**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-KSB**





x
            **ANNUAL
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934**For
                the fiscal year ended December 31, 2006ORo
            **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**


(Name
      of
      Small Business Issuer in Its Charter)





**Delaware**
            
            **84-1169517**(State
                or Other Jurisdiction of
            
            (I.R.S.
                EmployerIncorporation
                or Organization)
            
            Identification
                No.)**1185
                Avenue of the Americas, 20th Floor**
              **New
                York, New York**
            
            **10036**(Address
                of Principal Executive Offices)
            
            (Zip
                Code)





**(** **646)
      723-4000**


(Issuer’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




Check
          whether the issuer is not required to file reports pursuant to Section
          13 or
          Section 15(d) of the Exchange Act. o





Check
      whether the issuer (1) has filed all reports required to be filed by Section
      13
      or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
      for such shorter period that the registrant was required to file such reports),
      and (2) has been subject to such filing requirements for the past 90 days.


Yes
þ  No
o





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





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes
o  No
þ





The
      issuer’s revenues for its most recent fiscal year were $11,028,671.




As
      of
      March 26, 2007, the aggregate market value of the registrant’s common stock held
      by non-affiliates of the registrant was $63,120,923 based on the closing sale
      price as reported on the American Stock Exchange.





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





Class
            
            Outstanding
                at March****26**,**2007Common
                Stock, $.001 par value per share
            
            28,609,103
                shares





**DOCUMENTS
      INCORPORATED BY REFERENCE**





Document
            
            Parts
                Into Which IncorporatedNone





Transitional
      Small Business Disclosure Format (check one): Yes
o  No
þ









**TABLE
      OF CONTENTS**




PAGESPECIAL
                    NOTE REGARDING FORWARD-LOOKING STATEMENTS**PART
                    I**
                
                1ITEM
                    1.
                DESCRIPTION
                    OF BUSINESS
                1ITEM
                    2.
                DESCRIPTION
                    OF PROPERTY
                41ITEM
                    3.
                LEGAL
                    PROCEEDINGS
                42ITEM
                    4
                SUBMISSION
                    OF MATTERS TO A VOTE OFSECURITY
                    HOLDERS
                43**PART
                    II**
                
                44ITEM
                    5.
                MARKET
                    FOR COMMON EQUITY AND RELATEDSTOCKHOLDER
                    MATTERS
                44ITEM
                    6.
                MANAGEMENT’S
                    DISCUSSION AND ANALYSIS OFFINANCIAL
                    CONDITION AND RESULTS OF OPERATIONS
                46ITEM
                    7
                FINANCIAL
                    STATEMENTS
                F-1ITEM
                    8.
                CHANGES
                    IN AND DISAGREEMENTS WITHACCOUNTANTS
                    ON ACCOUNTING AND FINANCIALDISCLOSURE
                52ITEM
                    8A
                CONTROLS
                    AND PROCEDURES
                52ITEM
                    8B
                OTHER
                    INFORMATION
                52**PART
                    III**
                
                54ITEM
                    9.
                DIRECTORS,
                    EXECUTIVE OFFICERS, PROMOTERS,CONTROL
                    PERSONS AND CORPORATE GOVERNANCE;COMPLIANCE
                    WITH SECTION 16(a) OF THE EXCHANGE ACT
                54ITEM
                    10.
                EXECUTIVE
                    COMPENSATION
                59ITEM
                    11.
                SECURITY
                    OWNERSHIP OF CERTAIN BENEFICIALOWNERS
                    AND MANAGEMENT ANDRELATED
                    STOCKHOLDER MATTERS
                70ITEM
                    12.
                CERTAIN
                    RELATIONSHIPS AND RELATEDTRANSACTIONS,
                    AND DIRECTOR INDEPENDENCE
                74ITEM
                    13.
                EXHIBITS
                77ITEM
                    14.
                PRINCIPAL
                    ACCOUNTANT FEES AND SERVICES
                82





**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 under the captions “Risk Factors,” “Management’s
      Discussion and Analysis or Plan of Operation” and “Description of Business,” 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 flow to meet our
                requirements;


·
              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
                  loss of one or more of our plants 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 under the section entitled “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.





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.**  **DESCRIPTION
      OF BUSINESS.**





**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.





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 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 currently
      one
      of our directors
      and our former Chairman, President and Chief Executive Officer ;
      (b)
      250,000 options to the





1




mother-in-law
        of Jeffrey
        S. Langberg,a
        significant shareholder of Old Xethanol andour
        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 ofMr.
        Langbergentered
        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-Taylorand 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.





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 remains 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. Mr. Bellone continues to serve as our
      principal accounting officer. Also on January 29, 2007, the board elected Gil
      Boosidan and Robert L. Franklin to the company’s board of
      directors.







2


**Concurrent
      Private Offering**





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.





**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 Xethanol BioFuels 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
      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.




3


**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 has 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. We may decrease or increase this daily purchase amount at
      any
      time, provided that we may not increase the daily purchase amount above $40,000
      unless our stock price is above $5.25 per share for five consecutive trading
      days. The purchase price of the shares of common stock is based on the market
      price of our common stock, as described below, without any fixed discount to
      the
      market price. Fusion Capital does not have the right or the obligation to
      purchase shares of our common stock if the price of our common stock is less
      than $2.00 per share.





Under
      the
      terms of the Fusion Capital agreement, we issued 303,556 shares of our common
      stock to Fusion Capital as a commitment fee. Because the number of shares that
      we sell under the stock purchase agreement depends upon the market price, we
      cannot currently estimate the number of shares of common stock that we might
      ultimately issue to Fusion Capital. Subject to approval by our board of
      directors, we have the right, but not the obligation, to sell more than
      5,000,000 shares to Fusion Capital. As of March 1, 2007, Fusion Capital has
      purchased 1,894,699 shares of our common stock for net cash proceeds of
      $9,611,680. All shares of common stock that we sell to Fusion Capital are
      covered by a registration statement on Form SB-2 (File No. 333-129191) that
      became effective on December 28, 2005 and are saleable without restriction
      immediately upon issuance.





Under
      the
      Fusion Capital agreement, the purchase price per share of common stock is equal
      to the lesser of: (1) the lowest sale price of our common stock on the purchase
      date, or (2) the average of the three lowest closing sale prices of our common
      stock during the 12 consecutive trading days before the date of a purchase
      by
      Fusion Capital. The purchase price will be adjusted for any reorganization,
      recapitalization, non-cash dividend, stock split or other similar transaction
      occurring during the trading days in which the closing bid price is used to
      compute the purchase price. Fusion Capital may not purchase shares of our common
      stock under the common stock purchase agreement if Fusion Capital, together
      with
      its affiliates, would beneficially own more than 9.9% of our common stock
      outstanding at the time of the purchase by Fusion Capital.




Under
      the
      Fusion Capital agreement, we have the right to increase the daily purchase
      amount as the market price of our common stock increases. Specifically, for
      every $0.25 increase in the threshold price (as defined below) above $5.00
      per
      share, we have the right to increase the daily purchase amount by up to an
      additional $4,000 (for example, if the threshold price is $5.50 per share we
      would have the right to increase the daily purchase amount to an aggregate
      of
      $48,000). The “threshold price” is the lowest sale price of our common stock
      during the five trading days immediately preceding our notice to Fusion Capital
      to increase the daily purchase amount. If, at any time during any trading day
      the sale price of our common stock is below the threshold price, the applicable
      increase in the daily purchase amount will be void. We have the unconditional
      right to suspend purchases at any time for any reason effective upon one trading
      day’s notice. Any suspension would remain in effect until our revocation of the
      suspension.





In
      addition to the daily purchase amount, we may require Fusion Capital to purchase
      on any single trading day our shares in an amount up to $250,000, provided
      that
      our share price is above $6.00 per share during the ten previous trading days.
      The price at which those shares would be purchased will be the lesser of (a)
      the
      lowest sale price of our common stock on the trading day that Fusion Capital
      receives notice to purchase the shares, or (b) the lowest purchase price (as
      defined above) during the previous 15 trading days before the date that Fusion
      Capital receives notice. We may increase this amount to $500,000 if our share
      price is above $9.00 per share during the ten trading days before we deliver
      the
      purchase notice to Fusion Capital; to $750,000 if our share price is above
      $14.00 per share during the ten trading days before we deliver the purchase
      notice to Fusion Capital; and to up to $1,000,000 if our share price is above
      $20.00 per share during the ten trading days before we deliver the purchase
      notice to Fusion Capital. We may deliver multiple purchase notices, although
      at
      least ten trading days must have passed since the most recent non-daily purchase
      was completed.





Generally,
      Fusion Capital may terminate the agreement without any liability or payment
      to
      us on the occurrence of any of the following events of default:




4


(1)
              the
                  effectiveness of the registration statement covering the common
                  stock to
                  be issued under the purchase agreement lapses for any reason (including,
                  without limitation, the issuance of a stop order) or is unavailable
                  to
                  Fusion Capital for sale of our common stock and the lapse or
                  unavailability continues for a period of ten consecutive trading
                  days or
                  for more than an aggregate of 30 trading days in any 365-day
                  period;
  (2)
              suspension
                  by our principal market of our common stock from trading for a
                  period of
                  three consecutive trading days;
 (3)
                the
                    de-listing of our common stock from our principal market provided
                    our
                    common stock is not immediately thereafter trading on the Nasdaq
                    National
                    Market, the Nasdaq Capital Market, the New York Stock Exchange
                    or the
                    American Stock Exchange;
 (4)
                our
                    transfer agent’s failure for five trading days to issue to Fusion Capital
                    shares of our common stock that Fusion Capital is entitled to
                    under the
                    common stock purchase
                    agreement;
 (5)
                any
                    material breach of the representations or warranties or covenants
                    contained in the common stock purchase agreement or any related
                    agreements
                    which has or which could have a material adverse affect on us
                    subject to a
                    cure period of ten trading
                    days;
 (6)
                any
                    participation or threatened participation in insolvency or bankruptcy
                    proceedings by or against us; or
 (7)
                a
                    material adverse change in our business.





Fusion
      Capital may not waive the foregoing provisions or any conditions to
      closing.




We
      have
      the right to terminate the agreement without any payment or liability to Fusion
      Capital at any time, including on the sale of all 5,000,000 shares to Fusion
      Capital under the 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 Series B warrants.
      Assuming Goldman Sachs exercises of all of its warrants, its total investment
      would be $5,408,890.




5


**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. 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 $1,626,603 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, 2006 (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,
      2006. We will amortize the value of the amended sublicense agreement commencing
      on that date. 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.





6


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, 2007, we own 5,850,000 shares of H2Diesel Holdings
      common stock, which represents approximately 34.23% 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.




At
      December 31, 2006, we recorded a loss on our investment in H2Diesel of
      $2,321,514, after considering H2Diesel’s estimated value at December 31, 2006
      and the illiquidity of our investment. ****





**Warrants
      Issued in Connection with Organization of CoastalXethanol
      LLC**





On
      May
      30, 2006, we entered into an organizational agreement with Coastal Energy
      Development, Inc., under which, among other things, we issued to Coastal Energy
      a warrant to purchase 200,000 shares of our common stock at a purchase price
      of
      $6.85 per share that is first exercisable on May 30, 2007 and is exercisable
      until May 30, 2010. We have granted Coastal Energy certain registration rights
      with respect to the shares underlying that warrant. In addition, in the event
      of
      a “Change of Control” of us as defined in the agreement, Coastal Energy will
      have the right to exchange its interest in CoastalXethanol for our shares,
      at an
      exchange rate that is based upon the appraised value of Coastal Energy’s
      interest in CoastalXethanol and 95% of the market price of Xethanol common
      stock
      for the 15 days preceding the completion of the valuation of Coastal Energy
’s
      interest in CoastalXethanol. We have also agreed to permit Coastal Energy to
      require us to exchange Coastal Energy’s interest in CoastalXethanol for shares
      of our common stock after three years from the date of the organizational
      agreement. Coastal Energy has agreed to permit us to require Coastal Energy
      to
      exchange its interest in CoastalXethanol for shares of our common stock after
      one year from the date of the organizational agreement. In each case, the
      exchange rate will be set by mutual agreement or, if we and Coastal Energy
      cannot agree, based upon the appraised value of Coastal Energy’s interest in
      CoastalXethanol and the market price of our common stock for the 15 days
      preceding the completion of the valuation of Coastal Energy’s interest in
      CoastalXethanol. On March 5, 2007, we, along with CoastalXethanol, initiated
      litigation against Coastal Energy alleging that Coastal Energy failed to repay
      loans and failed to properly account for the funds it spent. We cannot predict
      how this litigation might affect the agreements described in this
      paragraph.





**Warrants
      Issued in Connection with 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. We have granted
      Global Energy certain registration rights with respect to the shares underlying
      those warrants. In the event of a “Change of Control” of us as defined in the
      organizational agreement, Global Energy will have the right to exchange its
      interest in NewEnglandXethanol for shares of our common stock, at an exchange
      rate that is based upon the appraised value of Global Energy’s interest in
      NewEnglandXethanol and 95% of the market price of our common stock for the
      15
      days preceding the completion of the valuation of Global Energy’s interest in
      NewEnglandXethanol. We have also agreed to permit Global Energy to require
      us to
      exchange its interest in NewEnglandXethanol for shares of our common stock
      after
      one year from the date of the organizational agreement. The exchange rate will
      be set by mutual agreement or, if we and Global Energy cannot agree, based
      upon
      the appraised value of Global Energy’s interest in NewEnglandXethanol and 90% of
      the closing price of our common stock for the 15 days preceding the completion
      of the valuation of Global Energy’s interest in NewEnglandXethanol.





7


In
      December 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 currently believe that the NewEnglandXethanol joint venture will conduct
      any
      further business.




**Shares
      issued in Connection with Acquisition of Advanced Biomass Gasification
      Technologies, Inc.**





Under
      an
      agreement and plan of acquisition dated June 13, 2006, we purchased all of
      the
      shares of Advanced Biomass Gasification Technologies, Inc. from UTEK Corporation
      in exchange for 136,838 shares of our common stock. ABGT had no operations
      before we purchased it. Until that time, its assets consisted solely of cash
      and
      a license and research agreement.





**Shares
      and Warrants Issued in Connection with 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 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 twenty days after
      the
      effective date of the registration statement that includes this report and
      to
      use commercially reasonable efforts to have the former registration statement
      declared effective as soon as reasonably practicable. The seller has agreed
      that
      it will not sell 698,500 of the shares issued at the closing before the first
      anniversary of the closing, notwithstanding the effectiveness of the resale
      registration statement covering the shares. The warrants may first be exercised
      for up to 100,000 shares when the resale registration statement covering the
      shares issuable upon their exercise becomes effective and for the remaining
      200,000 shares one year after issuance and thereafter are exercisable until
      the
      third anniversary of issuance.


8


**BUSINESS**





**Company
      Overview**





We
      are a
      renewable energy company producing ethanol and its co-products. We
      own an
      ethanol plant in Iowa that is currently producing ethanol at a rate of
      approximately 5.5 million gallons per year, using corn as its feedstock. Our
      goal is to develop or acquire methods of converting waste biomass raw materials
      into ethanol. We are executing a two-pronged business strategy: a technology
      strategy in which we work with leading scientists affiliated with national
      research laboratories and universities to license, acquire and commercialize
      innovative technologies; and a production strategy in which we plan to develop
      operating facilities located at or near the source of waste biomass and in
      proximity to high demand ethanol markets.





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 have now determined that Permeate
      is
      no longer a core asset. We are currently considering alternatives to maximize
      its value, including relocating a substantial portion of its equipment to one
      or
      more of our other sites and selling or otherwise disposing of Permeate’s
      remaining assets. As a result, we recognized an impairment loss of $513,942
      that
      is included in our audited consolidated statements of operations for the year
      ended December 31, 2006 included in this report.





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
      5.5
      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 2006 relate
      entirely to the BioFuels facility.





In
      line
      with our strategy to license, acquire and commercialize advanced processing
      technologies, we have a strategic alliance with UTEK Corporation, a
      publicly-traded technology transfer company. Through our arrangement with UTEK,
      we have acquired bio-separation and bio-fermentation technologies that may
      prove
      to be suitable for “small footprint” plants located on or near the source of
      non-corn-based feedstocks. In addition, we have developed strategic
      relationships with government and university research labs to further develop
      and prove out these technologies. Once a new technology has proved out in the
      laboratory, we plan to move it to the field for commercialization at one of
      our
      production facilities. We will also review opportunities to license our
      technologies to third parties to create royalty income streams.





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. 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. Additional territories may be added by written
      agreement of the parties. We intend to collaborate with H2Diesel in the
      development and testing of the technology to accelerate its commercialization,
      and we are in discussions with two independent laboratories to test the
      technology.




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. We acquired an 80% membership
      interest in CoastalXethanol for a capital contribution of $40,000, and Coastal




9




Energy
      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. We
      are
      evaluating the strategic alternatives for the Augusta site, which include
      converting part of it into a research facility with pilot plants and/or an
      ethanol production plant that would ultimately be able to produce 50 million
      gallons of ethanol. On March 5, 2007, we, along with CoastalXethanol, initiated
      litigation against Coastal Energy Development, Inc. alleging that it failed
      to
      repay loans and failed to properly account for the funds it spent.




In
      June
      2006, we organized NewEnglandXethanol, LLC to produce 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. 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 currently believe that the NewEnglandXethanol
      joint venture will conduct any further business.





In
      June
      2006, we purchased Advanced Biomass Gasification Technologies, Inc. (“ABGT”)
      from UTEK Corporation. 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 (the
“Gasification Technology”). ABGT is also a party to a Base Research Agreement
      with the EERC, which has agreed:





·
            to
                perform initial research, development, demonstration, productizing
                and
                project implementation work with respect to the Gasification Technology
                and 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 that is conceived or made during
                  the
                  project.





In
      July
      2006, we formed BlueRidgeXethanol, LLC, a wholly owned subsidiary, to pursue
      opportunities in North and South Carolina, Virginia, Kentucky and Tennessee.
      We
      recently changed the name of BlueRidgeXethanol to Advanced Cellulosic
      BioTechnologies LLC. In November 2006, we acquired the assets of Carolina
      Fiberboard Corporation, LLC, a former medium density fiberboard plant located
      in
      Spring Hope, North Carolina. We will transfer these assets to a newly formed
      North Carolina limited liability company, Spring Hope Biofuels, LLC, which
      will
      be 100% owned by Advanced Cellulosic BioTechnologies. We plan to construct
      a
      pilot plant at our Spring Hope site using wood chips as the primary feedstock.
      If we are successful in proving the technology on a pilot basis, we will seek
      to
      ultimately increase the rate of production at the facility to 35 million gallons
      per year.





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. Through our
      indirect ownership in Southeast Biofuels, we are evaluating the feasibility
      of
      producing ethanol from waste citrus biomass.




10





**Industry
      Overview**





*The
      Ethanol Market*





On
      August
      8, 2005, President Bush signed into law the Energy Policy Act of 2005. The
      Energy Policy Act transformed ethanol from a gasoline additive under the 1990
      Clean Air Act to a primary gasoline substitute, which we believe will serve
      to
      strengthen and expand the role of ethanol in the U.S. fuel economy. A highlight
      of the Energy Policy Act is the creation of a 7.5 billion gallon renewable
      fuel
      standard, or RFS, increasing use of renewable domestic fuels such as ethanol
      and
      biodiesel. The newly approved RFS of the Energy Policy Act establishes that
      a
      percentage of the U.S. fuel supply will be provided by renewable, domestic
      fuels
      such as ethanol. In addition, the Energy Policy Act establishes a 30% tax credit
      up to $30,000 for the cost of installing clean fuel refueling equipment, such
      as
      an E85 ethanol fuel pump.





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. Because MTBE is a suspected carcinogen that may contaminate
      ground water, ethanol is replacing MTBE as a common fuel additive. As MTBE
      is
      phased out, we expect demand for ethanol as a fuel additive to rise. A blend
      of
      5.5% or more of ethanol effectively complies with U.S. Environmental Protection
      Agency requirements for reformulated gasoline, which is mandated in most urban
      areas. We believe there are no economically feasible substitutes for MTBE other
      than ethanol.





Ethanol
      is a clean, high-octane, high-performance automotive fuel commonly blended
      in
      gasoline to extend supplies and reduce emissions. In 2004, according to the
      American Coalition for Ethanol, 30% of all United States gasoline was blended
      with some percentage of ethanol. 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.





Ethanol
      is a renewable fuel produced by the fermentation of starches and sugars such
      as
      those found in grains and other crops. Ethanol contains 35% oxygen by weight
      and, when combined with gasoline, it acts as an oxygenate, artificially
      introducing oxygen into gasoline and raising 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.





Recent
      studies published by the Renewable Fuel Association indicate that approximately
      4.7 billion gallons of ethanol will be consumed in 2007 in the United States,
      and every major automobile manufacturer approves and warrants the use of E10.
      Because the ethanol molecule contains oxygen, it allows an automobile engine
      to
      more completely combust fuel, resulting in fewer emissions and improved
      performance. Fuel ethanol has an octane value of 113 compared to 87 for regular
      unleaded gasoline. Domestic ethanol production has increased since 2004 by
      50%,
      and consumption increases in some foreign countries, such as Brazil, are even
      greater in recent years. For instance, 40% of the automobiles in Brazil operate
      on 100% ethanol, and others use a mixture of 22% ethanol and 78% gasoline.
      The
      European Union and Japan also encourage and mandate the increased use of
      ethanol.





According
      to the Renewable Fuels Association, 97 ethanol production plants were
      operational in the United States in February 2007, with an additional 33 plants
      under expansion or construction. During the last 20 years, ethanol production
      capacity in the United States has grown from almost nothing to about 5.0 billion
      gallons per year in 2006. 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.





The
      ethanol production industry is fragmented, with one company, Archer Daniels
      Midland, accounting for approximately 20% of U.S. production and the next
      largest producer accounting for less than 5% of the same market. The majority
      of
      plants are in the 20 million to 40 million gallons per year capacity range,
      with
      a number of these plants affiliated with local farmer co-operatives that account
      for 39% of total U.S. capacity.




11




In
      the
      United States, there are two principal commercial applications for ethanol.
      The
      first is as a mandatory oxygenate additive to gasoline to comply with clean
      air
      regulations. The second is as a voluntary substitute for gasoline - this is
      a
      purely economic choice by gasoline retailers who can make higher margins on
      selling ethanol-blended gasoline, provided ethanol is available in the local
      market. The U.S. gasoline market is currently approximately 150 billion gallons
      annually, so the potential market for ethanol (assuming only a 10% blend) is
      15
      billion gallons per year. Increasingly, motor manufacturers are producing
      flexible fuel vehicles (particularly sports utility vehicle models) which can
      run off ethanol blends of up to 85% (known as E85) to obtain exemptions from
      fleet fuel economy quotas. There are now more than six million flexible fuel
      vehicles on the road in the United States (according to the National Ethanol
      Vehicle Coalition (NEVC), offering further potential for significant growth
      in
      ethanol demand.





*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.





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.




12





*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, 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





(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. To compete in this
      business, we have acquired, and are seeking to expand, a portfolio of
      technologies for biomass-to-ethanol production. For more information on these
      technologies, see “Technology Platform” below.




We
      believe that the economics of waste and biomass ethanol are the reverse of
      corn
      ethanol. We believe that recovery of ethanol from biomass waste streams with
      traditional large-scale ethanol production technology is likely to be
      uneconomical, because these waste streams are widely distributed and their
      value
      is too low to make transportation to a central processing facility viable.
      Consequently, waste and biomass streams are normally landfilled or otherwise
      disposed of at the producer’s expense. We believe that the economics of biomass
      ethanol will favor “small footprint” processing plants that can be located close
      to biomass and waste sources. If these sources are located in immediate
      proximity to urban ethanol markets, freight costs will potentially be lower
      and
      margins will potentially be higher.





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. We plan to produce it because
      of its high price and potential for wider consumer acceptance.





13


**Business
      and Growth Strategy**





Our
      goal
      is to become a technology leader in the emerging renewable energy sector. We
      have developed several strategic initiatives to accomplish our goal, which
      include:




·
            Increasing
                our revenues from corn-based ethanol by constructing a new 35 million
                gallon per year facility at our existing BioFuels
                site.






·
            Integrating
                and commercializing our cellulosic-based initiatives, centered on
                our
                Spring Hope site, including developing or acquiring new technology,
                acquiring equipment and entering into strategic
                alliances.


·
              Producing
                  ethanol and other valuable bioproducts from non-corn sugar and
                  starch-rich
                  waste feedstocks, including waste citrus biomass, using a co-location
                  model where feasible.


·
              Developing
                  and commercializing our advanced gasification technology for producing
                  syngas as a fuel from
                  biomass.


·
              Developing
                  a diesel biofuel production capability using the exclusive sublicense
                  we
                  acquired from H2Diesel Holdings,
                  Inc.





*Corn
      Ethanol Initiative*





Our
      Blairstown, Iowa facility is currently producing ethanol from corn at the rate
      of 5.5 millions gallons per year. 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 have engaged the Facility
      Group to provide construction services and PRAJ Technologies to provide
      engineering and design services. To date, we have acquired all necessary
      permits, purchased an adjacent 55 acre lot, completed site preparation and
      are
      finalizing engineering, design and costing. As part of this project, we plan
      to
      integrate a gasification/co-generation system that will allow the facility
      to be
      energy self-sufficient by using waste by-products from the plant as
      feedstock.





*Cellulosic
      Ethanol and Other Biofuels Initiative*





We
      believe the key for renewable fuels in the United States will be the
      cost-effective production of ethanol and other biofuels from cellulosic
      feedstocks, such as those derived from wood, forest products industry waste,
      and
      agricultural residues (bagasse, rice straw, wheat straw, etc.).





Advanced
      Cellulosic BioTechnologies LLC
      (formerly named BlueRidge Xethanol, LLC) will be the focal point of our
      cellulosic ethanol strategy. Within ABT, we will integrate our portfolio of
      cellulosic technologies, plant and equipment, lab testing, scale-up,
      pretreatment system and strategic alliances. In addition, 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). We also plan to develop a pilot plant using wood chips
      as a cellulosic feedstock at the Spring Hope site. If we are successful in
      proving the technology on a pilot basis, we will seek to increase the rate
      of
      production at the facility to 35 million gallons per year.





