligation, the Company recognized $235,000 as compensation expense for the
      year
      ended December 31, 2006. Pursuant to the termination agreement, the Company
      and
      Mr. Langberg agreed to cancel the 250,000 warrants granted June 12, 2006, and
      issue to Mr. Langberg a fully vested five-year warrant to purchase 125,000
      shares of the




F-26


**XETHANOL
          CORPORATION**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**


Company’s
      common stock at an exercise price of $8.32 and a grant date of December 20,
      2006. With regard to this warrant, the Company recognized an expense of $60,000
      based on a fair value calculation. During the year ended December 31, 2006,
      Mr.
      Langberg received additional consulting fees of $135,000 was paid a performance
      bonus of $400,000, received health benefits with a value of $27, 000 and
      received a payment of $4,000 accrued from prior years. Total compensation
      expense recognized by the Company during 2006 with regard to Mr. Langberg was
      $858,000 and actual payments made to Mr. Langberg during 2006 were $584,000.
      Pursuant to the termination agreement, the Company paid Mr. Langberg consulting
      fees of $190,000 during the year ended December 31, 2007, which fees were
      recorded in compensation expense during the year ended December 31,
      2006.





On
      August
      25, 2006, the Company and Mr. d’Arnaud-Taylor, the Company’s former Chairman,
      President and Chief Executive Officer, entered into a termination agreement
      under which the Company and Mr. d’Arnaud-Taylor agreed that Mr.
      d’Arnaud-Taylor’s employment by, and his position as an officer of, the Company
      was terminated effective as of August 22, 2006 (the “Termination Date”). The
      agreement provided that Mr. d’Arnaud-Taylor would continue to serve as a
      director of the Company for the remainder of his current term.





Under
      the
      termination agreement, the Company continued to pay Mr. d’Arnaud-Taylor his
      salary and maintain his employment benefits as in effect immediately prior
      to
      the Termination Date through December 31, 2006, and the Company paid Mr.
      d’Arnaud-Taylor $100,000 in severance on the three-month anniversary of the
      Termination Date. The agreement provides that, subject to Mr. d’Arnaud-Taylor’s
      compliance with the terms of the agreement, the exercise periods of the options
      to purchase 250,000 shares of common stock at an exercise price of $5.56 per
      share and 450,000 shares of common stock at an exercise price of $8.32 per
      share
      that were granted to Mr. d’Arnaud-Taylor on February 28, 2006 and June 12, 2006,
      respectively, are extended until the third anniversary of the Termination Date
      with respect to one half of each option. The options are otherwise terminated.
      The agreement also provides that the Company will reimburse Mr. d’Arnaud-Taylor
      for any reasonable and appropriately documented business expenses he may have
      incurred prior to the Termination Date in the performance of his duties as
      an
      employee of the company and that Mr. d’Arnaud-Taylor will be entitled to
      coverage under the Company’s group medical and dental plans to the extent
      provided in and subject to the terms and conditions of the Company’s standard
      policy.





Under
      the
      termination agreement, Mr. d’Arnaud-Taylor agreed to provide such advisory and
      consulting services as the Company may reasonably request during the three
      months after the Termination Date to permit the orderly transfer of his duties
      to other company personnel and not to solicit employees of the company during
      the period ending on the first anniversary of the Termination Date. The
      agreement also provides for the Company and Mr. d’Arnaud-Taylor to mutually
      release each other from all claims arising prior to the date of the agreement,
      other than claims based on the released party’s willful acts, gross negligence
      or dishonesty and, with respect to Mr. d’Arnaud-Taylor’s release of the Company,
      claims vested before the date of the agreement for benefits under the Company’s
      employee benefit plans and claims for indemnification for acts as an officer
      of
      the Company.





On
      August
      25, 2006, the Company and Mr. d’Arnaud-Taylor entered into a one year consulting
      agreement under which Mr. d’Arnaud-Taylor agreed to provide such consulting and
      advisory services as the Company may reasonably request from time to time.
      During the term of the agreement, the Company was to pay Mr. d’Arnaud-Taylor
      $15,000 per month (payable monthly in arrears) and reimburse him for any
      reasonable and appropriately documented business expenses he may incur in the
      performance of his duties under the agreement. The agreement provided that
      Mr.
      d’Arnaud-Taylor was not required to dedicate more than eight days in any
      calendar month to the performance of services under the agreement and that
      if he
      did provide services for more than eight days in any calendar month, the Company
      would pay him an additional $2,000 for each additional day or part thereof.





The
      consulting agreement had a term of one year, subject to earlier termination
      by
      the Company if Mr. d’Arnaud-Taylor failed to perform his duties under the
      agreement. Upon the termination of the agreement, the Company would have had
      no
      obligation to Mr. d’Arnaud-Taylor other than payment obligations accrued before
      the termination date, which would have been paid within 15 days of the
      termination date. The agreement included covenants by Mr. d’Arnaud-Taylor
      regarding confidentiality, competition and solicitation of the Company’s
      customers, suppliers and employees. This agreement was terminated effective
      December 1, 2006.




F-27


**XETHANOL
          CORPORATION**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 On
      December 1, 2006, the Company entered into a consulting agreement with Mr.
      d’Arnaud-Taylor under which Mr. d’Arnaud-Taylor agreed to provide strategic
      advice to the Company’s Chief Executive Officer. During the term of the
      agreement, the Company agreed to pay Mr. d’Arnaud-Taylor $15,000 per month
      (payable monthly in advance) and reimburse him for reasonable and appropriately
      documented business expenses he incurred in the performance of his duties under
      the agreement. The term of the agreement expired on November 25, 2007. The
      agreement includes covenants by Mr. d’Arnaud-Taylor regarding
      confidentiality.





During
      2006, the Company recognized $406,000 in cash compensation expense, and actual
      payments made to Mr. d’Arnaud-Taylor during 2006 were $315,000. The Company also
      recognized expense of $1,344,000 related to options granted to Mr.
      d’Arnaud-Taylor as a result of his employment with Company and $170,000 related
      to options granted to Mr. d’Arnaud-Taylor as a result of his membership on the
      Company’s board of directors.





During
      2007, the Company recognized $165,000 in cash compensation expense, and actual
      payments made to Mr. d’Arnaud-Taylor during 2007 were $256,000.





William
      P. Behrens, a director of the Company, is the Vice Chairman of Northeast
      Securities, Inc., a multi-line financial services firm serving both
      institutional and individual clients. Under a placement agent agreement dated
      as
      of February 22, 2006 between Northeast and the Company, Northeast acted as
      the
      Company’s placement agent in connection with the private offering of the Company
      common stock and warrants to purchase common stock consummated on April 13,
      2006. In consideration of Northeast’s services, on April 13, 2006 the Company
      paid Northeast $1,928,397 in cash and issued to Northeast and its designees
      warrants to purchase 606,938 shares of the Company common stock at an exercise
      price $4.50 per share, exercisable at any time until April 12, 2009. The Company
      issued warrants to purchase 35,000 shares of common stock to Mr. Behrens as
      a
      designee of Northeast. The warrants may be exercised on a “cashless” basis at
      any time and are otherwise exercisable on the same terms and conditions as,
      and
      are entitled to registration rights on the same terms as, the warrants issued
      to
      the investors in the April 2006 private placement.





On
      October 1, 2006, the Company entered into an advisory agreement with Northeast
      under which Northeast agreed, on a non-exclusive basis, to assist the Company
      in
      various corporate matters including advice relating to general capital raising,
      mergers and acquisition matters, recommendations relating to business operations
      and strategic planning. In consideration of these services, the Company agreed
      to pay Northeast an advisory fee of $10,000 per month during the term of the
      agreement and to reimburse Northeast for all necessary and reasonable
      out-of-pocket costs and expenses it incurred in the performance of its
      obligations under the agreement. The scheduled term of the agreement was one
      year, subject to earlier termination by the Company in the event of a material
      breach by Northeast of any of its obligations under the agreement. In May 2007,
      the Company informally amended its agreement with Northeast to eliminate the
      advisory fee of $10,000 per month, although Northeast continued to perform
      advisory services for the Company. On July 25, 2007, the Company formally agreed
      with Northeast to terminate the agreement.





Pursuant
      to the agreement, during 2007 and 2006, the Company paid and recorded consulting
      expense of $40,000 and $30,000, respectively. In addition, Northeast received
      a
      $5,100 fee in connection with the Company’s purchase of auction rate securities
      during 2007.





The
      Company has an arrangement with one of its advisory board members to act as
      the
      Company’s chief technology strategist, and the Company pays him a monthly
      consulting fee of $8,000. For the years ended December 31, 2007 and 2006,
      $101,000 and $96,000, respectively, had been paid under this arrangement. During
      March 2006, the Company also granted this individual warrants to acquire 25,000
      shares of common stock at an exercise price of $4.50.





Accounts
      payable to all related parties as of December 31, 2007 and 2006 were $0 and
      $318,000, respectively.




F-28


**XETHANOL
          CORPORATION**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
      19.**  **LEGAL
      PROCEEDINGS**





The
      Company is a party to the lawsuits described below. An adverse result in these
      lawsuits could have a material adverse effect on the Company’s business, results
      of operations and financial condition. In connection with the class action
      lawsuit described below (and a derivative action that has been dismissed),
      the
      Company accrued $200,000 at December 31, 2006 to cover the deductible amount
      it
      is required to pay under its director and officer insurance policy for those
      claims. Through
      December 31, 2007, the Company has paid $200,000 in legal fees, has accrued
      a
      liability for the approximately $346,000 in additional legal fees and has
      recorded a $300,000 receivable from its insurance carriers, which is the amount
      the insurance carriers have agreed to pay under the tentative settlement
      described below.





*Class
      Action Lawsuit* .
      In October 2006, a shareholder class action complaint was filed in the United
      States District Court for the Southern District of New York, purportedly brought
      on behalf of all purchasers of Xethanol common stock during the period January
      31, 2006 through August 8, 2006. The complaint alleges, among other things,
      that
      the Company and some of its former officers and directors made materially false
      and misleading statements regarding the Company’s operations, management and
      internal controls in violation of Sections 10(b) and 20(a) of the Securities
      Exchange Act of 1934 and Rule 10b-5. The individual defendants are Lawrence
      S.
      Bellone, a former director, Executive Vice President, Corporate Development,
      principal accounting officer and Chief Financial Officer; Christopher
      d’Arnaud-Taylor, a former director, Chairman, President and Chief Executive
      Officer; and Jeffrey S. Langberg, a former director. The plaintiffs seek, among
      other things, unspecified compensatory damages and reasonable costs and
      expenses, including counsel fees and expert fees. Six nearly identical class
      action complaints were thereafter filed in the same court, all of which have
      been consolidated into one action, In re Xethanol Corporation Securities
      Litigation, 06 Civ. 10234 (HB) (S.D.N.Y.) (the Class Action”). The plaintiffs
      filed their amended consolidated complaint on March 23, 2007. The defendants
      filed a motion to dismiss the amended complaint on April 23, 2007. On September
      7, 2007, the District Court denied that motion.





On
      November 28, 2007, the defendants, including the Company, reached an agreement
      in principle with plaintiffs’ lead counsel to settle the Class Action. The
      tentative settlement agreement, which was reached during a mediation overseen
      by
      a retired United States District Court Judge, calls for the payment of $2.8
      million to the plaintiffs, of which the Company will pay $400,000 and the
      Company’s insurance carriers will pay $2.4 million. The agreement remains
      subject to final negotiated writings executed by the parties and approval by
      the
      United States District Court for the Southern District of New York.





*Global
      Energy and Management, LLC Lawsuit* .
      In
      December 2007, Global Energy and Management, LLC (“Global Energy”) filed an
      action in the federal court for the Southern District of New York against the
      Company and nine current or former officers, directors and employees. The
      lawsuit is entitled Global Energy and Management v. Xethanol Corporation, Mr.
      d’Arnaud-Taylor; Mr. Langberg; Mr. Bellone; Louis B. Bernstein, a former
      President, Interim Chief Executive Officer and director; David Ames, our Chief
      Executive Officer, President and a director; Thomas J. Endres, our Chief
      Operating Officer, Executive Vice President, Operations; Robin Buller, a former
      Executive Vice President - Strategic Development; David Kreitzer, a former
      employee; and John Murphy, a former consultant, 07 Civ. 11049 (NRB) (S.D.N.Y.).
      The lawsuit alleges fraud by the defendants in connection with Global Energy’s
      alleged investment of $250,000 in NewEnglandXethanol, LLC, a joint venture
      of
      the Company and Global Energy. On March 19, 2008, Global Energy served its
      second amended complaint on the Company. Based on an alleged investment of
      $250,000, Global Energy seeks more than $10,000,000 in damages plus pre-judgment
      interest and costs. Management has instructed counsel to vigorously represent
      and defend the Company’s interests in this litigation.





The
      Company was also a party to two other lawsuits that were settled in 2007 as
      described below.





*Repurchase
      of CED’s Interest in Joint Venture; Settlement of CED Lawsuit.*  On March
      5, 2007, the Company, along with CoastalXethanol, initiated an action against
      CED in the Supreme Court of the State of New York. On April 3, 2007, CED filed
      an answer and counterclaim. On September 14, 2007, the Company reached a
      settlement with CED and agreed to pay CED $400,000 in exchange for CED’s 20%
      interest in CoastalXethanol. The parties




F-29


**XETHANOL
          CORPORATION**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**


executed
      releases, the payment and purchase of CED’s 20% interest in CoastalXethanol was
      completed on September 24, 2007, and CoastalXethanol became a wholly-owned
      subsidiary of the Company.





