**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, 2005**




**Commission
      File No. 000-50154**




**XETHANOL
      CORPORATION**


*(Name
      of Small Business Issuer as specified in its charter)*




**Delaware**
            **84-1169517***(State
                or other jurisdiction
                of*
            *(I.R.S.
                Employer**incorporation
                or
                organization)*
            *Identification
                Number)*




**1185
      Avenue of the Americas**


**New
      York, New York 10036**


*(Address
      of Principal Executive Offices and Zip Code)*




Registrant's
      Telephone Number, Including Area Code **:
      (646) 723-4000**




Securities
      Registered Pursuant to Section 12(b) of the Act:


**None**




Securities
      Registered Pursuant to Section 12(g) of the Act:


**Common
      Stock, Par Value $.001 Per Share**




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




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




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. o




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




State
      issuer’s revenues for its most recent fiscal year: $4,342,927




State
      the
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      sold, or the average bid and asked price of such common equity, as of a
      specified date within the past 60 days: $73,038,854 (computed by reference
      to
      the average bid and asked price of the registrant’s common stock on March 24,
      2006).




As
      of
      March 24, 2006, there were 16,167,118 shares of the registrant's common stock
      outstanding.




DOCUMENTS
      INCORPORATED BY REFERENCE: None










**FORWARD-LOOKING
      STATEMENTS**




*This
      Annual Report on Form 10-KSB 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 only
      be
      based on facts and factors currently known by us. Consequently, forward-looking
      statements are inherently subject to risks and uncertainties, and 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 the heading “Item 1A. Risk Factors” and
      elsewhere in this report could substantially harm our business, results of
      operations and financial condition and 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.*




*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**




*On
      February 2, 2005, Zen Acquisition Corp., a Delaware corporation (“Zen
      Acquisition”) and a wholly owned subsidiary of Zen Pottery Equipment, Inc., a
      publicly traded Colorado corporation (“Zen”), merged with and into Xethanol
      Corporation, a Delaware corporation (“Old Xethanol”). As a result of the merger,
      Old Xethanol became a wholly owned subsidiary of Zen and changed its name to
      Xethanol BioEnergy, Inc. and Zen discontinued its business and succeeded to
      the
      business of Old Xethanol as its sole line of business. Following the merger,
      Zen
      reincorporated from the State of Colorado to the State of Delaware and changed
      its corporate name to Xethanol Corporation. Unless the context otherwise
      requires, “we,” “our,” “us,” and similar expressions refer to Xethanol
      Corporation, a Delaware corporation (formerly known as Zen Pottery Equipment,
      Inc., a Colorado corporation), after giving effect to the merger.*




**Company
      Overview**




We
      are a
      biotechnology-driven company with the primary goal of becoming a leader in
      the
      emerging biomass-to-ethanol industry. We produce ethanol and its co-products.
      Ethanol is a clean burning, renewable fuel and is used as a primary gasoline
      additive under the Energy Policy Act of 2005. We plan to optimize the use of
      biomass in the renewable energy field and convert biomass that is currently
      being abandoned or land filled into ethanol or other valuable co-products.
      Our
      business model is to deploy proprietary biotechnologies that will extract and
      ferment sugars trapped in these biomass waste concentrations in a cost effective
      manner by locating ethanol plants closer to biomass sources and in proximity
      to
      urbanized 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
      its
      first acquisition and plant, Iowa-based Permeate Refining, Inc. Permeate
      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 has a current capacity
      of
      1.6 million gallons of ethanol per year. In April 2005, we temporarily ceased
      operations at Permeate in order to refurbish the facility and to consider
      alternatives to maximize the strategic use of the facility. We are currently
      evaluating the possibility of adapting the facility to become our first
      cellulosic biomass refinery and integrating certain of our proprietary
      technologies.




2


In
      October 2004, Old Xethanol purchased its second facility located in Blairstown,
      Iowa, which is now operated by our Xethanol BioFuels subsidiary. The Xethanol
      BioFuels plant is situated on 25.5 acres with nearby corn and corn stover
      (biomass) production. The plant has a nameplate production capacity of
      approximately 5.5 million gallons of ethanol per year using corn as its
      feedstock. At the time of the acquisition, the plant was idled and in
      bankruptcy. After substantial upgrades and refurbishment, we recommenced
      production in July 2005 and the facility is currently producing approximately
      6
      million gallons per year. In addition to ethanol production, BioFuels also
      produces distiller’s wet grains, or DWG, a by-product of the traditional
      corn-to-ethanol process.




A
      significant aspect of our business model is the acquisition and development
      of
      advanced processing technologies. Through our strategic alliance with UTEK
      Corporation, a publicly-traded technology transfer company, whereby we outsource
      our technology search, we have acquired “small footprint” bio-separation and
      bio-fermentation technologies to lower production costs and increase profit
      potential. Under this program, we have acquired a pipeline of diverse
      technologies and 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, we intend to move it from the laboratory
      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.




***Corporate
      Information***




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




**Corporate
      History and Recent Developments**




Zen
      was
      formed under the laws of the State of Colorado on April 19, 1991. After the
      “reverse merger” transaction described below, Zen discontinued its previous
      business and succeeded to the business of Old Xethanol as its sole line of
      business.




Old
      Xethanol was originally incorporated in Delaware on January 24, 2000 as
      Freereal-Timequote.com, Inc. On August 8, 2000, the company changed its
      corporate name to LondonManhattan.com, Inc. and on September 19, 2001 changed
      its corporate name again to Xethanol Corporation to function as a holding and
      management company for a series of planned acquisitions and new ventures in
      the
      biomass-to-ethanol industry.




***Overview***




On
      February 2, 2005, we completed a so-called “reverse merger” transaction, in
      which we caused Zen Acquisition, a Delaware corporation and a newly-created,
      wholly-owned subsidiary of Zen, to be merged with and into Old Xethanol. As
      a
      result of the merger, Old Xethanol became a wholly owned subsidiary of Zen
      and
      changed its name to Xethanol BioEnergy, Inc. Following the merger, Zen
      reincorporated from the State of Colorado to the State of Delaware and changed
      its corporate name to Xethanol Corporation. In connection with our name change,
      we changed our trading symbol to XTHN.OB.




The
      reverse merger was consummated under Delaware law and pursuant to the Merger
      Agreement, as discussed below. A copy of the Merger Agreement was included
      as an
      exhibit to our Current Report on Form 8-K, dated February 2, 2005, which was
      filed with the SEC on February 3, 2005.




Concurrently
      with the closing of the merger, we also completed a private offering of shares
      of our common stock to accredited investors, and received gross proceeds of
      $3,000,028 at the closing of the private offering. We received an additional
      $867,849 upon a second closing of the private offering on February 15, 2005,
      for
      total gross private offering proceeds of $3,867,877.




***The
      Merger***




Pursuant
      to the Merger Agreement, at closing, 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 held by such stockholders. 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.




3


All
      outstanding warrants issued by Old Xethanol prior to 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 upon the exercise of
      such warrants was amended to reflect the applicable exchange ratio. Prior to
      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 a total of 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 private offering.




The
      shares of our common stock issued to former holders of Old Xethanol common
      stock
      in connection with the merger, and the shares of our common stock issued in
      the
      private offering, were not registered under the Securities Act of 1933, as
      amended (the “Securities Act”), in reliance upon exemptions from the
      registration requirements of the Securities Act.




***Expansion
      of 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,
      appointed 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. Mark Austin and Jeffrey S. Langberg were also appointed
      as directors effective February 28, 2005, after our compliance with the
      provisions of Section 14(f) of the Securities Exchange Act of 1934, as amended
      (the “Exchange Act”), and Rule 14f-1 promulgated under the Exchange Act. Messrs.
      Pool and Nathan also resigned as directors following the closing, with their
      resignations effective on 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, Messrs. Pool and Nathan and Ms. Pool resigned
      as
      our officers. On April 13, 2005, Lawrence S. Bellone was appointed to be our
      Chief Financial Officer. On May 27, 2005, Mark Austin resigned as a director,
      but remains on our advisory board. In December 2005, Mr. Austin entered into
      a
      consulting agreement with the Company to assist us in the development of our
      technology portfolio and overall technology strategy.  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. All directors hold office until the next annual meeting of
      stockholders and the election and qualification of their successors. Officers
      are elected annually by the board of directors and serve at the discretion
      of
      the board.




***Accounting
      Treatment; Change of Control***




The
      merger was accounted for as a recapitalization of Old Xethanol (or a “reverse
      merger”), since 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. Except as described in the previous
      paragraphs and in “Certain Relationships and Related Transactions,” 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.




4


***Concurrent
      Private Offering***




In
      connection with the merger, we completed the closing of a private offering
      of a
      total 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. 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 665,833 shares of our common stock in
      connection with the private offering and merger. After the closing of the merger
      and the closing of the private offering, we had outstanding 13,437,033 shares
      of
      common stock and warrants to purchase 1,293,370 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
      aggregate principal amount of $5,000,000. The proceeds of the financing were
      used to (i) satisfy the $3,000,000 demand note held by an Omaha, Nebraska
      commercial bank in connection with the purchase of the facility, (ii) refurbish
      and upgrade production capacity at the facility, (iii) fund start-up activities
      at the facility and related working capital requirements, and (iv) 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. The proceeds of the financing were used to repay funds
      advanced to Xethanol BioFuels by us, and we used those repaid funds for working
      capital and general corporate purposes.




The
      senior secured royalty income notes provide for interest to be paid
      semi-annually at the greater of 10% per year or 5% of 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
      have 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 have 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.




Pursuant
      to a security agreement, Xethanol BioFuels 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. In the
      event of an uncured default under the notes, the holders are authorized to
      take
      possession of, sell or operate the assets of Xethanol BioFuels in order to
      generate proceeds sufficient to pay the principal and interest of the notes.
      This could include collecting accounts owed by customers of the facility,
      operating or subleasing the facility, selling the ethanol and wet distillers
      grain, selling machinery and equipment relating to the facility, or taking
      any
      other lawful action to collect the principal and interest through realization
      on
      the assets of the facility. Recourse under the notes is limited to Xethanol
      BioFuels’ assets and is not guaranteed by us or any of our current or future
      subsidiaries, assets or facilities.




***Fusion
      Capital Common Stock Purchase Agreement***




On
      October 18, 2005, we entered into a common stock purchase agreement with Fusion
      Capital Fund II, LLC, pursuant to 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. This daily purchase amount may be decreased by us at any
      time. We also have the right to increase the 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 will be equal to a price based
      upon
      the future market price of our common stock, as set forth 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 in the event that the
      price of our common stock is less than $2.00 per share.




5


** Under
      the
      terms of the common stock purchase agreement, we issued 303,556 shares of our
      common stock to Fusion Capital as a commitment fee. Assuming Fusion Capital
      purchases all $20.0 million of common stock; we estimate that the maximum number
      of shares we will sell to Fusion Capital under the common stock purchase
      agreement will be 5,000,000 shares (excluding 303,556 shares issued to Fusion
      Capital as a commitment fee). 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.




Under
      the
      common stock purchase 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 prior to 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
      common stock purchase agreement, Fusion Capital has agreed to purchase on each
      trading day during the 25-month term of the agreement $40,000 of our common
      stock or an aggregate purchase of up to $20 million. We have the unconditional
      right to decrease the daily amount to be purchased by Fusion Capital at any
      time
      for any reason effective upon one trading day’s notice. In our discretion, we
      may elect to sell more of our common stock to Fusion Capital than the minimum
      daily amount. First, in respect of the daily purchase amount, 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 elect to 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 trading
      days prior thereto. The price at which such shares would be purchased will
      be
      the lesser of (i) the lowest sale price of our common stock on the trading
      day
      that notice is received by Fusion Capital to purchase such shares, or (ii)
      the
      lowest purchase price (as defined above) during the previous 15 trading days
      prior to the date that such purchase notice was received by Fusion Capital.
      We
      may increase this amount to $500,000 if our share price is above $9.00 per
      share
      during the ten trading days prior to our delivery of the purchase notice to
      Fusion Capital. This amount may also be increased to up to $750,000 if our
      share
      price is above $14.00 per share during the ten trading days prior to our
      delivery of the purchase notice to Fusion Capital. This aggregate amount may
      also be increased to up to $1,000,000 if our share price is above $20.00 per
      share during the ten trading days prior to our delivery of the purchase notice
      to Fusion Capital. We may deliver multiple purchase notices; however, at least
      ten trading days must have passed since the most recent non-daily purchase
      was
      completed.




Generally,
      Fusion Capital may terminate the common stock purchase agreement without any
      liability or payment to us upon the occurrence of any of the following events
      of
      default: (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 such 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 which
      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. Neither the foregoing provisions nor any conditions to closing may
      be
      waived by Fusion Capital.




6


We
      have
      the right to terminate the agreement without any payment or liability to Fusion
      Capital at any time, including in the event that all 5,000,000 shares are sold
      to Fusion Capital under the common stock purchase agreement.




**Business
      and Growth Strategy**




Our
      business and growth strategy encompasses a 3-pronged approach which is geared
      at
      ultimately increasing production levels and lowering production
      costs:




·
            Increase
                production capacity at our Iowa facilities through the physical expansion
                of these facilities utilizing cutting-edge engineering design as
                well as
                integration of our processing
                technologies,




·
            Employ
                a regional approach to building new ethanol production by focusing
                on port
                sites and coastal urban areas on the Atlantic and Gulf coasts. By
                creating
                a regional alliance strategy we will combine Xethanol’s ethanol expertise
                with local capital, human resources and project development skills
                to
                penetrate coastal markets presently being served by “imports” from the
                Corn Belt, and




·
            Employ
                a sector strategy to expansion by focusing on the forests products
                industry, a prolific provider of biomass waste streams and an area
                where
                we have significant technological
                advantages.




***Iowa
      Expansion Strategy***




Under
      the
      first prong of our business and growth strategy we plan to take advantage of
      our
      BioFuels facility which is located on 25 acres of land with nearby corn and
      biomass production as well as strong local civic and business relationships
      with
      all required permits already in place. After consideration and consultation
      with
      Harris Group, our process engineering firm, we are formulating a plan to expand
      the BioFuels facility from approximately 6 million gallon per year up to 25
      million gallons per year. Our expansion plan envisions state-of-the-art
      engineering design and equipment and the integration of cutting edge processing
      technologies. We believe this expansion, will optimize our investment in the
      facility and significantly increase profitability. We are currently evaluating
      contractor proposals. Of particular significance in this plan is our ability
      to
      continue to operate the plant with minimal disruptions during the
      expansion.




With
      regard to our Permeate facility, we are currently evaluating a plan to adapt
      Permeate to become a full production cellulosic biomass to ethanol facility.
      Under this plan, we would use local industrial biomass waste streams as our
      feedstock. We would convert these waste streams utilizing certain of our front
      end processing technologies. The Permeate facility is ideally designed for
      this
      project. It is anticipated that the facility could quickly ramp up from 1.6
      million gallons per year to 4 millions gallons per year. A few of the very
      attractive aspects of this project are 1) it is expected that any required
      physical plant alteration would be relatively minor and could be accomplished
      within 6 months, 2) it will be our first cellulosic biomass facility and a
      proving ground for our technologies, and 3) it will increase of overall
      production levels and profitability.




7


***Regional
      Co-Location Strategy***




Under
      the
      second prong of our business and growth strategy, we intend to build ethanol
      production facilities co-located with, or in proximity to, waste feedstock
      generators in the major ethanol usage areas clustered on the Atlantic and Gulf
      Coasts. To date, ethanol production has been concentrated in the corn farming
      states in the Midwest since corn is presently the major feedstock in ethanol
      production. However, ethanol buyers are clustered on the East and West Coasts
      around major trans-shipment points such as ports. We intend to partner with
      local entities that have real estate and tanker storage facilities available
      at
      these trans-shipment points and use their facilities to build local ethanol
      production facilities with a lower capital outlay on our part. We intend to
      implement proprietary bio-separation and bio-fermentation technologies at these
      coastal facilities that will allow us to use local biomass waste streams, such
      as industrial food processing wastes, in ethanol production. Our aim is to
      become a low-cost ethanol producer at major coastal trans-shipment points,
      and
      thus become the ethanol supplier of choice for large, local users.




The
      potential advantages of this strategy are as follows:




·
            the
                targeted sites are permitted, have established power generation and
                utilities and allow for immediate
                co-location,




·
            the
                targeted sites have useful infrastructure already in place, such
                as tanker
                storage facilities and pumping capability, decreasing the capital
                outlay
                required from us,




·
            potential
                biomass-waste-generating partners may be willing to contribute towards
                the
                up-front capital costs to construct biomass-to-ethanol facilities
                next to
                their plants, and then share revenues with
                us,




·
            commercial
                biomass waste generators and processors already have an established
                footprint in targeted urban areas,




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




·
            biomass
                waste material is renewable, accessible, low cost or free of charge,
                and
                generally abundant, and




·
            biomass
                waste streams are generated in urban areas where ethanol sells at
                higher
                prices and where locally-produced ethanol would make shipping costs
                (to
                the market) not material.




Our
      Coastal Xethanol venture is our initial effort under this strategy, with its
      first ethanol production facility anticipated to be built in Savannah, Georgia,
      and with additional plants to follow in or near ports that could service the
      North Florida and South Carolina markets.




We
      believe the expansion potential of this business and growth strategy is
      meaningful, as there are many prospective sites on the Atlantic Coast and Gulf
      Coast. We believe there are numerous partner candidates in local entities that
      have infrastructure available and/or waste feedstock output.




***Forest
      Products Industry Strategy***




Wood
      biomass residuals from the forest products industry are an optimal feedstock
      for
      ethanol production in terms of availability, cost and chemical composition.
      We
      have also dedicated a significant portion of our technology portfolio, as well
      as our continuing R&D efforts, on the forest products industry, most
      notably, our ongoing strategic partnership with the USDA Forest Products
      Laboratory. (See our acquisition of Xylose Technologies in “Technology Platform”
below.) Given these factors, we believe a natural strategy to pursue is to
      form
      business ventures with forest products companies whereby we would co-locate
      our
      facilities, either on or near the company site, and enter into off take
      agreements. Included in our forest products industry strategy would be the
      development of our xylitol business segment. Xylitol is a significant
      value-added co-product present in pulping wastes from the paper milling process.
      We are currently evaluating several initiatives under this strategy for both
      ethanol and xylitol production.




8
 
  **Technology
          Platform**
  The
          major
          variable costs associated with the production of ethanol are feedstock
          (traditionally corn), natural gas for heat generation at various stages
          of the
          process, and the disposal of excess water. We are focusing on a number
          of
          technologies to reduce these costs. 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 a key driver of our business. We are organized to facilitate
          this key business activity. Xethanol Corporation, as the parent corporation,
          works on acquiring and enhancing the technology platforms for all our
          operations. Our objectives are to access a continual stream of diverse
          advanced
          technologies from academic and other research organizations, on a worldwide
          basis, rather than be captive to any one particular technology platform.
          We
          engage 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 performed by UTEK on our behalf. The term
          of the
          agreement is one year, terminable by either party upon 90 days’ notice. In April
          2005, we extended this agreement through April 2006. 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 (NREL) and the U.S. Department of Agriculture’s
          Forest Products Labs, as well as research labs at Queen’s University, Ontario,
          Canada and the Virginia Polytechnic Institute. Through these strategic
          alliances, we have been able to outsource our research and development
          to
          specialists in the fields of enzyme and fermentation technology.
 