*Alternative
      Feedstocks Ethanol Initiative*





There
      are
      a number of available sugar and starch-rich feedstocks that are available for
      conversion into ethanol or other valuable bioproducts. Our initiatives in this
      area include: (1) citrus waste - we have a research agreement with the USDA
      as
      well as some of the equipment we need to develop a pilot plant; (2) bakery
      waste
      - we are in initial discussions with a bakery waste consolidator and scientists
      pursuing waste conversion technologies; and (3) forest products waste - we
      are
      evaluating a project converting xylose waste streams into xylitol using our
      genetic engineering development work with the U.S. Forest Products Laboratory.





14


We
      believe that an alternative feedstocks approach lends itself to a co-location
      model. Under this model, we would build ethanol production facilities co-located
      with, or in proximity to, the waste feedstock generators. The potential
      advantages of this strategy are as follows:





·
            decreased
                capital outlay, because the targeted sites have useful infrastructure
                already in place;




·
            sharing
                up-front costs and revenues with other potential biomass-waste-generating
                partners;




·
            commercial
                biomass waste generators and processors already have an established
                footprint;




·
            many
                commercial biomass waste generators and processors have multiple
                locations, allowing for rapid expansion of the co-location model;
                and




·
            biomass
                waste material is renewable, accessible, low cost, and generally
                abundant.




*Biomass
      Gasification Initiative*





We
      view
      our gasification initiative as both an expansion of our product capability
      beyond the production of ethanol as well as a complementary technology to our
      cellulosic initiative using lignin as a feedstock. Working with the EERC, we
      are
      currently developing a “small footprint gasifier” for the production of syngas,
      a lower BTU natural gas substitute that can replace up to 80% of diesel fuel
      in
      a diesel electric generator. If we are successful in developing this technology,
      we believe it can be used in cellulosic ethanol plants, military bases, truss
      plants and diesel-based, island electric requirements.





*Diesel
      Biofuel Production Initiative*





In
      April
      2006, we acquired an exclusive sublicense from H2Diesel, Inc. for the production
      of a diesel biofuel using H2Diesel’s processing technology. Although we believe
      that this technology may prove to be more cost effective than conventional
      biodiesel production, we note that the diesel biofuel manufactured by using
      this
      technology has not been used in diesel powered vehicles or heating equipment
      other than on a limited test basis. We intend to collaborate closely with
      H2Diesel Holdings, Inc. (“H2Diesel”), the successor to H2Diesel, Inc., to
      accelerate product testing and gain customer acceptance of this diesel biofuel.
      To this end, we are currently in discussions with two independent testing groups
      in the U.S. We intend that once the technology has been satisfactorily proven
      out, we will formulate a roll out strategy and seek a funding plan.





H2Diesel
      is a public company, and its shares are traded on the OTC Bulletin Board
      (HTWO.OB). We are a significant investor in H2Diesel’s common stock. As of March
      1, 2007, we owned 5,850,000 shares representing a 34.2% ownership interest
      in
      H2Diesel. H2Diesel is a development stage company with no operations. According
      to its SEC filings, H2Diesel is obligated to pay $9.1 million in additional
      payments to the owner of the licensed technology, including (a) $600,000 on
      July
      31, 2007 and (b) $1.5 million on October 31, 2007. To make these payments,
      H2Diesel must raise additional capital, and to our knowledge, H2Diesel has
      not
      done so. H2Diesel’s most recent quarterly report on Form 10-Q 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, we could
      lose our sublicense of the technology .





**Technology
      Platform**




*Overview;
      Relationship with UTEK*





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 focusing on 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
      believe that the identification, acquisition and development of proprietary
      technologies are important drivers of our business. We have engaged UTEK
      Corporation, a publicly-traded technology transfer company, to assist us in
      identifying technologies that may enable us to lower costs throughout the
      ethanol production cycle and create a technology platform for biomass
      conversion. In April 2004, we formalized this relationship by entering into
      a
      strategic alliance agreement with UTEK, which details the research and
      development activities to be




15




performed
      by UTEK on our behalf. The original term of
      the agreement was one year. We have subsequently renewed the agreement for
      two
      one-year terms, and the agreement is currently scheduled to expire on March
      31,
      2007. The agreement may be terminated by UTEK or by us upon 90 days’ notice.
      Under this arrangement, 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 have outsourced our research and
      development to specialists in the fields of enzyme, fermentation and
      gasification technologies. Under this arrangement, we have 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
      the
      technologies described below.




*Technologies
      Acquired from UTEK*





*Advanced
      Bioethanol Technologies, Inc.* In June
      2004, we acquired Advanced Bioethanol Technologies, Inc. from UTEK for 176,562
      shares of our common stock (after adjustment for our reverse merger
      transaction). Advanced Bioethanol holds the exclusive worldwide license to
      an
      innovative biomass extraction and fermentation process developed by researchers
      at Virginia Tech. Dr. Foster Aryi Agblevor, the developer of the process, has
      accepted a position on our Advisory Board. 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 intend to continue to develop
      this technology and have budgeted approximately $100,000 for this project during
      2007. We are currently unable to estimate the timetable or costs of completing
      the commercialization of this technology.





*Ethanol
      Extraction Technologies, Inc.* In
      September 2004, we acquired Ethanol Extraction Technologies, Inc. from UTEK
      for
      149,398 shares of our common stock (after adjustment for our reverse merger
      transaction). Ethanol Extraction holds the worldwide exclusive license to a
      patented technology developed by researchers at Queen’s University at Kingston,
      Ontario, Canada to continuously remove and isolate ethanol, an inhibitor of
      fermentation, during the fermentation process. The material terms of the license
      are described under “Intellectual Property Rights and Patents - Licensing and
      Collaborative Agreements - Queen’s University at Kingston, Ontario, Canada”
below. The technology incorporates a process in which the fermentation reaction
      and ethanol removal occur simultaneously. When implemented in ethanol plants,
      whether corn-based or otherwise, this technology is intended to increase plant
      capacity and reduce energy costs with relatively modest capital expenditures.
      We
      have evaluated this technology and currently do not intend to seek to develop
      it
      further.





*Superior
      Separation Technologies, Inc.* In
      January 2005, we acquired Superior Separation Technologies, Inc. from UTEK
      for
      220,702 shares of our common stock (after adjustment for our reverse merger
      transaction). Superior Separation 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




16




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
      intend
      to continue to develop this technology. 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. from UTEK for 567,857 shares
      of our common stock. Xylose Technologies 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 originally
      scheduled to expire in March 2007. In January 2007, we negotiated a second
      agreement with FPL with a term of one year. 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. Since 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.





In
      January 2007, we negotiated a second agreement with FPL. ** 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”) from
      UTEK for 136,838 shares of our common stock. ABGT
      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 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
      currently estimate that our costs for this project through the end of 2008
      will
      be approximately $5.0 million. We are currently unable to estimate the time
      or
      the cost required to complete the commercialization of this
      technology.





17


*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.
      Additional territories may be added by written agreement of the parties. We
      are
      currently in discussions with two independent laboratories to test the
      technology, and we intend to continue to explore commercial exploitation of
      the
      technology. 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.





*DDS
      Technologies USA, Inc.*





In
      October 2005, we entered into a marketing and licensing agreement with DDS
      Technologies USA, Inc. under which we obtained an exclusive, non-transferable
      license to an issued United States patent with claims relating to a micrometric
      separator for the classification of mixtures of solid particulate materials
      and
      related dry disaggregation technologies. Our license is limited to the
      production of ethanol feedstock and byproducts within the United States, but
      the
      agreement provides that we may sell ethanol and byproducts produced through
      the
      practice of the licensed technologies worldwide. As of January 1, 2007, this
      agreement is no longer exclusive. We are examining whether and how to pursue
      the
      use of this technology as part of our business plan.




**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 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.





18


**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 plan 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 filing 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.





19


Under
      these agreements, we have paid Virginia Tech $75,689 through March 1,
      2007.





*Queen’s
      University, Kingston, Ontario*





In
      September 2004, through our acquisition of Ethanol
      Extraction Technologies, Inc. ,
      we
      obtained an exclusive, worldwide royalty-bearing license from PARTEQ Research
      and Development Innovations, the technology transfer agency of Queen’s
      University in Kingston, Ontario, for the issued United States and Canadian
      patents with claims directed toward extractive fermentation. Our license is
      subject to research rights retained by PARTEQ and the Canadian Ministry of
      Energy and Mines. PARTEQ may terminate our license or reduce our excusive
      license to a non-exclusive license if we fail to use commercially reasonable
      efforts to exploit the licensed technology or fail to endeavor diligently to
      develop, manufacture and sell products that incorporate the licensed technology.
      Otherwise, this license will terminate upon the expiration of the later of
      September 28, 2014 or the date on which the last of the licensed patents
      expires. PARTEQ may also terminate the license agreement if we become insolvent
      or bankrupt or if we breach an obligation under the agreement and fail to cure
      our breach with 60 days after notice from PARTEQ of our breach.





Pursuant
      this agreement, we agreed to pay PARTEQ royalties equal to 1.0% on the net
      sale
      of any product that incorporates the licensed technology until the last patent
      expires and 0.25% thereafter for the term and 1.0% on any equipment that enables
      the use of the licensed technology and milestone payments of $2,500 per million
      gallons of nameplate capacity for each plant built, retrofitted or brought
      on-line during the term of the agreement that incorporates the licensed
      technologies. We also agreed to pay 10% of any revenues we receive through
      the
      sublicensing of the licensed technologies. Under this agreement, we have made
      no
      payments to PARTEQ through March 1, 2007, although Ethanol Extraction
      Technologies, Inc. paid PARTEQ a license issue fee of $30,000 before we acquired
      it.




The
      last
      of the patents licensed under this agreement has expired. Having done an
      extensive reevaluation of this technology and given the status of our other
      projects, we have discontinued the current development of this technology.





*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





20




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 March
      1, 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.




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. Either
      party may terminate this agreement upon written notice. 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.
      The
      new agreement has a term that expires on November 30, 2007 and requires us
      to
      pay to FPL a total of $250,000, payable in four equal quarterly installments
      beginning January 15, 2007. As of March 1, 2007, under these agreements, we
      have
      paid WARF and the FPL $250,000 under the first agreement and $62,500 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





21




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 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 $300,000 through March
      1,
      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





22




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 22,
      2007, 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:




**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.





23


*DDS
      Technologies USA, Inc.*





In
      October 2005, we entered into a marketing and licensing agreement with DDS
      Technologies USA, Inc. under which we obtained an exclusive, non-transferable
      license to an issued United States patent with claims relating to a micrometric
      separator for the classification of mixtures of solid particulate materials
      and
      related dry disaggregation technologies. Our license is limited to the
      production of ethanol feedstock and byproducts within the United States but
      the
      agreement provides that we may sell ethanol and byproducts produced through
      the
      practice of the licensed technologies worldwide. As of January 1, 2007, this
      agreement is no longer exclusive. Either party may terminate the agreement
      upon
      a material breach by the other, subject to the breaching party’s right to cure
      within 30 days after written notice.





The
      agreement provides that we may purchase machines embodying the licensed
      technology from DDS. We are obligated to pay DDS a royalty equal to 1.25% of
      our
      revenues from the sale of ethanol produced by any such machines (subject to
      a
      reduction to .25% if our exclusive right to act as marketing agent is terminated
      as described below) and 4.0% of our revenues from the sale of any byproducts
      produced by the machines. We also agreed to pay DDS a milestone payment equal
      to
      $2,500 for each 1 million gallons of nameplate capacity of each of our plants
      at
      which the machines are located.





Under
      this agreement, we were also appointed DDS’s exclusive marketing agent for
      machines embodying the licensed technologies. We agreed to purchase one machine
      for use as a demonstration model at our BioFuels facility. In consideration
      of
      our performance of marketing activities under the agreement, DDS issued to
      us
      200,000 shares of its common stock and paid us a one-time fee of $50,000 and
      agreed to pay us 10% of their revenues upon the sale of any machines embodying
      the licensed technologies, whether or not we introduced the purchaser of the
      machine to DDS. Because Xethanol did not buy 10 machines during 2006, our
      exclusive right to act as marketing agent has been converted into a
      non-exclusive right.





Through
      March 1, 2007, we have not paid DDS any amount under this agreement. We are
      examining whether and how to pursue the use of this technology as part of our
      business plan.




In
      connection with this agreement, we entered into a mutual release with DDS,
      by
      which each party discharged the other from all claims and liabilities and
      jointly filed dismissals with prejudice of all claims relating to legal actions
      concerning our investment in a joint venture called DDS-Xethanol,
      LLC.





**Joint
      Venture Agreements**





To
      date,
      in pursuit of our co-location strategy we have organized three subsidiaries:
      CoastalXethanol, NewEnglandXethanol and 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. We acquired an 80% membership interest in
      CoastalXethanol for a capital contribution of $40,000 and Coastal Energy
      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.





On
      May
      30, 2006, we entered into an organizational agreement and an operating agreement
      with Coastal Energy and CoastalXethanol. The organizational agreement
      contemplates that CoastalXethanol will
      develop and operate each facility through a limited liability company specially
      formed for that purpose and that CoastalXethanol will seek investment capital
      from third parties for purposes of funding the development and operation of
      each
      facility. We have the right, but not the obligation, to invest in any special
      limited liability company on the same terms as are offered to any third party
      investors.





24


The
      organizational agreement provides that CoastalXethanol will provide management
      services to each special limited liability company. In consideration of those
      services, each special limited liability company will pay CoastalXethanol the
      following management fees:





·
            commencing
                on the date that a special limited liability company acquires title
                to the
                property on which a facility is to be built and ending on the earlier
                of
                the date on which (a) the facility first produces ethanol in commercial
                quantities or (b) CoastalXethanol discontinues development of that
                facility, a monthly fee of $15,000 per month, payable on the tenth
                day of
                each month during the period;


·
              commencing
                  on the date that a special limited liability company first produces
                  ethanol in commercial quantities and thereafter until the first
                  calendar
                  month in which the operating cash flow of that special limited
                  liability
                  company is positive, a monthly fee of $15,000 per month, payable
                  on the
                  tenth day of each month during the period;
                  and


·
            commencing
                with the first month following the first calendar month in which
                the
                operating cash flow of the special limited liability company is positive,
                a monthly fee equal to the greater of (a) $15,000 or (b) the sum
                of (x) 3%
                of the gross revenues of the facility and (y) 2% of the net income
                of the
                special limited liability company with respect to that month, payable
                on
                the tenth day of each month during the
                period.




The
      organizational agreement provides that CoastalXethanol may loan Coastal Energy
      up to $63,000 in any month as Coastal Energy may request for working capital
      to
      the extent necessary for Coastal Energy to provide the services it is required
      to perform under the agreement. Those loans are repayable on demand, bear
      interest at the prime rate, and are repayable from any distributions by
      CoastalXethanol to Coastal Energy in respect to Coastal Energy’s membership
      interest in CoastalXethanol. As of March 1, 2007, we had advanced approximately
      $9.6 million to CoastalXethanol for working capital and investment purposes,
      and
      CoastalXethanol has loaned $630,000 to Coastal Energy for working capital
      purposes. CoastalXethanol has provided a 100% reserve against its loans to
      Coastal Energy pending CoastalXethanol having distributable cash
      flow.





Under
      the
      organizational agreement, we granted Coastal Energy and each special limited
      liability company the exclusive right to use our technologies for the
      development and operation of ethanol production facilities in certain geographic
      areas in which CoastalXethanol intends to construct its facilities. In
      consideration of this license, CoastalXethanol and each special limited
      liability company are obligated, jointly and severally, to pay us a license
      fee
      of up to $1,000,000 with respect to each facility, based on the achievement
      of
      certain milestones, and over time if each special limited liability ever
      achieves operating profitability. Under the organizational agreement, we granted
      Coastal Energy a warrant to purchase shares of our common stock. Please see
      “Description of Formation and Capitalization - Warrants Issued in Connection
      with Organization of CoastalXethanol LLC” above.




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. The acquisition
      of the Augusta facility was wholly financed by a loan from Xethanol. The loan
      is
      evidenced by a note that provides for five annual payments of principal and
      interest with the first annual payment due on the first anniversary of the
      date
      upon which Augusta BioFuels begins commercial ethanol production. So long as
      the
      note is outstanding, we will receive an extra 10% of any distributions made
      by
      CoastalXethanol with respect to its membership interests. To the extent the
      amount outstanding under the note ever decreases, the extra 10% that we are
      entitled to receive would be reduced proportionately. 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 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.





25


On
      March
      5, 2007, we, along with CoastalXethanol initiated an action against Coastal
      Energy in the Supreme Court of the State of New York. Our complaint alleges,
      among other things, that Coastal Energy failed to repay to CoastalXethanol
      loans
      in the principal amount of $630,000, plus interest, and that Coastal Energy
      has
      failed to properly account for the expenditure of certain of our funds and
      those
      of CoastalXethanol. In the complaint, we and CoastalXethanol seek from Coastal
      Energy 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.





*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. Please see “Description of Formation and Capitalization - Warrants
      Issued in Connection with Organization of NewEnglandXethanol, LLC”
above.





In
      December of 2006, our NewEnglandXethanol joint venture effectively ended based
      on a disagreement between us and Global Energy with respect to the actions
      that
      Global Energy and we were required to take pursuant to our joint venture. We
      do
      not currently believe that the NewEnglandXethanol joint venture will conduct
      any
      further business.





**Research
      and Development**





In
      conjunction with the development of our licensed technologies, we incurred
      research and development costs of $851,830 during the year ended December 31,
      2006 and $133,420 during the year ended December 31, 2005.





**Sales
      and Marketing**





We
      sell
      all of the ethanol we produce at our BioFuels 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 price determined on
      a
      pooled basis. The pool includes Aventine’s ethanol production as well as ours
      and the production of other small producers that are members of the Aventine
      marketing alliance. 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. 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 BioFuels. In July 2006, Aventine agreed that it would
      purchase all of the 41 million gallons that we anticipate we will be capable
      of
      producing at BioFuels when we have completed our expansion of the facility.




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





**Raw
      Material Supply**





Our
      BioFuels 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, 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, approximately 8,000 bushels, or approximately one and a half
      days supply, is kept on-site.





26


**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 BioFuels 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, and for the year
      ended December 31, 2006, we purchased 8,017 megawatt hours.





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.





**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





27




authorized
      to emit hazardous air pollutants above the threshold level, then we are required
      to comply with the NESHAP related to our manufacturing process and would be
      required to come into compliance with another NESHAP applicable to boilers
      and
      process heaters by September 13, 2007. New or expanded facilities would be
      required to comply with both standards upon startup if they exceed the hazardous
      air pollutant threshold. In addition to costs for achieving and maintaining
      compliance with these laws, more stringent standards may also limit our
      operating flexibility. Because other domestic ethanol manufacturers will have
      similar restrictions, however, we believe that compliance with more stringent
      air emission control or other environmental laws and regulations is not likely
      to materially affect our competitive position.




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





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**





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 97
      facilities, ranging in size from 300,000 to 300 million gallons per year,
      located predominately in the Corn Belt in the Midwest. According to the American
      Coalition for Ethanol, the largest domestic producer of ethanol is Archer
      Daniels Midland, which owns some of the largest plants in the country. Archer
      Daniels Midland accounts for approximately one-fifth of all domestic capacity
      with more than 1 billion gallons of production. Its larger plants are wet
      milling, as opposed to dry milling, and each plant produces 150 to 300 million
      gallons of ethanol per year. These large plants have certain cost advantages
      and
      economies of scale.




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. However, infrastructure for commercial biomass-to-ethanol
      production is yet to be developed. We believe our long-term growth prospects
      in
      biomass-to-ethanol depend on our ability to acquire and commercialize new
      technologies. As we continue to advance our biomass technology platform, we
      are
      likely to encounter competition for the same technologies from other companies
      that are also attempting to manufacture ethanol from cellulosic biomass
      feedstocks.




**Employees**





We
      had 34
      employees as of March 1, 2007, 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.




**Corporate
      Information**





Our
      corporate headquarters are located at 1185 Avenue of the Americas, 20th Floor,
      New York, New York 10036, and our telephone number is (646) 723-4000. Our
      website is located at www.xethanol.com.





28


We
      file
      annual, quarterly and current reports, proxy statements and other information
      with the SEC. You may read and copy any reports, statements or other information
      that we file at the SEC’s public reference facilities at 100 F Street, N.E.,
      Washington, DC 20549. Please call the SEC at (800) SEC-0330 for further
      information regarding the public reference facilities. The SEC maintains a
      website, http://www.sec.gov, which contains reports, proxy statements and
      information statements and other information regarding registrants that file
      electronically with the SEC, including us. Our SEC filings are also available
      to
      the public from commercial document retrieval services.





You
      may
      also request a copy of our filings at no cost by writing us at: Xethanol
      Corporation, 1185 Avenue of the Americas, 20th Floor, New York, New York 10036,
      Attention: Mr. Gary Flicker, Chief Financial Officer, or telephoning us at:
      (646) 723-4000.





29


**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 limited operating history in the ethanol
      industry.***





Old
      Xethanol began ethanol production operations in September 2003 with the
      acquisition of our Permeate Refining plant in Hopkinton, Iowa. In October 2004,
      Old Xethanol acquired our second plant in Blairstown, Iowa, which commenced
      operations in July 2005. Since the inception of our current business operations,
      we have been engaged in organizational activities, including developing a
      strategic operating plan, entering into contracts, hiring personnel, developing
      or licensing processing technology, raising private capital and seeking
      acquisitions. Accordingly, we have a limited relevant operating history that
      you
      can use to evaluate our performance and future prospects.





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





We
      incurred net losses of $20,178,729 for the year ended December 31, 2006;
      $11,377,075 for the year ended December 31, 2005; and $2,570,918 for the year
      ended December 31, 2004. From our inception on January 24, 2000 through December
      31, 2006, we reported an accumulated deficit of $32,551,096. 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.





***Our
      biomass-to-ethanol technologies are unproven on a large-scale commercial basis
      and could fail to perform 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.





30


***Our
      licensed diesel biofuel technology could fail to perform in a manner that makes
      its production commercially feasible.***





We
      are
      currently in discussions with two independent laboratories to test the H2Diesel
      technology that we have sublicensed for the production of a diesel biofuel.
      This
      technology has never been used in commercial production, and there can be no
      assurance that it will be commercially feasible to manufacture products using
      that technology or that it will not require further research and development,
      at
      considerable expense, to do so, or that we will be able to distribute the
      products we make effectively and profitably.





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





As
      of
      February 28, 2007, we had cash and cash equivalents of approximately $22.0
      million. We anticipate significant capital expenditures and investments over
      the
      next 12 months related to our strategic initiatives. Our current cost projection
      for the design, engineering and construction of the planned 35 million gallon
      ethanol production facility at our BioFuels site is approximately $75 million.
      We also plan to construct a pilot plant at our Spring Hope site using wood
      chips
      as the primary feedstock. If we are successful in proving the technology on
      a
      pilot basis, we will seek to ultimately increase the rate of production at
      the
      facility to 35 million gallons per year. We are currently developing an initial
      and long-term investment budget for this project. In December 2006, we formed
      a
      joint venture to invest in a pilot project to produce ethanol from citrus waste,
      and we anticipate spending approximately $1 million during the next 12 months
      to
      pursue this project. We are also currently evaluating project possibilities
      for
      our Augusta, Georgia site. We plan to use a portion of our current cash to
      provide seed capital for these projects while we analyze our financing options.
      We will also use cash on hand, as well as cash provided by operations, to cover
      corporate overhead and fund our research and development agreements.




We
      are
      currently in discussions with several intermediaries, advisors and investors
      to
      structure and raise the funds to finance these projects. As of March 1, 2007,
      we
      also have access to approximately $10 million in equity funding through our
      common stock purchase agreement with Fusion Capital. We can draw down on our
      agreement with Fusion Capital only if the market price of our common stock
      remains above $2.00. Other than our agreement with Fusion Capital, 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 may need to curtail expenses,
      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 require
      significant payment obligations and covenants that restrict how we operate
      our
      business.





***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 and enter into co-location joint
      ventures. We intend, after we make an acquisition, to integrate the acquired
      assets into our operations and 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, 2007, 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. Further,
      one of our key strategic initiatives is to develop a diesel biofuel production
      capability using our exclusive sublicense we acquired from H2Diesel




31




Holdings,
      Inc. According to its SEC filings, H2Diesel
      is obligated to pay $9.1 million in additional payments to the owner of the
      patent of the licensed technology, including (a) $600,000 on July 31, 2007
      and
      (b) $1.5 million on October 31, 2007. To make these payments, H2Diesel must
      raise additional capital, and to our knowledge, H2Diesel has not done so.
      H2Diesel’s most recent quarterly report on Form 10-Q 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, we could lose our
      sublicense of the technology.




***Our
      joint ventures may not be successful. In that event, our investments may not
      be
      profitable, our management may be distracted and we may be unable to pursue
      more
      attractive opportunities.***





We
      have
      entered into two joint ventures in which we are involved in disputes or
      litigation with our joint venture partners. In May 2006, we organized
      CoastalXethanol, LLC to develop plants for the production of ethanol in Georgia
      and parts of South Carolina. We own 80% of CoastalXethanol, which purchased
      the
      Augusta, Georgia manufacturing complex described elsewhere in this report
      through a wholly owned subsidiary. On March 5, 2007, we, along with
      CoastalXethanol, initiated litigation against our joint venture partner alleging
      that it failed to repay loans and failed to properly account for the funds
      it
      spent. We can offer no assurances regarding the ultimate resolution of this
      litigation. We may incur material legal fees, and our management may be
      distracted. Until this situation is resolved, CoastalXethanol is unlikely to
      be
      able to develop our Augusta facilities as we intend or to pursue additional
      business opportunities. In addition, we organized NewEnglandXethanol, LLC in
      June 2006 to produce ethanol in the New England states. NewEnglandXethanol
      was a
      joint venture with Global Energy and Management LLC with Global Energy and
      us
      each owning 50% of the membership interests in NewEnglandXethanol. In December
      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 currently believe that the NewEnglandXethanol joint venture will conduct
      any
      further business. We can offer no assurances that we will be able to enter
      into
      successful joint ventures in the future.