*Settlement
      of the Rolls lawsuit.* On July 29, 2005, William C. Roll, as trustee for the Hope C. Roll Trust, and
      Hope C. Roll, as trustee for the William C. Roll Trust, commenced an action
      against the Company in the Circuit Court of the Ninth Judicial Circuit, in
      and
      for Orange County, Florida, Case No. 2005-CA-6351. The complaint alleged that
      the plaintiffs are beneficial owners of 300,000 shares of common stock of a
      corporation of the same name that was organized under the laws of Delaware
      on
      January 24, 2000 (“Old Xethanol”). In connection with the February 2, 2005
      reverse merger, Zen Pottery Equipment, Inc., a publicly traded Colorado
      corporation (“Zen”), organized Zen Acquisition Corp. as a wholly owned Delaware
      subsidiary (“Zen Acquisition”). The complaint further alleged that the Rolls
      were entitled to have issued in their names the number of shares of the
      Company’s common stock to which they are entitled under the February 2, 2005
      merger agreement among Old Xethanol, Zen and Zen Acquisition. The complaint
      sought a declaratory judgment to that effect and the transfer to the plaintiffs
      of these shares of common stock, or, in the alternative, damages for breach
      of
      contract, conversion and breach of fiduciary duty. The complaint also sought
      punitive damages against the Company. The Company filed a notice of removal
      on
      August 29, 2005, and the case was removed to the United States District Court
      for the Middle District of Florida, Orlando Division (Case No.
      6:05-CV-1263-ORL-28-JGG). On May 2, 2007, the court entered an order finding
      the
      Company liable to the Rolls on their claim for conversion and breach of
      fiduciary duty. The parties entered into a settlement agreement on May 10,
      2007
      in which the Company agreed to pay $1.0 million to the plaintiffs. The Company’s
      directors and officers’ liability insurance carrier has paid the $1.0 million
      settlement amount. The Company incurred legal fees of approximately $430,000
      in
      defending the case.





**NOTE
      20.**  **COMMITMENT**





On
      April
      24, 2007, the Company entered into an office space lease for 6,354 square feet
      in Atlanta, Georgia. The lease commenced on June 15, 2007 on a 42-month term,
      including six months of free rent. The base rent is $14,000 per
      month.





**NOTE
      21.**  **SUBSEQUENT
      EVENTS**





In
      January 2008, the Company invested $250,000 in Carbon Motors Corporation, a
      new
      American automaker developing a specially-built law enforcement vehicle
      featuring a clean diesel engine that can run on biodiesel fuel. For its
      investment, the Company received a warrant that is initially exercisable for
      30,000 shares of Series B Preferred Stock at a price of $1.05 per share with
      a
      term of 5 years.





In
      January 2008, the Company made a $500,000 investment in Consus Ethanol, LLC
      of
      Pittsburgh, Pennsylvania pursuant to a convertible promissory note. Consus
      Ethanol has a permitted site in western Pennsylvania, where it plans to build
      the first of several ethanol plants. Its business model calls for a cogeneration
      plant using waste coal to power the companion ethanol plant - allowing
      significant energy cost savings. The note bears interest at the rate of 10%
      per
      annum and has an initial term of 6 months. Prior to the maturity date, the
      note
      can be extended for an additional six months or can be converted to equity.
      Northeast Securities is a financial advisor to Consus Ethanol.





F-30




**ITEM
                9.**
            **CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE.**





None.





**ITEM9A(T).**
            **CONTROLS
                AND PROCEDURES.**





**Disclosure
      Controls and Procedures**





Based
      on
      our management’s evaluation, with the participation of our Chief Executive
      Officer and Chief Financial Officer, as of December 31, 2007, the end of the
      period covered by this report, our Chief Executive Officer and Chief Financial
      Officer have concluded that our disclosure controls and procedures (as defined
      in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, (the
      “Exchange Act”)) were effective to ensure that information required to be
      disclosed by us in reports that we file or submit under the Exchange Act is
      recorded, processed, summarized and reported within the time periods specified
      in the rules and forms of the SEC and is accumulated and communicated to our
      management, including our Chief Executive Officer and Chief Financial Officer,
      as appropriate to allow timely decisions regarding required disclosure.





**Management’s
      Report on Internal Control over Financial Reporting**





Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting and for the assessment of the effectiveness
      of
      internal control over financial reporting. Our internal control over financial
      reporting is a process designed, as defined in Rule 13a-15(f) under the Exchange
      Act, to provide reasonable assurance regarding the reliability of financial
      reporting and the preparation of consolidated financial statements for external
      purposes in accordance with generally accepted accounting
      principles.





Our
      internal control over financial reporting is supported by written policies
      and
      procedures that:





1.
            pertain
                to the maintenance of records that, in reasonable detail, accurately
                and
                fairly reflect the transactions and dispositions of our assets;


2.
            provide
                reasonable assurance that transactions are recorded as necessary
                to permit
                preparation of consolidated financial statements in accordance with
                generally accepted accounting principles, and that our receipts and
                expenditures are being made only in accordance with authorizations
                of our
                management and directors; and


3.
            provide
                reasonable assurance regarding prevention or timely detection of
                unauthorized acquisition, use, or disposition of our assets that
                could
                have a material effect on the consolidated financial
                statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Projections of any evaluation of effectiveness
      to future periods are subject to the risk that controls may become inadequate
      because of changes in conditions, or that the degree of compliance with the
      policies or procedures may deteriorate.





In
      connection with the preparation of our annual consolidated financial statements,
      our management assessed the effectiveness of our internal control over financial
      reporting as of December 31, 2007. Management based this assessment on the
      criteria established in “ *Internal
      Control over Financial Reporting* — *Guidance for Smaller Public Companies* ”
issued
      by the Committee of Sponsoring Organizations of the Treadway Commission (which
      is sometimes referred to as the COSO Framework). Management’s assessment
      included an evaluation of the design of our internal control over financial
      reporting and testing of the operational effectiveness of our internal control
      over financial reporting. Based on this assessment, our management has concluded
      that our internal control over financial reporting was effective as of December
      31, 2007.





This
      annual report does not include an attestation report of our registered public
      accounting firm regarding internal control over financial reporting.
      Management’s report was not subject to attestation by our registered public
      accounting firm pursuant to temporary rules of the SEC that permit us to provide
      only management’s report in this annual report.




49


**Changes
      in Internal Controls**





There
      was
      no change in our internal control over financial reporting that occurred during
      the quarter ended December 31, 2007 that has materially affected, or is
      reasonably likely to materially affect, our internal control over financial
      reporting.





The
      design of any system of controls and procedures is based in part upon certain
      assumptions about the likelihood of future events. There can be no assurance
      that any design will succeed in achieving its stated goals under all potential
      future conditions, regardless of how remote.





**ITEM
      9B.**  **OTHER
      INFORMATION.**





None.


50




**PART
      III**





**ITEM
              10.**
            ******DIRECTORS,
                EXECUTIVE OFFICER****S
                AND CORPORATE GOVERNANCE**





**Directors
      and Executive Officers**





The
      following table provides information regarding the members of our board of
      directors and our executive officers. All directors hold office until the next
      annual meeting of stockholders and the election and qualification of their
      successors. Officers of our company are elected annually by the board of
      directors and serve at the discretion of the board. There are no family
      relationships among our directors and executive officers.





**Name**
            
            **Age**
            
            **Position**David
                R. Ames
            
            59
            
            Chief
                Executive Officer, President and DirectorGary
                Flicker
            
            49
            
            Chief
                Financial Officer, Executive Vice President and
                SecretaryThomas
                J. Endres*
            
            51
            
            Chief
                Operating Officer, Executive Vice President, OperationsWilliam
                P. Behrens
            
            69
            
            Director
                and Non-Executive Chairman of the BoardGil
                Boosidan
            
            35
            
            DirectorRichard
                D. Ditoro
            
            70
            
            DirectorRobert
                L. Franklin
            
            70
            
            DirectorEdwin
                L. Klett
            
            72
            
            Director




*
      Mr.
      Endres has resigned from our employment, effective April 12, 2008.





The
      principal occupations for the past five years (and, in some instances, for
      prior
      years) of each of our directors and officers are as follows:





**David
      R. Ames** became
      our Chief Executive Officer and President on November 9, 2006 and has served
      as
      a member of our board of directors since October 1, 2006. Mr. Ames has been
      an
      active venture capital investor in alternative energy companies, technologies,
      processes and services. He is currently a member of the National Ethanol Vehicle
      Coalition (NEVC), an association dedicated to bringing together political,
      business, industry and scientific leaders to focus on the alternative energy
      marketplace. In 2004, Mr. Ames co-founded Alterna Energy to make investments
      in
      alternative energy companies. From 1994 through 1999, Mr. Ames served as
      Chairman, President and Chief Executive Officer of Convergence.com, a provider
      of high-speed cable modem broadband internet access and other data services
      over
      cable systems that was founded by Mr. Ames in 1994 and acquired by C-COR
      Incorporated in 1999.




**Gary
      Flicker** became
      our Chief Financial Officer, Executive Vice President and Secretary on January
      29, 2007. From May 2002 through January 2007, Mr. Flicker was President and
      Chief Executive Officer of Flick Financial, a professional CPA/financial
      services firm founded by Mr. Flicker to assist businesses with their financial
      and related accounting needs. From March 2004 to November 2006, Flick Financial
      had been engaged by HealthSouth Corp. to assist in restating its financial
      statements. From 1997 through 2002, Mr. Flicker was the Executive Vice President
      and Chief Financial Officer of DVL, Inc., which owns and services commercial
      mortgage loans and manages real estate properties and partnerships. Mr. Flicker
      has been an independent member of the board of directors of DVL since 2004
      and
      chairs its audit committee. He is a licensed CPA in New York and Georgia and
      is
      a Member of the American Institute of Certified Public Accountants.





**Thomas
      J. Endres** became
      our Senior Vice President, Operations on September 7, 2006, our Executive Vice
      President, Operations on March 15, 2007 and our Chief Operating Officer on
      June
      19, 2007. On March 12, 2008, Mr. Endres informed our board of directors of
      his
      decision not to renew his employment agreement, which expired on March 6, 2008.
      He resigned as our Chief Operating Officer and Executive Vice President
      effective April 12, 2008. Before joining us, Mr. Endres served in the United
      States Army for 26 years, retiring with the rank of Lieutenant Colonel. From
      August 1997 until August 2006, he served as Director of Operations/Director
      of
      Cadet Activities at the United States Military Academy at West Point, from
      which
      he graduated in 1980. In this position, he was responsible for managing $2
      billion in facilities, a $50 million budget and 356 employees. From November




51




1999
      through April 2002, Mr. Endres also served as a member of the board of directors
      of the West Point Federal Credit Union, which managed over $55 million in funds.





**William
      P. Behrens** became
      our non-executive Chairman of the Board on November 9, 2006 and has served
      as a
      member of our board of directors since October 1, 2006. Mr. Behrens serves
      as
      the Vice Chairman at Northeast Securities, Inc., where he has built a
      significant presence in private-client advisory services and institutional
      brokerage. He joined Northeast Securities with over 30 years of experience
      from
      Ernst & Company, most recently as Chairman and CEO of Investec Ernst &
Company (a wholly owned subsidiary of Investec Group, Ltd.). Mr. Behrens
      currently serves as an Official for the American Stock Exchange and also served
      as a member of the Self-Regulatory Organizations Task Force on Options Reform
      and on committees for the FISC, American Stock Exchange, NSCC and NASD. He
      is
      also a director of Volumetric Fund, Inc.





**Gil
      Boosidan** became a
      member of our board of directors on January 29, 2007. Until February 2007,
      Mr.
      Boosidan served as Senior Vice President of IDT Corporation, a New York Stock
      Exchange listed company, as well as Treasurer of IDT Investments, Inc., a
      subsidiary of IDT that managed a substantial portion of IDT’s cash and
      investments. In that role, Mr. Boosidan managed its multi-million fixed income
      portfolio, and he coordinated IDT’s commercial banking relationships, borrowing,
      trading and risk management.




**Richard
      D. Ditoro**  became
      a
      member of our board of directors on September 7, 2006. Mr. Ditoro previously
      served as a member of our board of directors from July 28, 2005 through August
      10, 2006, the date of our 2006 annual meeting of stockholders, at which Mr.
      Ditoro did not stand for reelection. Mr. Ditoro is currently a principal in
      the
      consulting firm Merestone Development. In this capacity, Mr. Ditoro provides
      due
      diligence, financial modeling, market research, acquisition candidate profiling
      and strategic partnering advice and assistance to clients in the life sciences
      and specialty chemical sectors. Before forming Merestone Development in 1998,
      Mr. Ditoro held numerous senior management positions, including Vice President
      of Corporate Development, with Lonza Group, an international chemical
      conglomerate based in Basle, Switzerland.





**Robert
      L. Franklin** became a
      member of our board of directors on January 29, 2007. Mr. Franklin is a career
      investment banker who is currently the chairman of the Angel Investor Network
      in
      Hilton Head, South Carolina and in Savannah, Georgia. Since 1991, Mr. Franklin
      has been president of Prospect Ventures, Inc., advising private investors,
      entrepreneurs and private and public emerging growth companies regarding their
      capital requirements, business strategy, and the development of their boards
      of
      directors. He has served on numerous corporate and not-for-profit boards of
      directors. In July 2003, Mr. Franklin was appointed by Massachusetts Governor
      Romney as a member of the Massachusetts Public Education Nominating Council,
      on
      which he served until February 2005. In 2003 he was vice chairman, and in 2004
      he was chairman of the Council. In November 2004, he joined the Advisory Board
      of the Institute for Effective Governance, a Washington, DC service organization
      for responsible trustees. From 1998 to 2001, he was a member of the Advisory
      Board of Directors of the Association of the United States Army.





**Edwin
      L. Klett** became a
      member of our board of directors on December 7, 2006. Mr. Klett is currently
      senior counsel with the law firm of Buchanan Ingersoll & Rooney, in
      Pittsburgh, Pennsylvania, where he focuses his practice on corporate litigation.
      He was a partner in the law firm of Klett Rooney Lieber & Schorling from its
      formation in April 1989 until its merger with Buchanan Ingersoll in July 2006.
      He has over 40 years of experience in practicing law. A trial attorney with
      a
      background in corporate law, banking, securities and business matters, Mr.
      Klett
      was selected by the Pennsylvania Supreme Court to a four-year term on the
      Judicial Conduct Board of Pennsylvania in 2006. Mr. Klett is a fellow of the
      International Academy of Trial Lawyers, the American College of Trial Lawyers,
      the American Board of Trial Advocates, the American Bar Foundation and the
      American Law Institute. He is a member of the American Bar Association and
      previously served as a member of the ABA House of Delegates. Mr. Klett is also
      a
      member of the House of Delegates of the Pennsylvania Bar Association and
      previously served as chairman of the Securities and Class Action Committee
      of
      the Civil Litigation Section of the state association. Mr. Klett is also a
      director of Northeast Securities, Inc.