 In
          August
          2005, we acquired the outstanding stock of Xylose Technologies, Inc. from
          UTEK.
          Xylose Technologies owns 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. 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 2005, Old Xethanol acquired the outstanding stock of Superior Separation
          Technologies, Inc. from UTEK. Superior Separation owns the worldwide exclusive
          rights to patented technology developed by the National Renewable Energy
          Laboratory (NREL) for the enhanced separation of biomass feedstocks into
          their
          constituent fractions to facilitate subsequent conversion into ethanol
          and
          xylitol. The potential benefits of the 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.
 In
          September 2004, Old Xethanol acquired the outstanding stock of Ethanol
          Extraction Technologies, Inc. from UTEK. Ethanol Extraction holds the worldwide
          exclusive license to a patented technology developed by researchers at
          Queen’s
          University, Canada to continuously remove and isolate ethanol, an inhibitor
          of
          fermentation, during the fermentation process. 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. The potential
          benefits
          of the Ethanol Extraction’s Extractive Fermentation for Ethanol Production
          technology are that:
  9
  ·
                    the process allows use of concentrated feeds,
 
 ·
                    the process reduces water requirement,
 
 ·
                    the process reduces requirement for downstream
                      distillation,
 
 ·
                    the process is capable of retrofit into
                      a conventional
                      plant, and
 
 ·
                    the process can reduce ethanol production
                      costs for a new
                      plant.
 In
          June
          2004, we acquired the outstanding stock of Advanced Bioethanol Technologies,
          Inc. from UTEK. Advanced Bioethanol holds the exclusive worldwide license
          to an
          innovative biomass extraction and fermentation process developed by researchers
          at the Virginia Polytechnic Institute. The technology can be used to convert
          waste biomass to ethanol and other co-products. We believe this technology
          offers the potential to reduce the volume of feedstocks used and costs
          associated with their integration into the production process. Advanced
          Bioethanol’s proprietary biomass-to-ethanol and xylitol technology platform is
          being scaled-up by researchers at Virginia Tech. We intend to file patent
          applications in its name with Virginia Tech’s assistance, and the developer of
          the process has accepted a position on our Advisory Board. The benefits
          of the
          Advanced Bioethanol’s Simultaneous Hydrolysis of Biomass and Recycled Paper
          Sludge technology are that:
  ·
                    the process reduces the amount of additives
                      required for
                      healthy fermentation,
 
 ·
                    the process utilizes waste paper sludge
                      as active
                      ingredient and source of cellulose, and
 
 ·
                    the process requires fewer purification
                      steps prior to
                      fermentation.
 We
            have
            also entered into a strategic research and development alliance with
            Bio-Process
            Innovation, Inc. to commercialize certain rapid fermentation yeast technology
            under a grant from the U.S. Department of Energy. This technology also
            offers
            the potential to increase the capacity of existing plants by accelerating
            the
            fermentation and ethanol production cycle, and thereby providing additional
            throughput.
  **Intellectual
          Property**
  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 application was filed in the United States Receiving Office. A biomass
          includes material such as straw, corn stalks (stover), bagasse, hardwoods,
          cotton stalks, kenaf and hemp. 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.
  We,
          in
          conjunction with Virginia Tech Intellectual Properties Inc., intend to
          file
          patent applications on an invention for producing bioethanol. The inventive
          process provides a source of renewable energy from what were formerly considered
          waste products. This new invention is both environmentally beneficial and
          socially responsible.
  To
          protect our trade secrets and the unpatented proprietary information in
          our
          development activities, our employees, consultants and contractors are
          required
          to enter into agreements providing for the confidentiality and our ownership
          of
          such trade secrets and other unpatented proprietary information originated
          by
          them while in our employ. We also require potential joint venture partners
          to
          enter into confidentiality and non-disclosure agreements.
  10
 We
          cannot
          assure you that any patents will issue on any of the pending patent
          applications, nor can we 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.
          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 such patents, licenses and non-disclosure agreements.
  **Research
          and Development**
  In
          conjunction with the development of our licensed technologies, we incurred
          research and development costs of $133,420 in 2005 and $106,231 in
          2004.
  **Sales
          and Marketing**
  We
          sell
          the ethanol from our Xethanol BioFuels plant under an exclusive marketing
          agreement with Aventine Renewable Energy, Inc. Aventine supplies more than
          500
          million gallons of U.S. ethanol needs as the second-largest producer and
          marketer of ethanol in the United States. Aventine purchases all of Xethanol
          BioFuel’s ethanol production under a renewable three-year off-take agreement.
          Sales are made at market prices less the costs of transportation and Aventine’s
          marketing commission. Distiller’s wet grains produced at Xethanol BioFuels are
          sold into the animal feed market through a marketing agreement with a local
          agent.
  **Regulatory
          Approvals and Environmental Laws**
  We
          are
          subject to environmental regulations of the U.S. Environmental Protection
          Agency
          and regulations and permitting requirements of the State of Iowa. We are
          also
          required to obtain a permit issued by the Bureau of Alcohol, Tobacco and
          Firearms before any of our ethanol facilities can sell 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
          88
          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-third 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 entire industry’s infrastructure is geared toward corn as
          the principal feedstock. However, in the area of biomass-to-ethanol production,
          there are few operators and low output characteristics, and production
          infrastructure 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 27
          employees as of March 10, 2006. None of these employees is covered by a
          collective bargaining agreement and our management believes that our relations
          with our employees are good.
  **ITEM
          1A.**  **RISK
          FACTORS**
  *You
          should carefully read and consider the risks and uncertainties below and
          the
          other information contained in this report. The risks and uncertainties
          described below are not the only ones we may face. The following risks,
          together
          with the additional risks and uncertainties not currently known to us or
          that we
          currently deem immaterial could impair our financial condition and results
          of
          operation.*
  11
 **Risks
          Related to Our Business and Industry**
  ***Our
          current operations have a limited operating history and our Blairstown
          plant
          only recently commenced operating, which make us a speculative
          investment.***
  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 we refurbished
          and at which we 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 processing technology, raising private capital and
          seeking
          acquisitions. Our primary production facility, Xethanol BioFuels, only
          began
          operating in July 2005. Accordingly, we have limited relevant operating
          history
          upon which an evaluation of our performance and prospects can be made.
          We are
          subject to all of the business risks associated with a new enterprise,
          including, but not limited to, risks of unforeseen capital requirements,
          failure
          of market acceptance, failure to establish business relationships and
          competitive disadvantages as against larger and more established companies.
  ***We
          have had a history of net losses and our biomass-to-ethanol technologies
          are
          unproven on a large-scale commercial basis and could fail to perform in
          a
          commercial production environment, which could have a detrimental effect
          on the
          long-term capital appreciation of our stock.***
  During
          the period from January 24, 2000 (date of inception) to December 31, 2005,
          we
          have incurred a net loss of $15,372,367, and may incur additional losses
          thereafter, depending upon our ability to generate material revenues or
          achieve
          profitable operations from ethanol production. While production of ethanol
          from
          corn, sugars and starches is a mature technology, newer technologies for
          production of ethanol from biomass are still in their development stage.
          The
          technologies being pursued by us for ethanol production from biomass have
          never
          been utilized on a large-scale commercial basis. All of the tests conducted
          to
          date by us with respect to our biomass technologies have been performed
          on
          limited quantities of feedstocks, and we cannot assure you that the same
          or
          similar results could be obtained at competitive costs on a large-scale
          commercial basis. We have never utilized these biomass technologies under
          the
          conditions or in the volumes that will be required to be profitable and
          cannot
          predict all of the difficulties that may arise. It is possible that the
          technologies, when used, may require further research, development, design
          and
          testing prior to larger-scale commercialization. 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.
  ***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
          (including competitive) businesses, facilities or technologies and enter
          into
          co-location joint ventures. Our goal is to make such acquisitions, integrate
          these 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 the anticipated
          benefits
          of any acquisitions will be realized. In addition, future acquisitions
          by us
          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 can 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.
  ***Our
          business employs proprietary technology and information which may be difficult
          to protect and may infringe on the intellectual property rights of third
          parties.***
  We
          currently have United States patent applications pending and in the process
          of
          being filed, and may in the future file foreign patent applications. Our
          success
          depends, in part, on our ability to obtain patents, maintain trade secrecy
          and
          operate without infringing on the proprietary rights of third parties.
          We cannot
          assure you that the patents of others will not have an adverse effect on
          our
          ability to conduct our business, 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.
  12
 It
          is
          possible that 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 such 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 patent protection, we also rely on trade secrets, proprietary
          know-how and technology that we seek to protect, in part, by confidentiality
          agreements with our prospective joint venture partners, employees and
          consultants. We cannot assure you that these agreements will not be breached,
          that we will have adequate remedies for any breach, or that our trade secrets
          and proprietary know-how will not otherwise become known or be independently
          discovered by others.
  ***We
          will have a need for financing in order to sustain our operations and expand,
          which may not be available when needed. If we cannot obtain needed funding
          to
          sustain our operations and expand, and if the Fusion Capital financing
          is not
          available to us by its terms, we may have to curtail our operations, sell
          some
          of our assets or take actions that may dilute your financial
          interest.***
  We
          have
          financed our operations to date through the sale of our common stock and
          warrants in privately-negotiated transactions with accredited investors
          as well
          as our senior secured note financings. Based on our current financial position,
          cash forecast and plan of operation, we believe that we have adequate cash
          resources to sustain our operations through this year. However, future
          capital
          requirements could vary significantly and will depend on certain factors,
          many
          of which are not within our control. These include the ongoing development
          and
          testing of our proprietary biomass-to-ethanol technologies, the nature
          and
          timing of plant improvements, construction, permitting and acquisitions,
          and the
          availability of financing. The expansion of our business will require us
          to
          commit significant capital resources in amounts substantially in excess
          of our
          current financial resources.
  We
          only
          have the right to receive $40,000 per trading day under the agreement with
          Fusion Capital unless our stock price equals or exceeds $5.25, in which
          case the
          daily amount may be increased under certain conditions as the price of
          our
          common stock increases. Fusion Capital will not have the right, or the
          obligation, to purchase any shares of our common stock on any trading days
          that
          the market price of our common stock is less than $2.00. Since we registered
          under the Securities Act 5,000,000 shares for sale by Fusion Capital, the
          selling price of our common stock to Fusion Capital will have to average
          at
          least $4.00 per share for us to receive the maximum proceeds of $20 million
          without registering additional shares of common stock. In the event the
          average
          price per share falls below $4.00 per share, the purchase by Fusion Capital
          of
          the full 5,000,000 shares under the common stock purchase agreement would
          result
          in proceeds to us of less than $20 million unless we choose to register
          more
          than 5,000,000 shares, which we have the right, but not the obligation,
          to do.
          Subject to approval by our board of directors, we have the right, but not
          the
          obligation, to issue more than 5,000,000 shares to Fusion Capital. In the
          event
          we elect to issue more than 5,000,000 shares, we will be required to file
          a new
          registration statement and have it declared effective by the SEC.
  The
          extent to which we rely on Fusion Capital as a source of funding will depend
          on
          a number of factors including the prevailing market price of our common
          stock
          and the extent to which we are able to secure working capital from other
          sources. Specifically, Fusion Capital will not have the right, or the
          obligation, to purchase any shares of our common stock on any trading days
          that
          the market price of our common stock is less than $2.00. If obtaining sufficient
          financing from Fusion Capital were to prove unavailable or prohibitively
          dilutive and if we are unable to generate significant cash flow from our
          operations, we will need to secure another source of funding in order to
          satisfy
          our working capital needs. Even if we are able to access the full $20 million
          under the common stock purchase agreement with Fusion Capital, we may still
          need
          additional capital in the future to fully implement our business, operating
          and
          development plans. We cannot assure you that such financing will be available
          or, if available, that it will be on favorable terms. If adequate financing
          is
          not available, we may have to delay, scale back or eliminate some of our
          operations or expansion plans.
  13
 **We
          are dependent upon****Christopher
          d’Arnaud-Taylor, our Chairman, President and Chief Executive Officer, who
          we
          need to succeed.**
  We
          believe that our continued success will depend to a significant extent
          upon the
          efforts and abilities of Christopher d’Arnaud-Taylor, our Chairman, President
          and Chief Executive Officer, due to his contacts in the ethanol and biomass
          industries and his overall insight into our business direction. Our failure
          to
          retain Mr. d’Arnaud-Taylor, or to attract and retain additional qualified
          personnel, could adversely affect our operations. We do not currently carry
          key-man life insurance on any of our officers. See “Management.”
  ***Because
          we are smaller and have fewer financial resources than many larger ethanol
          producers, we may not be able to successfully compete in the very competitive
          ethanol industry.***
  There
          is
          significant competition among ethanol producers. Our business faces competition
          from larger plants, from plants that can produce a wider range of products
          than
          we can, and from other plants similar to our existing and proposed ethanol
          plants. Our ethanol plants will be in direct competition with other ethanol
          producers, many of which have greater resources than we currently have.
          Large
          ethanol producers are capable of producing a significantly greater amount
          of
          ethanol than we can and expect to produce.
  ***Competition
          from large producers of petroleum-based gasoline additives and other competitive
          products may impact our profitability.***
  Our
          existing and proposed ethanol plants will also compete with producers of
          other
          gasoline additives made from other raw materials having similar octane
          and
          oxygenate values as ethanol. The major oil companies have significantly
          greater
          resources than we have to develop alternative products and to influence
          legislation and public perception of ethanol. These other companies also
          have
          significant resources to begin production of ethanol should they choose
          to do
          so.
  ***Our
          profits are impacted by corn supply and feedstock prices, which could impact
          the
          value of your investment.***
  Until
          we
          are able to integrate waste starches and sugars and biomass feedstock into
          our
          production system, we will be producing 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. Significant variations in actual
          growing
          conditions from normal growing conditions may also adversely affect our
          ability
          to procure corn for its plants. Any events that tend to negatively impact
          the
          supply of corn will tend to increase prices and harm our business.
  Rising
          corn prices produce lower profit 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. 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 profitability 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.
  14
 ***Increased
          ethanol production in the United States could increase the demand for feedstocks
          and the resulting price of feedstocks, reducing our
          profitability.***
  New
          ethanol plants are under construction or planning throughout the United
          States.
          This increased ethanol production could increase corn demand and prices,
          resulting in higher production costs and lower profits.
  ***Price
          increases or interruptions in needed energy supplies could cause loss of
          customers and impair our profitability.***
  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 of time, 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.
  **Risks
          Related to Government Regulation and Subsidization**
  ***Federal
          regulations concerning tax incentives could expire or change, which could
          cause
          an erosion of the current competitive strength of the ethanol
          industry.***
  Congress
          currently provides certain federal tax credits for ethanol producers and
          marketers. The ethanol industry and our business depend on continuation
          of these
          credits. The credits have supported a market for ethanol that might disappear
          without the credits. The credits are scheduled to expire December 31, 2010.
          These credits may not continue beyond their scheduled expiration date or,
          if
          they continue, the incentives may not be at the same level. The revocation
          or
          amendment of any one or more of these tax incentives could adversely affect
          the
          future use of ethanol in a material way, and we cannot assure investors
          that any
          of these tax incentives will be continued. The elimination or reduction
          of
          federal tax incentives to the ethanol industry could have a material adverse
          impact on our business by making it more costly or difficult for it to
          produce
          and sell ethanol. If the federal ethanol tax incentives are eliminated
          or
          sharply curtailed, we believe that a decreased demand for ethanol could
          result.
  ***Lax
          enforcement of environmental and energy policy regulations may adversely
          affect
          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 the use of conventional fuels unless compliance with applicable
          regulatory requirements leads, directly or indirectly, to the use of ethanol.
          Both additional regulation and enforcement of such regulatory provisions
          are
          likely to be vigorously opposed by the entities affected by such requirements.
          If existing emissions-reducing standards are weakened, or if governments
          are not
          active and effective in enforcing such standards, our business and results
          of
          operations could be adversely affected. Even if the current trend toward
          more
          stringent emissions standards continues, we 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 profitability and decrease the
          value
          of your stock.
  ***Costs
          of compliance with burdensome or changing environmental and operational
          safety
          regulations could cause our focus to be diverted away from our business
          and 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 such changes may require additional capital expenditures or
          increased
          operating costs. Consequently, considerable resources may be required to
          comply
          with future environmental regulations. In addition, our ethanol plants
          could be
          subject to environmental nuisance or related claims by employees, property
          owners or residents near the ethanol plants arising from air or water
          discharges. Ethanol production has been known to 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.
  15
 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.
  **Risks
          Related to 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 such shares were
          purchased.***
  The
          market price of our common stock may fluctuate significantly (since our
          reverse
          merger in February 2005 through March 24, 2006, the high and low bid price
          for
          our common stock has been $7.77 and $2.30 per share, respectively) in response
          to factors, some of which are beyond our control, including the
          following:
  ·
                    inability to manufacture ethanol as efficiently
                      as we
                      expect due to factors related to costs and supply of corn,
                      energy or
                      water,
 
 ·
                    factors affecting 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
          stock
          market in general has experienced extreme price and volume fluctuations.
          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 worse if the
          trading
          volume of our common stock is low.
  ***Because
          we became public by means of a reverse merger, we may not be able to attract
          the
          attention of major brokerage firms for research and
          support.***
  Additional
          risks may exist since we became public through a “reverse merger.” Securities
          analysts of major brokerage firms may not provide us with coverage since
          there
          is no incentive to brokerage firms to recommend the purchase of our common
          stock. We cannot assure you that brokerage firms will want to conduct any
          secondary offerings on our behalf in the future.
  ***Our
          common stock may be considered “a penny stock” and may be difficult for you to
          sell.***
  The
          SEC
          has adopted regulations which generally define “penny stock” to be an equity
          security that has a market price of less than $5.00 per share or an exercise
          price of less than $5.00 per share, subject to specific exemptions. The
          market
          price of our common stock has been for much of its trading history since
          February 2005 and may continue to be less than $5.00 per share, and therefore
          may be designated as a “penny stock” according to SEC rules. This designation
          requires any broker or dealer selling these securities to disclose certain
          information concerning the transaction, obtain a written agreement from
          the
          purchaser and determine that the purchaser is reasonably suitable to purchase
          the securities. These rules may restrict the ability of brokers or dealers
          to
          sell our common stock and may affect the ability of investors to sell their
          shares. In addition, since our common stock is currently traded on the
          NASD’s
          OTC Bulletin Board, investors may find it difficult to obtain accurate
          quotations of our common stock and may experience a lack of buyers to purchase
          such stock or a lack of market makers to support the stock price.
  16
 ***The
          sale of our common stock to Fusion Capital may cause dilution and the sale
          of
          the shares of common stock acquired by Fusion Capital could cause the price
          of
          our common stock to decline.***
  The
          issuance of shares to Fusion Capital under the terms of the common stock
          purchase agreement will dilute the percentage interests of existing stockholders
          and could have an adverse effect on the market price of our common stock.
  The
          purchase price for the common stock to be sold to Fusion Capital pursuant
          to the
          common stock purchase agreement will fluctuate based on the market price
          of our
          common stock from time to time. Fusion Capital may sell none, some or all
          of the
          shares of common stock purchased from us at any time. We expect that such
          shares
          will be sold to Fusion Capital over a period of up to 25 months from December
          28, 2005, the date of the prospectus covering the resale of such shares
          by
          Fusion Capital. Depending upon market liquidity at the time, a resale of
          such
          shares by Fusion Capital at any given time could cause the trading price
          of our
          common stock to decline. The resale of a substantial number of shares of
          our
          common stock by Fusion Capital, or anticipation of such resales, could
          make it
          more difficult for us to sell equity or equity-related securities in the
          future
          at a time and at a price that we might otherwise wish to effect
          sales.
  ***A
          significant number of our shares are eligible for resale, 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 19,765,603 shares of our
          common
          stock may be offered from time to time in the open market pursuant to our
          prospectus dated December 28, 2005, and these sales may have a depressive
          effect
          on the market for the shares of our common stock. Additional shares of
          our
          common stock, including shares privately placed in February 2005, may be
          offered
          from time to time in the open market pursuant to 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 prior to such sale.
          Such
          sales may be repeated once each three months, and any of the restricted
          shares
          may be sold by a non-affiliate after they have been held two years.
  **Failure
          to achieve and maintain effective internal controls 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, 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, our operating results could be harmed.
  Commencing
          July 15, 2007, we will be required to document and test our internal control
          procedures in order to satisfy the requirements of Section 404 of the
          Sarbanes-Oxley Act of 2002, which requires annual management assessments
          of the
          effectiveness of our internal controls over financial reporting and a report
          by
          our independent registered public accounting firm addressing these assessments. In
          connection with the audit by our independent accountants of our December
          31,
          2004 financial statements, they notified us and our board of directors
          that they
          had identified significant deficiencies that they considered material weaknesses
          in the internal controls. The material weaknesses related to the financial
          reporting process and segregation of duties. Although
          we intend to augment our internal controls procedures and expand our accounting
          staff, there is no guarantee that this effort will be adequate.
  During
          the course of our testing, we may identify deficiencies which 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 such 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.
  17
 ***Our
          principal stockholders have significant voting power and may take actions
          that
          may not be in the best interest of all other
          stockholders.***
  Our
          officers, directors and principal stockholders control approximately 56%
          of our
          currently outstanding shares of common stock. If these stockholders act
          together, they may be able to exert significant control over our management
          and
          affairs requiring stockholder approval, including approval of significant
          corporate transactions. This concentration of ownership may have the effect
          of
          delaying or preventing a change in control and might adversely affect the
          market
          price of our common stock. This concentration of ownership may not be in
          the
          best interests of all our stockholders.
  ***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
          could issue “blank check” preferred stock without stockholder approval with the
          effect of diluting then current stockholder interests and impairing their
          voting
          rights, and provisions in our charter documents and under Delaware law
          could
          inhibit a takeover at a premium price.***
  Our
          certificate of incorporation authorizes the issuance of up to 1,000,000
          shares
          of “blank check” preferred stock with 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 dividend, liquidation, conversion, voting or other
          rights which could dilute the interest of, or impair the voting power of,
          our
          common stockholders. The issuance of a series of preferred stock could
          be used
          as a method of discouraging, delaying or preventing a change in control.
  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.
  **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 $10,400 from a company in which one of our directors
          is
          the managing member. See “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) which consists of a 25,000 square foot ethanol plant, and we own
          our
          Xethanol BioFuels facility located in Blairstown, Iowa which consists of
          a
          24,728 square foot ethanol plant on 25.5 acres of land. Each plant also
          includes
          warehouse and distribution facilities, and available space for potential
          expansion. The land, buildings and site improvements, mechanical and process
          equipment and specific personal property owned by Xethanol BioFuels are
          pledged
          as security for the $$6,600,000 of senior secured royalty notes issued
          by
          BioFuels during 2005, with $5,000,000 due in January 2012 and $1,600,000
          due in
          August 2012.We believe that these facilities will be adequate to meet our
          needs
          through 2006.
  **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 (hereinafter, the
          "Plaintiffs"), 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, requesting declaratory judgment declaring that Plaintiffs are
          entitled to receive 300,000 shares of our common stock and seeking transfer
          to Plaintiffs of these 300,000 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 being heard 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.
  18
 Effective
          October 19, 2005, we entered into a marketing and licensing agreement with
          DDS
          Technologies USA, Inc (“DDS”), under which among other things, we agreed to
          settle two related legal actions concerning our investment in a joint venture
          called DDS-Xethanol, LLC. Under the terms of the 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
          in the two legal actions. As part of the agreement, DDS issued 200,000
          shares of
          its stock to us. DDS also granted a license to us to deploy DDS’s patented dry
          disaggregation technology in our ethanol facilities. DDS also granted to
          us an
          exclusive license, with certain exceptions, to market the DDS dry disaggregation
          technology to the ethanol industry in the United States. We will pay a
          royalty
          to DDS for use of the technology equal to 1.25% of ethanol revenues generated
          from the use of such technology.
  **ITEM
          4.**  **SUBMISSION
          OF MATTERS TO A VOTE OF SECURITIES HOLDERS**
  None.
  **PART
          II**
  **ITEM
          5.**  **MARKET
          FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS**
  As
          of
          March 24, 2006, there were approximately 480 record holders of our common
          stock
          and there were 16,167,118 shares of our common stock outstanding.
  Our
          shares of common stock are quoted on the OTC Bulletin Board under the trading
          symbol XTHN.OB.
  The
          following table sets forth the high and low bid prices for our common stock
          for
          the periods indicated as reported by the OTC Bulletin Board. 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, 2004****:**First
                    Quarter
                