As
      a
      result of the joint ventures described above and other joint ventures that
      may
      prove to be unsuccessful, our investments may not be profitable, our management
      may be distracted and we may be unable to pursue more attractive
      opportunities.





***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




32




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.”





***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. These producers may
      be
      able to achieve substantial economies of scale and scope, thereby substantially
      reducing their fixed production costs and their marginal production costs.
      If
      these producers are able to substantially reduce their marginal production
      costs, the market price of ethanol may decline and we may be not be able 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 us, 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.





***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. 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.***





Unless
      and until we are able to integrate waste starches and sugars and biomass
      feedstock into our production system, we will produce ethanol 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. 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.





33


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 has increased
      materially in 2006 and in early 2007. Substantial increases in the price of
      corn
      have in the past caused some ethanol plants to temporarily cease production
      or
      lose money. 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.





***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
      BioFuels facility in Blairstown, Iowa for the production of ethanol. All of
      our
      2006 sales were from our BioFuels 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.





***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 BioFuels 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.




34





**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, and 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. We cannot assure you, however, 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
      of the minimum levels of renewable fuels included in gasoline mandated by the
      Energy Policy Act of 2005 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. 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.





***While
      the Energy Policy Act of 2005 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.





***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.




35




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. In particular, some in the ethanol industry have expressed
      concern about a new plant in El Salvador operated by Cargill, Inc., one of
      the
      largest ethanol producers in the United States. The plant takes the water out
      of
      Brazilian ethanol and then imports dehydrated ethanol from El Salvador to the
      United States duty-free, according to critics of the company. Because production
      costs for ethanol in Brazil are estimated to be significantly less than
      production costs for ethanol in the United States, the importation of Brazilian
      ethanol duty free through El Salvador or another country exempted from the
      tariff may negatively affect the demand for domestic ethanol and the price
      at
      which we sell our ethanol.




***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 future environmental regulations, although we did not incur
      any
      capital expenditures for environmental control in 2005 and 2006. 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.





36


**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 22, 2007, the high and low bid or closing sale price for our common stock
      has been $15.19 and $2.03 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
      may not be able 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 13,486,622
      were
      reserved for issuance as of March 1, 2007. Of the shares of common stock we
      have
      reserved for issuance, 10,381,321 shares were reserved for issuance on exercise
      of outstanding options or warrants to purchase common stock. Our board of
      directors has the authority, without further action or vote of our stockholders,
      to issue any or all of the 57,904,275 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.





The
      remaining 3,105,301 shares of our common stock reserved for issuance were
      reserved for sale under our October 18, 2005 stock purchase agreement with
      Fusion Capital Fund II, LLC. Under that agreement, Fusion Capital is obligated,
      subject to certain conditions, to purchase on each trading day $40,000 of our
      common stock




37




up
      to an aggregate of $20 million over a 25-month
      period, subject to earlier termination at our discretion. We may, in our
      discretion, suspend Fusion Capital’s obligation to purchase our common stock or
      decrease the minimum daily amount that Fusion Capital must purchase. We may
      also, in our discretion, elect to sell more of our common stock to Fusion
      Capital than the minimum daily amount. We have not sold any shares to Fusion
      since April 20, 2006. The purchase price of the shares of common stock purchased
      by Fusion Capital on each trading day will be equal to lower of the (A) the
      lowest sale price of the common stock on that trading day and (B) the arithmetic
      average of the three lowest closing sale prices for the common stock during
      the
      twelve consecutive trading days ending immediately before the trading day.
      Fusion Capital does not have the right or the obligation to purchase shares
      of
      our common stock if the price of our common stock is less than $2.00. Fusion
      Capital may not purchase shares under the agreement if it would then
      beneficially own more than 9.9% of our outstanding common stock. Because the
      number of shares that we sell under the stock purchase agreement depends upon
      the market price, we cannot currently estimate the number of shares of common
      stock that we might ultimately issue to Fusion Capital. We began selling shares
      to Fusion Capital under the stock purchase agreement on January 3, 2006. As
      of
      March 1, 2007, we have sold 1,894,699 shares for total gross proceeds of
      $9,846,016. All shares of common stock that we sell under the stock purchase
      agreement are covered by a registration statement on Form SB-2 (File No.
      333-129191) that became effective on December 28, 2005 and are saleable without
      restriction immediately upon issuance. Issuances under the stock purchase
      agreement 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 42,095,725 shares of our common
      stock may be offered from time to time in the open market, including shares
      reserved for issuance to Fusion and shares reserved for issuance upon 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. In general, a person who
      has held restricted shares for a period of one year 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 two-year holding
      requirement, non-affiliates of an issuer may make sales under Rule 144 without
      regard to the volume limitations, and any of the restricted shares may be sold
      by a non-affiliate after they have been held two years. 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 the fiscal year beginning January
      1,
      2008, our independent registered public accounting firm will be required to
      issue an attestation report on our internal controls over financial reporting.
      (If our public float exceeds $75 million on June 30, 2007, our independent
      registered public accounting firm will be required to issue an attestation
      report on our internal controls over financial reporting beginning with the
      year
      ended December 31, 2007.)





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.





38


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





We
      and
      some of our current and former officers and directors are defendants in class
      action 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 current and 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 individual defendants are Lawrence
      S.
      Bellone, a director, our Executive Vice President, Corporate Development and
      principal accounting officer and our former Chief Financial Officer; Christopher
      d’Arnaud-Taylor, a director and our former 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
      actions complaints were thereafter filed in the same court, all of which have
      been consolidated into one action. Management has instructed counsel to
      vigorously represent and defend our interests in this litigation.




Starting
      in late December 2006, three derivative actions were also filed in the United
      States District Court for the Southern District of New York, purportedly brought
      on behalf of Xethanol and naming the following individual defendants: Lawrence
      S. Bellone; Christopher d’Arnaud-Taylor; Jeffrey S. Langberg; David Ames, a
      director and our Chief Executive Officer and President; and directors William
      Behrens and Richard Ditoro, and naming Xethanol as a nominal defendant. These
      lawsuits allege that Xethanol was injured by the actions of the individual
      defendants, based on the same factual allegations found in the lawsuits
      described in the previous paragraph. Plaintiffs in these suits seek unspecified
      compensatory damages, injunctive relief and reasonable costs and expenses
      including counsel fees and experts’ fees. We expect that these lawsuits will
      also be consolidated into one derivative suit and that plaintiffs will serve
      a
      consolidated complaint on or about March 28, 2007. 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 these 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.





***Xethanol
      Corporation is engaged in other litigation that could have a material adverse
      effect on our business, results of operations and financial condition.***





Xethanol
      Corporation is a defendant in an action against our company in a in the United
      States District Court for the Middle District of Florida, Orlando Division.
      The
      complaint alleges that the plaintiffs are beneficial owners of 300,000 shares
      of
      common stock of Old Xethanol, that the plaintiffs are entitled to shares of
      Xethanol Corporation as a result of the reverse merger, or in the alternative,
      that the plaintiffs are entitled to damages for breach of contract, conversion,
      and breach of fiduciary duty. The case is on the trial calendar for trial during
      a trial term commencing April 2, 2007. Management
      has instructed counsel to vigorously represent and defend our interests in
      this
      litigation.





On
      March
      5, 2007, Xethanol Corporation, along with CoastalXethanol LLC (“CX”), initiated
      an action against Coastal Energy Development, Inc. (“CED”) in the Supreme Court
      of the State of New York, County of New York. The complaint alleges, among
      other
      things, that CED has failed to repay to CX loans in the principal amount of
      $630,000, plus interest, and that CED has failed to properly account for certain
      funds of Xethanol and CX. In the complaint, Xethanol and CX seek damages from
      CED 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. Management
      has instructed counsel to vigorously represent our interests in this
      litigation.





39


Litigation
      is subject to inherent uncertainties, and an adverse result in these 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.





***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.





40


**ITEM
      2.**  **DESCRIPTION
      OF PROPERTY.**





We
      maintain our principal executive and administrative 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
      12, Certain Relationships and Related Transactions - Office Space for a more
      detailed discussion of this arrangement .





We
      own
      our Permeate Refining facility located in Hopkinton, Iowa (near Cedar Rapids,
      Iowa) that consists of a 25,000 square foot ethanol plant (currently not
      operating); 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
      67
      acre vacant lot adjoining the property; our Augusta BioFuels facility located
      in
      Augusta, Georgia that consists of multiple facilities on 40.8 acres; and our
      Spring Hope 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.





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. We paid the full amount of the rent payable under the lease in
      advance in December 2006.





We
      believe that our facilities other than our Permeate facility are in good working
      order and are sufficient to meet our current requirements. Given Permeate’s
      small production size and location in a residential community, as well as recent
      acquisitions of more attractive sites, we have now determined that Permeate
      is
      no longer a core asset. We are currently considering alternatives to maximize
      its value, including relocating a substantial portion of its equipment to one
      or
      more of our other sites and selling or otherwise disposing of Permeate’s
      remaining assets. As a result, we recognized an impairment loss of $513,942
      that
      is included in our audited consolidated statements of operations for the year
      ended December 31, 2006 included in this report.


41


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





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
      our
      company in the Circuit Court of the Ninth Judicial Circuit, in and for Orange
      County, Florida, Case No. 2005-CA-6351. The complaint alleges that the
      plaintiffs are beneficial owners of 300,000 shares of common stock of Old
      Xethanol. The complaint further alleges that the Rolls are entitled to have
      issued in their name the number of shares of our common stock to which they
      are
      entitled pursuant to the merger agreement dated as of February 2, 2005 between
      Old Xethanol, Zen, and Zen Acquisition. The complaint seeks 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. We filed a notice of removal on August
      29, 2005, and the case is now pending in the United States District Court for
      the Middle District of Florida, Orlando Division (Case No.
      6:05-CV-1263-ORL-28-JGG). On September 8, 2005, we filed our answer and
      affirmative defenses to Plaintiffs’ complaint, asserting that the Rolls do not
      have any ownership interests in shares of our common stock. The discovery phase
      of the case ended on October 5, 2006. Court ordered mediation occurred on
      October 30, 2006. The mediation did not resolve the litigation. The case is
      on
      the trial calendar for trial during a trial term commencing April 2, 2007. Management
      has instructed counsel to vigorously represent and defend our interests in
      this
      litigation.




In
      October 2006, a shareholder class action complaint was filed in the United
      States District Court for the Southern District of New York. Six nearly
      identical class actions complaints were thereafter filed in the same court,
      all
      of which were then consolidated into one action, In re Xethanol Corporation
      Securities Litigation, 06 CV 10234 (HB) (S.D.N.Y.). On March 23, 2007, the
      plaintiffs filed a superseding Amended and Consolidated Class Action Complaint,
      purportedly on behalf of all purchasers of Xethanol common stock during the
      period January 31, 2006 through August 8, 2006 (the “Consolidated Complaint”).
      The Consolidated Complaint alleges, among other things, that we and some of
      our
      current and former officers and directors made materially false and misleading
      statements regarding our investors, management, operations and profitability
      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 director,
      our
      Executive Vice President, Corporate Development and principal accounting officer
      and our former Chief Financial Officer; Christopher d’Arnaud-Taylor, a director
      and our former Chairman, President and Chief Executive Officer; and Jeffrey
      S.
      Langberg, a former director. The plaintiffs seek, among other things,
      certification of the action as a class action, unspecified compensatory damages
      and reasonable costs and expenses, including counsel fees and expert fees.
      Management has instructed counsel to vigorously represent and defend our
      interests in this litigation.





Starting
      in late December 2006, three derivative actions were also filed in the United
      States District Court for the Southern District of New York, purportedly brought
      on behalf of Xethanol, naming individual defendants Lawrence S. Bellone;
      Christopher d’Arnaud-Taylor; Jeffrey S. Langberg; David Ames, a director and our
      Chief Executive Officer and President; and directors William Behrens and Richard
      Ditoro; and naming Xethanol as a nominal defendant, Radunz v. Bellone, et al.,
      06 CV 15536 (HB) (S.D.N.Y.); Russ v. Bellone, et al., 07 CV 00991 (HB)
      (S.D.N.Y.); and Fay-Hammonds v. Bellone, et al., 07 CV 00991 (HB) (S.D.N.Y.)
      (the “Derivative Suits”). These Derivative Suits allege that Xethanol was
      injured by the actions of the individual defendants, based on the same factual
      allegations found in the class action suits. Plaintiffs in these suits seek
      unspecified compensatory damages, injunctive relief and reasonable costs and
      expenses including counsel fees and experts’ fees. On March 16, 2007, the Court
      consolidated the Derivative Suits into one action, In re Xethanol Corporation
      Derivative Litigation, 06 CV 15536, and ordered Plaintiffs to file their
      Consolidated Complaint on or before March 28, 2007. Management has instructed
      counsel to vigorously represent and defend our interests in this
      litigation.





On
      March
      5, 2007, Xethanol, along with CoastalXethanol LLC (“CX”), initiated an action
      against Coastal Energy Development, Inc. (“CED”) in the Supreme Court of the
      State of New York, County of New York (Xethanol Corporation and CoastalXethanol
      LLC v. Coastal Energy Development, Inc., Index No.:600685/07). The complaint
      alleges, among other things, that CED has failed to repay to CX loans in the
      principal amount of $630,000, plus interest, and that CED has failed to properly
      account for certain funds of Xethanol and CX. In the complaint, Xethanol and
      CX
      seek damages from CED 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.





42


Litigation
      is subject to inherent uncertainties, and an adverse result in these 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.








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





No
      matter
      was submitted to a vote of security holders during the fourth quarter of
      2006.







43


**PART
      II**





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





**Holders**





As
      of
      March 27, 2007, there were approximately 199 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,
      2005
      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, 2006 (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, 2005 (1)**First
                  Quarter (through February 2)
              
              $
                  1.05
              
              
              $
                  0.80First
                  Quarter (February 3 to March 31)
              
              5.00
              
              
              3.00Second
                  Quarter
              
              4.50
              
              
              2.70Third
                  Quarter
              
              7.77
              
              
              3.25Fourth
                  Quarter
              
              6.05
              
              
              3.70**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


(1)
            First
                quarter 2005 market information is divided at February 2, 2005, the
                closing date of our reverse merger transaction. Our shares of common
                stock
                became eligible for quotation on the OTC Bulletin Board in 2003,
                when
                quotations related only to Zen Pottery Equipment, Inc. (under the
                symbol
                ZPYE.OB). In April 2005, our symbol was changed to
                XTHN.OB.




**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.




44


**Sales
      of Unregistered Securities**





On
      June
      12, 2006, Mr. Jeffrey S. 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. On December 20, 2006, we entered into an agreement
      with Mr. Langberg in which, we agreed, among other things, 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. The
      securities issued pursuant to the Organizational Agreement were issued in
      reliance on the exemptions from the registration requirements of the Securities
      Act of 1933 (“Act”) provided by Section 4(2) of the Act.





45


**ITEM
      6.**  **MANAGEMENT’S
      DISCUSSION AND ANALYSIS** **OR
      PLAN 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, 2006.
      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 $24.2 million as of December 31,
      2006
      and $22.0 million as of February 28, 2007. Previously, we had raised net cash
      proceeds of $9,611,680 through the sale of our shares to Fusion Capital, and
      we
      received $31,636,721 in net proceeds from our April 2006 private placement
      and
      our concurrent private placement to Goldman Sachs.





In
      August
      2006, we purchased a former pharmaceutical manufacturing complex located in
      the
      Augusta, Georgia from Pfizer Inc. for approximately $8.4 million in cash. In
      December 2006, we received approximately $3.1 million in cash for the sale
      of
      equipment at the Augusta site. In November 2006, we purchased a former medium
      density fiberboard plant located in Spring Hope, North Carolina from Carolina
      Fiberboard Corporation, LLC for approximately $4.0 million in cash, 1,197,000
      shares of common stock and warrants to purchase an additional 300,000 shares
      of
      common stock at $4.00 per share. During 2006, we also invested cash of
      approximately $2.9 million related to our new planned ethanol facility at our
      Blairstown site. For the year ended December 31, 2006, we used a total of
      approximately $13.0 million in net cash in connection with investing
      activities.





We
      anticipate significant capital expenditures and investments over the next 12
      months and longer related to our growth program. We plan to build a new 35
      million gallon production facility at our existing Blairstown location. We
      expect the total cost of our Blairstown project to be approximately $75 to
      $80
      million. We also plan to construct a pilot plant at our Spring Hope site using
      wood chips as the primary feedstock. If we are successful in proving the
      technology on a pilot basis, we will seek to ultimately increase the rate of
      production at the facility to 35 million gallons per year. We are currently
      developing an initial and long term investment budget for this project. In
      December 2006, we formed a joint venture to invest in a research project to
      produce pilot ethanol from ethanol from citrus waste. We are also evaluating
      project possibilities for our site in Augusta Georgia.





We
      plan
      to use a portion of our current cash to fund these projects and to provide
      seed
      equity for new projects while we analyze financing options. We will also use
      cash on hand as well as cash provided by operations to fund corporate overhead,
      expand infrastructure to accommodate our planned expansion and invest in
      technology and research and development. We will need substantial additional
      capital to pursue our growth 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.




46


**Results
      of Operations**





**Year
      Ended December 31, 2006 Compared to Year Ended December 31,
      2005**





**Net
      Loss.** We
      incurred a net loss of $20,178,729 for the year ended December 31, 2006 versus
      a
      net loss of $11,377,075 for the year ended December 31, 2005. Included in the
      net loss for the year ended December 31, 2006 were non-cash charges totaling
      $14,412,466 or 71.4% of our net loss. Significant non-cash charges resulted
      primarily from:





·
            issuance
                of stock, options and warrants for services rendered of
                $7,203,021;


·
              an
                  impairment loss on investment in H2Diesel of
                  $2,321,514;


·
            issuance
                of warrants in connection with debt conversion of $2,170,212;


·
              depreciation
                  and amortization of $791,326;


·
              an
                  impairment loss on fixed assets of $513,942,
                  and


·
              a
                  loss on equity of H2Diesel of $1,626,603 offset by management fee
                  income
                  of $436,598.





The
      increase in net loss of $8,801,654 for 2006 as compared to 2005 resulted
      primarily from:





·
            an
                increase in general and administrative expenses of
                $8,934,692;


·
              an
                  increase in research and development expenses of $718,410;


·
              an
                  increase in other expenses of $3,821,390;


·
              an
                  impairment loss on fixed assets of
                  $513,942;


·
              offset
                  by a decrease in write-off of net intangible assets and goodwill
                  of
                  $3,635,416, a one-time item in 2005; and


·
              an
                  increase in gross profit of
                  $1,551,364.





Our
      ability to achieve profitable operations depends in part on increasing revenue
      through planned expansion. Given the uncertainties surrounding the timing of
      adding new capacity as well as predicting gross margin, we cannot assure you
      when we will show profitable results.





**Net
      Sales.** Net **s** ales
      for
      the year ended December 31, 2006 were $11,028,671 compared to $4,264,732 for
      the
      year ended December 31, 2005. Sales during 2006 relate entirely to the BioFuels
      facility, and sales during 2005 relate to the Permeate operations for the first
      six months and to the BioFuels operations for the second six months. During
      the
      year ended December 31, 2006, BioFuels sold 5,248,890 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 $663,572 from the sales
      of
      by-products. Total average revenue per gallon including by-products was $2.10.
      During the year ended December 31, 2005, we sold approximately 79,000 gallons
      of
      ethanol through the Permeate facility at an average price per gallon of $1.25
      and 2,443,353 million gallons of ethanol through the BioFuels facility at an
      average price of $1.60 per gallon, and we generated revenue of approximately
      $335,000 from the sales of by-products.





**Cost
      of Sales.** Cost of
      sales for the year ended December 31, 2006 was $10,090,727 compared to
      $4,878,152 for the year ended December 31, 2005. Cost of sales is comprised
      of
      direct materials, direct labor and factory overhead. Included in factory
      overhead are energy costs, depreciation and repairs and maintenance. The
      increase in cost of sales is directly related to the increase in production
      during the period.





The
      average monthly cost of sales during the year ended December 31, 2006 was
      approximately $1.91 per gallon, reflecting the increased costs of grain during
      the period from a low of $0.79 per gallon in January to a high of $1.26 per
      gallon during December. This increase was partially offset by decreases in
      factory overhead, including energy costs. The BioFuels 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 larger plants.




47


**Gross
      Profit (Loss).** Gross
      profit for the year ended December 31, 2006 was $937,944, or 8.5% of net sales
      versus a gross loss of $613,420 for the year ended December 31, 2005. The
      increase in gross profit is principally due to a higher average selling price
      for the year ended December 31, 2006 compared to the prior year.





**General
      and Administrative Expenses.** General
      and administrative expenses (“G&A”) were $15,294,463 for the year ended
      December 31, 2006 compared to $6,359,771 for the year ended December 31, 2005,
      reflecting a net increase of $8,934,692, or 140.5%. The major component of
      G&A in 2006 was corporate overhead of $12,981,668, or 84.9% of total G&A
      as compared to corporate overhead of $4,983,168 in 2005, or 78.4% of total
      G&A. The increase in 2006 corporate overhead was $7,998,500, or 89.5% of the
      increase in total G&A for 2006 as compared to 2005.





The
      primary components of 2006 corporate overhead expense were: (a) employee
      compensation of $5,586,746 or 43.0% of corporate G&A, including $2,430,820
      in cash compensation and $3,155,926 in equity awards; (b) fees to outside
      advisors, professionals and other service providers of $3,022,000 or 23.3%
      of
      corporate G&A, including cash compensation of $2,123,290 and equity awards
      of $898,710; and (c) compensation to our directors of $2,407,571 or 18.5% of
      corporate G&A, including $20,000 in cash and $2,387,571 in stock option
      awards.





Included
      in fees to outside advisors and other service providers were:





·
            $816,705
                for auditing and legal services;


·
              $404,336
                  for public and investor relations
                  services;


·
              $351,233
                  for capital raising advisory services;


·
              $268,502
                  related to warrants issued to advisory board
                  member;


·
              $251,997
                  for engineering services; and


·
              $241,306
                  in executive search firm
                  services.





Other
      significant items included in corporate overhead were:





·
            $589,995
                related to warrants issued as part of the formation of CoastalXethanol;
                and


·
              $400,785
                  in travel and entertainment
                  expenses.





The
      increase in corporate overhead in 2006 as compared to 2005 was primarily
      attributable to (a) increases in employee compensation, resulting from additions
      to headcount as well as non-cash stock option sign-on and/or incentive bonuses,
      (b) increases in director compensation, resulting from the increase in the
      number of our directors, election of new directors and increases in stock option
      awards to our directors, and (c) increases in fees to outside advisors,
      corresponding to the increased business activity during the year. Other items
      accounting for the increase were increases in travel and entertainment and
      the
      warrants issued as part of the formation of CoastalXethanol.





Other
      significant items that contributed to the net increase in 2006 G&A were:
      higher depreciation expenses, expenses related to our Spring Hope site, expenses
      related to our CoastalXethanol operations, and a decrease in expenses related
      to
      our BioFuels operations that were included in 2005 G&A prior to the plant
      opening in July 2005.





**Research
      and Development.** Research
      and development expenses increased by $718,410 to $851,830 for the year ended
      December 31, 2006 compared to $133,420 for the year ended December 31, 2005.
      This increase reflected our research agreements with the National Renewable
      Energy Laboratory, the USDA Forest Products Laboratory, Virginia Tech and the
      Energy & Environmental Research Center.





**Impairment
      Loss - Fixed Assets** .
      At
      December 31, 2006, we charged $513,942 to expense to recognize an impairment
      loss on fixed assets at our Permeate facility. In anticipation of the possible
      transfer of certain equipment to one or more other company sites and then the
      probable sale or disposal of the remaining assets, we concluded that the
      carrying amount of the remaining assets exceeded their likely disposition value
      based on an analysis of current market prices.





48


**Write-off
      of Intangible Assets and Goodwill.** At
      December 31, 2005, we charged $3,635,416 to expense, representing the
      unamortized cost of acquiring technology licenses, after considering the
      uncertainties surrounding the timing of the commercialization of the licensed
      technologies and to write off goodwill of $205,000 of Permeate. The licenses
      were acquired because of the potential of the licensed technologies to reduce
      the costs of producing ethanol. In assessing the carrying values of these
      licenses, we attempted to evaluate the potential future cash flows related
      to
      each license. Given that these are new and still unproven technologies, we
      were
      unable to generate reliable or predictable cash flows for valuation purposes.
      Further, because of the developmental stage of the technologies, we could not
      be
      assured of when or if they would be commercially viable. We do not believe
      that
      the uncertainty surrounding the ultimate commercialization of any of these
      technologies will have a significant impact on our future results. We acquired
      all of these licenses from UTEK, a publicly traded unrelated technology transfer
      company, as a result of arm’s-length negotiations.




During
      2006, we entered into new research agreements with the institutions holding
      the
      original patents to continue the development and testing and enhancement of
      the
      licensed technologies, with the exception of Queens University of Canada, which
      after further evaluation, we decided not to pursue. We continue to believe
      that
      our portfolio of technologies, as well as our ongoing research and development
      arrangements with the governmental and academic institutions from which we
      acquired the licensed technologies, are an integral part of our growth strategy.





**Interest
      Income.** Interest
      income for the year ended December 31, 2006 increased by $1,115,406 from $68,755
      for the year ended December 31, 2005 to $1,184,161 for the year ended December
      31, 2006. This increase is due directly to the increase in our cash position
      and
      short-term investments as a result of the capital we raised during the second
      quarter of 2006.