**Audit
      Committee**





Our
      board
      of directors has established an audit committee composed of Mr. Boosidan, its
      chairman, Mr. Franklin, and Mr. Klett. The board has determined that Mr.
      Boosidan is an “audit committee financial expert” as




52




defined
      under applicable SEC rules and is “independent” under the listing standards of
      the American Stock Exchange, on which the shares of our common stock are
      listed.





**Section
      16(a) Beneficial Ownership Reporting Compliance**





Section
      16(a) of the Securities Exchange Act of 1934 requires our directors and
      executive officers and persons who own beneficially more than 10% of our
      outstanding common stock to file with the SEC initial reports of ownership
      and
      reports of changes in their ownership of our common stock. Directors, executive
      officers and greater than 10% shareholders are required by SEC regulations
      to
      furnish us with copies of the forms they file. To our knowledge, based solely
      on
      a review of the copies of such reports furnished to us, during the fiscal year
      ended December 31, 2007, none of our directors, officers, or beneficial owners
      of more than 10% of our common stock failed to file on a timely basis reports
      required by Section 16(a) of the Exchange Act during the year ended December
      31,
      2007, except that David R. Ames, our Chief Executive Officer, President and
      a
      director, filed
      a
      late Form 4 to report eight purchase transactions, seven of which were not
      reported on a timely basis ;
      and Gil
      Boosidan, a director, filed a late Form 3 to report his joining our board of
      directors ;
      Gary
      Flicker, our Chief Financial Officer and Executive Vice President, filed a
      late
      Form 3 to report his becoming an officer; and Robert L. Franklin, a director,
      filed a late Form 3 to report his joining our board of directors .





**Code
      of Business Conduct and Ethics and Guidelines on Governance
      Issues**





Our
      board
      of directors has adopted a code of ethics applicable to all officers, directors
      and employees, a copy of which is available on our website at www.xethanol.com.
      We will provide a copy of this code to any person, without charge, upon request,
      by writing to us at Xethanol Corporation, 3348 Peachtree Road NE, Suite 250
      Tower Place 200, Atlanta, Georgia 30326, Attention: Chief Financial Officer.
      We
      intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K
      regarding an amendment to, or waiver from, a provision of the code of ethics
      by
      posting such information on our website at the address specified above.


53


**ITEM
              11.**
            **EXECUTIVE
                COMPENSATION.**





The
      following Summary Compensation Table sets forth for the years ended December
      31,
      2007 and December 31, 2006 all plan compensation paid, distributed or accrued
      for services, including salary and bonus amounts, rendered in all capacities
      by
      all individuals who served as our principal executive officer during 2007 and
      our two most highly compensated executive officers other than the principal
      executive officer who were serving as executive officers at the end of 2007.
      These individuals are our “named executive officers.”





**Summary
      Compensation Table for 2007 and 2006**




**Name
                    and Principal Position**
                
                **Year**
                
                **Salary**
                  **($)**
                
                **Bonus**
                  **($)**
                
                **Option**
                  **Awards**
                  **($)(1)**
                
                **All
                    Other**
                  **Compensation**
                  **($)**
                
                **Total**
                  **($)**(a)
                
                (b)
                
                (c)
                
                (d)
                
                (e)
                
                (f)
                
                (g)David
                    Ames
                  *President
                    and Chief Executive Officer (2)*
                
                
                2007
                  2006
                
                
                1
                  1
                
                
                -
                  -
                
                
                1,340,201
                  743,472
                (3)
                  (4)
                
                -
                  5,000
                (5)
                
                1,340,202
                  748,473Gary
                    Flicker
                  *Chief
                    Financial Officer and Executive Vice President (6)*
                
                
                2007
                  2006
                
                
                245,296
                  -
                
                
                -
                  -
                
                
                382,342
                  -
                (7)
                
                -
                
                
                627,638
                  -Lawrence
                    Bellone
                  *Former
                    Executive Vice President - Corporate Development, Former Chief
                    Financial
                    Officer*(8)
                
                
                2007
                  2006
                
                
                180,495
                  180,000
                
                
                -
                  50,000
                
                
                178,324
                  312,259
                (9)
                  (10)
                
                -
                  -
                
                
                358,819
                  542,259Thomas
                    Endres
                  *Chief
                    Operating Officer and Executive Vice President, Operations*(11)
                
                
                2007
                  2006
                
                
                176,528
                  47,083
                
                
                -
                
                
                133,207
                  67,598
                (12)
                  (13)
                
                -
                  -
                
                
                309,735
                  114,681






(1)
            The
                amounts in column (e) reflect the dollar amount of awards under the
                Plan
                that we recognized for financial statement reporting purposes for
                the
                fiscal years ended December 31, 2007 and 2006 in accordance with FAS
                123(R). Assumptions used in the calculations of these amounts are
                included
                in Note 12 to our consolidated financial statements in this
                report.





(2)
            Mr.
                Ames has served as our President and Chief Executive Officer since
                November 9, 2006.





(3)
            This
                amount represents the compensation expense we incurred in 2007 for
                Mr.
                Ames in connection with the December 7, 2006 grant, which is described
                in
                footnote 4 below.





(4)
            On
                October 5, 2006, we granted an option to purchase 205,000 shares
                of our
                common stock to Mr. Ames at an exercise price of $3.00 per share
                (the
                closing price per share of our common stock on the day before the
                date of
                grant as reported by the American Stock Exchange) in consideration
                of his
                service as a director, and 175,000 shares were vested on the date
                of grant
                and the remainder of the option vests in two installments of 15,000
                shares
                each on the six-month and one-year anniversaries of the date of grant.
                The
                option expires on the tenth anniversary of the date of grant. On
                November
                9, 2006, upon Mr. Ames becoming our President and Chief Executive
                Officer,
                30,000 shares that were granted as part of the October 5, 2006 grant
                were
                forfeited as a result of his resigning as a member of the governance
                and
                compensation committees. On December 7, 2006, we granted an option
                to
                purchase 1,350,000 shares of our common stock to Mr. Ames at an exercise
                price of $2.44 per share (the closing price per share of our common
                stock
                on the date of grant as reported by the American Stock Exchange)
                in
                consideration of his service as our President and Chief Executive
                Officer,
                and 200,000 shares vested on the grant date. The remaining 1,150,000
                were
                initially scheduled to vest on the first anniversary of the date
                of grant.
                On February 1, 2007, Xethanol’s compensation committee agreed to revise
                the vesting of the option for




54




those 1,150,000 shares so that they
              vest in
              equal monthly installments on the seventh day of each month, with the
              final installment vesting on December 7, 2007. The option expires on
              the
              fifth anniversary of the date of grant. The amount in the table includes
              (x) $367,368 in compensation expense we incurred in 2006 for Mr. Ames
              in
              connection with the October 5, 2006 grant; and (y) $376,104 in
              compensation expense we incurred in 2006 for Mr. Ames in connection
              with
              the December 7, 2006 grant.  (5)
            This
                amount represents a payment made to Mr. Ames for his service as an
                independent director from October 1, 2006 until his election by the
                board
                as President and Chief Executive Officer on November 9,
                2006.





(6)
            Mr.
                Flicker became our Chief Financial Officer, Executive Vice President
                and
                Secretary on January 29, 2007.





(7)
            On
                February 1, 2007, we granted an option to purchase 425,000 shares
                of our
                common stock to Mr. Flicker at an exercise price of $2.79 per share
                (the
                closing price per share of our common stock on the date of grant
                as
                reported by the American Stock Exchange) in consideration of his
                service
                as our Chief Financial Officer, Executive Vice President and Secretary;
                212,500 shares were vested on February 1, 2008 and the remainder
                of the
                option vests in two equal installments of 106,250 shares each on
                the
                second and third anniversaries of the date of grant. The option expires
                on
                the fifth anniversary of the date of grant. The amount in the table
                represents the compensation expense we incurred in 2007 for Mr. Flicker
                in
                connection with the February 1, 2007
                grant.





(8)
            Mr.
                Bellone served as our Executive Vice President, Corporate Development
                from
                January 29, 2007 to December 2007. He served as a member of our board
                of
                directors from October 5, 2006 until his resignation on January 16,
                2008.
                Mr. Bellone served as our Chief Financial Officer from April 5, 2005
                until
                his election as Executive Vice President and provided financial consulting
                services to us from March 2005 until his election as Chief Financial
                Officer.





(9)
            The
                amount in the table includes (x) $61,785 in compensation expense
                we
                incurred in 2007 for Mr. Bellone in connection with the February
                28, 2006
                grant; and (y) $116,539 in compensation expense we incurred in 2007
                for
                Mr. Bellone in connection with the December 7, 2006 grant. The option
                grants are described in footnote 10
                below.





(10)
            On
                February 28, 2006, we granted an option to purchase 100,000 shares
                of our
                common stock to Mr. Bellone at an exercise price of $5.56 per share
                (the
                average closing price per share of our common stock on the five trading
                days before the date of grant as reported by the OTC Bulletin Board)
                in
                consideration of his service as our Chief Financial Officer, and
                all
                shares vested on the one-year anniversary of the date of grant. The
                option
                expires on the fifth anniversary of the date of grant. On December
                7,
                2006, we granted an option to purchase 100,000 shares of our common
                stock
                to Mr. Bellone at an exercise price of $2.44 per share (the closing
                price
                per share of our common stock on the date of grant as reported by
                the
                American Stock Exchange) in consideration of his service as our Chief
                Financial Officer, and all shares will vest on the first anniversary
                of
                the date of grant. The option expires on the fifth anniversary of
                the date
                of grant. The amount in the table includes (x) $301,665 in compensation
                expense we incurred in 2006 for Mr. Bellone in connection with the
                February 28, 2006 grant; and (y) $10,594 in compensation expense
                we
                incurred in 2006 for Mr. Bellone in connection with the December
                7, 2006
                grant.





(11)
            Mr.
                Endres became our Senior Vice President, Operations on September
                7, 2006,
                our Executive Vice President, Operations on March 15, 2007 and our
                Chief
                Operating Officer on June 19, 2007. On March 12, 2008, Mr. Endres
                informed
                our board of directors of his decision not to renew his employment
                agreement, which expired on March 6, 2008. Mr. Endres resigned as
                our
                Chief Operating Officer and Executive Vice President effective April
                12,
                2008.





(12)
            On
                June 19, 2007, we granted an option to purchase 50,000 shares of
                our
                common stock to Mr. Endres at an exercise price of $1.19 per share
                (the
                closing price per share of our common stock on the date of grant
                as
                reported by the American Stock Exchange) in consideration of his
                service
                as our Chief Operating Officer, and all shares will vest on the first
                anniversary of the date of grant. The option expires on the




55




fifth anniversary of the date of grant.
              The
              amount in the table includes (x) $116,539 in compensation expense we
              incurred in 2007 for Mr. Endres in connection with the December 7,
              2006
              grant, which is described in footnote 13 below; and (y) $16,668 in
              compensation expense we incurred in 2007 for Mr. Endres in connection
              with
              the June 19, 2007 grant.  (13)
            On
                September 7, 2006, we granted an option to purchase 30,000 shares
                of our
                common stock to Mr. Endres at an exercise price of $3.62 per share
                (the
                closing price per share of our common stock on the date of grant
                as
                reported by the American Stock Exchange) in consideration of his
                service
                as our Senior Vice President, Operations, and all shares vested on
                December 31, 2006. On December 7, 2006, we granted an option to purchase
                100,000 shares of our common stock to Mr. Endres at an exercise price
                of
                $2.44 per share (the closing price per share of our common stock
                on the
                date of grant as reported by the American Stock Exchange) in consideration
                of his continued service as our Senior Vice President, Operations,
                and all
                shares will vest on the first anniversary of the date of grant. Both
                options expire on the fifth anniversary of the dates of grant. The
                amount
                in the table includes (x) $57,003 in compensation expense we incurred
                in
                2006 for Mr. Endres in connection with the September 7, 2006 grant;
                and
                (y) $10,594 in compensation expense we incurred in 2006 for Mr. Endres
                in
                connection with the December 7, 2006 grant.





*Employment
      Agreement with Thomas Endres*





In
      connection with Mr. Endres’ appointment as Chief Operating Officer, we entered
      into an amended and restated employment agreement with him on June 19, 2007.
      The
      agreement provides for an annual base salary of $200,000 and has a term of
      eighteen months commencing on September 7, 2006 and ending on March 6, 2008.
      On
      March 12, 2008, Mr. Endres informed our board of directors of his decision
      not
      to renew his employment agreement. He resigned as our Chief Operating Officer
      and Executive Vice President effective April 12, 2008. His employment agreement
      provides for our previous grants to Mr. Endres of (a) an option to purchase
      30,000 shares of our common stock at an exercise price of $3.62 per share (the
      closing price per share of our common stock on September 7, 2006, the date
      of
      grant as reported by the American Stock Exchange), of which all shares vested
      on
      December 31, 2006, and (b) an option to purchase 100,000 shares of our common
      stock at an exercise price of $2.44 per share (the closing price per share
      of
      our common stock on December 7, 2006, the date of grant as reported by the
      American Stock Exchange). The option to purchase 100,000 shares of our common
      stock that was granted on December 7, 2006 vested on the first anniversary
      of
      the date of grant and expires on the fifth anniversary of the date of grant.
      Under the agreement, we also granted Mr. Endres on June 19, 2007 an additional
      option to purchase 50,000 shares of our common stock at an exercise price of
      $1.19 per share (the closing sales price of the common stock on the date of
      grant as reported on the American Stock Exchange). Because this option was
      not
      scheduled to vest until the first anniversary of the date of grant, it
      will
      be forfeited when his employment with us ends .





Under
      his
      employment agreement, Mr. Endres will receive any earned but unpaid salary
      through the date of termination.





*Outstanding
      Equity Awards for Named Executive Officers at Fiscal Year-End*





The
      following table sets forth certain information with respect to outstanding
      options at December 31, 2007 for each of our executive officers listed in the
      Summary Compensation Table above. Unless otherwise noted in the footnotes,
      options are fully vested. As
      noted
      below, the number of shares issuable upon exercise of the options granted in
      December 2006, February 2007 and June 2007, to the extent that such amount
      exceeded the number then available under the Plan, was subject to approval
      by
      our stockholders of an amendment to the Plan to increase the number of shares
      available for award under the Plan to cover those excess options. On February
      12, 2008, at the conclusion of our annual meeting of stockholders, our
      stockholders approved an amendment to the Plan to increase the number of shares
      of common stock available for issuance under the Plan from 4,000,000 to
      6,500,000. The
      Plan,
      as amended, provides that the total number of shares of common stock that may
      be
      subject to awards granted under the Plan is 6,500,000 shares (plus the number
      of
      shares with respect to which awards previously granted there under are
      forfeited, expire, terminate without being exercised or are settled with
      property other than shares, and the number of shares that are surrendered in
      payment of any awards or any tax withholding requirements). The table below
      reflects the outstanding stock options held on December 31, 2007, giving effect
      to the stockholder approval




56




on
      February 12, 2008 of the increase
      in the number of shares issuable under the Plan that covered those excess
      options.