                $
                1.05
                
                $
                0.80Second
                    Quarter
                
                
                1.05
                
                
                0.80Third
                    Quarter
                
                
                1.05
                
                
                0.80Fourth
                    Quarter
                
                
                1.05
                
                
                0.80**Year
                    Ending 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
                    Ending December 31, 2006****:**First
                    Quarter (through March 24, 2006)
                
                $
                6.75
                
                $
                2.30
 _______________________
  (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,
                    at which
                    time it related only to Zen Pottery Equipment, Inc. (under the
                    symbol
                    ZPYE.OB). In April 2005, our symbol was changed to
                    XTHN.OB.
  19
 **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, subject to our articles of incorporation. 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 we
          may deem
          relevant.
  **Equity
          Compensation Plan Information**
  At
          the
          time of the merger, neither we nor Old Xethanol had any outstanding stock
          options. On February 2, 2005, following the completion of the merger, the
          board
          of directors of our company adopted the Xethanol Corporation 2005 Incentive
          Compensation Plan (the “2005 Plan”), which our stockholders subsequently
          approved.
  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. Under
          the
          2005 Plan, the total number of shares of our common stock that may be subject
          to
          the granting of awards is 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. As of March 24, 2006, 317,070 shares
          of our
          common stock and stock options to purchase 1,030,000 shares of our common
          stock
          were granted under the 2005 Plan. See
          “Management - Incentive Compensation Plan” for a detailed description of the
          plan.
  The
          following table provides information regarding the status of our existing
          equity
          compensation plans at March 24, 2006:
  **Plan
                    category**
                
                **Shares
                    of common**
                  **stock
                    issued and shares**
                  **of
                    common stock to be**
                  **issued
                    upon exercise of outstanding options**
                
                **Weighted-average**
                  **exercise
                    price of**
                  **outstanding
                    options**
                
                **Number
                    of securities**
                  **remaining
                    available for**
                  **future
                    issuance under**
                  **equity
                    compensation**
                  **plan
                    (excluding**
                  **securities
                    reflected in the previous columns)**Equity
                    compensation plans approved by stockholders (1)
                
                
                1,347,070
                (2)
                $
                4.81
                
                
                652,930Equity
                    compensation plans not approved by stockholders
                
                
                —
                
                
                —
                
                
                —Total
                
                
                1,347,070
                (2)
                $
                4.81
                
                
                652,930
 _______________________
  (1)
                  Represents the 2005
                    Plan.
 (2)
                  Consists
                      of 317,070 shares of common stock with a fair value estimated
                      at $3.25 per
                      share and stock options to purchase 1,030,000 shares of our
                      common stock
                      with exercise prices ranging from $3.75 to $5.56 per
                      share.
 
  20
 
 **Recent
          Sales of Unregistered Securities**
 
 In
          connection with the reverse merger transaction discussed under the caption
          “Business—Corporate History and Recent Developments,” we completed the closing
          of a private offering of a total of 1,190,116 shares of our common stock
          at a
          purchase price of $3.25 per share to accredited investors pursuant to the
          terms
          of a Confidential Private Offering Memorandum, dated November 2004, as
          supplemented. 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. In
          our
          reverse merger transaction, the outstanding warrants of Old Xethanol prior
          to
          the transaction were amended to become warrants to purchase shares of our
          common
          stock on substantially the same terms as the previous warrants, except
          that the
          number of shares issuable upon the exercise of such warrants was amended
          to
          reflect the exchange ratio in the merger. At the time of the merger, neither
          we
          nor Old Xethanol had any options outstanding. However, following the merger,
          our
          board of directors adopted the Xethanol, Inc. 2005 Equity Compensation
          Plan,
          which was subsequently approved by our stockholders. Under this plan, we
          have
          issued 317,070 shares of restricted common stock and options to purchase
          an
          aggregate of 480,000 shares of common stock to certain directors, executives
          and
          other employees.
 
 The
          issuance and sale of the restricted common stock and options under our
          equity
          compensation plan to certain directors, executives and other employees
          was not
          registered under the Securities Act in reliance upon the exemption from
          registration provided by Section 4(2) of the Securities Act. We determined
          that
          the issuance of restricted common stock and options under our equity
          compensation plan to certain directors, executives and other employees
          are
          transactions not involving any public offering because such issuances were
          made
          to a limited number of our directors, officers and key employees who, at
          the
          time of issuance, each represented to us, among other things, that he was
          acquiring the securities for his own account and not with a view to the
          public
          distribution thereof, and that he understood that such securities may not
          be
          offered or sold in the United States absent registration under the Securities
          Act or an applicable exemption from the registration requirements thereof.
          Moreover, certificates evidencing such shares of restricted common stock
          each
          contain an appropriate restrictive legend stating that the securities have
          not
          been registered under the Securities Act and may not be offered or sold
          absent
          such registration or an applicable exemption, and appropriate “stop transfer”
instructions have been maintained in respect of such shares.
 
 The
          private offering was made solely to “accredited investors,” as that term is
          defined in Regulation D under the Securities Act. The shares of our common
          stock
          issued to former holders of Old Xethanol common stock in connection with
          the
          reverse merger, and the shares of our common stock issued in the private
          offering, were not registered under the Securities Act in reliance upon
          the
          exemption from registration provided by Section 4(2) of the Securities
          Act and
          Regulation D (Rule 506) promulgated under that section, which exempts
          transactions by an issuer not involving any public offering. These shares
          may
          not be offered or sold in the United States absent registration or an applicable
          exemption from the registration requirements. Certificates representing
          these
          shares contain a legend stating the same.
 
 National
          Securities Corporation and Neidiger, Tucker, Bruner Inc. served as co-placement
          agents and financial advisors in connection with the private offering.
          The
          co-placement agents and other advisors received an aggregate of $257,187
          in
          sales commissions and 252,948 shares of our common stock. The net proceeds
          of
          the private offering exclude these sales commissions. For a more complete
          description of the reverse merger transaction and accompanying private offering,
          see our current report on Form 8-K, dated February 2, 2005 and filed with
          the
          SEC on March 15, 2005.
 
 As
          previously disclosed in our Current Report on Form 8-K filed with the SEC
          on
          February 3, 2005, 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 aggregate principal amount of $5,000,000.
          The proceeds of the financing were used to (i) satisfy the $3,000,000 demand
          note held by an Omaha, Nebraska commercial bank in connection with the
          purchase
          of the facility, (ii) refurbish and upgrade capacity at the facility to
          7.5
          million gallons of ethanol per year, (iii) fund start-up activities at
          the
          facility and related working capital requirements, and (iv) pay legal and
          other
          professional fees. The
          senior secured royalty income notes provide for interest to be paid
          semi-annually at the greater of 10% per year or 5% of 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
          have 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 thereon. The holders of the notes
          have
          the right to convert their notes into shares of Xethanol common stock at
          any
          time at a conversion price equal to $4.00 per share (equivalent to 1,250,000
          shares), which is in excess of the $3.25 purchase price for shares sold
          in the
          private offering completed at the same time as the completion of our reverse
          merger transaction.
 
 21
 In
          addition, as previously disclosed in our Current Report on Form 8-K filed
          with
          the SEC on October 3, 2005, 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. The proceeds of the financing
          were
          used for general corporate purposes and to further the development and
          integration of Xethanol’s technologies. The
          senior secured royalty income notes provide for interest to be paid
          semi-annually at the greater of 10% per year or 5% of 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
          have the right to require the holders of the notes, from and after August
          2008,
          to surrender their notes for an amount equal to 130% of the outstanding
          principal, plus unpaid accrued interest thereon. The holders of the notes
          have
          the right to convert their notes into shares of Xethanol common stock at
          any
          time at a conversion price equal to $4.00 per share (equivalent to 400,000
          shares).
 
 The
          senior secured royalty income notes issued in the on January 19, 2005 and
          August
          8, 2005 were not registered under the Securities Act in reliance upon the
          exemption from registration provided by Section 4(2) of the Securities
          Act and
          Regulation D promulgated under that section, which exempts transactions
          by an
          issuer not involving any public offering. We
          determined that this offering of senior security royalty notes was exempt
          from
          registration because at the time of the issuance and sale thereof, the
          institutional investors each represented to us that it was an accredited
          investor, was purchasing the senior security royalty notes for its own
          account
          and not with a view to public distribution of the notes and had no agreement
          or
          understanding to distribute any of these notes. These notes may not be
          offered
          or sold in the United States absent registration or an applicable exemption
          from
          the registration requirements.
 
 On
          October 18, 2005, we entered into a common stock purchase agreement with
          Fusion
          Capital Fund II, LLC, pursuant to 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 also, in our discretion, elect to sell more of
          our
          common stock to Fusion Capital than the minimum daily amount. The purchase
          price
          of the shares of common stock will be equal to a price based upon the future
          market price of our common stock 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 in the event that the price of our common stock is less
          than
          $2.00 per share. Under the terms of the common stock purchase agreement,
          we
          issued 303,556 shares of our common stock to Fusion Capital as a commitment
          fee
          and have agreed to reserve out of our authorized and unissued common stock,
          5,000,000 shares solely for the purpose of effecting purchases of shares
          of our
          common stock by Fusion Capital. For additional information concerning the
          Fusion
          Capital transaction, please see “Business—Corporate History and Recent
          Developments—Fusion Capital Common Stock Purchase Agreement.”
 
 This
          offering was made pursuant to an exemption from registration provided by
          Section
          4(2) of the Securities Act, which exempts transactions by an issuer not
          involving any public offering. We
          determined that this offering to Fusion Capital was exempt from registration
          because at the time of execution, Fusion Capital represented to us that
          it was
          an accredited investor, was entering into the common stock purchase agreement
          for its own account and not with a view to public distribution of the shares
          and
          had no agreement or understanding to distribute any of these shares. Also,
          in
          the common stock purchase agreement, we represented to Fusion Capital that
          the
          shares were not being registered under the Securities Act and could not
          be
          resold without prior registration.
 
 Subsequent
          to the execution of the common stock purchase agreement with Fusion Capital,
          we
          filed a registration statement on Form SB-2 with the SEC to, among other
          things,
          register the resale of all of the shares of our common stock issuable under
          the
          Fusion Capital common stock purchase agreement under the Securities Act,
          including the 303,556 shares of our common stock issued to Fusion Capital
          as a
          commitment fee. This registration statement was declared effective by the
          SEC on
          December 28, 2005.
 
 22
 **ITEM
          6.**  **MANAGEMENT’S
          DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**
  *This
          Management’s Discussion and Analysis or Plan of Operation 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, but not limited to, 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.*
  *The
          following discussion of our financial condition and results of operations
          should
          be read in conjunction with our financial statements and the related notes
          included in this report.*
  **Overview**
  On
          February 2, 2005, we completed a so-called “reverse merger” transaction, in
          which we caused Zen Acquisition, a Delaware corporation and a newly-created,
          wholly-owned subsidiary of Zen, to be merged with and into Old Xethanol.
          As a
          result of the merger, Old Xethanol became a wholly owned subsidiary of
          Zen and
          changed its name to Xethanol BioEnergy, Inc.
  Prior
          to
          the merger, Zen was a company that manufactured pottery kilns. We discontinued
          these activities simultaneously with the merger by the sale of that business
          to
          Zen Zachariah Pool III, our previous principal stockholder and succeeded
          to the
          business of Old Xethanol as our sole line of business going forward. Old
          Xethanol was formed in January 2000 and began its ethanol production operations
          in September 2003. Following the merger, Zen reincorporated from the State
          of
          Colorado to the State of Delaware and changed its corporate name to Xethanol
          Corporation. Upon the closing of the merger, the directors and management
          of Old
          Xethanol became the directors and management of our company.
  The
          merger was accounted for as a recapitalization of Old Xethanol (or a “reverse
          merger”), since 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.
  **Plan
          of Operation**
  Our
          expected revenue model is based on the sale of ethanol and a related co-product
          called xylitol. Xylitol is a natural sweetener that was approved by the
          FDA in
          the 1960’s for use in foods and beverages, including chewing gums, candies,
          toothpastes and diabetic regimens. Xylitol is a co-product derived from
          biomass-to-ethanol production.
  At
          the
          present time, we own two ethanol plants in Iowa - Xethanol BioFuels in
          Blairstown and Permeate Refining in Hopkinton. We also own several proprietary
          bio-extraction, bio-separation and bio-fermentation technologies that are
          targeted at reducing costs throughout the entire ethanol production process
          as
          well as enabling the conversion of biomass to ethanol and xylitol.
  Xethanol
          BioFuels was acquired in November 2004 as an idled plant. During the first
          six
          months of 2005, this facility underwent substantial refurbishment and became
          operational in July 2005. This is a corn-based operation with an initial
          production capacity of 5.5 millions gallons of ethanol per year. After
          initial
          discussions with The Harris Group, our “owner’s engineering” firm, we are now
          evaluating contactor proposals to increase the plant production capacity
          to 25
          million gallons and at the same time optimize efficiency. The BioFuels
          facility
          is located on a 25 acre site with ample space for expansion.
  23
 Permeate
          Refining was initially designed to process waste starches and sugars and
          has a
          production capacity of 1.6 million gallons of ethanol per year. In April
          2005,
          we temporarily ceased operations at the Permeate Refining plant in order
          to
          refurbish the facility and evaluate strategic alternatives. We are currently
          evaluating a project to convert Permeate into one of the first US commercial
          cellulosic biomass to ethanol facilities. We are pursuing a plan combining
          steam
          gun explosion technology with our proprietary Virginia Tech fermentation
          technology. Under this plan, Permeate production capacity could be increased
          significantly with enhanced operating efficiency.
  We
          sell
          the ethanol from our Xethanol BioFuels plant under an exclusive marketing
          agreement with Aventine Renewable Energy, Inc. Aventine is the second largest
          marketer of ethanol in the United States and purchases all of Xethanol
          BioFuel’s
          ethanol production under a renewable three-year off-take agreement. Sales
          are
          made at market prices less the costs of transportation and Aventine’s marketing
          commission. Distillers wet grains that are produced as a by-product at
          BioFuels
          are sold through a local merchandising agent.
  **Results
          of Operations**
  ***Year
          Ended December 31, 2005 Compared to Year Ended December 31,
          2004***
  **Net
          Loss.** We had
          net losses of $11,377,075 and $2,570,918 for the years ended December 31,
          2005
          and 2004, respectively. These losses are not comparable given our significant
          activity during 2005 as compared to 2004, including the refurbishment and
          opening of Xethanol BioFuels, the reverse merger, the concurrent private
          offering, the senior secured notes financing, the establishment of a corporate
          office and organizational infrastructure and the write-off of intangible
          assets
          and goodwill. During these periods, operations were financed through various
          equity and debt private financing transactions.
  **Sales.** Net
          sales for the year ended December 31, 2005 were $4,342,927 as compared
          to
          $465,048 for the year ended December 31, 2004. During 2004, net sales were
          attributable solely to our Permeate operations. We sold approximately 295,000
          gallons of ethanol at an average price of $1.58 per gallon. Sales prices
          ranged
          during the year between $1.14 and $1.88. Net sales during 2005 reflect
          operations at Permeate from January 1, 2005 to March 31, 2005 which generated
          approximately $99,000 and at BioFuels from July 1, 2005 through December
          31,
          2005 which generated the balance. BioFuels sold approximately 2.44 million
          gallons of ethanol at average selling price of $1.60. Sales of DWGs contributed
          an additional $339,000 to total sales.
  **Cost
          of Sales.** Cost
          of
          sales for the year ended December 31, 2005 were $4,891,230 compared to
          $507,181
          for the year ended December 31, 2004. Higher cost of sales in 2005 relates
          to
          the higher level of sales during 2005. The cost of sales during 2005 reflect
          start-up production inefficiencies at BioFuels, inefficiencies driven by
          a lack
          of economies of scale while we slowly increased production to plant capacity
          and
          high prices of energy, especially natural gas.
  **Operating
          Expenses.** Operating
          expenses were $6,558,308 for the year ended December 31, 2005 as compared
          to
          $2,357,190 for the year ended December 31, 2004.
  The
          increase in operating expenses of $4,201,118 is due principally to 1) increased
          expenses of approximately $3,295,000 attributable to the creation of our
          corporate headquarters office, 2) increased expenses of approximately $860,000
          related to start-up expenses at the Xethanol BioFuels facility from January
          1,
          2005 until its opening on July 1, 2005, 3) increase in amortization expense
          of
          approximately $137,000 resulting from licenses acquired during 2005, and
          4)
          various expenses including depreciation related to Permeate Refining that
          are
          included in operating expenses in 2005 but were included in cost of sales
          in
          2004.
  The
          increase in expenses related to our corporate office is directly related
          to the
          growth of the company necessitating the development of a corporate
          infrastructure to support our growth, capital needs and our change to a
          public
          corporation. Accordingly, included in the $3,295,000 increase attributable
          to
          our corporate office is 1) approximately $1,955,000 of compensation expense
          related to our management team and directors and resulting from the hiring
          of a
          new CFO and Vice President of Operations as well as the election of four
          new
          independent directors to our Board, 2) approximately $822,000 related to
          services provided by outside advisors, consultants and agents for services
          ranging from investor relations, public relations, business development
          and
          capital raising, 3) approximately $235,000 related to legal and auditing
          fees,
          4) approximately $151,000 related to offices expense including rent, and
          5)
          $78,000 related to travel and entertainment.
  24
 Approximately
          $2,377,000 or 72% of the total corporate office increase was the result
          of
          non-cash compensation in the form of stock, warrants and options.
  **Write-off
          on Intangible Assets and Goodwill.** At
          December 31, 2005, the Company charged $3,635,416 to expense, representing
          the
          unamortized cost of acquiring its license agreements, after considering
          the
          uncertainties surrounding the timing of their commercialization. The Company
          also wrote off the $205,000 in goodwill associated with its acquisition
          of
          Permeate. Management continues to believe that its portfolio of technologies
          as
          well as its ongoing research and development arrangements with the governmental
          and academic institutions from which we acquired the licensed technologies
          is an
          integral part of the Company’s growth strategy.
  **Interest
          Expense.** Interest
          expense was $659,030 for the year ended December 31, 2005 as compared to
          $208,340 for the year ended December 31, 2004. The increase of $450,690
          is
          mainly attributable to senior secured royalty notes issued during 2005
          which was
          partially offset by the bank note payable assumed in October 2004 in connection
          with the acquisition of BioFuels and subsequently refinanced by the royalty
          notes in January 2005.
  **Organizational
          Expense.** In
          connection with the reverse merger, we paid $300,000 to the former owners
          of Zen
          to repurchase 8,200,000 shares of their Zen common stock which were then
          cancelled at the closing of the reverse merger. This payment was recorded
          for
          accounting purposes as an organizational expense.
  **Other
          Income.** Other
          income was $255,226 for the year ended December 31, 2005 as compared to
          $33,385
          for the year ended December 31, 2004. Included in Other income during 2005
          is
          $132,000 in cash and stock received from the settlement of the DDS Technologies
          legal action.
  **Liquidity
          and Capital Resources**
  At
          December 31, 2005, we had a cash balance of $802,664.
  During
          the year end December 31, 2005, we used net cash of $5,930,449 for operating
          activities. Additional cash of $999,913 was used to purchase property and
          equipment. Cash used for operating and investing was offset by net cash
          proceeds
          of $3,572,817 raised from our private offering, $6,600,000 of proceeds
          raised
          from the issuance of the senior secured royalty notes net of the repayment
          of
          the $3,000,000 note payable and $450,000 received in the acquisition of
          Xylose Technologies, Inc. Net cash increased during the year by
          $689,192.
  On
          October 18, 2005, we entered into a common stock purchase agreement with
          Fusion
          Capital Fund II, LLC, pursuant to which Fusion Capital agreed, under certain
          conditions, to purchase on each trading day $40,000 of our common stock
          up to an
          aggregate of $20 million over a 25-month period, subject to earlier termination
          at our discretion. We may also, in our discretion, elect to sell more of
          our
          common stock to Fusion Capital than the minimum daily amount. The purchase
          price
          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 Capital does not have the right or the obligation to purchase shares
          of
          our common stock in the event that the price of our 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. We filed a registration statement
          with
          the SEC to register under the Securities Act the resale of the shares of
          our
          common stock which we may issue to Fusion Capital under the common stock
          purchase agreement, which registration statement was declared effective
          by the
          SEC on December 28, 2005. We began selling shares of common stock to Fusion
          Capital under the common stock purchase agreement on January 3,
          2006.
  As
          of
          March 17, 2006, we had a cash balance of $3,334,571 and had raised $3,534,009
          from the sale of our shares to Fusion Capital and $408,000 from the exercise
          of
          shareholder warrants. Based
          upon our current financial condition, cash forecast and operating plan,
          management believes that it has adequate cash resources to sustain its
          operations through the end of the year. However, our continued existence
          is
          dependent upon several factors, including the ability to generate cash
          flow from
          the sale of our product through improved margins and expanding sales and
          (2) the
          ability to continue to draw down under the Fusion Capital transaction which
          is
          contingent on our stock price being above $2.00. Until such time as we
          can rely
          on sufficient revenues generated from operations, we will continue to seek
          additional sources of financing through private offerings of our
          securities.  Accordingly,
          if we fail to obtain additional financing or are unable to draw down funds
          under
          the Fusion Capital transaction, we will be required to substantially reduce
          and
          defer payments of operating expenses. We cannot assure you that we will
          be
          successful in obtaining any additional financing.
  25
 **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, inventories,
          valuation of intangible assets and contingencies and litigation. We base
          our
          estimates on historical experience and on various other assumptions that
          are
          believed to be 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 set forth in Note 2 to our financial
          statements as 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.
  **Recently
          Issued Accounting Pronouncements**
  In
          December 2004, the Financial Accounting Standards Board issued Statement
          of
          Financial Accounting Standards (“SFAS”) No. 123R “Share Based Payment.” This
          statement is a revision of SFAS No. 123, “Accounting for Stock-Based
          Compensation” and supersedes APB Opinion No. 25, Accounting for Stock Issued to
          Employees, and its related implementation guidance. SFAS No. 123R addresses
          all
          forms of share based payment (“SBP”) awards including shares issued under
          employee stock purchase plans, stock options, restricted stock and stock
          appreciation rights. Under SFAS No. 123R, SBP awards result in a cost that
          will
          be measured at fair value on the awards’ grant date, based on the estimated
          number of awards that are expected to vest. This statement is effective
          for
          public entities that file as small business issuers, as of the beginning
          of the
          first interim or annual reporting period that begins after December 15,
          2005. We
          adopted this pronouncement during the first quarter of 2005.
  In
          December 2004, the FASB issued SFAS No. 153, ** Exchanges
          of Nonmonetary Assets - An Amendment of APB Opinion No. 29. The amendments
          made
          by SFAS No. 153 are based on the principle that exchanges of nonmonetary
          assets
          should be measured based on the fair value of the assets exchanged. Further,
          the
          amendments eliminate the narrow exception for nonmonetary exchanges of
          similar
          productive assets and replace it with a broader exception for exchanges
          of
          nonmonetary assets that do not have “commercial substance.” SFAS No. 153 is
          effective for nonmonetary asset exchanges occurring in fiscal periods beginning
          after June 15, 2005. The adoption of SFAS No. 153 on its effective date
          did not
          have a material effect on the Company’s consolidated financial
          statements.
 