**Organizational
      Expenses.** In
      connection with the reverse merger in 2005, we paid $300,000 to the former
      owners of Zen to repurchase 8,200,000 of their Zen shares, which were then
      cancelled at the closing of the reverse merger. This payment was recorded for
      accounting purposes as an organizational expense during the year ended December
      31, 2005.





**Impairment
      Loss - H2Diesel.** At
      December 31, 2006, we recorded a loss on our investment in H2Diesel of
      $2,321,514, after considering H2Diesel’s estimated value at December 31, 2006
      and the illiquidity of our investment. ****





**Loss
      on Royalty Note Conversion.** 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 issue was $2,170,212. Also in connection with
      the conversion, the holders of the notes waived $203,500 in interest accrued
      up
      to the date of conversion. The accrual is reflected in interest expense and
      as
      an offset to the cost of the warrants.





**Loss
      on Equity of H2Diesel.** We
      recorded loss on equity of H2Diesel of $1,626,603 for the year ended December
      31, 2006. This loss represents our portion of H2Diesel’s net losses, based on
      the equity method of accounting, for the period from the effective date of
      our
      investment (April 14, 2006) through December 31, 2006.





**Interest
      Expense.** Interest
      expense decreased by $442,199 from $659,030 for the year ended December 31,
      2005
      to $216,831 for the year ended December 31, 2006. The decrease is the net result
      of (a) $6,600,000 of royalty notes being outstanding during 2006 for 111 days
      as
      compared to $5,000,000 in royalty notes being outstanding from January 19,
      2005
      through August 8, 2005, then $6,600,000 from August 8, 2005 until the notes
      were
      converted in April 2006, and (b) payment in full of the $1,125,000 outstanding
      balance due on the Permeate mortgage note.





49


**Liquidity
      and Capital Resources**





As
      of
      December 31, 2006, we had cash and cash equivalents of $24,183,165. Our working
      capital as of December 31, 2006 was $24,355,146, representing an increase in
      working capital of $24,865,470 compared to a deficit of $510,324 at December
      31,
      2005. As of December 31, 2006, we had outstanding debt instruments totaling
      $332,471.





During
      the year ended December 31, 2006, we used net cash of $5,924,400 for operating
      activities. We used additional cash of $16,137,394 for investing activities.
      Included in cash used for investing was:





·
            $8,413,949
                for the purchase of a former pharmaceutical manufacturing complex
                located
                in Augusta, Georgia;






·
            $4,036,747
                for the purchase of a former medium density fiberboard plant in Spring
                Hope, North Carolina;




·
            approximately
                $2,913,000 used in the preconstruction phase of our Blairstown expansion
                project;


·
              approximately
                  $324,000 for equipment and improvements at our existing Blairstown
                  facility;


·
              a
                  $300,000 contribution to a research and development project;
                  and


·
              $100,000
                  for the purchase of equipment to be used in the manufacture of
                  ethanol
                  from waste citrus peels.





In
      November 2006, after we purchased the Augusta site, we recovered $3,100,000
      from
      the sale of surplus equipment and scrap at that site.





During
      the year ended December 31, 2006, we received net cash proceeds of $42,193,521
      from the sales of our common stock. We raised net proceeds of $9,611,680 by
      selling shares of our common stock to Fusion Capital under a common stock
      purchase agreement dated October 18, 2005. We raised net proceeds of $31,636,721
      on April 13, 2006 from the closing of two separate private offerings of our
      common stock and warrants to purchase our common stock. We received additional
      cash proceeds of $945,120 from the exercise of stockholder
      warrants.





As
      noted
      above, we anticipate significant capital expenditures and investments over
      the
      next 12 months and longer related to our growth program. We plan to build a
      new
      35 million gallon production facility at our existing Blairstown location.
      On
      June 30, 2006, we entered into a $1.87 million contract for the design and
      engineering of the facility and through March 1, 2007 have made payments of
      $540,000 under the contract. We expect the total cost of our Blairstown project
      to be approximately $75 to $80 million. This cost includes approximately $15
      million related to a cogeneration plant. We also plan to construct a pilot
      plant
      at our Spring Hope site using wood chips as the primary feedstock. If we are
      successful in proving the technology on a pilot basis, we will seek to
      ultimately increase the rate of production at the facility to 35 million gallons
      per year. We are currently developing an initial and long-term investment budget
      for this project. 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 and anticipate spending
      approximately $1 million over the next twelve months to pursue this project.
      We
      are also evaluating project possibilities for our Augusta site.





As
      of
      February 28, 2006, we had cash and cash equivalents of approximately $22
      million. We plan to use a portion of our current cash to provide seed equity
      for
      the projects while we analyze financing options. We will also use cash on hand
      as well as cash provided by operations to fund corporate overhead, expand
      infrastructure to accommodate our planned expansion and invest in technology
      and
      research and development.





We
      will
      need substantial additional capital to pursue our growth plans. We may seek
      to
      raise capital through additional equity offerings, debt financing, bond
      financing, asset sales, or a combination of these methods. We are currently
      in
      preliminary discussions with several intermediaries, advisors and investors
      to
      structure and raise the funds to finance these projects. As of March 1, 2007,
      we
      also have access to approximately $10 million in equity funding through our
      common stock purchase agreement with Fusion Capital. We can continue to draw
      down on our agreement with Fusion Capital only if the market price of our common
      stock remains above $2.00. Other than our agreement with Fusion Capital, we
      currently have no commitments for any additional financing,





50




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 may need to curtail expenses, 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**





Our
      discussion and analysis of results of operations and financial condition are
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with accounting principles generally accepted in the United States
      of
      America. The preparation of these 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 provisions for uncollectible accounts receivable and inventories;
      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. These accounting
      policies conform to accounting principles generally accepted in the United
      States, and have been consistently applied in the preparation of the financial
      statements.




51


**ITEM
        7.**  **FINANCIAL
        STATEMENTS.**
 
 Our
        financial statements are filed as part of this annual report on the pages
        indicated.




Consolidated
      Financial Statements for the years ended December 31, 2006 and 2005





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, 2006 and 2005 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, 2006 and 2005, 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
      16,
      2007






F-2


**XETHANOL
        CORPORATION**
 **CONSOLIDATED
        BALANCE SHEETS**
  **December
                    31, 2006**
                
                **December
                    31, 2005****ASSETS**Current
                    assets:Cash
                    and cash equivalents
                
                $
                24,183,165
                
                $
                802,664Receivables
                
                
                581,762
                
                
                565,041Inventories
                
                
                290,747
                
                
                196,132Other
                    current assets
                
                
                846,097
                
                
                172,168Total
                    current assets
                
                
                25,901,771
                
                
                1,736,005Property
                    and equipment, net
                
                
                8,595,708
                
                
                6,682,433Property
                    held for development
                
                
                12,552,877
                
                
                -Investment
                    in and advances to H2Diesel Holdings, Inc.
                
                
                1,963,481
                
                
                -Research
                    and license agreements, net of amortization of $136,291
                
                
                895,359
                
                
                -Other
                    assets
                
                
                1,537,123
                
                
                686,955**TOTAL
                    ASSETS**
                
                $
                51,446,319
                
                $
                9,105,393**LIABILITIES
                    AND STOCKHOLDERS' EQUITY**Current
                    liabilities:Accounts
                    payable and accrued expenses
                
                $
                1,228,898
                
                $
                1,065,249Accounts
                    payable - related parties
                
                
                317,727
                
                
                56,080Mortgage
                    payable
                
                
                -
                
                
                1,125,000Total
                    current liabilities
                
                
                1,546,625
                
                
                2,246,329Senior
                    secured notes payable
                
                
                -
                
                
                6,600,000Note
                    payable
                
                
                309,914
                
                
                -Minority
                    interest
                
                
                115,617
                
                
                -Capitalized
                    lease obligation
                
                
                22,557
                
                
                30,388Total
                    liabilities
                
                
                1,994,713
                
                
                8,876,717Commitments
                    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;
                    28,497,648 and 15,011,219 shares issued andoutstanding
                    in 2006 and 2005, respectively
                
                
                28,497
                
                
                15,011Additional
                    paid-in-capital
                
                
                84,974,205
                
                
                15,586,032Accumulated
                    deficit
                
                
                (35,551,096
                )
                
                (15,372,367
                )Total
                    stockholders' equity
                
                
                49,451,606
                
                
                228,676**TOTAL
                    LIABILITIES AND STOCKHOLDERS' EQUITY**
                
                $
                51,446,319
                
                $
                9,105,393
 
 *See
        Notes to Consolidated Financial Statements*
 F-3
  **XETHANOL
        CORPORATION**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 **Years
                    Ended December 31,****2006**
                
                **2005**Net
                    sales
                
                $
                11,028,671
                
                $
                4,264,732Cost
                    of sales, including depreciation of $450,536 and $263,651for
                    2006 and 2005, respectively
                
                
                10,090,727
                
                
                4,878,152Gross
                    profit (loss)
                
                
                937,944
                
                
                (613,420
                )Operating
                    expenses:General
                    and administrative expenses, incl. depreciation andamortization
                    of $340,790 and $275,280 for 2006 and 2005,
                    respectively
                
                
                15,294,463
                
                
                6,359,771Research
                    and development
                
                
                851,830
                
                
                133,420Impairment
                    loss - fixed assets
                
                
                513,942
                
                
                -Write-off
                    of net intangible assets and goodwill
                
                
                -
                
                
                3,635,416Total
                    operating expenses
                
                
                16,660,235
                
                
                10,128,607Loss
                    from operations before other income (expense)
                
                
                (15,722,291
                )
                
                (10,742,027
                )Other
                    income (expense):Interest
                    income
                
                
                1,184,161
                
                
                68,755Organization
                    expense
                
                
                -
                
                
                (300,000
                )Loss
                    on royalty note conversion
                
                
                (1,966,712
                )
                
                -Interest
                    expense
                
                
                (216,831
                )
                
                (659,030
                )Impairment
                    loss - investment in H2Diesel Holdings, Inc.
                
                
                (2,321,514
                )
                
                -Loss
                    on equity of H2Diesel Holdings, Inc.
                
                
                (1,626,603
                )
                
                -Other
                    income
                
                
                491,061
                
                
                255,227Total
                    other income (expense)
                
                
                (4,456,438
                )
                
                (635,048
                )Net
                    loss
                
                $
                (20,178,729
                )
                $
                (11,377,075
                )Basic
                    and diluted net loss per share (2005 Restated)
                
                $
                (0.93
                )
                $
                (0.84
                )Weighted
                    average number ofshares
                    outstanding (2005 Restated)
                
                
                21,604,355
                
                
                13,475,166
 
 *See
        Notes to Consolidated Financial Statements*
 F-4
 **XETHANOL
        CORPORATION**
 **CONSOLIDATED
        STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY**
  **Common
                    Stock**
                
                **Additional**
                  **Paid-in-**
                  **Capital**
                
                **Accumulated**
                  **Deficit****Shares**
                
                **Amount**
                
                
                
                **Total**Balance
                    at December 31, 2004
                
                
                10,193,539
                
                $
                10,194
                
                $
                6,443,472
                
                $
                (3,995,292
                )
                $
                2,458,374Shares
                    issued for services
                
                
                13,242
                
                
                13
                
                
                48,737
                
                
                -
                
                
                48,750Contribution
                    to capital
                
                
                (500,000
                )
                
                (500
                )
                
                500
                
                
                -
                
                
                -Balance
                    at reverse merger
                
                
                9,706,781
                
                
                9,707
                
                
                6,492,709
                
                
                (3,995,292
                )
                
                2,507,124Shares
                    issued to shareholdersof
                    company acquired inrecapitalization
                    transaction
                
                
                1,874,303
                
                
                1,874
                
                
                (1,874
                )
                
                -
                
                
                -Shares
                    issued for cash
                
                
                1,190,116
                
                
                1,190
                
                
                3,571,627
                
                
                -
                
                
                3,572,817Shares
                    issued for services inconnection
                    with sales ofshares
                    and recapitalizationtransaction
                
                
                665,833
                
                
                666
                
                
                (666
                )
                
                -
                
                
                -Shares
                    issued for services
                
                
                135,000
                
                
                135
                
                
                501,715
                
                
                -
                
                
                501,850Shares
                    issued to UTEKCorporation
                    for acquisitions
                
                
                788,560
                
                
                789
                
                
                3,196,711
                
                
                -
                
                
                3,197,500Shares
                    issued to UTEKCorporation
                    for services
                
                
                30,000
                
                
                30
                
                
                119,970
                
                
                -
                
                
                120,000Warrants
                    issued for services
                
                
                -
                
                
                -
                
                
                167,425
                
                
                -
                
                
                167,425Shares
                    granted under 2005Incentive
                    Compensation Plan
                
                
                317,070
                
                
                317
                
                
                1,030,161
                
                
                -
                
                
                1,030,478Options
                    granted under 2005Incentive
                    Compensation Plan
                
                
                -
                
                
                -
                
                
                508,557
                
                
                -
                
                
                508,557Shares
                    issued to Fusion Capital
                
                
                303,556
                
                
                303
                
                
                (303
                )
                
                -Net
                    loss
                
                
                -
                
                
                -
                
                
                -
                
                
                (11,377,075
                )
                
                (11,377,075
                )Balance
                    at December 31, 2005
                
                
                15,011,219
                
                
                15,011
                
                
                15,586,032
                
                
                (15,372,367
                )
                
                228,676Shares
                    issued for cash to FusionCapital,
                    net of placement fees
                
                
                1,894,699
                
                
                1,894
                
                
                9,609,786
                
                
                -
                
                
                9,611,680Shares
                    issued for cash in privateofferings,
                    net of placement fees
                
                
                7,586,716
                
                
                7,587
                
                
                31,629,134
                
                
                -
                
                
                31,636,721Shares
                    issued in exchange forH2Diesel,
                    Inc. common stockand
                    sublicense
                
                
                500,000
                
                
                500
                
                
                5,424,500
                
                
                -
                
                
                5,425,000Shares
                    issued to UTEKCorporation
                    for acquisition
                
                
                136,838
                
                
                137
                
                
                1,131,513
                
                
                -
                
                
                1,131,650Shares
                    issued in connection with acquisitionin
                    Spring Hope, NC
                
                
                1,197,000
                
                
                1,197
                
                
                3,517,983
                
                
                -
                
                
                3,519,180Warrants
                    issued in connection with acquisitionin
                    Spring Hope, NC
                
                
                -
                
                
                -
                
                
                277,470
                
                
                
                
                
                277,470Shares
                    issued for exchange ofmortgage
                    note
                
                
                135,000
                
                
                135
                
                
                431,865
                
                
                -
                
                
                432,000Cancellation
                    of mortgage note
                
                
                -
                
                
                -
                
                
                449,605
                
                
                -
                
                
                449,605Shares
                    issued for exercise ofoutstanding
                    warrants
                
                
                311,428
                
                
                311
                
                
                944,809
                
                
                -
                
                
                945,120Shares
                    issued for conversion ofof
                    secured notes payable
                
                
                1,650,000
                
                
                1,650
                
                
                6,598,350
                
                
                -
                
                
                6,600,000Shares
                    issued for services
                
                
                74,748
                
                
                75
                
                
                568,176
                
                
                -
                
                
                568,251Options
                    granted under 2005Incentive
                    Compensation Plan
                
                
                -
                
                
                -
                
                
                5,483,056
                
                
                -
                
                
                5,483,056Warrants
                    issued in royalty note conversion
                
                
                -
                
                
                -
                
                
                2,170,212
                
                
                -
                
                
                2,170,212Warrants
                    issued for services
                
                
                -
                
                
                -
                
                
                1,151,714
                
                
                -
                
                
                1,151,714Net
                    loss
                
                
                -
                
                
                -
                
                
                -
                
                
                (20,178,729
                )
                
                (20,178,729
                )Balance
                    at December 31, 2006
                
                
                28,497,648
                
                $
                28,497
                
                $
                84,974,205
                
                $
                (35,551,096
                )
                $
                49,451,606
  S *ee
        Notes to Consolidated Financial Statements*
 F-5
 **XETHANOL
        CORPORATION**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **December
                    31, 2006**
                
                **December
                    31, 2005****Cash
                    flows from operating activities**Net
                    loss
                
                $
                (20,178,729
                )
                $
                (11,377,075
                )Adjustments
                    to reconcile net loss tonet
                    cash used in operating activities:Depreciation
                    and amortization
                
                
                791,326
                
                
                538,931Impairment
                    loss-investment
                
                
                68,000
                
                
                -Impairment
                    loss-fixed assets
                
                
                513,942
                
                
                -Amortization
                    of management fee income
                
                
                (436,598
                )
                
                -Issuance
                    of common stock, stock optionsand
                    warrants for services rendered
                
                
                7,203,021
                
                
                2,377,060Issuance
                    of warrants for debt conversion
                
                
                1,966,712
                
                
                -Issuance
                    of warrants in settlement of interest liabilityon
                    secured notes
                
                
                203,500
                
                
                -Impairment
                    loss on investment in H2Diesel Holdings, Inc.
                
                
                2,321,514
                
                
                -Loss
                    on equity of H2Diesel Holdings, Inc.
                
                
                1,626,603
                
                
                -Loss
                    on retirement of fixed assets
                
                
                154,446
                
                
                -Write-off
                    of net intangible assets and goodwill
                
                
                -
                
                
                3,635,416Investment
                    received in settlement of lawsuit
                
                
                -
                
                
                (82,000
                )Changes
                    in operating assets and liabilities:Receivables
                
                
                (16,721
                )
                
                (509,661
                )Inventories
                
                
                (94,615
                )
                
                (157,819
                )Other
                    assets
                
                
                (472,097
                )
                
                (528,239
                )Accounts
                    payable and accrued expenses
                
                
                425,296
                
                
                172,938Net
                    cash used in operating activities
                
                
                (5,924,400
                )
                
                (5,930,449
                )**Cash
                    flows from investing activities**Purchase
                    of property and equipment
                
                
                (3,236,698
                )
                
                (999,913
                )Purchase
                    of Augusta, GA assets
                
                
                (8,413,949
                )
                
                -Purchase
                    of Spring Hope, NC assets
                
                
                (4,036,747
                )
                
                -Investment
                    in research agreement
                
                
                (300,000
                )
                
                -Purchase
                    of Bartow, FL assets
                
                
                (100,000
                )
                
                -Advances
                    to H2Diesel Holdings, Inc.
                
                
                (50,000
                )
                
                -Cash
                    received from sale of Augusta, GA assets
                
                
                3,100,000
                
                
                -Net
                    cash used in investing activities
                
                
                (13,037,394
                )
                
                (999,913
                )**Cash
                    flows from financing activities**Payment
                    of mortgage payable
                
                
                (243,395
                )
                
                (3,000,000
                )Issuance
                    of notes payable
                
                
                -
                
                
                6,600,000Cash
                    received for common stock
                
                
                42,193,521
                
                
                3,572,817Cash
                    received from acquisition
                
                
                400,000
                
                
                450,000Payment
                    of capitalized lease obligation
                
                
                (7,831
                )
                
                (3,263
                )Net
                    cash provided by financing activities
                
                
                42,342,295
                
                
                7,619,554**Net
                    increase in cash and cash equivalents**
                
                
                23,380,501
                
                
                689,192**Cash
                    and cash equivalents - beginning of year**
                
                
                802,664
                
                
                113,472**Cash
                    and cash equivalents - end of year**
                
                $
                24,183,165
                
                $
                802,664**Supplemental
                    Disclosures**Interest
                    paid
                
                $
                13,331
                
                $
                659,030Income
                    taxes paid
                
                
                17,357
                
                
                8,835**Non-cash
                    activity**Research
                    and license agreements acquired in exchange forcommon
                    stock
                
                $
                731,650
                
                $
                2,747,500Issuance
                    of common stock in partial exchange formortgage
                    payable
                
                
                432,000
                
                
                -Issuance
                    of new mortgage payable in partial exchangefor
                    mortgage payable
                
                
                243,395
                
                
                -Increase
                    in stockholders' equity as a result of the exchangeof
                    mortgage payable with stockholders
                
                
                449,605
                
                
                -Property
                    and equipment obtained by capiatilzedlease
                    obligation
                
                
                -
                
                
                40,835Investment
                    acquired in exchange for common stock
                
                
                5,425,000
                
                
                -Investment
                    acquired in exchange for management services
                
                
                793,815Conversion
                    of notes payable to common stock
                
                
                6,600,000
                
                
                -Issuance
                    of common stock and warrants forSpring
                    Hope assets
                
                
                3,796,650
                
                
                -Issuance
                    of note payable for Bartow, FL assets
                
                
                309,914
                
                
                -Minority
                    interest in Southeast BioFuels, LLC
                
                
                115,617
                
                
                -Deferred
                    asset received for demolition work
                
                
                1,600,000
                
                
                -Increase
                    in construction in progress resulting fromdemolition
                    work
                
                
                480,000
                
                
                -
  *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 company producing ethanol and
      its co-products. The Company owns an ethanol plant in Iowa that is currently
      producing ethanol at a rate of approximately 5.5 million gallons per year,
      using
      corn as its feedstock. The Company’s goal is to develop or acquire methods of
      converting waste biomass raw materials into ethanol.





The
      Company commenced ethanol production in August 2003 with its first acquisition
      and plant, Iowa-based Permeate Refining, Inc. (“Permeate”). In October 2004,
      Xethanol purchased its second facility located in Blairstown, Iowa, which
      operates as Xethanol BioFuels LLC (“Xethanol BioFuels”). The Company plans to
      expand the plant located in Blairstown, Iowa. The Company ceased operations
      at
      its Permeate plant in March 2005.





***Recapitalization
      Transaction and Private Offering***




On
      February 2, 2005, the Company completed a recapitalization in the form of a
      “reverse merger” transaction with Zen Pottery Equipment, Inc. (“Zen”), a
      publicly traded Colorado corporation. As part of the merger, the Company merged
      into a wholly owned subsidiary of Zen. Zen acquired all the outstanding capital
      stock of the Company and, in consideration, issued approximately .88 of a share
      of common stock for each share of common stock to the Company’s shareholders or
      9,706,781shares. Zen retired all of its prior existing shares of common stock
      except for 1,874,303 shares of common stock retained by the original
      shareholders of Zen. The Company has retroactively restated is historical equity
      disclosures (based on the exchange ratio) so that, at the date of the
      recapitalization, the number of shares outstanding is equal to the number of
      shares issued by Zen to the Company’s shareholders.




Concurrent
      with the closing of the merger, the Company completed the closing of a private
      offering of a total of 1,190,116 shares of common stock at a price of $3.25
      per
      share (the “Offering”). Total net proceeds from the Offering were $3,572,817.




Placement
      agents and other advisors received an additional 665,833 shares of common stock
      for services rendered in connection with the Offering and the merger. After
      the
      closing of the Offering and the reverse merger, there were 13,437,033 shares
      of
      common stock of the Company issued and outstanding. Also, as result of the
      merger, warrants to purchase 1,465,068 shares of common stock of the Company
      were converted to warrants to purchase 1,293,370 shares of the common stock
      of
      the Company.




In
      March
      2005, following the merger, Zen reincorporated from the state of Colorado to
      the
      state of Delaware and changed its corporate name to Xethanol Corporation. As
      part of the Company’s reincorporation in Delaware, the authorized capital was
      amended to 50,000,000 shares of common stock and 1,000,000 shares of preferred
      stock. On August 10, 2006, at the annual meeting of stockholders, the
      stockholders voted to increase authorized capital to 100,000,000 shares of
      common stock.




For
      financial reporting purposes, the Company is deemed to be the acquirer in the
      reverse merger transaction. Consequently, the assets and liabilities and the
      historical operations reflected in the consolidated financial statements are
      those of the Company and are recorded at the historical cost basis of the
      Company.




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





***Basis
      of Presentation and Plan of Operation***




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.




Prior
      to
      July 1, 2005, the Company had devoted most of its activities to establishing
      its
      business, including raising capital and making acquisitions and, accordingly,
      the Company presented its financial statements as a development stage




F-7


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




company
      as defined in Statement of Financial Accounting Standards No. 7. On July 1,
      2005, the Company began operations at its Xethanol BioFuels plant and the plant
      is now generating significant revenues from the sales of ethanol and other
      by-products. Accordingly, the accompanying financial statements are not
      presented as a development stage company.




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 our 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. All highly liquid
      investments with stated maturities of three months or less from date of purchase
      are classified as cash equivalents; all highly liquid 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.





During
      2006, all investments accounted for as available for sale were held to maturity.
      During 2006, the Company invested in securities with greater than 90 days until
      maturity, which the Company classified as short-term securities. The Company
      did
      not recognize any unrealized gains or losses during the year. At December 31,
      2006, all of the Company’s short-term investments have been classified as cash
      equivalents.




***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, warrants and conversion
        of the senior secured notes are excluded from the calculation of net loss
        per
        share, as their effect would be antidilutive.




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:




F-8


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


**Balance
                  at December 31,****2006**
              
              
              **2005**Employee
                  stock options
              
              
              4,430,000
              
              
              480,000Series
                  A warrants
              
              
              1,517,383
              
              
              -Series
                  B warrants
              
              
              758,735
              
              
              -Placement
                  agent warrants
              
              
              606,938
              
              
              -Other
                  warrants
              
              
              2,314,720
              
              
              1,456,026Convertible
                  senior secured notes
              
              
              -
              
              
              1,650,0009,627,776
              
              
              3,586,026





***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, 2006, the Company has determined that an allowance for estimated
      uncollectible accounts is not necessary.





***Investments***





In
      January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation 46, Consolidation of Variable Interest Entities, an
      Interpretation of Accounting Research Bulletin No. 51 (“FIN 46”). In December
      2003, the FASB modified FIN 46 to make certain technical corrections and to
      address certain implementation issues that had arisen. 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 ABP 18 “The Equity Method of Accounting for Investments in
      Common Stock.”





F-9


**XETHANOL
        CORPORATION**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***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 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,**
              **2006**
            
            **December
                31,**
              **2005**Raw
                materials
            
            $
            80,671
            
            $
            68,169Work
                in process
            
            
            94,260
            
            
            72,620Finished
                goods
            
            
            115,816
            
            
            55,343$
            290,747
            
            $
            196,132





***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, the economic
      environment, and capital spending decisions of the Company’s customers and
      inflation.