**Outstanding
      Equity Awards at Fiscal Year-End (December 31, 2007)**




**Name**
                
                **Number
                    of**
                  **Securities**
                  **Underlying**
                  **Unexercised**
                  **Options**
                  **(#)**
                  **Exercisable**
                
                **Number
                    of**
                  **Securities**
                  **Underlying**
                  **Unexercised**
                  **Options**
                  **(#)**
                  **Unexercisable**
                
                **Option**
                  **Exercise**
                  **Price**
                  **($)**
                **Option**
                  **Expiration**
                  **Date**(a)
                
                (b)
                
                (c)
                
                (d)
                (e)David
                    R. Ames
                
                
                175,000
                  1,350,000
                (1)
                  (2)
                
                -
                  -
                
                
                3.00
                  2.44
                (3)
                  (4)
                
                October 5,
                    2016
                  December
                    7, 2011Gary
                    Flicker
                
                
                -
                
                
                425,000
                (5)
                
                2.79
                (4)
                
                February 1,
                    2012Lawrence
                    Bellone
                
                
                100,000
                  100,000
                  100,000
                (6)
                  (6)
                
                -
                  -
                  -
                
                
                3.75
                  5.56
                  2.44
                (7)(4)
                
                April
                    5, 2008
                  February
                    28, 2011
                  December
                    7, 2011Thomas
                    Endres
                
                
                30,000
                  100,000
                  -
                (8)
                  (8)
                
                -
                  -
                  50,000
                (9)
                
                3.62
                  2.44
                  1.19
                (4)
                  (4)
                  (4)
                
                September 7, 2011
                  December
                    7, 2011
                  June
                    19, 2012






(1)
            On
                October 5, 2006, we granted an option to purchase 205,000 shares
                of our
                common stock to Mr. Ames in consideration of his service as a director,
                and 175,000 shares were vested on the date of grant and the remainder
                of
                the option vests in two installments of 15,000 shares each on the
                six-month and one-year anniversaries of the date of grant. On November
                9,
                2006, upon Mr. Ames becoming our President and Chief Executive Officer,
                30,000 shares that were granted as part of the October 5, 2006 grant
                were
                forfeited as a result of his resigning as a member of the governance
                and
                compensation committees.





(2)
            On
                December 7, 2006, we granted an option to purchase 1,350,000 shares
                of our
                common stock to Mr. Ames in consideration of his service as our President
                and Chief Executive Officer, and 200,000 shares vested on the grant
                date.
                The 1,150,000 unvested options were initially scheduled to vest on
                the
                first anniversary of the date of grant. On February 1, 2007, Xethanol’s
                compensation committee agreed to revise the vesting of the option
                for
                those 1,150,000 shares so that they vest in equal monthly installments
                on
                the seventh day of each month, with the final installment vesting
                on
                December 7, 2007. 411,750 shares issuable on exercise of the option
                granted to Mr. Ames on December 7, 2006 were subject to stockholder
                approval of an amendment to the Plan, which was subsequently approved
                as
                of February 12, 2008.





(3)
            Based
                on the closing price per share of our common stock on the day before
                the
                date of grant as reported by the American Stock
                Exchange.





(4)
            Based
                on the closing price per share of our common stock on the date of
                grant as
                reported by the American Stock
                Exchange.





(5)
            On
                February 1, 2007, we granted an option to purchase 425,000 shares
                of our
                common stock to Mr. Flicker in consideration of his service as our
                Chief
                Financial Officer, Executive Vice President and Secretary, and 212,500
                shares were vested on February 1, 2008 and the remainder of the option
                vests in two equal installments of 106,250 shares each on the second
                and
                third anniversaries of the date of grant. 425,000 shares issuable
                on
                exercise of the option granted to Mr. Flicker on February 1, 2007
                were
                subject to stockholder approval of an amendment to the Plan, which
                was
                subsequently approved as of February 12, 2008.




57




(6)
            In
                consideration of his service as our Chief Financial Officer, on February
                28, 2006, we granted an option to purchase 100,000 shares of our
                common
                stock to Mr. Bellone, and on December 7, 2006, we granted an option
                to
                purchase 100,000 shares of our common stock. These options vested
                on
                February 28, 2007 and December 7, 2007, respectively. 30,500 shares
                issuable on exercise of the option granted to Mr. Bellone on December
                7,
                2006 were subject to stockholder approval of an amendment to the
                Plan,
                which was subsequently approved as of February 12, 2008.





(7)
            The
                average closing price per share of our common stock on the five trading
                days before the date of grant as reported by the OTC Bulletin
                Board.





(8)
            In
                consideration of his service as our Senior Vice President, Operations,
                on
                September 7, 2006, we granted to Mr. Endres an option to purchase
                30,000
                shares of our common stock that vested on December 31, 2006. On December
                7, 2006, we granted Mr. Endres an option to purchase 100,000 shares
                of our
                common stock that vested on December 7, 2007. 30,500 shares issuable
                on
                exercise of the option granted to Mr. Endres on December 7, 2006
                were
                subject to stockholder approval of an amendment to the Plan, which
                was
                subsequently approved as of February 12, 2008.





(9)
            On
                June 19, 2007, we granted an option to purchase 50,000 shares of
                our
                common stock to Mr. Endres in consideration of his service as our
                Chief
                Operating Officer, and all shares were scheduled to vest on the first
                anniversary of the date of grant and were subject to stockholder
                approval
                of an amendment to the Plan, which was subsequently approved as of
                February 12, 2008. On March 12, 2008, Mr. Endres informed our board
                of
                directors of his decision not to renew his employment agreement.
                He
                resigned as our Chief Operating Officer and Executive Vice President
                effective April 12, 2008. Accordingly, these options will be forfeited
                when Mr. Endres’ employment with us
                ends.




58




**Compensation
      of Directors**





The
      following table sets forth a summary of the compensation we paid in 2007 to
      our
      directors. The table includes any person who served during 2007 as a director
      (other than named executive officers), even if he is no longer serving as a
      director. For information about the compensation we paid to Mr. Ames for serving
      as a director, see the notes to the Summary Compensation Table above. Mr.
      Bellone, who served as a director from October 5, 2006 until his resignation
      on
      January 16, 2008, did not receive any compensation related to his service as
      a
      director in 2007.





**Director
      Compensation for 2007**





**Name**
            
            **Fees Earned**
              **or Paid**
              **in Cash**
              **($)**
            
            **Option**
              **Awards (1)**
              **($)**
            
            **All Other**
              **Compensation**
              **($)**
            
            **Total**
              **($)**(a)
            
            (b)
            
            (c)
            
            (d)
            
            (e)William
                P. Behrens (2)
            
            
            20,000
            
            
            62,978
                (3
            )
            
            -
            
            
            82,978Richard
                D. Ditoro (4)
            
            
            20,000
            
            
            26,989
                (3
            )
            
            -
            
            
            46,989Edwin
                L. Klett (5)
            
            
            20,000
            
            
            107,400
                (3
            )
            
            -
            
            
            127,400Christopher
                d’Arnaud-Taylor (6)
            
            
            -
            
            
            -
            
            
            165,000
                (7
            )
            
            165,000Gil
                Boosidan (8)
            
            
            20,000
            
            
            372,119
                (3
            )
            
            -
            
            
            392,119Robert
                L. Franklin (9)
            
            
            20,000
            
            
            372,119
                (3
            )
            
            -
            
            
            392,119








(1)
            The
                amounts in column (c) reflect the dollar amount of awards under the
                Plan
                that we recognized for financial statement reporting purposes for
                the
                fiscal year ended December 31, 2007 in accordance with FAS 123(R).
                Assumptions used in the calculation of this amount are included in
                Note 12
                to our audited consolidated financial statements in this report.





(2)
            Mr.
                Behrens, who is currently serving as a director, was elected to the
                board
                on October 1, 2006.





(3)
            The
                following table below summarizes the outstanding stock options held
                on
                December 31, 2007 by any person who served during 2007 as a director
                (other than named executive officers), even if he is no longer serving
                as
                a director. The number of shares issuable upon exercise of the options
                granted in December 2006 and February 2007, to the extent that such
                amount
                exceeded the number then available under the Plan, was subject to
                approval
                by our stockholders of an amendment to the Plan to increase the number
                of
                shares available for award under the Plan to cover those excess options.
                On February 12, 2008, at the conclusion of our annual meeting of
                stockholders, our stockholders approved an amendment to the Plan
                to
                increase the number of shares of common stock available for issuance
                under
                the Plan from 4,000,000 to 6,500,000.The
                table below reflects the outstanding stock options held on December
                31,
                2007, giving effect to the stockholder approval on February 12, 2008
                of
                theincrease
                in the number of shares issuable under the Plan that covered those
                excess
                options.




59




**Name**
              
              **Grant
                  Date**
              
              **Number** **of**
                **Options Granted**
              
              **Number
                  of**
                **Securities**
                **Underlying**
                **Unexercised**
                **Options**
                **(#)**
                **Exercisable**
              
              **Number
                  of**
                **Securities**
                **Underlying**
                **Unexercised**
                **Options**
                **(#)**
                **Unexercisable**
              
              **Option**
                **Exercise**
                **Price**
                **($)
                  (a)**
              **Option**
                **Expiration**
                **Date**William
                  P. Behrens (b)
              
              
              Oct.
                  5, 2006
              
              
              215,000
              
              
              215,000
              
              
              -
              
              
              3.00
              
              
              Oct.
                  5, 2016Richard
                  D. Ditoro (c)
              
              
              July
                  28, 2005
                Sept.
                  7, 2006
                Oct.
                  5, 2006
                Dec.
                  7, 2006
                Feb.
                  1, 2007
              
              
              80,000
                55,000
                5,000
                125,000
                15,000
              
              
              80,000
                55,000
                5,000
                125,000
                7,500
              
              
              -
                -
                -
                7,500
              
              
              4.00
                3.62
                3.00
                2.44
                2.79
              (d)
              
              July
                  28, 2010
                Sept.
                  7, 2011
                Oct.
                  5, 2016
                Dec.
                  7, 2016
                Feb.
                  1, 2017Edwin
                  L. Klett (e)
              
              
              Dec.
                  7, 2006
                Dec.
                  7, 2006
                Feb.
                  1, 2007
              
              
              40,000
                175,000
                25,000
              
              
              40,000
                175,000
                12,500
              
              
              -
                -
                12,500
              
              
              2.44
                2.44
                2.79
              
              
              Dec.
                  7, 2016
                Dec.
                  7, 2016
                Feb.
                  1, 2017Christopher
                  d’Arnaud-
                Taylor
                  (f)
              
              
              Feb.
                  28, 2006
                June
                  12, 2006
                Dec.
                  7, 2006
              
              
              125,000
                225,000
                100,000
              
              
              125,000
                225,000
                100,000
              
              
              -
                -
                -
              
              
              5.56
                8.32
                2.44
              
              
              Aug.
                  22, 2009
                Aug.
                  22, 2009
                Dec.
                  7, 2016Gil
                  Boosidan (g)
              
              
              Feb.
                  1, 2007
              
              
              200,000
              
              
              100,000
              
              
              100,000
              
              
              2.79
              
              
              Feb.
                  1, 2017Robert
                  L. Franklin (h)
              
              
              Feb.
                  1, 2007
              
              
              200,000
              
              
              100,000
              
              
              100,000
              
              
              2.79
              
              
              Feb.
                  1, 2017






(a)
            Except
                as noted otherwise, the exercise price of each option in this column
                is
                equal to the closing price per share of our common stock on the date
                of
                grant as reported by the American Stock
                Exchange.





(b)
            We
                granted an option to purchase 215,000 shares of our common stock
                to Mr.
                Behrens in consideration of his service as a director, and 175,000
                of the
                shares vested on the date of grant and the remainder of the option
                vested
                in two installments of 20,000 shares each on the six-month and one-year
                anniversaries of the date of grant. The amount in the table includes
                $62,978 in compensation expense we incurred in 2007 for Mr. Behrens
                in
                connection with this grant.





(c)
            We
                granted options to purchase shares of our common stock to Mr. Ditoro
                in
                consideration of his service as a director. The amount in the table
                includes $26,989 in compensation expense we incurred in 2007 for
                Mr.
                Ditoro in connection with the February 1, 2007
                grant.





(d)
            As
                reported by the OTC Bulletin Board, the high and closing prices per
                share
                of our common stock on the date of grant were $4.20 and the low price
                was
                $3.51.


(e)
            We
                granted options to purchase shares of our common stock to Mr. Klett
                in
                consideration of his service as a director. The amount in the table
                includes (x) $62,419 in compensation expense we incurred in 2007
                for Mr.
                Klett in connection with the Dec. 7, 2006 grant and (y) $44,981 in
                compensation expense we incurred in 2007 for Mr. Klett in connection
                with
                the February 1, 2007 grant.





(f)
            On
                February 28, 2006, we granted an option to purchase 250,000 shares
                of our
                common stock to Mr. d’Arnaud-Taylor in consideration of his service as our
                President and Chief Executive Officer, and all shares (as adjusted
                as
                described below) vested on the first anniversary of the grant date.
                On
                June 12, 2006, we granted an option to purchase 450,000 shares of
                our
                common stock to Mr. d’Arnaud-Taylor in consideration of his service as our
                President and Chief Executive Officer, with all shares to vest upon
                Mr.
                d’Arnaud-Taylor entering a new employment agreement. On August 25,
                2006,
                we entered into a termination agreement with Mr. d’Arnaud-Taylor under
                which we agreed with Mr. d’Arnaud-




60




Taylor that his employment by, and
              his
              position as an officer of, the company was terminated effective as
              of
              August 22, 2006. The agreement provided that Mr. d’Arnaud-Taylor would
              continue to serve as a director of the company for the remainder of
              his
              current term. The agreement further provided, with respect to the
              foregoing options, and subject to Mr. d'Arnaud-Taylor’s compliance with
              the terms of the agreement, that (a) the exercise period was extended
              until August 22, 2009 with respect to one half of each option; and
              (b) the
              remaining one-half of each option was terminated. On December 7, 2006,
              we
              granted an option to purchase 100,000 shares of our common stock to
              Mr.
              d’Arnaud-Taylor in consideration of his service as a director, and all
              shares vested on the date of grant. The option expires on the tenth
              anniversary of the date of grant.  (g)
            We
                granted options to purchase shares of our common stock to Mr. Boosidan
                in
                consideration of his service as a director. The amount in the table
                includes $372,119 in compensation expense we incurred in 2007 for
                Mr.
                Boosidan in connection with this grant.