 In
          March
          2005, the FASB issued Financial Interpretation No. 47, “Accounting for
          Conditional Asset Retirement Obligations - an Interpretation of FASB Statement
          No. 143,” which specifies the accounting treatment for obligations associated
          with the sale or disposal of an asset when there are legal requirements
          attendant to such a disposition. The Company adopted this pronouncement
          in 2005,
          as required, but there was no impact as there are no legal obligations
          associated with the future sale or disposal of any assets.
 
 In
          May
          2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
          Corrections — A Replacement of APB Opinion No. 20 and SFAS Statement
          No. 3”. SFAS No. 154 changes the requirements for the accounting and
          reporting of a change in accounting principle by requiring retrospective
          application to prior periods’ financial statements of the change in accounting
          principle, unless it is impracticable to do so. SFAS No. 154 is effective
          for accounting changes and corrections of errors made in fiscal years beginning
          after December 15, 2005. We do not expect the adoption of SFAS No. 154
          to have any impact on our consolidated financial statements.
  **ITEM
          7.**  **FINANCIAL
          STATEMENTS**
  Our
          Consolidated financial statements and notes thereto appear beginning on
          page F-1
          of this report and are incorporated herein by reference.
  26
  **ITEM
          8.**  **CHANGES
          IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
          DISCLOSURE**
  We
          have
          had no disagreements on any matter of accounting principles or practices,
          financial statement disclosure, or auditing scope or procedures with any
          of our
          accountants for the years ended December 31, 2005 and 2004.
  On
          February 8, 2005, we filed with the SEC a Current Report on Form 8-K reporting
          the resignation on February 2, 2005 of Cordovano and Honeck, P.C., as our
          independent auditor, and the approval by our board of directors on February
          2,
          2005 of Imowitz Koenig & Co., LLP as our new independent registered public
          accounting firm. In connection with the audits of our financial statements
          for
          each of the two fiscal years ended June 30, 2004 and 2003, and through
          February
          2, 2005, there were no disagreements with Cordovano and Honeck, P.C. on
          any
          matter of accounting principles or practices, financial statement disclosure,
          or
          auditing scope or procedure, which, if not resolved to the satisfaction
          of
          Cordovano and Honeck, P.C., would have caused Cordovano and Honeck, P.C.
          to make
          reference to the matter in its reports.
  Because
          Old Xethanol was deemed to be the accounting acquirer in the reverse merger,
          we
          have adopted the fiscal year end of December 31 of Old Xethanol, instead
          of our
          previous fiscal year end of June 30. On April 20, 2005, we filed a Current
          Report on Form 8-K/A containing financial statements for the year ended
          December
          31, 2004 to cover the transition period.
  We
          have
          not had any other changes in nor have we had any disagreements, whether
          or not
          resolved, with our accountants on accounting and financial disclosures
          during
          our two recent fiscal years or any later interim period.
  **ITEM
          8A.**  **CONTROLS
          AND PROCEDURES**
  Disclosure
          controls and procedures are our controls and other procedures that are
          designed
          to ensure that information required to be disclosed by us in the reports
          that we
          file or submit under the Exchange Act, is recorded, processed, summarized
          and
          reported, within the time periods specified in the SEC's rules and forms.
          Disclosure controls and procedures include, without limitation, controls
          and
          procedures designed to ensure that information required to be disclosed
          by us in
          the reports that we file under the Exchange Act is accumulated and communicated
          to our management, including principal executive officer and principal
          financial
          officer, as appropriate, to allow timely decisions regarding required
          disclosure.
  Our
          Chief
          Executive Officer and Chief Financial Officer have evaluated the effectiveness
          of the design and operation of our disclosure controls and procedures as
          of the
          end of the period covered by this report. The evaluation process, including
          the
          inherent limitations on the effectiveness of such controls and procedures,
          is
          more fully discussed below. Based upon our evaluation of the effectiveness
          of
          the design and operation of our disclosure controls and procedures, our
          Chief
          Executive Officer and Chief Financial Officer have concluded that as of
          the end
          of the period covered by this report, notwithstanding the prior existence
          of
          certain material weaknesses, our disclosure controls and procedures were
          effective.
  In
          connection with the audit of Old Xethanol’s December 31, 2004 financial
          statements, our independent registered public accounting firm notified
          our
          senior management and the board of directors that they had identified
          significant deficiencies that they considered material weaknesses in our
          internal controls. In the professional auditing literature, “significant
          deficiencies” are referred to as “reportable conditions”. These are control
          issues that could have significant adverse effects on the ability to record,
          process, summarize and report financial data in the financial statements.
          A
“material weakness” is defined in the auditing literature as a particularly
          serious reportable condition where the internal control does not reduce,
          to a
          relatively low level, the risk that misstatement caused by error or fraud
          may
          occur in amounts that would be material in relation to the financial statements
          and not be detected within a timely period by employees in the normal course
          of
          performing their assigned functions.
  27
 The
          material weaknesses identified by our independent registered public accounting
          firm related to two specific errors in our financial reporting and the
          lack of
          the necessary internal accounting resources. The first related to Old Xethanol’s
          recording of goodwill upon the acquisition of certain assets from Old Xethanol’s
          founding shareholders in September 2001. SEC Staff Accounting Bulletin
          #48 (SAB
          48) requires that transfers of non-monetary assets from promoters or
          shareholders in exchange for stock prior to or at the time of a company’s
          initial public offering normally should be recorded at the transferor’s
          historical cost basis. Old Xethanol’s previously issued financial statements for
          the year ended December 31, 2003, which were audited by our former independent
          auditors, overstated goodwill and stockholders’ equity by approximately $900,000
          because the assets acquired from Old Xethanol’s founding shareholders were
          recorded at estimated fair value instead of at their historical cost basis
          of
          zero. The second related to recording of the Permeate acquisition. The
          operations of Permeate were erroneously included in Old Xethanol’s results of
          operations for its full fiscal year ended December 31, 2003, rather than
          from
          the date of the acquisition, which was completed in July 2003. This adjustment
          caused a decrease in stockholders equity of approximately $150,000. Such
          financial statements related to periods prior to Old Xethanol’s “reverse merger”
transaction with Zen in February 2005 and, therefore, were not included
          in any
          report filed with the SEC under the Exchange Act. The foregoing adjustments
          were
          reflected in Old Xethanol’s financial statements for the year ended December 31,
          2004, which were included in Amendment No. 1 on Form 8-K/A to our Current
          Report
          on Form 8-K, dated February 2, 2005, filed with the SEC on April 20,
          2005.
  Prior
          to
          Old Xethanol’s “reverse merger” transaction with Zen in February 2005, during
          which time the foregoing errors in financial reporting were made, Old Xethanol
          had no formal audit committee, very limited accounting personnel and outsourced
          significant accounting functions. Reliance on such limited resources impaired
          Old Xethanol’s ability to provide for segregation of duties and the ability to
          ensure consistently complete and accurate financial reporting, as well
          as
          effective disclosure controls and procedures.
  The
          material weaknesses were discussed in detail among management and our current
          independent registered public accounting firm in the first quarter of 2005
          and,
          as a result of such discussions, we promptly implemented a series of steps
          to
          improve our financial reporting and disclosure controls and procedures
          and to
          remedy the material weaknesses identified. Such steps included putting
          in place
          personnel, processes, technology and other resources appropriate to support
          our
          financial reporting and disclosure controls and procedures. In this regard,
          we
          (1) appointed a chief financial officer, with financial accounting and
          Exchange
          Act reporting experience, in April 2005 to oversee all of our accounting
          and
          reporting functions, (2) consolidated all of our plant accounting, reporting
          and
          administrative functions at our Xethanol BioFuels facility under a local
          plant
          controller, (3) implemented a system of formal procedures and controls
          to enable
          the accurate and timely gathering, recording, processing and “up-the-ladder”
reporting of information, including formal monthly reporting requirements
          and
          regular conferences among internal accounting personnel and senior financial
          management, (4) consolidated all public reporting functions at our principal
          executive offices under the supervision of our Chief Financial Officer,
          and (5)
          on July 28, 2005, formed an audit committee of the board of directors composed
          entirely of independent directors. In addition, as we continue to grow,
          and as
          resources permit, we anticipate that our Chief Financial Officer will continue
          to hire such additional competent financial personnel to assist in the
          segregation of duties with respect to financial reporting and compliance
          with
          Section 404 of the Sarbanes-Oxley Act of 2002.
  Because
          all of the foregoing steps were implemented by our company prior to the
          end of
          the period covered by this report, our Chief Executive Officer and Chief
          Financial Officer were able to carefully evaluate the effectiveness of
          these new
          measures, together with our other disclosure controls and procedures, at
          the end
          of the period covered by this report. On the basis of such evaluation,
          our Chief
          Executive Officer and Chief Financial Officer reached the conclusion set
          forth
          above that, as of the end of the period covered by this report, notwithstanding
          the prior existence of certain material weaknesses; our disclosure controls
          and
          procedures were effective. However, because of the inherent limitation
          in all
          control systems, no evaluation of controls can provide absolute assurance
          that
          all control issues and instances of fraud, if any, will be or have been
          detected.
  The
          foregoing sets forth all of the significant changes that have occurred
          in our
          internal controls over financial reporting during the fiscal year ending
          December 31, 2005 that has materially affected, or is reasonably likely
          to
          materially affect, our internal controls over financial reporting. Except
          as
          described above, there were no significant changes in our internal controls
          over
          financial reporting that occurred during the year ended December 31, 2005
          that
          have materially affected, or are reasonably likely to materially affect,
          our
          internal controls over financial reporting.
  28
 
 **Limitations
          on the Effectiveness of Controls**
  We
          believe that a control system, no matter how well designed and operated,
          cannot
          provide absolute assurance that the objectives of the control system are
          met,
          and no evaluation of controls can provide absolute assurance that all control
          issues and instances of fraud, if any, within a company have been detected.
          Our
          disclosure controls and procedures are designed to provide a reasonable
          assurance of achieving their objectives and our Chief Executive Officer
          and
          Chief Financial Officer have concluded that such controls and procedures
          are
          effective at the “reasonable assurance” level.
  **ITEM
          8B.**  **OTHER
          INFORMATION**
  None.
  **PART
          III**
  **ITEM
                  9.**
                **DIRECTORS,
                    EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
                    WITH SECTION
                    16(A) OF THE EXCHANGE ACT**
  The
          following table sets forth information regarding the members of our board
          of
          directors and our executive officers.
  **Name**
                
                **Age**
                
                **Position**Christopher
                    d’Arnaud-Taylor
                
                60
                
                Chairman,
                    President and Chief Executive OfficerLawrence
                    S. Bellone
                
                49
                
                Chief
                    Financial OfficerRobin
                    Buller
                
                49
                
                Vice
                    President OperationsFranz
                    A. Skryanz
                
                68
                
                Vice
                    President, Secretary, Treasurer and DirectorJeffrey
                    S. Langberg
                