F-10


**XETHANOL
      CORPORATION**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





***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, 2006 and 2005, 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.





***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 $851,830 and $133,420 for the years ended December 31, 2006 and 2005,
      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 and will evaluate additional segment
      disclosure requirements as it expands its operations.





***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 is effective for fiscal years beginning after November
      15,
      2007. The Company does not expect the adoption of SFAS 157 to have a material
      impact on its consolidated financial position, results of operations or cash
      flows.


In
        September 2006, the Securities and Exchange Commission issued Staff Accounting
        Bulletin No. 108, Considering the Effects of Prior Year Misstatements when
        Quantifying Misstatements in Current Year Financial Statements (“SAB 108”). SAB
        108 provides guidance on how prior year misstatements should be taken into
        consideration when


F-11


**XETHANOL
      CORPORATION**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




quantifying
      misstatements in current year financial
      statements for purposes of determining whether the current year’s financial
      statements are materially misstated. SAB 108 is effective for fiscal years
      ending after November 16, 2006. The Company has determined that the provisions
      of SAB 108 do not have a material impact on its consolidated financial position,
      results of operations or cash flows.


**NOTE
          3.**  **XETHANOL
          BIOFUELS, LLC**
  In
          October 2004, the Company purchased the assets of 78th Street Ethanol,
          LLC, a
          corn-based ethanol plant in Blairstown, Iowa, at a bankruptcy court auction
          for
          $4,000,000 from the First National Bank of Omaha (“FNBO”). The purchase was
          financed with $1,000,000 of cash from the Company and a $3,000,000 secured
          demand note to FNBO. As described in Note 8, the Company paid off the $3,000,000
          note to FNBO in January 2005. On November 1, 2004, the Company formed Xethanol
          BioFuels, LLC (“Xethanol BioFuels”), a wholly owned Delaware limited liability
          company, to manage and operate the Blairstown facility. After a period
          to repair
          and refurbish the facility, Xethanol BioFuels began operating as of July
          1, 2005
          and has a current annual production capacity of 5.5 million
          gallons.




In
      July
      2006, the Company 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 (“Blairstown 2”). As part of this project, the Company plans to
      integrate a gasification/co-generation system to generate energy for the
      facility utilizing waste by-products from the plant. The Company estimates
      that
      the total cost for the project will between $75 and $80 million.





On
      June
      30, 2006, the Company entered into an agreement with PRAJ Industries. Ltd.
      (“PRAJ”) to supply process license, design, engineering and supervision
      services. The cost of the contract is $1,845,000 and is payable over seven
      installments based on predetermined deliverables. As of December 31, 2006,
      total
      payments of $540,000 have been made to PRAJ under the contract. In December
      2006, as part of the project, the Company acquired a 55-acre lot adjacent to
      the
      existing site for $1,020,000.





As
      of
      December 31, 2006, $2,913,114 of construction in progress costs have been
      expended on Blairstown 2 and are included on the Company’s balance sheet in
      property and equipment.





**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.
      Under
      the Base Research Agreement, as of December 31, 2006, 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
 
 F-12





**XETHANOL
      CORPORATION**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




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. The values of the assets acquired as of June 13, 2006 were
      as
      follows:




Cash
              
              $
              400,000License
              
              
              251,650Research
                  Agreement
              
              
              480,000$
              1,131,650





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, 2006 are
      as
      follows:


License
              
              $
              245,359Research
                  Agreement
              
              
              650,000$
              895,359




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 $136,291 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 (“CX”), an 80% owned subsidiary of the Company,
      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, CX,
      through its newly-formed, wholly-owned subsidiary, Augusta BioFuels, LLC
      (“ABF”), paid approximately $8.4 million in cash for the facility. The cash to
      acquire the facility was provided by a loan from the Company to CX (the “CX
      Note”) and a loan from CX to ABF (the “ABF Note”). These notes are eliminated in
      consolidation. The terms of the CX Note provide for five annual payments of
      principal and interest with the first annual payment due on the first
      anniversary of the date upon which ABF begins producing saleable ethanol. So
      long as the CX Note is outstanding, the Company will receive an extra 10% of
      any
      distributions made by CX with respect to the membership interests in CX. As
      the
      amount outstanding under the CX Note decreases, the extra 10% that the Company
      is entitled to receive will be reduced proportionately.





On
      October 31, 2006, ABF entered into a purchase and sale agreement with Rabin
      Worldwide, Inc, (the “Buyer”) for the sale of certain surplus equipment at the
      Augusta site. The Buyer paid $3,100,000 in cash to ABF and agreed to perform
      certain demolition work valued at $1,600,000. The demolition work is to be
      performed in three phases between November 2006 and June 2007 in accordance
      with
      the terms of a demolition agreement. The Company initially recorded the total
      value of the consideration received under this agreement, $4,700,000, 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, 2006,
      the Company estimated that approximately 30% of the demolition work had been
      performed and reduced the deferred asset by $480,000 with a corresponding
      increase to construction in progress.




The
      Company is currently evaluating several project
      possibilities that could be located at this site.




F-13





**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
      Company. 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.





The
      Company plans to initially construct a pilot plant at this site that would
      process ethanol from wood chips.





***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. 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 has been recorded
      at its discounted value of $309,914 and Renewable Spirits 22% interest in
      Southeast Biofuels has been recorded as minority interest of
      $115,617.





The
      Company plans to utilize the assets acquired in this transaction to develop
      a
      pilot plant processing ethanol from citrus waste.





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




Property
      and equipment consists of the following:





**December
                31,**
              **2006**
            
            **December
                31,**
              **2005**Land
            
            $
            61,887
            
            $
            61,887Buildings
            
            
            1,165,550
            
            
            1,497,588Machinery
                and equipment
            
            
            5,062,613
            
            
            5,150,729Land
                improvements
            
            
            569,284
            
            
            544,496Furniture
                and fixtures
            
            
            83,760
            
            
            43,648Construction
                in progress
            
            
            2,913,114
            
            
            -9,856,208
            
            
            7,298,348Less
                accumulated depreciation and amortization
            
            
            1,260,500
            
            
            615,915$
            8,595,708
            
            $
            6,682,433





Construction
      in progress consists of expenditures related to our Blairstown 2
      expansion.




F-14


**XETHANOL
        CORPORATION**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 Property
          held for development consists of the following fixed assets:
 
 **December
                    31,**
                  **2006**
                
                **December
                    31,**
                  **2005**Land
                
                $
                1,227,360
                
                $
                -Buildings
                
                
                1,588,535
                
                
                -Machinery
                    and equipment
                
                
                9,256,982
                
                
                -Construction
                    in progress
                
                
                480,000
                
                
                -$
                12,552,877
                
                $
                -
 
 Property
          held for development consists of the assets purchased in connection with
          our
          acquisitions in Augusta, Georgia; Spring Hope, North Carolina and Bartow,
          Florida. (See Note 4). Depreciation will not be recorded on these assets
          until
          they are placed into use.


**NOTE
      6.**  **INVESTMENT
      IN H2DIESEL, INC.**





On
      April
      14, 2006, the Company entered into an Investment Agreement (the “Original
      Investment Agreement”) with two institutional investors (the “Investors”) and
      H2Diesel, Inc. (“H2Diesel”). On May 17, 2006, the parties entered into an
      amendment (the “Amendment”) of the Original Investment Agreement effective as of
      April 14, 2006. The Original Investment Agreement as amended by the Amendment
      is
      referred to as the “Investment Agreement.”





On
      March
      20, 2006, in exchange for gross proceeds of $2,000,000 from the Investors,
      H2Diesel issued to the Investors 3,250,000 shares of H2Diesel’s common stock and
      stock options to purchase 2,000,000 shares of H2Diesel’s common stock for an
      aggregate purchase price of $5,000,000 (the “Investor Option”). On April 14,
      2006, H2Diesel issued to the Company a total of 2,600,000 shares of H2Diesel’s
      common stock, granted the Company the right to purchase up to an additional
      2,000,000 shares of H2Diesel common stock at an aggregate purchase price of
      $3,600,000 (the “Company Option”), and the Company granted the Investors the
      right to require the Company to purchase the 3,250,000 shares of H2Diesel common
      stock owned by the Investors in exchange for 500,000 shares of the Company’s
      common stock (the “Put Right”). 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
      share price of approximately $0.61and was credited to additional paid-in
      capital. Concurrently, on April 14, 2006, the Investors exercised their
      respective Put Rights, and the Company purchased the Investors’ 3,250,000 shares
      of H2Diesel’s common stock in exchange for 500,000 shares of the Company’s
      common stock. The Company considers its investment in H2Diesel as a variable
      interest in a VIE. Since 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,* at the ** fair
      value of the Company’s shares issued of $5,425,000. The Company’s 5,850,000
      shares of H2Diesel common stock held by the Company 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” transaction, in which
      Wireless Holdings, Inc., a Florida shell corporation without any continuing
      operation or assets, and 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. Shortly before the closing of the reverse
      merger, H2Diesel completed a private offering to accredited investors of
      2,915,000 shares of its common stock, par value $.0001 per share, and received
      gross proceeds of $2,915,000 at the closing of the private offering, which
      includes the conversion of a demand note in the principal amount of $765,000
      into 765,000 shares of its common stock at price of $1.00 per share. Upon the
      effectiveness of the reverse merger, each share of H2Diesel common stock
      outstanding immediately prior thereto was converted into one share of the common
      stock of Wireless Holdings, which subsequently changed its name to H2Diesel
      Holdings, Inc. As of December 31, 2006, the Company owns approximately 34.2%
      of
      the outstanding common stock of H2Diesel Holdings.




F-15


**XETHANOL
          CORPORATION**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 The
            fair
            value of the Company’s investment in H2Diesel as of April 14, 2006 has been
            estimated as follows:
 Net
                        assets of H2Diesel
                    
                    $
                    988,747Sublicense
                        agreement
                    
                    
                    1,000,000Master
                        license agreement
                    
                    
                    3,436,253Investment
                        in H2Diesel
                    
                    $
                    5,425,000


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




**Period
                  from**
                **February
                  28,****2006**
                **(Inception)
                  to****December
                  31, 2006****Statement
                  of Operations:**
              
              **(Unaudited)**Research
                  and development expenses
              
              $
              84,109General
                  and administrative expenses
              
              
              4,329,332Merger
                  expenses
              
              
              340,000Net
                  loss from operations
              
              
              4,753,441Interest
                  expense
              
              
              638,633Net
                  loss
              
              $
              5,392,074


**December
                  31, 2006****(Unaudited)**Cash
              
              $
              1,031,923Deferred
                  expenses
              
              
              70,275Total
                  current assets
              
              
              1,102,198License
                  agreement
              
              
              8,061,300Total
                  assets
              
              $
              9,163,498Accounts
                  payable and accrued expenses
              
              $
              190,504Note
                  payable-Xethanol Corp.
              
              
              50,000License
                  agreement payable, current portion
              
              
              1,449,302Total
                  current liabilities
              
              
              1,689,806License
                  agreement payable
              
              
              4,804,883Total
                  liabilities
              
              
              6,494,689Common
                  stock
              
              
              17,091Additional
                  paid-in capital
              
              
              8,043,792Deficit
                  accumulated during development stage
              
              $
              (5,392,074
              )Total
                  stockholders’ equity
              
              
              2,668,809Total
                  liabilities and stockholders’ equity
              
              $
              9,163,498




In
      connection with the Agreements, 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,




F-16




**XETHANOL
        CORPORATION**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  2006,
          effective April 14, 2006, in an Amended and Restated Sublicense Agreement
          (the
“Amended Sublicense Agreement”). 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.
  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 has no financial obligation to H2Diesel resulting
          from the
          termination of the Management Agreement and will retain 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 Option, 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. If they did not exercise their right to purchase all of the 500,000
          shares of H2Diesel common stock that they were entitled to purchase pursuant
          to
          their retained Investor Option rights, then the Company may have purchased
          those
          shares. The Company elected not to exercise the Company Option or the Investor
          Option prior to their expiration on August 15, 2006.


The
      financial statements of H2Diesel to be included in its annual report on Form
      10-KSB for the period ended December 31, 2006 were not available as of the
      date
      of this filing. For the period from April 14, 2006 through December 31, 2006,
      the Company recorded an estimated loss on the investment in H2Diesel of
      $1,626,603 based on the equity method of accounting and is reflected in “Loss on
      equity of H2Diesel Holdings, Inc.” in the Consolidated Statements of Operations.
      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. The Company will record expense pursuant to the Company’s
      amended sublicense agreement 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. Minimum royalties shall not be due until H2Diesel has met certain
      product specifications and other requirements of the Company. Accordingly,
      no
      expense has been recorded for the period ended December 31, 2006.





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 $2,321,514 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.





H2Diesel
      plans to produce, sell or sublicense to third parties for its manufacture and
      use, a proprietary vegetable oil-based diesel biofuel to be used as a substitute
      for conventional petroleum diesel and bio-diesel, heating and other fuels,
      pursuant to an exclusive license agreement entered into by H2Diesel on March
      20,
      2006 (the “Master License”). H2Diesel’s business model is to utilize its
      licensed proprietary technology to manufacture or sublicense its fuel products
      for sale to alternative fuel manufacturers and distributors.





Under
      the
      Amended Sublicense Agreement, the Company was granted an exclusive sublicense
      to make,
      use
      and sell
      products (“Products”) manufactured by using a fuel additive (the “Additive”) in
      Maine, Vermont, New Hampshire, Massachusetts, Connecticut, Rhode Island, New
      York, Pennsylvania, Delaware, New Jersey, Virginia, West Virginia,




F-17


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


North
        Carolina, South Carolina, Georgia and Florida, and 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 Sublicense Agreement, H2Diesel must sell Additive to the Company
        that is
        sufficient to meet the Company’s 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 the Company and H2Diesel
        may
        agree upon. The Company is obligated to pay certain royalties to H2Diesel
        based
        on sales of Products the Company or its sublicensees. The royalty (the
“Royalty”) that the Company must pay per gallon of Product that the Company or
        its distributors sell is the lesser of $.10 per gallon or the lowest per
        gallon
        royalty that H2Diesel charges to unrelated entities. The minimum total Royalties
        that the Company must pay during the first royalty period, which begins on
        the
        date H2Diesel first notifies the Company that it can produce and deliver
        Additive in sufficient quantities to meet the Company’s requirements, is able to
        do so and provides the Company with the technical and engineering specifications
        necessary for a plant to produce the Products (the “Trigger Date”) and ends 12
        months later, is the total Royalties that would be payable based upon sales
        of
        20,000,000 gallons of Product (the “Minimum Sales Amount”). The Minimum Sales
        Amount increases by 10,000,000 barrels for each succeeding 12-month period
        during the initial term of the Amended Sublicense Agreement, which ends 10
        years
        from the Trigger Date. If the Company does not meet the Minimum Sales Amount,
        or
        pay the Royalties that would have been payable had the Company met the Minimum
        Sales Amount, in any twelve-month period, the Company’s rights become
        non-exclusive. H2Diesel also has the right to terminate the Amended Sublicense
        Agreement if Royalties based upon the Minimum Sales Amount are not paid for
        the
        first three twelve-month periods after the Trigger Date. The Amended Sublicense
        Agreement automatically renews for successive one-year periods provided there
        is
        no existing default at the time of renewal. As of March 10, 2007, the Trigger
        Date had not yet commenced and accordingly, no royalty expense has been recorded
        by the Company pursuant to the Amended Sublicense Agreement.


Also
      on
      June 15, 2006, the Company entered into a Technology Access Agreement with
      H2Diesel, pursuant to which H2Diesel delivered to the Company the formula for
      the 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 the Company with
      information regarding modifications to that formula or know-how. The Company
      has
      no right to use the formula or the know-how so long as H2Diesel is not in
      default of its obligations under the Amended Sublicense Agreement. After an
      event of default, the Company has the right to use the formula and know-how
      to
      produce Additive to meet its needs to exercise the Company’s right to sell
      Product under the Amended Sublicense Agreement. The Company must pay H2Diesel
      the royalties the Company would otherwise have paid in connection with sales
      of
      Product, but may offset the amount by which the cost the Company incurs in
      manufacturing the Product itself exceeds the price that the Company would
      otherwise have paid H2Diesel. The Company has retained the right to seek damages
      from H2Diesel for any excess cost of the Additive.





H2Diesel
      is a development stage company with no operations. According to its SEC filings,
      H2Diesel is obligated to pay $9.1 million in additional payments to the owner
      of
      the licensed technology, including (a) $600,000 on July 31, 2007 and (b) $1.5
      million on October 31, 2007. To make these payments, H2Diesel must raise
      additional capital, and to our knowledge, H2Diesel has not done so. H2Diesel’s
      most recent quarterly report on Form 10-Q 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, we could lose our
      sublicense of the technology.




**NOTE
      7.**  **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-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


F-18
 **XETHANOL
            CORPORATION**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
  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.


The
      following table summarizes the estimated fair values of the assets of Permeate
      and Xethanol One LLC:




**December
                31, 2006**
            
            **December
                31, 2005**Land
            
            $
            33,700
            
            $
            33,700Buildings
            
            
            739,888
            
            
            739,888Machinery
                and equipment
            
            
            1,368,695
            
            
            1,361,8102,142,283
            
            
            2,135,398Less:     
                Accumulated
                depreciation
            
            
            579,243
            
            
            385,144Impairment
                loss
            
            
            513,942
            
            
            -$
            1,049,098
            
            $
            1,750,254





In
      April
      2005, the Company ceased operations at Permeate in order to upgrade the
      facility. The facility remained closed while the Company evaluated how to
      maximize strategic use of the facility. Given Permeate’s small production
      capacity and location in a residential community, as well as the Company’s
      recent acquisitions of more attractive sites, the Company has now determined
      that Permeate is no longer a core asset. The Company is currently considering
      various alternatives to maximize its value, including relocating a substantial
      portion of its equipment to one or more of its other sites. In accordance with
      SFAS 144, the Company records impairment losses for long-lived assets used
      in
      operations when indicators of impairment are present and the undiscounted cash
      flows are not sufficient to recover the assets carrying amount. The carrying
      value for Permeate was $1,563,040 as of December 31, 2006. In anticipation
      of
      the possible transfer of certain equipment to one or more other Company sites
      and then, the probable sale or disposal of Permeate’s remaining assets, the
      Company concluded that the carrying amount of the remaining assets exceeded
      their likely disposition value based on an analysis of current market prices.
      As
      of December 31, 2006, the Company recognized an impairment loss of $513,942
      that
      is included in “Loss from operations before other income” in the Consolidated
      Statements of Operations.




F-19
 **XETHANOL
        CORPORATION**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


**NOTE
        8.**  **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 Xethanol BioFuels 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 FNBO. The
        Company
        used the remaining proceeds to refurbish and upgrade capacity at the Xethanol
        BioFuels 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 (“DWG”) and any other co-products, including xylitol, at the Xethanol
        BioFuels 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 same two
        institutional investors and, at the closing of this transaction, Xethanol
        BioFuels issued senior secured royalty notes in the aggregate principal amount
        of $1,600,000 (the “August Notes”). The proceeds from this financing were used
        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, DWG and any other co-products, including
        xylitol, at the Xethanol BioFuels 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).


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 $1,966,712 related to issuance of the warrants and the waiver of
      interest is reflected in “Other expense” in the Consolidated Statements of
      Operations as “Loss on Royalty Note Conversion.”




**NOTE
      9.**  **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 our discretion. Under
      the terms of the common stock purchase agreement, the Company issued 303,556
      shares to Fusion as a commitment fee (the “Commitment Shares”) 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
      U.S. Securities and Exchange Commission covering the 303,556 Commitment Shares
      and 5,000,000 shares that may be issued to Fusion under the Purchase Agreement
      (the “Purchase Shares”). 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, which amount may be increased by the Company
      under certain conditions, each trading day during the term of the Purchase
      Agreement. The purchase price





F-20
 **XETHANOL
        CORPORATION**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  of
          the
          shares of common stock will be equal to a price based upon the future market
          price of the common stock without any fixed discount to the market price.
          Fusion
          does not have the right or the obligation to purchase shares of the Company’s
          common stock in the event that the price of the common stock is less than
          $2.00.
          Fusion may not purchase shares under the Purchase Agreement if Fusion would
          beneficially own more than 9.9% of the Company’s common stock outstanding at the
          time of the purchase by Fusion.
  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 Company has the option
          of
          selling up to an additional 3,105,301 shares of common stock to Fusion
          through
          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
          10.**  **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 Securities and Exchange Commission. Under
          the
          terms of this agreement, if the Registration Statement has not been declared
          effective by the Commission by April 13, 2007, then the holders of the
          warrants
          may elect to utilize a cashless exercise. The Company intends to file its
          third
          amendment to the Registration Statement initially filed on June 16, 2006
          on or
          before March 19, 2007. As of March 19, 2007, the Registration Statement
          has not
          been declared effective.


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 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
      11.**  **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 “2005 Plan”), which was subsequently approved by the Company’s shareholders
      on March 29, 2005.





The
      terms
      of the 2005 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. Until
      August 10, 2006, under the 2005 Plan, the total number of shares of the
      Company’s common stock that were


F-21
 **XETHANOL
          CORPORATION**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  subject
        to the granting of awards under the 2005 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. On
        December 7, 2006, subject to shareholder ratification at the Company’s next
        annual meeting, the Company’s board of directors unanimously approved an
        increase in the total number of shares of common stock that were subject
        to the
        granting of awards under the 2005 Plan to 4,747,070 shares. The persons eligible
        to receive awards under the 2005 Plan are the officers, directors, employees
        and
        independent contractors of the Company and its subsidiaries.
  During
        the years ended December 31, 2006 and 2005, options to purchase 4,440,000
        and
        530,000 shares of common stock, respectively, were granted to executive
        officers, employees and independent contractors. These options vest up to
        one
        year 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 $2.44
        to
        $11.04 per share. During the years ended December 31, 2006 and 2005, unvested
        options to purchase 490,000 and 50,000 shares of common stock were forfeited,
        respectively, by various directors and employees. The fair value of options
        granted during the years ended December 31, 2006 and 2005, net of forfeitures,
        is $7,725,104 and $667,396, respectively, and was determined at 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 $5,483,056 and $508,557
        for the years ended December 31, 2006 and 2005, respectively.
 
 As
        of
        December 31, 2006 and 2005, options to purchase 4,430,000 and 480,000 shares
        of
        common stock were outstanding under the 2005 Plan, respectively. At December
        31,
        2006 and 2005, the weighted average exercise price of outstanding options
        is
        $3.47 and $3.95, respectively.


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





**2006**
            
            **2005****Shares**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Shares**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**Outstanding
                at beginning of year
            
            
            480,000
            
            $
            3.95
            
            
            -
            
            
            -Options
                granted
            
            
            4,440,000
            
            
            3.75
            
            
            530,000
            
            $
            3.95Options
                exercised
            
            
            -
            
            
            -
            
            
            -
            
            
            -Options
                forfeited
            
            
            (490,000
            )
            
            6.46
            
            
            (50,000
            )
            $
            4.00Outstanding
                at end of year
            
            
            4,430,000
            
            $
            3.47
            
            
            480,000
            
            $
            3.95Exercisable
                at end of year
            
            
            2,305,000
            
            $
            3.75
            
            
            315,000
            
            $
            3.92






F-22


**XETHANOL
      CORPORATION**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





A
      summary
      of outstanding stock options at December 31, 2006 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**3,330,000
              
              $
              2.44
                  - $3.99
              
              $
              2.66
              
              
              6.30
              
              
              1,575,000
              
              $
              2.90805,000
              
              
              4.00
                  - 5.56
              
              
              4.82
              
              
              3.51
              
              
              505,000
              
              
              4.39295,000
              
              
              5.57
                  - 11.04
              
              
              8.97
              
              
              3.05
              
              
              225,000
              
              
              8.324,430,000
              
              
              
              
              $
              3.47
              
              
              5.57
              
              
              2,305,000
              
              $
              3.75
 
 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,****2006**
                
                **2005**Risk-free
                    interest rate
                
                
                4.55
                %
                
                3.94
                %Expected
                    life of options
                
                
                6.20
                
                
                4.38Expected
                    dividend yield
                
                
                0
                %
                
                0
                %Expected
                    volatility
                
                
                55.0
                %
                
                40.0
                %
 
 **NOTE
        12.**  **WARRANTS**
 
 During
        the years ended December 31, 2006 and 2005, the Company issued warrants to
        purchase 4,323,178 and 197,968 shares of the Company’s common stock,
        respectively. At December 31, 2006 and 2005, there were warrants to purchase
        5,197,776 and 1,456,026 shares of common stock, with weighted average exercise
        prices of $5.06 and $2.52, respectively.
 
 The
        fair
        value of warrants issued as compensation for services rendered during the
        years
        ended December 31, 2006 and 2005, was estimated at the grant date using the
        Black-Scholes option pricing model and recorded as expense over their respective
        vesting periods. During the year ended December 31, 2006 and 2005, the Company
        recorded compensation expense related to warrants granted for services rendered
        of $1,151,714 and $167,425. 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 is estimated at the grant date using
      a
      Black-Scholes option-pricing model with the following weighted average
      assumptions:


**Year
                  Ended**
                **December
                  31,****2006**
              
              **2005**Risk-free
                  interest rate
              
              
              4.79
              %
              
              3.71
              %Expected
                  life of options
              
              
              3.47
              
              
              3.00Expected
                  dividend yield
              
              
              0
              %
              
              0
              %Expected
                  volatility
              
              
              55.0
              %
              
              40.0
              %





F-23


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


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. There were no warrants
        exercised during the year ended December 31, 2005.
 