(h)
            We
                granted options to purchase shares of our common stock to Mr. Franklin
                in
                consideration of his service as a director. The amount in the table
                includes $372,119 in compensation expense we incurred in 2007 for
                Mr.
                Franklin in connection with this grant.





(4)
            Mr.
                Ditoro, who is currently serving as a director, served as a director
                from
                July 28, 2005 through August 10, 2006 and again became a director
                on
                September 7, 2006.





(5)
            Mr.
                Klett, who is currently serving as a director, was elected a director
                on
                December 7, 2006.




(6)
            Mr.
                d’Arnaud-Taylor, served as a director from February 2, 2005 until his
                term
                expired on February 12, 2008.





(7)
            On
                December 1, 2006, we entered into a consulting agreement with Mr.
                d’Arnaud-Taylor under which Mr. d’Arnaud-Taylor agreed to provide
                strategic advice to our Chief Executive Officer. This amount represents
                compensation expense we incurred in 2007 for Mr. d’Arnaud-Taylor under the
                December 1, 2006 consulting agreement, which expired on November
                25, 2007.
                For more information about our payments to Mr. d’Arnaud-Taylor, please see
                Item 12 below, “Certain Relationships and Related Transactions, and
                Director Independence - Termination and Consulting Agreements with
                Christopher d’Arnaud-Taylor.” Mr. d’Arnaud-Taylor did not receive any
                compensation related to his service as a director in
                2007.





(8)
            Mr.
                Boosidan, who is currently serving as a director, was elected as
                a
                director on January 29, 2007.





(9)
            Mr.
                Franklin, who is currently serving as a director, was elected as
                a
                director on January 29, 2007.





We
      compensate non-employee members of the board through a mixture of cash and
      equity-based compensation. Commencing October 1, 2006, we adopted a policy
      of
      paying each independent, non-employee director a quarterly retainer of $5,000
      for his services as a director. On March 20, 2008, we revised this policy to
      increase this quarterly retainer to $7,500.





On
      the
      date each independent, non-employee director is elected to the board of
      directors for his or her first time, our current policy is to grant to the
      director an option to purchase shares of our common stock at a price equal
      to
      the fair market value of our common stock on the date of grant. Directors also
      receive stock option grants for serving on the audit, governance, compensation
      and science committees. The number of shares underlying each annual option
      grant
      is: 25,000 shares for chairing the compensation, governance or science
      committees; 50,000 shares for chairing the audit committee; 15,000 shares for
      being a member of the governance, compensation or science committees; and 25,000
      shares for being a member of the audit committee. Annual grants to reelected
      directors are at the discretion of the board.





On
      March
      20, 2008, as detailed in the following table and in accordance with the policy
      described in the previous paragraph, we granted to our non-employee directors
      options to purchase a total of 275,000 shares at a purchase price per share
      equal to the closing price of the common stock on the American Stock Exchange
      on
      the




61




date
      of
      grant (which was $0.42 per share). The options granted to each director vest
      one
      half six months after the date of grant, and the remaining one half vests on
      the
      first anniversary of the date of grant. The options have a term of 10 years.





**Name**
            
            **Position**
            
            **Number
                of**
              **Options**Bill
                Behrens
            
            Chairman
                of the Board
            
            25,000Member
                of Compensation Committee
            
            15,000Member
                of Governance Committee
            
            15,000Gil
                Boosidan
            
            Chair
                of Audit Committee
            
            50,000Richard
                Ditoro
            
            Chair
                of Compensation Committee
            
            25,000Member
                of Governance Committee
            
            15,000Member
                of Science & Technology Committee
            
            15,000Robert
                Franklin
            
            Chair
                of Science & Technology Committee
            
            25,000Member
                of Audit Committee
            
            25,000Edwin
                Klett
            
            Chair
                of Governance Committee
            
            25,000Member
                of Compensation Committee
            
            15,000Member
                of Audit Committee
            
            25,000TOTAL
            
            
            
            275,000





Directors
      who are also our employees do not receive cash or equity compensation for
      service on the board in addition to compensation payable for their service
      as
      our employees.





Directors
      who are also our employees do not receive cash or equity compensation for
      service on the board in addition to compensation payable for their service
      as
      our employees.





**Change-in-Control
      Arrangements**





The
      Plan
      provides that if and only to the extent provided in the award agreement, or
      to
      the extent otherwise determined by the compensation committee, subject to
      certain limitations, on the occurrence of a “Change-in-Control”, (a) any option
      or stock appreciation right that was not previously vested and exercisable
      as of
      the time of the Change-in-Control, shall become immediately vested and
      exercisable, (b) any restrictions, deferral of settlement, and forfeiture
      conditions applicable to a restricted stock award, deferred stock award or
      an
      other stock-based award subject only to future service requirements granted
      under the Plan shall lapse and such awards shall be deemed fully vested as
      of
      the time of the Change-in-Control, and (c) with respect to any outstanding
      award
      subject to achievement of performance goals and conditions under the Plan,
      the
      compensation committee may, in its discretion, deem such performance goals
      and
      conditions as having been met as of the date of the
      Change-in-Control.




For
      this
      purpose, a “Change-in-Control” includes:





·
            consummation
                of a reorganization, merger, statutory share exchange or consolidation
                or
                similar corporate transaction involving Xethanol or any of its
                subsidiaries, a sale or other disposition of all or substantially
                all of
                the assets of Xethanol, or the acquisition of assets or stock of
                another
                entity by Xethanol or any of its subsidiaries (each a “Business
                Combination”), in each case, unless, following such Business Combination,
                (A) all or substantially all of the individuals and entities who
                were the
                beneficial owners, respectively, of the outstanding voting securities
                of
                Xethanol immediately prior to such Business Combination beneficially
                own,
                directly or indirectly, more than 50% of the then outstanding shares
                of
                common stock and the combined voting power of the then outstanding
                voting
                securities entitled to vote generally in the election of directors,
                as the
                case may be, of the corporation resulting from such Business Combination
                (including, without limitation, a corporation which as a result of
                such
                transaction owns Xethanol or all or substantially all of our assets
                either
                directly or through one or more subsidiaries) in substantially the
                same
                proportions as their ownership, immediately prior to such Business
                Combination, of the voting securities of Xethanol, (B) no person






62






(excluding any employee benefit plan
              (or
              related trust) of Xethanol or such corporation resulting from such
              Business Combination or any person that as of the effective date of
              the
              Plan owns beneficial ownership of a controlling interest) beneficially
              owns, directly or indirectly, fifty percent (50%) or more of the then
              outstanding shares of common stock of the corporation resulting from
              such
              Business Combination or the combined voting power of the then outstanding
              voting securities of such corporation except to the extent that such
              ownership existed prior to the Business Combination and (C) at least
              a
              majority of the members of the Board of Directors of the corporation
              resulting from such Business Combination were members of our incumbent
              board at the time of the execution of the initial agreement, or of
              the
              action of the Board, providing for such Business
              Combination; ·
            during
                any consecutive two-year period, individuals who at the beginning
                of that
                two-year period constituted the Board of Directors (together with
                any new
                directors whose election to the Board of Directors, or whose nomination
                for election by the stockholders of Xethanol, was approved by a vote
                of a
                majority of the directors then still in office who were either directors
                at the beginning of such period or whose elections or nominations
                for
                election were previously so approved) cease for any reason to constitute
                a
                majority of the Board of Directors then in office;
                or


·
            approval
                by our stockholders of a complete liquidation or dissolution of
                Xethanol.


63




**ITEM
              12.**
            **SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                STOCKHOLDER MATTERS.**





The
      following table sets forth information regarding the number of shares of our
      common stock beneficially owned as of March 1, 2008:





·
            each
                person who is known by us to beneficially own 5% or more of our common
                stock;


·
            each
                of our directors and named executive officers (other than Mr. Bellone,
                who
                is no longer an officer or a director, and Mr. d’Arnaud-Taylor, who is no
                longer a director); and


·
            all
                of our directors and executive officers, as a
                group.





Beneficial
      ownership is determined in accordance with the rules of the SEC and generally
      includes voting or investment power with respect to securities. Shares of our
      common stock that may be acquired on exercise of stock options or warrants
      that
      are currently exercisable or that become exercisable within 60 days after the
      date indicated in the table are deemed beneficially owned by the option holders.
      Subject to any applicable community property laws, the persons or entities
      named
      in the table above have sole voting and investment power with respect to all
      shares indicated as beneficially owned by them.





Except
      as
      otherwise provided below, the address of each of the persons listed below is
      c/o
      Xethanol Corporation, 3348 Peachtree NE, Suite 250 Tower Place 200, Atlanta,
      Georgia 30326.





**Name
                and Address of Beneficial Owner**
            
            **Number
                of**
              **Shares**
              **Beneficially**
              **Owned
                (1)**
            
            **Percentage**
              **of
                Shares**
              **Beneficially**
              **Owned
                (2)**David
                R. Ames
            
            
            1,625,010
            (3)
            
            5.4
            %Gary
                Flicker
            
            
            212,500
            (4)
            
            *Thomas
                J. Endres
            
            
            133,300
            (5)
            
            *William
                P. Behrens
            
            
            328,591
            (6)
            
            1.1
            %Gil
                Boosidan
            
            
            228,891
            (7)
            
            *Richard
                D. Ditoro
            
            
            288,828
            (8)
            
            1.0
            %Robert
                L. Franklin
            
            
            200,000
            (9)
            
            *Edwin
                L. Klett
            
            
            240,0000
            (10)
            
            *Directors
                and executive officers as a group
            
            
            3,257,420
            (11)
            
            10.3
            %




*
      Less
      than 1% of outstanding shares.





(1)
            Unless
                otherwise indicated, includes shares owned by a spouse, minor children and
                relatives sharing the same home, as well as entities owned or controlled
                by the named person. Also includes shares if the named person has
                the
                right to acquire those shares within 60 days after March 1, 2008
                by the
                exercise of any warrant, stock option or other right. Unless otherwise
                noted, shares are owned of record and beneficially by the named
                person.





(2)
            Based
                upon 28,609,103 shares of common stock outstanding on March 1,
                2008.





(3)
            Includes
                1,525,000 shares of common stock issuable to Mr. Ames on the exercise
                of
                stock options.





(4)
            These
                shares of common stock are issuable to Mr. Flicker on the exercise
                of
                stock options.





(5)
            These
                shares of common stock are issuable to Mr. Endres on the exercise
                of stock
                options.





(6)
            Includes
                215,000 shares of common stock issuable to Mr. Behrens on the exercise
                of
                stock options, 41,668 shares of common stock issuable on exercise
                of
                warrants held by Mr. Behrens and 50,000 shares of common stock issuable
                on
                exercise of warrants held by Northeast Securities, Inc. Mr. Behrens
                is
                Vice Chairman of




64




Northeast Securities and disclaims beneficial ownership
              of the portion of the shares held by Northeast Securities in which
              he has
              no pecuniary interest.  (7)
            Includes
                200,000 shares of common stock issuable upon the exercise of stock
                options, 22,223 shares of common stock and 6,668 shares of common
                stock
                issuable on exercise of warrants held by GBAF Capital, LLC, an entity
                controlled by Mr. Boosidan. Mr. Boosidan disclaims beneficial ownership
                of
                the portion of the shares held by GBAF Capital, LLC in which he has
                no
                pecuniary interest.





(8)
            Includes
                280,000 shares of common stock issuable to Mr. Ditoro on the exercise
                of
                stock options.





(9)
            These
                shares of common stock are issuable to Mr. Franklin on the exercise
                of
                stock options.





(10)
            These
                shares of common stock are issuable to Mr. Klett on the exercise
                of stock
                options.





(11)
            Includes
                3,100,836 shares of common stock issuable on the exercise of warrants
                and
                stock options.


65
  **Equity
      Compensation Plan Information**





At
      the
      time of the reverse merger described in Item 1, neither we nor Old Xethanol
      had
      any outstanding stock options. On February 2, 2005, following the completion
      of
      the reverse merger, our board of directors adopted the Xethanol Corporation
      2005
      Incentive Compensation Plan (the “Plan”), which our stockholders subsequently
      approved. The Plan is the only equity compensation plan approved by our
      stockholders.





The
      terms
      of the Plan provide for grants of stock options, stock appreciation rights
      or
      SARs, restricted stock, deferred stock, other stock-related awards and
      performance awards that may be settled in cash, stock or other property. The
      persons eligible to receive awards under the Plan are the officers, directors,
      employees and independent contractors of our company and our subsidiaries.
      Until
      August 10, 2006, under the Plan, the total number of shares of our common stock
      that were subject to the granting of awards under the Plan was equal to
      2,000,000 shares, plus the number of shares with respect to which awards
      previously granted thereunder are forfeited, expire, terminate without being
      exercised or are settled with property other than shares, and the number of
      shares that are surrendered in payment of any awards or any tax withholding
      requirements. On August 10, 2006, at the annual meeting of stockholders, the
      stockholders voted to amend the Plan (a) to increase the number of shares of
      common stock available for awards under the Plan from 2,000,000 to 4,000,000
      and
      (b) to eliminate a provision limiting to 250,000 the number of shares with
      respect to which each type of award may be granted to any participant during
      any
      fiscal year.