                56
                
                DirectorLouis
                    B. Bernstein
                
                55
                
                DirectorRichard
                    D. Ditoro
                
                67
                
                DirectorRichard
                    L. Ritchie
                
                59
                
                DirectorMarc
                    S. Goodman
                
                56
                
                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:
  **Christopher
          d’Arnaud-Taylor, Chairman, President and Chief Executive Officer,** has
          worked with Old Xethanol since August 2000. He became our Chairman, President
          and Chief Executive Officer on February 2, 2005. He is an international
          merchant
          banker and entrepreneur who gained global senior corporate executive experience
          with multinationals including Unilever, Reed Elsevier, Northrop Grumman
          and TKM
          Trading. He has directed the strategy, operations and financial affairs
          of
          companies in the United States, Europe, Africa, the Middle East and Asia
          and
          managed the development and execution of corporate turnarounds and
          entrepreneurial ventures worldwide. 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. London Manhattan has worked with
          entrepreneurs and established companies in forging new enterprises and
          realizing
          the potential of established businesses through mergers and acquisitions,
          joint
          ventures and strategic alliances. London Manhattan has participated as
          managing
          co-venturer in special situations where its direct involvement led to improving
          the operating results and strategic focus of an underperforming company
          or new
          business venture. Mr. d’Arnaud-Taylor also presently serves as a director of
          Metamorphix Global Inc, a developer of advanced precast concrete technology
          that
          emulates the patterns of natural stone, and Xeminex, Inc., an early-stage
          producer of lead and zinc concentrates. Previously, Mr. d’Arnaud-Taylor served
          as CEO of several global trading companies operating primarily throughout
          the
          developing world trading in forest products, precision equipment and building
          materials. He has consulted extensively with leading defense contractors
          in the
          USA and Europe on countertrade and defense offset performance. Mr.
          d’Arnaud-Taylor obtained his M.B.A. from the London Business School having
          completed additional graduate business studies as an exchange scholar in
          international finance and development economics at the Ecole des Hautes
          Etudes
          Commerciales in Paris, France and corporate finance at New York University’s
          Stern School of Business. He previously studied economics, government and
          law at
          the University of Exeter, England.
  29
 **Lawrence
          S. Bellone, Chief Financial Officer,** became
          our Chief Financial Officer on April 5, 2005. In March 2005, Mr. Bellone
          began
          providing financial consulting services to us, prior to being named our
          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
          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 innovative financing and investment
          transactions for Fortune 100 companies. He has negotiated and arranged
          more than
          $5 billion in transaction value for companies in the oil and gas, retail,
          chemical, pharmaceutical, consumer and paper industries. Prior to 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. Mr. Bellone holds
          a B.A.
          degree from Columbia University and an M.B.A. in accounting and finance
          from
          Fordham University. He also holds Series 7 and 63 designations from the
          NASD.
  **Robin
          Buller, Vice President Operations,** became
          our Vice President Operations on March 14, 2005. He has extensive experience
          in
          plant and machinery sales worldwide and brings an extensive international
          background to our business. From August 2003 to February 2005, Mr. Buller
          was
          CEO of New York-based Cromer Corporation, where he advised companies and
          institutions on a broad range of issues, from outsourcing and setting up
          factories in China, to understanding how to do business with China. He
          created a
          China contacts program to direct and assist U.S. companies in developing
          the
          right relationships and commercial channels. From November 1998 to July
          2003, he
          represented MAN Ferrostaal, Inc., Germany in the United States as International
          Sales Manager and handled sales of U.S.-made machinery and equipment into
          the
          Commonwealth of Independent States and Asia. Prior to that he held a number
          of
          positions with companies that included MAN Ferrostaal Inc., as well as
          positions
          with a number of other companies, including those that required several
          years'
          residency in the Far East. Mr. Buller is a Co-founder of the Prince of
          Wales
          Business Leaders Forum 2000 pilot program in Shanghai, which brought together
          Chinese CEOs and their foreign counterparts who engaged in extensive dialogue
          to
          learn from each other how to develop business using the best aspects from
          both
          cultures. He is a member of the Growing Business Roundtable, British American
          Business Inc., which engaged in business development advice for companies
          planning to export to the United States, he has been a guest speaker on
          International Business at Baruch College in New York, and he sat on the
          China
          Committee of the British Chamber of Commerce in Hong Kong, which lobbied
          both
          Beijing and London on behalf of Hong Kong and British companies. Mr. Buller
          holds a B.A. from the University of East Anglia in the United Kingdom and
          a
          Masters Diploma from The Institute of Export also in the United Kingdom.
  **Franz
          A. Skryanz, Vice President, Secretary, Treasurer and Director,** had
          worked with Old Xethanol since August 2000. He became our Vice President,
          Secretary, Treasurer and a director on February 2, 2005. He has also worked
          for
          more than the past five years with London Manhattan Securities, Inc. assisting
          Mr. d’Arnaud-Taylor in the development of international projects and managing
          accounting and administration of that company. He is a financial executive
          with
          extensive experience in international business gained in senior management
          positions with diverse business organizations. Presently, Mr. Skryanz provides
          financial management, corporate secretary and treasury services to early-stage
          entrepreneurial companies. Concurrent with his association with our company,
          Mr.
          Skryanz provides similar professional services to Metamorphix Global Inc.
          and
          Xeminex. Prior to joining Old Xethanol, he served as Treasurer and Secretary
          of
          NETdigest.com, Inc., Chief Financial Officer of Cam Designs, Inc. and Chief
          Financial Officer and Treasurer of Nyros Telecom Services, Inc., a
          privately-held company with telecom ventures in Russia. Mr. Skryanz holds
          an
          M.B.A. from the University of Vienna, Austria and was an exchange scholar
          at
          Cambridge University, England and the University of Valencia, Spain. He
          currently serves as a director of Metamorphix Global, Inc. and
          Xeminex.
  30
 **Jeffrey
          S. Langberg** , **Director,** became
          a
          member of our board of directors on February 28, 2005. Prior to that, since
          January 1999, Mr. Langberg had been a financial and business development
          advisor
          to the Chairman of Old Xethanol. For more than the past five years, Mr.
          Langberg
          has been an independent investment banker and business development advisor
          to
          public and privately-held companies involved in a broad range of industries.
          Mr.
          Langberg currently serves as an investment banker and business development
          advisor to Metamorphix Global Inc., a developer of advanced precast concrete
          technology that emulates the patterns of natural stone; United Energy Corp.,
          a
          manufacturer of specialty chemicals for the oil services industry; Deep
          Marine
          Technology, Inc., a designer of high technology single operator submarines
          for
          deep sea work; and Hybed Fuel Systems, Inc., a marketer of energy savings
          technology in the alternative fuels industry. Mr. Langberg graduated from
          the
          University of Pennsylvania’s Wharton School of Finance and received a law degree
          from Fordham University Law School.
  **Louis
          B. Bernstein** , **Director,** became
          a
          member of our board of directors on June 2, 2005. Mr. Bernstein is currently
          Assistant General Counsel of Pfizer Inc., where he has been an attorney
          for 29
          years. In this capacity, Mr. Bernstein has managed product liability claims
          and
          litigation involving prescription pharmaceuticals, orthopedic implants
          and other
          medical devices. Mr. Bernstein also 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.
          In addition, Mr. Bernstein has related experience in advertising and labeling
          review, legislative analysis and consultation regarding new products and
          investments, food and drug regulatory matters and commercial
          transactions.
  **Richard
          D. Ditoro** , **Director,** became
          a
          member of our board of directors on June 2, 2005. 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. Prior to joining Merestone
          Development, Mr .
          Ditoro
          held numerous senior management positions, including Vice President of
          Corporate
          Development with Lonza Group, an international chemical conglomerate based
          in
          Basle, Switzerland. Mr. Ditoro holds a B.S. degree from Georgetown University
          and an M.B.A. from the University of Chicago.
  **Richard
          L. Ritchie** , **Director,** became
          a
          member of our board of directors on July 28, 2005. Mr. Ritchie has been an
          independent investor since February 2000. He previously served as the Executive
          Vice President and Chief Financial Officer of Big Flower Holdings, Inc.,
          an
          advertising and marketing and information products and services company
          that was
          listed on the New York Stock Exchange until February 2000, when it was
          acquired.
          Mr. Ritchie, who is a certified public accountant, has more than 25 years
          of
          experience in finance and accounting with several major corporations and
          an
          accounting firm. Mr. Ritchie received B.A. and M.B.A. degrees from Michigan
          State University and completed the post-graduate Program for Management
          Development at the Harvard Business School.
  **Marc
          S. Goodman** , **Director,** became
          a
          member of our board of directors on August 10, 2005. Mr. Goodman co-founded
          the
          Kenmar group of companies in 1983. Kenmar is a fund of funds manager
          specializing in alternative investments. Mr. Goodman previously worked
          for
          Pasternak, Baum and Co., Inc, an international cash commodity firm, from
          1973
          through 1983, including serving as a Vice President and Director from 1981
          through 1983. While at Pasternak, Baum, Mr. Goodman was largely responsible
          for
          business development outside of the United States, for investment of its
          corporate retirement funds, and for selection of trading personnel in the
          Vegetable Oil Division. Mr. Goodman also created and developed Pasternak,
          Baum’s
          Lauric Oils Department. Mr. Goodman has conducted extensive business in
          South
          America, Europe, and the Far East; he has been a merchandiser of all major
          vegetable oils and their by-products, and of various other commodities
          such as
          sunflower seeds, frozen poultry, pulses, and potatoes. While at Pasternak,
          Baum,
          he was a member of the National Institute of Oilseeds Products and the
          American
          Fats and Oils Association (including its Export Rules Committee). Mr. Goodman
          graduated from the Bernard M. Baruch School of Business of the City University
          of New York with a B.B.A. in 1969 and an M.B.A. in 1971. He was awarded
          an
          Economics and Finance Department Fellowship from September 1969 through
          June
          1971.
  All
          directors hold office until the next annual meeting of stockholders and
          the
          election and qualification of their successors. Four of our seven directors
          are
          considered “independent” under the SEC’s independence standards. Officers are
          elected annually by the board of directors and serve at the discretion
          of the
          board.
  31
 There
          are
          no family relationships among our directors and executive officers. No
          director
          or executive officer has been a director or executive officer of any business
          which has filed a bankruptcy petition or had a bankruptcy petition filed
          against
          it.  No director or executive officer has been convicted of a criminal
          offense within the past five years or is the subject of a pending criminal
          proceeding.  No director or executive officer has been the subject of any
          order, judgment or decree of any court permanently or temporarily enjoining,
          barring, suspending or otherwise limiting his involvement in any type of
          business, securities or banking activities. No director or officer has
          been
          found by a court to have violated a federal or state securities or commodities
          law.
  **Key
          Employees**
  **James
          Stewart, Vice President - Plant Operations and General Manager - Xethanol
          BioFuels** (subsidiary of Xethanol BioEnergy, Inc.). Mr. Stewart has more than 23
          years of
          experience in ethanol production in the United States and throughout the
          world.
          In addition to extensive consulting experience, Mr. Stewart has been associated
          with the ethanol plant in Blairstown, Iowa since its inception and throughout
          its operations, including serving as general manager of the plant during
          its
          operation from 2000 through 2002. Mr. Stewart has extensive experience
          in all
          aspects of plant operation including regulatory affairs, staffing, engineering,
          feedstocks and emergency planning. Prior to his work at the Xethanol BioFuels
          plant, Mr. Stewart worked as a plant manager and in technical advisory
          roles at
          more than ten other ethanol production plants.
  **David
          Kreitzer** **,
          Vice President - Business Development.** Mr.
          Kreitzer became our Vice President - Business Development on April 6, 2005.
          He
          was formerly President and Chief Operating Officer of Gopher State Ethanol
          LLC,
          a company he joined in 2000. He has worked in every area of ethanol production
          having started as an operator and he worked his way up via maintenance
          and
          production to the post of Plant Manager. He was appointed Chief Operating
          Officer of Gopher State Ethanol in 2004. Apart from his management experience,
          Mr. Kreitzer brings to our company considerable expertise in the
          waste-to-ethanol sector, having introduced the use of industrial food waste
          as
          feedstock for ethanol production at Gopher State Ethanol. Mr. Kreitzer
          focuses
          on the waste-to-ethanol business at our company and applies his knowledge
          to
          developing new feedstock supply lines as well as devising new and improved
          ways
          to break down these materials into fermentable sugars.
  **Advisory
          Board**
  We
          have
          established an advisory board comprised of four members with experience
          in the
          ethanol production business or general corporate matters. Our advisory
          board
          meets periodically with our board of directors and management to discuss
          matters
          relating to our business activities. Members of our advisory board will
          be
          reimbursed by us for out-of-pocket expenses incurred in serving on our
          advisory
          board.
  Some
          of
          the members of our advisory board may serve as consultants to us under
          consulting agreements for which they will receive compensation. To our
          knowledge, none 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 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.
  32
 **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 agreement with the Company to assist us in the development of
          our
          technology portfolio and overall technology strategy.
  **Jed
          Schutz** has been
          a private investor and advisor to emerging technology companies, as well
          as a
          real estate developer, since 1985. His company, Windemere Development,
          has
          developed over 700 residential properties in the past eight years. He is
          the
          Chairman of the Board of Campusfood.com, Inc., a leading company in the
          online
          food ordering business. He also currently serves as a director of Advanced
          BioPhotonics Inc., a publicly-held advanced medical imaging technology
          company.
          He served as a director from 1993 to 1999, and for one year as Chairman
          of the
          Board, of FRM Nexus, a publicly-held company engaged primarily in medical
          financing. Mr. Schutz received a B.S. degree in biology from Duke University
          and
          a post-graduate Certificate in Business from New York University.
  **Donald
          Wilkes** is the
          President and Chief Executive Officer of Blue Pacific Flavors, Inc. and
          has more
          than 30 years experience in the food and beverage industry including creative
          work in innovative food flavor development in the Americas, Asia and Europe.
          In
          1992, Mr. Wilkes started Wilkes & Associates, Inc., a successful food
          technology/consulting firm that focuses on large Asian food and beverage
          manufacturers. He continues to consult to the food and beverage industry
          in
          Asia. His unique experience and relationships provided the basis for Blue
          Pacific’s expansion into the lucrative Asia Pacific markets. Founded in 1993,
          Blue Pacific Flavors has direct sales offices in China, Malaysia and Korea.
          Blue
          Pacific is a leading innovative flavor manufacturer known for designing
          imaginative beverage concepts that combine unique functional ingredients
          with
          proprietary engineered flavor systems. Mr. Wilkes is a professional member
          of
          the Institute of Food Technologists, American Association of Cereal Chemists
          and
          Chemists Club in New York. He sits on the Industry Advisory Board for Food
          and
          Science Nutrition at Chapman University and is a member of the Industry
          Advisory
          Board for New Hope Media Publication’s Nutraceutical and Functional Food
          magazine. He has served in the past as Chairman of the West Coast for National
          Association of Fruits, Flavors and Syrups, Functional Beverage and Wellness
          Summit 2001, 2002 and 2003, co-chaired Asia Business Forum’s International
          Conference on Coffee, Tea and Natural Colors, and co-chaired the Nutracon
          Functional Beverage Conference in Anaheim, California in 2003. Mr. Wilkes
          is a
          featured columnist in the quarterly food service culinary magazine “Flavor and
          the Menu,” in which he writes on food service and retail beverages trends and
          innovation. He co-authored a chapter on Functional Beverages with six other
          researchers called “Nutriceuticals and Functional Foods.”
  **Board
          Committees**
  **Audit
          Committee.** In
          July
          2005, we established an audit committee of the board of directors, which
          consists of Richard L. Ritchie, who serves as chairman of the committee,
          and
          Richard D. Ditoro, each of whom is an independent director. The board of
          directors has determined that Mr. Ritchie is a financial expert. The audit
          committee’s duties, which are specified in our Audit Committee Charter, include,
          but are not limited to:
  ·
                reviewing
                    and discussing with management and the independent accountants
                    our annual
                    and quarterly financial statements,
  ·
                directly
                    appointing, compensating, retaining, and overseeing the work
                    of the
                    independent auditor,
  33
 ·
                approving,
                    in advance, the provision by the independent auditor of all audit
                    and
                    permissible non-audit services,
  ·
                establishing
                    procedures for the receipt, retention, and treatment of complaints
                    received by us regarding accounting, internal accounting controls,
                    or
                    auditing matters and the confidential, anonymous submissions
                    by our
                    employees of concerns regarding questionable accounting or auditing
                    matters,
  ·
                the
                    right to engage and obtain assistance from outside legal and
                    other
                    advisors as the audit committee deems necessary to carry out
                    its
                    duties,
  ·
                the
                    right to receive appropriate funding from us to compensate the
                    independent
                    auditor and any outside advisors engaged by the committee and
                    to pay the
                    ordinary administrative expenses of the audit committee that
                    are necessary
                    or appropriate to carrying out its duties,
                    and
  ·
                unless
                    assigned to a comparable committee or group of independent directors,
                    they
                    must review and approve all related party
                    transactions.
  **Compensation
          Committee.** In
          July
          2005, we established a compensation committee of the board of directors,
          which
          consists of Marc S. Goodman, who serves as chairman of the committee, and
          Richard D. Ditoro, each of whom is an independent director. The compensation
          committee reviews and approves our salary and benefits policies, including
          compensation of executive officers. The compensation committee also administers
          our incentive compensation plan, and recommends and approves grants of
          stock
          options and restricted stock grants under that plan.
  **Nominations
          and Governance Committee.** In
          July
          2005, we established a nominations and governance committee of the board
          of
          directors, which consists of Louis B. Bernstein, who is an independent
          director
          and serves as chairman of the committee, and Franz Skryanz, who is a director
          and our Vice President, Secretary and Treasurer. The purpose of the nominations
          and governance committee is to select, or recommend for our entire board’s
          selection, the individuals to stand for election as directors at the annual
          meeting of stockholders and to oversee the selection and composition of
          committees of our board. The nominations and governance committee’s duties,
          which are specified in our Nominating/Corporate Governance Committee Charter,
          include, but are not limited to:
  ·
                    establishing criteria for the selection
                      of new
                      directors,
 
 ·
                    considering stockholder proposals of director
                      nominations,
 
 ·
                    committee selection and
                      composition,
 
 ·
                    considering the adequacy of our corporate
                      governance,
 
 ·
                    overseeing and approving management continuity
                      planning
                      process, and
 
 ·
                    reporting regularly to the board with respect
                      to the
                      committee’s duties.
 **Code
            of Ethics**
  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 http://www.xethanol.com .
          We will
          provide a copy of this code to any person, without charge, upon request,
          by
          writing to Xethanol, Inc., Attention: Chief Financial Officer, 1185 Avenue
          of
          the Americas, New York, New York 10036. 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 our code
          of ethics
          by posting such information on our website at the address specified
          above.
  34
 **Section
          16(a) Beneficial Ownership Reporting Compliance**
  Section
          16(a) of the Exchange Act requires our officers, directors and persons
          who
          beneficially own more than 10% of a registered class of our equity securities
          to
          file reports of securities ownership and changes in such ownership with
          the SEC.
          Officers, directors and greater than 10% beneficial owners are also required
          by
          rules promulgated by the SEC to furnish us with copies of all Section 16(a)
          forms they file.
  Based
          solely on a review of Forms 3 and 4 and amendments thereto furnished to
          us
          during the year ended December 31, 2005, and Forms 5 and amendments thereto
          furnished to us for the year ended December 31, 2005 and certain written
          representations, no persons who were either a director, officer, or beneficial
          owner 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, 2005, with the exception that (i) Lawrence Bellone filed a
          late
          report on Form 3 on October 31, 2005 and (ii) Robin Buller filed a late
          report
          on Form 3 on March 31, 2006.
  Copies
          of
          the insider trading reports can be found at our corporate website at http://www.xethanol.com ,
          on our
          Home page, under either “SEC Filings” or “Yahoo Finance”.
  **ITEM
          10.**  **EXECUTIVE
          COMPENSATION**
  The
          following Summary Compensation Table sets forth, for the years indicated,
          all
          cash compensation paid, distributed or accrued for services, including
          salary
          and bonus amounts, rendered in all capacities by our chief executive officer
          and
          all other executive officers who received or are entitled to receive
          remuneration in excess of $100,000 during the stated periods.
  **Summary
          Compensation Table**
  **Annual
                    Compensation**
                
                
                
                
                
                **Long-Term
                    Compensation****Name
                    and****Position**
                
                
                **Year**
                
                
                **Salary**
                
                
                **Bonus**
                
                
                **Other**
                  **Annual**
                  **Compensation**
                
                
                **(1)**
                
                
                **Restricted**
                  **Stock**
                  **Awards**
                
                
                **Number
                    of**
                  **Common**
                  **Shares**
                  **Underlying**
                  **Options**
                
                
                **All
                    Other Compensation**Christopher
                    d’Arnaud-Taylor
                
                
                2005
                
                
                180,000
                
                
                —
                
                
                
                
                
                
                
                
                —
                
                
                —
                
                
                —President
                  and CEO
                
                
                2004
                
                
                —
                
                
                —
                
                
                244,000
                
                
                (2)
                
                
                —
                
                
                —
                
                
                —2003
                
                
                —
                
                
                —
                
                
                190,300
                
                
                (2)
                
                
                —
                
                
                —
                
                
                —LawrenceBellone
                
                
                2005
                
                
                135,000
                
                
                —
                
                
                
                
                
                (3)
                
                
                812,500
                
                
                100,000
                
                
                —CFO
                
                
                2004
                
                
                —
                
                
                —
                
                
                —
                
                
                
                
                
                —
                
                
                —
                
                
                —Robin
                    Buller
                
                
                2005
                
                
                62,730
                
                
                —
                
                
                —
                
                
                (4)
                
                
                146,250
                
                
                —
                
                
                —VP,
                    Operations
                
                
                2004
                
                
                —
                
                
                —
                
                
                —
                
                
                
                
                
                —
                
                
                —
                
                
                —
 ________________________
  (1)
                Other
                    Annual Compensation does not include the cost to us or Old Xethanol
                    for
                    health and welfare benefits received by the above named officers.
                    The
                    aggregate amounts of such personal benefits did not exceed the
                    lesser of
                    $50,000 or 10% of the total annual compensation of such
                    officer.
  (2)
                The
                    compensation in the Other Annual Compensation column consists
                    of
                    consulting fees paid by Old Xethanol to London Manhattan Limited,
                    Inc., an
                    entity controlled by Mr. d’Arnaud-Taylor. See “Certain Relationships and
                    Related Transactions - Management and Consulting Services
                    Agreements.”
  (3)
                Mr.
                    Bellone joined our company in March
                    2005.
  (4)
                Mr.
                    Buller joined our company in March
                    2005.
  35
 **Options/SAR
          Grants and Fiscal Year End Option Exercises and Values**
  Prior
          to
          our 2005 Incentive Compensation Plan, we have not had a stock option plan
          or
          other similar incentive compensation plan for officers, directors and employees,
          and no stock options, restricted stock or SAR grants were granted or were
          outstanding at any time. The effective date of the 2005 Plan is February
          2,
          2005. As
          of the
          December 31, 2005, 317,070 shares of our common stock and stock options
          to
          purchase 480,000 shares of our common stock were granted under the 2005
          Plan.
  **Individual
          Option Grants in 2005**
  **Name**
                
                **Common****Shares****Underlying****Options****Granted**
                
                **Percent
                    of****Total****Option****Granted****To****Employees**
                
                **Exercise****Price**
                
                **Expiration****Date**Lawrence
                    Bellone, CFO
                
                100,000
                
                67%
                
                $3.75
                
                4/08
 
 **Aggregated
          Option Exercises in 2005 and Year-end Option Values**
  **Name**
                
                **Number
                    of****Common****Shares****Acquired****On
                    Exercise**
                
                **Value****Realized
                    ($)**
                
                **Number
                    of****Securities****Underlying****Unexercised****Options;****Exercisable/****Unexercisable**
                
                **Value
                    of****Unexercised****In-The-Money****Options;****Unexercisable/****Exercisable**Lawrence
                    Bellone,CFO
                
                —
                
                —
                
                100,000
                    / 0
                
                $39,000
                    (1)
 
 (1)
                Based
                    on the closing price of $4.14 per share of our common stock as
                    quoted on
                    the OTC Bulletin Board on December 30,
                    2005.
  **Compensation
          of Directors**
  Each
          current independent member of our board of directors has received stock
          options
          to purchase 50,000 shares of our common stock, plus the chairman of the
          audit
          committee received an additional 50,000 options and the chairmen of the
          compensation and governance committees received 25,000 additional options.
          One
          director not chairing any committee but serving on 2 committees received
          an
          additional 30,000 shares. All stock options are exercisable at $4.00 and
          are
          exercisable 50% at date of grant and 50% at the end of the first anniversary
          of
          service. Total options awarded to our independent directors were 330,000.
  Jeffrey
          S. Langberg, a director of the Company since February 2005, provides business
          advisory services to the Company under a consulting agreement entered into
          in
          February 2005. See “Certain Relationships and Related Transactions - Management
          and Consulting Services Agreements.” During 2005, we recorded consulting fees to
          Mr. Langberg of $455,000 and provided health insurance coverage to Mr.
          Langberg
          at a cost of $14,014 to the Company.
  **Employment
          Agreements**
  In
          January 2005, Christopher d’Arnaud-Taylor, our Chairman, President and Chief
          Executive Officer, entered into an employment agreement with us to continue
          serving as our Chairman, President and Chief Executive Officer for a term
          of
          three years. Franz A. Skryanz, our Vice President, Treasurer and Secretary,
          also
          entered into an employment agreement with us for a term of one year, commencing
          on January 1, 2005. Under these employment agreements, each of Messrs.
          d’Arnaud-Taylor and Skryanz will devote substantially all of his business
          time
          and efforts to our business.
  36
 The
          employment agreements of Messrs. d’Arnaud-Taylor and Skryanz provide that they
          will initially receive a fixed base salary at an annual rate of $180,000
          and
          $60,000, respectively. Effective March 1, 2006, Mr. Taylor’s base salary was
          increased to an annual rate of $216,000. The Company is in the process
          of
          preparing a more comprehensive agreement for Mr. d’Arnaud-Taylor which will
          supercede his current agreement.
  **Incentive
          Compensation Plan**
  On
          February 2, 2005, following the completion of the reverse merger, our board
          of
          directors adopted and approved a new 2005 Incentive Compensation Plan,
          which was
          submitted to and approved by our stockholders. The effective date of the
          2005
          Plan is February 2, 2005.
  The
          purpose of the 2005 Plan is to provide a means for our company and its
          subsidiaries and other designated affiliates, which we refer to as Related
          Entities, to attract key personnel to provide services to our company and
          the
          Related Entities, as well as to provide a means whereby those key persons
          can
          acquire and maintain stock ownership, thereby strengthening their commitment
          to
          the welfare of our company and its Related Entities and promoting the mutuality
          of interests between participants and our stockholders. A further purpose
          of the
          2005 Plan is to provide participants with additional incentive and reward
          opportunities designed to enhance the profitable growth of our company
          and its
          Related Entities, and provide participants with annual and long term performance
          incentives to expend their maximum efforts in the creation of stockholder
          value.
          The persons eligible to receive awards under the 2005 Plan are the officers,
          directors, employees and independent contractors of our company and our
          Related
          Entities.
  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. Under
          the
          2005 Plan, the total number of shares of our common stock that may be subject
          to
          the granting of awards under the 2005 Plan is 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.
  A
          committee of our board of directors, which we refer to as the Committee,
          is to
          administer the Plan. All Committee members must be “non-employee directors” as
          defined by Rule 16b-3 of the Exchange Act, “outside directors” for purposes of
          Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”),
          and independent as defined by NASDAQ or any other national securities exchange
          on which any securities of our company may be listed for trading in the
          future.
          The right of a participant to exercise or receive a grant or settlement
          of an
          award, and the timing thereof, may be subject to such performance conditions
          (including subjective individual goals) as may be specified by the Committee.
          In
          addition, the 2005 Plan authorizes specific performance awards, which represent
          a conditional right to receive cash, shares of our company common stock
          or other
          awards upon achievement of certain preestablished performance goals and
          subjective individual goals during a specified fiscal year. Subject to
          the
          requirements of the 2005 Plan, the Committee will determine performance
          award
          terms, including the required levels of performance with respect to specified
          business criteria, the corresponding amounts payable upon achievement of
          such
          levels of performance, termination and forfeiture provisions and the form
          of
          settlement.
  Our
          board
          of directors may amend, alter, suspend, discontinue or terminate the 2005
          Plan
          or the Committee’s authority to grant awards without further stockholder
          approval, except stockholder approval must be obtained for any amendment
          or
          alteration if such approval is required by law or regulation or under the
          rules
          of any stock exchange or quotation system on which shares of our company
          common
          stock are then listed or quoted. Thus, stockholder approval may not necessarily
          be required for every amendment to the 2005 Plan which might increase the
          cost
          of the 2005 Plan or alter the eligibility of persons to receive awards.
          Unless
          earlier terminated by our board of directors, the 2005 Plan will terminate
          at
          such time as no shares of our common stock remain available for issuance
          under
          the 2005 Plan and we have no further rights or obligations with respect
          to
          outstanding awards under the 2005 Plan.
  37
 **ITEM
          11.**  **SECURITY
          OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**
  The
          following table sets forth information regarding the number of shares of
          our
          common stock beneficially owned as of March 24, 2006:
  ·
                  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 upon 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 set forth below, the address of each of the persons listed below
          is
          c/o Xethanol Corporation, 1185 Avenue of the Americas, 20 th Floor,
          New York, New York 10036.
  **Name
                    and Address of Beneficial Owner**
                