 A
        summary
        of stock warrant activity is as follows:
  **2006**
              
              **2005****Shares**
              
              **Weighted**
                **Average**
                **Exercise**
                **Price**
              
              **Shares**
              
              **Weighted**
                **Average**
                **Exercise**
                **Price**Outstanding,
                  beginning of year
              
              
              1,456,026
              
              $
              2.52
              
              
              1,258,058
              
              $
              2.28Issued
                  to investors-Series A and B
              
              
              2,276,118
              
              
              5.28
              
              
              -
              
              
              -Issued
                  to placement agents
              
              
              606,938
              
              
              4.50
              
              
              -
              
              
              -Issued
                  for facility acquisition
              
              
              300,000
              
              
              4.00
              
              
              -
              
              
              -Issued
                  for services rendered
              
              
              810,122
              
              
              7.01
              
              
              197,968
              
              
              4.07Issued
                  for royalty note conversion
              
              
              330,000
              
              
              12.50
              
              
              -
              
              
              -Exercised
              
              
              (311,428
              )
              
              3.03
              
              
              -
              
              
              -Forfeited
              
              
              (270,000
              )
              
              8.21
              
              
              -
              
              
              -Outstanding,
                  end of year
              
              
              5,197,776
              
              $
              5.06
              
              
              1,456,026
              
              $
              2.52Exercisable,
                  end of year
              
              
              4,797,776
              
              $
              5.03
              
              
              1,456,026
              
              $
              2.52
 
 The
        following table summarizes warrant information as of December 31,
        2006:
 
 **Number
                  of**
                **Warrants**
              
              **Exercise**
                **Prices**
              
              **Expiration**
                **Date**390,294
              
              $
                  1.90
              
              2007161,219
              
              $
                  2.00
              
              2007453,321
              
              $
                  2.50
              
              200761,796
              
              $
                  3.25
              
              200735,312
              
              $
                  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
              
              2009-2011125,000
              
              $
                  8.32
              
              2011330,000
              
              $12.50
              
              20095,197,776
              
              $
                  5.06
  **NOTE
        13.**  **INVESTMENT
        IN TECHNOLOGY**
 
 ***Advanced
        Bioethanol Technologies, Inc.***
  On
        June
        29, 2004, the Company acquired 100% of the issued and outstanding common
        stock
        of Advanced Bioethanol Technologies, Inc. (“ABTI”) from UTEK Corporation in
        exchange for 200,000 shares of the Company’s common stock at a price of $1.50
        for a total consideration of $300,000. ABTI’s principal asset is a license
        agreement, which has a term of the later of the expiration date of the longest
        lived patent rights or twenty-one years, to a biomass extraction and
        fermentation process developed at Virginia Polytechnic Institute and State
        University (“Virginia Tech”). This technology converts waste biomass mixtures to
        ethanol by exploiting each mixture’s unique properties to solve
        feedstock- specific processing problems. The license calls
        for minimum royalty payments of $7,500 in year three, $15,000 in year


F-24


**XETHANOL
        CORPORATION**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 four
            and
            $30,000 in year five and each year thereafter until the end of the license
            term.
            At the time of the purchase, ABTI had no operations and accordingly,
            the Company
            determined that it was acquiring assets and not a business.
  On
            December 6, 2005, the company entered into a research agreement with
            Virginia
            Tech for the further development and eventual commercialization of the
            licensed
            technology. Under this agreement, the Company agreed to pay Virginia
            Tech
            $75,689 in five payments scheduled over the course of 2006 and 2007.
 ***Ethanol
          Extraction Technologies, Inc.***
  On
          September 30, 2004, the Company acquired 100% of the issued and outstanding
          common stock of Ethanol Extraction Technologies, Inc. (“EETI”) from UTEK
          Corporation in exchange for 169,230 shares of the Company’s common stock at a
          price of $3.25 for a total consideration of $550,000. EETI holds a license
          agreement, which has a term of the later of when the last patent of the
          licensed
          patents expires or ten years, to a patented extractive fermentation technology
          developed at Queens University, Ontario to continually remove and isolate
          ethanol during the fermentation process, incorporating a strategy in which
          the
          fermentation reaction and ethanol removal occur simultaneously, thereby
          increasing output and reducing energy costs. Under the license agreement,
          the
          Company is obligated to pay an annual earned royalty of 1% of net sales
          of
          licensed product prior to patent expiration and 0.25% thereafter plus 1%
          of net
          sales of equipment that enables the use of the licensed technology, for
          the term
          of the agreement. The license also calls for a one-time milestone payment
          of
          $2,500 per million gallons of nameplate capacity for each plant set up
          during
          the term of the agreement. At the time of the purchase, EETI had no operations
          and accordingly, the Company determined that it was acquiring assets and
          not a
          business.
  ***Superior
          Separation Technologies, Inc.***
  On
          January 11, 2005, the Company acquired 100% of the issued and outstanding
          common
          stock of Superior Separation Technologies, Inc. (“SSTI”) from UTEK Corporation
          in exchange for 250,000 shares of the Company’s common stock at a price of $3.25
          for a total consideration of $812,500. The number of shares issued was
          subsequently adjusted to 220,702 shares to reflect the effects of the reverse
          merger. SSTI holds a license agreement, which has a term of twenty years,
          to a
          patented technology developed at the U.S. Department of Energy’s National
          Renewable Energy Laboratory (“NREL”) designed to effectively separate
          lignocellulosic material into lignin, cellulose and dissolved sugars. The
          license calls for minimum royalty payments of $10,000 in 2007, $25,000
          in 2008
          and $50,000 in 2009 and each successive year thereafter until the end of
          the
          license term. At the time of the purchase, SSTI had no operations and
          accordingly, the Company determined that it was acquiring assets and not
          a
          business.
  In
          connection with this license agreement, in May 2006 the Company entered
          into a
          cooperative research and development agreement with Midwest Research Institute
          as operator of the NREL. Under the agreement, the Company is required to
          pay
          $300,000 to the NREL to finance the research to be performed under the
          agreement. The Company has the right to assert copyright in works that
          its
          employees create in performing under the agreement, and the Company has
          the
          right to retain ownership of any invention that its employees make in performing
          under the agreement, exercisable within twelve months of the disclosure
          of the
          invention. The Company has 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. The Company’s 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.
 
 ***Xylose
          Technologies, Inc.***
  On
          August
          15, 2005, the Company acquired 100% of the issued and outstanding common
          stock
          of Xylose Technologies, Inc. (“XTI”) from UTEK Corporation in exchange for
          567,857 shares of the Company’s common stock at a price of $4.20 for a total
          consideration of $2,385,000. XTI holds a license agreement, which has a
          term of
          twenty years, to patented technologies based on research done by the U.
          S.
          Department of Agriculture’s Forest Products Lab (the “FPL”) designed to convert
          xylose into ethanol and xylitol. The license calls for a minimum royalty
          payment
          of $15,000 in 2008 and $25,000 in 2009 and each successive
          year thereafter until the end of the license term. At the time of the
          acquisition,
 F-25


**XETHANOL
      CORPORATION**


**NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


XTI
        also
        held cash of $450,000. At the time of the purchase, XTI had no operations
        and
        accordingly, the Company determined that it was acquiring assets and not
        a
        business.
  On
        November 30, 2005, XTI entered into a Cooperative Research and Development
        Agreement (“CRADA”) with the FPL for the purpose of developing genetically
        engineered yeast strains for the production of xylitol from cellulosic biomass,
        such as wood chips. Under the CRADA, XTI will fund to FPL $250,000 over the
        course of 2006. The first payment of $62,500 was made in January 2006. In
        December 2006, this agreement was extended, at no additional cost, until
        March
        2007. In January 2007, the Company negotiated a second agreement. The new
        agreement has a term of one year and requires us to pay to FPL a total of
        $250,000, payable in four equal quarterly installments beginning January
        2007.


NOTE
        14.WRITE-OFF
        OF INTANGIBLE ASSETS
 
 During
        the fourth quarter of 2005, the Company charged $3,635,416 to expense,
        representing the unamortized cost of license agreements obtained as a result
        of
        the Company’s acquisitions of ABTI, EETI, SSTI and XTI and to write off $205,000
        of goodwill of Permeate. The Company had initially recorded on its balance
        sheet
        the cost of acquiring the license agreements as the value of the Company’s
        common stock issued to acquire such licenses. The technologies that are covered
        by these licenses are primarily designed to enhance ethanol production processes
        and improve feedstock separation to enable biomass conversion. After
        consideration and evaluation of the license agreement held by EETI, the Company
        decided not to continue to develop it. With regard to the license agreements
        related to ABTI, SSTI and XTI, the Company has ongoing research agreements
        with
        each of the institutions and scientists who hold the original patents for
        these
        technologies. Although the Company anticipates further development and testing,
        as well as new technologies and opportunities that may evolve from these
        relationships, given the pre-commercial stage of these technologies and the
        uncertainties surrounding both the ultimate commercial deployment of the
        technologies and the timing and amounts of any cash flows related to such
        deployment, the Company determined an impairment loss should be
        recognized.
 
 NOTE
        15.INCOME
        TAXES
 
 As
        of
        December 31, 2006 and 2005, the Company had unused net operating loss
        carryforwards approximating $15,458,000 and $8,600,000, respectively, which
        may
        be applied against future taxable income. The net operating loss carryforwards
        expire in the years 2020 through 2025. At December 31, 2006 and 2005 the
        deferred tax assets (representing the potential future tax savings) related
        to
        the carryforwards were as follows:
  2006
              
              2005Deferred
                  tax asset
              
              $
              6,263,000
              
              $
              3,525,000Less:
                  Valuation allowance
              
              
              6,263,000
              
              
              3,525,000Net
                  deferred tax asset
              
              $
              0
              
              $
              0
  As
        a
        result of the uncertainty that net operating loss carryforwards will be utilized
        in the foreseeable future, a 100% valuation allowance had been provided.
        At
        December 31, 2006 and 2005, a wholly owned subsidiary had an unused net
        operating loss carry forward of approximately $226,000 which 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 94% and 89% of the Company’s net sales for the years ended December
        31, 2006 and 2005, respectively.
  F-26


**XETHANOL
        CORPORATION**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE
          17.**  **JOINT
          VENTURES**





***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 (“CX”), for the
      purpose of implementing the projects contemplated by that letter of intent.
      On
      May 30, 2006, the Company entered into an Organizational Agreement
      (“Organizational Agreement”) with CED, pursuant to which the Company and CED
      organized CX. On the same date, the Company and CED entered into an Operating
      Agreement that relates to the operation and management of CX. The Company has
      granted CX the exclusive right to use its technology for the development and
      operation of such facilities in the geographic areas in which CX intends to
      construct its facilities.





The
      Company invested $40,000 for 80% of the membership interests in CX, and CED
      invested $10,000 for 20% of the membership interests in CX. In connection with
      those Agreements, 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 is
      first exercisable on May 30, 2007 and is exercisable until May 30, 2010. The
      fair value of these warrants is $1,011,420 and is being amortized over its
      vesting period. The Company granted CED certain registration rights with respect
      to the shares underlying such warrants. In the event of a change of control
      of
      the Company, CED will have the right to exchange its interest in CX for shares
      of the Company’s common stock, at an exchange rate that is based upon the
      appraised value of CED’s interest in CX and 95% of the market price of the
      Company’s common stock for the 15 days preceding the completion of the valuation
      of CED’s interest in CX. The Company also agreed to permit CED to require the
      Company to exchange CED’s interest in CX for shares of the Company’s common
      stock after three years from the date of the Organizational Agreement. CED
      agreed to permit the Company to require CED to exchange its interest in CX
      for
      shares of the Company’s common stock after three years from the date of the
      Organizational Agreement. In each case, the exchange rate will be set by mutual
      agreement or, if the Company and CED cannot agree, based upon the appraised
      value of CED’s interest in CX and the market price of the Company’s common stock
      for the 15 days preceding the completion of the valuation of CED’s interest in
      CX.





The
      organizational agreement also provides that CX may advance CED funds for working
      capital to the extent necessary for CED to provide the services it is required
      to perform under the agreement. Those advances bear interest at the prime rate,
      and are repayable from any distributions by CX to CED in respect to CED’s
      membership interest in CX. As of December 31, 2006, Xethanol had advanced
      $567,000 to CX for the purposes of funding working capital advances to CED.
      CX
      has established a 100% reserve against these loans, and any interest thereon,
      pending CX having distributable cash flow. The Company consolidates the
      operations of CX.





On
      March
      5, 2007, the Company with CX initiated an action against CED in the Supreme
      Court of the State of New York. The Company’s complaint alleges, among other
      things, that CED failed to repay to CX loans in the principal amount of
      $630,000, plus interest, and that CED has failed to properly account for the
      expenditure of certain of the Company’s funds and those of CX. In the complaint,
      the Company and CX 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.





***Organization
      of NewEnglandXethanol, LLC***





In
      April
      2006, the Company formed NewEnglandXethanol, LLC (“NEX”). In June 2006, the
      Company entered into an Organizational Agreement with Global Energy and
      Management, LLC (“Global”) and an Operating Agreement with NEX and Global
      relating to the operation and management of NEX. NEX was formed and organized
      to
      develop and operate ethanol production plants in Connecticut, Massachusetts,
      Rhode Island, New Hampshire, Maine and Vermont.




F-27


**XETHANOL
      CORPORATION**


**NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


The
        parties intended that each of those plants would be owned by a special purpose
        limited liability company owned by NEX and third party investors and operated
        by
        Global.
  The
        initial manager of NEX was Lee R. Tyrol, a principal of Global. Pursuant
        to the
        Organizational Agreement, Global was to provide those special limited liability
        companies with certain services that are listed in the Organizational Agreement,
        and they would pay Global the fees set forth in the Organizational Agreement.
        The Company and Global each owned 50% of the membership interests in
        NEX.




In
        connection with the Company’s agreement with Global, the Company issued to
        Global 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 is scheduled to expire on the
        fourth anniversary of the date of the Organizational Agreement. The Company
        granted Global certain registration rights with respect to the shares underlying
        such warrants. In the event of a Change of Control of the Company, Global
        would
        have the right to exchange its interest in NEX for shares of the Company’s
        common stock, at an exchange rate that was based upon the appraised value
        of
        Global’s interest in NEX and 95% of the market price of the Company’s common
        stock for the 15 days preceding the completion of the valuation of Global’s
        interest in NEX. The Company also agreed to permit Global to require the
        Company
        to exchange its interest in NEX for shares of the Company’s common stock after
        one year from the date of the Organizational Agreement. The exchange rate
        was to
        be set by mutual agreement or, if the Company and Global could not agree,
        based
        upon the appraised value of Global’s interest in NEX and 90% of the closing
        price of the Company’s common stock for the 15 days preceding the completion of
        the valuation of Global’s interest in NEX.
 
 The
        Company had determined that NEX was a variable interest entity. The Company
        was
        not the primary beneficiary and did not control NEX. Accordingly, the
        Company accounted for this investment based on the equity method of accounting
        pursuant to APB Opinion No. 18, *The
        Equity Method of Accounting for Investments in Common Stock* .
 
 In
        December 2006, the Company’s NEX joint venture effectively ended based on a
        disagreement between the Company and Global with respect to the actions that
        Global and the Company were required to take pursuant to the joint venture.
        The
        Company does not currently believe that the NEX joint venture will conduct
        any
        further business, and the warrants issued to Global have been
        cancelled.
  **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. Mr.
        Langberg did not receive any compensation otherwise payable to him as a
        director. Including $194,147 Mr. Langberg earned in 2004 that the Company
        paid
        him in 2005, the Company paid Mr. Langberg a total of $649,147 in 2005 (not
        including the office rent and related reimbursements described below), and
        the
        Company provided him with health insurance coverage at a cost of $14,014
        to the
        Company. 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, 2006 and 2005, total office rent
        expense plus reimbursements of other costs of $132,043 and $99,086,
        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


F-28
 **XETHANOL
        CORPORATION**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  (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 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 $60,439 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 $27,496 and received a payment of $4,353 accrued from prior years. Total
        compensation expense recognized by the Company during 2006 with regard to
        Mr.
        Langberg was $857,935 and actual payments made to Mr. Langberg during 2006
        were
        $584,353.
  In
        January 2005, the Company entered into an employment agreement with Christopher
        d’Arnaud-Taylor, a major stockholder and then Chairman of the Company’s Board of
        Directors, as the Company’s President and Chief Executive Officer for a term of
        three years (the “2005 Agreement”). The 2005 Agreement replaced an earlier
        management services agreement with London Manhattan Limited, Inc. a company
        owned by Mr. d’Arnaud-Taylor for the services of Mr. d’Arnaud-Taylor as its
        President and Chief Executive Officer. Under the 2005 Agreement, the Company
        paid Mr. d’Arnaud-Taylor a monthly fee of $15,000. During 2005, the Company made
        total payments to Mr. d’Arnaud-Taylor of $281,075. 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 provides that Mr.
        d’Arnaud-Taylor will continue to serve as a director of the Company for the
        remainder of his current term.


Under
        the
        termination agreement, the Company will continue 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.
 
 F-29
 **XETHANOL
          CORPORATION**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
  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.
 
 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 our Chief Executive Officer. During the term of the agreement,
        the
        Company will pay Mr. d’Arnaud-Taylor $15,000 per month (payable monthly in
        advance) and reimburse him for any reasonable and appropriately documented
        business expenses he may incur in the performance of his duties under the
        agreement. The term of the agreement expires on November 25, 2007, subject
        to
        earlier termination by either party at any time upon written notice to the
        other. If Mr. d’Arnaud-Taylor terminates the agreement before the scheduled
        termination, the Company is obligated to pay him all amounts due as of the
        date
        of the termination. If the Company terminates the agreement before the scheduled
        termination, the Company is obligated to pay Mr. Taylor pay him all amounts
        due as of the date of the termination plus a lump sum termination fee equal
        to
        the lesser of (a) the monthly consulting payable for the remainder of the
        scheduled term and (b) $90,000. 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 $1,344,458 related to options granted to Mr.
        d’Arnaud-Taylor as a result of his employment with Company and $170,234 related
        to options granted to Mr. d’Arnaud-Taylor as a result of his membership on the
        Company’s board of directors.
 
 Mr.
        William P. Behrens, a newly elected director effective October 1, 2006, is
        the
        Vice Chairman of Northeast Securities, Inc. (“Northeast”). Pursuant to a
        placement agent agreement dated as of February 22, 2006 (the “Placement Agent
        Agreement”) between the Company and Northeast, Northeast acted as the Company’s
        placement agent in connection with the private offering of the Company’s common
        stock and warrants to purchase common stock consummated on April 13, 2006.
        In
        consideration of Northeast’s services under the Placement Agent Agreement, on
        April 13, 2006, the Company paid Northeast $1,928,397 in cash and issued
        to
        Northeast and its designees warrants (the “Placement Agent Warrants”) to
        purchase a total of 606,938 shares of the Company’s common stock at an exercise
        price $4.50 per share, exercisable at any time until April 12, 2009. The
        Placement Agent Warrants may be exercised on a “cashless” basis at any time and
        are otherwise exercisable on the same terms and conditions as the warrants
        issued to the investors in the April 2006 private placement. Placement Agent
        Warrants to purchase 35,000 shares of common stock were issued to Mr. Behrens
        as
        a designee of Northeast. The Placement Agent Agreement provides that the
        shares
        of common stock issuable upon exercise of the Placement Agent Warrants are
        entitled to registration rights on the same terms as the shares of common
        stock
        and warrants purchased by the investors in the April 2006 private
        placement
 
 On
        October 1, 2006, the Company and Northeast entered into an advisory agreement
        pursuant to which Northeast will, on a non-exclusive basis, 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 will pay Northeast an advisory fee of $10,000 per month during the
        term
        of the agreement and reimburse Northeast for all necessary and reasonable
        out-of-pocket costs and expenses it incurs in the




F-30


**XETHANOL
          CORPORATION**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  performance
          of its obligations under the agreement. The term of the agreement is 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. The agreement
          provides that if, within twelve months after the termination of the agreement,
          the Company either (i) consummates a financing transaction with any investor
          introduced to the Company by Northeast prior to the termination or
          (ii)
          enters into a definitive agreement to consummate a financing transaction
          with
          any such investor and the financing transaction is consummated within six
          months
          thereafter, then the Company shall pay Northeast a cash fee in line with
          industry standard rates. The agreement also provides that the Company shall
          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
          November 2004, before the reverse merger and concurrent private offering
          described in Note 1, 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 the Company and currently one of the Company’s directors
          and its former Chairman, President and Chief Executive Officer ;
          (b)
          250,000 options to the mother-in-law of Jeffrey
          S. Langberg, a
          significant shareholder of the Company and a
          former
          director ;
          and (c)
          200,000 options to another significant shareholder of the Company’s predecessor.
          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 the Company’s common
          stock to the Company for cancellation. The Company reflected those contributions
          to capital in connection with the reverse merger in the consolidated statements
          of changes in stockholder’s equity. Under the Company’s agreement with Mr.
          d’Arnaud-Taylor and Mr. Langberg, they each caused share certificates for
          250,000 shares to be delivered to the Company’s transfer agent for cancellation.
 
 The
        Company also recorded consulting fees to other significant shareholders for
        the
        year ended December 31, 2005 of $77,796. During 2005, the Company also issued
        44,140 warrants to purchase common stock to a significant shareholder as
        compensation for consulting services. In December 2005, the Company entered
        into
        an arrangement with one of it advisory board members to act as the Company’s
        chief technology strategist and the Company pays a monthly consulting fee
        of
        $8,000. For the years ended December 31, 2006 and 2005, $96,000 and $8,000,
        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, 2006 and 2005 were $317,727
        and $56,080, respectively.
  **NOTE
        19.**  **LEGAL
        PROCEEDINGS**
 
 In
        the
        normal course of business, various claims, charges and litigation are asserted
        or commenced from time to time against the Company. The Company believes
        that
        final judgments, if any, which might be rendered against the Company in current
        litigation are adequately reserved or covered by insurance.
 
 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
        our
        Company in the Circuit Court of the Ninth Judicial Circuit, in and for Orange
        County, Florida, Case No. 2005-CA-6351. The complaint alleges that the
        plaintiffs are beneficial owners of 300,000 shares of common stock of Old
        Xethanol. The complaint further alleges that the Rolls are entitled to have
        issued in their name the number of shares of the Company’s common stock to which
        they are entitled pursuant to the merger agreement dated as of February 2,
        2005
        between Old Xethanol, Zen, and Zen Acquisition. The complaint seeks a
        declaratory judgment to that effect and the transfer to the plaintiffs of
        these
        shares of common stock, or, in the


F-31
 **XETHANOL
            CORPORATION**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
  alternative,
          damages for breach of contract, conversion, and breach of fiduciary duty.
          The
          Company filed a notice of removal on August 29, 2005, and the case is now
          pending in the United States District Court for the Middle District of
          Florida,
          Orlando Division (Case No. 6:05-CV-1263-ORL-28-JGG). On September 8, 2005,
          the
          Company filed its answer and affirmative defenses to Plaintiffs’ complaint,
          asserting that the Rolls do not have any ownership interests in shares
          of
          our common stock. The discovery phase of the case ended on October 5, 2006.
          Court ordered mediation occurred on October 30, 2006. The mediation did
          not
          resolve the litigation. The case is on the trial calendar for trial during
          a
          trial term commencing April 2, 2007.
  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 our current and 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 individual defendants are Lawrence
          S.
          Bellone, a director, the Company’s Executive Vice President, Corporate
          Development and principal accounting officer and the Company’s former Chief
          Financial Officer; Christopher d’Arnaud-Taylor, a director and the Company’s
          former 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 actions complaints (the “Class
          Action Suits”) 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.) Plaintiffs’ consolidated class action complaint is
          due to be served and filed on March 23, 2007.
 
 Starting
          in late December 2006, three derivative actions were also filed in the
          United
          States District Court for the Southern District of New York, purportedly
          brought
          on behalf of the Company and naming the following individual defendants:
          Lawrence S. Bellone; Christopher d’Arnaud-Taylor; Jeffrey S. Langberg; David
          Ames, a director and the Company’s Chief Executive Officer and President; and
          directors William Behrens and Richard Ditoro, and naming the Company as
          a
          nominal defendant,  Radunz
          v.
          Bellone, et al., 06 Civ. 15536 (HB) (S.D.N.Y.); Russ v. Bellone, et al.,
          07 Civ.
          00991 (HB) (S.D.N.Y.) ;
          and Fay-Hammonds
          v. Bellone, et al., 07 Civ.00991 (HB) (S.D.N.Y.) (the
“Derivative Suits”). These Derivative Suits allege that the Company was injured
          by the actions of the individual defendants, based on the same factual
          allegations found in the Class Action Suits. Plaintiffs in these suits
          seek
          unspecified compensatory damages, injunctive relief and reasonable costs
          and
          expenses including counsel fees and experts’ fees. The Company expects that the
          Derivative Suits will also be consolidated into one derivative suit and
          that
          plaintiffs will serve a consolidated complaint on or about March 28,
          2007.
 
 On
          March
          5, 2007, the Company, along with CoastalXethanol, LLC (“CX”), initiated an
          action against Coastal Energy Development, Inc. (“CED”) in the Supreme Court of
          the State of New York, County of New York (Xethanol Corporation and
          CoastalXethanol, LLC v. Coastal Energy Development, Inc., ** Index
          No.:600685/07). The complaint alleges, among other things, that CED has
          failed
          to repay to CX loans in the principal amount of $630,000, plus interest,
          and
          that CED has failed to properly account for certain funds of the Company
          and CX.
          In the complaint, the Company and CX seek damages from CED 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.
  F-32




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





Not
      applicable.





**ITEM
      8A.**  **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, 2006, 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.





There
      was
      no change in our internal control over financial reporting that occurred during
      the quarter ended December 31, 2006 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
      8B.**  **OTHER
      INFORMATION.**





**Background**





As
      described in the following paragraphs, we failed to file a Current Report on
      Form 8-K in a timely manner on several occasions in the fourth quarter of 2006.
      By providing the disclosure in this Item 8B, we are entitled to a limited safe
      harbor provided by SEC rules from liability under Section 10(b) of the Exchange
      Act and Rule 10b-5 thereunder for failure to timely file reports required by
      certain items in Form 8-K.