The
      total
      number of shares of common stock issuable on exercise of options granted on
      December 7, 2006, February 1, 2007 and June 19, 2007 exceeded the number of
      shares then available under the Plan by 1,652,070 shares (the “excess options”).
      The excess options were granted expressly subject to subsequent stockholder
      approval of an increase in the 4,000,000 limit in the Plan to cover those
      options. On February 12, 2008, at the conclusion of our annual meeting of
      stockholders, our stockholders approved an amendment to the Plan to increase
      the
      number of shares of common stock available for issuance under the plan from
      4,000,000 to 6,500,000, which covered all of the options granted subject to
      stockholder approval. The
      following table provides information regarding the status of our existing equity
      compensation plans at December 31, 2007, giving effect to the stockholder
      approval on February 12, 2008 of theincrease
      in the number of shares issuable under the Plan that covered those excess
      options. As described above,on
      March
      20, 2008, we granted to our non-employee directors options to purchase a total
      of 275,000 shares.





**Equity
      Compensation Plan Information**





**Plan
                category**
            
            **Number of**
              **securities**
              **to
                be issued**
              **upon
                exercise of**
              **outstanding**
              **options,
                warrants**
              **and
                rights**
            
            **Weighted-average**
              **exercise
                price of**
              **outstanding**
              **options,
                warrants**
              **and
                rights**
            
            **Number
                of securities**
              **remaining
                available for future**
              **issuances
                under equity**
              **compensation
                plans (excluding**
              **securities
                reflected in column (a)**(a)
            
            (b)
            
            (c)Equity
                compensation
              plans
                approved by
              security
                holders
            
            
            5,245,000
            
            $
            3.36
            
            
            937,930Equity
                compensation
              plans
                not approved
              by
                security holders (1)
            
            
            543,090
            
            $
            6.27
            
            
            0Total
            
            
            5,788,090
            
            $
            3.63
            
            
            937,930





(1)
              We
                  have issued warrants to purchase shares of our common stock in
                  exchange
                  for consideration in the form of goods or services as described
                  in
                  Statement of Financial Accounting Standards No. 123, Accounting
                  for
                  Stock-Based Compensation. These warrants are described
                  below:




66




(a)
            On
                December 20, 2006, we agreed with Mr. Jeffrey S. Langberg, a former
                director, to cancel the warrants we granted to him on June 12, 2006,
                and
                to issue to him a fully vested five-year warrant to purchase 125,000
                shares of our common stock at an exercise price of $8.32 per share.
                For
                more information about those warrants, please see Item 12, Certain
                Relationships and Related Transactions - Consulting Agreements with
                Jeffrey S. Langberg.





(b)
            On
                June 29, 2006, we issued to an entity a fully vested warrant to purchase
                25,000 shares of our common stock at an exercise price of $5.25 per
                share.
                The warrant expires on November 6, 2010. We issued this warrant for
                investor relations services.





(c)
            On
                April 13, 2006, we issued to an entity a fully vested three-year
                warrant
                to purchase 17,778 shares of our common stock at an exercise price
                of
                $4.50 per share. We issued this warrant for private placement advisory
                services.





(d)
            On
                March 31, 2006, we granted to three members of our advisory board
                warrants
                to purchase a total of 95,000 shares of our common stock. The warrants
                have a three-year term, are fully vested and have a weighted average
                exercise price of $4.71 per share. On February 1, 2005, we granted
                to two
                members of our advisory board warrants to purchase an aggregate of
                35,312
                shares of our common stock. The warrants have a three-year term,
                are fully
                vested and have an average exercise price of $3.75 per share.





(e)
            On
                December 1, 2005, we issued to an entity a fully vested three-year
                warrant
                to purchase 25,000 shares of our common stock at an exercise price
                of
                $4.00 per share. We issued this warrant for private placement advisory
                services.





(f)
            On
                September 1, 2005, we issued to a member of our advisory board a
                warrant
                to purchase 20,000 shares of our common stock at an exercise price
                of
                $5.25 per share. We issued this warrant for business development
                services.





(g)
            As
                more fully described in Note 17 to our audited consolidated financial
                statements in this report, we issued to Coastal Energy Development,
                Inc.
                (“CED”) a warrant to purchase 200,000 shares of our common stock at an
                exercise price of $6.85 per share to replace the warrant previously
                issued
                on May 30, 2006, which was first exercisable on May 30, 2007 and
                was
                exercisable until May 30, 2010. We issued this warrant as part of
                a
                settlement agreement with CED. The new warrant is exercisable through
                May
                30, 2009.


67


**ITEM
              13.**
            **CERTAIN
                RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
                INDEPENDENCE.**





**Acquisition
      of Permeate Refining**





In
      September 2001, Old Xethanol issued 1,000,000 shares of common stock to Robert
      and Carol Lehman, of Permeate Refining, Inc. as a “good faith” payment, under a
      non-binding letter of intent, in contemplation of the acquisition of Permeate.
      In July 2003, Old Xethanol completed the transaction and acquired Permeate.
      Old
      Xethanol, through its wholly owned subsidiary, Xethanol One, LLC, also acquired
      the real estate and some of the production facilities associated with Permeate’s
      operations from the Lehmans for a total price of $1,250,000, payable as follows:
      (a) a down payment of $125,000, which we made on July 9, 2003, and (b) a
      promissory note for the balance of $1,125,000, which bore interest at the simple
      interest rate of 9% per year with monthly payments due on the first day of
      each
      month commencing August 1, 2003 until June 1, 2006, the maturity date. Our
      obligations under the promissory note were secured by a mortgage on the Permeate
      real estate granted to Master’s Trust (an entity formed by the
      Lehmans).





Under
      an
      October 18, 2005 memorandum of agreement among the Lehmans, Master’s Trust and
      us, we entered into a mutual general release on January 23, 2006. Under release,
      we issued to the Lehmans a new $243,395 promissory note in exchange for the
      $1,125,000 promissory note and we issued 135,000 shares of our common stock
      to
      Master’s Trust in exchange for the full release and satisfaction of the mortgage
      on the Permeate real estate.





We
      repaid
      the new note in full on August 1, 2006, its maturity date. Interest was due
      monthly on the outstanding principal amount of the new note at a rate equal
      to
      0.5% above the prime rate. We made monthly payments equal to $3,128 allocated
      between interest and principal based on the then-current prime
      rate.





**Termination
      and Consulting Agreements with Christopher d’Arnaud-Taylor**





*Termination
      Agreement* .
      On
      August 25, 2006, we entered into a termination agreement with Christopher
      d’Arnaud-Taylor, our former director, Chairman, President and Chief Executive
      Officer, under which his employment by us and his position as an officer of
      our
      company was terminated effective as of August 22, 2006 (the “Termination Date”).
      The agreement provided that Mr. d’Arnaud-Taylor would continue to serve as a
      member of our board of directors for the remainder of his current term. Under
      the termination agreement, we continued to pay Mr. d’Arnaud-Taylor his salary
      and maintain his employment benefits in effect immediately before the
      Termination Date through September 30, 2006, and we paid Mr. d’Arnaud-Taylor
      $100,000 in severance on the three-month anniversary of the Termination Date.
      The agreement provides that, subject to Mr. d’Arnaud-Taylor’s compliance with
      the terms of the agreement, the exercise periods of the options to purchase
      250,000 shares of common stock at an exercise price of $5.56 per share and
      450,000 shares of common stock at an exercise price of $8.32 per share that
      were
      granted to Mr. d’Arnaud-Taylor on February 28, 2006 and June 12, 2006,
      respectively, are extended until the third anniversary of the Termination Date
      with respect to one half of each option. The options are otherwise terminated.
      The agreement also provides that we will reimburse Mr. d’Arnaud-Taylor for any
      reasonable and appropriately documented business expenses he may have incurred
      before the Termination Date in the performance of his duties as an employee
      and
      that Mr. d’Arnaud-Taylor will be entitled to continue his coverage under our
      group medical and dental plans to the extent provided in and subject to the
      terms and conditions of our standard policy.





Under
      the
      termination agreement, Mr. d’Arnaud-Taylor agreed to provide the advisory and
      consulting services as we may reasonably request during the three months after
      the Termination Date to permit the order transfer of his duties to other
      personnel and not to solicit our employees during the period ending on the
      first
      anniversary of the Termination Date. The agreement also provides for mutual
      releases from all claims arising before the date of the agreement, other than
      claims based on the released party’s willful acts, gross negligence or
      dishonesty and, with respect to Mr. d’Arnaud-Taylor’s release of us, claims
      vested before the date of the agreement for benefits under our employee benefit
      plans and claims for indemnification for acts as an officer of our
      company.





*Initial
      Consulting Agreement* .
      On
      August 25, 2006, we also entered into a consulting agreement with Mr.
      d’Arnaud-Taylor under which Mr. d’Arnaud-Taylor agreed to provide the
      consulting and advisory services as we may reasonably request from time to
      time.
      During the term of the agreement, we agreed to pay Mr. d’Arnaud-Taylor $15,000
      per month (payable monthly in arrears) and reimburse him for any reasonable
      and
      appropriately




68




documented
      business expenses he may incur in the performance of his duties under the
      agreement. The agreement provided that Mr. d’Arnaud-Taylor was not required
      to dedicate more than eight days in any calendar month to the performance of
      services under the agreement and that if he did provide services for more than
      eight days in any calendar month, we would pay him an additional $2,000 for
      each
      additional day or part of a day.





The
      consulting agreement had a term of one year, subject to earlier termination
      by
      us if Mr. d’Arnaud-Taylor failed to perform his duties under the agreement. Upon
      the termination of the agreement, we would have had no obligation to Mr.
      d’Arnaud-Taylor other than payment obligations accrued before the termination
      date, which would have been paid within 15 days of the termination date. The
      agreement included covenants by Mr. d’Arnaud-Taylor regarding
      confidentiality, competition and solicitation of our customers, suppliers and
      employees. This agreement was terminated effective December 1,
      2006.





*New
      Consulting Agreement* .
      On
      December 1, 2006, we entered into a consulting agreement with Mr.
      d’Arnaud-Taylor under which Mr. d’Arnaud-Taylor agreed to provide strategic
      advice to our Chief Executive Officer. During the term of the agreement, we
      paid
      Mr. d’Arnaud-Taylor $15,000 per month (payable monthly in advance) and
      reimbursed him for any reasonable and appropriately documented business expenses
      he incurred in the performance of his duties under the agreement. The term
      of
      the agreement expired on November 25, 2007.





During
      2006, we paid Mr. d’Arnaud-Taylor $315,000 and recognized $406,000 in cash
      compensation expense. We also recognized expense of $1,344,000 related to
      options granted to Mr. d’Arnaud-Taylor as a result of his employment and
      $170,000 related to options granted to him as a result of his membership on
      our
      board of directors. During 2007, we paid Mr. d’Arnaud-Taylor $256,000 and
      recognized $165,000 in cash compensation expense.





**Consulting
      Agreements with Jeffrey S. Langberg**





In
      February 2005, we entered into a consulting services agreement with Jeffrey
      S.
      Langberg, then one of our directors, under which Mr. Langberg agreed to provide
      general business advisory services. Under this agreement, we agreed to pay
      Mr.
      Langberg a monthly consulting fee of $15,000 per month and a sign-on bonus
      of
      $225,000. Under the consulting agreement, Mr. Langberg was also eligible to
      receive performances bonuses at the discretion of the board of directors as
      well
      as equity-based awards under the Plan. Mr. Langberg agreed to waive any
      compensation otherwise payable to him while he was a director of our company.
      During 2005, Mr. Langberg earned $180,000 in consulting fees and $275,000 in
      bonuses. Including $194,147 he earned in 2004 that we paid him in 2005, we
      paid
      Mr. Langberg a total of $649,147 in 2005, and we provided him with health
      insurance coverage at a cost of $14,014 to us. (We also paid rent paid to an
      entity controlled by Mr. Langberg as described below under “Office Space.”) Mr.
      Langberg did not receive any compensation otherwise payable to him as a director
      in 2005.





On
      June
      12, 2006, Mr. Langberg resigned from our board of directors. On that date,
      we
      issued to Mr. Langberg warrants to purchases 250,000 shares of common stock
      at
      an exercise price of $8.32 per share that were originally scheduled to vest
      upon
      the date on which NewEnglandXethanol, LLC has approved and commenced its initial
      project. For these purposes, the project was to be deemed to have been approved
      and commenced when (a) the project has been approved, (b) financing for
      construction of the project has been obtained and closed and (c) our chief
      executive officer has notified our board of directors or our compensation
      committee that conditions (a) and (b) have been met. Due to the contingent
      nature of these warrants, we did not reflect an expense for them in our
      financial statements. In September 2006, we entered into an agreement with
      Mr.
      Langberg that terminated our consulting agreement with him. Mr. Langberg
      continued to provide consulting services directly to our board of directors
      under the terms of the terminated agreement until December 20, 2006, when we
      entered into another agreement with Mr. Langberg that terminated the September
      2006 agreement. In the December 20, 2006 agreement with Mr. Langberg, we agreed
      as follows:





·
            to
                pay Mr. Langberg $15,000 on December 20, 2006 and $100,000 on January
                2,
                2007;


·
            to
                pay him six monthly payments of $15,000 each, beginning on December
                25,
                2006 and continuing on the 25thday of each month thereafter through May 25, 2007 (in addition to
                payments
                in that amount previously made on September 25, 2006 and October
                25,
                2006), although we are longer using Mr. Langberg’s services as a
                consultant;


·
            to
                cancel the warrants we granted to him on June 12, 2006, and to issue
                to
                him a fully vested five-year warrant to purchase 125,000 shares of
                our
                common stock at an exercise price of $8.32;






69




·
            to
                continue paying or reimbursing him for health insurance through May
                25,
                2007; and


·
            to
                amend the sublease arrangement with a company controlled by Mr. Langberg
                to reflect the terms described in “Office Space”
                below.





During
      2006, we paid Mr. Langberg a $400,000 performance bonus, consulting fees of
      $139,353 (including $4,353 in consulting fees he earned in 2005) and termination
      fees of $45,000. We also paid $27,496 in health insurance and benefits on his
      behalf. In connection with the warrant we agreed to issue to Mr. Langberg on
      December 20, 2006, we recognized a $60,439 compensation expense for financial
      statement reporting purposes for the fiscal year ended December 31, 2006 in
      accordance with FAS 123(R). (On an accrual basis, our audited financial
      statements reflect a $400,000 performance bonus, $135,000 in consulting fees,
      $235,000 in termination fees, a $60,439 compensation expense for the warrant,
      and $27,496 in health insurance and benefits.) Mr. Langberg received no
      compensation as a member of the board of directors in 2006. (We also paid rent
      paid to an entity controlled by Mr. Langberg as described below under “Office
      Space.”)