                **Number
                    of Shares**
                  **Beneficially
                    Owned (1)**
                
                **Percentage
                    of Shares****Beneficially
                    Owned (2)**Christopher
                    d’Arnaud-Taylor
                
                
                1,190,022
                (3)
                
                
                7.4
                %Lawrence
                    S. Bellone
                
                
                919,680
                (4)
                
                
                5.5
                %Robin
                    Buller
                
                
                45,000
                
                
                
                *Franz
                    A. Skyranz
                
                
                86,515
                
                
                
                *Jeffrey
                    S. Langberg
                
                
                1,137,595
                (5)
                
                
                7.0
                %Louis
                    B. Bernstein
                
                
                37,500
                (6)
                
                
                *Richard
                    D. Ditoro
                
                
                48,828
                (7)
                
                
                *Richard
                    L. Ritchie
                
                
                50,000
                (8)
                
                
                *Marc
                    S. Goodman
                
                
                37,500
                (9)
                
                
                *Directors
                    and executive officers as a group
                
                
                3,549,640
                (10)
                
                
                21.0
                %Lucas
                    Capital Management
                
                
                1,838,242
                (11)
                
                
                10.3
                %Robert
                    J. and Carol J. Lehman
                
                
                882,810
                (12)
                
                
                5.5
                %W.
                    Scott Smith
                
                
                972,414
                (13)
                
                
                6.0
                %UTEK
                    Corporation
                
                
                1,200,275
                (14)
                
                
                7.4
                %
  *  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 24,
                    2006, 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 16,167,118 shares of common stock outstanding on March 24,
                    2006.
  38
 (3)
                Includes
                    732,450 shares of common stock held by Mr. d’Arnaud-Taylor’s spouse,
                    132,422 shares of common stock held by Xtraction Technologies
                    Limited, an
                    entity controlled 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.
  (4)
                Includes
                    548,780 shares of common stock issuable upon the exercise of
                    currently
                    exercisable warrants and stock
                    options.
  (5)
                Includes
                    33,983 shares of common stock held by Mr. Langberg’s spouse and 1,103,512
                    shares of common stock held by Bresner Partners Ltd., an entity
                    controlled
                    by Mr. Langberg.
  (6)
                Consists
                    of 37,500 shares of common stock issuable upon the exercise of
                    currently
                    exercisable stock options.
  (7)
                Includes
                    40,000 shares of common stock issuable upon the exercise of currently
                    exercisable stock options.
  (8)
                Consists
                    of 50,000 shares of common stock issuable upon the exercise of
                    currently
                    exercisable stock options.
  (9)
                Consists
                    of 37,500 shares of common stock issuable upon the exercise of
                    currently
                    exercisable stock options.
  (10)
                Includes
                    676,280 shares of common stock issuable upon the exercise of
                    currently
                    exercisable warrants and stock
                    options.
  (11)
                Includes
                    1,650,000 shares of common stock issuable upon the conversion
                    of a
                    currently convertible senior secured royalty income note. The
                    address of
                    Lucas Capital Management, LLC is 328 Newman Springs Road, Red
                    Bank, New
                    Jersey 07701.
  (12)
                Mr. and
                    Mrs. Lehman’s address is 1578 Conestoga Trail NE, Swisher, Iowa
                    52338.
  (13)
                Includes
                    52,968 shares of common stock held by Jasmine Consulting, Inc.,
                    an entity
                    controlled by Mr. Smith. Mr. Smith’s address is 3141 Jasmine Drive,
                    Delray Beach, Florida 33483.
  (14)
                The
                    address of UTEK Corporation is 202 South Wheeler Street, Plant
                    City,
                    Florida 33563.
  **ITEM
          12.**  **CERTAIN
          RELATIONSHIPS AND RELATED TRANSACTIONS**
  **Acquisition
          of Permeate Refining**
  On
          September 1, 2001, Old Xethanol acquired the ethanol business of Energy
          Capital
& Technology LLC, including, under a letter of intent, the right to acquire
          Permeate Refining, Inc., an ethanol-producing company in Hopkinton, Iowa.
          Christopher d’Arnaud-Taylor, the Chairman and Chief Executive Officer of Old
          Xethanol, and certain other of our stockholders, in the aggregate, were
          the
          majority members of Energy Capital. In contemplation of the acquisition
          of
          Permeate Refining, in 2001, Old Xethanol issued 1,000,000 shares of its
          common
          stock to the owners of Permeate Refining, which included Robert J. Lehman,
          our
          President - Permeate Refining subsidiary, and his spouse. On July 7, 2003,
          Old
          Xethanol finalized the acquisition of 100% of the outstanding common stock
          of
          Permeate Refining from its stockholders for $750,000 in a cash
          transaction.
  In
          a
          separate transaction, through our wholly-owned subsidiary, Xethanol One,
          LLC, a
          Delaware limited liability company formed on May 28, 2003 for this purpose,
          Old
          Xethanol acquired the real estate and certain production facilities associated
          with Permeate Refining’s operations from Permeate Refining’s former owners,
          Robert J. Lehman and his spouse, 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 for the balance of $1,125,000, which bore interest
          at the
          simple interest rate of 9% per year with monthly payments due on the first
          day
          of each month commencing August 1, 2003 until June 1, 2006, at which time
          the
          entire balance owing on the promissory note was to be paid in full (the
“Note”).
          Consequently, Xethanol One, LLC was responsible for monthly payments of
          $10,530,
          consisting of $8,322 in interest and $2,208 in real estate tax
          installments.
  On
          October 18, 2005 we entered into a memorandum of agreement with Robert
          J. Lehman
          and his spouse and the Master’s Trust, which held the mortgage on the real
          estate associated with Permeate Refining’s operations. Pursuant to the
          agreement, we executed a Mutual General Release dated January 23, 2006.
          Under
          the terms of the Mutual General Release, the $1,125,000 Note was exchanged
          for a
          new note (“New Note”) issued by our company in the amount of $243,395 to the
          Lehman’s and 135,000 shares of our common stock were issued to Master’s Trust in
          exchange for the full release and satisfaction of the mortgage on the Permeate
          Refining real estate. The New Note is payable on August 1, 2006. Interest
          is due
          monthly on the outstanding principal of the Note at a rate equal to .5%
          above
          prime rate. We make a monthly payment equal to $3,128 allocated between
          interest
          and principal based on the current interest rate.
  39
 **Management
          and Consulting Services Agreements**
  In
          September 2001, Old Xethanol entered into a Management Services Agreement
          with
          London Manhattan Limited, Inc., a corporation controlled by Christopher
          d’Arnaud-Taylor, our Chairman and Chief Executive Officer, for the senior
          corporate management services of Mr. d’Arnaud-Taylor as its President. Pursuant
          to this agreement, Old Xethanol agreed to pay London Manhattan Limited,
          Inc. a
          monthly management fee, an incentive bonus based on the closing of project
          transactions and a percentage of our earnings before interest, depreciation
          and
          amortization. In connection with the reverse merger and private offering,
          we and
          London Manhattan Limited, Inc. agreed to terminate the Management Services
          Agreement, with no further liability or obligation on the part of the parties
          (except for certain earned, accrued fees), effective as of the closing
          of such
          transactions. Mr. d’Arnaud-Taylor entered into an employment agreement directly
          with us, as described in “Item 10. Executive Compensation - Employment
          Agreements.”
  In
          January 2003, Old Xethanol entered into a Consulting Services Agreement
          with
          Jeffrey Langberg & Associates, pursuant to which Jeffrey S. Langberg, now
          one of our directors, provided business advisory services. Under this agreement,
          Old Xethanol had agreed to pay Jeffrey Langberg & Associates a monthly
          consulting fee, an incentive bonus based on the closing of project transactions
          and a fee for introductions to investors. In connection with the reverse
          merger
          and private offering, we and Jeffrey Langberg & Associates agreed to
          terminate the Consulting Services Agreement, with no further liability
          or
          obligation on the part of the parties or of us (except for certain earned,
          accrued fees), effective as of the closing of such transactions. Under
          the
          January 2003 agreement, we recorded consulting fees to Mr. Langberg of
          $389,025
          in 2004 and $246,270 in 2003.
  In
          February 2005, we entered into a Consulting Services Agreement with Mr.
          Langberg, pursuant to 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. Mr.
          Langberg is 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 as a
          director
          of our company. During 2005, we recorded total consulting fees to Mr. Langberg
          of $455,000.
  **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 (“XMS”) which is a single member LLC controlled by Mr. Langberg. Under this
          arrangement, we are currently paying approximately $10,400 per month, plus
          reimbursements of other costs, in sublease payments on a month to month
          basis.
          As of December 31, 2005, total payments made were $99,806. No payments
          were
          required in 2004. During 2004, Old Xethanol paid a security deposit of
          $16,336
          and made a one-time payment to XMS of approximately $44,000 for furniture,
          telephone and computer equipment and related software.
  40
 **ITEM
          13.**  **EXHIBITS**
  The
          following exhibits are filed as part of this report. Exhibits previously
          filed
          are incorporated by reference, as noted.
  **Exhibit**
                  **No.**
                
                **Description
                    of Exhibit**2.1
                
                Agreement
                    of Merger and Plan of Reorganization, dated as of February 2,
                    2005, among
                    Zen Pottery Equipment, Inc., Zen Acquisition Corp. and Xethanol
                    Corporation.(1)3.1
                
                Certificate
                    of Incorporation of Xethanol Corporation.(2)3.2
                
                By-Laws
                    of Xethanol Corporation. (3)4.1
                
                Form
                    of Senior Secured Royalty Income Notes issued by Xethanol BioFuels,
                    LLC.(1)4.2
                
                Form
                    of Warrant. (2)4.3
                
                Specimen
                    Common Stock Certificate.10.1
                
                Form
                    of Security Agreement between Xethanol BioFuels, LLC and Lucas
                    Energy
                    Total Return Master Fund, Ltd. and Lucas Energy Total Return
                    Partners,
                    LLC.(1)10.2
                
                Xethanol
                    Corporation 2005 Incentive Compensation Plan.(3)10.3
                
                Employment
                    Agreement, dated as of February 2, 2005, between Christopher
                    d’Arnaud-Taylor and Xethanol Corporation.(4)10.4
                
                Employment
                    Agreement, dated as of February 2, 2005, between Frank A. Skryanz
                    and
                    Xethanol Corporation.(4)10.5
                
                Form
                    of Private Placement Subscription Agreement.(4)10.6
                
                Common
                    Stock Purchase Agreement, dated October 18, 2005, by and between
                    the
                    Fusion Capital Fund II, LLC and Xethanol Corporation.(5)10.7
                
                Registration
                    Rights Agreement, dated October 18, 2005, by and between the
                    Fusion
                    Capital Fund II, LLC and Xethanol Corporation.(5)14.1
                
                Code
                    of Ethics.16.1
                
                Cordovano
                    and Honeck LLP, Response Letter, dated February 8, 2005.(6)21.1
                
                Subsidiaries
                    of the Registrant.(7)24.1
                
                Power
                    of Attorney. (8)31.1
                
                Certification
                    of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                    Act of 2002.31.2
                
                Certification
                    of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                    Act of 2002.32.1
                
                Certification
                    of Chief Executive Officer and Chief Financial Officer pursuant
                    to 18
                    U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
                    Act of 2002.99.1
                
                Audit
                    Committee Charter. (7)99.2
                
                Compensation
                    Committee Charter. (7)99.3
                
                Nominations
                    and Governance Committee Charter. (7)
 
 ——————
 (1)
                Incorporated
                    by reference to the exhibits included with our Current Report
                    on Form 8-K,
                    dated February 2, 2005, and filed with the SEC on February 3,
                    2005.
  (2)
                Incorporated
                    by reference to the exhibits included with Amendment No. 1 to
                    our
                    Registration Statement on Form SB-2, filed with the SEC on December
                    6,
                    2005.
  (3)
                Incorporated
                    by reference to the exhibits included with our definitive Information
                    Statement on Schedule 14C, filed with the SEC on March 9, 2005.
  (4)
                Incorporated
                    by reference to the exhibits included with our Current Report
                    on Form 8-K,
                    dated February 2, 2005, and filed with SEC on March 15, 2005.
  (5)
                Incorporated
                    by reference to the exhibits included with our Current Report
                    on Form 8-K,
                    dated October 18, 2005, and filed with SEC on October 19, 2005.
  (6)
                Incorporated
                    by reference to the exhibits included with our Current Report
                    on Form 8-K,
                    dated February 2, 2005, and filed with the SEC on February 8,
                    2005.
  (7)
                Incorporated
                    by reference to the exhibits included with our Registration Statement
                    on
                    Form SB-2, filed with the SEC on October 21,
                    2005.
  (8)
                Included
                    on the signature page of this Annual Report on Form 10-KSB and
                    incorporated by reference herein.
  **ITEM
          14.**  **PRINCIPAL
          ACCOUNTANT FEES AND SERVICES**
 
 On
          February 8, 2005, we filed with the SEC a Current Report on Form 8-K reporting
          the resignation on February 2, 2005 of Cordovano and Honeck, P.C., as our
          independent auditor, and the approval by our board of directors on February
          2,
          2005 of Imowitz Koenig & Co., LLP as our new independent registered public
          accounting firm. In connection with the audits of our financial statements
          for
          each of the two fiscal years ended June 30, 2004 and 2003, and through
          February
          2, 2005, there were no disagreements with Cordovano and Honeck, P.C. on
          any
          matter of accounting principles or practices, financial statement disclosure,
          or
          auditing scope or procedure, which, if not resolved to the satisfaction
          of
          Cordovano and Honeck, P.C., would have caused Cordovano and Honeck, P.C.
          to make
          reference to the matter in its reports.
 
 41
 Because
          Old Xethanol was deemed to be the accounting acquirer in the reverse merger,
          we
          have adopted the fiscal year end of December 31 of Old Xethanol, instead
          of our
          previous fiscal year end of June 30. On April 20, 2005, we filed a Current
          Report on Form 8-K/A containing financial statements for the year ended
          December
          31, 2004 to cover the transition period. Imowitz Koenig & Co., LLP audited
          our consolidated financial statements for the years ended December 31,
          2004 and
          2005.
 
 **Independent
          Registered Public Accounting Firm’s Fees**
  The
          following table shows the fees paid or accrued by the Company for audit
          and
          other services provided by Imowitz Koenig & Co., LLP for the years ended
          December 31, 2005 and 2004.
  **Year**
                
                **Audit
                    Fees (1)**
                
                **Audit-Related
                    Fees (2)**
                
                **Tax
                    Fees (3)**
                
                **All
                    Other Fees**
                
                **Total
                    Fees**2005
                
                $77,000
                
                $47,505
                
                $38,796
                
                —
                
                $163,3012004
                
                $70,161
                
                —
                
                —
                
                —
                
                $70,161
 _________________
 (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
                    2005 these services included consulting services and accounting
                    research
                    services related to our Registration Statement and 8-K filings.
  (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 to pre-approve audit and non-audit
          services provided by our independent registered public accounting firm.
          On
          November 28, 2005, our Audit Committee began pre-approving all services
          by
          Imowitz Koenig & Co., LLP and has pre-approved all new services since that
          time.
  The
          Audit
          Committee pre-approves all audit and non-audit services to be performed
          for the
          Company by its independent registered public accounting firm. The Audit
          Committee does not delegate the Audit Committee’s responsibilities under the
          Exchange Act to the Company’s management. The Audit Committee has determined
          that the rendering of the services other than audit services by Imowitz
          Koenig
& Co., LLP is compatible with maintaining Imowitz Koenig & Co., LLP’s
          independence.
  42
 **SIGNATURES**
  Pursuant
          to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant
          has duly caused this report to be signed by the undersigned, in the City
          of New
          York, State of New York, on March 31, 2006, thereunto duly
          authorized.
 **XETHANOL
                  CORPORATION**By:
                /s/ Christopher d’Arnaud-TaylorChristopher
                  d’Arnaud-TaylorChairman,
                  President and Chief Executive Officer (principal executive
                  officer)
  By:
                /s/ Lawrence S. BelloneLawrence
                  S. BelloneChief
                    Financial Officer (principal financial and accounting
                    officer)
   **POWER
          OF ATTORNEY**
  We,
          the
          undersigned officers and directors of Xethanol Corporation, hereby severally
          constitute and appoint Christopher d’Arnaud-Taylor and Lawrence S. Bellone, and
          each of them (with full power to each of them to act alone), our true and
          lawful
          attorneys-in-fact and agents, with full power of substitution, for us and
          in our
          stead, in any and all capacities, to sign any and all amendments to this
          annual
          report (and all documents relating thereto, and to file the same, with
          all
          exhibits thereto, and other documents in connection therewith, with the
          U.S.
          Securities and Exchange Commission, granting to said attorneys-in-fact
          and
          agents, and each of them, full power and authority to do and perform each
          and
          every act and thing necessary or advisable to be done in and about the
          premises,
          as full to all intents and purposes as he might or could do in person,
          hereby
          ratifying and confirming all the said attorneys-in-fact and agents, or
          any of
          them, or their substitute or substitutes may lawfully do or cause to be
          done by
          virtue hereof.
  In
          accordance with the Exchange Act, this report has been signed by the following
          persons in the capacities and on the dates stated.
  **Signature**
                
                **Title**
                
                **Date**/s/
                    Christopher d’Arnaud-Taylor
                
                Chairman,
                    President and Chief Executive Officer
                
                March
                    31, 2006Christopher
                    d’Arnaud-Taylor/s/
                    Lawrence S. Bellone
                
                Chief
                  Financial Officer
                
                March
                    31, 2006Lawrence
                    S. Bellone/s/
                    Franz A. Skryanz
                
                Director,
                    Vice President, Secretary and Treasurer
                
                March
                    31, 2006Franz
                    A. Skryanz/s/
                    Jeffrey S. Langberg
                
                Director
                
                March
                    31, 2006Jeffrey
                    S. Langberg/s/
                    Louis B. Bernstein
                
                Director
                
                March
                    31, 2006Louis
                    B. Bernstein/s/
                    Richard D. Ditoro
                
                Director
                
                March
                    31, 2006Richard
                    D. Ditoro/s/
                    Richard L. Ritchie
                
                Director
                
                March
                    31, 2006Richard
                    L. Ritchie/s/
                    Marc S. Goodman
                
                Director
                
                March
                    31, 2006Marc
                    S. Goodman
 
 43
 
 XETHANOL CORPORATION 
 **Form
              10-KSB**
 **Consolidated
              Financial Statements**
 **Contents**
 
 **Consolidated
                        Financial Statements for the years ended December 31, 2005
                        and
                        2004**Report
                        of Independent Registered Public Accounting Firm
                    F-2Consolidated
                        Balance Sheets
                    F-3Consolidated
                        Statements of Operations
                    F-4Consolidated
                        Statements of Cash Flows
                    F-5Consolidated
                        Statements of Changes in Stockholders’ Equity
                    F-6Notes
                        to Consolidated Financial Statements
                    F-7
 
 F-1
 **Report
              ofIndependent 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, 2005 and 2004 and the related consolidated
              statements of operations, stockholders’ equity, and cash flows for the years
              then ended. These financial statements are the responsibility of the
              Company’s
              management. Our responsibility is to express an opinion on these financial
              statements based on our audits.
  We
              conducted our audits in accordance with the standards of the Public
              Company
              Accounting Oversight Board (United States). Those standards require
              that we plan
              and perform the audit to obtain reasonable assurance about whether
              the 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
              financial statements. An audit also includes assessing the accounting
              principles
              used and significant estimates made by management, as well as, evaluating
              the
              overall financial statement presentation. We believe that our audits
              provide a
              reasonable basis for our opinion.
 