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





On
      December 1, 2006, we agreed with Mr. Christopher d’Arnaud-Taylor, a director,
      officer and significant shareholder of Old Xethanol and currently one of our
      directors and our former Chairman, President and Chief Executive Officer, to
      terminate his consulting agreement and entered into another consulting agreement
      with Mr. d’Arnaud-Taylor on that date. For a description of those agreements,
      please see Item 10, Executive Compensation - Termination and Consulting
      Agreements with Christopher d’Arnaud-Taylor below, which section is incorporated
      by reference into this Item 8B.





**Effective
      Ending of NewEnglandXethanol Joint Venture**





In
      June
      2006, we organized NewEnglandXethanol, LLC to produce ethanol in the New England
      states. NewEnglandXethanol was a joint venture with Global Energy and Management
      LLC with Global Energy and us each owning 50% of the membership interests in
      NewEnglandXethanol. In December 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 currently believe that the NewEnglandXethanol
      joint venture will conduct any further business. We did not file a Current
      Report on Form 8-K in December 2006 to report the effective ending of our joint
      venture relationship.





52


**Grant
      of Options to Officers and Directors in December 2006**





The
      following disclosure regarding the grant of options to Mr. David R. Ames, our
      President and Chief Executive Officer and a director, is contained in a Current
      Reports on Form 8-K/A and Form 8-K we filed with the SEC on February 2,
      2007.




On
      November 9, 2006, our board of directors elected David R. Ames as our President
      and Chief Executive Officer. As described in the Current Report on Form 8-K
      dated November 9, 2006, we agreed to pay Mr. Ames an annual salary of $1.00
      for
      his services as President and Chief Executive Officer but had not determined
      the
      material terms of the non-cash compensation as of the date of the filing of
      that
      Current Report on Form 8-K.





On
      December 7, 2006, our board of directors granted to certain of our officers,
      directors, employees and consultants options (the “December 2006 Options”) under
      our 2005 Incentive Compensation Plan (the “Plan”) to purchase an aggregate of
      2,415,000 shares of our common stock at an exercise price equal to $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. Among the December 2006 Options was
      an
      option to purchase 1,350,000 shares granted to Mr. Ames, 200,000 of which vested
      on the date of grant, and the remaining 1,150,000 were initially scheduled
      to
      vest on the first anniversary of the date of grant. On February 1, 2007, our
      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.
      The
      option expires on the fifth anniversary of the date of grant. Other December
      2006 Options were options to purchase 100,000 shares granted to each of
      Christopher d’Arnaud-Taylor (a director and former Chief Executive Officer),
      Lawrence S. Bellone (a director and then Chief Financial Officer) and Robin
      Buller (Vice President - Strategic Development). The option granted to Mr.
      Taylor expires on the tenth anniversary of the date of grant and the options
      granted to Mr. Bellone and Mr. Buller expire on the fifth anniversary of the
      date of grant.





The
      Plan
      provides that the total number of shares of common stock that may be subject
      to
      awards granted thereunder is 4,000,000 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). On December 7, 2006, prior to the grant
      of
      the December 2006 Options, there were 1,667,930 shares of common stock remaining
      available for awards under the Plan. Therefore, the number of shares issuable
      upon exercise of the December 2006 Options exceeded the number then available
      under the Plan by 747,070 shares, which represents approximately 31% of the
      shares issuable upon exercise of the December 2006 Options. Accordingly, the
      compensation committee of the board of directors has determined that each of
      the
      December 2006 Options shall be subject, on a pro rata basis, to approval by
      our
      stockholders of an amendment to the Plan to increase the number of shares
      available for award thereunder.





We
      currently contemplate that we will submit to our stockholders at the 2007 annual
      meeting of stockholders a proposal to amend the Plan to increase the number
      of
      shares available for award thereunder to cover the 747,070 shares issuable
      upon
      exercise of the December 2006 Options and an additional 865,000 shares issuable
      upon exercise of other outstanding options similarly granted in 2007 subject
      to
      approval by our stockholders. If the stockholders do not approve that amendment,
      the December 2006 Options will be void to the extent (and only to the extent)
      that the number of shares issuable upon the exercise thereof exceeds each
      grantee’s pro rata allocation of the 747,070 excess shares, and the compensation
      committee will consider alternative incentives for the grantees.




53





**PART
      III**





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





**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
            
            58
            
            Chief
                Executive Officer, President and DirectorGary
                Flicker
            
            48
            
            Chief
                Financial Officer, Executive Vice President and
                SecretaryLawrence
                S. Bellone
            
            50
            
            Executive
                Vice President, Corporate Development and DirectorThomas
                J. Endres
            
            50
            
            Executive
                Vice President, OperationsWilliam
                P. Behrens
            
            68
            
            Director
                and Non-Executive Chairman of the BoardGil
                Boosidan
            
            34
            
            DirectorChristopher
                d’Arnaud-Taylor
            
            61
            
            DirectorRichard
                D. Ditoro
            
            69
            
            DirectorRobert
                L. Franklin
            
            69
            
            DirectorEdwin
                L. Klett
            
            71
            
            Director





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.





**Lawrence
      S. Bellone** became
      our Executive Vice President, Corporate Development on January 29, 2007 and
      a
      member of our board of directors on October 5, 2006. 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. From October 2003 to February 2005,
      Mr.
      Bellone was a managing director with Bentley Associates, a New York-based
      investment banking boutique/broker-dealer providing mergers and acquisitions,
      private placement and corporate advisory services primarily to small and
      midsized companies. From January to September 2003, Mr. Bellone was an
      independent financial consultant. From 1988 through December 2002, Mr. Bellone
      was involved in a wide range of projects and activities including lending,
      leasing, loan syndications, private




54




debt
      placement, principal investments, derivatives,
      corporate development and arbitrage while working in the investment banking
      and
      capital market areas of Chase Manhattan Bank (later to become JP Morgan Chase).
      As a Managing Director and senior member of the Structured Capital Group, he
      was
      responsible for structuring, originating and executing financing and investment
      transactions for Fortune 100 companies. Before joining Chase in 1988, he worked
      in various public and private accounting and finance functions at NY Life
      Insurance, Price Waterhouse and JP Morgan. While at Price Waterhouse, he
      qualified as a C.P.A. in New York State.




**Thomas
      J. Endres** became
      our Senior Vice President, Operations on September 7, 2006 and subsequently
      our
      Executive Vice President, Operations on March 15, 2007. 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 1999 through April 2002, Mr. Endres also served as
      a
      member of the board of directors of the West Point Federal Credit Union, where
      he managed over $55 million in funds and was responsible for the credit union’s
      investment policies, interest rate analysis and overall fund management.





**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. Mr. Boosidan holds BA in Economics and Accounting
      from the Tel Aviv University and an MBA from the Recanati Graduate School of
      Business in Tel Aviv. He passed the CPA examinations in both Israel and the
      state of New York.





**Christopher
      d’Arnaud-Taylor** became a
      member of our board of directors on February 2, 2005. From February 2, 2005
      through August 22, 2006, he served as our Chairman, President and Chief
      Executive Officer. Before February 2, 2006, he had worked with Old Xethanol
      since August 2000. He is an international merchant banker and entrepreneur.
      Mr.
      d’Arnaud-Taylor has been a Director and President of a private merchant banking
      firm, London Manhattan Securities, Inc., for more than the past five years.
      Mr.
      d’Arnaud-Taylor also presently serves as a director of Xeminex, Inc.





**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




55




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.





**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. During 2006, the following persons served on our board of
      directors and were “independent” within the meaning of Rule 10A-3(b)(1)(ii)
      under the Exchange Act and Section 121A of the AMEX Company Guide: Mr. Behrens,
      Mr. Ditoro, Mr. Klett, Mr. Ames (for part of 2006 before he became an officer),
      Mr. Louis B. Bernstein (for part of 2006 before he became an officer), Mr.
      Marc
      S. Goodman, Richard L. Ritchie.




**Advisory
      Board**





We
      have
      established an advisory board currently comprised of two members with experience
      in the ethanol production business or general corporate matters. Our advisory
      board consults with our board of directors and management to discuss matters
      relating to our business activities. Our policy is to reimburse members of
      our
      advisory board for out-of-pocket expenses incurred in serving on our advisory
      board.





Members
      of our advisory board may serve as consultants to us under consulting agreements
      for which they will receive compensation. In December 2005, we entered into
      an
      arrangement with Mr. Mark Austin, a member of our advisory board, under which
      he
      agreed to serve as our chief technology strategist on a month-to-month basis
      in
      consideration of a monthly consulting fee of $8,000. For the year ended December
      31, 2006, we paid Mr. Austin $96,000 under this agreement. During March 2006,
      we
      also granted to Mr. Austin warrants to acquire 25,000 shares of common stock
      at
      an exercise price of $4.50 per share. In March 2006, we entered into an
      arrangement with Dr. Foster Aryi Agblevor, a member of our advisory board,
      under
      which he agreed to provide research and consulting services for a two-year
      term.
      For the year ended December 31, 2006, we paid Dr. Agblevor $6,390 under this
      agreement. During March 2006, we also granted to Dr. Agblevor warrants to
      acquire 20,000 shares of common stock at an exercise price of $5.50 per share.
      To our knowledge, neither of our advisory board members has any conflict of
      interest between their obligations to us and their obligations to others.
      Companies with which advisory board members are involved may in the future
      have
      commercial relationships with us.





The
      members of our advisory board and their primary professional affiliations are
      as
      follows:





**Foster
      Aryi Agblevor** **,
      Ph.D.** is known
      internationally as an expert in thermochemical biomass conversion and rapid
      characterization of biomass feedstocks. His expertise in the area was recognized
      with the winning of the Best Paper Awards at the Gordon Conference on Analytical
      Pyrolysis in 1991 and 1993. He was also awarded the U.S. Department of Energy’s
      Special Achievement Award for his contribution towards the development of
      biomass standards. Since 1996, Dr. Agblevor has been an Associate Professor
      in
      the Biological Systems Engineering Department at Virginia Tech. From 1990 to
      1996, most recently as a Senior Chemical Engineer, Dr. Agblevor was on the
      staff
      of the Center for Renewable Chemicals and Materials at the National Renewable
      Energy Laboratory. Dr. Agblevor is the current Vice Chairman of the E48
      Committee on Biotechnology of the American Society of Testing and Materials
      (ASTM). He has




56




developed
      eight ASTM standards on biomass analysis. Dr. Agblevor has authored more than
      100 publications in peer-reviewed journals and conference proceedings and holds
      two U.S. patents and three other patents pending concerning biomass for ethanol
      production. He has been guest lecturer at the Department of Chemical and
      Petroleum Engineering, Colorado School of Mines, and was an invited speaker
      at
      the Department of Chemical and Petroleum Engineering, University of Kansas,
      and
      at several International Energy Agency (IEA) meetings throughout the country.
      Dr. Agblevor has organized and chaired several sessions of the Cellulose Paper
      and Textile Division of the American Chemical Society and is active in the
      American Institute of Chemical Engineers. Dr. Agblevor received M.A.Sc. and
      Ph.D. degrees in Chemical Engineering and Applied Chemistry from the University
      of Toronto, Canada.




**Mark
      Austin** is the
      Managing Director of Chandler Reed LLC, a strategic growth and venture
      development consulting firm, where he advises clients in the areas of business
      strategy and planning, technology development, marketing, finance and strategic
      alliances. He has lectured on strategic planning in China, business development
      in Africa, and technology in Latin America. Mr. Austin holds patents issued
      in
      the United States, Latin America, Europe and Asia, and has won product design
      awards in the United States and Asia. He is an advisor to the New York Energy
      & Environmental Funders’ Forum, a program of the Center for Economic and
      Environmental Partnership, Inc. In December 2005, Mr. Austin entered into a
      consulting arrangement with us to assist us in the development of our technology
      portfolio and overall technology strategy.





**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 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, 2006, 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,
      2006, except that David R. Ames, our Chief Executive Officer, President and
      a
      director, failed
      to
      file a Form 4 to report the grant of options upon his election to the board
      (although he reported the grant of the options in his Form 3) ;
      William
      P. Behrens, the Chairman of our Board of Directors, filed a late Form 3 to
      report his joining our board of directors, failed
      to
      file a Form 4 to report the grant of options upon his election to the board
      (although he reported the grant of the options in his Form 3) and
      filed
      a late Form 4 reporting one transaction; Lawrence S. Bellone, our Executive
      Vice
      President, Corporate Development and a director and formerly our Chief Financial
      Officer, filed a late Form 4 reporting the grant of options; Christopher
      d’Arnaud-Taylor, our former Chairman, President and Chief Executive Officer,
      filed one late Form 4 reporting the grant of options and failed to file another
      Form 4 reporting the grant of options; Richard D. Ditoro, a director, filed
      a
      late Form 3 to report his becoming a director ,
      failed
      to file a Form 3 when he rejoined our board on September 7, 2006 after leaving
      the board at the annual meeting in August 2006 and filed one late Form 4; Thomas
      Endres, our Executive Vice President, Operations and formerly our Senior Vice
      President, Operations, filed a late Form 3 and failed to file a Form 4 to report
      the grant of options upon his becoming an officer (although he reported the
      grant of the options in his Form 3); Marc S. Goodman, formerly a director,
      filed
      a late Form 4 reporting the grant of options; Edwin L. Klett, a director, filed
      a late Form 3 to report his joining our board of directors and failed to file
      a
      Form 4 to report the grant of options upon his election to the board (although
      he reported the grant of the options in his Form 3); Mark J. Oppenheimer,
      formerly a director, failed to file a Form 4 to report the grant of options
      upon
      his election to the board (although he reported the grant of the options in
      his
      Form 3) ;
      and
      Jeffrey S. Langberg, formerly a director, filed a late Form 3 to report his
      becoming a director.





57


**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, 1185 Avenue of the Americas, New
      York,
      New York 10036, 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.




58


**ITEM
      10.**  **EXECUTIVE
      COMPENSATION.**





The
      following Summary Compensation Table sets forth for the year ended 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 2006 and our two most highly
      compensated executive officers other than the principal executive officer who
      were serving as executive officers at the end of 2006. These individuals are
      our
“named executive officers.”





**Summary
      Compensation Table**





**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)*
            
            
            2006
            
            
            1
            
            
            -
            
            
            743,472
                (3
            )
            
            5,000
                (4
            )
            
            748,473Christopher
                d’Arnaud-Taylor
              *Former
                President and Chief*
              *Executive
                Officer*(5)
            
            
            2006
            
            
            156,000
            
            
            -
            
            
            1,514,692
                (6
            )
            
            250,000
                (7
            )
            
            1,920,692Louis
                B. Bernstein
              *Former
                President and Interim Chief Executive Officer*(8)
            
            
            2006
            
            
            69,531
            
            
            -
            
            
            93,103
                (9
            )
            
            -
            
            
            162,634Lawrence
                Bellone
              *Executive
                Vice President - Corporate Development, Former Chief Financial
                Officer*(10)
            
            
            2006
            
            
            180,000
            
            
            50,000
            
            
            312,259
                (11
            )
            
            -
            
            
            542,259Thomas
                Endres
              *Executive
                Vice President, Operations*(12)
            
            
            2006
            
            
            47,083
            
            
            -
            
            
            67,598
                (13
            )
            
            -
            
            
            114,681




(1)
            The
                amounts in column (e) reflect the dollar amount of awards under our
                2005
                Incentive Compensation Plan that we recognized for financial statement
                reporting purposes for the fiscal year ended December 31, 2006 in
                accordance with FAS 123(R). For Mr. Bernstein, the amount includes
                compensation derived from awards granted before 2006 but that vested
                in
                2006 and from awards granted in 2006 and vested in 2006. Assumptions
                used
                in the calculations of these amounts are included in Note 12 to our
                Consolidated Financial Statements for the year ended December 31,
                2006
                included in this report.





The
                2005 Incentive Compensation Plan provides that the total number of
                shares
                of common stock that may be subject to awards granted thereunder
                is
                4,000,000 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). On December 7, 2006, before any additional
                options were granted on that date as described in various footnotes
                to
                this table (the “December 2006 Options”), there were 1,667,930 shares of
                common stock remaining available for awards under the Plan. The number
                of
                shares issuable upon exercise of the December 2006 Options exceeded
                the
                number then available under the Plan by 747,070 shares, which represents
                approximately 31% of the shares issuable upon exercise of the December
                2006 Options. Accordingly, the compensation committee of our board
                of
                directors determined that each of the December 2006 Options shall
                be
                subject, on a pro rata basis, to approval by our stockholders of
                an
                amendment to the Plan to increase the number of shares available
                for award
                thereunder. As a result of this determination, shares issuable upon
                exercise of the December 2006 Options are subject to stockholder
                approval,
                as noted below.





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




59




(3)
            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 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. 418,000 shares issuable
                on
                exercise of the option granted to Mr. Ames are subject to stockholder
                approval. The option expires on the fifth anniversary of the date
                of
                grant. The amount in the table includes (x) $367,369 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.




(4)
            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.





(5)
            Mr.
                d’Arnaud-Taylor served as our Chairman, President and Chief Executive
                Officer from February 2, 2005 until his termination effective August
                22,
                2006 under a termination agreement. The agreement provides that Mr.
                d’Arnaud-Taylor will continue to serve as a director of the company
                for
                the remainder of his current term. We may be able to deduct only
                $1,000,000 of the total compensation paid to Mr. d’Arnaud-Taylor for tax
                purposes based on the deductibility limitation in Section 162(m)
                of the
                Internal Revenue Code. For a description of our termination and consulting
                agreements with Mr. d’Arnaud-Taylor, see the immediately following
                subsection entitled “Termination and Consulting Agreements with
                Christopher d’Arnaud-Taylor.”





(6)
            On
                February 28, 2006, we granted an option to purchase 250,000 shares
                of our
                common stock to Mr. d’Arnaud-Taylor 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 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 at an exercise price of $8.32 per share (the last sale
                price per share of our common stock on the date of grant as reported
                by
                the OTC Bulletin Board) 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-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 will
                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 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 a director,
                and all shares vested on the date of grant. The option expires on
                the
                tenth anniversary of the date of grant. 31,000 shares issuable on
                exercise
                of the option granted to Mr. d’Arnaud-Taylor are subject to stockholder
                approval. The amount in the table includes (x) $454,313 in compensation
                expense we incurred in 2006 for Mr. d’Arnaud-Taylor in connection with the
                February 28, 2006 grant (as adjusted); (y) $890,145 in compensation
                expense we incurred in 2006 for Mr. d’Arnaud-Taylor in connection with the
                June 12, 2006 grant (as adjusted); and (z) $170,234 in compensation
                expense we incurred in 2006 for Mr. d’Arnaud-Taylor in connection with the
                December 7, 2006 grant.




60




(7)
            This
                amount represents compensation expense in 2006 to Mr. d’Arnaud-Taylor
                under the August 24, 2006 termination agreement and the August 25,
                2006
                consulting agreement (as terminated on December 1, 2006 and replaced),
                in
                each case between Mr. d’Arnaud-Taylor and
                us.





(8)
            Mr.
                Bernstein served: (a) as our Interim Chief Executive Officer from
                August
                21, 2006 until his resignation on November 9, 2006; (b) as our President
                from September 7, 2006 until his resignation on November 9, 2006;
                and (c)
                as a director from June 2, 2005 until his resignation on November
                9, 2006.




(9)
            On
                July 28, 2005, we granted an option to purchase 75,000 shares of
                our
                common stock to Mr. Bernstein at an exercise price of $4.00 per share
                (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) in consideration of his service as a director, and 50% of
                the
                shares vested on the grant date and the remaining 50% vested on the
                first
                anniversary of the grant date. The option expires on the fifth anniversary
                of the date of grant. On September 7, 2006, we granted an option
                to
                purchase 45,000 shares of our common stock to Mr. Bernstein 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 President and Interim Chief Executive
                Officer, with 30,000 shares vesting on the date of grant and the
                remaining
                15,000 shares vesting on termination of his service as our Interim
                Chief
                Executive Officer and resumption as an independent member of the
                Board of
                Directors. The option expires on the fifth anniversary of the date
                of
                grant. On November 9, 2006 upon termination of Mr. Bernstein’s service as
                our President and Interim Chief Executive Officer and his resignation
                from
                the our board of directors, 15,000 shares awarded on September 7,
                2006
                were forfeited. The amount in the table includes (x) $36,100 in
                compensation expense we incurred in 2006 for Mr. Bernstein in connection
                with the July 28, 2005 grant; and (y) $57,003 in compensation expense
                we
                incurred in 2006 for Mr. Bernstein in connection with the September
                7,
                2006 grant.





(10)
            Mr.
                Bellone became our Executive Vice President, Corporate Development
                on
                January 29, 2007 and a member of our board of directors on October
                5,
                2006. 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.





(11)
            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. 31,000 shares issuable on exercise of the option
                granted to Mr. Bellone are subject to stockholder approval. 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.





(12)
            Mr.
                Endres became our Senior Vice President, Operations on September
                7, 2006
                and subsequently our Executive Vice President, Operations on March
                15,
                2007.





(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. 31,000
                shares issuable on exercise of this option granted to Mr. Endres
                are
                subject to stockholder approval. 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.





61


*Employment
      Agreement with Thomas Endres*





In
      September 2006, we entered into an employment agreement with Thomas Endres,
      our
      Executive Vice President, Operations. Mr. Endres’ agreement provides for an
      annual base salary of $150,000 and has a term of eighteen months commencing
      on
      September 7, 2006 and ending on March 6, 2008. The employment agreement further
      provides for our grant to Mr. Endres of 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 the date of grant as reported by the American
      Stock
      Exchange).




The
      employment agreement provides for various payments to Mr. Endres upon cessation
      of employment, depending on the circumstances. If Mr. Endres is terminated
      for
“cause” or Mr. Endres resigns other than for “good reason,” he will receive any
      earned but unpaid salary through the date of termination. “Cause” means: (a)
      willful engagement in conduct which is materially injurious to us; (b) willful
      fraud or material dishonesty in performing duties; (c) deliberate or intentional
      failure to substantially perform duties that results in material harm to us;
      (d)
      the conviction for, or plea of nolo contendere to a charge of, commission of
      a
      felony; or (e) the continuous and habitual failure to substantially perform
      duties under the employment agreement. “Good reason” means: (a) a breach by us
      relating to compensation and benefits; (b) a material breach by us of any of
      the
      terms of the employment agreement; or (c) the relocation of Mr. Endres’
principal place of business at our request beyond 50 miles from its current
      location. In situations involving the continuous and habitual failure to
      substantially perform duties and termination based on “good reason,” the
      employment agreement requires prior written notice of termination and provides
      an opportunity to cure within twenty days of such notice. If Mr. Endres dies
      or
      becomes disabled during his term of employment, is terminated without “cause,”
or resigns for “good reason,” he will receive then current base salary for the
      remainder of his term under the agreement, immediate vesting of all
      stock
      options or stock-based compensation, and continuation of his company benefits
      (e.g., health, life, disability insurance) for the
      remainder of his term under the agreement.





*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 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 provides that Mr. d’Arnaud-Taylor will 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 documented business expenses he may incur in the performance
      of
      his duties under the agreement. The agreement provided that





62




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
      will
      pay Mr. d’Arnaud-Taylor $15,000 per month (payable monthly in advance) and
      reimburse him for any reasonable and appropriately documented business expenses
      he may incur in the performance of his duties under the agreement. The term
      of
      the agreement expires on November 25, 2007, subject to earlier termination
      by
      either party at any time upon written notice to the other. If
      Mr. d’Arnaud-Taylor terminates the agreement before the scheduled
      termination, we are obligated to pay him all amounts due as of the date of
      the
      termination. If we terminate the agreement before the scheduled termination,
      we
      are obligated to pay Mr. d’Arnaud-Taylor all amounts due as of the date of
      the termination plus a lump sum termination fee equal to the lesser of (a)
      the
      monthly consulting payable for the remainder of the scheduled term and (b)
      $90,000. The agreement includes covenants by Mr. d’Arnaud-Taylor regarding
      confidentiality.





*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, 2006 for each of our executive officers listed in the
      Summary Compensation Table above. Unless otherwise noted in the footnotes,
      options are fully vested. The 2005 Incentive Compensation Plan provides that
      the
      total number of shares of common stock that may be subject to awards granted
      thereunder is 4,000,000 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). On December 7, 2006, before any additional options were granted
      on that date (the “December 2006 Options”), there were 1,667,930 shares of
      common stock remaining available for awards under the Plan. The number of shares
      issuable upon exercise of the December 2006 Options exceeded the number then
      available under the Plan by 747,070 shares, which represents approximately
      31%
      of the shares issuable upon exercise of the December 2006 Options. Accordingly,
      the compensation committee of our board of directors determined that each of
      the
      December 2006 Options shall be subject, on a pro rata basis, to approval by
      our
      stockholders of an amendment to the Plan to increase the number of shares
      available for award thereunder. As a result of this determination, shares
      issuable upon exercise of the December 2006 Options are subject to stockholder
      approval, as noted below. The
      December 2006 Options included in this table have either an option expiration
      date of December 7, 2011 or December 7, 2016 .





63




**Outstanding
      Equity Awards at Fiscal Year-End**


**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)
              
              
              
              
              3.00
              (3)
              
              October
                  5, 2016200,000
              (2)
              
              1,150,000
              (2)
              
              2.44
              (3)
              
              December
                  7, 2011Christopher
                  d’Arnaud-Taylor
              
              
              125,000
              (4)
              
              -
              
              
              5.56
              (5)
              
              August
                  22, 2009225,000
              (4)
              
              -
              
              
              8.32
              (6)
              
              August
                  22, 2009100,000
              (7)
              
              -
              
              
              2.44
              (3)
              
              December
                  7, 2016Louis
                  B. Bernstein
              
              
              75,000
              (8)
              
              -
              
              
              4.00
              (9)
              
              July
                  28, 201030,000
              (10)
              
              -
              
              
              3.62
              (3)
              
              September
                  7, 2011Lawrence
                  Bellone
              
              
              100,000
              
              
              -
              
              
              3.75
              
              
              April
                  5, 2008-
              
              
              100,000
              (11)
              
              5.56
              (5)
              
              February
                  28, 2011-
              
              
              100,000
              (11)
              
              2.44
              (3)
              
              December
                  7, 2011Thomas
                  Endres
              
              
              30,000
              (12)
              
              -
              
              
              3.62
              
              
              September
                  7, 2011-
              
              
              100,000
              (12)
              
              2.44
              
              
              December
                  7, 2011




(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. 418,500 shares issuable on exercise of the option
                granted to Mr. Ames are subject to stockholder approval.