**Office
      Space**





In
      October 2004, Old Xethanol began sharing office space in New York City with
      other affiliated companies under a sublease with Xethanol Management Services,
      LLC, a single member limited liability company controlled by Jeffrey S.
      Langberg. Under this arrangement as amended pursuant to the December 20, 2006
      agreement with Mr. Langberg described above, we are currently paying
      approximately $17,000 per month, plus reimbursements of other costs, in sublease
      payments on a month-to-month basis. Total payments under the sublease were
      $216,964 for the year ended December 31, 2007 and $132,043 for the year ended
      December 31, 2006.





**Agreements
      with Northeast Securities, Inc.**





William
      P. Behrens, a director, is the Vice Chairman of Northeast Securities, Inc.,
      a
      multi-line financial services firm serving both institutional and individual
      clients. Under a placement agent agreement dated as of February 22, 2006 between
      Northeast and us, Northeast acted as our placement agent in connection with
      the
      private offering of our common stock and warrants to purchase common stock
      consummated on April 13, 2006. In consideration of Northeast’s services, on
      April 13, 2006 we paid Northeast $1,928,397 in cash and issued to Northeast
      and
      its designees warrants to purchase 606,938 shares of our common stock at an
      exercise price $4.50 per share, exercisable at any time until April 12, 2009.
      We
      issued warrants to purchase 35,000 shares of common stock to Mr. Behrens as
      a
      designee of Northeast. The warrants may be exercised on a “cashless” basis at
      any time and are otherwise exercisable on the same terms and conditions as,
      and
      are entitled to registration rights on the same terms as, the warrants issued
      to
      the investors in the April 2006 private placement. (Mr. Behrens also acquired
      in
      the private offering 22,223 shares of common stock, 4,445 Series A warrants
      and
      2,223 Series B warrants on the same terms as the other investors in the private
      offering.)





On
      October 1, 2006, we entered into an advisory agreement with Northeast under
      which Northeast agreed, on a non-exclusive basis, to assist us in various
      corporate matters including advice relating to general capital raising, mergers
      and acquisition matters, recommendations relating to business operations and
      strategic planning. In consideration of these services, we agreed to pay
      Northeast an advisory fee of $10,000 per month during the term of the agreement
      and to reimburse Northeast for all necessary and reasonable out-of-pocket costs
      and expenses it incurred in the performance of its obligations under the
      agreement. The scheduled term of the agreement was one year, subject to earlier
      termination by us in the event of a material breach by Northeast of any of
      its
      obligations under the agreement. The agreement provided that if, within twelve
      months after the termination of the agreement, we either (a) consummate a
      financing transaction with any investor that Northeast introduced to us before
      the termination or (b) enter into a definitive agreement to consummate a
      financing transaction with any such investor and the financing transaction
      is
      consummated within six months thereafter, then we are obligated to pay Northeast
      a cash fee in line with industry standard rates (the “tail provision”). In the
      agreement, we also agreed to indemnify Northeast against any losses, claims,
      damages and liabilities it may incur as a result of its engagement as an advisor
      under the agreement, other than losses, claims, damages and liabilities
      resulting solely from Northeast’s gross negligence or willful misconduct. In May
      2007, we informally amended our agreement with Northeast to eliminate the
      advisory fee of $10,000 per month, although Northeast continued to perform
      advisory services for us. On July 25, 2007, we formally agreed with Northeast
      to
      terminate the agreement, including the tail provision.




70




**Determination
      of Independent Directors**





Our
      board
      of directors has determined that each of Mr. Behrens, Mr. Boosidan, Mr. Ditoro,
      Mr. Franklin and Mr. Klett is an “independent” director within the meaning of
      Rule 10A-3(b)(1)(ii) under the Exchange Act and Section 121A of the AMEX Company
      Guide. In evaluating Mr. Behrens’ independence, our board considered that Mr.
      Behrens is the Vice Chairman of Northeast Securities, Inc., the placement agent
      for our April 2006 private placement. There were no transactions, relationships,
      or arrangements not disclosed in this Item 13 pursuant to Item 404(a) of
      Regulation S-K that our board considered in making the determinations of
      independence described in this paragraph.


71
  **ITEM
      14.** **Principal
      Accounting Fees and Services.**





**Independent
      Registered Public Accounting Firm’s Fees**





The
      following table shows the fees accrued for audit and other services provided
      by
      Imowitz Koenig & Co., LLP, our independent registered public accounting
      firm, for the years ended December 31, 2007 and 2006.





**Year**
            
            **Audit
                Fees (1)**
            
            **Audit-Related****Fees
                (2)**
            
            **Tax
                Fees (3)**
            
            **All Other Fees**
            
            **Total
                Fees**2007
            
            $
            225,000
            
            $
            89,057
            
            $
            92,394
            
            
            -
            
            $
            406,4512006
            
            $
            338,246
            
            $
            81,690
            
            $
            64,175
            
            
            -
            
            $
            484,111




(1)
            “Audit
                Fees” consist of fees for professional services provided in connection
                with the audit of our financial statements and review of our quarterly
                financial statements and audit services provided in connection with
                other
                statutory or regulatory filings. The amount shown for 2007 is an
                estimate
                and is subject to adjustment.





(2)
            “Audit
                Related Fees” consist of fees billed for assurance and related services
                that are reasonably related to the performance of the audit or review
                of
                our financial statements and are not reported under “Audit Fees.” During
                2007 and 2006, these fees primarily related to accounting research
                in
                connection with our registration statements on Form SB-2 and our
                current
                reports on Form 8-K that we filed with the SEC.





(3)
            “Tax
                Fees” consist of fees associated with tax compliance, including tax return
                preparation.





**Pre-Approval
      Policies and Procedures**





Applicable
      SEC rules require the audit committee of our board of directors to pre-approve
      audit and non-audit services provided by Imowitz Koenig, our independent
      registered public accounting firm. On November 28, 2005, our audit committee
      began pre-approving all services by Imowitz Koenig and has pre-approved all
      new
      services since that time. The audit committee does not delegate its
      responsibilities under the Exchange Act to our management. The audit committee
      has determined that the rendering of the services other than audit services
      by
      Imowitz Koenig is compatible with maintaining Imowitz Koenig’s independence.


72




**PART
      IV**





**ITEM
              15.**
            **EXHIBITS,
                FINANCIAL STATEMENT
                SCHEDULES.**





**Exhibit
                No.**
            
            **Description
                of Exhibit**3.1
            
            Certificate
                of Incorporation of Xethanol Corporation. [Incorporated by reference
                to
                Exhibit 2 in our Definitive Information Statement on Schedule 14C
                filed
                with the SEC on March 9, 2005.]3.2
            
            By-Laws
                of Xethanol Corporation. [Incorporated by reference to Exhibit 3
                in our
                Definitive Information Statement on Schedule 14C filed with the SEC
                on
                March 9, 2005.]3.3
            
            Amended
                and Restated Bylaws of Xethanol Corporation. [Incorporated by reference
                to
                Exhibit 3.1 in our current report on Form 8-K dated November 12,
                2007.]4.1
            
            Form
                of Senior Secured Royalty Income Notes issued by XethanolBioFuels,
                LLC.
                [Incorporated by reference to Exhibit 4.1 in our current report on
                Form
                8-K dated February 2, 2005.]4.2
            
            Specimen
                Common Stock Certificate. [Incorporated by reference to Exhibit 4.3
                in our
                annual report on Form 10-KSB for the year ended December 31, 2005.]4.3
            
            Form
                of Series A Warrant issued by Xethanol Corporation to the Investors
                and to
                Goldman Sachs & Co. [Incorporated by reference to Exhibit 4.3 in
                Amendment No. 3 to Registration Statement on Form SB-2 (File No.
                333-135121) filed with the SEC on March 26, 2007.]4.4
            
            Form
                of Series B Warrant issued by Xethanol Corporation to the Investors
                and to
                Goldman Sachs & Co. [Incorporated by reference to Exhibit 4.4 in
                Amendment No. 3 to Registration Statement on Form SB-2 (File No.
                333-135121) filed with the SEC on March 26, 2007.]*Miscellaneous
                Corporate Agreements*10.1
            
            Agreement
                of Merger and Plan of Reorganization dated February 2, 2005 by and
                among
                Zen Pottery Equipment, Inc., Zen Acquisition Corp. and Xethanol
                Corporation. [Incorporated by reference to Exhibit 2.1 in our current
                report on Form 8-K dated February 2, 2005.]10.2
            
            Form
                of Agreement and Plan of Merger by and between Zen Pottery Equipment,
                Inc.
                and Xethanol Corporation. [Incorporated by reference to Exhibit 1
                in our
                Definitive Information Statement on Schedule 14C filed with the SEC
                on
                March 9, 2005.]10.3
            
            Form
                of Security Agreement by and among Xethanol BioFuels, LLC and Lucas
                Energy
                Total Return Offshore, Ltd. and Lucas Energy Total Return Partners,
                LLC.
                [Incorporated by reference to Exhibit 10.1 in our current report
                on Form
                8-K dated February 2, 2005.]10.4
            
            Ethanol
                Marketing Agreement dated May 20, 2005 by and between Xethanol BioFuels,
                LLC and Aventine Renewable Energy, Inc. [Incorporated by reference
                to
                Exhibit 10.41 in our Amendment No. 1 to Registration Statement on
                Form
                SB-2 (File No. 333-135121) filed with the SEC on September 15,
                2006.]10.5
            
            Amendment
                dated July 2006 to Ethanol Marketing Agreement dated May 20, 2005
                by and
                between Xethanol BioFuels, LLC and Aventine Renewable Energy, Inc.
                [Incorporated by reference to Exhibit 10.44 in our Amendment No.
                2 to
                Registration Statement on Form SB-2 (File No. 333-135121) filed with
                the
                SEC on November 28, 2006.]




73


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


*Agreements
                with or Related to Related Parties*10.6
            
            Xethanol
                Corporation 2005 Incentive Compensation Plan, as amended on August
                10,
                2006, including Form of Non-Qualified Stock Option Agreement.
                [Incorporated by reference to Exhibit 10.8 in Amendment No. 3 to
                Registration Statement on Form SB-2 (File No. 333-135121) filed with
                the
                SEC on March 26, 2007.]10.7
            
            Form
                of Non-Qualified Stock Option Agreement (for options granted on December
                7, 2006). [Incorporated by reference to Exhibit 10.9 in our registration
                statement on Form SB−2, Amendment No. 6, filed with the SEC on August 8,
                2007.]10.8
            
            Form
                of Non-Qualified Stock Option Agreement (for options granted during
                2007).[Incorporated by reference to Exhibit 10.10 in our registration
                statement on Form SB−2, Amendment No. 6, filed with the SEC on August 8,
                2007.]10.9
            
            Termination
                Agreement dated August 25, 2006 by and between Xethanol Corporation
                and
                Christopher d’Arnaud-Taylor. [Incorporated by reference to Exhibit 10.9 in
                Amendment No. 3 to Registration Statement on Form SB-2 (File No.
                333-135121) filed with the SEC on March 26, 2007.]10.10
            
            Consulting
                Agreement dated August 25, 2006 by and between Xethanol Corporation
                and
                Christopher d’Arnaud-Taylor (terminated on December 1, 2006).
                [Incorporated by reference to Exhibit 10.10 in Amendment No. 3 to
                Registration Statement on Form SB-2 (File No. 333-135121) filed with
                the
                SEC on March 26, 2007.]10.11
            
            Employment
                Agreement dated September 7, 2006 by and between Xethanol Corporation
                and
                Thomas J. Endres. [Incorporated by reference to Exhibit 10.11 in
                Amendment
                No. 3 to Registration Statement on Form SB-2 (File No. 333-135121)
                filed
                with the SEC on March 26, 2007.]10.12
            
            Indemnification
                Agreement dated October 1, 2006 by and between Xethanol Corporation
                and
                William P. Behrens. [Incorporated by reference to Exhibit 10.45 in
                Amendment No. 2 to Registration Statement on Form SB-2 (File No.
                333-135121) filed with the SEC on November 28, 2006.] (The identical
                form
                of Indemnification Agreement was subsequently executed by Xethanol
                Corporation and each of the following directors: Lawrence S. Bellone,
                David R. Ames, Edwin L. Klett, Gill Boosidan and Robert L. Franklin.)10.13
            
            Consulting
                Agreement dated December 1, 2006 by and between Xethanol Corporation
                and
                Christopher d’Arnaud-Taylor. [Incorporated by reference to Exhibit 10.13
                in Amendment No. 3 to Registration Statement on Form SB-2 (File No.
                333-135121) filed with the SEC on March 26, 2007.]10.14
            
            Amended
                and Restated Employment Agreement dated June 19, 2007 by and between
                Xethanol Corporation and Thomas J. Endres. [Incorporated by reference
                to
                Exhibit 10.16 in our registration statement on Form SB−2, Amendment No. 6,
                filed with the SEC on August 8, 2007.]*Financing
                Documents*10.15
            
            Form
                of Private Placement Subscription Agreement. [Incorporated by reference
                to
                Exhibit 10.4 in our current report on Form 8-K dated February 2,
                2005.]10.16
            
            Common
                Stock Purchase Agreement dated October 18, 2005 by and between the
                Fusion
                Capital Fund II, LLC and Xethanol Corporation. [Incorporated by reference
                to Exhibit 10.1 in our current report on Form 8-K dated October 18,
                2005.]