 In
              our
              opinion, the consolidated financial statements referred to above present
              fairly,
              in all material respects, the financial position of Xethanol Corporation
              as of
              December 31, 2005 and 2004, 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.
   /s/Imowitz
              Koenig & Co., LLP
  New
              York,
              New York
 March
              24,
              2006
  F-2
 XETHANOL CORPORATION   **CONSOLIDATED
              BALANCE SHEETS**
  **December
                          31, 2005**
                      
                      **December
                          31, 2004****ASSETS**Current
                          assets:Cash
                          and cash equivalents
                      
                      $
                      802,664
                      
                      $
                      113,472Receivables
                      
                      
                      565,041
                      
                      
                      55,380Inventory:Finished
                          goods
                      
                      
                      55,343
                      
                      
                      —Raw
                          materials
                      
                      
                      68,169
                      
                      
                      27,453Work
                          in process
                      
                      
                      72,620
                      
                      
                      10,860Other
                          assets
                      
                      
                      172,168
                      
                      
                      93,455Total
                          current assets
                      
                      
                      1,736,005
                      
                      
                      300,620Property
                          and equipment, net
                      
                      
                      6,682,433
                      
                      
                      6,028,712Goodwill
                      
                      
                      —
                      
                      
                      205,000License
                          agreements, net
                      
                      
                      —
                      
                      
                      834,819Investments
                      
                      
                      182,000
                      
                      
                      100,000Other
                          assets
                      
                      
                      504,955
                      
                      
                      55,429**TOTAL
                          ASSETS**
                      
                      $
                      9,105,393
                      
                      $
                      7,524,580**LIABILITIES
                          AND STOCKHOLDERS' EQUITY**Current
                          liabilities:Accounts
                          payable
                      
                      $
                      694,473
                      
                      $
                      329,620Accounts
                          payable - related parties
                      
                      
                      56,080
                      
                      
                      388,736Accrued
                          expenses
                      
                      
                      370,776
                      
                      
                      222,850Mortgage
                          payable
                      
                      
                      1,125,000
                      
                      
                      —Total
                          current liabilities
                      
                      
                      2,246,329
                      
                      
                      941,206Mortgages
                          payable
                      
                      
                      —
                      
                      
                      4,125,000Senior
                          secured notes payable
                      
                      
                      6,600,000
                      
                      
                      —Capitalized
                          lease obligation
                      
                      
                      30,388
                      
                      
                      —Total
                          long-term liabilities
                      
                      
                      6,630,388
                      
                      
                      4,125,000CommitmentStockholders'
                          equity:Preferred
                          stock, $0.01 par value, 1,000,000shares
                          authorized; 0 shares issued and outstanding
                      
                      
                      —
                      
                      
                      —Common
                          stock, $0.001 par value, 50,000,000 sharesauthorized;
                          15,011,219 and 11,546,705 shares issued andoutstanding
                          in 2005 and 2004, respectively
                      
                      
                      15,011
                      
                      
                      11,547Additional
                          paid-in-capital
                      
                      
                      15,586,032
                      
                      
                      6,442,119Accumulated
                          deficit
                      
                      
                      (15,372,367
                      )
                      
                      (3,995,292
                      )Total
                          stockholders' equity
                      
                      
                      228,676
                      
                      
                      2,458,374**TOTAL
                          LIABILITIES AND STOCKHOLDERS' EQUITY**
                      
                      $
                      9,105,393
                      
                      $
                      7,524,580
  *See
              Notes to Consolidated Financial Statements*
 F-3
 XETHANOL
              CORPORATION
 **CONSOLIDATED
              STATEMENTS OF OPERATIONS**
  **Years
                          Ended****December
                          31, 2005**
                      
                      **December
                          31, 2004**Sales
                      
                      $
                      4,342,927
                      
                      $
                      465,048Cost
                          of sales, incl. depreciation of $263,651and
                          $157,558 for 2005 and 2004
                      
                      
                      4,891,230
                      
                      
                      507,181Gross
                          loss
                      
                      
                      (548,303
                      )
                      
                      (42,133
                      )Operating
                          expenses, incl. depreciation andand
                          amortization of $275,280 and $16,483for
                          2005 and 2004
                      
                      
                      6,558,308
                      
                      
                      2,357,190Write-off
                          of net intangible assets and goodwill
                      
                      
                      3,635,416
                      
                      
                      —Loss
                          from operations before other income (expense)
                      
                      
                      (10,742,027
                      )
                      
                      (2,399,323
                      )Other
                          income (expense):Interest
                          income
                      
                      
                      68,755
                      
                      
                      3,360Organization
                          expense
                      
                      
                      (300,000
                      )
                      
                      —Interest
                          expense
                      
                      
                      (659,030
                      )
                      
                      (208,340
                      )Other
                          income
                      
                      
                      255,227
                      
                      
                      33,385Total
                          other income (expense)
                      
                      
                      (635,048
                      )
                      
                      (171,595
                      )Net
                          loss
                      
                      $
                      (11,377,075
                      )
                      $
                      (2,570,918
                      )Basic
                          and diluted net loss per share
                      
                      $
                      (0.83
                      )
                      $
                      (0.25
                      )Weighted
                          average number ofshares
                          outstanding
                      
                      
                      13,683,616
                      
                      
                      10,194,834
 
  *See
              Notes to Consolidated Financial Statements* ****
 F-4
 **XETHANOL
              CORPORATION**
  **CONSOLIDATED
              STATEMENT OF CHANGES IN STOCKHOLDER’S EQUITY**
 
 **Common
                          Stock**
                      
                      **Additional**
                        **Paid-in-**
                      
                      **Accumulated****Shares**
                      
                      **Amount**
                      
                      **Capital**
                      
                      **Deficit**
                      
                      **Total**Balance
                          at December 31, 2003
                      
                      
                      9,551,606
                      
                      $
                      9,552
                      
                      $
                      2,205,314
                      
                      $
                      (1,424,374
                      )
                      $
                      790,492Shares
                          issued for cash
                      
                      
                      1,466,065
                      
                      
                      1,466
                      
                      
                      3,052,309
                      
                      
                      —
                      
                      
                      3,053,775Shares
                          issued for services
                      
                      
                      96,647
                      
                      
                      97
                      
                      
                      90,640
                      
                      
                      —
                      
                      
                      90,737Shares
                          issued to UTEKCorporation
                          for acquisitions
                      
                      
                      369,230
                      
                      
                      369
                      
                      
                      849,631
                      
                      
                      —
                      
                      
                      850,000Shares
                          issued to UTEKCorporation
                          for services
                      
                      
                      63,157
                      
                      
                      63
                      
                      
                      119,937
                      
                      
                      —
                      
                      
                      120,000Warrants
                          issued for services
                      
                      
                      —
                      
                      
                      —
                      
                      
                      124,288
                      
                      
                      —
                      
                      
                      124,288Net
                          loss
                      
                      
                      —
                      
                      
                      —
                      
                      
                      —
                      
                      
                      (2,570,918
                      )
                      
                      (2,570,918
                      )Balance
                          at December 31, 2004
                      
                      
                      11,546,705
                      
                      
                      11,547
                      
                      
                      6,442,119
                      
                      
                      (3,995,292
                      )
                      
                      2,458,374Adjustment
                          to outstandingshares
                          as a result ofrecapitalization
                          transaction
                      
                      
                      (1,854,924
                      )
                      
                      (1,854
                      )
                      
                      1,854
                      
                      
                      —
                      
                      
                      —Shares
                          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
                      
                      
                      665
                      
                      
                      (665
                      )
                      
                      —
                      
                      
                      —Shares
                          issued for services
                      
                      
                      150,000
                      
                      
                      150
                      
                      
                      550,450
                      
                      
                      —
                      
                      
                      550,600Shares
                          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
                      )
                      $
                      228,676
 
  *See
              Notes to Consolidated Financial Statements* ****
 F-5
 XETHANOL CORPORATION   **CONSOLIDATED
              STATEMENTS OF CHANGES IN CASH FLOWS**
  **December
                          31, 2005**
                      
                      **December
                          31, 2004****Cash
                          flows from operating activities**Net
                          loss
                      
                      $
                      (11,377,075
                      )
                      $
                      (2,570,918
                      )Adjustments
                          to reconcile net loss tonet
                          cash used in operating activities:Depreciation
                          and amortization
                      
                      
                      538,931
                      
                      
                      174,041Issuance
                          of common stock, stock optionsand
                          warrants for services rendered
                      
                      
                      2,377,060
                      
                      
                      335,025Impairment
                          loss on investments
                      
                      
                      —
                      
                      
                      98,277Write-off
                          of net intangible assets and goodwill
                      
                      
                      3,635,416
                      
                      
                      —Investment
                          received in settlement of lawsuit
                      
                      
                      (82,000
                      )
                      
                      —Changes
                          in operating assets and liabilities:Restricted
                          cash
                      
                      
                      —
                      
                      
                      (14,592
                      )Receivables
                      
                      
                      (509,661
                      )
                      
                      (30,179
                      )Inventory
                      
                      
                      (157,819
                      )
                      
                      (33,576
                      )Other
                          assets
                      
                      
                      (528,239
                      )
                      
                      (96,508
                      )Accounts
                          payable
                      
                      
                      25,012
                      
                      
                      313,752Accrued
                          expenses
                      
                      
                      147,926
                      
                      
                      98,873Net
                          cash used in operating activities
                      
                      
                      (5,930,449
                      )
                      
                      (1,725,805
                      )**Cash
                          flows from investing activities**Deposit
                          on acquisition
                      
                      
                      —
                      
                      
                      (1,000,000
                      )Purchase
                          of investments
                      
                      
                      —
                      
                      
                      (198,277
                      )Purchase
                          of property and equipment
                      
                      
                      (999,913
                      )
                      
                      (61,929
                      )Cash
                          used in investing activities
                      
                      
                      (999,913
                      )
                      
                      (1,260,206
                      )**Cash
                          flows from financing activities**Payment
                          of notes payable
                      
                      
                      (3,000,000
                      )
                      
                      (50,000
                      )Issuance
                          of notes payable
                      
                      
                      6,600,000
                      
                      
                      —Cash
                          received for common stock
                      
                      
                      3,572,817
                      
                      
                      3,053,775Cash
                          received from acquisition
                      
                      
                      450,000
                      
                      
                      —Payment
                          of capitalized lease obligation
                      
                      
                      (3,263
                      )
                      
                      —Net
                          cash provided by financing activities
                      
                      
                      7,619,554
                      
                      
                      3,003,775**Net
                          increase in cash and cash equivalents**
                      
                      
                      689,192
                      
                      
                      17,764**Cash
                          and cash equivalents - beginning of year**
                      
                      
                      113,472
                      
                      
                      95,708**Cash
                          and cash equivalents - end of year**
                      
                      $
                      802,664
                      
                      $
                      113,472**Supplemental
                          Disclosures**Interest
                          paid
                      
                      $
                      659,030
                      
                      $
                      208,340Income
                          taxes paid
                      
                      $
                      8,835
                      
                      $
                      453**Non-cash
                          activity**License
                          agreements acquired in exchange forcommon
                          stock
                      
                      $
                      2,747,500
                      
                      $
                      850,000Property
                          acquired for debt assumed in acquisitions
                      
                      $
                      —
                      
                      $
                      3,081,593Property
                          and equipment obtained bycapitalized
                          lease obligations
                      
                      $
                      40,835
                      
                      $
                      —
  *See
              Notes to Consolidated Financial Statements* ****
 F-6
 XETHANOL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL
            STATEMENTS   **NOTE
              1.**  **DESCRIPTION
              OF BUSINESS AND ORGANIZATION**
  Xethanol
              Corporation (the “Company”) is a biotechnology-driven company in the emerging
              biomass-to-ethanol industry. The Company produces ethanol and its co-products.
              Ethanol is a clean burning, renewable fuel and is used as a primary
              gasoline
              additive under the Energy Policy Act of 2005. The Company plans to
              optimize the
              use of biomass in the renewable energy field and convert biomass that
              is
              currently being abandoned or land filled into ethanol or other valuable
              co-products. The Company’s business model is to deploy proprietary
              biotechnologies that will extract and ferment sugars trapped in these
              biomass
              waste concentrations in a cost effective manner by locating ethanol
              plants
              closer to biomass sources and in proximity to urbanized high-demand
              ethanol
              markets.
  The
              Company was originally incorporated on January 24, 2000 in Delaware
              as
              Freereal-Timequote.com, Inc. On August 8, 2000, the Company changed
              its name
              from Freereal-Timequote.com, Inc. to LondonManhattan.com, Inc.
              (“LondonManhattan”). On September 19, 2001, LondonManhattan changed its name to
              Xethanol Corporation, to function as a holding and management company
              for a
              series of planned acquisitions and new ventures in the biomass-to-ethanol
              industry.
  ***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 9,706,781 shares
              of its
              common stock to the Company’s shareholders. 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.
  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 to accredited investors (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.
  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
              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.
  F-7
 **XETHANOL
              CORPORATIONNOTES TO CONSOLIDATED FINANCIAL
              STATEMENTS**
  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.
  Based
              upon the Company’s current financial condition, cash forecast and operating
              plan, management believes that it has adequate cash resources to sustain
              its
              operations through the end of 2006. However, the Company’s continued existence
              is dependent upon several factors, including the ability to generate
              cash flow
              from the sale of its product through improved margins and expanding
              sales and
              (2) the ability to continue to draw down under the Fusion Capital transaction
              (discussed in Note 8) which is contingent on the Company’s
              stock price
              being above $2.00. Until such time as the Company can rely on sufficient
              revenues generated from operations, the Company will continue to seek
              additional
              sources of financing through private offerings of the Company’s
              securities.  Accordingly,
              if the Company fails to obtain additional financing or is unable to
              draw down
              funds under the Fusion Capital transaction, the Company will be required
              to
              substantially reduce and defer payments of operating expenses. The
              Company
              cannot be assured that it will be successful in obtaining any additional
              financing.
  ***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 in the valuation
              of fixed
              assets and intangibles and their estimated useful lives to calculate
              depreciation and amortization. The Company evaluates its estimates
              on an ongoing
              basis. Actual results could differ from those estimates under different
              assumptions or conditions.
  ***Cash
              Equivalents***
  The
              Company considers all highly liquid investments with a maturity of
              three months
              or less at the time of purchase to be cash equivalents.
  ***Marketable
              Securities***
  The
              Company accounts for its investments in marketable securities as "available
              for
              sale" securities. "Available for sale" securities are stated at fair
              value with
              changes in market value recognized in stockholders' equity.
  ***Loss
              Per Common Share***
  Loss
              per
              share (“EPS”) is computed based on the 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. As of December 31, 2005,
              there were
              3,586,026 shares of common stock equivalents that could potentially
              dilute EPS
              in the future that were not included in the computation of EPS because
              to do so
              would have been antidilutive.
  F-8
 **XETHANOL
              CORPORATIONNOTES TO CONSOLIDATED FINANCIAL
              STATEMENTS**
  ***Concentration
              of Credit Risk***
  The
              Company maintains cash and cash equivalents with a major financial
              institution
              which 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***
  Stock
              issued for services and in connection with acquisitions has been valued
              based on
              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.
              The
              Company calculates this allowance based upon its historical level of
              past-due
              accounts, and its relationships with, and the economic status of, its
              customers.
              At December 31, 2005, 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 do not 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. As of December 31, 2005, the Company is
              not a primary beneficiary of any VIE’s.
  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”.
  ***Inventory***
  Finished
              goods are carried at the lower of cost using the average cost method
              or market.
              Raw materials are carried at average cost. Work in process is based
              on the
              amount of average product costs currently in the production
              pipeline.
  ***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 ranging
              from
              five to twenty years.
  F-9
 **XETHANOL
              CORPORATIONNOTES TO CONSOLIDATED FINANCIAL
              STATEMENTS**
  ***License
              Agreements***
  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 $133,420 and $106,231 for the years ended December 31, 2005 and
              2004,
              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. Long term debt bears interest at current
              rates and
              therefore, the carrying value approximates fair value.
  ***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
              December 2004, the FASB issued Statement of Financial Accounting Standards
              (“SFAS”) No. 123R “Share Based Payment.” This statement is a revision of SFAS
              No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion
              No. 25, Accounting for Stock Issued to Employees, and its related implementation
              guidance. SFAS No. 123R addresses all forms of share based payment
              (“SBP”)
              awards including shares issued under employee stock purchase plans,
              stock
              options, restricted stock and stock appreciation rights. Under SFAS
              No. 123R,
              SBP awards result in a cost that will be measured at fair value on
              the awards’
grant date, based on the estimated number of awards that are expected
              to vest.
              This statement is effective for public entities that file as small
              business
              issuers, as of the beginning of the first interim or annual reporting
              period
              that begins after December 15, 2005. The Company adopted this pronouncement
              during the first quarter of 2005.
  In
              December 2004, the FASB issued SFAS No. 153, ** Exchanges
              of Nonmonetary Assets - An Amendment of APB Opinion No. 29. The amendments
              made
              by SFAS No. 153 are based on the principle that exchanges of nonmonetary
              assets
              should be measured based on the fair value of the assets exchanged.
              Further, the
              amendments eliminate the narrow exception for nonmonetary exchanges
              of similar
              productive assets and replace it with a broader exception for exchanges
              of
              nonmonetary assets that do not have “commercial substance.” SFAS No. 153 is
              effective for nonmonetary asset exchanges occurring in fiscal periods
              beginning
              after June 15, 2005. The adoption of SFAS No. 153 on its effective
              date did not
              have a material effect on the Company’s consolidated financial
              statements.
 
 F-10
 **XETHANOL
              CORPORATIONNOTES TO CONSOLIDATED FINANCIAL
              STATEMENTS**
  In
              March
              2005, the FASB issued Financial Interpretation No. 47, “Accounting for
              Conditional Asset Retirement Obligations - an Interpretation of FASB
              Statement
              No. 143,” which specifies the accounting treatment for obligations associated
              with the sale or disposal of an asset when there are legal requirements
              attendant to such a disposition. The Company adopted this pronouncement
              in 2005,
              as required, but there was no impact as there are no legal obligations
              associated with the future sale or disposal of any assets.
 
 In
              May
              2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
              Corrections — A Replacement of APB Opinion No. 20 and SFAS Statement
              No. 3”. SFAS No. 154 changes the requirements for the accounting and
              reporting of a change in accounting principle by requiring retrospective
              application to prior periods’ financial statements of the change in accounting
              principle, unless it is impracticable to do so. SFAS No. 154 is effective
              for accounting changes and corrections of errors made in fiscal years
              beginning
              after December 15, 2005. We do not expect the adoption of SFAS No. 154
              to have any impact on our consolidated financial statements.
  **NOTE
              3.**  **ACQUISITIONS**
  ***Permeate
              Refining, Inc*** *.*
  In
              September 2001, the Company acquired the rights to acquire Permeate
              Refining,
              Inc. (“Permeate”), an ethanol producing company located in Hopkinton, Iowa. In
              contemplation of the acquisition of Permeate, the Company issued 1,000,000
              shares of common stock to the owners of Permeate in 2001.
  On
              July
              7, 2003, the Company acquired from the owners of Permeate, its machinery
              and
              equipment for an aggregate purchase price of $750,000 in a cash transaction.
              The
              Company also acquired for cash, inventory valued at $50,000.
  In
              a
              separate transaction, through its wholly owned subsidiary Xethanol
              One, LLC, (a
              Delaware limited liability company formed on May 28, 2003 for this
              purpose), the
              Company acquired the real-estate and certain production facilities
              associated
              with Permeate’s operations from their owners, Robert and Carol Lehman (the
“Lehmans”), for a total price of $1,250,000, payable as follows: (a) a down
              payment of $125,000 was made on July 9, 2003; and (b) the balance of
              $1,125,000,
              is payable under a promissory note, secured by a mortgage, with a face
              amount of
              $1,125,000 and bearing interest at the simple interest rate of 9% per
              annum with
              monthly payments of interest due on the first day of each month commencing
              August 1, 2003 until June 30, 2006, at which time the entire balance
              owing on
              the promissory note shall be paid in full. As further discussed in
              Note 16, the
              Company restructured the promissory note in January 2006.
  In
              conjunction with the acquisition of Permeate, the Company entered into
              employment and consulting agreements with its previous owners, Robert
              and Carol
              Lehman, to serve as general manager and financial/administrative director,
              respectively. The employment and consulting agreements with Robert
              and Carol
              Lehman were terminated in July 2005. Under these agreements, the Company
              paid
              $60,000 in 2005 and $120,000 in 2004.
  The
              following table summarizes the estimated fair values of the assets
              acquired as
              of the acquisition date:
  Permeate
                          Refining, IncMachinery
                          and equipment
                      
                      $
                      750,000Inventory
                      
                      
                      50,000Total
                      
                      $
                      800,000
 F-11
 XETHANOL
              CORPORATIONNOTES TO
              CONSOLIDATED FINANCIAL STATEMENTS
  Xethanol
                          One, LLCLand
                      