(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)
            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 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-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,
                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.





(5)
            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.




64




(6)
            The
                last sale price per share of our common stock on the date of grant
                as
                reported by the OTC Bulletin Board.





(7)
            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. 31,000 shares
                issuable on exercise of the option granted to Mr. d’Arnaud-Taylor are
                subject to stockholder approval.




(8)
            On
                July 28, 2005, we granted an option to purchase 75,000 shares of
                our
                common stock to Mr. Bernstein in consideration of his service as
                a
                director, and 50% of the shares vested on the grant date and the
                remaining
                50% vested on the first anniversary of the grant date.





(9)
            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.





(10)
            On
                September 7, 2006, we granted an option to purchase 45,000 shares
                of our
                common stock to Mr. Bernstein in consideration of his service as
                our
                President and Interim Chief Executive Officer, with 30,000 shares
                vesting
                on the date of grant and the remaining 15,000 shares vesting on
                termination of his service as our Interim Chief Executive Officer
                and
                resumption as an independent member of the Board of Directors. On
                November
                9, 2006 upon termination of Mr. Bernstein’s service as our Interim Chief
                Executive Officer and his resignation from the our board of directors,
                15,000 shares awarded on September 7, 2006 were forfeited.





(11)
            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 vest on
                February 28, 2007 and December 7, 2007
                respectively.





(12)
            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 vests on December 7,
                2007.





**Compensation
      of Directors**





The
      following table sets forth a summary of the compensation we paid in 2006 to
      our
      directors. The table includes any person who served during 2006 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, Mr.
      d’Arnaud-Taylor and Mr. Bernstein for serving as directors, see the notes to
      the
      Summary Compensation Table above. Mr. Bellone has not received any compensation
      related to serving as a director.




65




**Director
      Compensation**





**Name**
            
            **Fees
                Earned**
              **or
                Paid**
              **in
                Cash**
              **($)**
            
            **Option**
              **Awards
                (1)**
              **($)**
            
            **All
                Other**
              **Compensation**
              **($)**
            
            **Total**
              **($)**(a)
            
            (b)
            
            (c)
            
            (d)
            
            (e)




William
                P. Behrens (2)
            
            
            5,000
            
            
            388,361
            (3)
            
            -
            
            
            393,361Richard
                D. Ditoro (4)
            
            
            5,000
            
            
            366,301
            (3)
            
            -
            
            
            371,301Edwin
                L. Klett (5)
            
            
            -
            
            
            303,584
            (3)
            
            -
            
            
            303,584Marc
                Goodman (6)
            
            
            -
            
            
            131,106
            (3)
            
            -
            
            
            131,106Mark
                Oppenheimer (7)
            
            
            -
            
            
            367,369
            (3)
            
            -
            
            
            367,369Jeffrey
                Langberg (8)
            
            
            -
            
            
            -
            
            
            672,288
            (9)
            
            672,288Richard
                Ritchie (10)
            
            
            -
            
            
            200,142
            (3)
            
            
            
            
            200,142Franz
                A. Skryanz (11)
            
            
            -
            
            
            2,649
            (3)
            
            60,000
            (12)
            
            62,649





(1)
            The
                amounts in column (c) reflect the dollar amount of awards under our
                2005
                Incentive Compensation Plan that we recognized for financial statement
                reporting purposes for the fiscal year ended December 31, 2006 in
                accordance with FAS 123(R). For Mr. Ditoro, Mr. Goodman and Mr. Ritchie,
                amounts include compensation derived from awards granted before 2006
                but
                that vested in 2006. Assumptions used in the calculation of this
                amount
                are included in Note 12 to our audited consolidated financial statements
                for the year ended December 31, 2006 included in this report.





The
                2005 Incentive Compensation Plan provides that the total number of
                shares
                of common stock that may be subject to awards granted thereunder
                is
                4,000,000 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). On December 7, 2006, before any additional
                options were granted on that date (the “December 2006 Options”), there
                were 1,667,930 shares of common stock remaining available for awards
                under
                the Plan. The number of shares issuable upon exercise of the December
                2006
                Options exceeded the number then available under the Plan by 747,070
                shares, which represents approximately 31% of the shares issuable
                upon
                exercise of the December 2006 Options. Accordingly, the compensation
                committee of our board of directors determined that each of the December
                2006 Options shall be subject, on a pro rata basis, to approval by
                our
                stockholders of an amendment to the Plan to increase the number of
                shares
                available for award thereunder. As a result of this determination,
                shares
                issuable upon exercise of the December 2006 Options are subject to
                stockholder approval, as noted below.





(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, 2006 by any person who served during 2006 as a director
                (other than named executive officers), even if he is no longer serving
                as
                a director.




66





**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
              
              
              175,000
              
              
              40,000
              
              
              3.00
              
              
              Oct.
                  5, 2016Richard
                  D. Ditoro (c)
              
              
              July
                  28, 2005
              
              
              80,000
              
              
              80,000
              
              
              -
              
              
              4.00
              (d)
              
              July
                  28, 2010Sept.
                  7, 2006
              
              
              55,000
              
              
              55,000
              
              
              -
              
              
              3.62
              
              
              Sept.
                  7, 2011Oct.
                  5, 2006
              
              
              5,000
              
              
              5,000
              
              
              -
              
              
              3.00
              
              
              Oct.
                  5, 2011Dec.
                  7, 2006
              
              
              125,000
              
              
              125,000
              
              
              
              
              
              2.44
              
              
              Dec.
                  7, 2016Edwin
                  L. Klett
              
              
              Dec.
                  7, 2006
              (e)
              
              40,000
              
              
              -
              
              
              40,000
              
              
              2.44
              
              
              Dec.
                  7, 2016Dec.
                  7, 2006
              (f)
              
              175,000
              
              
              175,000
              
              
              -
              
              
              2.44
              
              
              Dec.
                  7, 2016Marc
                  Goodman (g)
              
              
              July
                  28, 2005
              
              
              75,000
              
              
              75,000
              
              
              -
              
              
              4.00
              (d)
              
              July
                  28, 2010Sept.
                  7, 2006
              
              
              50,000
              
              
              50,000
              
              
              -
              
              
              3.62
              
              
              Sept.
                  7, 2011Mark
                  Oppenheimer (h)
              
              
              Oct.
                  5, 2006
              
              
              230,000
              
              
              175,000
              
              
              -
              
              
              3.00
              
              
              Oct.
                  5, 2016Richard
                  Ritchie (i)
              
              
              July
                  28, 2005
              
              
              100,000
              
              
              100,000
              
              
              -
              
              
              4.00
              (d)
              
              July
                  28, 2010Sept.
                  7, 2006
              
              
              80,000
              
              
              80,000
              
              
              -
              
              
              3.62
              
              
              Sept.
                  7, 2011Franz
                  A. Skryanz (j)
              
              
              Dec.
                  7, 2006
              
              
              25,000
              
              
              -
              
              
              25,000
              
              
              2.44
              
              
              Dec.
                  7, 2011




(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
                vests
                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
                $388,361 in compensation expense we incurred in 2006 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 (i) $38,506 in compensation expense we incurred in 2006
                for Mr.
                Ditoro in connection with the July 28, 2005 grant; (ii) $104,506
                in
                compensation expense we incurred in 2006 for Mr. Ditoro in connection
                with
                the September 7, 2006 grant; (iii) $10,496 in compensation expense
                we
                incurred in 2006 for Mr. Ditoro in connection with the October 5,
                2006
                grant; and (iv) $212,793 in compensation expense we incurred in 2006
                for
                Mr. Ditoro in connection with the December 7, 2006 grant. 38,750
                shares
                issuable on exercise of the December 7, 2006 option granted to Mr.
                Ditoro
                are subject to stockholder approval.





(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 an option to Mr. Klett in consideration of his service
                  as a
                  director, and the option vests in two installments of 20,000 shares
                  each
                  on the six-month and one-year anniversaries of the date of grant.
                  12,400
                  shares issuable on exercise of the option granted to Mr. Klett
                  are subject
                  to stockholder approval. The amount in the table includes $5,674
                  in
                  compensation expense we incurred in 2006 for Mr. Klett in connection
                  with
                  this grant.


(f)
            We
                granted an option to shares of our common stock to Mr. Klett in
                consideration of his service as a director, and all shares vest on
                the
                date of grant. 54,250 shares issuable on exercise of the option granted
                to
                Mr. Klett are subject to stockholder approval. The amount in the
                table
                includes $297,910 in compensation expense we incurred in 2006 for
                Mr.
                Klett in connection with this grant.




67




(g)
            We
                granted options to purchase shares of our common stock to Mr. Goodman
                in
                consideration of his service as a director. The amount in the table
                includes (i) $36,100 in compensation expense we incurred in 2006
                for Mr.
                Goodman in connection with the July 28, 2005 grant; and (ii) $95,006
                in
                compensation expense we incurred in 2006 for Mr. Goodman in connection
                with the September 7, 2006 grant.




(h)
            We
                granted an option to purchase 230,000 shares of our common stock
                to Mr.
                Oppenheimer 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
                vests in two installments of 27,500 shares each on the six-month
                and
                one-year anniversaries of the date of grant. Upon Mr. Oppenheimer’s
                resignation from the Board on November 9, 2006, 55,000 shares awarded
                on
                October 5, 2006 were forfeited. The amount in the table includes
                $367,369
                in compensation expense we incurred in 2006 for Mr. Oppenheimer in
                connection with this grant.





(i)
            We
                granted options to purchase shares of our common stock to Mr. Ritchie
                in
                consideration of his service as a director. The amount in the table
                includes (i) $48,133 in compensation expense we incurred in 2006
                for Mr.
                Ritchie in connection with the July 28, 2005 grant; and (ii) $152,009
                in
                compensation expense we incurred in 2006 for Mr. Ritchie in connection
                with the September 7, 2006 grant.





(j)
            No
                options were granted to Mr. Skryanz for his service as a director.
                The
                amount in this table includes $2,649 in compensation expense we incurred
                in 2006 for Mr. Skryanz in connection with the December 7, 2006
                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.
                Goodman was elected to the Board of Directors on July 28, 2005 and
                served
                as a director from August 10, 2005 through September 28,
                2006.





(7)
            Mr.
                Oppenheimer served as a director from October 1, 2006 through November
                9,
                2006.





(8)
            Mr.
                Langberg served as a director from February 28, 2005 through June
                12,
                2006. We granted no options to Mr. Langberg in 2006, and no options
                were
                outstanding at December 31, 2006.





(9)
            During
                2006, we paid Mr. Langberg a $400,000 performance bonus, 2005 consulting
                fees of $4,353, 2006 consulting fees of $135,000 and termination
                fees of
                $45,000. We also paid $27,496 in health insurance and benefits on
                his
                behalf. On December 20, 2006, we agreed 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, and, in connection with that warrant, we
                recognized a $60,439 compensation expense in 2006.(On
                an accrual basis, ouraudited
                financial statements reflect an additional $190,000 in termination
                fees
                payable as of December 31, 2006, less $4,353 of 2005 consulting fees.)Mr.
                Langberg received no compensation as a member of the board of
                directors.
                For more information about our payments to Mr. Langberg, please see
                “Certain Relationships and Related
                Transactions.”





(10)
            Mr.
                Ritchie served as a director from July 28, 2005 through September
                28,
                2006.





(11)
            Mr.
                Skryanz served as a director from February 2, 2005 through October
                5,
                2006.





(12)
            The
                amount represents wages paid to Mr. Skryanz as our Treasurer during
                2006.




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
      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,
      nominating and governance, compensation and science committees. The number
      of
      shares underlying each annual option grant is: 25,000 shares for chairing the
      compensation, nominating and governance or science committees; 50,000





68




shares
      for chairing the audit committee; 15,000 shares for being a member of the
      nominating and governance, compensation or science committees; and 25,000 shares
      for being a member of the audit committee. Annual grants to re-elected directors
      are at the discretion of the board. 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.







69


**ITEM
      11.**  **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 22, 2007:





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


·
              each
                  of our directors and executive officers;
                  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 which may be acquired on exercise of stock options or warrants
      which are currently exercisable or which 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, 1185 Avenue of the Americas, 20th Floor, New York, New
      York 10036.




**Name
                  and Address of Beneficial Owner**
              
              **Number**
                **of****Shares**
                **Beneficially**
                **Owned
                  (1)**
              
              **Percentage**
                **of
                  Shares**
                **Beneficially**
                **Owned
                  (2)**
  David
                  R. Ames
              
              
              854,177
              (3)
              
              2.9
              %Gary
                  Flicker
              
              
              -
              
              
              *Lawrence
                  S. Bellone
              
              
              1,029,180
              (4)
              
              3.5
              %Thomas
                  J. Endres
              
              
              33,300
              
              
              *William
                  P. Behrens
              
              
              308,891
              (5)
              
              1.1
              %Gil
                  Boosidan
              
              
              103,891
              (6)
              
              *Christopher
                  d’Arnaud-Taylor
              
              
              1,420,139
              (7)
              
              4.9
              %Richard
                  D. Ditoro
              
              
              273,828
              (8)
              
              *Robert
                  L. Franklin
              
              
              75,000
              (9)
              
              *Edwin
                  L. Klett
              
              
              175,000
              (10)
              
              *Directors
                  and executive officers as a group
              
              
              4,273,406
              (11)
              
              13.6
              %





*
            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, 2007,
                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 22,
                2007.





(3)
            Includes
                854,167 shares of common stock issuable to Mr. Ames on the exercise
                of
                warrants and stock options.





(4)
            Includes
                537,325 shares of common stock issuable to Mr. Bellone on the exercise
                of
                warrants and stock options.





(5)
            Includes
                195,000 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 Northeast Securities and disclaims beneficial ownership
                of the portion of the shares held by Northeast Securities in which
                he has
                no pecuniary interest.




70




(6)
            Includes
                75,000 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.




(7)
            Includes
                450,000 shares of common stock issuable to Mr. d’Arnaud-Taylor on the
                exercise of stock options; 632,450 shares of common stock held by
                Mr.
                d’Arnaud-Taylor’s spouse; 318,088 shares of common stock held by London
                Manhattan Securities, Inc., an entity controlled by Mr. d’Arnaud-Taylor;
                and 12,539 shares of common stock held by London Manhattan Limited,
                Inc.,
                an entity controlled by Mr.
                d’Arnaud-Taylor.





(8)
            Includes
                265,000 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)
            Includes2,754,828shares
                of common stock issuable on the exercise of warrants and stock
                options.





71





**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, and which was amended on August 10, 2006 after we received stockholder
      approval of the amendments on that date. 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.





On
      December 7, 2006, our board of directors granted to certain of our officers,
      directors, employees and consultants options (the “December 2006 Options”) under
      the Plan to purchase 2,415,000 shares of our common stock at an exercise price
      equal to $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. The Plan provides
      that
      the total number of shares of common stock that may be subject to awards granted
      under the Plan is 4,000,000 shares (plus the number of shares with respect
      to
      which awards previously granted under the Plan 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 December 7, 2006, before the grant of the December
      2006 Options, there were 1,667,930 shares of common stock remaining available
      for awards under the Plan. Therefore, the number of shares issuable upon
      exercise of the December 2006 Options exceeded the number then available under
      the Plan by 747,070 shares, which represents approximately 31% of the shares
      issuable upon exercise of the December 2006 Options. Accordingly, the
      compensation committee of our board of directors has determined that each of
      the
      December 2006 Options is subject, on a pro rata basis, to approval by our
      stockholders of an amendment to the Plan to increase the number of shares
      available for award under the plan.





We
      currently contemplate that we will submit to our stockholders at the 2007 annual
      meeting of stockholders a proposal to amend the Plan to increase the number
      of
      shares available for award under the Plan to cover the 747,070 shares issuable
      upon exercise of the December 2006 Options and an additional 865,000 shares
      issuable upon exercise of other outstanding options similarly granted subject
      to
      approval by our stockholders. If the stockholders do not approve that amendment,
      the December 2006 Options will be void to the extent (and only to the extent)
      that the number of shares issuable upon the exercise of those options exceeds
      the holder’s pro rata allocation of the 747,070 excess shares, and the
      compensation committee will consider alternative incentives for those
      holders.




The
      following table provides information regarding the status of our existing equity
      compensation plans at December 31, 2006:





**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
                compensationplans
                approved bysecurity
                holders
            
            
            3,682,930
            
            $
            3.68
            
            
            0Equity
                compensationplans
                not approvedby
                security holders (1)
            
            
            1,463,411
            
            $
            3.71
            
            
            0Total
            
            
            5,146,341
            
            $
            3.69
            
            
            0




*(Footnotes
      are on following page.)*




72




(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:





(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. 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. The warrant expires
      on
      November 6, 2010. We issued this warrant for investor relations
      services.





(c)  On
      May
      30, 2006, we entered into an organizational agreement with Coastal Energy
      Development, Inc., under which, among other things, we issued to Coastal Energy
      a warrant to purchase 200,000 shares of our common stock at a purchase price
      of
      $6.85 per share that is first exercisable on May 30, 2007 and is exercisable
      until May 30, 2010. We issued this warrant in connection with the formation
      of
      CoastalXethanol LCC.





(d)  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. We issued
      this
      warrant for private placement advisory services.





(e)  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.





(f)  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. We
      issued this warrant for private placement advisory services.





(g)  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. We issued this warrant
      for business development services.




(h)  On
February
        23, 2004, we issued to an entity a fully vested warrant to purchase 111,455
        shares of our common stock at an exercise price of $2.00. We issued this
        warrant
        for financial consulting services.
 (i)  On
September
            23, 2004, we issued to an entity a fully vested warrant to purchase 17,656
            shares of our common stock at an exercise price of $3.25. We issued this
            warrant
            for financial consulting services.
 (j)  On
October
                26, 2004, we issued to an individual a fully vested warrant to purchase
                44,140
                shares of our common stock at an exercise price of $3.25. We issued
                this warrant
                for financial consulting
                services.




(k)  On
December
          7, 2006, the board of directors of Xethanol granted to certain of its officers,
          directors, employees and consultants options (the “December
          2006
          Options”)
          under Xethanol’s 2005
          Incentive
          Compensation Plan (the “Plan”), to purchase an aggregate of 2,415,000 shares of
          Xethanol’s common stock at an exercise price equal to $2.44 per share, the
          closing price per share of Xethanol’s common stock on the date of grant as
          reported by the American Stock Exchange. This grant included options to
          purchase
          747,070 shares of common stock subject to approval by our stockholders
          as
          explained above.


73


**ITEM
      12.**  **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.





**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 2005 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;





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




74




·
            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
      $132,043 for the year ended December 31, 2006 and $99,806 for the year ended
      December 31, 2005.





**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 is, on a non-exclusive basis, assisting 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, Xethanol 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 incurs in the performance of its obligations under the
      agreement. The term of the agreement is 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 provides that if, within twelve months after
      the termination of the agreement, Xethanol either (a) consummates a financing
      transaction with any investor that Northeast introduced to us before the
      termination or (b) enters 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. 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.





**Reverse
      Merger**





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




75




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 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. 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.





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 currently
      one
      of our directors
      and our former 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. Under our agreement with Mr. d’Arnaud-Taylor and Mr. Langberg,
      they each caused to be delivered share certificates for 250,000 shares to our
      transfer agent for cancellation. The shares were tendered by London Manhattan
      Securities Inc., a company controlled by Mr. d’Arnaud-Taylor, and by Mrs.
      Jeffrey S. Langberg.





**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. During 2006, the following persons served
      on our board of directors and were “independent” within the meaning of Rule
      10A-3(b)(1)(ii) under the Exchange Act and Section 121A of the AMEX Company
      Guide: Mr. Behrens, Mr. Ditoro, Mr. Klett, Mr. Ames (for part of 2006 before
      he
      became an officer), Mr. Louis B. Bernstein (for part of 2006 before he became
      an
      officer), Mr. Marc S. Goodman, Richard L. Ritchie.




76




**ITEM
      13.**  **EXHIBITS.**






**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.]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 our
                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 our
                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 4.1 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.]*Agreements
                with or Related to Related Parties*10.6
            
            Employment
                Agreement, dated February 2, 2005, between Christopher d'Arnaud-Taylor
                and
                Xethanol Corporation. [Incorporated by reference to Exhibit 10.3
                in our
                current report on Form 8-K dated February 2, 2005.]10.7
            
            Employment
                Agreement, dated February 2, 2005, between Frank A Skryanz and Xethanol
                Corporation. [Incorporated by reference to Exhibit 10.4 in our current
                report on Form 8-K dated February 2,
                2005.]






77




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


10.8
            
            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 our Amendment No. 3
                to
                Registration Statement on Form SB-2 (File No. 333-135121) filed with
                the
                SEC on March 26, 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
                our 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 our 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
                our
                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 our Amendment No. 3 to Registration Statement on Form SB-2 (File
                No.
                333-135121) filed with the SEC on March 26, 2007.]*Financing
                Documents*10.14
            
            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.]10.15
            
            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.]10.16
            
            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.]10.17
            
            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.]10.18
            
            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.]10.19
            
            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.]10.20
            
            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.]




78




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


10.21
            
            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.]10.22
            
            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.]




*Documents
                Related to Joint Ventures*10.23
            
            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.]10.24
            
            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.]10.25
            
            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.]10.26
            
            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.]10.27
            
            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.]10.28
            
            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.]*Agreements
                Related to Acquisitions of Facilities*10.29
            
            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 our Amendment No. 3 to Registration Statement on Form SB-2
                (File
                No. 333-135121) filed with the SEC on March 26, 2007.]10.30
            
            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 our Amendment No. 3 to Registration
                Statement on Form SB-2 (File No. 333-135121) filed with the SEC on
                March
                26, 2007.]10.31
            
            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.]10.32
            
            Escrow
                Agreement dated November 7, 2006 by and between Xethanol Corporation
                and
                Carolina Fiberboard Corporation. [Incorporated by reference to Exhibit
                10.32 in our Amendment No. 3 to Registration Statement on Form SB-2
                (File
                No. 333-135121) filed with the SEC on March 26,
                2007.]




79




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


*Technology-Related
                Agreements**(for
                Agreements Related to H2Diesel, see below)*10.33
            
            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.]10.34
            
            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.]


10.35
            
            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.]10.36
            
            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.]10.37
            
            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.]10.38
            
            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.]10.39
            
            Exclusive
                License Agreement dated September 28, 2004 between PARTEQ Research
                and
                Development Innovations and Ethanol Extraction Technologies, Inc.
                [Incorporated by reference to Exhibit 10.36 in our Amendment No.
                1 to
                Registration Statement on Form SB-2 (File No. 333-135121) filed with
                the
                SEC on September 15, 2006.]10.40
            
            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.]10.41
            
            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.]10.42
            
            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.]10.43
            
            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.]10.44
            
            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.]




80




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


10.45
            
            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.]10.46
            
            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*10.47
            
            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.]10.48
            
            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.]10.49
            
            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.]10.50
            
            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.].10.51
            
            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.]10.52
            
            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.]10.53
            
            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.]10.54
            
            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.]21.1
            
            Subsidiaries
                of Xethanol Corporation. [Incorporated by reference to Exhibit 21.1
                in our
                Amendment No. 3 to Registration Statement on Form SB-2 (File No.
                333-135121) filed with the SEC on March 26, 2007.]24.1
            
            Power
                of Attorney (contained on the signature page hereof).31
            
            Certifications
                of David R. AmesandGary
                Flicker pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.32
            
            Certifications
                of David R. AmesandGary
                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.





81


**ITEM
      14.**  **PRINCIPAL
      ACCOUNTANT 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, 2006 and 2005.





**Year**
            
            **Audit
                Fees (1)**
            
            **Audit-Related****Fees
                (2)**
            
            **Tax
                Fees (3)**
            
            **All
                Other Fees**
            
            **Total
                Fees**2006
            
            $
            338,246
            
            $
            81,690
            
            $
            64,175
            
            
            -
            
            $
            484,1112005
            
            $
            77,000
            
            $
            47,505
            
            $
            38,796
            
            
            -
            
            $
            163,301






(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.




(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 2006, these services
      included accounting research related to 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.




82




**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 30, 2007
            By:
            /s/
                David R. AmesDavid
                R. AmesChief
                Executive Officer and President
                (principal
                  executive officer)


Date:
                March 30, 2007
            By:
            /s/
                Gary FlickerGary
                FlickerChief
                Financial Officer
                (principal
                  financial officer)


Date:
                March 30, 2007
            By:
            /s/
                Lawrence S. BelloneLawrence
                S. BelloneExecutive
                Vice President, Corporate Development
                (principal
                  accounting officer)




83




**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-KSB 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
              and
                  President
            
            March
                30, 2007David
                R. Ames/s/
                Gary Flicker
            
            Chief
                Financial Officer
            
            March
                30, 2007Gary
                Flicker/s/
                Lawrence S. Bellone
            
            Director
                Executive Vice President, Corporate Development
              (principal
                accounting officer)
            
            March
                30, 2007Lawrence
                S. Bellone/s/
                William P. Behrens
            
            Chairman
                of the Board of Directors
            
            March
                30, 2007William
                P. Behrens/s/
                Gil Boosidan
            
            Director
            
            March
                30, 2007Gil
                Boosidan/s/
                Christopher d’Arnaud-Taylor
            
            Director
            
            March
                30, 2007Christopher
                d’Arnaud-Taylor/s/
                Richard D. Ditoro
            
            Director
            
            March
                30, 2007Richard
                D. Ditoro/s/
                Robert L. Franklin
            
            Director
            
            March
                30, 2007Robert
                L. Franklin/s/
                Edwin L. Klett
            
            Director
            
            March
                30, 2007Edwin
                L. Klett





84