74


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


10.17
            
            Registration
                Rights Agreement dated October 18, 2005 by and between the Fusion
                Capital
                Fund II, LLC and Xethanol Corporation. [Incorporated by reference
                to
                Exhibit 10.2 in our current report on Form 8-K dated October 18,
                2005.]10.18
            
            Form
                of Warrant. [Incorporated by reference to Exhibit 4.2 in our Amendment
                No.
                1 to Registration Statement on Form SB-2 (File No. 333- 129191) filed
                with
                the SEC on December 6, 2005.]10.19
            
            Purchase
                Agreement dated April 3, 2006 by and among Xethanol Corporation and
                the
                Investors. [Incorporated by reference to Exhibit 1.1 in our current
                report
                on Form 8-K dated April 3, 2006.]10.20
            
            Registration
                Rights Agreement dated April 3, 2006 by and among Xethanol Corporation
                and
                the Investors. [Incorporated by reference to Exhibit 1.2 in our current
                report on Form 8-K dated April 3, 2006.]10.21
            
            Purchase
                Agreement dated April 3, 2006 by and among Xethanol Corporation and
                Goldman Sachs & Co. [Incorporated by reference to Exhibit 1.6 in our
                current report on Form 8-K dated April 3, 2006.]10.22
            
            Fund
                Warrant dated April 21, 2006 issued to Lucas Energy Total Return
                Master
                Fund, Ltd. by Xethanol Corporation. [Incorporated by reference to
                Exhibit
                3.1 in our current report on Form 8-K dated April 7,
                2006.]10.23
            
            Partners
                Warrant dated April 21, 2006 issued to Lucas Energy Total Return
                Partners,
                Ltd. by Xethanol Corporation. [Incorporated by reference to Exhibit
                3.2 in
                our current report on Form 8-K dated April 7, 2006.]10.24
            
            Mutual
                Termination Agreement by and between Xethanol Corporation and Fusion
                Capital Fund II, LLC dated November 13, 2007. [Incorporated by reference
                to Exhibit 10.1 in our current report on Form 8-K dated November
                12,
                2007.]*Documents
                Related to Joint Ventures*10.25
            
            Organizational
                Agreement dated May 30, 2006 by and among Xethanol Corporation, Coastal
                Energy Development, Inc. and CoastalXethanol LLC. [Incorporated by
                reference to Exhibit 1.1 in our current report on Form 8-K dated
                May 30,
                2006.]10.26
            
            Operating
                Agreement dated May 30, 2006 by and among Xethanol Corporation, Coastal
                Energy Development, Inc. and CoastalXethanol LLC. [Incorporated by
                reference to Exhibit 1.2 in our current report on Form 8-K dated
                May 30,
                2006.]10.27
            
            Form
                of Warrant dated May 30, 2006 issued to Coastal Energy Development,
                Inc.
                by Xethanol Corporation. [Incorporated by reference to Exhibit 3.2
                in our
                current report on Form 8-K dated April 7, 2006.]10.28
            
            Organizational
                Agreement dated June 23, 2006 by and among Xethanol Corporation,
                Global
                Energy and Management, LLC and NewEnglandXethanol, LLC. [Incorporated
                by
                reference to Exhibit 1.1 in our current report on Form 8-K dated
                June 23,
                2006.]10.29
            
            Operating
                Agreement dated June 23, 2006 by and among Xethanol Corporation,
                Global
                Energy and Management, LLC and NewEnglandXethanol, LLC. [Incorporated
                by
                reference to Exhibit 1.2 in our current report on Form 8-K dated
                June 23,
                2006.]10.30
            
            Warrant
                dated June 23, 2006 issued to Global Energy and Management LLC by
                Xethanol
                Corporation. [Incorporated by reference to Exhibit 3.1 in our current
                report on Form 8-K dated June 23,
                2006.]




75


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


10.31
            
            First
                Amendment to Organizational Agreement and Operation Agreement dated
                August
                22, 2006 by and among Xethanol Corporation, Coastal Energy Development,
                Inc. and CoastalXethanol LLC. [Incorporated by reference to Exhibit
                10.32
                in Amendment No. 6 to Registration Statement on Form SB-2 (File No.
                333-135121) filed with the SEC on August 8, 2007.]*Agreements
                Related to Acquisitions of Facilities*10.32
            
            Purchase
                and Sale Agreement dated August 4, 2006 by and among Augusta BioFuels,
                LLC, an indirect subsidiary of Xethanol Corporation, Pfizer Inc.,
                G.D.
                Searle LLC and CoastalXethanol LLC. [Incorporated by reference to
                Exhibit
                10.29 in Amendment No. 3 to Registration Statement on Form SB-2 (File
                No.
                333-135121) filed with the SEC on March 26, 2007.]10.33
            
            Asset
                Purchase Agreement dated August 7, 2006 by and among Xethanol Corporation,
                Carolina Fiberboard Corporation LLC and Victor Kramer. [Incorporated
                by
                reference to Exhibit 10.30 in Amendment No. 3 to Registration Statement
                on
                Form SB-2 (File No. 333-135121) filed with the SEC on March 26,
                2007.]10.34
            
            Amended
                and Restated Asset Purchase Agreement dated November 7, 2006 by and
                among
                Xethanol Corporation, Carolina Fiberboard Corporation, LLC and Victor
                Kramer. [Incorporated by reference to Exhibit 10.47 in our Amendment
                No. 2
                to Registration Statement on Form SB-2 (File No. 333-135121) filed
                with
                the SEC on November 28, 2006.]10.35
            
            Escrow
                Agreement dated November 7, 2006 by and between Xethanol Corporation
                and
                Carolina Fiberboard Corporation. [Incorporated by reference to Exhibit
                10.32 in Amendment No. 3 to Registration Statement on Form SB-2 (File
                No.
                333-135121) filed with the SEC on March 26, 2007.]*Technology-Related
                Agreements**(for
                Agreements Related to H2Diesel, see below)*10.36
            
            Strategic
                Alliance Agreement dated April 1, 2004 by and between UTEK Corporation
                and
                Xethanol Corporation. [Incorporated by reference to Exhibit 10.31
                in our
                Amendment No. 1 to Registration Statement on Form SB-2 (File No.
                333-135121) filed with the SEC on September 15, 2006.]10.37
            
            Letter
                Agreement dated March 17, 2005 by and between UTEK Corporation and
                Xethanol Corporation. [Incorporated by reference to Exhibit 10.32
                in our
                Amendment No. 1 to Registration Statement on Form SB-2 (File No.
                333-135121) filed with the SEC on September 15, 2006.]10.38
            
            Letter
                Agreement dated April 12, 2006 by and between UTEK Corporation and
                Xethanol Corporation. [Incorporated by reference to Exhibit 10.33
                in our
                Amendment No. 1 to Registration Statement on Form SB-2 (File No.
                333-135121) filed with the SEC on September 15, 2006.]10.39
            
            Agreement
                and Plan of Acquisition dated June 13, 2006 by and among Advanced
                Biomass
                Gasification Technologies, Inc., UTEK Corporation and Xethanol
                Corporation. [Incorporated by reference to Exhibit 10.4 in our current
                report on Form 8-K dated June 12, 2006.]


10.40
            
            License Agreement
                dated June 24, 2005 by and between Virginia Tech Intellectual Properties,
                Inc. and Advanced Bioethanol Technologies, Inc., a wholly owned subsidiary
                of UTEK Corporation. [Incorporated by reference to Exhibit 10.34
                in our
                Amendment No. 1 to Registration Statement on Form SB-2 (File No.
                333-135121) filed with the SEC on September 15, 2006.]


76


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


10.41
            
            Research
                Agreement dated December 6, 2005 between Virginia Polytechnic Institute
                and State University and Xethanol. [Incorporated by reference to
                Exhibit
                10.35 in our Amendment No. 1 to Registration Statement on Form SB-2
                (File
                No. 333-135121) filed with the SEC on September 15, 2006.]10.42
            
            Exclusive
                Patent License by and between Midwest Research Institute, Management
                and
                Operating Contractor for the National Renewable Energy Laboratory
                and
                Superior Separation Technologies, Inc. [Incorporated by reference
                to
                Exhibit 10.37 in our Amendment No. 1 to Registration Statement on
                Form
                SB-2 (File No. 333-135121) filed with the SEC on September 15, 2006.]10.43
            
            Cooperative
                Research and Development Agreement dated May 1, 2006 by and between
                Midwest Research Institute, Management and Operating Contractor for
                the
                National Renewable Energy Laboratory and Superior Separation Technologies,
                Inc. [Incorporated by reference to Exhibit 10.38 in our Amendment
                No. 1 to
                Registration Statement on Form SB-2 (File No. 333-135121) filed with
                the
                SEC on September 15, 2006.]10.44
            
            Non-Exclusive
                License Agreement dated June 30, 2005 by and between Wisconsin Alumni
                Research Foundation and Xylose Technologies, Inc. [Incorporated by
                reference to Exhibit 10.39 in our Amendment No. 1 to Registration
                Statement on Form SB-2 (File No. 333-135121) filed with the SEC on
                September 15, 2006.]10.45
            
            Marketing
                and License Agreement dated October 19, 2005 by and between Xethanol
                Corporation and DDS Technologies USA, Inc. [Incorporated by reference
                to
                Exhibit 10.42 in our Amendment No. 1 to Registration Statement on
                Form
                SB-2 (File No. 333-135121) filed with the SEC on September 15,
                2006.]10.46
            
            Cooperative
                Research and Development Agreement dated November 30, 2005 between
                USDA,
                Forest Service Forest Products Laboratory and Xylose Technologies,
                Inc.
                [Incorporated by reference to Exhibit 10.40 in our Amendment No.
                1 to
                Registration Statement on Form SB-2 (File No. 333-135121) filed with
                the
                SEC on September 15, 2006.]10.47
            
            Base
                Research Agreement dated May 24, 2006 by and between the University
                of
                North Dakota Energy and Environmental Research Center and Advanced
                Biomass
                Gasification Technologies, Inc. [Incorporated by reference to Exhibit
                10.5
                in our current report on Form 8-K dated June 12, 2006.]10.48
            
            Exclusive
                Patent and Know-How Final License Agreement dated May 24, 2006 by
                and
                between the Energy and Environmental Research Center Foundation and
                Advanced Biomass Gasification Technologies, Inc. [Incorporated by
                reference to Exhibit 10.6 in our current report on Form 8-K dated
                June 12,
                2006.]*Agreements
                Related to H2Diesel*10.49
            
            Management
                Agreement dated April 14, 2006 by and between Xethanol Corporation
                and
                H2Diesel, Inc. [Incorporated by reference to Exhibit 1.3 in our current
                report on Form 8-K dated April 14, 2006.]10.50
            
            Sublicense
                Agreement dated April 14, 2006 by and between Xethanol Corporation
                and
                H2Diesel, Inc. [Incorporated by reference to Exhibit 1.4 in our current
                report on Form 8-K dated April 14, 2006.]10.51
            
            Investment
                Agreement dated April 14, 2006 by and among Xethanol Corporation
                and
                H2Diesel, Inc., and the Investors. [Incorporated by reference to
                Exhibit
                1.1 in our current report on Form 8-K dated April 14,
                2006.]




77


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


10.52
            
            Registration
                Rights Agreement dated April 14, 2006 by and among Xethanol Corporation
                and the Investors. [Incorporated by reference to Exhibit 1.2 in our
                current report on Form 8-K dated April 14, 2006.].10.53
            
            Registration
                Rights Agreement dated April 14, 2006 by and among Xethanol Corporation,
                Crestview Capital Master, LLC and TOIBB Investment, LLC. [Incorporated
                by
                reference to Exhibit 10.43 in our Amendment No. 1 to Registration
                Statement on Form SB-2 (File No. 333-135121) filed with the SEC on
                September 15, 2006.]10.54
            
            First
                Amendment to Investment Agreement dated June 15, 2006 by and among
                Xethanol Corporation, H2Diesel, Inc., and the Investors. [Incorporated
                by
                reference to Exhibit 10.1 in our current report on Form 8-K dated
                June 12,
                2006.]10.55
            
            Amended
                and Restated Sublicense Agreement dated June 15, 2006 by and between
                Xethanol Corporation and H2Diesel, Inc. [Incorporated by reference
                to
                Exhibit 10.2 in our current report on Form 8-K dated June 12,
                2006.]10.56
            
            Technology
                Access Agreement dated June 15, 2006 by and between Xethanol Corporation
                and H2Diesel, Inc. [Incorporated by reference to Exhibit 10.3 in
                our
                current report on Form 8-K dated June 12, 2006.]21
            
            Subsidiaries
                of Xethanol Corporation.24
            
            Power
                of Attorney (contained on the signature page hereof).31
            
            Certifications
                of David R. Ames and Gary Flicker pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.32
            
            Certifications
                of David R. Ames and Gary Flicker pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002. This exhibit is not “filed” for purposes of
                Section 18 of the Securities Exchange Act of 1934 but is instead
                furnished
                as provided by applicable rules of the Securities and Exchange
                Commission.


78




**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.







**XETHANOL
              CORPORATION**Date:
                March 31, 2008
            By:
            /s/
                David R. AmesDavid
                R. Ames
              Chief
                Executive Officer and President
              (principal
                executive officer)Date:
                March 31, 2008
            By:
            /s/
                Gary FlickerGary
                Flicker
              Chief
                Financial Officer and Executive Vice President
              (principal
                financial officer)


79




**POWER
      OF ATTORNEY**





KNOW
      ALL
      MEN BY THESE PRESENTS, that each director and officer whose signature appears
      below constitutes and appoints each of David R. Ames and Gary Flicker, either
      of
      them signing individually, as his true and lawful attorney-in-fact and agent,
      with full powers of substitution and resubstitution, for him and in his name,
      place and stead, to sign in any and all capacities any and all amendments to
      this annual report on Form 10-K and to file the same, with all exhibits thereto
      and all other documents in connection therewith, with the Securities and
      Exchange Commission, granting unto said attorneys-in-fact and agents, and each
      of them, full power and authority to do and perform each and every act and
      thing
      requisite and necessary to be done, as fully to all intents and purposes as
      he
      might or could do in person, hereby ratifying and confirming all that such
      attorneys-in-fact and agents, or any of them, may lawfully do or cause to be
      done by virtue hereof.





Pursuant
      to the requirements of Securities Exchange Act of 1934, as amended, this report
      has been signed by the following persons in the capacities and on the date
      indicated.





**Signature**
            
            **Title**
            
            **Date**/s/
                David R. Ames
            
            Director, Chief
                Executive Officer
            
            March
                31, 2008David
                R. Ames
            
            and
                President*
            
            Chief
                Financial Officer
            
            March
                31, 2008Gary
              Flicker
            
            and
              Executive Vice President*
            
            Chairman
                of the Board of Directors
            
            March
                31, 2008William
              P. Behrens*
            
            Director
            
            March
                31, 2008Gil
                Boosidan*
            
            Director
            
            March
                31, 2008Richard
                D. Ditoro*
            
            Director
            
            March
                31, 2008Robert
                L. Franklin*
            
            Director
            
            March
                31, 2008Edwin
                L. Klett




*By:
            /s/ David
                R. AmesAttorney-in-fact
              David R. Ames




80