                      $
                      33,700Buildings
                      
                      
                      732,600Machinery
                          & Equipment
                      
                      
                      483,700Total
                      
                      $
                      1,250,000
 In
              April
              2005, the Company temporarily ceased operations at Permeate in order
              to
              refurbish the facility and to consider alternatives to maximize the
              strategic
              use of the facility. The Company is currently evaluating the possibility
              of
              utilizing the facility initially as a pilot plant for commercializing
              certain of
              its technologies and ultimately scaling up the facility once the technology
              proves out.
  In
              connection with the acquisition of Permeate, the Company recognized
              $205,000 of
              goodwill. The Company assessed the value of this asset in accordance
              with the
              requirements of SFAS No. 142 “Goodwill and Other Intangible Assets”. The
              evaluation is based on estimates of future revenues, profits, and working
              capital requirements. Based on these assessments, the Company has determined
              that the goodwill has been impaired and has written off the $205,000
              of goodwill
              during the fourth quarter of 2005.
  ***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 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 four and $30,000
              in year five
              and each year thereafter until the end of the license term.
  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 will pay Virginia Tech
              $75,689 in
              five payments scheduled over the course of 2006.
  ***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 ten years, to a patented, Queens University,
              Ontario, developed extractive fermentation technology 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.
  ***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 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.
  F-12
 XETHANOL
                CORPORATIONNOTES TO
                CONSOLIDATED FINANCIAL STATEMENTS
  **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, XTI also
              held cash
              of $450,000.
  On
              November 30, 2005, XTI entered into a Collaborative 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.
  **NOTE
              4.**  **WRITE-OFF
              OF INTANGIBLE ASSETS**
  The
              Company charged $3,635,416 to expense during the fourth quarter of
              2005, representing the unamortized cost of acquiring its license agreements
              described in Note 3, after considering the uncertainties surrounding
              the timing
              of their commercialization.
  **NOTE
              5.**  **FORMATION
              OF 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 7, the Company paid off the
              $3,000,000
              note to FNBO in January 2005. On November 1, 2004 the Company formed
              Xethanol
              BioFuels, LLC (“BioFuels”), a wholly owned Delaware limited liability company,
              to manage and operate the Blairstown facility. After a period to repair
              and
              refurbish the facility, BioFuels began operating as of July 1,
              2005.
  The
              following table summarizes the estimated fair values of the assets
              acquired and
              liabilities assumed as of the acquisition date:
  Land
                      
                      $
                      28,187Buildings
                      
                      
                      723,356Improvements
                      
                      
                      153,714Machinery and
                          Equipment
                      
                      
                      3,176,336Total
                      
                      $
                      4,081,593Accrued
                          property taxes and accrued interest payable
                      
                      $
                      81,953
  F-13
 ****XETHANOL
              CORPORATIONNOTES TO CONSOLIDATED FINANCIAL
              STATEMENTS****
 **NOTE
                6.** **PROPERTY AND EQUIPMENT**
  Property
                and equipment consists of the following:
 
 **December
                          31,**
                        **2005**
                      
                      **December
                          31,**
                        **2004**Land
                      
                      $
                      61,887
                      
                      $
                      61,887Buildings
                      
                      
                      1,497,588
                      
                      
                      1,463,246Machinery
                          and equipment
                      
                      
                      5,150,729
                      
                      
                      4,537,303Land
                          improvements
                      
                      
                      544,496
                      
                      
                      158,714Furniture
                          and fixtures
                      
                      
                      43,648
                      
                      
                      36,4507,298,348
                      
                      
                      6,257,600Less
                          accumulated depreciation and amortization
                      
                      
                      615,915
                      
                      
                      228,888$
                      6,682,433
                      
                      $
                      6,028,712
  **NOTE
                7.**  **SENIOR
                SECURED 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 BioFuels facility. At the closing of that transaction, 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
                were 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 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 provide 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 BioFuels
                facility, with the principal becoming due in January 2012. The Company
                has 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 have 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,
                BioFuels issued
                senior secured royalty notes in the aggregate principal amount of
                $1,600,000
                (the “August Notes”). The proceeds from this financing will be used for working
                capital and general corporate purposes. The terms of this financing
                provide 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 BioFuels facility, with the principal becoming due
                in August
                2012. The Company has 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 have 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).
  Pursuant
                to a security agreement, Xethanol BioFuels 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.
                In the
                event of an uncured default under the notes, the holders are authorized
                to take
                possession of, sell or operate the assets of Xethanol BioFuels in
                order to
                generate proceeds sufficient to pay the principal and interest of
                the notes.
                This could include collecting accounts owed by customers of the facility,
                operating or subleasing the facility, selling the ethanol and wet
                distillers
                grain, selling machinery and equipment relating to the facility,
                or taking any
                other lawful action to collect the principal and interest through
                realization on
                the assets of the facility. Recourse under the notes is limited to
                Xethanol
                BioFuels’ assets and is not guaranteed by us or any of our current or future
                subsidiaries, assets or facilities.
  F-14
 **XETHANOL
                CORPORATIONNOTES TO CONSOLIDATED FINANCIAL
                STATEMENTS**
  On
                December 31, 2005, interest on the January Notes and on the August
                Notes was due
                and paid and, accordingly, there is no accrued interest on these
                notes reported
                in the Company’s financial statements as of December 31, 2005.
  **NOTE
                8.**  **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 has
                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 which 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 has
                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 of the shares
                of common stock
                will be equal to a price based upon the 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.
  The
                Company engaged several consultants to introduce, arrange and negotiate
                the
                financing with Fusion. As compensation for services rendered, the
                Company agreed
                to pay 2.38% of the gross funds to be received from Fusion, warrants
                to purchase
                75,000 shares of the Company’s common stock and $25,000 as reimbursement for
                expenses. The Company issued these warrants in January 2006.
  As
                of
                December 31, 2005, the Company had not issued any Purchase Shares
                to Fusion. As
                of March 24, 2006, the Company has issued 908,465 Purchase Shares
                to Fusion for
                total gross proceeds of $3,818,007.
  **NOTE
                9.**  **RESTRICTED
                CASH**
  On
                May
                10, 2005, the Company opened up a letter of credit in the amount
                of $220,000, as
                required by an insurance company to post a bond in connection with
                our permit
                application to the Bureau of Alcohol, Tobacco and Firearms (the “BATF”). In
                order to obtain the letter of credit, the Company has placed $220,000
                in a one
                year time deposit account with the issuing bank as collateral.
  On
                May
                10, 2005, the Company opened up a letter of credit in the amount
                of $50,000, as
                required by an agreement with a grain service provider. In order
                to obtain the
                letter of credit, the Company has placed $50,000 in a one year time
                deposit
                account with the issuing bank as collateral.
  In
                the
                event the issuing bank is required to make payments under the letters
                of credit
                as a result of the Company’s non-compliance with the terms of the BATF bond or
                grain service provider agreement, the issuing bank would draw against
                the
                Company’s cash on deposit with the bank.
  The
                total
                cash of $270,000 on deposit with the issuing bank is reported in
                non-current
“Other assets”.
  **NOTE
                10.**  **INCENTIVE
                COMPENSATION PLAN**
  On
                February 2, 2005, following the completion of the reverse merger,
                our board of
                directors adopted and approved a new 2005 Incentive Compensation
                Plan (the “2005
                Plan”), which was subsequently approved by the Company's shareholders
                on March
                29, 2005.
  F-15
 **XETHANOL
                CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
 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.
                Under
                the 2005 Plan, the total number of shares of our common stock that
                may be
                subject to the granting of awards under the 2005 Plan shall be equal
                to
                2,000,000 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. The persons eligible to receive awards under the 2005
                Plan are the
                officers, directors, employees and independent contractors of the
                Company and
                its subsidiaries.
  As
                of
                December 31, 2005, 317,070 shares of common stock and stock options
                to purchase
                480,000 shares of common stock were granted under the 2005 Plan.
  A
                summary
                of stock option activity under the 2005 Plan is as follows:
 
 **Shares**
                      
                      **Weighted****Average****Exercise****Price**Outstanding
                          as of December 31, 2004
                      
                      —
                      
                      —Options
                          granted
                      
                      
                      530,000
                      
                      $
                      3.95Options
                          exercised
                      
                      
                      —
                      
                      
                      —Options
                          forfeited
                      
                      
                      50,000
                      
                      $
                      4.00Outstanding
                          as of December 31, 2005
                      
                      
                      480,000
                      
                      $
                      3.95Exercisable
                          as of December 31, 2005
                      
                      
                      315,000
                      
                      $
                      3.92
 
 A
                summary
                of stock options outstanding as of December 31, 2005 is as follows :
 **Options
                            Exercisable****Number**
                          **Outstanding**
                        
                        **Exercise**
                          **Price**
                        
                        **Weighted**
                          **Average**
                          **Exercise**
                          **Price**
                        
                        **Weighted**
                          **Remaining**
                          **Life**
                          **In
                            Years**
                        
                        **Number**
                          **Exercisable**
                        
                        **Weighted**
                          **Average**
                          **Exercise**
                          **Price**100,000
                        
                        $
                            3.75
                        
                        $
                            3.75
                        
                        2.75
                        
                        100,000
                        
                        $
                            3.75380,000
                        
                        $
                            4.00
                        
                        $
                            4.00
                        
                        4.26
                        
                        215,000
                        
                        $
                            4.00480,000
                        
                        
                        
                        $
                            3.95
                        
                        3.94
                        
                        315,000
                        
                        $
                            3.92
  The
                fair
                values of the options awarded under the 2005 Plan are estimated at
                the grant
                date using the Black-Scholes option pricing model and are recorded
                as expense
                over the respective vesting periods. Significant assumptions used
                in the
                Black-Scholes model are the U.S. Treasury yield curve rates that
                corresponds
                with the maturity of each option, i.e., the risk-free rate and 40%
                for
                volatility. The risk-free rates used in the model ranged from 3.50%
                to 4.39%
                during 2005. During the year ended December 31, 2005, net compensation
                expense
                related to 2005 Plan option activity was $508,557.
  As
                of
                December 31, 2005, 317,070 shares of common stock were awarded and
                are
                outstanding under the 2005 Plan. The fair value of these shares was
                estimated
                using the Offering price of $3.25 per share and was recorded as compensation
                expense. During the year ended December 31, 2005, net compensation
                expense
                related to 2005 Plan stock awards was $1,030,478.
  During
                the first quarter of 2006, the Company granted an additional 550,000
                options to
                executive officers and key employees.
  F-16
 **XETHANOL
                CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
                11.**  **WARRANTS**
  During
                2004, the Company issued 1,084,807 warrants to investors as an inducement
                to
                purchase Xethanol shares sold by the Company in private offerings
                and 173,251
                warrants to consultants as compensation for services rendered for
                a total of
                1,258,058 warrants after adjustment for recapitalization. During
                2005, the
                Company granted 197,968 warrants to various consultants and advisors
                as
                compensation for services rendered.
  The
                fair
                values of the warrants granted during 2004 and 2005 were estimated
                at the grant
                date using the Black-Scholes option pricing model and recorded as
                expense over
                the respective vesting periods. Significant assumptions used in the
                Black-Scholes model are the current rate of the U.S. Treasury security
                that
                corresponds with the maturity of each warrant, i.e., the risk-free
                rate and 40%
                for volatility. The risk-free rates used in the model ranged from
                3.50% to 4.39%
                during 2005. During the years ended December 31, 2005 and 2004, net
                compensation
                expense related to warrants granted for services was $167,425 and
                $124,288,
                respectively.
  A
                summary
                of stock warrant activity is as follows:
  **December
                          31, 2005**
                      
                      **December
                          31, 2004****Shares**
                      
                      **Weighted****Average****Exercise****Price**
                      
                      **Shares**
                      
                      **Weighted****Average****Exercise****Price**Outstanding,
                          beginning of year
                      
                      
                      1,425,068
                      
                      $
                      2.28
                      
                      
                      —
                      
                      
                      —Less:
                          Recapitalization adjustment
                      
                      
                      167,010
                      
                      
                      —
                      
                      
                      —
                      
                      
                      —Warrants
                          granted
                      
                      
                      197,968
                      
                      $
                      4.07
                      
                      
                      1,425,068
                      
                      $
                      2.28Warrants
                          exercised
                      
                      
                      —
                      
                      
                      —
                      
                      
                      —
                      
                      
                      —Warrants
                          forfeited
                      
                      
                      —
                      
                      
                      —
                      
                      
                      —
                      
                      
                      —Outstanding,
                          end of year
                      
                      
                      1,456,026
                      
                      $
                      2.52
                      
                      
                      1,425,068
                      
                      $
                      2.28Exercisable,
                          end of year
                      
                      
                      1,456,026
                      
                      $
                      2.52
                      
                      
                      1,425,068
                      
                      $
                      2.28
 
 The
                following table summarizes warrants information as of December 31,
                2005:
  **Number
                          of****Warrants**
                      
                      **Exercise****Prices**
                      
                      **Expiration****Dates**390,294
                      
                      
                      $
                          1.90
                      
                      2007176,087
                      
                      
                      $
                          2.00
                      
                      2007629,881
                      
                      
                      $
                          2.50
                      
                      200761,796
                      
                      
                      $
                          3.25
                      
                      200745,312
                      
                      
                      $
                          3.75
                      
                      2007132,656
                      
                      
                      $
                          4.00
                      
                      200820,000
                      
                      
                      $
                          5.25
                      
                      20101,456,026
  F-17
 XETHANOL
                CORPORATIONNOTES TO
                CONSOLIDATED FINANCIAL STATEMENTS
  **NOTE
                12.**  **INCOME
                TAXES**
  As
                of
                December 31, 2005 and 2004, the Company had unused net operating
                loss
                carryforwards approximating $8,600,000 and $3,800,000, respectively,
                which may
                be applied against future taxable income. The net operating loss
                carryforwards
                expire in the years 2020 through 2024. At December 31, 2005 and 2004
                the
                deferred tax assets (representing the potential future tax savings)
                related to
                the carryforwards were as follows:
  **2005**
                      
                      **2004**Deferred
                          tax asset
                      
                      $
                      3,525,000
                      
                      $
                      1,520,000Less:
                          Valuation allowance
                      
                      $
                      3,525,000
                      
                      $
                      1,520,000Net
                          deferred tax asset
                      
                      
                      —
                      
                      
                      —
 
 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, 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
                13.**  **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 89% of the Company’s sales for the year ended December 31,
                2005.
  **NOTE
                14.**  **RELATED
                PARTY TRANSACTIONS**
  On
                January 1, 2003, the Company renegotiated an existing management
                services
                agreement with LondonManhattan Limited, Inc. (“LML”) for the services of
                Christopher d’Arnaud-Taylor as its President and Chief Executive Officer (the
“2003 Agreement”). Mr. d’Arnaud-Taylor is the owner of LML, a significant
                shareholder of the Company and the Company’s Chairman of the Board of directors.
                Under this arrangement, the Company agreed to pay LML 1) a management
                fee of
                $10,000 per month until the first “Project Transaction”, as defined below,
                closed, $12,000 per month from such date to the closing of the second
                Project
                Transaction, and $15,000 per month, thereafter, 2) an incentive bonus
                of $50,000
                upon closing of the first Project Transaction $100,000 upon closing
                of each
                subsequent Project Transaction and 3) $100,000 in full satisfaction
                for all
                management and/or other services previously rendered to the Company
                under
                previous agreements that remained unpaid and outstanding as of December
                31,
                2002. The term “Project Transaction” as used above and below means the
                completion of an acquisition, merger or other new venture. The acquisition
                of
                Permeate Refining, Inc., discussed in Note 3 above, represents the
                first Project
                Transaction and the acquisition of the assets of 78th Street Ethanol,
                LLC from
                FNBO, discussed in Note5 above, represents the second Project Transaction.
                During 2004, the Company made total payments to Mr. d’Arnaud-Taylor of
                $216,275.
  In
                January 2005, the Company terminated its arrangement with LML and
                entered into
                an employment agreement directly with Mr. d’Arnaud-Taylor as the Company’s
                President and Chief Executive Officer for a term of three years (the
“2005
                Agreement”). Under the 2005 Agreement, the Company pays 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
                January 1, 2003, the Company entered into formal consulting services
                agreement
                with Jeffrey Langberg & Associates (“Langberg”). Langberg is a significant
                shareholder of the Company and became a member of the Board of directors
                in
                2005. Under this agreement, the Company agreed to pay Langberg 1)
                consulting
                fees at the rate of $10,000 per month until such time as the first
                Project
                Transaction closes, at the rate of $12,000 per month from such date
                to the
                closing of the second Project Transaction, and at the rate of $15,000
                per month
                thereafter, 2) an incentive bonus of $50,000 upon closing of the
                first Project
                Transaction and $100,000 upon closing of each subsequent Project
                Transaction
                thereafter, and 3) a finder’s fee for the gross proceeds from the sale of
                securities to investors introduced to the Company and 4) $100,000
                in full
                satisfaction for all consulting and/or other services previously
                rendered and
                not paid by the Company. During 2004, the Company made total payments
                to
                Langberg of $334,525 including finder’s fees of $145,025 which were recorded as
                a reduction to Additional paid-in-capital.
  F-18
 **XETHANOL
                CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
 In
                February 2005, the Company re-negotiated its consulting services
                agreement with
                Langberg, pursuant to which Mr. Langberg agreed to provide general
                business
                advisory services to the Company. Under this agreement, the Company
                agreed to
                pay Mr. Langberg a consulting fee of $15,000 per month and a $225,000
                sign-on
                bonus. Mr. Langberg is also eligible to receive performances bonuses
                at the
                discretion of the Board of directors. Mr. Langberg agreed to waive
                any
                compensation otherwise payable to him as a director of the Company.
                During 2005,
                the Company made total payments to Langberg of $649,147.
  The
                Company also recorded consulting fees to other significant shareholders
                for the
                years ended December 31, 2005 and 2004 of $77,796 and $144,000, respectively.
                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. As of December 31,
                2005, $8,000
                had been paid under this arrangement. During 2004, the Company also
                issued
                44,140 warrants to purchase common stock to a significant shareholder
                as
                compensation for consulting services.
  Accounts
                payable to all related parties as of December 31, 2005 and 2004 were
                $56,080 and
                $388,736, respectively.
  In
                October 2004, the Company began sharing office space in New York
                City with other
                affiliated companies under a sublease with Xethanol Management Services,
                LLC
                (“XMS”) which is a single member LLC controlled by Mr. Langberg. Under
                this
                arrangement, Xethanol is currently paying approximately $10,400 per
                month, plus
                reimbursement of other costs, in sublease payments on a month to month
                basis. As of December 31, 2005 total payments made were $99,806.
                No payments
                were required in 2004. During 2004, the Company paid a security deposit
                of
                $16,336 and made a one-time payment to XMS of approximately $44,000
                for
                furniture, telephone and computer equipment and related software.
                Xethanol
                management believes the allocation of rent and other office expenditures
                among
                affiliates is reasonable and appropriate.
  **NOTE
                15.**  **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 (hereinafter, the
                "Plaintiffs"), commenced an action against Xethanol in the Circuit
                Court of the
                Ninth Judicial Circuit, in and for Orange County, Florida, Case No.
                2005-CA-6351, requesting declaratory judgment declaring that Plaintiffs are
                entitled to receive 300,000 shares of Xethanol common stock and seeking
                transfer
                to Plaintiffs of these 300,000 shares of Xethanol common
                stock, or, in the alternative, damages for breach of contract, conversion,
                and
                breach of fiduciary duty.  Xethanol filed a notice of removal on August 29,
                2005, and the case is now being heard 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, Xethanol filed its answer
                and affirmative defenses to Plaintiffs' complaint, asserting that
                the Rolls do
                not have any ownership interests in the Xethanol shares.
  Effective
                October 19, 2005, the Company entered into a marketing and licensing
                agreement
                with DDS Technologies USA, Inc (“DDS”), under which among other things, the
                Company agreed to settle two related legal actions concerning its
                investment in
                the DDS-Xethanol, LLC joint venture. Under the terms of the agreement,
                we
                entered into a mutual release with DDS, by which each party discharged
                the other
                from all claims and liabilities. As part of the agreement, DDS issued
                200,000
                shares of its stock to Xethanol. DDS also granted a license to the
                Company to
                deploy DDS’s patented dry disaggregation technology in our ethanol facilities.
                DDS also granted to the Company an exclusive license, with certain
                exceptions,
                to market the DDS dry disaggregation technology to the ethanol industry
                in the
                United States. The Company will pay a royalty to DDS for use of the
                technology
                equal to 1.25% of ethanol revenues generated from the use of such
                technology.
                The DDS stock received as part of the settlement has been recorded
                in
                Investments with an estimated value of $82,000. This stock has been
                classified
                as available for sale securities.
  F-19
 **XETHANOL
                CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
                16.**  **SUBSEQUENT
                EVENTS**
  **Permeate
                Refining Refinancing**
  Pursuant
                to a memorandum of agreement entered into on October 18, 2005 by
                the Company
                with the current holder of a $1,125,000 promissory note issued by
                Xethanol One,
                LLC, a wholly-owned subsidiary of the Company, the Company executed
                a Mutual
                General Release dated January 23, 2006. Under the terms of the Mutual
                General
                Release, the $1,125,000 promissory note was exchanged for a new note
                issued by
                the Company in the amount of $243,395 (the “Note”) and 135,000 shares of the
                Company’s common stock.
  The
                Note
                is payable on August 1, 2006. Interest is due monthly on the outstanding
                principal of the Note at a rate equal to .5% above prime rate. The
                Company makes
                a monthly payment equal $3,128 allocated between interest and principal
                based on
                the current interest rate. As of March 1, 2006, the outstanding balance
                on the
                Note is $240,050.
  The
                Company recorded the issuance of the 135,000 shares at a value $432,000
                based on
                the closing price of the Company’s stock on January 23, 2006.
  As
                a
                result of the above transactions, the Company recorded an increase
                in
                Shareholders’ equity of $449,605 as the holders of the Note are significant
                shareholders in the Company.
  F-20
 **EXHIBIT
            INDEX**
 **Exhibit**
                  **No.**
                
                **Description
                    of Exhibit**4.3
                
                Specimen
                    Common Stock Certificate.14.1
                
                Code
                    of Ethics.31.1
                
                Certification
                    of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                    Act of 2002.31.2
                
                Certification
                    of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                    Act of 2002.32.1
                
                Certification
                    of Chief Executive Officer and Chief Financial Officer pursuant
                    to 18
                    U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
                    Act of 2002.
 
 44